2015 BusinessDay Economic Survey. Economy weak, cash rate steady

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Fresh from its success in forecasting correctly that the Reserve Bank would go an entire year without a moving its cash rate, the BusinessDay forecasting panel is predicting a second year of the same.

The 25 eminent economists who make up the panel are predicting on average yet another 12 months of steady rates, meaning no change until all the way through to December 2015 - a record run of 28 months.

The panel comprises is made up of leading market economists, industry economists, academics and consultants. Over time its average forecasts have proved to be more reliable than those of any of its members.

The Reserve Bank's first meeting of 2015 next Tuesday will be keenly watched. Rate cuts in other countries, a sluggish Australian economy and a collapse in the rate of inflation are ratcheting up pressure on Australia's central bank to cut - but economists are sharply divided on whether the Bank will cut at all. Beneath the surface of the average forecast of a steady cash rate forecast lie sharp differences. Only about half the panel expects the rate to stay steady at 2.5 per cent. The other half expects it to either climb or fall.

Bill Evans of Westpac, James McIntyre of Macquarie Group, and Stephen Anthony of the consultancy Macroeconomics consultancy expect two cuts within months, bringing down the cash rate to an all-time low of 2 per cent, where they expect it will remain for the rest of the year.

McIntyre thinks the bank should have cut rates months ago, with Australia already in a per capita "demand recession", he says.

Steve Keen and Alan Oster expect one interest rate cut in the first half of the year, followed by another in the second. Oster says the weak jobs market and the slide in commodity prices argue for a cut, while the low inflation rate and cooling housing market suggest it can be afforded.

At the other end of the scale, Michael Workman of the Commonwealth Bank and Annette Beacher of TD Securities expect two hikes late in the year, lifting the cash rate to 3 per cent.

Workman says the lower dollar will do a better job of boosting  the economy than would a cut in rates, without the accompanying risk of overstimulating the housing market. He says While consumers and businesses do lack confidence, it isn't because their cost of funds is too high, he says.

Monash University's Jakob Madsen expects only one hike in interest rates, in the second half of the year. He says at 2.5 per cent the inflation-adjusted cash rate is already close to zero. He says The big problems facing the Australian economy are structural rather than than cyclical and a lower interest rate won't fix them, he says.

Saul Eslake and Chris Caton are among those expecting steady rates all year. Eslake says the Reserve Bank will would want to avoid cutting in order to leave something "up its sleeve'" in the event of another global shock. He says it's not clear that another cut of 25 or even 50 points would achieve what cuts of 225 points between November 2011 and August 2013 did, which is a lower unemployment rate. Caton says although he is not expecting it, the bank will would be forced to cut if the unemployment rate goes went through 6.5 per cent "with any velocity".

Housing expert Nigel Stapledon of the University of NSW says the main beneficiary of a lower rate would be housing, which at present needs no stimulus.

All of our panel prepared their responses before the deadline of January 12, meaning none were able to take into account the very low inflation figure released on January 28. While this put them all on an equal footing, it meant they were perhaps less inclined to foresee rate cuts than if the survey had been taken when the low inflation rate was apparent...

Their  average forecast is for a cash rate of 2.41 per cent by December, close to the present 2.5 per cent but slightly lower, meaning they believe a cut is more likely than an increase. The cash rate is only moved in increments of 0.25 per cent.

The panel's views more broadly about 2015 are not encouraging. Most expect weak economic growth and a further rise in unemployment. None expect a recession. Two expect a per capita recession - a shrinking of in the economic pie per person.

As is usual, the panel is forecasting an inflation rate of 2.4 per cent, the centre of the Reserve Bank's 2 per cent to 3 per cent target band. Steve Keen of Kingston University, London, is the only member predicting a headline rate outside the band, of expecting 1.5 per cent through the year, with an underlying rate of 1 per cent. Neville Norman of Melbourne University predicts a 2.05 per cent, with an underlying rate of 1.95 per cent.

Several of the panel expect wages to grow more slowly than inflation, resulting in a year of falling real wages following on the back of a year in which they barely grew. Michael Workman expects inflation of 2.7 per cent, with wage growth of just 2.2 per cent. Jakob Madsen of Monash University expects inflation of 2.5 per cent and wage growth of 2.2 per cent. Steve Keen expects inflation of 1.5 and wage growth of 1 per cent. Saul Eslake, Shane Oliver and Tom Skladzien of the Australian Manufacturing Workers Union expect zero real wage growth. The average forecast is wage growth of 2.6 per cent, just a touch above the average inflation forecast of 2.4 per cent.

None of the panel expects the present extraordinarily low bond rates to last. The 10-year bond rate has been less than south 3 per cent all year. This week it hit an all-time low of 2.48 per cent, about on a par with the long term rate of inflation implying a zero real borrowing cost. All of the panel but two expect a rate at or more than north of 3 per cent by December. Stephen Anthony expects 2.76 per cent, and Warren Hogan 2.1 per cent. The average forecast is 3.39 per cent.

There is precious little good news on jobs in the BusinessDay survey. All but three of the panel expect the unemployment rate to climb in the next six months. The average has it climbing from its present 6.1 per cent to 6.5 per cent by mid year, ending the year at 6.4 per cent. Stephen Anthony and Steve Keen expect an unemployment rate of 7 per cent.

Household spending is expected to grow no faster than it did last year, climbing by 2.5 per cent in real terms. Business investment is expected to slip another 4.8 per cent. Housing investment is expected to grow more slowly at 4.6 per cent.

Australia's gross domestic product is expected to grow by 2.6 per cent, about around the same as budget forecast but well down on the long-run trend. Population growth means GDP per capita should advance weakly at 1 per cent. Jakob Madsen and Neville Norman expect GDP per capita to shrink.

The panel expects Chinese economic growth to fall to 6.9 per cent in the year ahead, a 25-year low. It expects world growth of 3.5 per cent. Both are in line with the International Monetary Fund forecasts. It expects the recovering US economy to grow 2.9 per cent - a good deal less than the IMF forecast of 3.6 per cent.

On average the panel expects the slide in Australia's terms of trade to slow, with them losing only a further 3.6 per cent in 2015, but the average conceals a wide range from a further slide of 15 per cent to a lift of 7 per cent. None of the panel expects a dramatic recovery in the iron ore price. The forecasts range from a low of $US55 a per tonne to a high of $US86.

The panel expects the Australian dollar to slide lower throughout the year, ending at US77 cents, which is about where the Reserve Bank is said to have long believed it should be. But again the range of forecasts is wide, from a slide to US69 cents (Steven Anthony) to a rebound to US86 cents (JP Morgan's Stephen Walters).

The panel expects the 2014-15 budget deficit to come in slightly a touch worse than forecast at $43.8 billion. All expect it to fall the following year, to an average of $34.2 billion.

Much will depend on the strength of what the panel believes will be a tepid economy, on the Australian dollar, and on nominal gross domestic product, which drives government income. The panel expects nominal GDP growth of 3.7 per cent in 2015, an improvement on the 2.7 per cent recorded in the year to September, but still well down on the 9 per cent a year per annum recorded in the mining boom.

In The Age and Sydney Morning Herald



Wisdom in the crowds. How the BusinessDay 2015 panel got most things right

What our panel got right about 2014 it got spectacularly right. What it got wrong was awfully wrong.

First the spectacular successes. On average last year's BusinessDay panel expected economic growth of 2.7 per cent in the year to December. The most recent figure (for September) is exactly 2.7 per cent. It expected global growth of 3.3 per cent, which is exactly what we got. It expected a December unemployment rate of 6 per cent. The December figure was barely a whisker away at 6.1 per cent. And it expected an entire year without a move in the Reserve Bank cash rate – an extraordinarily rare occurrence and which is exactly what happened.

On these measures the average of the panel's forecasts was right in a way none of our individual panelists were.

But what the panel got wrong was often so wrong that not a single panel member came close.

The panel thought inflation would end the year at 2.5 per cent. It ended at 1.7 per cent, below even the lowest of the panelists' forecasts. The panel thought the 10-year bond rate was to end the year at 4.6 per cent. It ended at an extraordinary low of 2.8 per cent and has since fallen further. None of the panelists expected anything below 4 per cent. The panel thought the dollar would slip to 86US¢. It slid to 82. It thought the terms of trade would slip 4 per cent. They slid 9 per cent.

What the mistakes have in common is the late-year collapse in commodity prices. None of our panel saw the full extent of what was coming. Those that foresaw something include Tim Toohey of Goldman Sachs (a terms of trade collapse of 9 per cent), Stephen Anthony of Macroeconomics (who had the lowest inflation forecast of 2 per cent), Bill Evans of Westpac (who had the lowest bond rate forecast of 4 per cent), and Melbourne's University's Neville Norman and Macquarie Group's Richard Gibbs, who correctly picked the exchange rate of 82US¢ to the dollar.

But as near to right as about individual outcomes as some of our panelists were, none got the whole picture. The late-year collapse in oil and other prices was simply too dramatic (and perhaps too geopolitical) to see coming.

It's been a BusinessDay tradition for years to bestow the title of forecaster of the year on the panelist who got the most things right. Previous winners include Stephen Anthony, Jakob Madsen and Steve Keen. This year none are deserving of the award. The unexpected took everyone by surprise. Away from the unexpected, the average of the panelists' forecasts did very well indeed. The average was a better predictor than any individual forecast.

In The Age and Sydney Morning Herald



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Minimal evidence against the minimum wage

There's nothing more Australian than the minimum wage.

Now on the eve of Australia Day it's up for grabs.

As Australian as Vegemite, the bionic ear and the preferential vote, the national minimum wage sprang to life in 1907. Victoria had gone out on its own a few years earlier. Britain, the United States and most of the rest of the developed world followed later. Even now their minimum wages are nowhere near as generous as ours.

It's why on Tuesday President Obama used his State of the Union address to call on Congress to lift the US minimum wage. And it's why on Thursday Australia's Productivity Commission raised the prospect of dumping it.

"What is the rationale for the minimum wage in contemporary Australia?" it asked in the issues paper that kicked off its inquiry into Australia's workplace relations framework.

And: "how effective is the minimum wage in meeting that rationale?"

The minimum wage is $16.87 an hour. The Commission is worried it's going to families that don't need it.

"Not all minimum wage earners are members of low-income households," it says. Only around one third of adult minimum wage earners are in the poorest 20 per cent of working households. The rest are in better off households.

The Commission cites Labor's assistant treasury spokesman Andrew Leigh who as an economics professor before entering politics wrote that high minimum wages might lift inequality if they lowered employment in low income households.

But Leigh's concern, and the Commission's, depends on the assumption that minimum wages boost unemployment.

It's a reasonable assumption. If employers can pay employees as little as they like, they'll have more spare cash to spread around employing more of them. It used to be the conventional wisdom, until researchers went looking for evidence...

Like the Loch Ness Monster, many have now reluctantly concluded that it's not there. Joshua Angrist of the Massachusetts Institute of Technology is one of the world's leading experts in the use of statistics.

He told American radio last year that the burden of proof had shifted from those who wanted to argue for a minimum wage to those that wanted to argue against it on the ground that studies show it cost jobs.

"It's been hard to find those," he said. It wasn't that the evidence against minimum wages wouldn't be found, it was just that "the scholarly work on the minimum wage today is in a very different place than it was before."

Last May The Economist magazine admitted it had been wrong. It had opposed the introduction of a nationwide minimum wage in Britain on the ground that it would cost jobs.

"No-one who has studied the effects of Britain's minimum wage now thinks it has raised unemployment," it wrote. It had "changed its mind".

A few months earlier more than 600 US economists – including seven Nobel Prize winners – signed an open letter to Congress calling for an increase in the minimum wage. They said the weight of evidence now showed increases in the wage had "little or no negative effect on the employment of minimum-wage workers".

One of the key pieces of evidence was gathered in the early 1990s when New Jersey lifted its minimum wage from $US4.25 to $US5.05 per hour.  Neighbouring Pennsylvania did not. Princeton University economists David Card and Alan Krueger surveyed 410 fast food restaurants in New Jersey and in Pennsylvania before and after the change. If minimum wages did hurt employment, employment would have suffered more in New Jersey fast food restaurants than in Pennsylvanian ones. But that's not what they found.

"Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent," they wrote. They also examined employment growth elsewhere in New Jersey at stores already paying above the minimum and unaffected by the change. They found no change in employment, suggesting no statewide phenomena was in play.

Their curious conclusion was that higher minimum wages didn't hurt employment. If anything, they helped it.

Among the possible reasons is that higher wages might make it easier for firms to attract good workers and lift profitability. It's certainly not a settled question. But the cards are stacked against those who'll want to tell the Productivity Commission Australia's minimum wage costs jobs. The Commission itself quotes a finding by the expert panel of the Fair Work Commission that "modest minimum wage adjustments lead to a small, or zero, effect on employment".

The Commission says it wants evidence. Evidence against the minimum wage is hard to find.

In The Age and Sydney Morning Herald


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Highly taxed? ACOSS says middle income Australians pay 11 cents in the dollar

Australians pay far less tax than they believe, a new report finds, and certainly far less tax than the Treasurer thinks they do.

Mr Hockey told Fairfax radio on Monday that Australians paid nearly half their income in tax.

"When Australians spend the first six months of the year working for the government with tax rates nearly 50 cents in the dollar it is a disincentive," he said. "You're working July, August, September, October, November, December just for the government and then you start working for yourself and your own household income after that for another six months - it is a disincentive."

A report released on Saturday by the Australian Council of Social Service finds that personal tax as a proportion of a middle-earning household's income is just 11 per cent - a good deal less than other calculations and far less less than the Treasurer's.

High-earning households pay 20 per cent of their household income.

ACOSS arrives at the figures by including all household income in its total, including untaxed or lightly taxed of lightly taxed income washed through superannuation, family trusts and negatively geared properties.

"To get a true picture you need to look at total income rather than just taxable income," ACOSS chief executive Cassandra Goldie said.

The personal tax scale prepared by ACOSS is quite progressive. The bottom one-fifth of households pay 3 per cent of their income in personal tax, the next group pays 7 per cent, middle group 11 per cent, the second-top group 15 per cent and the top group 20 per cent...

But the progressivity vanishes when other forms of tax are included. Including the goods and services tax and other consumption taxes such as petrol and tobacco excise, the lowest earning household pays 24 per cent of its income in tax and the highest earning household only a little more at 28 per cent.

Dr Goldie said the goods and services tax hit low earners far harder than high earners meaning they paid much more in consumption tax than income tax while high earners paid much more in income tax than consumption tax.

"It shows how skewed the tax debate is becoming. We seem to be only talking about the GST, yet our modelling shows that lifting the GST would hit hit the lowest earners far more than the highest earners," she said.

Superannuation tax concessions and those for trusts, negative gearing and capital gains were far more likely to raise money from well off households than the GST

ACOSS has prepared the research paper as part of its contribution to the governments tax review which Mr Hockey will launched early next month.

"We are about to be embroiled in a very contested debate and we have the treasurer suggesting people are contributing half their income to tax which is simply not accurate," she said.  "How can we possibly get responsible debate about reform when we don't even have good transparency about the facts?"

"We are releasing this paper to demonstrate that based on the Bureau of Statistics data and appropriate modelling people on higher incomes are contributing around 28 per cent. They are able to pay more."

In The Age and Sydney Morning Herald


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Low bond rates. Abbott prepares to pass up the deal of the century

Who'd say no the deal of a lifetime? Tony Abbott would, and it's our tragedy.

The ten year bond rate is the rate at which the government can borrow for ten years at a fixed rate of interest. Right now its just 2.55 per cent, an all-time low.

By way of comparison in the 1970s it exceeded 10 per cent, in the 1980s it passed 16 per cent, in the 1990s it passed 10 per cent, in the 2000s 5 per cent, and until now in this decade it has usually been above 3 per cent. It dived below 3 per cent at the end of last year and is now just 2.55 per cent, the lowest in living memory.

If Australia was to borrow, big time, for important projects that took the best part of a decade to complete, it would have no risk of ever having to fork out more than 2.55 per cent per year in interest. The record low rate would be locked in, for the entire ten years.

Australia's inflation rate is currently 2.3 per cent. Although it will almost certainly fall in the wake of the collapse in oil prices when it is updated next week, the Reserve Bank has a mandate to keep the rate centred at around 2.5 per cent. That means that right now our government is being offered billions for next to nothing, billions for scarcely more than the expected rate of inflation.

If Abbott was the chief executive of a company with good prospects he'd grab the money and borrow as many billions as he could without impairing his credit rating.

In Australia's case that's probably an extra $100 billion. That's enough to build the long-awaited Brisbane to Sydney to Melbourne high speed rail line, or to build Labor's original national broadband network, or to build Sydney's $11 billion WestConnex road project plus Melbourne's $11 billion metro rail project plus Melbourne's $16 billion East West Link plus something big in each of the other states.

And it would cost next to nothing. All each of these projects would need is a positive real rate of return (which several of those listed above lack) and we would get ahead.

All we would need is confidence in the worth of our ideas.

It's rare to be offered money for nothing...

It's happening because interest rates in the rest of the world have dropped to near zero. Japan's ten year bond rate is 0.24 per cent, Germany's is 0.40 per cent, Britain's 1.54 per cent. Even in the United States where the economy is improving, the ten year bond rate is just 1.81 per cent. Without the ability to earn decent returns in the nations to our north investors are flocking to here and buying our government bonds. In order to get them they are prepared to bid down the rates we have to pay them to all time lows.

It mightn't last. In October Reserve Bank assistant governor Guy Debelle warned of a "relatively violent" correction in bond markets. He said as soon as it looks as if interest rates will climb, the purchasers of bonds will demand much higher rates in order to cover themselves for what's likely over the next ten years. The opportunity will vanish.

If we are prepared to grasp it, there's no shortage of projects that would set us up for decades to come. In education, in health, in the delivery to railway lines into suburbs that are at present barely accessible - in all of these areas there are projects whose benefits would exceed their costs and exceed them by more than enough to pay the minimal rate of interest being demanded.

Some are visionary. Bank of America Merrill Lynch economist Saul Eslake says if Australia was to get serious about reducing its dependence on coal it would consider paying coal producers to close, and speeding up the commercialisation of battery technologies that would allow Australians with the next wave of solar panels to live off the grid.

The risk is that bad projects would be chosen over good ones and the money wasted. Abbott himself provides reason for concern. Despite promising during the election to "require all Commonwealth-funded projects worth more than $100 million to undergo a cost-benefit analysis by Infrastructure Australia" his first budget funded scores of road projects without such approval. Some of the cost-benefit studies weren't even published, in others the figures were massaged to make them look better than they were.

The Grattan Institute's John Daley suggests setting up an independent statutory authority along the lines of the Reserve Bank to vet proposals for spending big money. Its members would be appointed by the Governor-General for terms of five to seven years, it would report directly to parliament and it would publish of all of its findings compete with the assumptions behind them. He says even cheap money should be spent well.

Could the Coalition grab the opportunity before it vanishes? There are some good signs. With help from the Greens it axed Labor's debt ceiling. Since taking office it has run up an extra $78 billion in debt. But it is unorganised, behind in the polls and a prisoner of some of the silly things it said about debt while in opposition.

We have a once in a lifetime opportunity. It'll slip through our fingers.

In The Age and Sydney Morning Herald


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We're living longer. Get over it

Here's the good news: We're living longer. Here's the bad news: There isn't any.

The idea that living longer will make us infirmed for longer and a burden on society for longer has been central to the government's narrative about ever-rising health costs.

It started within months of the minister being sworn in. Preparing the ground for a Medicare co-payment Peter Dutton said health spending was on an "unsustainable path". The cost of the Medical Benefits Schedule (Medicare) was "spiraling".

"The use of MBS services increases as people get older, with those aged over 65 accessing an average of 33 MBS services in a year, while younger people access around 11 services per year," he told the the Committee for Economic Development of Australia.

Combined with talk of an ageing population it made it sound as if living longer was part of the problem, as did his wildly overstated talk about the increased incidence of dementia.

"The fact is 170 people per week today are being diagnosed with dementia, but in a number of years it'll be 7,500 a week," he told Lateline while trying to sell the co-payment.

The ABC fact checking unit ran its ruler over his claim and found that rather than increasing fortyfold over a number of years, as the minister had said dementia was set to treble over four decades...

We are certainly living much longer, and we're set to live longer still. But living longer isn't meaning living longer infirmed or hooked up to machines.

When the Australian Institute of Health and Welfare delivered the good news in the lead up to Christmas you might have  expected the health minister to trumpet it. I would have. It means we've little to fear from our extra years. We might get more bored or have more financial problems, but we are unlikely to be too much more incapacitated. Instead the minister said little, bunkering down yet again to find another way to get us to pay more for visits to the doctor.

Here's what the Institute found. Its report is entitled Healthy life expectancy in Australia: patterns and trends 1998 to 2012.

Between 1998 and 2012 the life expectancy for newborn boys grew from 75.9 years to 79.9 years - an extraordinary increase in such a short time. In little more than a decade Australian men gained an extra 4 years.

But how many of those extra years are good ones, disability free?

The Institute's remarkable finding is that men have gained an extra 4.4 years of disability-free life. Not only are Australian men set to live 4 years longer, but less of their lives are likely to be incapacitated.

It doesn't mean that medical expenses aren't climbing. They are climbing because more of us are getting old and also because medicine is getting more expensive. But it does mean that our longer lifespans aren't responsible for that much of the extra expenses. At least not for men.

For women the picture is (slightly) less rosy. Between 1998 and 2012 the expected life for a newborn girl climbed from 81.5 years to 84.3 years - an increase of 2.8 years.

The increase in the number of disability-free years was slightly less (2.4 years) meaning that most - but not not all - of the extra years were disability-free. In terms of value for money whatever is driving those extra years looks like a good deal, an even better deal for men.

Better still, the estimates of 79.9 years for men and 84.3 years for women almost certainly understate how long we will live. The government actuary points in a separate report that 60 per cent of newborn boys and girls live longer than their life expectancies, and that's before likely improvements in medical technologies over the course of their lives are taken into account. That's because life expectancies are averages, and the averages are weighed down the relatively large number of babies who die before they turn one.

The actuary says a boy born today can expect 85.6 years on a not-so-optimistic view about technology, 90.5 on a better view. A girl born today can expect 90 years or 92.2.

A man who is now 30 can expect 84 years or 88, a woman 88 or 90. A man who is about to turn 65 can expect 85 or 86, a women 88 or 88.6.

Around half of us will live longer than those estimates, and we'll do it without putting too much more strain on the health system.

Old age isn't a problem. It's what we are trying to achieve. Dutton's replacement Sussan Ley would get off to a good start by celebrating rather than demonising our incredible good fortune.

In The Age and Sydney Morning Herald


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Vacancies. The jobs market springs cautiously back to life

The jobs market is reawakening.

The latest Bureau of Statistics figures show that even though Australia's unemployment rate remains at its highest for twelve years, the number of vacancies on offer is steadily climbing.  

The bureau finds employers had 152,400 vacancies on offer in November, up from 140,900 one year previously. The bureau's measure is more reliable than those that count job advertisements because it includes all vacancies on offer, whether or not they are advertised.

NSW is by far the most promising state on Australia's east coast, offering 44,800 jobs for a total of 228,500 job seekers, meaning there 5.1 NSW residents unemployed for each vacancy.

Victoria is the least promising state with 33,300 vacant jobs on offer for 213,600 job seekers, meaning there are 6.4 unemployed Victorians for each vacancy...

The Australian Capital Territory appears to be promising with 5.1 unemployed residents competing for each vacant job, but the ACT figures are distorted because many ACT job seekers live outside the territory.

The Queensland market is almost as tough as Victoria's with 6.1 unemployed locals for each vacant job,  significantly worse than 4.8 a year earlier.

Western Australia remains the best state in which to search for a job, with just 3.1 unemployed locals for each vacancy. In the Northern Territory the number of vacancies slightly exceeds the number of residents who say they are unemployed.

The resurgence in job vacancies is led by the professional and scientific industries (up 4100 in the past year) and by manufacturing (up 3500). Vacancies in the mining industry slipped a further 900. At its peak three years ago the mining industry had 10,300 vacant jobs. It now has 3800.

Although at a two-year high, the number of vacant jobs is well down on the peak of 190,000 reached in February 2011 before the jobs market turned down. The unemployment figures for December will be released on Thursday.

In The Age and Sydney Morning Herald


How many unemployed per vacant job?

Unemployed per vacancy

November 2014 (November 2012)

NSW 5.1 (4.9)

Victoria 6.4 (6.1)

Queensland 6.1 (6.1)

South Australia 6.7 (6.5)

Western Australia 3.1 (3.1)

Tasmania 7.9 (8.5)

Northern Territory 0.9 (0.9)

Australian Capital Territory 5.1 (5.1)

Australia 5.1 (5.1)

ABS 6354.0, ABS 6202.0 (trend)



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Kissed by a rainbow. The good news on oil prices we didn't see coming

How'd we get so lucky? The price of oil halved in a matter of months and hardly any of us saw it coming.

Back in September when the oil price was $US93 per barrel Australia's Bureau of Resource and Energy Economics forecast "a gradual decline" to a figure still north of $US90. What happened was a collapse to $US46.

If it stays near $US50 (and there's talk or $US40 or less for two or three years) the typical Australian family will save $14 a per week according to the AMP's Shane Oliver.

He bases his calculation on an average petrol price of $1.13 per litre (it's already fallen to to 99.9 cents in some places) and an average top up per week of 35 litres.

Put in perspective, $14 per week is more than the benefit per family from another cut in mortgage rates. It's around $730 per year, worth as much as a pay rise of $1100 to someone on the typical tax rate.

There's every reason to believe families will spend some of it, giving businesses the confidence to put on more workers.

Not only will the new much lower oil price boost the economy directly, but by cutting inflation to as little as 2 per cent (that's what's expected when the next figure comes out) it'll give the Reserve Bank more than enough room to cut interest rates as well if it wants to do more.

It's like the sudden emergence of the resources boom all over again, except that where that showered Australia with income, the halving of the oil price will slash costs, for businesses as well as consumers. The mining industry, the makers of plastics that feed their way into almost everything we buy, the trucks that deliver them to shops - all of them rely on oil and all of them will face much lower costs.

The other (not so good) difference from the mining boom is that whereas that boom brought the government more revenue and repeated budget surpluses, this one will eat into government revenue. The prices of Australia's liquefied natural gas exports are contractually linked to oil prices. They will slide with the oil price, cutting the tax take from those projects...

Since September the share price of Santos has halved, the price of BHP has slid 22 per cent and the price of Woodside has slid 16 per cent

The December budget update factored in the slide in the oil price to that point and revised down revenue from the Petroleum Resource Rent Tax by $760 million. In the four weeks since the oil price has slid a further 20 per cent.

So why did the experts miss it? Partly because the oil price had been unusually steady for an unusually long time. For three years from mid 2011 to mid 2014 it was usually stuck between $US100 and $US110 a barrel.

But the apparent stability was deceptive. Beneath the surface the high price was making it economic for the United States and Canada to extract oil in ways they once never could have. The United States did it by fracking - using high pressure water to fracture rocks. Canada did it by refining tar sands, both expensive processes.

American production climbed to within striking distance of Saudi Arabia's. At the same time wars in Iraq and Libya cut production from the Middle East leaving the worldwide total little changed.

Until Iraq and Libya returned to production and demand from China tapered off.

Then a sudden oversupply pushed prices south until the Organization of the Petroleum Exporting Countries met in November. The US and Canada are not members of OPEC. It could have decided to wind back production to restore prices as it had done in the past, and many experts expected it to again. But that would have been a gift to the upstarts and also to Russia which isn't a member. Instead it decided to destroy their business model. Maintaining production and allowing the oil price to plummet would hurt the US and Canada far more than it would hurt OPEC.

New Canadian tar sands projects are thought to be uneconomic at prices of between $US70 and $US60 a barrel, new US fracking projects at prices between $US60 and $US50. Saudi Arabia makes money all the way down to $US25.

The latest price of $US46 is sufficient for the Middle East to rid itself of its North American rivals. When their existing projects close they won't open new ones. But that will take a while, suggesting we are set for low prices for years to come.

It is possible that the Middle East will lose its nerve, but unlikely. Qantas lost its nerve after years of a capacity war with Virgin in which it kept piling on extra seats to match Virgin's extra seats. It gave up after evaporating its profit, and prices climbed back.

But Middle Eastern producers such as Saudi Arabia are different. Unlike Qantas they have very low costs and (barring political turmoil) the ability to keep prices low for years.

And unlike Qantas there's something in it for them if the entire world grows more strongly. The International Monetary Fund says the new lower price will boost global economic growth by between 0.3 and 0.7 per cent in the year ahead. That'll mean more oil is sold, and make a fresh economic crisis less likely. Except in high cost producers such as Russia, Venezuela and Nigeria. Their economies are now in deep trouble, collateral damage of the oil war between the Middle East and North America.

For Australia it's on balance good news, news we've scarcely begun to come to grips with.

In The Age and Sydney Morning Herald


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Climate change. Why some of us won't believe that it's getting hotter

What is it about the temperature that some of us find so hard to accept?

The year just ended was one of the hottest on record. In NSW it was the absolute hottest, in Victoria the second-hottest, and in Australia the third hottest.

The measure is compiled by the Bureau of Meteorology. It dates back to 1910. A separate global reading prepared by the World Meteorological Organisation has 2014 the hottest year  since international records began in 1880. Not a single year since 1985 has been below average and every one of the ten hottest years has been since 1998.

That it's getting hotter is what economists call an empirical question - a matter of fact not worth arguing about, although it is certainly worth arguing about the reasons for the increase and what we might do about it.

But that's not the way many Australians see it. I posted the Bureau of Meteorology's findings on Twitter on Tuesday and was told: "Not really". Apparently, "climate-wise we are in pretty good shape."

If the Bureau had been displaying measures of the temperature on a specific day or a cricket commentator had been displaying the cricket score, there would be no quibbling. The discussion would centre about the reasons for the result and its implications.

But when it comes to the slowly rising temperature some of us won't even accept the readings. And that says something about us, or at least about those of us who won't accept what's in front of our faces...

I am not prepared to believe that these people are anti-science. Some of them are engineers, some mining company company executives. Like all of us, they depend on science in their everyday lives.

Nor am I prepared to believe they've led sheltered lives, although it's a popular theory. In the United States a survey of six months worth of coverage on Rupert Murdoch's Fox News Channel found that 37 of its 40 mentions of climate change were misleading.

The misleading coverage included "broad dismissals of human-caused climate change, disparaging comments about individual scientists, rejections of climate science as a body of knowledge, and cherry picking of data".

Fox News called global warming a "fraud", a "hoax" and "pseudo science".

Rupert Murdoch's Wall Street Journal fared little better. 39 of its 48 references were misleading.

In Australia it's not as bad. Rupert Murdoch's The Australian gives more space to climate change than any other newspaper. Its articles are 47 per cent negative, 44 per cent neutral and 9 per cent positive according to the Australian Centre for Independent Journalism.

It's impossible to read The Australian's articles without feeling at least a bit curious about climate change.

Another theory is that it's to do with psychology. Some people are more threatened by bad news than others, making them less able to accept that it's real.

And now a more sophisticated theory suggests that it's not about the facts at all. It's really a debate about the implications, disguised as a debate about the facts. Troy Campbell and Aaron Kay, a researcher and associate professor in neuroscience at Duke University in North Carolina find that belief in temperature forecasts is correlated with beliefs about government regulation and what those forecasts would mean for government regulation.

They assembled a panel of at least 40 Republicans and 40 Democrats and asked each whether they believed the consensus forecast about temperature increases. Half were told that climate change could be fought in a market friendly way, the other half that it would need heavy handed regulation. Of the Republicans, the proportion who accepted the temperature forecast was 55 per cent when they were told climate change could be addressed by the free market and only 22 per cent when they were told it would need regulation.

(Democrats were around 70 per cent likely believe the temperature forecast and weren't much swayed by how climate change would be fought.)

The finding is important. It means that that the first step in getting people to at least agree that it's getting hotter is to stop talking about how to prevent it. Muddying the two, as we do all the time, gets people's backs up.

It is getting hotter. Seven of Australia's ten hottest years on record have been since the Sydney Olympics. Last year was 0.91C hotter than the long-term average. Last year's maximums were 1.16C hotter than long-term average maximums.  Warming is a fact. The Bureau of Meteorology accepts it, the government accepts it and it shouldn't be beyond our abilities to accept it.

Then we can talk about what to do.

In The Age and Sydney Morning Herald


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Geoblocks. How Netflix, Apple et al take us for a ride

How's this for rewarding loyalty?

Netflix is about to come to Australia and as a thank you to the 200,000 Australians who've been devotedly buying its content for years it's reportedly about to pull the plug.

Until now $US8.99 per month has bought unlimited access to as many 100,000 movies and TV shows for any Australian able to trick the Netflix computer into thinking they're in the US. It's been easy, and it's been legal.

The High Court declared in 2005 that it was legal to circumvent geoblocks. A geoblock is a technological device designed to limit someone's access to a product or service depending on where they live.

The region codes on DVDs are geoblocks. They are intended to stop viewers in some parts of the world watching DVDs intended for viewers in other parts. They cause heartbreak for travellers returning from overseas attempting to play what they've bought, bemusement on the part of workers who move between countries and are required to nominate a single region code and embarrassment for international figures such President Obama who once gave his British counterpart a gift of 25 classic American movies that were unwatchable in Britain.

Sony PlayStations were designed so that PlayStation games bought in some parts of the globe weren't playable on PlayStations sold in others, an absurd restriction that encouraged a Sydney engineer named Eddy Stevens to develop a $45 computer chip that turned any PlayStation into a device that could play any PlayStation game. Sony took him all the way to the High Court where it lost in a unanimous judgement that held that it was legal for Australians to circumvent attempts to prevent them accessing products they had bought.

He was backed by the Australian Competition and Consumer Commission and later by the Howard government, which took care in implementing the Australia-US Free Trade Agreement to ensure Australians remained free to jump around geoblocks.

The Howard government had an excellent record in fighting geoblocks, in whatever form they took. Until 2008 record companies misused the copyright law to prevent retailers from sourcing legally produced CDs from overseas. They had to buy them from the Australian distributor at the Australian price regardless of how cheaply they could be bought elsewhere. Howard made imports legal fending off claims from Labor and musicians such as Peter Garrett that Australian music wouldn't survive if Australians were able to buy it cheaply.

Now the draft report of Abbott's competition review wants to go further...

At the moment in many circumstances it is still illegal for retailers to source books from overseas without the permission of the local distributors. They divide the world into regions giving each a local monopoly and the right to charge monopoly prices. The Australian Digital Alliance says on average Australian libraries pay 58 per cent more for print books than they would in the US.

The Harper review wants this remaining restriction removed unless it can be shown it is in the public interest. And it backs a recommendation of a parliamentary inquiry that the government educate Australians about the extent to which they can get around geoblocks and the tools they can use to do it.

It sees geoblocks as a restraint on trade, a block on competition, artificially imposed red tape. While companies such as Apple are quite rightly able to shop around the world for cheapest parts and labour they design their products to make sure that we can't.

The Apple website prices the latest Taylor Swift single at $US1.29 on iTunes. But use an Australian credit card to buy it and you'll be told its $2.19. That's a surcharge of more than one third at the current exchange rate.

Submissions to the parliament's 2013 information technology inquiry found music was typically 67 per cent more expensive than for customers in the US, games 61 per cent more expensive and e-books 13 per cent more expensive. Professional software was 49 per cent more expensive and hardware 26 per cent more expensive.

Apple, Adobe and Microsoft refused to take part in the inquiry, and so were summonsed, forced to appear. They tried to muddy the waters, talking about the GST, which can only explain a portion of the differences and isn't applied to many internet purchases in any event.

The unacknowledged reason they charge Australians more is because they can. It's called price discrimination and it's one of the most effective ways of turning a profit. The method is to find a group of customers not particularly resistant to high prices (in this case Australians), isolate them, and charge them a premium.

The inquiry went further than the Harper review proposes and recommended that the government consider banning geoblocking if other measures didn't bring prices into line. Adobe warned it the move would hit business confidence, but Canada has just announced plans to prohibit unjustified cross-border price discrimination and New Zealand has embraced a new internet service provider that disables geoblocks by default.

Even Australia Post is getting into the act, setting up ShopMate, a service that gives Australian customers a US address they can use with a prepaid credit card to buy whatever is offer overseas at the price charged overseas.

It's why Netflix's existing Australian customers are keen to hang on to their US subscriptions even after the local service launches in March - not necessarily because the local service will be more expensive (the price hasn't been announced) but because it'll offer many fewer movies than the one in the US. The film industry divides the world into regions, doling out rights as if by decree. It's a practice that goes back a century, and for books much longer. It's time it stopped.

In The Age and Sydney Morning Herald


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Ridiculous, but they work. Why we continue to make New year's resolutions

New Year's resolutions are ridiculous.

Think about it. People who want to change their behaviours  decide to change their behaviours and then all do so at once at midnight. But if they really wanted to change their behaviours they would do it of their own accord, without waiting.

At least that's what anyone who has ever studied economics has been taught. People are meant to be straightforward, literally single-minded.

But we're not, and the success of New Year's resolutions proves it. That's right, success. Because despite all of the jibes the truth is that New Year's resolutions work, and work far better than alternative of simply deciding to change behaviour and then changing it.

The reasons why give us an insight into what it means to be human and into why many of us are never quite sure who we are.

Here's the evidence, assembled by a US psychologist John Norcross. In the leadup to New Year's Eve 1995 he and a team from the University of Scranton in Pennsylvania phoned hundreds of Americans at random and asked whether they were planning to make a specific measurable resolutions at midnight or whether they weren't but still had measurable goals they would like to achieve.

Half a year later an impressive 46 per cent of those who had made resolutions claimed to be meeting their goals, compared to only 4 per cent of those who had not.

Conceding that self-reported success might be exaggerated, he said his findings should be seen "in a comparative context - compared to what".

"In this case, the success rate of resolutions is approximately 10 times higher than the success rate of adults desiring to change their behavior but not making a resolution."

His findings have been replicated repeatedly: resolutions work.

And they suggest that rather than being single-minded many of us are better thought of as having at least two minds, each fighting for control. One might be the saver, the other the spender; one the worker, the other the shirker; one the dieter, the other the eater.

Economist Richard Thaler had his epiphany when he invited a group of graduate students to his house for dinner. While he was cooking he brought out a bowl of cashews.

"We started devouring them," he later explained. "I could see that our appetites were in danger. After a while I hid the bowl in the kitchen. Everyone thanked me."

And then it hit him. He was being thanked by graduate economists. They wouldn't be thanking him at all if they really believed human beings were rational. "After all," he recalled in his biography, "if we wanted to stop eating cashews, we could have done that at any time".

Economics has traditionally explained away what appear to be two separate selves by saying each of us is one self with stable preferences moderated by a discount rate. Because we care most about the present we "discount" whatever good or bad things are likely to happen in the future when comparing them to the good or bad things we are facing now. We are said to have a constant discount rate of around 8 per cent per year.

But the explanation doesn't stand up. Rather than being constant, our discount rate seems to climb the closer we get to the choice we have to make.

Ask someone today to choose between working seven hours on April 1 or eight hours on April 15 and that person will almost certainly choose the easier day on April 1. But ask again when April 1 arrives and the same person will almost certainly choose the harder day in a fortnight's time.

The example comes from US economists Ted O'Donoghue and Matthew Rabin who in 1999 published a paper in the American Economic Review eviscerating the traditional idea of a constant discount rate and proposing instead a model of two selves in which the first was concerned only about the present (always wanting to put off anything unpleasant) and the second was concerned about where that would lead.

The two fight it out. There's no single 'self' always in command.

If they are right it explains the success of resolutions - they are a tool the long-term self can use to trap the short-term self into acting.

And it explains why certain types of resolutions are more likely to succeed than others - those that are specific and are made in public and no room for backing out.

John F Kennedy did it most famously in 1962 with his commitment to send a man to moon "before this decade is out" and just as effectively a year earlier declaring that the US would regard any attack on West Berlin "as an attack upon us all".

In both he was influenced by Thomas Schelling, an adviser to President Truman who later won the Nobel Prize in Economics and probably invented the concept of Mutually Assured Destruction, which against all odds has kept the world free of nuclear attacks for seven decades.

His insight was that closing off options can be empowering. The US was formidable when it declared that it would send a man to the moon no matter what, frightening when it declared it would defend Berlin no matter what and terrifying when it declared it would respond to nuclear force with nuclear force no matter what.

His advice for tonight is to eschew vague resolutions and go for absolutes: "Just as it may be easier to ban nuclear weapons from the battlefield in toto than through carefully graduated specifications on their use, zero is a more enforceable limit on cigarettes or chewing gum than some flexible quantitative ration."

And say it out loud. Lock yourself in. You might be surprised at what you can achieve.

In The Age and Sydney Morning Herald


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Advice for Hockey: Slug super and fix the budget in one hit

Sooner or later Joe Hockey is going to do what's needed.

He is running out of other options. In opposition he said returning the budget to surplus would be easy: "Based on the numbers presented last Tuesday night, we will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term," he promised just 18 months before the election.

As the election came closer he became more cautious, refusing to set a date. And then in his first budget, in May this year, he said he would deliver a surplus in 2018-19, a deadline now a mere memory.

Many of the things he thought would be simple turned out to be difficult. He was going to axe 12,000 public service positions before discovering Labor had already set in train processes to axe 14,000. He hemmed himself in with promises not to cut health, education or pensions, each of which he has had to honour in the breach.

Some of his promises made things needlessly hard. Axing the carbon tax (while keeping the associated compensation measures) will cost the budget $7 billion.

And the iron ore price collapsed. It'll rip $14 billion from the budget over the next four years. It's a truly massive problem, yet rather than find a massive fix Hockey has so far used piecemeal measures such as shaving foreign aid, indexing petrol excise, penalising job seekers, giving less to universities and trying to charge for previously free visits to the doctor.

Each doesn't save much, and each arouses so much opposition as to make it scarcely worth his while, even if it gets through the Senate.

What he needs instead is one really big tax hike (spending cuts won't raise enough), but one won't rip money out of wallets and purses. It needs to be easy to justify (attractive to Labor), invisible on a day-to-day basis, and simple. And it needs to raise, say, $12 billion. Per year....

Labor's own tax review has already pointed the way, but at the time Labor was too scared to take any notice.

What Hockey needs to do is to tax compulsory superannuation contributions as income, which is what they are. At the moment after the employer pays them they are taxed from the fund at 15 per cent, which is a very good deal if you are on a marginal tax of 37 per cent, quite a good deal if your rate is 19 per cent, and an appalling deal if you earn so little your tax rate is zero.

Instead of being paid by the fund the tax would be paid by the employee at the same time as all their other tax, in the same way as other tax and at the same rate as other tax. Nothing could be simpler.

The Treasury says the present tax arrangement will cost the budget $17.8 billion this financial year, $19.15 billion next financial year and $20.7 billion the following year. The figures exclude the incredibly generous concessions for the income earned within super funds, which needn't be touched. But they do include the tax concessions on extra contributions made over and above what's compulsory. To the extent that they are made merely to avoid tax they will vanish, cutting the benefit for the government to about $12 billion a year – which happens to be about what's needed.

Former Treasury economist Steven Anthony of the Canberra consultancy Macroeconomics has come up with the $12 billion figure, from taxing wages paid as super in the same way as wages paid as wages. He says it's extremely conservative and it would climb each year.

The thing about compulsory contributions is that they are compulsory. They can't be cut. The government would lock in an extra $12 billion per year (and climbing) at the stroke of a pen. It shouldn't dent household spending in the same way as would an increase in income tax, but it might make households more wary of spending, believing they've less tucked away for when they retire.

Which is where Hockey's just-completed financial system review comes in. It's come up with a plan to boost retirement incomes by between 25 per cent and 40 per cent, largely by the simple expedient of cutting the other "superannuation tax" – the fees imposed by fund managers for performance that's usually no better than ordinary.

The plan is wonderfully simple. The market would cut the fees all by itself. All the government would do is conduct an auction every three or so years for the right to manage all new default accounts. With a huge business up for grabs, the fund managers would fight among themselves to bid the fee down. Right now fees range from 0.48 per cent 1.84 per cent. When Chile adopted the scheme it got the fees for new accounts down to 0.4 per cent and customers in other schemes switched over. The Grattan Institute reckons it would save around $10 billion per year, which coincidentally is close the $12 billion extra the government would take from them by properly taxing their super contributions.

As it happens the Coalition is in a good position to blame Labor when it grabs the $12 billion. It is Labor that set up compulsory super in 1992. It is Labor that taxed all contributions at 15 per cent regardless of the taxpayer's rate. It is Labor that was prepared to leave the woefully deficient scheme in place until right near the end when budget pressures forced it to take limited action against high earners – action that it didn't have time to put through parliament.

If anything it is the Coalition that has a better track record. Peter Costello introduced a 15 per cent super tax surcharge for high earners (they paid 15 per cent plus 15 per cent) which he later removed after it led to "enormous complexity and compliance costs".

This wouldn't. There is nothing simpler than taxing all income as if it is income. And the pay-as-you-earn tax system is set up to collect it.

It's over to Joe, and the tax inquiry he is about to commission. He could solve his problems in one hit.

In The Age and Sydney Morning Herald


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Why you'll pay much more for the doctor. The three-card trick that purports to save $3.5 billion

How can a $5 GP co-payment that excludes the young and those on benefits save just as much as a $7 co-payment that applies to everyone?

That's what we'll be asked to believe when the budget update is published next week. We'll be told Prime Minister Tony Abbott's new health package will save $3.5 billion whereas his old package would have saved $3.6 billion.

Part of the trick is that it isn't the co-payment that saves the government money, it's the cut to the Medicare rebate. That cut was always going to be $5 per consultation. If doctors had had the ability to charge a $7 co-payment they would have got an extra $2 in their pockets. Now they won't.

Another part of the trick is that the government will now cut some rebates by much more. Standard so-called Level B consultations of up to 10 minutes currently attract a $37.05 rebate. Under the changes they will classified as Level A and attract $16.95 for the young and concession holders and $11.95 for everyone else.

And the two-year freeze on increasing the amount of Medicare rebates that was going to extend to June 2016 will now become a four-year freeze, extending to June 2018.

Doctors will lose just as much as before, but in different ways and for longer.

At least that's what the budget update will say.

All of the changes but one will be introduced through the back door by regulation rather than by legislation, which requires the approval of Parliament. But regulations can be disallowed by the Parliament after they are introduced. Just last month the Senate disallowed the regulations that purported to water down consumer protection under financial advice law.

There's every reason to think it's prepared to do so again if it doesn't like co-payments, meaning that, while the $3.5 billion saving will be in the budget update, most of it will never be banked.

In The Age and Sydney Morning Herald


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Abbott's GP co-payments aren't dead: it's a tweak not a termination

Tony Abbott has cut the size of the co-payment and he has excluded children and Australians on benefits, but he is insisting on a co-payment, or as he puts it a "price signal".

Like a price signal for pollution (the carbon tax) or a price signal for traffic congestion (road tolls) the theory is that if we are charged for something we'll use less of it.

But visits to the doctor aren't quite like those other things. One of the things we are buying when we go to the doctor is information - information about whether we really needed to go in the first place. We can't know until we go. Doctors and patients have what health economists call an "information asymmetry". And so that makes it entirely possible that co-payments could deter necessary, as well as frivolous, visits.

It's what the giant Rand health experiment in the United States found. It sent some people to the doctor for free, charged others small fees and others big fees. In the words of the Rand report: "Cost sharing did not seem to have a selective effect." Serious as well as trivial visits were equally discouraged and those visits that were discouraged were almost entirely first visits, those that let the patients know whether it's serious or trivial...

His move might help the budget, but it might not help public health, and there's reason to think it mightn't even help the budget as much as he thinks.

If general practitioners do find their work their work slowing down as patients are turned away by co-payments, what are they expected to do? What they are likely to do is to see other patients more intensively - to recommend follow-ups and to make their consultations last longer. They'll get less from the government per consultation (Abbott is cutting the Medicare rebate by $5 for all but young patients and concession card holders) but they are unlikely to put in fewer hours.

And these changes are unlikely to pass the Senate. Most of them are being introduced by regulations rather than legislation bypassing the need for Senate approval, but the Senate still has the ability to disallow regulations, and just last month it showed it was prepared to use it when it was presented with watered-down financial advice regulations. It isn't over yet.

In The Age and Sydney Morning Herald


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Want lower interest rates? Attack negative gearing

There's only one thing standing in the way of lower interest rates, and the Abbott government has just been handed a way to deal with it.

When the Reserve Bank board gets back from its summer break on February 3 it will be told that the economy is weak and (on the latest figures) getting weaker.

It will be told that the government is unable to do what's needed to boost it. Hemmed in by the deficit and its talk about the deficit it won't boost spending and, aside from promised tax cuts due next July, it won't cut taxes further. (Credit where credit is due. At least Joe Hockey says he won't cut spending further in next week's budget update. That would be "in the current circumstances quite irresponsible," he says.)

So it's up to the Reserve Bank.

Another cut in its cash rate from 2.5 per cent to 2.25 per cent would boost the economy by giving mortgage holders access to more cash (an extra $51 dollars each month for someone on a $350,000 mortgage) and make it cheaper for businesses to borrow.

And it would make Australia a less attractive place for foreigners to park money, knocking out a support for the high dollar and making it easier for Australian businesses to compete with imports and sell overseas.

Normally it's fear of inflation that holds the Reserve Bank back from cutting interest rates, but not this time. Both price growth and wage growth are disturbingly low.

But not house price growth. Since house prices bottomed in 2011 the typical price has climbed a frightening $100,000. For much of this year prices have been climbing at an annual rate of 11 per cent in Melbourne, 16 per cent in Sydney. Just recently the pace has slowed, with prices actually slipping in Melbourne. The latest annual figures are 8.3 per cent in Melbourne, 13.2 per cent in Sydney...

The Reserve Bank is worried about reigniting what it regards as an unsustainable boom in house prices and pushing them to the point where they collapse and cause financial damage.

It's the only thing standing in the way of it cutting rates.

The Bank's governor Glenn Stevens has been thinking out loud about ways to restrain house prices in order to make get room to cutrate cuts possible. Importantly he has discovered that ordinary homebuyers aren't the problem. In the past year the amount borrowed by personal investors to buy property has climbed at almost twice the rate of the amount borrowed by owner occupiers. Investors now account for $1 in every $3 1 in every 3 dollarsborrowed to buy property. Stevens is thinking about imposing tougher lending standards and capital requirements for lenders to investors but leaving owner occupier loans alone.

And now the Murray financial system inquiry suggests something else...

On Sunday it pointed its finger at the tax system. In its words: "The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing".

EverSince the Howard government halved the headline rate of capital gains tax in late 1999, investors have enjoyed a low rate of tax on the profits they make when they sell properties while being able to deduct from their taxable earnings the full interest costs of the borrowing they use to make those profits.

The Murray review calls the tax treatment "asymmetric".

For well-heeled households it has made investing in second, third and even fourth properties a no-brainer.

As Macquarie Bank economist Rory Robertson told his clients at the time, "since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries".

By becoming landlords they have provided renters a useful service, but by elbowing would-be owner-occupiers out of the way in order to buy properties on which to run up interest bills they have also been creating those renters.

Since Howard changed the rules, the proportion of households forced to rent has climbed from 27.2 per cent to to 30.3 per cent.

House prices have run way ahead of household incomes ever since.

Doubling the rate of capital gains tax to make it the same as the tax paid on other income would take the wind out of the investor housing market. If the government wanted to merely do it to new housing investors (leaving existing investors untouched) it would take out the wind slowly. Or perhaps it could do it only to investors who buy existing properties rather than ones built from scratch. The Murray inquiry isn't prescriptive. It wants capital gains tax and negative gearing investigated by the tax inquiry Abbott is expected to announce this week.

Abbott could give the Reserve Bank cover by announcing at the same time as the tax inquiry that he is inclined to act against negative gearing. He could say that when the new rules are decided on they will apply from December 2014, deflating the housing market straight away and making it easy for the Bank to push down rates.

It would help the Bank help him, and quite possibly allow much lower interest rates. And it would rake in more tax as well.

In The Age and Sydney Morning Herald


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Duty calls John Fraser back to head Australia's treasury

John Fraser says he felt he had little choice when approached a few months ago in London about running Australia’s treasury.

A former treasury official who rose to the rank of deputy secretary, he had spent most of the last two decades working in investment banking, much of it overseas with the financial conglomerate UBS.

“This country has been very good to me, and life's been very good to me and I felt I might be able to make a contribution,” he said after the governor general approved his appointment as Australia’s 17th treasury secretary.

“I don't want to sound as if I'm a saint - I am not. But I think all of us, particularly those who have been a bit lucky, have a moral obligation to do something for our country.”

Mr Fraser was jetlagged as the Governor-General approved his appointment. He had arrived from London at 2am and been unable to sleep.

Asked how he’ll run the department differently from his predecessor Martin Parkinson who was forced to resign by the prime minister Mr Fraser said he had no set views and was still learning about how the department had changed.

“Martin has been very helpful in briefing me, and indeed I'll be spending a day with the treasury team before Christmas to go through everything. But no I don't have any thoughts. It’s a broader organisation than when I was there.”

Treasurer Joe Hockey paid tribute to Dr Parkinson who leaves on Friday describing him as a “loyal servant of the Australian people”.

Dr Parkinson was effectively sacked by Mr Abbott shortly after the Coalition took office. Mr Abbott asked him to stay on only until after the May budget. The recently published biography of Mr Hockey indicates the decision was taken without the treasurer’s knowledge. Mr Hockey later managed to negotiate an extension for Dr Parkinson.

“He has utilised his enormous intellect to pursue and affect significant policy change. He is a man of great personal integrity. I wish him all the very best for his future,” Mr Hockey said in a statement.

Mr Fraser said he believed the treasury’s job was to work with rather than for Australia’s political leaders.

In The Age and Sydney Morning Herald


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GDP Weak. Rate cut looms

An unprecedented further cut in interest rates to levels never seen before in Australia is now virtually certain as the national economy sputters with dwindling growth and disposable incomes slipping backwards.

Slower than expected growth of just 2.7 per cent for the year, outlined in the September quarter national accounts, immediately prompted Treasurer Joe Hockey to reassure Australians he would not order harsh new cuts in the forthcoming Mid-Year Economic and Fiscal Outlook nor in his second budget in May, admitting it would harm the economy and risk further falls in jobs growth and incomes.

"If we have revenue falls due to external factors we should not chase them down," he said. "New cuts to the budget would slow the Australian economy."

Outgoing Treasury Secretary Martin Parkinson said the figures were "a serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians."

The bleak outlook is both economically and politically complex for the Abbott government.

While it had been pursuing an austerity agenda, the risk of harming anaemic growth could now force a fiscal re-think delaying the 2017-18 time-table back to surplus, and a winding in or abandoning of cuts it has been unable to achieve anyway through a hostile Senate.

Mr Hockey told reporters his preference was for a good Christmas with high levels of spending...

With the government now desperate to underpin at-risk business and consumer confidence, Mr Hockey also promised 2015 would be better than 2014 and that 2016 would be better again.

"We want Christmas to be good for Australia, we want Australians to go out there and spend - not just for Santa Claus but for Australia, because increasing household consumption is good for the economy and that in turn will help create jobs for other Australians."

Yet with people's disposable incomes now stuck in negative territory for two successive quarters, there are concerns that to some, the situation will already feel like a recession, sending spending further down.

Australia's economy grew just 0.3 per cent in the first three months of the financial year, a low hit only once before in the past three years. The weak growth rates of 0.5 and 0.3 per cent in the June and September quarters follow much stronger growth rates of 0.8 and 1 per cent in previous two quarters. They suggest economic growth is weakening quickly, a prospect that alarms the Bank.

The central bank's board next meets on February 3. A cut in its cash rate from its present long-term low of 2.50 per cent to 2.25 per cent would take the typical discounted home loan rate below 5 per cent to 4.85 per cent, the lowest since 1970. It would slice a further $51 dollars off the monthly cost of servicing a $350,000 home loan.

The accounts show national income fell for the second successive quarter, slipping 0.4 per cent in September after slipping 0.3 per cent in June, enabling Labor's treasury spokesman Chris Bowen to claim Australia was in an "income recession", the first since the global financial crisis in 2009.

Income per capita shrank 0.8 per cent in September after shrinking 0.8 per cent in June. Household spending was flat after adjusting for inflation as consumers saved more in order to make up for lower real incomes.

On the release of the national accounts the Australian dollar dropped about half a cent to 83.92 US cents, the first time it has been below 84 US cents in four years. Betting on the futures market raised the implied probability of a rate cut in February from 13 per cent to 22 per cent.

Budget revenues are driven by nominal gross domestic product, unadjusted for inflation. It slipped 0.1 per cent in the quarter, indicating that budget revenues will be revised down further when the mid-year budget update is released in two weeks.

The government claims that Labor has blocked $28 billion of savings by blocking budget measures in the Senate.

Mr Hockey said although there would be few if any spending cuts in the budget update he would stick with his strategy of getting spending under control, removing red tape, and granting billions of dollars to the states to build roads.

"We expect the states to help us roll out this new productive infrastructure as quickly as possible," he said. "This will support growth and jobs in the short and medium term and lift our nation's productivity."

The accounts show the construction industry going backwards, subtracting 0.2 points from economic growth in the quarter. Financial and insurance services was the best performing industry, adding 0.2 points to economic growth.

NSW is the best performing state economy in terms of spending, boasting an increase of 1.3 per cent in the past three months. Spending in Victoria slumped 1.6 per cent.

In The Age and Sydney Morning Herald

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