Wednesday, May 08, 2013
The stubbornly high Aussie. Why the RBA cut and will cut again
Deep concern about the high Australian dollar drove the Reserve Bank to cut its cash rate to the lowest level on record Tuesday, a cut quickly passed on by all but one of the big banks.
The board acted without waiting to know what was in next week’s budget after being told that the mining investment boom might have peaked and there was insufficient activity elsewhere in the economy to take its place. Information supplied to the Bank by mining companies suggested the peak “may well be upon us.”
Instead of sliding with minerals prices as would have been expected, the Australian dollar has remained high during a year in the price of Australia’s resource exports has slipped 9 per cent.
Denied the chance to become more internationally competitive, non-mining businesses have failed to invest as the Reserve Bank wanted. The Bank has also found that mortgage holders banked most of its two most recent rate cuts by boosting repayments rather than borrowing more.
The cut in the cash rate from 3 to 2.75 per cent takes it below what the government dubbed the “emergency levels” it fell to during the global financial crisis. The rate is lowest since the bank began publishing its cash rate at the start of the 1990s. An older series of records suggests it is the lowest since 1959 - when Elvis Presley was in the US army, John Lennon and Paul McCartney had not yet named their band The Beatles and Robert Menzies had just started his record run as Australia’s prime minister.
Financial markets expect further records to tumble. Futures trading late Wednesday predicted another cut of 0.25 points within three months.
Treasurer Wayne Swan rejected as “grossly inaccurate” the suggestion rates were now at lower than emergency levels.
Wider margins mean the rates charged to bank customers are still well above those that prevailed during the 2008-09 crisis.
The standard variable mortgage rate hit a low of 5.75 per cent during the crisis. Even after Tuesday’s cut the lowest standard bank rate will be 6.13 per cent, offered by the National Australia Bank within minutes of the Reserve Bank’s cut in full.
The only big bank not to pass on the 0.25 per cent cut in full was the ANZ whose rate committee meets on Friday.
The cut will slice a further $47 from the monthly cost of servicing a $300,000 loan, taking the monthly saving since 2007 to $456...
Shadow Treasurer Joe Hockey said it would only be good news for the economy if it kick-started credit growth.
“This has been undertaken by the Reserve Bank not because the economy is doing well but because the economy is not doing well,” he said.
“The Bank has taken this leadership position because the budget is in chaos and the government is not providing leadership.”
Governor Glenn Stevens highlighted the stubbornly high Australian dollar in a statement accompanying the cut saying it had been “little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time”.
Demand for credit remained “relatively subdued”.
The Bank will watch closely official data on business investment, wholesale prices and employment during the next month as well as assessing the impact of the budget before deciding what to do next.
In today's Sydney Morning Herald and Age
Standard rates this morning
NAB: 6.13% (down 0.25 points)
Commonwealth: 6.15% (down 0.25 points)
Westpac: 6.26% (down 0.25 points)
Bank of Queensland: 6.26% (down 0.25 points)
ANZ: 6.40% (rate committee meets Friday)
Bendigo Bank 6.51% (under consideration)
MORTGAGE SAVING PER MONTH
$20,000 $3
$40,000 $6
$60,000 $9
$80,000 $12
$100,000 $16
$150,000 $23
$200,000 $31
$250,000 $39
$300,000 $47
$350,000 $54
$400,000 $62
$450,000 $70
$500,000 $78
$600,000 $93
$700,000 $109
$800,000 $124
$900,000 $140
$1,000,000 $155
Assumes 25 year 6.20% variable mortgage
Related Posts
. April: What's the RBA's Plan A? Hoping something comes up
. RBA in March. Quietly happy, prepared
. February. Why it's it's on standby to cut again
Tuesday, May 07, 2013
Earn $210,000? You're in the top 1 per cent
An income of $210,100 per year makes you ultra-rich, an income of $688,700 makes you uber-rich.Labor MP Andrew Leigh has calculated the new cut-off points as part of his research for an upcoming book on inequality in Australia entitled Battlers and Billionaires. He began the research in his earlier life as a professor of economics at the Australian National University. He has updated the calculations using Tax Office data for the 2010-11 financial year released last week.
That data shows that only 1 per cent of Australians earned more than $210,100 per year, up from a cut-off point of $194,400 the year before. Only 0.1 per cent of Australians earned more than $688,700 per year.
The data shows inequity climbing for the second consecutive year after sliding during the global financial crisis. In 2010-11 the top one per cent of earners took home 9.2 per cent of Australian income, up from 8.6 per cent two years before. In 2006 before the crisis hit the take exceeded 10 per cent.
“The global financial crisis was just a small deviation from a big long-term trend,” Dr Leigh said. “In just about every English speaking country in the world inequality has been climbing since the early 1980s".
Incomes were their least-equal in 1950 when the top 1 per cent of Australian earners took home 14 per cent of the nation’s pay packet. “It was the Korean war wool boom,” Dr Leigh says. In that year an astonishing 90 per cent of the top group were farmers.”
Buy 1981 the share of the top 1 per cent had fallen to 4.6 per cent, its lowest on record.
“What we have seen since is a globalisation of the jobs market. Executives are mobile. Companies are in an international bidding war to attract and retain them"...
“We have also seen an explosion in information technology. The high earners in the corner offices benefit from this much more than those sitting in the middle.”
“When I worked in a law firm in the 1990s we employed juniors to find documents. Now that’s being done by intelligent machines. The gains are being captured in the wages of the people who want the information rather than the wages of the people who used to find it for them.”
The figures show only 0.05 per cent of Australian taxpayers earned more than a million dollars - around 6,000 people.
In today's Sydney Morning Herald and Age
Related Reading
. The millionares who pay no tax - Tim Colebatch
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Monday, May 06, 2013
Budget 2013. Bad for shape-shfting multinationals, smokers....
And so many others as it spreads the pain around
Treasurer Wayne Swan has reached out to his colleagues in Russia and the United Kingdom as part of global assault on multinational profit shifting that will form a corner stone of the May 14 budget.
The budget will stop overseas headquartered firms from loading up their Australian arms with debt which used to generate profits that are taxed elsewhere.
When Australian borrowing climbs above 60 per cent of assets the firms will no longer be able to deduct interest expenses from their Australian income. The present limit is 75 per cent.
Mr Swan has written to Russia’s finance minister Anton Siluanov and to Britain’s chancellor of the exchequer George Osborne asking for support for coordinated action against profit shifting at the next G20 finance ministers meeting in July. Russia will chair the meeting. The specific measure included in the budget will raise $2 billion over four years.
Parliamentary Budget Office calculations obtained exclusively by Fairfax show mining tax revenue sliding well below the budget target. Income from the minerals resource rent tax is set to be around $1 billion per year less than expected in October. When more recent iron ore prices are fed into the model the tax will raise only $800 million this financial year instead of the expected $2 billion. In 2016-17 it will raise $1.8 billion instead of 2.8 billion.
The Office modelled a Greens proposal to lift the rate of the MRRT from 22.5 per cent to 40 per cent. It found it would have raised an extra $2.5 billion this financial year and an extra $4.8 billion per year by 2016-17. Other proposals include extending the tax to minerals other than coal and iron ore and limiting the so-called starting-base for the cost of projects. The combined savings amount to $3.9 billion this financial year and $6.5 billion per year by 2016-17.
Up for further consideration is a 25 per cent hike in tobacco excise that would raise an extra $5 billion over four years...
The increase was considered but rejected in the leadup to the October minibudget. It would push up the price of cigarettes to more than $20 per packet. The proposal would implement a long-standing recommendation of the National Preventative Health Taskforce.
The Foundation for Alcohol Research and Education has revived a proposal for a flat tax on alcohol, one that would remove the low-tax and tax-free status of many types of wine. Recommended by the Henry Tax Review but ruled out by the government at the time, the proposal is backed up by a new cost-benefit analysis that finds it would make 85 per cent of taxpayers better off, hurting only the remaining 15 per cent. It would net the budget $1.5 billion per year.
As Cabinet meets to sign off on further budget measures Monday the Australian Industry group has counselled it not to cut too hard merely in order to bring the budget close to surplus.
Almost half of the 330 manufacturing, services and construction firms surveyed by the group rate returning the budget to balance as the least important of five priorities for the government.
The most important is cutting the company tax rate followed by boosting infrastructure spending and government support for research and development and training.
“It shows that business believes that in this current economic environment balancing the budget is not the main game," said Ai Group chief executive, Innes Willox.
"While businesses appreciate the need for budget discipline, in this slowing economy the majority of businesses rank objectives that will help rebuild competitiveness more highly than bringing the budget back into balance,” he said.
In today's Sydney Morning Herald and Age
Related Posts
. Let's impose a special tax, on Apple, Google, and Starbucks
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Read more >>
Treasurer Wayne Swan has reached out to his colleagues in Russia and the United Kingdom as part of global assault on multinational profit shifting that will form a corner stone of the May 14 budget.The budget will stop overseas headquartered firms from loading up their Australian arms with debt which used to generate profits that are taxed elsewhere.
When Australian borrowing climbs above 60 per cent of assets the firms will no longer be able to deduct interest expenses from their Australian income. The present limit is 75 per cent.
Mr Swan has written to Russia’s finance minister Anton Siluanov and to Britain’s chancellor of the exchequer George Osborne asking for support for coordinated action against profit shifting at the next G20 finance ministers meeting in July. Russia will chair the meeting. The specific measure included in the budget will raise $2 billion over four years.
Parliamentary Budget Office calculations obtained exclusively by Fairfax show mining tax revenue sliding well below the budget target. Income from the minerals resource rent tax is set to be around $1 billion per year less than expected in October. When more recent iron ore prices are fed into the model the tax will raise only $800 million this financial year instead of the expected $2 billion. In 2016-17 it will raise $1.8 billion instead of 2.8 billion.
The Office modelled a Greens proposal to lift the rate of the MRRT from 22.5 per cent to 40 per cent. It found it would have raised an extra $2.5 billion this financial year and an extra $4.8 billion per year by 2016-17. Other proposals include extending the tax to minerals other than coal and iron ore and limiting the so-called starting-base for the cost of projects. The combined savings amount to $3.9 billion this financial year and $6.5 billion per year by 2016-17.
Up for further consideration is a 25 per cent hike in tobacco excise that would raise an extra $5 billion over four years...
The increase was considered but rejected in the leadup to the October minibudget. It would push up the price of cigarettes to more than $20 per packet. The proposal would implement a long-standing recommendation of the National Preventative Health Taskforce.
The Foundation for Alcohol Research and Education has revived a proposal for a flat tax on alcohol, one that would remove the low-tax and tax-free status of many types of wine. Recommended by the Henry Tax Review but ruled out by the government at the time, the proposal is backed up by a new cost-benefit analysis that finds it would make 85 per cent of taxpayers better off, hurting only the remaining 15 per cent. It would net the budget $1.5 billion per year.
As Cabinet meets to sign off on further budget measures Monday the Australian Industry group has counselled it not to cut too hard merely in order to bring the budget close to surplus.
Almost half of the 330 manufacturing, services and construction firms surveyed by the group rate returning the budget to balance as the least important of five priorities for the government.
The most important is cutting the company tax rate followed by boosting infrastructure spending and government support for research and development and training.
“It shows that business believes that in this current economic environment balancing the budget is not the main game," said Ai Group chief executive, Innes Willox.
"While businesses appreciate the need for budget discipline, in this slowing economy the majority of businesses rank objectives that will help rebuild competitiveness more highly than bringing the budget back into balance,” he said.
In today's Sydney Morning Herald and Age
Related Posts
. Let's impose a special tax, on Apple, Google, and Starbucks
. Why it'll be a near $10 billion deficit, with lots of small cuts
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Saturday, May 04, 2013
Why it'll be a near $10 billion deficit, with lots of small cuts
Not as dramatic as you've be led to believe
A mere ten days away, Wayne Swan’s sixth budget is nowhere near complete.
Last minute decisions and rapid responses to deteriorating conditions have become a hallmark of what he and his department have put themselves through each May.
Two weeks ago Europe’s carbon price collapsed, robbing the budget of $5 billion per year after Australia links to the European carbon price in 2015.
While not quite working around the clock (as did happen during the global financial crisis) staff in the Treasury building are working until midnight and sometimes beyond in a last-minute scramble to find money and politically acceptable savings, arriving back hours later wrung out.
Until January Jim Chalmers was Wayne Swan’s chief of staff. He says while no six consecutive Australian budgets have been framed in more challenging circumstances, this one is especially difficult.
“It’s the dramatically lower expected tax take,” he says. “If this one makes the necessary room for the schools plan and disability care despite falling company revenues it will be more difficult to land than the others but will arguably have bigger socio-economic dividends.”
His bugbear is forecasting. “It’s like throwing darts at a moving dartboard in a stiff wind,” he says.
The Treasury is being blamed for the revenue forecast spectacularly wrong. As recently as October it was forecasting revenue down only $2 billion on what it expected last May. It is now likely to be down an extra $12 billion, an extraordinary deterioration for an economy not actually in an economic downturn.
The events since October couldn’t have been foreseen and weren’t, despite of queue of critics lining up to say they always thought the revenue forecasts were fanciful.
“The critics were right for all the wrong reasons,” says former Treasury official Stephen Koukoulas, who also briefly worked as an economic advisor to prime minister Gillard.
“Well good on them. They said the budget wouldn’t get back into surplus this financial year and it won’t. They deserve to go to the top of the class for their forecasting ability. Except that their reasons were wrong. They thought the economy would be a lot weaker than the Treasury thought. It isn’t. Treasury got economic growth pretty much right"...
What Treasury didn’t get right, what no mainstream forecaster foresaw, was that the Australian dollar would stay high as the prices for Australian exports fell.
“It hasn’t happened before. The terms of trade and the dollar typically move together. If you had been within Treasury arguing that the terms of trade were going to fall 13 odd per cent but that the dollar was going to remain high at about 103 US cents no-one would have believed you. You would have been laughed out of the room. It made no sense.”
The high dollar removed the cushion Australia had previously enjoyed whenever export prices fell. The full force of the collapse in late 2012 flowed straight through into Australian dollar income. Company profits shrank. Budget revenue slipped behind target.
That the high dollar is an vote of confidence by international money markets is cold comfort.
So too is the continuing boom in mining investment notwithstanding some high-profile cancellations.
The more that resource companies spend building new plants the more they more they cut their taxable income. That their taxable income is already being hit by an unprecedented combination of lower prices and a high dollar makes the hit to Wayne Swan’s budget all the more painful.
A weaker outlook for resource prices would normally be expected to curb mining investment, but the big projects already underway can’t easily be stopped. In time the canceled projects will benefit immediate tax revenue, just as the completed projects will boost long term revenue. But that’s in the future. Right now Swan’s budget is wearing the pain of an investment boom without reaping the benefit.
And the mining tax itself has raised nothing like what was expected, in part because the government didn’t fully understand what it had signed up to when it sat down around the Cabinet table with the chiefs of BHP Billiton, Rio Tinto and Xstrata. A second tax measure, introduced at the same time, is doing better. The government extended the existing offshore petroleum tax to the North West Shelf and to onshore petroleum. It’s doing so well that the Coalition plans to keep it should it win office, while axing its better-known cousin.
The financial task facing the government isn’t as big as it would have you believe.
It has promised not to make up the $12 billion the budget has fallen short, suggesting it’ll forecast a deficit for this financial year and for the next of around $10 billion to $12 billion. Compared to previous years it’ll be a good outcome. The deficit for 2011-12 was $43.7 billion.
To get there all it has to do is to pay for its new measures with cuts or extra taxes. The big new measures are the National Disability Insurance Scheme and the Gonksi education reforms to the states. The 0.5 per cent extension to the Medicare levy announced this week gets it much of the way.
“It isn’t financially difficult, it’s politically difficult,” says koukoulas. “They only need a few billion, but finding that without annoying people - in an election year - will be awfully hard.”
“I have seen the Treasurer and Finance Minister put up good ideas and have minister after minister knock them down. The process is exhausting. What starts out as a big measure ends up small.”
The cuts to superannuation tax breaks announced early ahead of the budget are a case in point. After considering measures that would have raised it between between $500 million and $1 billion per year, the government settled on a package that made $900 million over four years. Tellingly it received few complaints from the superannuation industry.
“They ended up with a few crumbs off the table,” Koukoulas says. “If they had gone in hard they could have easily got another billion or two and hurt very few people. We would have forgotten about it by now and they would have got a big chunk of cash.”
Koukoulas thinks the government’s reluctance to offend means the big budget decisions are already known. What’s left will be a multitude of small measures, each offending someone, but most of them not too much.
Reports on Friday suggested the government was unlikely to go after the massive $3 billion paid to the mining industry in diesel fuel rebates. The rumours themselves were enough to spark a advertising campaign hammering the message that taking money from mining is “a really dumb idea”.
It’ll go after easier targets, some of whom fear even worse under the Coalition. The public service will get another so-called “efficiency dividend”.
What it won’t be able to do is to lie. Even a minor fudge would be found out. On Monday August 12 the Governor General will issue writs for the election. Ten days later the heads of treasury and finance have to release what’s known as PEFO - the pre-election economic & fiscal outlook. A creation of the former treasurer Peter Costello as part of the Charter of Budget Honesty PEFO has to represent their own views, free from the dictates of political masters. With a change of government likely they will have every reason to call it exactly as they see it. Fiddles will be exposed, which is why there almost certainly won’t be any.
The heads of departments might even go further, offering their own views as to whether finances are sustainable beyond the standard four years of “forward estimates” included in the budget. Such an assessment would be appropriate given that many of the budget measures will have a life of well beyond four years, including the National Disability Insurance Scheme.
And if the heads don’t do it, the Parliamentary Budget Officer will. The new post, set up as part of the agreement with the independents gives former finance department deputy secretary Phil Bowen the right to report on whatever he chooses. Within weeks of the budget he will deliver his assessment of whether it is in sustainable balance, and for good measure he will look back ten years to examine whether previous budgets were.
Calculations released by the Australia Institute on Saturday show the six successive years of personal income tax cuts kicked off by the Howard government in 2003 are costing revenue $38.9 billion per year. The cost over and above the price of merely indexing the tax scales so people weren’t pushed into higher brackets is $25 billion per year.
Swan has a week and a bit to get the pieces to fit. The document needn’t be printed until Sunday. The final piece of the forecasting puzzle - the exchange rate assumption - won’t be settled until Thursday or Friday. He will rise to his feet on Tuesday.
In today's Sydney Morning Herald
Related Posts
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Read more >>
A mere ten days away, Wayne Swan’s sixth budget is nowhere near complete.Last minute decisions and rapid responses to deteriorating conditions have become a hallmark of what he and his department have put themselves through each May.
Two weeks ago Europe’s carbon price collapsed, robbing the budget of $5 billion per year after Australia links to the European carbon price in 2015.
While not quite working around the clock (as did happen during the global financial crisis) staff in the Treasury building are working until midnight and sometimes beyond in a last-minute scramble to find money and politically acceptable savings, arriving back hours later wrung out.
Until January Jim Chalmers was Wayne Swan’s chief of staff. He says while no six consecutive Australian budgets have been framed in more challenging circumstances, this one is especially difficult.
“It’s the dramatically lower expected tax take,” he says. “If this one makes the necessary room for the schools plan and disability care despite falling company revenues it will be more difficult to land than the others but will arguably have bigger socio-economic dividends.”
His bugbear is forecasting. “It’s like throwing darts at a moving dartboard in a stiff wind,” he says.
The Treasury is being blamed for the revenue forecast spectacularly wrong. As recently as October it was forecasting revenue down only $2 billion on what it expected last May. It is now likely to be down an extra $12 billion, an extraordinary deterioration for an economy not actually in an economic downturn.
The events since October couldn’t have been foreseen and weren’t, despite of queue of critics lining up to say they always thought the revenue forecasts were fanciful.
“The critics were right for all the wrong reasons,” says former Treasury official Stephen Koukoulas, who also briefly worked as an economic advisor to prime minister Gillard.
“Well good on them. They said the budget wouldn’t get back into surplus this financial year and it won’t. They deserve to go to the top of the class for their forecasting ability. Except that their reasons were wrong. They thought the economy would be a lot weaker than the Treasury thought. It isn’t. Treasury got economic growth pretty much right"...
What Treasury didn’t get right, what no mainstream forecaster foresaw, was that the Australian dollar would stay high as the prices for Australian exports fell.
“It hasn’t happened before. The terms of trade and the dollar typically move together. If you had been within Treasury arguing that the terms of trade were going to fall 13 odd per cent but that the dollar was going to remain high at about 103 US cents no-one would have believed you. You would have been laughed out of the room. It made no sense.”
The high dollar removed the cushion Australia had previously enjoyed whenever export prices fell. The full force of the collapse in late 2012 flowed straight through into Australian dollar income. Company profits shrank. Budget revenue slipped behind target.
That the high dollar is an vote of confidence by international money markets is cold comfort.
So too is the continuing boom in mining investment notwithstanding some high-profile cancellations.
The more that resource companies spend building new plants the more they more they cut their taxable income. That their taxable income is already being hit by an unprecedented combination of lower prices and a high dollar makes the hit to Wayne Swan’s budget all the more painful.
A weaker outlook for resource prices would normally be expected to curb mining investment, but the big projects already underway can’t easily be stopped. In time the canceled projects will benefit immediate tax revenue, just as the completed projects will boost long term revenue. But that’s in the future. Right now Swan’s budget is wearing the pain of an investment boom without reaping the benefit.
And the mining tax itself has raised nothing like what was expected, in part because the government didn’t fully understand what it had signed up to when it sat down around the Cabinet table with the chiefs of BHP Billiton, Rio Tinto and Xstrata. A second tax measure, introduced at the same time, is doing better. The government extended the existing offshore petroleum tax to the North West Shelf and to onshore petroleum. It’s doing so well that the Coalition plans to keep it should it win office, while axing its better-known cousin.
The financial task facing the government isn’t as big as it would have you believe.
It has promised not to make up the $12 billion the budget has fallen short, suggesting it’ll forecast a deficit for this financial year and for the next of around $10 billion to $12 billion. Compared to previous years it’ll be a good outcome. The deficit for 2011-12 was $43.7 billion.
To get there all it has to do is to pay for its new measures with cuts or extra taxes. The big new measures are the National Disability Insurance Scheme and the Gonksi education reforms to the states. The 0.5 per cent extension to the Medicare levy announced this week gets it much of the way.
“It isn’t financially difficult, it’s politically difficult,” says koukoulas. “They only need a few billion, but finding that without annoying people - in an election year - will be awfully hard.”
“I have seen the Treasurer and Finance Minister put up good ideas and have minister after minister knock them down. The process is exhausting. What starts out as a big measure ends up small.”
The cuts to superannuation tax breaks announced early ahead of the budget are a case in point. After considering measures that would have raised it between between $500 million and $1 billion per year, the government settled on a package that made $900 million over four years. Tellingly it received few complaints from the superannuation industry.
“They ended up with a few crumbs off the table,” Koukoulas says. “If they had gone in hard they could have easily got another billion or two and hurt very few people. We would have forgotten about it by now and they would have got a big chunk of cash.”
Koukoulas thinks the government’s reluctance to offend means the big budget decisions are already known. What’s left will be a multitude of small measures, each offending someone, but most of them not too much.
Reports on Friday suggested the government was unlikely to go after the massive $3 billion paid to the mining industry in diesel fuel rebates. The rumours themselves were enough to spark a advertising campaign hammering the message that taking money from mining is “a really dumb idea”.
It’ll go after easier targets, some of whom fear even worse under the Coalition. The public service will get another so-called “efficiency dividend”.
What it won’t be able to do is to lie. Even a minor fudge would be found out. On Monday August 12 the Governor General will issue writs for the election. Ten days later the heads of treasury and finance have to release what’s known as PEFO - the pre-election economic & fiscal outlook. A creation of the former treasurer Peter Costello as part of the Charter of Budget Honesty PEFO has to represent their own views, free from the dictates of political masters. With a change of government likely they will have every reason to call it exactly as they see it. Fiddles will be exposed, which is why there almost certainly won’t be any.
The heads of departments might even go further, offering their own views as to whether finances are sustainable beyond the standard four years of “forward estimates” included in the budget. Such an assessment would be appropriate given that many of the budget measures will have a life of well beyond four years, including the National Disability Insurance Scheme.
And if the heads don’t do it, the Parliamentary Budget Officer will. The new post, set up as part of the agreement with the independents gives former finance department deputy secretary Phil Bowen the right to report on whatever he chooses. Within weeks of the budget he will deliver his assessment of whether it is in sustainable balance, and for good measure he will look back ten years to examine whether previous budgets were.
Calculations released by the Australia Institute on Saturday show the six successive years of personal income tax cuts kicked off by the Howard government in 2003 are costing revenue $38.9 billion per year. The cost over and above the price of merely indexing the tax scales so people weren’t pushed into higher brackets is $25 billion per year.
Swan has a week and a bit to get the pieces to fit. The document needn’t be printed until Sunday. The final piece of the forecasting puzzle - the exchange rate assumption - won’t be settled until Thursday or Friday. He will rise to his feet on Tuesday.
In today's Sydney Morning Herald
Related Posts
. The Budget. What if our prime minister gave a really good speech?
. Grattan: Why we're facing a decade of deficits
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Thursday, May 02, 2013
The NDIS. Why Joe Hockey is wrong, big-time
Joe Hockey is Wrong. The shadow treasurer said Wednesday he did not see a National Disability Insurance Scheme levy as “the right solution in this environment”.
“If the economy is underperforming, you don't tax it to increase performance. You never tax and regulate your way to prosperity,” he told Sky News.
He is quite right to say that taxes by themselves can’t improve economic performance. But they can improve economic performance if they are used for that purpose.
The Productivity Commission examined the question in its 2011 inquiry chaired by Patricia Scott, who worked Joe Hockey as the head of his human services department in the Howard government.
It found whereas the financial cost of the National Disability Insurance Scheme would be $6.5 billion, its economic cost of far less. The $6.5 billion was merely “a transfer of resources from one group to another”.
The economic cost would be around $1.6 billion, flowing from the distortionary impacts of raising the revenue.
“Given this, the NDIS would only have to produce an annual gain of $3,800 per participant to meet a cost-benefit test,” the report said.
“Given the scope of the benefits, that test would be passed easily,” it concluded.
One of the economic benefits was what it did for the lives of the people it helped.
Another would be its success in bringing into the workforce Australians who were previously unemployable for life.
“Were Australia to achieve employment ratios for people with disabilities equivalent to the average OECD benchmark — a highly achievable target given the proposed reforms — employment of people with mild to profound disabilities would rise by 100,000 by 2050,” it said.
In fact it expected an employment gain of 220,000. This isn’t the same as the employment gain often claimed by promoters of major projects which amounts to no more than moving existing workers from one region to another. The Productivity Commission was talking about actual newly-created workers able to produce things for Australia they otherwise would not have.
As Australia’s population ages and the supply of workers for each non-worker shrinks, finding extra workers able to make the things we need will become the main game in town.
The Productivity Commission said the newly-created workforce would be likely to push gross domestic product one per cent higher than it would have been by the middle of the century.
In the dollars of the time that would be $32 billion in additional GDP “in that year alone”. In the dollars of 2050 it will be more like $200 billion per year.
Some things are worth doing precisely for the reason that they will boost Australia’s economic performance. Whatever its other merits, the National Disability Insurance Scheme is one of them.
In today's Sydney Morning Herald and Age
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. 2012. The NDIS, Labor is poised for greatness
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Wednesday, May 01, 2013
Negatively geared. Our landlords lose $13.2 billion, mostly on purpose
Australia's shame
Negatively geared property investors lost an astonishing $13.2 billion in 2010-11, up from $10.1 billion the year before.
The latest Tax Office statistics show the average loss per negatively geared investor was $10,950, up from $9,130 the year before. The average loss for high income a negatively geared investor earning more than $180,000 was $23,800.
Higher interest rates and rising property prices during 2010-11 swelled the losses.
The figures identify negative gearing as one of the key drains on personal tax collections with one in every seven Australian taxpayers now a property investor and one in every ten negatively geared.
The 2010 Henry Tax Review declined to recommend against the practice, its chairman Ken Henry telling a press conference as he was preparing the report that he "still wears the scars" from an earlier short-lived experiment with limiting negative gearing in the 1980s.
“I actually think Henry was incredibly wussy about it,” Bank of America economist Saul Eslake said Tuesday. "I have to translate the words ‘negative gearing’ to people overseas because it just sounds crazy to have a system that rewards people for losing money.”
“Removing it would be close to the top of my agenda. I have a list of what I regard as the worst tax decisions of the last twenty years. One is the halving of the headline rate of capital gains tax (in 1999) that made negative gearing attractive.”
“The others are the abandonment of indexation of petrol excise, the Senior Australian Tax Offset - the measure that says if you are over 65 you pay less tax on a given amount of income than if you are under 65 - and the abolition of income tax on super fund earnings paid to people over 60.”
“They would be my contenders for the dumbest tax decisions of the last twenty years. Frankly, I can’t choose between them"..
The tax statistics released Tuesday also identify fuel tax credits as by far the most expensive offset in the tax system, costing $5.1 billion in 2010-11 and $5.5 billion in 2011-12, way in excess of the next biggest contenders, the Education Tax Refund which cost $700 million and the research and development tax offset which cost $614 million.
The credits are for fuel used in heavy vehicles and are overwhelmingly used in the mining industry.
“The argument for it is that the purpose of fuel excise was to pay for roads, and that mining companies get a rebate because they don’t use their vehicles on public roads. I guess there is some merit in that argument, although in my view not enough merit to justify $5.5 billion of revenue forgone,” Mr Eslake said.
The tax statistics identify residents of the eastern Sydney postcode 2027 as Australia’s highest earners, taking home a home an average taxable income of $203,270 each. The postcode takes in Darling Point, Edgecliff, Rushcutters Bay and Point Piper. Around 50 of them are also farmers in primary production trusts or partnerships, losing between them $6.7 million.
Australia’s second and third highest earning postcodes are 3944 and 3142 taking in the Victorian town of Portsea and Toorak and Howkesburn in Melbourne. The average income for each is around $180,000.
Only 2501,400 Australians earned $180,000 or more in 2010-11, enough to put them into the top tax bracket. The bracket took in 2.7 per cent of all taxpayers.
The average male income during 2011-11 was $63,000. The average female income was $42,150.
In today's Sydney Morning Herald and Age
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Negatively geared property investors lost an astonishing $13.2 billion in 2010-11, up from $10.1 billion the year before.The latest Tax Office statistics show the average loss per negatively geared investor was $10,950, up from $9,130 the year before. The average loss for high income a negatively geared investor earning more than $180,000 was $23,800.
Higher interest rates and rising property prices during 2010-11 swelled the losses.
The figures identify negative gearing as one of the key drains on personal tax collections with one in every seven Australian taxpayers now a property investor and one in every ten negatively geared.
The 2010 Henry Tax Review declined to recommend against the practice, its chairman Ken Henry telling a press conference as he was preparing the report that he "still wears the scars" from an earlier short-lived experiment with limiting negative gearing in the 1980s.
“I actually think Henry was incredibly wussy about it,” Bank of America economist Saul Eslake said Tuesday. "I have to translate the words ‘negative gearing’ to people overseas because it just sounds crazy to have a system that rewards people for losing money.”
“Removing it would be close to the top of my agenda. I have a list of what I regard as the worst tax decisions of the last twenty years. One is the halving of the headline rate of capital gains tax (in 1999) that made negative gearing attractive.”
“The others are the abandonment of indexation of petrol excise, the Senior Australian Tax Offset - the measure that says if you are over 65 you pay less tax on a given amount of income than if you are under 65 - and the abolition of income tax on super fund earnings paid to people over 60.”
“They would be my contenders for the dumbest tax decisions of the last twenty years. Frankly, I can’t choose between them"..
The tax statistics released Tuesday also identify fuel tax credits as by far the most expensive offset in the tax system, costing $5.1 billion in 2010-11 and $5.5 billion in 2011-12, way in excess of the next biggest contenders, the Education Tax Refund which cost $700 million and the research and development tax offset which cost $614 million.
The credits are for fuel used in heavy vehicles and are overwhelmingly used in the mining industry.
“The argument for it is that the purpose of fuel excise was to pay for roads, and that mining companies get a rebate because they don’t use their vehicles on public roads. I guess there is some merit in that argument, although in my view not enough merit to justify $5.5 billion of revenue forgone,” Mr Eslake said.
The tax statistics identify residents of the eastern Sydney postcode 2027 as Australia’s highest earners, taking home a home an average taxable income of $203,270 each. The postcode takes in Darling Point, Edgecliff, Rushcutters Bay and Point Piper. Around 50 of them are also farmers in primary production trusts or partnerships, losing between them $6.7 million.
Australia’s second and third highest earning postcodes are 3944 and 3142 taking in the Victorian town of Portsea and Toorak and Howkesburn in Melbourne. The average income for each is around $180,000.
Only 2501,400 Australians earned $180,000 or more in 2010-11, enough to put them into the top tax bracket. The bracket took in 2.7 per cent of all taxpayers.
The average male income during 2011-11 was $63,000. The average female income was $42,150.
In today's Sydney Morning Herald and Age
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Tuesday, April 30, 2013
The Budget. What if our prime minister gave a really good speech?
People would make fun of her:
Below the fold is the heart of a truely excellent speech.
Here's my take:
Gillard and Swan have tried everything else. Now they’re trying honesty.
A year ago they locked in permanent increases in payments to families and Australians on welfare worth $1 billion per year to be funded by “spreading the benefits of the boom”.
They made no mention of the possibility that the boom wouldn’t last, whereas the extra payments would continue for ever.
The legislated increase in lightly-taxed superannuation contributions starting in July will cost the government a fortune by the time it is complete at the end of the decade. It was to be funded by a mining tax, one leading economist Ross Garnaut said Monday was deeply flawed and might never raise much money.
The National Disability Insurance Scheme eventually set to cost $6 billion per year was approved with not a whisper how it would be paid for.
As revenue began to fall well short of the forecasts in October the government fudged things, producing a budget update that attempted to make up the shortfall by one-offs such as making some quarterly company tax payments monthly and hoovering up earlier money in unclaimed bank accounts.
All the while its official line was nothing much was wrong. The budget was still on track for a surplus.
Until December when Swan admitted the jig was up and told the truth about the futility of cutting for cutting’s sake, merely in order to announce a surplus (a view endorsed in the past fortnight by his shadow Joe Hockey).
Now the prime minister has laid bare the whole truth. The easy days of Mining Boom Mark I are over and will not return. Company tax reached “an astonishing 5.3 per cent of gross domestic product” in the final year of the Howard government. It is now 4.5 per cent. Capital gains tax was 1.5 per cent. It is now 0.4 per cent.
Normally low inflation might be welcome, but right now it is hurting profits, weighing on investment plans and weighing down the company tax take. Normally strong overseas confidence in Australia would be welcome, but right now it is keeping the dollar high and further denting company profits and investment plans.
The prime minister has levelled with us. She hasn’t said what she is going to do.
In today's Sydney Morning Herald and Age
Julia Gillard:
The back drop to our Budget decision making – Australia’s resilience, global weakness, a persistently high dollar – have been known for some time.
What is new is how strong the revenue pressures on the nation’s Budget are.
We must plan for these strengthening pressures – and that is a key part of preparing our Budget for this year.
The persistent high dollar, as well as squeezing exporting jobs, also squeezes the profits of exporting firms: with lower profits for these companies comes lower company tax going to Government.
We can’t assume this will change soon.
The high dollar is also placing competitive pressures on firms here, who face new pressures from cheaper imports – holding down prices across the board, with the high dollar making it hard for these firms to pass on price increases, holding down profits – and in turn holding down company tax.
Consumers do benefit, but many businesses are doing it tough.
All this means the data on our economy now reveals a significant new fact.
This is the striking and continuing divergence between what economists refer to as real GDP growth and nominal GDP growth.
My best shorthand description of those terms is this.
Real GDP growth is growth in the volume of the economy.
The actual activity in the economy, how many jobs there are, the quantity of infrastructure we build, the amount of goods and services we export – how many tonnes of coal, how many international students pay for a course here, how many houses are built.
Nominal GDP growth counts this growth in volume and it also counts growth of the prices of all these things.
Today, real GDP is growing solidly – we’re creating more jobs, exporting more goods and services and buying and selling more from each other, just as we planned.
However prices are growing at a slower rate than is usual for this stage of the economic cycle, a slower rate than was forecast – and so nominal GDP growth for this current year is significantly slower than was forecast and we expect nominal GDP growth for future years to be revised down.
The current data shows nominal GDP growth after the first half of the 2012-13 year was an annual rate of two per cent.
At Budget last year, we had forecast nominal GDP to grow at five per cent.
What’s changed?
While the prices of our exports continue to be lower than their recent peaks because of weak global demand and increasing global supply, the prices of imports are now lower than forecast because of the strength of our dollar.
The prices of goods produced at home are also lower than forecast because competition from imports is so fierce.
This is now putting so much downward pressure on prices that growth in nominal GDP is actually lower than growth in real GDP.
What’s more, this has now been true for nearly an entire financial year – since the beginning of the June quarter last year.
This has never happened for such a long period in the whole half a century and more of the National Accounts.
Not during the global financial crisis, not during the 1991 or 1982 recessions.
Not even during the Menzies “credit squeeze” of 1961, which was effectively a deliberate policy attempt to slow price growth, do we find a similar effect.
Now, that’s a long explanation of a pretty technical fact.
But for the Budget bottom line, it’s a very meaningful fact – because, naturally enough, companies don’t pay tax on volume, they pay tax on value, which is driven by price.
The Pharaoh might have kept one fifth part of the grain from the field but the Tax Commissioner collects in dollars and cents.
So even if the economy is growing as much as expected, when prices are growing much less than expected, tax grows much less too.
The “bottom line for the Budget bottom line” is this: the amount of tax revenue the Government has collected so far this financial year is already $7.5 billion less than was forecast last October.
Treasury now estimates that this reduction will increase to around $12 billion by the end of the financial year.
This unusually low revenue, which wasn’t forecast even a few months ago, creates a significant fiscal gap over the Budget period.
Put simply, spending is controlled but the amount of tax money coming to the government is growing much slower than expected.
Inevitably, confronted with the facts, the economic simpletons and sloganeers will squirm and throw in arguments to distract.
First, you will be told that revenue for the next financial year is still expected to be more than this financial year. That’s true – at the same time our population will be larger, more people will be on the age pension, health costs will continue to rise.
Indeed the growth in health and in the age pension will be far higher than the growth in tax money.
So revenue growth will be less than natural growth in key areas of expenditure and is spectacularly lower than reasonably predicted.
It is the failure of growth in tax money to match reasonable predictions that creates the Budget challenge.
Second, you will be told it isn’t about less tax money in but about spending.
However... of the advanced Western economies, only Switzerland spends a smaller share of its economy on government than does Australia.
The total size of government here is less than the US, less than the UK.
Not as measured in revenue either, measured in spending.
And let me reiterate, for the future we will continue to match new spending in the Budget with savings.
Given all this, tax money down, spending controlled, the question for Budget planners is difficult to answer, but simple to state: how, and how fast, to fill that significant fiscal gap?
Australia will not go back to the extraordinary revenue peaks of “mining boom mark I” from 2002-03 to 2007-08.
While we should expect revenue to improve as we move to the production and export phase of the current mining boom, it’s clear that the extraordinary revenue peaks of the mid-2000s won't be repeated.
The overall story: by 2005-06 the share of the economy taken in tax reached a peak of 24.2 per cent – compared to 22.4 in 1996 and 22.2 as we reported in our last update in October.
The huge profits of that time meant that company tax revenue reached an astonishing 5.3 per cent of GDP in 2006-07 compared to a share of 4.5 per cent of GDP last financial year – a fall of around $10 billion in company tax a year.
Capital gains tax was 1.5 per cent of GDP in 2006-07 – last financial year it was 0.4 per cent.
We collect less than one-third of the amount compared to seven years ago and in dollar terms the drop in tax collection is around $15 billion a year.
Quite apart from any other factor, remaining competitive in the contemporary global economy doesn’t allow us simply to turn back time on tax collection by dialling up tax revenue to these levels.
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Saturday, April 27, 2013
Austerity. Why it is suddenly no longer fashionable
It’s been an appalling fortnight for peddlers of austerity. Bit by bit the weight of Australian and international opinion has shifted away from surplus towards deficit, away from repayment towards debt and away from containing inflation to rekindling it.Australia contribution was startling. As recently as December opposition leader Tony Abbott was promising surpluses “in each year of the first term of a Coalition government,” although he qualified the promise by saying it was “based on the published figures”.
Last week he declared “all bets are off”.
"We were confident that we could deliver a surplus based on what the government was telling us until just before Christmas," he said. "But all bets are off given that the Government won't tell us what the deficit will be."
His treasury spokesman Joe Hockey fleshed things out. Enforced austerity at a time when the economy was fragile could send things pear-shaped.
“It is important to be prudent,” he told an investment conference. “We are not going to go down the path of austerity simply to bring the budget back to surplus, because it would end up being a temporary surplus depending on how deep the deficit is that we inherit.”
“The challenge will be how to get the settings right to bring the budget back to surplus, to start to pay down some of the government debt - whilst at the same time not constraining what I think will be a sense of optimism and hope if there is a change of government,” he said in further remarks not previously reported.
“I think companies will unleash their balance sheets, and I think consumers will as well if there is a change of government, and I am very mindful that we don’t want to be the ones that close down that optimism.”
The Coalition’s new caution about a swift return to surplus, coming months after the government’s embrace of caution, means there is now no mainstream political party promising to quickly end the deficits, or to quickly pay down the government debt they will pile up.
In January Hockey was committed to a surplus “to the core of my bones”. Events since have chilled those bones.
The Reserve Bank is worried there simply isn’t enough happening in the economy to take the place of mining investment as it turns down. The December quarter national accounts released in March showed machinery and equipment investment down 2.5 per cent. Hours worked slipped 0.1 per cent. Household spending climbed just 0.2 per cent.
The consumer price figures released Wednesday put March quarter seasonally-adjusted inflation at just 0.1 per cent. Businesses are having to discount to get Australians to spend. (Woolworths cut average prices 2.5 per cent in the quarter). The discounting is squeezing their profits and providing little reason to invest, at exactly the time the economy needs non-mining investment.
To further cut government spending at such a time could risk recession. Overseas the idea that government debt itself causes recession got hammered at about the same time as the Coalition’s rethink in Australia...
Internationally renowned economists Carmen Reinhart and Kenneth Rogoff became disciples of the austerity movement in 2010 when they published a provocative paper entitled “Growth in the Time of Debt”. They claimed to have discovered a tipping point. Government debt didn’t seem to do much harm until it reached 90 per cent of gross domestic product. But from that point economic growth crumbled.
“Even advanced economies hit a ceiling,” they wrote. “Current debt trajectories are a risk to long-term growth.”
Mitt Romney’s vice presidential running mate deployed their finding in campaigns. In Britain an advisor to David Cameron used it to back spending cuts which as it happened pushed the UK into recession. In mainland Europe it prodded already weak economies to cut spending further.
At the University of Massachusetts a graduate student had been having trouble with his homework. Thomas Herndon had been trying to replicate Reinhart and Rogoff’s findings. Eventually they gave him their spreadsheet and showed him how to use it. When he did he found glaring - almost inconceivable - errors.
In attempting to average 20 cells on their Excel spreadsheet they had only highlighted 15, leaving out the first five in the alphabet - Australia, Austria, Belgium, Canada and Denmark. And there was more. When he and his teachers recalculated the spreadsheet the tipping point disappeared. All that remained was a mild negative correlation between government debt and growth, one more likely to be the result of weak growth pushing up the debt ratio than other way around.
A laughing stock on US television all week and mocked more seriously by US economist Paul Krugman as the “coding error that destroyed the economies of the Western world,” the findings had carried weight in Australia. Just this week the Grattan Institute cited them in support of the proposition that high debt could slow economic growth “for a long time”.
Austerity for austerity’s sake is suddenly unfashionable. The Grattan Institute’s talk of a decade of deficits has become more of a forecast rather than a warning.
The Reserve Bank meets in ten days time, a week before the budget. It is increasingly concerned about the economy and it’s in no mood for austerity.
In today's Sydney Morning Herald
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Thursday, April 25, 2013
It is possible for inflation to fall too low. It has - Swan
So low has Australia’s rate of inflation fallen that the Treasurer is worried and the Reserve Bank is rethinking the economic outlook.Australia’s quarterly rate came in at just 0.4 per cent in the March quarter. In the six months to March following the one-off jolt to prices from the introduction of the carbon tax, prices climbed just 0.6 per cent. Annualised, the six-month inflation rate is just 1.2 per cent.
The only substantial price increases in the March quarter were usual jump in recorded pharmaceutical prices after each December’s expiry of the Medicare Safety Net and the January increase in school fees. Even those increases were well below those of the year before, pushing the Bureau of Statistics’ calculation of Australia’s seasonally adjusted inflation rate down to just 0.1 per cent.
“The high dollar is weighing on prices,” said Treasurer Wayne Swan. “And the flipside of the high dollar weighing on prices is that this is putting immense pressure on the profitability of many businesses, large and small, right across our economy.”
Mr Swan said said Australia was probably in the grip of deflation.
“Price growth for domestic goods and services, which is a broader group of prices than to the consumer price index has generally been much weaker than the CPI we are seeing today. Quarterly growth in the prices for all goods and services in our economy as measured by the GDP deflator has been negative in four of the past five quarters.”
“Just as the high dollar is affecting the profitability of businesses, it's also having a very big impact on government revenues across the forward estimates, largely through the impact on profits and prices.”
“This sustained hit to revenues means we're going to have to make some difficult and tough decisions in this year's Budget, but Labor's choice will be to support jobs.
One of the surprises in the March quarter was that so-called imported inflation remained low even though the dollar scarcely climbed...
“Theoretically, tradable deflation can only continue if the Aussie dollar keeps on rising,” said Commonwealth Bank senior economist Michael Workman.
“But while the Aussie dollar did not appreciate significantly over the first quarter tradables deflation continued. It seems like the effects of a high currency are being drawn out, international exporters are discounting their prices and as a result domestic retailers are discounting their stock more than usual."
Sales figures for Woolworths show its average food and liquor prices slipped 2.5 per cent in the March quarter after sliding 2.8 per cent in the December quarter. Coles prices fell 1.3 per cent.
The Reserve Bank sees the lower-than-expected inflation as a sign that retailers are cutting prices in order to keep consumers spending.
The Bank is updating its view of the economy in the wake of the figures and will present a somewhat more downbeat view to its board at its May meeting to be held one week before the budget.
Futures trading lifted the likelihood of a rate cut at the May meeting from 31 per cent to 44 per cent.
“The chance of a further cut in May has clearly increased,” said BT Financial Group economist Chris Caton. “It may now be close to 50-50.”
“What we find out in the next two weeks, about both the Australian economy and the rest of the world, could tip the balance.”
GOING DOWN
Prices in the three months to March
Bread: Down 0.3%
Milk : Down 1.5%
Eggs: Down 0.1%
Clothes: Down 3.3
Furniture: Down 6.8%
Motor vehicles: Down 1.3%
GOING UP
Rents: Up 0.8%
Electricity: Up 2.4%
Petrol: Up 1.2%
Transport fares: Up 3.3%
ABS March quarter consumer price index
In The Sydney Morning Herald and The Age
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6401.0
Monday, April 22, 2013
Really Rio? The judge who put its claims about jobs to the test
Thank heavens. Monday Column
If only judges thought about economics.
Rio Tinto lashed out at the NSW Land and Environment court last Monday after it overturned a government decision to approve a massive expansion of its Warkworth open cut coal mine in the Hunter Valley.
The decision was “significantly obstructing investment and job creation in New South Wales,” the mining giant thundered.
It was “a blow to our plans for the Mount Thorley Warkworth mine and the jobs of the 1300 people who work there”.
If only the judge had thought about the impact on jobs.
As it happened the judge spent a good deal of time considering the impact on jobs, especially Rio’s far-fetched claim that its plan would have created an extra 44,600 jobs.
What he found will send shockwaves through the ranks of economic consultants. It will never again be safe to come up with a big number for jobs created (“direct and indirect”) expecting the decision maker to give it a tick because it is the outcome of an economic model.
The Treasury has been on to the scam for a long time.
In an economy near full employment you can’t create extra highly skilled jobs.
Here’s its former secretary Ken Henry addressing troops in 2007:
“Consider, for example, recent commentary in the press which argues that the government should support a nuclear power sector because jobs would be created. Where will the nuclear scientists and technicians come from? Is it seriously being suggested that they will come from the dole queue or from Indigenous Community Development Employment Projects?”
“The next time any of you get an opportunity to write a coordination comment on a Cabinet submission that proposes a taxpayer-funded handout for some stunning new investment proposition – and I predict that some of you won’t have to wait very long for such an opportunity – I suggest you draw attention to the submission’s failure to identify the businesses that will lose labour, and be forced to reduce output, if the proposal is agreed to.”
Rio Tinto used what is known as an input-output model to argue that if it spent more at its mine in the Hunter more jobs would be created elsewhere in the Hunter. That’s the sort of thing an input-output model is likely to conclude. Mining’s links to some industries (such transport) are strong, its links to others (such as communications)are weak. The model assigns each link a ‘multiplier’ and - voila! - out comes a disturbingly precise estimate of the total number of jobs created. Rio said expanding its mine would create an extra 44,675 jobs, where each is defined as full-time and lasting for one year.
It’s a common (if flawed) technique. Pizza Hut used it to claim the introduction of the Big Foot pizza would create thousands of jobs. But the organisers of really big events such as the Sydney 2000 Olympics have shied away from it, perhaps fearing close scrutiny...
The study conducted for Rio by Andrew Searles of The Hunter Valley Research Foundation was a good example of a well-constructed input-output study (although the data he used was more than a decade old). The main problem with it is that is was an input-output study. As with all such studies it assumed there were unemployed resources on tap, ready to meet the firm’s needs.
“I am sure Dr Searles will agree with me,” the Australia’s Institute’s Richard Dennis told the court. “Quite explicitly the input-output data that is before you assumes the existence of what I refer to as a ghost workforce.”
“The idea that there are unemployed skilled mining and manufacturing workers in the Hunter Valley at the moment sitting and waiting for these projects to go ahead, I just don’t think is plausible, accurate or useful.”
Indeed the mining industry itself had been warning of chronic shortages and bidding up wages to grab workers from other industries.
Counting as jobs created the jobs workers went to without counting as jobs destroyed the jobs they went from was double counting.
“What would happen if every industry were to commission a consultant to write the same report for them,” Dr Denniss asked rhetorically.
“If every industry were to go and try and estimate the indirect jobs that flowed because of their industry’s existence, what you find is that Australia would employ around 200 per cent of its current workforce,” he replied using calculations from Bureau of Statistics input-output tables.
Dr Searles said he thought there was enough skilled unemployed labour in the region to meet the needs of the expanded mine and that the unemployment rate might climb in the future.
The court was told the rate for Singleton Council was 1.1 per cent.
Dr Dennis extolled the virtues of computable general equilibrium model which takes skill shortages into account. Dr Searles said he had never used one.
It wasn't Rio’s finest day in court, but it would be wrong for it to claim the judge didn’t seriously consider its claims about jobs.
In today's Sydney Morning Herald and Age
12/10224 - BULGA MILBRODALE PROGRESS ASSOCIATION INC v MINISTER FOR PLANNING AND INFRASTRUCTURE & ANOR
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If only judges thought about economics.Rio Tinto lashed out at the NSW Land and Environment court last Monday after it overturned a government decision to approve a massive expansion of its Warkworth open cut coal mine in the Hunter Valley.
The decision was “significantly obstructing investment and job creation in New South Wales,” the mining giant thundered.
It was “a blow to our plans for the Mount Thorley Warkworth mine and the jobs of the 1300 people who work there”.
If only the judge had thought about the impact on jobs.
As it happened the judge spent a good deal of time considering the impact on jobs, especially Rio’s far-fetched claim that its plan would have created an extra 44,600 jobs.
What he found will send shockwaves through the ranks of economic consultants. It will never again be safe to come up with a big number for jobs created (“direct and indirect”) expecting the decision maker to give it a tick because it is the outcome of an economic model.
The Treasury has been on to the scam for a long time.
In an economy near full employment you can’t create extra highly skilled jobs.
Here’s its former secretary Ken Henry addressing troops in 2007:
“Consider, for example, recent commentary in the press which argues that the government should support a nuclear power sector because jobs would be created. Where will the nuclear scientists and technicians come from? Is it seriously being suggested that they will come from the dole queue or from Indigenous Community Development Employment Projects?”
“The next time any of you get an opportunity to write a coordination comment on a Cabinet submission that proposes a taxpayer-funded handout for some stunning new investment proposition – and I predict that some of you won’t have to wait very long for such an opportunity – I suggest you draw attention to the submission’s failure to identify the businesses that will lose labour, and be forced to reduce output, if the proposal is agreed to.”
Rio Tinto used what is known as an input-output model to argue that if it spent more at its mine in the Hunter more jobs would be created elsewhere in the Hunter. That’s the sort of thing an input-output model is likely to conclude. Mining’s links to some industries (such transport) are strong, its links to others (such as communications)are weak. The model assigns each link a ‘multiplier’ and - voila! - out comes a disturbingly precise estimate of the total number of jobs created. Rio said expanding its mine would create an extra 44,675 jobs, where each is defined as full-time and lasting for one year.
It’s a common (if flawed) technique. Pizza Hut used it to claim the introduction of the Big Foot pizza would create thousands of jobs. But the organisers of really big events such as the Sydney 2000 Olympics have shied away from it, perhaps fearing close scrutiny...
The study conducted for Rio by Andrew Searles of The Hunter Valley Research Foundation was a good example of a well-constructed input-output study (although the data he used was more than a decade old). The main problem with it is that is was an input-output study. As with all such studies it assumed there were unemployed resources on tap, ready to meet the firm’s needs.
“I am sure Dr Searles will agree with me,” the Australia’s Institute’s Richard Dennis told the court. “Quite explicitly the input-output data that is before you assumes the existence of what I refer to as a ghost workforce.”
“The idea that there are unemployed skilled mining and manufacturing workers in the Hunter Valley at the moment sitting and waiting for these projects to go ahead, I just don’t think is plausible, accurate or useful.”
Indeed the mining industry itself had been warning of chronic shortages and bidding up wages to grab workers from other industries.
Counting as jobs created the jobs workers went to without counting as jobs destroyed the jobs they went from was double counting.
“What would happen if every industry were to commission a consultant to write the same report for them,” Dr Denniss asked rhetorically.
“If every industry were to go and try and estimate the indirect jobs that flowed because of their industry’s existence, what you find is that Australia would employ around 200 per cent of its current workforce,” he replied using calculations from Bureau of Statistics input-output tables.
Dr Searles said he thought there was enough skilled unemployed labour in the region to meet the needs of the expanded mine and that the unemployment rate might climb in the future.
The court was told the rate for Singleton Council was 1.1 per cent.
Dr Dennis extolled the virtues of computable general equilibrium model which takes skill shortages into account. Dr Searles said he had never used one.
It wasn't Rio’s finest day in court, but it would be wrong for it to claim the judge didn’t seriously consider its claims about jobs.
In today's Sydney Morning Herald and Age
12/10224 - BULGA MILBRODALE PROGRESS ASSOCIATION INC v MINISTER FOR PLANNING AND INFRASTRUCTURE & ANOR
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Grattan: Why we're facing a decade of deficits
Australia faces a decade of budget deficits with the annual total set to pass $60 billion in 2023 unless governments take tough action to “share the pain,” a leading think tank has warned.The Grattan Institute’s assessment comes as Treasurer Wayne Swan confirms the budget had taken a $7.5 billion hit since the mid-year update in October.
“We have seen a really unique event in our economic life,” Mr Swan told the ABC from Washington where he has been attending international meetings.
“We have seen the terms of trade come down but the dollar didn't move. That's caused a hit, if you like, a sledgehammer to revenues in the budget since the mid-year update of something like $7.5 billion.”
“And of course the impact won't just be in this financial year, it will also be across the forward estimates.”
The Grattan Institute says while notionally on track to surplus at the moment, the combined total of state and Commonwealth budget deficits should reach 4 per cent of gross domestic product by 2023, which is around $60 billion in today’s dollars and would be around $100 billion in ten year’s time.
“Initiatives such as national disability insurance scheme, the education reforms, direct action on climate change and parental leave are only a small part of it,” Grattan Institute chief executive John Daley said.
“The big driver, costing $30 billion, is extra spending on health. Contrary to popular belief the extra spending isn’t being driven by aging. It’s that compared to ten years ago today’s 60 year olds see the doctor more often, have more tests, face more operations and take more drugs. We are getting something out of the extra spending, more people are staying alive, but the question is - who is going to pay for it?”
The Institute also believes welfare spending will have to climb in part because the present Newstart unemployment allowance is unsustainably low...
It says company tax revenue, mining and carbon tax revenue and general tax takings will slide as a proportion of the economy as the price of exports slips.
“The problem is the attractive solutions won’t buy that much money,” said Mr Daley. “Cutting middle class welfare won’t be enough, Australia doesn’t have that much. Even if you axed the baby bonus, the schoolkids bonus and parts of Family Tax Benefit B that go to high earners you’d only make $4 billion.”
“Eliminating government waste won’t help much either. Axing the Commonwealth departments of education and health might save the wages of $5000 public servants, but that’s only around half a billion.
The Institute says the gap can only be closed by higher taxes, meaning the days of “painless” budget fixes are over.
“The places to look are company tax and company tax concessions, income tax and goods and services tax. The old idea that you can introduce a change with no losers (at least none earning less $100,000) won’t work.
“Everyone will have to share the pain. Victoria’s Kennett showed what could happen in the early 1990s. It was explicit about saying that everybody was going to have to share in bringing the budget back into surplus.”
A spokesman for Mr Swan rejected the suggestion the Treasurer would not take hard decisions saying its new spending on schools was funded by cutbacks in other areas.
It had tacked health spending by means testing the private health insurance rebate and “cutting the millionaires’ dental scheme.”
Mr Swan told the ABC he was not going to make up for a shortfall in May’s budget by “savage cuts”.
“That would not support jobs and growth and it would lead to higher unemployment,” he said.
In today's Sydney Morning Herald and Age
$60 BILLION IN DEFICIT
The Grattan Institute’s 2023 forecast
$30 billion - Extra health spending
$7.5 billion - Extra welfare spending
$7.5 billion - Gonski and other initiatives
$7.5 billion - Weaker company tax
$7.5 billion - Weaker mining and carbon tax
Total deficits of all Australian governments, in 2013 dollars
Grattan Institute, Budget Pressures on Australian Governments April 2013
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Friday, April 19, 2013
Hockey. That surplus promise - ditch it, we're not stupid
The Coalition has abandoned its plan to quickly return the budget to surplus, citing deteriorating government finances.
“It is important to be prudent,” Mr Hockey told a forum organised by The Australian Financial Review on Thursday.
“We are not going to go down the path of austerity simply to bring the budget back to surplus because it would end up being a temporary surplus, depending on how deep the deficit is that we inherit.”
His remarks are a departure from a commitment he made on the ABC’s AM program in January.
“Our commitment is emphatic,” he said then. “Based on the numbers published today we will deliver a surplus in our first year and every year after that.”
Opposition leader Tony Abbott backed him up saying that afternoon: “Based on the published figures we believe we can deliver surpluses in each year of the first term of a Coalition government”.
Since then further evidence has emerged of a deteriorating budget starting point. Figures released Friday showed government revenue in the eight months to February $7 billion behind the official forecast made only four months earlier...
This week’s collapse in the European carbon price has made the official forecasts for Australian carbon tax revenue look untenable after Australia moves to a price linked to Europe’s in 2015. Mining tax revenue is also a fraction of the official forecast.
However it is not clear how much the weaker revenue from those two taxes would hurt the Coalition’s plans as it had been planning to abolish them.
Mr Hockey’s increased caution puts him in apparent agreement with the Treasurer Wayne Swan who signalled a slower return to surplus Thursday saying on arriving for meetings in Washington that “to cut to the bone” would “drive our economy into the ground and send unemployment skywards”.
“This approach will never be acceptable to this government,” he said.
In The Age
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Thursday, April 18, 2013
Big Data. The former minister wants it, others not so much
Conference website here.
Rudd backer Kim Carr - a casualty of Labor’s leadership turmoil - will use a speech in Melbourne Thursday to attack “bureaucratic blockers” in the public service and his own party’s commitment to open government.
Until March the minister for human services responsible for Centrelink, Medicare and the pharmaceutical benefits scheme, Senator Carr will say most governments start off believing in open government, but that “the will tends to ossify”.
Senator Carr broke new ground by throwing open previously closed departmental records to researchers examining questions such as the link between prescription drugs and birth defects and the health impacts of low incomes.
Invited to open Thursday’s health informatics conference when he was minister, he agreed to open the conference as backbencher after the invitation was re-issued.
“Who isn’t in favour of accountability? Who isn’t a fan of evidence-based policy?” his speaking notes say.
“The trouble is our practice doesn’t always live up to our aspirations.”
“As Sir Humphrey observed in Yes Minister: If people don’t know what you’re doing, they don’t know what you’re doing wrong.”
“The authority to approve data release is usually held by very senior public servants. However this power is often delegated right down to ‘middle management’ positions.”
“I have been told that officers with the delegated authority often ‘sit on’ requests for inordinate amounts of time. Sometimes it’s due to an overblown assessment of the privacy risks. At other times, they simply lack the time to jump through the hurdles"...
The department processes 200 million payments per year. It holds 7 million gigabits of data.
“President Obama has recently announced a great new project to map the human mind. We have here the great map of Australian society: life as it is lived,” Senator Carr will say.
“Public servants need to constantly be reminded and perhaps reassured that government wants them to release data in accordance with legislation.”
“I have approached members of the Coalition on this front, and I have been very pleased with their response.”
In The National Times
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Rudd backer Kim Carr - a casualty of Labor’s leadership turmoil - will use a speech in Melbourne Thursday to attack “bureaucratic blockers” in the public service and his own party’s commitment to open government.Until March the minister for human services responsible for Centrelink, Medicare and the pharmaceutical benefits scheme, Senator Carr will say most governments start off believing in open government, but that “the will tends to ossify”.
Senator Carr broke new ground by throwing open previously closed departmental records to researchers examining questions such as the link between prescription drugs and birth defects and the health impacts of low incomes.
Invited to open Thursday’s health informatics conference when he was minister, he agreed to open the conference as backbencher after the invitation was re-issued.
“Who isn’t in favour of accountability? Who isn’t a fan of evidence-based policy?” his speaking notes say.
“The trouble is our practice doesn’t always live up to our aspirations.”
“As Sir Humphrey observed in Yes Minister: If people don’t know what you’re doing, they don’t know what you’re doing wrong.”
“The authority to approve data release is usually held by very senior public servants. However this power is often delegated right down to ‘middle management’ positions.”
“I have been told that officers with the delegated authority often ‘sit on’ requests for inordinate amounts of time. Sometimes it’s due to an overblown assessment of the privacy risks. At other times, they simply lack the time to jump through the hurdles"...
The department processes 200 million payments per year. It holds 7 million gigabits of data.
“President Obama has recently announced a great new project to map the human mind. We have here the great map of Australian society: life as it is lived,” Senator Carr will say.
“Public servants need to constantly be reminded and perhaps reassured that government wants them to release data in accordance with legislation.”
“I have approached members of the Coalition on this front, and I have been very pleased with their response.”
In The National Times
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Sunday, April 14, 2013
Holden's tragedy. Elvis has left the room
What’s killing Holden is what killed the Top 40.
As a child growing up in the 1970s I scarcely missed an edition of American Top 40. It mattered to me because it was the Top 40. Record buyers and radio stations shared common music tastes.
But towards the end of the 1970s it began to splinter.
Some US stations didn’t play disco. They edited out the disco records before putting the program to air. Others played only country music, others only ‘black’, and others only white, including the new video hits channel MTV which famously didn’t play a black video until Michael Jackson broke through with one so good it could not be ignored.
Three decades on it is happening to news. Readers are increasingly choosing their own sorts of news, via a twitter stream or (in some cases) a newspaper that tells them the sort of things they want to hear.
Michael Jackson was a throwback. The era of universally shared musical taste probably ended earlier with Elvis. Bruce Springsteen thinks so. In a speech at a 2012 music festival he quoted a 1977 Elvis obituary:
“I can guarantee you one thing,” said music critic Lester Bangs. “We will never again agree on anything as we agreed on Elvis.”.
“So I won't bother saying goodbye to his corpse. I will say good-bye to you.”
There’s no longer a generally-agreed Top 40. There’s the adult contemporary chart, the soul chart, and so on. There’s more music, but different types of it are created for different types of people.
Which brings us to Holden.
When Elvis died Holden had close to 40 per cent of Australia’s market. We really did love “Football, Meat Pies, Kangaroos and Holden cars”. Four out of every five cars sold in Australia were made in Australia. And they looked pretty much identical.
Partly it is because we had little choice. The tariff (tax) added to the price of each imported car was 57.5 per cent.
And partly it’s because most of us probably did want the same thing - a big car. Holden gave birth to the Commodore as Elvis died. It is still with us, and it is still big. It’s competitor the Ford Falcon is big.
But our tastes have fractured. More of us have wanted small cars, more green cars, and more and more four wheel drives (now known as SUVs). But with only rare exceptions the Australian manufacturers have acted as if we didn’t. Like the makers of American Top 40 continuing to pretend there were still universal musical tastes through the 1980s each of Australia’s big four kept acting as if the key to survival was making a better version of the same big thing.
Economic theory shows us that’s what protected firms do.
Ever wondered why Qantas and Virgin flights leave at roughly the same times? It’d be more useful if they left at different times, but without outside competition they won’t.
A century ago a United States economist named Harold Hotelling explained why using Hotelling’s Law.
Imagine a kilometre long beach served by just two ice cream carts. Each sunbather wants a cart nearby. The best solution would be to put the carts where no sunbaker has to walk more than 250 meters, by placing one cart one quarter the way along and the other three quarters along.
But if that happened each cart would be tempted to move closer to the middle to grab some of the other’s business. Eventually the two would be next to each other.
Our big car makers kept specialising in big cars because they believed they could focus inwards, each trying to grab the other’s market share.
They might have gotten away with it (amid grumbles from consumers) except that the wall protecting them crumbled. On January 1 2010 last bricks were kicked away. The 10 per cent tariff was cut to 5 per cent. Offsets mean the effective rate is 3.5 per cent.
At the same time the dollar did what it had never done in the era of floating exchange rates. It climbed above $US1 and stayed there. In the quarter of a century to January 2010 the Aussie had averaged 72 US cents. It’s now 105 US cents. That makes foreign cars 45 per cent cheaper to import, and there’s no tariff wall to keep them out.
Free to buy what we want to we are shelling out for different cars like never before. Every third new car sold is an SUV. Every fifth car sold is small. Only every tenth new car sold in made in Australia. Every 25th new car sold is an Australian-made Holden.
Holden let go of 500 workers this week. It’s one size fits all business model has gone and it is not coming back.
In today's Sun Herald
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As a child growing up in the 1970s I scarcely missed an edition of American Top 40. It mattered to me because it was the Top 40. Record buyers and radio stations shared common music tastes.
But towards the end of the 1970s it began to splinter.
Some US stations didn’t play disco. They edited out the disco records before putting the program to air. Others played only country music, others only ‘black’, and others only white, including the new video hits channel MTV which famously didn’t play a black video until Michael Jackson broke through with one so good it could not be ignored.
Three decades on it is happening to news. Readers are increasingly choosing their own sorts of news, via a twitter stream or (in some cases) a newspaper that tells them the sort of things they want to hear.
Michael Jackson was a throwback. The era of universally shared musical taste probably ended earlier with Elvis. Bruce Springsteen thinks so. In a speech at a 2012 music festival he quoted a 1977 Elvis obituary:
“I can guarantee you one thing,” said music critic Lester Bangs. “We will never again agree on anything as we agreed on Elvis.”.
“So I won't bother saying goodbye to his corpse. I will say good-bye to you.”
There’s no longer a generally-agreed Top 40. There’s the adult contemporary chart, the soul chart, and so on. There’s more music, but different types of it are created for different types of people.
Which brings us to Holden.
When Elvis died Holden had close to 40 per cent of Australia’s market. We really did love “Football, Meat Pies, Kangaroos and Holden cars”. Four out of every five cars sold in Australia were made in Australia. And they looked pretty much identical.
Partly it is because we had little choice. The tariff (tax) added to the price of each imported car was 57.5 per cent.
And partly it’s because most of us probably did want the same thing - a big car. Holden gave birth to the Commodore as Elvis died. It is still with us, and it is still big. It’s competitor the Ford Falcon is big.
But our tastes have fractured. More of us have wanted small cars, more green cars, and more and more four wheel drives (now known as SUVs). But with only rare exceptions the Australian manufacturers have acted as if we didn’t. Like the makers of American Top 40 continuing to pretend there were still universal musical tastes through the 1980s each of Australia’s big four kept acting as if the key to survival was making a better version of the same big thing.
Economic theory shows us that’s what protected firms do.
Ever wondered why Qantas and Virgin flights leave at roughly the same times? It’d be more useful if they left at different times, but without outside competition they won’t.
A century ago a United States economist named Harold Hotelling explained why using Hotelling’s Law.
Imagine a kilometre long beach served by just two ice cream carts. Each sunbather wants a cart nearby. The best solution would be to put the carts where no sunbaker has to walk more than 250 meters, by placing one cart one quarter the way along and the other three quarters along.
But if that happened each cart would be tempted to move closer to the middle to grab some of the other’s business. Eventually the two would be next to each other.
Our big car makers kept specialising in big cars because they believed they could focus inwards, each trying to grab the other’s market share.
They might have gotten away with it (amid grumbles from consumers) except that the wall protecting them crumbled. On January 1 2010 last bricks were kicked away. The 10 per cent tariff was cut to 5 per cent. Offsets mean the effective rate is 3.5 per cent.
At the same time the dollar did what it had never done in the era of floating exchange rates. It climbed above $US1 and stayed there. In the quarter of a century to January 2010 the Aussie had averaged 72 US cents. It’s now 105 US cents. That makes foreign cars 45 per cent cheaper to import, and there’s no tariff wall to keep them out.
Free to buy what we want to we are shelling out for different cars like never before. Every third new car sold is an SUV. Every fifth car sold is small. Only every tenth new car sold in made in Australia. Every 25th new car sold is an Australian-made Holden.
Holden let go of 500 workers this week. It’s one size fits all business model has gone and it is not coming back.
In today's Sun Herald
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. $275 million buys how many jobs? With Holden we don't know
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