Portrait of a sick system is chance to put things right

We’re apathetic about super, until we’re not.

On Tuesday phone lines to Australia’s biggest bank-run super funds buckled under a deluge of calls from customers wanting to close multiple accounts. Traffic to the Australian Securities and Investments Commission’s website for consolidating your super jumped 500 per cent.

And in at least one school, Year 12 students were shown two videos; one produced by the Productivity Commission depicting super funds as pigs, and the other prepared by this newspaper, making the point that multiple and poorly chosen accounts can cost members in excess of $400,000 over their working lives.

Asked to check in on their own accounts as homework, some discovered they already had more than one. They had been working casually, flipping burgers and selling clothes. Each new account furnished them with a new insurance policy, which sounds like a bonus until you realise they were getting insured more than once against death and losing their income. They were aged 16 and 17.

Every additional insurance policy, whether junk or not, costs $85,000 over a working life, according to the Productivity Commission report that set off the avalanche of calls. (In reality many wouldn’t cost that much, because they would drain inactive accounts first.) That super funds have knowingly allowed multiple insurance policies to accumulate in the accounts of people too young to benefit is one of a number of scandals uncovered in the report.

The commission’s suggested solutions to the problems of multiple and unsuitable insurance policies are simple: funds would be prevented from foisting them on anyone aged under 25 without their consent; inactive accounts would have their policies stopped. People with inactive accounts are almost certain to have another active account with insurance or no income to insure.

Treasurer Scott Morrison commissioned the inquiry a year ago, at a time when he was still implacably opposed to a banking royal commission. Its head, Producitity Commission deputy chair Karen Chester, refers to it as the “not-so-royal commission”.

Morrison wanted it to examine the costs, fees and net returns of super funds, the role of insurance premiums in eroding member balances, and the antiquated way in which people are pushed into default funds that are tied to jobs, not people. The lines between the two commissions will blur in the coming weeks, as the banking royal commission itself turns its attention to super.

Tuesday’s report is a draft. The Productivity Commission can’t be certain when it will deliver the final report partly because the banking royal commission is taking up so much of bank executives’ time that it would be unfair to ask them to deal with the super report until the banking inquiry is out of the way. But the commission is keen to hear from the rest of us immediately.

On Friday it added a new ‘Brief Comments’ section to its website. Ordinary Australians will be able to upload up to 200 words without the need to make a formal submission. Their names won’t be published but, if they agree, their comments will be. When Chester did this before in an earlier superannuation inquiry, she was able to put the lived experience of Australians to fund representatives in public hearings and get them to concede that things weren’t as rosy as they had been suggesting.

Their investment performance is disheartening. Super funds are made up of asset classes; things such as property, shares, international shares and government bonds, assembled in certain proportions.

By examining the average performance of each of the underlying asset classes and assembling them in the same proportions as each of the regulated funds - in what it thinks is a world first - the commission has been able to compare what the fund’s performance would have been if no special skill had been added with the results they actually delivered over more than a decade, taking account of fees and tax.

Shockingly, it found that the 228 funds taken together (accounting for 93 per cent of all accounts and 61 per cent of all superannuation assets) did worse than if the managers had just set the proportions and then done nothing. Their attempts to pick stocks consistently cost their members money. Without putting too fine a point on it, their members would have been better off paying them to do nothing.

The retail funds, mostly run by the banks, are the worst. Instead of producing the 6 per cent per year they would have if they had just set their asset allocation and sacked their stock pickers, they produced 5 per cent. (Stock pickers in the union and employer-controlled industry funds did add value, but not much, boosting annual returns by 0.2 percentage points.)

The commission says it’s at a loss to understand how the retail stock pickers can be so bad. On the face of it it would take a rare and perverse skill to consistently produce worse results than leaving things alone. Keen readers of the Productivity Commission website will find a clue in one of the submissions, from Kevin Liu and Elizabeth Ooi at the School of Risk and Actuarial Studies at the University of NSW.

Despite their complaints about how the directors of industry funds aren’t independent (most are employer and union representatives), most of the directors of retail funds aren’t independent either. Four out of five are affiliated to the bank or larger entity that owns the fund, often by working for another part of it.

Liu and Ooi find that the more affiliated directors a retail fund had, the worse it performed. And the more related-party service providers it used, the worse it performed. The effect was “both statistically and economically significant, and consistent across different measures of investment performance”. The implication is that affiliated directors put the interests of the bank or larger entity first, perhaps by loading up super funds with products it wanted to shift.

Looked at this way, the superior performance of the industry funds isn’t so much the result of superior skill as it is the result of doing a job well in a straightforward way without a conflict of interest.

It’s also the result of scale. Many of the retail funds are deliberately small. There are around 40,000 of them, a number so big as to almost certainly be designed to confuse and beguile the customer rather than help. It’s no accident that Australia’s biggest industry fund, AustralianSuper, is always one of the top performers.

But some of the industry funds are also small, and are shockers when it comes to performance, sitting alongside the worst of the bank-run funds. Appallingly, new employees and people switching jobs continue to get funneled into them because of the provisions of industrial awards. For as long as that happens their directors will be tempted to keep them open, pocketing board fees for running an organisation that stays subscale but open as the trickle of members leaving is replaced by a stream coming in.

It’s why the commission wants super to follow the person, not the job, with every new labour market entrant (and everyone changing jobs) presented with a list of the top 10 funds and invited to pick and stick for as long as they like, without accumulating multiples. Labor and the Coalition have cautiously welcomed the idea.

It is competing with another model, proposed by Future Fund chair Peter Costello, in which the government would run the only default fund, freezing the top 10 out. It says a lot about how bad the performance of the bank-owned funds has been that some in the Coalition are prepared to countenance it - and also a lot about how much they despise the top-performing union and employer-controlled industry funds.

Australia’s superannuation system is 25 years old. The pool of super savings has climbed to $2.6 trillion. By 2030 it’ll be $5 trillion. It’s important to get it right.

In The Age and Sydney Morning Herald

Read more >>

The appalling truth about our 'world-class' super

Here’s how you can tell the Productivity Commission was spot-on in its assessment of the superannuation system.

Not a single part of the industry, not one, has explicitly endorsed its key recommendation.

That’s because it is intended to help us: users of superannuation who depend on the industry.

We entrust it with an extraordinary $2.6 trillion (for reference, Australia’s entire gross domestic product, everything we produce and earn in a year, is $1.8 trillion). And the sum keeps growing as we put ever more into super each year through compulsory contributions, which are set to climb to 12 per cent of our salaries.

Yet it treats us with contempt. It has known for decades about the cost to us (and benefits to it) of multiple accounts. The commission says over a working life the extra admin and insurance charges can amount to an entire year’s pay. Yet behind the scenes its representatives have been lobbying Financial Services Minister Kelly O’Dwyer against attempts to stamp them out.

Australia has an astounding 29 million super accounts and only 20 million adults and teenagers aged 15 or more. One in three of our accounts are unwanted multiples.

The insurance fees are particularly egregious. One in four of us with insurance through superannuation don’t know we’ve got it and are unlikely to claim. Those of us with multiple policies can only claim on one of them for things such as income protection because that’s all the law allows, making the others useless. More absurdly, premiums for policies that include income protection continue to be deducted from the accounts of people who are out of work, denuding thier accounts by forcing them to pay to protect income they don’t have.

Many of us (those without specific provisions in our awards or industrial agreements) have had the freedom to choose what fund we want to be in since 2005. But the odds have been stacked against us. Banks have been paying their employees bonuses to switch us into expensive and poorly performing products.

They’ve been paying our financial advisors commissions to do the same thing, and providing attractive banking terms to employers prepared to do the same thing. Those of us who try and examine the market for ourselves are presented with a deliberately large and bewildering array of more than 40,000 individual products. The commission says the more complex the product, the lower the return the fund selling it is able to offer because the less likely we are to understand it.

So badly do the bank-owned funds perform that, taken together, they deliver their members a return around one sixth lower than would "plain vanilla" funds offering the same mix of asset classes and facing the same costs and taxes – an achievement that’s almost impossible to explain, although very large fees and using some of the funds as dumping grounds for poorly performing products might form part of the explanation.

In order to find out whether the funds themselves knew why they performed so badly the commission sent out to a survey, with reminder letters, to the 208 that service most of the population. Only 114 responded. Among those that didn’t respond were the Defence Force Superannuation Scheme and the AMP Eligible Rollover Fund. One attempted to game the survey by providing its name and address (so that it wouldn’t be included in the list of non-responders) and leaving all of the other fields blank, a performance the commission described as “contumelious” – a word that means showing an utter disregard for someone else’s work.

An impressive 81 per cent of the responders said they undertook performance attribution analysis, which means they knew why they were performing as they were. But only five (that’s right, only five of those funds) were able to outline what their analysis said. The rest were either not telling the truth about about whether they undertook analysis or were trying to hide what it showed.

Some of the industry funds performed poorly too. Some are funds into which people are forced to put their money by industrial awards. So bad are they compared to better funds the commission says over a lifetime the difference could amount to $635,000, or nine years' pay.

And yet neither Industry Super, the Institute of Superannuation Trustees or the Association of Superannuation Funds has explicitly backed the Commission’s key recommendation, and neither has the Financial Services Council, although it has come the closest.

The Productivity Commission wants all Australians joining the workforce to be presented with a drop-down menu of 10 best performing funds and asked to pick one. They would be perfectly free to pick from a broader list, or even to pick a fund that wasn’t on a list. And they could stay in that fund regardless of who employed them. An independent panel would refresh the menu every four years meaning funds would compete to stay on it. Financial planners would have to show clients the list as well. Denied an inflow of conscripted or deluded new members, the bad funds would close.

Yet their representatives oppose it. They have “expressed caution”, they say our system is “world class”, they say the Productivity Commission is “badly misguided”.

I reckon it’s got their number.

In The Age and Sydney Morning Herald

Read more >>

The PC's fix for our multibillion super 'mess'

The biggest shakeup in the history of Australia’s $2.6 trillion superannuation system would see new workers able to choose an approved high-performing fund for life, saving as much as $407,000 by avoiding underperforming funds and multiple accounts.

A landmark Productivity Commission review has found that almost one third of default super accounts are chronic underperformers, actually costing members more than if they had invested in the underlying assets themselves and paid management fees. Another third, some 10 million, are unintended multiple accounts whose extra fees and duplicate insurance policies cost members $2.6 billion per year despite decades of government programs aimed at encouraging members to consolidate accounts.

“The government’s efforts are about sweeping up some of the mess. We want to do that as well, but we also want to stop the mess reoccurring,” said inquiry chairman and Productivity Commission deputy chief Karen Chester.

The Commission finds that “absurdly,” many accounts are tied to jobs rather than members, forcing Australians to accumulate accounts as they switch jobs unless they make active decisions to merge them.

Some of the insurance policies they accumulate are “zombies” unusable because of rules that prevent people claiming more than one income protection payout.

It wants all new workforce entrants to be shown a dropdown menu of up to 10 "best in show" top performing funds when they apply for a tax file number. The 10 would be chosen by an independent panel every four years. Employees would be free to choose a fund not in the top 10 or to make no choice, in which case they would be randomly assigned to one of the 10 best performers.

Laboratory experiments conducted for the Commission showed that 95 per cent of people presented with the drop down menu made a choice, either for one of the top 10 or for another fund they knew about, or for a self-managed fund.

 

The changes would remove the power of the unions, employers and the Fair Work Commission to assign default funds through industrial awards and enterprise bargains.

Indicative calculations by the Productivity Commission suggest that the “overwhelming majority” of the top 10  would be employer and union-controlled industry funds, as they perform much better than bank-owned retail funds.

But industry funds are also well represented among the 26 worst performing default funds, accounting for 10 over the past decade, compared to the for-profit sector’s 12.

Asked to identify the worst performing default funds, Ms Chester said that wasn’t the point of the report. “If we were to name funds it could make things worse by sparking a run on those funds,” she said. The Commission’s draft recommendations would ease bad performers out of the system gradually.

 

Almost half a million people join the workforce every year, accounting for $1 billion of super contributions in that year alone, meaning the changes would deprive poorly performing funds of new members, encouraging the trustees to consider whether they wanted to remain in business. Each of the one in seven workers who change jobs every year would also be shown the list of the top 10 and invited to change or consolidate their accounts.

Financial planners would also be encouraged to recommend funds from the top 10 list or to to show reasons why they hadn’t under a rule known as ‘if not, why not?’

Ms Chester said that of all the inquiries she and her fellow commissioner Angela McRae had worked on, this set of recommendations produced the “best bang for buck”.

“It could be worth 3.9 billion per year. I don’t think you can overstate the impact.” she said.

The Commission believes its analysis of Australia’s superannuation system is a world-first. “As far as we know, nobody in Australia nor anybody internationally has previously assessed the performance of a superannuation or a pension plan system,” Ms Chester said. “One of the reasons it is hard is that there are more than 40,000 super products, a number that makes it hard for consumers to make decisions.”

“We took the stated asset allocation of each MySuper fund and compared its performance to that of the underlying assets, making allowance for fees. It gave us a measure of whether the fund managers added or subtracted value. Astonishing, around a third consistently subtracted value. All were default funds.”

The Commission wants the list of MySuper approved products scaled back by up to one third and the poor performers removed. “The limbo bar has to be significantly heightened,” Ms Chester said, adding that she was not aware of any funds that had ever applied for MySuper authorisation that had failed to get it.

Only 114 of the 208 funds surveyed by the Commission responded, and only 5 were able to detail their net investment returns by asset class.

“I don't think you can overstate our professional disappointment with the content of the responses to the questions that really mattered,” Ms Chester said. “It constrained in doing our analysis. We will be writing to all those who haven’t properly responded on Tuesday morning asking them to complete their homework so that we can complete our analysis.”

Financial Services Minister Kelly O’Dwyer backed the Commission saying the funds that had not properly responded were showing “contempt for the Australian people.

“This is a government mandated system. They are thumbing their noses at millions of Australians, she said.

The Commission had backed the government’s determination to end multiple insurance policies, consolidate super accounts and reunite members with their lost super.

Its ideas were clever and would need to be carefully considered by the government. The Commission’s report is a draft and will be followed by a final report with firm recommendations by December.

In The Age and Sydney Morning Herald

Read more >>

How Turnbull can back down on company tax, 'obviously'

How do you walk away from something to which you’ve committed your soul? You say things have changed, “obviously”.

It’s how marriages end in divorce, how deputies abandon their prime ministers and how Labor treasurer Wayne Swan quietly but spectacularly abandoned his absolute commitment to a budget surplus in late 2012.

He had been holding the line for half a decade, promising in his first budget “the largest surplus as a share of GDP in nearly a decade”, and then in his second, after the surplus evaporated during the financial crisis, “hard choices that chart the course back to surplus”.

In his third it was a “return to surplus in three years' time, three years ahead of schedule, and ahead of every major advanced economy”.

In his fourth it was an upgraded surplus, “back in the black by 2012‑13, on time, as promised”.

And then in his fifth, an even grander pledge: “Madam Deputy Speaker, the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.

“This budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time. The deficit years of the global recession are behind us, the surplus years are here.”

Along the way he contorted language to avoid even conceding the possibility that he would never deliver a surplus.

“Let me hear in plain English that the budget is within a hair’s breadth of going into deficit,” the ABC’s Kerry O’Brien asked him as the financial crisis gathered pace. “It seems silly to me that anybody would bother to argue that proposition. Will you accept going into deficit, if you have to, to maintain appropriate stimulus of the economy under the threat of recession and high unemployment?”

Swan: “Kerry, it would be silly to speculate along the lines of your question.”

O’Brien: “Why?”

Swan: “Because I've made it clear. We are projecting modest growth and modest surpluses, but if the situation were to deteriorate significantly it would have an impact on our surpluses and it may well be the case that we could end up in the area that you're speculating about.

O’Brien: “Well, say it. In deficit.”

Swan: “I am not going to say it because we're projecting modest surpluses.”

Incredibly, in October 2012, a year before Labor lost office and four months into the financial year that was meant to deliver the continually forecast surplus, the mid-year budget update still penciled one in, albeit assisted by fancy accounting tricks. It was “absolutely appropriate to stick with our surplus objective”, Swan told reporters.

Until December 20, days before Christmas, at which point Swan opened a press conference expressing dismay that the October tax receipts had been well below forecasts.

“Obviously, dramatically lower tax revenue now makes it unlikely that there will be a surplus in 2012-13,” he intoned, as if he had been caught unawares. “A sledgehammer hit our revenues.”

I’ve retold that story to make it clear that even the most unlikely backdowns are easy for politicians, even after repeated declarations of undying fidelity.

All through the on-again off-again negotiations with senators over the company tax cuts, Malcolm Turnbull has maintained that he is “absolutely” committed to the remaining $35.6 billion, and, if necessary, will take them to the next election.

“The Prime Minister did not leave any wiggle room at all,” said his chief negotiator, Mathias Cormann, in February at an earlier time when it looked as if hope had been lost. “We are completely and utterly committed to our business tax cuts. They were very necessary at the last election, we took them to the last election. They will be even more important by the time of the next election. If the Senate were not to pass these very important business tax cuts, yes, we will fight for them at the next election.”

No wiggle room.

Until a moment of zen on Tuesday after Pauline Hanson had what is probably her fourth change of heart.

“We might not ever get to that point,” Cormann said when asked if the company tax cuts might ever get through the Senate. He repeated, for emphasis: “It might well be that we won’t ever get there.”

Cormann insists that he wasn’t paving the way for a last-minute backdown, but if it happened, just before the election, the lines would be delivered without shame, as were Swan’s when the economy and his government headed south. Things would have changed, “obviously”. Cormann would have $35.6 billion more to offer in real tax cuts - income tax cuts - to people who vote.

And probably much more. The Coalition won’t reveal the updated 10-year budget cost of its company tax cuts because it doesn’t want Labor to know how much it will have to offer that it can’t.

Like Labor, it could promise to revisit its company tax cuts later, when the budget and the Senate permitted.

It’d be acknowledging reality, shamefacedly, and promising more to voters now, rather than years down the track when the small and uncertain impact of uncertain company tax cuts worked its way through the system.

In The Age and Sydney Morning Herald

Read more >>

Cry for the banks. They'll pay more than they'll save

Australia’s big four banks and their shareholders will recover very little of the new major bank levy from the proposed cut in company tax, a Fairfax Media analysis has found.

In fact, the proposed company tax cut and the major bank levy would leave banks more highly taxed than they were before the 2017 budget.

The levy, which came into force in the middle of last year, is expected to raise $1.6 billion a year from each of the big four banks and Macquarie Bank.

After adjusting for one-off restructuring costs incurred by the National Australia Bank, the most recent annual profits of the big four - ANZ, Commonwealth, NAB and Westpac - amount to $43.7 billion.

They paid $13.168 billion in tax, an effective rate of 30 per cent.

The tax cut before the Senate, from 30 per cent to 25 per cent, would cut the big four’s tax bill by $2.2 billion. But most of their shares are held by Australians eligible for dividend imputation, meaning that up to three-quarters of the revenue lost as a result of the cut would be clawed back in higher tax collections from Australian shareholders who received lower dividend imputation cheques.

The net cost to revenue is likely to be as little as $570 million per year at current profit levels, only around one-third of the extra $1.6 billion the big four and Macquarie will pay in the major bank levy.

The findings accord with a claim made in parliament last week by Treasurer Scott Morrison that by the time the major banks received the full benefit of the proposed cut in the company tax rate to 25 per cent in 2026, they will have paid an extra $16 billion to the government in the bank levy.

Other tax measures under consideration by the government that would help offset the cost of the company tax cuts and gain favour with crossbench senators include an increase in the petroleum resource rent tax and a new tax on e-commerce giants such as Google, Facebook and Uber. The budget papers provide for $3 billion in “decisions taken but not yet announced”.

The Australian Bankers Association declined to comment on whether the major banks would pay more in the levy than they would gain from the proposed cut in the company tax rate, referring questions to the Business Council.

A spokesman for Business Council chief executive Jennifer Westacott pointed to comments she she made this month where she said there was no case for exempting or 'carving out' or banks from the tax cut.

"They are paying a levy of $1.6 billion a year. Are we seriously going to punish the shareholders, the mums and dads?" she asked. "Are we seriously going to punish everyone in the banking system, the regional bank manager who's been helping out a local community for years?"

In parliament on Monday, Mr Morrison again refused to quantity the budget cost of the 10-year program of company tax cuts and the year-by-year cost of his three-stage program of personal income tax cuts.

In a Senate estimates hearing on Wednesday, officials from the department of finance are expected to refer to the Treasury questions about the cost of both sets of tax cuts. The Treasury will appear before the committee next Tuesday.

Labor Treasury spokesman Jim Chalmers said his party would try to split the personal income tax cut bill, supporting only the first wave of tax cuts due to start in July.

He held open the possibility of supporting the second of the three waves of tax cuts set down for 2024.

“We have made our view abundantly clear on the first part of it for low- and middle-income earners; we've said we're not wild about the third stage, which is two elections away, but we have got more discussions to have on that intermediate stage,” he said.

In The Age and Sydney Morning Herald

Read more >>

Here's my big dangerous tax idea: let us keep our money

Suddenly we’ve wised up. As far back as any of us can remember, all the way back to the beginning of income tax, we’ve been easy to bribe.

Here’s how it has worked in every election and in almost every budget: “You’ve been working hard and paying too much tax. We feel your pain. We’ve magically found some money from somewhere. We’re pulling a tax cut out of a hat. You can thank us later.”

That the rabbit was our own money, taken from us in ever-increasing amounts through an automatic process known as bracket creep, and then only partly returned, was the trick we weren’t invited to dwell on.

Here’s how it will work this time. In the year ahead wages will probably climb 2.1 per cent. It’ll push a greater proportion of our pay into the highest rate of tax we pay. All by itself that will push up the total amount of tax we pay by around $6 billion, even though our actual buying power, our inflation-adjusted wages, might not much change. The budget tax cuts will give us back some of it: around $4.4 billion.

Hey presto. We’re supposed to be awed.

Even after 10 years, after the third and most expensive phase of the Morrison tax cuts announced on budget night, middle earners will still find themselves paying 3 per cent more of their income in tax than they do right now: 18 per cent instead of 15 per cent, according to the Grattan Institute. Only the very highest earners - the top 10 per cent - will get their bracket creep back.

(We need to rely on organisations such as the Grattan Institute and the Parliamentary Budget Office for the calculations because the government won’t provide them for us. It wants us to be in awe of the trick without seeing how it's done.)

It helps that bracket creep isn’t widely understood, certainly not by shock jocks such as Sydney’s Ray Hadley (“it simply means that people who were formerly taxed at the lower income rate through no fault of their own go on to the next income rate”), Nor, on the face of it, by the Treasurer himself, who on Monday said that the third and final stage of his plan that levelled the tax rate between $41,001 and $200,000 meant that “for most Australians, who will earn over their lifetime somewhere between $40,000 and up to $200,000, they will never face bracket creep again”.

Bracket creep happens even if you don’t change brackets. Whenever your income climbs, a greater proportion of it ends up in your highest tax bracket, leaving a lower proportion of it in your lower brackets and beneath the tax-free threshold.

Imagine you had been earning $75,000 and inflation pushed up your wage to $77,000. Your buying power wouldn’t much improve and you wouldn’t change tax brackets, but your tax bill would climb from $15,922 to $16,572. The chunk of your salary lost in tax would climb from 21.2 per cent to 21.5 per cent. A lower proportion of it would be protected by the tax-free threshold.

It’d be easy to fix. You would index the tax-free threshold and each of the other thresholds to the general rate of wage increases, or to the general rate of inflation, both of which at the moment are near 2.1 per cent. So the $18,200 tax-free threshold would climb to $18,582 and then to $18,972 and so on.

It would be devastating for the budget and devastating for politicians. Without automatic tax increases they would no longer be able to announce regular 'tax cuts' that only partly returned our money in return for applause.

But the applause has stopped. This week’s Fairfax-Ipsos poll found that 57 per cent of voters didn’t want the cuts they were offered. They would have rather had the money used paying off government debt. Only 37 per cent wanted the tax cuts, and many of them would have regarded them as unsurprising. It’s probably Peter Costello’s fault. By repeatedly cutting tax rates under prime minister John Howard, he destroyed the magic.

Indexation would make the magic real. And it would make budget choices real.

At the moment we grant the government leeway for indulgences such as spending $50 million commemorating the voyage of Captain Cook, or $247 million keeping chaplains in schools. If those indulgences meant an explicit increase in tax rates we would indulge our politicians less.

As it stands, most of the promised $80 billion cut in the company tax rate is to be funded by bracket creep. If indexation removed that option it would have to be funded by an explicit increase in income tax or another tax, and we would be less accommodating.

On the other hand, we would become keener to accept tax increases where they were the only way of getting things we wanted, such as they were with the National Disability Insurance Scheme. Without bracket creep, if we wanted more spending on something like health we would have to agree to pay for it. Or disagree, in which case we wouldn’t get it. We would become prepared to pay more tax where we had to, and keener on getting value for what we paid.

We would start treating our money as if it was ours.

In The Age and Sydney Morning Herald

Read more >>

Doubts aside, one million more jobs was never a big ask

The biggest myth surrounding the Tony Abbott’s pledge of 1 million jobs in five years is that he reached for the stars.

Welcoming the 1 million mark several months ahead of schedule Malcolm Turnbull said it “seemed pretty ambitious at that time”.

It didn’t, because at the time Abbott made it, in November 2012 a year before the election, it was unexceptional.

His full commitment was to create “1 million new jobs within five years, and 2 million new jobs over the next decade”.

The previous five years had been pretty unimpressive. They included the financial crisis. But the five years before that, during the mining boom, had been stellar. Over the entire 10 years employment had climbed 2,106,500.

Which is why Abbott promised 2 million.

Early in his term a Coalition insider told Fairfax Media there had been no modelling or detailed calculations behind the pledge.

Abbott had looked at what Howard had achieved and “assumed they could achieve the same outcome”.

Population growth would help. It would be easier to boost the workforce by 2 million with the larger population we would have in 10 years time than with the smaller population Howard had.

For a while, unusually low jobs growth during Gillard’s last year and Abbott’s first made it look as if the target would be hard to beat. Calculated decisions to deny lifelines to Holden, Ford and Toyota forcing them to close made the target harder.

Labor’s Chris Bowen succumbed to the pessimism, saying at the time that all the evidence was that Abbott would “fall well short”.

 

But an improving international economy and a gift from Julia Gillard turned things around. So big is the National Disability Insurance Scheme that it’ll cost $20 billion per year when fully operational, two thirds as much as defence.

The Productivity Commission believes it will create one in five of all the new jobs in the second half of this decade.

Abbott is odds on to get his second million, whether or not he or his colleagues are around to deliver it.

In The Age and Sydney Morning Herald

Read more >>

Suddenly, the tax choice is clear

Labor’s decision to back only the first stage of the Coalition's budget tax cuts and then build on it offers voters a clear choice.

The Coalition is offering a tax cut that most benefits middle earners on between $37,000 and $90,000, delivered in the form of a rebate after the end of each tax year, followed years later by a second and third stage of more expensive tax cuts that would most benefit very high earners on $160,000 and above.

Labor is the offering the same tax cut aimed at middle earners, bulked up by 75 per cent a year later in 2019.

Labor’s plan cheaper over time. The eventual cost of the Coalition’s plan, not yet revealed in Parliament despite requests, is probably $18 billion per year, which is more than the Commonwealth spends on the Pharmaceutical Benefits Scheme, and half what it spends on Medicare.

Labor’s plan is more expensive than the Coalition’s in the early years; a total of $19.2 billion over four years compared $13.4 billion, but it will cost much less over the longer term, because there will be no stage two and stage three targeting high earners, unless Labor later decides to offer one.

It thinks it can find the extra $5.8 billion pretty easily. It is cracking down on negative gearing and capital gains tax concessions, it won’t proceed with the rest of the company tax cuts (at least until the budget is in a better position) and it won’t hand out as many dividend imputation cheques.

The savings mean it will be able to offer a low earner on $40,000 an extra tax credit of $218, which when added to the Coalition’s $290 will amount to $508. A middle earner on $60,000 would get an extra $398, taking the total to $928.

Beyond the $90,000 mark both tax credits would shrink, falling to zero after $125,000. Very low earners beneath the $18,200 tax-free threshold would get nothing under either scheme.

But high earners won’t completely miss out under the scheme unveiled by Opposition Leader Bill Shorten on Thursday night. He says Labor will support a separate Coalition measure that will lift the $87,000 tax threshold to $90,000 from July this year, giving a small benefit of $135 per year to all high earners, even to millionaires.

But that’s all high earners will get from Labor, at least all that it is taking to the election and to the byelections due next month. It is firmly focused on the middle earners Treasurer Scott Morrison says he is is focused on, and nothing else down the track.

In The Age and Sydney Morning Herald

Read more >>

Meet the weirdest collection of tax cuts on record

Has there ever been a more weird collection of tax cuts?

Ahead of the budget we were promised simple cuts. What we got was a collection of changes so eccentric they are almost impossible to explain quickly and even harder to make sense of quickly. Here goes.

Instead of concentrating tax cuts on low- and middle-earners as promised, Scott Morrison has changed a tax threshold, one faced by only the top 20 per cent of earners, and overlaid a new and bizarrely-shaped so-called tax offset on top of an existing offset to give Australians earning between $48,000 and $90,000 a year an extra $530 a year and Australians below $37,000 a lower sum of $200, and those earning something in between, something in between.

But they won’t get it in their pay packets as extra pay. In fact they won’t get it at all during the next financial year, even though it is due to come in on July 1.

Instead they’ll have to wait until beyond the end of that financial year to put in tax returns and get back with their refund cheque something between $200 and $530.

In his post-budget address to the National Press Club Morrison said it would help them with “bills to be paid”, but it won’t, unless those bills are annual and come in at the same time as their tax return.

Most of us face quarterly bills and make weekly visits to the supermarket. It’s why the pay-as-you-earn system takes tax from us evenly; in order to help with our bills.

The weirdness in what Morrison has designed makes his demand that the Senate approve his changes by July 1 redundant. They could be leglislated up to three quarters of a year later and still take effect on time, as previous late changes to tax laws have made clear.

The only people who would suffer if the Senate declined to abide by the Treasurer's near-immediate deadline are the high earners on more than $87,000 (millionaires included) who would miss out on $2.60 per week for the change in the second-highest threshold.

But, just as how the Hitchhiker's Guide to the Galaxy said that if anyone discovered exactly what the universe was for and why it was here, it would instantly disappear and be replaced by something even more inexplicable, the complicated changes Morrison wants to bed down would disappear in 2022 and be replaced by something much more expensive, that by 2024 morphed into an even more expensive fairly flat tax structure with zero rate up to $18,000, a 19 per cent rate to $41,000, then a 32.55 per cent rate all the way to $200,000 followed by a top rate of 45 per cent.

Morrison wants the parliament to vote for it straight away, even though the final stage of the transformation wouldn’t take place until 2024. And, unfathomably, he doesn’t want to tell it how much each stage would cost.

Asked repeatedly in parliament on Wednesday to outline the year-by-year cost of what he was asking the parliament to vote for Morrison refused and accused his questioner of being “tricky”.

“The cost of the measure is $140 billion over the next 10 years,” he said. “The bill is on the table, vote for it or oppose it. Whichever way you do it, the Australian people know where you sit on tax and where they sit on tax: higher tax on Labor, low under the Liberal and National Party."

Which didn’t answer the question. But it suggested answers. The Treasurer is required to publish in the budget papers the cost of the first four years of the tax changes (the years that encompass the bizarre tax offset). It’s $13.4 billion, which works out at $3.35 billion a year.

Simple maths suggests the cost of the remaining six of those 10 years would be a very large $126.6 billion, which works out at $21.1 billion a year. So large is $21.1 billion per year (six times the size of the tax cut in the first four years) that it is almost impossible to find a tax cut to compare it with. None of them, not since the ones that brought in the goods and services tax at the turn of the century, has been anything like as big.

It’s almost as if Morrison has deliberately made his scheme complicated and of unknown long-term cost in order to have the Senate reject it.

A simple cut, of the kind we thought we were promised, would have sailed through. Morrison could have cut the 19 per cent rate to 17 per cent or the 32.5 per cent rate to 30.5 per cent at a cost of $4 billion or $6 billion a year. Taxpayers would have understood it and enjoyed the benefits from day one.

Labor could have understood it and topped it as well, perhaps as soon as Thursday night in the budget reply speech, which might be another reason why Morrison has opted for something so complex and ungainly that no-one would want to top, let alone replicate.

Or it could be that he just likes tinkering. Whatever the reason, he served us poorly on budget night. We could have had a tax cut we understood and could spend. We might have thought we deserved one.

In The Age and Sydney Morning Herald

Read more >>

Budget 2018: Morrison budgets for good times

Rarely has a government so brazenly broken its compact with the Australian people.

Set down in every budget since the Coalition's first in 2014, and reprinted in this one, is a commitment that any boost to the budget due to better economic circumstances "will be banked as an improvement to the budget bottom line" rather than given away as tax cuts, or a package for Baby Boomers, or anything else.

That boost, bestowed on the budget in just the past six months since the December update, is an extraordinary $35 billion over four years.

Company tax collections are up 22 per cent, takings from super funds are up 34 per cent, takings from natural gas producers paying the resource rent tax are up 18.5 per cent. If ever there was an opportunity to bank a really big improvement in the budget's fortunes resulting from higher iron ore and coal prices and improving economic conditions both here and overseas, this was it.

Instead, the government's decided to bank only a bit over half of it – $14.8 billion of the $35 billion will be spent on us rather than on the bottom line, on things such as tax cuts and freeways and railways and seniors packages and abandoning the scheduled increase in the Medicare levy.

The tax cuts are more than they seem, and also less than they seem. They are more than they seem because they come on top of the decision to abandon the 0.5 percentage point increase in the Medicare levy. In the financial year beginning mid next year the tax cuts will be worth $4.1 billion and the Medicare levy decision $3.5 billion, making the impact on our wallets twice as generous as the tax cuts alone would suggest.

They are less generous than they seem because they don't hand back all of the effects of bracket creep. Ahead of the budget the Parliamentary Budget Office said it expected bracket creep and employment growth to net the government an extra $27 billion over four years. The tax cuts hand back only $13.4 billion of it.

The most remarkable thing about the budget forecasts is the way the surplus grows, and grows, to easily exceed the government's target of 1 per cent of GDP by mid next decade. In the budget update released just five months ago in December, the surplus flatlined at just half a per cent of GDP with no improvement in sight.

Some of it is luck. Treasury officials in the budget lockup said the sudden jump in revenue in the past six months is being treated as permanent. Even though revenue isn't expected to keep growing as fast, it'll grow from the new higher level, pushing up all the forecasts years out into the future.

Also, in a remarkable instance of fortunate timing, from 2020-21 on, Future Fund earnings get counted towards the surplus. They haven't been to date, because the whole point of the Future Fund has been to build up money to pay public service pensions. The legislation setting it up envisaged that by 2020-21 that work would be done and any further earnings could count towards the budget bottom line. Its work probably isn't done, it reckoned without the global financial crisis, but the government is going ahead regardless. In 2020-21 the Future Fund will bequeath the surplus an extra $4 billion, and probably more each year as time goes on.

And timing helps. The second big lick of tax cuts take place in 2022-23, conveniently one year beyond the four-year forecasting horizon, as does much of the promised infrastructure spending.

And some of the infrastructure spending is off-budget. The government says the $5 billion it will tip into the Melbourne Airport Rail Link will be invested as equity in a profit-making corporation, which means it won't need to show up in the budget, a plan about which its partner in the enterprise, the Victorian government, has other ideas.

And the forecasts are rosy. They say wage growth will climb from 2.1 to 3.5 per cent, and growth in consumer spending will climb to 3 per cent. They were released as the Bureau of Statistics reported that retail sales had been flat for the past three months, meaning the turn-up will be have to be dramatic.

It is what the Treasury expects. It believes that strong employment growth, combined with the effect of strong employment growth on perceptions of job security will encourage us to save less and spend more, for as long as international economic conditions remain good.

And here's the catch – a beautiful one for the budget numbers. The first two years of budget numbers are always "forecasts" – they are what the Treasury expects to happen. The following two are "projections" – they are based on long-run averages. As it happens, the Treasury is relaxed about the economy over the next two years. It is only after that, in 2020-21 and beyond that it is worried, primarily about what will happen in the US in the aftermath of the Trump tax cut boost as interest rates rise. But it doesn't need to incorporate those worries into the budget. They would be forecasts, not projections.

We've been handed a budget for the good times that pays out as if those good times will last, even though they may not.

In The Age and Sydney Morning Herald

Read more >>

Promises, promises. The big one this budget will break

Four years ago the Coalition penned a note to itself, as it was required to under the Charter of Budget Honesty Act.

The idea of such notes is that if a newly elected government sets down in advance what it is aiming to achieve, it can be held to account, both by itself and by voters.

Entitled “Fiscal Strategy” and reprinted or revised in every budget that follows, each note is a sort of letter to the future, a self-imposed straitjacket.

Here’s part of Joe Hockey’s, penned for his first budget in 2014:

“The Budget repair strategy is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023-24, consistent with the medium-term fiscal strategy.”

The commendably specific target was repeated in Hockey’s second budget before being watered down by Scott Morrison in 2016 and 2017 to commit the government to deliver surpluses building to at least 1 per cent of GDP merely “as soon as possible”.

But it’s still pretty specific.

In each budget there are graphs showing what the government projects over the next decade. Only Hockey’s first budget projected surpluses building to and then exceeding 1 per cent of GDP.

His second budget and each of Morrison’s next two budgets haven’t got surpluses coming anywhere near 1 per cent of GDP at any time on the graph or (from the look of the slope) at any time beyond it. Morrison’s reach just half a per cent of GDP despite the goal printed alongside them in the Fiscal Strategy.

The straitjacket is more restrictive still.

Unchanged from when Hockey first set it down, another commitment says the overall impact of shifts in receipts and payments due to changes in the economy “will be banked as an improvement to the budget bottom line if this impact is positive”.

What it means is that if the budget picks up because the economy has picked up, the extra income will be used to build up the surplus rather than given away, either as tax cuts or extra spending. Scout's honour.

It’s a commitment Morrison is certain to break next Tuesday, and there’s a good chance he’ll change it so that it doesn’t look silly being printed in a budget that does the opposite.

I asked him last week whether he was still committed to his commitment or had walked away, and was rewarded with a non-answer.

“What you will see is that the budget is going back into balance on the timetable that we have noted,” he replied. That commits him to only a tiny surplus of half a per cent of GDP in 2020-21 with no necessary improvement beyond it, probably because the extra income will be given away.

Worse still (as far as the budget is concerned) he has as good as promised to give away the extra income.

“We have a speed limit on taxes which we stick to – 23.9 per cent,” he told reporters outside the Treasury building on Monday. “That is as high as we believe taxes should be as a share of the economy and we will be sticking to that plan.”

The number has a mythic significance. Not mentioned in the Fiscal Strategy, it is said to be the tax-to-GDP ratio the Howard government bequeathed to the Rudd government (although subsequent revisions have moved it down to 23.8 per cent).

For several years a mere forecasting assumption in the budget, it has been elevated of late by Morrison to the status of new target: a “guide rail” that will guarantee continual tax cuts as the economy grows and delay a return to a meaningful budget surplus.

Last week he spoke about his and Joe Hockey’s published fiscal strategies in the past tense. “The rules that we have been using to continue to guide our path back to balance have been incredibly important and we have been banking those,” he said. From here on the only thing that seems to matter as far as the budget balance is concerned is delivering the small surpluses previously forecast rather than banking the extra revenue that comes in to make them bigger as promised.

Will it matter if we’ve only small surpluses as far as the eye can see instead of the bigger ones that Hockey and Morrison once promised? It won’t, if everything goes right.

But we went into the global financial crisis with a budget surplus of well over 1 per cent of GDP, which we needed in order to spray around cash and keep ourselves out of recession without trying to borrow big as financial markets shut down. It was incredibly fortunate timing, which was the chief reason both Hockey and Morrison committed to building up a big surplus “as soon as possible”.

Without returning to the sort of surplus we were promised we are also seriously exposed to an increase in borrowing costs. If bond rates climb from 2.7 per cent to 3.7 per cent, the chunk of the budget devoted to interest payments will climb from $13 billion to $18 billion per year, which is as much as the budget on schools.

Banking rather than giving away what flows in when times are good would be the best way of protecting ourselves when they turn bad.

In The Age and Sydney Morning Herald

Read more >>

Victorian state budget 2018-19: Pallas tests the limits

Tim Pallas describes his budget as a statement of faith. It is, and not only of faith that Victoria’s extraordinary population boom will continue and necessitate the building of even more schools, roads, railways and hospitals. It’s also a statement of faith in property prices.

Buried within the budget is an assumption about how fast property prices will continue to grow. Amazingly, after briefly dipping to about 2.5 per cent, price growth is assumed to bounce back to more than 5 per cent a year for the last three years of the budget projections and presumably beyond.

The latest figures for Melbourne property prices, released as the Treasurer prepared to deliver his speech, show a drop of 0.7 per cent over the past three months, which is pretty much the same as a plateau, after almost a decade of continual increases.

Had the budget instead assumed steady property prices it would take in about $250 million less than forecast from stamp duty and land tax in 2018-19 and as much as $2 billion a year less by 2021-22.

Treasury officials believe they’ve good reasons for assuming price growth will bounce back.

Historically, average price growth has been more than 5 per cent a year, and,  discounting events such as the global financial crisis, prices have never stopped growing for long.

Also, Melbourne’s rapid population growth is affecting prices in an unusual way. Price growth is slowing in inner and metropolitan Melbourne, but continuing strongly in outer Melbourne.

Treasury’s methodology doesn’t allow it to assume a recession or a crisis, so is forced to assume an overall pickup, even though Pallas has asked it to be conservative.

It is on stronger ground predicting a jump in grants revenue of 10.3 per cent next financial year, most of it from the Commonwealth which doles out GST collections.

The Grants Commission has told it it will be compensated for very strong population growth (about 150,000 people a year, which is the population of Canberra every three years) and also to a lesser extent for getting less than its fair share of Commonwealth infrastructure funding.

In future it is expecting more modest growth in grants revenue of 3 per cent a year, a figure that very much depends on the Commonwealth’s decision about a change in Grants Commission formula due later this year.

Pallas is correct to call it an infrastructure budget, but it is more cautious than it seems. He is spending $13.7 billion on infrastructure in the coming year, but only $2.8 billion of it will be on new projects.

His new road and rail programs amount to $4 billion, but only $383 million will be spent during 2018-19. His new program of schools upgrades will cost $1.4 billion, but only $658 million will be spent during 2018-19.

It is true that major projects take time, but it’s also true that Pallas regards himself as bound by his commitment to keep government debt below the level he inherited in 2014, which is about 6 per cent of gross state product. It’s an unreasonable straitjacket. Victoria’s needs are growing much faster than before he took the job.

In earlier budgets he wasn’t as bound by the straitjacket. He could privatise things to fund infrastructure instead of running up debt. He has more or less run out of things to privatise, which means he feels there are limits to what he can do.

There are also real limits. Victoria is running low on concrete, and running low on the skills that are needed to build what needs to be built, which is one of the reasons so much of the budget is centred around building up skills.

Pallas is pushing up his wages bill by 10.1 per cent in the year ahead to take on the teachers and police and public servants and hospital and other staff to keep up with demands. He is testing the limits where he can.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald

Read more >>

Turnbull in best position to offer tax cuts in nine years

A “humongous” lift in Australia’s tax take has put the Turnbull government in the best position to deliver personal income tax cuts in nine years.

New Department of Finance figures reveal a rolling annual budget deficit of just $14 billion in the year to March- the lowest rolling annual deficit since 2009.

The data shows company tax revenues are up 23.3 per cent on the previous year, while personal tax revenues are up 5.4 per cent. Company tax is bringing in $36.2 billion more than it did a year ago, personal tax an extra $10.6 billion, goods and services taxes an extra $7.5 billion, and superannuation an extra $3.2 billion.

Deloitte Access calculations to be released on Monday show the Coalition could afford to spend $8 billion per year on personal income tax cuts and still leave room for a paper-thin forecast surplus of $3.8 billion in 2020-21.

Middle to lower income Australians will be the biggest beneficiaries of the tax cuts in next month’s budget, and will likely be phased in over several years.

One way for Treasurer Scott Morrison to deliver cuts worth $8 billion per year would be to lift the threshold for the 32.5 cent rate from $37,000 to $43,000 and the threshold for the 37 cent rate from $87,000 to $93,000. Another would be to lift the $37,000 threshold to $38,000 and cut the rate from 32.5 to 30 cents. A third would be to lift the tax free threshold from $18,200 to $20,000 and the $37,000 threshold to $40,000.

Calculations in the Deloitte Access Budget Monitor show that if revenue continues to climb at its present rate, the budget will be in surplus within 12 months.

“To be clear, that is not what we are forecasting,” said Deloitte Access partner Chris Richardson. “What has happened is that a bunch of big taxpayers have run out of accumulated tax losses at pretty much the same time, I'd call it October.

“Instead of a steady shift to companies paying tax again, we had a surge, but it won’t continue at that rate.”

The Budget Monitor predicts a budget balance $7 billion better than officially forecast this financial year, $7.2 billion better than officially forecast next financial year, $1.6 billion better in 2019-20 and $2 billion worse in 2020-21.

“The humongous improvement won’t last, but what concerns us is that the government will give almost all of it away in tax cuts and other election sweeteners,” Mr Richardson said.

“Time and time again we have seen the economy do better than forecast and politicians unfurl the ‘Mission Accomplished’ banner and stop taking difficult decisions because they think it will do things for them.

“Think of Paul Keating and the so-called L-A-W tax cuts which he had to abandon, think of Wayne Swan announcing four years of surpluses which he had to walk away from. Less obviously, think of Peter Costello and John Howard announcing the baby bonus and increased family benefits and tax cuts, that later turned out to be unsustainable.”

“It would be wise to not applaud too loudly when the tax cuts are announced.”

Speaking on Sunday, Mr Morrision said the budget would focus on making the economy strong. "That means lower taxes, building key economic infrastructure, backing small business to create more jobs and opening up new markets for our exporters," he told Fairfax Media. Lower taxes would further strengthen the economy to create more jobs and guarantee essential services, he said.

Commonwealth Securities chief economist Craig James said that if the government eliminated the deficit first and then cut taxes it would save $16 billion to $17 billion per year in interest payments.

The Deloitte report notes a better option than tax cuts would be to spend $3 billion per year lifting the Newstart unemployment benefit by $50 a week and indexing it to wages.

“Newstart hasn’t kept up with national living standards for more than a quarter of a century and is shrinking sharply relative to average and minimum wages and the age pension,” the report says. “If we had to nominate the single standout fairness failure in Australia in 2018, itis undoubtedly our embarrassingly inadequate unemployment benefits.”

The Department of Finance data shows revenue well up on the official projections in the mid-year budget update released in December. The government expected to take in $319.9 billion in the financial year to March but took in $325.2 billion. It expected to spend $346.3 billion and spent only $342.6

In The Age and Sydney Morning Herald

Read more >>

Super increases already hurting wages: Grattan

The Grattan Institute has made a last-ditch plea for the Turnbull government to abandon the scheduled increases in compulsory superannuation contributions, saying they are already hurting wages.

A schedule to be confirmed on budget night will lift employers' contributions from 9.5 per cent of salary to 10 per cent in 2021, and then by an extra 0.5 points each year until 2025 when contributions reach 12 per cent.

The institute’s analysis, to be released on Monday, says the timetable is already being taken into account in enterprise agreement negotiations, where it is suppressing offers.

The program of increases, set in train by the Rudd Labor government, has already been postponed twice, first by the Abbott government and then by the Turnbull government, but is due to restart in 2021.

“Unless stopped, the program will cut wage rises, cost the federal budget billions well into the future, and actually harm some retirement incomes,” said Grattan Institute chief executive John Daley.

The more superannuation a low earner has, the lower the age pension they receive in retirement. For each $1000 of assets above the threshold each pensioner loses $78 a year in pension payments.

Because the age pension is indexed to wages, increasing employers super contributions at the expense of wages cuts pension growth.

“Our research shows that increasing the rate to 12 per cent would make future pension payments 2 per cent lower than otherwise,” Mr Daley said. “By suppressing pension payments, it could make existing pensioners worse off by up to $460 a year for singles and $640 a year for couples.”

Earlier this month Financial Services Minister Kelly O'Dwyer spoke out against increasing compulsory contributions, but indicated it was likely the program would stay in the budget.

“The increase of 9.5 per cent to 12 per cent will mean around $10 billion a year more flowing into the industry in 2025-26, which, of course, means a bonus of hundreds of millions of dollars in fees each year for the industry and ever increasing salaries for industry professionals," she said.

Mr Daley said the scheduled increases would hurt the federal budget because money that would have been paid out and taxed as wages would be paid out as superannuation and taxed at 15 per cent instead.

“In both the short and long term, superannuation costs the budget more than it saves because the tax breaks cost the government more than the pension savings,” he said.

“Treasury analysis estimates that the revenue forgone from superannuation tax breaks as a result of moving to 12 per cent added to past increases would exceed the budgetary savings from lower age-pension spending for many years.

“Eventually superannuation would save the budget money but, from about 2060, by which time there would be 80 years of budget costs to pay back before government was in front.”

In The Age and Sydney Morning Herald

Read more >>

Victoria's privatisation, population & property billions

Where are the billions coming from? In part, from property. This financial year Treasurer Tim Pallas will get $6.6 billion from property stamp duty, up from $5.4 billion in 2015-16. He will get $2.4 billion from land tax, up from $1.7 billion in 2015.

The good news is that Victorian property values are staying high. Sydney prices slid 1.7 per cent in the three months to March whereas Melbourne prices slipped just 0.5 per cent.

Going forward, Tuesday’s budget will forecast still high but lower income from stamp duty, a judgment that looks about right. Melbourne’s population growth is the strongest in Australia, which means Melbourne property prices are more likely than most to stay high.

Many more of the billions will come from asset sales. The Turnbull government will pay the Andrews government a touch over $2 billion for Victoria’s share of Snowy Hydro, and a private buyer will pay it an estimated $2 billion for the right to run the land titles registry.

Victoria will get $16.8 billion from the Commonwealth Grants Commission in goods and services tax collections, that’s about $900 million more than it expected. It’ll reflect both Victoria’s bigger than expected population, and its lower than expected share of Commonwealth infrastructure grants. The Grants Commission’s formula requires it to compensate for Commonwealth stinginess after enough years have passed, and the Abbott and Turnbull governments have been stingy long enough for the compensation to kick in.

And the Commonwealth is at last becoming more generous. The $5 billion promised for a Melbourne Airport rail link and the $1.42 billion promised for regional rail are making things easier.

The economy itself is helping. One in every ten jobs in Victoria has been created in the past 3½ years, since the election of the Andrews government. One in every seven dollars sloshing around in the economy wasn’t there before Andrews was elected and (coincidentally) Victoria’s population growth took off.

It’s impressive, but doesn’t quite explain how Tim Pallas can promise to spend $10 billion a year on infrastructure for the next four years and still bring in a surplus.

The answer lies in a quaint state budget accounting convention. When the money is spent, it isn’t spent as far as the budget is concerned. All that appears on the budget are the interest payments on the borrowings to spend the money, and later depreciation on the infrastructure that’s been built. You can literally borrow to spend as much as you want on infrastructure in a state budget and still report the surplus you would have had if hadn’t.

Once small, the interest component of the budget is climbing. That needn’t be a problem if the infrastructure is worthwhile, which most of it probably is. Privatisations have kept the debt relatively low. On Tuesday Pallas will say it's less than he inherited from the Coalition.

In The Age and Sydney Morning Herald

Read more >>

Please, no more superannuation

Here’s something that should be in the budget but won’t be: an end to the outrageous assault on our wallets that is ever-increasing compulsory superannuation.

I am hearing that it nearly was in next week’s budget, until the government chickened out.

I’ve never been able to see what most people see in boosting compulsory superannuation, although I certainly have been able to see what those who stand to benefit see in it. They are people who work in the finance industry and the trade union movement and the employer organisations that would get an extra $10 billion a year of our wages to play with, if, as scheduled, compulsory contributions climb from 9.5 per cent of our salaries to 12 per cent in the space of a few years.

They would be doing more than playing with our wages. They’d be collecting hundreds of millions of dollars more in fees for doing it, for making essentially the same investment decisions as they are making at the moment.

But think what it would mean for the rest of us, for the vast bulk of the population who (after a five-year phase in period) would have an extra 2.5 per cent of each year’s salary taken from us and put somewhere else. If we were told we were about to get a tax increase of that size (and in essence it would be a tax increase) we would be enraged. All the more so because the phase-in will be brutal.

For more than a decade the compulsory super was stuck at 9 per cent. The Henry Tax Review examined whether that was enough and found that it was. It recommended that compulsory contributions “remain at 9 per cent”.

It was an unwelcome recommendation for a Labor government that had already decided to lift the rate beyond 9 per cent, so it ignored it. Deceitfully, it announced the lift to 12 per cent on the day it released the Henry Review, giving the impression it had endorsed it. Given everything else that was announced that day, including the mining super-profits tax, Henry’s explicit recommendation not to do what the government was determined to do slipped under the radar.

Henry’s thinking was that while locking away an extra 3 per cent of wages would probably increase retirement incomes, it would do it mainly by further impoverishing people who were already hard up.

Well-off Australians already save much more than their compulsory super contributions. Indeed, even excluding housing, most of their assets are held outside super. They’ve no problem cutting back on other savings in order to negate the effect of an increase in compulsory super, just as they have done when it’s been increased in the past.

Less well-off Australians are trapped. Saving little outside super because of more immediate demands, such as rent or mortgages or raising families or putting themselves through university, they are forced to accept less take-home pay than they would have got at the times in their lives when they need it most in return for the promise of more when they were retired and mightn’t need it as much.

And don’t for a moment think those compulsory contributions don’t come from pay. All manner of people tell me they don’t, but they are not the people who know. Bill Shorten put it this way when spruiking the planned increase from 9 to 12 per cent: “What will happen is that superannuation, the increases to superannuation, will be absorbed as part of people's pay rises.” Employers forced to pay more of their employment bill in superannuation will necessarily pay less of it in wage rises.

Which didn’t matter much for the first two increases. The first, from 9 to 9.25 per cent, was small and seems to have cut wage rises from about 3 per cent to 2.75. The second, a year later, was the same size. It seems to have cut wage rises from about 2.4 per cent to 2.2.

But the next increases were to be gargantuan. Labor’s plan doubled them after the first two, lifting the annual jump from 0.25 to 0.5 percentage points, and it was set to do it at a time when wage rises were sliding to an all-time low. Had that next increase of 0.5 points happened it would have cut wage growth from about 2 per cent to an impossibly low 1.5 per cent, sending buying power backwards.

In its first budget the Abbott government baulked and froze the rate at 9.5, later extending the freeze until 2021. It’s that 2021 increase from 9.5 to 10 per cent which will appear in the four years of estimates to be published in Tuesday week’s budget. (It appears in the budget because increases in compulsory super cost the budget money, taking income out of highly taxed wages and putting it into more lightly taxed super funds.)

It’s why Tuesday week was going to be the perfect time to abandon the schedule of increases for good, an opportunity I’m told the budget cabinet has passed up. It might have taken the view that it shouldn’t fix up Labor’s mess for it. If Labor wins the next election, it will have to either wind back its schedule itself or risk sending living standards backwards.

If compulsory super stayed at 9.5 per cent, anyone who wanted to would still be able to put away extra and anyone who couldn’t wouldn’t have to. We could hang onto our money.

In The Age and Sydney Morning Herald

Read more >>

How the Coalition ran interference for the banks

The Coalition wasn't merely asleep at the wheel when it came to the practices being exposed at the banking royal commission: it pulled out all stops to allow some of them to continue, including attempting to circumvent the will of parliament, in an extraordinary 12-month burst of activity that began within weeks of its election.

It had inherited Labor’s Future of Financial Advice Act, legislated in 2012 but not due to take full effect until mid 2014, 10 months after the election that swept it to power.

The result of a parliamentary inquiry and years of agonising about how to protect consumers in the wake of the collapse of investment schemes including those run by Storm Financial, Timbercorp, Opes Prime, Bridgecorp, Westpoint, Trio and Commonwealth Financial Planning Limited, the law banned secret commissions and, from that point on, required financial advisers to put the interests of their clients ahead of their own.

Actually, it came into effect on July 1, 2013 during the life of the Gillard Labor government, but the Securities and Investments Commission decided to take “a facilitative compliance approach”, meaning it wouldn’t enforce it until July 1, 2014, which turned out to be after the Coalition took office.

The law banned kickbacks and commissions paid to advisers by the makers of the products they were selling, which for the dangerous products had been extraordinarily large. Advisers putting retirees into Storm Financial had been paid 6 to 7 per cent of the amount invested. Advisers putting clients into Timbercorp had been paid 10 per cent plus an ongoing fee for as long as the funds stayed there.

Labor’s law wound back, but did not completely eliminate, the ability of banks to reward their staff for recommending the banks’ own products, and it only applied prospectively. Existing kickbacks could remain but clients would have to be told how much money was being taken out of their investments each year and would have to approve.

Once every year they would be given a statement explicitly telling them how much of their funds was being siphoned off to pay their adviser. Once every two years they would be asked if they wanted it to continue. If they said "no" or said nothing (which would be the case if they were dead, or the adviser had lost contact with them) the outflow would stop.

Clients who felt they were continuing to get good service from their adviser could allow the withdrawals to continue, which might be why it so terrified the (largely bank-owned) advice industry.

Days before Christmas 2013 the Coalition outlined amendments it hoped to get through parliament. Fee disclosure statements were only to be provided to new clients. Old ones could remain in the dark. And there would be no need for clients to opt in to having money removed from their accounts, ever. And there would no longer be an overarching requirement for advisers to act in the best interests of their clients, merely steps they would have to follow, “so that advisers can be certain they have satisfied their obligations”.

As July 1 2014 approached and it looked as if the amendments wouldn’t get through parliament, Finance Minister Mathias Cormann gazetted regulations that purported to have the same effect. Parliament would have been able to disallow them when it next met, but he delayed tabling them until the last possible moment, lengthening the period of time they were in force without being tested. Then Labor trumped him by reading them out aloud in the Senate, which effectively tabled them and forced a vote. Cormann managed to get the Palmer United Party on side and keep the regulations at first, until Jackie Lambie split with Clive Palmer over the issue and left his party and voted them down.

Then, when all had been lost, the banks and financial advisers begged for more time. They have been "thrown into disarray" and wouldn’t have their systems ready. ASIC said it wouldn’t enforce the law until July 1, 2015, two years after it had been due to begin.

ASIC and Cormann had given the financial advice industry an extra two years in which to charge commissions and escape an overarching requirement to put the clients first.

Even now, all this time later, I can’t work out why Cormann tried so hard.

Looking back over the emails we exchanged, I can see that he distinguished between "sales" and advice. He said that financial advice should be commission-free, but that "sales" were different, which is what the banks were arguing.

And advisers should be allowed to limit their advice about just one topic, such as superannuation, without the need to take everything into account and weigh up their client's best interests (as do doctors and lawyers, who have to put their client's best interests first regardless).

He said the requirement for clients to opt in to making continuing payments to advisers was "red tape", and "retrospective".

“Peter, I have honestly tried my best to do the right thing in the public interest,” he wrote. “I don’t expect that any of this will change your mind, but I thought you should know why we are doing what we are doing.”

In The Age and Sydney Morning Herald

Read more >>

Spreading the benefits. Where have I heard that before?

I had a sinking feeling in Sydney’s Four Seasons Hotel listening to Treasurer Scott Morrison guarantee that he would be able to deliver permanent tax cuts and properly fund the National Disability Insurance Scheme “in this year’s budget and beyond” without any longer needing an extra levy.

I’d heard it before, more or less, in the Great Hall of Parliament House in 2012. The speaker was Wayne Swan, Morrison’s long-term Labor predecessor, who after years of bad luck including the global financial crisis was finding revenue turning up.

“I am proud to announce a new Spreading the Benefits of the Boom package,” he told us. It was time to share the proceeds of the mining boom with families and businesses, and the disabled.

In the budget he had funded the first stage of the National Disability Insurance Scheme - the first $1 billion over four years; he increased funding for dental services, aged care, hospitals, infrastructure and superannuation, all because “for too many Australians this feels like someone else’s mining boom''.

I wrote on my notepad that day that the boom would end when the demand for Australia’s minerals faded, but that the spending Swan had put in train to “share the benefits” would continue.

In retrospect Swan was unwise to be so generous with something that wouldn’t last, but few in the room that day spoke up.

In The Age and Sydney Morning Herald

Read more >>

'Benefit of hindsight': ASIC may have been wrong body

One of the architects of Australia's financial system has expressed doubts about the policing power given to one of the corporate regulators now under fire for failing to prevent fraud and deception by the banks.

Professor Ian Harper was a member of the Wallis committee of inquiry into the financial system which in 1997 recommended the creation of a specialist organisation to regulate financial markets and financial institutions known as the Australian Securities and Investments Commission, or ASIC.

He later chaired the Harper Competition Review for the Abbott and Turnbull governments, and is a Reserve Bank of Australia board member.

Critically, the Wallis recommendations allowed ASIC to take over responsibility for policing consumer laws previously conducted by the Australian Competition and Consumer Commission.

On Tuesday Professor Harper said at the time the committee had thought a specialist body would be better able to handle the complex nature of consumer financial products, although he conceded that even then there was concern it would become too close to the institutions it regulated.

“The argument in favour of leaving consumer protection with the ACCC was that it wouldn’t be captured,” Professor Harper told Fairfax Media. “One day it deals with the electricity industry, the next day it deals with Coles and Woolies. It doesn’t have time to become close to the industries it polices.

“The argument against a specialist regulator is that it will succumb to the ‘Stockholm Syndrome’, that the regulator and the industry will hire from each other and go to the same conferences and so on.

“We now know of clear cases in which ASIC has been misled. Would it have tried harder, would it have made further inquiries had it been less close to the organisations it regulated? It might have.”

Regulatory agencies like ASIC have come under fire at the royal commission but are yet to appear at hearings. Asked if the ACCC would be prepared to take back responsibilities ceded to ASIC a spokesman for ACCC chairman Rod Sims declined to comment.

Professor Harper said concern about being too close to industry was one of the reasons the Wallis Review recommended the creation of a body separate from the Reserve Bank to oversee the prudential health of the retail banks.

“I have already said that with the benefit of hindsight we were wrong about several things,” Professor Harper said. “We placed too much faith in the efficient market hypothesis and in light touch regulation, we said the government didn’t need to guarantee bank deposits.

“With the benefit of hindsight and what's been coming out at the royal commission, the weaknesses of the specialist approach we took to regulation are also evident.”

It was “quite apparent” that the ACCC would have been able to handle the complexities inherent in financial products without needing to defer to a specialist body, he added. He noted the competition watchdog was more than capable of handling energy pricing, petrol pricing and the complex relationship between petrol stations and supermarkets.

Had it retained responsibility for policy consumer laws as well as responsibility for competition laws governing market power and mergers and acquisition which it kept, Australia’s financial landscape might have been different.

“It was 20 years ago, we would have been expected to learn something,” Professor Harper said.

The royal commission hearings will reconvene on Thursday.

In The Age and Sydney Morning Herald

Read more >>