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

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

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

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

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

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

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

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

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

Because every enterprise needs both.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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

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

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

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

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

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

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

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

This time they have...

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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Westpac and the Commonwealth protect mortgage profits no matter what

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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Now Hockey says he wanted to tax the rich all along

Now he tells us.

Hockey wanted to wind back super tax concessions all along.

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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Asking what super is for opens a can of worms

The Treasurer jumped the gun.

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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

The madness is receding.

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

 

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Deadline stressed? You've brought it on yourself

You probably shouldn't be reading this.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And that's the problem.

In The Age and Sydney Morning Herald

 

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No longer a nation of homeowners, we're renting

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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Why you're working an extra 16 minutes a week

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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Switching sides. Now Coalition voters get the glooms

It's as if they have switched sides

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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

Now Malcolm's sucked in.

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

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

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

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

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

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

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

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

So why do it?

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

 

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Morrison's start was woeful, but there's time

Scott Morrison's first outings as Treasurer were woeful.

On the night of the spill, Malcolm Turnbull promised something different: "a style of leadership that respects the people's intelligence, that explains these complex issues and then sets out the course of action we believe we should take, and makes a case for it".

Turnbull promised "advocacy, not slogans".

Morrison gave us, "work, save, invest".

And then this slogan: "We have a spending problem, not a revenue problem."

It isn't even the truth. Australia does indeed have a revenue problem, as Morrison's predecessor was happy to acknowledge. From the turn of this century right through to the global financial crisis, the Australian government's income never dipped below 25 per cent of gross domestic product. Then it collapsed and hasn't fully recovered. We do indeed have a revenue problem, as well as a spending problem. Spending is 25.9 per cent of GDP, revenue is 24 per cent.

Pressed by journalist Leigh Sales about the need to tackle both, Morrison replied that the budget forward estimates had revenue climbing back to a touch over 25 per cent of GDP by 2018-19, which meant things would be fine.

Except that it won't. The budget forecasts have revenue barely climbing at all, reaching just 24.2 per cent of GDP in 2016-17. After that, the budget projections have it climbing to a tad over 25 per cent. But projections aren't forecasts. The difference is enormously important, and a treasurer who could really explain complex issues would have pointed it out.

Forecasts are the Treasury's best guesses, taking everything into account. Each budget it produces forecasts for the following two financial years, and for the years beyond that, when it's too difficult to make forecasts, it produces "projections"...

The projections come with a health warning. Here's how the Treasury spelt it out in the budget from which Morrison quoted: "These projections are not forecasts, but rather are based on a set of medium-term assumptions."

The assumptions are odd, and they produce odd results, at times quite different to those of any reasonable forecast. They assume "spare capacity in the economy is absorbed over five years". That's a fancy way of saying they assume the unemployment rate will slide to 5 per cent.

That's right. They assume a slide in unemployment (which would indeed boost government revenue).

To get the fall in unemployment, the Treasury projections produce a very fast economic growth rate of 3.5 per cent a year ("above trend") for five consecutive years.

Naturally, it boosts projected revenue. But it has no basis in reality. There's no particular reason to think it will happen. It's the automatic output of a blindly mechanical model. It's wishful thinking.

Right now, Australia's economy is growing at an annual pace of just 2 per cent. For as long as that happens, we are indeed going to have a revenue problem, and also a spending problem.

And for as long as commodity prices fall. The Reserve Bank's index of commodity prices has been sliding for the past four years. It's now only half what it was, and it is continuing to edge down. The news from China offers little hope. Commodity prices drive taxation revenue. Our government is both collecting too little for the amount it is spending and spending too much for the amount it is collecting. A treasurer able to address complex issues would talk about both. But Morrison has already shut down discussion.

"I'm not in that camp," he says, when asked about the need to tackle revenue.

Closing off an option will limit our trust in the new Treasurer and make us feel he is not really prepared to govern in our interests.

It will also make it more difficult for him to manage the budget, should the downturn in revenue continue.

It's less than Turnbull had led us to hope for, but it's not too late.

The best thing for Morrison to say for the next few weeks is not that much, as he reads into the job. Then he should start a really open conversation about the budget and tax where all options are on the table (although some more preferred than others), including the option of raising more tax.

The most popular premier in the land will be pleased to help. Morrison's NSW colleague Mike Baird believes we will have to raise more in order to properly fund hospitals. Victoria's Labor Treasurer, Tim Pallas, believes the same thing. So does South Australia Premier Jay Weatherill​.

Their views shouldn't be instantly dismissed. They're going to be down $80 billion over the next 10 years because of a decision by Joe Hockey to cut their funding formula to tart up his first budget. They're the real victims of the slowdown in revenue. And they're the ones who are going to have to provide the services we need. We are entitled to an open and honest conversation about how much we are prepared to pay for our services, as well as how much spending on them should be cut.

Morrison has the ability to transcend his past by opening up an intelligent conversation. It's what Turnbull led us to expect. Or he can revert to form and hide behind slogans. It's what we've become used to.

In The Age and Sydney Morning Herald

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Tony Abbott's pension. The myth that won't die

Some stories are too good to die, like the one about Tony Abbott's prime ministerial pension. Apparently he would have been able to get one if he had been in office for just three more days.

It is said that the pension is only available to prime ministers who have been in the job for two years. Abbott became prime minister on September 18, 2013. He was replaced just short of two years, earlier this month on September 15. If only he had held out another three days he could have retired on serious money, or so the story goes.

His treasurer is said to have done much better. Joe Hockey was sworn in on 18 September, 2013 and left office on September 21 - a period of just over two years.

It's so delicious it ought to be true, which might be why the ABC recycled it several times on the night of the spill and one of the News Corporation papers reported it as a fact the next day. And it could be why I am still getting emails berating me for overlooking it when I totaled Abbott's entitlements on the night of the spill.

I didn't overlook it. I checked it out and found it wrong. But I was unwise not to say so, figuring that there was not much news in something that was wrong.

I'm still getting emails. So rather than reply to each one, and to the others that are bound to come, I'll set the record straight.

The story is almost - but not completely - baseless.

The small amount of truth lies in a document some of the believers keep circulating on the internet. It's an account from the Parliamentary Library of the Parliamentary Retiring Allowances Act. The account notes that in 1959 the "period of service for prime minister to attain eligibility reduced from three years to two years".

Proof, right? But eligibility for what? For a small supplement to the pension worth at the time 2000 to 3000 pounds per year.

It's not the pension itself, it's an add-on for ex-prime ministers.

And that's where the believers stop reading, having found what they were looking for. But further down in the same document it says the provision was repealed in 1978 and the "discreet prime ministerial benefit discontinued".

The Library is right. Today section 19A of the renamed Parliamentary Contributory Superannuation Act refers to a supplement only available to prime ministers who held the office before 1978, none of whom are alive.

If Abbott retires, he will get around $300,000 per year, based on his length of service and the jobs he has held. The provisions don't step up with every two years of service.

But I'm sure I'll be told again that they do. The internet has both made it easier to find out the truth and easier to be fooled by dated information that looks as if it is truth.

In The Age and Sydney Morning Herald

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Australia heads to Atlanta for last-ditch talks to revive the Trans-Pacific Partnership

The stalled Trans-Pacific Partnership negotiations will be restarted next week, with the possibility of an agreement by the week's end.

"There are some unresolved issues, but I don't believe they are intractable," Trade Minister Andrew Robb said as Australian officials prepared to travel to Atlanta, where officials from 12 nations including the United States, Japan and Singapore will meet to narrow down differences before ministerial talks due later in the week.

Talks aimed at creating the world's biggest free-trade zone broke down in Hawaii in August, with disputes over medicines, cars and dairy products the main stumbling blocks.

Mr Robb is understood to have withstood enormous pressure from the US to extend the period of so-called data protection for new biotech medicines known as biologic drugs. The US wanted 12 years in which drug companies could be able to charge high prices, Australia wanted no more than the present five.

It had been thought that an agreement would be impossible once the Hawaii talks broke up, because of the start of the US election season and an election in Canada. US President Barack Obama is keen to land the deal before he leaves office in January 2017.

The fresh round of talks begins in Atlanta on Monday, and then if progress is made ministerial talks including Mr Robb will begin on Wednesday.

The timetable means a deal could be sealed by Sunday, creating a new trade zone that would encompass 40 per cent of the world's economy...

It could only be done if the US, Japan, Mexico and Canada reach agreement on market access for agriculture and vehicles in separate talks that will take place in Atlanta as officials are meeting.

Mr Robb said he remained committed to playing a constructive role to help conclude a high quality TPP.

All going well he would be in the US next week.

More than 150 health experts including 60 professors of medicine have written to Mr Robb calling on him to remain firm in opposing measures that would add hundreds of millions of dollars to the cost of the Pharmaceutical Benefits Scheme.

They are also opposed to so-called investor-state dispute settlement mechanisms that would allow foreign corporations to sue Australian federal, state and local governments over policies to protect health that are seen to hurt foreign investment.

"We understand that the government's agreement with the ISDS clause is dependent on both the adequacy of health and the environmental safeguards," the letter says. "However, we believe the safeguards are insufficient to prevent corporations from using ISDS to challenge legitimate health and environmental measures."

The Australian Fair Trade and Investment Network has sought a meeting with Prime Minister Malcolm Turnbull to argue that Australia should continue to oppose stronger monopolies on biologic medicines, draconian copyright rules and foreign investor rights to sue governments.

In The Age and Sydney Morning Herald

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Why Sydneysiders are pulling up stumps. Victoria becomes Australia's fastest-growing state

An "extraordinary surge" in population has pushed Victoria to the top of the national ladder after it gained an extra 97,500 citizens in the year to March, a growth rate of 1.7 per cent.

The next fastest-growing states, NSW and Western Australia, had growth rates of only 1.4 per cent, which was also the national average and the slowest rate for a decade.

Australia's population growth rate is now well below the 2.1 per cent achieved during the height of the mining boom and below the 1.5 per cent per year assumed in the intergenerational report.

The slowdown is the result of both a slide in the birthrate and a sharp fall in so-called net overseas migration as fewer immigrants come to Australia and more Australians move overseas.

Victoria has also benefited for a surge in internal migration, as relatively affordable housing and good job prospects make it a magnet for the rest of Australia.

In the past six months, 37,800 Australians have moved to Victoria from other states and only 31,900 Victorians have left.

By contrast 45,400 Australians moved to NSW but 48,800 NSW residents left.

Victoria and Queensland are the only two states gaining population as a result of interstate migration...

Demographer Bob Birrell from the Australian Population Research Institute said conditions in Sydney were driving the exodus to Melbourne.

"If you want a freestanding house in Sydney for less than $600,000 you have to move out 55 kilometres," he said. "In Melbourne you can still get one for $300,000.

"I am actually a little surprised that more Sydneysiders aren't moving to Melbourne."

Immigration was also feeding the extraordinary surge in Victoria's population. Although NSW received slightly more immigrants than Victoria, Victoria received more as a proportion of its population.

Population projections produced by the Bureau of Statistics have Melbourne's population exceeding Sydney's on two of the three scenarios modelled.

Under the "high fertility, overseas migration and life expectancy" scenario, Melbourne's population would be 9.193 million by the middle of the century and Sydney's 8.431 million.

Under the "medium fertility, overseas migration and life expectancy" scenario, Melbourne's population would be 8.162 million, and Sydney's 8.124 million.

Under the "low fertility, overseas migration and life expectancy" scenario, Melbourne's population would be 7.353 million and Sydney's 7.716 million.

Dr Birrell said the projections assumed that recent rates of population growth would continue, something that was unlikely. The Melbourne CBD simply couldn't keep growing as fast as it had because it would run out of room.

The bureau had assumed that the mining boom-related surge in immigration would continue 40 years into the future.

In The Age and Sydney Morning Herald

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Like the Black Knight. Why the tax white paper needs a reset

The tax white paper was badly in need of a reset. Like the Black Knight in Monty Python and the Holy Grail, the Treasury was continuing to draft the paper after its arms and legs had been chopped off.

Originally told that nothing was off limits, the Treasury was then told (through the prime minister via the media) that superannuation was off limits, that negative gearing was off limits, and that capital gains tax was off limits.

It had already got the message that mining taxes and carbon taxes were off limits.

With so few arms left to reform the tax system, it would have produced a document that would have not only lacked impact at the time it was released, but that wouldn't have even been filed away for bringing out when the time was right.

When it restarts work it will get a clearer idea of the priorities of the new administration, and it will be able to make it an administration document.

That's what a white paper is: a statement of the goals to be pursued by the administration. (The "green paper" that precedes it is a statement of options. It's green because it's not fully formed).

It is highly likely Malcolm Turnbull will lead by example. There's nothing to stop him making a few quick symbolic changes to the tax system before the white paper process is complete, giving the Treasury and the public an indication of his priorities.

The green paper would be postponed until the first half of next year, and the white paper, with concrete serious options for further tax reform, until after the late 2016 election.

It's easy to guess at the measures that won't be candidates for quick reform.

The goods and services tax can't be changed quickly. It would need the agreement of the states, and it would need a lot of time to persuade the public.

While cutting company tax might be a good idea, it's a difficult case to put before an election, and (as was generally agreed at this week's Australian Financial Review tax summit) it's expensive to do to the extent that would actually make Australia competitive.

The government has already cut the small business rate from 30 per cent to 28.5 per cent. Doing the same for big business would scarcely make any difference in a world where some of Australia's competitors offer tax rates as low as 16 per cent.

By instinct Turnbull would like to cut personal income tax and fund the cuts by removing the "swiss cheese" raft of exemptions and concessions that make the system so complex. He said so, shortly joining Parliament.

But that's very hard work. It can't be done in the next few months.

What can be done, right now, is to blunt superannuation tax concessions. The biggest of them are overwhelmingly directed to high earners, who don't need them to put away for their retirement.

Former NSW treasurer Michael Egan told the tax summit it was a scandal that he and everyone else well advised over 60 paid nothing on their super, thanks to Peter Costello.

"It is the worst thing that any treasurer has ever done in the history of federation," he said. "It is a treasurer's responsibility to protect the revenue, and he didn't."

Action on super, perhaps limiting the absurdly generous amounts high earners can pump into funds each year in order to pay less tax, would raise big dollars straight away. It would show that the new Prime Minister lacked the blindspots of the old one. It would be a downpayment on more complete tax reform when the time comes.

In The Age and Sydney Morning Herald

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AFR tax summit: Strip GST powers from states, John Brumby says

State premiers should be stripped of their power to block changes to the goods and services tax as part of a plan to kick-start tax reform, a former premier has told the AFR tax summit.

John Brumby, Victoria's premier from 2007 to 2010, told the summit that when he reviewed the distribution of the GST for the Gillard government in 2011, he was given explicit instructions not to investigate raising the rate.

He said it was "nonsense" to suggest the rate couldn't be changed without the agreement of every single state as had been claimed by the former treasurer and prime minister.

"That may well have been the arrangement under an intergovernmental agreement, but it needn't be in the future," he said.

"If you think about it, everything else we do goes through the parliament with a simple majority, an absolute majority. If it's constitutional, it's a two-thirds majority.

"What if you got every state and territory in Australia across the line except for the Northern Territory and Tasmania, constituting less than 5 per cent of the nation's GDP? Could they hold up the whole of the nation? I think the threshold needs to be lowered to a two-thirds agreement of the states and territories."

He also rejected the notion that boosting the GST would especially hurt low income earners...

"The UK has done some excellent work on this. A large cohort of the people who are poor are actually university students, and they are not poor all their life. We need to rethink just how regressive the GST is."

The head of the Australian Council of Social Service, Cassandra Goldie, said she would not be "verballed" into saying she supported increasing the GST.

She would be prepared to consider it as part of a "grand bargain" to reform Australia's tax system.

"Before we look at that, we should look at broadening the base of the income tax and cutting superannuation tax breaks," she said.

Grattan Institute chief executive John Daley told the summit the simplest quick tax reform for the Turnbull government would be to scrap the generous $180,000 annual limit on the amount individuals could contribute to super from post-tax income.

"Anyone who can pay in that much per year out of post-tax income doesn't need help with their retirement," he said.

He proposed instead a lifetime cap of $650,000 indexed to inflation.

Prime Minister Malcolm Turnbull has denied reports that he has instructed the Treasury to stop work on the the tax paper, pending a "reset".

However, Treasury staff say they have been asked to stop and rethink tax "from the ground up".

Mr Daley told the summit he guessed that super would be "at least, to some extent, the first against the wall".

South Australian Premier Jay Weatherill told the summit that "very substantial opportunities had opened up" with the ascension of Mr Turnbull.

"He is talking about respecting the intelligence of the Australian people. I haven't heard those words since Bob Hawke," he said.

"We are in a period where we are relatively free of elections. I talked to the Prime Minister last Friday, and I have to say I am encouraged. We have the potential to strike a grand bargain."

South Australia has proposed extending a GST-style tax of 10 per cent to banks, to be charged on the margin between the cost at which they borrow money and the price at which they lend it. It would apply only to consumer and not to business loans.

It would raise $3 billion to $4.5 billion per year for the states, but would have to be administered nationally, to prevent tax competition between the states.

In The Age and Sydney Morning Herald

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Bigger on the inside. Turnbull's administrative reshuffle

There's more to Malcolm Turnbull's reshuffle than a change of ministers. There has also been change in the nature of ministries.

Copyright, long the responsibility of the Attorney-General's Department, has been quietly moved out of the hands of Attorney-General George Brandis and given to the Minister for Communications and Arts, Mitch Fifield.

Senator Brandis was a strong proponent of heavy copyright enforcement, pushing for internet service providers to send copyright warning notices to users they suspected of illegal downloading. For almost two years he has sat on a report from the Law Reform Commission that recommended more liberal access to access to published works through a system known as fair use.

Matthew Rimmer, professor of intellectual property law at the Queensland University of Technology, said Senator Fifield would have a "clean slate" to reconsider options "pointedly ignored" by Senator Brandis.

The Attorney-General's Department was always an odd place for copyright, apparently justified because it involved the law. The Treasury might have made more sense, on the ground that copyright is a restriction of trade with implications for competition policy.

The inclusion of copyright in the Communications and Arts portfolio opens up the possibility of change.

Monash University copyright specialist Rebecca Giblin said the minister would need to examine reforming Australia's "archaic exceptions regime", finally ending the ban on the so-called parallel import of books, ending perpetual copyright for unpublished works, and ratifying the Marrakesh Treaty which would give greater access to books to the vision impaired. 

The Department of Communications has also lost a responsibility...

It will no longer look after Government 2.0, the move to get all government services online. The responsibility will move to the Department of Prime Minister and Cabinet where it will remain under the eye of the former communications minister, new Prime Minister Malcolm Turnbull.

Another change transfers responsibility for childcare benefits and family assistance from the Department of Social Services to the Department of Education and Training. The move will give Education Minister Simon Birmingham a much broader responsibility than his predecessor Christopher Pyne, encompassing all forms of financial support to families with children.

In a move interpreted as a sign that the Clean Energy Finance Corporation will not be abolished as had been government policy, the agency will move from the Treasury to the Department of the Environment. The department will also gain responsibility for the Renewable Energy Agency.

As foreshadowed in the agreement between the new Prime Minister and the National Party, responsibility for the management of water resources moves from the Environment Department to the renamed Department of Agriculture and Water.

Although seldom examined closely, changes in the so-called administrative arrangements can provide useful clues to the government's plans.

On its election in 1996 the Howard government moved responsibility for ports from the Transport Department to the Department of Industrial Relations. Two years later the industrial relations minister rather than the transport minister was able to handle the 1998 waterfront dispute.

In The Age and Sydney Morning Herald

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Labor says no to a higher GST, yes to lower company tax

Labor has rejected co-operating with the Coalition on boosting the goods and services tax, whatever the outcome of next year's tax white paper and negotiations with the states.

Addressing the Australian Financial Review tax summit in Sydney, Labor treasury spokesman Chris Bowen said while any GST rise would be permanent, any income tax cuts funded by it would be eaten away by bracket creep.

"Are we really going to increase the GST every time the nation needs to deal with bracket creep?" he asked. There were as many as five suggestions for what to do with any extra GST, among them funding state budgets, cutting the deficit and cutting company tax. Only one could be afforded.

"It's like when you get a raise in your salary and you think of five things you'd love to do with the extra money," he said. "Deep down you know you can only do one."

But Labor was prepared to negotiate with the Coalition on cutting the company tax rate.

Asked if he agreed that company tax was ultimately borne by a firm's employees rather than its owners, Mr Bowen replied: "It is a statement of fact which I agree with.

"I would like to see the corporate tax rate come down over time. I have previously said the nation should be aiming for a 25 per cent corporate tax rate."

BHP defended its tax record at the conference, saying it paid more than the Australian statutory rate of 30 per cent, and paid 35 per cent when royalties were included...

Last year it booked $60 billion of revenue in Australia and only $1 billion in the low-tax jurisdiction of Singapore. Much of that faced top-up tax in Australia at a rate of 58 per cent.

"We support measures to crack down on base erosion and profit shifting. We support it even though it is going to cost us more money in compliance," BHP's head of tax, Jane Michie, said. "That's not because we are altruistic; it's because we are realistic. There's a growing consensus things have to change."

On Wednesday, BHP will release a complete account of its tax payments broken down by commodity and country.

Tax expert Greg Smith, who was a member of the Henry tax review, said Australia shouldn't bother trying to compete on corporate tax rates with countries such as Singapore and Britain with rates below 20 per cent.

"There's no doubt in my mind that Australia cannot chase footloose investment as its strategy," he said. "To do that you've got to go to 15 per cent. You'll blow your political equation way before you get there."

Economist Saul Eslake said there were clues to Malcolm Turnbull's approach to tax in one of his speeches given soon after he became an MP 10 years ago. He called for lower income tax rates and a broader base. That would mean fewer exemptions, disproportionately used by high-income earners.

"Australia's personal income tax base is like a giant Swiss cheese, riddled with holes that allow people to pay less tax on particular types of income," Mr Eslake said.

In The Age and Sydney Morning Herald

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If the Abbott government was paralysed by something as simple as the effects test...

By the end, Abbott couldn't govern.

Obliged to respond to a report it had commissioned, his cabinet froze.

Pressuring it from one side were small businesses and the Australian Competition and Consumer Commission, the body charged with protecting consumers and advancing competition. They backed the finding of the Harper competition review, that it had become next to impossible to successfully prosecute big businesses for monstering small ones.

Pressuring it from the other side were Australia's biggest businesses, among them the big banks and Woolworths and Wesfarmers (which owns Coles). Backing them were the Business Council, some big-business-friendly unions, and the Australian Labor Party.

Abbott's initial instincts were oppose the Labor Party, the unions and big business. Almost by definition, anything they agreed on had to hurt someone. His minister for Small Business Bruce Billson strongly backed the Harper review, as did the National Party.

Harper had found that Section 46 of the Competition and Consumer Act lacked force. In Billson's words, it was "a dud" – "like a hunting dog that won't leave the porch".

The section prohibits a corporation with substantial market power from taking advantage of that power for the purpose of eliminating or substantially damaging a competitor.

Which sounds fine, until you consider the loopholes, as lawyers do.

One is that the corporation has to "take advantage of that power" for the purpose of eliminating or substantially damaging a competitor.

It would be perfectly legal for a big firm with market power to sell its products for next to nothing and run up huge losses in order to force a competitor out of business, so long as it did not "take advantage of its market power" to do it.

Alan Fels, a former head of the Competition and Consumer Commission, points out that there have been cases where the Federal Court has found that blatant anti-competitive behaviour by big businesses is lawful because there was no "taking advantage".

"The lawyers and economic consultants representing big business have had a field day, earning a king's ransom in fees, by producing Houdini-like escapes from the law based on reasoning about the meaning of these words."

The other loophole is the words: "for the purpose of"...

Under Australian law, appalling behaviour that destroys competition and competitors is quite OK, so long as it is not for the purpose of destroying competition and competitors.

Short of a confession, the purpose of an action is almost impossible to prove. It involves looking inside someone's mind and asking why they did something rather than looking at what they did.

Only two of the 129 countries with competition laws build them about intent. The rest look at effects.

"No other economy in the world has such a weak provision dealing with dominant businesses able to use their economic muscle – not to win the contest to delight customers, but to take out businesses or to fortify their positions so that new entrants don't get a chance," Billson said this month shortly after Abbott's cabinet rolled him.

Actually, it didn't roll him. It decided to shelve the decision on Section 46 indefinitely.

Harper wanted it reframed to prohibit a corporation with substantial market power from engaging in conduct that had the purpose, "effect or likely effect" of substantially lessening competition.

Harper recommended the effects test in March. For the entire six months since – right up until his last day – Abbott was unable to decide what to do, becoming cooler and cooler about the idea the more that big business lobbied. The Business Council is reported to have threatened a public relations campaign that would have said that $2 milk was under threat, or something like that; $2 milk would indeed have been under threat if its effect had been to take out competitors, eventually resulting in higher prices.

So too would the behaviour of Qantas, which in 2001 helped push Ansett over the edge by taking out full-page ads showing the sea of red seats it was preparing to add to routes all over Australia just as Ansett's receivers were negotiating with a buyer that might have saved it. It would have been hard to prove intent, but it would have been easier to prove effect.

Business lobbyists warned of a "lawyers' picnic" if it became easier to convict big businesses for destroying competition (putting to one side the role that lawyers already played). And they warned of a "chilling effect" if the boards had to consider the effect of their actions on competition in the same way that they did in other countries.

Labor's Chris Bowen backed them, insisting that sometimes big businesses needed to trample on small businesses in order to get big enough to take on Asia.

"As you seek to grow scale to compete in Asia in the coming decades, I could think of nothing worse than a group of competition lawyers saying you have to be a little careful," he told an industry function. An effects test was "one of the most dangerous economic ideas considered by a cabinet in living memory".

Labor's pro-big business stance is easier to make sense of when you realise that big businesses are more unionised than small ones. Unions want them to take out non-unionised competitors.

Turnbull's cabinet is going to have to make a decision, and not only about that. There are scores of completed inquiries that have been piling up in Abbott's in-tray, among them the financial system inquiry which reported in December. With Billson out of the cabinet, and with Labor almost guaranteeing not to attack him, he'll find it easier to back the big guys.

In The Age and Sydney Morning Herald

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