GDP. Jump in exports hides weak economy

The Australian economy performed better than expected in the three months to September, but no-one is celebrating.

The biggest rebound in exports in 15 years pushed up the September quarter growth rate to 0.9 per cent, a result not bettered for three years. But were it not for the unusual jump in exports, the economy wouldn't have grown at all.

Domestic demand shrank in the September quarter, with inflation-adjusted spending in NSW, Queensland, Western Australia, the Northern Territory and Australian Capital Territory turning down, and spending growing only in two states: Tasmania and South Australia. Spending in Victoria was flat.

"Today's national accounts show an economy in transition," Prime Minister Turnbull told parliament.

"We have had the great stimulus from the terms of trade, and the mining industry will continue to be strong and productive, but that big investment hit has come and it has gone."

Private investment slid 2.9 per cent in the quarter and 4.3 over the year. Public investment slid 9.2 per cent in the quarter and 7.9 per cent over the year. Household spending climbed 0.7 per cent in the quarter and a respectable 2.7 per cent over the year...

 

 

Treasurer Scott Morrison said businesses were "consolidating" and preparing to invest.

"We do obviously want to see business investment in the non-mining sector grow in the future and we believe that will occur in the years ahead, but only if as a country we remain focused on policies that support growth and jobs," he said.

The annual economic growth rate of 2.5 per cent is well down on the 2.75 per cent the treasury says is needed to absorb unemployment and is no faster than the 2.5 per cent recorded a year ago. During the mining booms growth ranged from 3 to 5 per cent.

 

 

Shadow treasurer Chris Bowen said the economy was weaker than the figures suggested.

"Without strong mining exports, the economy would have clearly struggled to generate much growth at all in the September quarter," he said.

In Perth Reserve Bank governor Glenn Stevens said not too much should be read into the number.

"Let's not overplay the significance, but the economy is growing, and I think you would still say the outlook is for continued moderate growth," he said.

The national accounts show Australia's terms of trade slipping a further 2.4 per cent in the quarter and 10.5 per cent over the year. A measure of export prices relative to import prices, the terms of trade directly impacts on the budget through its effect on the incomes of exporters.

The forecasts in the May budget were built around an iron ore price of $US48 per tonne. Futures trading has marked it down to less than $US40 a tonne, suggesting a downgrade when the budget update to be released on December 15.

Each $US10 fall in the price of iron ore is thought to cost the government around $2.5 billion per year in lost revenue.

In The Age and Sydney Morning Herald

 

 

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Older Australians too cautious, says Productivity Commission

There's such a thing as too much caution.

Older Australians could enjoy far higher standards of living and could cut their reliance on the aged pension if they just ate into just a portion of the $1 trillion tied up in their homes, a new Productivity Commission study has found.

But it says few of them are interested.

Contrary to the myth that retirees fritter away their superannuation lump sums in order to get the pension, the study finds that most are too cautious with their money, engaging in too much "precautionary saving" and dying with their houses and savings intact.

"When faced with lower incomes, older Australians are more likely to cut expenditure than draw down on their wealth, Productivity Commissioner Karen Chester said. "This means not accessing the wealth embedded in their family home."

Entitled Housing Decisions of Older Australians, the report includes the results of a specially commissioned survey of 1500 older Australians. Only 15 per cent expect to downsize to smaller homes while only one to 2 per cent used reverse mortgages to tap into the value of their homes.

Downsizing is difficult, and not necessarily affordable. Those that try run the risk of losing some of their pensions if the transaction makes them money.

Many over 60s continue to save throughout their retirement, even when their only income was the pension, and even near the end of their lives ...

Around 40 per cent of single pensioners and 33 per cent of couples live on less than the Association of Superannuation Funds of Australia benchmark for a "modest lifestyle", suggesting that the benchmarks are too high.

The study finds that the greater availability of in-home care is turning residential aged care into "end of life service". The typical admission age is 83 years and climbing, with average tenure only two to three years.

In The Age and Sydney Morning Herald

 

 

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No revenue problem, Treasurer? We're about to learn the truth

About that revenue problem ... the one we don't have.

Since the May budget, expected revenue has slipped by $4.6 billion for 2015-16, and $8 billion for 2016-17. Projected spending has hardly grown at all.

Deloitte Access, which has calculated the figures ahead of this month's mid-year budget update, reckons this year's deficit will be $5.2 billion worse than forecast ($40.3 billion rather than $35.1 billion), and next year's $8.3 billion worse than forecast ($34.1 billion rather than $25.8 billion). Subsequent years will be $11.4 billion and $12.7 billion bigger.

By any measure, the government has a revenue problem. Any measure but the treasurer's, that is.

Within days of taking the job three months ago Scott Morrison infamously declared that revenue wasn't a concern. The budget he was inheriting had "a spending problem, not a revenue problem".

It would be odd if it was true, given that the first Hockey budget took a stick to spending and more or less left revenue alone. Morrison has been softening the language since, most recently redefining the concept of a revenue problem. "A revenue problem I would define as not taxing people enough," he told Sky News last month. "I don't think that we have that problem."

"Our problem at the moment is that Australians aren't earning enough – not that they're not paying enough tax, but that we're not earning enough."

He is right about earnings. Since the Coalition took office private sector wage growth has slid from 2.7 per cent to 2.1 per cent – a record low.

Not only are Australians not earning as much as expected and not paying as much tax as expected, they are less likely to be pushed into higher tax brackets than was expected ...

Deloitte Access says pay-as-you-go tax collections will be $2 billion lower than expected this financial year and $2.6 billion the next.

Company tax collections will be $4.4 billion lower this year and $7 billion less the next. Lower than expected profits will mean lower than expected share prices and superannuation returns.

Superannuation taxes will raise just $7 billion next year – only slightly more than half the sum of $12 billion collected a few years back.

This week Morrison has been fine-tuning his language ahead of the December update. "What you will get from this government is a very honest and sober view about where we are heading," he said on Monday. "But an optimistic view which is based on realism."

When the bad news is presented in two weeks' time, it'll be delivered without a solution. The mid-year update isn't a budget, or even a minibudget. Aside from some measures to boost innovation, it'll let the problems sit.

One of the those problems may well be a set of projections that shows the budget never returning to surplus. The treasury has downgraded its long-term economic growth projections, making an automatic return to surplus harder. Without a return to surplus (or without a downturn in global interest rates) the government can't cut its steadily growing interest bill on borrowings.

Once close to zero, net interest on borrowings is now $11 billion per year, roughly half what the government spends on Medicare. As each new deficit requires more borrowing, it'll keep growing, hitting $13 billion in 2018-19. Unless something happens to drive it down, budgets will become increasingly constrained in what they can do.

By letting the state of Australia's finances sink in over the summer break and not proposing solutions until the release of the tax green paper early in the new year Morrison and Turnbull will focus our minds on the importance of getting tax right. What matters is not so much an immediate revenue fix (although that would be nice) but plugging the holes that are about to get bigger.

The tax concession on superannuation contributions will cost the government $17.35 billion this financial year. By 2018-19 it will cost $20 billion. The treasury believes it would grab most of it if it taxed contributions at marginal rates. Very little would leak elsewhere, in part because most super contributions are compulsory. The concession on the earnings of super funds costs $16 billion, but by 2018-19 it is set to almost double, costing $30 billion.

Left unchecked, these extraordinarily generous concessions will make our tax system increasingly leaky, especially as more and more high wealth Australians retire and move into the phase of life where they pay no tax whatsoever on their super fund earnings, no matter how big.

I am often asked why I am always on about super these days (something the government is also on about). Why not attack other tax concessions or lift tax rates on something else? It's because the concessions on super are huge; bigger than anything else apart from concessions on the family home, and growing far faster.

They can be wound back in a way that creates winners. Low-income Australians will be better off if super is taxed at marginal rates with a rebate, and they are the people compulsory super is meant to be for. Wise financial managers pay attention to revenue as well as spending. In a few days' time we'll discover how important that is.

In The Age and Sydney Morning Herald

 

 

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Twelve days. Low inflation keeps true-love's costs low

In Australia, inflation is just 1.5 per cent.

While some prices are climbing (cigarettes cost 5 per cent more than they did a year ago) others are plummeting. The electronics chain Dick Smith has cut the value of its stock 20 per cent ahead of a Christmas discounting spree.

But in the United States inflation is far lower, so low that price of the items named in the song Twelve Days of Christmas has climbed only 0.6 per cent.

It's the lowest increase since 2002.

PNC Asset Management has been computing the index since 1984. Especially sensitive to changes in the price of gold, musicians and poultry, at times it has jumped 16 per cent in a single year. But this year the price of gold rings is steady, and most wages haven't moved.

Costing no more than they did a year ago are the eight maids a milking, the nine ladies dancing, the eleven pipers piping and the twelve drummers drumming.

Only the ten lords-a-leaping have scored a pay rise. Sourced from the Pennsylvania Ballet, they are asking for an extra 3 per cent...

French hens, calling birds, and geese-a-laying all cost no more than a year ago, although the price of partridges has soared 25 per cent and the price of turtle doves has climbed 11.5 per cent.

"While the economy continues to chug along on a sustainable path, low commodity prices are keeping consumer costs down," said PNC chief investment officer Jim Dunigan in a statement. "True-loves should be thrilled that they can have their goose and better afford the gas to roast it."

The total cost of the true-love's basket is $US2855. Buying the items over the internet brings it down to $US1620.

 

2015 PNC Christmas Price Index

☆ Partridge: $25 (up 25%)

☆ Pear tree: $189.99 (up1.2%)

☆ A partridge in a pear tree: $214.99 (up 11.5%)

☆ Two turtle doves: $290 (0.0%)

☆ Three french hens: $181.50 (0.0%)

☆ Four calling birds: $599.96 (0.0%)

☆ Five gold rings: $750.00 ((0.0%)

☆ Six geese-a-laying $360 (0.0%)

☆ Seven swans-a-swimming $13,125 (0.0%)

☆ Eight maids-a-milking: $58 (0.0%)

☆ Nine ladies dancing: $7,552.84 (0.0%)

☆Ten lords-a-leaping: $5,508.70 (up 3%)

☆ Eleven pipers piping: $2,635.20 (0.0%)

☆ Twelve drummers drumming: $2,854.80 (0.0%)

Total: $2855 (US dollars)

Source: PNC Asset Management

In The Age and Sydney Morning Herald

 

 

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No surplus in sight: Deloitte says budget billions worse as revenue crumbles

The Australian budget is facing deficits $38 billion worse than forecast and on present settings will never return to surplus, an authoritative new analysis has found.

Released just a fortnight before treasurer Scott Morrison officially updates the budget in the mid-year review, the Deloitte Access Budget Monitor finds this year's deficit will be about $40.3 billion rather than the forecast $35.1 billion, the next year's $34.1 billion rather than $25.8 billion, and the deficits in 2017-18 and 2018-19 $11.3 billion and $12.7 billion worse.

It comes days after Treasury revised down its long-term economic growth projections, a downgrade not fully reflected in the Deloitte Access report.

"That line on the budget graph that shows the deficit disappearing, it never gets there on our projections," Deloitte Access partner Chris Richardson said.

Declining Chinese economic growth and sliding commodity prices are set to drag down company tax collections with receipts $4.4 billion less than expected in 2015-16 and $7 billion less in 2016-17.

Superannuation tax collections will be $2.2 billion less than forecast. At $7 billion in 2015-16, they will be only slightly more than half the $12 billion collected in 2007-08 before the financial crisis.

Historically low interest rates will keep interest income "subdued", and a surge in deductions related to negative gearing will hold back net rental income...

Record low wage growth will cut pay-as-you-go tax collections by $2.1 billion in 2015-16 and $2.6 billion in 2016-17. The report says the low wage growth is a "double disappointment" because it will also blunt the effects of bracket creep, meaning fewer workers than expected will move into higher tax brackets and push the budget back towards surplus.

On the positive side, rapidly growing real estate prices will boost capital gains tax receipts and the lower dollar will boost customs duties through higher import prices.

Deloitte Access expects the economy to be 2.5 per cent smaller than forecast by Treasury by 2018-19, a loss of $48 billion.

"You may think we paint a grim picture of the remaining task of budget repair," the report says. "But you would be wrong. Among the wildly optimistic assumptions underpinning our own figuring are that the Senate passes in full the savings still before it within a year from now, the states roll over on the cuts they face and sing kumbaya, and that the Beatles get back together. Oh, wait …"

If the Senate does not pass the stalled budget measures the deficit will be another $67 billion worse than expected during the next 10 years.

Mr Richardson said while he wouldn't describe the budget repair task as urgent, both sides of politics had "strikingly mismanaged" Australia's finances and repair kept getting harder.

The forecasts came as the BIS Shrapnel consultancy released a report predicting further big declines in mining investment. The report says after sliding 11 per cent in 2014-15, mining investment will slide 25 per cent this year and a further 25 per cent next year.

"This sharp fall in investment is occurring at a time of weaker prices, forcing the high-cost producers to rethink their mine plans and the nature of operations," it says. "This paradigm shift is not expected to be temporary. Some high-cost producers were forced to place their operations in care and maintenance while low-cost producers pushed forward to carve out a greater share of the market."

BIS Shrapnel says the industry will lose a further 20,000 jobs during the next three years on top of the 40,000 direct losses since the investment peak.

Treasurer Scott Morrison said the government would continue to make progress in cutting the deficit "despite the significant headwinds of falling commodity prices and the transitioning of our economy from the strong investment phase of the mining boom".

"We are not in denial about the challenges that we face globally or at home," he said. "We are just getting on with the task of strengthening the budget and growing our economy."

"Had we stayed on Labor's spending path the budget would be almost $80 billion worse off over this budget year and the forward estimates. "

Labor treasury spokesman Chris Bowen said Mr Morison had been wrong to claim that the budget "did not have a revenue problem".

Deloitte's forecast of $38 billion in additional deficits came on top of a doubling of the budget deficit in the past year.

The government will finalise the numbers for its mid-year update in the next two weeks after the release of the September-quarter national accounts on Wednesday. The mid-year update is not expected to include major changes to taxation, which will be held over until the green paper and the white paper to be released in the new year.

In The Age and Sydney Morning Herald

 

 

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Just a nudge. Why Malcolm Turnbull is embracing behavioural economics

There's something odd about the urinals at the Netherlands airport. Each one has what appears to be a fly embossed in the porcelain right at the point designers want men to hit.

Normally pretty bad at aiming with precision, men can't resist trying to hit it and wash it away. So much so, that adorning the urinals helped reduce "spillage" 44 per cent.

Cass Sunstein loves telling the story. In Australia to help prime minister Turnbull launch his own behavioural economics unit, Sunstein used to run the US office of information and regulatory affairs under President Obama. It was known as Obama's 'Nudge Unit', for good reason. Sunstein co-authored the book Nudge, and is an expert in using behavioural economics to change behaviour.

Three years ago Australia's present cabinet secretary Arthur Sinodinos ridiculed the idea in a press release entitled "Nanny state wants to nudge you!". But that was when Gillard was in power. Turnbull likes nudges. Their best selling point is that they are cheap.

Sunstein explained on Monday that in the US poor children were eligible for free school meals so long as their parents signed up. But whether because many were too busy or too embarrassed millions of children missed out.

So the authorities allowed schools to automatically enrol any child they thought might be eligible. Parents who wished could still take their children out.

The result was an extra 12 million children obtaining meals to which they were legally entitled...

>"It was just a nudge," he said. "We switched the default."

Sunstein also tackled low college enrolments among low-income students by sending each a text message just before the deadline. Low-income enrolments jumped 5.7 per cent.

The ideas don't just come out of his head. They are the result of incredibly large real world trials. When the US Internal Revenue Service wanted to increase the honesty of businesses reporting sales it tried adding an extra signature box to the top of the form. Reported sales boomed.

Critics say that nudges engineer outcomes, but so too do badly designed forms, such as ones that don't have signature boxes at the top. It's just that they do it thoughtlessly.

In Australia the Tax Office has been doing it thoughtfully for half a decade.

If you are late paying your tax this year you'll get a letter that says: "When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia's way of life."

The words weren't chosen at random. They were the result of real time experiments trying out different combinations of words on millions of taxpayers.

This year the letters are in different coloured inks: first blue, then amber (signalling a warning) then red. Cheryl-Lea Field, the deputy commissioner in charge of debt recovery, says this simple change has pushed up the number of recipients paying within 30 days from 30.3 to 36.8 per cent. The number making partial payments has jumped from 44 to 50 per cent.

And she's sending reminder texts to perennial late payers. The most effective include the taxpayer's name ("Peter") and arrive just before the payment is due. Last year an extra 65,000 paid by the due date, at a cost of only 9c per text.

The office has even has discovered the power of "thank you" texts. Late payers feel their effort has been appreciated and pay more quickly next time.

Her phone staff no longer use inflexible scripts. They used to have to ask "can you pay today" even after the caller had made it quite clear they couldn't. Now they are allowed to listen and help draw up payment plans.

There's even an online calculator to help late payers draw up plans themselves. And it'll soon come with gentle warnings, pointing out where, in the view of the software, the plan could be too optimistic.

In September President Obama signed an executive order requiring all US agencies to make use of behavioural insights. NSW premier Mike Baird has set up his own behavioural insights unit using staff and ideas borrowed from the British PM David Cameron. And now Malcolm Turnbull's on board. On one level they are doing no more than requiring agencies to think about how they interact with us. On another they are asking agencies to manipulate us.

It's something we're used to: advertisers have done it for years. Turnbull wants to even the score.

In The Age and Sydney Morning Herald

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They're not going to push up the GST. Super is where the action is

It's getting near the time when Scott Morrison and Malcolm Turnbull will need to make decisions about tax, and I'm not talking about the GST.

The big GST decision, on whether to lift it to 15 per cent, is already as good as made. The Treasurer and Prime Minister won't do it. Nor will they extend the goods and services tax to food, to health or to education, although they might yet extend it to financial services.

Extending it to health and education would be unfair. People such as me who use public schools and public hospitals without charge would pay no extra tax, while others already paying dearly would be asked to pay an extra 10 per cent. And, in all likelihood, the government would feel obliged to further fund private schools and the private health system to compensate. Extending the GST to fresh food was never going to happen. It would hit low earners the hardest, and these days it's almost impossible to compensate them.

When the GST was introduced in 2000, most low earners paid tax. But not now. In the past 15 years, the tax-free threshold has tripled to $18,000. And most self-funded retirees no longer pay tax. It's no longer possible to compensate them by cutting tax rates. And because many of them don't receive cash payments (that's why they are called "self-funded"), it's not possible to compensate them by boosting payments either.

Lifting the GST to 15 per cent or fully taxing food would be incredibly difficult if they wanted to compensate the least-well off, and Australians insist on it. New Zealand lifted its GST from 10 per cent to 12.5 per cent in 1989 without compensation, but it couldn't happen here.

And they'd be doing it for the states. Under existing laws, the GST flows to them. But the states aren't even agreed they want more GST. With NSW in favour, and Victoria against, and the money not flowing to the Commonwealth in any event, there's little reason for it to go out on a limb putting the case for collecting more...

Except for financial services. They weren't properly taxed when the GST was introduced, because they were hard to define. The financial service is the margin the bank adds to a product such as a mortgage, rather than the mortgage itself. If Australia managed to do it, it would raise an extra $4.7 billion a year without the need to compensate low earners (financial services are disproportionately used by high earners).

And it could use the promise of extra money for the states to persuade them to phase out some of their truly objectionable taxes, such as those that single out insurance and commercial property transactions.

Morrison and Turnbull's big decisions concern superannuation. Right now, most wage earners pay just 15 per cent on their contributions, even if they are on the top marginal tax rate and earning $200,000-plus. (At Labor's last gasp, it introduced an extra tax for the small number of Australians on $300,000-plus, taking their rate to a still-concessional 30 per cent.)

The best way to tax contributions would be to tax everyone at their marginal rate. Very low earners would pay nothing, very high earners would pay 45 per cent, and so on. It would rake in an extra $15 billion a year, an amount that would climb over time.

If they were feeling generous, they could give some of it back, perhaps a flat 10 or 15 percentage points up to a limit, through a rebate paid into funds.

But they would have to go further. Earnings, as well as contributions are lightly taxed, a benefit that accrues overwhelmingly to high earners with large balances. The standard rate is just 15 per cent, although funds are able to roughly halve it by the way they structure their investments. When the fund is used to pay out retirement benefits, the tax rate on earnings drops to zero. Not only are the payouts not taxed, no matter how big, but the earnings used to generate those payouts are completely untaxed, no matter how much is under management.

Unless Morrison fixes it, the hole will get bigger and bigger as more and more Australians retire and enjoy completely untaxed investment earnings.

Fixing it will make him enemies. Neither the big institutions that control the private funds nor the unions and employers that control the industry funds will want to pay more tax, and retirees will claim that taxing their investment earnings is retrospective.

But there's a way out. It's the one the government has already used to push up the pension age. Rather than declaring that the investment earnings of retirees will be taxed now, Morrison could declare that the investment earnings of future retirees will be taxed in, say, 15 years. Nothing would be retrospective. Anyone who had already retired could keep their zero tax rate until they died. Future retirees would have plenty of time to prepare.

Squibbing this decision will condemn Australia to an ever-widening hole in its tax system and show that Morrison and Turnbull aren't serious about fixing it.

I think they are.

In The Age and Sydney Morning Herald

 

 

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Immigration: The economic case for open borders

This is about the worst time to write that we should open our borders.

One of the suicide bombers who took part in the Paris attacks was a refugee, or at least had the passport of someone who was let in as a Syrian refugee.

The assistant speaker of the NSW Parliament has called on the Prime Minister to close our borders to Islamic refugees, at least until we have a better idea of who we are letting in. Yet, the case for opening our borders, as part of a staged process, in concert with other countries, is extraordinarily strong.

Worldwide, the best guess is that if all borders were opened and people could move where they liked, global income would double. By way of comparison the gains from removing barriers to trade such as tariffs amount to only a few per cent of global GDP.

Harvard economist Lant​ Pritchett says even if the barriers to immigration were loosened just a bit (enough to boost the US labour force by 1 per cent) global income would grow by more than all the world's official foreign aid combined. US economist Alex Tabarrok​, writing in the October issue of the The Atlantic, describes immigration as the greatest anti-poverty program ever devised. 

But what would freer immigration do for us, at the receiving end? We can take it as read that it would improve the lives of those who moved here. That's why they'd do it.

In a draft report released on Friday, the Productivity Commission presented the preliminary results of modelling it is conducting on the effects of immigration on income per head. It said that without any further immigration, Australia's real income per head would climb 42 per cent by 2060. With immigration, continued at its present rate, income per head would climb 50 per cent.

Immigration makes us richer. Without further immigration the proportion of the population aged 65 and older would swell from 14 to 28 per cent and the number of workers would shrink. Continued at present levels, immigration would hold the proportion at 22 per cent.

Australian National University professor Bob Gregory believes the government's first intergenerational report got immigration wrong. It said that immigration was of little use in stopping the population from aging, because immigrants themselves aged. Gregory says while this is true in the very long-term, from decade to decade the effect is enormous...

Immigrants are typically young, but not too young, between the ages of 18 and 40 – exactly the age range in which they are the least likely to use government services and most likely to pay for them.

So big has been the economic boost from increased immigration over the past decade that Gregory compares it to the mining boom. He says it eclipses the potential boost from lifting productivity, except while the mining boom came and went, the boost from increased immigration will last.

It is already beyond our control. Immigration soared way beyond what planners expected in the first half of the last decade, and then dived at the start of this one, making a mockery of the former prime minister John Howard's famous declaration that we would decide who came here and the circumstances in which they came.

New Zealanders can move here without limit under an agreement signed decades ago. In better times, 45,500 a year moved here. Now, with the New Zealand economy looking better and ours worse, it's only half that.

An astounding 345,600 foreign students live here with the ability to work (down from 434,000 when times were better), 188,000 workers live here on temporary 457 visas (down from 202,000), and 143,900 work here while on holidays.

All of these programs are uncapped, all give the people who use them the inside running on permanent migration, and all eat away at the fiction that we control our borders. Loosening control further is likely to help, rather than harm us, so long as it boosts immigration.

It's true that immigrants put a greater strain on our cities and on our environment, but we have scarcely begun to manage those things properly. Charging for road use and carbon emissions would be a start. And by contributing to Australia, immigrants give us the resources to build more infrastructure and protect our environment, if we have the will to do so.

Immigration boosts incomes because it allows people to move to where they can reach their full potential. Imagine a world in which the citizens of Ballarat were walled in and prevented from taking advantage of the opportunities in Melbourne. Imagine that the citizens of Melbourne gave them aid and bombed their enemies, telling them they would do anything to help them, other than letting them in.

Even worse, imagine that we locked up the citizens of Ballarat who tried to reach Melbourne, preventing them working, deliberately wasting the greatest resource on earth.

When the father of modern economics, Adam Smith, wrote The Wealth of Nations, he was referring not to wealth in the form of gold or silver, but to the wealth embodied in people able to exercise their full potential.

Yes, we would need to free up immigration slowly in concert with other countries, perhaps as part of trade agreements, and yes, we would need to be on the lookout for terrorists and criminals, just as we need to be on the lookout at home.

But the benefits of freeing up immigration dwarf those of anything else imaginable. In time, I think we'll see these benefits.

In The Age and Sydney Morning Herald

 

 

Recommended reading

. The real benefits of migration - Tim Harford, Financial Times, October 27, 2015

. The Case for Getting Rid of Borders—Completely - Alex Tabarrok, The Atlantic, October 10, 2015

. If People Could Immigrate Anywhere, Would Poverty Be Eliminated? - Shaun Raviv, The Atlantic April 26, 2015

. Economics and Emigration: Trillion-Dollar Bills on the Sidewalk? - Michael A Clemens, Journal of Economic Perspectives, Summer 2011

. Let Their People Come: Lant Pritchett, Center For Global Development, Washington 2006

. What makes a terrorist? - Alan B. Krueger, Vox, 11 September, 2007

. Open Borders: The Case website

 

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For dopey career males like me.. When tax doesn't matter

Scott Morrison has got tax the wrong way around. A week ago he told bunch of bemused economists that income tax had "become the silent tax", as if that was a bad thing. He liked the line so much, he used it on Sky News a few days later, and then at a press conference at Parliament House. "With income tax, you pay it all year and often don't see what's getting taken out of your pocket," he told Sky. "You go to the automatic teller machine and you pull out your money and it doesn't say on there that you paid 19 cents in the dollar or 45 plus the Medicare levy, plus the deficit reduction levy." "This is a silent tax, it's a forgotten tax and this is something that is holding Australians back who want to actually work more," he told the press conference. Whoa. If income tax really was silent (and I don't think for a minute it is – it's on pay slips and group certificates) it wouldn't be holding anyone back from doing anything. It'd be a close to perfect tax, one that didn't change behaviour. It wouldn't be a drag on productivity because no-one would ease off work in order to avoid paying it. If only. As it happens, income tax is a bit like that for many men. They know what they are paying, but it doesn't stop them working. As Melbourne University's John Freebairn confided to delegates at the conference Morrison spoke at: "For dopey career males like me who are are no good at cooking and looking after children, our elasticity of labour supply is almost zero." Such men have nowhere else to go. High income tax rates aren't going to stop them working. "But women with children have lots other things they can do," Freebairn continued. "Their elasticity is pretty high. Setting labour tax rates high on dopey males like me has almost no distortion costs. But setting it high on smart young women thinking about starting families has huge costs." Women considering returning to work or putting in more hours after having children most certainly do factor in the tax they'll have to pay (they look it up) along with the extra childcare costs they will incur and the family tax benefits they will lose. The total, the so-called effective marginal tax rate, is often close to and in some cases surpasses 100 per cent of what they would earn, meaning work leaves them no better off. It most certainly does put them off working. It's a drag on the economy far bigger than than that faced by working men pushed into higher tax brackets that Morrison says they don't even know about. Removing distortions the tax system actually imposes ought to be at the heart of the changes we will make. Helpfully, the treasury ranks them in its tax discussion paper. The worst – by far – is stamp duty on real estate transactions. The treasury says it is three times as distorting as income tax. People really do stay put rather than move house in order to avoid paying it. The best tax, by far, is land tax. As Freebairn says, land can't go anywhere. Taxing it makes little difference to anything. The benefits from simply swapping stamp duty for land tax are immense, dwarfing the treasury's estimate of the benefits from swapping income tax for goods and services tax. As would be the benefits of more broadly taxing super-profits (despite the kerfuffle over the mining tax). Super profits flow from things that are stuck here. They derive from the minerals and petroleum that are stuck in the ground and from the monopoly position of businesses such as banks. People will continue to mine and operate banks even if extra tax cuts the profits to just a bit beyond ordinary, rather than super. If a super-profits tax was used to cut ordinary company tax, it'd be a double win. And if all income was taxed as income, income tax would distort very little. Right now fringe benefits and super contributions are taxed more lightly than wages. Yet they come from the same pot. As Freebairn says: "a dollar is a dollar is a dollar, certainly to the employer." Taxed evenly, people would no longer be encouraged to accept company cars and dine out in lieu of cash. And Morrison would rake in an extra $20 billion. There's a lot he can do to get Australia moving. The GST is the least of it. In The Age and Sydney Morning Herald

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If Lehman Brothers had been 'Lehman Sisters'... Harnessing the power of women

If Malcolm Turnbull wants to really unleash Australia's potential, he should hire Martin Parkinson.

Parkinson is the treasury secretary Abbott unfairly sacked against the wishes of his treasurer. Jetting in from a stint at Princeton University last week, Parkinson attended Turnbull's 61st birthday party in Sydney before returning to Canberra.

When he took over as treasury secretary in 2011, after a year away running the climate change department, he noticed that something was wrong.

"I realised that the nature of the policy discussions was quite masculine, whereas the nature of the policy discussions on issues – just as deeply technical and complex – in climate change were of a different style," he said later. "That's what made me start to think, what is going on here?"

What he did next is detailed in a riveting new book titled New Women, New Men, New Economy by corporate advisers Narelle Hooper and Rodin Genoff.

After seeking advice, Parkinson not only set targets for the proportion of women in the treasury senior executive (35 per cent by 2016, 40 per cent soon after) he set about changing what treasury valued to bring them about. When picking candidates for promotion or special projects, more weight was to be given to co-ordination and people skills and less to conceptual and analytic skills.

Because every enterprise needs both.

In example after example, Hooper and Genoff demonstrate that organisations that make good use of women perform better than those that don't.

When Credit Suisse examined the performance of 3000 companies in 40 markets over nine years it found that companies where women occupied half the top slots did 50 per cent better than those in which they didn't.

"It was such a consistent pattern that the researchers initially questioned their analysis and checked it again," Hooper and Genoff write. They were seeing what doctors call a dose effect. "The more women, the higher the performance".

McKinsey and Co reported this year that the 25 per cent of companies most likely to employ female executives did far better financially than the other 75 per cent. Those that were also racially diverse did better still.

Diversity matters because the more mindsets you can bring to creating something or solving a problem, the less likely it is you'll miss something out.

Google is renowned for being innovative, yet when it launched its YouTube app for iPhones in 2012, 5 to 10 per cent of the videos loaded upside down. Without knowing it, Google's mostly right-handed staff had designed an app for right-handers.

In other spheres, the consequences of excluding insights can be worse.

Neelie Kroes, the European Union commissioner for competition during the financial crisis, put it this way: "If Lehman Brothers had been 'Lehman Sisters', would the crisis have happened like it did?"

She said the answer was No. "Women managers are naturally more risk-averse and they think about the long term. Generally women have a better ear to listen and they are less likely to pretend to know everything themselves. They are team players with less ego."

This isn't to say that women are always better at making decisions than men. In some spheres women might be, in others women might not. The differences are nowhere near as important as the enormous and demonstrable benefits of using the skills of both.

The treasury's target goes beyond ensuring that 40 per cent of its executives are women (already 52 per cent of its staff are women). Its deputy secretary Nigel Ray told a senate hearing last month that the target was better described as 40-40-20: 40 per cent women, 40 per cent men, and 20 per cent of either.

To get it, the treasury runs unconscious bias training sessions and uses its formidable analytical skills to monitor gender splits in performance ratings, promotion and pay. It's adopted an "if not, why not" approach to requests for flexible work. The onus is now on the treasury supervisor to explain why a request for reduced hours or working from home can't be accommodated rather than on the worker to explain why it should be.

Smart companies like Rio and Qantas get it. Rio finds women use less fuel when they drive trucks. And the Irish-born openly gay Qantas chief Alan Joyce says if someone like him can run an Australian airline, anyone should be able to do anything.

Australia is going to have to use every resource it has if it's to make the most of the decades ahead. Parkinson gets it, and he is a first class economist and administrator to boot. Turnbull could do far worse than put him and his insights to work.

In The Age and Sydney Morning Herald

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Mortgage rates: the big four think they'll get away with it

Notice how quiet the big four banks have been since they jacked up interest rates?

Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.

Not too long ago the banks would have defended their rate rises on the radio and television to egg each other on. Here's Westpac's then retail chief, Peter Hanlon, in 2009. He had just whacked up mortgage rates by an extra 0.20 points on top of the Reserve Bank's rise of 0.25. "All the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding," he told radio 3AW 's Neil Mitchell. "All the banks are in the same boat, but they'll obviously make their own decisions."

It was known as the mating call of the banks. Discussing prices over the phone would have been illegal, so the banks communicated by radio.

And then the government outlawed that too. Anti-price-signalling legislation means they've got to stay silent and just hope each of the others takes the hint.

This time they have...

It's true that the smaller banks won't push up rates, because they're not affected by the new tougher capital requirements, but that doesn't much worry the big four. They figured out long ago that most of us don't change banks, even when we should.

The big four say they're pushing up rates because they've been forced to hold more capital. Until now the big banks have been required to hold embarrassingly little to back up their mortgages. The Murray Financial System Inquiry found that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.

Tying up more capital on each loan will necessarily mean a lower return, which ought to be OK. Each loan becomes safer. Overseas that's what happens – shareholders take a hit – but not here. Our big banks believe they can widen their margins, restore their profits and maintain their payouts to shareholders.

Former treasurer Wayne Swan used to rail against the banks for this sort of behaviour: "If you're not happy with your bank, walk down the road and get a better deal."

Swan set up a bank-switching hotline, required banks to hand over lists of direct debits to departing customers, and eventually abolished mortgage exit fees, but none of it seemed to help.

Even though the smaller banks offer lower mortgage rates and accept lower returns, we're reluctant to move to them. It's true that under the cover of the global financial crisis many of them became big banks in disguise. The Commonwealth now owns BankWest and most of Mortgage Choice. Westpac owns Rams Home Loans, St George and the Bank of Melbourne.

One of the reasons we are so reluctant to switch to the small guys is our distaste for filling in forms. Going to a new bank means proving your identity all over again. It means demonstrating spending and savings habits. It means revaluing your house, and not being too old to look like a good prospect. Those who do manage it are likely to be hunted down by their old banks' retention teams and bribed to stay with the sort of low rates that ought to have been available to all of the bank's customers.

The best way to make switching easy would be complete account number portability of the kind we have for mobile phone numbers. There's no need to re-establish your identity and no need to speak to your old provider. The new one switches everything across. A review of the idea in 2011 found the technology wasn't yet available, but it must be coming closer.

And there's another, sadder, reason we are reluctant to move. Some of us are comforted by high profits. An extraordinary survey by the Australia Institute finds that one in five of the big banks' customers think high profits made them safer. They are begging to be fleeced.

We're our own worst enemies, and the big banks know it.

In The Age and Sydney Morning Herald

 

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Westpac and the Commonwealth protect mortgage profits no matter what

If the Commonwealth Bank and Westpac had been located anywhere else, they wouldn't have pushed up rates.

The Australian Prudential Regulation Authority has imposed tough new capital requirements that will require each of the big banks to back up their housing loans with more cash.

In the United States and elsewhere where this has happened the banks' shareholders simply accepted lower returns. More capital made the banks safer, less deserving of an outsized return to compensate for risk.

Not here. Westpac and the Commonwealth seem to believe their shareholders are entitled to outsized returns no matter what.

Westpac's return on shareholder funds is an astonishing 15.8 per cent. The Commonwealth's is even higher - 18.2 per cent.

In the United States, Morgan Stanley, run by Australian James Gorman, accepts high single-digit returns. In Australia recently he said investors around the world were becoming more comfortable with idea of banks holding more capital in exchange for lower earnings.

As recently as two months ago the head of the Commonwealth Bank, Ian Narev, said the same thing. "As you carry a bit more capital and wear a bit more costs, you are going to get a moderate decline in profitability," he told shareholders...

And perhaps to increase them. The best guess within official circles is that if the banks insisted on merely maintaining their profits they would have had to add the equivalent of 0.10 percentage points to the price of each loan. Because (so far) they are raising rates only on mortgages and not on business loans they would probably have to recoup a bit more from each mortgage, although not as much as 0.15 percentage points.

Westpac is lifting its variable mortgage rates by 0.20 points, the Commonwealth by 0.15 points. They are doing it in a year in which their other costs of borrowing have fallen.

The only thing that will make them think twice is losing business. The smaller banks aren't threatened with the same higher costs. They already heavily back their loans. They are in an excellent position to steal Commonwealth and Westpac customers.

The Commonwealth and Westpac think we're too lazy to make the switch.

In The Age and Sydney Morning Herald

 

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Now Hockey says he wanted to tax the rich all along

Now he tells us.

Hockey wanted to wind back super tax concessions all along.

"We should be wiser and more consistent on tax concessions," the former treasurer told Parliament in his farewell speech. "In particular, tax concessions on superannuation should be carefully pared back."

It wasn't what he said while he had the job.

When Labor put forward rather mild measures that would have reduced super tax concessions Hockey said only Labor wanted "to introduce new taxes and have new changes on superannuation".

"The last thing you would want to do to people relying on investment income is to hit them with a new tax," he said.

All Labor wanted was to ensure that retirees getting more than $75,000 a year in super actually paid tax, at a rate of 15 per cent. And it wanted to more highly tax super contributions, but only for Australians earning more than $250,000.

Until Labor came forward with these most inoffensive of suggestions, Hockey had indeed spoken quietly about doing something about super tax concessions. But as soon as Labor offered support, he and the rest of the Coalition backtracked as fast as they could.

He now says he wanted to re-skew negative gearing toward new housing so there was an "incentive to add to the housing stock rather than an incentive to speculate on existing property".

Again, it's not what he said at the time. In July he attacked Labor's never-announced proposal to do something just like that, saying it would create "an exception to a standing rule in taxation law, and that is that you can deduct the cost of, or the losses, against, another form of income".

In his valedictory speech he said he had endeavoured "and failed" to keep all tax options on the table. It was an admission that he had wanted to do the right thing but lacked the strength to follow through.

Who knows? Eventually he might have found it. But how long would we have had to wait?

In The Age and Sydney Morning Herald

 

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Asking what super is for opens a can of worms

The Treasurer jumped the gun.

Promising in his formal response to the financial system inquiry to determine and enshrine in legislation the objectives of Australia's $2 trillion superannuation system Scott Morrison cut to the chase. It's primary purpose was to "ensure that when Australians reach retirement age they will not be reliant on welfare".

Which is fair enough. But other people think super is for other things, which is why the Murray Review demanded that someone clarify its purpose.

Some think it's for income smoothing, in which case it make sense to allow withdrawals for home deposits. Some think it's for wealth accumulation, in which case it makes sense to keep giving high earners the biggest super tax breaks. Some think it's to build national saving, in which case tax breaks for high earners also make sense.

If the government adopts Morrison's definition of the purpose, tax breaks skewed to high earners make no sense at all. They ought to be skewed in the other direction, towards those actually at risk of falling back on the pension.

Right now, as the Murray review told him, the top 10 per cent of earners get more than 35 per cent of the concessions. The bottom 10 per cent get none, the next 10 per cent get just 1 per cent.

It would be easy to switch things around. Labor's Henry tax review suggested taxing all super contributions at the taxpayer's marginal rate offset by capped rebates...

But maybe that's not what Morrison means. He and Assistant Treasurer Kelly O'Dwyer are keener to talk about putting people in the "driver's seat" when it comes to managing their money. That means allowing all Australians the right to choose their own fund, whatever their enterprise agreement says. David Murray saw it as human right. Morrison and O'Dwyer might also see it as containing the influence of unions.

Murray suggested going further and introducing a competitive tender to pick new default funds, taking the power away from employers. The Coalition is less gung-ho on that, punting the idea off the Productivity Commission to develop models ahead of an inquiry later this decade.

There are good reasons why no-one has adopted a formal definition of the purpose of super until now. Clarifying the purpose would involve clarifying the role of tax concessions and compulsion. It would involve asking hard questions.

In The Age and Sydney Morning Herald

 

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The bubble is shrinking. But why were house prices ever so high in the first place?

The madness is receding.

Each month for a year now more than half of all the dollars lent for buying and building homes went to investors. The insanity is apparent when you consider that until the mid-1990s only 10 to 20 per cent went to investors. People bought houses to live in.

In May this year as prices in Sydney and Melbourne soared to once-unimaginable heights the proportion lent to investors hit an all-time high of 53.5 per cent. And then it slipped, in August sliding below 50 per cent for the first time in a year.

At 48.5 per cent, it's still ridiculously high, but something has changed. The canaries can smell the gas.

The Reserve Bank has been desperate to contain investors because it believes they are accelerating the boom and might amplify the risk of crash.

As it put it in its Financial Stability Review released on Friday: "Investors are more likely to contribute to the run-up in prices than owner-occupiers because the rationales for their purchases differ: capital gains are likely a greater motivating factor for investors, and rising prices can induce even more investor demand by increasing expectations for future price rises. Investors also tend to face fewer barriers to exit."

Investors were also denying owner-occupiers houses they once would have bought. Before the cut in capital gains tax that sparked the boom in borrowing for investment, fewer than half the households headed by Australians aged 25 to 34 rented. Now it's 60 per cent.

The Bank and the Prudential Regulation Authority have been heavying the retail banks to make things more difficult for investors. Last week they hailed "tentative" signs of success. And then Westpac put up all variable mortgage rates 0.20 per cent.

At Saturday's auctions in Sydney only 65.1 per cent of properties sold. A week before it had been 70 per cent. Back in May it was 90 per cent. Melbourne's clearance rates held up at 73 per cent.

Macquarie Group is predicting a 7.5 per cent decline in house prices over the next two years. If it's gentle, it'll be good. But why did they ever get so punishingly high in the first place?

Tax is an awfully big part of it. When the Howard government halved the headline rate of capital gains tax at the end of the 1990s the price of a typical house jumped from two to three times household disposable income to four times disposable income. At no other time in Australian history have prices jumped so far so quickly. Negative gearing (making losses on rent to offset against other income in order to enjoy a barely-taxed capital gain) became mainstream...

"It is a truism that if an investor is buying a property, an owner-occupier is not," the head of the Bank's financial stability department Lucci Ellis told the parliament's home ownership inquiry in July. "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties."

 

Investors like to believe that they are creating new properties, adding to supply and driving down prices. But few of them are. Before the explosion in negative gearing, one in every six new investors built a home. It's now one in 16.

Tilt has also ramped up house prices by making them more affordable to start with, at the cost of being less affordable over time. That's the "tilt". It used to be the other way around. When interest rates and inflation were high, the upfront cost of buying was high (because the of the mortgage rate) but the payments became easier over time as wage rises inflated the burden away. These days low interest rates make it much easier to buy a house (so long as you can get a deposit) but low inflation makes it much harder to pay off.

The changed tilt has pushed up prices because borrowers who didn't realise what happened rushed in and bid in order to take advantage of cheap rates without realising that the burden would stay with them for much longer.

Increasing wealth has been the other big driver of house prices. The richer we get after meeting our basic needs the more we are prepared to pay for the place in which we live. (The fact that owner-occupied housing is entirely tax free helps as well.)

The typical home now has 3.1 bedrooms, up from 2.9 two decades ago, as well as other rooms such as studies and extra living rooms that used to be uncommon. Eight out of 10 homes now have at least one bedroom free.

But that's not where the real money is going. For those who that can afford it, place is more important than space. And there's a limited number of well-located places. The bigger our cities become the more important it becomes to have a place close well in to the centre, or vaguely near the sea.

It's the prices in these suburbs that move first, and short of a wealth tax or a land tax or a capital gains tax on the family home, there's nothing that that can be done to stop them rising.

"More supply", the simple fix, isn't going to help.

It's wise to resign ourselves to the reality that some house prices are always going to be beyond most of us. But if the other prices of other houses ease off and fall for a bit, we will be able to count ourselves lucky.

In The Age and Sydney Morning Herald

 

 

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Deadline stressed? You've brought it on yourself

You probably shouldn't be reading this.

You've got too much to do. But that's one of the odd things we do when we've too much to do: we thumb through newspapers, we check our email, we read articles like this about how to get through our list rather than actually getting through our list.

We act as if we've taken leave of our senses.

Just about everyone knows the way to get through a list. It's to take on fewer projects, start big projects earlier and finish them sooner. But almost no one does it. It's as if, when we are busy, we lose the mental strength to escape from our busyness.

That might sound familiar. It should. It's the way dieters approach dieting. Everyone knows that the way to do it is to eat less and to eat less often. Yet most can't manage it. We start to diet, then we get hungry, and lose the mental strength needed to keep going.

This isn't just an analogy. Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir​ reckon it's the same thing. They set out their argument in their new book titled Scarcity: The New Science of Having Less and How It Defines Our Lives.

They believe that scarcity (whether of time or food or money) makes us temporarily dumber.

They're even prepared to say how much dumber. They say it's worth 13 to 14 IQ points.

Thirteen points is enough to move you from "average" to "superior" intelligence, they say. "If you move in the other direction, losing 13 points can take you from average to a category labelled borderline deficient."

Not for one second are they saying that busy people are dumb or that dieters are dumb or that poor people are dumb...

They are saying that when we get into those situations we become dumber and that that makes those situations worse. As they put it: "scarcity creates its own trap".

Here's how it worked with a group of shoppers they surveyed at a New Jersey mall. Just before administering the IQ test they asked about auto insurance:

Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision?

Rich and poor shoppers answered the question in much the same way, and were roughly matched in the intelligence test that followed. Then they administered the test to a new group of shoppers, but changed one detail of the question. Instead of it being a $300 service, it became "an expensive $3000 service".

A rich shopper is easily able to handle $3000, but for a poor shopper it is almost impossible. The rich subjects did just as well as before in the intelligence test. The poor subjects did far, far worse.

They'd been made worse because they had been made to think about financial problems, which soaked up their "mental bandwidth".

As Mullainathan and Shafir put it: "The mind orients automatically, powerfully, toward unfulfilled needs. For the hungry, that need is food. For the busy it might be a project that needs to be finished. For the cash-strapped it might be this month's rent payment; for the lonely, a lack of companionship. Scarcity is more than just the displeasure of having very little. It changes how we think."

Someone desperate for enough money to make it through the week will be attracted by a payday loan, whatever the interest rate and the likelihood of paying it back. Their critical facilities will be weakened and they'll become poorer still.

A dieter unable to think about anything but food will relent (just once) telling themselves they will make it up the next day, without realising they'll probably relent the next day as well.

Someone mired in deadlines and an overwhelming workload will say yes to just one more project (so long as it is in the future) without realising that they've just made things worse.

The solution they propose is to consciously build slack into our systems: to only accept work that won't overload us, to go on a less demanding diet, or to further lower the living standard we accept. They are solutions that might make sense if so much of our brains weren't tied up worrying about the next crisis.

And that's the problem.

In The Age and Sydney Morning Herald

 

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No longer a nation of homeowners, we're renting

Once a nation of homeowners, we are becoming a nation of renters.

It's been two years since the latest update on housing occupancy and the one released on Friday show the proportion of households renting has edged up to 31.4 per cent. The proportion owning outright is only a point or two in front, at 32.5 per cent. Around 35 per cent of homes are mortgaged.

Back before the tax change that ignited negative gearing at the end of the 1990s around 40 per cent of households owned outright, and only 28 per cent rented.

It's the flipside of the boom in second properties that has made Australia a nation of landlords. The Bureau of Statistics says an extraordinary 1.5 million households now own properties they don't live in. Among high earners 39 per cent own a second, third or fourth property.

The extra properties need tenants, and the higher prices the landlords have been prepared to pay to get the properties have created a new class of tenants - those who once would have been able to afford to buy in their own right.

In September 1999 the Howard government halved the headline rate of capital gains tax, making the life of a negatively geared landlord suddenly up to twice as attractive as it had been.

So popular has the lifestyle become that the Bureau of Statistics reports that about 300,000 landlords don't live in their own homes. They rent out, while renting elsewhere themselves.

Among households headed by Australians aged under 35 an extraordinary 63.4 per cent rent.

Labor has held out the prospect of some sort of action to wind back negative gearing in order to make owner-occupation more affordable.

Tony Abbott ruled it out, but there's a glimmer of hope. Malcolm Turnbull is prepared to think again.

In The Age and Sydney Morning Herald

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No revenue problem Treasurer? Tax revenue falls $1.7 billion short:

Weeks after Treasurer Scott Morrison declared his budget had "a spending problem, not a revenue problem", new finance department figures show revenue falling short.

The figures for the first two months of the financial year show revenue of only $61.113 billion in July and August, well short of the $63.336 billion expected when the budget was delivered in July.

Tax revenue is down $1.7 billion down on the budget forecast due to both slower than expected wage growth and weaker than expected dividend payments.

Superannuation tax receipts are about 20 per cent short of expectations and the resource tax has brought in less than half of what was expected due in part to the lower oil price.

On the upside, company tax takings are $1 billion ahead of expectations and the lower Australian dollar has helped bring in an extra $1 billion in customs duty.

Spending is roughly as expected at $73.495 billion for the first two months of the financial year.

Former treasurer Joe Hockey forecast a deficit this financial year of $35.1 billion. Two months in to the year the deficit is $13.5 billion, more than one third of the forecast total.

But the department says that care needs to be taken when comparing cumulative revenue to full-year forecasts as takings can vary from month to month.

In The Age and Sydney Morning Herald

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Why you're working an extra 16 minutes a week

Feel like you're working longer days? That's because if you're a typical Australian worker, you are.

The latest employment figures show that, on average, we are each putting in a quarter of an hour more per week than this time last year.

The working week has grown over a year in which the unemployment rate has stayed put, suggesting that had employers put on extra workers rather than work their existing workforce harder, unemployment would be a good deal lower.

Australia's unemployment rate stayed steady at 6.2 per cent in September, the same rate that prevailed in September 2014.

But in September 2014 the average full-time worker put in 39 hours and 13 minutes per week. The total is now 39 hours and 29 minutes, a jump of 16 minutes.

The average part-time worker put in 16 hours and 42 minutes per week. The total is now 16 hours and 56 minutes, a jump of 14 minutes.

The extra hours are a sign of improving business conditions that aren't yet matched by improved business confidence.

The National Australia Bank's measure of business conditions has climbed from near-neutral to positive over a year in which its measure of business confidence has failed to grow.

Without confidence that better conditions will continue, it makes sense to put on more hours rather than hire more workers who might be difficult to keep.

Rough estimates suggest that if employers had put on more workers instead of increasing the number of hours their existing employees worked, about 291,000 Australians would have gained jobs over the past year instead of 230,100...

Employment Minister Michaelia Cash described the trend as "very healthy", saying that in the past nine months 160,300 jobs had been created, the highest number in a nine-month period for five years.

NSW has been responsible for the vast bulk of the jobs growth, boosting employment by 100,500. Queensland lifted employment by 28,000, Victoria by 15,600 and Western Australia and the Northern Territory by 5200 and 4500 respectively.

Employment grew by just 1100 in the Northern Territory, by 800 in Tasmania and by 600 in the Australian Capital Territory.

In The Age and Sydney Morning Herald

 

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Switching sides. Now Coalition voters get the glooms

It's as if they have switched sides

Since the ascension of Malcolm Turnbull, it's Coalition voters who have been feeling downbeat - the most downbeat since the election - and Labor voters who've been feeling better.

It's usual for consumer confidence to change as soon as there's change at the top. Usually what happens is that supporters of the party that lost become pessimistic and supporters of the party that won become optimistic and stay that way that way as long as their side is in power. Throughout the entire life of the Rudd and Gillard governments Labor voters were more optimistic than Coalition voters and stayed that way right through until the 2013 election when positions swapped.

Coalition voters have been clearly more optimistic than Labor voters in the Westpac Melbourne Institute survey ever since the election of Tony Abbott. Until now.

The October survey is the first since Malcolm Turnbull became Prime Minister. Confidence among Coalition voters dived from a clearly positive 105.9 points (on a scale where 100 means optimists and pessimists are evenly balanced) to 102.1, the lowest reading in the two-year history of the Coalition government.

It's Labor voters who have had a surge of enthusiasm. Their confidence has surged from a deeply gloomy 86.7 to 93.3. It's the second-highest reading in the life of the Coalition government...

If all of Australia had reacted as did Labor voters, consumer confidence would have surged 7.6 per cent. Because Coalition voters turned bearish, confidence surged only 4.4 per cent.

"The result is a little short of the increase we would had expected given the strong boost the government received in the polls," Westpac chief economist Bill Evans said.

Labor voters appear to have found a prime minister that makes them feel better while Coalition voters feel worse but still plan to vote for the Coalition.

The consumer sentiment index is made up of five questions, dealing with perceptions of changes in family finances, perceptions of future changes in family finances, economic conditions over the next year and economic conditions over the next five years as well as whether now is the right time to buy a major household item.

On all but one of those measures consumers are more confident since the ascension of Malcolm Turnbull. The exception is their assessment of the Australian economy over the next five years.

A separate part of the survey revealed that expectations of house price increases fell by 3.9 per cent between September and October. They are down by around 15 per cent over the past three months and 25 per cent from their peak in December 2013.

In The Age and Sydney Morning Herald

 

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Just 'cos Westpac raises rates... A Reserve Bank rate cut is no sure thing

Steady on. It's far too early to predict a rate cut in November. And that isn't just because the Reserve Bank genuinely hasn't considered the question and won't until shortly before its November meeting.

Macquarie Group's interest rate analyst James McIntyre thinks the RBA will cut rates because Westpac has pushed them up. It's "all but a done deal", he says.

It's true that if all of the lenders lifted their retail rates by 0.25 points, the Reserve Bank would be likely to cut its cash rate by 0.25 points.

Governor Glenn Stevens has said often in the past that the bank targets retail rates and uses its cash rate as merely a means to get at that end. If the retail banks push up or push down rates on their own, the Reserve Bank will push down or push up its cash rate to compensate.

But Westpac is only one of the big four banks, and the big four between them control only around 80 per cent of the mortgage market.

Its decision to lift its variable mortgage rates by 0.20 points might only affect one quarter of the market, perhaps less.

And it's only lifted them on products with the Westpac brand. For the moment products branded St George and Bank of Melbourne are unaffected.

Treasurer Scott Morrison has forcefully made the point that Westpac's hike is more than would be needed to compensate it for new rules that will push up its cost of capital.

If he succeeds in dissuading others from following it, the Reserve Bank is unlikely to move in November. Westpac's move will feed into the mix of factors to be considered, but in a small way.

In The Age and Sydney Morning Herald

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Trans-Pacific Partnership: we're selling sovereignty for little return

Now Malcolm's sucked in.

Hot on the heels of his predecessor, who labelled the China-Australia Free Trade agreement an "export agreement" (when his own modelling showed it would boost imports more than exports), and claimed it would create hundreds of thousands of jobs (when his modelling said it wouldn't even create tens of thousands), Turnbull says the 12-nation Trans-Pacific Partnership will be a "gigantic foundation stone" for Australia's future.

Pressed by an eager Neil Mitchell on Radio 3AW last week for details about the jobs it would create, he said: "More jobs, absolutely. Australian jobs depend upon open markets and free trade".

Which is a pity, because the only economic modelling we have shows it won't create jobs. It'll boost the Australian economy (slightly) by shifting workers away from some jobs towards others, but it will replace rather than add jobs, in the same way as things that are modelled usually do.

Our own Productivity Commission is itching to model the effects of the Trans-Pacific Partnership. It's the sort of task it was set up to do. But for some reason governments don't ask it to, so in this case we have to rely on the work of the prestigious Peterson Institute for International Economics in the United States. It is a supporter of the TPP. One of its blog posts is called "The Case for TPP". Another is titled: "A Convincing Case for Passing the TPP". Yet it finds the economic benefits are slight.

It says 10 years on, the United States economy will be 0.4 per cent bigger as a result of the TPP. That's it. It isn't a boost in economic growth of 0.4 per cent a year (which would be substantial), it's a total boost of 0.4 per cent after a decade, brought about by a barely perceptible lift in economic growth.

The effect on employment is zilch. "Expecting normal US employment then, we do not calculate any increase in the number of people at work," the authors say.

But about one-half of 1 per cent of the US workforce will move from import-competing jobs (typically in manufacturing) to exporting jobs (typically in services) where they will better paid. It's that, and cheaper imports, that drives the small increase in living standards.

Some countries do much better. Japan boosts its income by 2 per cent, according to the model; Malaysia by 5.6 per cent; and Vietnam by 10.5 per cent. But Australia fares much the same as the US. Our economic boost after 10 years is 0.5 per cent. Our manufacturing and mining industries shrink as a result of the deal and our agricultural and service industries grow. The net effect isn't big...

So why do it?

Free trade agreements give us special access to markets that others don't have. Whereas other countries would face tariffs or quotas if they attempted to sell to TPP members, as a member country we would face lower or zero tariffs. We would be inside the castle rather than out, a bit like members of the European Union.

And by cutting our own tariffs (albeit for imports from inside the castle rather than out), we would get cheaper goods. Of course we could (and should) cut all our tariffs, but that wouldn't be playing the trade agreement game. We wouldn't then be able to offer privileged access.

And that's where the problems start. Treating outsiders as worse than importers stuffs up trade. Here's an example. Under the TPP, Japan gets special access to the US car market, but only if its cars are "Japanese". More than a certain proportion of Chinese parts, and there's no special access. So Japan is discouraged from sourcing parts from the most efficient supplier. It means that, like most so-called "free trade" agreements, the TPP is anti-trade. A study of the US-Australia agreement 10 years on found it had rather than boosted trade with the rest of the world.

Much of the TPP deals with services. It'll be easier for Australian-registered architects, lawyers and engineers to get work in other TPP countries, just as it'll be easier for professionals from those other countries to bid for work here. It's the part of the agreement Trade Minister Andrew Robb describes as "truly transformational".

But it comes at a cost. The cost is standardisation. In almost every case the TPP nations will be locked into the US way of doing things and denied the freedom to move to anything else. Copyright is an example. Right now the Productivity Commission is examining whether Australia's copyright term really needs to last until 70 years after the death of the author. Regardless of what it finds, we will be locked into 70 years by the TPP (as well as by the US-Australia Free Trade Agreement). When Robb says the agreements require no changes to our intellectual property laws, he is telling only half the story. They also prevent changes to our intellectual property laws. They lock us into American standards.

We managed to escape a US demand that we give drug manufacturers longer monopoly rights that would have cost our Pharmaceutical Benefits Scheme $100 million a year, but the agreement has locked us into the monopoly rights we do grant. Our rules will be overseen by a TPP Commission to prevent backsliding.

And we are locked into a US-style investor-state dispute settlement scheme that will allow foreign companies (other than tobacco companies) to sue our governments in extraterritorial tribunals.

US-style rules will also be imposed in a range of ways we would probably support. Labor laws in the TPP states will have to outlaw child slavery, environmental laws will have to fight wildlife trafficking, and so on. To prove we are open for e-commerce, we will be unable to pass laws requiring Australian data to be kept within Australia.

Is it all a fair price to pay? On balance I'd say not. But then I am particularly keen on economic sovereignty. The agreement we are about to sign sells it, for not that much in return.

In The Age and Sydney Morning Herald

 

 

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