Tuesday, October 31, 2017

Could land tax 'Bowie bonds' be a nifty fix for stamp duty?

An economist from Melbourne University believes he just might have found a way around the roadblock that's been stopping NSW and Victoria replacing stamp duty with land tax.

The swap has been commended by the Rudd government's Henry tax review, the Abbott government's tax discussion paper, and by last month's Productivity Commission review for the Turnbull government.

The Treasury believes stamp duty is one of the most distorting taxes and land tax one of the best, meaning that a swap would benefit the economy by as much as 72¢ in every dollar raised.

But so far, only one state or territory has embraced it: the Australian Capital Territory, which is slowly cutting the rate of stamp duty on Canberra homes while lifting the Canberra version of council rates, a process that will take 20 years.

It can't do it faster because that would mean double taxing someone who paid full stamp duty before the change and then was hit by higher land tax afterwards.

An alternative would be to eliminate stamp duty immediately and to apply the land tax only to those properties that were bought stamp duty free. Eventually, after most properties changed hands, the land tax would be near universal.

But the main reason none of the states have done it is the short-term hit to revenue. Stamp duty is collected infrequently. Land tax would be collected more frequently at a much lower rate, every year or every quarter. But if the rate was set to make no-one worse off, the government would to wait years after properties had been sold to get back in land tax what would have earned immediately in stamp duty.

The proposal by Kevin Davis, research director of the Australian Centre of Financial Studies, in a paper released on Wednesday, is for state governments to sell their right to some of their future land tax collections in return for upfront payments.

"In each year following the abolition of stamp duty, the government will no longer receive the large revenue amount which would arise from stamp duty on house sales in that year," his paper says.

"Suppose that were $5 billion (a conservative estimate for the larger states). It would be fairly straightforward for the government to issue $5 billion worth of securities which provide the holders with the entitlement to the corresponding future stream of property tax revenue for the next 30 years."

Professor Davis says a byproduct would be the creation of a new low-risk, long-term asset class suitable for superannuation funds of the kind they get now by buying shares in privately run toll-roads and airports. For funds that wanted it, the payments could be designed to give them exposure to the residential property market.

The idea of "securitisation" isn't new. Home lenders securitise future mortgage payments and sell them to investors. In 1997 David Bowie issued so-called Bowie Bonds giving investors the right to the royalties from tracks including Space Oddity, Heroes and Ashes to Ashes for 10 years in return for an upfront payment.

Professor Davis says while many details would need to be worked out, he can't see why it wouldn't work. He says an immediate advantage would be to reward older homeowners who downsized. They would be tens of thousands of dollars better off, instead of no better off as they often are now after paying stamp duty. Australians would find it easier to move for work, and the land tax would impose a penalty on Australians who held onto land rather than using it.

In The Age and Sydney Morning Herald

Monday, October 30, 2017

Labor to open free trade agreements to scrutiny

All future free trade agreements would be vetted by the Productivity Commission and re-examined every 10 years under a new Labor policy that has won endorsement from business organisations.

Unveiling the policy at a function hosted by the Australian Chamber of Commerce and Industry, Labor trade spokesman Jason Clare said the public was sceptical about the China, Korea and Japan trade agreements in part because they hadn't been subject to an independent arms-length assessment outlining what they would mean for jobs and incomes.

"At the moment, once a free trade agreement is signed a report is prepared by the Department of Foreign Affairs and Trade outlining why it is in Australia's national interest. That's it," he said.

"Given all the scepticism that exists, I don't think it's good enough to rely on a report from the same people who negotiated the deal. It should be independently assessed."

Australia signed the giant 12-nation Trans Pacific Partnership Agreement with the United States without the benefit of any independent analysis of its economic effects. The government published a report commissioned by the Department of Foreign Affairs on the combined economic effects of China, Korea and Japan free trade agreements, but did not allow other parts of government to independently analyse them.

The Productivity Commission has been scathing about the latest series of agreements, arguing that they grant legal rights to foreign investors not available to Australians, expose the government to potentially large unfunded liabilities and impose extra costs on businesses attempting to comply with them.

The Commission says that by favouring some countries over others and excluding firms sourcing substantial inputs from overseas, they "add to the complexity of international trade and investment, are costly and time-consuming to negotiate and add to the compliance costs of firms and administrative costs of governments."

Appearing before a parliamentary inquiry, Commission chairman Peter Harris said without a genuinely independent analysis before deals were signed, the consensus in favour of open trade would crumble.

The analysis should first identify the problem that the trade agreement was designed to solve, find the lowest-cost means of solving that problem and then make clear the costs the proposed agreement would impose on business.

It should be conducted before negotiations begin, and again in the four or so months after they have concluded but before the deal is ratified.

The Korea-Australia agreement included 5200 separate so-called rules of origin delineating which inputs could be included in an export in order for it to have preferential treatment. It was "red tape, growing at a very healthy rate," Mr Harris said.

Mr Clare also promised that the Commission would conduct an independent review of each agreement ten years after ratification. The department told the parliamentary inquiry that to the best of its knowledge none of the agreements signed by Australia had been assessed by Australia after the event. A review of the US-Australia agreement conducted by the Australian National university 10 years after ratification found it had not boosted trade at all.

The Chamber's director of international trade, Bryan Clark said Labor had embraced, not only the Chamber's position but also the recommendations of the parliament's joint standing committee on treaties and the Senate foreign affairs and trade committee. The Business Council said Labor's proposal was "worth considering".

Trade Minister Steven Ciobo said Australia already had measures in place to test the effectiveness of its agreements. There was rigorous oversight by the joint standing committee on treaties, which included Labor politicians.

In The Ag e and Sydney Morning Herald

Sunday, October 29, 2017

The Bachelorette explained. In praise of online dating

How do you explain The Bachelorette?

I'm not talking about the bachelorette herself, Sophie Monk: she's a topic for another day.

I am talking about the behaviour of the men who were locked in the house with her – her suitors.

Each declared she was the love of their life, presumably because they were locked in a house with her, or perhaps because they were on television.

What other reasonable explanation could there be? Choosing a long-term partner is one of the most serious decisions anyone makes. The odds of each of the housemates picking the same woman in the same house, when there are billions of other people to choose from, and billions of other locations, are infinitesimal.

But their behaviour checks out. Sheena Iyengar met her future husband at a bus stop, and she has been studying the economics of choice ever since.

A professor at the Columbia Business School, she invites her students to heterosexual speed dating sessions, which she uses as mini laboratories. Here's one of her most important findings: men (not women) become increasingly less choosy toward the end of each session. Women set standards and maintain them. They mark their last date as harshly as the first. Men begin with standards and discard them if it looks like they'll go home alone.

To some extent they are looking for different things. She asked each to answer "yes" or "no" to seeing the other again, and to rate them for attractiveness, sincerity, intelligence, fun, ambition, and shared interests./p>

It may not come as a surprise that men highly value physical attractiveness. A woman's physical attractiveness was 18 per cent more important in getting a man to say yes than was a man's attractiveness in getting a woman to yes. Women valued intelligence roughly twice as much as men did, and men did it an odd way. The more intelligent the woman was, the more likely the man was to say yes, right up to the point when he thought she was as intelligent as he was. Beyond that extra intelligence didn't help at all.

It was even worse for ambition. Women valued it. Men valued it up until the point they thought the woman was as ambitious as them. Beyond that, it counted against the women. It made men more likely to say no.

An endearing characteristic of men was that they didn't much care about race. For women it mattered a lot. They were 14 percentage points more likely to say yes to someone of their own race than someone of a different race, which, given that they said yes 38 per cent of the time, made race enough to turn an ordinary no into a definite no or into a moderately strong yes.

But that's changing. Online dating is replacing bumping into people at bus stops and hooking up with friends of friends or speed dating. Almost instantly the universe of potential dates has become massive.

Cornell University economist Josue Ortega and and psychologist Philipp Hergovich have just published a  paper about what ought to happen to society when the universe of potential dates is no longer limited. They say it ought to become racially integrated, really quickly.

Online dating only really began in the mid-1990s, and only really took off in the 2000s. As it happens, at both times there was an upsurge in interracial marriage.

It might be coincidence, but if it's not their model suggests that race itself will break down in the United States, and everywhere else that gives itself over to online dating.

And the marriages will be stronger, another finding that comes from choices no longer being limited.

It's the exact opposite of The Bachelorette. And it's arriving fast.

In The Age and Sydney Morning Herald

Thursday, October 26, 2017

Who'll face up to the pharmacy protection racket?

Have you heard about the inquiry into the rules governing pharmacies and what they get paid?

I'll let you in on a secret. It's secret, even though the Health Minister received its report six weeks ago. Which is odd, because Greg Hunt has been acting as if there's no report to consider.

Just last week he introduced proposed legislation that would entrench in law one of the key protections the inquiry was examining.

Until now, the so-called location rules have been the result of a contract signed between the Pharmacy Guild and the government, renewed every five years. If Hunt's proposal gets through, they'll remain in place indefinitely, until the law is rescinded or amended.

Hunt and the guild agreed to make the rules indefinite back in the middle of the year while the inquiry was under way.

If its report is critical of those rules when Hunt finally makes it public, he'll be embarrassed, but it will be too late.

Last month at a small gathering of health economists at Old Parliament House in Canberra, the inquiry's chairman, Stephen King, provided an insight into what it will say.

For pharmacy owners the location rules are "the equivalent of falling down a gold mine". But they need to continuously change and refine them because there's money to be made competing with the monopolies that benefit from them and money to be made shutting that competition down. It's like a giant game of Whack-A-Mole.

The 56-page location-rule handbook outlines the need for surveyor's reports (23 times) and the importance of confirmation "that the measurement has been undertaken from the mid point at ground level of the public access door of each of the premises".

The rules originally allowed a qualified pharmacist to set up a new pharmacy with no constraints whatsoever as long as it wasn't within 10 kilometres of an existing one.

"A pharmacy in Gympie in Queensland, a Chemist Warehouse, has set up 10 kilometres out of town," King told the gathering. "And because it provides what consumers think is a great service at a great price, people have been travelling 10 kilometres to get there. It's actually got other shops around it now, because it has drawn customers to it.

"Now obviously that was unreasonable competition," he added, sarcastically. "It had to be stopped. That pharmacist wouldn't be allowed to set up in that location today. Later versions of the rules say there has to be 'enough demand'.

"The rules create local monopolies. If an area grows, an extra pharmacy provider number becomes available. Under the rules the existing owner is allowed to apply for it and usually gets it.

"We have been to parts of Australia where there, I think it was Alice Springs, where there were four pharmacies. We didn't realise they were all owned by the same people. They all had different brands, creating the appearance of competition, but they were clearly not competing.

"In Broome three out of the four pharmacies were owned by the same people. We turned up to the first and said we were going to the next one afterwards. They said: 'Why are you doing that? We own that one as well.' "

Local monopolies mean prescription prices are higher than they should be. But King was unable to find out how much higher.

"Pharmacists are agents of government; the government pays them, on average, $11.50 for each item they dispense. We tried to find out what their costs were. We asked the guild to tell us. It does an annual survey of its members. It said it couldn't give us that information because it was provided only for the purposes of the survey.

"So we said: can you go back to your members and ask if that information can be shared, confidentially. The guild said no, so we did our own survey. Unfortunately, the guild then sent around a message suggesting its members not engage with our survey.

Very few did. But the best information we could get is that the efficient dispensing fee would be beneath $10 and probably somewhere between $8 and $9. The caveat is that the information isn't very good. After two years of looking at this, I still can't get the data. No one can, with the possible exception of the guild.

"But you can get an idea by looking at prices in the inner areas of Sydney and Melbourne where there is competition. They offer dollar discounts which come out of pharmacists' pockets. But they are not offered in the outer suburbs, and they are not offered in rural Australia."

As a "thought experiment" King considered withdrawing the business and tendering it out. "Maybe you could offer two locations on each side of a main street. Would-be dispensers could tender by offering the lowest fee they would be prepared to accept."

On Tuesday the Productivity Commission (on whose board King sits, although he wasn't involved in the latest inquiry) went further. It wants the business taken away from pharmacies and given to machines of the kind that are common in Canada. They dispense quickly and accurately for a fraction of the price.

In The Age and Sydney Morning Herald

Tuesday, October 24, 2017

Schools, universities, hospitals holding us back - Productivity Commission

Automatic dispensing machines would replace pharmacies, low-value healthcare procedures would be defunded, people with real-world skills would be made teachers, and drivers would be charged for the use of roads under a series of audacious proposals the Productivity Commission believes could add $80 billion per year to economic growth - an amount it says would grow over time.

The five-year program, requested by the Treasurer Scott Morrison, is designed to jump-start innate, or so-called "multifactor" productivity, which the commission believes has barely grown since 2004.

The productivity boost brought about by economic reforms in the 1990s produced almost all of the decade's spectacular lift in living standards. Since 2004 innate productivity growth has produced almost none, with most of the productivity growth that has been achieved the result of investment spending and most of the income growth the result of the mining boom.

Productivity Commission chairman Peter Harris said the slowdown in Australia's capacity to "do more with the same" was puzzling because scientific and technological knowledge had seemingly advanced. In 2003 there was no "cloud", no "internet of things" or smartphones and music and software were provided in physical forms.

Without action to remove the last big obstacles to productivity, Australia might consign itself to half a century of low income growth.

The obstacles were predominantly in the public sector, in the way it provided health and education and managed cities. It was as ripe for reform now as manufacturing was in the 1980s.

Twenty seven per cent of adults were obese, holding back their ability to contribute to the labour force, although Australians life expectancy was the third-highest in the developed world, the 11 years spent in ill-health was the third worst in the OECD.

Medical best-practice was often ignored. Seventy five per cent of bronchitis was treated with antibiotics, when the correct rate was close to zero, 71,087 knee arthroscopies were performed per year in most cases without evidence of benefits, 27,500 hysterectomies were performed without a diagnosis of cancer. Often it was because doctors didn't know how to say "no" to patients, and because patients didn't know what best practice was.

The commission recommends defunding low value procedures and creating scorecards for the performance of providers to enable patients to compare outcomes.

Medicines would be dispensed by ATM-style machines or by staff without pharmacist qualifications. "This new model would not, under any realistic assumptions require anywhere near the current 20,000 pharmacists who provide clinical services, and so would require a transition to a much smaller employment base," the commission says. Universities would be informed of the need for fewer pharmacists, some of whom could transition to other forms of medical work assisting doctors. The new dispensaries would not be bound by the location rules that prevent pharmacies from competition.

The Pharmacy Guild - one of the country's most powerful lobby groups - instantly rejected the recommendation as "radical and unworkable", saying it would "dumb down" an entire profession.

The commission wants universities to provide honest assessments of the employability of their graduates before enrolment and to be subject to competition law where they could be made to provide refunds or replacement courses.

"If you buy a kettle and it doesn't perform, you've got the right to return it and get a new kettle," Mr Harris said launching the report. "If your education doesn't perform as promised, the same law should apply."

Mr Harris said one-in-five university graduates were underemployed, up from one-in-10 a decade ago. His report discusses, but does not recommend, stopping fees imposed for university teaching being used to fund university research.

The report imposes a five-year timeframe for lifting teaching standards, noting that the performance of 15-year-olds in maths has slipped to the level of 14-year-olds in the year 2000. It says 30 per cent of year 7 to 10 information technology teachers have neither studied the subject at second‑year tertiary level nor been trained in how to teach it at tertiary level.

"Fifteen-year-olds are being taught by people who may not necessarily know the subject and can't answer questions because it's not their field," Mr Harris said.

One solution was to "take people who aren't necessarily trained teachers and train them up". Another was to train teachers in specialist fields such as maths and IT.

Other recommendations include phasing out stamp duties in favour of land tax and trialing pay-peer-drive charges for roads as an alternative to petrol excise.

"None of these ideas are new, we didn't make them up," Mr Harris said. "But when people tell you they are already being implemented, don't believe them. That's what we are trying to achieve."

Mr Morrison said he would work with the states on the ideas, beginning with the treasurers' conference on Friday.

In The Age and Sydney Morning Herald


Pharmacists are unfinished business

Why pharmacists? They've got off lightly. Peter Harris, the head of the Productivity Commission, worked for the prime minister's department in the 1990s when the Hilmer competition reforms were ending cozy arrangements for just about everyone, and earlier on prime minister Bob Hawke's personal staff.

Manufacturers lost tariff protection, banks suffered an onslaught of foreign competition and unions were denied industry wide bargaining. Only three industries survived completely unscathed, each due to impressive lobbying.

One was the taxi industry. It has since been buried by the GPS (anyone can find a street) technologically-driven undercutting. Another was newsagents. The cozy rules that prevented one from encroaching on the turf or another and guaranteed they changed hands for high prices have been rendered irrelevant by digital direct delivery.

The third was pharmacies. Incredibly profitable, protected by a thicket of impenetrable rules that prevent one from competing with another within 1.5 kilometres, or 500 metres inside a shopping centre subject to the provision of a surveyor's report, they get guaranteed business "sustained through government fiat".

Like once-valued taxi drivers, they have special skills that are no longer especially special. Machines can read prescriptions, select the right pills and stick labels on bottles. In some parts of the world they operate like ATMs. In others they work with the assistance of sales assistants without a detailed knowledge of pharmacology.

Harris can see what will happen to pharmacists (and is happening already through the online delivery of medicines from overseas). He wants a new less-skilled workforce trained to work with the machines and universities told to produce fewer pharmacy graduates.

It's an inconvenient recommendation for a government that has just signed a new long-term agreement with the Pharmacy Guild, as is the recommendation for a carbon price, a land tax in lieu of stamp duty, a fair use regime for copyright and taxing wine as if it was beer. It is a tribute to the Treasurer Scott Morrison that he commissioned the report without knowing what would be in it.

The traditional targets for productivity reform; unions, industries protected by tariffs, have few further to offer. The big ones left are in the public sector where hospitals, schools and universities operate pretty much as they did in the 1970s.

Harris wants them subject to the same sort of market discipline as manufacturers. They shouldn't be rewarded for producing products that don't work and consumers should have the right and the information needed to shop around. Teachers should know about what they teach and universities should provide refunds if their courses don't work.

Harris is bothering because without a new push on productivity, living standards are likely to stagnate. The targets he has picked are the big ones left.

In The Age and Sydney Morning Herald

Monday, October 23, 2017

Census 2016: Locals move out as new arrivals target Sydney

Sydney is running a "population deficit" with the rest of the country, new census figures show.

The figures for population movement released on Monday show that although Sydney benefited from an enormous inflow of migrants (399,620) in five years leading up to the census, it lost population to every region of the country.

Sydney sent 27,670 locals to Melbourne, many more than the 19,100 Melbourne residents who moved to Sydney.

It sent 21,480 locals to Brisbane, many more than the 15,570 Brisbane residents who moved to Sydney.

It sent 27,166 to regional Queensland, many more than the 19,100 regional Queenslanders who moved to Sydney, and 10,200 to Perth, many more than the 8660 Perth residents who returned to Sydney.

The exodus was particularly pronounced in regional NSW, which benefited from an outflow of 105,060 Sydneysiders, easily surpassing the flow of 62,470 moving from regional NSW to the city.

The picture painted by the Bureau of Statistics is of a city that has become the primary destination for immigrants who displace locals who move to other parts of Australia and other parts of the state.

The census shows a similar phenomenon in Melbourne, which in the five years leading up to the census gained residents from overseas and every region of Australia but one. That region was rural and regional Victoria, which gained 76,210 ex-Melburnians, easily exceeding the 59,220 who moved to Melbourne.

So great were the outflows from Sydney and Melbourne to the rest of NSW and Victoria that those regions became two of the fastest growing in the nation, gaining a net 17,570 and 28,720 new arrivals from the rest of the country.

The other regions to grow at the expense of the rest of the country were Greater Brisbane (25,440), regional Queensland (14,620), Greater Melbourne (10,670) and Greater Perth (5910).

The regions to lose locals to the rest of Australia were Greater Sydney (77,590), Adelaide (9470), regional Western Australia (5480) and regional South Australia (3060).

In The Age and Sydney Morning Herald


Census 2016: Australians flock to Melbourne as locals head out

Melbourne gained an extra 485,220 residents in the five years to the 2016 census, the overwhelming bulk of them imports from the rest of the country or overseas.

While most came from overseas (365,240), Sydney accounted for 27,670, more than any other Australian city, setting up a flow that was only partly offset by the 19,100 Melburnians who headed north to Sydney.

Brisbane sent 17,000 of its residents to Melbourne, a flow partly offset by the 13,700 Melburnians who moved in the other direction.

The next most important sources of new Melburnians were regional Queensland (16,730), regional NSW (15,350), Perth (14,190) and Adelaide (12,110).

The figures, in the second wave of census data released by the Bureau of Statistics on Monday show that all but one Australian region sent substantially more people to Melbourne than Melbourne sent to it. The exception is regional and rural Victoria, described by the Bureau as "rest of state".

A record 76,210 Melburnians moved to other parts of Victoria in the five years leading up to the census, comfortably more than the 59,220 regional Victorians who moved to Melbourne.

Melbourne was the only significant source of regional Victoria's population growth.

The picture painted by the Bureau is of a city that attracts immigrants and Australians from other states who displace locals who move to other parts of Victoria.

Its a phenomenon long established in NSW where Sydney takes the lion's share of immigrants who displace locals who move to other parts of the state.

In the five years leading up to the census 105,060 Sydneysiders left for regional NSW, more than offsetting the 62,470 regional residents who moved to Sydney.

So great was the outflow from Sydney and Melbourne to regions in the lead-up to the census that regional Victoria and regional NSW became two of the fastest growing regions in the nation, gaining 17,570 and 28,720 net arrivals from the rest of the country.

The other regions to grow at the expense of the rest of the country were Greater Brisbane (25,440), regional Queensland (14,620), Greater Melbourne (10,670) and Greater Perth (5910).

The regions to lose locals to the rest of Australia were Greater Sydney (77,590), Adelaide (9470), regional Western Australia (5480) and regional South Australia (3060).

In The Age and Sydney Morning Herald

NBNCo may never make a profit, warns chief

The national broadband network is losing money with each typical connection it makes and believes that unless it is protected from competition due to data delivered by ultrafast mobile broadband it will never make a profit.

The company's concerns have been detailed by chief executive Bill Morrow in an exclusive interview ahead of a Four Corners report on Monday that it fears will suggest "the whole thing is a mess".

"We collect about $43 per month from retail service providers for each home they sell into," Mr Morrow said. "In order to recover costs we need $52."

"We, NBN and the board, are betting that future applications are going to bring more value into homes, that they are going to need more bandwidth or more data and that the retail service providers will pay us more."

"It's a bet we've taken. If it doesn't come together, we've got a problem."

Asked whether NBN could withstand competition from data delivered by new ultrafast 5G networks that didn't need connections to houses, Mr Morrow said: "Forget about 5G for a moment, even the antenna technology using 4G is a viable alternative to NBN where the towers are already up."

"Think about the NBN business model. The only reason we are able to get connections into those 2 million difficult-to-wire homes that are cost prohibitive is because we are taking margin from low-cost city areas. As soon as competitors eat into these margins through enhanced antenna technology, we've got a problem."

Fixed-line competitors to the NBN will soon have to pay a levy beginning at $7.09 a month to help subsidise delivery to hard-to-connect customers.

"The problem is the levy excludes wireless, even where people never take the modem outside of the house," Mr Morrow said. "It's a threat that wasn't envisaged by this government or the last when the business plans were put together."

Conceding that a levy on mobile broadband would be unpopular, Mr Morrow said: "Things are going to have to happen. The government has two options: to regulate to protect this model, or to realise that the NBN won't have the finances it thought and might require some off-budget monies to go in to make it happen."

At the moment the NBN is required to make a profit, repaying government loans and returning the government's investment through dividends.

"I think government moves are going to be inevitable," Mr Morrow said. "It all depends on how serious this competitive threat is, but being an old wireless guy I can guarantee you I would have had my team seriously looking at this."

In April, internet service provider TPG spent $1.3 billion on wireless spectrum in what was widely interpreted to be a move into mobile data. Telstra, Optus and Vodafone already have substantial mobile data networks.

Asked how much subsidy the NBN would need if it wasn't protected from competition, Mr Morrow said it was too early to predict how much mobile competition would eat into its margins.

Asked whether NBN would ever make the profit required of it even with protection from competition, Mr Morrow said he wouldn't speculate.

"It's too early. I've been around the telco industry for 40 years and things have ebbed and flowed quite a bit. Companies have crashed and burned and later emerged as super-valuable – it's too premature to think about."

In The Age and Sydney Morning Herald


NBN Co chief says under Labor connections cost it up to $40,000

NBN Co had to shell out more than $40,000 to connect some hard-to-reach properties, in one case spending more than $90,000 when it was compelled to provide fibre to a property near Townsville in Queensland, according to figures to be released on Monday in a bid to counter a push to have it revert to the Rudd government's original target of 93 per cent fibre to premises.

The list of the 10 most expensive to connect locations in each state shows it spent $41,304 connecting a business in Strathfield in Sydney that needed concrete and bitumen broken to install a new conduit. It spent $51,464 connecting a business in Ballarat than needed 10 metres of bitumen broken and relayed.

"It's all very well to say leave no home left behind when it comes to fibre as was the original Labor requirement," NBN Co chief Bill Morrow told BusinessDay, "But boy, some of those homes are bloody expensive; you've got heritage homes and rock to drill through and they've often already got infrastructure in place you can use to get good speeds."

Mr Morrow was appointed in 2013 as the incoming communications minister Malcolm Turnbull abandoned the 93 per cent target and allowed NBN to deliver city connections by a mix of technologies including fibre to the node, fibre to the curb and the so-called HFC cables installed to deliver pay TV.

It cost an average of $4400 to connect premises purely by fibre and only $2300 using the multi-technology mix.

Mr Morrow rejected comparisons with the $3000 it costs the New Zealand provider Chorus to deliver fibre direct to premises.

"We are required to connect every premise. Chorus doesn't need to because it can leave the existing network in place," Mr Morrow said.

"In fact, they've told us, they struggle to get people to go over the fibre, because people are happy with the fibre to the node they've got and don't want any more."

"Our rules require us to force people off. That means we have to supply every premise. Unlike Chorus which owns the existing network, we have to pay Telstra about $1000 for each of its customers we disconnect."

The Telecommunications Industry Ombudsman's annual report shows a sharp increase in the number of complaints about the NBN, often relating to delays in connections and missed appointments by retailers.

Mr Morrow said one of the reasons for consumer frustration might be that for most purposes, ultrafast broadband provided little more than standard broadband.

"Much of the emotion geared around some of the poor experiences people are having relates to their expectations. They can't help but think this comes back to policy-based decisions and therefore technology-based decisions and that the government made the wrong decisions deploying the wrong technology and the whole thing's a mess.

"I've done tests in my own house. I have two kids that are on internet constantly, I have two university students in my house and there's two professionals. We're on the internet all the time."

"I said, alright you Stan users and Netflix users and YouTube users, I want you to get on and go for your maximum. I have a 50-megabit per second product. I tested it and we were using maximum of 10 megabits. So if I had just the 12 megabits, the basic low service, l would have felt no difference within my house."

"The only difference, and this is valid, is that if I've got a 100-megabit service versus a >four-megabit or five-megabit, and I try to download a movie, it clearly is going to download faster. But my argument to those people who say they could get files faster is to say – great, you can download the National Library in an hour, but then what? What are you going to do with that 100-megabit service thereafter?"

"What's lost on a lot of the fibre zealots out there is that this isn't a free product provided with taxpayer money. We have to make a modest return. The more we charge, the harder it will be to get people connected.

"There are these small circles who say 'I want more fibre and I want it faster'. My reply is that it's not just about you, it's about everybody in the country. If everybody in the country had 25 megabits we would be far better off than you having a gigabit."

Asked how much more it could have cost to deliver fibre to 93 per cent of Australian premises as originally required, Mr Morrow said it would have been at least another $10 billion. Some of that would have been the extra expense, and some the lost revenue because it would have taken at least four more years to build, meaning delivery well beyond the current target date of 2020.

Mr Morrow rejected the suggestion that fibre to the premise would have been cheaper in the long run because of lower running and maintenance costs.

"It craps me up. You've got to remember we are talking millions of homes you have to spread the cost of electricity and extra technicians over. It's nothing. You would never be able to spend enough money on operations and maintenance to make up the cost difference, not over 50 years, not over 100 years."

Nor was it true that the Telstra pay TV hybrid fibre-coaxial being repurposed by the NBN was more expensive to get right than would be new fibre.

"HFC is probably the most invested in infrastructure around the world and the most deployed infrastructure to provide superfast broadband to people's homes. People are employing it in brand new greenfield applications. We are seeing speeds of tens of gigabits per coming down, very low fault rates and very maintenance costs."

"Yes, it is true that the HFC network we got from Telstra is requiring far more of an upgrade than we originally envisioned. That was an oversight, or a lack of data that we had. But it still a far cheaper and far faster to deploy than putting fibre to every home."

In The Age and Sydney Morning Herald

Thursday, October 19, 2017

How maths killed the company tax cut

The company tax cut is dead. Maths killed it, last week.

It happened with the release of an innocuous-looking report from the Parliamentary Budget Office entitled Changes in average personal income tax rates: distributional impacts.

Those changes were baked into, but not spelled out in, the May budget.

They are needed for it to whirr back into surplus by 2020-21 as promised.

They come about because, aside from boosting the Medicare levy to help pay for the National Disability Insurance Scheme, the budget proposes to do nothing about the income tax scales whatsoever. Nothing. For four years. That's how it whirrs back into surplus.

Normally budgets cut income tax every few years. They have to, because otherwise wage increases would push more and more of our incomes into higher tax brackets. The misleading term for what happens is "bracket creep". But it happens whether or not we are pushed into a higher tax bracket. Any increase in wages, even within a bracket, pushes more of our income into our highest brackets, pushing up the total amount of tax we pay and pushing up our total tax rate.

Here's how it would work if you were on $50,000. If your pay climbed 3 per cent to $51,500 you wouldn't change brackets but your tax bill would climb from $7797 to $8284. More tax would be taken out at 32.5 cents in the dollar and proportionately less at 19 cents. Your average rate would climb from to 15.6 to 16.1 per cent.

To prevent this sort of thing happening, budgets repeatedly adjust income tax scales. Since the turn of this century, budgets have cut tax rates in 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2012 and 2016. A gap of four years or more without cuts, as is baked into the 2017 budget, is unusual.

All the Parliamentary Budget Office did was calculate what the budget projections would mean for various types of taxpayers.

For middle earners (those in the middle 20 per cent) they will mean an extraordinary jump in overall tax payments from 14.9 to 18.2 per cent. Only 0.5 points of the increase would be due to the higher Medicare Levy.

For earners one rung up (the next 20 per cent) they will mean a jump in tax paid from 21.9 to 24.1 per cent. For those at the very top they will mean a jump from 32 to 33.9 per cent.

One rung below the middle (a rung centred around $28,000) the tax take will jump from 5.5 to 8 per cent. Only at the very bottom (a rung centred around $8000) would there be little change. That's because most of the bottom rung would remain below the tax-free threshold.

The figures are projections out to 2021-22. It's true that we might get extra tax cuts not accounted for in the budget projections. But if we do, there won't be a budget surplus, not without an unexpected mining boom-style windfall or something else to fund them.

And there will have to be. A ramp up in the tax taken from middle Australia from 14.9 per cent to 18.2 per cent is unthinkable.

The only obvious place to grab the kind of money that will be needed is a program that hasn't yet become law.

Only half of the government's $50 billion program of company tax cuts has become law. The Senate passed $24 billion of it. Company tax is set to fall from 30 per cent to 25 per cent for small and medium size businesses, but not for big ones.

Forced to choose between finishing the job in order to help big business and cutting tax rates for individuals in order to stave off implausible bracket creep, there's no choice.

Businesses don't suffer bracket creep. Individuals do. Businesses don't vote. Individuals do.

And despite all the talk about how uncompetitive Australia's company tax rate is, or would become if Donald Trump succeeded in convincing Congress to cut the US tax rate to 20 per cent (the Business Council put out another brochure this week), and despite all the talk about how dynamic Australia would become if the company tax rate was cut to 25 per cent, the truth is the cut wouldn't pay for itself. The Treasury says so. The cost, to be paid for somehow, would be $8 billion per year.

It might well be that wages don't increase by anything like as much as is forecast and that bracket creep is less severe. But that would just create another set of problems. The government would fall well short of its targeted surplus and be under further pressure to find money from somewhere, most likely the yet-to-be legislated tax cuts.

The most important insight from economics is that actions have costs, often opportunity costs. Richard Thaler won a Nobel Prize last week in part for pointing out how little that is understood. There may well be great benefits from cutting the company tax rate. But there would also be great costs. One of them would be the lost opportunity to support middle earners, who'll need it.

In The Age and Sydney Morning Herald

Tuesday, October 17, 2017

NEG. A chance to put climate wars behind us

Out of the ashes of repeated failed attempts to give us cleaner and more reliable electricity – the emissions trading scheme, the emissions intensity scheme, and the clean energy target – has come something surprisingly good.

The national energy guarantee will do more or less what each of the other schemes would have done. It will make the electricity system cleaner (in accordance with the Abbott government's commitments under the Paris climate agreement) while giving investors the certainty they need to work out what kind of power stations to build and when.

Because most of the other schemes were never implemented and the one that was (the renewable energy target) wasn't made permanent, investors have been denied that certainty until now.

Chloe Munro was a member of the Finkel review into the future security of the national electricity market. She told a conference in Melbourne last week that merely having a scheme, any sort of scheme that could withstand repeated electoral cycles, would be enough to give investors the confidence to spend the billions of dollars needed to build plants likely to last as long as half a century. With no national scheme (apart from the renewable energy target, which ends from 2020) they've had to guess what the future schemes will require of them. The details of the scheme adopted weren't as important as knowing it was there.

But the details of the scheme adopted by the Coalition are pretty good. Unlike earlier proposals, this new plan requires nothing of generators: no certificates, no baselines and credits. Instead, responsibility for achieving emissions reduction and reliability targets will be handed to the retailers. They will need to ensure that the mix of electricity they buy meets a known emissions-reduction trajectory and mandated reliability standard. They're best placed to do it for the lowest possible price. They are in the business of getting value for money.

After the renewable energy target ends in 2020 there will be no requirement for retailers to buy electricity from any particular source, merely electricity whose overall mix brings about lower emissions year after year.

Will being a scheme that's "technologically blind" give investors the confidence to build new coal-fired power stations? I doubt it. The Abbott government signed Australia up to reduce emissions by 26 to 28 per cent on 2005 levels by 2030. The targets that will be given to the retailers will reflect that. Coal will have less and less place in their mix.

It's true that they would also be given reliability standards to maintain, and that coal could help with that. But with batteries, gas and solar able to come on at the flick of a switch when renewable output is low and with coal cumbersome to fire up and difficult to fire down, they are likely to find cheaper ways of keeping power reliable.

The retailers might be asked to cut emissions by more. The Paris Agreement requires Australia to go beyond 26 to 28 per cent, reviewing its target every five years in order to ensure global warming is kept below 2°. If Australia signs up to do more, the retailers will be signed up to do more.

And they might have to do more in any event. Initially they will be asked to adopt a trajectory that cuts emissions by 26 per cent because that's Australia's commitment. But they might need to do more than their share. Other polluters – in air transport, road transport, industry and farming – are finding cutting hard, and expensive. Over time it will be cheaper to ask electricity to shoulder more of the weight because that's where the easy gains are.

Malcolm Turnbull has found a scheme that will appeal to the backers of coal (because it won't discriminate against it), to would-be electricity investors (who want to know what the rules are), to consumers worried about prices (because it will put the suppliers in charge of getting value for money), to households concerned about blackouts (because it will require retailers to concern themselves with reliability), and to his predecessor who signed Australia up the Paris emissions reduction target. The energy guarantee provides a means of achieving it.

In The Age and Sydney Morning Herald

Monday, October 16, 2017

'Staggering': Young people twice as likely to be on Centrelink benefits if parents were

Children of parents on Centrelink benefits are almost twice as likely to be on benefits themselves by their early 20s as children who are not.

The world-first finding, culled from 18 years of Centrelink records, calls into question the conventional wisdom that it is easy for Australians to escape their upbringing.

The researchers from the Universities of Melbourne and Sydney were granted unprecedented access to the lifetime payment records of 124,285 young Australians born between October 1987 and March 1988.

They examined their payment status at the ages of 18, 20 and 26, and hope to do so again at the age of 30.

They found that 32 per cent of the children born to parents not in receipt of benefits were themselves on some sort of benefit by the ages of 18 to 26. But among those born to parents who were on benefits, the proportion was almost twice as high at 58 per cent, a ratio of 1.8 to 1.

The effect was the most pronounced for the children of parents on single-parent benefits and disability and carer payments.

Young people who had grown up with parents who received disability mental health payments received 2.4 times the amount of social assistance as their peers who had grown up in families that did not receive them, and 4 times the assistance of children who grew up in families with no history of social assistance at all.

Young people who had grown up with a parent on the single parenting payment received 2.2 times the assistance of other young.

In contrast, young people who had grown up in families receiving Newstart or the partnered-parent benefits received just 1.5 to 1.7 times as much assistance as other people in life.

Importantly, the researchers found that young people who had grown up in single parent or disability payment household were far more likely than other young people to be on welfare payments of all types, not just single parent of disability payments.

Researcher Deborah Cobb-Clark of Sydney University said she was shocked by the finding and took some time to be convinced.

"Disability is pretty random. For the children of parents on disability benefits to themselves be on welfare later on life is kind of like lightning striking twice," she said.

"I had thought the biggest correlation would be unemployment benefits, because they are related to investments in education."

Professor Cobb-Clark said she wasn't aware of another team anywhere in the word that had looked at the intergenerational correlation of benefit payments across an entire system.

"There will be other people who follow this with other work, so maybe this is not the end of the story, but I think what is going on is that the disadvantage for kids whose parents are on disability benefits and single parent payments is just really intense, and it is manifested itself in all kinds of things happening to them before they are 26: they are more likely to be on unemployment benefits, they are more likely to be on the caring benefit themselves, they are more likely to be on disability benefits.

"It happens to a fairly small group of people, but if you are one of those people it looks very difficult to overcome."

So large was the Centrelink dataset that the University of Sydney had to build a "virtual computer" linking hundreds of others to process it.

University of Melbourne researcher Nicolás Salamanca said the finding ought to be a "game changer" for the way governments designed social policy. "This isn't survey data. It's almost 100 per cent coverage, drilling down into 126 million fortnightly payments. The results are staggering," he said.

"The government is talking about an investment approach to welfare, funding what works, but until now it has had little idea about what leads to what in subsequent generations".

The paper, to be published by Melbourne University on Monday, makes clear that it has not found that welfare payments themselves lead to more welfare payments.

"If anything, it's the reverse," said Professor Cobb-Clark. "Young people who grew up in disadvantaged families would not be better off had their families never received benefits.

"The benefits are a marker for something that's happened. It is important that people don't jump to the conclusion that we can fix all this by taking them away."

In The Age and Sydney Morning Herald

Sunday, October 15, 2017

Standard gauge no more. How the Reserve Bank is about to make our money fly

Why is it so hard to move money?

In part, for the same reason our trains are the shape they are, and our cars, and perhaps even our space shuttles. Nothing gets designed from scratch.

In the US (and Australia) the standard rail gauge is 1435 mm, which was 4 feet 8.5 inches. It was copied from England, where it had been used for trams, whose designs were copied from horse-drawn wagons.

The wheels of the wagons were that distance apart in order to fit into the ruts that were first cut into long-distance roads by Roman chariots. The Romans made their chariots that width so that each could be pulled by two horses.

And the connection to space travel? Each space shuttle had two big booster rockets attached to the sides of its fuel tank. The shuttles were launched from the Kennedy Space Centre at Cape Canaveral in Florida. But the booster rockets were made in Utah, from where they had to travel to Florida by train. You can guess the rest.

The boosters could have been wider, but the train had to travel through a tunnel, the width of which was related to the width of the tracks, which were related to the width of the ruts made by chariots on British roads, which were related to the width of Roman horses.

It's the same for Twitter, whose (generally popular) limit of 140 characters was set in its early years as a service delivered by mobile phone texts that were limited to 160 characters. After setting aside 20 characters for the delivery address, Twitter offered 140 for the message.

The number 160 came from a German communications researcher who in 1985 sat at a typewriter tapping out random sentences to figure out just how small a message could reasonably be and still fit in the small amount of extra bandwidth allocated alongside the space for mobile phone calls by the emerging GSM global system for mobile communications.

It's the same with typewriters. Most of us type on a keyboard whose top row begins with QWERTY. It was set up that way in the late 1800s in order to separate the keys of the letters commonly typed together on manual typewriters in order to ensure they didn't jam (or perhaps because that was the best way to type Morse code, the stories differ).

Centuries on, we still use the inelegant QWERTY even though we don't need to, although for better or worse Twitter says we are about to get 280 characters.

Which brings us to money. Have you ever wondered why we can't transfer it in real time, and why internet banking limits you to a miserly 14 characters to identify the reason. It's because the system it is built on dates back an awfully long way, back to the days of computer punch cards. The message length was then 80 characters because that's how many holes there were in the punch cards. It got crunched to 14 as more of the holes got used for other things.

Until now. Adrian Lovney, chief of the new payments platform that will be rolled out from Australia Day describes it as an "entirely new set of rails". Built from the ground up it will allow us to use email addresses or phone numbers instead of BSBs and it will give us 280 characters rather than 14. Down the track it could give us more, if we need them. And it'll transfer money within seconds rather than overnight.

The company that's building it is owned by the Reserve Bank and the 12 biggest private banks, but it'll be used by the lot. Like microwave ovens and GPS tracking, we'll soon wonder how we ever lived without it, at least until a few decades down the track when it is baked into future products and holding us back.

In The Age and Sydney Morning Herald

Friday, October 13, 2017

An inconvenient truth: you're paying less for your mortgage than a decade ago

Record-low mortgage rates have made it easier to meet the payments on home loans than it has been in decades, despite record-high house prices, new figures show.

Confounding talk of unaffordability, the Bureau of Statistics calculations show that as recently as 2005-06 it took an average household 19 per cent of its gross income to meet ongoing housing costs. By 2015-16, it had fallen to 16 per cent, the least in records going more than 20 years.

The average mortgaged household now spends less of its income on housing than it does on food, a turnaround from earlier surveys in which it spent more. Housing costs include mortgage payments and water and rate payments.

Adjusted for inflation, the average mortgaged household paid $434 per week in 2015-16, much the same as in 2005-06. But over the same period the average income of mortgaged households climbed from $2272 per week to $2759.

"Mortgage and property values have also increased in the last decade," said Dean Adams, the Bureau's director of household characteristics and social reporting. "Ten years ago, the real median dwelling value was $449,000, which climbed to $520,000."

Mr Adams said the burden imposed on mortgaged households might be even lower than the survey suggested.

"Our survey measures what they chose to pay in mortgage costs, not what they had to pay," he said. "As rates have come down, some will have spent more than they need to in order to get ahead on their loans."

Canberra is the easiest city in which to pay off a mortgage, with monthly payments of 15 per cent of income, a near record low. Darwin is the most expensive, with monthly payments of 18 per cent. Sydney and Hobart have monthly payments of 17 per cent, and Melbourne, Brisbane Adelaide and Perth monthly payments of 16 per cent.

Housing costs have deteriorated for renters. The average cost for households renting privately is $350 per week, less than the $452 cost for mortgaged households, but as a record high of 21 per cent as a proportion of income, up from 19 per cent ten years earlier. Renters in public housing pay less again, $167 per week, but the cost also amounts to 21 per cent of household income.

Private renters are worst off in Hobart, paying 22 per cent of household income, and best-off in Darwin, paying 19 per cent. Sydney, Canberra and Adelaide renters pay 21 per cent, and Melbourne, Brisbane and Perth renters 20 per cent

The best-off Australians are those who own outright who typically spend just $51 per week on housing; 3 per cent of their incomes.

The proportion of households renting privately has climbed to 25.7 per cent, the highest on record. Twenty years ago it was 19 per cent. The proportion renting public housing has slid from 6 per cent to 3.6 per cent, and the proportion owning or buying homes has slipped from 70.9 to 67.2 per cent.

Among home-owning households the proportion that have paid off their mortgages has fallen dramatically, from 42.8 per cent of all households to 31.4 per cent.

The proportion of older households still paying off mortgages has tripled in the past ten years, climbing from 7 per cent to 21 per cent.

Grattan Institute chief John Daley said the most important finding was that low-income households were increasingly stressed. The poorest were now spending 28 per cent of their income on housing, compared to 23 per cent ten years ago. Most middle earners there had seen little change.

Two out of every nine homeowners owned more than one property, either for use as a second home or for renting out. One in 14 owned more than three.

The number of people per home fell from 2.7 in 1995–96 to 2.5 in 2005–06, but has since climbed back to 2.6.

The number of bedrooms per household climbed from 3 to 3.2. Four out of every five homes have at least one bedroom to spare.

In The Age and Sydney Morning Herald

Thursday, October 12, 2017

Why Richard Thaler thinks we've two brains, in one body

The winner of this year's Nobel Prize for Economics nearly lost his first job as soon as he got it.

As a young professor, Richard Thaler designed an exam that would easily sort the students into three categories: the superstars, those who understood things well enough, and those that couldn't. It worked, but he faced a revolt. The average score turned out to be just 72 out of 100.

The number out of 100 made no difference to the eventual grades. The As, Bs, and Cs were awarded in accordance with the standard grading curve, and he told his students so. But he says they still "hated my exam, and they were none too happy with me".

Worried he wouldn't keep his job, he redesigned the exam (but not the questions, and not the ultimate allocation of As, Bs and Cs) so that it was marked out of 137 instead of 100.

"The students were delighted! No one's actual grade was affected, but everyone was happy," he wrote in his 2015 book Misbehaving.

He chose 137 for two reasons. "First, it produced an average score well into the 90s, with some students even getting scores above 100, generating a reaction approaching ecstasy. Second, because dividing one's score by 137 was not easy to do in one's head, most students did not seem to bother to convert their scores into percentages."

He even said so, writing to his students that the scoring system had "no effect on the grade you get in the course, but it seems to make you happier". None of them complained again.

A few years ago I took part in a mass experiment conducted by one of Thaler's colleagues. He asked each of us to take out our driver's licence and write the last two digits of the identification number at the top of a page. Then he showed us a bottle of red wine and asked up to write at the bottom of the page our guess as to what it was worth; anything between 00 and 99 dollars.

Astonishingly, those of us with licences whose last two digits spelled out a low number thought the wine was cheap. Those whose licences produced a high number thought it was expensive.

In both cases we were misled by an anchor; the students by the anchor of 100, and those of us in the experiment by the digits at the end of our licence numbers. As Thaler accumulated more and more examples, and tested them in experiments, he set them out in a list on his backboard entitled "dumb stuff people do".

"Dumb" was too harsh. We are lazy more than we are than dumb. Most of us could make a proper guess as to the value of a bottle of wine, and most of us could work out percentages, but, as Thaler puts it, we have "limited time and brainpower". We find it easier not to bother, to fall back on shortcuts.

And yet mainstream economics has been built around the assumption that we are always calculating and mostly getting it right. When shown that we don't, that we consistently get things wrong, traditionalist economists have excuses: "If the stakes are high enough people will get it right; in the real world people learn and avoid mistakes; in aggregate errors cancel out," and so on.

Thaler's greatest contribution has been to show that our mistakes aren't random; that they are predictable, and that they are often worse when the decisions are big. We are good at grocery shopping. We do it all the time. But only rarely do we buy a house, or enrol in a savings plan. It's these decisions that we often get spectacularly wrong, in predictable ways.

One of his greatest practical contributions has been "Save More Tomorrow", a US scheme in which companies sign up their employees not to squirrel away more of their pay packet today (when it would hurt) but to do it later, when they get a pay rise. It came from his insight that rather than acting as if we are rational when it comes to decisions about saving and splurging (or dieting and eating) we act as if we are two separate beings fighting for control of ourselves.

It's been more or less proven. In one experiment, economists from Columbia and Stanford universities offered 6000 Americans the chance to take part in a lottery. They were given a choice of what to accept as a prize: either $55 in cash, or a lesser-value $50 bottle of wine. Astonishingly, about a quarter chose the wine.

When asked why, they said things like: "If I chose the cash, I would probably spend it on something I need rather than something I would really enjoy" and: "This way I will have to pamper myself ." Part of them is trying to escape from a straitjacket strapped on by the other part.

Thaler might be best known for his appearance in the movie The Big Short where he explained collateralised debt obligations to the pop star Selena Gomez; and also for his co-written book Nudge, now used as something of a guide by governments in the UK, the US, and now Australia and NSW who have set up behavioural economics units. He is on to something big.

In The Age and Sydney Morning Herald



Nationalisation. Turn default super over to government, Costello urges

Former treasurer Peter Costello has called for what would amount to the nationalisation of compulsory default superannuation, saying if it was run by the government there would be no war between industry and private funds over who should run it.

Addressing a conference of superannuation managers in Melbourne, the former Coalition treasurer and current chair of the government's Future Fund stressed he was speaking in a private capacity.

"Let me say I believe that, subject to safeguards, people should be able to choose who manages their super," Mr Costello told the conference on the future of superannuation.

"But the reality is in Australia there is a large cohort of people who don't choose. Their money goes into default funds. They get allocated to an industry or an employer fund. They make no choice over the investment profile.

"Now I am not pointing the finger at anybody, because you've got to remember that I was in government for nearly 12 years, so if you want to point the finger, you can point it at me.

"This is my personal view: instead of the government arbitrating between industry funds and private funds, there is a fair argument that compulsory payments, the so-called default payments, should be allocated to a national safety net administrator, let's call it the Super Guarantee Agency. It would be a not-for-profit agency which would set up its own investment board like the Canadian Pension Plan. We would call it the SCIA, the Super Guarantee Investment Arm.

"It could contract out the management, or the Future Fund Management Agency could do it.

"The Fund is not out there touting to be the default fund, it can't be. It was set up to invest government surpluses; it invests only one class of money, which is government money, and it doesn't [invest] private accounts."

But the former Treasurer said that didn't mean the government itself shouldn't run default super, an idea he knew the Productivity Commission was examining.

"There would be huge economies of scale. It would end the fight between the funds that have been unable to attract the money voluntarily," he told the audience of fund managers.

"The government decided to go into superannuation. The government should show an interest in managing it.

"Default contributions are at the moment spread between many funds, allocated to many different products, many of whom use the same manager and all of whom pay fees to do so. Those fees could be reduced if that money was pooled; if there was only one default fund making large allocations and using market power to drive down costs."

Canada' Pension Plan is funded with compulsory contributions of 9.9 per cent (half from employers and half from employees) close to Australia's 9.5 per cent and has become one of the world's most respected investors, taking an active interest in Australian infrastructure.

Unlike Australian funds, Canada's fund didn't feel constrained to invest in the big banks.

"There would not be another western country where the stock exchange is so dominated by financials, and in particular by the big banks," Mr Costello said. This is the 'quadropoly' as I have previously described it."

Almost every fund in Australia owned shares in the big four banks.

"I do not think this is healthy," Mr Costello said. "I have no doubt it is of enormous advantage to the banks. They never have to fear the flight of Australian investors.

"You can see why an air of impregnability and complacency has seeped into the management of the banks. Market discipline is negligible, and their returns on equity are hardly matched anywhere in the world.

"Compulsory superannuation has created an industry and delivered benefits for the young and ambitious and talented Australians work in it.

"But that's not really why it exists. It exists for those who are forfeiting their wages month-in, month-out on the expectation that 10 or 20 or 30 or 40 years of saving will get them benefits to enjoy in their retirement. As the system matures we have a very long way to go to make sure we deliver them those benefits."

In The Age and Sydney Morning Herald

Monday, October 09, 2017

Victoria, NSW to lose billions under Productivity Commission's GST shakeup

Victoria would lose an extra 6¢ out of every dollar of GST revenue collected in the state, Queensland would lose 13¢ and NSW would lose 1¢ under fresh proposals to change how the Goods and Services Tax is carved up between the states.

They equate to a loss of $972 million for Victoria, $1.6 billion for Queensland and $110 million for NSW.

The calculations, in an appendix to the Productivity Commission's newly released draft report on GST distribution, assume that the changes are introduced immediately in order to lift Western Australia's share of its GST takings up from 34 per cent to 87 per cent. If, as the Commission proposes, they were applied later when Western Australia's share has recovered further, the impact would be less severe.

The estimates supplied to Treasurer Scott Morrison have Victoria's GST payout falling from 93¢ of every dollar collected to 87¢. Queensland's share would slide from $1.19 to $1.06, the NSW share from 88¢ to 87¢, South Australia's share from $1.44 to $1.32, Tasmania's share from $1.80 to $1.62, the ACT's share from $1.19 to $1.07, and the Northern Territory's share from $4.66 to $4.55.

The commission found Australia's system of dividing GST revenue is broken, "beyond comprehension by the public" and poorly understood by most within government.

Although it has broad support, it delivers "unfair equity", attempting to bring all states up to the financial strength of the strongest state, even if the GST revenue kept by that state needs to fall to unprecedented lows.

The report also pointed to a "first mover disadvantage" that applies to any state that attempts to introduce a new tax first. At the moment if NSW or Victoria attempted to switch from stamp duty to land tax each would lose more than $300 million in GST payments. If it attempted to introduce a road traffic congestion charge NSW would lose $670 million. Victoria would lose $6 million.

The commission rejected three proposed ideas to ease the burden on Western Australia. One is to hand out extra Commonwealth grants outside the GST process, as the Turnbull government has done. Another is to guarantee that no state's GST share would fall below 70 per cent of what it put in, and another is to allow each state to keep at least 50 per cent of an extra revenue it raised from mining, proposed by the Commonwealth Grants Commission.

Its calculations suggest Western Australia loses in GST adjustments as much as 88¢ of every dollar it raises in mining royalties.

It suggested that instead of aiming to bring the financial capacity of each state up to the financial capacity of the strongest, an updated formula attempt to merely bring it up to the financial capacity of the average or second strongest.

The commission said in normal times the new formula would make little difference to the GST distribution. Only at extreme times such as the present when West Australian's share has dived to extraordinary lows, would it soften the blow.

Mr Morrison welcomed the draft recommendations and said the way the GST revenue was carved up needed a proper fix, rather than more "band-aids and bolt-ons".

"The commission needs to do a lot more work, they have got to firm up what they believe the answer is, although they have given some good hints," he said. "They have also got to work out a transition plan so that we can get from A to B. It's not enough to know where B is, you have to work out how to get there and that is what I have tasked them to do between now and the final report."

The commission rejected a proposal put forward by government ministers and the Grants Commission to penalise states that banned coal seam gas mining by allowing those that permitted it to keep all of the extra royalties they earned.

"Mining revenue is a prime example of a source-based advantage; one a state benefits from by virtue of where its borders happen to be drawn," the commission said. "It should prima facie be included in the equalisation process."

Victoria's Acting Treasurer Gavin Jennings said the commission had poured cold water on the Coalition's plan to discipline states that protected their environments.

"Mr Morrison's thought bubble to punish states like Victoria and NSW who have acted to protect their farmers, their world-class produce and their environment, has been thrown into the bin where it belongs," he said.

NSW Treasurer Dominic Perrottet said it was encouraging to see the Productivity Commission acknowledge what NSW has said all along: that the GST system was in dire need of an overhaul.

"Ultimately the Productivity Commission has acknowledged we need real reform, not just to the GST system, but to the entire federal system when it comes to the taxes we pay, the services governments provide, and the way they are funded," he said. "My number one priority will be to continue to fight tooth and nail for the people of NSW to get the maximum value for the tax they pay."

The commission has called for submissions on its draft recommendations. It will present a final report to the Treasurer by January 31.

In The Age and Sydney Morning Herald


Analysis: GST change a softening of the edges rather than a revolution

The Productivity Commission has found that the way the GST is divided up is broken, and much of it "beyond comprehension". But it has also found something more important: that the brokenness doesn't much matter.

Treasurer Scott Morrison asked it to examine the influence of the current system on "productivity, efficiency and economic growth".

In short, the commission found there was none, or none it could find.

"In practice, it is hard to tell whether Australia's system has helped or hindered productivity and growth," its report says.

In part that's because, despite all the angst about the carve-up of the GST, the carve-up is small in relation to the size of state governments.

There's less than $8 billion moved around each year, out of a total GST cake of $60.7 billion. The states themselves, with local governments, raise the best part of $200 billion. The Commonwealth raises almost $300 billion. It's worth arguing about, but it isn't enough drive behaviour.

Morrison asked whether the GST carve-up rules were impeding the movement of capital and labour across state borders. The commission found that people move interstate "for a range of reasons". GST distributions were "unlikely to play a significant role".

So unimportant did the commission find the GST formula that it flirted with the idea of scrapping it entirely and simply doling out the GST on the basis of population. It was a recommendation of Tony Abbott's 2014 Commission of Audit. The disadvantaged states – South Australia, Tasmania, the ACT and the Northern Territory – could apply for extra top-up funding directly from the Commonwealth. The commission rejected the idea only because it thought the top-up funding was "unlikely to be forthcoming".

Instead it has settled for for modifying the extremes of the system we've got. Instead of falling as low as 30 cents out of every dollar collected from Western Australians, Western Australia's GST payment would only fall to 87 cents.

The change would give poor states only the average financial capacity of the other states, or the capacity of the second-best, rather than the best.

The commission's idea isn't new. Up until 1981 it's how the Grants Commission divided the pie, redistributing merely enough to allow states to function "at a standard not appreciably below that of other states".

Morrison is keen. Whereas previous treasurers have treated the distribution of the GST as political Kryptonite, saying it was up to the states to agree on a change (knowing they won't) Morrison is prepared to get his hands dirty. He needs to consult the states on the change but he doesn't need them to agree. Although it wouldn't take effect until 2020, he is likely to get the ball rolling next year.

In The Age and Sydney Morning Herald