Wednesday, February 23, 2022

This pointless $1,080 tax break should have ended years ago – but has become hard to stop

We are about to find out whether we’ll lose a tax break worth up to $1,080 a year.

Treasurer Josh Frydenberg says he hadn’t “made any final decision” on the A$7.8 billion per year low and middle income tax offset ahead of next month’s budget.

He also says it was never intended to be “a permanent feature of the tax system”, which is true enough.

He could have added that it is incredibly poorly designed, introduced for a purpose that no longer exists, extended for a purpose that didn’t make sense, and now can’t be abolished without giving people a “pay cut”.

The low and middle income tax offset (LMITO) was introduced by Scott Morrison in his final budget as treasurer before becoming prime minister in 2018.

Its peculiar design owes much to the government’s experience with Robodebt, and its ill-fated attempt to collect what it believed were overpaid Centrelink benefits.

A flawed tax break, designed in Robodebt’s shadow

Morrison was by then acutely aware of the anguish caused by Robodebt, officially called the online compliance intervention program – which many people forget he introduced in 2016 to ensure “welfare recipients accurately disclose assets and investments”.

Robodebt sent what looked like demands for repayment to Australians who often owed nothing, and ended up costing the government A$1.8 billion in settlements.

LMITO was born of a desire to flatten Australia’s income tax scale and avoid the mistakes of Robodebt.

Australia has five tax rates counting the initial tax rate of zero, which applies to dollars earned up to $18,200. Anything earned above $18,200 up to a threshold gets taxed at 19%, anything beyond the next threshold gets taxed at 32.5%, anything beyond the next at 37%, and anything beyond $180,000 at 45%.

Morrison wanted to remove one of the thresholds, the one that introduced the 37% tax rate, leaving the scale with just three rates above zero: 19%, 32.5% and 45%.

The cost would be enormous, climbing to $24.6 billion per year. By then 44% of the benefit would go to the highest earning Australians on more than $180,000.

Part one of a three-part plan

So Morrison did it in stages. The first would provide “tax relief for middle and low income earners now”. It would be limited to taxpayers earning up to $125,333.

The second, in 2022-23, would push out two of the thresholds: 32.5% would come in at $45,000 instead of $37,000, and 37% would come in at $120,000 instead of $90,000. And the LMITO tax break would go. It wouldn’t be needed, because people getting it would get at least as much from stage two.

The third and final stage, in 2024-25, would flatten the tax scale.

But the problem with directing a benefit to what Morrison called “low and middle earners” was ensuring it went only to them.

What if one of them thought they would earn $100,000, and actually earned $150,000?

They’d have to be sent letters asking them to pay the money back, as with Robodebt.

So Morrison and the treasury decided recipients wouldn’t get the money until they had put in their tax returns, documenting what they made.

The offset would begin in July 2018, but the money wouldn’t hit the recipients’ bank accounts for more than a year, until the second half of 2019 – after their tax had been sorted.

Despite being called the low and middle income tax offset, very low earners would get nothing.

Those on less than $18,200 had no tax to refund. The rest would get up to $530 (later lifted to $1,080) – but only after they had done their tax. And the messy arrangement was only to last for a few years, until the second stage came in.

‘Not permanent’, but hard to stop

In 2020, as part of the government’s COVID response, Treasurer Josh Frydenberg brought forward stage two. At that point, the offset was no longer needed.

But, perhaps in order to claim “the greatest benefits will flow to those on lower incomes”, Frydenberg extended the offset for another year.

In 2021 he extended it for yet another year, this time as a “stimulus measure”, albeit an ineffective one. A stimulus measure that doesn’t hit bank accounts for more than a year is anything but immediate.

Frydenberg’s problem is that now he has given us both the offset and the stage two together, and done it for two years, actually ending the offset will quite rightly be seen as a tax increase or a “pay cut”, directed at low and middle earners. The timing is particularly tricky, with a federal election due weeks after this year’s budget.

Costing the best part of $8 billion per year, delivered when it is not needed, and destined to continue until someone can find a way to stop it, the offset is an awfully constructed annual bonus for all but the highest-earning Australians.

Like the instant asset write off for business, which keeps getting extended because otherwise businesses would complain, there’s a chance the LMITO will stay with us forever.

As ill-fitting as it is, there is an unexpected benefit. The Tax Office says we’ve been getting our returns in early.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Monday, February 21, 2022

Lets open up big: economists say we need more migrants

Wes Mountain/The Conversation, CC BY-ND

Australia’s leading economists have overwhelmingly endorsed a return to the highest immigration intake on record, saying Australia should aim for at least 190,000 migrants per year as it opens its borders, up from the target of 160,000 per year set ahead of COVID.

More than a third of those surveyed believe 190,000 isn’t enough, arguing that a “catch up” will show Australia is open to the world.

Prime Minister Scott Morrison cut Australia’s migration ceiling from 190,000 to 160,000 places per year in March 2019, in order to “tackle the impact of increasing population in congested cities”.

The 49 economists who took part in the Economics Society of Australia poll were selected by their peers for their expertise in macroeconomics, microeconomics and economic modelling. One is a member of the Reserve Bank board.

Ahead of COVID, Australia’s permanent intake has only been as high as 190,000 on five occasions, during the five years 190,000 was the official target.

Annual migrant intake in the years leading up to COVID

Parliamentary Library 2021

The government’s intergenerational report released mid last year assumed a return to an intake of 190,000 per year in 2023-24.

Only four of the 49 economists surveyed by The Economic Society and The Conversation wanted less migration than Australia had going into COVID.

Their concerns were that growing population numbers put pressure on “fragile resources and infrastructure”. Slower population growth would “ease pressures on the environment, housing prices, infrastructure and emissions”.

Adelaide University labour market specialist Sue Richardson said there was no evidence high levels of migration raised GDP per person, as opposed to GDP.

Congestion and the environment matter

“In terms of living standards, it is the per capita measure that matters,” she said. “And it should be adjusted for increased traffic congestion, urban density and pressures on the health and other important social systems.”

The six economists who thought an annual intake of 160,000 was about right made the point that what mattered more was the composition of the intake. There should be less unskilled migration, more skilled migration and a “decent humanitarian program”.

The 19 economists who went for 190,000 argued less would show a “lack of ambition” for lifting economic growth.

Helen Silver, chief general manager at Allianz Australia and a former head of Victoria’s Department of Premier and Cabinet said a higher target would be both a “catch up” and would act to symbolise Australia was more open to the world.

Australia benefits from being open

Any target would need to be flexible and responsive to the capacity of Australia’s heath and other systems given the ongoing pandemic.

Melbourne University economist John Freebairn said a larger population would enable Australia to capture economies of scale and fill gaps in high skill and low skill jobs caused by labour market rigidities and failures in training systems.

It would increase the government’s tax take net of spending and help build a more dynamic and interesting society, as it had in the past.

The 18 economists (37.5% of the total) who said 190,000 was not enough argued that Australia’s status as a nation of immigrants gave it a formidable advantage.

190,000 could be considered a floor

UNSW economist Gigi Foster said in the wake of Australia’s responses to COVID its challenge was not so much what target to set, but rather how to convince immigrants to come here.

Melbourne University ‘s Chris Edmond said if Australia had the same per capita target as Canada it would have a permanent intake of 250,000 per year.

The University of Sydney’s James Morely said 190,000 was less than 1% of the population and was in any event not a target for net migration as that would be determined by the number of Australians who left and returned, and the number who came in temporarily under other schemes.

Given low birth rates and a need for a balanced age profile Australia should probably target permanent visas of 320,000 - 1.25% of the current population.

RMIT’s Leonora Risse said what mattered was that the migration intake was accompanied by policies designed to ensure migrants reached their potential.

When considering an upper limit on migration, we should keep in mind that 30% of all Australians were born overseas. For 20% of Australians, one or both parents were born overseas. Australia would not be what it was were it not for migration.

Notably absent from most of the 49 responses was discussion of the impact of migration on wages and the employment of locals.

The experts surveyed seemed to regard these impacts as not particularly big in either direction compared to the impacts of migration on dynamism, Australia’s place in the world, and its environment, infrastructure and social cohesion.

Detailed responses:

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, February 16, 2022

Australia cut unemployment faster than predicted – why stop now?

If you told someone a year ago unemployment was about to dive below 5%, to just above 4%, they wouldn’t have believed you.

If that person was an expert, and you said it would happen despite a Delta outbreak and lockdowns in our two biggest states, they might have said you had little idea of how the economy worked.

At the beginning of last year, The Conversation asked 21 of Australia’s leading economists what would happen in 2021 and 2022. At the time, the published unemployment rate was 6.6%.

None of them thought it would slip below 5% in 2021 or 2022.

Asked when the unemployment rate might eventually even touch 5%, none nominated 2021. Only two nominated 2022. The rest picked dates years into the future. Three picked “not for the foreseeable future”.

Six months later unemployment was 4.9%, six months after that it was 4.157%.

And yet many experts – many of whom use the models that failed to foresee how quickly unemployment would fall – are now using the same models to warn against doing too much to push it down further.

Experts concerned

They are worried about absurdly high inflation along the lines of the 7.5% now being experienced in the United States and the danger that authorities will push up interest rates too late and too hard to crush it, bringing on a recession.

In their sights are the Reserve Bank’s ultra-low cash rate and the government’s A$7 billion per year tax offset, introduced in 2018 to provide tax relief ahead of the more comprehensive tax cuts now in effect, then extended twice to support the economy during COVID.

Removing them – removing the economic support set to push it down to where it hasn’t been in half a century – is said to be essential in order to bring down government debt and avoid disastrous inflation.

Governor relaxed

Reserve Bank Governor Philip Lowe dealt quickly with the idea of cutting back government support to reduce government debt on Friday.

He told a parliamentary committee that while this was an option “conceptually”, a better idea would be to use government spending to grow national income quickly so the debt-to-income ratio shrank.

That’s the way the debt-to-income ratio has been shrunk in the past – by expanding national income through, among other things, putting more people into jobs.

Dr Lowe also has ideas about tightening settings to stymie inflation, which don’t accord with those of the experts who warn of a US-style takeoff in inflation if we eat further into unemployment.

The case for caution was summed up this way by economist Andrew Charlton on Radio National’s Saturday Extra a few weeks back:

Running the economy is a bit like driving a car around a racetrack. You want to go as fast as you can, but you don’t want to go too fast or you will crash.

Go too fast and you’ll get rising inflation, authorities will be forced to lift interest rates quickly, and you’ll bring on a recession. Ease off on boosting employment – be less ambitious – and you won’t crash.

It’s the way many of those who responded to The Conversation’s survey see it. It’s the way many economists with eyes on the US see it. But it isn’t the way the governor sees it.

Dr Lowe told parliament last week that Australia was not the United States.

Australia is not the US

In the US, utility prices jumped 25% over the past year. In Australia it was 2%. In the US new car prices jumped 12%. In Australia it was 6%. The US price increases are largely one-offs caused by shortages. In Asia, inflation has scarcely moved.

In Australia wage growth is no higher (at 2.2%) than it was before COVID, even though unemployment is dramatically lower. That’s because, unlike the US, Australia kept workers in their jobs through JobKeeper and measures to keep jobs safe. Employers haven’t had to offer more to get workers back.

The Reserve Bank’s model says inflation should be climbing much higher than it is with unemployment as low as it is. That that hasn’t happened suggests the model is wrong.

On Friday, Reserve Bank chief economist Luci Ellis said if there was a floor under unemployment that couldn’t be breached without setting off an inflationary spiral, that floor was not “set in stone”.

One of the reasons is that as people previously unemployed become employed, the floor of people employers regard as unemployable sinks.

The longer the Reserve Bank and the government’s budget keeps supporting the economy, the lower the floor will sink and the fewer Australians will be kept unemployed.

Dr Ellis said while her model was telling her the floor under unemployment was 5%, it was not “the right way to think about it”. The floor might be four-point something, it might be three-point something. Until we get there, we won’t know.

Given that we are in uncharted territory we owe it to ourselves to chart it. This is the Reserve Bank’s view, and it might well be the government’s view.

We owe it to ourselves to see just how low unemployment can be.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, February 09, 2022

An investment in clean indoor air would do more than help us fight COVID – it would help us concentrate, with lasting benefits

Sometimes the best things you can do are invisible.

Such as fighting cholera by ensuring drinking water wasn’t contaminated by sewage, as happened in London in the 1840s.

Or setting up an emissions trading scheme, which drove emissions down, despite former prime minister Tony Abbott attacking it as a “so-called market in the non-delivery of an invisible substance to no one”.

Air free from contamination is as invisible as uncontaminated water, but the case for air isn’t yet as widely accepted as it is for water.

Air pollution from motor vehicles kills about 280 Australians per year, yet Australian petrol is allowed to contain 15 times as much sulphur as petrol sold in the US, the UK, Europe, Korea, Japan and New Zealand. Australia is planning to adopt in 2024 the standard adopted elsewhere in 2015.

And poor air quality harms us in ways that fall short of death.

Poor air harms performance

A new six-nation study of office workers in countries from China to the United States found that where ventilation is poor and levels of particulate matter are high, workers perform worse or more slowly on tests involving adding and subtracting and colour-coding words.

Another study on the relationship between indoor air quality and competitive chess players found that when the concentration of fine particulate matter with a diameter smaller than 2.5 micrometres (0.0025mm, better known as PM2.5) climbs as much as it can, players are 26% more likely to make mistakes.

The effect is worse if the players are running out of time.

Smart employers recognise this. When Google moved into a new headquarters in Mountain View, California, it was offered air filtration that cut pollutants to 0.0001 parts per billion. It opted for zero parts per billion, and paid more to get it.

If performance and education matter (and they do – on Monday the government launched a new inquiry into productivity) we ought to be treating clean air as an investment in productivity, over and above its undoubted benefit in containing the spread of COVID.

Here’s my big idea. The A$14 billion Building the Education Revolution program Labor put in place during the global financial crisis both helped fight the crisis and left Australia with thousands of school halls.

As far as legacies go, this wasn’t bad. The halls have been used for assemblies and plays and before and after school care.

But a program designed to contain the spread of COVID that left Australia with schools and workplaces in which the occupants were able to think clearly, and rarely caught infections – that would deliver an enduring dividend.

Many schools have openable windows, as do some workplaces. But in winter and for security reasons they are often closed and not reopened.

Distinguished Professor Lidia Morawska, director of International Laboratory for Air Quality and Health at the Queensland University of Technology, says outside air typically contains about 420 parts per million of carbon dioxide.

Science magazine

Beyond a few hundred parts per million indoors, the aerosols that carry viruses circulate rather than get blown away. In closed rooms and offices they can travel long distances and remain aloft for hours. Beyond 1,000 parts per million – and indoors, many times 1,000ppm is common – our ability to concentrate drops.

In order to fight COVID in classrooms, education authorities in Victoria, NSW, Queensland, Western Australia, South Australia, Tasmania the ACT and the Northern Territory say they are prepared to install air purifiers where needed.

The ACT is reusing those it bought to filter smoke during the 2020 bushfires. Victoria has gone the furthest – ordering 51,000 from Samsung.

These so-called high efficiency particulate air (HEPA) filters work by removing ultra-fine particles rather than bringing in air from the outside.

Portable purifiers are a stopgap

As a stop-gap for fighting COVID Professor Morawska thinks purifiers are okay. But she says as soon as COVID passes they are likely to be put in cupboards and not used til next time. They are unlikely to produce a lasting benefit.

A far, far cheaper and perhaps more enduring solution would be to buy or mandate cheap carbon dioxide (C0₂) meters (portable meters can cost less than $100) for every classroom, office and shop.

Heavy duty meters can be mounted on walls and set to glow red when the air is bad. They are in schools throughout Germany.

C0₂ meters do more than monitor carbon dioxide.

By calculating how much of it is in rooms where humans have been, they measure ventilation. They are a good guide as to whether air is circulating and viruses and toxins are being diluted.

Installing meters and ensuring their output is displayed might just be one of the best-value interventions to fight COVID there is – leaving us with the lasting benefit of air that is safe in the same way as our water is safe.

Meters make the invisible visible

The initial cost would be low compared to the $14 billion spent on school halls.

The lasting benefit would be an awareness of when and where we needed to open windows and spend money installing better air flow systems, and when and where we did not.

The cost of poor indoor air can be measured not just in billions, but in billions per year. Back in the late 1990s the CSIRO calculated a cost of $12 billion per year. Two decades on, coronaviruses and bushfire smoke would make it greater still.

We’ve been offered a cost-effective chance to make the invisible visible and extend our productivity and lifespans. I reckon we should grab it.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, February 02, 2022

Unemployment below 3% is possible – if Australia budgets for it

What’s the boldest thing the Morrison government could do in next month’s budget?

It would be to forecast an unemployment rate below 4% (a rate of three-point-something), then to pledge to go further, to two-point-something.

Neither have happened for half a century; not since the long Coalition reign of Robert Menzies and his successors from the 1950s to the early 1970s, when unemployment was between 2 and 3%.

Astoundingly, both are now within Treasurer Josh Frydenberg’s reach in a way they weren’t mere weeks ago.

This time last year, the official budget strategy (its formal title is fiscal strategy) pledged to maintain economic support until the unemployment rate was “comfortably below 6%”.

Frydenberg ditched that target on the ground it was unambitious in the May budget, replacing it with a commitment to spend until the recovery was “secure and the unemployment rate is back to pre-crisis levels or lower”.

But – even projecting forward all the way out to 2025 – Frydenberg couldn’t promise an unemployment rate below 4%. There wasn’t the demand for workers to support it.

Suddenly, below 4% is possible

Even as late as December last year in the mid-year budget update, the best the treasury could forecast was an unemployment rate of 4.25%, which wouldn’t be reached until mid-2023 and wouldn’t be bettered in forecasts stretching out to mid-2025.

Then in January, we learnt that in December itself the unemployment rate had dipped below the forecast to 4.2% a year and a half early.

And it was the real thing. The unemployment rate hadn’t been cut artificially by people withdrawing from the search for work because of lockdowns (as had happened temporarily earlier in the year). Unemployment fell by 62,200 in December because an extra 64,800 people found work.

Unemployment touching 4% once more

Unemployment rate, seasonally adjusted from 1978. ABS labour force, ABS labour force historical timeseries

The proportion of the population aged 15 and over in work is the truest measure of employment, because it’s unaffected by whether or not someone calls themselves unemployed. In December last year, that had climbed to 63.3% – a record high.

Several countries, including Singapore, South Korea and New Zealand, do even better, suggesting we can push employment higher still.

And the jobs have come with hours. All but a few of the extra jobs created over the past year have been full-time. In December the total number of hours worked hit an all-time high. The proportion of workers underemployed (not getting the hours they want) sank to a 13-year low.

The 50-year low is closer than it seems

The unemployment rate was better than it looked. Calculated to several decimal places rather than the usual single place, the December rate was 4.157% – within a hairsbreadth of the historic low of 3.981% achieved in February 2008 at the height of the mining boom; the only time in the modern era the rate slipped below 4%.

To get below 4% from here on, and to get below the previous long-term low, would only require an extra 25,000 people in jobs.

That’s what makes a budget forecast of an unemployment rate beginning with a “3” – the first since the 1970s – suddenly plausible. On Tuesday the Reserve Bank governor and the prime minister said they expected it this year.

Vacancies abound

ABS job vacancies, seasonally adjusted

Making something much better plausible – what until recently was a barely imaginable unemployment rate beginning with “2” – is the number of vacant jobs on offer.

In November, the Bureau of Statistics survey found a record 396,100 jobs on offer, so many as to mean one job for every 1.7 people looking. The more usual ratio, back in the days before COVID, was one vacancy for every three unemployed people looking.

Below 3% is within reach

If half of those job vacancies (198,000) were filled by someone presently unemployed, the unemployment rate would fall to 2.7%.

Which is another way of saying an unemployment rate lower than 3% – an unemployment rate beginning with “2” – is within reach.

A budget that forecast a rate lower than 4%, but adopted as a target or stretch forecast an unemployment rate lower than 3%, would make history.

It would have to set out the means to achieve it, one of which would be to adopt a new fiscal strategy that committed the government to “invest in a stronger economy” (the words in the existing fiscal strategy) until unemployment is between 2% and 3%.

The existing strategy commits the government to invest in a stronger economy until unemployment is down to “where it was prior to the pandemic or lower”.

What’s missing? A target and more help for job-seekers

The target would delay budget repair by only a few years, and it would make that repair quicker when it started because hundreds of thousands more Australians would be paying tax and no longer claiming JobSeeker.

And it would lock in an expectation of permanently lower unemployment, in the same way as the Reserve Bank’s success in crushing inflation in the 1990s locked in an expectation of permanently low inflation.

If the government articulated the target, the Reserve Bank would be likely to assist. Full employment is the second of the three goals spelled out in its charter.

The government would also have to do much more of what it started in its last budget, which is to set up programs to make unemployed workers more job-ready and make employers more likely to hire them.

It’s within reach for Labor, or the Coalition

Some of that is already happening as the large number of vacancies and low number of unemployed forces employers to take on people they wouldn’t have before. Many will be glad.

Often the only thing that’s “wrong” about a worker who has been out of work for a long time is that they have been out of work for a long time. As employers discover that, they are likely to find it is easier to fill vacancies than they thought.

An unemployment target of 2-3% would be game-changing, and it’s within reach. The last side of politics to preside over ultra-low unemployment was the Coalition, making it natural that Morrison and Frydenberg should take up the mantle of Robert Menzies and his treasurer Harold Holt.

If they won’t, it’s an opening for Labor. There’s a chance to all but eliminate unnecessary unemployment in Australia. Not in 50 years have we been this close.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.