Thursday, February 22, 2018

We'd be mugs to follow Trump on company tax - yet

We were mugs to believe what we were told in the election about property prices. The Prime Minister said if negative gearing went and capital gains were better taxed, prices would be “smashed”. His Treasurer said it would “take a sledgehammer” to prices.

Thanks to Freedom of Information, we now know that the Treasury thought the effects were “likely to be small”.

Now they are telling us that a cut in the company tax rate would bring about an “immediate” jump in wages.

“We would expect the effects to be immediate,” Finance Minister Mathias Cormann told ABC’s AM program last week. “Look no further than the United States” he said. “The effect after the Trump administration was able to pass their tax cuts through the US Congress was as immediate as it was dramatic. Immediately a long list of businesses in America provided wage increases and additional bonuses.”

That’s not how it would work here, and certainly not what the Treasury modelling finds. In the United States, whereas a number of companies did lift wage rates and pay one-off bonuses after the tax cuts in January, most did something different. They announced bonuses to their shareholders, big ones.

In the first six weeks of the year they announced a record $171 billion of stock buybacks. Buybacks are payments to existing shareholders that enrich them directly and help them indirectly by pushing up the price of their remaining shares.

It’s more than double the $76 million of buybacks announced by the same time last year. “It's the largest ever, and nothing has really changed except the tax law," said Jeffrey Rubin, a director of research at Birinyi Associates, which compiled the figures, in an interview with CNN.

It’s probably what you would do if you got an income tax cut. You’d spend a little on yourself, and only later think about working harder. Opinions differ about what companies will do in the future. The International Monetary Fund expects a short-lived boom in investment as accelerated write-off provisions (not present in the proposed Australian company tax cuts) drag planned investment forward. The Moody’s credit rating agency expects little. “We do not expect corporate tax cuts to lead to a meaningful boost in business investment,” it has told its clients. Its thinking was that if record-low interest rates didn’t ignite investment, company tax cuts wouldn’t either.

What our Treasury thinks would happen here is that foreign companies would invest more, because the returns would be greater, and that local firms would use more of their earnings to grow their business. Investment in more and better machines would make workers more valuable and worth outbidding other employers for. It’s a circuitous way to get a wage rise and far from instant. But new research from Germany suggests it exists.

The research examines the effect of 6800 company tax changes over 20 years in a nation in which 10,001 municipalities were allowed to set their company tax rate independently. It finds that workers got 51 per cent of the benefit of (and shared 51 per cent of the the cost of) company tax changes, which is about what other studies find. In a useful caveat for Australia’s union movement, it found the effect was greater where collective bargaining was greater. In a less attractive caveat for Australia, it found the effect was “close to zero” for large firms, firms that operated across borders and foreign-owned firms.

What matters for Australians (but not for company owners, to the extent those owners are offshore) is the effect on household welfare. The Treasury’s modelling of the proposed cut in the Australian company tax rate from 30 to 25 per cent puts the eventual boost to household welfare at between 0.1 and 0.2 per cent. It would be 0.1 per cent if the cut was paid for by letting bracket creep lift personal income tax collections, or 0.2 per cent if it was paid for by a hypothetical lump-sum tax. The Treasury says the nearest to such a thing in real life is a broad-based land tax.

Not everyone agrees that there would be a boost at all. Victoria University’s Dr Janine Dixon finds there would probably be a net cut in living standards, of about $1600 each. The high proportion of Australian firms owned overseas means more money would be lost in tax and have to be made up for by other tax increases than would be gained by the workers whose wages rose.

Our leaders aren't particularly open about how they would fund the revenue they would lose by cutting the company tax (and everyone thinks they would lose something, no one thinks the cut would be self-funding). One suggestion from Dr Chris Murphy, who did some of the modelling for the Treasury, is to lift the GST from 10 to 11 per cent. Another is to impose an extra tax on banks, as Britain did when it cut its company tax rate.

Eventually we will probably have to cut our company tax rate, and cut it below 25 per cent. Tax competition from Donald Trump and others, of the kind our Reserve Bank Governor describes as “regrettable”, will make it inevitable. But there’s no reason to rush, yet. Despite what we are being told, at the moment the benefits just aren’t that big.

In The Age and Sydney Morning Herald

Sunday, February 18, 2018

Welcome to university, the university of life

Never have I been more excited than on my first day at university.

Orientation week, which is about to begin throughout the nation, opened a door to an entire world of courses, clubs, concerts, films, friends and beautiful facilities in which to have endless fun and be treated like an adult without ever having to act like one.

Ditching the idea of science, my original first choice, I chose drama, because I fancied myself as a producer of radio plays, politics, because I was obsessed with it, and economics because there was so much about it in the papers, and it was really, really, interesting; all the more so because no-one seemed to know the answers.

At university I was allowed to grow up slowly and learn stuff I wanted to learn, for its own sake. Never, for a second, until the final few months did I think about whether it would get me a job.

I don’t know what’s changed in more recent years, perhaps the economy, but it doesn’t seem to be like that these days. Students often work part-time, they choose courses on the basis of job prospects and they limit the time they spend on campus.

If I had my way, I would recommend the full university experience to everyone, but I’d be wrong.

Financially, there’s an advantage, one I didn’t know much about at the time.

Over their lifetimes university graduates earn 40 to 75 per cent more than workers who go to work straight from school. One estimate puts the lifetime earnings of male graduates at $2.3 million compared to $1.7 million for those who go straight to work. The earnings of female graduates are put at $1.8 million compared to $1.4 million.

You might have noticed those figures say nothing about whether or not university education is the cause of those extra earnings. Those people might have done well anyway. It is my unfortunate duty to tell you most would not have. University education brings about extra earnings, rather than being merely associated with them. An ingenious Australian study of identical twins (“by definition, the same innate ability and family background”) found that it’s the twin that does the extra study that gets the extra earnings.

Research conducted by Dr Andrew Leigh, now a member of parliament, found that each extra year of education beyond Year 10 added an extra 10 per cent to lifetime earnings.

But it didn’t answer the more important question: what is it about those extra years that makes the students so much more valuable? If you think the answer is "learning more stuff" you’ll have to answer to Bryan Caplan.

A university professor himself, he has just published a book titled The Case Against Education. Its implications are enormous. He is in no doubt that graduates earn more, and that graduation is the reason.

But he thinks it has little to do with what they learnt. Consider two students who had each learnt as much. One had a family tragedy and couldn’t sit the final exam, the other could. US statistics show that the one who got the final piece of paper earns roughly 10 per cent more than other people for each extra year of education, whereas the one who learnt the stuff but missed out on the certificate gets only 4.2 per cent more.

Or ask someone whether they would have rather have learnt stuff without getting a degree or got a degree without learning stuff.

And what could they possibly have learnt at university that would be of use to an employer anyway? Calculus? Literature? Most jobs don’t even require algebra, and literature doesn’t help people write, which is what’s required in jobs. There are exceptions: economics might be one, engineering another. But most courses teach things that aren’t useful for employers.

So why do employers pay so much for people who’ve done them, or at least have got the certificates to show they once did them?

Caplan reckons it’s profiling, a bit like racial profiling, where police use the way someone looks as a rule of thumb to work out whether they are likely to commit a crime, or the profiling by insurance companies who use postcodes to tell them what to charge. It mightn’t be fair, but it's quick.

Seen that way, university is a sorting tool for employers, one they don’t pay for. It helps them identify characteristics that will be needed on the job but have nothing to do with what was learnt. One is intelligence. You need a certain amount to get enough marks to pass, whatever the subject. Another is consciousness. You need to apply yourself. And the third is conformity. Sane free-thinkers realise quickly there’s not a lot of point to what they are learning and drop out. Degrees certify IQ, the ability to knuckle down and a worker who won’t make trouble.

So they are great for employers and great for graduates, albeit at the cost of enormous wasted resources. Employers could get the same outcomes if the courses lasted for two years instead of four, or even one. Or if they administered tests themselves.

If Caplan’s right, we should be pushing politicians for less education rather than more, especially as the ageing of the population makes workers more scarce. My own company, Fairfax, is doing just that. It has taken on several truly excellent journalists precisely for the reason that they left university rather than see it through. They wanted to do the job rather than study it.

In The Age and Sydney Morning Herald

See also: The Economists, Is education a waste of time and money?


Thursday, February 15, 2018

A modest proposal for better behaved banks

Suddenly, banks are behaving nicely. They are no longer charging for the use of teller machines, the chief executive of the National Australia Bank took a day out of his $6.6 million a year job to sell copies of The Big Issue, and from this week it’ll be really, really easy to transfer funds. It’ll take seconds rather than days, and you won’t need to look up a BSB. You’ll be able to use a phone number or email address instead.

Could it get any better? Absolutely, and the route is spelt out in one of the submissions to the Productivity Commission’s inquiry into competition in the financial system, which is running in parallel with the banking industry royal commission.

The Productivity Commission has found that, notwithstanding the banks’ belated success in bringing service into the 21st century, they and their competitors aren’t particularly competitive. There’s half as many of them as there used to be in 1999. Instead of charging all their customers the best possible rate as competitive firms would, they charge their existing mortgage holders $66 to $87 a month more than new ones, in what amounts to a penalty for loyalty.

In the words of the commission’s draft report: “rivalry through price competition is rarely evident”. Half of all bank customers don’t switch banks, and the banks count on it.

Over time their prices tend to converge, as might be expected in a competitive industry, but the commission finds that they don’t necessarily converge on the lowest possible price, which is the sign of an industry that is not competitive.

The smaller banks aren’t much help. Their operating costs are much higher than the big ones, and on the occasions when the government has given them a leg-up to cut those costs, they've used it to boost their margins rather than cut their prices.

When the Prudential Regulation Authority prevailed on the banks to cut the flow of interest-only loans to investors, they did it by lifting what they charged on all interest-only loans, new and existing, in an inversion of their usual practice of reserving special treatment for new customers.

Their average margin on those loans climbed from 3.5 percentage points above the cash rate to almost 4.5 points, producing a nice extra profit that they didn’t compete away by charging other customers less.

The commission wants it made easier for new banks to enter the market to take on the old ones, and it wants the competition regulator to police them in the same way it polices petrol stations.

But it hasn’t taken on board – yet – a much more powerful proposal from one of its own, Dr Nicholas Gruen, who used to be a productivity commissioner.

He says we’ve made our biggest productivity gains by destroying the understructures that allowed protected industries to overcharge and provide bad service. We slashed tariffs, ushering in much cheaper prices for clothes and cars. We presented Telstra with a competitor and then with several more. We did away with the two-airline policy. All in the 1990s.

The few cozy restrictions that survived – such as those for taxis, pharmacies and newsagents – are being rendered redundant by technology. It’s increasingly easy to order rides, drugs and news online.

About the only demonstrably non-competitive industry left is banking (although electricity and gas retailers deserve a special mention, which I’ll save for another day).

How much do banks overcharge us? A Bank of England study finds that if the bank itself (the equivalent of our Reserve Bank) offered its own banking services direct to customers on the same terms as it offers them to the banks, which is cost recovery, and if it did it in digital currency, it could permanently lift GDP by 3 per cent.

By way of comparison, our Treasury finds that the proposed cut in the company tax rate (which would have to be financed by increasing other taxes) would permanently lift GDP by 1 per cent.

The Bank of England number may well be an overestimate, but by definition it would cost us nothing. The central bank (in our case the Reserve Bank) would offer deposit and mortgage services at cost.

And it would do it for super, as suggested last year by former treasurer Peter Costello. The government-run super funds (those for public servants) return an enormous 2.2 percentage points a year more than the retail funds, and a handy 0.6 points more than industry funds. The government has advantages others do not. It has massive scale, it actually runs the financial system, and it is trusted in a way the private sector is not.

Gruen isn’t suggesting for a moment that the private banks would disappear. He doesn’t want that. He merely wants them exposed to the same sort of competition that Woolworths and Coles have faced from Aldi – competition from the lowest cost provider.

The competition would have to be fair, there would have to be no tax advantages. But if it is possible to provide an essential service at the lowest possible cost, it is worth asking why we wouldn’t. It's worth asking why we would continue to protect banks when almost every other industry that overcharges us has been made to stop.

In The Age and Sydney Morning Herald

Thursday, February 08, 2018

Stoking a fire with gasoline: why Wall Street shuddered

Why did the US sharemarket suddenly tank?

For the same reason that ours might, one day, although there are no signs of it yet.

The US jobs market is on fire. In the past year the United States has hired an extra 2.1 million workers, and not just because of Trump. In the previous year, under Obama, it hired an extra 2.5 million. All up, since the low point in 2009 the US has taken on an extraordinary 18 million additional workers, an extra 14 per cent.

It has pushed the US unemployment rate down from 10 per cent to 4.1 per cent, where it has stayed for four consecutive months. So low is 4.1 per cent that, with the exception of a few months under President Clinton at the height of tech stock mania at the start of this century, you need to go back to 1969, when astronauts first walked on the moon, to find it bettered.

It's low enough to be well below the official best guess of the so-called "natural" rate of unemployment, below which wage rises fuel accelerating inflation. We've got a so-called natural rate in Australia. The best guess is that ours is about 5 per cent, and, although we have been making in-roads into unemployment, we're not down there yet. The US is down there, well into what would normally be lift-off territory for wages and prices, but here's what's strange: all through 2017 and 2016 and 2015 wage growth scarcely budged. It hasn't moved too far away from 2.5 per cent.

Just as in Australia, without a takeoff in wages there's been no reason to fear a big increase in official interest rates. The US Federal Reserve has pushed up rates five times since the improving US economy allowed it to begin moving its Federal Funds Rate away from zero in 2015, but not aggressively. There has been precious little inflation to contain.

Until Friday. US average hourly earnings per employee jumped, enough to push up the annual growth rate to 2.9 per cent. Inflation, and much higher interest rates to contain it, suddenly became real. The US bond rate (which is the market's best guess of future short-term rates) surged. The 10-year bond climbed to 2.8 per cent, up from 2.4 per cent four weeks earlier.

That's a real cost to any business that needs to borrow long-term, and a real cost to the US government, which will need to borrow big to fund Trump's tax cuts. It means the value of US businesses is suddenly lower, because they are valued with reference to their earnings and the bond rate.

It meant shares were suddenly worth less, because when human traders began offloading shares to reflect the new reality the robots took over, automatically selling to protect themselves. Over two days share prices fell 6.4 per cent. On Tuesday night they regained some of that loss, but the future looks different now; more normal, with the value of shares less likely to keep rising as a consequence of low inflation holding interest rates back.

As popular as they have been with business, Trump's planned tax cuts will have themselves pushed up bond rates. The US government needs to borrow hundreds of billions of dollars more because it isn't fully funding them, in contrast to Australia where the Coalition's tax cuts are meant to be funded by making savings elsewhere and allowing other taxes to remain relatively higher so that company tax rates can be pushed relatively lower.

And Trump's tax cuts will hurt in a more fundamental way. Cutting tax is a great way to boost the economy. If the unemployment rate was 10 per cent it would really help. It would lift the economy without stoking inflation. But when the jobs market is on fire and the unemployment rate is about to hit an unnerving 4 per cent, it will add gasoline and make the flames fly higher.

It'll mean even higher interest rates. Trump is rolling out a policy that should be held in reserve for bad times when times are increasingly good. As the International Monetary Fund noted last month, the US will have to tighten its budget in future years to meet the higher interest costs, perhaps in worse times. It is why it has downgraded its forecasts for US growth beyond 2020. It's the opposite of what's normally regarded as prudent management, which is to borrow when times are bad (as Australia did during the global financial crisis) and to repay when they are better (as Australia is trying to do now).

What it'll mean for us is higher Australian government borrowing rates. Our 10-year bond rate peaked at 2.9 per cent on Monday, up from 2.6 per cent four weeks earlier. All other things being equal, the personal income tax cuts we've been promised have become less affordable.

Trump gives the impression of playing with fire rather than managing it. We don't know where it will lead.

In The Age and Sydney Morning Herald

Saturday, February 03, 2018

2018 Economic Survey. Dismal, but no disaster: how the panel sees 2018

The Reserve Bank board will confront a cheerless outlook when it meets for the first time this year on Tuesday.

The latest Fairfax Media Scope economic survey predicts barely adequate economic growth of 2.7 per cent, growth in living standards (real net disposable income per capita) of just 1.8 per cent, and barely any real wage growth.

The surveyed economists see further slides in housing investment and Sydney home prices, a sharemarket whose price growth will struggle to keep pace with continued low inflation and an Australian dollar that will remain stubbornly high at 75 US cents.

It amounts to an argument to leave interest rates where they are, and that is exactly what the panel expects for the first half of the year, predicting an unchanged cash rate of 1.5 per cent in June. That would make the period from August 2016 to July 2018 the longest stretch of steady rates since the Reserve Bank began publishing records.

But then in the second half most of the surveyed economists predict a hike, the first rate rise forecast by the panel since 2010.

The Scope panel is made up of 26 leading economists from financial markets, academia, consultancy and industry. Over time, its average forecasts have proven to be more accurate than those of any of its individual members.

New entrants this year include Macquarie Group’s Ric Deverell and Sarah Hunter of BIS Oxford Economics, the renamed BIS Shrapnel.





Although on balance the panel expects 2.7 per cent economic growth, the forecast range is weighted to the downside. Perennial pessimist Steve Keen picks 1 per cent, Sally Auld of JP Morgan tips 2.2 per cent, Paul Dales of Capital Economics picks 2.3 per cent, and Stephen Anthony, Stephen Koukoulas and Su-Lin Ong expect 2.4 per cent.

Last year’s forecaster of the year, Bill Evans, sees growth a little higher at 2.5 per cent. The highest forecast, from Janine Dixon, Jakob Madsen and Neville Norman is just 3.1 per cent.

The chance of a recession within the next two years is 15 per cent, which sounds bad, but is an improvement on the aggregate forecast of 20 per cent mid last year.

Stephen Anthony, a former forecaster of the year, assigns a 30 per cent probability to a recession within two years.

“This current housing boom is easily the greatest in the history of our major capital cities, and history shows that the deepest recessions tend to follow real estate busts,” he writes. “The key risk to the domestic economy in 2018 and 2019 is depressed spending on the back of a property slump in eastern Australia combined with record household debt and rising borrowing costs.”

Mardi Dungey, Sarah Hunter, Stephen Koukoulas, Neville Norman, and Julie Toth assign a zero or negligible probability to a recession.

Koukoulas says what would raise the possibility is a severe and sudden slump in house prices, which would hurt the household sector and banks.

“The experience in many countries during the global financial crisis shows how a sharp fall in house prices devastates an economy,” he writes.

The other risks are global; the Chinese economy faltering and geopolitical issues from Brexit, China, the US, North Korea, Middle East or elsewhere, which can’t be sensibly assessed.

The University of Tasmania's Saul Eslake makes the point that the risk of a recession is unrelated to how long it has been since the last one .

“Suggestions that we are ‘due’ for one have no foundation.,” he says.

“Recessions are the result either of a policy mistake, or an external shock. There is no compelling reason to think that policy-makers have made, or are about to make, a mistake of the sort that could precipitate a recession.

"My estimate of a one-in-six chance of a recession reflects my assessment of the probability of an external shock, most likely emanating from policy mistakes in the United States."

Offshore growth

The world economy is picking up.

The panel expects global growth of 3.7 per cent, a touch below the International Monetary Fund’s forecast of 3.9 per cent.

Some on the panel led by Eslake are predicting much higher growth in the US, as is the IMF, on the back of the Trump tax package. Others are sceptical. The average forecast is for unchanged US growth of 2.5 per cent.

The panel expects Chinese growth to hold up at 6.5 per cent and for the iron ore price to hold up at $US65 per tonne, down on the present $US72 per tonne, but still relatively high.

It should keep nominal GDP growth high at 4.5 per cent. Nominal growth is what matters for the budget. It is a measure of the number of dollars coming in rather than the number of tonnes sold.

But this is unlikely to translate into noticeable income growth for families. Real net disposable income per capita is expected to climb just 1.8 per cent throughout 2018, meaning growth is positive (at times it was zero or negative in 2014 and 2015) but nowhere near as high as it has been.

In the year to September 2017 it was 4.5 per cent. In the year to December 2016 it was 7 per cent.

Household spending is forecast to grow 2.2 per cent, not many points above population growth of 1.6 per cent.

The unemployment rate should close the year little changed at 5.4 per cent.


With home prices peaking (the panel expects further growth of only 2.1 per cent in Melbourne and a decline of 0.9 per cent in Sydney) investment in housing is expected to slide a further 2.2 per cent.

Mining investment is expected to slide a further 3.9 per cent, dashing hopes that the slide is about to end. Non-mining business investment, which climbed a welcome 9 per cent in the year to September, is expected to grow more slowly, by 6.4 per cent.

Wages and prices

Real wages are expected to barely grow for the fourth consecutive year, climbing by between 0.1 and 0.3 percentage points. The panel expects the wage price index to grow by 2.2 per cent while the consumer price index grows 2.1 per cent and the underlying price index climbs 1.9 per cent.

The forecast implies that much of the 1.8 per cent growth in real net disposable income per capita won’t flow through as wage growth.


The panel expects the ASX S&P 200 to close the year at 6205, an increase of just 2.3 per cent on December 2017.

It’s well down on the increase of 7 per cent in the year just past, barely more than inflation, but the upside is that our panel picked just 2.25 per cent last time and were proved wrong.

The local sharemarket has a habit of taking forecasters by surprise, being particularly susceptible to what happens on overseas markets.

The Australian dollar, at present uncomfortably high at 80 US cents, is expected to decline to 75 US cents, increasing the competitiveness of Australian industry somewhat, but not as much as many would like.

Julie Toth of the Australian Industry Group is amongst those predicting hardly any fall in dollar, picking 79 US cents. Paul Bloxham of HSBC is predicting 84 US cents and Michael Blythe of the Commonwealth Bank is predicting 83 cents.

Like the sharemarket, the dollar is at the mercy of what happens in the US, but in the other direction. If the greenback is falling against other currencies, it tends to make the Australian dollar rise.

Government infrastructure investment, not forecast in the survey, is expected to be high, and the good news for it is that government borrowing rates are expected to stay low. The panel expects a 10-year bond rate of 2.9 per cent in December, only a few points above where it is now. It hasn’t been above 3 per cent since 2014.

In The Age and Sydney Morning Herald


A Bill market - meet the forecaster who owned 2017

No-one got 2017 as right as Bill Evans.

The Westpac veteran picked economic growth of 3 per cent, pretty close to the 2.8 per cent we’ve got so far (for the year to September) and much closer than previous forecasters of the year Stephen Anthony and Renee Fry-McKibbin who picked 1.6 and 1.8 per cent.

More importantly and less commonly, Evans picked nominal growth of 5.4 per cent, way in excess of the 3 per cent that prevailed when he made the forecast and the sort of jump not seen since the mining boom. Nominal growth is measured in actual dollars of income, the kind that matter for the budget. A surge in iron ore prices (which Evans also picked) pushed up nominal growth to 5.9 per cent, more than the highest of the forecasts this time last year, but within range of the 5.4 per cent picked by Evans and also Paul Bloxham of HSBC.

To forecast that the Reserve Bank would keep its cash rate steady for an entire year notwithstanding the surge in national income required restraint and a reading of the bank that has made Evans, a former research manager at the bank, one of the best at predicting when it will and won’t move. For what it’s worth, in today’s survey he is predicting the second year in a row without a move in the 1.5 per cent cash rate, something that, if it happens, will be the longest period of steady rates since the bank began publishing its decisions in 1990.

Bloxham, another Reserve Bank alumni, also correctly picked 2017 as a year without rate moves and is expecting that to continue into the second half of this year, although this isn’t reflected in the published survey results that show him tipping an increase to 1.75 per cent. He has since revised away that increase in the wake of the tame inflation figure published after the survey deadline. Bloxham might have been named forecaster of the year along with Evans were it not for his over-optimistic prediction for headline economic growth of 3.4 per cent.

Only seven of our 27 panelists predicted a turndown in housing investment, Evans among them. Most correctly predicted a further slide in mining investment, but few picked the scale of the lift in non-mining investment which in the year to September recovered 9 per cent. The closest were Stephen Koukoulas (up 10 per cent), Richard Yetsenga (up 9 per cent) and Su-Lin Ong (up 8 per cent).

The Australian dollar came in much higher than Evans and the bulk of the panel had expected at 78 US cents and has since climbed to 80 cents. The average forecast, and Evans forecast, was 72 cents. The closest were 77 cents (Jakob Madsen), 76 cents (Besa Deda and Bill Mitchell) and 78 cents (Neville Norman).

The 10 year bond rate came in lower than expected at 2.6 per cent. The panel had picked an average nearer 3 per cent as had Evans. The most accurate forecasts (and bond rates are one of the key things market economists are paid to forecast) were by Saul Eslake, Fry-McKibbin, Koukoulas, Madsen, Mitchell and the National Australia Bank’s Riki Polygenis.

The ASX 200 closed the year up 7 per cent, better than the average forecast of 2.25 per cent, close to the gains of 5 to 6 per cent predicted by Evans, Koukoulas and Norman, and very close to the gain of 6.5 per cent predicted by Julie Toth of the Australian Industry Group.

Evans doesn’t work alone. He has a team of six Australian economists who toss ideas around and play devil’s advocate. Although they can use computer models, they are wary of them.

Senior economist Matthew Hassan says mechanical models go wrong during major shifts. The latest iron ore price boom was one. The model said it would boost consumer spending.

Evans and his team thought that it would at first, but then incorporated detailed insights from their consumer sentiment survey which told them the relationship had broken down. They are not afraid to change their forecasts, and they issue announcements when they do, which often move markets.

But they are also prepared to stick with a view. Hassan says they’ll do it longer than others if they think they are right.

In The Age and Sydney Morning Herald

Thursday, February 01, 2018

Follow the money - it won't make you communist

Anyone would think I'd gone communist. Along with John Howard.

As soon as the Treasury released its tax expenditures statement last week, I and others who reported it were accused of wanting to ape Eastern Europe, of going "Peak Orwellian".

"The author has raised an interesting concept, everything belongs to the government and one has no individual rights or assets," wrote one of my kinder correspondents.

"The left regards tax not gouged as government spending," wrote another. "Since when has retaining your earnings been a government handout?"

The short answer is: since at least 1998. That's when Howard made it mandatory for the Treasury to report tax expenditures as if they were cash expenditures.

On taking over as Coalition prime minister after 13 years of Labor government, he set up a Commission of Audit to tell him what to cut.

It told him that government programs were delivered in two ways: as direct payments which hurt the budget, and as tax breaks which also hurt the budget.

Although often functionally identical (parents don't care whether they get the family tax benefit as a payment or a rebate, patients don't mind how they get the private health insurance rebate, and most wouldn't know whether the baby bonus was a payment or a tax break) the two get treated quite differently.

Payments get put in the budget of individual ministers as a line item to be scrutinised and reviewed in the lead-up to every budget.

Tax breaks go on no one's budget and become part of the furniture. As the Henry tax review reported later, they can be "difficult to contain".

Accounting for them once a year, in the same way as direct payments are accounted for twice a year in each budget and budget update, lets us know what they are and what they are worth.

It doesn't mean (necessarily) that they are at risk, any more than accounting for the annual cost of the pension means it's at risk.

This year the Treasury found 289, from the huge (the $74 billion cost of exempting the family home from capital gains tax) to the unquantifiable (exempting charities, hospitals and trade unions from income tax) to the odd (exempting ministers of religion from fringe benefits tax) to the small but growing (the farm management deposit system, which is expected to double in cost this year from $245 million to $560 million).

The correspondents who think that I'm a communist for publishing these figures, presumably along with Howard and Treasury and the government-dominated committee that decided they should continue to be published this way, argue that letting people keep their own money is different to handing them government money.

But it is identical if you tax some people at standard rates and give a special deal to others. That's how tax expenditures are calculated, by working out what's normal (such as the standard income tax rates) and then working out the cost of concessions (such as tax-free redundancy payments, which cost $2.4 billion a year).

Sometimes it's hard to know what's standard, and the tax expenditures statement reflects this. The standard company tax rate is 30 per cent. Small and medium-size businesses with turnovers of up to $50 million will eventually get a lower rate of 25 per cent, which is in the books as a tax expenditure of $2.2 billion a year. But if the government gets its proposed cut for all businesses through the Senate and the general rate comes down to 25 per cent, costing much more, the statement won't record a tax expenditure at all, except >for any discounts from the new lower standard rate of 25 per cent. The statement says so.

Its critics claim that its estimates are exaggerations because if, for example, superannuation contributions were fully taxed people would contribute less to superannuation and the government wouldn't get back what it thinks it's losing. But when the Treasury put these claims to the test and calculated so-called "revenue gain" estimates of what it would get back in the real world, it found the numbers were little different.

For superannuation, that's partly because contributions are compulsory. To the extent that people wind back extra voluntary contributions they'll divert their money into other investments that are likely to be more fully taxed and get hit with income tax before the money goes in. So although the Treasury wouldn't get back the full $16.5 billion it loses because of the concessional tax on super contributions, it believes it would get back almost all of it, $16.3 billion, although much would be in other forms of tax.

The costs of these concessions are real, just as real as the $23 billion the government pays out each year in Medicare, or the $12 billion it pays out in pharmaceutical benefits. But the beneficiaries aren't always as deserving. The biggest superannuation and capital gains tax concessions are directed towards the highest earners, something we wouldn't tolerate if they were delivered as cheques, paid into accounts.

Which is why they want them hidden. Which is why they talk about communism. They are embarrassed.

In The Age and Sydney Morning Herald