2011-12: The year we saved big time, and went backwards

Australian households stashed away a record $70 billion during the past financial year, pouring extra funds into banks and term deposits, yet when the financial year ended they were $6 billion poorer than when they started.

The latest financial accounts from the Bureau of Statistics show per capita wealth slid 2 per cent over the year to June and 11 per cent over five years to June, all because of falling share prices.

The rout has since been reversed. Share prices have climbed 6 per cent since the start of July. But the uneven performance of the sharemarket has encouraged Australians to park more of their savings in cash and park more in the bank than ever before.

Households held a record $726.6 billion in cash and deposits at the end of June, accounting for 23.7 per cent of their financial assets - up from 21.9 per cent a year before.

“It’s a safe haven approach, a knee jerk reaction to uncertainty,” says Commonwealth Securities chief economist Craig James.

“It gets down to confidence. People know about what been happening in Europe, they know about the United States, and they know about China. So with deposit rates so high why wouldn't you be putting anything extra you had into term deposits?”

It’s not only households. The ABS figures show superannuation funds had 15.9 per cent of their assets stored in cash at deposits at the end of June - the highest proportion on record and roughly double the long-term average of 8.5 per cent...

Private non-financial companies had a near-record 45.4 per cent of their financial assets stored in cash and deposits, well above the long run average of 39 per cent.

Foreigners have been buying shares where Australians have not, lifting their ownership of the Australian share market to 47.2 per cent, the highest stake in 20 years. Foreign holdings of Australian government bonds eased back to 78.2 per cent from the record 79.8 per cent in March.

Per capita net financial wealth slipped from $65,044 to $63,675 over the financial year, despite increased saving. The figure excludes wealth held in the form of real estate
but is weighed down by loans secured against real estate.

“What’s encouraging for people who are paying off their own homes is that home prices went up in September, and that the share market has been climbing. Household wealth could pick up,” Mr James said.

“And time cures all ills. If we get some good news out of the United States and out of China and if people don’t focus so much on Europe and if the Australian economy continues to track along nicely people might start to feel wealthy again and put more of their money back to the share market.”

In today's Age


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A GDP one-off? You'd want to hope so

Swan's confident

Australia suffered its biggest economic collapse in 20 years in the three months to March as severe weather shrank national income 1.2 per cent - a reverse not seen since recession “we had to have” at the start of the 1990s.

The contraction pushed Australia toward the bottom of the developed nation pack it used to lead and put talk of an interest rate hike on hold.

Australia's annual growth rate is now just 1 per cent, well below the 1.8 per cent recorded in the United Kingdom, the 2.3 per cent in the United States and the 2.5 per cent throughout Europe.

“What is clear is this: if the mining boom has a cough the Australian economy can suffer pneumonia,” said Coalition Treasury spokesman Joe Hockey. “The economy is increasingly reliant on the mining boom.”

Treasurer Wayne Swan said he was certain the drop would be a one-off, meaning Australia would avoid the two consecutive quarters of negative growth commonly described as a recession.

“I think there will be a strong rebound. Just as we took a hit of a bit over 1 per cent, I’d expect a rebound somewhere of that order,” he told the Herald

“You’re beginning to see it now in some of the data. Coal exports picked up in April. If you start to move around my home state you start to see it a bit more now.”

Coal and iron ore exports slumped 27 per cent during the quarter and coal and iron ore production slid 5.3 per cent. Treasury expects a further 2.5 per cent slide this quarter. Farm production slid 0.6 per cent with Treasury expecting a further 0.6 per cent as a result of the floods.

Treasury believes the Queensland cyclone, the floods in Queensland, northern NSW and Victoria and and the earthquakes in Japan and New Zealand between them wiped 1.7 per cent off Australian GDP, meaning without the disasters growth would have been positive.

The 1.2 per cent dive is deeper than the 0.9 per cent recorded in the global financial crisis and almost as deep as the 1.3 per cent dive recorded during the early 1990s recession.

Only during the oil crisis of the mid 1970s did the economy contract significantly faster.

The slide calls into doubt the forecasts the Reserve Bank used to back up its warnings of the need for higher interest rates. It last month forecast economic growth of 2.5 per cent over the year to June, and outcome that could now only be achieved with an implausibly large 2.9 per cent rebound in the June quarter.

“It will now be very difficult, from a public relations point of view, for the Bank to deliver soon on its clear intention to raise rates,” said Westpac chief economist Bill Evans.

Eight of Australia’s 19 industry sectors went backwards in the quarter, with sharp reverses in agriculture, mining and manufacturing outweighing smaller gains in retail, health care and construction.

Household disposable income climbed 3.6 per cent but consumer spending increased only 0.6 per cent as households squirrelled away rather than spent most of their extra income lifting their saving rate to an unusually high 11.5 per cent - the highest since the financial crisis and a peak not otherwise seen for 25 years.


Mr Swan said the caution was “partially a result of what people read about the international economy, and partially a consequence of the fact that our two most significant trading partners had very significant natural disasters.”

“We know that people have cash and people are consuming, but they are also saving,” he said. “The heartening thing is that outside of the exports sector, there is a degree of solid strength.”

Published in today's SMH


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It's time to properly tax super, and the 50% discount for capital gains looks silly as well - Henry

Actually he thinks everything about the way we tax savings is silly.

Here's the key graph from the talk Ken Henry delivered today in Adelaide:




Super contributions are negatively taxed, big time. Rental properties and shares are also negatively taxed big-time, but only if they are funded by debt.

Make sense?

Meanwhile savings parked in bank accounts are taxed massively - at way above the saver's marginal tax rate.

Make sense?

Hold on.

This speech throws the lot into the mix.

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Want to get people to save?

Scare them. It's working.

Graph from Saul Eslake's presentation to ANZ board of directors, Feb 24.

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Refuted economic doctrines

Now here's a countdown!

What "truths" has the global economic crisis rendered crap?

Professor John Quiggin is up to Number 4 and still counting.

Refuted economic doctrines #1: The efficient markets hypothesis

Refuted economic doctrines #2: The case for privatisation

Refuted economic doctrines #3: The Great Moderation

Refuted economic doctrines #4: Individual retirement accounts

Enjoy!

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Great new reading from the Treasury

I spent a terribly enjoyable hour in the sun in the Parliament House courtyard reading these, really.

The macroeconomic implications of financial deleveraging by Will Devlin and Huw McKay:

How does it happen, and why does it always seem so much more severe than it needs to be?

Household saving in Australia, by Susie Thorne and Jill Cropp:

Why did it fall, and (more interestingly) why has it been climbing these last few years?

Harnessing the demand side: Australian consumer policy, by Stephen Hally-Burton, Siddharth Shirodkar, Simon Winckler and Simon Writer:

A terribly useful guide through the development of consumer policy in Australia.

Did you know that four thousand years ago the Babylonian ruler Hammurabi decreed that, "If the mistress of a beer-shop has not received corn as the price of beer or has demanded silver on an excessive scale, and has made the measure of beer less than the measure of corn, that beer-seller shall be prosecuted and drowned."

So began consumer law.

These are in the Treasury's Quarterly Economic Roundup - a most excellent publication.

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Superannuation - the assumptions

Regarding Super-man, below, commentator Tej writes:

"I guess this is what to expect when you get librarians to do financial calculations. If you assume a normal profile of earnings, 40 years in the work force, 15% tax on contributions, 12% tax on earnings which is typical of super funds, 1% fees, 6.5% real returns before fees (typical of the last 100 years), then a person whose only savings are the 9% super will have 35% of their peak income available to draw.

This is based on the fact that if you draw more than 3% you have a big chance of exhausting your money. I would be interested to see the librarians' calculations - I suspect they are assuming 10% plus investment returns which is unrealistic after taxes, fees and inflation.

So, what are the Parliamentary Librarian's assumptions?

The document is:

Richard Denniss, The Crisis of Cash or Crisis of Confidence - the Cost of Ageing in Australia, Australian Journal of Political Economy, July 16, 2007

Here's the table: (click to enlarge)



And here are the assumptions:

"An individual making 9 per cent contributions to superannuation for 40 years, living for 18 years post retirement and receiving a real rate of return of 3.5 per cent. The retirement incomes for low income earners include income from both superannuation and the relevant part pension to which they are entitled. The reasonable benefit limit has been ignored."

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It's probably not like you think - Australia's tax system

Read it here.

Australia has far more taxes than is commonly realised – 125 at a conservative count, many of them extremely obscure.

The queen bee levy is singled out as Australia’s smallest tax in the in the discussion paper that will guide the 18-month review of Australia’s tax system.

In 2006/07 the levy raised just $8,000 from bee keepers exporting queen bees, levied at the rate of 10 cents for each bee sold for over $20 and 0.5 per cent of the price of bees sold more cheaply. But, like many of Australia’s smaller taxes, it cost a lot to collect. The discussion paper says that out of every $100 collected, $21 dollars was eaten up by the cost of collection.

The Nashi Pear Levy and Export Charge is the most expensive tax to collect, the costs eating up $30 of every $100 collected.

Many of these taxes, among them the Buffalo Slaughter Levy and the Lychee Levy have been introduced at the request of the producers being taxed...

The discussion paper makes the point that would rather trust the government to collect their money and hand it to their industry than they would trust each other.

Most of the $2602.5 billion raised in tax in 2006/07 came from just ten taxes, the biggest being personal tax, company tax, the Goods and Services Tax and fuel excise.

For many of us, paying tax is neither complicated nor particularly painful. Our tax take is the eighth lowest in the OECD. And contrary to widespread belief the system isn’t getting more complex.

The discussion paper says that on almost every measure – pages of the income tax law, the use of tax agents, the time spent preparing business activity statements, the tax system is becoming simpler.

Launching the 343-page discussion paper in Melbourne the Treasurer Wayne Swan said its observations would challenge many people.

“I don’t necessarily find that everything in this paper gels with everything that I have said on tax in the past, and that is as it should be. This is a Treasury discussion paper which is out there to promote discussion.”

The Treasury Secretary Ken Henry who is heading the inquiry said he had “no doubt some people will find some of the observations a little uncomfortable”.

The paper suggests that the taxation of the returns from saving is blatantly unfair. Interest on money in the bank is taxed at a real rate approaching 80 per cent. Money earned from borrowing to buy shares is taxed at a real rate of around 5 per cent, and the returns from employer-provided superannuation are taxed at a real rate of minus 180 per cent.

It raises the prospect of imposing a resources rent tax on coal and iron ore miners making the point that “these natural resources are owned by all Australians”. It says their profits have increased by far more than have state government mining royalties.

The members of the tax and transfer system review will meet for the first time today. They have been asked to report by the end of 2009.

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Tuesday Column: Labor's home saving scheme is now only half a dud

Wayne Swan said his Budget would keep all of Labor’s election promises.

But it didn’t really.

Some of them were too awful to implement in full.

Take Wayne Swan’s promised ‘Low Tax First Home Owner Savings Accounts’.

His pre-election sales pitch promised that “savers will be eligible for a low tax rate of 15 per cent on the first $5000 of income they deposit in their account each year rather than the ordinary tax rate they would pay”.

There were two problems. One was there was no mechanism for charging people one rate of income tax on wages parked in an account and another rate of income tax on the rest. Labor hadn’t realised that.

The other was that Australians on salaries of up to $30,000 (soon to be $34,000) pay no more than 15 per cent tax anyway – for them the so-called ‘low tax’ accounts wouldn’t be low tax at all...

But for someone earning in excess of $75,000, the 15 per cent rate would be valuable indeed. A rate of 15 per cent instead of 40 per cent would mean a gift from other taxpayers of $1,250 for each $5,000 parked in the accounts.

For a very high-income earners on a tax rates of 45 per cent the gift would be bigger still.

Labor didn’t see this at the time, explaining that it was proposing “superannuation-style accounts”.

The tax concessions for superannuation do indeed have such unfair and indefensible features. That Wayne Swan didn’t see them that way is disheartening.

He continued not to see the problems after the election when the Treasury made them clear.

In advice to the Treasurer mainly blacked out from documents released under the Freedom of Information Act the Treasury said that they couldn’t charge one rate of tax on income put in one place and another on income put in another unless the specially taxed accounts were to be funded by employers as are superannuation accounts.

But the Treasury said Wayne Swan could achieve the same effect as his policy would by paying a government co-contribution directly into each First Home Saver Account. If he wanted exactly the same effect, he could direct the biggest contributions into the accounts of the highest income earners.

I am guessing that the Treasury said this to make a point, one the Treasurer failed to get – that his policy was untenable.

Instead in February Wayne Swan and the Housing Minister Tanya Plibersek actually published something very close to the Treasury’s ‘suggestion’ under their own names in a consultation paper.

It was hoot - the equivalent of a ‘kick me’ sign.

It even included a table making clear that an Australian on up to $80,000 could get $750 from the government (Swan and Plibersek had at least abandoned the idea that low-income earners should get nothing), someone earning more than $80,000 could get $1,250 and someone earning in excess of $180,000 could get $1,500.

Expressed as a per cent the matching contribution would be 15 per cent of what most earners put in, 25 per cent of what higher income earners put in, and 30 per cent of what very high-income earners put in.

Then Swan and Plibersek asked for submissions.

Unpublished until now, the public submissions excoriate the ministers’ clever idea and their dumbness in actually putting it forward for comments.

One member of the public, Leah Fawcett, wrote:

“I would like to know why an earner of $180,000+ will receive the most contribution from the government, while a low to middle income earner will receives the least.”

“I understand that higher income earners pay more tax. But someone with an income of $180,000 will still take home more than an average income earner. That person should be more able to afford their own home.”

Another, Ian Hafekost complained that under the proposal:

“Those individuals with a taxable income of up to $80,000 per annum, who you would think might need the most help in saving for a deposit, receive the smallest Government contribution.”

Yet another, David Ng was “shocked and utterly disillusioned to find that the government contribution is twice as much for those paying the highest rate of income tax (i.e. with the most income) as for those with the lowest”.

“I cannot comprehend how rewarding those who earn around $80,000 per annum with a $1,250 contribution, and those who earn $40,000 with $750, even though they have both saved $5,000, could possibly do anything other than to push house prices even further beyond the reach of the latter, who is after all competing with the former,” he said.

“To portray it as being even vaguely beneficial to lower-income earners is a fallacy, as not only does their higher-earning competition have equal access to the scheme, and not only do these richer aspirants escape paying the higher rates of income tax that would normally be applicable to their savings; they are to be given more money solely because they earn more.”

“Not because they have saved more, but because they earn more,” he added for emphasis.

David Ng said that as it stood the proposal might even push housing further out of the reach of low income earners.

“The proposal is a tax-break for middle-to-high income earners that will enable them to spend more on housing, thus pushing up prices which are already beyond the reach of most low income earners.”

The proposal would be the right one only if the aim was to “push up house prices and exacerbate the housing schism”.

As he put it: “Tax reform to help the rich should be publicly debated rather than advanced under the guise of improving housing affordability”.

What would Wayne Swan and Tanya Plibersek do without such selfless Australians as Leah Fawcett, Ian Hafekost and David Ng prepared to spend their own time gently pointing out the blindingly obvious ways in which their Ministers have stuffed up?

The Treasurer sheepishly and belatedly backed down on Budget night. His budget documents said that the government contribution had been changed to a flat 17 per cent “in order to increase assistance to low and middle income earners”.

Because of the late change the start of the scheme was pushed out from July to October.

But it is still an untenably unfair scheme. The earnings of the a First Home Owner Savings Accounts will be taxed at 15 per cent – a concession that’s worth nothing for a low-income earner, but a lot for a very high-income earner.

The Treasurer and Housing Minister mightn’t have twigged to that.

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Tuesday Column: Rudd's really dud Budget promise

By all accounts Wayne Swan's first Budget, due in a fortnight, will be a shocker. And not only for people from the ACT. But there will be generosity amidst its meanness - a surprising amount of it reserved for those of us who are already very well off.

Want evidence?

Consider Labor's plan for First Home Saver Accounts, cobbled together a few weeks before the election and so poorly designed that after the election the Treasury told Labor it was unworkable.

The redesigned scheme, due to come into effect on July 1, works like this: Every dollar that first home savers put into an account - up to a maximum of $5,000 - will be matched by a government contribution of 15 cents.

Except for Australians earning more than $80,000 per annum. They will get a government co-contribution of 25 cents for every dollar they invest. Really. ...

Unless they earn more than $180,000 per annum in which case they will be blessed with a government contribution of 30 cents per dollar they invest.

That's right.

The Labor government has come up with a scheme that would grant Lauchlan Murdoch – the richest young person at last week's 2020 Summit – twice as much as the ACT's Sid Chakrabarti, one of the poorest.

Wayne Swan's announcement, in February this year, included a table to make the disparity clear. It says that a low to middle income earner putting aside $5,000 each year would get $750 from the government; a high income earner $1,500.

The Treasurer put the design up for discussion on the Treasury website and received more than 100 submissions. But curiously the Treasury hasn't made them public, although it said that it would and although it would be required to if asked under the Freedom of Information Act.

Its website now says it will release the submissions “following the Government’s announcement of its final policy decisions”, which probably means on Budget night when they will be beside the point.

Here's how the consumer organisation Choice delicately phrased its criticism in its submission: “We cannot see a clear policy rationale for the proposal to provide higher contributions to higher income earners.”

It added, either with tongue in cheek or to spell it out in case the Treasury officers were really dumb, “we are unaware of any evidence to suggest that sufficient savings are more difficult to achieve for higher income earners.”

What on earth could have possessed the Treasurer to come up with such an obviously bad policy, and why on earth did the Cabinet endorse it for delivery in the May Budget?

It is fairly clear why the Cabinet endorsed it. It it is a deliverable version of an undeliverable election promise. And the Prime Minister believes in delivering his election promises.

As Mr Rudd said last just week, “we went to the election committed to implementing this. We intend to proceed”.

Asked whether whether he agreed that the scheme gave the most money to the applicants on the highest incomes, the Prime Minister replied, “there would be some people who would argue that, but the reason we've called for submissions is to get the public's input into this.”

What possessed the Treasurer to come up with it? The consultation paper released by the Treasury in February gives the game away.

“First Home Saver Accounts will reflect the arrangements for superannuation,” it says. “The government contributions will vary from 15 per cent to 30 per cent depending on the account holder's marginal income tax rate.”

That is indeed how support for superannuation contributions works.

The government taxes those contributions at 15 per cent instead of the taxpayer's marginal income tax rate. That gives low income earners already paying 15 per cent no benefit, middle income earners paying 30 per cent a 15 per cent benefit, and high income earners paying 45 per cent rung a big 30 per cent benefit.

It isn't fair, and it was Labor that introduced it when it was last in office.

But the unfairness of that superannuation concession was disguised by the way in which it was it presented – as a 15 per cent flat tax.

The tax was flat, but the benefit was skewed to high income earners.

Wayne Swan attempted the same presentational trick when he announced his plan for First Home Saver Accounts just weeks before the November election. He said savers using the accounts would be eligible for a low tax rate of 15 per cent “rather than the ordinary tax rate they would pay”.

But by telling him after the election that his plan wouldn't work in that form and that he could achieve an identical result by paying money directly into the accounts of savers, the Treasury has made plain the ridiculous nature of what he proposed.

It is said by those who still defend the scheme that it won't favour the rich that much in practice, because they don't need to save to buy houses.

The counter argument, undeniably true, is that it won't favour the really poor at all because they can't afford to save to buy houses.

There's a chance that the design of the scheme will be modified before budget night, and newspaper articles like this one will help, along with the torrent of (presumably negative) submissions to the Treasury.

But that the idea got as far as it did says a lot about Labor's attention to detail as it was drawing up its election policies and the paucity of advice available to Treasurers in Opposition.

Its not the only dud policy about to be inflicted on us with the Budget.

The government has promised to lend up to $10,000 at a zero real rate of interest on a first-come first-served basis to a limited number of families who install solar panels on their roofs. The millionaires will get in first. As Kevin Rudd predicted when announcing the policy, it will “increase the value of their homes”.

And parents in receipt of Family Tax Benefits who spend money on books or computers in their home will get a tax refund of up to $750 per child to help with the expense. But not those parents who can't afford computers or books for their children. They'll miss out.

We will learn a lot about Wayne Swan and the Rudd Labor government on Budget night by examining exactly who they are generous to.

It'll be instructive.


HT: Jessica Irvine

See also Tuesday Column, Savings incentives don't boost savings, February 12, 2008

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Rudd's dud plan for first home saver accounts

Jessica Irvine, in this morning's SMH:

"THE centrepiece of the Rudd Government's plan to increase national savings and make housing more affordable - its first-home saver account - is unfair, too complex and may not be available on time, according to a flood of submissions to a Treasury inquiry into the plan.

They say it is highly regressive, gives rich savers double the benefit of poor savers, makes no provision for a direct withdrawal of funds if someone's circumstances chang, its eligibility age of 18 is too high, and it may be too complex and costly for superannuation funds to set up by the proposed start date of July 1.

The Government has refused requests by the Herald to see the submissions, understood to number about 120, even though the deadline passed six weeks ago. The Treasury website said they would be treated as public documents unless otherwise requested.

But a number of submissions obtained by the Herald reveal a long list of criticisms from consumer groups, super funds and other financial bodies"...

Read the full thing:

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