Tax. Think of the Business Council as a dog chasing a car

Wednesday column

The Business Council has selective amnesia. Last week its chief executive Jennifer Westacott sent an email to members distancing herself from an “inaccurate tax report in this morning's media”.

The Age had reported that Business Council had in the past spoken in favour of a widely applied super-profits tax.

As it had.

Its submission to the Henry Tax Review, Unrealised Gains: The Competitive Possibilities of Tax Reform commended a system that taxed normal returns differently to so-called pure profits saying it had “the potential to deliver significant benefits”.

Known as Allowance for Corporate Equity (ACE) the system would allow companies to deduct from their income a “normal return on their equity” before paying tax in the same way as they can presently deduct interest payments.

“The effect of such an arrangement is that companies would incur tax only on above normal returns,” the Business Council wrote, recommending Henry examine it in more detail.

So why the amnesia? It could be because the idea is gaining traction.

Dogs like to chase cars, but they get uneasy if they catch them... Umbrella organisations, especially responsible ones, like to propose good policies. But they get uneasy if they might become law.

The Minerals Council proposed a profits-based tax as an alternative to royalties in its submission to the Henry Review. It reversed course when Wayne Swan took the idea seriously and drew up legislation.

The Business Council has the same problem the Minerals Council had. Some of the companies it represents - the biggest high-profile ones - would be hurt by a tax that fell only on super-profits. Most would benefit, but it is no position to represent them. It needs the big mining companies and the banks. Without them it would have no clout.

The Business Council went cold on ACE just as the Treasurer was warming to it.

Its position paper ahead of the October tax summit said “few other countries in the world have introduced an ACE and the Henry review did not recommend moving to an ACE at this stage, instead suggesting that international developments should be monitored, with Australia being a fast follower rather than a pioneer in this area”.

It believed that was “the right approach for now”.

Henry himself thought he had opened up discussion rather than closed it down.

Weeks after the release of his report he said of all of the proposed refinements to company tax, ACE appeared to “offer the most promise”.

It also offered “the most in the way of empirical evidence, with variants having been used in
Croatia, Brazil, Italy, Austria, Belgium and Latvia; and it appears to offer the least resistance path of reform, probably being the easiest system to integrate into existing company income tax systems”.

Then the UK tax review called for an Allowance for Corporate Equity. It wanted tax on ordinary profits cut to zero and tax on super-profits to remain at the current rate. The lost revenue made up by extra taxes on consumers. Because the zero rate on ordinary profits would bring more capital into the country, it said in the long run the change would be partly self-funding, pushing up GDP 1.4 per cent.

Wayne Swan began to pay close attention. At the tax summit Melbourne University’s John Freebairn, a former research director of the Business Council, said Australia’s super-profits tax rate might be “more towards 40 or 50 per cent”.

It would only be paid by firms earning “monopolistic-type rent”.

“And lets rub it into the banks,” he added. “They seem to make much higher returns than anyone else.”

Swan liked the idea so much he set up a working group to examine changes to corporate tax, "particularly an allowance for corporate equity”. He made Freebairn a member, asked for worked examples and costings, and set a deadline of the end of next year.

The Business Council’s Westacott is also a member of the working group, as is ACTU secretary Jeff Lawrence. She will have to confront the Business Council’s previous support for the idea pretty quickly, even if it slipped her mind last week.

Raising the tax take for some businesses while cutting it for others would split her membership, but that doesn’t make it a bad idea.

Investment propositions that are marginal with company tax rates as they are will become viable if their tax rate is cut to zero. Australia will attract more capital and the workers that work with it will become more valuable. Businesses that make massive returns on equity (in the case of banks, with little accompanying downside risk) will stay.

If they are minded to, they will expand. As parliament debated the minerals resource rent tax this year spending on iron ore exploration jumped 49 per cent and spending on coal exploration 84 per cent; all in the space of three months.

Taxing only super-profits rather than ordinary profits looks like a win-win. It would bring in and keep the capital we need while raising money from firms that won’t leave. That’s why Swan’s attracted to it, that’s why he’s set up a working group to sort out the details, that’s why he has put the Business Council on it.

Published in today's Age



Business tax working group

Wayne Swan
October 12, 2011

Today I am pleased to announce the terms of reference and appointments to a working group that will look at how our tax system can best help businesses respond to the pressures of a changing economy.

The working group will look at reforms that can increase productivity and deliver tax relief to struggling businesses in our patchwork economy and develop a set of savings options within business tax, such as broadening the base and addressing loopholes or unnecessary concessions.

Dealing with the challenges of an economy where different sectors are growing at different speeds has been central to our tax reform agenda both in terms of what we have done so far and what we need to do next.

At the Tax Forum last week, I announced that Chris Jordan, the chairman of the Board of Taxation, had agreed to head the working group.

It will focus on reform options that relieve the taxation of new investment:

• in the near term, by looking at changes to the tax treatment of business losses; and

• in the longer term, by looking at options like reducing the corporate tax rate further or alternatives such as allowances for corporate equity.

The working group will also be required to identify options to fund any proposals from within the business tax system.

The tax system will continue to play a critical role in helping our economy adjust to change and spreading the benefits of the mining boom to all corners of our patchwork economy.


Terms of reference

Objectives

1. The Working Group will make recommendations on how the Australian business tax system can be improved to make the most of the challenges and opportunities arising from transformations in the broader economic environment, including the patchwork economy.

2. The revenue neutral reforms to the business tax system will aim to increase productivity, while delivering tax relief to struggling businesses.


Scope

3. The Working Group will focus on reform options that relieve the taxation of new investment:

3.1. in the near term, by reforming the tax treatment of business losses; and

3.2. in the longer term, by reducing the corporate tax rate further or moving to a business expenditure tax system, particularly an allowance for corporate equity.

4. For its final reports, the Working Group will provide specific analysis of these business tax reform options, including:

4.1. descriptions of how these reform options operate overseas and evidence on their effectiveness;

4.2. potential priorities for reform, including transitional paths;

4.3. worked examples of how these options would affect business taxpayers, including their financial and tax accounts;

4.4. revenue integrity provisions, such as measures necessary to limit: the inappropriate claiming of tax losses; the equity allowance to new equity; and small and closely held businesses converting labour into business income;

4.5. how the reform options integrate with the rest of the tax system now and in the future;

4.6. impacts on national income and macroeconomic risks; and

4.7. costings.

5. The working group will also identify a range of off-setting budget savings from existing Commonwealth business taxation (or spending) measures. Changes to the GST should not be considered.

5.1. The savings to be generated by the particular options will be costed by the Treasury in accordance with the budget rules.

6. In developing its recommendations, the Working Group should have regard to the report of the Australia’s Future Tax System Review and relevant international experience and expertise.


Timing

7. The Working Group is required to provide the Treasurer with:

7.1. an initial report on the proposed directions for improving the tax treatment of losses and offsetting savings in mid-November 2011;

7.2. a final report on the treatment of losses and the offsetting savings in March 2012; and

7.3. a further report on longer-term business tax reform options and offsetting savings by the end of 2012.


Consultation

8. For its final reports, the Working Group should consult widely with industry and the broader community.

9. The Working Group may establish technical sub-groups to consider specific issues or seek input from other sources of expert advice.


Support

10. The Working Group will be supported by a Secretariat within Treasury.


Membership


CHRIS JORDAN (Chairman)

Chris Jordan is a Fellow of the Institute of Chartered Accountants, the Taxation Institute in Australia, and the Australian Institute of Company Directors and is a Solicitor of the Supreme Court of New South Wales.

Chris is the NSW Chairman of KPMG. He is the Chairman of the Board of Taxation which is an advisory body to the Federal Treasurer and is a board member of the Sydney Children’s Hospital Foundation and the Bell Shakespeare Company.

Chris was awarded the honour of Officer of the Order of Australia in the 2005 Queens Birthday Honours list for high-level advice to Government.

JENNIFER WESTACOTT

Jennifer Westacott took up the role of Chief Executive at the Business Council of Australia (BCA) in April 2011.

Jennifer has extensive policy experience in both the public and private sectors. She has held critical leadership positions as the Director of Housing and the Secretary of Education in Victoria, and most recently was the Director-General of the New South Wales Department of Infrastructure, Planning and Natural Resources.

Jennifer was a Director and National Lead Partner at KPMG and provided advice and assistance to some of Australia’s major corporations on climate change and sustainability matters, and provided advice to governments around Australia on major reform priorities. She previously chaired the Public Sector Performance Commission in South Australia, and was a member of the Commonwealth Grants Commission.

JEFF LAWRENCE

Jeff Lawrence was elected as Secretary of the Australian Council of Trade Unions (ACTU) in August 2007.

Prior to that, he was National Secretary of one of Australia’s largest unions, the Liquor Hospitality and Miscellaneous Union (now known as United Voice). Jeff is a Director on the AustralianSuper trustee board.

Under Jeff’s stewardship, the ACTU was a key negotiator in the drafting of the Fair Work Act, which features a guaranteed safety net of rights and conditions, improved protection from unfair dismissal, the abolition of Australian Workplace Agreements, an independent umpire, and rights to collective bargaining.

During his time as Secretary, Australian unions have successfully advocated for economic stimulus measures to protect Australian jobs during the downturn, won the first national paid maternity leave scheme, and received government commitment to increase superannuation guarantee to 12 per cent to ensure all workers have financial security in retirement.

Jeff has devoted his entire career to advancing the interests of working Australians and their families, particularly the low-paid.

ROB McLEOD

Rob was appointed Ernst & Young’s Oceania Managing Partner and CEO in 2010 and was previously Ernst & Young’s New Zealand Country Managing Partner. He has more than 30 years experience in corporate and international tax.

Rob has held a number of high profile roles in New Zealand including Chairman of the New Zealand Business Roundtable. In 2001, he conducted the most recent comprehensive New Zealand government tax review – the McLeod Review. In 2009, he was appointed to the government-sponsored Tax Working Group and the Capital Markets Development Taskforce, both of which had a strong focus on tax reform. He was also a member of the New Zealand Government appointed Consultative Committee on Capital Gains Tax in 1989.

He has been appointed to numerous government committees, the latest ones focusing on defence, infrastructure and Maori economic development.

TERESA DYSON

Teresa Dyson is a Tax Partner in Blake Dawson’s Brisbane office, specialising in providing income tax advice on corporate and financing issues to domestic and international businesses. Teresa is a member of the Board of Taxation and the Resource Taxes Implementation Group.

Teresa is the National Chairman of the Law Council of Australia, Business Law Section, Tax Committee and, in that capacity, represented the Law Council of Australia at the Tax Forum. She is currently recognised as a leading individual in tax in Chambers Global 2011 and Best Lawyers 2011.

PETER BURN

Dr Peter Burn, Director of Public Policy, Australian Industry Group (Ai Group), has extensive experience in taxation policy through his role at Ai Group since 2002 and as Director – Policy at the Business Council of Australia with particular responsibilities for taxation policy from 1997. Peter was also the Secretary of the Business Coalition for Tax Reform in the years around the Australia's New Tax System.

Prior to these roles, Peter lectured in public finance and microeconomic policy at the University of Queensland and the University of Newcastle and still earlier served in the Tax Policy Division of Treasury during the 1980s reforms to Australia's tax system.

FRANK DRENTH

Frank Drenth has been in the role of Executive Director of the Corporate Tax Association (CTA), since 1998. The CTA represents the taxation interests of about 120 of Australia’s largest companies. He is also Deputy Chair of the Business Coalition for Tax Reform, which brings together the views of the broader business community on tax reform issues.

Over a period of many years Mr Drenth has had extensive experience as an external stakeholder in the development of Australia’s tax policy and law, as well as aspects of tax administration that are relevant to large companies. Mr Drenth has previously occupied corporate tax roles in large Australian companies. He has also worked a large chartered accounting firm after starting his career with the Australian Taxation Office.

JOHN FREEBAIRN

John Freebairn holds the Ritchie chair in economics at the University of Melbourne. He has degrees from the University of New England and the University of California, Davis. Prior to joining Melbourne in 1996, his preceding career includes university appointments at the ANU, LaTrobe and Monash, and periods with the NSW Department of Agriculture and at the Business Council of Australia. John is an applied microeconomist and economic policy analyst with current interests in taxation reform and environmental economics.

ROB HEFEREN

Executive Director, Revenue Group, The Treasury


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Nick Sherry: The man who knew too much

This was Gillard, yesterday:

"Nick’s personal interest and more than 20 years experience in the Australian superannuation system made him a valuable asset as an economic Minister during the Global Financial Crisis when he oversaw elements of the superannuation system."

She is right. Nick Sherry knew more about superannuation than anyone else in the government.

So he was removed from that portfolio and given another one so minister after minister could get on with the business of ramping up compulsory superannuation, something Nick didn't agree with and the Henry Review recommended against.

If only he had known less.


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Ten predictions guaranteed in 2012

Nathan Bell in The Age:

1. A lot of things will happen that no forecaster thought to include in their predictions for 2012. These events will be the obvious consequences of the current economic and political environment. So obvious, in fact, that they weren’t included in the predictions.

2. Many things won’t happen that forecasters did include in their predictions for 2012. This will be a result of unforeseen circumstances and six sigma events, annual anomalies that crop up one in a million years.

3. A small number of the vast number of predictions about 2012 will randomly come true and the predictors will be proclaimed gurus. This will be despite the fact that it was their 1000thprediction and the first one they got right.

4. All predictions will be adjusted throughout the year so that the forecaster’s final prognostications, announced on Christmas Eve, will be very close to accurate.

5. Those fund managers that outperform for the year will cite their skills, systems, intelligence and uncanny ability to time the market as the reasons for their outperformance. While acknowledging that past returns are no guarantee of future returns, the past returns will be included in advertising materials in very large font.

6. Those that underperform will cite the randomness of markets and that any one bad year will obviously be followed by a good one, because underlying it all they have superior skills...

Continued at The Age.

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Return of the Master. Keynes won.

"Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary."

Paul Krugman points to this piece by economic historian Kevin O’Rourke:

"One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.

A second, related lesson is that it is difficult to cut nominal wages, and that they are certainly not flexible enough to eliminate unemployment. That is true even in a country as flexible, small, and open as Ireland, where unemployment increased last month to 14.5%, emigration notwithstanding, and where tax revenues in November ran 1.6% below target as a result. If the nineteenth-century “internal devaluation” strategy to promote growth by cutting domestic wages and prices is proving so difficult in Ireland, how does the EU expect it to work across the entire eurozone periphery?

The world nowadays looks very much like the theoretical world that economists have traditionally used to examine the costs and benefits of monetary unions. The eurozone members’ loss of ability to devalue their exchange rates is a major cost. Governments’ efforts to promote wage cuts, or to engineer them by driving their countries into recession, cannot substitute for exchange-rate devaluation. Placing the entire burden of adjustment on deficit countries is a recipe for disaster."

End of argument?

And here's an excellent long piece from the NewYorker on the return of the master.






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Why can't a woman be more like a man? She can, if she avoids them

Gender Differences in Risk Aversion:
Do Single‐Sex Environments Affect their Development?

Alison Booth

Lina Cardona Sosa
and Patrick Nolen
University of Essex, 
Australian National University

November 2011

Abstract

Single‐sex classes within coeducational environments are likely to modify students' risk‐taking attitudes
in economically important ways. To test this, we designed a controlled experiment using first year
college students who made choices over real‐stakes lotteries at two distinct dates. Students were
randomly assigned to classes of three types: all female, all male, and coeducational. They were not
allowed to change group subsequently. We found that women are less likely to make risky choices than
men at both dates. However, after eight weeks in a single‐sex environment, women were significantly
more likely to choose the lottery than their counterparts in coeducational groups. These results are
robust to the inclusion of controls for IQ and for personality type, as well as to a number of sensitivity
tests. Our findings suggest that observed gender differences in behaviour under uncertainty found in
previous studies might partly reflect social learning rather than inherent gender traits.

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Australia is really good. The only people who don't believe it are...

Everyone is raving about Possum's Crikey post.

The are right. He is right.

Read the full thing here. Here's an extract.

"So this is our economic reality – we are the wealthiest nation in the world with 75.5% of our adult population making it into the global top 10%, our economy has grown faster than nearly all others (certainly faster than all other developed countries), our household income growth has been one of the fastest in the world (including our poor having income growth larger than everyone else’s rich!), we have the highest minimum wages in the world, the third lowest debt and the 6th lowest taxes in the OECD and are ranked 2nd on the United Nations Human Development Index.

And this didn’t happen by accident. This happened by design.

This happened because of 30 years of hard, tedious, extraordinarily difficult policy work that far, far too many of us now either take completely for granted, or have simply forgotten about. We have, without even realising it, created the most successful and unique economic and policy arrangement of the late 20th and early 21st century – the proof is in the pudding. A low tax nation with high quality, public funded institutions. A low debt nation with world leading human development and infrastructure. The wealthiest nation in the world where even though our rich get richer, our poor have income growth so extraordinary that it increases at a faster rate than the rich expect to experience anywhere else in the world but Australia. A nation where we enjoy the highest minimum wages in the world.

But so many of us simply deny it – the conservatives deny it because it’s more convenient to whip up hysteria about their political enemies. Filling the heads of Australians with complete lies for partisan advantage and not giving a pinch of the proverbial about the human damage that would be wrought if they ever succeeded in getting us to talk ourselves into a recession of our own making . That’s not to mention many of their ideologues – denial is an absolute must when any acknowledgement of our actual economic and social reality would be to admit that their extreme policy fetishes are just pissing in the wind.

The broad left in Australia deny it, because to admit our economic and social reality is to admit that we’ve actually solved most of the big problems that other nations are still grappling with, and they had little to do with it. The problems we have left in Australia are difficult and sophisticated, requiring a level of thoughtful engagement far beyond the scope of occupying Fuck Knows Where in tents. If the US government responded to the Occupy Wall Street movement by implementing a large policy program that Australia already has – Occupy Wall Street would declare victory and go to the pub!"...

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Eurozone debt: Who owes what to whom?

Interactive graphic from the BBC.

Includes the US.

Click to play around:

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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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Bank by bank by bank by bank. How Swan won.

The Age

The standoff over home loan interest rates has ended, with Australia's big four banks finally yielding to political pressure and intervention by Treasurer Wayne Swan by passing on the Reserve Bank's 0.25 point cut.

After two days of silence from the big four - and a storm of public protest and indignation from the Treasurer - ANZ move first, announcing yesterday it would cut its standard variable home loan rate from 7.55 per cent to 7.30. Fellow Melbourne-based giant NAB followed quickly, dropping its standard rate to 7.22 per cent.

Mr Swan, who had already phoned executives at the banks to put his case, resorted to messages on Twitter, saying: "Heat just gone up another notch on Westpac and CBA."

Commonwealth fell into line late in the afternoon, and Westpac, which had the highest home rate before the controversy, yielded about 7.30pm after another tweet from the Treasurer: "Westpac customers deserve their bank to do the right thing as well."

ANZ, NAB and Westpac will also pass on the 0.25 point cut to business. The Commonwealth was considering its position.

But it was not all good news for borrowers, with the banks to continue charging the old rates until Monday week.

And ANZ, although it acted first to cut this time, has flagged a bid to escape the political pressure to pass on Reserve Bank moves in future... It says it will now review its rates on the second Friday of every month, regardless of whether the Reserve has moved.

The shift means that for ANZ's 700,000 customers, their interest rates could rise or fall even when the central bank has left official rates unchanged.

ANZ's Australian operations chief, Philip Chronican, said the public expectation that all official rate moves would be passed on had become ''dysfunctional''.

There were far more significant influences on bank costs than the Reserve cash rate, he said, and ANZ had long been planning to ''break the nexus'' between official changes and mortgage prices. ''We've all said it's a nexus that needs to be broken and we just thought it was about time somebody did something about it.''

UBS banking analyst Jonathan Mott, said ANZ's move would break the ''misconception'' about the link between the Reserve Bank and mortgage rates, and had the potential to make retail borrowing costs more volatile.

Westpac group executive Jason Yetton held out the prospect of an imminent rate hike should conditions deteriorate in Europe, saying the "unstable and deteriorating economic situation in Europe" posed significant risks.

"It is placing pressure on both the availability and cost of raising funds overseas to support mortgage and business lending in Australia."

The big banks return on equity is high compared to their counterparts overseas. The Commonwealth makes 19.5 per cent per year, NAB 15 per cent, Westpac 16 per cent and ANZ 15 per cent. US big banks make 5.7 per cent, British big banks 3.5 per cent and banks in mainland Europe 8 per cent.

Mr Swan has asked his business tax working group to report by the end of the year on the feasibility of introducing a tax on outsized returns on equity as part of a tradeoff that would cut corporate tax on ordinary profits to zero.

Published in today'sAge


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It's the west and north that's doing it. Why our economic growth looks good

WHERE AUSTRALIA FITS

September quarter real GDP growth

China: 2.3%
Japan: 1.5%
Australia: 1%
Canada: 0.86%
South Korea: 0.8%
Germany: 0.5%
US: 2%
UK: 0.5%
France:0.4%
Euro zone: 0.2%

ABS 5206.0, Eurostat


STATE BY STATE

September growth in state final demand

Western Australia: 8.4%
Queensland: 3.5%
Tasmania 1.1%
NSW: 0.5%
Victoria: -0.1%
South Australia: -1.6%

ABS 5206.0

Australia’s economy has roared out of the blocks after this year’s devastating natural disasters, but almost all of the action is in two states.

Treasurer Wayne Swan yesterday hailed economic growth figures he said were “exceptional, particularly at a time when most economies are struggling to grow at all and suffering mass unemployment”.

Gross domestic product grew 1 per cent in the September quarter following a rebound of 1.4 per cent in the June quarter after negative growth in the wake of the Queensland floods.

By contrast South Korea grew 0.8 per cent, Germany and the United Kingdom 0.5 per cent and the entire euro currency area 0.2 per cent.

Only Japan grew faster among the developed nations in the quarter, and it has been growing more slowly than Australia over the year.

But away from Western Australia and Queensland growth was anemic. NSW state final demand barely grew at all, climbing 0.5 per cent in the quarter. Victorian state final demand slipped 0.1 per cent. Western Australia - with a mere one tenth of Australia’s population - recorded demand growth of 8.4 per cent. Queensland recorded 3.5 per cent.

Over the past year state final demand in Western Australia has grown at a blistering 16.4 per cent, demand in Queensland by 9.3 per cent. The rest of the nation grew 1.3 per cent...

In both states growth was driven by a surge of investment. Western Australian business investment surged 27 per cent in the quarter, Queensland business investment 12 per cent.

Mining and mining-related construction drove the burst of investment with big liquefied natural gas projects in Queensland and Western Australia helping push up engineering construction 31 per cent in the quarter and 52 per cent over the year – the biggest annual increase in 30 years.

“As we go forward, you will see strong growth in investment, but it may well come in big lumps,” Mr Swan told a parliament house press conference. “We will see some quarters where it is not as strong and others where it comes through really strongly. But all of these projects are based on long-term investment horizons, and provide a solid bedrock in our economy.”

Government demand slipped away quickly as the budget was tightened, sliding 2.6 per cent or $2.1 billion in the quarter. Public investment slipped 7.2 per cent as stimulus building projects wound up.

Consumer spending held up well, climbing 1.2 per cent in the quarter and 3.8 per cent over the year - faster than the rate of retail sales growth suggesting a good deal of spending is on services, overseas tourism and direct overseas purchases not captured in the retail figures.

Spending on so-called vices has been sliding rapidly. Gambling losses accounted for only 2.8 per cent of consumer spending, down from 4.1 per cent a decade earlier. Cigarettes and tobacco accounted for only 1.4 per cent of spending, down from 2.4 per cent a decade earlier.

Wage income per person grew by around 5.5 per cent over the year but much of it was squirrelled away rather than spent. The household saving ratio stayed fairly steady at 10.1 per cent, close to its long-term high.

The news had little effect on financial markets. Reflecting economic conditions in July, August and September it is regarded as dated, providing a view of the economy before the renewed problems in Europe and before Australian export prices turned down.

Published in today's SMH and Age


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5206.0

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No Action: The big banks prepare to dud their customers

What you’ll pay

Standard rates this morning

Westpac: 7.61% No change
Commonwealth: 7.56% No change
ANZ: 7.55% No change
NAB: 7.47% No change
Bank of Queensland: 7.36%
ME Bank: 6.74% (for union members)

Australia’s big four banks have snubbed their customers in the lead-up to Christmas. For the first time in more than two years not one of the big four has responded to a Reserve Bank rate cut on the day it was announced.

When the Bank last cut rates on Melbourne Cup day two of the big four - Westpac and the Commonwealth - proclaimed within minutes they would be passing on the cut in full.

Yesterday’s announcement of the second successive cut of 0.25 points in the Reserve Bank’s cash rate was followed by silence from each of the big four, with none apparently willing to be the first to reveal they would not pass on the cut in full.

The last time all four sat on their hands as the Reserve Bank moved - in April 2009 during the global financial crisis - three eventually passed on only 0.10 points of the 0.25 point cut and one passed on none.

An decision to pass on none of the cut this time would deny a household with a $300,000 mortgage a cut in repayments of $49 per month.

A decision to pass on only 0.10 points would deny such a household $29 per month.

An exasperated Treasurer Wayne Swan said yesterday many families and small businesses would be “very angry if there is not a full pass through of this rate cut by the banks in the system”...

“I have spent a lot of time putting in place more competition into our banking system over the past twelve months than we have seen in years. If people are unhappy with their financial institution they have the capacity to walk down the road,” he said.

Two smaller institutions yesterday passed on the cut in full. The Bank of Queensland cut its standard variable mortgage rate to 7.36 per cent.

Chief executive Stuart Grimshaw said passing on the full cut was “the right thing to do last month and it’s the right thing to do this month”.

“Our cost of funds continue to increase so pricing remains a balancing act, but with Christmas less than three weeks away we know our customers will appreciate the extra dollars,” he said.

Members Equity Bank also passed on the full 0.25 points, cutting its rate for union and industry super fund members to 6.74 per cent.

Ahead of the Reserve Bank’s decision Commonwealth Bank Chief Ralph Norris flagged the possibility of holding back future rate cuts saying “over the next two, three, four years, the cost of money is going to get much more expensive and I don't see any other choice than financial institutions internationally will pass on the additional costs”.

New anti price signalling laws introduced by Mr Swan to help ensure banks no longer "dud Australian families" make it difficult for banks to explain their thinking about rates after Reserve Bank board decisions.

ANZ chief Mike Smith hinted at this thinking last month saying “there is a credit crunch in Europe now, it is spreading to Asia and it will spread here too”.

The European debt crisis lies behind yesterday’s Reserve Bank board decision. The Bank believes the world economy is weakening and that mainland Europe will be fortunate if its economy merely records zero growth in 2012. Weaker global growth will inevitably flow through to Australia, further weakening Reserve Bank forecasts.

The cut took no account of the possibility of financial market turmoil flowing from a decision by a European nation to repudiate its debts or unilaterally abandon the euro. In the event of such a crisis the Reserve Bank board would hold an emergency meeting, possibly by phone, rather than waiting until the next scheduled meeting in February.

The Bank believes rates are now at or below normal, meaning there is no need to cut further in the absence of a new international downturn. If the big four banks do fully pass on the latest cut, mortgage and small business rates will be 0.20 points below their 15 year average.

Published in today's SMH and Age


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Our rich are getting richer.

Australia is among those nations becoming becoming less equal...

While elsewhere...

Australia’s top 1 per cent are grabbing a greater share of our income than at any time since the 1950s.

A new OECD report finds Australian incomes were their most evenly distributed at the end of the 1970s when the top 1 per cent of earners took home 4.8 per cent of the income. Since the early eighties the proportion has climbed to 8.8 per cent, meaning Australia’s top earners amass for themselves nine times as much income as as if it was distributed evenly.

In almost all of the OECD countries surveyed income inequality was at its highest before the very high before the first world war and fell sahrply during the second world war.

But whereas income inequality has remained low in mainland European countries and Japan since bottoming in the seventies, it has climbed since the eighties in the US and Australia, Canada, Ireland and the United Kingdom.

The surge has been particularly dramatic in the United States which gave its top 1 per cent around 8 per cent of the national income at the turn of the 1980s and 18 per cent in the most recent reading.

Australia also stands out because of how quickly all ranges have grown... Between the mid-1980s and the late 2000s the income enjoyed by the top ten percent of households has soared 4.5 per cent per year in real terms, more than in any other OECD member.

Income earned by the bottom ten percent has climbed 3 per cent per year, also one the fastest rates in the OECD.

But the compounding effect of the different rates has opened up a very wide income gap.

A family taking home $30,000 in the mid-1980s would be earning $68,000 today if income had grown 3 per cent per year. A family earning $30,000 enjoying a 4.5 per cent rate of growth would be earning $103,000 today.

Entitled Divided We stand the report is unable to identify any one single cause of growing income inequality in English speaking nations, saying it could flow from increased global competition for highly-skilled workers, it could be that advances in information technology are making highly-skilled workers more prized, or it could be that highly paid workers are putting in more hours.

It also identifies “assortative mating”, a phenomenon in which high earners increasingly marry parters who are also high earning – “doctors marrying doctors rather than nurses”. It says 40 per cent of couples where both partners work have similar earnings compared with 33 per cent two decades ago.

Published in today's SMH and Age


FASTER AT THE TOP

Annual real household income growth
Mid-1980s to late 2000s

Bottom 10 per cent Top 10 per cent

Australia 3.0% 4.5%
Canada 0.9% 1.6%
France 1.6% 1.3%
Germany 0.1% 1.6%
Israel -1.1% 2.4%
New Zealand 1.1% 2.5%
United Kingdom 0.9% 2.5%
United States 0.5% 1.9%

Disposable household income, adjusted for inflation

Divided We stand: Why inequality keeps rising, OECD 2011





Inequality in Australia, As Seen by the OECD



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What'll the RBA announce at 2.30 pm AEDT today?

Stephen Koukoulas has prepared a draft press release:

Number 2011-2XYZ

Date 6 December 2011

Embargo: For Immediate Release


Not a Statement by Glenn Stevens, Governor, RBA: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 4.25 per cent, effective 7 December 2011.

Recent information is consistent with a moderation in the pace of global growth, though fears of a major downturn have not been borne out so far. The pace of the US economic expansion continues to be moderate and there remains considerable spare capacity. China's growth has continued to slow leading to some cautionary easing in policy. Output in Asia remains solid, and domestic demand in the region is generally expanding. Trade performance, however, continues to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue. Commodity prices have stabilized at relatively high levels after some falls from around mid-year.

Financial markets have recovered somewhat from the turmoil of recent months, helped by the coordinated central bank policy action to support banking and market liquidity. Further signs that European governments are making progress in their efforts to deal with the sovereign debt and banking problems has reduced market pessimism. Equity markets have gained ground, but it is still likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a longer period of precautionary behaviour by firms and households.

Information about the Australian economy suggests moderate growth overall. The terms of trade have now probably peaked and will decline somewhat in the near term, but they remain very high. Investment in the resources sector is picking up very strongly, with much more to come. Some related service sectors are enjoying better-than-average conditions. In other sectors, cautious behaviour by households and the high exchange rate have had a noticeable dampening effect. Dwelling construction has weakened further in recent months while consumer demand appears to be expanding at a little below the long run trend. The unemployment rate has increased a little over recent months to be around 5¼ per cent. Fiscal policy is having a contractionary effect on economic activity and public demand is forecast to subtract from GDP growth in 2012-13.

Recent information on underlying inflation suggests the subdued demand conditions and the high exchange rate continue to dampen inflation. With labour market conditions now softer than at the beginning od 2011, there has been confirmation that growth in labour costs has slowed. The Labour Price Index rose by around 3½ per cent and is consistent with moderate inflation.

The Bank's current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme. The risks to this outlook are evenly balanced although in the near term, headline inflation is likely to be very low as some temporary price spikes unwind.

Credit growth remains subdued and there continue to be orderly falls in house prices. The exchange rate has been very variable over the past few months, but remains at historically high levels. Financial conditions eased in response to the 25 basis point interest rate cut in November with standard variable mortgage and most business lending interest rates falling. Bank deposit rates have also fallen in recent months.

Last month, the Board moved monetary policy from a mildly restrictive stance given the overall growth moderation, lower inflation and subdued confidence outside the resources sector. These trends remain in place and the Board concluded that a neutral stance of monetary policy is required to be consistent with achieving sustainable growth and 2–3 per cent inflation over time.

We'll know soon enough.

Read more >>

Swan gets on with business, cutting most company tax rates - to zero

Most Australian companies would pay no tax on their earnings, while some would pay a much higher rate of "super tax" on large profits, under radical plans being developed in the wake of the Gillard government's tax summit.

The change, if fully implemented, would in effect extend the government's minerals resource rent tax across the entire Australian corporate sector.

It would lead to the most profitable companies paying a lot more tax, and the rest paying less or none at all.

The plan is being prepared by a working group set up by Treasurer Wayne Swan after this year's tax summit, and has received preliminary support from key business groups and union leaders.

According to its authors, the plan is aimed at giving more incentive for business investment, without necessarily reducing the total amount of company tax collected.

Addressing a tax conference at Canberra University yesterday, the head of Treasury's revenue group, Rob Heferen, compared the change to the introduction of the goods and services tax in 2000.

He said this would be a more radical change.

"When Australia introduced a consumption tax there was a pretty clear path to follow," he told the conference.

"This is not like that. We need to be careful about unknowns. Having said that, the imperative for the change may well be a little bit stronger"...

The nine-person working group is examining a proposal known as "allowance for corporate equity", under which no tax would apply to the portion of corporate profits necessary to get a reasonable return on equity.

Most companies, especially most manufacturers, fail to meet that hurdle and so would pay no company tax.

Banks and mining companies make a much greater return on equity and so would be liable for the super tax on the excess portion of their earnings.

Working group member John Freebairn from Melbourne University told the conference the super tax rate could be as high as 40 or 50 per cent.

He nominated McDonald's and KFC as examples of companies able to make larger than normal profits because of the power of their brands.

ACTU secretary Jeff Lawrence, also on the business working group, opened the door for broad agreement on the proposal, telling the conference the union movement would be prepared to accept it on the condition the total company tax take did not fall.

He previously opposed moves to cut the standard corporate tax rate below 29 per cent.

The Business Council of Australia, also represented on the working group, has previously spoken in favour of the idea.

Asked by The Age whether the change would be practical, Mr Heferen said it had been implemented in a number of countries although not on the scale of the GST.

"Belgium has one, Brazil and Italy had it, Latvia has it. But from what I can gather none have done it for the reasons we think it is useful, which is to attract capital and boost labour productivity."

Mr Heferen represents Treasury on the working group and headed the Henry tax review secretariat.

"It would be complex, but company tax is already complex. It would be especially difficult when people were getting used to it," he said.

"Our next step is to properly quantify the cost of change, the actual cost of people moving over to a new system.

"That is something that whatever government Australia has needs to think about. The costs of change might be very significant."

Mr Swan has asked the working group to deliver a report on the proposal by next December.

He has asked for an earlier report on the tax treatment of losses by March.

Published in today's SMH and Age


Beyond the Tax Forum - Speech by Rob Heferen




From: Jennifer Westacott
Sent: Monday, December 05, 2011 09:32 PM

Subject: Statement from Jennifer Westacott to BCA members on inaccurate tax report in this morning's media

To: BCA Members
BCA Liaison Delegates
BCA Company Chairmen

Reports in this morning’s SMH and Age newspapers that the BCA favours the introduction of a super profits tax are wrong.

The BCA is participating in the Business Tax Working Group which is examining options to relieve the taxation of new investment. However, the group has not even begun to consider options around the allowance for corporate equity model – which is just one option that the Treasurer has asked the group to examine, along with a reduction in the company tax rate.

The BCA’s position is to support the recommendation of the Henry review that Australia’s company tax rate should be reduced to 25 per cent as economic and fiscal circumstances permit.

We have also reiterated the need for extensive consultations on any major changes to the tax system, and we will be holding a specialist tax forum for BCA members early in the new year.

If you have any questions or concerns about this, please feel free to contact me or our Chief Economist, Peter Crone.

Thanks and regards

Jennifer


From: Peter Martin
Date: Tue, Dec 6, 2011 at 3:40 PM
To: XXXX
Cc: Jennifer.Westacott@bca.com.au

I wrote that the Business Council had previously spoken in favour of the idea.

You'll find it here, in its excellent paper entitled:

UNREALISED GAINS: THE COMPETITIVE POSSIBILITIES OF TAX REFORM

Currently, corporate income tax falls on the
‘full return’ to corporate equity – that is, the
normal return and so-called ‘pure’ profi t.
Under an ACE system, companies are
allowed to deduct an imputed normal return
on their equity from the corporate income tax
base, in a similar way to deductions that are
made for interest payments on debt. The effect
of such an arrangement is that companies
would incur tax only on ‘above normal returns’.
The adoption of an ACE has the potential to
deliver signifi cant benefi ts. Assuming that the
corporate tax rate remains unchanged, the
ACE reduces the corporate tax burden by
effectively narrowing the tax base. While we
accept the conventional wisdom that, in general,
broader tax bases are more effi cient, the ACE
has the potential to deliver benefi ts for a country
like Australia while avoiding distortions to
resource allocation and ineffi ciencies typically
associated with narrower tax bases.

The ACE system has the potential to remove
the bias in favour of debt fi nancing that fl ows
from the tax deductibility of interest on debt.
Implementing new tax arrangements that work
to reduce an excess reliance on debt will improve
economic effi ciency. It may also eliminate the
need for thin capitalisation rules which, in turn,
would materially reduce complexity within the
tax system.

As for expenditure taxes generally, under an
ACE the tax system should not affect the cost
of capital of a fi rm, as the effective marginal
tax rate (EMTR) is zero for an investment
generating returns that just cover the cost
of capital (that is, an investment that only
produces ‘normal returns’).

In addition, the ACE could eliminate potential
problems and complexities that arise in having
to distinguish debt from equity fi nance. In the
face of fi nancial innovation which has blurred
the distinction between the two, the ACE
approach may provide signifi cant benefi ts in
terms of greater simplifi cation and improved
resource allocation.

While current depreciation rules continue to
apply, the ACE could also reduce distortions
associated with the treatment of depreciation.
Specifi cally, it offsets the investment distortions
caused by deviations between true economic
depreciation and depreciation for tax purposes.
From an implementation perspective, the ACE
is likely to be relatively simple to introduce
because it continues to rely on the current
corporate income tax system. Initially the ACE
approach could apply only to new equity
capital, which limits the revenue implications
and also minimises potential windfall gains
to shareholders.

The benefits of an ACE would, however, be
undermined if the corporate tax rate is raised
to offset the impact of base narrowing.

This
is one of the major disadvantages usually
highlighted in respect of an ACE arrangement.
However, the authors of this study concluded
that there is no need to increase the corporate
tax rate because in the long run the potential
to stimulate investment both for locally based
companies and from inbound investors will
raise the pre-tax return to domestic factors
of production by more than the revenue loss
from the ACE.

An ACE arrangement warrants further
investigation, and we recommend that the review
panel examine the proposal in more detail

I don't know why Jennifer did not acknowledge this in her email to members.

Peter





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Will the Reserve Bank cut rates tomorrow? I doubt even it knows

Meantime Chris Joye says he found this video of a pre-meeting chat.

Participants: someone like Assistant Governor Phil Lowe, someone like senior board member Roger Corbett:



My take:

Reserve Bank specialists are in the dark about whether the Bank will cut interest rates at its final meeting for the year tomorrow with some believing even the board members themselves are uncertain.

Tomorrow’s meeting comes ahead of economic growth figures Wednesday likely to be very strong as Queensland rebounds from the floods but amid uncertainty over events in Europe and the knowledge there isn’t another board meeting scheduled until February.

“Waiting two months until the next board meeting is too big a risk to take given the deteriorating situation in Europe,” says AMP head of investment strategy Shane Oliver who is genuinely uncertain. “While recent better than expected data in Australia - notably for business investment - make it a close call, the Bank’s policy of ‘least regret’ would argue strongly in favour of a precautionary rate cut.”

Commonwealth securities chief economist Craig James thinks on balance the Bank will hold off until February for “tactical” reasons.

“If it waits until February the European situation might get resolved one way or another. I think it will hold off, but I don’t hold this view with supreme confidence” he says, adding that if he was on the board he would cut straight away.

Missing from almost all the commentary about tomorrow’s meeting is the serious suggestion the past week’s mid-year economic statement and the projected narrow 2012-12 budget surplus will have anything to do with it...

The Bank has for some time acknowledged in board minutes that tighter fiscal policy is having a contractionary effect on the economy. It cut rates in November because underlying inflation had fallen back to around 2.5 per cent, the centre of its target band and the long-term average.

The Melbourne Cup day cash rate rate cut moved the overall structure of rates towards but not all the way to their 15-year average, leaving the Bank room for just one more cut which it could justify as being in line with its inflation target. The question facing the board is whether to make that cut this week or wait until February. It is possible that the board has before it an open recommendation and possible also that it will amend whatever recommendation was emailed to members in the staff briefing pack late last week.

Seasoned Reserve Bank watcher Chris Caton of BT Financial Group said the decision could go either way.

“They don’t want to look like they are panicking, but on the other hand given that the rest of the world took substantive liquidity enhancing measures to support European economies last week the Reserve Bank might want to say well they are part of that club.”

“The Australian data can be read two ways. In the past week we have had very very strong capital expenditure numbers and very weak residential building approvals. I don’t know what it should do. Obviously it is going to cut rates again, the only question is is whether it is Tuesday or in February.”

September quarter national accounts released Wednesday are expected to show impressive economic growth of around 1 per cent for the second successive quarter, in part because of rebuilding activity in Queensland.

Although annualised growth over the past six months will exceed 4 per cent, the negative March quarter should knock down annual growth to less than 3 per cent.

Polls show market economists evenly split on the Reserve Bank’s decision tomorrow. Futures traders are more confident with the latest pricing implying a 96 per cent probability of a cut in the cash to 4.50 per cent.

Published in today's SMH and Age


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About our banks (funny video)

From Chris Joye:






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Miners invest, Minerals Council sledges "socioeconomic policy agenda"

The government has hailed new mining investment figures as a “resounding vote of confidence” as the industry itself complains about an “increasingly regressive shift in Australia's socioeconomic policy agenda”.

Business investment climbed 12 per cent in the September quarter and 31 per cent over the year to September - the fastest growth on record. Mining investment surged 22 per cent in the quarter and 60 per cent over the year. Manufactuing investment jumped 10 per cent in the quarter and around 30 pc over the year.

“This is are a resounding vote of confidence in the future of our economy,” said Treasurer Wayne Swan. “They underscore our fundamental strengths and help demonstrate why we are better placed than just about anyone in the face of the current global instability.”

The Bureau of Statistics figures follow Bureau of Resources and Energy Economics calculations putting committed resource investments at a record $232 billion. A further $224 billion in investment is planned but not yet committed.

“Of course we can expect to see some lumpiness in investment as we go forward due to the massive scale of individual projects,” the Treasurer said. “But there is no doubt the mining industry has a very bright future and is continuing to power ahead.”

Minerals Council chief Mitch Hooke as sounded a more bitter note in an email to full and associate members...

“The increasingly regressive shift in Australia's socioeconomic policy agenda is quite rightly starting to get significant public media air play,” he writes in the memo dated Friday November 25.

Of concern is the “greater emphasis on the reallocation and redistribution of wealth [rather] than building the productive capacity of the economy - carving up the pie, than growing it”.

The email bemoans “the convenience of demonising the resources sector as the political scapegoat for the inevitable pressures of Australia's economic structural adjustment, and as the substance to the politics of envy and class warfare”.

Government intervention is increasingly focused on “a predilection that government's know better than efficiently functioning markets”. Reinstitutionalised union involvment in commercial decision making is “reestablishing in the bargaining process a legitimacy for matters not directly relating to the employment relationship”.

On average firms upgraded their planned spending this financial year by 6 per cent to planned growth of 35 per cent over the financial year, well in excess of the 14 per cent predicted in Tuesday’s mid-year budget update.

The results strengthened speculation about a very strong September quarter economic growth figure due next Wednesday, with some predictions as high as a rebound of 1 per cent.

Published in today's SMH





From: Mitchell Hooke [mailto:Mitchell.Hooke@minerals.org.au]
Sent: Friday, 25 November 2011 7:46 AM
Subject: The emerging contest to the regressive public policy environment!

TO: FULL AND ASSOCIATE MEMBERS OF THE MINERALS COUNCIL OF AUSTRALIA
CORPORATE AFFAIRS GROUP

The increasingly regressive shift in Australia's socio-economic policy
agenda is quite rightly starting to get significant public media air
play as concern within the business community increases and as the
contest becomes more acute for intellectual capital among the key
opinion leaders.

Accordingly, I thought you might appreciate a copy of the speech Gary
Banks, Chairman, Productivity Commission, gave to the ACCI 2011 Annual
Dinner on Wednesday evening last, which resonates strongly with the
MCA's views and advocacy platform.

As I'm sure you appreciate, we are increasingly concerned, and
therefore focussed in our advocacy efforts, at the profound shift in
the national public policy climate confronting the minerals industry.
Quite simply, the policy circumstances have profoundly shifted from
the opportunity costs of the "passive failures" of economic reform
inertia in addressing capacity constraints, to the adversity of the
"active threats" of the regression to what some commentators liken to
"the toxic norms of the 1970's" - the time of the last significant
commodities boom.

The key drivers being:

* greater emphasis on the reallocation and redistribution of
wealth than building the productive capacity of the economy - carving
up the pie, than growing it.

* the convenience of demonising the resources sector as the
political scapegoat for the inevitable pressures of Australia's
economic structural adjustment, and as the substance to the politics
of envy and class warfare.

* the re-institutionalisation of union third party direct
involvement in the commercial decision making of companies -
compromising workplace flexibility, principally direct relationships
between the employer and the employee, and re-establishing in the
bargaining process, a legitimacy for matters not directly relating to
the employment relationship.

* increasing Government intervention in the market - greater
regulation - and with increasing emphasis in State Constitutional
responsibilities - founded in a predilection that Government's know
better than efficiently functioning markets, and that the legitimate
cause of national consistency/harmonisation is better effected through
centralised control than an efficiently functioning federation, and

* an emerging protectionist sentiment justifying direct or
quasi industry assistance as a political defence to, rather than
effectively targeted transitional assistance to enable industry's to
better adjust.


Those of you who attended the MCA Full Council meeting in Sydney in
mid October, will recall that the "shifting sands" of the public
policy agenda and the misguided focus on the "ill effects" of the
resources boom, was central to the Council's discussions.

Next week the MCA Board will consider the Council's Business Plan and
Budget for next year, a central component of which is our policy
advocacy strategy and tactics in this space.

We will keep you posted on developments.



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Lib costings debacle - "auditors" fined

Amateur hour all round.

The two Perth accountants who costed the Coalition’s 2010 election policies breached professional standards and will be fined, a disciplinary tribunal has ruled.

The ruling is an embarrassment to the Coalition which claimed during the campaign the costing was “as good as you could get anywhere in the country, including in Treasury." In recent months it has threatened to use private accountants once again.

Geoffrey Phillip Kid and Cyrus Patell, both of the Perth office of WHK Horwath produced a one-page report for the Coalition two days before the election which Shadow Treasurer Joe Hockey tendered as an audit, saying the pair had certified “in law that our numbers are accurate".

“If the fifth-biggest accounting firm in Australia signs off on our numbers it is a brave person to start saying there are accounting tricks,” he told ABC radio. “I tell you it is audited. This is an audited statement.’’

In fact the document was the result of a carefully-worded agreement between the accountants and the Coalition to produce work primarily "not of an audit nature".

An audit would examine the assumptions used by the Coalition and whether they were reasonable.

Kidd and Patell’s unpublished agreement with the Coalition explicity required them to make no inquires about “the reasonableness of otherwise of the assumptions used"...

A professional conduct tribunal established by the Institute of Chartered Accountants ruled in July that Kidd and Patel were liable to face disciplinary action because their one-page report failed to contain “a statement that the procedures performed do not constitute either an audit or a review” and so failed to properly describe the limited nature of the agreed upon procedures.

Kidd and Patel appealed. The November judgement upholds the original finding stating that in view of the nature of the assignment and public interest in the matter Kidd and Patell had “a professional obligation to understand” the type of service they were providing and to comply with the applicable standards.

The initial decision that they be “severely reprimanded” was downgraded on appeal to “reprimanded”. Each will be fined $5000 and will will have to make a contribution toward the cost of the hearing and the appeal.

Treasurer Wayne Swan said yesterday the judgement was “the final nail in the coffin for the Liberals’ economic credibility”.

“It has been laid to rest at the bottom of a $70 billion budget crater. It shows exactly why Mr Hockey is so desperate to avoid independent, professional scrutiny of his budget debacle by the Treasury and now by the newly legislated Parliamentary Budget Office,” he said.

Contacted by The Age last night Mr Hockey said it was a matter between the Institute and the two accountants.

Asked whether he had been wise to refer to their work as an audit he said: “I’m not getting into it mate”.

A Treasury examination of the Coalition’s 2010 costings found errors including double counting and questionable assumptions amounting to $11 billion.

Mr Hockey said he would use the new $25 million Parliamentary Budget Office for costing his policies up until the campaign began. “After that we are looking at a range of options,” he told The Age.

“It might not be a private accounting firm, it might be a panel of eminent Australians.”

Sydney University accountancy professor Bob Walker whose complaint sparked the investigation said he was disappointed in the judgement which did not directly address the “overriding responsibility of members of the accounting profession to act in the public interest”.

Published in today's Age


The letter:





Coaltiion Costings Document August 18 2010



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