Super. Great if you're already well off

Roughly half of the $15 billion in tax breaks for superannuation contributions goes to the top 12 per cent of income earners, according to new research to be presented to the Senate this week.

The Australian Council of Social Service says the other half goes to bottom 88 per cent, with those at the very bottom getting nothing, even after proposed reforms.

ACOSS will the Senate economics committee the proposed government contribution to the super funds of low-earning Australians would merely cut their tax penalty for putting money into super from 15 per cent to zero, leaving untouched the tax benefit for high earners of 32 cents in the dollar.

“We spend more on super tax concessions for high income earners than it would cost to simply give them the pension,” said ACOSS tax policy officer Peter Davidson.

“It’s all the more wasteful because they are likely to save for their retirement anyway. High income earners are unlikely to need either the pension or tax incentives.”

ACOSS will propose a flatter system of support in which all super contributions are taxed at the worker’s marginal tax rate, offset by a rebate paid into their super fund at the end of each year.

One option modelled by the Council would give a 100 per cent rebate for the first $300 of contributions... followed by a 20 per cent rebate for additional contributions up to $8000 per year.

ACOSS says the proposal would be revenue neutral and would make 80 per cent of super fund members better off.

“It would be simple. Employers already know their employees’ marginal tax rates and already deduct tax. This tax would come out of super fund contributions, not wages,” Mr Davidson said.

“The proposal has losers, and they will complain. The problem is that the people who best understand the system are the high earners and their advisors who benefit from it the most. The 80 per cent who would benefit from the change understand super the least.”

Superannuation minister Bill Shorten has assembled a group experts to advise him on ways to ensure the move from 9 per cent to 12 per cent compulsory super will further disadvantage low income earners.

ACOSS will also be ask the government to limit the “rort” that allows workers aged over 55 to churn their income through super funds, making concessionally taxed contributions which they then withdraw as untaxed benefits.

“We would limit the concession to contributions that actually increased balances. Right now tens of billions are churned through funds for no other purpose than reducing tax,” said Mr Davidson.

In today's Canberra Times and Sydney Morning Herald


ACOSS on Superannuation



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Mining. Good for restaurants - RBA deputy

Café and restaurant owners in Melbourne and Sydney can rest easy. They’re not missing out on the benefits of the mining boom.

The Reserve Bank’s Philip Lowe used his maiden speech as deputy governor yesterday to point to “a chain that links the investment boom in the Pilbara and in Queensland to the increase in spending at cafés and restaurants in Melbourne and Sydney”.

Day-to-day the transmission mechanism could be hard to see.

“It starts with the high terms of trade that have pushed up the Australian dollar,” Dr Lowe told the Committee for Economic Development of Australia. “In turn, the prices Australians pay for many manufactured goods are, on average, no higher than they were a decade ago, despite average household incomes having increased by more than 60 per cent.”

“The stable prices for many goods, combined with strong disposable income growth means there is more disposable income to be spent on services in the cities and towns far from where the resources boom is taking place.”

At the same time the high dollar was hurting the manufacturing, tourism and education sectors, as well as some parts of agriculture and more recently some business services sectors.

The net effect was hard to judge... The Bank was “carefully examining every piece of data that comes in for insight”.

Asked whether the mining boom would be transitory, leaving Australian industry hollowed out, Dr Lowe said he could make a plausible case that the mining boom would be “very long-lasting”.

“The process of development of those very large and populous countries of Asia is going to take many many decades and Australia has the resources to supply those needs over many decades. If that is the case, the Australian economy has to go through some structural adjustment and it will be quite long lasting.”

“My sense is that from an overall perspective we are not losing the skills that that will make us competitive in the medium term.”

Moves by the big banks to push up interest rates independently of the Reserve did not threaten its ability to wield monetary policy. It targeted the overall level of rates charged rather than its cash rate and could keep adjusting the cash rate until it got the overall level it wanted.

By and large Australia was well served by the media in its reporting of economic issues. But reporting on Asia was not as strong as it should be. Second-tier data out of the United States was “breathlessly reported” but Chinese industrial production data was hard to find.

In today's Canberra Times, Sydney Morning Herald and Age


RBA Speech by Philip Lowe - 16 February 2012



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Jobs. Things aren't good, yet

Don’t get too excited, yet.

Officially employment surged in January after going sideways (falling slightly) throughout 2011.

The jump of 46,300 jobs in January sounds good, but is doing little more than reversing a slide of 35,700 jobs in December (revised down from a slide of 29,300).

The truth is jobs growth is a lot less spectacular than it now looks and a bit better than it did look.

Using smoothed trend figures and going back to the start of the financial year the Bureau of Statistics believed 11,900 jobs were created in seven months, not enough to stop the number of people identifying as unemployed climbing 19,000.

The more important point is that these are small numbers in the context of the total number of Australians in work - 11.4 million.

Employment is continuing to go sideways. The mid-year budget update foresaw that total growing 1 per cent, around 114,300 jobs. Seven months into the financial year we have scarcely scratched the surface.

The Bureau says the trend rate of jobs growth right now is 1700 jobs per month. At that rate it would take five years to accumulate extra the jobs forecast for this financial year. The unemployment rate would steadily rise from 5.1 per cent to the upper fives.

Maybe jobs growth will take off. But we can’t be sure that it has taken off yet.

The Reserve Bank is as unlikely to be persuaded that the labour market spluttered into life in January as it was that jobs growth really stopped in 2011.

A good figure is better than a bad one, but it is unlikely to dissuade the Reserve Bank from cutting rates next month if that’s what it is minded to do in order to offset private bank rate increases.

In Thursday's BusinessDay

Official figures showed a boost in employment of 46,300 in January pushing down Australia’s unemployment rate from 5.2 to 5.1 per cent.

But the jump largely reversed a seasonally adjusted dive of 35,700 jobs in December.

On a trend basis employment inched ahead just 1700 in the past month, well short of the 5600 per month that would be needed to meet the forecasts in the government’s mid-year budget update.

Employment minister Bill Shorten said he expected upward pressure on unemployment in future months.

But he said the January figures showed employment at a record high and unemployment much lower than in many parts of the world, something that “might even give a 24-hour siesta to the opposition’s negativity”.

Treasury executive director David Gruen told a Senate committee the labour market was “clearly weaker in 2011 than it was it was in 2010”. He expected an improvement this financial year, but jobs growth would still not be fast enough to keep pace with population growth.

NSW gained 10,900 jobs in seasonally adjusted terms in January but continued to lose jobs in trend terms.

The NSW unemployment rate was close to the national average at 5.2 per cent. Tasmania had the highest unemployment rate at 7 per cent, Western Australia the lowest of any state at 4.2 per cent, and the Australian Capital Territory the lowest in the nation at 3.7 per cent.

In today's Canberra times and Sydney Morning Herald



For another view, one that takes one month's seasonally adjusted change literally, here's Prime Minister Gillard in parliament yesterday:

"Today we see statistics that I believe that Australians will take pride in when they look around the world and see how many nations and how many working people—millions of them—are suffering with unemployment. Let me repeat: today the unemployment rate went down; 46,000 jobs were added to the economy in January. This is at a time when the number of people who were looking for work—the participation rate—went up. This means we saw over 15,000 people who were looking for work find a job. That is a remarkable thing. Just think about it: over 15,000 Australians who were without the benefits of work have found a job."

And Wayne Swan, Sunday:

"On Thursday, we learnt that more Australians are in work today than at any time in our history. That’s more Australians than ever bringing home a pay packet to their families, gaining the opportunity of a better life and a brighter future. It’s a fantastic achievement for our nation, particularly given the current state of the global economy. This news was unfortunately overshadowed in the media by reports of job losses at a number of companies. Obviously any job loss is a huge blow for those affected, but it’s important not to lose sight of the bigger picture – the fact that overall 46,300 more Australians gained work last month and the unemployment rate fell to 5.1 per cent."

And Prime Minister Gillard Sunday:

When I've got the unemployment results on Thursday and saw our economy create 46,000 jobs in January, that's the kind of thing I'm focussed on.


Oh my.


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We were feeling better, until Westpac whacked us

Consumer confidence has lifted. The Westpac Melbourne Institute survey finds twice as many families believe it is a good time to buy a major household item as believe it’s bad. But the survey was conducted last week ahead of Friday’s decisions by Westpac and the ANZ to push up mortgage rates.

The survey came as the Commonwealth Bank reported a half-year cash profit of $3.576 billion, up 7 per cent from the year before. The result gives the Commonwealth a return on equity of 19.2 per cent - way above the 15 per cent typical of other Australian banks and the 5 per cent typical of banks overseas.

Treasurer Wayne Swan told parliament the Commonwealth had made the money “despite global volatility in global financial markets”.

“It shows they are hugely profitable,” he said.

“My belief and the belief of the government is that the banking system should work for all Australians, for every customer, for every worker, for the shareholders, for the broader community and the whole economy,” he said referring to the Commonwealth’s decision on Monday to lift its standard variable mortgage rate 0.10 points to 7.41 per cent, giving it the second-highest rate behind Westpac’s 7.46 per cent.

The decision will help restore a 0.10 point dipin the bank’s net interest margin from 2.31 per cent to 2.21 per cent.

Commonwealth Bank chief executive Ian Narev told a Sydney media conference that before the bank lifted rates Monday “writing a new home loan was not profitable”.

“I expect and welcome scrutiny,’’ the newly-appointed chief executive said... ‘‘What is critical in our mind is that that scrutiny is had on the facts and not against abstract concepts. Some of the sides, in particular the shareholders and deposit-holders, their voices have been lost a bit in the debate.’’

The Commonwealth’s 19.2 per cent return on equity saying profitability was “appropriate for an institution of this size at this time”.

Internationally a 5 per cent return on equity is more common, although Canadian banks average 15 per cent.

Mr Narev sought to distance the Commonwealth from the other major banks saying he had no plans for redundancies and no plans to move workers offshore.

“We don't have a different view from any of our competitors on the need to be as productive as we can be, we do have a different view on how to achieve that productivity in a sustainable way,” he said.

The ANZ has announced plans to cut 1000 jobs and Westpac 400.

The consumer confidence survey shows 54 per cent of Australian families believe now is a good time to buy a major household item, more than double the 26 per cent who thought the time was bad.

The results reflect the high Australian dollar and also the two successive Reserve Bank rate cuts in November and December.

The Bank’s unexpected decision not to cut rates this month appears to have dimmed confidence with those responses collected after the Tuesday announcement some 4 per cent less positive than those collected before.

Confidence among mortgagee holders is 7 per cent lower than among households who rent.

The overall confidence index jumped 4 per cent to 101.1, a level where optimists just outnumber pessimists.

In today's Canberra Times, Sydney Morning Herald and Age


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Rate rises. Two hold out

Australia’s largest credit union CUA has joined the Bank of Queensland in refusing to follow the big four banks in lifting mortgage rates.

The decision opens up a wide gap between its standard variable mortgage rate of 6.72 per cent and the most expensive rate charged by Westpac of 7.46 per cent. The saving from switching a $300,000 mortgage from the standard Westpac rate to the CUA would be $142 per month.

Treasurer Wayne Swan appealed to customers to consider switching saying there were “better deals on offer out there, including a number of deals which are much lower than what’s on offer from the big four”.

The saving may not be as great as the comparison suggests because many Westpac customers were on a discounted rate and may not get such a big discount with another lender.

“Our banking reforms - like banning mortgage exit fees on new loans - are all about putting the power back in the hands of consumers so they can more easily ditch any bank that tries to take them for a ride,” Mr Swan said... “These reforms were opposed by Joe Hockey and the Liberals, who sided with vested interests over Australian families.”

In parliament shadow treasurer Joe Hockey stepped up his attack on the banks referring to almost 2000 jobs to be lost at ANZ, Westpac, Macquarie, Suncorp and other institutions and asking what they said about the industry.

Prime Minister Gillard replied she wanted to make it clear how she felt about the decisions announced by the ANZ. “I think the combination of putting up your interest rates, then announcing job losses, and then seeking to blame both of those decisions on someone else is reprehensible,” she said.

ANZ was the first of the big four banks to increase its rates independently of the Reserve Bank, announcing an increase of 0.06 points Friday. On Monday it announced it would be shedding 1000 jobs.

On Friday it will announce a first quarter profit expected to be steady at $1.45 billion. The Commonwealth Bank will today report a first half year profit expected to be $3.49 billion, up 4.9 per cent. On Thursday Westpac will announce a first quarter profit expected to be $1.55 billion.

The Australian Bankers’ Association acknowledged public concern about the rate rises yesterday saying it understood why people were surprised by the moves.

‘‘For over ten years banks moved in step with the Reserve Bank of Australia and that created the reasonable expectation that the RBA cash rate was the only factor determining bank funding costs and the interest rates banks charged,” said chief executive Steven Munchenberg. ‘‘Unfortunately, the global financial crisis has shown that this is not the case.’’

Reserve Bank assistant governor Guy Debelle told a conference in Sydney bank funding costs jumped sharply in the second half of last year.

In today's Sydney Morning Herald


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No need for finance, we're waiting for a sign - business

It’s not just the Reserve Bank that’s sitting on its hands.

The latest NAB business survey shows an extraordinary two-thirds of Australian businesses reported no need for finance in January, the highest proportion since the question was first asked in 2008.

The jump from 64 per cent of businesses requiring no credit to 67 per cent in the monthly survey rendered less relevant the subsidiary question of whether credit was easy to obtain. The survey found conditions broadly unchanged with an increases in the proportion of borrowers finding loans harder to obtain offset by an increase in the proportion finding them easier to obtain.

“There must be a lot of businesses sitting on their hands,” said CommSec chief economist Craig James. “Either firms aren’t keen to take on debt, internal sources of funding are healthy, or firms don’t want to take on new projects.”

“It is not as if confidence has totally dried up,” Mr James said. “It’s that businesses would prefer to hold fire at present, no doubt waiting to see how the European situation and domestic political situation play out. It appears the caution expressed by consumers is infectious, with businesses also seemingly blinded by the headlights of oncoming traffic.”

ANZ economist Dylan Eades said the survey showed the economy tracking sideways... with the Reserve Bank rate cuts and improvement in offshore markets apparently failing to significantly lift growth prospects.

The survey shows deteriorating conditions in the wholesale and construction industries, offset by improvements in mining. The net business conditions index inched up from zero to two percentage points above zero, slightly above its long term average.

Westpac senior economist Andrew Hanlan said a pronounced divide was developing with conditions “positive for Western Australia, very weak in Tasmania and close to zero for the other states.”

In today's Sydney Morning Herald


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Short memories. We kept the banks afloat, and this week they'll...

WHOSE TURN?

One bank takes the heat, then another

December 2009: WESTPAC lifts rate 45 points instead of Reserve Bank’s 25. Cites the price of bananas. Other banks follow.

November 2010: COMMONWEALTH lifts rates 45 points after the Reserve lifts 25. Other banks follow.

November 2011: NAB cuts rates only 20 points after Reserve cuts 5 points.

February 2012: ANZ lifts rates 6 points after Reserve Bank leaves rates flat. Westpac follows, others consider positions.

HOW THEY LINE UP AT THE START OF THE WEEK

Westpac 7.46% (from 7.36%)
ANZ 7.36% (from 7.30%)
Bank of Queensland 7.36% (no change)
Commonwealth 7.31% (decision imminent)
National Australia Bank 7.22% (decision imminent)
Reserve Bank 4.25% (steady)

Standard variable mortgage rates, Reserve Bank cash rate. February decisions

Borrowers are in for further pain this week with the Commonwealth and National Australia Banks each expected to launch separate reviews of their mortgage and business rates ahead of announcing multi-billion dollar profits.

Westpac and the ANZ defied the Treasurer and lifted variable rates 0.10 and 0.06 percentage points late Friday despite a decision by the Reserve Bank to hold its cash rate steady.

On Wednesday the Commonwealth Bank will report a first half year profit expected to be $3.49 billion, up 4.9 per cent. On Thursday Westpac will announce a first quarter profit expected to be of $1.55 billion and on Friday the ANZ will announce a first quarter profit expected to be steady at $1.45 billion.

The ANZ has asked to meet finance union representatives today amid fears it is preparing to unveil details of planned jobs cuts.

Treasurer Wayne Swan warned the Commonwealth and NAB to consider the consequences of moving saying they could lose business to other lenders offering rates “a full percentage point lower.”

"Just as many angry Westpac and ANZ customers would have been looking very closely over the weekend at other lenders offering rates a full percentage point lower than ANZ and Westpac’s, so too does any other bank that follows suit risk seeing their customers walk out the door," he told The Age.

Westpac’s decision to announce its rate hike Friday “as the 6pm news was rolling” would offend a lot of people.

But when asked what he could take, Mr Swan said “Let’s be very clear, we have not in this country over the last 25, 30 years regulated interest rates”.

Shadow Treasurer Joe Hockey said Mr Swan’s “soft lettuce” response gave the Commonwealth and National Australia banks licence to move as well.

Mr Swan said it was “up to Mr Hockey to explain this week why he opposed our ban on mortgage exit fees and sided with the big banks over Australian families”.

The National Australia Bank is now pricing mortgage rates an unusual 0.24 points below Westpac, almost the equivalent of an official Reserve Bank rate cut worth $48 per month on a $300,000 mortgage.

Although it has promised to continue to offer the lowest rate among the big four, NAB has not ruled out lifting rates to take them closer to the other three... A spokeswoman told The Age Sunday that as part of its commitment to having the lowest rate it “regularly monitors competitors' rates."

The Commonwealth Bank said rates were “continually under review”.

CLSA banking analyst Brian Johnson said the Commonwealth and NAB would “likely lift standard variable mortgage rates by a similar margin”. The loans they sold through mortgage brokers now barely covered the cost of capital.

ANZ Australian chief Phil Chronican said his bank’s 0.06 point increase wasn’t enough to cover costs. “Six points certainly doesn’t in any sense recover the margin pressure we’ve had, but we also needed to be mindful that customers were going to look at other banks,” he said.

The ANZ’s meeting with the Finance Sector Union today comes amid speculation it will be the most aggressive of the majors in cutting jobs. The union has previously claimed as many as 900 ANZ jobs are at risk.

An ANZ spokesman said the bank regularly met the union and had “nothing to announce at this time”.

Consumer group Choice pointed to the “coincidence” of the big four announcing bad news in turn. Westpac was the first to announce an outsized rate increase in 2009, the Commonwealth in 2010, the NAB the first to announce an incomplete cut in 2011, and the ANZ the first to announce an extra hike in February.

“It might be random, it might be telepathy, it might be by design, but it confirms too many preconceptions,” said campaign director Christopher Zinn.

AMP Capital chief economist Shane Oliver said the rate hikes would pressure the Reserve Bank to cut its cash rate next month in an attempt to bring retail rates back down. The Reserve targeted retail rather than professional rates.

In today's Sydney Morning Herald and Age


REQUIRED READING:

Michael West - Banks: deep pockets, short arms and shorter memories

Michael West - Reserve kept Bankwest afloat: litigator

Mark Bouris and Christopher Joye - Scrap the big four’s ‘protected species’ status


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Thanks Whitney, you did good.

Only 48.

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How much more? Westpac sticks it to its customers, sticks it to Swan

HOW MUCH MORE PER MONTH?

With ANZ / With Westpac

MORTGAGE

$20,000: $0.78 $1.30
$40,000: $1.55 $2.59
$60,000: $2.33 $3.88
$80,000: $3.10 $5.16
$100,000: $3.88 $6.48
$200,000: $7.76 $12.96
$300,000: $11.64 $19.44
$400,000: $15.52 $25.92
$500,000: $19.40 $32.40
$600,000: $23.28 $38.88
$700,000: $27.16 $45.38
$800,000: $31.04 $51.62
$900,000: $34.92 $58.32
$1,000,000: $38.80 $64.80

Standard variable rate, 25 year mortgage

HOW THEY LINE UP NOW

Westpac 7.46% (from 7.36%)
ANZ 7.36% (from 7.30%)
Bank of Queensland 7.36%
Commonwealth 7.31%
National Australia Bank 7.22%
ME Bank 6.74% (members only)


ANZ and Westpac have warned they could again raise mortgage rates without a signal from the Reserve Bank because of continued uncertainty in global money markets.

The two giants yesterday increased mortgage rates - blaming the need to protect profit margins - triggering an immediate backlash from politicians and customers.

ANZ lifted its mortgage rates by 6 basis points, taking its standard variable mortgage rate to 7.36 per cent.

Westpac followed with a more aggressive increase, raising its variable rate by 10 basis points to 7.46 per cent. This gives it the highest borrowing charge among the major banks.

Other banks - both big and small - are expected to push through their own rate rises in coming weeks.

The move comes just days after the Reserve Bank surprised the banking sectors by opting to leave the official cash rates on hold. Major banks had been planning to pass on only some of the anticipated Reserve Bank cuts.

An angry Treasurer Wayne Swan linked yesterday's rate rises to decisions by banks, including Westpac, to cut staff. From time to time, he said, banks "decide they want to give priority to their shareholders over their customers and over their staff".

"We don't dictate what they do with their pricing or what they do with their staffing, but what we can do is put in place a framework that empowers their customers to move down the road and get a better deal," he said.

The ANZ move is expected to add $12 a month to repayments on a $300,000 mortgage, while the Westpac move adds $20. It is understood both banks briefed the Treasurer before going public with their decisions...

Last night, Commonwealth Bank, the nation's biggest mortgage lender, had not changed its rates, although a spokesman said ''rates are regularly reviewed''.

National Australia Bank said it had not changed its mortgage rates. A spokeswoman said it was committed to having the lowest rate of the big banks.

The Commonwealth is charging 7.31 per cent for its variable mortgage while National Australia Bank is discounting at 7.22 per cent.

ANZ's Australian head, Phil Chronican, last night told The Saturday Age he faced a "serious dilemma" in becoming the first bank in four years to increase rates without guidance from the Reserve Bank.

However, he cautioned if funding costs did not subside this could again force his bank's hand.

''We don't know where the cycle is going to go while funding costs continue to bounce around.
''It would be wrong to say this (move) puts an end to anything,'' he said.

Westpac group's Peter Hanlon strongly rejected suggestions the bank was gouging customers.

''What we're doing here is reflecting the costs of funding,'' Mr Hanlon said.

''We want to make sure the bank remains strong, we want to make sure we continue to lend and what we've seen with banks overseas when they run into problems they have to be bailed out by governments,'' he added.

Coalition Treasury spokesman Joe Hockey rubbished the suggestion that customers could take their business elsewhere, saying "it's not going to do any good walking away if down the road one of the other major banks increases their rates".

"This shows the Treasurer is weak. He's been out there this week talking about how hugely profitable the banks are, how they should pass on any interest rate cut in full.

''And now at the end of the week we've got a rise and he simply shrugs his shoulders."

Greens MP Adam Bandt called on Mr Swan to get behind his bill that would require banks to provide so-called tracker mortgages that rise and fall with the cash rate.

'The time for tough talking ? is at an end," he said. ''Wayne Swan should not let ANZ get away with it.''

A Reserve Bank statement released yesterday said that in January banks were paying an unusual 2.50 percentage points above the government bond rate to raise money overseas. But it said in recent weeks the cost had come back 0.30 points.

Most lending rates were close to their medium-term averages. A benign inflation outlook gave the Reserve "scope" to cut official rates should economic conditions weaken materially.

The Reserve knocked its forecast for economic growth in the year to June from 4 to 3.5 per cent on the basis of lower International Monetary Fund forecasts for global growth. It expects growth to slip further later in the year before climbing back towards 3.5 per cent late in 2013.

With smaller banks and credit unions also feeling the pinch on funding, the major banks were again flexing their pricing muscle, CLSA banking analyst Brian Johnson said.

This ''suggests that in the near term, higher bank funding costs will be passed on to borrowers,'' he said.

Published in today's Sydney Morning Herald and Age


Oh my. Remember this?




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ANZ: “The only major bank whose margins shrank in the second half of 2011”

The ANZ has quietly lifted the mortgage rate it charges new customers.

Bank executives will meet this morning to consider formally lifting the rates charged to all variable mortgage customers. An increase of 0.10 percentage points would add $19 to the monthly cost of servicing a $300,000 loan.

But on Monday with minimal fanfare ahead of Tuesday’s Reserve Bank board meeting the bank lifted the effective rate charged to new high-value mortgage customers.

Previously new customers borrowing at least $500,000 were were offered a discount of 100 points off the standard variable mortgage rate, taking the rate charged from 7.3 to 6.3 per cent.

On Monday the discount was cut to 90 points, lifting the rate charged to new customers to 6.4 per cent.

“It means anyone who has applied for a $500,000 loan from Monday will be paying $31 more per month than anyone who borrowed the week before,” said Canstar senior financial analyst Mitchell Watson.

“Existing customers are still paying the same rates so it doesn’t make the ANZ that much money, but it is a sign it is tightening.”

The move comes as the Swiss-based Financial Stability Board expressed concern about Australia’s relatively generous government backing of bank deposits...

Australia has one of the broadest depositor protection schemes in the world. With a cap of $250,000 the scheme is equal to only the United States in terms of protected deposits.

‘‘Although a high coverage level reduces the incentives for depositors to run, adequate controls are needed to ensure a proper balance between financial stability and market discipline,’’ the Financial Stability Board said in a global review.

The ANZ pledged in December to no longer closely follow the Reserve Bank in adjusting rates, considering the question independently on the second Friday of each month.

Evans & Partners banking analyst George Gabriel said of all the big banks the ANZ was under the most pressure to tighten rates.

“It's the only major bank whose margins shrank in the second half of 2011,” he told the Herald.

“Westpac and Bendigo Bank are talking about following the ANZ, but it is the ANZ that needs to move rates the most.”

Mr Gabriel said on balance he thought the ANZ would not move today because it would not want to “expend all its political capital unnecessarily”.

“The spectre of re-regulation always hangs over banks. France has just introduced 0.1 per cent financial transactions tax. It’s not wise to antagonise the Treasurer without a good reason.”

The National Australia Bank promised this week that its rates would always be lower than the other big three for the duration of the year. Bank of Queensland said yesterday it would hold its rates steady until the next Reserve Bank board meeting regardless of what the other banks did.

“It’s great to see Bank of Queensland really throwing down the gauntlet to the big banks to do the right thing by their customers,” Treasurer Wayne Swan said. “Our reforms are all about putting the power back in the hands of consumers so they can more easily ditch any bank that tries to take them for a ride.”

Consumer group Choice called on the big four banks to back up their decisions about home loan rates with evidence, publishing the reasons for any changes.

“If it’s good enough for the Reserve Bank to release the minutes of its board meetings, it’s good enough for banks who seek to go it alone,” campaign director Chris Zinn said.

In today's Canberra Times, Sydney Morning Herald and Age


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How the high dollar hurts

Colebatch:

For 20 years from 1985 to 2005, the Aussie dollar averaged US70c. Now it is hovering around $US1.05. At that level, the question is: does it make sense for any firm to export manufactured goods from Australia?

It's not just Alcoa, Toyota or Holden. It's any firm that exports from Australia, or competes with imports. In the currency of global trade, producing in Australia is now 50 per cent more expensive than in the past. That applies to cars, computer games, university courses or tourism.

Between 1985 and 2005, the Aussie floated between US50c and US90c. If it got too high, firms would tighten their belts, grit their teeth and wait for it to fall. This time it's different.

The dollar is now far above its old levels. Some say it could go higher. Many, most, believe it is now up there to stay. This is not just a cyclical high, it's a structural shift. And it has wrecked good business plans that had assumed a dollar in the range it used to live in.

The destruction is going on all around us. Since the global financial crisis began, Bureau of Statistics figures show, a net 127,000 manufacturing jobs have been wiped out across Australia. One in every eight manufacturing jobs has gone already. Far more than that are under threat.

Treasury, the markets and the Reserve Bank tell us the Aussie is set to remain high far into the future, maybe for decades. It may not stay at today's level, but it will stay well above the zone it lived in before the minerals boom began. This is an epochal change, which will change Australia.

Why does the level of the dollar matter? Suppose you're a manufacturer in Clayton making plastic thingos. There's a big global market, but you're competing with manufacturers in China, Korea, everywhere.

Suppose it costs you $A10 to produce a kilo of thingos... With the dollar at US70c, that makes your costs $US7 a kilo. Suppose the world price is $US9 a kilo, then you're making a decent profit from exporting.

But with the dollar at $US1.05, suddenly your costs have jumped to $10.50 a kilo, yet the global price is only $9. To export thingos now costs you money, serious money. If you think the dollar is going to stay that high, you either somehow cut costs dramatically, or give up the game.

And that's not all. Suppose your Chinese rival can produce thingos for $US5 a kilo. When the $A was US70c, his costs in $A were marginally higher than yours; you could hold him off at home. But with the Aussie at $US1.05, his costs are now less than $A5 a kilo. He can undercut you and take away your local contracts. If you think the $A will stay up here, you don't just give up exporting - you give up manufacturing.

This is a crisis that will bring many well-run firms to their knees: not because they are inefficient, but because costs beyond their control have made them uncompetitive. It is a crisis that, if the dollar remains high as forecast, will cost hundreds of thousands of manufacturing jobs.

But seeing our politicians arguing is like watching two bald men fighting over a comb.

Julia Gillard and Wayne Swan always trot out the line that Labor understands that there are people and firms who are doing it tough. OK, but what are you are going to do about it?

Tony Abbott says he wouldn't have a carbon tax. Wow. A carbon tax might add about 1 per cent to the cost of manufacturing in Australia. The higher dollar has added about 50 per cent. What are you going to do about that?

One option is to do what others do: get the central bank to drive the dollar down. That's possible. They can do that by printing money - but that's the recipe for inflation.

There's two other ways, both unpalatable: invest overseas, as China does, or stop wage growth, as Germany once did.

Our best chance was the mining tax. A 40 per cent tax on superprofits in all mineral sectors, as originally intended, would have sharply slowed mining industry growth, reducing the upwards force on the $A and allowing other industries more room to grow. But Tony Abbott said no, Labor backed off, and even its emasculated tax is yet to pass Parliament.

In the crisis, our politicians and policy advisers have failed the test - unless you think ''do nothing'' is the correct answer. This change will leave many victims in its wake.


Ridout:

Manufacturing industry leader Heather Ridout is in no doubt the high dollar is stifling her members’ businesses, but she says it isn’t just making Australia unattractive compared with Asia.

“We are losing competitiveness against the United States,” she says. “I was talking to a company today that has found a 30 per cent differential in wage costs between the US and Australia. That’s at the prevailing exchange rate. It would make sense to move their operations to the United States.”

Whereas during the global financial crisis Australian manufacturers didn’t think about moving offshore, believing the crisis would pass, she says now they believe the high dollar is here to stay.

“They held on to their workforce during the GFC. They did deals to reduce hours, people took all their holidays, people went on training courses, you name it, gardening leave,” she says. “But now there is a certainty things won’t return to how they were. The reality is dawning, and the implications aren’t great for Australia.”

Ms Ridout nominates the apparently permanently elevated dollar as the biggest threat to manufacturing in living memory, certainly bigger than the reduction in tariffs - which happened gradually - and bigger than the rise of China as a competitor.

Australian Workers’ Union boss Paul Howes yesterday blamed the Reserve Bank for the high dollar saying the Bank signed a ‘‘death warrant’’ for manufacturing on Tuesday when it left its cash rate on hold. The dollar jumped more than 1 US cent to 108 US cents within minutes.

“The Alcoa aluminium plant in Geelong can be incredibly profitable if the dollar sits at 104 or lower,’’ Mr Howes said. ‘‘But when you’re sitting near 110 and when there are no signs of it coming down, when the Reserve Bank is basically trying to sign a death warrant on Australian manufacturing industry; yes, these jobs are under threat.’’

Ms Ridout who joins the board of the Reserve Bank on Valentines Day said it wasn’t fair to blame the Bank for the high dollar, when so much else was propping it up.

“United States official interest rates are set at zero for the next couple of years, European authorities are lending at 1 per cent. Our rates are higher but the Reserve’s decisions won’t much change that. Our triple-A credit rating is pulling in money and high commodity prices are boosting demand for dollars.”

“Our members are fighting back - some are boosting research and development - but I can’t guild the lily. Things will not be the same.”


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Loony tunes. The quickly-assembled carbon price guide

Who says the government doesn't move quickly

The 20-page colour booklet "What a Carbon Price Means for You" mailed out to to 10 million households in August may become something of a collectors item.

The Audit Office has found the Climate Change Department used it to make 99 claims about the carbon tax, 32 of which it was unable to fully back up in the accompanying documentation.

Typical was the claim that “9 in 10 households will receive some combination of tax cuts and increased payments to help them with the cost of living impact of the carbon price”.

The Audit Office found the department relied on a document which stated less emphatically that “about” 9 in 10 households would receive the assistance.

The booklet said over four million households would get assistance “at least” 20 per cent more than the average price impact of the carbon tax, whereas the source document said the assistance would be “around” 20 per cent more than the price impact.

The Department set up a fact-checking matrix.. enabling it to allow back up each of the 142 claims made in the radio, television, print and mail-out advertisements, but when actually checked by Audit Office, 52 of the claims made were found not to be backed up in the way the matrix said they had.

The booklet said by the end of the decade the carbon pricing package would cut emissions by the equivalent of taking 45 million cars off the road, but the matrix said nothing about an equivalent number of cars.

The radio and television advertisements spoke about the carbon tax as if it had been decided, whereas at the time the legalisation had not been passed.

In its response to the audit released late yesterday the Department of Climate Change pleaded “difficult circumstances” and a “complex policy package”. It said each of the claims in the advertising could be supported by evidence. But the Audit Office found much of that evidence had to be assembled later after its inquiries and did not form part of the matrix meant to back up the campaign.

It found the $2.7 million tender for printing the booklet was conducted within a “severely compressed” time frame of approximately one-and-a-half days.

In addition “a last-minute variation to the scope of the tender - which gave firms approximately 90 minutes to quote on the cost of printing the booklet in A4 size as well as A5 size - had the effect of further limiting the number of suppliers likely to submit satisfactory quotes,” the report says.

The $1.7 million mail-out distribution contract was approved verbally by one departmental officer and recorded in the department’s systems later as having been approved by another. A further six spending proposals were approved after the agreements had been entered into.

The Office says the time frame for buying television advertising was sometimes less than a week, making it hard to get advertisements on the best programs at the best times.

Coalition climate change spokesman Greg Hunt said the report found the department had both breached its rules and failed to effectively sell its message.

He called on the prime minister to pull the plug on the forthcoming $10 million campaign to sell the carbon tax in the lead up its introduction on July 1.

In today's Canberra Times, Sydney Morning Herald and Age


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Bleak Christmas? That's what credit card numbers suggest

An unusually weak Christmas for credit cards suggests the end of year spending malaise may have extended beyond retail stores.

Retail figures released earlier this week showed no growth in seasonally adjusted spending in the three months to Christmas. Through the year spending growth of 2.4 per cent was the worst on record.

Credit card application figures released this morning  by the rating agency Veda show requests for cards in the December quarter were down 9.9 per cent on the year before.

Personal loan applications continued to grow, climbing 2.4 per cent over the year.

Veda consumer risk chief Angus Luffman said the decline was unusual... “The final quarter is typically a time when there is stronger demand for credit,” he said. “Our figures support other data suggesting consumers are becoming more circumspect.”

The decline might also reflect a switch toward debit cards and impact of responsible lending laws.

In today's Business Day


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Peter Veness, the parliament's tribute

House of Representatives, Tuesday February 7

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Why the Reserve sat on its hands, why the banks might not

Denied an interest rate cut, mortgage holders may soon be hit by a rate increase as the ANZ bank prepares to announce an interest rate move independent of the Reserve Bank this Friday.

The Reserve Bank board’s decision to sit on its hands rather than cut rates as the market expected pushed up the Australian dollar up more than a cent to 108.12 US, the first time it has traded above 108 cents since August.

Dealers say if the board’s decision is followed by good news on Greek debt negotiations the dollar could sail past its post-float record of 110.81 set last July.

‘The big risk event was the Reserve Bank, now that they didn’t cut, it will be hard to cut this trend,” said Easy Forex currency trader Tony Darvall.

The Bank board defied expectations because it believes the global economy and financial markets are marginally more healthy than when it last met and cut rates in December.

“Share markets have risen and term funding markets have re-opened, including for Australian banks, albeit at increased cost,” said Reserve Bank governor Glenn Stevens in a statement.

The meeting was told the latest National Australia Bank survey had business conditions at about their long-term average, although the circumstances varied widely from industry to industry.

While the high Australian dollar was making life very difficult for some industries, including retailing, the once in a century resource investment boom was boosting others.

The Bank is not persuaded by figures showing no growth in employment over the past year, noting that job vacancies, job advertisements and business hiring intentions all improving and the unemployment rate has not yet moved up.

Mr Stevens said the bank stood ready to cut rates “should demand conditions weaken materially”...

Inflation was exactly where the Reserve Bank wanted it. Underlying inflation was in the centre of the Bank’s target band at 2.5 per cent. Were it not for the effect of the carbon tax, which the Bank will ignore in setting rates, inflation was likely to remain within the 2 to 3 per cent target band for the next two years.

“The Bank has taken the view that it can afford to still sit for now and keep its powder dry.,” said former Reserve Bank economist Paul Bloxham at HSBC Australia.

“The domestic economy is still in good shape, and last year's cuts will start to provide support for some of the more interest-rate sensitive sectors. The future path for rates will mostly be driven by the global economy.”

The ANZ’s rate setting committee will meet on Friday to make good on its promise to adjust rates monthly independently of the Reserve Bank.

Banking analyst Brett Le Mesurier at BBY Limited said a rate increase on Friday was “a real possibility”.

“Offshore funding accounts of 20 per cent of their lending. It costs much more than it did in December. What its done to their total costs is hard to tell. At a minimum it has probably added 0.10 percentage points,” he said.

If the ANZ moves on Friday the other banks will be likely to follow, adopting a new pattern of adjusting rates independently of the Reserve.

The National Australia Bank yesterday pledged to offer the lowest mortgage rate of the big four for all of 2012.

“We acknowledge a tougher world economy is presenting uncertainty for many customers,” said personal banking executive Lisa Gray. “NAB will provide that certainty by announcing our ongoing commitment to having the lowest of the big four standard variable rates.”

Published in today's Canberra Times, Sydney Morning Herald and Age


Date 7 February 2012
For Immediate Release

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.25 per cent.
Information becoming available since the December meeting confirms that economic conditions in Europe were weakening late last year, with risks still skewed to the downside. Reflecting this, most forecasters have lowered their forecasts for world GDP growth this year to a below trend pace. That said, recent data from the United States suggest a continuing moderate expansion after a soft patch in mid 2011. Growth in China has moderated as was intended, but on most indicators remained quite robust through the second half of last year. Conditions around other parts of Asia have softened. Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels.

The acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers. Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made. Financial market sentiment, though remaining skittish, has generally improved since early December. Share markets have risen and term funding markets have re-opened, including for Australian banks, albeit at increased cost compared with the situation prevailing in mid 2011.

Information on the Australian economy continues to suggest growth close to trend, with differences between sectors. Labour market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months. CPI inflation has declined as expected, as the large rises in food prices resulting from the floods a year ago have been unwinding. Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.

Credit growth remains modest, though there has been a slight increase in demand for credit by businesses. Housing prices showed some sign of stabilising at the end of 2011, after having declined for most of the year. The exchange rate has risen further, even though the terms of trade have started to decline. This is largely a reflection of a decline in the euro against all currencies. Nonetheless, the Australian dollar in trade-weighted terms is somewhat higher than the Bank had previously assumed.

At today's meeting, the Board noted that interest rates for borrowers have declined to be close to their medium-term average, as a result of the actions at the Board's previous two meetings. With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.



WHY THE RESERVE SAT ON ITS HANDS

National Times, February 7

What do you do when things are broadly as they should be? Nothing. You sit on your hands. It’s called masterly inaction, and our Reserve Bank is rather good at it.

It kept rates steady for 11 months from November 2010, for 14 months from December 2003.

It was difficult. Financial markets make money from volatility and were forever punting it would move one way or the other.

Here’s the key sentence from the governor Glenn Stevens’ statement released after this morning’s board meeting:

“With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment.”

Not straightforward enough?

Unemployment is a little above 5 per cent. That’s close to trend. Underlying inflation is close to trend.

In the governor’s words:

“Information on the Australian economy continues to suggest growth close to trend, with differences between sectors. Labour market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months. CPI inflation has declined as expected, as the large rises in food prices resulting from the floods a year ago have been unwinding.”

The bank believes underlying inflation is “around 2.5 per cent” - right in the middle of its 2 to 3 per cent target band.

And for the future: “Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2 to 3 per cent range.”

Interest rates are also about where they would be. As the governor says: “interest rates for borrowers have declined to be close to their medium-term average”.

Inflation is happens to be low enough to allow the Bank to cut rates below their long term average, but not low enough to require it to do so.

In its words: “Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy”. But things haven’t, so it won’t, yet.

Things have worsened in Europe “with risks still skewed to the downside”, but “some progress has been made” in alleviating the resulting financial pressures on banks. Just in the past two weeks our own banks have been able to source money more cheaply.

Commodity prices are climbing back a bit after falling sharply. The US economy is picking up and China is slowing “as intended”.

It’s a good time for sitting on hands, if you’ve got the patience. But the Bank’s ready to move when needed. Don’t doubt it.



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Fun from the Self Managed Super Fund Professionals' Association

Gee.



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The chance of a rate cut today? RBA:50-50 Markets:100%

We'll know at 2.30 pm AEDT

A betting plunge on financial markets rates an interest rate cut as good as certain after weak retail sales figures appearing to show the worst growth on record.

The Reserve Bank board meets this morning in Sydney to consider whether to cut the official cash rate a further 0.25 points to 4 per cent, conscious that three of the big four banks have signalled they are unlikely to pass on any cut in full.

Treasurer Wayne Swan said yesterday customers “would be rightly angry if their bank decided to withhold any cut”.

“Banks should think long and hard about taking their customers for granted,” he said, pointing to new rules that made it easier for customers to switch if they found better deals.

Retail spending finished the year flat in seasonally adjusted terms in the three months to Christmas, dashing hopes of an end of year recovery.

Over the year to December retail spending grew just 2.4 per cent - the weakest annual growth in records dating back 50 years...

The Bureau of Statistics said after adjusting for inflation the quantity of goods bought climbed 1.4 per cent, merely in line with population growth.

‘‘I think we’re now starting to look at some very dangerous territory in terms of retailers having to close their doors and perhaps a significant loss of jobs,’’ said Australian National Retailers Association chief Margy Osmond. ‘‘Retail employs over 1.2 million people across Australia, it’s the biggest private sector employer.”

But the Reserve Bank has indicated previously it no longer regards retail figures as accurately depicting consumer spending. More consumer spending is taken place online away from shops and more is on services such as international travel, also not captured in the retail figures.

The Bank believes inflationary pressures are low enough to allow it to cut rates, but not so low as to require it to do so at today’s meeting, making the outcome of the meeting hard to predict.

Futures traders threw caution to the wind after the retail figures, their pricing pushing up the implied probability of a cut today from 73 per cent to 100 per cent.

Online bookmaker sportsbet.com.au will pay out only $1.25 on a $1 bet of a rate cut, but will pay out more than $2 on any of the banks actually passing it on in full.

ANZ decoupled itself from the Reserve Bank deliberations in December declaring its funding costs “largely unrelated to movements in the Reserve Bank’s official cash rate”.

It will now decide whether to move rates on the second Friday of each month, well away from the Reserve Bank’s decision on the first Tuesday.

National Australia bank chief Cameron Clyne has also declared there is no necessary correlation between the Reserve Bank’s moves and his bank’s cost of funds. Westpac chief Gail Kelly said her funding costs are now higher than at any time during global financial crisis.

Moodys rating service yesterday identified Australian and New Zealand banks as the most exposed in the Asia Pacific to high refinancing risks should the European financial crisis worsen.

“The proportion of external funding is 19 per cent for Australia and 16 per cent for New Zealand,” it said. “This exposes banks in both systems to refinancing risks in the event of wholesale market stress.”

Mr Swan said Australian banks remained very profitable with very healthy returns on equity and margins. Since it had become easier to switch banks the growth rate in loans at non-major banks had more than doubled.

The ANZ’s count of job advertisements jumped an encouraging 6 per cent in seasonally adjusted terms in January, lifting it up 0.7 per cent over the year. The ABS reported no jobs growth in the year to December, the worst performance in two decades.

Published in today's SMH and Age


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8501.0

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News starts now. Two giant leaps for journalism, Monday

Yes, parliament's back, from Tuesday.

From Monday (midnight Monday morning) The Global Mail goes live:

It is non-profit journalism, funded by a patron.

A promising model, and one that takes us back to the earliest days of journalism.

Stephen Crittenden, Ellen Fanning, Mike Bowers, Eric Ellis, Jess Hill, Mike Seccombe are exactly the kind of people you would pick if you were assembling a first-class team. Monica Attard has.

It's at theglobalmail.org from midnight.

And the National Times gets real.

Right now it looks like the opinion and discussion site it was set up as.

But pretty smartly from Monday it'll run breaking national news, - lots of it, writen specially by Fairfax reporters (including Canberra reporters) as it happens. (No wire stories.)

And there will be a live blog, presided over by national treasure Katharine Murphy each day parliament sits.

Bookmark them: The Pulse, nationaltimes.com.au.

Read more >>

Digging deep - the miners versus the unions versus Wotif

Mining companies and mining industry associations spent in excess of $8 million on political campaigning during the election year of 2010-11, much of it donated direct to the Liberal and National parties.

The spending, revealed yesterday by the Australian Electoral Commission, comes on top of $22 million spent the previous financial year on donations and campaigning against the proposed resource super profits tax.

The Minerals Council of Australia and the Association of Mining and Exploration Companies spent just over $5 million on what the electoral commission defined as the “broadcast of political matter”.

They spent another $1 million on the printing, production and publication of political material.

Heading the mining donors was Queensland magnate Clive Palmer whose companies sent $959,000 to the Liberal and National parties. Queensland Nickel was the largest individual donor to the Liberal party, contributing $500,000.

The AEC figures appear to show no mining dollars going to Labor.

The tobacco industry was similarly one-sided, although in its case that was because Labor has stopped accepting its donations... British American Tobacco and Philip Morris sent a combined $264,000 to Coalition parties, much of it in small parcels, the most intriguing of which was a donation of $999 to the South Australian Liberal Party.

The Alliance of Australian Retailers, itself funded by Philip Morris, Imperial Tobacco and British American Tobacco, spent $9 million on political advertising advertising. Imperial Tobacco and Phillip Morris spent another $4.7 million.

Attorney General and former health minister Nicola Roxon challenged opposition leader Tony Abbott to declare when parliament returns that the coalition will no longer accept donations from big tobacco.

Pubs and clubs spent almost $2 million as they launched a campaign against poker machine reforms. The Coalition received the bulk of the funds, but the Labor Party was supported too, although the size of the donations was smaller.

Some donors were near impeccably even handed. The movie maker and cinema operator Village Roadshow donated $352,336 to the Labor Party, becoming its biggest single donor. It sent $327,788 to the Liberal Party.

The National Australia Bank sent $166,738 to Labor and $172,000 to the Coalition. Westpac sent about $55,000 to each.

Manildra Group, an ethanol producer, donated $238,800 to Labor and $335,300 to the Coalition.

The Greens scored the biggest single donation - $1.47 million from Graeme Wood, the founder of the Wotif hotel reservations service.

Among the largest donors to Labor were the Electrical Trades Union ($330,914) and Hong Kong Kingson Investments run by Chinese property developer Chau Chak Wing ($250,000).

Labor raised $92 million in 2010-11, the Liberals $98 million, and the Nationals $14 million. The Greens raised $13 million.

Each party went deeper into debt to fund the election. Labor’s debt blew out from $11.8 million to $15.8 million. The Liberals’ debt grew from $11.8 million to $15.5 million, the Nationals’ debt from $1 million to $2.9 million and the Greens debt from $460,000 to $831,000.

In today's Sydney Morning Herald and Age


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Tax expenditures. Notice how the big ones go to the best off:

WHERE THE DOLLARS ARE

Our top ten tax expenditures:

$35.5 billion Capital Gains Tax exemption for the family home

$30.2 billion superannuation tax concessions

$5.9 billion GST exemption for food

$4.7 billion Capital Gains Tax 50% discount

$3.8 billion GST financial services concessions

$3 billion GST exemption for health

$2.9 billion GST exemption for education

$2 billion Family Tax benefit tax exemption

$1.3 billion Tax exemption for private health insurance rebate

$1.3 billion Tax exemption for charities

2011-12 estimates

Source: Commonwealth Treasury, Tax Expenditures Statement

Exempting agriculture and deforestation from the carbon tax will cost $3.5 billion per year when the system is up and running according to a new Treasury analysis released as part of the Charter of Budget Honesty.

The so-called Tax Expenditures Statement attempts to quantify the tax income lost as a result of concessions, on the basis that concessions often achieve the same effect as direct spending with the same impact on the budget balance.

But they are hard to measure with certainty. Treasury says for some there simply isn’t enough data to guess at how much tax would be paid without the concession. For others a mathematical calculation of the tax that would be collected without the concession will overstate its cost because without the concession people will change their behaviour to avoid the tax.

The biggest tax concessions are the $35.5 billion Capital Gains Tax exemption for the family home, superannuation tax concessions totalling $30.2 billion, the $5.9 billion goods and services tax exemption for food and the $4.7 billion 50 per cent tax discount on money made from capital gains.

Treasury says growth in the value of tax concessions has slowed over the past two years because of the impact of the global financial crisis on superannuation returns.

Budget measures have also helped... This year the government changed and made less generous the formula used to calculate the value of motor vehicle fringe benefits. Worth an estimated $1.2 billion in 2011-12, the concession will cost just half of that by 2014-15.

“It’s a win for the environment. The new formula should put an end to driving to get up miles,” said Australian Conservation Foundation strategic director Charles Berger. “But it’s also a win for the budget. The government deserves congratulations.”

The first estimates for the carbon tax show that by 2014-15 the exemption for agricultural emissions will cost $2.2 billion per year, the exemption for deforestation will cost $1.3 billion, and the exemption for decommissioned mines will cost $30 million.

Published in today's SMH and Age


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