Anyone who doubts the Medical Research Fund is a fig leaf..

It took Mark Latham to say the unsayable. “If a cure to cancer is to be found, most likely it will happen in Europe or the United States,” he wrote in the Weekend Financial Review. Spending scarce funds to find a cure ourselves is a waste of money, a political fig leaf to cover the electoral pain of the GP co-payment.

Anyone who doubts that the Medical Research Future Fund is a fig leaf or an afterthought, needs to only look at the pattern of leaks and speeches leading up to the budget. Ministers spoke often about the need to restrain the cost of Medicare, scarcely at all about the need to boost medical research.

They weren’t able to prepare the way for the medical research future fund because it didn’t come first. It isn’t that pharmaceutical benefits, doctors rebates and future hospital funding are being cut to pay for the fund. It’s that the fund was evoked late in the piece to smooth the edges of the cuts.  

Under the descriptions of 23 separate cuts in the budget are the words: “The savings from this measure will be invested by the government in the Medical Research Future Fund”.

The cuts hit dental health, mental health, funding for eye examinations, measures to improve diagnostic images, research into preventive health, a trial of e-health and $55 billion of hospital funding over the next 10 years.

We’re told the cuts are to build a $20 billion Medical Research Future Fund, but the immediate purpose is to cut the deficit.

The wonders of budget accounting mean that the savings notionally allocated to the fund will actually be used to bring down the budget deficit except for when money is withdrawn from the fund to pay for research.

It’s the same trick Peter Costello pulled with the Future Fund. The government gets two gold stars for the price of one. It can both cut the deficit and build up the funds for medical research. And it isn’t yet too sure about what type of research.

Under questioning by senators on Monday, health department officials revealed that they didn’t even know about the fund until late in the budget process and even then provided no advice on how it would work.

Asked about the kind of things the fund would finance, the department's secretary Jane Halton said the questions were hypothetical.

Would it include evaluations of potentially life-saving preventive health measures such as SunSmart and anti-tobacco programs? “I think it’s unlikely based on the description I have seen, but again we are in an area that we probably can’t yet answer,” she replied.  

A few minutes later she asked for her words to be expunged saying she really didn’t know. “We need to work through this level of detail” she told the senators.

We know that cures for cancer, Alzheimer's and heart disease will be part of fund’s remit, because the Treasurer told us so. “One day someone will find a cure for cancer,” he said after the budget. “Let it be an Australian and let it be us investing in our own health care.”

Latham’s point is that the idea is silly. By all means contribute proportionately to a global effort to find cures for diseases, but don’t try and lead the pack by taking scarce dollars away from applying the medical lessons we have already learnt.

Small countries like Australia are for the most part users rather than creators of technology, and our funds are limited as Joe Hockey well knows.

The Medical Journal of Australia isn’t fooled. This month’s editorial says a government genuinely concerned about extending the working lives of Australians would be investing more in preventing chronic disease, not less.

“The direct effects of the proposed federal budget on prevention include cuts to funding for the National Partnership Agreement on Preventive Health, loss of much of the money previously administered through the now-defunct Australian National Preventive Health Agency, and reductions in social media campaigns, for example, on smoking cessation,” it says.

“Increased funding for bowel cancer screening, the Sporting Schools initiative, the proposed National Diabetes Strategy and for dementia research are positive developments, but do not balance the losses.”

It’s the indirect effects of the measures the fund seeks to make palatable that have it really worried. The $7 co-payment will work out at $14 for patients with chronic diseases. They’ll pay once to see the doctor and then again to have a test. The editorial quoted four studies which have each found that visits for preventive reasons are the ones co-payments are most likely to cut back.

“The effects of these co-payments on preventive behaviour are greatest among those who can least afford the additional costs,” it observes. Which is a pity because “the potential for prevention is greatest among poorer patients, who are often at a health disadvantage”.

We’ll all suffer if co-payments cut vaccination rates, even those of us who aren’t poor, and even if the Medical Research Future Fund finds a cure cancer.

The journal’s biggest concern is that the cuts to hospital services will hit preventive health measures because they are seen as less urgent.

“The greatest pity of all is that the proposed cuts to funding for health come at the time when the first evidence is at hand of potential benefits of the large-scale preventive programs implemented under the national partnership agreements,” the journal writes. “A slowing in the rate of increase in childhood obesity and reductions in smoking rates among indigenous populations have been hard-won achievements.”

Withdrawing from measures ;we know will work in order to fund measures we think might work is a daft way to manage our health. But it'll help cut the deficit.

In The Age and Sydney Morning Herald

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Budget 2014. Settling scores and looking after mates

The budget was an exercise in settling scores and looking after mates.

Sure, it improved the nation’s finances. But at every turn it took the opportunity to punish or threaten the Coalition’s critics while protecting its supporters. Australians on benefits get their incomes cut by up to 10 per cent and in some cases 18 per cent. They will be charged for previously free visits to the doctor. Organisations that normally speak up for them such as the Council of Social Service have been told their government funding will be extended by only six months this year and then the contracts put out to tender.  

Big food, big tobacco and big alcohol have been thrown the carcass of the Australian National Preventive Health Agency. Like the introduction of Medicare co-payments the move won’t actually save the budget any money because the savings will be redirected to medical research, but it will please corporations which have been amongst the Coalition’s biggest backers.

Coalition pets such as the banks, private health insurance industry and private schools get off lightly. The government will hand private schools $6.8 billion in the coming financial year - no cutback on what was scheduled - and $9.3 billion the following year. The private health insurance rebate survives with barely a scrape. It’ll cost $5.5 billion this coming financial year and $5.8 billion the next.

And the banks profit hugely from the tens of billions of dollars handed out every year in superannuation tax concessions, also untouched.

They are about to be given a second helping. Hurriedly pushed on to the back burner in March when assistant treasurer Arthur Sinodinos stepped aside over questions about his behaviour at the NSW Independent Commission Against Corruption, the government is about to revive its attempt to neuter parts of the financial advice law.

It wants what the banks want. They want to remove the  requirement for financial planners to always act in their clients' best interests, and they want to reintroduce limited commissions.

It’s a prospect that terrifies anyone who had just watched Four Corners. On May 6 reporter Adele Ferguson examined the behaviour of the Commonwealth Bank, one of the banks that wants Labor’s new law to be watered down.

It rewarded its tellers for trawling through information about their customers in order to find prospects for financial planners.

“A lot of people, what they don't understand is that the teller will be looking up their details on the bank's information system, identifying if they could be sent to a planner,” a former Commonwealth planner said. “They are given targets for referrals each week.

“The emphasis is always on trying to get the maximum share of wallet out of each customer. The planners have actually been incentivised or forced in a way to give advice that's not in people's best interests, and the whole system is really structured to bring that about.”

Four Corners told stories of families almost brought to ruin after the Commonwealth Bank and its representatives steered them out of safe products into dangerous ones, in some cases “without ever explaining the risks”.

Labor’s law, already in place, requires financial planners to take all reasonable steps to act in the best interests of their clients.

The banks and the Coalition want to water this down so they merely have to complete a checklist of six specific steps. Monash University corporate law specialist Paul Latimer told the Senate inquiry that removing the overarching best interests requirement would be like leaving doctors with only a few specific boxes to tick instead of asking them to also ensure they were acting in the best interests of their patients.

And they want to allow tellers to once again receive commissions for pushing products and advisors their customers’ way.

Why? Right now the big four banks with the AMP control 80 per cent of the financial planning industry. If they can’t leverage their tellers that share will shrink. And incentives work.

In 2012 two economists from the Federal Reserve Bank of Chicago and Ohio State University published a study entitled Do Loan Officers’ Incentives Lead to Lax Lending Standards?. It found that loan officers whose pay was supplemented by incentives wrote 19 per cent more loans than those whose pay was not. And the loans they wrote were 28 per cent more likely to default.

Incentives work, even if - in some cases, especially if - they are small.

The banks need to blunt the Future of Financial Advice Act. But it’s less clear why the Australian government needs to blunt it. It’s true that banks have been big supporters of the Coalition. One of them, the National Australia Bank, employed the assistant treasurer Arthur Sinodinos as an executive after he left John Howard’s office and before he joined the Senate where he drew up the pro-bank legislation the government is about to introduce.

In The Age and Sydney Morning Herald

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Budget 2014. An indexation trick without an asterisk

Honest Joe has delivered a stunning first instalment. It's stunning because he has harnessed the power of compound indexation to restrain spending by more and more as each year goes by. It's the first instalment because his second, due within two years, will deal with tax.

Until now, pension and disability payments have climbed twice a year in order to keep pace with wages.

From 2017 (a date chosen to keep an election promise about no pension changes in the first term), they will climb more slowly in line with the consumer price index.

The CPI typically climbs 2.5 per cent a year. Wages have typically climbed 3.5 per cent. The difference will create an ever-widening gap in living standards, allowing the government to save an ever-increasing pile of money.

He couldn't try the same trick with family tax benefits because they are already linked to the CPI. Instead, he'll freeze them for two years.

And he'll make it harder to get nearly every benefit going. This matters when it comes to government spending because benefits (so called transfer payments) make up the bulk of government spending. It's easy to talk about the cost of government, but the cost of running the government is small compared with the cost of the funds handed out.

The savings won't be great to start with, all the more so because the changes to the pension will be delayed. That's why there will be a temporary budget repair levy to fill the gap. It will end in July 2017, when the changes to the pension start.

What harnessing the power of compound indexation gives Hockey is a way to predict ever-greater savings right out to the end of the 10-year projection period. It's an honest version of the so-called "magic asterisk" trick used by his predecessor, Wayne Swan. Swan said there would be ever greater savings year by year because the government would cut spending as a proportion of gross domestic product year by year. It was a tautology rather than a plan. Treasury officials in the budget lock-up gave the impression they were glad to be free of magic asterisks and have in their place honestly-described measures that actually would cut spending.

In the budget papers, they say the projections "do not assume a cap on real spending growth to achieve budget surpluses". Instead, they are built on an identifiable cut in payments growth as a result of measures actually announced.

If pensioners and other recipients of benefits are smart, they will worry. Left long enough without one-off adjustments, the pension would eventually shrink to a tiny proportion of the average wage. But the first of what will probably be a series of one-off adjustments can be put off for years, until beyond the budget's 10-year time horizon. When it happens, pensioners will have to justify their demands for a catch-up increase. Until then, their benefits will climb by no more than inflation and they are likely to be happy enough because at least they will be getting what appear to be twice-yearly increases.

The result, far more credible than any of the previous governments' forecasts, is an end to the budget deficit in 2018-19 and then a steady climb to a substantial surplus of 2.5 per cent of GDP by 2024-25, or 1.5 per cent if, as is more likely, some of the proceeds of bracket creep are returned in tax cuts.

It would be going too far to say the savings are locked in. They depend on one incredibly important assumption - no recession for the next 10 years.

Australia has already stretched it out to 22 years. An extra 10 years would mean 33, a record achieved by no other country apart from post-war Japan.

Treasury secretary Martin Parkinson told a gathering of economists last month that if it were to happen, Australia could be extraordinarily proud, before adding: "It is not, however, something on which I would want to rely."

Two-thirds of Honest Joe's budget savings relate to payments; only one third to revenue. That's to be expected in a budget that concentrates on spending rather than tax. A tax review will be announced before the end of the year and if its recommended measures are anything like as dramatic as the ones Hockey is imposing on spending, high-income users of the superannuation system and others enjoying tax breaks are going to find that second tough budget unsettling.

And not just high earners.

Hockey is doing to the states what he is doing to pensioners.

From July 2017, their hospitals will be funded in accordance with Labor's generous National Health Reform Agreement, but by a formula built on the consumer price index and population growth. It will hit the states badly, given what is happening to medical costs.

What will they do? He explained to journalists in the budget lock-up that they have options. Lifting the rate of the goods and services tax is one of them. It would be up to the states, he pointed out. But it would be their problem.

By 2017, his tax inquiry will have made its report. It will doubtless argue the case for a higher and broader GST, as has every other inquiry that has been allowed to examine the question. (The Henry tax review wasn't allowed to examine the question.) Then it will be up to the states. Hockey might be prepared to help them. He is certainly prepared to starve them of hospital funds in order to concentrate their minds.

Hockey has not delivered a horror budget. It inflicts pain only gradually, and openly. It will help get the budget back into balance. And there is more to come.

In The Age and Sydney Morning Herald

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Vic budget 2014: Big spending, but not for some time

A big-spending budget that delivers steadily increasing surpluses? Joe Hockey would like to see that.

Michael O'Brien has managed it partly by not spending big at all. Spending will climb merely in line with inflation at 2.8 per cent in the coming financial year, and then scarcely at all (0.7 per cent) as a number of big spending initiatives wind down or are transferred elsewhere. The biggest is the National Disability Insurance Scheme. It'll be funded by Joe Hockey from 2015-16. And by us, from a higher Medicare levy beginning this July. Commonwealth-state spending partnerships on health and early childhood education are also set to expire in 2015-16 and if the Commonwealth doesn't renew them Michael O'Brien won't volunteer the money.

What big spending there is is concentrated on infrastructure. But most of it won't be spent for some years, and when it is it won't immediately hurt the budget. Capital spending doesn't contribute to the surplus or deficit at the time it takes place. It contributes later via an accounting rule called 'depreciation'. Bits of the cost turn up in the budget a piece at a time over the life of the project. It’s a sort-of magic and its increasing use has seen annual depreciation expenses soar. They will climb to $2.4 billion this financial year. By 2017-18 they will be $3 billion. Interest costs would climb as well were it not for the sale of the Port of Melbourne.

And that's not the only magic. The Commonwealth is coming good with two lots of $1.5 billion to fund both stages of the East West Link. The wonder of state budget accounting means both feed straight into the budget bottom line. The grants add to the surplus when they come in, but they don’t detract from it when the money comes out to build roads and railways, except for later as depreciation.

Other income is rolling in. Land tax revenue will jump an extraordinary 16.9 per cent next financial year, and stamp duty 6 per cent. (To his credit the Treasurer hasn't assumed it will continue like that. How could he?) Victoria's population is climbing at the second-fastest rate in the nation after Western Australia, 1.8 per cent. It means more taxpayers and more pressure on house prices, in a sort-of virtuous revenue spiral. Tax hikes on gambling and motor vehicle registration will also help.

All up, tax revenue is set to climb an exceptional 10.7 per cent next financial year and by an astounding 32 per cent in the five years to 2017-18.

And that's without considering Victoria's share of the goods and services tax revenue. Next financial year Victoria will receive its lowest share in a decade - just 88.3 cents for every dollar of GST collected within its borders. But the dip is temporary and historical. It reflects the circumstances in the past, several years ago. The process of dividing up the GST revenue works slowly and with a lag. Victoria’s economy was stronger than the NSW economy several years ago and it is being punished for that, but it’s weaker now and it will be rewarded for that. By 2017-18 it should be receiving 94 cents per dollar of GST collected in (delayed) compensation.

GST income will climb by about a billion a year right through to 2017-18.

And Victoria’s economy is picking up. The forecasts have employment growing and state economic growth climbing from 1.6 per cent per year to 2.75 per cent by 2015-16.

The budget figures aren’t as good as they look, but Joe Hockey would happily do a trade.

In The Age and Sydney Morning Herald

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Hockey's Commission of Audit anything but responsible

Who in their right mind would hit anyone with an effective marginal tax rate of 94 per cent?

Australia’s top personal income tax rate has never hit 80 per cent. Labor’s resource super profits tax would have been 40 per cent applied to a 28 per cent company tax rate. Labor feared that any more would take away the incentive to mine.

Yet the Commission of Audit wants to hit Australians moving from the dole back into the workforce with an effective marginal tax rate of 94 per cent on wages of $19,0000 to $32,000.

This would stall their reward from work at close to $19,000 even as they took second and third part-time jobs.

It’s not as if the commission is unaware of the concept of incentives. It mentioned them more than 70 times in its report released last week. It even mentioned  “incentives to work”.

At the moment, financial incentives dive as earned income passes $18,000. That’s when the 19 per cent income tax rate comes into play as well as the 60 cents by which Newstart is withdrawn for each extra dollar earned. Where one member of an otherwise employed couple is on Newstart it can amount to an effective marginal tax rate of 79 per cent. It is a minimal return for extra work, but it is something.

At recommendation 27B the commission proposes boosting the withdrawal rate from 60 per cent to 75 per cent. It says it “represents a more appropriate targeting of safety net payments”. It would also represent an effective marginal tax rate of 94 per cent.

It would all but eliminate the immediate financial return for either person in that couple taking on extra work.

Whether the commission realises this is unclear. It certainly doesn’t mention it. Its chief concern is saving the government money. That's fine as far as it goes, but at times it goes in the opposite direction to what the government is trying to achieve.

The report begins with the commission’s 10 “Principles of Good Government”. There are exactly 10: Live within your means, protect the truly disadvantaged, respect personal responsibility; those sorts of things.

What there isn’t is an attempt to address the question of what government is for and what it is trying to achieve. It is trying to achieve a lot more than protecting the truly disadvantaged. Among other things to get people into work. And to keep them alive.

Which brings us to Medicare co-payments.

It proposes them as a cost-saving measure: “From an economic perspective health care is like any other good or service in that utilisation increases dramatically when the marginal cost approaches zero,” it says.

“There would be substantial benefit in addressing health costs if the community is more aware of the real costs of using the health care system.”

Doubtless true, in the short-term.

The Commission says it may “help to reduce demand for unnecessary or overused services”.

It would. But it would also cut demand for timely services that stop people becoming sick and save costs later on.

Most of the time when we go to the doctor we don’t know whether we are seriously sick. That’s why we go. Dissuading us from going when we think we are not particularly sick will at times also dissuade us from going when it turns out we are.

The massive Rand Corporation experiment in the 1970s funded tens of thousands of visits to the doctor at different rates. Some were charged large co-payments, some small ones and some none.

The Americans who were asked to pay did indeed visit the doctor less. But the study found that those who who stayed away were just as likely to have serious problems as trivial ones. In its words: “Cost sharing did not seem to have a selective effect”.

Neither the Rand experiment nor a later comprehensive study by Australian health economist Jeff Richardson represent the final word. But it would be nice to think the commission even read them, or even considered the impact of its recommendations on health.

It’s the same for the Pharmaceutical Benefits Scheme. Pushing up co-payments would save the government money. But the commission’s own talk about price signals suggests it would also dissuade people from obtaining prescription drugs. That would be a good thing if we overused them. It would be a bad thing if we needed them. It’s a question worth considering.

The tragedy of the commission’s report is that virtually none of it could be adopted without further consideration. It’s a list of ideas without an assessment of their consequences.

Governments need to be responsible. It’s unfortunate that the commission subtitled its report “Towards Responsible Government”.

In The Age and Sydney Morning Herald

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Budget explainer: It's the debt, not the spending. Why the budget is bleeding

“Australia has a serious spending problem.” Keep repeating it until you believe it. Joe Hockey has.

The Treasurer was at it again on Friday in the third and final of his scene-setting speeches before the budget.

“The problem at the heart of Labor's legacy was excessive spending,” he told the Australia-Israel Chamber of Commerce .

It’s a good line, but it isn’t true.

Spending is running somewhat higher than it was when the Coalition was last in office, that’s all. On the other hand, government revenue – most of it tax – is far lower.

Australia has a big budget problem – certainly a big revenue problem - but it doesn’t yet have a spending problem.

The figures for the most recent financial year tell the story. Two years beforehand in 2010-11, Treasury forecast revenue equal to 24.1 per cent of gross domestic product by 2012-13. It was a low forecast by the standards of the previous Howard government. But what the Gillard government got was 23.1 per cent of GDP, billions of dollars less.

By a staggering coincidence, government spending that year amounted to exactly 24.1 per cent of GDP, precisely the same figure as the revenue it had expected to get.

If revenue had rolled in as expected, the past financial year’s budget wouldn’t be in deficit in all. Wayne Swan would be crowing about his success in eliminating the deficit on time, as promised.

No one is too sure where the revenue has gone. It’s a murder mystery with multiple suspects.

One is a new style of tax minimisation. Cloud-based corporations such as Google, Apple, Microsoft and Amazon pay far less tax here than their bricks and mortar predecessors used to. Whether it’s Ireland, Singapore, Holland or a more exotic tax haven, they can decide where big chunks of their incomes are meant to reside and shuffle their locations at will. So far we’ve been powerless to stop them.

Another is mining companies. Although big taxpayers because of the size of their operations, they have been paying a much lower proportion of their operating profits as tax than the rest of the corporate sector, about 5 to 10 percentage points less according to Treasury Secretary Martin Parkinson.

“Just to be clear, this is not a judgment about what the effective tax rate paid by mining companies should be,” he told business economists last May. “It is simply a statement of fact.”

Miners have been ramping up their investment spending and writing it off against their incomes quickly for tax purposes.

Another suspect is John Howard. Trapped in a moment of what columnist Annabel Crabb calls “electoral existential panic” over petrol prices in 2001, he froze the fuel excise, abandoning indexation. It hasn’t moved since. It’s still 39.14¢/litre, even though the price of petrol has climbed 60 per cent. The quick fix didn’t cost his budget much at the time but now costs $5 billion per year...

Howard gets fingered again for what economist Saul Eslake describes as “one of the worst taxation decisions made in the past 20 years”. In his last months in office, Howard exempted entirely from tax all superannuation benefits paid to almost all Australians aged 60 and over. Even the interest earned within their funds became tax free. The parting gift cost his budget nothing but crimps revenue more and more as more and more Australians age.

Another suspect is us. At times during the Howard era, households saved nothing. Income was spent as it came in. Now households as a whole save a staggering 10 per cent of their income. Much of it isn’t put in the bank, it’s used to pay down mortgages. We haven’t saved as much since 1986. It’s money largely withdrawn from the economy, money that would have once been spent on businesses that would themselves be taxed and would employ staff who would also be taxed.

And we are changing the way we are spending. More of it is overseas where it escapes the goods and services tax and more is on education and health, also untouched by the GST. The GST is allocated to the states rather than the Commonwealth so the shortfall doesn't have an impact on the Commonwealth directly, but it does put it under pressure to give the states more of its diminished income.

Australia goes into the budget with a projected deficit of $47 billion (a figure inflated by the government’s decision to pay $8 billion to top up the Reserve Bank’s reserve fund).

Each extra year the budget remains in deficit means many more billions the government has to borrow. Net debt is now expected to peak at 16 per cent of GDP, about $280 billion. Two years ago, the forecast was for a peak of just 6 per cent of GDP, about $100 billion.

Although very low by the standards of other developed countries, the forecast is an awful lot bigger than it was.

By itself, the level of debt doesn’t matter much. Government debt is not like household debt. When you or I have a debt it is usually owed to a single institution, the one that provides our mortgage. We have no choice but to pay it off, either by making the payment in full or by dying and having it taken out of our estate.

But governments aren’t like people. They are more like corporations with a multitude borrowings, each paid off when it falls due and each overlapping. There is no such thing as “the” government debt. Instead it is like the water in a bath being kept warm as old water escapes and new water flows in. The volume of water in the bath may not change, but the composition changes all the time. Lenders lend and get repaid continuously. And, unlike people, governments never die. There is never an end point at which “the government debt” has to be extinguished.

And extinguishing it would be a bad idea. In 2002-03, when the Howard government no longer needed government debt, it commissioned a review into whether it should bother continuing to issue government bonds. The review concluded that financial markets need government bonds in order to price private sector loans. Without them, interest rates would be higher. And financial institutions are required by regulators to hold some of their capital in extremely safe assets. Without government bonds they would be struggling. So the Howard government undertook to ensure it always borrowed at least $25 billion whether it needed it or not. It invested what it borrowed in shares and the like, allowing it to boast that it had no net debt while maintaining a gross debt

It’s just as well it did. When the financial crisis hit, the Rudd government decided to borrow big time. Had the Australian government not kept its debt market open it would have found that difficult in the circumstances of the time. Few would now argue the government should be entirely debt free.

A subsequent review found it would be wisest for gross debt to never fall below 12 to 14 per cent of GDP, around $200 billion in today’s dollars. (Today’s gross debt is around $400 billion.)

Although by itself the level of debt doesn’t matter much, it matters for what it does to the annual budget deficit. Once negligible, net interest payments are now about $9 billion. That’s an extra expense the budget didn’t used to have. It is set to climb to $13 billion in two years’ time as more deficits mean more borrowing, which means even bigger interest payments in future budgets.

The scale of the interest bill can be seen by comparing it to other government expenses. At 2.2 per cent of spending, $9 billion is the same as the sum the government spends on non-government schools, on residential aged care and on Newstart. Truly massive in the context of government spending, it’s about one half the size of Medicare and one third  the size of the biggest program of all – the age pension.

Unless something happens to drive that interest bill down, the government will be increasingly constrained in what it can do.

The only way to drive it down (short of a cut in interest rates) is to start running budget surpluses.

That’s why it’s talking about temporary taxes and slowing increases in the pension. It’s why the budget will be unpleasant.

It’s true the problem would disappear if revenue simply snapped back to where it used to be as a proportion of the economy. But this government can no more whistle up Howard-era revenue than could the last one.

Something has changed in the way the economy works and government has to change too.

In The Age and Sydney Morning Herald


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Tips for Hockey's budget: Spare health, hit super and pensions

Lifting the pension age and imposing a deficit reduction tax are just the start.

Here are the other things I would like Joe Hockey to announce on budget night in a bid to bring down the deficit.

1. Scrap the regularly scheduled increases in compulsory super contributions. The first of them, last July, increased employers’ contributions from 9 per cent of salary to 9.25 per cent. Another this July  will lift them to 9.5 per cent. Coming at the same time as the 0.5 percentage point jump in the Medicare levy it’ll rip billions out of the economy. But, unlike the Medicare levy, the lift in super contributions will cost rather than earn the government money. That’s because our pay rises will shrink to fund them - the figures show it has already begun to happen. Smaller pay rises will mean smaller increases in income for the government to tax.

In opposition the Coalition promised to pause the climb to 12 per cent for two years, boosting the budget by $1.5 billion. It should axe the entire process and save five times as much.

2. Adopt another of the Henry Review’s recommendations and tax all super contributions as income at the taxpayer’s marginal rate, replacing the tax concessions with a flat-rate refundable tax offset. Tax concessions cost $13.5 billion to $16 billion ayear. Most go to high income earners. The offset might cost half as much.

3. Make super cheap. The Grattan Institute believes we pay two to three times what we should in fees. It suggests the government tender out the right to manage all newly opened default accounts every two years. The rest of us would be invited to switch. To accelerate the process the government could make the funds invoice us rather than silently remove our money.  On conservative assumptions Grattan thinks the tenders could boost retirement incomes by 25 per cent.

4. End or severely wind back access to the Seniors Health Card. It is available only to those retirees too well off to qualify for a part pension; couples with combined incomes of more than $70,000 and assets of more than $1.1 million not counting their family homes. The Seniors Health Card has no effective income test and no assets test. It gives well-heeled retirees access to cheap medicine denied to less well off workers.

With the card comes the seniors supplement and associated carbon tax compensation. Abolishing those two would save $2 billion a year.

5. Tighten access to the age pension and increase it more slowly. Raising it in line with the consumer price index instead of male earnings would save $900 million a year, increasing by $900 million more each future year. At the moment pensioners get to cherry pick the highest possible increase in their income each six months. When wages increase slowly they get the CPI. When the CPI increases slowly they get the increase in wages. Other Australians don’t have that luxury.

6. Leave the carbon tax in place. The government has already committed itself to keep the income tax cuts that were delivered in compensation for the tax, so it may as well also keep the tax. It is due to shrink soon when it transforms into an trading scheme tied to the lower European carbon price. Leaving things as they are would save the budget $6 billion in four years, according to the parliamentary budget office.

7. Keep the mining tax as well. That it raises little money at the moment isn’t a fault, it’s a design feature. The up side is it’ll give the government more money when mining profits improve. Joe Hockey is alive to the argument. When Labor introduced the latest version of the mining tax it also introduced another measure subjecting onshore and previously exempt North West Shelf gas to the offshore petroleum resource rent tax. Hockey has kept that measure. He wants the money.

8. Build up the funds needed to cut company tax down the track. Right now foreigners are keen to invest in Australia. But they won’t always be, and as other economies recover they will begin cutting their own company tax rates. We need to be able to cut ours when needed.

9. Plan to raise the goods and services tax after the next election. It’s a fiction that all the states need to agree and a fiction that it all needs to be spent on the states. Lifting the rate from 10 per cent to 12.5 per cent would bring in an extra $6.4 billion a year. Some could go to the states. Extending the GST to education and health would net $3 billion a year.

10. Stop attempting to run schools. Close that part of the Commonwealth education department and stop distributing grants to both state and private schools. Give the states more money and let them decide how to run their schools and whether or not to support private schools.

11. Reconsider plans for a co-payment for free visits to the doctor. General practitioners are cheap compared to specialist and hospital services. If they can direct people away from more expensive services where appropriate or to direct them there quickly in emergencies the entire system will save money.

12. Announce a date for the end of fuel excise and the introduction of telemetric pay-as-you drive road user charges.

13. Limit negative gearing (saving $2 billion), restore full capital gains tax ($5 billion) and end the private health insurance rebate ($3 billion).

Bank the proceeds and use them to run down debt. Later they can be used to fund expected increases in health spending and to cut income tax.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald

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What's worse for the budget? Super or pensions

Is the cost of the pension really soaring beyond control? Or is that just the sort of talk we hear in the lead-up to every tough budget? Isn't the cost of superannuation growing even faster? And why all the talk about super and pensions just after the Coalition won office promising no change to neither?

IS THE PENSION THE CAUSE OF JOE HOCKEY’S BUDGET WOES?

It doesn’t help. At present, the age pension accounts for 9.6 per cent of government payments. It is expected to climb to 10.6 per cent over the next four years but, after that, the Commission of Audit says it’ll stay steady at 10.6 per cent for the rest of the next decade.

SO IT’S NOT UNSUSTAINABLE?

Longer term it will climb much further. Over the next 40 years, the number of Australians aged 65 or over will double. And, on retirement, almost all will get at least a part pension or an associated benefit. Right now four out of every five retirees get a pension, and almost half of the rest get a Commonwealth health card and seniors’ supplement.

IS GIVING THE HEALTH CARD TO SO MANY SENIORS EXPENSIVE?

You bet. According to the Treasurer, nearly 80 per cent of spending on the Pharmaceutical Benefits Scheme is directed to Australians on concession cards.

WHO CAN GET A SENIOR’S HEALTH CARD?

Millionaires can get it – there is no assets test. The income test is one of the weakest ever devised. Singles earning more than $50,000 can’t get the card, nor couples earning more than $80,000, but superannuation isn’t counted as income meaning an Australian raking in as much as $100,000 or more a year from super (plus $50,000 from elsewhere) are still entitled to cheap medicines.

WHAT ABOUT THE PENSION? IS THAT EASY TO GET?

It is, if you put your money into your house. Couples earning up to $70,000 with up to $1.1 million in assets can get the pension, and their family home isn’t included when calculating assets, meaning they can use their assets into their homes and have $1.1 million to spare and still get the pension.

ARE WE GETTING THE PENSION TOO EARLY?

By historical standards, yes. When it was introduced in 1909 less than half of all newborn boys could expect to live until 65. Today half will live beyond 92. That’s a quarter of a century on the pension if the qualifying age stops at 67, something its designers never envisioned.

WOULD IT HELP THE BUDGET MUCH IF THE PENSION AGE WAS LIFTED TO 70?

Over time, yes. And it would help indirectly as well. Australians who are working longer feed economic growth for longer and pay taxes for longer. They will lift our standard of living.

BUT NOT EVERYONE CAN WORK UNTIL THEY ARE 70 CAN THEY?

Not everyone can work until the present pension age of 65. Many physically backbreaking jobs aren’t possible beyond 50. These people either change to less demanding jobs or rely on their savings and Newstart to tide them over. In extreme cases they go on the disability support pension. But most jobs aren’t like that. Thiry years ago one in every four Australians were employed in manufacturing and construction. Today it’s one in every six, and many of those jobs are becoming more mechanised.

AREN’T SUPERANNUATION TAX CONCESSIONS >BIGGER AND FASTER GROWING THAN THE PENSION?

On one measure they will become bigger in 2015, and they are much faster growing, climbing at the extraordinary rate of 12 per cent per year. That’s partly because the earnings in funds are compounding and partly because compulsory superannuation contributions are scheduled to climb over the rest of the decade.

It’s unclear why we offer concessions – lower tax rates on funds earned in super compared to wages, for example – to encourage something that is compulsory. If concessions were really thought to be necessary to boost private saving, they would be better directed toward voluntary extra saving. The Australia Institute proposes removing all tax concessions from super and instead giving every retiree an enhanced pension. It’s calculations suggest the switch would save the government an astounding $52 billion per year.

BUT WOULDN’T THIS PUNISH SELF-FUNDED RETIREES?

Only to the extent that government-funded tax concessions would be removed. And those concessions would be replaced by a decent government-guaranteed income on which they could build.

THEN WHY THE FOCUS ON PENSIONS RATHER THAN SUPER TAX CONCESSIONS?

Because tax concessions are invisible. They don’t feature in the Audit Commission's list of ''large and fast growing programs'' because they aren’t programs. And perhaps because superannuants are often better educated, more politically astute and in a better position to lobby than pensioners.

WHAT CAN WE EXPECT?

The first Commission of Audit report will be released on Thursday. It’ll provide clues. The budget is on May 13.

In The Age and Sydney Morning Herald

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The Grattan fix. How to stop fees eating up our super

Invisible fees are forcing Australians to pay twice as much as they should to their superannuation fund managers, cutting retirement incomes by 20 per cent according to a new study that recommends the government take control of default super funds and award contracts by tender.

Entitled The $10 billion super sting the Grattan Institute study says Australians pay $20 billion in superannuation fees, or $1100 per account per year - roughly twice as much as is charged in similar OECD countries.

The extra fees cuts retirement lump sums by more than 15 per cent and retirement incomes by more than 20 per cent.

Analysis of Australian Prudential Regulation Authority data shows the funds with the highest fees typically produce the lowest returns, even before the fees are taken out.

But because the fees are are automatically removed from compulsorily accumulated savings and not invoiced they are largely invisible, allowing funds compete on the basis of marketing rather than price.

Most Australians remain in the default fund assigned to them by their employers, allowing fund managers to promote themselves to employers and financial advisors rather than members in the knowledge they won’t face the fees.

Fewer than ­­2 per cent of Australians ‘shop around’ by switching funds for any reason other than changing jobs or being moved into a new fund by their employer.

“Most Australians are very trusting,” said the Institute's productivity growth program director Jim Minifie...

“They are never presented with a bill for what’s taken out of their accounts. They figure that if the government set up the system it must have put in place the checks and balances.”

The Institute’s assessment is backed up by the Treasury which this month described Australia’s super system as one of the world’s least efficient and most expensive. Of the fifteen OECD nations whose pension operating expenses it graphed in a submission to the financial system inquiry, Australia’s were exceeded only by those of Spain, Hungary, Mexico and the Czech Republic.

Dr Minifie said the new SuperStream rules for default funds will do little to change things.

“They prohibits commissions and cut back on administrative costs, but they does nothing to restrain fees,” he said. “The most expensive SuperStream product we found has an annual fee of 2.5 per cent.”

The Institute proposes removing from employers the power to select default funds and giving it instead to a government-appointed body which would conduct a tender for the right to manage all new default accounts for a period of two years. After ascertaining that the tenderers were appropriately qualified the Australian Office of Financial Management would award the tender on the basis of price.

“When Chile did this it got the fee for new accounts down to 0.4 per cent. We could get it lower given the size of our market,” said Dr Minifie.

To spread the benefits the Grattan Institute also suggests an initiative for the customers of other managers called “Make tax time super choice time”.

When completing online returns these taxpayers would be shown the fees charged by their fund also shown those charged by the default fund. They would be invited to switch at the press of a button.

“It’s similar to the Motor Voter in the US where Americans are prompted to sign up to vote when they renew their registration. The idea is to make it as frictionless as possible,” said Dr Minifie.

In The Age and Sydney Morning Herald


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Abbott's biggest broken promise - to build our cities well

Expect an avalanche of broken promises in the first Abbott budget four weeks from today, none of them as important as the promise he has just broken.

Broken promises are inevitable when an opposition comes in. It’s the first time it gets to see the books, and usually the first time it gets good advice. But none are as overarching as the promise Abbott broke last week.

It was a promise about the way he would govern - about the way he would make really big decisions, the ones that cost us billions.

With the experience of Rudd’s back-of-the-envelope $43 billion national broadband network fresh in his mind he promised that in future his government would require Infrastructure Australia to “routinely publish public cost-benefit analyses for all projects being considered for Commonwealth support”.

The cut in point would be $100 million. Any project worth more than that was to be assessed for cost-effectiveness before Abbott gave it a tick.

Infrastructure Australia was also going to rank projects in order of payoffs. The ones at the top of the queue would be the most deserving.

As Abbott and Hockey have repeatedly told us, governments can’t do everything. That’s why it is crucially important that it direct its limited funds to the projects that most boost productivity.

Then out of the blue last week he announced a second airport for Sydney. A few days earlier the Napthine government announced a rail link to Tullamarine. Abbott will have to stump up funds for that as well. He has promised to contribute 15 per cent to the cost of new projects funded from the sale of assets such as the Port of Melbourne.

The second Sydney airport can better be described as "roads to nowhere". There's no especial reason to think it will ever be built and if it is built there's no reason to think it'll have many customers. But the roads leading to it will be built. Abbott is starting on them first. Like Melbourne's East West Link they will move cars between suburbs rather than into the city.

Infrastructure Australia says East West Link has a direct benefit-cost ratio of just 0.8:1 meaning it will return a loss-making 80¢ for each $1 spent. The benefit-cost ratio of the second Sydney airport is unknown but is unlikely to be any better and there’s little evidence (yet) that a train to Tullamarine would achieve much more than the existing Skybus.

The proposed Melbourne Metro is much better. The rail extensions have a direct benefit cost ratio of 1.2: 1  meaning their benefits clearly exceed their cost. That’s because they will get people into the city.

Cities are where workers are at their most productive. They bump into each other, bump into workers from other businesses and are in easy reach of potential employers. A UK study found a 10 per cent increase in the proportion of workers packed into the city centre typically boosts productivity 1.25 per cent, an enormous figure given Australia’s current productivity improvements. The Rudd and Gillard governments were particularly resistant to the idea of bringing more people to city centres, having hitched their wagons to the NBN, one of whose claimed benefits was to take workers out of cities.

In its Productive Cities report the Grattan Institute outlines the experience of SKM, a global engineering consulting firm that used to be based in Armadale, just seven kilometres south-east of Melbourne’s centre. Doubtless a convenient location for many people, with good parking and on two tram routes, it cost SKM around 40 per cent less per square metre than office space in the city.

Yet when the time came to renovate or move, it moved to the city.

“A central location allows the firm to recruit from a deeper talent pool,” Grattan explains. “Previously, some skilled workers and top graduates from the west or north of Melbourne were put off.”

“Clients are far more likely to come to SKM at its new address,” it says. “Most external meetings can be reached with a brief walk or tram ride. These short trips in the CBD are much more productive than taxi trips from the old suburban HQ. In the rich, supportive ecosystem of the CBD, SKM employees say they often bump into professionals from other high-knowledge firms, building personal networks and sharing knowledge. Despite the cost, SKM has little doubt that the move made good business sense.”

Cities exist because they work. And they work best when workers can get into the centre.

Urban economist Edward Glaeser puts it more grandly in his book Triumph of the City. He says, like ants and monkeys, humans are intensely social and excel in producing things together.

“Just as ant colonies do things that are far beyond the abilities of isolated insects, cities achieve much more than isolated humans,” he writes. “Cities enable collaboration, especially the joint production of knowledge that is mankind's most important creation. Ideas flow readily from person to person in the dense corridors of Bangalore or London, and people are willing to put up with high urban prices just to be around talented people, some of whose knowledge will rub off.”

Glaeser says the central paradox of modern cities is that “proximity has become ever more valuable as the cost of connecting across long distances has fallen”.

Knowledge-intensive work is where big productivity gains come from. Our wharves are becoming increasingly more mechanised.-The employees who work out how to mechanise them work in cities away from the wharves, rubbing shoulders with others who can contribute to their ideas.

Pushing more knowledge workers into our city centre and in to each other is our best bet of producing more. Slow roads to the centre and a train system stretched beyond its limits slows that down. (As well as level crossings, replacing them with overpasses or underpasses turns out to be extraordinarily effective.) It is these things rather than "roads to nowhere" that’ll do the most to lift productivity and lift incomes.

That’s what Infrastructure Australia would have told Tony Abbott if he had kept his one really worthwhile election promise and asked.

In The Age and Sydney Morning Herald

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It's the small bribes that suck us in

The shocking thing about the gifts and favours uncovered by the NSW Independent Commission Against Corruption is that they are small.

Australian Water Holdings gave the Liberal Party $75,000 - a tiny sum compared to the $1 billion contract it was seeking. It sent the premier a $3000 bottle of wine. Its behaviour is typical. At the height of the ferociously fought battle over the plain packaging of cigarettes in 2010-11 British American Tobacco gave the Liberal Party $184,565. It did it in small parcels - $2200 to the NSW branch, $10,000 to the Victorian branch, a further $5500 to the NSW branch and so on.

Most political donations are even smaller. Away from politics they are puny. Doctors routinely get pens and free samples from drug companies. They cost the companies nothing compared to what’s at stake.

Yet they work. Equally shocking is the finding from laboratory experiments that small gifts achieve more than big ones. Truly.

A few years back professors Ulrike Malmendier and Klaus Schmidt from US National Bureau of Economic Research discovered that while a small gift persuaded the recipient to award contracts to the donor’s company 68 per cent of the time (instead of 50), a gift worth three times as much cut the response back to 50 per cent, which was no better than if there been no gift at all.

The finding has disturbing implications for legislators' attempts to wind back the impact of donations by limiting their size. It suggests they will achieve little.

The study is called You Owe Me. It could have been titled: ''When less buys more''.

Malmendier and Schmidt investigated a special situation, one in which a decision maker receives a gift intended to persuade him or her to select the donor’s product over another one for a third party. In the case of the government, that third party is the taxpayer. In the case of a doctor it’s their patient; in the case of a financial adviser, their client.

What’s special about that situation is that the cost of bad decisions isn’t borne by the person who makes them. It is borne by their client.

Malmendier and Schmidt deliberately designed their experiment to make it unlikely the gifts would have any effect at all. Gifts and bribes are usually thought to be influential only if the recipient knows they will see the donor again, or if the donor will find out whether or not they’ve selected the donor’s product.

In 15 rounds of experiments with 350 students they made sure neither condition applied. After the gift the recipient never saw the donor again and the donor never found out whether it had any effect.

And they made sure the recipients knew the gift is intended to influence them.

Yet they found the effects of small gifts were huge.

Even where the products offered by the donor were clearly worse than those offered by the non-donor the decision makers chose the the worse over the better product almost 50 per cent of the time, compared to only 10 per cent when there were no donations.

As the size of the donations increased their effectiveness waned.

Their explanation for the effectiveness of small donations is that they create a special bond, what they refer to as the “dark side” of our desire to be social. Put starkly, we find it hard not to be nice to someone who has just been nice to us, even if we know it’s a trick.

And we do seem to know. Asked whether the donors were trying to influence them or just being nice, almost all of the decision makers said the gifts were an attempt to buy influence. Doctors would doubtless say the same thing about gifts from drug companies.

Big gifts may be less effective than small gifts in part because they are so visible as to be unsettling. Few people like to admit to themselves that they being bribed.

The findings suggest that rules that require the disclosure of donations above a certain size are the wrong way around. They would have more effect if they focused on donations below a certain size. And making donations public has little effect. Another part of the experiment found the decision makers behaved in exactly the same way whether or not the client knew they had been accepting small gifts.

The implications go beyond politics.

Labor outlawed commissions for financial advisers in 2013. The Coalition plans to bring them back in a limited way by allowing banks to pay their staff ''volume-based'' bonuses of up to 10 per cent of their total wages.

It is an extraordinarily bad idea.

The small rewards the Coalition would allow may enable the banks to skew the recommendations of their staff more effectively than the big ones they would not. Small rewards are pernicious. They sneak in under our radar.

In The Age and Sydney Morning Herald

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ISDS: The trap Australia and Japan avoided

So straightforward was Australia’s first trade deal with Japan that the Japanese thought it was a trick.

Twelve years after the war and with the Thai-Burma railway still fresh in Australians’ minds Australia offered Japan ‘'most favoured nation'' status for its exports in return for Japan giving its exports the same treatment.

Japan’s lead negotiator Ushiba Nobuhiko stayed in Canberra for six months going through the proposal line by line.

At one point Australia's exasperated lead negotiator Alan Westerman told him he was wasting their time. “I am telling you right now that Australia will remove all discrimination. Now let’s get on to what you will do and then let’s go and have a game of golf,” he said.

Ushiba Nobuhiko cabled Japan, they still thought the Australians were trying to trick them and Ushiba Nobuhiko was recalled. In his biography of trade minister Jack McEwen Peter Golding reports that eventually Ushiba Nobuhiko convinced his superiors that the Australians meant what they said and prime ministers Kishi Nobusuke and Robert Menzies signed the deal that went on to make both nations rich.

Japan’s present prime minister Shinzo Abe is Kishi Nobusuke’s grandson. The deal he will sign with Tony Abbott is in some ways similar to the simple one his grandfather signed 57 years ago.

It doesn't include an ISDS. The initials stand for Investor State Dispute Settlement procedures and they're everywhere. Conducted by specially-constituted often private tribunals, usually in secret, there have been 400 cases heard in the past 10 years. There have been 58 in the most recent year for which the United Nations Conference on Trade and Development has done the sums, although it says it can’t be sure because the mere existence of some hearings is kept secret.

One of them is against Australia. Philip Morris Asia acquired Philip Morris Australia in 2011 for the express purpose of using the ISDS provisions of an obscure Hong Kong Australia trade treaty, a process known as “nationality planning”. It says Australia’s plain packaging legislation deprives it of the value of its investment. Australia is attempting to have the case laughed out of court on the grounds that Philip Morris Asia only bought Philip Morris Australia after the plain packs legislation was already public (and for that reason) so it can’t say Australia’s action wasn’t expected.

But fighting the case is costing Australia millions and its mere existence is frightening poorer countries that might want to follow Australia's lead. Philip Morris has already lost its case under Australian law in the High Court. It is using rights not available to other Australian companies to get yet another bite of the cherry, this time in a tribunal that doesn't need to take account of precedents, doesn't need to publish transcripts and whose decisions are unappealable. The ''judges'' are also less independent than real ones. They take turns acting for (sometimes big-paying) litigants and sitting in judgement on them.

The United States loves investor state dispute settlement procedures. It has insisted on them in every one of the 14 free trade agreements it has signed and the 17 it wants to sign. Its companies use them to browbeat and potentially bankrupt governments that introduce environmental or health-related laws they don't like, a practice Australia's productivity Commission refers to as "regulatory chill".

Only one world leader has successfully stood up to the US over a demand for an ISDS. It was John Howard, who in 2004 told George W. Bush he wasn't having one in Australia's free trade agreement.

It has not hurt us at all. Indeed, when the Productivity Commission examined investor state dispute settlement procedures in 2010 it found no evidence that they boosted investment in nations likely to be sued. It recommended the government "seek to avoid" them in the future.

Labor banned them saying it would "not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses".

The Coalition went to the election saying it would be prepared to consider them on a case by case basis. It has said yes to one with Korea, with what it said are safeguards for health and environmental legislation. But they were similar to safeguards that have failed to stop ISDS proceedings on environmental matters overseas.

It said yes in order to have something to trade away in return for more market access. The US wants one in the 12-nation Trans Pacific Partnership. Australia is under pressure to say yes to sell more sugar.

Other nations are saying no. Indonesia has just announced it will terminate all 67 of its treaties with an ISDS. France, Germany, Brazil and Argentina are thinking along similar lines.

And now Australia has said no to an ISDS in its free trade agreement with Japan. The agreement will be better and simpler because of it. Robert Menzies and Shinzo Abe's grandfather would be proud.

In The Age and Sydney Morning Herald

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There are worse things than a higher GST

So you’re frightened by the prospect of a higher GST? You shouldn’t be. The alternatives are worse.

One of them, outlined by Treasury secretary Martin Parkinson on Wednesday, is deceptively painful.

It’s doing nothing – just leaving the tax system on hold for 10 years and letting climbing revenues eat away at the projected deficits as inflation pushes more of our incomes into higher tax brackets.

It’s called “bracket creep”, although it can happen even if inflation doesn’t push your wage into a higher tax bracket. Every time your wage goes up, a greater proportion of it becomes taxed (above the tax-free threshold) rather than untaxed (below the threshold). It means that by doing nothing other than accepting ordinary annual wage rises, each of us is made to pay an ever increasing proportion of our income in tax.

It’s a sort of secret sauce for the politicians and officials who put together the budget. They can forecast ever-increasing revenue without needing to forecast anything unpopular. The latest projections assume 10 straight years of bracket creep, that’s 10 consecutive budgets without tax cuts. It’s something we haven’t had in generations.

Nine out of the past 10 budgets delivered tax cuts, one of them as compensation for the introduction of the carbon tax. That’s how dependent we have become on the annual or semi-annual ritual of higher wages, higher tax and then tax cuts that push our tax back down.

If the ritual was suspended for the next 10 years – and that’s what is planned to bring the budget under control – ordinary Australians would find themselves paying extraordinary amounts of tax.

Here’s what would happen to an Australian on $50,000. At the moment that person pays $7797 in tax, excluding the Medicare levy. That’s an average rate of 15.6 per cent.

After 10 years without tax cuts that person would be earning $70,500 and paying $14,459 in tax – an average rate of 20.5 per cent.

The purchasing power of that person’s wage would have done no more than keep pace, but the tax take would be dramatically higher.

Strangely enough, someone on a higher wage would suffer less. Someone earning $100,000 today will earn $141,000 in 10 years (assuming wage growth of 3.5 per cent). Their tax bill would edge up from 24.9 to 28.5 per cent.

But Australians on lower wages would get mugged. Someone earning $30,000 today pays 7.47 per cent of their wage in tax. In 10 years that person would pay 13 per cent. Their tax rate would almost double.

That’s the easy, apparently painless alternative to lifting the GST. That’s what will happen unless someone finds another way to bring down the deficit.

With such outrageous increases in tax would come tax avoidance, as it always does. People won’t respect laws they think are unfair. And low-income Australians considering whether to return to work or work extra hours would quite reasonably decide that it is not worth their while, or at least nowhere near as worthwhile as it was.

Lifting or extending the GST would also hurt low-income Australians, but it might not hurt them as much as would allowing inflation and unchanged tax scales to steal their wages.

As it happens, extending the GST to the presently untaxed categories of private education and private health wouldn't hurt very low earners little. It’s not where many of them spend their money but it is where most of the growth in spending is. The alternative to capturing it is to allow bracket creep to steal more and more of their wages.

Australia’s GST system works well, a lot better than doesour income tax system. Overseas experience suggests it could withstand an increase in its rate much better than could income tax. New Zealand lifted its GST from 10 to 12.5 per cent and then to 15 per cent with few complaints.

Of course, there are other alternatives.

The government could slash spending. But the really big government spending is on things we want, such as health, education and pensions. Or it could lift company tax. But if it did companies would relocate or be less keen to come here.

Or it could attempt to get at the billions we are missing out on from Apple, Microsoft, Google and the like who make money here but pay little tax. It’s trying, but it would be unwise to bank on success.

Or it could tax carbon emissions, resource rents and attack the obscenely generous superannuation tax concessions going to very high income earners. Oh wait, the last lot tried that and got voted out. So we better prepare for a higher GST.

In The Age and Sydney Morning Herald

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Plea from the edge of the abyss. Why we need the Climate Change Authority

If we were sleepwalking towards catastrophe would we know?

The UN Intergovernmental Panel on Climate Change is about to release frightening projections for the impacts of the climate change that is already unstoppable. Among the projections for the next five years is the displacement of hundreds of millions of people, a slide in crop yields and increased deaths from heatwaves.

Few dispute that it is happening. Australia’s environment department has a whole division dealing with adaption - how to cope with what we can’t stop.

Bernie Fraser heads the Climate Change Authority. The man who ruthlessly bore down on inflation just as Australia was recovering from the early 1990s recession, he knows everything about acting in the country’s long-term interests.

But few others seem to.

“I am not out to scare the pants off anybody here and I don't want to insult your intelligence with suggestions that climate change is a load of crap,” he told the National Press Club this month.

“But if policymakers accept the science and its implications, you would expect them to follow through.”

The science says any increase in global average temperatures of more than two degrees compared with pre-industrial levels is “getting into the dangerous category”. We are already halfway there, and there’s only a limited amount of carbon and equivalent gasses we can release before we get there, our so-called our “carbon budget”.

We are using it up at too fast a rate to hold the increase to two degrees. All isn’t lost, if we can pull back. The sooner we pull back gently, the less sharply we will have to pull back later.

That was the message in the Climate Change Authority’s report on targets released on March 5. Its finding was that Australia should lift its target for cutting emissions from 5 per cent below 2000 levels by 2020 to 19 per cent. Making that steeper cut now will avoid a much steeper cut later.

Much of what it suggests is easy. Adopting tougher motor vehicle emissions standards of the kind already in place elsewhere would cut running costs as well as emissions. And there will soon no longer be a local vehicle building industry to object.

Another is to simply buy extra emissions reductions from other countries. They are going cheaply at the moment, and 2020 is looming too soon to bring about all of the cuts on the Australian continent. The globe doesn’t mind where they take place. So far the Coalition has been unaccountably hostile to the idea, presenting buying cuts from overseas as a sort of moral failing. But we trade with other nations all the time and for the moment it’s the only way to do what’s needed.

It’s the reactions to the suggestions in his report that shocked Fraser.   ...

He is not surprised by the reactions of business, except by their scale and brazenness. But he is surprised by those of the government. “It is the Government's job to protect community interests,” he says. “Every politician pledges to do just that in the lead-up to every election campaign that I have heard.”

The government plans to abolish the Climate Change Authority. While not disputing the science, it shows no interest in lifting Australia's emissions reduction target. It wants to remove the carbon tax and is prepared to underfund the Emissions Reduction Fund that will replace it. It wants to axe the Clean Energy Finance Corporation and to wind back the renewable energy target.

If it believes the science - and it says it does - its thinking is unaccountably short-term, unless you consider the three-yearly electoral cycle.  If an entire nation was sleepwalking towards catastrophe it’d be politically risky to wake it up.

Could an entire nation, perhaps the entire globe, sleepwalk towards catastrophe?

Al Bartlett thought so. He was Professor Emeritus in Nuclear Physics at University of Colorado at Boulder. Before he died last year he spoke to the BBC’s More or Less radio program. <i>More or Less</i> deals with statistics, as did the interview.

Bartlett was an expert on what happens when constant growth comes up against a hard limit. A YouTube video of one of his lectures is entitled: The Most Important Video You'll Ever See.

“Steady growth means doubling over a certain period of time,” he explained to More or Less.

“Suppose you have bacteria that doubles in number every minute. Now suppose you put one of these bacterium in an empty bottle at 11.00 am and then observed that the bottle was full at midday.”

“At what time was the bottle half full?”

The surprising answer is 11.59 am - just one minute before midday, because the bacteria are doubling every minute.

“Now if you were an average bacterium in the at bottle, at what time would you first realise that you were running out of space?” he asked.

The answer mightn’t even be one minute before it was too late.

“After all, at one minute before twelve the bottle was half full, at two minutes before twelve it was only a quarter full and at five minutes before it was only 3 per cent full with 97 per cent of open space just yearning for development.

“At five minutes before twelve how many of you would realise that there was a problem?”

How many of us would realise we were sleepwalking towards catastrophe?

In The Age and Sydney Morning Herald

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Public-private sector partnerships a mirage. The PC says so

Of all the strange things to have flowed from the corruption inquiry engulfing the former assistant treasurer, few are stranger than his use of the word ''passionate''. Arthur Sinodinos says Australian Water Holdings is a ''company whose mission I believed in and was passionate about''.

Passionate? Australian Water Holdings built pipes, tanks and pumps for Sydney Water that it could have built itself.

It's easy to imagine getting passionate about such a mission if it was the only means of getting pipes, tanks and pumps to Sydney's north-west. Or if AWH could do it more cheaply than Sydney Water itself.

Both are claimed by spruikers of public-private partnerships. In fact they are often asserted as universal truths.

Joe Hockey did so shortly after the election when he asked the Productivity Commission to inquire into ways to use the private sector more. ''The capacity of government to meet expectations for improved infrastructure services is always limited,'' he said. ''Options involving the private sector can reduce the call on government.''

The father of NSW public-private partnerships, the late 1980s and early 1990s premier Nick Greiner, made it a mantra.

Opening the privately built (and then privately run) M4 motorway, he said: ''The choice is very simple. Either have the road as a privately owned tollway or not have the road at all.''

It's complete nonsense, and a draft Productivity Commission report delivered to Hockey spells out the fallacy in excruciating detail. The private sector can't do anything the public sector can't, unless it charges. And the government itself could do that if it wanted to.

Sometimes the private sector will do things better than the public sector. The commission cites three studies that find private projects are more likely to be completed on time and near budget than government ones.

Often it'll do things worse. Borrowing is more expensive for firms such as AWH (chaired by Sinodinos) and the firm that built the M4 (whose board Greiner later joined). And the salaries are more expensive. Sinodinos was paid $200,000 for a part-time job as AWH chairman. Eddie Obeid jnr was paid $350,000. If AWH had scored the contract it was angling for, Sinodinos was set to get a bonus that would take his shareholding to about $20 million.

The fallacy is the view companies such as AWH can get access to money the government can't - what the commission calls the ''magic pudding'' fallacy.

Private sector money has to come from somewhere. Most often the private firm will siphon it out of the government, as AWH did when it billed Sydney Water for expenses including limousine rides, pornographic movies and Sinodinos' salary. Or it might borrow the money and later siphon it out of the government, meaning the government will face the same sort of costs as if it had borrowed itself.

Or it might charge tolls, which the government itself could do if it had the guts.

Either way there's nothing stopping the government borrowing more than it has for worthwhile projects. The commission thinks it can. On that point it thinks Hockey and Greiner are wrong. And probably also NSW Treasurer Mike Baird.

His plan is more subtle. It's called ''recycling''. He has sold the leases on Port Botany and Port Kembla to use the proceeds to build the first stage of WestConnex. When that's built, he will sell it and then use the proceeds to build the second stage, and so on.

As a piece of financial engineering, it's admirable. But the commission thinks it confuses two very different questions: whether something is worth building and whether it's better off privately run.

It's not happy with Baird's view of the world, but it reads as if it is much happier than it would have been with Greiner's, during whose term as premier the company that is now AWH gained the Sydney Water contract.

In The Age and Sydney Morning Herald

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How to pay for roads

Why is it that whenever anyone asks about the funding of roads they end up getting a report that reads like 1960s' science fiction?

Kevin Rudd didn't expect it when he asked the Henry tax review to examine roads. It found that fuel tax was on the way out. New developments in technology mean increasing numbers of cars don't use fuel. Henry suggested ''telematics'', where each vehicle reported its trips to a central computer that charged its owners per kilometre driven.

Four years on Tony Abbott has been ambushed by the same suggestion. He asked the Productivity Commission to inquire into the financing of public infrastructure. He wants more of the funds to come from the private sector. Instead the commission's draft report released on Thursday found that private financing was ''not a magic pudding'' and recommended a trial of telematics. Abbott backed away quickly. Telematics was ''not something this government is considering''.

But it keeps being suggested because it's the right answer. When Abbott's ''Son-of-Henry'' tax review gets under way shortly it will probably suggest it as well. And it's far from the only confronting common sense suggestion in the draft report.

Its starting point is that we probably don't need as many new freeways and toll roads (and rail lines and desalination plants) as we think we do. It says we should first work out what we want to achieve (such as moving cars quickly) and then work out the cheapest means of achieving it. It might be congestion taxes or priority lanes for cars with three or more passengers.

It points to the national broadband network as a classic example of what not to do. Rudd developed a solution without first identifying the nature of the problem and considering whether there were cheaper ways of solving it. When none of the companies bidding to build the NBN handed in acceptable tenders Rudd decided to build a grander one with government funds at 10 times the cost. At every turn Rudd blocked attempts to compare costs and benefits.

If governments decide they should build something, ultimately the private sector won't be much help. It's not where the money comes from. In the end it can come from only four sources, according to the commission: user charges; user-specific taxes; general taxes; and (rarely) philanthropy.

Private sector funds have to come from somewhere, and to the extent that they are borrowed at high interest rates they will be more expensive than public funds.

Governments love public-private partnerships (PPPs). Victoria has 23 of them. But they are a sleight of hand.

''There is a perception that they offer a way to increase the provision of public infrastructure without drawing on a government's purse, thereby circumventing budgetary and borrowing constraints,'' the commission says.

In reality the money has to come from somewhere, either from charges or tax, but shifted in time in an effort to enable governments to keep their AAA credit ratings.

''There are benefits to maintaining a AAA credit rating,'' the commission says. ''However, there may be situations where public financing of infrastructure would be more efficient and welfare enhancing than either obtaining private financing or not providing the infrastructure.

''In these circumstances, it is in the community's interest for governments to weigh up all considerations and not just focus on credit rating concerns.''

The commission believes governments have plenty of scope to borrow more for worthwhile projects even if their credit ratings slip, and believes they probably wouldn't slip any more than if they had signed up for a PPP. Ratings agencies see through them.

And the commission has little time for the related fad of ''recycling''. Joe Hockey talks about it as a magic ingredient of this year's federal budget. Victoria's Michael O'Brien wants to do it with the Port of Melbourne. NSW is the pioneer, funding roads then selling them and funding more roads with the proceeds.

''It involves two decisions that should be considered independently,'' the commission says. ''First, whether a government-owned asset should be sold; and second, whether the government should procure new infrastructure.''

The commission has no doubt that ports and electricity generators should be sold. But it believes the arguments stand on their own. They are to do with who would best manage the assets rather than whether the proceeds should be plundered.

Asked to endorse the fashionable view that high labour costs and restrictive practices are pushing up the cost of big projects, the commission largely refuses.

''There is no single culprit,'' it says. ''Labour costs have risen steeply, particularly for (largely non-unionised) engineering design and consulting services, but so too have material input prices. For the construction industry as a whole the labour share of total costs has not changed appreciably over the past two decades.''

It's an uncommonly calm and uncommonly forward-looking assessment of the way Abbott and the states can go about building the things we need. All the more so because it's not what he expected.


In The Age and Sydney Morning Herald

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'Repeal day'. It's easier than fixing problems

I'm going to enjoy ''repeal day''. That's on Wednesday week when the Prime Minister's parliamentary secretary introduces a blizzard of legislation and regulations aimed at sweeping away thousands of pieces of useless legislation and regulations.

Nifty, eh? It'll doubtless sweep away the laws that prevent newsagents competing with newsagents, that prevent pharmacies (and supermarkets) competing with pharmacies, and prevent taxi drivers collecting who they want.
It won't? But Josh Frydenberg, the Prime Minister's parliamentary secretary, says he wants to attack the red tape that is "cutting jobs, impeding innovation and deterring investment". Last Friday the head of the Productivity Commission nominated the red tape tying up newsagents, pharmacies and taxis as among the last shards unattacked by the wave of competition reforms set off by the Hawke government in the early 1990s.

His back-of-the-envelope calculations put the benefits of the so-called Hilmer reforms at $20 billion. He said the remaining reforms would probably be worth $5 billion.

Frydenberg will be attacking easier targets. He is set to take on weights and measures acts that he says set the standards for calibrating imperial measuring equipment during the 1960s transition to the metric system, and a war service homes regulation that set rates of interest charged in the '60s.

Repeal day is a stunt copied from the US. It would be fair to say that repealing these types of laws - and they are the only types Frydenberg mentions - will achieve nothing whatsoever when it comes to repealing red tape that matters.

"It might remove irritants, but it's actually fictitious; it's ghosts, red-tape ghosts," was the assessment of the father of the competition reforms, Professor Fred Hilmer, at the same seminar last Friday.

"I'll give you a silly example," he said referring to his own experience as vice-chancellor of the University of NSW. "Under the Audit Act, a university has to file accounts to the Parliament for every one of its subsidiaries. That would be a book centimetres thick. We don't. No one does it. And they'll repeal it. "

Removing laws that cause actual damage is harder.

Newsagents are forbidden by restrictive agreements from poaching each other's customers. The former prime minister John Howard went out on a limb to persuade the Australian Competition and Consumer Commission to back off on its plan to allow competition, declaring the restrictions "part of our way of life".

The Community Pharmacy Agreement between the government and Pharmacy Guild prevents a new pharmacy from opening up within 1.5 kilometres of an old one (unless it's in a shopping centre). When a qualified pharmacist tried to open up in the ACT suburb of Hackett in 2012, she was told she couldn't because there was already a pharmacy in Watson, 1.345 kilometres away.

Had her shop been 155 metres to the south she could have served the suburb and provided competition.

If the red tape mollycoddling existing pharmacies was removed altogether supermarkets would be able to dispense medicines at all hours of the day using qualified pharmacists. They could force down prices.

It would be in the spirit of the Hilmer reforms, but whenever a politician suggests pharmacists should face the same sort of competition as other businesses, friendly chemists hit their customers with petitions to sign while they are waiting for prescriptions.

And there's taxis. At the seminar to commemorate the 21st anniversary of the Hilmer reforms, Productivity Commission chief Peter Harris noted similarities.

Existing businesses in all three areas have been protected by red tape for so long that they are under attack in any case.

For newsagents he said the decline in circulation and the rise of social media had done "what regulatory reform could not".

Taxis face a $3.5 billion threat from Uber. That's how much Google has just paid for an app that connects passengers directly to drivers at the touch of a button.

"Three point five billion looks remarkable for a taxi booking app," Harris said.

"This suggests that there is much more scope for reform gains than just a convenient online booking service. I am not going to speculate what they might be.

"Without taking sides I merely note that Google is not the sort of entity that will go away quietly."

Even chemists are feeling "the hot breath of technology-driven competition".

"I will not comment on the position in Australia, but both Canada and the United States are experiencing the impact of online competition jumping over regulatory boundaries," he said.

"According to media reports, Canada's much cheaper regulated pricing of pharmacy products - a 200 per cent cost difference in the 10 most prescribed drugs in New York state - attracts scripts from the US to the extent that parcels are now being scrutinised by border agencies."

Tony Abbott has just commissioned the first full-scale review of competition policy since Hilmer 21 years ago. What he does in response to it will say far more about what he really thinks of red tape than will ''repeal day''. It'll show whether he hates red tape enough to take on his friends.
In The Age and Sydney Morning Herald

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When you've nothing to say, say you're 'open for business'

What do you say when you've nothing to say? You declare you're ''open for business''. That's what South Australia did when it lost Mitsubishi in 2008. Left with 61 hectares of factory space, it advertised an''opportunity''.

Six years on, the site remains mostly empty. The government will move in departments of a university and some TAFE colleges, it has attracted some small businesses and a data centre and its website continues to proclaim: ''Right place, right time.''

Two-thirds of the workers who lost their jobs after an earlier Mitsubishi closure were employed on lower wages. One-third job-hopped from casual job to causal job. South Australia's share of the national economy slumped one-third of one per cent.

It's a picture of the future facing Victoria as Alcoa, Toyota, Ford, Holden and much of Qantas leave. This state is just as dependent on manufacturing as is South Australia. In both states it provides one job in every 10. ''How to avoid South Australia's mistakes'' might just as well have been the title of the report handed to Prime Minister Tony Abbott on Friday.

Prepared by a committee including former Victorian industry minister Mark Birrell, it is addressed to the right level of government. Most international studies show it's the economy rather than anything the locals can do that determines how factory closures pan out. John Spoehr of the Australian Workplace Innovation and Social Research Centre sums up the evidence in a paper just published by the City of Playford, which takes in the Holden plant in Adelaide. He says it is far easier for displaced workers to slot into new jobs when the economy is booming. Workers in the arc that takes in Avalon, Geelong and Point Henry might have been OK had their factories closed a decade or so back when the economy was revving up. They are less likely to be OK today.

Few new firms arise when the national economy is fairly flat. The best way to support the arc is to boost the national economy or at least not flatten it further.

If Abbott and treasurer Joe Hockey came from Victoria instead of Sydney, they might grasp the point. As much as they would like to start winding back the budget deficit, it is not the right time for the economy of Geelong and it is not the right time for the broader economies of Victoria and South Australia.

Slogans don't attract businesses. In the three months since Abbott declared Australia ''open for business'' ABS figures show planned mining investment collapsed 25 per cent and planned manufacturing investment 20 per cent. Economic conditions attract businesses, and cutbacks can make them worse.

Hockey's way out in the May budget might be to announce that many of the cuts recommended by his Commission of Audit will take place but not for some time, so as not to worsen conditions now.

Another would be to announce a number of big government-funded infrastructure programs, several of them near Geelong. It'd be a Band-Aid. Eventually those jobs would go. But it might be enough to last the arc until things pick up.

In The Age and Sydney Morning Herald

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