How about this time we try, just try, to report on budgets and tax differently?

There are just five weeks until the budget, and the usual lists of winners and losers.

Among last year’s winners were said to be single parents, renters and first home buyers. Among the losers were said to be vapers, truckies and consultants.

It’s also how we talk about tax: winners and losers.

On budget night when the changes to the Stage 3 tax cuts are re-announced, we will be told they will make Australians earning less than A$146,000 better off than they would have been, and Australians earning more than that worse off.

It’s terribly predictable, but it’s also worse than that.

It’s part of a way of thinking and reporting that makes changes that could actually help us all but impossible.

Making that point passionately in Canberra last week (and apologising for his own role in it) was Ken Henry, the government’s chief economic advisor as head of the treasury between 2001 and 2011, and the head of the 2009 Henry Tax Review.

Confessions of a gun for hire

Here’s Henry’s confession. Shortly after he joined the treasury as a tax expert in the lead up to the 1985 tax summit convened by Treasurer Paul Keating and Prime Minister Bob Hawke, he was taken aside by his treasury bosses and told that arguments about making Australia better weren’t going to fly.

His bosses told him:

all anybody would want to know is what was in it for them, how many dollars they were going to get – and that’s also all the newspapers would want to know, that’s what they would be printing on their front pages.

What would matter would be the immediate “overnight” estimates of who would win and who would lose. Beyond not costing the government money, nothing else would matter – not how the changes would affect society by funnelling people into doing some things and not others, and not what they would do over time to the people who won or lost on the night.

So, presumably with a heavy heart, Henry developed a computer model that spat out nothing more than immediate winners and losers and ignored what the changes would do to Australia over the longer term.

Winners and losers are (almost) beside the point

Henry says looking back it is easy to understand “why we did what we did”.

“But I can’t escape the sense that, in developing the tools that facilitated squabbles over the distribution of gains and losses among the households of Australia in 1985, we were participating in a conspiracy against future Australian households.”

Henry did it again in 1991, helping build a much more precise version of the model whose exaggerated precision was used by Keating as prime minister to kill off Opposition Leader John Hewson’s plan for a raft of tax changes including a 15% goods and services tax and to end Hewson’s political career.

But it worried Henry. He says Hewson’s package was a genuine attempt to break out of the winners and losers mindset and argue for changes on the basis they would benefit society.

Then in the late 1990s Henry dusted off the model again and used it in the opposite way – to help the Howard government get its 10% GST over the line.

‘A conspiracy against future Australians’

Henry’s confessions tell us about more than the flexibility needed to serve the government of the day. They tell us the thing that matters most, making Australia work better, can’t really be spoken about.

And the more it is not spoken about – the more people are merely told what’s in it for them – the harder that is to change.

Here’s what Henry says really matters, and what he says he tried to address in his 2009 tax review.

The things we ought not to celebrate, and ought to tax heavily, are plunder, dumb luck, and a “finders keepers” approach to resources, including mineral resources.

The things we ought to avoid taxing are income from work, the normal rates of return for businesses, and transactions. They are the things we need more of to build our living standards.

We need less tax on wages and ordinary profits, and more on unreasonably large profits, windfall capital gains, wealth and the use of land and natural resources.

By lightly taxing the things that take from the rest of us (such as the superprofits earned by companies with some sort of monopoly) and heavily taxing the things that give to the rest of us (such as the effort put in by workers and businesses) we are bequeathing to our children a weaker Australia.

What’s winning matters as much as who’s winning

As Henry puts it, Australia’s young people are being screwed – not necessarily by what the tax system is doing to them today (although what negative gearing and capital gains tax breaks are doing to home prices can’t be helping) but by the way we are choking attempts to build the economy they’ll inherit.

He says we’ve got to level with them and level with ourselves, which is also the argument of Mixed Fortunes, the book detailing the history of tax reform in Australia by former treasury official Paul Tilley that Henry launched.

It’s an argument the journalists in the audience (I am one) and the lone politician in the audience (Assistant Treasury Minister Andrew Leigh) should take to heart. I’ll still report on winners and losers next month, but I’ll also aim to go deeper – to report on what’s winning as well as who.

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From where we work to what we spend, the ABS knows more about us than ever before: here’s what’s changing

How much were prices rising in January when Shadow Treasurer Angus Taylor said inflation was “rampant”?

The prices that give us a good steer on inflation were falling, by 0.4%.

That’s the change that month in what the Bureau of Statistics calls the consumer price index “excluding volatile items”. The items it excludes (because they are often affected by supply disruptions) are fruit, vegetables and fuel.

Apart from that, the measure of prices I just quoted is the best monthly measure of the prices of everything that households buy in the proportions they buy them.

Not all prices were falling. The price of alcohol was up, the price of bread was down, the price of rent was up, and the price of tourist accommodation was down. It’s only on balance (excluding volatile items) that prices fell.

This is the sort of thing we wouldn’t have known about until just a few years ago. Up until late 2022, the consumer price index was calculated only four times a year, and even that was a herculean feat.

A ten-fold increase in data

The bureau had to collect what used to be 100,000 separate prices for each of those four surveys – a huge number collected in person, either over the phone (“hello, can you tell me your current price for…”) or in stores via handheld devices.

The cost to the bureau, and the number of staff involved, was enormous – big enough to make a monthly measure impossible, as important as that would have been to a Reserve Bank that set interest rates monthly and needed a monthly read on inflation.

But in the last few years the use of supermarket scanner data, “web scrapping” to collect online prices, and data feeds direct from the computers of rental agents and all sorts of other businesses have cut costs enormously and increased the number of prices collected each quarter almost ten-fold to 900,000.

The bureau says the monthly index isn’t as comprehensive as the quarterly index yet, but it will be by the end of 2025, at which time the bureau will use it to replace the quarterly index, delivering something of the same quality 12 times a year.

That’s just one of the ways in which an explosion of previously-inaccessible data is transforming the way the bureau goes about its job and is set to make statistics that used to be only fairly reliable suddenly very reliable.

Retail figures set for the chop

For more than half a century, every month since April 1961, the bureau has published an update on retail spending – how much we are spending in shops.

The survey used to be quite useful. Back when it started, we did more than half our spending in shops. These days it’s only one third, the rest is on services.

And the retail survey was always a pretty rough-and-ready way to find out what we spent in shops. Each month the bureau surveys about 700 large businesses and 2,700 smaller businesses selected at random. It uses phone calls and paper forms.

Meantime, in part due to the national emergency created by COVID, it’s been given access to something better. Australia’s big four banks agreed to give the bureau de-identified card and transaction data to enable it to quickly get a handle on how much we were spending early in the pandemic, and they’ve kept providing it.

It turns out to be very good indeed. It covers far more retail outlets than the retail survey ever did, as well as spending on services and spending overseas, and it divides spending into categories based on the type of merchant.

It doesn’t directly cover what we spend in cash, but there’s a lot less of that than there used to be. It’ll replace the retail survey from the middle of next year.

Millions instead of thousands

The mammoth monthly employment survey of 24,000 households remains in place, as do the doorknocks that begin each household’s eight-month turn at completing the survey, but alongside it the bureau is developing a far more comprehensive measure using payroll data submitted to the tax office.

While payroll numbers can’t tell us everything the employment survey does (they can’t yet tell us the hours people work and whether are looking for work) they cover millions of Australians instead of thousands, and come out weekly.

The bureau is doing the same sort of thing almost everywhere. For more than a century it has surveyed farmers to find out what they are growing. It’s begun supplementing that with data from satellites and the machines used on farms.

The ultimate goal of all of these changes, gathered together under the banner “Big Data, Timely Insights” is to ask as few questions as possible. Why run a survey, when you can find out directly?

Big data, timely insights

It’s far harder than it looks. A lot of the so-called administrative data provided to banks and other organisations isn’t sorted in a way that makes it useful. That’s where the bureau is concentrating its efforts. The more it succeeds, the less it will need to bother us and the better the information it will produce.

In the meantime, here’s an update on those inflation figures, the ones that come out monthly. In February, the consumer price index excluding volatile items did not change, meaning in that particular month, inflation was zero.

Even better, adding the past six months together (and multiplying by two) gives you an annual inflation rate of 2.5% – slap bang in the middle of the Reserve Bank’s 2-3% target band, suggesting things are moving in the right direction.

It’s too early to declare victory over inflation that was at one stage heading towards 8%, but at the moment the monthly figures show things heading down.

If the direction changes, the bureau will tell us, quick smart.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Uber has settled a class action lawsuit for $270 million – what was it accused of?

Who’d want to go back to the days before Uber? The days in which you could never be certain you could get a taxi, the days of long wait times trying to order one on the phone, and the days in which you would never know for sure how your driver would treat you.

So much has Uber improved the experience of getting a ride (young people rely on it in a way their parents were never able to rely on taxis) that it might seem incomprehensible Uber has just agreed to pay almost A$272 million to stop a class action against it going to court.

The $271.8 million settlement is the fifth-largest in Australia, eclipsed only by two for Victoria’s 2009 Black Saturday bushfires, one for Queeensland’s 2011 floods and one for Johnson & Johnson for defective pelvic mesh implants.

So what exactly did Uber do wrong – or at least be so unwilling to defend it was prepared to pay a quarter of a billion dollars not to have aired in court?

The statement of claim presented on behalf of 8,000 taxi drivers and licence holders to the Supreme Court of Victoria paints a picture of an organisation prepared to break the law in order to build a large base of customers it could use to lobby to change the law to make what it had been doing legal.

‘Greyballing’ and ghost cars

The statement of claim points to internal Uber documents that indicate Uber knew in advance of its 2014 launch that its so-called UberX drivers were not licensed to operate commercial passenger vehicles, and that the fines were small.

Its aim was to quickly get to 2,000 trips per week in both Melbourne and Sydney, to ensure it had “as many people as possible to support UberX leading up to what will inevitably be a regulatory fight in both cities”.

Uber told drivers it would pay their fines, and in Victoria paid $1,732 at a time.

The class action said where inspectors tried to collect evidence, Uber engaged in a practice known as “greyballing” in which the apps of selected users get shown a fake view of ghost cars that won’t stop for them.

The claim said Uber also used “blackout geofences” that made it impossible to hire Ubers near the buildings used by enforcement officers and regulators.

Case settled at the last moment

By settling just before the case went to court, Uber managed to avoid these claims being tested, and also managed to avoid the court airing the trove of documents leaked two years ago in which one international Uber executive joked he and his colleagues had become “pirates” and another conceded: “we’re just f***ing illegal.”

Uber succeeded in getting each state’s laws changed, at a cost of devaluing to near zero taxi licences reported to have been worth as much as $500,000 each.

But in its defence (and I may as well defend Uber because it decided not to in court) most taxi drivers never paid anything like $500,000.

And taxis provided a pretty poor service. That’s because the number in each state was limited, which helped ensure drivers had work, but worked against customers in two ways – it ensured there weren’t enough taxis available at busy times, and by pushing up the price of licences it pushed up the price of fares.

Taxis served cities poorly

In a landmark 2012 report, Customers First, two years before the arrival of Uber, former competition chief Allan Fels recommended Victoria issue licences without limit, charging a simple fee of about $20,000 per year for anyone who wanted one.

It’s this recommendation, adopted by Victoria and publicised in other Australian states, that began devaluing licences before the arrival of Uber.

And the Fels report found most of the owners of licences weren’t drivers.

Most were passive investors, some of whom had done well by punting that the value of their licences would rise, and all of whom should have taken into account the possibility the value could fall.

Uber has gone mainstream

Now that Uber has won the right to do what was illegal (and settled a class action that would have exposed how it did it), it has lifted its prices to something closer to taxi fares and allowed customers to book taxis from its platform.

It has become mainstream in other ways. In Australia, it has entered into an agreement with the Transport Workers’ Union on employment, and in the US it wants to work with transport authorities to replace lightly used bus services.

The path Uber has forged – becoming an outlaw, building public support for a change in the law, then becoming entrenched – has become something of a model for new firms in all sorts of other industries, from online gambling, to cryptocurrency trading to footpath scooters.

Uber has shown it works. In this case, the class action has shown that ultimately there can be a cost, but it took a long time and it wasn’t at all certain until the last moment that Uber would buckle.

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What’ll happen when Facebook stops paying for news? Here’s what happened when radio stopped paying for music

Why are musicians so keen to get played on the radio?

It can’t be because of the money.

In Australia they are paid at rates so low they come close to making streaming services look generous. By law, no radio station can be made to pay more than 1% of the station’s gross revenue for all of the music it plays, even if it is an all-music station. By the time the labels have had their cut, the artists get a lot less.

Legislation now before the Senate would remove the ceiling, allowing radio stations and the representatives of musical artists to negotiate freely, with a final decision made by a tribunal in cases where they can’t reach agreement.

It’s a bit like the legislation set up to arbitrate disputes between platforms such as Facebook and news organisations about the amount to pay for news.

The parallels tell us an awful lot about where the power lies in disputes between platforms and providers. Here’s a hint: it doesn’t lie with providers, whether they provide music, or news, or, for that matter, fruit to Coles and Woolworths.

Radio pays little for music, and always has

Here’s what happened with radio.

Legislation dating back to 1968 has given Australian radio stations a blanket right to play whatever music they want so long as they negotiate a payment rate with the relevant collecting society.

If the station and collecting society can’t agree on the rate, the decision is made by an independent tribunal, but, for commercial stations, the tribunal is limited to awarding no more than 1% of the station’s gross revenue, and for ABC stations, a mere half of one cent per Australian resident per year.

The attorney-general introduced the ceilings to “allay the fears” of radio stations and initially promised a review after five years, a provision he later dropped from the final draft of the legislation. A half a century of inflation has rendered the ABC’s ceiling of half a cent per person worth a fraction of what it was.

The ABC pays half a cent per person

The ceilings only apply to radio stations and only to the recordings. Television stations (including ABC stations) pay much more per track.

And composers, who are paid separately with no legislated limit, get much more.

This means the composers of You’re the Voice get paid quite well, but the performer, John Farnham, does not.

The record industry has tried time and time again to remove the ceiling.

In 2010 it even went to the High Court, arguing along the lines of the case depicted in the movie The Castle that the constitution prevented the Commonwealth from acquiring property other than “on just terms”.

The High Court said “no”, no property had been acquired.

Now, independent Senator David Pocock is trying again.

‘Fair pay for radio play’

Pocock’s Fair Pay for Radio Play bill would remove the ceilings, allowing the radio industry and the record industry to negotiate “a fair rate” subject to adjudication by the Copyright Tribunal.

The radio industry says, if that happens, it will play less Australian music. It would also ask to be freed from the legislated requirement to play Australian music.

The recording industry talks as if the radio industry is bluffing.

Annabelle Herd, head of the Phonographic Performance Company of Australia, told the Senate hearing

even if the radio networks stopped playing all Australian music, they would still have to pay to play UK music, Canadian music and music from pretty much every other country in the world.

It’s a point she might not want to push too far.

In 1970 that’s exactly what happened. In response to what it felt was an over-large demand from the Phonographic Performance Company, the commercial radio industry said no, and refused to play any of its music.

Instead, it played records from independent Australian labels who didn’t charge and got their records pressed in Singapore, and American music, lots of it.

While the industry couldn’t play music from the UK, Canada and a bunch of other countries that were signatories to the relevant copyright treaty, it could play music from the United States, which didn’t charge, and hadn’t signed the treaty.

When radio called the labels’ bluff

A disc jockey quoted at the time said he didn’t think the average listener would notice, and there’s nothing on record to suggest the average listener did.

The Beatles album Let it Be was released on May 8. The record ban, as it was called, came into force on May 16. The Long and Winding Road cracked the top five just about everywhere it was released, apart from Australia.

Five months later, the record companies caved. The only thing the radio industry offered it was a guaranteed number of advertisements per week. Which had been the radio industry’s point all along. The record companies needed radio play for exposure. Without it, people were unlikely to buy their discs.

It’s possible to stretch parallels too far, but when Facebook temporarily stopped linking to pieces from Australian news sites in 2021, traffic to those sites slid 13%.

The common theme is that – as unfair as it seems – platforms have an awful lot of power over providers. If Coles and Woolworths say no, fruit growers won’t be able to distribute their product; if radio stations say no, artists won’t be as widely disseminated; and if Facebook and its ilk say no, news sites will get fewer clicks.

Facebook has been paying millions of dollars to Australian news sites since the news media bargaining code began in 2021. In February it said when the agreements expire, it will pay no more.

The code allows the government to force Facebook to pay, but only if it continues to link to news, and it has given every indication it won’t.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Economists say Australia shouldn’t try to transition to net zero by aping the mammoth US Inflation Reduction Act

Australia’s top economists are pressing Prime Minister Anthony Albanese not to ape US President Joe Biden’s “think big” approach to clean energy.

Biden’s so-called Inflation Reduction Act – dubbed the largest climate investment in US history – directs nearly US$400 billion (A$605 billion) in federal funding to support clean energy through tax breaks, grants and loan guarantees. Its goal is to halve US emissions by 2035.

Among the biggest beneficiaries will be US firms producing hydrogen, wind turbines, solar cells and batteries.

In the lead-up to this year’s May budget, Albanese said that, like in the US, he wanted Australia’s government to be a partner in the energy transformation, not just an observer.

He wanted to “think big”.

While Australia need not go “dollar-for-dollar” against the US and other nations in the scale of its spending, it could go “toe-to-toe” on the impact of its programs.

Not dollar-for-dollar, not toe-to-toe

Today, in a survey commissioned by the Economic Society of Australia and The Conversation, an overwhelming majority of Australia’s pre-eminent economists cautioned against special support for projects that will drive the energy transition. Instead, most backed grants to innovative firms across the entire economy.

The 44 leading economists who took part have been recognised by their peers as Australia’s leaders in fields including economic modelling and budget policy.

Asked whether Australia should ape the US Inflation Reduction Act by subsidising firms in the same industries, provide access to credit for firms that would supply the US, or merely provide more grants to innovative firms across the entire economy, two-thirds voted for supporting innovation across the economy.

Only four wanted Australia to copy the US.

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Two of the experts surveyed declined to pick an option. Economic modeller Warwick McKibbin said labour market and tax reforms were the best ways to encourage new firms. Energy specialist Frank Jotzo said government support needed to deliver returns to the nation, not just prop up company profits.

McKibbin said any support for particular Australian businesses should be in the form of contingent loans, ensuring successful recipients with high cash flows paid back a proportion of their profits.

Mark Cully, a former chief economist with the federal Department of Industry, said there was no point in going head-to-head or toe-to-toe with the United States, the European Union or South Korea in doing things such as making batteries.

Supply the US revolution, don’t copy it

Cully said Australia was well placed to supply the resources those countries will need to develop green industries as well as to benefit from what they produce.

But Australian investment in research and development has been falling as a share of GDP for a decade, endangering productivity. The public component of this investment is now just 0.5% of GDP, the least on record.

Funding should be directed to research and development across the economy through institutions such as the CSIRO and business-university linkages, steering clear of “picking winners”.

Speaking before last week’s announcement of A$840 million in government loans to support a rare earths mine backed by Australia’s richest person, Gina Rinehart, economic modeller Janine Dixon said Australia should do all it could to ensure the benefits of public investments stayed with the public rather than private companies.

Economist Saul Eslake said corporate rent-seeking (businesses getting special favours) helped Australia slide from being one of the richest countries in the world at federation to being about 26th by the early 1990s, when governments became less supportive.

John Quiggin supported advancing loans to firms that supplied US projects. He said while it was less than optimal, the government was almost certain to support manufacturing, and this was better than building AUKUS submarines.

Consultant Rana Roy, who voted for no government support, said Australia was experiencing the biggest dive in living standards in half a century. He said the government would be

better advised to spend the remaining months until the next election concentrating for once on the modest task of preventing a further collapse in Australian living standards.

The United States would shortly elect its next president and Congress. They might be much less well disposed to the Inflation Reduction Act, leaving Australia with little to respond to.

Impose conditions

Many of those surveyed reiterated their support for a carbon tax as the best way of cutting emissions. Many more bemoaned what they said was the futility of “picking winners”. Economist Stefanie Schurer said it had never been a good policy in the past, and would not be in the future, adding:

this remains true even if other countries do it.

While eschewing picking winners, economists Adrian Blundell-Wignall, David Byrne, Nicki Hutley and Lisa Magnani said a well-designed grants scheme could encourage investment if it ensured the recipients provided value for money.

Support should be temporary and come with conditions, as in the United States.

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Prepare to hear about an ‘official recession’. Unofficially, we’ve been in one for some time

Australians are set to find out if we are on the edge of a so-called “official” recession.

Due out mid-Wednesday, the national accounts will either show spending, incomes and production continued to grow in the three months to December, or show they fell.

If they fell, it would be the first of the two strikes needed for what some people call an “official” recession. (Though surprisingly, there’s no such thing here in Australia, as I’ll explain later.)

The second strike would be a fall in the following three months, the so-called March quarter. If we get two quarters in a row, all manner of people – probably including the treasurer – will declare it a recession.

But whatever Wednesday’s data shows, the truth is we are already experiencing the biggest dive in living standards in half a century – and have been for two years.

How to spot a genuine recession

The figures due out on Wednesday will give us an indication of whether ordinary Australians are better or worse off, if we know where to look.

The first thing to do is to put to one side the headline increases or falls in gross domestic product (GDP). Those are spending, income and production over the entire economy each three months.

Those figures show GDP growth was weak before the pandemic, very weak during lockdowns (shrinking for two successive quarters), then strong as lockdowns ended. It’s been exceedingly weak since.

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But this tells us little about spending and income per person, which is how each of us experiences daily life.

Adjusted for our current very high rate of population growth, GDP per person is extremely weak. It’s been falling, or barely growing, for three quarters now.

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And even this doesn’t tell us enough.

What matters most for each one of us – in the view of Chris Richardson, formerly of Deloitte Access Economics – is real household disposable income per capita.

Unfortunately, the bureau of statistics doesn’t display this on its website. But it’s easy enough to calculate from the bureau’s spreadsheets.

It’s the income accruing to households, adjusted for the prices paid by households, and then adjusted some more.

The bureau also subtracts taxes paid (which have climbed because of the expiry of the temporary tax offset in mid-2023). And it subtracts net interest payments, most of which are mortgage payments.

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In his public presentations, Richardson says he refers to real household disposable income per capita as “living standards”, because that’s what it measures.

It shows weak spending, rising prices, a greater tax take, and much greater payments on mortgages have been shrinking living standards for two years.

That’s how it has felt for two years, even if the way the pain has been spread has been different than in the past.

The biggest dive in living standards in half a century

Previous dips in household disposable income per capita have been accompanied by high unemployment, concentrating the pain in the unlucky group looking for work at the time.

In contrast, this dip in living standards has been accompanied (so far) by low unemployment, pushing more of the burden onto working taxpayers.

Looked at through a longer-term lens (the longest the bureau’s spreadsheets allow) the latest dive in real household disposable income per capita is the biggest in half a century.

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The broad picture is of fairly steady living standards until the mid-1990s, accelerating living standards during the 2000s mining boom, and then fairly flat (rising slowly) after the 2008-2009 global economic crisis.

They jumped for a bit during the COVID lockdowns, because of all the government assistance. But they’ve been diving since.

There’s no such thing as an official recession

Perhaps surprisingly, given how much we talk about “official” recessions, even the Reserve Bank of Australia says “there is no single definition of recession” here.

Many people talk about a recession meaning two quarters in a row of shrinking spending and income. This appears to date back to a 1974 New York Times article, written by a US business cycle expert Julius Shiskin.

He said two quarters of shrinking economic activity was one of the criteria you could use to decide whether or not an economy was in recession.

Shiskin’s pronouncement was subsequently latched on to by journalists all over the world, who made it the definition because it was simple.

But it has led to nonsensical conclusions.

How Australia and the US differ

Three decades ago, after the release of the September 1990 national accounts on November 29, Treasurer Paul Keating declared they showed Australia in recession.

Keating famously added:

the most important thing is this is the recession that Australia had to have.

Those words live on, but the so-called “recession” didn’t. It vanished soon after. What had been a small decline in economic activity, followed by a big decline, got revised to become a small increase, followed by a big decline.

How? The Australian Bureau of Statistics revises the national accounts as a matter of course, each time new information comes in.

Its revisions moved Australia’s early 1990s recession to the March and June quarters of 1991.

A “recession” even briefly appeared after revisions to the 2000 national accounts, under Prime Minister John Howard and Treasurer Peter Costello. Then it disappeared, after further revisions.

In the United States, they’re not nearly as mechanical. There, there isn’t an official recession until a committee of elders convened by the National Bureau of Economic Research says so. Its proclamations have broad support.

If Wednesday’s figures show Australia’s economic activity shrinking, we will hear a lot more about an “official” recession. But it will make little difference to Treasurer Jim Chalmers as he prepares this year’s May budget.

Just like the rest of us, he knows things are going backwards.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Worried about price gouging? For banks, there’s a simple solution

Does it feel like you’re being charged more for all sorts of things these days, from groceries to banking? Turns out, you’re right.

While we might be more likely to remember prices that go up than prices that go down, the very best evidence – assembled by Australia’s Treasury, the federal government’s lead economic adviser – says your suspicions are right. We really are being charged more than we used to be two decades ago.

Coupled with the latest profit reports from Australia’s biggest supermarkets and banks, including Tuesday’s half-year results from Coles, it suggests we are contributing more to company profits than we used to.

Climbing price markups

The Treasury estimates show in the 13 years between 2003-04 and 2016-17, the average price markup – the difference between the cost of a product and its selling price – across all Australian industries climbed 6%.

That’s extra profit, taken from your wallet, going to the people selling you things.

Those Treasury estimates are contained in a background paper prepared for the competition inquiry being undertaken by a panel including Productivity Commission chair Danielle Wood, former Competition and Consumer Commission chief Rod Sims, and business leader David Gonski.

At the same time, the average share of each industry held by its biggest four firms edged up from 41% to 43%.

Profit margins are also higher here than in more competitive markets overseas.

This is true in banking, where the big four have taken over St George, BankWest, and the Bank of Melbourne – and are about to take over Suncorp.

It’s also true in supermarkets, where the big two, Woolworths and Coles, have taken over or seen off Franklins, Bi-Lo and Safeway.

Bigger profit margins than overseas

Coles supermarkets reported earnings before adjustments of A$1.73 billion on sales of $19.778 billion in the half year to December – a profit margin of 8.7%.

Last week, Woolworths supermarkets reported earnings of $2.45 billion on sales of $25.648 billion – a margin of 9.6%.

By way of comparison, the dominant UK supermarket group, Sainsbury’s, has a profit margin of 6.13%.

In banking, the Commonwealth Bank has just reported a return on equity (profit as a proportion of shareholders’ funds) of 13.8%. National Australia Bank reported 12.9%.

While on a par with the big banks overseas, those recent returns are a good deal higher than CommBank’s 11.5% and NAB’s 10.7% reported two years ago.

Little hope for groceries

For supermarkets, there’s not a lot the government can do, apart from launching an inquiry, and perhaps giving Australian authorities the power to break up firms that abuse their market power.

But Prime Minister Anthony Albanese has said he isn’t keen on giving Australian authorities the sort of powers available to authorities in the United States and the United Kingdom, saying (incongruously) Australia is “not the old Soviet Union”.

And doing anything short of that would be unlikely to have much effect. Australia’s two supermarket giants have invested a fortune in high-tech warehouses and distribution systems, which new rivals would be hard-pressed to match.

Hope for more competitive banking

But for banks it’s altogether different. Richard Denniss of the Australia Institute has come up with the idea, and it’s a beauty.

It’s for the government to provide a low-cost banking service – expanding on services it already offers.

The costs would be so low, other banks might decide to add features and resell them in the same way as resellers sell mobile phone and NBN services.

The primary function of any bank is to provide a numbered account into which Australians can deposit and withdraw funds.

The Australian Tax Office does this already, at an incredibly low cost.

The tax office gives every working Australian a tax file number. Employers deposit money into these accounts, and – should the tax office owe a refund – taxpayers withdraw them.

Some taxpayers ensure their tax is overpaid, so they withdraw later.

Denniss describes it as a bank account with the world’s clumsiest interface.

The government could offer bank loans

It wouldn’t be much of a stretch from improving that interface to offering government loans.

In fact, government loans are already provided in some circumstances: such as to retirees with home equity through the home equity access scheme, and to Centrelink recipients through advance payments.

It woudn’t be much more of stretch to provide loans more broadly, at an incredibly low administrative cost. The government already lends against the value of homes.

Back in the days when the federal government owned the Commonwealth Bank, it had to cover the high costs of running bricks and mortar branches.

Freed from those costs, the government could now offer a low-cost, technology-enabled basic banking service that would tempt us away from the big four banks – unless they offered better value.

Of course it would cost money, although a lot of it has already been spent setting up the system of tax file numbers and accounts. And of course the banks would hate the idea. That would be the point.

But doing what we can to stop Australians being overcharged is important, not only for wage earners but also for businesses.

The competition inquiry the government has launched is a good start. It shouldn’t be frightened about where it might lead.

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What would a vehicle efficiency standard for new cars cost – or save – Australian drivers?

Opposition leader Peter Dutton says Labor’s proposed fuel efficiency standard for new cars would push up the price of a Mazda CX30 “by about $19,000”.

Given that right now the Mazda CX30 costs A$33,140, that’d be one hell of an increase.

So what should we really expect if Australia finally introduces fuel efficiency standards here – decades after the US and Europe? What could it cost us upfront for buying new cars? And how much could we save later in lower fuel bills?

Here’s what we do know, based on decades of international experience, new federal government analysis – and even cost estimates from a previous Coalition government.

Car efficiency standards are common overseas

Labor is proposing a so-called new vehicle efficiency standard of the kind proposed by the Coalition in 2016, championed by the Coalition in 2022, and common in the rest of the world.

Here’s how it works in Europe, the United States and Japan, and just about every advanced economy other than Russia and Australia.

Every car manufacturer has to meet an average efficiency standard for the new vehicles it sells each year, whether expressed in miles per gallon (the US) or carbon dioxide emitted per kilometre (Europe).

Europe has been doing it since 2009. When it tightened its standards in 2020, average CO₂ emissions of new passenger cars sold fell 12% and a further 12.5% the following year.

In the US, fuel efficiency has doubled

The United States has been doing it since 1975.

In that time, the average efficiency of its new cars has doubled, and it is about to tighten standards further.

After decades of being the odd one out, Australian passenger cars on average use 20% more fuel than passenger cars in the US.

And that isn’t only because Australians like SUVs and utes. In both Australia and the US, SUVs and utes account for four out of every five new light vehicles sold.

But the new SUVs and utes sold in Australia produce on average 24% more emissions than those sold in the United States. The new smaller cars sold in Australia produce 31% more.

Standards change the mix of what’s sold

Efficiency standards don’t prevent carmakers from selling inefficient vehicles. What they do is ensure they make those vehicles more efficient, or balance their sales with sales of more efficient ones.

At the moment, it means the vehicles sold in the US and elsewhere get advanced emissions technologies not generally offered in Australia.

It’s easy to understand why. With efficient vehicles prized in the US, Europe, and other places, because they are needed to balance up the sales of less efficient vehicles, they get diverted to those places – rather than Australia.

In the words of Volkswagen Group Australia chief Michael Bartsch, it makes Australia a “dumping ground” for older and less efficient vehicles.

Labor has put forward three options for targets: a slow start, a fast start, and its preferred option: “fast but flexible”.

Its preferred option would require carmakers selling in Australia to catch up with the standards of countries including the United States by 2028.

For motorists, the biggest benefit is fuel savings – calculated at A$107 billion between now and 2050. Against that sit vehicle technology, electricity and battery replacement costs of half as much, leaving motorists a long way ahead.

But would it push up the price of cars, as Dutton suggests?

‘No systemic, statistically significant increase’

The government’s consultation paper says the evidence consistently shows no price impact or a negligible price impact.

But common sense suggests it’ll make the price of gas guzzlers somewhat more expensive, and lean, fuel-efficient machines less expensive, as carmakers adjust the mix of what they trying to sell.

When the Coalition looked at this back in 2016, it found the standard it proposed would increase the price of an average-performing petrol passenger vehicle by between $800 and $2,000, and the price of an average-performing diesel light commercial vehicle by between $750 and $2,000.

At the petrol price at the time, $1.30 per litre – far less than we’re paying now – motorists would have been ahead after four years.

Maybe Labor’s plan will push up car prices more than the Coalition’s 2016 plan, because it is more ambitious, as Dutton suggests. Or maybe it will push up prices by less because vehicle technology has improved.

In the US, a statistical analysis of prices from 2003 to 2021 found “no systemic, statistically significant increase in inflation-adjusted vehicle prices” during two decades in which standards were tightened and fuel economy improved 30%.

And standards will need to tighten. Cars and other light vehicles account for 13% of Australia’s carbon emissions. Both this government – and its Coalition predecessor – committed to cutting Australia’s net emissions to zero by 2050.

Without vehicles pulling their weight, along with heavy industry and electricity, we won’t get there.

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How Albanese could tweak negative gearing to build more new homes

There are two things the prime minister needs to get into his head about tax. One is that saying he won’t make any further changes no longer works. The other is that negative gearing doesn’t do much to get people into homes.

Anthony Albanese seemed to have taken the first point on board when he spoke to The Insiders on Sunday.

Rather than promising flat-out not to change the rules around negative gearing, he merely said he was

supportive of the current rules, we have not considered changes to them

But he was less careful when it came to the virtues of negative gearing. He said there was

a whole lot of analysis that says they encourage investment in housing, the key when it comes to housing is housing supply.

His official advisers in the treasury don’t think negative gearing does much to increase the supply of housing – or, if they do, they omitted it from the six-page briefing note headed “negative gearing”, prepared to help the treasurer answer questions about it in parliament.

Our rules reward bad management

Negative gearing is a particularly Australian tax benefit, which – unlike in other countries – benefits dud landlords: those who can’t make money by renting out properties.

If they lose money (by paying out more in interest, maintenance and other expenses than they are receiving in rent) we let them offset that loss, not only against income from other investments, but also against income from their wage or salary.

It means they can cut their wage for tax purposes, cutting the tax they pay on it. And at the same time, they can hang on to a property they can later sell for a profit, which will be taxed at only half the normal rate, thanks to Australia’s 50% discount on capital gains.

It isn’t allowed in the United Kingdom or the United States. There, if you are a landlord who can’t make money, you can offset your losses against profits from other investments – but not against your wage.

In Canada you can offset rental losses against wages, but there must have been an “an intention to make a profit”. That would probably rule out most Australian negative gearers.

Most gearers don’t build homes

In Australia, an astounding one million of us negatively gear – more than one in nine taxpayers. In 2020-21 they claimed losses amounting to $8.7 billion – 3.5% of the income tax collected – meaning if they didn’t do it (if they didn’t claim for what seem to be deliberate losses) the rest of us could pay less tax.

What Albanese said on the weekend was half right. Negative gearing encourages investment. Most months, more than one in three new home loans is for an investment property.

But most of those loans don’t increase supply – the thing Albanese says matters.

That’s because the overwhelming bulk of investor home loans go to “investors” planning to buy existing homes – to bid against and likely beat would-be owner-occupiers.

In December 2023, only 23% of the loans to investors was used to build a home or buy a newly-built home. In November only 19%.

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As a means of getting more homes built, negative gearing leaks like a sieve. As a means of ensuring Australians continue to rent, rather than buy, it’s effective.

In the 20 or so years since the headline rate of capital gains tax was halved, supercharging negative gearing, the proportion of Australian households renting has climbed from 26% to 30%. If those extra renters become owners, an extra 400,000 Australians would be in homes they could call their own.

How to get better value from gearing

The really bizarre thing is that Albanese has it in his power to ensure negative gearing does exactly what he said it did – supercharge the building of houses.

All he would need to do is what Labor promised to do in 2016 and again in 2019. In those elections, Bill Shorten went to voters promising to limit the use of negative gearing to newly-built homes.

As Shorten put it, taxpayers would

continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

The sieve would no longer leak. Every dollar of tax lost to a negative gearer would help build a home.

What would have happened if Shorten had got his way: if Australia both focused the use of negative gearing and cut the capital gains discount as he had proposed?

Modelling just published in Australian Economic Papers finds the share of households who own their home rather than renting it would have climbed 4.7%.

That’s security worth having, especially if it is accompanied by more homes.

An idea whose time is coming?

Australia’s Treasury has begun publishing estimates of the cost of the present unfocused system of negative gearing. Its latest, released last week, puts the cost at $2.7 billion per year, to which should probably be added a chunk of the $19 billion per year lost as a result of the capital gains concession.

The estimates are new. Until Jim Chalmers became treasurer, his department didn’t publish estimates of the cost of rental deductions.

Chalmers is far from the first treasurer to be curious about what the concession does. Scott Morrison expressed concern about the “excesses” of negative gearing.

And Morrison’s predecessor, Joe Hockey, said on leaving parliament that negative gearing should be skewed towards new housing, so “there is an incentive to add to the housing stock rather than an incentive to speculate on existing property”.

Albanese is normally cautious. But as he is showing us right now with his rejigged Stage 3 tax cuts, there are times when he is not.

If he really wants to throw everything he has got at building more homes, he knows what to do.

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Mortgage and inflation pain to ease, but only slowly: how 31 top economists see 2024

Wes Mountain/The Conversation, CC BY-ND

A panel of 31 leading economists assembled by The Conversation sees no cut in interest rates before the middle of this year, and only a slight cut by December, enough to trim just $55 per month off the cost of servicing a $600,000 variable-rate mortgage.

The panel draws on the expertise of leading forecasters at 28 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.

Its forecasts paint a picture of weak economic growth, stagnant consumer spending, and a continuing per-capita recession.

The average forecast is for the Reserve Bank to delay cutting its cash rate, keeping it near its present 4.35% until at least the middle of the year, and then cutting it to 4.2% by December 2024, 3.6% by December 2025 and 3.4% by December 2026.

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The gentle descent would deliver only three interest rate cuts by the end of next year, cutting $274 from the monthly cost of servicing a $600,000 mortgage and leaving the cost around $1,100 higher than it was before rates began climbing.

Six of the experts surveyed expect the Reserve Bank to increase rates further in the first half of the year, while 20 expect no change and three expect a cut.

Former head of the NSW treasury Percy Allan said while the Reserve Bank would push up rates in the first half of the year to make sure inflation comes down, it would be forced to relent in the second half of the year as unemployment grows and the economy heads towards recession.

Warwick McKibbin, a former member of the Reserve Bank board, said the board would push up rates twice more in the first half of the year as insurance against inflation before leaving them on hold.

Former Reserve Bank of Australia chief economist Luci Ellis, who is now chief economist at Westpac, expects the first cut no sooner than September, believing the board will wait to see clear evidence of further falls in inflation and economic weakening before it moves.

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Inflation to keep falling, but more gradually

Today’s Reserve Bank board meeting will consider an inflation rate that has come down faster than it expected, diving from 7.8% to 4.1% in the space of a year.

The newer more experimental monthly measure of inflation was just 3.4% in the year to December, only points away from the Reserve Bank’s target of 2–3%.

But the panel expects the descent to slow from here on, with the standard measure taking the rest of the year to fall from 4.1% to 3.5% and not getting below 3% until late 2025.

Economists Chris Richardson and Saul Eslake say while inflation will keep heading down, the decline might be slowed by supply chain pressures from the conflict in the Middle East and the boost to incomes from the tax cuts due in July.

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Slower wage growth, higher unemployment

While the panel expects wages to grow faster than the consumer price index, it expects wages growth to slip from around 4% in 2023 to 3.8% in 2024 and 3.4% in 2025 as higher unemployment blunts workers’ bargaining power.

But the panel doesn’t expect much of an increase in unemployment. It expects the unemployment rate to climb from its present 3.9% (which is almost a long-term low) to 4.3% throughout 2024, and then to stay at about that level through 2025.

All but two of the panel expect the unemployment rate to remain below the range of 5–6% that was typical in the decade before COVID.

Economic modeller Janine Dixon said the “new normal” between 4% and 5% was likely to become permanent as workers embraced flexible arrangements that allow them to stay in jobs in a way they couldn’t before.

Cassandra Winzar, chief economist at the Committee for the Economic Development of Australia, said the government’s commitment to full employment was one of the things likely to keep unemployment low, along with Australia’s demographic transition as older workers leave the workforce.

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Slower economic growth, per-capita recession

The panel expects very low economic growth of just 1.7% in 2024, climbing to 2.3% in 2025. Both are well below the 2.75% the treasury believes the economy is capable of.

All but one of the forecasts are for economic growth below the present population growth rate of 2.4%, suggesting that the panel expects population growth to exceed economic growth for the second year running, extending Australia’s so-called per capita recession.

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The lacklustre forecasts raise the possibility of what is commonly defined as a “technical recession”, which is two consecutive quarters of negative economic somewhere within a year of mediocre growth.

Taken together, the forecasters assign a 20% probability to such a recession in the next two years, which is lower than in previous surveys.

But some of the individual estimates are high. Percy Allen and Stephen Anthony assign a 75% and 70% chance to such a recession, and Warren Hogan a 50% chance.

Hogan said when the economic growth figures for the present quarter get released, they are likely to show Australia is in such a recession at the moment.

The economy barely grew at all in the September quarter, expanding just 0.2% and was likely to have shrunk in the December quarter and to shrink further in this quarter.

The panel expects the US economy to grow by 2.1% in the year ahead in line with the International Monetary Fund forecast, and China’s economy to grow 5.4%, which is lower than the International Monetary Fund’s forecast.

Weaker spending, weak investment

The panel expects weak real household spending growth of just 1.2% in 2014, supported by an ultra-low household saving ratio of close to zero, down from a recent peak of 19% in September 2021.

Mala Raghavan of The University of Tasmania said previous gains in income, rising asset prices and accumulated savings were being overwhelmed by high inflation and rising interest rates.

Luci Ellis expected the squeeze to continue until tax and interest rate cuts in the second half of the year, accompanied by declining inflation.

The panel expects non-mining investment to grow by only 5.1% in the year ahead, down from 15%, and mining investment to grow by 10.2%, down from 22%.

Johnathan McMenamin from Barrenjoey said private and public investment had been responsible for the lion’s share of economic growth over the past year and was set to plateau and fade as a driver of growth.

Home prices to climb, but more slowly

The panel expects home price growth of 4.6% in Sydney during 2024 (down from 11.4% in 2024) and 3.1% in Melbourne, down from 3.9% in 2024.

ANZ economist Adam Boyton said decade-low building approvals and very strong population growth should keep demand for housing high, outweighing a drag on prices from high interest rates. While high interest rates have been restraining demand, they are likely to ease later in the year.

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In other forecasts, the panel expects the Australian dollar to stay below US$0.70, closing the year at US$0.69, it expects the ASX 200 share market index to climb just 3% in 2024 after climbing 7.8% in 2023, and it expects a small budget surplus of A$3.8 billion in 2023-24, followed by a deficit of A$13 billion in 2024-25.

The budget surplus should be supported by a forecast iron ore price of US$114 per tonne in December 2024, down from the present US$130, but well up on the US$105 assumed in the government’s December budget update.

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The Conversation’s Economic Panel

Click on economist to see full profile.

Download the answers as XLS PDF

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Why Australian workers’ true cost of living has climbed far faster than we’ve been told

Why is Prime Minister Anthony Albanese suddenly so keen to deliver extra cost-of-living relief – keen enough to summon Labor members of parliament to Canberra for a briefing on Wednesday, followed by a National Press Club address on Thursday?

One immediate reason is he is keen to make sure Labor wins the upcoming byelection in the outer-Melbourne electorate of Dunkley on March 2.

But the cost of living wouldn’t matter much for Dunkley – and it wouldn’t matter much for the rest of us – unless it was really biting.

And despite what the treasurer himself has been trying to tell us, it is biting.

Treasurer Jim Chalmers has been pointing out that in the June quarter and the September quarter (the three months to June and to September) real wages grew for the first time in years. By that he means that the wages index compiled by the Bureau of Statistics began growing faster than the consumer price index.

It’s better than growing more slowly, but it tells us next to nothing about what’s happening to buying power. Here’s why.

Why CPI understates today’s living costs

Way back in the late 1990s, more than a quarter of a century ago, the consumer price index (CPI) used to actually reflect the cost of living. It included all of the big costs incurred by households, including – importantly – mortgage interest payments. At the time, mortgages accounted for an average of $5 of every $100 each wage earner spent.

Then in September 1998, in response to representations from the Reserve Bank and the Treasury, the bureau changed the way it calculated the index. It excluded mortgage and other interest payments, in a decision it acknowledged would make the index worse at measuring living costs.

It still carries the warning on its website, saying the consumer price index is

not the conceptually ideal measure for assessing the changes in the purchasing power of the disposable incomes of households.

The index actually does a pretty good job of measuring changes in living costs at times when mortgage rates aren’t much changing. But at times when they are tumbling, it’ll overestimate living costs. And when mortgage rates are soaring – as they have been lately – it will way understate what’s happening to living costs.

We know by how much. For years, the bureau has also published a separate set of measures it pointedly calls “living cost indexes”. These do include mortgage and other interest charges, and for households headed by employees (for whom the buying power of wages matters) they are substantial.

Living costs are up 9%, rather than 5.4%

While the consumer price index (the one quoted by the treasurer) increased 5.4% in the year to September, the living cost index for households headed by wage earners climbed 9%.

For these working households, the price of food climbed 4.8% in the year to September, the price of electricity 14.5% and the price of mortgage interest charges 68%.

It’s the increases in mortgage rates that have made the increases in the other prices hurt so much.

The overall increase in prices faced by wage-earners – 9% – is way above the typical wage increase of 4%.

Bill Mitchell of the University of Newcastle points out that on this measure, the correct one, the buying power of wages has been falling for two and a half years. He says it puts the treasurer’s comments in a wholly different light.

Why we should distrust the CPI

Working Australians are right to distrust the consumer price index, which is something the Australian Council of Social Service warned the bureau about when it made the change.

Each month, the Melbourne Institute asks Australians whether their family finances have deteriorated over the previous year. Usually, about one-third of those surveyed say they have.

But for more than a year now, around 50% of those surveyed have been saying their finances have got worse. That’s a peak not seen since the global financial crisis, and one that has lasted longer.

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Asked about family finances over the next 12 months, more than 30% say they’ll worsen further. It’s usually 20%.

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Looked at from today’s perspective, the arguments put forward in 1997 for weakening the consumer price index as a measure of living costs are unimpressive.

Back then, the Treasury noted that many welfare recipients didn’t have mortgages and that a consumer price index that excluded them would better reflect their living costs.

The Reserve Bank argued interest rates were “conceptually different from other prices”. In any event, it wanted them excluded because it found it hard to use higher interest rates to bring down inflation if those higher rates pushed the measure of inflation up.

The change attracted little attention at the time, because mortgage rates weren’t moving much. By the time they did, the change had been bedded down.

But here’s some good news

For most of the time since the change, mortgage rates have either increased gradually or been cut, meaning the difference between what the consumer price index has been telling us and what’s been happening to us hasn’t been too stark. It’s been stark lately because interest rates have been rising quickly.

The good news – and there is good news – is that financial markets expect rates to begin falling this year, with the next move down.

Inflation as measured by the consumer price index (inflation excluding mortgage rates) is already falling.

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We get the next official update on the consumer price index next week (and the update for the lesser-known living cost indexes a week after that).

It makes now a particularly good time to announce measures to address the cost-of-living crisis. We need them because we really are in something of a crisis. Things are a lot worse than the official index suggests.

And there’s a chance that soon they’ll begin to get better, allowing the prime minister to claim a win.

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