Sunday, February 26, 2017

Cut company tax and you cut national income: Grattan

The Turnbull government's proposed company tax cut would drop national income for years before it boosted it and would never be self-funding, a new analysis from the Grattan Institute has found.

One of the key justifications for the proposed phase down in the company tax rate from from 30 per cent to 25 per cent over 10 years has been that it would boost national income and wages.

"Even assuming you get those things in the long run, there will be a period of time in which national income falls," said the director of the Grattan Institute's productivity growth program Jim Minifie.

"That's because you are giving a tax cut to foreigners, meaning the benefit at first goes overseas".

"The Treasury has cited work that says it would take four or more years for investment to respond, lifting Australian national income but it could take a decade."

"The challenge for government is that it would be trying to do that at a time when if is not quite clear whether it can repair the budget. In other words, it's proposal isn't fully funded."

Write-off solution

The Grattan Institute report, Stagnation nation? Australian investment in a low-growth world finds that a cheaper and more effective measure would be an investment allowance that permitted companies to immediately write-off a portion of their investment before depreciating the rest over time.

"One worry is that some firms might be tempted to rort the system by relabeling operating costs as investment, but it might be manageable," Dr Minifie said.

The government could do both, allowing the investment allowance to fill the initial hole in national income that would be created by the company tax cut, but it would have to specify how it was going to pay for both.

Other measures were even less attractive. A tax cut for small business was "hard to justify" as a means of boosting investment while accelerated depreciation delayed tax payments.

An "allowance for corporate equity" of the kind proposed by the former treasury secretary Ken Henry would treat payments to shareholders in the same way as interest payments, meaning no tax would be paid on projects yielding an ordinary rate of return, and higher rates would be paid on those yielding more.

It would make projects that were only mildly profitable more attractive, but it would be hard to implement because it would create losers as well as winners.

Non-mining investment had fallen from 12 per cent to 9 per cent of GDP, lower than at any time in the fifty years from 1960 to 2010. But it was important to keep the problem in perspective.

In The Age and Sydney Morning Herald

Friday, February 24, 2017

IP. Schools and unis charged millions for things that are free

Australian schools pay $9 million each year to display web pages that are available freely on the internet. They are even charged for displaying thumbnail images of book covers on their school intranet sites.

They and other institutions pay another $11 million each year to collection agencies for the display of works whose authors can't be found, which the agencies then pool and distribute to members who weren't the authors.

Addressing a copyright forum at the National Library on Friday, the co-chair of the Productivity Commission's intellectual property inquiry, Karen Chester, said she regarded her recommendation that Australia adopt a US-style system of "fair use" as more important than the recommendation that Australia allow the free import of books.

Removing the remaining restrictions on importing books would cut prices by $25 million. On average books bought in Australia are 20 per cent more expensive than identical titles bought in places such as Britain.

Of the $25 million, $15 million flowed overseas.

"So it's hard not to view import restrictions as anything but the least effective way to support local authors, and perversely at the expense of local readers," she said.

"We did listen to the case made by locally based publishers that the additional money they make from import restrictions delivering them higher prices is then used to cross subsidise local authors."

"We requested this evidence – show us the money. But we were met with the sound of deafening silence."

However she said of the recommendations presently before the government, allowing "fair use" was far more important.

"We know with import restrictions that technology, the digital age and new business models have proved a great equaliser. Digital books and real time publishing will continue to discipline the price premium local publishers will extract. So perhaps where we find ourselves today, with import restrictions costing Australian readers around $25 million each year, is about as bad as it will get."

"The same cannot be said for our system of copyright exceptions. And here's the policy rub and where the greatest policy imperative looms largest for government. The inequities and costs the present system are growing and will continue to do so with technological and digital advances."

"Think, no access to data for data mining means no incentive to the workforce to develop those skills — skills which other jurisdictions are developing in spades."

"Think, hampering access to cloud computing means that Australian firms and families are left to use inefficient, antiquated systems in comparison to other markets and countries that can make use of the latest technology."

"Think, schools and universities not paying $9 million each year for material that is freely available."

"The Commission heard from Universities Australia about how institutions were reluctant to use material for Massive Open Online Courses because fair dealing might not extend to them."

"It's not just about the millions of lost export dollars of our universities. It's about what's needed to re-equip our workforce to remain relevant. A university student today will have 17 different jobs. Fair use is a policy lever to avoid the looming education divide of haves and have not's."

At present new uses of copyrighted material are presumed to break the law until Parliament gets around to changing it, which took until 2006 in the case of home taping of television programs.

In the United States, Singapore and Israel new uses are permitted on the condition that they are "fair", taking account of the purpose and nature of the use, how much is used, and whether or not it harms the market for the original work.

The Commission's report was delivered to the government in September and is with the Industry Minister Arthur Sinodinos.

In The Age and Sydney Morning Herald

Forget rate cuts. RBA chief Philip Lowe overrules his staff

Reserve Bank governor Philip Lowe has no plans to cut interest rates, and worries that if he did, he would make an already indebted nation "more fragile".

Appearing before a parliamentary committee after five months in the role, Dr Lowe conceded that others in the Bank took a different view.

"People on my own staff argue this," he told the hearing.

"The counter-argument is that lower interest rates would mainly work through encouraging people to borrow more. That would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing."

"Household debt is at record levels. Is it really in the national interest to get a little bit more employment in the short-term at the expense of encouraging that fragility?"

Dr Lowe pointed to "green shoots" of economic recovery, even in the poorest-performing state, Western Australia.

"The headwind from falling commodity prices turned into a gentle tailwind as commodity prices lifted," he said. "And the headwind from falling mining investment should blow itself out before too long."

Offering a "personal perspective" on house prices, he said he had two teenage children who would soon need places to live.

"I'll be OK because I am paid a lot of money," he said. "But high prices are entrenching inequality."

In the days of higher wage growth, it was much easier to pay off a home loan. With wage growth now near 2 per cent, buyers were forced to bear the burden of high payments for much longer.

Tightening the negative gearing and capital gains tax concessions would take some heat out of the market.

While negative gearing by itself wasn't the issue, in combination with capital gains tax discounts, it fuelled investor buying, which pushed up prices.

It was too early to tell how the policies of US president Donald Trump would affect Australia and the global economy, but the biggest risk was that he would erect barriers that wound back international trade.

"We will be the big losers if that deteriorates," Dr Lowe said. "Our ability to sell our minerals, and our services to the rest of the world, is critical to our standard of living."

"The idea that we make ourselves wealthier by erecting barriers, it's crazy."

Governor Lowe understood the argument for a lower company tax rate but wasn't advocating it.

"Since the financial crisis other governments have been talking about company tax rates as low as 15 to 20 per cent," he said.

"You could argue that from a global perspective that is not useful. But that's not the world that we live in. The choice for the Parliament is whether to respond."

"Australia has lots of advantages and firms come here for a lot of reasons, but tax is a consideration, and I think if you are uncompetitive you will probably get a few less dollars of capital formation from foreign firms.

"It's a choice for the Parliament. It's a decision about foreign, not Australian investment, because dividend imputation makes a tax-cut effectively irrelevant for Australian companies".

In The Age and Sydney Morning Herald

Thursday, February 23, 2017

Electricity prices are going up regardless

I'll give it to you cold. Electricity prices are going up. They have been too low for too long.

Malcolm Turnbull, Treasurer Scott Morrison and their Energy Minister, Josh Frydenberg, are happy to make political capital out of the inevitable return to normality (by blaming Labor and fondling pieces of coal in Parliament) but they are careful not to say they can stop it.

Frydenberg talks about "reducing pressure" on prices rather than keeping them down.

Prices have been unnaturally low because we've had more generators able to make the stuff than we have had people wanting to use it.

Usage per person started falling in 2010 and has only recently begun to recover. To sell power, generators have had to cut prices. Worse still, three of the biggest were bought by their present owners for next to nothing.

That means they can afford to unload electricity for little more than the cost of making it, pushing down the prices that can be charged by the others who need to also cover the costs of set-up.

One of the lowest-priced is Hazelwood in Victoria. The present owner got it for a song when it acquired its parent company. Another is the nearby Loy Yang A. Australia's AGL bought much of it from the Tokyo Electric Power Company in a fire sale after the Fukushima nuclear disaster.

And the third is the giant Liddell power station in the NSW Hunter Valley, virtually given to AGL by the NSW government as part of a larger deal that enables the government to avoid the clean-up costs when it's shut down.

Hazelwood is closing next month. Its French owner wants to exit coal worldwide. The ageing Liddell plant doesn't have long to go. With fewer of these unusual competitors able to charge unreasonably low prices, the other generators will be able to charge more like what they need and prices will shoot up.

The Energy Market Commission says wholesale prices will jump 20 to 40 per cent in Victoria, South Australia and Tasmania when Hazelwood goes, before falling back somewhat as new wind-powered stations come on-line.

But no new station, be it wind or even coal-powered, will be able to act like the big three have and sell power as if the station itself costs nothing. Nor will they be able to plan to sell power without factoring in environmental costs.

You can't plan to do that if you're building something that's going to last 50 years.

Which isn't to say there's nothing Frydenberg and his state counterparts can do. They are attempting to depress retail prices by changing the rules so they eat into retailing and transmission margins, and they could easily change the archaic and apparently manipulated rules governing how power is sold every five minutes.

That's right. Every five minutes, there are auctions to determine who gets to sell how much and for what price during the next five minutes in different parts of the so-called National Electricity Market, which takes in the eastern states and South Australia.

But a quaint historical rule means what the winners are actually paid is the average price over the six five-minute intervals that make up each half-hour.

So if the generators hold back and offer very little power and demand high prices during the first five minutes of each 30-minute cycle, and push the price per megawatt hour towards the ceiling of $14,000, they can offer much more at lower prices during the rest of the half-hour and still get an average price north of $2000, which is above the odds.

A new "five minutes means five minutes" rule would stop them.

And it would make it easy for battery farms to submit bids when the price gets high. They mightn't be able to bid for a full half-hour to take the edge off high prices, but they could do it for five or 10 minutes. Overseas, and in Western Australia, companies such as EnerNOC act as "demand aggregators" bidding to turn off demand when prices get high.

A zinc smelter might be able to turn off for five or 10 minutes and still keep its zinc molten, but not for half an hour.

And they could change the rules to reward generators that provide "inertia". Old-style coal-fired power stations do it automatically. They alternate the direction of current at 50 cycles per second because their turbines spin at a constant speed.

As coal-fired stations become more scarce, other generators are going to have to be paid to provide that service. Wind farms can do it using electronics, and the government is funding a trial at the massive Hornsdale wind farm north of Adelaide.

Down the track, battery farms should be able to do it as well, providing "synthetic inertia" as good as that created by spinning lumps of iron.

Away from the glare of politicians, the Finkel Review being conducted by the chief scientist, Alan Finkel, for the state and federal energy ministers is examining all of these options. It won't be able to stop prices rising, but it might just be able to make things work better.

In The Age and Sydney Morning Herald

Why low wage growth hurts

Low wage growth is what the Coalition wanted. Within weeks of being sworn in as employment minister in 2013, Eric Abetz warned "weak-kneed employers" against caving in to unreasonable union demands.

He set the pace himself, axing Commonwealth guidelines for cleaners employed on government contracts, giving them what amounted to pay cuts of around 20 per cent when their contracts expired.

He offered defence force staff just 1.5 per cent, less than inflation and the lowest increase in living memory. His prime minister, Tony Abbott, decreed that no public servant would get more. Abetz offered staff in his own department just 0.5 per cent along with cuts to conditions. Later, under the Turnbull government, the purse strings were loosened as it became apparent that the "wages explosion" Abetz feared had turned into a different sort of problem.

In the December budget update, the Treasury wrote down the tax receipts expected in the budget by $3.7 billion, and by $30.7 billion over the four years, despite higher commodity prices, largely because of what had happened to wages. Instead of growing by the forecast 2.5 per cent, they were growing by 1.9 per cent. It cut its forecast to 2.25 per cent and may have to cut it again.

Lower wage growth means less tax revenue than expected, higher government payments, including Family Tax Benefits, and less consumer spending and perhaps even less economic growth.

On what would have once been thought of as the bright side, it can also lead to lower inflation in a self-perpetuating spiral, as pointed out by Reserve Bank Governor Philip Lowe on Wednesday.

But he's not happy about the prospect because inflation is already below his target, and without the certainty of some price rises, businesses are unlikely to want to expand.

About the only genuine positive is that employers are unlikely to want to move jobs offshore or replace workers with machines. They are cheap enough as they are.

Low wage growth can mean

  • Lower tax revenue
  • Higher government payments
  • Lower consumer spending
  • Lower economic growth
  • Lower inflation
  • Lower investment
  • Less offshoring and automation
In The Age and Sydney Morning Herald

Sunday, February 19, 2017

What if the nerds are reading Trump right?

The January meeting of the American Economic Association is to economics nerds what Star Wars conventions are to George Lucas fanatics. It's an opportunity for more than 13,000 of them to cram into hotels to swap ideas, make new friends and catch up on research.

Justin Wolfers prowled the halls. An Australian expatriate who's professor of economics at the University of Michigan, he told the Australian forecasting conference in Sydney this week: "There are more handsome people blessed with amazing social skills in that one building than you'll ever see anywhere else."

He asked them what was going on.

"Over the course of four days I literally did not meet a single North American economist who thought that anything good for the US was going to come out of the Trump administration," he said. "Not one."

Not a single nerd. But outside of the Chicago Hyatt Regency, in the world of actual business ...

Each month, the US National Federation of Independent Business asks 10,000 small business owners whether they think conditions will improve or get worse in the six months ahead.

The month before the election, 7 per cent more thought things would get worse than get better. Two months later, 50 per cent more thought things would improve. "That's an extraordinary turnaround of 57 per cent in two months," Wolfers said. "Small business people are just beside themselves with joy."

There has, he said, never been a more pure test of what matters most: the views of experts, or of real business people putting up real money who can make things happen because they believe things will happen.

"And it's not obvious who's right," he said. "Do we trust the guys who study this stuff for a living, or the guys who bet millions of dollars?"

These are the reasons to trust the experts.

  • Trump has signalled interest in a war in the Middle East. The first Gulf war knocked off trillions (15 per cent) from the US stock market.
  • Impeachment and all it entails is a real possibility – Trump has already lost a National Security Advisor.
  • There's an increased risk of a new financial crisis, with Trump preparing to unwind the Wall Street Reform Act.
  • And an increased risk of the US defaulting on its debt. Trump has already said he would consider "renegotiating" it.
  • And the possibility of a trade war, and the collapse of a stable financial system.

Too extreme? Perhaps. But his point is we have to put some probability on these events, "just as a couple of years ago we had to put some probability on a reality TV host becoming president".

But how big a probability? Wolfers says before the election, smart people thought we should take Trump seriously, but not literally. They were wrong. Trump's biggest surprise has been his fidelity. "He really has begun to do the things he said he would do." The awful truth is we're going to have to take him literally and work through what that means.

In The Age and Sydney Morning Herald

Thursday, February 16, 2017

Why have our ministers got it in for the unemployed?

What were they thinking? On Monday three members of cabinet called a press conference to pressure the Senate to cut the dole. That's right, to cut the dole. At just $13,750 per year plus an $8.80 per fortnight energy allowance, it's already so low the Business Council believes it "presents a barrier to employment and risks entrenching poverty." The Organisation for Economic Co-operation and Development, the research arm of the world's richest economies, says Australia's unemployment benefit has reached the point where it may no longer be effective in "enabling someone to look for a suitable job".

Even a Coalition-dominated inquiry found a "compelling case" for boosting it.

But the three ministers wanted to deny the energy supplement to new entrants on the spurious ground that this would merely remove "carbon tax compensation for a carbon tax that no longer exists". It wouldn't. The Newstart cost of living increase was cut 0.7 per cent when the energy supplement came in to avoid double counting. If the energy supplement went but the cut remained, new entrants to Newstart would be worse off than if the whole thing had never happened.

And they wanted to withhold Newstart from newly-unemployed Australians aged 22 to 25, paying them instead the lower $11,375 Youth Allowance. The under 25s would have to wait longer too – five weeks instead of the present one.

Rather than spend time arguing the merits of cutting a benefit already so low it can barely be lived on, Treasurer Scott Morrison, Social Services Minister Christian Porter and Education Minister Simon Birmingham delivered instead what amounted to a threat: if the Senate didn't cut the unemployment benefit, they might not fully fund the National Disability Insurance Scheme.

But not at first. In a burlesque twist, they opened the press conference spruiking the case for an unfunded massive company tax cut.

When they turned to the National Disability Insurance Scheme their message was that it had to be funded, that those funds would come from cuts to unemployment benefits, and that the Senate had to back them.

An astounded Nick Xenophon, who leads a team of three in the Senate, labelled it blackmail. "As a negotiating tactic, this is as subtle as a sledgehammer," he said. It was "dumb policy and even dumber politics".

Using the disabled as a human shield to defend cuts to other Australians in need is as dumb as it gets. The ministers seemed to think it would work because it was all welfare.

Later that day Porter relented, saying he hadn't really been holding the disabled hostage, and of course he would properly fund the national insurance scheme.

But that he and his colleagues thought the idea was smart at the time says something about their attitude to people they are meant to support.

Back in October Porter became convinced that they were getting more from staying at home than would if they worked.

"We have found these pockets," he told Sydney's 2GB, "and maybe that's being a bit generous, because they are very large pockets, of payment categories and rules that intersect in a way that mean you can earn as much through the welfare system, and I use the word 'earn' advisedly, you can earn as much as you do from working very hard".

It was evidence he pushed his department to find. "We have been asked to put together a cameo of a parenting payment recipient getting over $45k per year," one of his departmental staff explained in an email released to me under the Freedom of Information Act. "Unfortunately this urgent."

The department exceeded expectations. It came up with an unusual case of a single parent with four children aged 13, 10, 7 and 4 managing to pay $400 per week in rent. She would get $52,523.50 per year.

The next morning The Australian quoted the minister under a front page headline that read: "Parental welfare pays more than work". "Thousands of parents claiming government benefits are financially better off not getting a job" it said, which wasn't what the figure showed at all, as the flurry of departmental emails that followed made clear.

"The article is comparing apples and oranges," said one. "It seems like the author hasn't spent too much time thinking about how the payments actually work, and what their intent is."

Most of the $52,523 quoted was the Family Tax Benefit, which would be paid to a parent with that many children even if she did work, meaning she or he would be much better off working than not.

But in the round of media interviews that followed the Social Services Minister passed up the opportunity to correct the false report, and Morrison backed him, saying it was "a crying shame that some Australians would have to take a pay cut to get a job in this country because of the way our welfare system works".

Asked via Freedom of Information to provide material created in the previous four months that supported the minister's claim, the department could not.

Inept in their dealings with the Senate, Porter, Morrison and other ministers might have also misread the public. Many of of us know someone who has needed Newstart. Almost all of us knows someone who's been monstered by Centrelink. Those Freedom of Information requests are just beginning.

In The Age and Sydney Morning Herald

Tuesday, February 14, 2017

Memo Scott Morrison: there ain't no jam jars

What's this about a "locked box"? Treasurer Scott Morrison says the savings that'll be made from cutting unemployment and other benefits will be put into the modern-day equivalent of a jam jar - "a locked box for which the Social Services Minister has full visibility and accountability to ensure that the money that will come from making these changes will go to ensure that the National Disability Insurance Scheme continues to be funded".

It came across as a threat: if the Senate didn't support the $3 billion of spending cuts in the clumsily named Omnibus Savings and Child Care Reform Bill, the National Disability Insurance Scheme mightn't be properly funded.

In reality there are no locked boxes. Clause 81 of the Constitution says "all revenues or moneys raised or received by the executive government of the Commonwealth shall form one consolidated revenue fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution".

There are no separate jam jars.

But it hasn't stopped the governments of all persuasion from acting as if there are. The best-known is the Medicare levy, which we are told funds Medicare and the National Disability Insurance Scheme, but which in reality goes straight into consolidated revenue (and couldn't anywhere near fully fund them in any event).

Some of them are silly. In his 2014 budget Joe Hockey promised the increase in the fuel excise would be ploughed back into roads. Not fuel excise itself, just the proposed increase, which was so tiny compared to total road funding that it would have been possible to say it had been ploughed back into roads, even if total road spending was cut.

And shortly after the lunchtime press conference it was conceded in question time that the threat had no force. Social Services Minister Christian Porter said that regardless of what goes into the 'locked box' the funding gap for the disability Insurance Scheme "will be met".

It was his "very strong preference" that it be met by finding savings.

But those savings needn't come from lifting the age of eligibility for the Newstart unemployment benefit from 22 to 25, they needn't come from lengthening the waiting period, and they needn't come from cutting it. It's possible to find other savings. If asked, the Senate crossbench would be happy to come up with suggestions.

In The Age and Sydney Morning Herald

Sunday, February 05, 2017

NAPLAN prepares us for neither the real world nor Trump

Google NAPLAN and you'll get an advertisement taking you to a website that will help you cram for it.

Of course that's not the idea. The standardised National Assessment Program for Literacy and Numeracy introduced by Julia Gillard as education minister is meant to be impossible to prepare for.

But teachers do. The next one is in May, two weeks into term two. The reputation of their students, the reputation of the school and their own reputations depend on it. Time that would have been spent encouraging year 3, 5, 7 and 9 students to ask questions and gain knowledge will instead be spent drilling them in how to pass the test.

That the two aren't the same ought to be apparent from the writing test. It's a hangover from an earlier era, before Donald Trump stood for president.

The persuasive writing test requires the student to introduce a topic, seek to persuade the reader by "for example, listing and describing parts, comparing and contrasting and showing cause and effect" and then to "synthesise" the ideas in order to draw a conclusion".

It might have been an effective technique in the 1960s, but since then decades of research have established what Trump instinctively knew – that clearly set-out arguments don't persuade. If they did, his greatest successes wouldn't have been in town hall rallies and on Twitter.

Fact checkers say 70 per cent of his campaign claims were false, but the method of argument required for students to succeed at NAPLAN couldn't defeat them. It's as if Clinton had on her team Australians who'd aced NAPLAN, and Trump had Americans who knew about people.

They key to convincing people appears to be repetition, something frowned on by those who mark NAPLAN. Study after study has found that the more often something is said the more likely it is to be regarded as true, all the more so if it is said by your side of politics.

In one, voters who were told about a policy assessed it in accordance with its merits and their ideological leanings. Another identically matched group, given the same information but also told that their side of politics supported it, backed it overwhelmingly. The political party effect "overwhelmed the impact of both the policy's objective content and participants' ideological beliefs".

In another, voters were given false information, given a "correction" telling them that it was false and in large numbers continued believed it. It happens because we are lazy. Processing a correction takes effort. Continually evaluating things to determine whether they are false takes effort. Using whatever our party thinks as a rough guide saves time.

And corrections can backfire. By repeating the original claim (as a correction or a fact check has to) they cement it in memory.

We're going to need new techniques of telling the truth from here on. They needn't be manipulative, but they'll have to move beyond the straightforward, beyond what's taught by time-stressed teachers teaching for the test.

In The Age and Sydney Morning Herald

Saturday, February 04, 2017

2017 Economic Survey: Steady rates in better year ahead

The Reserve Bank faces no pressure to adjust interest rates at its first meeting for the year on Tuesday and very little pressure to adjust them at any time during the year as the 2017 BusinessDay Scope forecasting survey predicts a rarity – an entire year of unchanged rates, something that hasn't happened since the survey successfully forecast a year of steady rates in 2014 and before that 2004.

Approaching its 40th year, the exclusive BusinessDay survey is made up of forecasts from 27 leading economists in the diverse fields of financial markets, academia, consultancy and industry. Over time its average predictions have proved to be more accurate than those of any of its individual members.

Against a backdrop of sharply climbing commodity prices, an unusual trade surplus and what's expected to be a rebound in US economic growth, the Scope panel predicts Australian economic growth of 2.4 per cent in 2017, a big improvement on the most recent result of 1.8 per cent, but nowhere near as big as the implied forecast of 3 per cent in the treasury's mid-year budget update.


Only two of the panel expect growth to exceed the federal treasury's 3 per cent forecast: HSBC's Paul Bloxham, who expects 3.4 per cent, and ANZ's Richard Yetsenga, who expects 3.3 per cent. Five are bunched with the treasury at 3 per cent, including Westpac's Bill Evans and the National Australia Bank's Riki Polygenis. But the two who came closest to getting GDP right last year, Stephen Anthony and Bill Mitchell, are far more pessimistic, each predicting only 1.6 per cent.

"Worldwide, the huge expansion in liquidity is pushing up asset prices instead of sparking investment," Anthony says.

"And in Australia mining investment has further to slide.

"That makes us a one-trick pony. We've got high-density dwelling investment driving the economy; potentially unsustainably as a result of effervescence coming in through China and our interest rate settings. That's really the only driver we've got. It will come off at some point in 2017.

"Other than that, consumption is weak, public investment is weak, public consumption is weak, and while net exports are helping, they are driven by Chinese monetary expansion, which will continue for a while before tailing off after 2017. Our growth rate will stay low, between 1 and 2 per cent."

Most of the panel (although not Anthony) expect a Trump-driven boost in US economic growth to more than 2 per cent. Three of the panel expect growth of 3 per cent. All expect China's reported growth to be close to the official target of 6.5 to 6.7 per cent, in part because of revelations that at least one province has faked data in order to meet the target. Most expect global growth to chug along at around 3.1 per cent.


Last year's extraordinary jump in the price of iron ore should run out of steam. After climbing from $US40 a tonne to more than $US80 by December, the panel's central forecast is for a retreat to $US70. But six of the 27 expect further increases, two of them, Mardi Dungey and Neville Norman, to about $US100 a tonne.

The panel's central forecast is for Australia's terms of trade – with the nation running a substantial surplus – to close 2017 little changed, but two of the panel, Sally Auld and Margaret McKenzie expect further jumps of 7 and 10 per cent, while Michael Blythe and Paul Dales expect sharp falls of 7 and 8 per cent.

The jump in commodity prices has already eliminated Australia's trade deficit and is poised to as-good-as eliminate its current account deficit in the view of the ANZ's Yetsenga, who is forecasting a rounding-error deficit of less than $1 billion in 2017, after $66 billion in 2016. On average the panel expects $46 billion.


Most expect a retreat in the Australian dollar from 76 US cents to around 72 US cents. Only one of the panel expects the dollar to move a long way above where it finished 2016, that is Margaret McKenzie of the ACTU who predicts 95 US cents.

Living standards

Most of the panel expect the high commodity prices to inject extra cash into the economy, lifting the increase in nominal GDP to 3.7 per cent. The Reserve Bank's favourite measure of living standards, real net disposable income per capita, should climb 1.5 per cent in 2017 after slipping in 2015 and rebounding 1.7 per cent in the year to September. Two of the panel, Dales and McKenzie, expect mining-boom style growth of 3 and 3.5 per cent.

Prices, wages, jobs

The panel expects inflation to recover from its disturbingly low 2016 range of 1 to 1.5 per cent, hitting 1.9 per cent by December, which is just below the bottom of the Reserve Bank's 2 to 3 per cent target band. Only two of our forecasters, Saul Eslake and Richard Robinson, expect underlying inflation to climb to anything near the middle of the band, 2.4 per cent for Eslake and 2.3 per cent for Robinson.

Wages should mercifully increase by more than prices, in part because of the extra money high commodity prices will give to employers, climbing 2.1 per cent in 2017 after a record-low 1.9 per cent in 2016. The highest wage growth forecast is 2.7 per cent, from Victoria University economic modeller Janine Dixon. Only one of the forecasts is particularly low. It's for a fall in wages of 0.5 per cent, from Steve Keen, who is also the only forecaster predicting a recession: economic growth throughout the year of minus 1 per cent. 

The panel expects the unemployment rate to stay more or less where it is at 5.8 per cent, with only Keen and McKenzie of the ACTU predicting big increases, to 6.5 per cent.


The boost in commodity prices will help the budget, but not yet. Mining companies still have a lot of investment spending to write off their tax bills.

They'll also help to the extent that they boost wages, but that boost isn't expected to be big. The panel is predicting slightly bigger budget deficits than those forecast by the government: $39 billion for 2016-17 and $35 billion for 2017-18

Interest rates

Money will remain cheap for the government should it decide to shake off its reluctance and borrow big for infrastructure. The panel is predicting a 10-year bond rate of just 2.9 per cent in 2017. Only Paul Dales, Saul Eslake, and Su-Lin Ong predict increases to north of 3.25 per cent. Paul Bloxham expects a dive to 1.9 per cent.

Most expect a steady cash rate throughout the year, with only four predicting an increase. Twelve expect at least one cut, to 1.25 per cent, six expect a further cut to 1 per cent. On average the panel expects a cash rate of 1.4 per cent, which, given that the Reserve Bank only adjusts in increments of 0.25 per cent, means no change at 1.5 per cent.


After collapsing 40 per cent in 2016, mining investment should slide by a more gracious 13 per cent in 2017. But the range of forecasts is unusually wide, from a collapse of 30 per cent (Polygenis and Shane Oliver) to a rebound of 10 per cent (Shane Garrett).

Non-mining investment should climb a further 3.5 per cent after climbing 3 per cent last year, but the range of these forecasts is also wide, from a slide of 3 per cent (Dales) to a jump of 10 per cent (Koukoulas).

The range of housing investment forecasts is also wide, with the central forecast of just 1.9 per cent masking forecasts as high as growth of 11 per cent (Norman) and as low as a slide of 5.5 per cent (from the Housing Industry Association itself).


Home prices should take a breather, with the CoreLogic measure growing by just 4.9 per cent in Sydney and 4.3 per cent in Melbourne after an extraordinary 15.5 per cent and 13.7 per cent in 2016. Some forecasters expect home prices to fall (Nicki Hutley, Koukoulas and Keen) and two expect no growth (Jakob Madsen, and Richard Robinson from the property specialist BIS Shrapnel). The highest forecasts are for further growth of 12 per cent (Renee Fry-McKibbin for Sydney and Mardi Dungey for Melbourne).

Share market

The ASX200 should also take a breather, climbing just 2 per cent from 5627 to 5794 after climbing 6 per cent in 2016. Only Anthony and Keen expect falls, of around 10 per cent. Both Anthony and Keen has been forecaster of the year, each more than once.

In The Age and Sydney Morning Herald

The people who saw crazy 2016 coming

In most years there's room for one forecaster of the year. But not in 2016. Hardly any of our panel picked the dive in Australia's growth rate to 1.8 per cent or the dive in the cash rate to a record-low 1.5 per cent. Wage growth was lower than all but the most pessimistic of the forecasts, and house prices ended the year far higher than the highest.

But at their best, three of our panel got just about everything right.

Stephen Anthony of Industry Super (a two-time forecaster of the year) was right about Australia's very low economic growth rate. He picked 2 per cent for the year to December. He was also right about the cash rate, one of only five who expected it to slip 1.5 per cent. And he was right about the timing. He predicted one cut in the first half of 2016 and one in the second.

But like most he was far too cautious on house prices (expecting growth of only 3.5 per cent in Sydney and 6.5 per cent in Melbourne), far too keen on a low dollar (expecting 62 US cents instead of 72) and pessimistic about commodity prices, expecting a slide in the iron ore price to $US33. In fairness, few people expected the late-year surge in commodity prices, and none of our panel.

The ANU's Renee Fry-McKibbin got house prices pretty right. The typical forecast was for the CoreLogic measure of Sydney prices to climb 2 per cent and for the Melbourne measure 3 per cent. The year ended with prices up 15.5 per cent and 13.7 per cent. The Housing Industry Association and the property specialist BIS Shrapnel were as wrong as the rest of them, picking around 6 per cent and 3 per cent. Fry-McKibbin picked 10 per cent and 9 per cent, and she got housing investment pretty right as well.

She says with money cheap she could see nothing that would slow prices down. New home building was high but it takes a while, and a while to provide infrastructure to new suburbs. This year she is going for 12 per cent and 10 per cent.

Bill Mitchell of Newcastle University's Centre of Full Employment and Equity is the third of this year's three-pack. He was darn close on Australian economic growth, the closest on US economic growth, and the closest on record-low wage growth, picking an ultra low 2 per cent, close to the 1.9 per cent recorded in the year to September. He also hit the bullseye on the 10-year bond rate, picking 2.7 per cent, which is where it ended up.

He says low wage growth would have been obvious to anyone who wasn't seduced by the fairly steady unemployment rate. Underemployment had been climbing, tens of thousands of people had left the workforce who would have once been in it, and what jobs growth there was had been concentrated in part-time jobs that were typically non-unionised where workers had low bargaining power. This year he is predicting wage growth of 1.8 per cent, less than the rate of inflation, meaning earning power will shrink.

He says the low bond rate was also obvious, given auction data showing queues of traders wanting to buy risk-free assets. For all the talk about the need to attract foreign capital, Australia's government finds it pretty easy.

There are three honourable mentions: Shane Oliver was also close on wages, Jakob Madsen was spot on in predicting an outsized fall in mining investment of 40 per cent, and Stephen Koukoulas had the highest iron ore price. At $US58 a tonne it was higher than anyone else's, but still far short of what happened.

Arise Bill, Stephen and Renee, and may one of you not need to split the award next time.

In The Age and Sydney Morning Herald

Thursday, February 02, 2017

High prices hurt. Why Sinodinos is under pressure over books

Strong governments stand up for little people.

In working-class Brisbane in the early 1970s, no one stood up for the Chesters.

"Working parents, three kids. My mother had been squirrelling away money for two years to afford a return flight to Perth to visit her mother," daughter Karen told a conference late last year.

"The price of domestic air travel at the time was in real terms over fourfold what it is today. The price of clothing, with tariffs north of 40 per cent – think President Trump – was also more than threefold higher in real terms than today. And three kids, each five years apart in age, experienced a simultaneous exponential growth spurt."

"A perfect storm for my mother, who ended up raiding the squirrel tin to re-clothe us. No flight to Perth. She never saw her mother again."

By the early 80s, Chester was studying economics at the University of Queensland. She'd wanted to get into law, but didn't get the marks. One day in the second semester, during microeconomics, what had happened to her family began to become clear. Punitive tariffs on clothes and the two-airline policy had prevented her mother getting to Perth.

Four years further on, hired as an economics graduate at the Department of Prime Minister and Cabinet, a 20-something Chester was sitting in prime minister Bob Hawke's office taking notes.

He asked the assembled officials to tell him why he should cut tariffs.

"Because tariffs screw workers," Chester mumbled, in a voice she had hoped was too quiet to be heard.

But it was heard. Hawke asked the officials to explain how, asked for modelling on exactly how much they hurt workers, and started to drive tariffs down.

Twenty years on, after some years away in the private sector, Chester found herself back in government chairing a Productivity Commission inquiry into (among other things) the price of books.

So-called parallel import restrictions make it illegal for booksellers to import from wholesalers, except in limited circumstances. Forced to go through Australian publishers, even for the big name foreign books by authors such as JK Rowling or Elena Ferrante, the bookshops can be hit up for more and made to charge their customers more.

Except that the Booksellers Association and the Publishers Association told Chester it didn't happen. The booksellers prepared a chart of the price of 75 books in Australia, the US and the United Kingdom and argued there was little difference. The publishers compared 200 titles and said most were cheaper in Australia.

But Chester noticed that the samples were limited, in odd ways. And the booksellers' list compared the price of Australian paperbacks to foreign hardbacks, even where Australian hardbacks were available and more expensive.

She commissioned her own higher-quality survey of the price of 1000 identically matched books from the top 5000 titles sold in Australia and the UK and found the pre-tax Australian prices exceeded the prices charged in the UK by a staggering 20 per cent.

Worse still, limiting her comparison to just the majority of books that were more expensive in Australia (which is what's relevant for examining the effect of trade restrictions) she found the average difference was 30 per cent.

Despite their protestations, the Australian publishers seemed fully aware that they charged more for overseas books than was charged overseas, because they argued before her that they used those profits to subsidise the production of Australian books. But when she asked them for details about the cross-subsidy none returned with an answer, although several promised to.

It's the same argument that was used by Australian record labels right up until 1998, when John Howard (with Arthur Sinodinos as his chief of staff) extended Hawke's program of trade liberalisation by allowing the free import of compact discs. It was going to kill Australian music.

Two decades on, it's an easy claim to assess. Back in 1998 the Triple J Hottest 100 contained 42 Australian recordings, an all-time record. By this Australia Day it contained 66. The industry tally of all genres finds that back in 1998 Australian recordings accounted for 1 in every 5 recordings bought here. After two decades of open trade, it's 1 in every 3.

Sinodinos is now industry minister, and says he is as committed now as he was then to blasting away rules that hurt consumers. "Protection stops you being lean, it leads to companies padding themselves out," he told Fairfax Media this week. He has before him Chester's report, and he wants responses within a fortnight.

The Harper competition review has already recommended removing the remaining import restrictions on books, as has the Competition and Consumer Commission, the old Prices Surveillance Authority and a Senate inquiry. The government accepted Harper's recommendation and asked Chester's inquiry how to do it. She's recommended an immediate end in December this year, with no phase out.

Labor, shamefully, is backing continued high prices as it did for compact discs two decades ago. This time it wants to "support Australian stories".

Chester wants to support Australian consumers. She says there's $15 million to $25 million in it on just the 1000 titles she examined, depending on freight costs. Sinodinos will have to decide whether to back us.

In The Age and Sydney Morning Herald