Monday, May 27, 2019

Without decent policies, Labor would get fewer votes, not more

The main reason so many voters have given up on politics and politicians is their belief that modern pollies care more about advancing their careers than advancing the wellbeing of the nation.

So, were Labor to decide that it lost the election – which dodgy polling encouraged it and everyone else to believe it was sure to win - because it made itself a "big target" by having lots of policies to fix things, rather than "small target" with few policies of any consequence, it would risk confirming voters’ suspicions that it cared more about getting back to power than improving voters’ lives.

Not a great way to garner votes. Particularly because, for reasons I’ll get to, the small-target strategy works better for the party of the business establishment and the status quo than for the party representing those who think the status quo needs reforming.

When you decide that having too many policies was the main reason you lost, it’s only human nature to flip to the opposite extreme of having none. Human, but not smart.

Economics teaches that success in life comes from seeking out the best “trade-off” between conflicting but equally desirable objectives. It involves using your brain to nut out the best answer, not turning it off.

As political scientist Rod Tiffen has reminded us, the no-brain response after elections is that “everything the winning party did is treated as a stroke of genius, and all the loser’s moves were foolish”.

If Labor wants to draw the right conclusions about the various reasons for its failure it will need to put a lot more mental effort into answering the eternal policy question: “what works and what doesn’t?”.

One obvious possibility is that Labor lost partly because it “did a Hillary Clinton,” focusing on the well-educated, socially progressive (and often public-sector employed) section of the party’s base and forgetting about the less educated, less progressive section in outer suburbs and the regions.

Labor’s had the tricky job of straddling these two, very different parts of its heartland for decades. When John Howard perfected the technique of “wedging” your political opponent, the original application involved driving a wedge between the well-educated and the blue-collar parts of Labor’s base. The classic case is the treatment of asylum seekers.

The no-brain response would be for Labor to “go back to” its blue-collar base. Labor can’t win without both ends. But it certainly needs to put a lot more effort into satisfying both ends. What can it do to help the regions than isn’t too blatantly wasteful? How can it look after victims of the inevitable shift from fossil fuels to renewable energy?

With every summer getting hotter, it’s not surprising the Greens had a good election. And the best explanation for the swing to Labor or independents in many well-heeled Liberal electorates is Liberal voters’ growing recognition that we need a government that’s genuine about combating global warming.

It’s quite possible this is of less concern to the blue-collar end of Labor’s heartland, particularly if it can be (falsely) convinced the immediate cost to household budgets would be high. But for Labor to tone-down its climate policy would risk it getting an even lower primary vote as more of its progressive base shifted to the Greens and, in the case of the Senate, didn’t flow back.

Labor needs reminding that life wasn’t meant to be easy for reformist parties. The party of the business establishment and the status quo always starts with a built-in advantage. They’re the people who surely must be better at running the economy and who stand for minimal change – the thing we all fear.

That’s why the Libs can get elected with no policy other than blocking the rise of all those Labor trouble-makers, and why Labor gets elected only by making the case for change. Why vote for a Labor status quo when you can vote for the original and best?

One of the Libs’ most effective lines was “Labor can’t manage money so they’ll come after yours.” Labor’s eternal vulnerability on the money question is why it would be folly for it to lay most of the blame for its failure at the feet of its one money man who does command the respect of econocrats, economists and business people, Chris Bowen. All the people who wanted to win votes by promising to spend big on education and health, scapegoating the poor blighter who had to find ways to pay for it all.

Similarly, when Labor relegates to a junior role a highly regarded former economics professor, Andrew Leigh, simply because he’s not a member of any faction, it reinforces voters’ suspicion that Labor members put their own careers ahead of the country’s good governance.
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Saturday, May 25, 2019

Why did Labor lose? Not because of its tough tax plans

It’s been a week since the election so, naturally, by now a great many of the people who work in the House with the Flag on Top – politicians, staffers, journalists – know exactly why Labor lost and the Coalition won: those hugely controversial dividend franking credits.

There were other reasons, of course, but franking credits is the big one. How do I know they know? Because this is what happens after every election.

The denizens of the House take only a few days to decide on the single most important factor driving the result. Surprisingly, each side of politics – the winners and the losers – almost invariably comes to the same conclusion.

And once they have, the concrete around the notion sets quickly and what started as a theory becomes received wisdom, something any fool knows and part of the building’s corporate memory.

Months later, political scientists will come up with different, much more “evidence-based” explanations, but by then it will be too late. No one listens to them because the die has been cast.

Which is why it may already be too late for research by Dr Richard Denniss and others at the Australia Institute to debunk the quite misguided notion that it was all the people who’d be hurt by the franking credits policy voting against an evil-intentioned Labor Party.

When you see Denniss’ quite startling findings it should also disabuse you of the notion that, particularly in a country as big and varied as ours, a party’s loss of an election could ever be, as the academics say, “mono-causal” rather than “multi-factorial”.

Labor’s performance was disappointing (for its supporters, anyway), not disastrous. The composition of the House of Reps has changed surprisingly little. So it may surprise you, but shouldn’t, that as well as there being lots of electorates that swung to the Coalition (measured on a two-party-preferred basis), there were also lots of electorates than swung to Labor.

Get this: the seats that swung to the Coalition were mainly those whose voters had low incomes, whereas the seats that swung to Labor tended to be those whose voters had high incomes.

Among the seats with the 10 biggest swings to Labor were five from Victoria, three from NSW and one each from WA and the ACT. The swings varied from 3.7 per cent to 6.6 per cent.

In all but two of those seats, they had at least twice the proportion of high income-earners (people in the top 20 per cent) than the national average. Under the Coalition’s three-stage tax plan, voters in the same eight electorates are estimated to get tax cuts in 2024 varying from 49 per cent more to double the national average.

Across Australia, the average value of franking credits per taxpayer is $695 a year. In those eight electorates (five of which are held by the Coalition), the average value ranges from $1213 to $2578 a year.

Now let’s look at the 10 electorates with the biggest swings to the Coalition – six in Queensland and four in NSW. The swings varied from 6 per cent to 11.3 per cent. All of the seats had less than the national average of people with high incomes. And for all but one of them, the average tax cut in 2024 will be below the national average.

How much do they get in franking credits? All 10 seats get less than the $695-a-year national average. Between 83 per cent and 16 per cent of the average, to be precise.

Looking more generally, electorates with more people on low and middle incomes tended to swing to the Coalition, whereas electorates with more people on high incomes tended to swing to Labor.

Next, since it’s the (well-off) retired who would have been hit by the plan to end refunds of unused franking credits, the researchers looked at the voting trend for electorates with a high share of voters over 65.

They found only a very slight tendency for such electorates to move their votes to the Coalition.

So, what should we make of all this? Well, for a start, the figures allow us to rule out some possibilities, but leave others open.

They seem to refute the contention that many well-off retirees (or even prospective well-off retirees) moved their votes away from Labor because they were deeply opposed to the planned changes to franking credits.

They leave open the possibility than many less well-off voters moved their vote away from Labor because they disapproved of the way well-off retirees were to be treated. If so, they were being very magnanimous towards people better off than themselves.

Possible, but not likely. It’s easier to believe they (or, at least, some of them) were renters voting against Labor in response to the real estate agents’ scare campaign claiming Labor’s plan to limit negative gearing would force up rents.

Turning to the higher-income electorates, there’s little sign of many people moving their votes away from Labor because of their opposition to its franking credit plan – or to its move against negative gearing, for that matter.

According to Denniss, it looks like renters voted to help their landlords keep their tax lurks, whereas the landlords voted for Labor’s offer of free childcare and the restoration of penalty rates for their tenants.

Well, maybe. What can be said with more confidence is that it’s hard to see much sign of an outbreak of class warfare.

Moving on from Labor’s controversial tax changes, the success or near success of independents running in Liberal seats such as Warringah and Wentworth in prosperous parts of Sydney, and Indi in rural Victoria, makes it easier to believe the swing to Labor in so many high-income electorates was motivated by a concern that Australia needed a more convincing policy to combat climate change.

As for the swing against Labor in many low-to-middle electorates in Queensland and NSW, my guess is they felt Labor was neglecting their worries about jobs and the cost of living.

It’s never as simple as many workers in Parliament House convince themselves.
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Wednesday, May 22, 2019

Now the pilot's back, economy flying on a wing and a prayer

It’s always nice for the country to be led by someone who’s obviously got God on his side. When he prays for a miracle, he gets it. And the challenges facing the economy are such that Scott Morrison may need all the divine assistance he can summon.

The Coalition – and their dispirited opponents - should remember the fate of the last chap who won an unwinnable federal election: Paul Keating in 1993. By the time the next election arrived, voters were, in Queensland Labor premier Wayne Goss’s words, “sitting on their verandas with baseball bats”.

The Liberals shouldn’t forget the miraculous nature of their win. After their years of infighting and indiscipline they richly deserved to be thrown out, but were saved by Morrison’s superior campaigning skills and his success in convincing people with nothing to fear from restrictions on franking credits and negative gearing that they should be fearful (not sure what God thought about that).

This was not a historic vindication, just a reprieve. Carry on the way you have been, and your fate will only have been delayed.

And remember: Keating’s reprieve came as part of the 25 years Australians spent trembling at the thought of a tax on services as well as goods. “If you don’t understand it,” Keating told the punters, “don’t vote for it.”

We’ve now had such a tax for almost 20 years. And would you believe? Turned out the GST was no biggie. What brave souls we are.

Come July, we’ll have gone an amazing 28 years without a severe recession. Starting to sound ominous.

Look around the world – trade war between America and China, China’s faltering economic miracle, America’s boom that must bust, Japan and Europe with chronically weak economies and Brexit Britain about to shoot its economy in both feet – and it’s not hard to think you see our next recession in the offing.

Certainly, it has to come some time. But I don’t see one as imminent. What many don’t realise is we have enough troubles of our own, without help from abroad.

Ever since the global financial crisis in 2008-09, and more so since the busting of our mining construction boom in 2013, our economy has been acting strangely, behaving in ways it used not to.

If Morrison and his Treasurer, Josh Frydenberg, understand the way it hasn’t been back to business as usual, they’ve shown little sign of it.

If they haven’t yet got the message – perhaps because a politicised Treasury hasn’t been game to give them news they won’t like – enlightenment, in the form of being hit on the head by the bureau of statistics, may not be far off.

Ever since Treasury’s optimistic forecasts encouraged Labor’s Wayne Swan to claim to be delivering four budget surpluses in a row – a claim Frydenberg repeated in the April budget – the econocrats have just shifted forward another year their unwavering conviction that everything will soon be back to the old normal.

It hasn’t happened throughout the Coalition’s two terms. The economy’s just kept grinding along in second gear, failing to reach the cruising speed the econocrats profess to see coming.

It hasn’t happened because the economy’s productivity – output per unit of input - hasn’t improved as fast as it used to, and what little improvement we’ve had hasn’t flowed on to wages. It’s because wages haven’t grown faster than prices, as we’ve come to expect, that so many people are complaining about the cost of living.

What has concealed the truth from us is our rapid, immigration-fuelled population growth. The other rich countries’ populations haven’t been growing nearly as fast. This has given us a bigger economy, but not a richer one.

Of late we have had a partial – and probably temporary – rebound in the prices we get for our mineral exports. Combined with years of bracket creep, the boost to mining company profits (and their tax payments) has finally made Frydenberg’s budget look a lot healthier than the economy does.

Weak growth in real wages (plus continuing bracket creep) mean weak growth in the disposable income of Australia’s households. Which, in turn, means weak growth in the economy’s mainstay, consumer spending.

All this became unmissable when the economy slowed to a crawl in the second half of last year. Predictably, the April budget took this to be little more than a blip on the onward and upward trajectory.

But all the economic indicators we’ve seen since the budget – weak inflation, no improvement in wage growth – suggest the weakness is continuing.

Another respect in which the economy has been behaving strangely is that employment – particularly full-time jobs - has been growing much more strongly than the modest growth in the economy would lead us to expect.

It’s this that Morrison and Frydenberg trumpeted during the election campaign as proof positive of their superior management of the economy. Fine. But the rate of growth in employment is slowing and the rate of unemployment, having fallen slowly to 5 per cent, seems now to be going up, not down.

With the election out of the way, the Reserve Bank won’t wait long before it cuts interest rates to try to give the economy a boost. The $1080-a-pop tax refund cheques after June 30 will also help, provided Morrison can get them through Parliament in time. More earnest prayer required, I think.
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Monday, May 20, 2019

Morrison's miracle election may turn out to be the easy bit


The great risk from Scott Morrison’s miraculous victory is that it will lead politicians on both sides to draw conclusions that worsen our politics and our policies. Bill Shorten offered us a chance to change the government and change the nation, and was answered with a firm No Thanks.

It’s a great win for the Coalition, but a loss for economic policy. The voters’ "revealed preference" is for more personality, less debate of the tough choices we must make to secure our future in a threatening world.

The first lesson the pollies will learn is that disunity doesn’t have to be death. Almost six years of fighting like Kilkenny cats can be forgotten during the eternity of a five-week election campaign, provided you put all the focus on the latest guy, and his predecessors are kept hidden.

The second lesson the pollies will learn is that the only safe strategy for oppositions is to make themselves a "small target", with only a few, popular policies, so all the focus is on the failings of the government.

Whatever policy changes you may be thinking of making, keep your intentions to yourself and don’t, whatever you do, seek a mandate for change.

Almost 28 years of continuous growth have rendered Australians a timorous nation. No national emergency, no need for change. As Kevin Rudd was the last Labor leader to understand, what voters crave is change without change. Promise it. (Since such a thing is impossible, deliver something else. Expect a backlash.)

Politicians have understood all this since Dr John Hewson (his PhD said: "knows more about economics than politics") used Fightback – "the longest suicide note in history" – to lose the unlosable election in 1993.

Labor forgot this because it wanted to be seen as less negative and destructive than Tony Abbott, and because, knowing Shorten lacked charisma, it decided policy substance was the best substitute. As it turned out, wrong.

In this era of unreal reality game shows, and multitudes of disillusioned, disengaged voters, the most successful politicians are those best at show biz. Morrison may not be the lovable larrikin Bob Hawke was, but he comes a lot closer than Hawke’s union mate did.

Morrison spent five weeks performing for the cameras to the exclusion of all others, and the electorate warmed to what it saw. Perhaps what Labor needs is a casting director.

The third lesson the pollies will learn is that the eternal reality of conflict between the classes must always remain covert. Any overt attack on privilege does more to fire up the defences of the well-off than to whet the appetites of those missing out.

In this country, the only envy that works is the downward variety. Envy the jobless for being able to eat without working, or the Indigenous for the extra help they get? Sure.

This government has spent its time beating up on boat people, public servants and those on welfare and, in the process, has gained more votes than it’s lost.

The well-off may have benefited from a lot more good luck (as I have) than it suits them to admit, but they are adept at convincing the punters than an attack on my five dollars is an attack on your five cents.

Labor fashioned a policy to pay for more of the spending on health and education voters genuinely want by reducing the tax breaks of the top 10 per cent (including the top 10 per cent of retirees), but almost every oldie was convinced they’d be a victim.

Same with the way the nation’s real estate agents put the frighteners on their tenants over negative gearing.

Highlight the conflict between the generations and you’re smacked by the demographic reality that voters get older every year, and the over-65s far outnumber the young.

In this election it was the Morrison government that made itself a small target so all the focus would be on Labor’s perceived policy losers.

Believing he had nothing to lose, Morrison staked everything on offering the world’s most expensive tax cuts.

But did he lie awake in the early hours of Sunday morning wondering how on earth he’d pay for them without the budget heading back into deficit? About the hugely optimistic forecasts of the economy’s early return to strong growth used to bolster his economic record? About the requirement that there be zero real growth in government spending per person over the next four years?

Morrison has no policy to control electricity prices, no convincing policy on climate change, no policy to halt the rising cost of health insurance, no policy response to any downturn in the economy, no solution to “cost of living pressures” and no plan to increase wages except yet more waiting.

The day may come when he decides winning the election was the easy bit.
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Saturday, May 18, 2019

Where’s the money coming from? Ask me after the election

A key issue in this campaign has been whether government should be bigger or smaller. But that’s not the way either side has wanted to frame it. As usual, both sides prefer to be seen as offering more government spending and tax cuts and a return to big budget surpluses. In election campaigns, the rules of arithmetic are flexible.

A twist this time is that Scott Morrison is using his promised super-mega $300-billion tax cuts to support his claim that the Libs are always the lower-taxing party, whereas Labor is invariably the party of higher taxes.

But such massive tax cuts surely require big cuts in government spending? Oh, gosh no. Where did you get that idea? As he and Treasurer Josh Frydenberg have repeatedly said, they’re willing to "guarantee the essential services that Australians need and deserve".

For their part, Bill Shorten and Chris Bowen are promising to reverse a lot of the government’s previous alleged spending cuts in health and education, while more than matching the first stage of the government’s tax cuts and achieving bigger budget surpluses than it would. They would square this circle by "paying for our commitments by closing loopholes for the top end of town".

Only this week did Labor produce its detailed costings and figurings. We’ll come to that.

Apart from this week’s last-minute additions, all the government’s costings and figurings were outlined in the April budget, of course, and confirmed a few days later in the pre-election update.

Actually, this government has a rather chequered history on the unmentionable subject of whether government should be bigger or smaller. The obvious advantage of a bigger government is that it provides more of the services we love, and doesn’t skimp on their quality. The obvious advantage of a smaller government is less tax to pay.

When Tony Abbott came to government in 2013 determined to end debt and deficit ASAP, he pledged to do so solely by cutting government spending and avoiding any tax increases (apart from his temporary budget repair levy on high income-earners).

Trouble is, voters were so appalled by the sweeping cuts to health and education he proposed that his government’s standing in the opinion polls plunged, never to recover. The Senate blocked many of his cuts.

The episode revealed what economists call the "revealed preference" of voters (not what they say, but what they do). They may like tax cuts and hate the idea of new or increased taxes, what they really don’t want is smaller government.

In subsequent budgets, the Coalition pretty much abandoned the notion of cutting its way back to surplus (apart, of course, for its regular cuts in things most voters didn’t worry about – public servant numbers and payments to people on welfare).

It tried to limit the growth in government spending by following a rule that any new spending proposals had to be offset by equivalent cuts. Apart from that, it sat back and waited for "bracket creep" to raise tax collections to the point where the deficit disappeared.

Except for Malcolm Turnbull’s first budget, in 2016. Here he proposed to phase in a cut to the rate of company tax, and covered part of its cost by pinching Labor’s plan for huge increases in the tax on tobacco, and doing his own versions of Labor’s plans to tax multinational companies and reduce superannuation tax concessions.

In the end, most of the plan to cut company tax was abandoned, but the tax raising measures stayed – a point to remember when Morrison and Frydenberg try to give you the impression it’s only Labor that increases taxes or cuts back tax concessions (or increases taxes via bracket creep).

When Danielle Wood, of the Grattan Institute, looked more closely at Frydenberg’s budget, she found the government had fiddled the figures to exaggerate the extent to which it had limited the growth in government spending so far, and now was claiming to be able to limit its average real growth to just 1.3 per cent a year over the next four years – something no government has ever come close to achieving.

The ageing of the population and the huge demands this will make on the budget make it even harder to credit.

Now Dr Peter Davidson, principal adviser to the Australian Council of Social Service, has taken Grattan’s work and dug even deeper. He finds that, after you allow for expected population growth, real spending growth per person would be zero.

We’re told that, still in real terms, spending on tertiary education is expected to fall by 0.6 per cent each year, while spending on dental health, and on family payments, are each expected to fall by 0.7 per cent.

Spending on employment services is expected to fall by 2.5 per cent a year and on social housing by 2.7 per cent.

You may believe that would happen should the Coalition be re-elected, but I don’t. It’s possible Morrison has a dastardly secret plan to "do another Abbott" after the election, but it’s much easier to believe the government was just fudging the figures to make it seem it could afford big tax cuts as well as achieve big surpluses.

Meanwhile, Labor’s costings reveal that "closing loopholes for the top end of town" is a misleading way to describe its various cutbacks of tax breaks affecting high-income earners and plan to restore the Coalition’s budget repair levy for another five years.

But the costings are just that – costings of individual promises. Nowhere are we told what the various tax-raising measures add up to, nor what the various spending measures add up to.

We are, however, told that the former would exceed the latter by $17 billion over the next four years. Oh, well that’s OK then.

Bit too tricky for my liking. When it comes to the size of government, neither side wants to spell it out truthfully before the election. Thanks, guys.
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Wednesday, May 15, 2019

A politician always wins, but this time the choice really matters


If you judged it by the way Labor's been so quick to match the Coalition’s backdated doubling to $1000-a-year of its tax cut for middle income-earners (good idea) and now the Coalition’s plan to help first-home buyers (con job), you’d be justified in thinking that, despite all their furious arguing with each other, there’s little to choose from between the two sides. For once, however, such a conclusion would be dead wrong.

Not for many moons have voters faced such a clear-cut choice between Labor and Liberal.

It’s true that, if you judge the pollies by the way they behave, they’re just as bad as each other. Both sides refuse to answer the question, never say yes or no when they could dissemble, keep saying tricky things calculated to mislead, claim to “feel your pain” when they don’t, keep badmouthing each other and answering a question about their policies by attacking their opponents’ policies, and make promises they’re not sure they can keep.

And – one we’ll need to watch out for if Labor wins – claim to be much more high-principled than the government while they’re in opposition, but then do just the same when they’re in government, justifying it by saying they’re no worse than the last lot.

All true. But where the two sides are very different is in the policies they’re offering. And, although the more unpopular of those policies may or may not make it through the Senate, this is one time I’m inclined to agree with Paul Keating when he repeats his saying that “when you change the government, you change the country”.

Since it’s true that governments lose elections far more often than oppositions win them, the standard practice is for oppositions to make themselves a “small target” – to promise little of substance – so all the focus is on the many things the government has stuffed up.

Not this time. This time it’s the government making itself a small target – running on its economic record, with few policy promises bar its $300-billion tax plan – while Labor has so many controversial policies to go with its popular ones the Libs have been spoilt for choice.

Only the naive believe the battle between the classes ever ended, but in this election it’s more in-your-face than any time since the days of Labor’s Arthur Calwell. The Libs say Labor wants to increase taxes rather than cut them, but it would be more accurate to say it wants to make the well-off (including the well-off retired) pay more tax, while using the proceeds to increase government spending on health, education, childcare and much else, with what’s left over used to repay some of the government’s debt.

Labor plans to abolish tax refunds of unused dividend franking credits for those not on the pension, wind back negative gearing and the capital gains tax discount, reduce superannuation tax concessions, tax family trusts and restore for four years the 2¢-in-the-dollar budget repair levy on income above $180,000 a year, not to mention cancel the second and third stages of the Libs’ tax cuts.

In other words, Bill Shorten and Chris Bowen plan to use both sides of the budget to affect the biggest redistribution of income from high income-earners to low and middle income-earners we’ve seen in ages.

By contrast, the Libs are fighting tooth and nail to protect the tax breaks favouring property investors, self-funded retirees, high-income superannuation savers and business people who’ve gone for years using family trusts to reduce the tax they pay – most of which concessions were introduced by the Howard government.

As well, the Libs’ seven-year, three-stage, super-mega tax plan would favour high income-earners – individuals earning more than $100,000 and, particularly, $200,000 a year – to a degree more generous/blatant than I can remember.

The first stage, which is limited largely to middle income-earners, would give them an immediate cut in their average tax rate of no more than about 1¢ in every dollar they earn. That’s pretty much it for low and middle income-earners.

High income-earners have to wait for stage two (July 2022) and stage three (July 2024) before they get much. But then the heavens would open. Cuts in average tax rates would range from 1.5¢ in every dollar for those on $110,000 to 4.5¢ in the dollar for me and my mates on $200,000 and above.

Next, more than ever before, this election sees Labor going for the young vote (negative gearing, better childcare, preschool and universities) while the Libs defend actual and prospective self-funded retirees.

Except for Scott Morrison’s last-minute, few-details first home loan deposit scheme (which Labor matched within an hour or two). It sounds better than is, mainly because access to it would be limited. Further falls in house prices would do far more to help – but no pollie wants to say that.

Then there’s the minor matter of the adequacy of our contribution to the Paris Agreement’s effort to limit global warming. Here, too, the choice is wide, ranging from the Coalition (just pretending) to Labor (real but inadequate) to the Greens (full blast).

All that remains is a threshold question: will your choice be aimed at benefiting yourself and your family, or the wider community and “those less fortunate than ourselves”?
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Monday, May 13, 2019

Let's stop pretending the old normal is just around the corner

Just as a new chief executive makes sure their first act is to clear out all the stuff-ups left by their predecessor, so a new federal government needs to release its econocrats from the ever-more dubious proposition that nothing in the economy has changed and we’ll soon be back to the old normal.

That’s the old normal of productivity improving by 1.5 per cent a year, the economy growing by 2.75 per cent and wages growing more than 1 per cent faster than the 2.5 per cent inflation rate, with unemployment of 5 per cent and a fat budget surplus rapidly returning the government’s net debt to zero.

That’s the happy fantasy the econocrats have been predicting every year since 2012, the year they helped former treasurer Wayne Swan delude himself he was “delivering” four budget surpluses in a row.

It’s the same fantasy guiding the forecasts in this year’s budget and allowing Treasurer Josh Frydenberg to repeat Swan’s prediction.

A new government would do well to start by freeing itself from the purgatory of endlessly under-achieved forecasts. A re-elected government, of course, would find it much harder to free itself from addiction to the happy pills.

A now highly politicised Treasury seems to have had little trouble keeping this dubious faith that nothing fundamental in the economy has changed and that, every year the return to the old normal fails to happen – we’re up to seven and counting – makes this year’s forecast all the more likely to be the lucky winner.

No, it’s the Reserve Bank and its governor, Dr Philip Lowe, that’s had trouble reconciling the she’ll-be-right forecasting methodology with the daily reality of economic indicators that didn’t get the memo. Unlike Treasury, Lowe has to do it in public – and update his forecasts every quarter, not just twice a year.

The Reserve may be independent when it comes to making decisions about interest rates – though, as we saw last week, not still so independent it’s game to risk pricking the political happy bubble by cutting rates during an election campaign – but it has never allowed itself to be independent of Treasury’s forecasts.

Being bureaucrats, the Reserve’s bosses live in fear of ignorant journalists writing stories about Treasury and the Reserve being at loggerheads. So they never allow their forecasts to be more than a quarter of a percentage point at variance with Treasury’s.

Their bureaucratic minds also mean they prefer to initiate rate changes in February, May, August or on Melbourne Cup day, so their move can be justified in the quarterly statement on monetary policy published the following Friday.

All this does much to explain the contortions Lowe put himself through last week. Everything the Reserve said about the immediate outlook for the economy implied it should have begun cutting last week.

It slashed its forecasts for consumer spending, inflation and GDP for the rest of this calendar year, which of itself was enough to justify an immediate cut. Last Tuesday it told us enigmatically it “will be paying close attention to developments in the labour market”, but three days later forecast that unemployment would be unchanged at 5 per cent for the next two years.

What Lowe hasn’t explained is that the only thing in the labour market that would stop him cutting rates in the next few months is if unemployment were to fall. That’s because the one respect in which he’s broken free of the Treasury orthodoxy is his acknowledgement, before a parliamentary committee, that the best estimate of full employment (the “non-accelerating-inflation rate of unemployment”) has dropped from about 5 per cent to about 4.5 per cent. If you’re not heading down to 4.5 per cent, why aren’t you cutting?

Trouble is, if full employment is 4.5 not Treasury’s 5, that means our “potential” growth rate is likely to be below Treasury’s 2.75 per cent (including its assumption of 1.5 per cent annual improvement in productivity). And, if that’s so, then our “output gap” will be less than the 1.25 percentage points that Treasury uses to justify its projection that the economy will grow for five years in a row at 3 per cent, before dropping back to 2.75 per cent a year.

The trick to Treasury’s forecasting is that, though it always cuts its immediate forecasts to accommodate the latest disappointment in the actual data, its mechanical projections assume “reversion to the mean”, so its later forecasts have to rise to meet the start of the we’re-back-to-normal projections. But it’s always the old mean we'll be reverting to, not any new one.

Now get this: measured on a consistent “year-average” basis, the Reserve’s latest “slashed” forecasts differ in no significant way from those Treasury put in this year's budget. When it comes to forecasting, the Reserve is slave to a politicised Treasury.
Read more >>

Saturday, May 11, 2019

Don't trust pollies to tell you the truth about tax

"You don’t grow the economy by taxing it more,” Scott Morrison declared in the ABC’s election debate. Then his Treasurer, Josh Frydenberg, claimed the Coalition’s $300 billion in tax cuts would make income tax “more progressive” not less. As a prospective major beneficiary of those cuts, I’d love to believe both claims. Unfortunately, there’s little evidence to support either.

Meanwhile, higher income-earners should be in no doubt they’ll be paying a lot more tax should Bill Shorten and Chris Bowen come to power and get their plans through the Senate.

Labor plans to reduce the concessional treatment of negative gearing and capital gains, unused franking credits and family trusts, abandon the second and third stages of the $300 billion tax cuts, and increase the top rate of income tax by 2¢ in the dollar for three years.

If the line that “you don’t grow the economy by taxing it more” makes sense to you, you need to think harder. Taken literally, the sensible response to it is, “No one ever said you do”. It’s a non-sequitur – the first part of the sentence doesn’t fit with the last part.

Morrison wants you to think it means that taxes always discourage economic growth. This notion suits many well-off people who’d love to pay less tax, but that doesn’t make it true.

Say by some miracle we lived in a world with no taxes. It’s not clear that if we had no one enforcing laws, the roads were shocking, and only the rich could afford to educate their children or see a doctor, the economy would be much bigger and faster growing.

On the other hand, it would be true that taxes held back the economy’s growth if governments collected a lot of tax and then buried the money in a hole.

In the real world, however, governments spend almost all the money they collect in taxes (if not more). Some of that money may be wasted, but much of it does a lot of good – to the economy and the people who make up the economy.

We all benefit from living in law-abiding country, with decent roads, low-cost education and good healthcare, not to mention the high wages our educations and health enable us to earn. Our businesses also benefit from operating in such a country.

It’s true that some countries have tax systems that collect their taxes in ways that do more to discourage economic activity than other countries do. It’s true, too, that some countries spend their tax dollars more effectively than others.

But what economists have never been able to demonstrate is that those countries with high rates of total taxation – the Scandinavians, for instance – have smaller and slower-growing economies than those countries with low rates of tax.

There would be more truth in Morrison’s line if he changed it to say “you don’t grow the economy by taxing it less” – you just leave some people better off and others worse off.

Which brings us to Frydenberg’s remarkable claim that his $300-billion tax plan – where the first stage goes mainly to middle income-earners, but the two later stages go disproportionately to people earning a lot more than $100,000 a year - will make the income tax scale more “progressive” rather than less.

As I explained in detail in this column a month ago, a progressive tax is one that takes a progressively higher proportion of people’s incomes as incomes rise.

But two economists at the Australian National University’s research school of economics, Associate Professor Chung Tran and Nabeeh Zakariyya, have produced a more sophisticated analysis, using the Suits index (invented by Daniel Suits) to express our income tax scale’s progressivity as a single number, and then see how it has changed over the years.

Unsurprisingly, they find that our income tax scale is and always has been progressive (and will stay progressive if the Coalition’s tax plan comes to pass).

They found that, in 2016, the top 10 per cent of taxpayers accounted for 32 per cent of all the pre-tax income, but 46 per cent of all the income tax paid. That’s progressive. Between them, their marginal tax rate (on the last part of their income) was 41¢ in the dollar, but their average tax rate (on all their income) was just 29¢ in the dollar.

More surprisingly, the authors found that the scale’s degree of progressivity changes from year to year, and tends to move in cycles of greater and lesser progressiveness.

What factors cause these cycles? Government-initiated changes in the scale, obviously, but also changes in the distribution of pre-tax income between income-earners and – a big one – the effects of “bracket creep” as inflation pushes people onto higher tax brackets or otherwise raises their average rate of tax.

Significantly, the authors confirmed Treasury’s contention that bracket creep reduces progressivity - that is, it favours high income-earners (who don't have a higher tax bracket to be pushed onto).

They find that the income tax scale’s progressiveness declined in the Howard government years between 2001 and 2006, but then increased sharply, reaching a peak in 2010 (during the Labor years), but since then has declined slowly (thanks to bracket creep and the absence of tax cuts, as governments gave top priority to reducing the budget deficit).

Even so, the scale was more progressive in 2016 than it was in 2004.

Frydenberg’s claim that his three-stage tax plan would make income tax more progressive seems based on the fact that the top tax rate would be unchanged at 45¢ in the dollar, while some lower rates fell and, according to Treasury’s debatable projections, by 2024 the top 5 per cent of taxpayers’ share of total tax paid would have risen from 32.7 per cent to 32.9 per cent.

Should his plan actually come about, the Suits index will tell us whether it really has made income tax more progressive rather than less. Since people on $200,000 will have their average tax rate cut by 4.5¢ in every dollar of income, I very much doubt it.
Read more >>

Wednesday, May 8, 2019

Interest rate cuts are coming, which isn't good news

The Reserve Bank may have decided not to cut interest rates right now, but it’s likely to be only a few months before it does start cutting, and it’s unlikely to stop at one. So, is it just waiting until after the election? I doubt that’s the reason.

The Reserve has moved interest rates twice during election campaigns – raising them in 2007 (much to the surprise of Peter Costello, whose mind was on politics at the time) and cutting them in 2013 – so, had Reserve governor Dr Philip Lowe considered an immediate cut was needed, I doubt he would have hesitated to make it.

The Reserve acts independently of the elected government, so it is – and must be seen to be - apolitical. Lowe’s predecessor, Glenn Stevens – who instigated both those previous moves – decided that the only way to be genuinely apolitical was for him to act as soon as he believed the best interests of the economy required him to, regardless of what the politicians were up to at the time.

I doubt his former deputy and understudy, Lowe, would see it any differently.

So, is Lowe’s judgement that a rate cut isn’t needed urgently bad news or good for Scott Morrison – or, conversely, for Bill Shorten?

First point: stupid question. What matters most is whether it’s good or bad news for you and me, and the economy we live in, not the fortunes of the people we hire to run the country for us. The rest is mere political speculation.

The media invariably judge a fall in interest rates to be good news and a rise bad news. But this is far too narrow a perspective. For a start, it assumes all their customers have mortgages and none are saving for a home deposit or for retirement. The retired are absolutely hating the present protracted period of record low interest rates.

For another thing, it assumes that our loans or our deposits are the only things that matter to our economic wellbeing. That the central bank’s movement of interest rates has no implications for, say, our prospects of getting a decent pay rise, or of hanging onto our job.

The fact is that central banks use the manipulation of interest rates to influence the rate at which the economy’s growing. They raise rates when everything’s going swimmingly and, in fact, needs slowing down a bit to keep inflation in check.

They cut interest rates when things aren’t going all that well – when, for instance, low wage increases are causing anaemic growth in consumer spending and this is giving businesses little incentive to expand their operations, or when a rise in unemployment is threatening.

Penny dropped? A cut in interest rates is a portent of tougher times ahead, whereas a rise in rates says the good times are rolling and will keep doing so for a while yet.

So it’s not at all clear that, had he cut rates, Lowe would have been doing Morrison a favour politically and doing Shorten a disservice.

In Treasurer Josh Frydenberg’s budget speech a month ago – it seems an eternity – he used the phrase “strong growth” 14 times. Turned out Morrison was basing his case for re-election on the claim that the Coalition had returned the economy to strong growth – after the mess those terrible unwashed union people had made, as they always do.

That claim is now not looking so believable. It was in trouble even before the budget, when we learnt in March that the economy had suffered a second successive quarter of weak growth, slashing the rise in real gross domestic product during 2018 to just 2.3 per cent – rather than the 3 per cent the Reserve had been talking about.

This was the first sign that, having left its official interest rate steady at 1.5 per cent for more than two and a half years, the Reserve needed to think about using a cut in rates to help push the economy along.

The next sign came just a fortnight ago, when the release of the consumer price index showed that, while some prices fell and others rose during the March quarter, on balance there was no change in the cost of the typical basket of goods and services bought by households.

This caused the annual rate of price increase to fall from 1.8 per cent to 1.3 per cent – at a time when the Reserve had gone for more than three years assuring us it would soon be back in the Reserve’s target range of between 2 and 3 per cent.

So, quite a blow to the Reserve’s assurances that the economy was getting stronger, and a sign it should be thinking seriously about cutting rates to kick things along. (Prices tend to rise faster the faster the economy is growing so, paradoxically, very low inflation is a worrying sign.)

In which case, why has Lowe hesitated? Because, I suspect, he’s waiting for the third shoe to fall. Employment has been growing faster than you’d expect in a weak economy, so he may be waiting for signs it’s slowing, too.

And he’d want to be confident a cut in interest rates didn’t restart the housing boom in Sydney and Melbourne, which has left too many people with far too much debt.
Read more >>

Monday, May 6, 2019

Universities: both sides should clean up the mess they've made

Among the many issues needing early attention from the winner of the federal election is universities. Trouble is, neither side seems to have much idea of how to fix the mess both parties spent decades creating, before Julia Gillard brought things to a head with the brainwave of moving to “demand-driven” funding.

Her idea of shifting control over the size of annual federal-funded undergraduate admissions from budget-conscious bureaucrats in Canberra to individual universities ignored the decades of funding repression to which the unis had previously been subjected.

Governments of both persuasions had gone for years trying to get the universities off the budget books by a process of de facto privatisation. Unis were given the power to charge (government-set) tuition fees to local students – HECS – and unrestricted power to charge overseas students – but with commensurate cuts in government grants.

The result has been to make vice chancellors as money-obsessed as any company chief executive, but without the private sector’s simple profit-maximising objective. Universities have lost their way, no longer sure what they’re doing or why they’re doing it.

Meanwhile, when Gillard opened the unis’ access to the federal coffers the predictable happened: vice chancellors went crazy, slashing entry requirements and cramming in as many more under-qualified undergrads as they could.

This seems to have been particularly true of second-string and regional unis. Australian Catholic University, Swinburne and Sunshine Coast more than doubled their domestic undergrad enrolments between 2008 and 2017. Another six increased their enrolments by more than half.

Gillard’s move to demand-driven funding was linked to her policy of raising the proportion of school-leavers going on to higher education to 40 per cent. A worthy goal – except that everyone took “higher education” to mean going to uni.

So, at a time when federal and state governments were engaged in their disastrous experiment with using “contestability” to get TAFE off their budgets, it suited both status-conscious parents and money-strapped lesser universities for the unis to cut their entry standards and poach kids who would have been better served getting a technical education.

Returning to the feds’ budget preoccupation, after the unis’ inevitable demand-driven raid on the federal purse came the Finance Department’s inevitable cry of pain: we can’t possibly afford this hugely increased cost.

The accountants’ solution – one that couldn’t have made sense to anyone who understood how un-market-like universities are – came in the Abbott government’s first budget: match the deregulation of uni places with the deregulation of uni fees (and cut uni grants by 20 per cent while you’re at it).

Fortunately, the Senate firmly rejected this bizonomics stupidity. But this left Abbott’s successors bereft of ideas to limit the unis’ cost to the budget. They ended up doing what they could do without parliamentary approval: canning the demand-driven system.

Which brings us to the election campaign. Labor is promising to restore demand-driven funding – but also to instigate an inquiry to find a more sensible division of roles between the two parts of higher education. Hopefully, the latter would undo the damage done by the former.

The Coalition is persisting with its spending cuts. But, because regional universities are claiming to be hard hit by those cuts, it promises special spending to help them (think National Party rent seeking).

But none of this would fix the real problem with the way universities have allowed their funding problems to undermine their commitment to high-quality undergraduate teaching and even high-quality research.

They’ve gone too close to turning undergrad teaching into a money-making sausage machine, where you have to be really dumb not to pass, where you don’t need to attend lectures because it’s all online, where lecturers – who will perish if they don’t get their publications up – limit their students’ access time, and where the lecturer is a casual because the person who should be doing it has brought in a big research grant and been rewarded by being allowed to “buy out” their teaching load.

Universities treat their junior academic staff badly (we get flexibility, you get insecurity) and have become bamboozled by KPIs and other faddish “metrics”. Their worryingly high dependence on fees from overseas students means the sandstone “Group of Eight” unis have become obsessed by lifting their place on the various international rankings of universities.

Why? So they can attract more overseas students and charge them higher fees. While their academics find ways to game their KPIs, their many “pro-vice chancellor (something in brackets)” search for ways to use their academic appointments and research direction to game the international rankings.

I think a much more comprehensive inquiry is needed.
Read more >>

Saturday, May 4, 2019

Only the stupid think the cost of climate change is simple

You know an election campaign has run off the rails when the pollies start hurling the results of economic modelling at each other. Voters find it incomprehensible and cover their ears, and the only people who think it proves something are the pollies themselves and the journalists silly enough to imagine their incessant demands to “show us your modelling” will expose the truth.

The more you know about modelling, the less it impresses you. There’s a place for economic modelling, but it’s in a seminar room, being pulled apart by experts, not in the argy-bargy of politicians seeking election, vested interests seeking more bucks, and journos who think their customers will just love a bit more meaningless conflict.

Thinking people know and accept that the future is unknowable. Unthinking people delude themselves that somewhere out there is an expert with a magic box – or maybe a crystal ball - who can give them a sneak peek at what only God knows in advance.

The only truly honest thing a modeller could tell you (which their need to earn a living invariably stops them doing) is: What on earth makes you think I’d know?

In the public debate, modelling is about misleading people – unknowingly or, more often, knowingly. It’s used like a drunk uses a lamppost: more for support than illumination.

There are two approaches you can take to modelling results. One, believe all results that fit with your prejudices and ignore all those that don’t. Two, be sceptical of them all and don’t accept any results where you haven’t been told which assumptions are the main drivers of those results.

Although Prime Minister Scott Morrison has only an unconvincing policy to achieve the 26 to 28 per cent reduction in greenhouse gas emissions by 2030, to which Australia has committed itself, the media is pounding Opposition Leader Bill Shorten to reveal the “cost” of his promise to reduce emissions by 45 per cent by 2030.

For reasons I don’t understand, Shorten is displaying a degree of honesty rarely seen in Canberra and claiming he doesn’t know the cost. The media can tell a lie when they see one, and are almost apoplectic in their efforts to extract the truth from him.

To the media, it’s a simple question, so it must have a simple answer and Shorten must know it. If he knows but won’t tell us, this can only be because the cost is absolutely horrendous. His climate change spokesman, Mark Butler, says it’s impossible to know the cost – but that’s obviously another lie.

Which, in a way, it is. It’s not possible to know the cost with the remotest degree of accuracy, but it’s perfectly possible to fudge something up and say it’s the cost.

What cost is that? The cost of whatever suits. Cost to the budget? Cost to the economy? Cost to the economy that ignores any benefit to the economy? Cost to the economy that ignores the cost of not doing anything?

Shorten’s in trouble because - for once – he isn’t playing the game the way the denizens of the House with the Flag on Top expect it to be played. Why won’t the man do the honourable thing and pay some “independent” economic consultancy to do some modelling that proves the cost would be minor?

An old political rule says that, whenever you leave a vacuum, your opponent will be happy to fill it for you. Enter Morrison, waving modelling carried out by Dr Brian Fisher, a former head of the Australian Bureau of Agricultural and Resource Economics, and now a consultant to the mining industry.

Fisher denies being a climate change sceptic and says the government didn’t sponsor his modelling. He’s been modelling the cost of acting against climate change since his time at ABARE in the 1990s and invariably finds it to be surprisingly high (I can remember decades ago writing to explain why his results weren’t as bad they could be made to sound).

His latest modelling finds that Labor’s policy would cause gross national product to be at least $264 billion, and as much as $542 billion, lower than it would otherwise be in 2030. By then the wholesale price of electricity would be up to 67 per cent higher than otherwise. Real wages would be up to 10 per cent lower than otherwise, and employment would be up to 300,000 lower than otherwise.

For what it’s worth, other economists who are experts on climate change have said these estimates of the costs are (to put it politely) far too high.

What’s more important to understand is that econometric models are built on a heap of assumptions – assumptions about how the economy works, and assumptions about what will happen in the future.

Dr Richard Denniss, of the Australia Institute, offers this list of things no one knows, but modellers have to make assumptions about if they want to claim they know what some policy change will cost: how far and how fast the cost of renewable energy and battery storage will fall; how far and how fast the cost of electric cars will fall; how quickly firms that face higher energy prices will adapt by increasing their efficiency; how the introduction of new sources of electricity generation and storage will disrupt the business models of today’s highly profitable electricity retailers; how regulation of energy prices will increase or decrease the monopoly profits of energy and petrol companies; how much the trend to household electricity generation and storage will increase the efficiency of the national grid by reducing problems with seasonal peaks in demand; whether the batteries of electric cars will be a form of free storage for the national grid; and how long it will take for autonomous vehicles to transform car ownership and use.

Still think the cost of Labor’s emissions policy is a simple question with a simple answer - that’s believable?
Read more >>

Wednesday, May 1, 2019

Endless fights over money don’t improve education results

One of the few things both sides agree on in this election campaign is that we must get education right. A highly educated and well-trained workforce is our best insurance that all the benefits that digital disruption brings don’t come at the cost of many people unable to find decent jobs.

As a rich nation, our workers are highly paid. That’s not bad, it’s good. But it does mean we have to ensure our workers continue being equipped with the knowledge and skills that make their labour valuable - to local employers and to the purchasers of the goods and services we export.

One thing it doesn’t mean is that all our youngsters should go to university. There will be plenty of well-paid, safe, interesting jobs for the less academically inclined, provided they’re equipped with the valuable technical and caring skills provided by a healthy vocational education and training sector.

A top-notch technical education system will also be key to achieving something we’ve long just rabbited on about: lifelong learning. Being able to update your skills for your occupation’s latest digital whiz-bangery, or quickly acquire different skills for a job in a new industry with better prospects than the one that just ejected you.

But while we’re emphasising education’s instrumental importance to maintaining our material standard of living, we should never lose sight of its intrinsic value to our spiritual living standard. Education for its own sake. Because it satisfies humans’ insatiable curiosity about the world – even the universe – we live in.

We need to get education and training right at every level, from childcare (these days renamed ECEC - “early childhood education and care”), preschool, primary and secondary school, vocational education and training, and university.

To me, our greater understanding of the way tiny brains develop combines with common sense to say that, in our efforts to get every level of education up to scratch, we should start at the bottom and work up.

The better-equipped kids are when they progress from one stage to the next, the easier it is for that next stage to ensure they thrive rather than fall behind.

On childcare, the Coalition did a good job of rationalising the feds’ two conflicting childcare subsidies, but Labor is promising a lot more money for childcare, including phasing in much better pay for (mainly female) better-educated childcare workers.

The Coalition has achieved universal preschool for four-year-olds and, in the budget, extended that funding for a further two years. Labor has topped that, promising permanent funding arrangements and extension of the scheme to three-year-olds, as most other rich countries do.

Let’s be frank: because Labor plans to increase, rather than cut, the tax on high income-earners, it has a lot more money to spend on all levels of education (plus a lot of other areas).

It’s certainly promising to spend more on schools. The Coalition’s great achievement has been to introduce its own, better and somewhat cheaper version of businessman David Gonski’s needs-based funding of schools – which it immediately marred by doing a special deal with Catholic schools.

Labor’s promising to return to its earlier Gonski funding levels (but, hopefully, not to its earlier commitment that no rich school would lose a dollar).

It’s often claimed we spend a lot on schools relative to other countries, but the Grattan Institute’s schools expert, Dr Peter Goss, says that, when you allow for our younger population, only the Netherlands and the United States spend less than we do among nine other comparable rich countries.

International testing shows our 15-year-olds’ scores for maths, science and reading are each below the average for those countries. On maths, our score of 524 in 2003 had dropped to 494 by 2015.

For science, our gap between the top and bottom students – a measure of fairness - is wider than for the others, bar Canada, South Korea, Japan and even Britain.

Which demolishes the claim that we’re pouring more money into schools but getting worse results. What’s true is that our spending is below average and our results are also below average – and getting worse.

So, do we need to spend a lot more? No, not a lot more now we’ve gone a long way towards redistributing funding favour of needy (mainly public) schools full of kids with low income, low educated parents.

The feds and, more particularly, the states have more to do to re-align funding between advantaged non-government schools and their own disadvantaged public schools.

Once disadvantaged schools are getting their full whack of needs-based funding, however, we can end the eternal shootfight over money and move to the more important issue of ensuring the money's better spent.

Much can be done to help teachers move to more effective ways of teaching, making schools less like a production line and giving more attention to individuals, many of whom have trouble keeping up, while some are insufficiently challenged.

But, Goss says, this is mainly a job for the state governments, and the feds should avoid trying to backseat drive. The feds would help more by obliging the universities to do a much better job of selecting and preparing future teachers.
Read more >>

Monday, April 29, 2019

Treasury signs off on budget fantasy forecasts

While we were preparing for the Easter-Anzac super long weekend, the secretary to the Treasury and the secretary of the Finance Department released the PEFO – pre-election economic and fiscal outlook – their official, once-every-three-years licence to tell us anything the government hasn’t told us but should have. And what was that? Not a sausage.

They made trivial updates to the budget figures and solemnly swore that all the rest of it “reflects the best professional judgement of the officers of the Treasury and the Department of Finance”. Wow. Really?

This despite the fact that, taken at face value, this is the most fiscally irresponsible budget since Whitlam. It’s a budget claiming to be able to cut income tax by $300 billion over 10 years and spend $100 billion on infrastructure over 10 years, while still returning to continuous surplus and eliminating the net debt over the same period.

No sensible person could believe all that was likely to come to pass. Far more probable that, should those tax cuts and spending increases actually happen, it wouldn’t be long before the budget was back in deficit and the debt was growing not falling.

We owe it to the Grattan Institute’s Danielle Wood and her team for joining the dots, provided in the bowels of the budget papers, to reveal how the cost of the tax cuts stays small until the last year of the budget’s “forward estimates”, 2022-23, then leaps to a cost of about $35 billion a year, rising to about $45 billion a year in 2029-30.

Never before have we had tax cuts remotely approaching such a cost.

The reason this grandiosity reminds no one of the Whitlam era is that no one takes it at face value. No one believes it could possibly happen. It’s a description of a future fantasyland.

First, it’s the budget of a chronically unpopular government desperately trying to bribe its way back to office, with little chance of succeeding.

Second, its supposed action is many years – and two or three elections – off in the future. Whatever transpires over the next decade, we can be pretty sure it won’t bear much resemblance to the scenario painted in the budget papers.

But if it’s all harmless bulldust, it can hardly reflect Treasury’s “best professional judgement” unless Treasury’s joined the happy fiction business. And the fact remains that, even more than its predecessors, this is a budget calculated to mislead.

What Treasury declines to make sure we realise is that the magic is all achieved by assumption. Convenient assumption.

Just as Wayne Swan’s promised return to permanent surplus – and his later assurance that his hugely expensive disability insurance scheme and Gonski school funding, though carefully hidden beyond the forward estimates, were “fully funded” – were based on overly optimistic assumptions that failed to come to pass, so is Josh Frydenberg’s promised return to permanent surplus and his assurance that his $300 billion in tax cuts and $100 billion in infrastructure spending are fully funded.

The trick has two parts. First, assume (as you did in each of the seven previous budgets) that, within a year or two, the economy’s growth will have returned to the old normal, where it will stay forever.

Second, assume the government will be able to sustain for many years a degree of spending restraint never achieved in the past. Make sure this heroic assumption is turned into a cabinet resolution, so it can be passed off as the seemingly innocuous assumption of “unchanged policy”, not the mere New Year’s resolution it really is.

Swan’s claim (proved by lovely graphs) that his hidden spending plans were fully funded was based on government policy to limit spending growth to 2 per cent real a year on average – a goal he repeatedly claimed to be achieving, but never did.

Frydenberg’s claim (with lovely graphs) that his post-forward-estimates tax cuts and spending increases are fully funded is based on a government policy to limit real spending growth to even less than Swan’s 2 per cent, which will cause total government spending to fall from 24.9 per cent of GDP to an unbelievable 23.6 per cent by 2029-30.

Again, we’ve had to rely on Grattan’s Wood to join the dots the budget papers don’t and tell us Frydenberg’s happy assumptions imply annual spending cuts increasing to about $40 billion a year by the final year. (She has also explained the tricks on which the government’s claim to have limited its real spending growth to 1.9 per cent a year relies.)

Meanwhile, back in the real world, the economic outlook is so strong the Reserve Bank is deciding whether it needs to start cutting interest rates immediately, or can afford to wait until unemployment starts rising.

And continuing strong growth, we’re asked to believe, is Treasury’s best professional judgement.
Read more >>

Saturday, April 27, 2019

Election competition over infrastructure is too costly

The popular view of infrastructure is that we don’t have nearly enough of the stuff, so the more we spend the better for the economy. The sad reality is that every year huge amounts of taxpayers’ money are wasted on infrastructure – and much of the damage is begun in election campaigns.

This is not to deny that well-chosen and executed infrastructure projects contribute significantly to improving the productivity of the economy – its ability to produce more goods and services per unit of inputs of economic resources.

It may even be true that we have a backlog of projects we should be getting on with. But that doesn’t mean we’re not wasting a shedload of money – mainly by building the wrong things in the wrong places.

Sadly, in our messy world, shortages of infrastructure can exist side by side with waste and extravagance. The more money we waste, the bigger the shortages.

Why does this happen? Often because good economics gets trumped by expedient politics. Often what’s good economics lacks sex appeal – spending enough each year to ensure roads and rail lines are well maintained, for instance – whereas politicians are irresistibly attracted to projects that are new, flashy and appeal to the unthinking (radio shock jocks, for example) as just what they think we need.

And because political parties mostly want to use the announcement of new spending projects to win voters’ approval in those electorates they might lose or could win.

That’s why election campaigns are when the seeds of later waste are sown. You think of something that will sound nice, pick a price tag that sounds big but not too big, travel to the right town, don hi-vis jacket and hard hat, wait till the media cameras arrive, make the grand promise – and then wait till you’re elected or re-elected to get the bureaucrats to "do the paperwork" – estimate how much it really will cost and work up some sort of "business case" showing the project’s benefits will exceed its costs.

This, of course, is just the opposite of how you’d go about ensuring every dollar spent was well-spent. Someone suggests a project, you put it to the test. What exactly is the problem you’re trying to solve? How does it rank in importance against all our other problems?

The particular project you’re examining is probably just one way of solving the nominated problem. What are the other options? You compare the various options by making the best measurement you can of each one’s costs and expected benefits to the community, then pick the option where the benefits most exceed the costs. (There may well be some unquantifiable considerations that also need to be taken into account.)

By this point you ought to have a well-informed estimate of the chosen project’s monetary cost. That estimate should allow for the likelihood that not everything will run according to plan.

According to Hugh Batrouney, then of the Grattan Institute, last year the federal government proposed rail links to the (future) Western Sydney airport and to Tullamarine airport. (Note the symmetry. If Sydney’s getting something, better have something similar for Melbourne.)

At the time of announcement, neither project had a developed business case. But the opposition was quick to support the government’s proposal.

Trouble is, a government study found that Western Sydney won’t need a rail link until 2036 at the earliest. In the case of Melbourne’s rail link, the project’s route hasn’t been resolved, let alone its costs, ticket pricing structure or potential benefits.

And Infrastructure Victoria said upgrading airport bus services should be investigated before spending on a rail link – which, in any case, would be much more expensive and couldn’t be delivered for at least 15 years.

Grattan’s healthcare expert, Dr Stephen Duckett, says that when federal politicians promise to build new hospitals in particular places – as both sides have done in this campaign – they interfere with the state governments’ responsibility to plan where the next hospital development should be, so as to ensure access to public hospitals is adequate throughout the state.

Next, take the plan announced in this year’s budget for a national “commuter car park fund” costing $500 million over 10 years, intended to make it easier for people in the suburbs to drive to their local train station.

A group of transport and urban planning experts from the University of Melbourne has written on The Conversation website that half a bil may sound like a lot, but it probably buys only about 30,000 new parking spaces, serving maybe 45,000 extra commuters. That’s just 4 per cent of the Australians who travel to work by public transport.

And, they note, there’s no guarantee the extra parkers would be people who’d no longer go to work by car. Studies suggest a lot of them would be people who formerly walked, cycled or bussed to a different station (where the parking spots are always taken).

The experts suggest it might be better to spend the $500 million on more frequent bus services to stations, and use the car parks for more valuable purposes.

Marion Terrill, Grattan’s transport infrastructure expert, says Labor’s most important promises aren’t the sexy stuff about electric vehicles, but one to ensure Infrastructure Australia assesses projects before the decision to invest in them, and to make the assessed business cases public. Doesn’t quite fit with some of Labor’s latest project promises, however.

"It would be a significant improvement if whichever party wins government next month were to commit to, and follow through on, careful assessment of transport gaps and problems, consideration of the various feasible solutions, and rigorous evaluation of the preferred approach," she concludes.

"And it’s not enough just to do this; it should be done in public." Amen to that.
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Wednesday, April 24, 2019

A present-laden kiss from Santa won't make healthcare better

Whenever voters are asked what are their main issues of concern, one worry always comes top: healthcare. That explains why we’re hearing so much about health in this ever-so-exciting election campaign.

Bill Shorten wants to talk about health because it’s one of the issues voters always regard as better handled by Labor than by the Coalition. (Voters habitually favour the Coalition on running the economy and on taxation, which explains why these are Scott Morrison’s favourite topics.)

But this time the Coalition’s also keen to talk about all it’s done – and is promising to do – on health because it blames Labor’s last-minute social media scare campaign – that the Libs had plans to “privatise” Medicare – for its loss of seats in the 2016 election.

The truth is, by international standards Australians have good health and a good healthcare system, which doesn’t cost all that much.

So why is healthcare always our biggest worry? Perhaps because of the well-publicised waiting times for elective surgery in public hospitals. Or because most medical specialists charge fees far higher than the Medicare benefit, with the gap paid out of the patient’s pocket.

Australia’s health system is more reliant on out-of-pocket payments than most other rich countries. Part of this is the ever-rising cost of private health insurance.

This explains why the things politicians say about healthcare during election campaigns invariably involve spending more money. Governments boast that they’re spending record amounts (which is always true because both prices and the population keep rising) and promise to spend a bit more.

This time, Labor claims the Coalition has “cut” healthcare spending – by which it means that the Coalition hasn’t spent as much as the previous Labor government had planned to – and is promising to restore that funding (mainly in the form of the feds picking up a higher share of the states’ spending on public hospitals) and to spend more on reducing the out-of-pocket costs of cancer patients.

Are you detecting a pattern here? Because the health system has long been about as privatised as it could be – private hospitals, private health insurance, subsidised fee-for-service payments to self-employed GPs and specialists, co-payments for pharmaceuticals and for doctors who don’t bulk-bill – governments can never spend enough.

As presently organised, our system is a bottomless pit. Governments could never satisfy the demand that doctors and hospitals could generate if left to their own devices.

When you add federal and state, healthcare is by far the biggest and the fastest growing category of government spending – and thus the biggest reason we need to pay more in taxes each year.

It’s also our fastest growing employer. It’s certain to keep growing rapidly, not only because of the ageing population but also the ever-rising cost of advances in medical technology.

This isn’t bad, it’s good. The richer we get, the more we can afford to spend on top-quality healthcare. But that’s not to say we couldn’t be getting much better value for the dollars we spend.

Because our present badly organised system is driven mainly by doctors’ – particularly specialists’ - desire to protect and increase their incomes, whichever side of politics is in office, federal or state, spends most of its time between elections trying to hold back the growth in health spending.

They do this mainly by crude methods such as allowing backlogs and waiting lists to build up, freezing the level of Medicare rebates, increasing patient co-payments and delaying the approval of new pharmaceuticals.

Then, when an election looms, they approve a raft of new drugs, promise to spend more on a few things chosen to appeal to voters, and to spend $X million shortening surgery queues which, for some mysterious reason, seem to have built up.

That is, at elections both sides play Santa, not Mr Fix-it. Any plan to reform something would be bound to have some brand of specialists howling for your blood, and conning old ladies into monstering their local member.

In consequence, progress in reducing waste and improving the quality of care is slow. Doctors earn their living by fixing people who are sick. There’s little incentive to do what makes more sense: divert more of the spending into encouraging people to avoid getting sick in the first place.

After that comes more emphasis on early detection: better for the patient, better for the taxpayer. And the best way to improve prevention and early detection is to divert more money into “primary care” – by GPs and other health professionals, such as specially trained nurses, physiotherapists, psychologists etc.

GPs need to be shifted from providing acute care – charging a fee every time someone turns up for a consultation – to receiving larger payments from the government for accepting responsibility for helping a particular patient deal with a particular chronic condition, such as diabetes, for a period of time.

The Coalition’s record in making progress towards such a better, more integrated system is, at best, mixed.

The parts of Labor’s policy it doesn’t want to talk about – setting up a federal-state Australian healthcare reform commission – and the specifics of how it would keep its promise to encourage cancer specialists to bulk-bill, hold the promise of systemic improvement. But also the risk that the extra spending did more to help specialists' pockets than patients'.
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Monday, April 22, 2019

If you’re virtuous, don’t be afraid to signal it to the world

I’m troubled by the fashion of accusing others of “virtue signalling”. This world could use more virtue and less vice. And if people want others to see their virtue, well, there are worse sins.

Usually, it’s an accusation hurled at those on the other side of the political fence as a way of impugning their motives. They’re not genuinely virtuous, they just want people to think they are when they’re not.

They want to be seen as better than we are. They want me to feel guilty for not being as good as them, but I’m not buying that. I may be motivated by self-interest in the government policies I advocate, but so are they – they’re just pretending otherwise.

You can rationalise such a response by using the assumption of the neo-classical economic model that economic agents (you and me) are always and only motivated by self-interest. Altruism doesn’t exist. When I help someone, I’m doing so only because it makes me feel good.

In truth, social psychology has found plenty of evidence for the existence of altruism. It’s associated with another truth: homo sapiens’ success as a species is owed as much to co-operation as to competition.

I remember how shocked I was years ago to hear a top Treasury official refer with contempt to the Australian Council of Social Service – the peak body representing welfare organisations, including the Salvos – as “the compassion industry”.

First time I’d heard that word used as a term of derision. It reminded me of a song we sang when I was a Salvo: “Except I am moved with compassion, how dwellest Thy Spirit in me?”.

The Treasury man’s claim was that the ACOSS people didn’t really care about the poor and needy, they’d just found a way to make their living by representing the interests of poor. They were no more than another lobby group with their hand out.

As social animals, humans form themselves into tribes – groups. We have a compulsion to divide the world into good guys and bad guys. Naturally, my group are the goodies but, unfortunately, your group are the baddies.

Each of us sees ourselves as good, but some others as bad. I’m genuinely virtuous, whereas you’re just pretending to be.

In truth, none of us is all good or all bad. All of us are good in some respects and bad in others. And psychologists tell us we’re all often guilty of hypocrisy – applying high standards in judging others’ behaviour while making excuses for our own.

Equally, much of what we do we do for mixed motives. Try this test (one I usually fail): when you’re giving money to charity, how do you answer when asked if you’d like your donation to remain anonymous?

It’s possible some of us do virtuous acts – or make statements in support of virtuous policies – without any genuine interest in the wellbeing of others. It’s possible, but I doubt it’s very common.

What’s much more likely is mixed motives: we’re genuine in our professed concern about others, but equally genuine in our desire to be seen by others as having such a concern. That’s not really hypocritical, just being human.

Because we’ve evolved as group animals, all of us care deeply about what others think of us. We want to be accepted by the other members of the group. And we fear being excluded from the group.

Like teenagers, we’re desperate to fit in. The more we look and act like the others, the more comfortable we feel.

(This points to a further weakness in the neo-classical model: its assumption that each of us is a rugged individualist who makes decisions – about what movie to see or what clothes to buy – totally without reference to what those around us are doing.)

Turns out humans are signalling animals. We’re always using what we do, what we say, the way we dress, to signal our virtues to others – including our conformity to the group’s norms of acceptable behaviour.

The economy abounds with people and businesses sending signals. The first three economists to realise this won the Nobel prize for their genius.

We resort to sending signals because neither we nor others have enough hard information about the people we deal with and who deal with us. The main message we send is: you can trust me to deal with you honestly.

In today’s economy we’re suffering from a loss of trust, caused by a lack of virtuous behaviour, which has damaged reputations. We need economic behaviour to be a lot more virtuous. As that virtue is signalled, others will join in and the group norm of acceptable behaviour will be restored.
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Saturday, April 20, 2019

Sidney Kidman: how to make a buck out of a terrible climate

You may not have heard of Sir Sidney Kidman, once known as Australia’s Cattle King. He died in 1935. But when it comes to using “innovation” to get rich, he was tops – certainly, the most amazing. And he’s about to become our patron saint of climate change adaptation.

He chose to farm in the most arid, unpredictable and unforgiving part of Australia, and he made his pile. His company, S. Kidman & Co, exists to this day, and in 2016 was acquired by Hancock Prospecting, owned by Gina Rinehart, with Shanghai CRED as junior partner.

There are two ways to respond to climate change. Plan A is mitigation: do things to stop it happening. Plan B is adaptation: learn to live with a much hotter world where, apart from the rising sea level, extreme weather events are more frequent and bigger.

Since we’re making such a hash of Plan A – not just us, but the world in general – it may not be long before we have no choice but to get on with Plan B. Innovation – finding new ways to do things – will be king and Kidman will be recognised as the forerunner he was.

As any climate-change denier will tell you, there’s nothing new about drought. These days, all our good farmers have learnt that, though you can never tell when, another drought is always coming, so you have to be ready for it.

But Kidman was on quite another level: he found a way to make money out of drought. Dr Leo Dobes, an economist from the Crawford School of Public Policy at the Australian National University, has written a paper attempting to uncover the secret of what Kidman would never have called his “business model”.

From the turn of the previous century, Kidman, born in modest circumstances, built up a collection of cattle properties in the most marginal country in Australia’s Dead Heart – the area around the Simpson Desert, to the north of Lake Eyre – and in the “corner country” where the borders of the Northern Territory, Queensland, South Australia and NSW meet.

In this arid core of Australia, rain was very irregular and occurred mainly through thunderstorms after very hot weather. Kidman said his South Australian properties generally got less than 100 to 200 millimetres a year.

Kidman was always buying and selling properties, ending up with properties extending across the whole continent.

There was an underlying rationale to his acquisitions, however. He had several breeding properties in the north, including Newcastle Waters in the NT and Augustus Downs and Fiery Downs in Queensland, which had a tropical climate with a short rainy season.

Further north in the Gulf country, the summer rainfall seasons were more prolonged, and Kidman also used his properties there to source cattle for southern markets. Properties in the Channel country of south-western Queensland, where the grasses where softer, were used to fatten cattle for market.

A second characteristic of his holdings was the concentration of adjoining properties, running from west of the Darling River to the SA border, along the Diamantina and Georgina rivers and Cooper’s Creek in the Channel country, and along the stock route to the west of Lake Eyre via Charlotte Waters to Marree and Farina. This amounted to two major chains of properties.

“Because the holdings were on, or in close proximity to, major stock routes (and associated watercourses), they afforded easy access to rail heads connected to southern markets” in Sydney, Melbourne and Adelaide, Dobes says.

So, what was the business model that allowed Kidman to succeed where so many others failed? You can see signs of a supply-chain model – a vertically integrated business, from properties that bred cattle, to fattening properties and final sale in capital city markets.

Also signs of spatial diversification. Lack of rain or feed on one property could be compensated by moving cattle to a property with sufficient feed.

“Kidman’s drovers were shifting, shifting, shifting all the time. There was no such thing as starving or dying stock on Kidman’s stations. They just shifted them.”

But Dobes sees Kidman’s business model as captured by his creation of three “real options”. In financial markets, buying an “option” gives you the right, but not the obligation, to buy (or, in other cases, sell) a parcel of shares at a set price at a specified date in the future. It’s a way of trying to protect yourself from uncertain future developments.

In Kidman’s case, however, the options weren’t financial, they were real – physical. Kidman could easily move his stock to better conditions because his properties were adjacent and because he kept those properties understocked. The opportunity cost of understocking was the price of the option.

Second, because his properties followed stock routes and waterways, Kidman could move his stock towards better conditions – and towards the market – in a way that gave his cattle priority over other people’s herds on the route. Again, understocking was the price of this option.

Third, Kidman’s practice of holding properties near rail heads, plus his maintenance of a network of drovers, camel drivers, Aborigines, dingo trappers and friendly telegraph operators, who provided information about the movement of competing herds being driven to various markets, allowed him to direct his cattle to the city market where prices were likely to be highest.

Kidman’s modern relevance is not just in overcoming a harsh and unpredictable climate, but in coping with unexpected changes – in his case, rabbit infestation, erosion, the rapid spread of cattle ticks in northern Australia and the results of overstocking by earlier pastoralists.

Kidman’s “real options” were innovative ways of coping with, reducing and even profiting from uncertainty – which Dobes concludes is the hallmark of climate change. Australia’s farmers and others can adapt to climate change by finding their own real options.
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Wednesday, April 17, 2019

The great election diversion: arguments about tax, tax, tax

No one’s more interested in taxation than me, but there’s got to be more to this election campaign than claims about which side is high taxing and which low taxing, and interminable arguments and scare campaigns about franking credits and negative gearing.

Fortunately, the nation’s best and most independent think-tank, the Grattan Institute, has taken a much broader view of the issues to which the winning side should pay most attention in its Commonwealth Orange Book (an allusion to the red book and the blue book that the public service prepares to present to whichever side wins).

To help voters put the election issues into context, however, Grattan starts by comparing our performance on a broad range of indicators with nine comparable countries.

On standard of living – measured by gross national income per person – our $62,800 a year is well behind the United States ($75,900) and less behind the Netherlands ($68,100), Germany ($66,900) and Sweden ($64,900), but ahead of Canada ($57,300), Britain ($54,900), Japan ($54,300), New Zealand ($48,800) and South Korea ($48,400).

So we’re in the middle of the pack of rich countries. We can afford high quality public services (paid for by moderately high taxes) and afford to treat the disadvantaged with consideration.

But, despite all the times Scott Morrison repeats the words “strong economy”, our living standards have stagnated in recent times.

At 73 per cent, our rate of employment – the proportion of the working-age population with jobs – is at the low end of the range (New Zealand is on 77 per cent), but all countries are comfortably above America’s 70 per cent – a sign that all’s not so well in Trump’s supposedly strong economy.

A good check on our present success is our NEET rate – the proportion of people aged 15 to 29 who are not in employment, education or training. At 11 per cent we’re level with New Zealand, and better than Canada, Britain and the US, but worse that Germany, Sweden and the Netherlands.

Could do better. We need to fix the almighty mess we’ve made of vocational education and training.

On income inequality, our gap puts us towards the wrong end of the pack: equal with New Zealand, worse than Sweden, the Netherlands, Germany, Canada and even Britain, but better than South Korea, Japan and the pinnacle of inequality, the US.

We could greatly reduce inequality simply by paying the $3 billion a year it would cost to raise the dole by $75 a week – a truth Bill Shorten shouldn’t need a protracted inquiry to tell him. That $3 billion, by the way, compares with the estimated annual cost of Morrison’s tax plan, when fully implemented, of $35 billion a year.

We do surprisingly badly on housing, with fewer dwellings per 1000 adults than all the others bar South Korea. And with median housing costs as high as 23 per cent of disposable income, we’re dearer than everywhere except Holland.

Less surprising is how badly the land that used to boast about its cheap power is doing. These days, only German households pay more for electricity than ours do. Despite our ever-growing exports of LNG, our industries pay more for gas than the Canadians, Kiwis and Americans.

And, thanks to the policy dominance of the climate-change deniers, our electricity use generates far more carbon emissions than the others do. A lot more reform of the reforms needed.

Our relatively low funding of schools, and its division on a sectarian basis – the religious get more than the non-religious; some religions get more than others – hasn’t left our kids' performance looking good in international comparisons.

If you ignore the poor deal we give our Indigenous (as we usually do), our health system ranks well. Our life expectancy at birth is bettered only by Japan, and the cost of our healthcare as a proportion of national income is at the lower end (and only a bit more than half what the Yanks pay for their appalling system).

Even so, there’s room for us to get better value for money, and our out-of-pocket healthcare costs are higher than everywhere except Sweden and South Korea.

Which brings us to the quality of our governance. In Australia, trust in government is low and falling. In international comparisons, we’re about middle of the pack on trust.

But Australian cynicism is now at an all-time high – only a quarter of us think “people in government can be trusted to do the right thing” – the lowest since the survey began in 1969.

Grattan says there’s a growing sense that people in government look after their own interests, or those of powerful groups, rather than the public interest.

Many other democracies have stronger rules on political donations and lobbying, designed to keep special-interest influence in check. Most rich countries restrict political donations or party spending in some way. We don’t.

The feds are lagging the states in establishing an effective anti-corruption or integrity commission, in requiring timely disclosure of political donations, publishing ministerial diaries and in imposing a lobbyist register without glaring loopholes.

The failure of both sides to act at the federal level undermines the effectiveness of state measures.

So, turns out we do have issues other than tax we should be focusing on.
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