Why the states should charge income tax

Suddenly the election is about something else: how our states have had it too good for too long. And about how we've had it even better.

In every previous election we've been able to vote for better hospitals, schools and roads at the state level (which of course we want) and for lower taxes or lower budget deficits at the Commonwealth level (which of course we also want).

We've been able to kid ourselves we can achieve both.

It's been excruciating for our prime ministers and treasurers, and for anyone who cares about things being done properly. Elected in 2013 to cut the deficit without putting up tax, Tony Abbott and Joe Hockey slashed future grants to the states for hospitals and schools by $80 billion over10 years. They said after 2017 they would lift grants for hospitals by only inflation and population growth. The actual cost of running hospitals is climbing much faster.

It's the sort of thing we asked them to do, to find savings to eliminate the deficit. But then the state governments squealed and said they were unable to do the sort of things we asked them to, and pressured Malcolm Turnbull to relent.

He will relent. He'll offer to lift grants more or less in accordance with the actual cost of running hospitals for another three years. But only if the states agree to negotiate in good faith about what happens next. Beyond 2020 he'll revert to the miserly formula of inflation plus population growth. If the states feel they need more (and over time they will) they'll have the option of imposing their own income tax surcharge. Turnbull will cut Commonwealth income tax by a few percentage points to make room, and then allow each state to replace some or all of those points.

Initially the states >would be limited to merely replacing what the Commonwealth took away, but after that they could charge more. In Turnbull's words, they would be "accountable to their own voters".

It would cut both ways. Any state that wanted to offer a Rolls-Royce hospital service would be able to do so, as long as it charged for it through tax. Any state that wanted to keep its taxes low would be able to do that, so long as it offered fewer grand services.

Voters would be able to choose, or in extreme cases move. Queensland (to use a hypothetical example) might want to position itself as the low tax state. Anyone who moved there, attracted by the low tax, would know they were also taking chances with their health. Anyone who moved to South Australia to take advantage of good health services would know they had to pay for the privilege.

Every election, for decades now, the Australian National University has surveyed voters about what matters to them most. Until recently their number one concern was tax. In 1998 about 23 per cent labelled it "extremely important". Only 10 per cent thought health and Medicare were extremely important.

But at the turn of the century things began to shift. In 2001 tax and health were on level pegging at 16.3 per cent and 16.1 per cent respectively. By 2013 the positions had reversed. Now 19 per cent think health and Medicare are extremely important and only 11 per cent are as concerned about tax. It's the sort of change you would expect as the population gets older and richer.

Critics of these surveys say they don't mean much. People aren't asked to put their money where their mouths are. But under the scheme being hatched by Turnbull they will. For the first time Australians would be forced to choose between more health spending and lower tax when they vote. I'm betting the surveys are right and people will opt for better hospitals. But that's not what excites me. It's that voters will have to make a choice, to acknowledge that good hospitals cost money and wear the consequences of their decisions.

To tell the truth, I'd love it if each state decided on a different mix. Then each could look at the other and see what worked best. NSW was the first to make Australian history compulsory in high school. Victoria was the first to make seat belts compulsory. Tasmania was the first to introduce daylight saving. Each picked what worked. Experimentation is what federations are meant to be about. It's no accident that federations such as Canada, the United States and Germany usually work better than unitary states such as Italy, Greece and France.

By presenting states with hard choices Turnbull will not only make the experimentation more real, he'll also make the states run things better. There isn't a terribly strong incentive to run hospitals and schools well when you're not coming up with all the money yourself. There's a much stronger incentive if you're paying for the lot.

States funding what they provide is hardly new. Each state raised its own income tax before the Commonwealth entered the field in 1915 and then generously offered to also collect income tax as an agent for the states during the depression. In the Second World >War, without consultation, it kept the lot for itself as a "temporary" measure and never gave it back.

It isn't surprising that in modern times the states haven't asked for its return. Politically they've had the best of both worlds and we've been able to vote as if we are in La La Land. Turnbull wants us to face reality.

In The Age and Sydney Morning Herald

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Where states' rights stop. The environment

I am a big believer in states’ rights, but you’ve got to know where to stop.

If there’s one thing the Abbott government’s Commission of Audit got right it’s that our system of eight separate states and territories is a strength rather than a weakness. It ensures that our decision-makers ride the same trams, use the same schools and get treated in the same hospitals as the rest of us.

And they compete with each other. Victorians are always looking north, south and west to pick out the best of what’s happening elsewhere. Western Australia tried out industrial relations reform before we did, South Australia gave women the right to vote and stand for office, Tasmania was a lone beacon for many years on daylight saving and Victoria led the way in making seat belts and helmets for motorcyclists compulsory.

By completing, each state strengthens the whole. If an innovation in one state doesn’t work, it stays there and doesn’t damage the rest. If it does work, it spreads and makes the rest stronger. A paper commissioned by former premier Steve Bracks for the Council for the Australian Federation described Australia as a ship with eight separate watertight compartments: “When a leak is sprung in one compartment, the cargo stowed there may be damaged, but the other compartments remain dry and keep the ship afloat”, it said.

In contrast the single national school curriculum proposed by Julia Gillard could have put us on the wrong track for years. One of its selling points was that individual states didn’t deviate. Yet it built on the deviations they had made to date, such as NSW striking out on its own and making Australian history compulsory in high school. Without experimentation the curriculum would have become weaker.

But you’ve got to know where to stop.

Malcolm Fraser put a stop to states rights over the environment almost 40 years ago. A big believe in states rights himself, as Coalition prime minister he overrode Queensland to end sand mining on Fraser Island. Seven years later Labor’s Bob Hawke went all the way to the High Court to override Tasmania on its plan to dam the Franklin River. They did this because national assets such as the Great Barrier Reef and the Tasmanian wilderness belong to all of us. They matter to all of us, and not just to the citizens of states keen to attract industry and earn mining royalties.

Twenty years on John Howard introduced the Environmental Protection and Biodiversity Conservation Act. It declared once and for all that the Commonwealth as well as the states had a legitimate interest in the environment within their borders, and between their borders. Migratory birds, groundwater and the Murray Darling River system don’t respect lines on maps.

The Howard government banned broad-scale tree clearing in Queensland, expanded to 33 per cent the proportion of the Great Barrier Reef protected from fishing, and took control of the Murray Darling Basin.

Its Labor successor tried to stop cattle grazing in Victoria’s Alpine National Park, something Abbott’s environment minister Greg Hunt has since approved.

But until now no Australian government has seriously countenanced the proposition that the environment was a matter solely for the states. Even the Gillard government, which experimented with devolution in an effort to counter “green tape”, gave up after it realised state governments wouldn’t impose the same high standards as the Commonwealth.

Now the Abbott government is legislating for what it calls a “one-stop shop”...

Billed as a “major step forward in the government's commitment to reduce red tape” the law would devolve responsibility for environmental approvals to “the most appropriate level of government”.

Abbott and Hunt believe the appropriate level is state government, and if it chooses to delegate, local government, raising the spectre of at least eight “one-stop shops”, each with different approval processes and none of them necessarily inclined to protect the national environment.

Peter Cosier of the Wentworth Group of Concerned Scientists put it this way in evidence to the Senate last week: “I have actually worked in local government, I am a fan of local government. They have a very important role to play. I cannot imagine many local councils, though, would accept that they have a mandate to make a judgement as to whether or not something affects a matter of national environmental significance.”

The Commonwealth has already signed draft agreements with NSW, Queensland and Western Australia to devolve its powers. It says it will retain “call-in powers” which it can use to override states about to approve something that will cause serious or irreversible environmental damage. But the rules say they’ll have to be used before the state makes the decision. And under the law they’ll have little ability to monitor the decisions the states are about to make.

The Wentworth Group said it was aware of no other countries that delegated environmental approvals in a similar way.

Perhaps we can trust the Queensland government to protect the Great Barrier Reef, even though its premier Campbell Newman says Queensland “is in the coal business”. Perhaps we can trust South Australia not to destroy the Great Artesian Basin, even though it is desperately short of money and anxious for mines. But state governments are elected to pursue state rather than national interests. That’s why we have them.

The environment is a national interest. The tragedy of Abbott’s legislation is that if he is office long enough it will come back to bite him. Australians will hold the national government to account for what happens to the Australian environment whether or not it tries to claim it has passed the responsibility to somebody else.

In The Age and Sydney Morning Herald

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Radical, gutsy and quick. What to expect from the Commission of Audit

Saturday column

Joe Hockey’s new Commission of Audit will be the most comprehensive in almost two decades. It’ll examine everything the government does.

And what’ll it say?

Well if it’s anything like the last one established by Peter Costello 17 years ago it’ll recommend further inquiries.

Truely. Here are extracts from that last Commission of Audit report delivered to Costello in 1996:

. “The government should undertake a fundamental review...

. “The Government should review its policy...

. “The Government should initiate further work...

And so on.

Why did the Commission recommend further work rather than do it itself?

It didn’t have the time.

It kept saying so, using phrases like:

. “Because of the very tight deadline for completion of this report...

. “In the limited time available...

. “Because of this time constraint...

And so on.

Costello had given it just three months.

If there’s one lesson Hockey might have learnt from the last time the Coalition asked a Commission to examine its entire financial operation, it’s not to give it only three months.

Hockey has listened. He has given it three and a half.

The Commission’s first report examining the scope of government, the efficiency and effectiveness of spending, the state of the Commonwealth’s finances and the the effectiveness of budget controls is due on January 31.

That’s right, January 31. Even working through Christmas with “a lot of resources” the Commissioners will have to tackle really big questions at a breakneck pace.

Their second report, examining infrastructure and public sector performance, is due two months later.

The thinking behind the speed is impossible to fathom. Hockey himself wants the report to be “thorough and comprehensive”. The Henry Tax Review was given more than a year. I’ve a suspicion the lightning-fast timetable wasn’t his.

To keep to it the Commission will have to take shortcuts. The most obvious is to purloin the findings of its predecessor.

But some of those findings will unsettle the Coalition, if the not Commission itself...

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The first Commission was chaired by Professor Bob Officer, an expert in corporate finance from the Melbourne Business School. It took no prisoners. This one is chaired by Tony Shepherd, the president of the Business Council, which is a lobby group for Australia’s top 100 business leaders.

The Officer Commission wanted the government to “urgently review assistance to business and higher income earners”.

It fingered the export market development grants scheme (which survives to this day), the 150 per cent research and development tax concession (only recently closed by Labor) and the non means tested childcare cash rebate (which the Henry Tax Review also wanted means tested and still isn’t).

Its broader concern was that money was being shovelled to businesses and high income earners by means of scarcely visible tax concessions rather than direct payments. That’s how the government shovels outsized support to the superannuation accounts of high earners and the family homes of Australians who are already rich. By contrast measures that support poorer Australians are easy to see in the budget and always in the line for the cop. Just this week the government announced plans to axe the Low income Superannuation Contribution. The more expensive support delivered to high income super accounts was spared.

“The government should comprehensively review all existing tax expenditures programs,” the Commission recommended. It should convert those that were actually worthwhile into direct grants so the public could see where its money was going.

And that was just the start of its attack on privilege. It turned its guns on politicians themselves. Peter Costello was infuriated. Politicians super should be “structured in a similar way to arrangements for senior executives in the rest of the workforce”. It took eight years and campaigning by the new Labor leader Mark Latham for the Howard government to reluctantly act. It replaced the parliamentary super scheme with much like that applying to other other people, but only for new politicians. Howard, Costello and Latham himself continue to receive a super benefit costing around 78 per cent of their salaries for the rest of their lives.

The Commonwealth should abandon its support for private schools. The states could fund them if they wanted to (and there are good reasons why they might, every privately schooled student is a student less the states have to teach). In fact the Commonwealth would get out of school education altogether, keeping responsibility only for tertiary education which it wouldn’t directly fund. Instead it would fund scholarships which students could use to buy education from universities and TAFEs which full fees. Much of what the Commonwealth does in the field of health would be handed to the states as well.

And the Commonwealth would less fully fund pensioners. For obscure historical reasons their payments are linked to 25 per cent of male total average earnings. The government would instead linking them to a lower measure (median total male and female earnings) or lift them only in line with the consumer price index or not lift them at all except following regular reviews which would consider “all relevant circumstances, including budget pressures”.

The unemployed would get no joy from their campaign for higher NewStart benefits. The Commission saw sense in giving them a good deal less than the pension to make sure they weren’t lulled into staying unemployed.

And leaders such as Tony Abbott who wants to build “roads of the 21st Century” would be told bluntly Australia had enough infrastructure. There was “no evidence of overall infrastructure inadequacy”. (Although it should be noted that is a view the Commission might not hold if it revisited the question. What was true in 1996 might not remain true in 2013.)

The Officer Commission was radical, gutsy and quick - so quick it never got the chance to flesh out its ideas. Perhaps that’s why the Coalition has made its successor quick. It might be frightened of what it will find.

In The Sydney Morning Herald and The Age


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Parkinson to RBA. Don't stymie the slide in the dollar

The head of the Treasury says the Reserve Bank should be prepared to cut interest rates further as the Australian dollar falls, if necessary temporarily breaching its target and allowing inflation to climb beyond 3 per cent.

Dr Martin Parkinson is a member of the Reserve Bank board. The Bank’s governor Glenn Stevens has signed an agreement with the Treasurer to keep inflation between 2 and 3 per cent “on average over the cycle”.

As the Australian dollar slid below 95 US cents for the first time in 30 months on Thursday Dr Parkinson told a Senate hearing the Bank should “look through” the inflation consequences of the sliding dollar and continue to keep interest rates low or cut them further even as the falling dollar pushed up prices.

“I wouldn’t wish to speak on the governor’s behalf and as a board member it is always a slightly difficult situation,” he said.

“But they could basically keep interest rates at a particular point, or they could lower them further, and just accept that inflation went out of the band for a period. Then, you know, they could try and stop the second round effects.”

He was backed up by his deputy David Gruen who said the Reserve Bank’s “flexible” target meant it could allow inflation to climb above the top of the 2 to 3 per cent target band so long as it did not spark a wage-price spiral. Inflation is at present 2.5 per cent. A sudden increase in rates in order to contain inflation as the dollar fell could harm the economy and prevent the dollar from falling further. It has slid from 102 US cents to 94.6 US cents in the past five weeks.

Dr Parkinson conceded that some of the assumptions that underlay the Budget forecasts were out of date when the budget was delivered on May 14 and said he took “full responsibility”...

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“When we were bedding down the budget there were movements in commodity prices and we had to say, well what do we do? Do we respond to what has happened, or do we sit? We chose to sit, and I take full responsibility.”

“With hindsight I think I would have been better off jumping in the other direction, but it was an on-balance decision".

The decision means the forecasts in the Treasury’s pre-election outlook will be different to those in the budget, taking into account what will most likely be lower commodity prices and a lower dollar. The likely difference backs the Coalition's contention that it won’t be in a position to release its policy costings until after the Treasury update when the campaign is underway.

Dr Parkinson and Dr Gruen savaged reports in each of Australia’s leading newspapers suggesting that Western Australia was in a demand recession.

“The idea that in the face of the largest export boom we have ever seen you ignore exports and focus on one piece of the economy, demand and claim that that is a recession, it belongs in the comic books,” Dr Gruen said.

State final demand in Western Australia slid 1.5 per cent in the March quarter after sliding 0.7 per cent in the December quarter.

Dr Parkinson said he would would never describe either a state a national economy as being in recession “by counting quarters of negative growth.”

“In Australia it is often said the official definition of a recession is two quarters of negative growth. I don’t know who the official is,” he told the hearing.

Asked what would constitute a recession, Dr Parkinson said he did “not tend to utilise a definition”.

“I reckon a recession is something, you know it when you’ve got it,” he said.

In today's Canberra Times, Sydney Morning Herald Related: National Times


COOL QUOTE FROM PARKINSON:

"I think the whole idea of saying, you’ve got this thing called the economy which is totally interlinked and saying well today what I am interested in is ‘is there a recession in the housing sector or is their a recession in Victoria’, you may as well say ‘is there a recession in houses that are built out of red brick with tin roof, as against ‘is there a recession Ballarat as against Bendigo’."


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State treasurers to Swan: Collect more GST

State Treasurers are to push for the first significant extension of the GST as a new international survey finds its earning power embarrassingly low.

The OECD survey, Consumption Tax Trends 2012 finds Australia’s GST accounts for just 14 per cent of nationwide tax collections, compared to a average among developed nations of 19 per cent. The United Kingdom’s Value Added Tax brings in a more typical 17 per cent. The New Zealand GST brings in 27 per cent.

Among developed nations only Canada, Japan and Switzerland charge less GST than Australia. The typical rate is 18 per cent, almost double Australia’s 10 per cent.

Ahead of Monday’s meeting in Canberra Treasurer Wayne Swan has attempted to head off a push by state Treasurers to extend the tax releasing figures showing it hits low-income Australians much harder than others.

“We don’t support hitting those who can least afford it to bankroll somebody else’s tax cut,” he said. “It is wrong to pretend that jacking up the GST is the holy grail of tax reform. While it has become an accepted part of the tax mix and its integrity should be protected, it is a regressive tax – those on lower incomes pay a larger proportion of their incomes on it than those on higher incomes.”

NSW Coalition Treasurer Mike Baird and South Australian Labor Treasurer Jack Snelling will present a united front acknowledging the Commonwealth is unwilling to boost the GST, but asking it instead to extend it to privately imported parcels worth $500.

If adopted the proposal would not only apply the 10 per cent GST to those parcels for the first time but would lumber the senders with the administrative costs of opening and taxing the parcels...

“Ernst & Young say before costs the measure would raise $2.5 billion for the states over the next three years,” Mr Baird said. “If we can pass those costs on to the suppliers it could well be $2.5 billion in net terms.

“It’s an essential reform. It’s not popular, but it’s the right thing for my state and the country. When the GST was first envisaged on-line retailing wasn’t growing at 25 per cent per annum as it currently is,and physical retailing wasn’t flat as it currently is. It’s about bringing the GST into the modern age. “

“All of us have put this to our cabinets except for Western Australia, which is about to have an election.”

The Australian National Retailers Association released calculations showing overseas retailers were set to capture $2.7 billion or 8 per cent of Christmas spending. Much of it would escape the GST, which at present is only applied when an incoming parcel is valued at $1000 or more.

“This has very real implications for the states which will be hundreds of millions of dollars poorer with no GST collected on these goods. This means schools hospitals, roads to families across the country,” chief executive Margy Osmond said.

The Treasurers will attempt to pin the Commonwealth to a timetable to cut the threshold to $500. The Productivity Commission, the low Value Parcel Processing Taskforce and the Greiner Review of GST Distribution  have all found in favour of cutting the threshold if a way could be found to shift the processing costs to the senders.

Mr Swan will get little joy from the states on his demand they wind back stamp duties and so-called nuisance taxes. They will suggest he first hands them several billion dollars of Commonwealth income tax as a replacement.

In today's Age


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Our new economic landscape: Western Australia, then daylight

Gross State Product per head

Western Australia: $100,100

Australian Capital Territory: $87,500
Northern Territory: $80,400
Queensland: $61,500
Victoria: $58,100
NSW: $62,000
South Australia: $55,300
Tasmania: $47,400

International comparisons

Luxembourg: $US115,800
United States: $US48,300
United Kingdom: $US38,800

ABS 5220.0

A decade ago each Western Australian produced little more than did each resident of NSW and Victoria. Official figures released Wednesday describe a nation transformed with each West Australian now producing 61 per cent more than each resident of NSW and 72 per cent more than each Victorian. If Western Australia was a nation its GDP per head would be exceeded only by Luxembourg.

The state accounts produced by the Bureau of Statistics show Western Australia now makes up 16 per cent of the Australian economy, up from 11 per cent a decade earlier. NSW has shrunk from 35 per cent of the national economy to 31 per cent and Victoria from 25 to 22 per cent. The combined share of Australia’s two biggest states is now just 53 per cent, down from 60 per cent a decade earlier.

The mining industry is responsible for around half of Western Australia’s economic growth, for only one eighth of NSW growth, and for none of Victoria’s. In the past year the financial services industry has contributed the most to NSW growth, and professional services the most to Victoria’s growth.

The new league table has the Western Australia growing by far the fastest of the states at the blistering annual pace of 6.7 per cent, followed by the Northern Territory at 4.4 per cent and Queensland at 4 per cent. In the slow lane are NSW (2.4 per cent), Victoria (2.3 per cent), South Australia (2.1 per cent) and Tasmania (0.5 per cent).

Western Australia now produces $100,100 per head, well above the $62,000 per head total in NSW and $58,100 in Victoria. Only the Northern Territory and the high-wage Australian Capital Territory come close producing $80,400 and $87,500 per head. Queensland produces $61,500 per head and Tasmania $47,400.

The gross state product figures are calculated only once each year and provide a more reliable guide to the economic performance of each state than the state final demand figures released quarterly.

International Monetary Fund calculations show only the tax haven of Luxembourg ahead of Western Australia with a GDP per head of $US115,800 in 2010... The international runners up, coming behind Western Australia, are Qatar ($US98,100), Norway ($US97,600) and Switzerland ($US83,100).

In terms of sheer economic size Western Australia would now be the world’s 40th biggest economy if it was a sovereign nation, ranked between Portugal and Israel.

The figures show that dispute Australia’s 21 continuous years of economic growth, every state other than Western Australia has slipped in terms of production per capita at some time in the last few years. NSW, Victoria and Queensland went backwards during the global financial crisis in 2008-09. Victoria and Queensland also went backwards in 2009-10. South Australia’s output per head slipped in 2009-10 and Tasmania’s in 2009-10 and 2010-11.


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Why the GST is failing, and why it's hard to fix

Me on ABC Adelaide 891 September 19, 2012

11 minutes, play or CLICK THEN CLICK AGAIN to download mp3

The GST takes in $50 billion per year

WAYS TO GET MORE

Lift the rate to 12.5%: An extra $12.5 billion

Lift the rate to 15%: An extra $25 billion

Tax fresh food: An extra $6 billion

Tax financial services: An extra $4 billion

Tax health spending: An extra $3 billion

Tax education: An extra $3 billion

Tax child care: An extra $600 million

Tax on-line imports: An extra $600 million

Commonwealth Treasury: 2012 Budget, 2011 Tax Expenditures Statement.

(Rounded figures)

Lifting the goods and services tax to 15 per cent would boost Australian state budgets by an extraordinary $25 billion per year - $8 billion of which would be kept by the O’Farrell government in NSW, but experts warn it would soon evaporate.

Fifteen per cent was the rate originally slated for the GST to be introduced by a John Hewson-led Coalition government should it have taken office in 1993. It is also the rate to which New Zealand has now lifted its GST after two decades at 12.5 per cent. It is dwarfed by GST rates of 20 per cent or more in most of Europe.

At 10 per cent, Australia’s GST earns the states $50 billion per year, double the $24 billion it earned when introduced in July 2000. But as a proportion of gross domestic product it has been slipping for years, something Treasury budget papers blame on increased household saving, and also a “steady decline in expenditure on items attracting GST as a share of total consumption”.

“We knew this was going to happen,” says Greg Smith, a former head of Treasury’s revenue group and a member of the Henry Tax Review. “It was clear people were moving their spending from goods to services - it was one of the arguments for a GST - but it was also clear they were moving spending to services outside the scope of the GST such as health and education."

Treasury calculations show the prices of health, education and rent - all excluded from the GST - have been increasing far faster than the prices of items covered by the GST, meaning a growing proportion of spending is GST exempt.
It is why NSW Premier Barry O'Farrell and Treasurer Mike Baird have called for a debate about lifting the GST, receiving backing from South Australia’s Treasurer Jack Snelling.

But experts warn lifting the rate to 12.5 or 15 per cent would only buy time, perhaps even accelerating the shift in spending away from items covered by the GST...

“The greater the GST rate the greater the incentive for fraud and for moving spending elsewhere,” says Neil Warren, professor of taxation at the University of UNSW. “To stop it you would need to tighten up on GST-free imports and consider extending the GST to food, education and health.”

Treasury calculations show extending the GST to presently exempt fresh food would raise an extra $6 billion per year (some of which would need to be spent compensating low income earners), extending it to education would raise a further $3 billion, and health another $3 billion.

But Professor Smith says the health and education savings are illusory.

“The states themselves are the biggest providers of health and education. Taxing their services in order to help fund their services would mean money in one door and out the other. It isn’t a net revenue gain.”

And much of the extra income would be earmarked as soon as it came in.

“The Commonwealth would want the states to cut insurance taxes and stamp duties. Those two alone would eat up the extra income. The Commonwealth would want to pin the states down to timetables for cutting the taxes, it wouldn’t just let them have the extra GST,” said Professor Warren.

In today's Sydney Morning Herald and Age


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Olympic Dam. Why will BHP be charged so little?

Let's start with the ANU's Paul Cleary, author of the just-released Mine-Field - The Dark Side of Australia's Resources Rush

Here he is in The Australian:

"This deal is a monumental example of state government incompetence when it comes to acting as custodian of the nation's mineral wealth.

South Australia has agreed to a regime based solely on percentages and even cents per tonne of the mine's production. Mike Rann, who stands down today as Premier, has done South Australians a disservice that will cost them dearly for almost half a century.

The then premier Mike Rann and his administration should know full well that these royalties fail to capture a fair share of mining profits. This has been in the economic literature since the 1970s and was made more prominent by the Henry review. Yet the deal does not contain a single element of profits-based taxation.

The case for such measures is all the more compelling given that the mineral resources rent tax will not tax the millions of tonnes of copper, uranium, silver and gold the mine will be produce under the 45-year agreement, because the MRRT only applies to coal and iron ore.

Given that this is an agreement negotiated in the 21st century, it beggars belief the state could have agreed to a regime based exclusively on production-based royalties that hark back to medieval times.

But none of these ideas penetrated the thinking of the South Australian government when it negotiated its 45-year agreement for BHP's $30 billion expansion.

The three-tier regime involves 3.5 per cent for refined mineral products, meaning copper and gold, and 5 per cent for uranium oxide and uranium-bearing copper concentrates.

There's also 35c per tonne on extractive minerals sold to a third party, but this is not even indexed for inflation, so its value will diminish over the life of the agreement."


They were points he was making on ABC Adelaide 891 Tuesday when the man who negotiated the deal, former state Treasurer Kevin Foley rang in:

Play or CLICK THEN CLICK AGAIN to download mp3

Foley: “You don’t even understand the state-based royalty system. A royalty is a tax on the quantity of the mineral taken from a mine. It’s not a tax in a, as a profit-based tax. That can only be levied by the Commonwealth government.

Cleary: The previous government...

Foley: No that’s just not true, you don’t know what you are talking about. A royalty is what a state government can apply, a tax based on profit can only be applied by the Commonwealth government.

Cleary: That is not the case.

Foley: It is true. We don’t have access to the company profitability, it is only held by the Australian Tax Office and the national government. They are the only body by which a profits-based tax can be applied, so you don’t even know what you are talking about."

One of them had to be wrong, either Cleary or Foley.

It was Foley, the man who negotiated the Olympic Dam deal, as I outlined on Wednesday.

South Australia is perfectly capable of imposing a profits-based royalty but decided not to.

But listen in, to a conversation between Foley and me that actually gets somewhere...


18 minutes, play or CLICK THEN CLICK AGAIN to download mp3




To recap:

Our system of distributing money between the states is so warped that states that impose high royalties get almost all of their excess earnings taken away from them, and states that impose profits-based royalties (which by definition earn little money in the early years allowing projects to go ahead that otherwise would not) get penalised.

Is there a better way?

You bet.

Ross Garnaut is on the case:

Ross Garnaut, Submission to GST Review, July 2012



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How do I rate South Australia's economy?

Me on ABC Adelaide ABC 891 June 28, 2012

55 minutes, play or RIGHT CLICK to download mp3



With

. Peter Vaughan, CEO Business SA

. Jane Kittel, Managing Director, Bank SA

. John Spoehr, Executive Director, Australian Institute for Social Research

. Dick Blandy, Adjunct Professor of Economics, School of Management, Uni SA


The SA Report, now its second year, encourages healthy debate and discussion about our State. 891 ABC Adelaide and ABC Local Radio are inviting South Australians to join the discourse during a special day of broadcasting on Thursday June 28.

"If I could pick only one economic statistic to give me a picture of a state’s economic health I would use the unemployment rate. South Australia’s has been hovering around 5% for eight months. That’s a good sign in itself. But what’s even better is that it is almost exactly in line with what’s been happening to the nation. Despite all the talk about a “two-speed” Australian economy dispersion of unemployment rates across the nation is close to the lowest it has ever been. That’s because Australia (including South Australia, at the vangarde of demographic change) is running low on workers.

Yes, manufacturing firms are closing. But that’s been happening for a long time. And many of the workers in those firms are reaching retirement age. So too are teachers. The state Education Department has traditionally been the state’s biggest employer. South Australia is likely to be low on workers from here on.

If Olympic Dam gets the go-ahead, that will be an economic plus (although not necessarily an environmental plus). If it doesn’t, there are other smaller mining projects on the drawing board and even if they don’t all go ahead the rising tide of national demand for workers will lift the South Australian boat.

Weak GST revenues make things difficult for the state government, but it made the right decision in forgoing its top credit rating rather than savagely cutting spending.

South Australia’s fortunes are tied to Australia’s fortunes. It is a linkage many other parts of the world would love to have."

Peter Martin's score out of ten for South Australia’s economic prospects: 8/10

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Alright for some. The two Australias drift apart

IT DEPENDS WHERE YOU LIVE

Wage growth

South East Australia 5.0%
- NSW 4.6%
- Victoria 5.5%

North West Australia 10.9%
- Queensland 9.2%
- Western Australia 12.8%

Sales growth

South East Australia 2.9%
- NSW 4.3%
- Victoria 1.4%

North West Australia 14.6%
- Queensland 16.9%
- Western Australia 12.4%

Seasonally adjusted, year to December ABS 5676.0

A sharp geographic divide has opened up in business conditions, with the latest Bureau of Statistics report showing sales growth five times as fast in Australia’s north west as the south east and wage growth twice as fast.

The business indicators report, one of the building blocks for the National Accounts to be released tomorrow show sales growth over the year to December of 14.6 per cent in Queensland, the Northern Territory and Western Australia combined compared to just 2.9 per cent in NSW, Victoria, South Australia, the ACT and Tasmania.

Wage growth averages 10.9 per cent in the north west mining states compared to just 5 per cent in the south east.

The divide will be up for discussion at this morning’s Reserve Bank board meeting in Sydney, the first to be attended by Heather Ridout, chief executive of the Australian Industry group who replaced BlueScope Steel chairman Graham Kraehe in February.

Appearing before the parliament’s economics committee last month Reserve Bank governor Glenn Stevens lamented the “very disparate and very powerful forces” at work in the economy and said monetary policy could not make them go away.

“This is a message that does not really gladden too many people's hearts,” he told the committee... “Monetary policy is a national policy. We have one instrument—one currency. We are a currency area and we cannot make the differences go away.”

The board is almost universally expected to leave rates on hold when it announces its decision at 2.30 this afternoon. Even futures pricing, which typically overstates the likelihood of a cut, ascribes just a 15 per cent probability to a cut and an 85 per cent probability to rates staying put.

The ABS says company profits barely grew in 2011, inching ahead just 2.1 per cent; the worst result in more than a decade with the exception of the global financial crisis in 2009 in which profits slid 13.7 per cent.

In the December quarter company profits fell 6.5 per cent, led down by a halving in profits in financial, insurance and other services, a 9 per cent dive in mining profits and a 5 per cent fall in manufacturing profits. Profits in the administrative and support sector climbed 12 per cent and utilities profits climbed 5 per cent.

Wages and salaries climbed just 0.8 per cent in the quarter, largely reflecting higher salaries and employment was little changed.

Inventory levels climbed 1.4 per cent, led by 2.2 per cent increase in mining inventories as sales fell.

The TD Securities gauge climbed just 0.1 per cent in February to be up 2.0 per cent over the year, a weak enough reading to allow the Reserve Bank board to cut rates if it was minded to.

The Australian Industry Group performance of services index slumped 5.3 points in February 46.7 where a reading below 50 points to further contraction. The ANZ job advertisement index is more encouraging, climbing 3.3 per cent in February after rising by 7.5 per cent in January.

Published in today's Sydney Morning Herald and Age

Recommended reading


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The new Brisbane line divides the new haves from the new have-nots

Gina Reinheart is one of the new haves

Mention "the Brisbane Line” to someone old enough and they will think of the line on a map allegedly drawn during the second world war to separate the Australia’s South East from the rest of the nation which would be ceded to Japan in the event of an invasion.

The line was a myth, eventually found by a royal commission to have never been part of
Australian defence planning.

But Deloitte Access Economics says a new Brisbane Line has emerged, one that travels from the south east corner of Queensland to Adelaide confining the 80 per cent of Australian workers who live south east of it to a relatively small triangle of land.

The difference is that this time it is the 20 per cent of our workers who live north and west of the line who’ll prosper.

Access says 53 per cent of the major investment projects either under way or approved live north and west of the line...

Writing in this morning’s Access Investment Monitor economist David Rumbens says “rarely have Australia’s economic prospects been as geographically skewed”.

“Even within Queensland the line provides a handy dividing line,” he says. “Brisbane and the Gold Coast struggle with weak construction and a weak housing market, while to the north the struggle is about how to find and house workers.”

North Queensland is hosting three massive liquefied natural gas developments – a $20 billion off-shore project near Gladstone, due for completion in 2016, a $16 billion coal seam methane project in Gladstone and a $15 billion inland gas pipeline terminating near Gladstone.

South Australia is waiting for word from BHP on the proposed $20 billion expansion of the Olympic Dam uranium and copper mine.

Mr Rumbens said even within states the “Queensland line” denotes those parts set to grow quickly from those less fortunate.

“Olympic Dam is north of the line in South Australia, manufacturing is south of it,” he told the Herald.

“You can use the line to predict economic growth. Investment leads to economic growth. Growth will be fast on one side of the line, slower on the other,” he said.

In the December the number of major projects under construction or about to start reached a new record high of $415 billion, up 43 per cent on a year earlier.

A separately released National Australia Bank survey shows business confidence growing strongly in Western Australia and Queensland, growing weakly in Victoria and South Australia, and falling in Tasmania.

Published in today's SMH


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What's going down? In Victoria jobs, demand...

The Age

Fresh evidence has emerged suggesting Victoria is holding back the national economy, endangering budget forecasts.

One day after national accounts figures showed demand in Victoria fell during a quarter when it rose in four other states, yesterday’s employment figures showed Victoria losing 30,200 workers at a time when every other state was hiring.

In the first five months of the financial year NSW put on an extra 24,100 jobs, Queensland an extra 14,400 and Western Australia an extra 2500.

So big is the contraction in Victoria that it calls into question forecasts in the mid-year budget update released just last week.

In place of the budget forecast of 500,000 new jobs over two years the update predicted 114,000 new jobs in the current financial year and 173,000 the next.

The November employment figures show five months into the financial year Australia has created 24,500 new jobs - only half as many as would be expected if the official forecasts on track...

A spokeswoman for state Treasurer Kim Wells insisted things were about to turn up saying said the government was ''implementing a clear plan" to boost the economy through increased business investment, productivity growth and job creation.

"This week alone a number of companies have announced plans to increase jobs and investment in Melbourne and regional Victoria, this will continue over the coming weeks with a series of major job announcements to be made before Christmas," she said.

Shadow Treasurer Tim Holding said the government of running down the economy after ''inheriting the engine room of jobs creation" from the previous Labor state government.

Victoria’s unemployment rate edged up from 5.4 to 5.5 per cent and the national rate from 5.2 to 5.3 per cent. Full-time employment fell 39,900 in November. Part-time employment climbed 33,600.

Treasurer Wayne Swan said the net loss of 6300 jobs was “a very small uptick in unemployment”.

“Our economy is strong, but there are impacts which flow through our economy from the events in Europe. Despite that our unemployment rate has a 5 in front of it, which is vastly different than what is going on just about everywhere in the developed world where they have, 9, 10, 14 and 15 per cent,” he said.

Men have born the brunt labour market change over the past year, losing 10,400 jobs at a time when women have gained 50,800 jobs. Part-time employment is up 55,300 while full-time employment is down 14,900.

“The labour market is far from robust,” said Westpac senior economist Justin Smirk.

“The labour force seems to be growing by around 14,000 per month. We are expecting job losses of around 17,000 per month for the rest of the financial year taking the unemployment rate to 5.75 per cent.

Published in today's SMH and Age


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CommSec: Adjust your maps, we're three-speed

Australia is no longer a two-speed economy. Commonwealth Securities says we're now “three-speed”.

“Western Australia is in a group by itself,” the stockbroker says in its State of the States report released this morning. [MON] “The next level comprises the Australian Capital Territory, Victoria and South Australia, then there is a gap before the next four: Tasmania, NSW, Northern Territory and Queensland.”

NSW slots into the also-ran category by virtue of appalling weak economic growth compared to historical averages and other states. Growth in the June quarter was just 8 per cent above the NSW decade long average compared to 28 per cent in Western Australia, 21 per cent in the ACT, 16 per cent in South Australia, and 12 per cent in the second-poorest performer Tasmania.

Retail spending in NSW was up just 11 per cent on the decade long average, compared to 20 per cent in the leading state Western Australia.

Dwelling commencements were down 18 per cent on long-term averages while those in Victoria were up 28 per cent and in the ACT up 82 per cent.

“NSW is struggling to find an X-factor that will drive growth,” said CommSec chief economist Craig James. “It has above average population growth, but so does the ACT and Western Australia"...

The CommSec methodology disadvantages traditionally strong states such as NSW by comparing their current performance to their historical averages. Mr James defends the method by saying it is how the Reserve Bank assesses interest rates. "Just as the Bank does with interest rates we use decade-long averages to decide what is normal," he says.

South Australia and Victoria, both traditionally weaker than NSW, look exceptionally strong when measured against historical performance.

South Australia’s construction work is up 40 per cent on the long-term average, Victoria’s 25 per cent, and NSW just 15 per cent.

Mr James told the Herald the state’s prospects might be about to turn up. “The new government has committed itself to getting more homes and units built, that should spark retail spending and employment as it did in Victoria. And the benefits of the mining boom might start to roll. NSW might move into the second tier, but a lot would need to go right. At the moment it is more of a Tasmania than a Victoria,” he said.

Published in today's SMH and Age


THREE SPEEDS

CommSec rating, strength

TOP SPEED:

Western Australia - economic growth

SERIOUS CONTENDERS:

Australian Capital Territory - home building
Victoria - dwelling starts, retail
South Australia - construction

WAY BEHIND:

Tasmania - employment
NSW - population
Norther Territory - employment
Queensland - investment


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Multi-speed or two-speed, NSW looks sick

NSW is vying with flood-ravaged Queensland for the bottom spot in the latest CommSec economic league table, slipping below previously weak states such as South Australia and Tasmania.

The quarterly report puts the NSW economy last or near last on most of the measures assessed by the stock broker, and a narrow second-last to Queensland overall.

“Queensland has been hit by once in a generation floods and cyclones. It is understandable that it is struggling,” said CommSec chief economist Craig James.

“But for NSW the problems are deeper. Nearly every other state has had something to propel growth, whether it be housing in Victoria and the Australian Capital Territory or mining in Western Australia. NSW has weak on planning, weak on delivering infrastructure to the places that need it, weak on building railways to the houses that will need them. There is a new government in place now and there should be no excuses.”

The CommSec table puts Western Australia in number one position as the best economy, with the Australian Capital Territory in second place.

The table measures performance relative to historical averages rather than absolute performance... a methodology that disadvantages traditionally strong states such as NSW.

“We are trying to find how each economy is performing compared with its normal,” said Mr James. “Just as the Reserve Bank does with interest rates, we have used decade-long averages to to decide what is normal.”

NSW is at the bottom of the pack when its economic growth is compared to its decade average, with growth just 9 per cent higher. Western Australia’s is nearly 30 per cent higher. NSW is near the bottom of the pack on retail spending with current spending 12 per cent higher than the decade average compared to 22 per cent for Western Australia.

For home building NSW is 17 per cent below the decade average whereas the leader, the Australian Capital Territory, is 80 per cent above it.

“NSW has not had a government focused on these things. Victoria, now in third place, could soon climb to the top. You have to ask why Victoria, why not NSW and the answer has to be NSW needs to be focusing more on getting people coming in to the state, keeping down the cost of living and keeping down the cost of housing.”

“The new government does want to do that but people want to see results. They are what it will be judged on.”

Treasurer Wayne Swan acknowledged Sunday parts of the economy were weak.

“We are seeing out there a cautious consumer but the fundamentals underlying our economy are strong,” he told Network Ten. “We have the strength to withstand adverse international events, although we are not entirely immune from them.”

Published in today's SMH and Age


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The way we divide the GST cake is a scandal

At the heart of Prime Minister Gillard’s decision to upend Australia’s long-settled system of dividing GST money between the states is a scandal, an outrage.

She hinted at the awful truth when she said it rewarded “underperformance in service delivery”.

At present all the Goods and Services Tax takings are pooled and divided between the states on the basis of their population adjusted by a relativity rating.

For the two biggest states the ratings are close to 1. The NSW rating is 0.95, Victoria’s is 0.93, meaning each gets back somewhat less than they would expect on the basis of population.

Adjusted for special needs and the luck some states have in having a resource base to tax, the ratings range from a low of 0.68 (for Western Australia) to a high of 1.62 (for Tasmania).

Except for one. The Northern Territory adjustment is by a factor
of 5 - 5.07 to be precise, soon to climb to 5.35. Largely because of its special needs in having a large highly-disadvantaged Indigenous population it gets back five times as much from GST as it puts in.

But it doesn’t need to spend the money fixing up Indigenous disadvantage - the grants are untied.

In fact it is in its financial interest for the Indigenous disadvantage to remain... It is in its financial interest to spend the money on something else - offices in Darwin, enviable salaries for its public servants and politicans.

As Australia’s foremost expert on state taxation Neil Warren puts it, “the Northern Territory likes to have a disadvantaged population - it has no interest in removing disadvantage.”

“The money given to them because they need Indigenous housing, they have poured into Darwin.”

If, as Professor Warren has proposed to the government, that money was paid instead in tied grants decided on the basis of performance rather than need, its relativity factor would drop like a stone.

It isn’t such an unusual idea. It is what Kevin Rudd proposed for hospitals. Money would be carved out of the untied GST distributions and handed to the states on the basis that they spent it where it was needed.

Critics of Julia Gillard’s push for a shakeup of the system of dividing the cake miss the point when they say that for every state that is made better off another will be made worse off. If we can get a system that actually makes Australians better off, we’ll all get ahead.

Published in today's Age


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Governor Stevens pwned!

See Tim Colebatch this morning.

Governor Stevens this week argued that there were not really two Australias:

"While some events can lead to a divergence in economic conditions across Australia, overall these differences have not been especially large in recent times . . . What is remarkable, in fact, is that the differences are not, in the end, larger."

- Reserve Bank governor Glenn Stevens, September 20

But here's what Stevens was saying back in February:

"Yes, I think it is going to be a two-speed economy . . . I think all those issues of geographical differences and industry differences are likely to re-emerge with a vengeance. The relative price of resources is high, that of manufactures is low. There are structural adjustment implications of this for our economy . . . they will, I think, probably intensify in the years ahead."

- Reserve Bank governor Glenn Stevens, February 19

Some extracts from Tim Colebatch:

"In my next life, I want to be a central bank governor. People fawn on you, whatever you say is taken as gospel, and others rarely challenge it...

The Reserve chief played down the risk of that resources boom dividing Australia into a two-speed economy. Indeed, he tried to persuade his audience that this hadn't happened, and wouldn't happen.

The only evidence he presented was a handful of graphs demonstrating that over a 10-year or 15-year time period, movements in prices and unemployment rates had differed less in the six Australian states than in the 50 states of the US or the 27 countries of the European Union. You don't say. I wonder if that might have something to do with the fact that states are always more alike than countries. Or that six units of anything offer less scope for differences than 27 or 50.

The Guv's choice of time frame also missed the point. We were not a two-speed economy 10 or 15 years ago. This emerged in the past five years, as mining investment and export revenues grew exponentially, the Reserve responded by driving up interest rates, which drove up the dollar, which made significant parts of our manufacturing, agricultural and tourism industries uncompetitive.

That is why the two-speed economy became an issue. It is why we in Victoria fear the consequences of an even larger mining boom, and an even higher dollar, ahead.

It is why Stevens himself warned just seven months ago that the problems of a two-speed economy "are likely to re-emerge with a vengeance" and "will probably intensify in the years ahead"...

The new Glenn should listen to the old one."

Published in today's Age

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The paradox of mining

From an excellent new RBA paper Structural Change in the Australian Economy by Ellis Connolly and Christine Lewis.

Mining isn't much changing what we do:

But something is making the mining states more important:

The whole thing is excellent reading.

As is a magnificent paper on Interpreting Market Responses to Economic Data:

"It is interesting that the Australian equity market is more responsive to US inflation and employment news than to Australian employment news."

And a great primer on Economic Change in India.

They are all here.



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Australian statistics are top notch. Not.

But the ABS is about to tell us they are. It's conducted a survey. No joke.

The man appointed to push state governments to improve their hospitals, schools and disability services says he is for much of the time he is flying blind.

Paul McClintock, a former head of John Howard's Cabinet Policy Unit has been asked to get the states to lift their game in six key areas as chair of the Council of Australian Government's Reform Council.

But yesterday he told a national statistical conference the entire process was in danger of breaking down paving the way for a Commonwealth takeover of state responsibilities, in part because he couldn't get the information he needed to do his job.

"Of the nine national health care benchmarks, data is not available to measure three," he said. "We can't report on indicators related to the quality and safety of hospital care and we can't measure progress against the agreed benchmark of reducing type 2 diabetes. Hospitals data is routinely one year late."

"Our data on disability comes from an ABS survey conducted once every six years. Our report released this year relied on data from 2003. We are unable to measure progress."

While the council is required to monitor the proportion of young people who have obtained a Year 12 of equivalent qualification in each state it is forced to rely on an annual Bureau of Statistics field survey.

"It's a survey of 20 to 24 year olds, and there's a time lag... For our 2010 report we used data from the 2008 survey based on answers to questions from people who completed Year 12 between three and seven years ago," he told the conference.

"There is an alternative source of data for Year 12 attainment that is actually well-suited to the task. It is fairly obvious. It's the data collected by the schools themselves. But each state does it differently. We can't compare it across jurisdictions."

"Without political, cultural and structural support there is a real risk this bold experiment will be put aside and the states will face, in the words of the head of the Prime Minister's Department, a less amenable Commonwealth."

"The future of the federation will change. I can assure you from my experience politicians will not allow indefinte time for this to work."

Treasury head Ken Henry told the Sydney conference there was a risk of decision makers using the wrong data simply because it was all they had, in the same way as a drunk was said to look for keys under a lamp post because it was where the light was.

"We know that there are limitations on data. But we should take care not to allow these limitations to become barriers to developing policy," he said.

The media helped dumb down data.

"While there are some exceptions, much of television and newspaper reporting on economic news contains little more than a passing reference containing no detail apart from a one-word summary that the news was 'good' or 'bad' - or that whilst Joe Bloggs claimed the data were good news, Fred Smith claimed they were bad news," he said.

Assistant Treasurer Bill Shorten pledged at the conference to rely on "evidence-based policy" in the new parliament saying it would be needed to guide legislation through the House and the Senate.

Published in today's SMH


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This minority government could actually be good - Ross Garnaut thinks so

I reckon he's right

Australia's new minority government should be welcomed as an opportunity for good decision making according to economist and climate change expert Professor Ross Garnaut who told a Canberra seminar yesterday it could "end the great Australian complacency".

Identifying crucial stumbling blocks to lifting productivity he said in only one would the new arrangements be unlikely to help.

That was the role of the states who were prevented from acting as states by the Commonwealth which interfered at will.

"Successive use of tied grants has turned virtually every important function of the states into a joint function with the Commonwealth with no-one really responsible for anything," he told the Melbourne Institute seminar.

"Transport planning in Sydney - one of the very important challenges of our country, and one for which the NSW government should be held to account - becomes a big issue in a federal election. This completely blurs responsibility."

Grants Commission revenue sharing arrangements stopped states bothering to raise revenue.

"Why was it left to the Commonwealth rather than Western Australia to put up mining royalties?" he asked... "Because if Western Australia put up royalties the gains would go to governments in South Australia, Tasmania, Victoria NSW and Queensland."

His climate change review recommended a price on carbon. Instead the government and opposition wanted regulations that would do more damage. The agreement with independents provided an opportunity to get a carbon price after all, and would allow those decisions to be made in the context of the Henry Tax Review.

"There are important links. An efficient carbon tax or a carbon price is going to raise big revenue. A lot of that should go back to the household sector. It can help finance personal income tax cuts."

Considering the Henry Review piecemeal had led to absurd results such limiting the resource tax to only two commodities, ensuring company tax cuts meant other mining super profits were even less taxed. Australia's resource boom would ease soon leaving less super profits to tax.

It would not be easy to get big changes across a wide range of policies in the new parliament. "But it could be a parliament in which we make big progress in a smaller number of important areas," Professor Garnaut said.

Treasury Secretary Ken Henry told the conference Australia was "facing again the challenges of an economy operating at near to full capacity and said big challenges would include the rise of China and India, climate change, population growth and aging and technological change.

Published in today's SMH and Age


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