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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald

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What's worse for the budget? Super or pensions

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

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

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

SO IT’S NOT UNSUSTAINABLE?

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

IS GIVING THE HEALTH CARD TO SO MANY SENIORS EXPENSIVE?

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

WHO CAN GET A SENIOR’S HEALTH CARD?

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

WHAT ABOUT THE PENSION? IS THAT EASY TO GET?

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

ARE WE GETTING THE PENSION TOO EARLY?

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

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

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

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

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

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

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

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

BUT WOULDN’T THIS PUNISH SELF-FUNDED RETIREES?

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

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

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

WHAT CAN WE EXPECT?

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

In The Age and Sydney Morning Herald

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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It's the small bribes that suck us in

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

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

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

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

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

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

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

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

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

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

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

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

Yet they found the effects of small gifts were huge.

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

As the size of the donations increased their effectiveness waned.

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

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

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

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

The implications go beyond politics.

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

It is an extraordinarily bad idea.

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

In The Age and Sydney Morning Herald

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ISDS: The trap Australia and Japan avoided

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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There are worse things than a higher GST

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Of course, there are other alternatives.

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

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

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

In The Age and Sydney Morning Herald

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

If we were sleepwalking towards catastrophe would we know?

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

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

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

But few others seem to.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“At what time was the bottle half full?”

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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How to pay for roads

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


In The Age and Sydney Morning Herald

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

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

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

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

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

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

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

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

Removing laws that cause actual damage is harder.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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Spending on health is sustainable precisely for the reason that we want to sustain it

Unsustainable? A generation ago the veteran Labor MP Barry Jones led an inquiry into expectations of life in the 21st century. He said the question was being framed as whether Australia could "afford" an ageing population. "At first sight this seems an ordinary sort of accountant's question," he reported. "Like: can we afford a new car?''

"But decisive differences emerge when we consider the answers. If we can't afford a new car, we don't buy one, and nobody suffers. But what if we decide that we can't afford the coming increase in the aged population?"

Jones said it was a deeply sinister question. Or a silly one.

Peter Dutton is Australia’s health minister. Joe Hockey is Australia’s treasurer.

(Dutton shouldn't be confused with the assistant health minister Fiona Nash who is more famous for pulling down health websites and defunding preventative health organisations).

Within weeks of taking on the health job last year, Dutton declared the system was on track to becoming "unmanageable".

Last week, in an address to the Committee for Economic Development of Australia, he said spending on Medicare was "spiralling", future costs were "staggering", and we were on an "unsustainable path with no prospect of meeting the needs of the health of our nation in the 21st century".

Then Hockey piled in: "If our health, welfare, and education systems stay exactly the same, Australia is going to run out of money to pay for them," he said as the G20 summit got under way.

Hockey is one of the few people who has read the Commission of Audit report. His concerns would reflect its concerns. But when it comes to health they are misplaced.

Health is about the last thing we will run out of money for. It matters more to us than does almost anything else. Jones was right. Spending on health is sustainable precisely for the reason that we want to sustain it.

We are spending more on health because more of us are getting older (the phenomenon Jones was inquiring into) and also because we are buying new and better health services. We would be mad not to. It is not normally thought of as waste to spend more to buy something that is better.

A year ago, Hockey had a relatively new form of surgery known as a gastric sleeve. As much as 80 per cent of his stomach was removed to make it more like a sleeve. It's expected to save lives. A few years ago it wasn't possible. It costs Medicare millions.

Offered a choice between an old dial-up internet connection and a new broadband service most of us would opt for the broadband. It isn't wasted money. Nor is it unsustainable, given rising incomes. Broadband matters to us. Health matters even more.

But the difference is that health is predominantly provided by governments. We tend to see it as a problem when governments buy more, even if we want them to, whereas we don't worry when we do.

There's little doubt that we want to pay more tax for health. The latest increase in the Medicare levy (due in July) was approved with scarcely a murmur. It'll help fund the National Disability Insurance Scheme.

Some 19 per cent of the Australians surveyed in the latest Australian National University election survey rated health as their No.1 priority. Only 11 per cent nominated tax. It used to be the other way around.

As recently as the 1990s, Australians were more concerned about tax than health. But we are richer now, and older. We are able to, and keener to, spend more of our GDP on health.

It's always wise to get value for money, but it would really be stupid to buy less of what we really want.
In The Age and Sydney Morning Herald

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Protecting predators. What is it with assistant ministers?

What is it with assistant ministers? First the assistant health minister pulls down a healthy food labeling website, then the assistant treasurer insists he’ll plow on with plans to neuter Australia’s new financial advice rules.

One took two years to build, the other took five years. The food website had just gone live. The Future of Financial Advice legislation has been in place seven months.

What assistant ministers Fiona Nash and Arthur Sinodinos have in common is a willingness to buckle to the least consumer-friendly parts of the industries they regulate.

Nash was helped by a Chief of Staff who had an undisclosed conflict of interest. Sinodinos was until recently a senior executive at the National Australia Bank.

The legislation Sinodinos plans to stifle was born out of the collapse of Storm Financial.

Thousands of elderly and poor investors lost everything they had and more, persuaded by their advisors to borrow against their homes to buy shares and then to borrow more using the shares themselves as collateral. When the share price collapsed in the global financial crisis they lost the lot and owed even more.

The owners of Storm financial pocketed 7.5 per cent of everything that was sent their way, upfront. That’s 7.5 per cent of everything the clients invested as well as everything the clients borrowed. They directed huge chunks of it as rewards to the advisers the clients trusted.

After a landmark parliamentary inquiry and three years of subsequent negotiations Labor introduced a new law designed to make sure it could never happen again.

Financial planners would be required to act in the “best interests” of their clients. It was that simple. Sure, there were also specific requirements, but behind them was a straightforward requirement to act in their client’s “best interests”.

One of the specific requirements was a ban on commissions and other forms of conflicted remuneration...

It’s hard to work for a client when you are being rewarded for steering your clients in a particular direction. Doctors are unable to receive payments for scripts from drug companies. It’s fairly straightforward.

And advisors who continued to receive annual so-called “trailing commissions” from the makers of products they had previously sold would be required to let their clients know, by letter, once a year.

Every two years the clients would be asked by letter whether they wanted to continue to have the trailing commission deducted from their funds. If they failed to “opt in” the deductions would stop.

It would be fair to say much of the industry has already adapted to the changes (just as much of the food industry has already adapted to the food labelling changes that annoyed the assistant health minister).

Financial planners whose business model was built around commissions have left the industry. Many of those that remain are keen to serve their clients.

During the election the Coalition said little about the Future of Financial Advice Act (just as it said little about food labelling). Sinodinos didn’t know he would have the portfolio.

Just before Christmas he declared that the law had gone “too far”. They had created “unnecessary complexity”.

Oddly the part of the law he was keenest to remove was the simplest - the requirement for an advisor to act in their client’s “best interests”.

Taking it away would leave the process-related steps, the boxes that should be ticked, making it legal for an advisor to tick each box and yet not act in their client’s best interests.

Conflicted payments would be allowed once again, where the advice was general in nature and not personal. Put simply, if an advisor promises not examine a client’s circumstances, they are able to receive a kickback.

Advisors continuing to receive trailing commissions won’t need to let their clients know. Annual letters will be required only to clients signed up after July 2013. Sinodinos says “applying this requirement to existing clients is overly onerous” - an odd statement given that trailing commissions are said to be a continuing fee for an ongoing service.

And “opt in” will become “opt out”. Clients will be able to stop financial planners getting what might be an ongoing 0.5 per cent of their funds each year, but only if they find out about it and only if they make the effort of “opting out”.

It’s the delivery of a wish list which is making some in the industry blush. Although not the banks. They hated it the new law. They want to be able to continue to incentivise their employees for steering their customers into their own products. Being freed from the need to act in a customer’s “best interests” is worth a lot.

If Sinodinos was going to change the law he would have to act quickly. It has been in place since July 2013. Waiting until the Senate changed in July 2014 would waiting too long.

So he is going to try and do it by regulation. Regulations can be disallowed by the parliament, but that needn’t be an impediment if Sinodinos introduces them just after the parliament rises on March 27. It won’t sit again for six clear weeks giving his regulations the force of law - if they are legal, which the top law firm of Arnold Bloch Leibler believes they are not.

Regulations are intended to implement the provisions of an laws rather than nullify them it says in advice to Industry Super. Sinodinos will be hoping that by the time anyone challenges the regulations a more compliant Senate will have amended the law, giving him cover.

But it’s a big risk for an infinitesimal political gain.

Sinodinos is looking like Nash.
In The Age and Sydney Morning Herald

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Loads of money: it's the route to happiness

Never believe a rich person who tells you money doesn't matter. I used to be one of them. Not rich in financial assets, but on a high-enough income.

I used to appear on the ABC and in newspapers spouting the then conventional economic wisdom that (beyond a certain point) more money didn't make people more happy.

Of course it seems to, I would say. An individual who gets a pay rise will feel better off than his or her less fortunate neighbours but that's just because of a change in status. If an entire nation (or an entire state) gets a pay rise no one in it will feel any better off.

It's what the data seemed to show. In the United States average happiness had merely bounced around for decades as income per person climbed. Internationally high-income countries seemed to be scarcely any happier than low-income ones, except for cases of extreme poverty.

The buzzwords of the time were ''habituation'', ''homeostasis'' and the ''hedonic treadmill''. We were meant to have a sort of thermostat inside us. People who had lost their legs were said to feel little worse than when they had them. People who had won the lottery were said to feel little better than if they had lost. As Ethan Hawke put it in the movie Before Sunset: ''If they were basically optimistic and jovial, now they're optimistic and jovial in a wheelchair. If they were petty and miserable, now they're petty and miserable with a new Cadillac, a house and a boat.''

By all means get more money, the argument went, but if you really want to be happy, stop comparing yourself to your neighbours.

It reached its high point in 2006 with an article in the prestigious Financial Times headed: ''The hippies were right all along''.

Victoria's Treasurer had better hope they were indeed right. In the past six months 27,000 Victorians have lost their jobs. Melbourne incomes are growing at only half their usual rate and on one measure are falling.

But the hippies are wrong. And I was wrong, and probably Ethan Hawke. A re-examination of the data shows money is about as closely related to happiness as could be.

After comparing the results of 160 Gallup polls in 160 nations with gross domestic product per capita in those nations, Australian economist Justin Wolfers described it as ''one of the tightest cross-country relationships I have ever seen''.

Previous surveys had only compared handfuls of nations.

In 2008 he and University of Michigan colleague Betsey Stevenson found that GDP per person wasn't merely correlated to happiness, but correlated at a level of 0.8. And that was assuming the data was accurate. Wolfers believes the underlying correlation is even stronger.

Both GDP per capita and happiness are hard to measure. (Happiness turns out to be easier. It's a simple question, asked on a scale of 0 to 10 in all countries all around the world. GDP is harder. It is calculated by adding up everything produced, spent and earned in each nation. In some places it isn't done well.)

''It is amazing that the estimated correlation is as high as 0.8, given that it's a correlation between two noisy measures,'' Wolfers says. The actual correlation might be nearer 100 per cent.

And just as with income there seems to be no limit. The more money a person or a society gets, the happier they get - without end. Wolfers and Stevenson find that a doubling of a high income lifts happiness by about as much as a doubling of a low income. ''If there is a satiation point, we are yet to reach it,'' Stevenson says.

The downside is that as income per person slides, happiness or ''life satisfaction'' slides. We feel uneasy.

Which brings us to Victoria. SGS Economics and Planning says Melbourne's economy has typically grown by 3 per cent per year. In the past financial year it grew only 1.7 per cent.

When adjusted for population, GDP per person went backwards. On average, each resident of Melbourne made and earned less than the year before.

Treasurer Michael O'Brien doesn't like the conclusion. He points out that Victorians are having babies at a record rate. He says it's the births that have turned GDP per person negative. Adult Victorians probably may not have lost real income.

But Melbourne's GDP per capita has slipped in three of the past five years. It's looking like a trend.

The finance industry has grown. SGS says it accounts for 12 per cent of what Melbourne does, up from 7 per cent. Much of it is setting up in Southbank and the Docklands, straining the ability of public transport to get people to work.

Away from the centre, work in the middle and outer suburbs is hollowing out.

It's probably adding to frustration and anxiety. And if the established relationship between GDP per capita and happiness holds, it's making us grumpy.

It's an awful environment in which to be standing for re-election.

In The Age and Sydney Morning Herald

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Romance. Why is a ''basic woman'' is so attractive to a basic man?

Sixteen Valentines Days ago economist Herbert Stein stumbled across perhaps the ultimate question.

Why is it, he asked, that a “basic woman” is so attractive to a basic man?

He was quick to point out that he could have asked the question the other way around.

Stein had worked presidents Nixon and Ford. He was a senior fellow at the American Enterprise Institute. He was 81.

The question is harder to answer than you might think.

Stein liked to ponder it as he sat at an outdoor table watching couples walk arm-in-arm up the hill leading to New York’s Kennedy Centre.

“I look particularly at the women in those couples. They are not glamorous,” he wrote in Slate Magazine.

“Some of them are pretty, but many would be considered plain. Since they are on their way to the Kennedy Center, presumably to attend a play, an opera or a concert, one may assume that they are somewhat above average in cultural literacy. But in other respects one must assume that they are, like most people, average.”

“But to the man whose hand or arm she is holding, she is not average,” he wrote. “She is the whole world to him. They may argue occasionally, or even frequently. He may have an eye for the cute intern in his office. But that is superficial. Fundamentally, she is the most valuable thing in his life.”

And then his question: “Why is this basic woman so valuable to the man whose hand or arm she is holding?”

In their new book, An Economic Theory of Greed, Love, Groups, and Networks Australian economists Paul Frijters and Gigi Foster actually attempt an answer, but at a personal cost...

Forster writes that while the prospect of understanding love is intellectually compelling, “actually witnessing the demystification of the love mechanism is also shocking on a personal level.”

“One must find a way to carry on after this experience as a normal individual, despite having deconstructed love (and hence one’s own loves) into constituent parts.”

They see love as a strategy, in the same way as trade and stealing are strategies. Each is about getting something we want, but love is a strategy that changes us.

Economists have long known about the other two. We are acquisitive. If we see something we want we take it. If we can’t take it we trade something for it. But what if neither taking nor trading works? What if we are powerless to get what we want?

Newborn babies are as powerless as could be. Taking things isn’t an option, they can scarcely move. Nor is trade, they have nothing physical to trade.

So they do the only thing they can. They completely subjugate themselves to a higher power.

As Frijters puts it: “Someone who starts to love begins by desiring something from some outside entity. This entity can be a potential sexual partner, a parent, society, a god, or any other person or abstract notion.”

“From a position of relative weakness, the loving person tries to gain control over this entity by incorporating the entity into his own sense of self.”

The needy person makes themselves a mere part of something larger, be it society, a religion or (hopefully) a couple.

And then they are hooked. They are no longer just themselves. It’s hard to fall out of love with something you’ve become part of. The other person, the society or the church or cult has becomes your everything.

Why is this basic woman so valuable to this basic man?

Stein says it isn’t necessarily sex, although it may once have been. He says it’s something even more primitive: human contact.

And conversation.

“The primary purpose of this conversation is not to convey any specific information,” he writes. “Its primary purpose is to say, I am here and I know that you are here."

And it’s being needed.

“If no one needs you, what good are you, and what are you here for?” he asks. “Other people - employers, students, readers - may say that they need you. But it isn't true. In all such relationships you are replaceable at some price. But to this woman you are not replaceable at any price.”

“So this ordinary woman - one like about 50 million others in America - has this great value to this man she is going to the theatre with. He surely does not make a calculation. He probably never says how much he values her, to himself or to her. But he acts as if he knows it.”

How did Stein, a mere economist, know it? He wrote: “My wife and I walked up that hill to the Kennedy Centre many times”.

In The Age and Sydney Morning Herald


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We've drawn a line in sand on industry support. Sure.

Within minutes of treasurer Joe Hockey declaring an end to “the age of entitlement” on Monday the assistant infrastructure minister Jamie Briggs stood on a highway on the outskirts of Hobart and announced a grant of $3.5 million to a Tasmanian seafoods manufacturer, Huon Aquaculture.

It would help “provide the equipment to process fresh fish, as well as smokehouses and other machinery for boning, skinning, portioning and mincing,” he said.

The Tasmanian government was kicking in $1.5 million, the Commonwealth $3.5 million and Huon Aquaculture itself $7 million.

As it happens the proportions are roughly similar to those asked for by SPC Ardmona to save its fruit canning plants in Victoria. SPC had suggested $25 million from the state government, $25 million from the Commonwealth and $90 million from itself. In fact as a proportion of the total SPC had asked the Commonwealth for less than Huon - two dollars in every ten rather than three.

Why did the Commonwealth reject one, creating “an important marker” and not the other? On Tuesday finance minister Mathias Cormann tied himself in knots explaining that one was a “grant” while the other was a “co-investment”, although at it wasn’t always clear which.

“Let’s just be very clear,” the finance minister said.

“We were not being asked to make a co-investment, we were being asked to make a grant from the taxpayer to an individual business so that they would be able to invest in a $12 million dollar restructure of their business. We were not being asked to make an investment, if you make an investment you actually get a share in the business and you end up getting a return from your investment.”

Governments of all persuasions support businesses, sometimes by direct grants, sometimes by tax breaks, sometimes by tariffs and sometimes by the provision of services such as Austrade, subsidised water and electricity, technical colleges and the CSIRO.

Often the support has a broader justification. We are told the grant to Huon Aquaculture will “support Tasmania's contribution to this vital industry”.

The $16 million to Cadbury in Tasmania is “essentially an investment in tourism infrastructure” according to the prime minister.

What will eventually be $750 million per year in “direct action” grants to carbon emitters is as much about the environment as it is the businesses that benefit.

It’s the same with the $5.5 billion per year private health insurance rebate. It’s about the patients as well as the funds...

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Government support for business is as hard to escape as it is to quantify.

The Australia Institute says the mining industry receives $4.5 billion per year in subsidies and tax concessions, half of it from fuel subsidies. The Productivity Commission comes up with a lower total - $700 million per year.

The motor vehicles industry costs $621 million, and another $785 billion in tariffs. Food manufacture costs relatively little in terms of grants and concessions ($45 million and $62 million) but a whopping $1.7 billion in tariffs.

All up the Productivity Commission says Australian governments deliver $10 billion per year in industry support.

An end to support - “a line in the sand” as a backbencher put it - would be something to see. But we’re nowhere near it and we probably never will be.

In The Sydney Morning Herald and The Age






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2014 Economic Survey. Steady as she goes: rates on hold all year

Here is is, the 2014 BusinessDay economics survey:

As the Reserve Bank prepares for its first board meeting of the year the BusinessDay forecasting panel is predicting a rarity - an entire year without a move in official interest rates.

It hasn’t happened since 2004.

A unique blend of 25 of Australia’s leading forecasters in the diverse fields of market economics, academia, consultancy and industry associations, the BusinessDay panel includes several former Treasury forecasters. Over time its average forecasts have proved to be more reliable than those of any of its individual members.

A year ago the average forecast was for a cut in the Reserve Bank’s cash rate from 3 per cent to 2.7 per cent. The Bank cut to 2.5 per cent. In 2012 the average forecast was for a cut from 4.5 per cent to 3.6 per cent. The Bank cut to 3 per cent. This time the average forecast is for no cuts. The average comes in slightly below the current rate at slightly below the current rate at 2.46 per cent by June and slightly above at 2.55 per cent by December.

If rates do say on hold at around 2.5 per cent for the entire year it will be because the settings are already in place to deliver just enough (anemic) economic growth to keep further unemployment (almost) at bay.

The average forecast reflects a panel evenly split. Nine of the 25 members expect rates to fall further, nine expect rates to climb, and seven expect them to stay put. Two of the panel expect cash rates to fall to an ultra-low 2 per cent. One of them, Macquarie Group’s Richard Gibbs expects it to happen in the first half of the year. The most bullish forecast is from Stephen Koukoulas of Market Economics who expects 3.5 per cent by the end of the year and 3 per cent by June. As it happens Koukoulas was spot on last year, predicting a near-record low of 2.5 per cent by year’s end.

The central forecast is for improving global growth partly offset by a further easing in China. The panel expects the world economy to grow 3.3 per cent in 2014. In the United States it expects through-the-year growth to climb to 2.7 per cent. China’s growth should slip further to 7.4 per cent, but there is a wide range around the forecast. Melbourne University’s Neville Norman expects China to grow by 8.2 per cent. Stephen Anthony of the Canberra consultancy Macroeconomics expects 6.5 per cent.

Weaker Chinese growth would mean a further slide in Australia’s terms of trade. The price of Australia’s exports relative to imports has already slid 18 per cent from the peak in late 2011. The panel expects a further slide of 3.9 per cent. Only Richard Robinson of BIS Shrapnel and Gareth Aird of the Commonwealth Bank expect an improvement. Their forecast upturns are modest: 1.4 and 0.7 per cent.

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Business investment is expected to stagnate further as resource prices sink. Non-mining businesses are unlikely to fill the gap. The average forecast is for a further decline in investment of 3.2 per cent. Tim Toohey of Goldman Sachs forecasts the steepest decline: 11.6 per cent. Neville Norman is alone among the panel in expecting an increase, of 5.1 per cent.

The panel expects Housing investment to surge as the full impact of last year’s rate reductions comes through. The most impressive forecast is from Tim Toohey who offsets his pessimism about business investment by predicting a 10.5 per cent lift in home building. The average forecast is for a 5.3 per cent increase. One of the lowest forecasts is from the Housing Industry Association itself, which is expecting 1.8 per cent.

The pace of Household spending is also expected to pick up, climbing 2.5 per cent in 2014 after advancing 1.8 per cent over the past twelve months.

The panel believes the boosts in both housing investment and household spending will be enough to lift the pace of GDP growth from 2.3 per cent to 2.7 per cent. The highest forecast, from Stephen Koukoulas is 3.9 per cent. The lowest, from Jakob Madsen of Monash University is 1.2 per cent.

Although welcome, economic growth of 2.7 per cent would be well below the long-term growth rate of 3.4 per cent, and insufficient to stop the unemployment rate rising. The central forecast is for an unemployment rate of 6 per cent by year’s end, up two notches from the present 5.8 per cent.

Population growth means individual living standards will advance by less than GDP. The panel expects GDP per capita to grow by 1 per cent during 2014, which is an improvement on 2013. Jakob Madsen expects it to fall, slipping 0.5 per cent.

Inflation has been edging up with the falling dollar, most recently reaching 2.7 per cent in the year to December. The panel expect it to stay at recent highs, finishing the year at 2.5 per cent backed by an underlying rate of 2.4 per cent. The ANZ’s Justin Fabo picks the highest headline rate: 3.4 per cent. Nigel Stapledon of the Australian School of Business picks the lowest, 2 per cent.

The panel expects the Australian dollar to drift lower, finishing the year at 86 US cents - close to but not quite at the “magic spot” of 80 and 85 US cents identified by Reserve Bank board member Heather Ridout in an interview with Fairfax Media in January. Only two of the panel expect the dollar to end the year back up above 90 US cents: Su-Lin Ong of RBC Capital Markets who expects US 95 and Stephen Koukoulas who expects parity. The lowest forecast, from Stephen Anthony is for US 78.

And the budget deficit will come in pretty much as forecast, both this year and the next in the view of the panel. The result is more surprising than it seems. The forecasts in the government’s pre-Christmas budget update were presented as if they reflected badly on the outgoing Labor government. The update predicted a deficit of $47 billion in 2013-14 and $33.9 billion in 2014-15, unless something changed. The government has set up a Commission of Audit to recommend changes in time to shrink the deficit in 2014-15, but the panel expects little progress. It’s opting for $47.6 billion in 2013-14 and $32.8 billion in 2014-15.

Given the panel’s relatively weak forecast for Australian economic growth it might be of the view that the economy couldn’t take too much progress on the cutting the deficit. If the government reaches a different view and cuts hard, the panel’s central forecast of unchanged interest rates may turn out to be on the high side.

In Business Saturday


The most accurate of the Business Day forecasters this past year was only half human.

“Barry” is a dynamic stochastic general equilibrium model of the Australian economy. Its creator is Stephen Anthony, a former Treasury modeller who set up a private consultancy Macroeconomics in 2007.

Dr Anthony uses his own judgement about fiscal policy and monetary policy and then uses Barry to spit out results for everything else. Barry is built from more than fifty equations.

Last year Barry said the Australian economy would grow by 2.5 per cent (so far it’s been growing at 2.3 per cent), China would growth 7.3 per cent (so far 7.7 per cent), the US would grow through the year growth by 2.1 per cent (2.0 per cent), household spending would grow 1.8 per cent (1.8 per cent) housing investment 2.1 per cent (1.7 per cent). Barry said the Australian dollar would end the year at 90.5 US cents (it ended at 89.2) and a current account deficit would reach $55 billion (it reached $52 billion).

Not everything came out the way Barry and Stephen predicted. Inflation was higher at 2.5 per cent rather than 2.1 per cent, unemployment was lower at 5.8 per cent rather than 6.3 per cent and the cash rate was nowhere near as low. It ended the year at 2.5 per cent, well above the machine-human hybrid’s prediction of 2 per cent.

Only five out of the Business Day panel got the cash rate completely right, and they were completely human: Shane Oliver of the AMP, Nigel Stapledon of the University of NSW, Frank Gelber of BIS Shrapnel, Stephen Koukoulas of Market Economics, and Brad Crofts of the Australian Workers Union. Most of the panel thought it would end the year much higher, some above 3 per cent.

The inflation rate of 2.7 per cent was an easy pick for most of the market economists, but for no-one else apart from Neville Norman of Melbourne University.

Where the academics came into their own was the 2012-13 budget deficit. None of the other forecasters predicted anything like the eventual outcome of $18.8 billion. Professors Bill Mitchell and Jakob Madsen came about as close as possible, picking $20 billion.

All of the other forecasters who went for a lower deficit can be excused. The Treasurer had been predicting a surplus.

In Business Saturday


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