Wednesday, August 29, 2012

We need a more balanced approach to progress

A lot of the problems the nation struggles with and argues over boil down to the considerable potential for conflict between what economists summarise as "equity" and "efficiency".

We act as though one is right and the other wrong but, in truth, sensible people want a mix of both. So, though we don't always realise it, the hard part is finding the best trade-off between the two.

"Efficiency" means taking the scarce resources of land, labour and capital available to the community and employing them in such a way that they produce the combination of goods and services that maximises the satisfaction of the community's material wants.

So it's about improving the productivity of our work effort - getting a bigger bang for our buck and minimising waste. But it's also about being flexible in our response to the change that comes along.

Technology is always improving, allowing us to achieve the things we want more efficiently or even allowing us to satisfy wants we didn't know we had. So we accept it as a force for good, but it can greatly disrupt the lives of people whose jobs have been geared to the old technology.

No one tends to argue against technological change, but we're often less willing to accept change coming from that other major source, change in how the rest of the world relates to us. Why should we change just because they've changed?

Let's say the economic development of China and India reaches the point where they need huge quantities of coal and iron ore to make steel. They're willing to pay much higher prices and their need for a lot of steel is likely to run for several decades.

Are we willing to take their money? Sure. Are we willing to build a lot more mines to accommodate their needs? Sure. Are we willing to pay the various prices that come with this good fortune: the high dollar that makes life a lot tougher for manufacturers and others, the need to shift workers and other resources to other parts of the country, the two-speed economy this will bring? Not so sure.

All this sounding familiar? The efficiency story is one we hear all the time from economists, business people and politicians.

Taken narrowly, "equity" refers to the fairness with which the proceeds from all this efficiency are distributed between individuals and households. Is income being shared more unequally between the top, middle and bottom, or less?

But I want to use the term more broadly to encompass all our non-efficiency objectives. Not just monetary fairness, but our need to preserve the natural environment, need for strong relationships with family and friends, need for recreation and our desire to live in a community that's free, democratic and subject to the rule of law, with harmony between the many groups that make it up.

You can see the scope for conflict between all these objectives. We don't want to be so efficient we're unfair, nor so fair we're inefficient.

Conflict arises partly because people tend to specialise in one objective or another. They bang on about the economy or the environment or social concerns as though their speciality was all that mattered. Business people and economists are particularly prone to having one-track minds, but they're by no means the only super-specialists.

An even bigger problem arises because so many people tend to conceal pursuit of their own interests behind the banner of a larger, worthier cause. Cutting my taxes would be great for the economy. If you care about People not Profit, you'll protect my job from change (what this implies for other people's jobs is not my concern; they can look after themselves).

I have doubts about the sincerity of business groups demanding reforms to correct our supposed weak productivity performance. Why? Because the "reforms" they choose to advocate would benefit themselves in the first instance and the rest of us only indirectly.

But, similarly, unions fight to preserve a status quo that's been overtaken by events and to protect their (surviving) members' interests at the expense of other workers.

Perhaps many of these urgers aren't knowingly dishonest in the way they frame their case, just so conscious of their own interests that they're unable to see how self-serving their arguments are.

Maybe I'm just getting old, but it seems to me the public debate about government policies is getting more self-seeking, strident and polarised.

It also seems the people who worry most about money have more of the stuff and are able to use it to buy a bigger say in the debate. We're always hearing how much money we'll lose if we fail to improve our productivity performance, but we rarely hear about what we have to give up to preserve and enhance our material affluence.

The people reminding us there's more to life than money and the things it buys don't get much of a hearing. Are we being asked to work longer hours (including at the end of a mobile phone)? Will we be required to work on weekends and public holidays? Will that mean we see less of our spouse, kids, extended family and friends? If so, how exactly will we be better off?

Will the hastening pace of modern life make us more stressed and damage our health? Will more people succumb to depression? Will greater efficiency make our jobs less secure and less permanent? Will we continue destroying the environment and losing species? If so, how exactly will we be better off?

We need a more balanced approach to progress. One that weighs the pros and cons of "reforms" more carefully and doesn't go overboard in one direction or another.

Monday, August 27, 2012

Productivity loses in unholy Gonski money fight

We've just stuffed up a great opportunity to improve worker productivity. You didn't notice? I bet you didn't. It slipped past without the business people and economists who claim to be so concerned about productivity noticing a thing.

It happened last week. The independent schools lobby came out in full cry against the Gonski report's proposal to put federal funding of schools on a needs basis. As is now de rigueur for interest groups on the make, the lobby claimed to have ''modelling'' showing 3200 schools would lose funding under the proposal despite the government's guarantee that ''no school would lose a dollar''.

Though lists of allegedly losing schools were leaked to the Murdoch press, the modelling methodology has not been adequately documented, nor properly examined by the media (fat chance) or anyone else.

But when this attack was combined with the opposition's decision to use Gonski for another scare campaign, Julia Gillard went to water, promising ''every independent school in Australia will see their funding increase under our plan''. In real terms, no less.

David Gonski and his committee proposed increased funding of $5 billion a year for schools - government or non-government - according to their numbers of low-income, indigenous, disabled, non-English speaking or remote-area students.

According to the calculations of Trevor Cobbold, of the public-school Save Our Schools lobby group, Gillard's promise of extra funding for independent schools regardless of educational need could cost a further $1.5 billion a year.

See what happened? Successful lobbying by the independent schools ensured that, however much extra ends up being spent on federal grants to schools, more will go to privileged students who don't need it and less to underprivileged students who do.

Should Tony Abbott win the federal election, it's likely little or nothing extra will be spent on increasing resources for the education of the underprivileged. And that will be a lost opportunity to improve the future productivity of Australia's workforce.

And yet we've heard not a peep from all those business people, economists and economic rationalists who profess to be so worried about our supposedly weak productivity performance. Why not? Two rival explanations come to mind.

One is that they're not genuine in their concern and are using the productivity argument merely as a cover for their demands the government shift the balance of industrial relations bargaining power back in favour of employers and cut the rate of company tax.

The more charitable alternative is that their thinking moves only in straight lines and familiar ruts, causing them to frame the Gonski debate as one involving ''equity'' (fairness) rather than ''efficiency''. Many economics types regard equity issues as beyond their expertise or interest.

Press them and some will say they believe in ''equality of opportunity'' but not ''equality of outcome''. If so, there aren't many proposals fitting that criterion better than ensuring disadvantaged kids get a decent education.

But you don't have to think hard to realise Gonski represents a rare - and thus highly attractive - case where equity and efficiency aren't in conflict.

When we think about human capital and its contribution to productivity improvement, we tend to think of doing more at the top of the skills ladder. But it applies just as much at the bottom.

Leaving aside the ultimate saving to the taxpayer, the better we educate the disadvantaged, the greater the productivity of their labour and its value to employers. And even if few became brain surgeons, their higher rate of participation in the workforce would increase their contribution to the nation's wealth.

It's important to realise the opportunity for ''moving forward'' we stuffed up last week. Gonski represented an attempt at compromise in the unending public-private school battle, a truce in the class conflict.

It involved an end to the division of federal school grants on the basis of schools' category, with funding growth based on the differing resource needs of disadvantaged students regardless of which system they were in. No school's funding would be reduced no matter how privileged, but in a relatively painless process over time the basis of funding would shift from past entitlement to present student need.

This required the teachers' unions and anti-state-aiders to accept that independent schools would continue to receive significant assistance regardless of need. It required privileged independent schools to accept that, over time, their share of total funding would decline in favour of the disadvantaged.

So who wasn't prepared to compromise? The ideologically crazed unions? No, the money hungry elite schools - as usual, hiding their naked greed behind the camouflage of the cash-strapped Catholic systemic schools and some far-from-loaded, relatively new independent schools.

There's nothing new about the pursuit of blatant self-interest in the eternal political money fight. But the political ''debate'' seems to be getting more selfish and aggressive as each year passes. We used to be able to compromise and co-operate for the greater good - to quietly accept that some people's need was greater than our own - but not any more, it seems.

Some of the headmasters and headmistresses of our elite schools are hugely impressive as individuals. Do they really go along with this self-seeking? Here's a good school motto: the first shall stay first and the last shall stay last.

To see so many professed followers of Jesus using all the secular world's dishonest lobbying tricks to preserve their privilege against the depredations of the undeserving poor is truly disillusioning.


Saturday, August 25, 2012

The tax base is leaking - not good news

One of Julia Gillard's proudest claims is that the federal tax burden is much lower under Labor than it was when John Howard and Peter Costello were in charge. It's true. But it's not anything to boast about - the tax base has sprung a leak. Several leaks.

In the mid-noughties, federal tax receipts hit a record 24.2 per cent of gross domestic product. This year they're expected to equal only 22.1 per cent, despite the introduction of the carbon tax and the mining tax.

The fact is the global financial crisis hit tax revenue hard and it's yet to fully recover. The budget's forward estimates see it returning only to 22.9 per cent by 2015-16.

If you don't enjoy paying tax you may be tempted to regard all this as good news, but as both the present Treasury secretary, Dr Martin Parkinson, and his predecessor Dr Ken Henry have warned in the past week or so, it's quite worrying.

It means the budget won't "whirr back into surplus" the way it did after the recessions of the early 1980s and early '90s. It will be a continuing struggle to keep the budget in surplus, meaning it will take a long time to pay off the net public debt incurred in the recession everyone says we didn't have.

Remember the happy debate about whether we should build up a sovereign wealth fund? Forget it - we just won't have the brass.

It means we'll be struggling to keep up with the growth in existing spending programs - particularly health - with little scope to pay for the disability insurance scheme, the Gonski report's proposals for education, aged-care spending and any other improvements we'd like to see, without dropping some big programs or introducing new taxes.

And as Henry reminded us this week, if the population keeps growing at the rate we expect, we'll need to spend a lot expanding the public infrastructure to accommodate them. Only some of that can be borrowed.

So what exactly is the problem with the tax base? Why has it never been the same since the global financial crisis?

The biggest problem is with company tax collections. For many years they averaged about 3 per cent of GDP, but in the long boom that preceded the crisis, they grew to an unprecedented 5.3 per cent. Last year they were 4 per cent.

Much of the trouble is the collapse of receipts from capital gains tax. The long boom of rising share and property prices resulted in many individuals, companies and pension funds building up capital gains, which became realised and taxable when the assets were sold. Capital gain tax receipts got to as much as about 1.5 per cent of GDP, most of which was paid by companies.

The financial crisis saw big falls in the sharemarket, wiping out unrealised gains and, in other cases, creating realised and unrealised losses. Share prices on the Australian stock exchange haven't yet recovered to their peak before the crisis, and it's hard to see another boom starting any time soon. Property prices are less relevant - capital gains on owner-occupied homes aren't subject to tax - but they haven't been going anywhere either.

At present, gains tax is raising only about 0.5 per cent of GDP.

The second big change in company tax revenue since the crisis concerns the mining companies. The first phase of the resources boom before the crisis saw the prices for coal and iron ore shoot up and the miners' profits with them. Pretty much 30 per cent of that increase would have been taxable.

The second phase following the crisis saw prices go even higher, but by then many of the miners had embarked on major expansion plans, so that the depreciation charges on their capital spending significantly reduced their taxable profits.

So the mining investment boom adds to GDP on one hand, but directly subtracts from company tax collections on the other. Yet another subtraction from company tax collections is the high dollar, which reduces the Aussie-dollar value of export earnings.

The problem with personal income tax collections arises from the eight tax cuts in a row announced by Peter Costello (with Labor delivering the last three). When you cut taxes that often, you do a lot more than give back the proceeds of bracket creep (known to economists as "fiscal drag"). So the real level of income tax was reduced. The second-top rate of tax was greatly reduced and the width of the tax brackets was widened, with the threshold for the top rate raised from $60,000 to $180,000 a year, thereby greatly reducing the tax scale's capacity to generate bracket creep.

What this means is that, with company tax collections then riding so high, the Howard government thought it could bring about lasting change in the tax mix, making the budget more reliant on revenue from companies and less from individuals. Then company tax revenue collapsed.

Yet another tax with big problems is the goods and services tax. With households' decade-long spending spree a thing of the past, consumption spending is now growing no faster than household incomes.

But not all consumer spending is subject to the GST, and some of the categories that aren't - particularly private spending on education and health - are growing a lot faster than the categories that are, meaning GST collections are growing more slowly than consumption.

You may think this a problem for the premiers rather than the feds, but state budgets are so heavily dependent on the GST that what's a problem for the premiers becomes a problem for the prime minister.

That's not the states' only revenue problem. They're locked in a destructive competition to raise the threshold at which payroll tax becomes payable. And the weakness of the residential property market - including the lower number of sales - has hit another key state tax, conveyancing duty.

Although some of these many problems with the tax base may go away in time, it's hard to see that time occurring in the next five to 10 years. And by then the problems for the taxman created by globalisation and the greater mobility of capital and highly skilled labour (which I wrote about last Saturday) may be starting to bite.

To many people - particularly business people - the words "tax reform" make them think of paying less tax. One day soon it will dawn on them that the reform we must bring about is new and higher taxes.

Wednesday, August 22, 2012

Big Tobacco as caring corporate citizen

Surely we're being far too tough on Big Tobacco, as so many disparagingly refer to it, after the failure of its High Court challenge to the plain packaging legislation. If we'd only open our minds to what British American Tobacco and the others are saying, we'd see how remarkably public spirited they are.

They're worried not for themselves but about the "serious unintended consequences" they fear plain packaging will bring. According to their spokesman, Scott McIntyre, its only benefit will be to "organised crime groups which sell illegal tobacco on our streets".

Huh? "The illegal black market will grow further when all packs look the same and are easier to copy," he says.

In case you hadn't heard, this country faces a rampant illicit tobacco problem, with "criminal gangs now smuggling three times the amount of counterfeit and contraband cigarettes into Australia" last year, compared with the year before.

Overall, the illegal tobacco market is equal to 13.4 per cent of the legal market. How does the industry know? It commissioned a report from Deloitte, a financial services firm.

The industry has been terribly concerned about the illicit tobacco market for some years. Why? Not for itself, of course, but for what it's costing the taxpayer in lost tobacco excise. Last year, almost $1 billion, according to Deloitte.

You've often seen me criticise industries trying to hit the taxpayer for subsidies but with the tobacco people it's all the other way. Last year they ran ads desperately trying to dissuade the government from persisting with its plain packaging notion and thereby obliging the industry to cost the taxpayer millions in legal fees responding to Big Tobacco's High Court challenge - not to mention the billions the government stood to lose in compensation should the court agree the government had appropriated the industry's intellectual property.

Fortunately, the court didn't agree. It also awarded costs against the industry, which I'm sure will come as a great relief to the public-spirited tobacco people.

But the industry's concern for the taxpayer doesn't end there. It opposed the 25 per cent increase in the tobacco excise in 2010 because of the hit to revenue it would cause as the jump in the price of legal cigarettes forced more of the market into the hands of the cut-price criminal black market.

You may in your innocence think plain packaging will reduce the number of young people taking up smoking but that's where you would be wrong.

As the industry explained in full page ads last year, plain packaging "could drive the cost of [legal] tobacco down. Because with no branding, companies will have no option but to compete on price. And lower prices will make tobacco more accessible to young adults".

The boss of British American elaborated elsewhere that this was a worry because it would undermine government health initiatives to curb tobacco consumption. See what caring people we're dealing with?

As I discuss in my little video on the website today, I think plain packaging may force down the prices of "premium-brand" cigarettes. That wouldn't be a good thing but it would be easily (and lucratively) remedied by increasing the tobacco excise.

The tobacco companies aren't the only critics. According to the Australian Retailers Association, "retailers now face the costs of plain packaging transactions, which will see a significant increase in the time taken to complete a transaction as all products will be near identical".

"Transaction time increases are estimated to cost businesses up to half a billion dollars, which is the equivalent of 15,000 jobs," we're told. No back-of-an-envelope was offered in support of this remarkable claim, in which case I'd be inclined to view it with scepticism.

But what about the supposedly booming black market - how worried should we be about it? Not very. We've really only got the industry's word for how big it is and a detailed critique by Quit Victoria casts doubt on the reliability of the report commissioned from Deloitte.

Deloitte's calculations are built on a poll with a very small sample, which doesn't seem completely random. It asks smokers about their purchases of unbranded tobacco (mainly loose tobacco in plastic bags), contraband cigarettes (those imported without excise payment) and counterfeit cigarettes (those with fake brand names) and adds their answers together, even though you'd expect virtually all counterfeit smokes also to be contraband.

How do people know the cigarettes they've bought are illicit? Because of perceived poor quality, cheap prices, labelling in foreign languages and a different taste. Trouble is, these days a lot of cheap, foreign-made, funny-looking cigarettes are imported legally.

According to Quit Victoria, Deloitte's estimates imply one cigarette in eight is illicit. That's a bit hard to swallow.

Quit Victoria used an official survey by the Australian Institute of Health and Welfare in 2010, which had a very much bigger sample, to estimate the total use of illicit tobacco products is more like 2 per cent to 3 per cent of the overall market.

This implies the revenue forgone by the taxpayer is closer to $165 million a year than $1 billion.

I'm sure taxpayers everywhere thank the industry for its concern on our behalf but I don't think we need to be losing too much sleep over it.

Monday, August 20, 2012

Treasury thinks the unthinkable: tax rises

Note well: the secretary to Treasury, Dr Martin Parkinson, has provided voters with the only no-bulldust budgetary advice they're likely to get between now and the federal election. Everything they get from the politicians - on both sides - will be straight from vote-chasers' fantasy land.

Even much of the media believe their interests lie in feeding their customers more of the self-delusion they prefer to hear rather than reminding them of the harsh realities of fiscal arithmetic.

In a speech last week, Parkinson noted the community's demand for the sort of "superior goods" governments provide - such as healthcare, aged care, disability assistance, education and social welfare - will only continue to rise.

That's because demand for superior goods grows faster than our income grows. Using that term is an implicit admission the community's demands are legitimate rather than populist.

"At the same time, the taxation base is weaker than we had imagined in the mid-2000s," he says. "With hindsight, it is apparent that part of revenue collections then reflected a temporary bubble in the economy."

Translation: perhaps it wasn't smart to award ourselves eight income-tax cuts in a row. (Some of us don't need to rely on hindsight for that judgment.)

"The take-out message is that the days of large surpluses being delivered by buoyant tax receipts are behind us ... tax receipts are expected to remain substantially lower - around $20 billion per annum lower at the Commonwealth level alone - than pre-crisis projections.

"The outcome is that ... we face, as a community, a widening gap between the demands we are placing on government and what we are prepared to pay to fund government."

Now get this: contrary to every impression the pollies will be giving you, "we will not be able to meet these demands for new spending by increasing the efficiency and effectiveness of existing government spending alone (although this is important in its own right)".

"Nor can we rely solely on our existing tax bases, as these are expected to deliver less revenue as a proportion of gross domestic product ... What will be required - of governments at all levels - to meet the community's demand for new spending, will be more revenue or significant savings in other areas."

That's the news the national dailies didn't think fit to print: the Treasury secretary, high priest of economic rationalism, has countenanced higher taxes and even new taxes.

All this is a blow to those people anxious to see both sides of politics commit to introducing the national disability insurance scheme at an extra cost of $8 billion a year (closely followed by those people anxious to see both sides commit to introducing the Gonski reforms to education at an extra cost of $5 billion a year).

So what on earth can we do? Limiting our focus to the disability scheme, how could we possibly find that kind of money?

Well, one possibility not to be dismissed lightly is using an increase in the Medicare levy to pay for it. But as Dr Richard Denniss and David Richardson of the Australia Institute suggested last week, there's another, less obvious source of revenue: reform the concessional tax treatment of superannuation to make it more effective and less inequitable.

Using the savings to pay for the disability scheme would strike a double blow for fairness.

It would take money disproportionately from the well-off (the top 5 per cent of income earners get 37 per cent of cost of the super tax concessions) and give it to some of the most disadvantaged people in our community: the disabled and their carers.

The Treasury secretary is telling us we have to make hard decisions about our priorities; we can't afford all the things we'd like to do. Just so.

So consider this: within a few years, the rapidly growing revenue forgone on super tax concessions is projected to equal the cost of the age pension itself: $45 billion a year.

That's way more than the feds spend on education, almost twice what they spend on defence, and more than twice what they spend on the family tax benefit or on Medicare.

We can afford to shower this largesse on the better-off 60 per cent of the population of pension age while the disabled get screwed?

The grossly underpaid financial services industry and the direct beneficiaries of the super concessions argue they're justified by the consequent saving to the taxpayer in reduced pension payments.

But as best Denniss and Richardson can determine it, it costs the taxpayer $2 for every $1 saved. That's an overall average, of course. People at the top would save a lot more than $2 for every $1 they gave up, while many towards the bottom would save less than they gave up. (We should know the exact distribution, but the government won't tell us, for some reason.)

It's not hard to see why the super tax concessions offer other taxpayers such a rotten deal. As a supposed incentive to people to make their own provision for retirement they're hopeless.

Most of the people who receive it save no more than they're compelled to, while people at the top of the tree are hugely rewarded for saving they'd do anyway. The less your ability to save, the smaller incentive you're given, and vice versa.

For those organisations urging us to spend big on worthy causes, the "take-out message" from Parkinson's sobering assessment of our scope for greater spending is clear: don't waste your breath unless you're prepared to get your hands dirty and suggest a good way to pay for it.

Saturday, August 18, 2012

Rise of multinationals threatens our tax collections

As the world's centre of economic gravity shifts towards Asia, the process of globalisation - the breaking down of barriers between countries - is speeding up. This means there's no shortage of challenges looming for our political leaders.

They'll pop up in many areas, but in a speech earlier this month the boss of Treasury's revenue group, Rob Heferen, outlined those affecting taxation. He says our present tax system, which relies heavily on taxing income - whether of individuals (48 per cent of total federal tax revenue) or companies (22 per cent) - will come under increasing pressure.

Since the introduction of full dividend imputation in the late 1980s - under which Australian shareholders get a tax credit for the company tax already paid on their dividends - the main purpose of company tax has been to tax profits earned by foreign shareholders.

But globalisation is increasing the "mobility" of capital (and to a lesser extent, labour), making it easier to shift to countries where tax rates are lower. Heferen says this is particularly true for multinational companies (including Australian multinationals), which now account for about a quarter of global production.

Multinationals have considerable latitude in choosing where to locate their production, making them more sensitive than other businesses to the tax rates that apply to them. Of course, many other factors will also influence such decisions: the quality of the labour force, the adequacy of the infrastructure, the rule of law, access to raw materials and access to markets for their products.

Multinationals also have some latitude in deciding in which country they'll declare their profits, notwithstanding rules that attempt to limit profit-shifting. In the case of profits, tax is likely to be a primary driver, maybe the primary factor.

"So setting tax policy to deal with multinational enterprises is an increasingly difficult task," Heferen says. "Policy should support innovation and attract investment, but also help uphold the integrity of the corporate tax system."

Because of the greater competition for foreign investment, policy makers must take into account how other countries tax multinationals, as well as the wide range of successful tax planning strategies available for companies to use.

You can see these difficulties in rules about "transfer pricing". "When a firm 'trades' with itself across borders, we want to ensure it is using the prices an independent party would have paid, rather than manipulating prices to gain a tax advantage," he says. "But this principle can be very difficult to enforce in practice. There are many goods which are either proprietary [in house] or rarely traded, so there may be no market price for the asset."

Then there's the effect of financial innovation. It's now easier than ever to move funds between countries at little cost and to re-characterise financial assets from debt to equity or vice versa. These options place further pressure on the system and help firms seeking to minimise their worldwide tax.

This matters because Australia, like many countries, treats debt and equity differently for tax purposes. The problem is compounded by countries using different definitions of debt and equity.

Another problem arises from the increasing role of intangible assets - such as brands, copyright and other intellectual property, customer lists and internal processes - which are often the result of much spending on research and development or marketing.

Investment in intangible assets is growing faster than investment in tangible assets such as machines and buildings. Since intangibles have no fixed, physical form, it's much easier to relocate them to low-tax countries. Pfizer and Microsoft have moved much of their research and development to Ireland.

Going the other way is the taxation of natural resources. Unlike other resources, these are immobile. You can either develop the site or leave the stuff in the ground. And the profitability of their exploitation often depends on natural factors: the quality of the ore, or how easily it can be got at.

Because world prices are still so high, our largely foreign-owned miners are making profits far in excess of those needed to make these projects a worthwhile investment.

Taxing the gap between profit and the level needed to induce investment won't discourage investment and this is part of the rationale behind the Minerals Resource Rent Tax.

Research suggests other small, open economies like us have configured their tax systems to rely less on income taxes and more on taxes levied on less internationally mobile bases, such as resource rents, land and consumption.

"However, raising taxes on some immobile bases, most notably consumption, may also have implications for the fairness of the system, its social acceptability and the ability of the government to redistribute income," Heferen says. On the other hand: "In the longer term, if we opt to keep relying on mobile bases for a high proportion of revenue, we may see increased risks for tax-base erosion and stronger disincentives for capital investment and for individuals to acquire productivity-enhancing skills."

So, is there any way around this unpalatable choice? Heferen says one answer may be finding a different base for company tax.

The standard choice is between a "residence" base (you tax Australian companies on their world-wide income, but don't tax foreign companies operating in Australia) and a "source" base (you tax all companies just on their income from production in Australia, but don't tax Australian companies on their income from foreign production).

Like most countries, we've chosen the source base (though, strangely, not for capital gains). But some leading academics have suggested we move to a "destination" base, where we'd tax companies' profits on sales they made to Australian final consumers, regardless of where production occurred.

In practice, this would be a source-based tax, but with adjustments made for exports and imports. It would eliminate the incentive for companies to shift their location or their earnings to other countries.

This seems a strange approach for a country like ours, with our mineral exports being so profitable, but maybe this could be fixed with adequate resource rent taxes.

And Heferen says we shouldn't "underestimate the power of structural change in the global economy to shape policy in new and unexpected ways".

Wednesday, August 15, 2012

Self-funded retirees are kidding themselves - and us

One thing that gets me going is comfortably-off people who feel sorry for themselves: those who complain how hard it is to get by on $150,000 a year, or retired people who profess to be "self-funded".

Someone once asked me why I was so disparaging of self-funded retirees when, from what they could see, I was going to end up as one myself. It's true. Or, rather, it's true my superannuation is too generous for me to get even a smell of the age pension.

But I'd never claim that made me "self-funded". Why not? Because I know damn well other taxpayers have contributed mightily to funding the vastly bigger private pension I'll end up on.

The other thing that annoys me about the self-proclaimed self-funded is their motive for making this false claim. They say it because they've got their hand out. I'm too well-off to get the pension, therefore you owe me.

So how about a seniors' card that entitles me to pay next-to-nothing on public transport not because I'm poor but just because I'm old? How about charging me the same nominal fee for pharmaceuticals you charge pensioners but deny to the working poor?

The so-called self-funded - the Howard government's favourite charity - enjoy all these perks. But they don't seem to realise that, the more successful they are with their begging bowl, the less true their claim becomes.

The notorious superannuation "reforms" Peter Costello announced in 2006, which centred on making super payouts tax free for people 60 and over - and which successive governments will have to laboriously unpick at great political cost in coming years - included significantly liberalising the means test on the age pension.

Suddenly, there was a sharp fall in the number of people not receiving the pension and a sharp jump in the number receiving a part-pension. But did all those with their mouths now firmly clamped on the pension teat stop referring to themselves as "self-funded"? I doubt it.

The way the numerous spruikers for the super industry tell it, governments impose iniquitous taxes on those independent, prudent, frugal, virtuous souls who struggle to save for their retirement. Rubbish.

For working people, all the additional income we earn is taxed at rates of 19?, 32.5?, 37? or 45? in the dollar depending on how much we earn. But the 9 per cent - eventually to be 12 per cent - of our salary that employers are required to pay into superannuation is taxed at a flat rate of just 15? in the dollar. Ditto for extra contributions made through "salary sacrifice".

So super contributions are, in fact, taxed concessionally. Just how concessional varies inversely with your need - the higher your income, the more you save per dollar. People like me save 30? in tax on every dollar they put into super (plus the 1.5? Medicare levy). What's more, income earned on money in super funds is also taxed at no more than 15 per cent, no matter how high your income.

Super is taxed in a way that yields little benefit to the needy, but grossly favours the better off. As someone said, for he that hath, to him shall be given.

The cost to the federal budget in revenue forgone is huge and rapidly rising. It was $30 billion last financial year and is projected to reach $45 billion by 2015-16.

But whenever this unfairness is pointed out, those who benefit (including those who benefit by managing super funds or providing advice to them) are quick to fly to the defence. It's terribly unfair to look at the gross cost of the super tax concessions without taking into account the saving to the budget from all those people who won't be getting the pension.

A study by Richard Denniss and David Richardson, of the Australia Institute, Can the Taxpayer Afford "Self-funded Retirement"?, to be released today, advises that by 2015-16, the $45 billion forgone on super concessions is expected to equal the cost of the age pension itself. (It will dwarf federal spending on education or on Medicare, and be almost double what we spend on defence.)

So just how much will the super concessions save us on pension payments? Treasury could have estimated this but, if it has, it hasn't been made public - presumably because its paucity would cause too much embarrassment to a government game only to nibble away at super's unfairness to those whose interests Labor (and Bruce Springsteen) professes to represent.

Even so, Denniss and Richardson give us a fair idea. Treasury does project that, by 2047 - 35 years' time - the proportion of people of pension age not receiving the pension will have risen by just 3 percentage points to about 20 per cent.

The main effect of all the concessions will be to increase the proportion of people receiving only a part-pension by 15 percentage points to about half of those on the pension.

From this, the authors estimate the saving on the pension bill in 2047 will be about $14 billion a year in today's dollars. That's only about half what the super concessions are costing - meaning the other half represents clear cop for the better-off superannuants (including my good self).

Treasury estimates that just the top 5 per cent of income earners collect 37 per cent of all super concessions. The authors quote a representative example of someone on the top tax rate retiring with a payout of $780,000, 60 per cent of which comes from tax concessions.

So, please, let's have a bit less hypocrisy on the great favour well-off retirees are doing the taxpayer.

Monday, August 13, 2012

Union lion bearded in its den

Fair Work Australia's monumental rebuff to the Transport Workers Union in its dispute with Qantas strikes a blow to the credibility of claims the Fair Work Act is some kind of conspiracy against employers.

The commission (which is what Fair Work Australia is in all but name) had no choice last week but to support Qantas management because, in both its tactics and its demands, the union was being so bloody-minded.

That's true even though, by grounding its planes worldwide and locking out all its staff last October, Qantas management could come up with no more creative solution to its bargaining problem than to be as bloody-minded as some of its unions.

This was not so much a win for "managers' right to manage" as the commission's commonsense judgment that all the industrial parties needed to face up to the harsh commercial realities threatening the survival of their business.

Here we had a union demanding 5 per cent annual pay rises at the same time it was fighting to prevent its employer from turning to cheaper sources of labour. That makes sense? These guys needed their heads examined.

Qantas's long-running disputes with three of its unions represent the only times Fair Work Australia has agreed to impose arbitrated resolutions so far in its brief existence. Remembering the way the old arbitration system had degenerated by the time we abandoned it in the mid-1990s, it's been vitally important to limit use of compulsory arbitration to cases of the greatest intransigence.

The whole point of the move from the centralised system to bargaining at the enterprise level was to get employers and unions dealing with each other face-to-face and responding their workplace's particular circumstances, rather than the old game of unions pulling on a strike to oblige the referee to intervene and impose a compromise.

It will be a pity if the commission's refusal last week to split the difference in the old way encourages other militant employers to seek to resolve disagreements with their workers the chaos-causing Qantas way.

Even so, the commission's refusal to go anywhere near splitting the difference provides powerful evidence it can be trusted to adjudicate issues sensibly in a system that hasn't swung the balance too far the unions' way.

Perhaps this explains why the national dailies - which, in their campaigning against the evils of Fair Work, seem to find another story about union atrocities for the front page most days - weren't greatly excited by the employers' big win last week.

The trouble with two such influential organs distorting their reporting of industrial relations so persistently and to such an extent is that between them, they can leave the public with a grossly exaggerated impression of the extent of union misbehaviour and the deleterious effect of Fair Work.

Read too much of that stuff and you come away thinking the union movement has risen from its deathbed to pose the greatest threat to our continued prosperity. Remember, union membership is down to 18 per cent of the workforce (from 50 per cent in 1982) and 14 per cent of private sector workers.

Another figure to keep in mind next time you read about the union monster poised to eat the economy's lunch: more than 80 per cent of enterprises don't have a union presence.

Two labour lawyers, Dr Anthony Forsyth, of Monash University, and Professor Andrew Stewart, of Adelaide University, note in their submission to the Fair Work review that "the concerns about union activities that so animate certain employers in the resources, manufacturing and construction sectors are very far removed from the issues confronting businesses in other parts of the economy".

"For the small to medium enterprises that predominate in sectors such as retail and hospitality, both unions and indeed collective bargaining are largely absent. Their concerns are much more likely, in our experience, to revolve around the costs and 'inflexibilities' imposed by the award system, and the renewed exposure to unfair dismissal claims that the Fair Work Act has brought."

So far, Fair Work has failed in its aim to greatly increase the extent of collective bargaining, with the proportion of employees covered by collective agreements increasing from 39.8 per cent of the workforce in 2008, to just 43.4 per cent in 2010.

Forsyth and Stewart argue many of these new agreements are effectively non-union instruments drafted by employers to replace the individual workplace agreements formerly available under Work Choices.

"Such agreements may be presented as 'collective', and they do require the endorsement of a majority of employees to be registered under the Fair Work Act - but only rarely are they the product of anything that could be said to resemble a bargaining process," they say.

Genuine collective bargaining is likely to be confined mainly to large, unionised workplaces in the public sector and to some sections of the private sector.

Much of the bitter complaint about Fair Work comes from the miners. Forsyth and Stewart say what some employers in the resources sector are seeking is a capacity to manage their businesses without the involvement of unions, and to undertake projects entirely free of any threat of industrial action.

"These aspirations are simply not compatible with the principle of freedom of association ... Indeed, to allow them to be fully realised would involve restrictions on the taking of industrial action, or on union rights of entry, that would go far beyond anything envisaged by the Howard government, even during the Work Choices period," they say.

Talk of Fair Work having unnecessarily bolstered "union power" should not only be kept in proportion, but also understood in the context of a broader ideological agenda that is profoundly antithetical to the principle of collectivism, they conclude.

Saturday, August 11, 2012

The tricky truth about the jobs figures

If you want to know what's happening to employment, there's the hard way and the easy way to find out. But, in any case, can you believe the official figures?

Economists, the markets and the media prefer to do it the hard way, using the "thrills and spills" method. The "seasonally adjusted" figures we got from the Bureau of Statistics this week showed total employment across Australia rose 14,000 last month.

But the previous month it fell 28,000. So, did the economy take off in July having collapsed in June? Maybe, but employment grew 28,000 in May, following growth of 13,000 in April. So, is the economy going up and down like a yo-yo?

Maybe. Last month the unemployment rate fell to 5.2 per cent from 5.3 per cent the previous month. But that was up from 5.1 per cent in May, which was itself up from 5.0 per cent in April. Then again, April was down from 5.2 per cent in March.

Confused? Precisely. The hard way gives you thrills and spills from one month to the next, which makes it hard to work out what's really happening.

The easy way to do it is to take the bureau's advice and look instead at it its "trend" figures. These are the seasonally adjusted figures smoothed out to remove statistical "noise" - unexplained variability that probably doesn't prove anything.

Guess what? The trend figures make it easy to do what we want to do: identify the trend. Is employment going up, down or sideways?

They show that, over the first seven months of this year, employment has been growing at an average rate of 10,000 jobs a month. Is that a lot or a little? Well, it's been sufficient to hold the rate of unemployment virtually unchanged at 5.2 per cent. (Remember, since the labour force keeps growing, we have to create jobs just to hold unemployment steady.)

Is an unemployment rate of 5.2 per cent good or bad? Well, most economists would tell you it's about as good as it gets. They regard the rate of full employment as being about 5 per cent or a little lower.

But here's where the doubts arise in many people's minds. I get more emails from readers querying the reliability of the job figures than any other subject.

"One can't help gain the impression that the definition of employment is being gradually liberalised for political purposes, i.e. to make the figures look more impressive," says one. "An individual is now assessed as being 'employed' if they work just one hour each week," says another.

Many people have a deeply held belief that the way we measure employment and unemployment has been tampered with by governments in recent times to make things appear better than they are.

When unemployment fell to much better levels under the Howard government, this notion used to pop up in the minds of Labor voters. Now Labor's in power it pops up in the minds of Liberal voters.

I don't know where this notion came from, but it's factually wrong. It didn't happen. No government of any colour has changed the way employment and unemployment are measured in the past 30 years. I wrote this when Howard was in power and I'm writing it again now.

One reason the pollies haven't fiddled the figures is that the Bureau of Statistics, which enjoys a high degree of independence of the elected government, would never let them. Had any pollie ever tried to twist the bureau's arm, you'd remember the monumental row this would have created.

No, the definitions the bureau uses are set by international statistical convention. And the convention hasn't changed significantly in many decades. No one has changed the rules.

So, does that mean we can take the official figures as gospel truth? Sorry, life ain't that simple. There's a saying in Canberra: when you're trying to explain something and you face a choice between a stuff-up and a conspiracy, go for the stuff-up every time.

The trouble with the official figures is not that the definition of unemployment has been changed, but that it's unrealistically narrow and always has been. It's true a person is classed as being employed if they work just one hour each week.

Of course, very few people who do work do so for as little as an hour or three. Nor is it correct to imagine everyone working part-time would prefer to have a full-time job. Some would; many - particularly full-time students, the semi-retired and parents looking after young children - wouldn't.

So the real question is: how many part-time workers would prefer to be working more hours than they do? The answer in May this year was 890,000. Note, however, that other figures suggest only a bit over half of those people wanted full-time jobs. The rest (roughly 400,000) were people working part-time who just wanted a few more hours a week.

The 890,000 "under-employed" workers account for 7.4 per cent of the labour force. Add to them the 625,000 workers officially defined as unemployed (the ones giving an unemployment rate of 5.2 per cent) and you get a "labour force underutilisation rate" of 12.6 per cent.

How do I know that? I read it in the same bureau publication (which you can find on its website) that told me this week the official unemployment rate in July was 5.2 per cent. The bureau calculates underemployment every three months, but publishes the figure each month.

I think that, whereas the official unemployment figure understates the true size of the problem, the underutilisation figure overstates it (because part-timers who'd like to work a few more hours a week don't have a big problem). That's why my rule of thumb has long been that to get a more realistic idea of the extent of unemployment you should take the official figure and double it.

But if you're trying to get at the truth (as opposed to trying to prove the political party you hate is doing a terrible job), remember two points. First, if you double today's unemployment rate you should double all the earlier rates you compare it with.

Second, remember the trajectory of the higher figure should move pretty much in line with that of the lower figure. So if the official unemployment figure is stable, it's reasonable to assume the more realistic figure is too.

Wednesday, August 8, 2012

For true productivity gains, co-operate don't fight

When Peter Reith replaced Labor's Industrial Relations Act with the Workplace Relations Act in 1996, he changed the act's principal objective from the "prevention and settlement of industrial disputes" to "providing a framework for co-operative workplace relations". I'm not sure the Howard government always lived up to that ideal, but it was certainly the right idea.

John Howard was fond of saying we should emphasise the things that unite us, not the things that divide us. Again, I'm not sure he always lived up to that, but it was the right idea - particularly for relations between bosses and workers.

The principal objective of the Fair Work Act is to provide a "balanced framework for co-operative and productive workplace relations that promotes national economic prosperity and social inclusion". That's even better.

At a time when so many of our industries are under so much pressure to change from so many sources - the high dollar, the prudent consumer, the digital revolution, the deregulation of world airlines - we need all the co-operation we can get between employers and unions.

Most economists have rejected the claims of some that our seemingly poor productivity performance over the past decade can be blamed on the Fair Work Act that came into full effect only at the start of 2010.

But that's not the same as saying the act is without fault. And it's certainly not to deny the need for our industrial relations to be as conducive as possible to improved productivity.

If we were to believe all we see and hear, we'd conclude relations were pretty bad at present. I'm not convinced that's true. More likely, a handful of highly publicised, bitter disputes has provoked a lot of tough talking on both sides of the fence, and left us with the impression things are worse than they really are. Even so, too much of the debate about Fair Work has focused on whether it's got the balance right between the adversaries, and not enough on how much it's helping to turn adversaries into partners.

There are plenty of people who've always hated the unions, and plenty who've always hated the bosses. All of us can be lured into playing that game but, in all our interests, we need to resist the temptation. It's self-indulgent at a time when we need to pull together.

For industrial relations to become more co-operative, and hence more productive, we need give and take on both sides.

What managers need to accept is that workers are entitled to reasonable treatment. Managers want to do well out of their association with a business; so do workers. And, to adapt a quote, the economy was made for man, not man for the economy.

There are plenty of ways to improve the productivity of labour - and certainly, to cut the cost of labour - that involve making life more uncertain, insecure, unpleasant and even unhealthy for workers. If that's what "flexibility" means, it's hardly surprising workers resist it. Good managers resist the temptation to go down that shortcut to supposed prosperity.

Many proposals to "outsource" production or resort to contract labour aren't about two-way flexibility but about cutting costs by escaping existing in-house arrangements over pay and conditions. Good managers need to do better than that.

Australia's workers are relatively highly paid, with good conditions. This is a good thing, not a bad thing. It's certainly nothing to try to make workers feel guilty about. As any economist will tell you, our high pay rates are justified by our relatively highly educated and skilled workforce, by the high-quality capital equipment it works with, and by the sharing of this nation's considerable wealth.

The goal of management should not be finding ways to escape these high costs, but finding ways to defend our high wage rates with high productivity. In this endeavour they're entitled to full co-operation from their workers.

What workers need to accept is that the world economy is changing rapidly and as it changes we must change. Businesses must respond to the changing commercial pressures on them, or they will fail.

In a capitalist economy, businesses need to earn an adequate return on the shareholders' funds invested in them. In the final analysis, managers are paid to ensure their business remains profitable. They will do whatever it takes.

Such profits are not illegitimate, and they're not available to be plundered by workers demanding excessive wage rises or refusing to change in response to the changing pressures on the business.

Workers and their unions simply cannot pretend the pressures for change bearing down on the business are a problem for management, but not for them. The more they resist a creative response, the more managers will go around them in the search for cheaper labour.

Change - painful change - can't be avoided by attempting to strongarm management into including guarantees of job security in enterprise agreements. Guess what? There are no guarantees in an ever-changing market economy.

Much of the change being imposed on various industries will inevitably involve redundancies. The most workers can expect is decent redundancy pay, the avoidance of excesses designed to impress the sharemarket, and a preference for redundancies to be voluntary.

Professor Paul Gollan, of Macquarie University, argues the key to greater co-operation in the workplace is giving workers greater "voice" - formal arrangements within businesses by which employees are consulted, given their say and encouraged to propose improvements and "add value". Studies confirm such processes are associated with greater productivity.

Senior managers' "prerogative" - about which I say more in my little video on the website - is to ensure their staff is fully informed about the challenges facing the business.

Monday, August 6, 2012

Fair Work debate fans the fighting mood

THE most disappointing thing about the review of the Fair Work Act and the reaction to it is the way they push industrial relations towards being more adversarial rather than less.

At time when so many businesses face unusually challenging pressures for structural change, we need more co-operation between the industrial partners, not more class struggle and barracking from the sidelines.

The standard approach to industrial relations reform is to see it as about "getting the balance right". There's a fundamental conflict of interest between labour and capital, we think, plus a wide difference in bargaining power, so the objective is to ensure the eternally battling parties are fairly evenly matched.

That's the public policy objective, of course. If you're on one side or the other, your objective is simply to get the rules changed in a way that gives you the drop over the other side.

The conventional view is that, with its attempt to install individual contracts as the chief form of bargaining and marginalise the unions, WorkChoices pushed the balance too far in the direction of employers.

So it was fair enough - particularly after voters seemed to reject WorkChoices so decisively - for Fair Work to push the balance back the other way. The review's job was to decide whether the balance had now been pushed too far the other way.

The trouble with the review is that it didn't do much more than adjudicate the rival claims, legal section by section. With two of the three members of the review being lawyers - and one a judge - you couldn't have expected anything else.

Although the media portrayed the employer groups' reaction to the review as angry, I suspect they were quite pleased. They won more points than they expected to, while the unions won fewer.

One trouble with the traditional approach to regulating industrial relations - supervise a fair fight - is that it's reinforced by all our other adversarial institutions. It comes naturally to lawyers, but also to politicians.

There's nothing Julia Gillard and Labor would love more than a rematch on industrial relations and there are plenty of urgers on the Liberal sidelines spoiling for a punch-up.

For once, however, Bruiser Abbott isn't tempted, judging correctly that such a them-and-us contest would greatly favour "them". Electorally, WorkChoices is still toxic.

Should Abbott win the election, it will be interesting to see what gap emerges between his pre-election rhetoric and his post-election policies. Many of his backers are hoping for a yawning chasm.

Just as the traditional industrial relations approach is adversarial, so the IR experts are highly factionalised. Most academic experts long ago chose sides between the unions and the employers. Trying to find experts who can see both sides of the argument is one of the trials of my job.

Wherever there are adversaries, there you can expect to find the media, doing their best to increase the fun by amplifying the conflict. What's new is to have the national dailies taking sides in their reporting, with the union side of the story virtually unmentioned.

Whenever there's a brawl, it's hard for interested bystanders to resist the temptation to join in. I suspect that's the story with big business leaders: they're not greatly affected, but they know whose side they're on.

Consider the results of last week's CEO Pulse survey of 96 chief executives. Fully 82 per cent of them think Fair Work is having a negative impact on productivity. That's for the whole economy. For their own industry, it's down to 60 per cent. And for their own business? Down to 51 per cent, with 45 per cent saying it's having no effect.

Coming from people with such obvious alignment, that tells me we don't have a lot to worry about. It reveals the classic survey gap between first-hand experience and the general impression people have picked up, mainly from the media.

My guess is a few big, militant unions are taking every advantage of Fair Work to make unreasonable demands. And they're being vigorously opposed by a few equally militant, unreasonable big businesses.

But we shouldn't allow people with a vested interest in conflict to misdirect us. The real problem with Fair Work is that it's not doing as much good as it could be at a time when bosses and workers need to pull together.

Saturday, August 4, 2012

We've come a long way on industrial relations

In all the argument about the rights and wrongs of Julia Gillard's Fair Work Act, it's easy to forget we've been making radical changes to our industrial relations and wage-fixing system since the late 1980s.

Since the labour market is such an integral part of the economy, it's reasonable to suppose those changes have made a significant contribution to the economy's markedly improved performance over the past two decades.

What you can't do is look at the macro-economic record and confidently attribute this improvement or that deterioration to either the Fair Work Act or the Work Choices regime that preceded it.

Why not? Because, particularly if you're talking about our weak productivity performance, the timing doesn't fit. Also because neither regime was or has been in force long enough to be sure they've had much effect on anything. Changes take time to make a mark.

But, above all, because when you take just one factor and use it to explain some particular development in the economy, you're unconsciously assuming ceteris paribus - all else remains equal. And in the real world, that's never true. For all you know, the development may be explained by some other factor, or combination of factors.

So whenever you see a protagonist in the debate confidently claiming the slowdown in productivity can be blamed on the industrial relations approach they oppose, know they're talking prejudice, not reasoned analysis.

As this week's review of the Fair Work Act reminds us, we've been overhauling our industrial relations and wage-fixing system for ages. For most of the time since Federation we operated under a uniquely antipodean system of federal and state "conciliation and arbitration".

In theory, all strikes were illegal because the system made them unnecessary. In practice, strikes were frequent, but short.

In theory, the commission running the system would provide conciliation to differing employers and unions, trying to help them reach an agreement. If this didn't work it would compulsorily arbitrate to impose a solution, usually roughly splitting the difference. In practice, disputes were almost always settled by arbitration. Unions would pull on a strike to get the umpire to intervene and impose a decision.

In theory, wage rises were controlled by the commission in a "national wage case", making them nationally uniform for all workers subject to particular "industrial awards", on which the system was built. In practice, you could get pay rises other ways, including by breaking out of the system if you had enough muscle. Some increases would "flow on" from one key award to all awards.

Get the feeling it wasn't working very well? The first attempt to restore order was to limit wage rises to those awarded by the national wage case, where wages were indexed to the consumer price index.

But indexation was abandoned in 1987 and wage rises were awarded in exchange for the removal of "restrictive work practices" (inefficiencies). Awards were restructured to reduce demarcations between people on different awards at the same workplace and to make awards more flexible.

In 1991, the commission introduced "enterprise bargaining" between unions and employers at the level of the individual workplace. It applied a "no-disadvantage [to employees] test" before ratifying agreements. In 1994, with a new Industrial Relations Act, a more formal system of collective bargaining at the enterprise level was introduced, the national wage case was ended and replaced with a system of small annual "safety net" award wage increases for workers unable to negotiate an increase.

All that happened under the Hawke-Keating government. From early 1997 the Howard government's Workplace Relations Act promoted the use of individual contracts (subject to the no-disadvantage test) by introducing "Australian workplace agreements", increased the emphasis on enterprise bargaining by reducing the content of awards to 20 "allowable matters" and reduced union power by outlawing compulsory unionism and making strikes legal ("protected") only during the negotiation of new agreements.

The Howard government's second major set of changes, Work Choices, took effect in 2006. It moved from a federal to a national system, sought to make individual contracts the main form of wage agreement by removing the no-disadvantage test, greatly increased the restrictions on unions where employers persisted with collective bargaining, and largely sidelined the commission.

After much criticism, in May 2007 John Howard significantly watered down these provisions by restoring a version of the no-disadvantage test and reinstating close scrutiny of individual contracts before approval.

Labor's Fair Work Act didn't really take effect until the start of 2010. It ended legislative recognition of individual contracts and restored collectively bargained enterprise agreements as the main form of wage-fixing. It largely restored the role of the commission under the cutesy title, Fair Work Australia. It reformed the award system, reducing more than 3000 federal and state awards to 122 simpler and less prescriptive "modern awards".

Some silly partisans have tried to blame Fair Work for our weak performance on the productivity of labour, but the figures don't bear this out. Productivity improved fastest under the Keating government's regime and the early years of the Workplace Relations Act, but then slowed and the weakness continued under both Work Choices and Fair Work. In any case, this ignores the huge effect of the special factors affecting productivity in mining and utilities.

But productivity isn't the only test of improved labour market performance. What about strikes? Working days lost per 1000 employees averaged 232 a year in the last days of arbitration, 176 under Labor's first Industrial Relations Act, 96 under its second act, 54 under Howard's Workplace Relations Act, 13 under Work Choices and 18 under Fair Work.

Some have blamed Fair Work for the small jump in days lost last year but most of this is explained by disputes involving the O'Farrell government and NSW public servants, who aren't covered by Fair Work.

Despite employer complaints, the minimum wage grew in real terms by less than 9 per cent over the 11 years to 2012. It dropped from 62 per cent of median full-time earnings in 1997 to 54 per cent in 2010.

The review of the Fair Work Act concludes that, since it came into force, "important outcomes such as wages growth, industrial disputation, the responsiveness of wages to supply and demand, the rate of employment growth and the flexibility of work patterns have been favourable to Australia's continuing prosperity, as indeed they have been since the transition away from arbitration two decades ago".

Wednesday, August 1, 2012

No one knows how we'll pay for disability scheme

You may not have noticed, but last week was among the most significant of the Gillard government's term. The commitments made may do great good, but they will also cause much pain and gnashing of teeth in the years ahead.

Last week the nation made it crystal clear to its political leaders - federal and state - it wanted them to get on with implementing the national disability insurance scheme. After decades of turning a blind eye to the difficulties faced by the disabled and their carers, last week conscience struck.

Fine. You're a believer; so am I. But the scheme is very expensive: when fully implemented in 2018, an additional $8 billion a year. Or, as the politicians and the media usually prefer to put it, $32 billion over four years.

To give you an idea, $8 billion a year is more than will be raised each year by the carbon tax or more than twice what will be raised by the new mining tax.

So how will the disability scheme be paid for? No one has any idea. The pollies were arguing about that very question when - urged on by the same radio shock jocks who on other days rail against "debt and deficit" - the electorate put a rocket under them: Just do it!

That's why I have reservations. We behaved like a teenager with his first pay packet who goes out and buys a car on the never-never, without a moment's thought about how he'll fit the repayments into his budget.

Perhaps this was the only way an increasingly self-centred nation was ever going to commit to something so caring but expensive. Had we dwelt on how much it would cost and how we'd be paying for it, we might have made an excuse and passed on.

Even so, the accountant in me remains uneasy. Sometimes in politics, good deeds aren't born of the purest motives. The Productivity Commission report that recommended the scheme called for the pilot programs to begin in 2014.

I suspect Julia Gillard brought it forward a year because she wanted to be seen doing something worthwhile - and something that didn't have Kevin Rudd's fingerprints on it. She committed to spending just $1 billion over the four-year trial phase.

If Gillard has a clear idea of how she would afford the scheme when fully implemented, she's given no hint of it. All we know is that, contrary to the commission's advice, she expects the states to bear some of the cost.

I suspect she's fingered the states as a red herring, intending to draw attention away from her own lack of forethought. That's where we got to last week. She put the wood on the premiers to make a small contribution to the cost of their state's pilot scheme, but many declined. This could have been the usual story - whenever the feds require the premiers' co-operation, their hands go out: What's it worth to you?

If that was the premiers' motivation, I'm sympathetic. Though the states are responsible for provision of many costly public services - law and order, roads and transport, schools and hospitals - their taxing powers have been greatly constrained by the High Court, leaving them heavily dependent on the feds.

John Howard's decision to grant them the full proceeds from the goods and services tax was intended to solve their problem, but it's no longer the "growth tax" it was. Our consumer spending no longer outstrips our income the way it did, and an ever-growing proportion of our spending goes on items excluded from the tax, particularly private education and health.

So the premiers can't reasonably be expected to stump up for anything much. And, indeed, it's the feds who'll have to come up with a solution to their chronic revenue problem. This week a poll shows 84 per cent of respondents oppose increasing the rate of the GST to 12.5 per cent.

But only the Liberal premiers jacked up last week. The remaining Labor state and territory leaders played along. So maybe it wasn't the standard premiers' money-motivated bail-up.

There isn't a politician in the country with the courage to openly oppose the disability scheme. Gillard's lack of courage comes in telling us how she proposes to pay for it. Maybe she's decided she'll worry about that only if she wins the next election.

Tony Abbott's more likely to win it, of course. I suspect the hard-heads on his side had been intending to relegate implementation of the full scheme to the status of an "aspiration" to be afforded only when finances permit.

That now would be a lot harder to do, following the surge of public pressure that forced the premiers of NSW and Victoria to back down after just a day or so. Such forceful expressions of the public's will stay burnt on politicians' brains long after you and I have forgotten them.

Abbott's shadow treasurer, Joe Hockey, is saying it would be cruel to offer hope to the disabled when there was no guarantee the money could be found. In contrast, his more slick-tongued finance spokesman, Andrew Robb, says the full scheme would be introduced in 2018, but this "probably would require the removal or scaling back of other programs".

Don't forget Abbott would first have to cover the cost of abolishing the carbon tax and the mining tax. This is a man who professes to believe taxes must go down and may never go up. Now he's got to find a further $8 billion a year in spending cuts.

I find it hard to believe this would happen. But whatever happens, I foresee much pain and gnashing of teeth.