Monday, April 30, 2018

Turnbull in best position to offer tax cuts in nine years

A “humongous” lift in Australia’s tax take has put the Turnbull government in the best position to deliver personal income tax cuts in nine years.

New Department of Finance figures reveal a rolling annual budget deficit of just $14 billion in the year to March- the lowest rolling annual deficit since 2009.

The data shows company tax revenues are up 23.3 per cent on the previous year, while personal tax revenues are up 5.4 per cent. Company tax is bringing in $36.2 billion more than it did a year ago, personal tax an extra $10.6 billion, goods and services taxes an extra $7.5 billion, and superannuation an extra $3.2 billion.

Deloitte Access calculations to be released on Monday show the Coalition could afford to spend $8 billion per year on personal income tax cuts and still leave room for a paper-thin forecast surplus of $3.8 billion in 2020-21.

Middle to lower income Australians will be the biggest beneficiaries of the tax cuts in next month’s budget, and will likely be phased in over several years.

One way for Treasurer Scott Morrison to deliver cuts worth $8 billion per year would be to lift the threshold for the 32.5 cent rate from $37,000 to $43,000 and the threshold for the 37 cent rate from $87,000 to $93,000. Another would be to lift the $37,000 threshold to $38,000 and cut the rate from 32.5 to 30 cents. A third would be to lift the tax free threshold from $18,200 to $20,000 and the $37,000 threshold to $40,000.

Calculations in the Deloitte Access Budget Monitor show that if revenue continues to climb at its present rate, the budget will be in surplus within 12 months.

“To be clear, that is not what we are forecasting,” said Deloitte Access partner Chris Richardson. “What has happened is that a bunch of big taxpayers have run out of accumulated tax losses at pretty much the same time, I'd call it October.

“Instead of a steady shift to companies paying tax again, we had a surge, but it won’t continue at that rate.”

The Budget Monitor predicts a budget balance $7 billion better than officially forecast this financial year, $7.2 billion better than officially forecast next financial year, $1.6 billion better in 2019-20 and $2 billion worse in 2020-21.

“The humongous improvement won’t last, but what concerns us is that the government will give almost all of it away in tax cuts and other election sweeteners,” Mr Richardson said.

“Time and time again we have seen the economy do better than forecast and politicians unfurl the ‘Mission Accomplished’ banner and stop taking difficult decisions because they think it will do things for them.

“Think of Paul Keating and the so-called L-A-W tax cuts which he had to abandon, think of Wayne Swan announcing four years of surpluses which he had to walk away from. Less obviously, think of Peter Costello and John Howard announcing the baby bonus and increased family benefits and tax cuts, that later turned out to be unsustainable.”

“It would be wise to not applaud too loudly when the tax cuts are announced.”

Speaking on Sunday, Mr Morrision said the budget would focus on making the economy strong. "That means lower taxes, building key economic infrastructure, backing small business to create more jobs and opening up new markets for our exporters," he told Fairfax Media. Lower taxes would further strengthen the economy to create more jobs and guarantee essential services, he said.

Commonwealth Securities chief economist Craig James said that if the government eliminated the deficit first and then cut taxes it would save $16 billion to $17 billion per year in interest payments.

The Deloitte report notes a better option than tax cuts would be to spend $3 billion per year lifting the Newstart unemployment benefit by $50 a week and indexing it to wages.

“Newstart hasn’t kept up with national living standards for more than a quarter of a century and is shrinking sharply relative to average and minimum wages and the age pension,” the report says. “If we had to nominate the single standout fairness failure in Australia in 2018, itis undoubtedly our embarrassingly inadequate unemployment benefits.”

The Department of Finance data shows revenue well up on the official projections in the mid-year budget update released in December. The government expected to take in $319.9 billion in the financial year to March but took in $325.2 billion. It expected to spend $346.3 billion and spent only $342.6

In The Age and Sydney Morning Herald

Super increases already hurting wages: Grattan

The Grattan Institute has made a last-ditch plea for the Turnbull government to abandon the scheduled increases in compulsory superannuation contributions, saying they are already hurting wages.

A schedule to be confirmed on budget night will lift employers' contributions from 9.5 per cent of salary to 10 per cent in 2021, and then by an extra 0.5 points each year until 2025 when contributions reach 12 per cent.

The institute’s analysis, to be released on Monday, says the timetable is already being taken into account in enterprise agreement negotiations, where it is suppressing offers.

The program of increases, set in train by the Rudd Labor government, has already been postponed twice, first by the Abbott government and then by the Turnbull government, but is due to restart in 2021.

“Unless stopped, the program will cut wage rises, cost the federal budget billions well into the future, and actually harm some retirement incomes,” said Grattan Institute chief executive John Daley.

The more superannuation a low earner has, the lower the age pension they receive in retirement. For each $1000 of assets above the threshold each pensioner loses $78 a year in pension payments.

Because the age pension is indexed to wages, increasing employers super contributions at the expense of wages cuts pension growth.

“Our research shows that increasing the rate to 12 per cent would make future pension payments 2 per cent lower than otherwise,” Mr Daley said. “By suppressing pension payments, it could make existing pensioners worse off by up to $460 a year for singles and $640 a year for couples.”

Earlier this month Financial Services Minister Kelly O'Dwyer spoke out against increasing compulsory contributions, but indicated it was likely the program would stay in the budget.

“The increase of 9.5 per cent to 12 per cent will mean around $10 billion a year more flowing into the industry in 2025-26, which, of course, means a bonus of hundreds of millions of dollars in fees each year for the industry and ever increasing salaries for industry professionals," she said.

Mr Daley said the scheduled increases would hurt the federal budget because money that would have been paid out and taxed as wages would be paid out as superannuation and taxed at 15 per cent instead.

“In both the short and long term, superannuation costs the budget more than it saves because the tax breaks cost the government more than the pension savings,” he said.

“Treasury analysis estimates that the revenue forgone from superannuation tax breaks as a result of moving to 12 per cent added to past increases would exceed the budgetary savings from lower age-pension spending for many years.

“Eventually superannuation would save the budget money but, from about 2060, by which time there would be 80 years of budget costs to pay back before government was in front.”

In The Age and Sydney Morning Herald

Victoria's privatisation, population & property billions

Where are the billions coming from? In part, from property. This financial year Treasurer Tim Pallas will get $6.6 billion from property stamp duty, up from $5.4 billion in 2015-16. He will get $2.4 billion from land tax, up from $1.7 billion in 2015.

The good news is that Victorian property values are staying high. Sydney prices slid 1.7 per cent in the three months to March whereas Melbourne prices slipped just 0.5 per cent.

Going forward, Tuesday’s budget will forecast still high but lower income from stamp duty, a judgment that looks about right. Melbourne’s population growth is the strongest in Australia, which means Melbourne property prices are more likely than most to stay high.

Many more of the billions will come from asset sales. The Turnbull government will pay the Andrews government a touch over $2 billion for Victoria’s share of Snowy Hydro, and a private buyer will pay it an estimated $2 billion for the right to run the land titles registry.

Victoria will get $16.8 billion from the Commonwealth Grants Commission in goods and services tax collections, that’s about $900 million more than it expected. It’ll reflect both Victoria’s bigger than expected population, and its lower than expected share of Commonwealth infrastructure grants. The Grants Commission’s formula requires it to compensate for Commonwealth stinginess after enough years have passed, and the Abbott and Turnbull governments have been stingy long enough for the compensation to kick in.

And the Commonwealth is at last becoming more generous. The $5 billion promised for a Melbourne Airport rail link and the $1.42 billion promised for regional rail are making things easier.

The economy itself is helping. One in every ten jobs in Victoria has been created in the past 3½ years, since the election of the Andrews government. One in every seven dollars sloshing around in the economy wasn’t there before Andrews was elected and (coincidentally) Victoria’s population growth took off.

It’s impressive, but doesn’t quite explain how Tim Pallas can promise to spend $10 billion a year on infrastructure for the next four years and still bring in a surplus.

The answer lies in a quaint state budget accounting convention. When the money is spent, it isn’t spent as far as the budget is concerned. All that appears on the budget are the interest payments on the borrowings to spend the money, and later depreciation on the infrastructure that’s been built. You can literally borrow to spend as much as you want on infrastructure in a state budget and still report the surplus you would have had if hadn’t.

Once small, the interest component of the budget is climbing. That needn’t be a problem if the infrastructure is worthwhile, which most of it probably is. Privatisations have kept the debt relatively low. On Tuesday Pallas will say it's less than he inherited from the Coalition.

In The Age and Sydney Morning Herald

Sunday, April 29, 2018

Please, no more superannuation

Here’s something that should be in the budget but won’t be: an end to the outrageous assault on our wallets that is ever-increasing compulsory superannuation.

I am hearing that it nearly was in next week’s budget, until the government chickened out.

I’ve never been able to see what most people see in boosting compulsory superannuation, although I certainly have been able to see what those who stand to benefit see in it. They are people who work in the finance industry and the trade union movement and the employer organisations that would get an extra $10 billion a year of our wages to play with, if, as scheduled, compulsory contributions climb from 9.5 per cent of our salaries to 12 per cent in the space of a few years.

They would be doing more than playing with our wages. They’d be collecting hundreds of millions of dollars more in fees for doing it, for making essentially the same investment decisions as they are making at the moment.

But think what it would mean for the rest of us, for the vast bulk of the population who (after a five-year phase in period) would have an extra 2.5 per cent of each year’s salary taken from us and put somewhere else. If we were told we were about to get a tax increase of that size (and in essence it would be a tax increase) we would be enraged. All the more so because the phase-in will be brutal.

For more than a decade the compulsory super was stuck at 9 per cent. The Henry Tax Review examined whether that was enough and found that it was. It recommended that compulsory contributions “remain at 9 per cent”.

It was an unwelcome recommendation for a Labor government that had already decided to lift the rate beyond 9 per cent, so it ignored it. Deceitfully, it announced the lift to 12 per cent on the day it released the Henry Review, giving the impression it had endorsed it. Given everything else that was announced that day, including the mining super-profits tax, Henry’s explicit recommendation not to do what the government was determined to do slipped under the radar.

Henry’s thinking was that while locking away an extra 3 per cent of wages would probably increase retirement incomes, it would do it mainly by further impoverishing people who were already hard up.

Well-off Australians already save much more than their compulsory super contributions. Indeed, even excluding housing, most of their assets are held outside super. They’ve no problem cutting back on other savings in order to negate the effect of an increase in compulsory super, just as they have done when it’s been increased in the past.

Less well-off Australians are trapped. Saving little outside super because of more immediate demands, such as rent or mortgages or raising families or putting themselves through university, they are forced to accept less take-home pay than they would have got at the times in their lives when they need it most in return for the promise of more when they were retired and mightn’t need it as much.

And don’t for a moment think those compulsory contributions don’t come from pay. All manner of people tell me they don’t, but they are not the people who know. Bill Shorten put it this way when spruiking the planned increase from 9 to 12 per cent: “What will happen is that superannuation, the increases to superannuation, will be absorbed as part of people's pay rises.” Employers forced to pay more of their employment bill in superannuation will necessarily pay less of it in wage rises.

Which didn’t matter much for the first two increases. The first, from 9 to 9.25 per cent, was small and seems to have cut wage rises from about 3 per cent to 2.75. The second, a year later, was the same size. It seems to have cut wage rises from about 2.4 per cent to 2.2.

But the next increases were to be gargantuan. Labor’s plan doubled them after the first two, lifting the annual jump from 0.25 to 0.5 percentage points, and it was set to do it at a time when wage rises were sliding to an all-time low. Had that next increase of 0.5 points happened it would have cut wage growth from about 2 per cent to an impossibly low 1.5 per cent, sending buying power backwards.

In its first budget the Abbott government baulked and froze the rate at 9.5, later extending the freeze until 2021. It’s that 2021 increase from 9.5 to 10 per cent which will appear in the four years of estimates to be published in Tuesday week’s budget. (It appears in the budget because increases in compulsory super cost the budget money, taking income out of highly taxed wages and putting it into more lightly taxed super funds.)

It’s why Tuesday week was going to be the perfect time to abandon the schedule of increases for good, an opportunity I’m told the budget cabinet has passed up. It might have taken the view that it shouldn’t fix up Labor’s mess for it. If Labor wins the next election, it will have to either wind back its schedule itself or risk sending living standards backwards.

If compulsory super stayed at 9.5 per cent, anyone who wanted to would still be able to put away extra and anyone who couldn’t wouldn’t have to. We could hang onto our money.

In The Age and Sydney Morning Herald

Thursday, April 26, 2018

How the Coalition ran interference for the banks

The Coalition wasn't merely asleep at the wheel when it came to the practices being exposed at the banking royal commission: it pulled out all stops to allow some of them to continue, including attempting to circumvent the will of parliament, in an extraordinary 12-month burst of activity that began within weeks of its election.

It had inherited Labor’s Future of Financial Advice Act, legislated in 2012 but not due to take full effect until mid 2014, 10 months after the election that swept it to power.

The result of a parliamentary inquiry and years of agonising about how to protect consumers in the wake of the collapse of investment schemes including those run by Storm Financial, Timbercorp, Opes Prime, Bridgecorp, Westpoint, Trio and Commonwealth Financial Planning Limited, the law banned secret commissions and, from that point on, required financial advisers to put the interests of their clients ahead of their own.

Actually, it came into effect on July 1, 2013 during the life of the Gillard Labor government, but the Securities and Investments Commission decided to take “a facilitative compliance approach”, meaning it wouldn’t enforce it until July 1, 2014, which turned out to be after the Coalition took office.

The law banned kickbacks and commissions paid to advisers by the makers of the products they were selling, which for the dangerous products had been extraordinarily large. Advisers putting retirees into Storm Financial had been paid 6 to 7 per cent of the amount invested. Advisers putting clients into Timbercorp had been paid 10 per cent plus an ongoing fee for as long as the funds stayed there.

Labor’s law wound back, but did not completely eliminate, the ability of banks to reward their staff for recommending the banks’ own products, and it only applied prospectively. Existing kickbacks could remain but clients would have to be told how much money was being taken out of their investments each year and would have to approve.

Once every year they would be given a statement explicitly telling them how much of their funds was being siphoned off to pay their adviser. Once every two years they would be asked if they wanted it to continue. If they said "no" or said nothing (which would be the case if they were dead, or the adviser had lost contact with them) the outflow would stop.

Clients who felt they were continuing to get good service from their adviser could allow the withdrawals to continue, which might be why it so terrified the (largely bank-owned) advice industry.

Days before Christmas 2013 the Coalition outlined amendments it hoped to get through parliament. Fee disclosure statements were only to be provided to new clients. Old ones could remain in the dark. And there would be no need for clients to opt in to having money removed from their accounts, ever. And there would no longer be an overarching requirement for advisers to act in the best interests of their clients, merely steps they would have to follow, “so that advisers can be certain they have satisfied their obligations”.

As July 1 2014 approached and it looked as if the amendments wouldn’t get through parliament, Finance Minister Mathias Cormann gazetted regulations that purported to have the same effect. Parliament would have been able to disallow them when it next met, but he delayed tabling them until the last possible moment, lengthening the period of time they were in force without being tested. Then Labor trumped him by reading them out aloud in the Senate, which effectively tabled them and forced a vote. Cormann managed to get the Palmer United Party on side and keep the regulations at first, until Jackie Lambie split with Clive Palmer over the issue and left his party and voted them down.

Then, when all had been lost, the banks and financial advisers begged for more time. They have been "thrown into disarray" and wouldn’t have their systems ready. ASIC said it wouldn’t enforce the law until July 1, 2015, two years after it had been due to begin.

ASIC and Cormann had given the financial advice industry an extra two years in which to charge commissions and escape an overarching requirement to put the clients first.

Even now, all this time later, I can’t work out why Cormann tried so hard.

Looking back over the emails we exchanged, I can see that he distinguished between "sales" and advice. He said that financial advice should be commission-free, but that "sales" were different, which is what the banks were arguing.

And advisers should be allowed to limit their advice about just one topic, such as superannuation, without the need to take everything into account and weigh up their client's best interests (as do doctors and lawyers, who have to put their client's best interests first regardless).

He said the requirement for clients to opt in to making continuing payments to advisers was "red tape", and "retrospective".

“Peter, I have honestly tried my best to do the right thing in the public interest,” he wrote. “I don’t expect that any of this will change your mind, but I thought you should know why we are doing what we are doing.”

In The Age and Sydney Morning Herald

Spreading the benefits. Where have I heard that before?

I had a sinking feeling in Sydney’s Four Seasons Hotel listening to Treasurer Scott Morrison guarantee that he would be able to deliver permanent tax cuts and properly fund the National Disability Insurance Scheme “in this year’s budget and beyond” without any longer needing an extra levy.

I’d heard it before, more or less, in the Great Hall of Parliament House in 2012. The speaker was Wayne Swan, Morrison’s long-term Labor predecessor, who after years of bad luck including the global financial crisis was finding revenue turning up.

“I am proud to announce a new Spreading the Benefits of the Boom package,” he told us. It was time to share the proceeds of the mining boom with families and businesses, and the disabled.

In the budget he had funded the first stage of the National Disability Insurance Scheme - the first $1 billion over four years; he increased funding for dental services, aged care, hospitals, infrastructure and superannuation, all because “for too many Australians this feels like someone else’s mining boom''.

I wrote on my notepad that day that the boom would end when the demand for Australia’s minerals faded, but that the spending Swan had put in train to “share the benefits” would continue.

In retrospect Swan was unwise to be so generous with something that wouldn’t last, but few in the room that day spoke up.

In The Age and Sydney Morning Herald

Tuesday, April 24, 2018

'Benefit of hindsight': ASIC may have been wrong body

One of the architects of Australia's financial system has expressed doubts about the policing power given to one of the corporate regulators now under fire for failing to prevent fraud and deception by the banks.

Professor Ian Harper was a member of the Wallis committee of inquiry into the financial system which in 1997 recommended the creation of a specialist organisation to regulate financial markets and financial institutions known as the Australian Securities and Investments Commission, or ASIC.

He later chaired the Harper Competition Review for the Abbott and Turnbull governments, and is a Reserve Bank of Australia board member.

Critically, the Wallis recommendations allowed ASIC to take over responsibility for policing consumer laws previously conducted by the Australian Competition and Consumer Commission.

On Tuesday Professor Harper said at the time the committee had thought a specialist body would be better able to handle the complex nature of consumer financial products, although he conceded that even then there was concern it would become too close to the institutions it regulated.

“The argument in favour of leaving consumer protection with the ACCC was that it wouldn’t be captured,” Professor Harper told Fairfax Media. “One day it deals with the electricity industry, the next day it deals with Coles and Woolies. It doesn’t have time to become close to the industries it polices.

“The argument against a specialist regulator is that it will succumb to the ‘Stockholm Syndrome’, that the regulator and the industry will hire from each other and go to the same conferences and so on.

“We now know of clear cases in which ASIC has been misled. Would it have tried harder, would it have made further inquiries had it been less close to the organisations it regulated? It might have.”

Regulatory agencies like ASIC have come under fire at the royal commission but are yet to appear at hearings. Asked if the ACCC would be prepared to take back responsibilities ceded to ASIC a spokesman for ACCC chairman Rod Sims declined to comment.

Professor Harper said concern about being too close to industry was one of the reasons the Wallis Review recommended the creation of a body separate from the Reserve Bank to oversee the prudential health of the retail banks.

“I have already said that with the benefit of hindsight we were wrong about several things,” Professor Harper said. “We placed too much faith in the efficient market hypothesis and in light touch regulation, we said the government didn’t need to guarantee bank deposits.

“With the benefit of hindsight and what's been coming out at the royal commission, the weaknesses of the specialist approach we took to regulation are also evident.”

It was “quite apparent” that the ACCC would have been able to handle the complexities inherent in financial products without needing to defer to a specialist body, he added. He noted the competition watchdog was more than capable of handling energy pricing, petrol pricing and the complex relationship between petrol stations and supermarkets.

Had it retained responsibility for policy consumer laws as well as responsibility for competition laws governing market power and mergers and acquisition which it kept, Australia’s financial landscape might have been different.

“It was 20 years ago, we would have been expected to learn something,” Professor Harper said.

The royal commission hearings will reconvene on Thursday.

In The Age and Sydney Morning Herald

Thursday, April 19, 2018

I'll say it. We’re spending too much on infrastructure

I am going to say it. We are spending too much on infrastructure – on roads, railways, bridges and the like. We don’t try the cheap things first. And we are spending too much on the NBN.

You probably disagree, especially if you are waiting for a train, or in a car with a driver who is stuck in traffic. If you go to the footy you would prefer a better stadium, if you use the internet, you would like it faster.

Here’s what those sorts of projects, and many more like them, set to be funded in upcoming budgets and elections, have in common: the people who use them don’t pay for them. Train fares cover at most 30 per cent of the cost of the trips.

The income from fuel excise and rego and licence fees no longer covers the cost of maintaining and building roads.

The national broadband network will never get its money back, despite what was promised, and neither will spending on stadiums, especially when governments persist in knocking them down and rebuilding them, starting the cycle all over again.

(There is a reason I haven’t mentioned electricity. That market works well, also despite what you’ve heard. Any company proposing a new electricity plant needs to pay for it and be pretty sure it’ll get its money back.

The days of government-built generators are behind us, unless this one decides to build a coal or nuclear white elephant, which would kind of prove my point.

Even Malcolm Turnbull’s much loved Snowy Hydro pumped storage scheme is probably uneconomic when the costs of construction and the construction of transmission lines are taken into account.)

I am not arguing for the users of roads and trains and stadiums to be charged the full cost of providing them, and neither are Stephen Bell and Michael Keating, a professor of economics and the former head of government departments including Finance and Prime Minister and Cabinet, who set out their claims in a new book entitled Fair Share, Competing Claims and Australia’s Economic Future. I am arguing that where users don’t have to pay the full costs they will pressure the government to build too much.

Or the government will be tempted to offer uneconomic infrastructure as a bribe, believing it’ll get voters across the line who will get the benefits without having to pay the full costs.

Big pseudo-commercial projects such as the NBN and the inland rail line are especially attractive because they can be funded off-budget through an odd convention that removes their impact so long as the government asserts they will one day make money.

On budget night the Melbourne Airport rail link might become another. The $5 billion Turnbull has promised will look attractive to travellers and needn’t make a dent in Scott Morrison’s budget, even though Infrastructure Victoria says it won’t make sense until 2032 or 2047.

Bell and Keating’s point is that it is not enough to say that roads are congested, or that things could be better. If roads were never congested, we would have spent too much. Without commercial discipline, governments need to conduct cost-benefit studies to determine what’s value for money. They are imperfect, but they are no good if they are ignored.

During the 2016 federal election the Coalition committed to 21 transport infrastructure projects, each costing more than $100 million; only five had been approved by Infrastructure Australia. Labor committed to 28; only one had been approved by Infrastructure Australia.

Often it’s better to do nothing, or little. The much-hyped tram line from Sydney’s Central station to the University of NSW will deliver passengers slower than the existing bus shuttle. Infrastructure Victoria says the Melbourne rail link would deliver passengers slower than could the existing SkyBus with priority signalling. Scores of capital city households are finding the NBN more expensive than the commercial service it replaced.

Productivity Commission chairman Peter Harris has a three-stage rule when it comes to infrastructure. It’s this: “First identify the problem, then identify the least-cost solution, then take a deep breath."

If it had been applied to the NBN, it would have been delivered only to the places that private providers wouldn’t serve, for a fraction of the cost. If it had been applied to Melbourne’s airport rail link, the bus service would have been fixed first. If it had been applied to roads, congestion charges would have been tried first.

And not building things buys time. Since the government committed to the NBN in 2009, 4G (and soon 5G) mobile services have grown to an extent not envisaged, making the project even less economic than it seemed at the time. By the time we’ve built many of the freeways we are repeatedly planning, congestion charging or driverless cars might have arrived, making them much less economic.

Doing nothing, or little, is hard for politicians, even if it eventually means lower taxes. They come to office pledging restraint and, after their first budgets, don’t deliver it. I’m happy to vote for the party that promises straight up to build the least next election. It’ll probably make the best decisions.

In The Age and Sydney Morning Herald

Reserve Bank might fund mortgages: bank official

A senior Reserve Bank official has raised the prospect of buying mortgages to keep the economy afloat during the next recession.

Leon Berkelmans monitors financial markets for the bank and shared what he said were his personal thoughts at a conference in Canberra organised by the Melbourne Institute of Applied Economic and Social Research.

The bank has kept its cash rate steady at an all-time low of 1.5 per cent for a record 20 months, leaving it little room to cut further should the economy turn down.

Dr Berkelmans said it might be possible to cut the cash rate below zero, as central banks had done in Japan and Europe. But cutting too far below zero would see retail banks withdrawing their funds from the Reserve, leaving its cash rate impotent.

Central banks in the United States, Britain, Japan and mainland Europe had pumped cash into their economies by buying government and corporate bonds when they could no longer cut interest rates, a process known as quantitative easing.

As a “thought experiment” he outlined the options available to the bank, although he stressed it had no official position and to the best of his knowledge hadn’t wargamed what it might do.

“Let me be very clear,” he said. “The Reserve Bank is not planning on engaging in quantitative easing anytime soon, so please do not form the impression that at the next board meeting they will be discussing it. They will not.”

“But, just as a thought experiment, the bank would need to buy securities.”

Japan’s central bank owned securities worth 90 per cent of an entire year’s gross domestic product. The European Central Bank had securities worth around 40 per cent of gross domestic product. The US Federal Reserve owned securities worth 30 per cent of GDP.

The Reserve Bank of Australia only owned securities worth about 10 per cent of Australia’s GDP.

“Let's engage in a thought experiment. Again, this is just a thought experiment,” he said. “This is not the what the Reserve Bank is thinking of doing right now.”

“Suppose that we wanted to engage in episode of quantitative easing that would result in the bank’s balance sheet going up as much as did the European Central Bank’s; to 40 per cent of GDP. We would need securities worth another 30 per cent of GDP.

“What would 30 percentage points look like? In net terms the entire stock of Australian government bonds in the market amount to 30 percentage points of GDP.

“We would need to go out and buy every single Australian government security, and there are many reasons why we might not want to.

“So again, in the spirit of a thought experiment, what else could we go out and buy?

“There are asset-backed securities, primarily residential mortgage backed securities.”

The US Federal Reserve bought residential mortgage backed securities during the financial crisis of 2008 to 2009.

It ensured the mortgage market continued to function and gave cash to the institutions that sold that they were able to use elsewhere. It meant the Federal Reserve rather the previous owners became entitled to the mortgage payments that lay behind the securities, effectively making it a mortgage funder.

There was a risk that Australian wouldn’t have enough residential mortgage backed securities on offer for the bank to buy. There were half as many as before the financial crisis. But overseas experience had showed that the central bank was a buyer more were created, making mortgages more available and supporting the economy.

Dr Berkelmans stressed that the bank had no official position on what it might do.

His idea was quite distinct from a proposal floated by the Australian Greens for Reserve Bank to provide residential mortgages. Mortgages would be bought at the wholesale level rather provided at the retail level.

Board minutes released on Tuesday said it was more likely the next move in the bank’s cash rates “would be up, rather than down” depending on further progress cutting the unemployment rate and boosting the inflation rate. Figures released on Thursday showed the unemployment rate steady at 5.5 per cent in March for the third consecutive month.

In The Age and Sydney Morning Herald

Sunday, April 15, 2018

It's time for sweetest tax of them all

Never before has a tax been such an instant success. I am talking about what happened in Britain last Friday. That’s when new so-called sugar tax sprung into life, with much of its work already done.

The whole idea was to cut the consumption of sugar, something we have just as much need to do here, given that our rates of obesity are on a par with those in Britain - an outrage that will prevent many of us living long lives.

Up to one third of us are obese, another third are overweight. Thirty years ago it was 10 per cent. If you don’t think that’s shortening lives, ask my colleague, Peter FitzSimons. He says everyone he sees aged over 75 is thin. Their heavier contemporaries are dead.

Announcing the sugar tax in the 2016 budget, Britain’s (Conservative) Treasurer George Osborne said five-year-olds were consuming their entire body weight in sugar every year.

A single can of cola has nine teaspoons of sugar in it. Other drinks have 13 teaspoons - more than double the recommended daily intake.

“I am not prepared to look back at my time here in this parliament doing this job, and say to my children’s generation: 'I’m sorry, we knew there was a problem with sugary drinks, we knew it caused disease, but we ducked,'” he said.

His tax was clever. It was to apply only to soft drinks, and it wouldn’t apply for two years, until 2018. It would be set at three different rates.

The rate would be zero for drinks with 5 grams or less of sugar per 100 millilitres, meaning some would stay tax-free, including Schweppes Lemonade, Tesco Lemonade and Lucozade Sport. It’d be heavier for drinks with between 5 and 8 grams of sugar. Among them were Fanta, Sprite and Dr Pepper. And it would be high for drinks with more than 8 grams, such as Coke, Pepsi and Red Bull.

His hope was that the drinks above each threshold would cut their sugar until they were below it. It’d cut their tax from 24 pence per litre to 18 pence, or from 18 pence to nothing. They had two years in which to do it.

Within months, Tesco said it would reformulate its entire range to escape the levy. Lucozade Ribena followed, also for its entire range. It meant halving the high sugar contents of Lucozade and Ribena.

Then Sprite halved its sugar content, Fanta fell from grams 7 to 4.5, and 7 Up from a scary 11 grams to 7 grams.

By the time the tax arrived last week, Britain had more than halved its initial estimate of what the tax would raise, cutting its estimate for takings in the first year from £520 million to £240 million ($439.6 million to $952.5 million).

The government-owned Behavioural Insights Team reckons around 750 million litres of drink has been reformatted, which would save a welcome 30,000 tonnes of sugar per year, all before day one.

There’ll be more change now the tax is in place. Retailers will more prominently display the cheaper drinks that are lower-taxed, producers will shift their marketing to products they are able to sell for less, and customers comparing prices will be more likely to pick the cheap ones. More manufacturers will cut their sugar content as a result, and even those that don’t will sell increasing amounts of their zero-sugar products and less of those with sugar.

After a while, the sugar tax might raise very little. Which was the idea. The universal truth about tax is that people don’t like paying it. It can be put to good use.

Australia did it with petrol. From 1994 we more heavily taxed leaded petrol, pushing up the price by 2 cents per litre to encourage drivers to switch to unleaded. We do it with tobacco, and, imperfectly, with alcohol.

What’s great about so-called sin taxes (or "Pigovian taxes") is the double pay-off. Taxing more the things we want less of, including things that kill people, allows us to tax less the things we want more of, such as jobs, income and savings.

Julia Gillard did it big-time in 2012. Her carbon tax raised $14 billion. She used it to pay out$14 million in income tax cuts, grants to industries and increases in pensions and benefits. By taxing "bads", she was able to cut taxes on "goods".

Electricity emissions slid during those two years, then climbed again after the tax was axed.

Prime Minister Malcolm Turnbull gets the idea, at least in theory. He said so during the last election.

“All of us know that if you want to have less of something, you increase the tax on it,” he said, complaining about Labor’s plan to boost the capital gains tax. “That is how health organisations justify and urge governments, as we are doing, to increase the tax on tobacco. Labor clearly wants to have less investment.”

What about less obesity? If we designed our sugar tax like Britain’s, we could cut consumption from the day it came in. And we could use what we raised to fight obesity in other ways, or to help cut income tax.

We would be joining 30 or so countries already doing it. The Grattan Institute says our sugar industry would barely suffer. It exports most of what it makes, and it would export more if it sold less here, without much further depressing the global price.

It’d be popular too, if you believe the opinion polls. And it might actually do some good.

In The Age and Sydney Morning Herald

Thursday, April 12, 2018

Why the Tullamarine rail link barely stacks up

Just months ago in December, Infrastructure Victoria published the most comprehensive analysis yet of Victoria’s infrastructure needs.

It examined 300 potential projects, many of them desperately needed, and pronounced the Melbourne Airport Rail Link only “supported in principle”.

And not for a long time.

Upgrades to SkyBus should be pursued first, as “a more cost effective solution in the short-term”.

How long was that short term? Infrastructure Victoria said the airport rail link wouldn’t be needed for 15 to 30 years.

The supporting analysis prepared by consultants KPMG, Arup and Jacobs said the most cost-effective time for a Tullamarine railway to open would be between 2036 and 2039 - two decades away.

Infrastructure Victoria said if the rail link cost $3 billion to $5 billion, and was opened way into the future when the need was greater, it would have a benefit-cost ratio of between 1 and 1.4, meaning its benefits would exceed the costs - a conclusion that might not apply to the Turnbull government’s proposal, which would cost more than twice as much and open as soon as possible.

The reason Infrastructure Victoria wanted to wait is that the alternative of using priority signals for Skybus is so much cheaper - a total cost of only $50 million to $100 million according to its estimates.

Giving buses priority all the way to Melbourne airport wouldn’t even need dedicated lanes on the freeway, although it would on several of the roads leading up to it, including the entry and exit to Adderley Street and Footscray Road.

Ramp metering and priority traffic signals could do the trick, avoiding inconvenience to other users.

Infrastructure Victoria reckons the cheap changes will allow buses to run every three to five minutes during peak times with “a reliable 20-to-25-minutes journey time”, in contrast to the rail proposal in which trains would run every 10 minutes, with a journey time to the city of 30 minutes.

Eventually, decades on, the freeway would become congested enough for the railway to make sense. But in the meantime, improving SkyBus provided “the opportunity to defer the significant cost of a heavy rail link to the airport”.

The billions of dollars saved “could be used to fund other high priority projects”.

Delaying projects that aren’t yet needed is one of the best ways governments can manage money.

The Grattan Institute’s John Daley puts it this way: “In capital investment, sequencing is everything. The value of deferring a project is enormous. Put another way, the cost of building a project early is enormous.”

And in the next 20 to 30 years things might change. The report says in a few decades driverless cars may make the calculations different.

And the report delivers a warning: A rail link wouldn't allow users of public transport to have their cake and eat it too. For the train to make sense, city buses would have to stop, as they did in Sydney.

That’s because the railway would scarcely bring about any increase in the number of passengers using public transport. In the words of the report, the increase would be “not that significant”.

Driving to the airport would remain attractive, and become more so, which is one of the claimed benefits of the railway.

Premier Daniel Andrews supports the project. He has promised that construction will be “well under way” by the time the Metro Tunnel is completed in 2026.

And he'll be grateful for the money. Before the announcement, Treasury calculations had Victoria getting less than 10 per cent of Commonwealth infrastructure funds, even though Victoria accounts for more than 25 per cent of Australia’s population.

Five billion from the Commonwealth will take it to 18 per cent.

In The Age and Sydney Morning Herald

Wednesday, April 11, 2018

Extortion is no way to fix the budget

In their rush to find money for next month's tax cuts, Turnbull and Morrison run the risk of making an awful mistake.

Like they did in 2016, and perhaps in 2017.

In 2016, needing to demonstrate that they could pay for their (modest) election promises, they unveiled a $2 billion fix days before the vote.

Social services minister Christian Porter's welfare budget was to be shaved by 0.3 per cent, and it wasn't going to hurt.

The saving would flow from the use of "technology, but also technology that we’ve applied and learnt from previous experience".

According to Porter, Centrelink would cross-match "in a very sophisticated and quick way" data from the Tax Office with data from the Department of Human Services.

The high-tech fix would provide "better and more accurate assessments of employment income and non-employment income".

Anyone found to have been overpaid on a Newstart, disability or other allowance would get their tax return garnisheed.

But it wouldn’t be a dragnet. Morrison spoke of it as a "more bespoke way of dealing with people’s arrangements". It would "cut red tape, and ensure that mistakes are minimised".

Porter promised "a whole range of safeguards" to ensure any repayments weren't onerous or crushing.

And that's where the ministers appear to have left it, leaving the bureaucracy to raise the $2 billion.

A new paper by Professor Terry Carney, at the time a member of the Administrative Appeals Tribunal, details what happened next.

Whereas previously Centrelink staff had satisfied themselves that there had been overpayments before issuing debt notices, if necessary by using their compulsory powers to require employers to provide pay slip records, from July 2016 they didn't bother, and instead raised debts whenever their clients were unable to disprove suspected overpayments.

And suspected overpayments were everywhere.

The Centrelink computer raised an alarm whenever it thought that someone had been working for more than allowed in a fortnight when they had been claiming benefits. But the Tax Office data wasn’t broken down into fortnights – employers report to the Tax Office annually or quarterly. So the computer guessed, by crudely averaging data for longer periods to produce what was often necessarily spurious data for individual fortnights.

The whole point of a program such as Newstart is that people get off it. It is implied by the name. Anyone who did get off it within a reporting period would have income that they gained in fortnights they were off Newstart necessarily attributed to fortnights they were on Newstart, guaranteed. It was a foreseeable error, and one that could have been avoided (at some cost), given that Centrelink had the power to obtain payslips.

Instead, clients were asked to obtain payslips or bank records themselves, dating back as much as seven years, even though the Centrelink website had only advised them to keep them for six months.

If they couldn't, automated "robo-debt" letters told them to pay up, in an inversion of the usual onus of proof. It worked like extortion. Some of the victims were vulnerable, some couldn’t cope.

Terry Carney is a professor of law. His paper says the practice was illegal, and it quotes as an authority former High Court justice Kenneth Hayne, now leading the royal commission into misconduct by banks.

He says it may have also been inconsistent with the Commonwealth’s "model decision making" and "model litigant" policies. The Commonwealth is meant to act fairly, even where there is temptation not to.

The temptation was $2 billion, most of which is as far away as ever. The department has told the Senate it wiped or cut one in five of the debts it issued. In the first 15 months it "raised" $350 million, but received just $84 million.

This week’s Fairfax Media and Four Corners investigation suggests the same sort of pressure came into play towards the end of the 2017 financial year. Staff in the Tax Office appear to have been told to seize funds from the bank accounts of taxpayers assessed to owe it money, regardless of whether they could pay.

One of the emails said: “The last hour of power is upon us ... that means you still have time to issue another five garnishees … right?”

It’s alleged the office targeted small businesses without the resources to fight it. Several collapsed. It is behaviour inconsistent with model decision making, and inconsistent with the role of the public service. Centrelink and Tax Office staff who had previously been trying to do the right thing found themselves demonised, in order to get dollars through the door.

I am fearful something like it will happen again, on May 8, even if the impact isn’t apparent on budget night.

Morrison, Turnbull and Cormann are under enormous pressure to find as many dollars as they can to fund tax cuts. They’ve been helped by lower than expected spending and a better than expected economy, but they’ll be searching for more. As in 2016, they’ll be tempted to do something whose consequences won’t become clear until after the election.

I am concerned that they won’t resist it, or won’t inquire enough. History suggests I’m right.

In The Age and Sydney Morning Herald

Tuesday, April 10, 2018

Lend quickly and unsustainably. China's modus operandi

From Vanuatu to Papua New Guinea, from Sri Lanka to Pakistan, from the Maldives to the tiny republic of Djibouti on the Horn of Africa, Chinese ‘assistance’ follows roughly the same pattern.

It comes in the form of loans, not much cheaper than, and sometimes more expensive than loans that could have been obtained from organisations set up for the purpose such as World Bank and International Monetary Fund. But their advantage is that they are approved quickly and are often for purposes more attractive to elites than to the countries themselves.

China was insistent on lending for a 1000-seat convention centre in Vanuatu rather than the hospital that some of the local authorities would have preferred.

It's also often smaller things; bursaries for children of the elites to be educated in China, contracts for their families.

And there’s usually a port or an airfield involved.

In Sri Lanka’s case, China advanced loans approaching US$15 billion for projects including a power plant, an airport, an extension of an existing seaport and a new seaport.

After a 2015 election dominated by allegations of corruption, a new president came in promising to weaken the bonds with China. Instead, he found himself bound by contracts to make payments on debts for projects that weren’t commercial. The new Hambantota airport became known as the world’s emptiest. He agreed to hand over to China 99-year leases on the Hambantota seaport (and the airport) in exchange for writing down the debt.

In Djibouti, a dirt poor country with a population of less than one million, China advanced US$9 billion, pushing it towards unsustainable debt. After the International Monetary Fund has sounded a warning it lent US$1.1 billion to develop a port. In January 2016 it was granted a commercial lease at the port that quickly escalated to becoming a commercial and military logistics hub, and then a full naval base. It was built and occupied within 18 months. By November 2017 Chinese troops were conducting live fire drills.

Observers say that if China gets the right to build a military base in Vanuatu it’ll also be constructed in record quick time. China’s modus operandi is to lend target countries more than they can afford for projects that won’t pay returns, buttering up decision makers along the way, then to renegotiate the debt in return for the right to strategically important assets.

It spreads its money widely, because it knows that doesn’t work in one country will probably work in another. And when it gets approval, it moves fast, knowing that in many of the target countries circumstances change quickly.

In The Age and Sydney Morning Herald

Thursday, April 05, 2018

Morrison's dilemma: Awash with money, but not enough

Just quietly, the budget is in an excellent position to deliver tax cuts. A year ago, it wouldn’t have been thought possible. Certainly the Treasurer Scott Morrison didn’t think it was possible. He used the May budget to announce a tax increase (a hike in the Medicare Levy) without which he wouldn’t have been able to credibly continue to promise a surplus by the end of the decade.

His budget pencilled in a wafer-thin surplus of $7.4 billion in 2020-21. Without the Medicare levy increase, it would have been even less: a "rounding error" surplus of $3.15 billion, a mere fraction of a per cent of GDP.

Since then, money’s been rolling in. At first in a trickle (the December budget update lifted the 2017-18 revenue estimate $3.6 billion) and then a flood. By the end of February the government had taken in $5.5 billion more than it had expected in predictions made just three months earlier.

It’s an astounding $3 billion ahead on company tax. It’s the suddenness of the jump that’s important. When China began pushing up coal and iron ore prices in 2016 tax collections barely moved. Mining companies used their losses to cut their tax bills. The belated jump in tax payments suggests they’ve been used up. From here on, tax payments should climb with profits.

The government is $1 billion ahead on income tax. That’s $1 billion ahead of what it expected just three months ago. Remember that proud boast of a record 420,700 jobs created in the past year? Most of those extra jobs were unexpected. The budget predicted jobs growth of 1.5 per cent. The economy has delivered growth of 3.3 per cent. Most of the newly hired workers are full-time and paying serious tax.

So big has been the jump in revenue that in two months so far this financial year, November and February, the budget has been in surplus. In those months the government took in more revenue than it paid out, something it hasn’t done for a decade.

The question facing the Treasury in the lead-up to next month’s May budget is how much of that boost in revenue is permanent. How much of it can be baked into predictions of future income as guaranteed, and able to be given away in tax cuts, should the government want to do that instead of strengthening the projected surplus.

Here’s my guess: the government will discover that its income has permanently become $5 billion a year higher than previously forecast. That’s $5 billion a year available to be handed to voters in income tax cuts. And more.

The government has already announced (but not released estimates for) measures that will raise several more billions, allowing for bigger income tax cuts. One will require foreign investors deriving income from so-called “stapled structures” used for infrastructure projects to pay tax at 30 per cent rather than 15 per cent. Morrison said last week it could come to be worth billions.

It can also book more from its moves against multinational tax avoidance. Also last week Morrison revealed that the anti tax avoidance measures announced so far had persuaded 38 large companies that sell to Australians to bring their sales onshore for tax purposes, meaning “an additional $7 billion in income each year will be returned to the Australian tax base”.

And there are other measures proposed or likely that can be used to garner money for tax cuts. There’s the talked about further cut in foreign aid, there’s clawing back of university fees from former students who have died. There could even be further cuts in projected spending on Newstart and other benefits as a result of changes to the law approved last week that will make it harder for beneficiaries to claim benefits to which they are legally entitled.

So far this financial year the government is $3 billion behind in what it expected to spend on welfare and other payments, suggesting there’s room to expect to spend less next year. My conservative guess is that the government will feel it has something in the order of $8 billion a year to hand out in income tax cuts in the budget due in four weeks time.

It could have more, safely another to $4 billion a year more, if it (reluctantly) abandoned the rest of its proposed company tax cuts, using the sound reasoning that they failed to pass the Senate.

Eight billion could comfortably buy a $5000 lift in the threshold of each of the top three income tax rates. The 32.5 per cent threshold would climb from $37,000 to $42,000, the 37 per cent threshold would climb from $87,000 to $92,000 and so on. Or it could buy a cut of one percentage point in each of our four tax rates with a bit left over.

It’s beyond doubt that we need personal income tax cuts. Bracket creep is eating away at our incomes even though in real terms our wages are scarcely climbing. Morrison’s problem is that however generous his offering, it can be trumped by Labor. It’ll be able to use the money it will book winding back the excesses of negative gearing and dividend imputation, as well as company tax cuts. He’ll be able to be generous, but probably not generous enough.

In The Age and Sydney Morning Herald

Sunday, April 01, 2018

Why your chocolate tastes better

That chocolate you’re opening, it’s better than it used to be.

To most of us, there are only two types of chocolate: that glorious melt-in-your-mouth confection made with cocoa butter, and the lesser, waxy, so-called "compound" chocolate made with vegetable oil, about which I would rather not think. And please, don’t get me started on carob.

What most of us probably don’t know is that the main ingredient grows on trees, and generally only on small collections of them.

Ninety eight per cent of the cocoa pods used to make chocolate are grown on small farms where they are also harvested and fermented in a process that can’t be easily mechanised.

“They grow from the trunks and the branches, they don't grow from twigs,” says Fuzz Kitto, a co-ordinator with the anti slavery campaign Stop the Traffik. “You’ve got to cut the pods off very carefully, so as not to damage the nodes where they join the trees, otherwise they won’t grow again.”

The pods look like small footballs. Inside each is white pith and then a sack, or "placenta", which holds the seeds in a special fluid.

At the farm the seeds and fluid are smeared on banana leaves on tables that slope downwards so the fluid can drain off. Then banana leaves are placed on top. The leaves and the fluid provide the enzymes that are needed for fermentation, a process that takes three to five days. Afterwards, the seeds are taken to racks in a central point in a village where they are dried.

Most of it happens in Côte d’Ivoire (formerly known as the Ivory Coast) and neighbouring Ghana in west Africa. Between them they account for two thirds of the pods harvested worldwide.

From then on, things get big. There are only three big processors, and they sell to only six big manufacturers: Mars, Mondelez (which we know as Cadbury), Nestle, Ferrero, Meiji of Japan, and Hershey.

The processors crush and roast the beans to create liquor, out of which comes cocoa butter and cocoa powder. The more of the butter that’s included in the final product, the better it tastes. But there’s a lot of demand from other users of cocoa butter, including the cosmetics industry which likes it because it is so hydrating.

It’s a world away from the dirt poor farms that need boys, ideally aged 10 to 16, who can climb and have nimble fingers. Many buy their boys from labour agents who truck them in from nearby Burkina Faso and Mali. They are lured with promises of a better life, then locked up, not paid and made to pick and ferment pods with no way out, often not even knowing which country they are in.

How do Cadbury, Nestle, Mars and Ferrero feel about it? Awful. But it’s only in the past few years they’ve been doing a lot about it. Stop the Traffik’s first Australian breakthrough was with the Adelaide family-owned manufacturer Haigh’s.

Campaigner Carolyn Kitto says Haig’s was at first suspicious. Then, as it learnt more and discovered it was possible to work out where its beans came from, it became excited, and then proud. “Every time we turned up, the executives wanted to tell us more about what they had done,” she says. “It’s become about their values.”

After complaints and the threat of legislation in Europe, which is the world’s biggest chocolate consumer, all of the big manufacturers got together with governments, campaigners and farmers at the world cocoa conference in 2012 and drew up plans of action.

Nestle is aiming for 100 per cent slave and child-free labour. It is already up to 37 per cent. It is also funding child schooling, clean water and sanitation programs and has commissioned the international Fair Labor Association to audit farms at random.

When an early visit found slavery, fearful Nestle executives invited Kitto in to ask how she would react. She told them she would congratulate them because it meant their systems were working. “If you are not finding some slavery, you are not looking,” she said.

Mondelez is up to 35 per cent slave-free beans. It is funding community development plans in five communities. Mars might be up to 80 per cent, although it is only claiming 50 per cent, Ferrero believes it is up to 75 per cent, and Lindt operates independently of the big processors and tracks 90 per cent of the beans it buys directly from farmers and roasts.

The only Australian holdout is Darrell Lea, which has been in receivership and has just changed hands again. It hasn’t yet said where its beans come from.

Even better, Australia is about to get a Modern Slavery Act, recommended unanimously by a parliamentary committee. Every business above a certain size will be required to know and report where its raw materials come from. It'll leave a better taste.

In The Age and Sydney Morning Herald