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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Monday, April 15, 2019

Strong economy? No, but maybe it will be eighth time lucky

Scott Morrison wants the Coalition re-elected because of its superior management of the economy. In Josh Frydenberg’s budget speech he referred to our “strong economy” 14 times. Why? He had to keep saying it because it ain’t true.

But get this: it’s not the government’s fault. It’s happening for reasons far beyond the government’s control. Growth is weak in Australia and throughout the developed world for deep reasons economists don’t yet fully understand.

It’s taken a while to realise this because the econocrats – mainly Treasury, but with the acquiescence of the Reserve Bank - either can’t or won’t accept its truth. They’ve gone for eight budgets in a row forecasting an early return to strong growth.

And for seven years in a row they’ve been way off. But so great is their certainty that nothing fundamental has changed, they’ve fronted up with yet another forecast that this year will be different. This year we'll reach lift-off.

It may not be entirely coincidental that, the longer Treasury dwells in the land of hope-springs-eternal, the more it gives its political masters the budget numbers they crave: ones showing the budget deficit soon returning to surplus and staying in surplus as the net debt falls to zero.

In what follows, I’ll ignore Treasury’s cute distinction between “forecasts” and “projections”. Sorry, guys, you’ve played that card too many times.

It’s a key part of the way you’ve misled the public, your political masters, economists and probably even yourselves, that everything’s going fine and will soon be back to normal. It’s part of the reason the net debt’s been allowed to double under this government – we kept being told it wasn’t happening.

When laughing-stock Wayne Swan began his 2012 budget speech promising four budget surpluses in a row, this was based on Treasury’s forecast that real gross domestic product would grow by 3.25 per cent in 2012-13, and then by 3 per cent in each of the three following years.

The 3.25 per cent turned out to be 2.6 per cent, then another 2.6 per cent, 2.3 per cent and 2.8 per cent.

After such an embarrassing stuff-up, you’d think Treasury might have had a rethink. Not a bit of it. Just two budgets later – this government’s first - it had the economy’s growth accelerating over the forward estimates not to 3 per cent, but 3.5 per cent. The first of these turned out to be 2.3 per cent and the next one, 2.8 per cent.

In the 2016 budget, Treasury took a bit of a pull and reverted to forecasting recoveries to no more than 3 per cent growth.

In this month’s budget, Treasury has us growing by only 2.25 per cent in the year just ending. But not to worry. In the coming year it will strengthen to 2.75 per cent, and be back to 3 per cent in the second last year of the forward estimates, where it will stay in 2022-23.

It’s a similar story with what’s become the key problem component of GDP, wages. In Swan’s ill-fated budget, the wage price index was forecast to grow by 3.75 per cent in the budget year and the year following. Turned out to be 2.9 per cent and 2.5 per cent.

The following year’s budget – Swan’s last – put expected wage growth in 2014-15 at 3.5 per cent. Turned out to be 2.3 per cent. Treasury’s first guess for 2017-18 was 3 per cent. Came in at 2.1 per cent.

Treasury’s response to its repeated over-forecasting is just to push the ETA of the return to strong growth out another year. Nothing fundamental in the economy has changed, nothing’s wrong with the forecasting method, it’s just taking a bit longer than we thought. This time we’ll be right.

But, you may object, if the economy’s remained so weak for so long, how come growth in employment has been strong since early 2017 and unemployment has slowly fallen to 5 per cent?

Because of high levels of immigration – high even by our standards, and unmatched by the other rich countries – and because the under-employment rate was worsening until recently.

Much of the jobs growth has come from federal government spending on rolling out the National Disability Insurance Scheme, and state government spending on infrastructure. After all, public sector consumption and investment spending accounted for more than half the surprisingly weak GDP growth of 2.3 per cent over calendar 2018.

Remember this: a strong, healthy economy is one where demand is always threatening to push inflation above the target zone. Our inflation rate's been below the target for three years.

And this amazing fact: the world real long-term interest rate has been falling for years and is now at zero or below. That’s a sign of strong growth?

It’s time Treasury and the Reserve stopped kidding themselves – and us.
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Saturday, April 13, 2019

Morrison plan shows who he thinks most deserves a tax cut


Scott Morrison wants this election to be all about his redoubled plan for lower taxes. But Treasurer Josh Frydenberg doesn’t want anyone saying it will stop income tax being “progressive”. He’s right. But his claim that the tax system will remain highly progressive is debatable.

In last year’s budget, Morrison announced a three-stage tax cut, spread over seven years. It had a cumulative cost to the government’s revenue of a massive $144 billion over 10 years, with most of that cost coming in the later years.

In the budget Frydenberg produced last week, he doubled down on last year’s plan. He doubled the early part and greatly increased the later parts, at an additional cost of $158 billion over 10 years, taking the total cost to more than $300 billion – an incredible sum in several senses.

I’ll explain the grand plan in a sec, but first let’s be clear on the meaning of three words you hear bandied about whenever tax changes are debated: progressive, regressive and (less commonly) proportional.

A tax is said to be progressive when it takes a progressively higher proportion of people’s income as incomes rise.

The key word here is proportion. You judge “progressivity” not by the dollar amount people pay, or the amount of the cut they get, but by how that amount compares with their income. When a tax takes a higher proportion of a higher income than it does of a lower income, it’s progressive.

Conversely, a tax that takes a higher proportion of lower incomes than it does of higher incomes is said to be regressive.

A tax that takes the same proportion of all incomes, whether high or low, is said to be (you won’t believe this) proportional. It marks the borderline between progressivity and regressivity.

The main progressive tax is personal income tax. The example of a regressive tax people always quote is the goods and services tax.

But, in fact, almost all other taxes are regressive – with the notable exception of tax on the value of land (such as council rates), which is progressive because people with high incomes tend to own more land and more valuable land.

What makes income tax progressive is that your income is taxed in slices, with each extra slice being taxed at a higher rate.

Under the present tax scale – which Morrison’s plan would change in coming years – the first $18,200 of your income goes untaxed, the next $18,800 is taxed at 19¢ in the dollar, the next $53,000 at 32.5¢, the next $90,000 at 37¢, and anything above that at 45¢ in the dollar. (All of which is before you add 2¢ in the dollar for the Medicare levy.)

The slice (or tax bracket) into which the last part of your income falls determines your “marginal” tax rate – the rate you pay on any increase in your income.

Your average tax rate is determined by adding up all the tax you pay on each slice, then dividing that total by your income. Your average tax rate will always be a lot lower than your marginal rate.

For an income tax to be proportional it must have only one rate and no first, tax-free slice. So any income tax scale with a tax-free threshold must be progressive, even if only mildly so.

Now the details of Morrison and Frydenberg’s grand plan. As I said, it cuts tax in three stages over seven years.

The first is an immediate, reasonably generous tax cut (equivalent to about $20 a week) to people on middle incomes, earning between $48,000 and $90,000 a year. Those below that range get a lot less, as do those above it.

The second stage, which comes in three years’ time, July 2022, offers nothing much for people earning below $90,000 a year. For those earning more, there’d be a new tax cut ranging from nothing to $26 a week for those on $120,000 and above.

The third stage, coming a further two years later, in July 2024, offers tax cuts for everyone earning over $45,000 a year, ranging from nothing to about $65 a week for those on incomes up to $180,000 a year – plus another saving of up to $58 a week for those earning up to $200,000 and above.

But here’s a tip. You can think of the first, immediate stage as almost certain to be received because, though it has been only partially legislated, Labor has pledged to put it through.

It’s uncertain, however, whether we’ll ever see the other two stages. It’s not just that they’re so far into the future. It’s also that, though last year’s stages two and three are legislated, Labor says it would repeal them. As for this year’s enhancements of stages two and three, they're not yet legislated, and Labor won’t have a bar of ’em.

But, assuming stages two and three actually come to pass, how would the plan change the tax scale’s progressivity?

Well, with marginal tax rates varying from zero on income up to $18,200 a year, to 45¢ in the dollar on income over $200,000 a year, there can be no doubt that income tax would remain progressive.

But Frydenberg’s claim it would remain “highly progressive” is debatable. Presumably, he bases this on the estimate that the top 6 per cent of taxpayers, those earning more than $200,000 a year, would still be paying 36 per cent of total income tax collections in 2024-25.

Given the (no doubt optimistic) assumptions about how fast wages grow between now and then, this may be arithmetically correct. But it ignores the way the introduction of a massive 30¢-in-the dollar tax bracket running from $45,000 a year to $200,000 would put a big kink in the tax scale, making it significantly less progressive than it was.

The proof: whereas people on incomes between $45,000 and $90,000 would have their average tax rate cut by about 2.5 percentage points, this then rises to a cut of 4.8 percentage points for those on $180,000, before jumping to a maximum cut of 5.8 points for those on $200,000 and above. It’s tough at the top.
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Wednesday, April 10, 2019

Why politicians only pretend to care about low income earners


It must be the Salvo still hidden inside me that makes my blood boil when Treasurer Josh Frydenberg claims to be delivering a tax cut worth $1080 a year to “low and middle income earners” and his claim is mindlessly repeated by journalists as though it’s a fact that doesn’t need checking.

I was brought up to care about people at the bottom. So, since we’re bound to spend most of the election campaign debating the complaints of the whingeing well-off, let’s spend just a moment thinking about “those less fortunate than ourselves”.

The $1080 – which Labor has promised to match should it win the election – will go to people earning between $48,000 and $90,000 a year, or about $920 to $1730 a week.

Does that sound like low and middle to you? It’s not hard to convince yourself it does. After all, the average earnings of adults working full-time are $93,300 a year.

Trouble is, the average (or mean) income is far from being typical. That’s because it’s pushed up by a relatively small number of people on very high incomes - the 1 per cent, if you like.

The typical income isn’t the mean, it’s the median – the one that, if you arranged all the incomes by size, is exactly in the middle, with 50 per cent of incomes above and 50 per cent below.

The median adult full-time worker is on $78,300 – 16 per cent lower than the mean. What makes the median “typical” is that a high proportion of all full-time workers will be clustered around it, a bit above or a bit below.

But about a third of all workers are part-time, two-thirds of whom are women. Shouldn’t they be included in any assessment of what’s “low and middle”?

When you do include them, the typical income of all workers drops to $57,900. That’s 21 per cent above $48,000 and 36 per cent below $90,000. So the government’s range does a better job of covering those above the middle than those below.

But how low is low? It’s hardly true that there are no workers on incomes below $48,000. Not even full-time workers. The federal minimum full-time wage is $37,400. How can anything called a “low and medium income” tax cut fail to include the many full-timers on the minimum wage?

It’s true, of course, that not everyone earning less than $48,000 a year misses out on a tax cut (known technically as a tax offset). Those earning $37,000 get not $1080 a year, but $255 – about a quarter of the full cut.

Why? Presumably, because their incomes are too low to qualify as officially low. Or maybe because, when your income’s that low, your need for a bit more money to spend is even lower. They might go crazy if you gave them as much as a thou.

For incomes between $37,000 and $48,000, the tax cut starts at $255 and rises at the rate of 7.5¢ in the dollar until it reaches $1080. This means those on the minimum full-time wage get a princely $285.

For incomes below $37,000, the tax cut will be up to $255 – though, for such an insignificant group, a mere 2.3 million people, the budget papers don’t bother saying how this will work.

Is that the bottom of those with low income incomes? Not really. About a third of households have incomes too low to pay income tax. Some of these people are the comfortably off alleged “self-funded retirees”, whose income from superannuation is exempt from income tax, but the rest are people dependent on some form of government welfare payment.

What do they get? Those on some form of pension get a one-off payment of $75 (or $125 for couples), which will be a huge help with their power bills.

What gets me is how we can claim to be worried about those with low incomes while excluding those whose income is low because they can’t find a job. They were ineligible for help because the lower taxes were only for, to quote the measure's official name, “hard-working Australians”.

Longing to be a hard worker doesn’t qualify, apparently. Frydenberg went to great length to justify the decision to exclude those on the dole even from the $75 payment – before the government belatedly included them, for fear the measure might be blocked in the Senate.

But if anyone really cared about the lowest of low incomes, they’d end the 25-year freeze on increasing the dole beyond the rise in consumer prices. It’s unconscionable for a nation as rich as we are to the give the jobless so little to live on it actually makes it harder for them to find work.

And that’s before you remember all the many instances where this government has sought to stigmatise and punish the unemployed for being jobless. For the jobless, it's all stick, no carrot.

Don’t kid yourself Labor would be much better, however. It’s seeking plaudits (and product differentiation) by raising the Liberals’ $255 cut to $350 – which will make all the difference.

And Labor is just as unwilling to increase the dole as the Coalition is. Why? Not because Labor thinks it possible to live decently on $40 a day, nor even because it would cost too much (which it wouldn’t).

No, as Labor shadow social services minister Linda Burney had the honesty to admit, it’s because too many voters – including Labor voters, no doubt – would disapprove. And we wouldn’t want that.
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Monday, April 8, 2019

Frydenberg's budget: if it looks too good to be true . . .

What a wonderful world we live in now our politicians have discovered the cure for opportunity cost. In his first budget, Josh Frydenberg is doing a Gladys: he wants us to believe “we can have it all”.

Over the next 10 years, he can give us: tax cuts worth $302 billion, new infrastructure worth $100 billion, sundry other goodies, and a budget that’s back in the black and stays there, so that the net debt falls to zero. Yeah? How?

But first, a flashback. Labor’s Wayne Swan ended up a laughing stock after he began his 2012 budget speech with the immortal words: “The four years of surpluses I announce tonight . . . this budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time.”

Here's what Frydenberg said seven years later: “Tonight, I am pleased to announce a budget surplus of $7.1 billion . . . In 2020-21, a surplus of $11 billion. In 2021-22, a surplus of $17.8 billion. In 2012-23, a surplus of $9.2 billion. A total of $45 billion of surpluses over the next four years.”

Oh dear. This year even the media knew not to fall into their usual trap of treating the government’s estimate of next year’s budget balance as an already accomplished fact. Actually, we won’t know the “actual” for another 18 months.

But, as usual, the media took little notice of the expected budget balance for the year just ending – a truth the Finance Department’s creative accountants have long exploited to improve the new year’s expected balance at the expense of the old year’s.

Some have questioned why Frydenberg didn’t try harder to turn the old year’s small deficit into a small surplus so that, should the Coalition lose the election, it would have avoided going into the history books as a government that was in power for six years without ever recording a surplus.

Short answer: it couldn’t afford to. Reading the budget papers’ fine print makes it clear the creative department had to put in much furniture shifting to come up with the predicted surplus of $7.1 billion – an amount Frydenberg has been able to assert is “substantial” rather than “wafer thin”.

Think about this: in the old year, government spending is expected to leap by 4.9 per cent in real terms, whereas in the new year it will grow by just 0.1 per cent real. Do you reckon that discontinuity happened by chance?

My colleague Shane Wright has noted the government’s decision to bring forward to the old year $1.3 billion in grants to local councils due to be made in the new year. He could have added that two new one-off cash grants, one to help recipients of residential aged care and another to help pensioners with their energy bills, with a total cost approaching $700 million, will be paid in the old year rather than the new.

The government’s been promising to have the budget “back in the black” by 2019-20 since Joe Hockey’s time. And for some years has been “reprofiling” the timing of payments and receipts to ensure this target is met.

Wright reminds us that a change in the timing of tobacco excise collections announced in last year’s budget will, purely by chance, yield a one-off boost of several billions in the new financial year.

Why are we so anxious to get the budget back in black? Because we want to start reducing the government’s debt. Trouble is, since Peter Costello’s day, successive treasurers have drawn our attention to the underlying cash deficit and away from the ironically named “headline” cash deficit.

That’s a problem because it’s actually the higher headline deficit that has to be funded by borrowing – or, if it’s in surplus, can be used to pay off debt. Guess what? The budget estimates that we’ll still be in headline deficit of $4.4 billion in the coming year, and won’t be in surplus until 2021-22.

The discrepancy is explained mainly by successive governments using an accounting loophole to exclude their spending on the NBN, the second Sydney airport, the inland railway and other projects from the underlying deficit.

Even so, Frydenberg assures us the government’s net debt will have been fully repaid by June 2030 – and he has a lovely graph that proves it. How is our path to a debtless Nirvana achieved?

By assuming that government spending grows with almost unprecedented slowness despite the ageing of the population, that the economy grows strongly for another 10 years without missing a beat and with productivity improving each year at a rate faster than we’ve achieved in decades, and – get this – that the government’s financial assets will grow by almost 3 percentage points to 12.8 per cent of gross domestic product.

When it comes to creativity, Australia’s politicians are second to none.
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Saturday, April 6, 2019

Budget makes Frydenberg an unwitting Keynesian stimulator

Treasurer Josh Frydenberg doesn’t want anyone saying the budget he unveiled this week involves applying some “fiscal stimulus” to get the economy moving faster. He’d prefer to say his budget is “pro-growth”.

But what is fiscal stimulus? And does that label apply to this year’s budget? Only if you’re prepared to be called a “Keynesian” economist. Which Frydenberg isn’t.

Why not? Because in the hard right circles in which many Liberals move, the name of John Maynard Keynes (rhymes with Brains) has become a swearword. (That’s because their penchant for dividing people into political friends and foes exceeds their understanding of economics.)

The K-word isn’t one used a lot by the Reserve Bank. My guess is it would be quite pleased with what Frydenberg has done in coming up with his own version of what, when Kevin Rudd did it after the global financial crisis in 2008, was dubbed a “cash splash”.

But the Reserve would limit itself to saying Frydenberg has made the budget “less contractionary” than it would have been.

The “fiscal” in fiscal stimulus is just a flash word for anything to do with the budget. The managers of the macro economy often do things intended to stimulate it to grow faster, create more jobs and make us more prosperous.

In last year’s budget, Scott Morrison introduced a new “low and middle income tax offset” (known to aficionados as the lamington) worth $530 a year, to be received by workers earning between $48,000 and $90,000 a year, with those on lower or higher incomes getting lesser amounts, starting from last July.

The offset was equivalent to about $10 a week but, because it’s a “tax offset”, they don’t get it until they’ve submitted their annual tax return at the end of the financial year and received their tax refund cheque. That cheque (these days actually a transfer to their bank account) will include the offset.

So workers should receive their first offset payment as a lump sum sometime in the September quarter of this year.

But this week the government decided to increase the amount of the offset by $550 and to backdate it to last July. So about 4.5 million taxpayers will be given a cash grant of $1080 in a few months’ time. When they spend that money, it should give the economy a kick along.

First point to understand, however, is that though the motive for the policy changes politicians announce in budgets is usually political – they just want to buy our votes, for instance - that doesn’t stop those measures having an effect on the economy.

Economists ignore the political motivations and focus on the likely economic effects.

Second point, while it’s easy to see that something as sexy as a tax cut could, when it’s spent, add to economic activity, that’s just as true of the government's spending to build new infrastructure, or add new medicines to the pharmaceutical benefits scheme, or spend more on education.

So what will stimulate the economy is all the new programs the government decides to spend on, less any cuts in government spending or new tax increases it makes.

The budget papers show that, since the midyear budget update in December, the government’s decisions to change tax and spending programs total $5.7 billion, spread over the present financial year and the coming year.

That total stimulus is equivalent to about 0.3 per cent of gross domestic product – meaning that, despite all the excitement, it’s not exactly huge.

Third point, while most people see immediately that the things governments do with their budgets affect the economy, it takes them longer to realise that, particularly because the economy (GDP) is about four times bigger than the budget, the things the economy does also affect the budget.

That is, there’s a two-way relationship between the budget and the economy.

As the economy grows during the upswing of the business cycle, this should improve the budget balance, as the progressivity of the income tax scale (aka bracket creep) causes income tax collections to grow faster than income itself, and government spending on dole payments falls as more people find jobs.

Alternatively, as the economy slows during the downswing of the business cycle, tax collections also slow down and dole payments grow as people lose their jobs.

Keynesian economists refer to this source of improvement or deterioration in the budget balance as the “cyclical” component.

In contrast, they refer to the improvement or deterioration in the budget balance caused by the explicit decisions of the government to change taxes and government spending as the “structural” component.

Keynesians judge the “stance of policy” adopted in the budget by the change in this structural component. And, as we’ve seen, they’d judge the stance this year to be mildly stimulatory.

The Reserve – which needs to know what effect changes in the budget are having on the strength of demand in the economy so it can decide what it needs to do about interest rates – makes no distinction between the cyclical and structural components of the budget balance.

It simply looks at the direction and size of the expected change in the overall budget balance, which it calls the “fiscal impact”.

As well as seeing that the balance was expected to swing from deficit to surplus, it would note from the budget papers that, since the midyear budget update in December, tax collections and spending underruns were expected to improve the budget balance by $9.7 billion over the present and coming financial years.

In other words, the budget was now expected to take a further $9.7 billion more out of the economy than it put back in. Such a fiscal impact would be contractionary, not stimulatory.

But Frydenberg’s new spending and tax cut, costing $5.7 billion, will make the budget a bit less contractionary than it could have been. Good.
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Wednesday, April 3, 2019

Budget does the right thing for the wrong reason

Set aside the politics, focus on the economy's immediate needs, and this is a good budget – though, with less politics and more economics, it could have been better.

Viewed through a political lens, this is the classic budget of a government that knows it has only a slim chance of winning the looming election but also knows it has little to lose by abandoning its stated policies and promising more government spending and yet more tax cuts.

Add an economic perspective, however, and it's a budget that does the right thing for the wrong reason.

The Coalition won office almost six years ago promising to make eliminating "Labor's debt and deficit" its highest priority.

It's taken all this time to get to the point of being able to budget for a surplus next financial year, during which time the debt has doubled.

The rules it set itself said there were to be no tax cuts until the surplus was much higher than the one it's expecting. Any unexpected improvement in tax collections should be "banked" not spent. Only by running the biggest surpluses possible could the debt be paid off quickly.

All that is now out the window. But, whatever the government's ulterior motive, that's a good thing.

Why? Because, despite the decade that's passed since the global financial crisis – and the Treasurer's repetition of the mantra "a stronger economy" – the economy is still surprisingly weak. A year ago, it looked like it might be moving into top gear, but since then we have seen it fall back to grinding along in second.

That being so, now is not the time to have the budget taking a lot more money out of the economy than it's putting back in.

Although employment has been growing more strongly than you would expect, the economy's growth has remained below-par. It's being held back mainly by weak consumer spending, which is weak mainly because wages aren't increasing much – a phenomenon both sides of politics prefer to call "cost of living pressures".

Treasurer Josh Frydenberg predicts that wages will grow by 2.75 per cent in the coming financial year and by 3.25 per cent the following year. That's likely to prove over-optimistic, as such forecasts have been throughout the Coalition's term.

The tax cuts he is promising are a poor substitute for a decent pay rise, but they will help consumers keep spending and turning the wheels of the economy.

People earning between $925 and $1730 a week will get a tax cut equivalent to about $20 a week, backdated to July last year. But it will come in the form of an annual tax refund cheque after submitting their return in a few months time, that is $1080 higher than otherwise.

People earning less that $925 a week, or more than $1730 a week, will get much lower refunds.

Likewise, the one-off cash grants to pensioners are a poor substitute for a lasting solution to the problems in the electricity market, but they're better than nothing.

And the planned big increase in the government's spending on infrastructure will also help.

One little-noticed reason for us to be less impatient to pay off government debt is that the interest rate on long-term government bonds has fallen below 2 per cent. That's less than the rate of inflation.

The problem with Frydenberg's tax cuts is that though he keeps saying (and the media dutifully keep repeating) they are aimed at "low and middle income-earners", in truth, most of the money will go to people whose incomes are way above the middle.

By far the most expensive change to last year's seven-year tax cut plan – the change that does most to double the cost of the cuts to a staggering $302 billion over 10 years – is the decision to cut the middle tax rate from 32.5¢ in every dollar to 30¢ from July 2024.

The consequent saving will range from zero for those earning less than $925 a week to $75 a week for those earning $3845 a week and above.

These top earners don't have a pressing problem with the cost of living and are likely to save rather than recirculate a lot of their tax cut.

Had Frydenberg done more to direct his generosity to the really hard-pressed – including the unemployed, living it up on $40 a day – it would all have gone straight to retailers, big and small.

But the size and shape of the tax cuts we'll end up with are far from decided. The bidding war between the parties isn't over.

When the government announced the first stage of its tax cuts last year, it took Labor two days to up the ante by 75 per cent. The Treasurer has now doubled the government's original offer. In two days' time we will hear if Bill Shorten intends to see Frydenberg – or raise him.

The difference between the two sides is that whereas the Coalition's tax cuts come at the expense of slower progress in paying off the debt, Labor's plans involve cutting tax breaks in a way that takes from high-saving, higher income-earners and gives to low-saving, lower income-earners.

With an election coming in six weeks, you choose.
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Monday, April 1, 2019

The budget's getting better, but the economy's getting worse

Why would a government that boasts of its superior economic management be entering an election campaign with a budget warning of harder economic times ahead? Because it has no choice.

It will turn this admission of a bleaker economic outlook – with a slowdown in the global economy and, domestically, the risk that falling house prices could further weaken consumer spending – into a warning that now is just the wrong time to turn the economy over to those bunglers in the Labor Party, but this will be making the best of a bad deal.

There’s nothing new about a big give-away pre-election budget, but the budget we’ll see on Tuesday night will be different in several respects. For one thing, it’s not often you get a full budget that’s timed to be the kick-off of a six-week election campaign.

It will be more like an election policy speech than a budget, since none of its measures will have been legislated, let alone put into effect. Unless the Coalition wins, it’s a budget we’ll never hear of again.

For another thing, it’s reasonable to expect that strong economies and strong budgets go together, as do weak economies and weak budgets. The state of economy determines the state of the budget balance.

Not this time. As Deloitte Access Economics’ Chris Richardson has observed, “the economy is getting worse, but the budget is getting better”. Let’s start with the budget.

Politically, this budget is built on a fiction: that its centrepiece, a further round of tax cuts (and possibly one-off cash grants to pensioners) on top of last year’s three-stage, seven-year tax cuts costing $144 billion over 10 years, is the fruit of the government’s success in returning the budget to surplus, not a sign of its political desperation.

In truth, the government’s budgetary record is hardly anything to boast about, particularly when you remember the confident promises it made while in opposition about how quickly and easily it could eliminate “debt and deficit”.

The deficit may be gone, but there's still a lot of debt - which the Coalition seems in no hurry to pay back.

We know the government will budget for a decent surplus in the coming financial year, but it’s so close to balance in the present year that it would take only minor creative accounting to produce a “surprise” surplus a year earlier than promised.

When you remember how close to balance Labor’s Wayne Swan got in 2012-13, however, it’s surprising it’s taken the Coalition all of two terms to get us to where we now are.

You can blame this on lack of political will, but it’s now more apparent than it has been that the delay is a product of the economy’s slowness to recover from the Great Recession we supposedly didn’t have.

Even since Swan’s day, the econocrats – including the Reserve Bank – have each year been forecasting an early return to strong economic growth and a greatly improved budget balance.

And, each year, their forecasts have proved way too optimistic, particularly for a return to strong wage growth. A return to economic business as usual has repeatedly eluded us.

It’s not the econocrats’ fault, it’s the slowness of all of us to realise that the “secular stagnation” that’s dogged the United States and the other advanced economies is also dogging us. But with the economy’s unexpected slowing to growth of just 2.3 per cent over 2018 – or 0.7 per cent when you subtract population growth – it’s now a lot harder not to realise.

Few remember that Tony Abbott’s ill-fated first budget in 2014 was carefully designed to do little to reduce the budget deficit for the first three years because the economy was still too weak withstand a move to contractionary fiscal policy.

The surprising fact is, little has changed in all the years since then. This is the macro-economic justification for Tuesday’s purely politically motivated announcement of further tax cuts. The economy’s still too weak to withstand contractionary fiscal policy as the budget heads into surplusland.

But, in that case, how have we finally got back to surplus? Partly, through surprisingly limited real growth in government spending. But, mainly, through years of bracket creep, the exhaustion of companies’ prior tax losses, more effective anti-avoidance measures and, above all, the good luck of a (probably temporary) recovery in coal and iron ore prices and, thus, mining company profits.

Treasurer Josh Frydenberg will be hoping to convince us the budget improvement is lasting, but the weak economy is temporary. It’s more likely to be the other way round.
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