Big business quick to veto productivity tax reform

Well, you can forget about Treasurer Jim Chalmers’ three-day roundtable discussions leading to any improvement in the economy’s productivity and growth, let alone getting the budget back under control.

Late last week, the Business Council of Australia persuaded all of Canberra’s many other business lobby groups to join it in rejecting out of hand the Productivity Commission’s proposal for reform of the company tax system which, the commission argued, would increase businesses’ incentive to invest more in productivity-enhancing plant and equipment, without any net reduction in company tax collections.

The proposal is for the rate of company tax to be cut for all but our biggest 500 companies, while introducing a 5 per cent tax on the net cash flow of all companies.

The join statement by 24 business lobby groups says that “while some businesses may benefit under the proposal, it risks all Australian consumers and businesses paying more for the things they buy every day – groceries, fuel and other daily essentials”.

Get it? This is the lobbyists’ oldest trick: “We’re not concerned about what the tax change would do to our profits, dear reader, we’re just worried about what it would do you and your pocket. It’s not us we worry about, it’s our customers.”

Suddenly, their professed concern about the lack of productivity improvement and slow growth is out the window, and now it’s the cost of living they’re deeply worried about. They’ve been urging governments to increase the GST for years, but now they don’t want higher prices. Yeah, sure.

Bet you didn’t know there are as many as 24 different business lobby groups in the capital. Their role is to advance the narrowly defined interests of their paying clients back in the rest of Oz by means fair or foul. They’re not paid to help the government reach a deal we can all live with, nor to suggest that their clients worry about anything other than their own immediate interests.

Canberra calls this lobbying. Economists call it rent-seeking. You press the government for special deals at the expense of someone else, while ensuring you contribute as little as possible. This, apparently, is the way democracy is meant to work.

And if the lobbyists can play this game, why can’t the business press join in? As its blatantly partisan commentary makes clear, big business’ only interest in attending the government’s roundtable was to come away with some new concession, ideally a cut in company tax.

At the summit after Labor was elected in 2022, business came away with nothing, we’re told, while the unions got all they wanted. Well, not gonna play along with that again.

It’s no surprise the Business Council is so opposed to the Productivity Commission’s proposal, which would reduce the tax paid by all companies bar the top 500. They’d get no cut in conventional company tax, but would pay the new 5 per cent cash flow tax.

Which lobby group roots for our biggest companies? The Business Council. What is surprising is the ease with which it was able to persuade all the other business lobbies to join it in helping protect the Big 500, even though most of their own members should have benefited from the deal.

Huh? I think the explanation is in the first sentence of the joint statement: the “proposal to tax business cash flow is an experimental change that hasn’t been tried anywhere else in the world”.

True. So, a simple case of resistance to radical change. And who could blame them? Economists – and the Productivity Commission itself – don’t have a good record in promoting radical changes that look good on paper and also work in practice. Think: the whole neoliberal project and, especially, the notion that creating from nowhere a market for the supply of disability services would be easy and efficient. It’s wasted billions.

When we wonder why productivity has stopped improving, the obvious suspect is the huge decline in the growth of business investment in new plant and equipment. Giving workers more and better machines to work with is the main way we’ve increased their ability to produce more per hour.

On paper, the commission’s partial switch from conventional company tax to a tax on companies’ net cash flow – which allows them to write off the full cost of new assets immediately – ought to improve productivity.

But the budget’s projected decade of deficits prohibits the Albanese government from giving tax cuts to companies or anyone else. So, while the commission’s plan would cut the tax paid by almost all companies, this cost to government revenue would be recouped by the extra tax paid by the Big 500.

Guess what? Many if not most of those companies pay far less tax than you’d expect. In particular, many of them are the subsidiaries of foreign multinationals using profit-shifting to pay laughably small amounts of tax in Australia.

The commission readily explains that the tax saving to most companies would be covered by tax-dodging foreign companies. Australia’s rare system of dividend imputation (“franking credits”) means that the Australian shareholders of Australian companies get their share of company tax refunded.

Only the foreign shareholders of Australian companies bear the cost of company tax. So why does the Business Council bang on unceasingly about the need to cut the rate of company tax? Because, when it gets down to cases, the Business Council represents the interests of foreign multinationals operating in Australia. That’s its guilty secret.

Footnote. When I wrote last week about the way “modelling” is used to make estimates of the favourable effects of a proposal sound more scientific and reliable than they are, I didn’t know the first offender would be the Productivity Commission, quoting results produced by Australia’s leading commercial modeller, Chris Murphy.

It says modelling suggests its proposal could increase investment by $7.4 billion, Gross Domestic Product by $14.6 billion and labour productivity by 0.4 per cent.

Sorry, no “computable general equilibrium” model can tell you the likely effect of some policy change on productivity. Someone has to insert their best guess at the effect on productivity, and all the model does is calculate what, given a host of other assumptions, such an improvement would mean for GDP.

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It's hard not to hate investors when the property game is so unfair

BY MILLIE MUROI, Economics Writer

The thing about moving up the food chain from renter to home buyer is that it comes with a monumental mindset shift.

After years of renting, hearing the words “high rent” makes me freeze and sends shivers of dread down my spine. Yet, there I was at an inspection last weekend, listening to a real estate agent happily declaring how high the average rent in the area was.

It took me a moment to recalibrate my alarmed expression, trying to blend in with the investors nodding along in satisfaction. There’s also a certain air of indifference radiating from buyers who aren’t desperately looking for an escape from the rental rat race – which I failed (quite miserably) to imitate.

Don’t get me wrong. Investors can play a positive role in our housing crisis. But only when the rules of the real estate game are set correctly.

Right now, there are plenty of ladders for investors and home owners, and no shortage of snakes setting renters and first-home-buying hopefuls back.

The more inspections I attend, though, the more I understand how we got where we are – and how we’ve ended up so stuck.

When we stand to gain from the rules and outcomes of a system, it becomes easier to play down the problems. That’s because humans hate the discomfort (known as “cognitive dissonance”) of holding conflicting beliefs or acting in a way that clashes with their beliefs.

While I’ve met and heard from generous landlords who could – but choose not to – charge the maximum rent, they’re an exceedingly rare species. It’s much easier for most of us to justify an unfair system we benefit from, than to give up our personal gain or live in a constant state of contradiction.

It’s also easier to think things are totally fine when the people we’re surrounded by aren’t outraged by it. The more time I spend at inspections, the more desensitised I’ve become to the way we see housing: as a wealth-building machine.

Low home ownership is not always a bad thing. But it’s terrible when the only other option – renting – leaves many in financial stress and struggling to save for a deposit: the very thing they need to buy their way out.

In Australia, about one-third of the population rents and one in three of these renters are spending more than 30 per cent of their income on housing, meaning they are considered to be in financial stress.

The problem with keeping people renting for life by necessity is that it keeps many of them trapped in a tough position for the rest of their lives.

Retirees who rent in the private market are much more likely to live in poverty than retirees who own their own house. Two-thirds of retired renters live in poverty, compared with one-quarter of those with a mortgage and one in 10 who own their home outright.

And the rate of home ownership has continued to drop over the decades. More than half of Australians born between 1947 and 1951 owned a home between the ages of 25 and 29, compared with one in three people born between 1992 and 1996.

The big focus on lifting our supply of houses is fantastic: both the government’s ambition to build 1.2 million new homes by the end of the decade and the push to reduce the red tape – from zoning laws to slow approvals processes – standing in the way of private businesses and developers.

But as ANZ chief economist Richard Yetsenga points out, the evidence suggests changing things on the supply side alone won’t be enough.

As of March this year, the government had completed only about 350 homes through its $10 billion Housing Australia Future Fund, with 5465 under construction. Building houses has never been something we can do overnight. But the process has become slower over time.

Yetsenga also points out Australia has 11 million dwellings and a population of 26 million. With these numbers, there should be far fewer people facing homelessness or being priced out of the property market.

“The challenge seems to be more about misallocation than a genuine shortage,” he says. “Some choices, while individually reasonable, might be turning housing into a luxury for others.”

One thing we need to examine is the capital gains tax discount, which halves the rate at which investors are taxed when they sell a property and make a profit as long as they have held the property for at least 12 months.

That’s a generous discount that gives investors more reason to snap up properties. That’s not necessarily a bad thing, except when considering the fact investors are often competing against first home buyers, and we’re facing a supply shortage.

We may not need to abolish the tax discount completely. In fact, it’s probably a good idea to keep it for investors who are building new homes rather than buying up existing ones. And the additional discount for people using their investment properties to provide affordable housing is a good thing.

But reducing the capital gains tax discount for existing properties being rented out at standard (and often seemingly excessive) rates might give first home buyers a better chance at getting their feet in the market.

Because here’s the thing: as long as most of the population are home owners, and the majority of their wealth is tied up in the value of their house, the overwhelming interest will always be to see property prices continue to rise, even if incomes fail to keep up.

In the 1990s, the average home in Australia was worth about 9.5 times the average household income per person. By 2023, they were fetching 16.4 times the average household income per person.

With supply only softly creeping up, it’s simply unrealistic to assume house price growth will slow significantly.

I’ve been fortunate to have lived rent-free, until the age of 21, and to have received a little bit of help from my grandparents to boost my deposit.

But it shouldn’t take luck – having the right parents (and grandparents) – to buy a house.

If we’re going to treat homes as investments, it needs to be just as possible for a kid growing up in a broken household with no family help to escape the rental market and start building their wealth as it is for anyone else.

There’s also a strong case for abolishing stamp duty – a levy collected by state and territory governments on the purchase of homes – and moving to a land tax paid annually on the value of the land a property sits on. Why? Because stamp duty discourages people from moving, including empty-nesters who could downsize, to homes that better fit their needs.

While we should welcome investment into new homes, we don’t need to give more reason for investors (who are not providing affordable housing) to compete with first home buyers.

I’m still on the hunt for a home after one property I inspected with a price guide of $460,000 sold to an investor for $530,000.

I’m in a much better position than many, but it’s clear, as long as I’m competing with investors, to see how the cards remain stacked against first home buyers. Hating the player might not be very productive, but I certainly hate the game.

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What if people just want better jobs, not more stuff

Sorry, but the more the great and good bang on about the urgent need for more “productivity”, the more doubts I have. Have you noticed it’s always the businesspeople, economists and politicians who tell us what we need more of, never us telling them what we’d like?

How do we know whether what they say we need would be better for them but not better for us? Short answer: we don’t. We’re supposed to take their word for it.

The urgers rarely take the time to explain what this “productivity” is, let alone why we need much more of it. I’ve no doubt that, following the coming three-day economic roundtable, the Albanese government will make some changes to taxes and regulation that, it assures us, will increase this productivity thing, whatever it is.

We’ve seen such exercises many times before. “We’ll do this and it’ll all be much better.” Trouble is, they never come back to check whether it really is better – or who did better and who didn’t.

We were assured that cutting some rich people’s taxes would, say, create more jobs. The tax cuts go through, but we never hear any more about the jobs. Makes you wonder whether it was just a story we were told.

So, what’s the story with this fabulously desirable thing called productivity?

What we do in the economy is take a bunch of resources – labour, capital, equipment and raw materials – and transform them into a host of the goods and services we use to live our lives. When the output of goods and services grows faster than our input of resources grows – when our production processes become more efficient – economists say our “productivity” has improved.

Which means we’re better off. More prosperous. Believe it or not, our productivity has improved a bit almost every year since the Industrial Revolution. How? Mainly by us inventing better machines, finding better ways to do things and having a better-educated workforce.

It’s this huge improvement in our productiveness that’s given us a standard of living many times better than it was 200 years ago. Our homes, our health, our food, our entertainments and our possessions are far better than they were.

What’s worrying the great and the good is that this process of small annual improvement in our living standards seems to have stalled about a decade ago. They don’t actually know why it’s stalled, or whether the stoppage is temporary or permanent.

But the people at the top of our economy are worried by the thought that, unless we do something, our standard of living may never go any higher. This thought appals them, and they assume it appals us just as much. We’ve got used to ever-rising living standards, and for this to stop would be disastrous.

Well, maybe, maybe not. What no one seems to have observed is that this is a completely materialist view of how our lives could be better. Better goods, better services and a lot more of both.

My guess is that, for the managerial class, more money to buy bigger and better stuff is what they most want. But I’m not sure if that’s what the rest of us want – especially after we’d given some thought to the alternatives.

If an ever-higher material living standard came free of charge, of course we’d all want it. But if it came at a cost – as it’s likely to – we’d have to think harder about the price and what we’d have to give up to pay it.

When the big business lobby groups argue that our productivity has stopped improving because their taxes are too high and the Labor government has introduced too many regulations controlling how they pay and treat their workers, sometimes I think what they’re saying is: we could make you so much richer if only you’d let us make your working lives a misery.

In a recent article for Project Syndicate, Dani Rodrik, a Harvard economist, argues that most working people probably want a good job more than higher pay. “When people are asked about wellbeing and life satisfaction, the work they do ranks at the top, along with contributions to their community and family bonds,” he says.

This is something economists keep forgetting. In their simple theory, work is a pain. And the only reason you do it is to get money to buy the stuff you want. The bad bit is work; the good bit is consumption.

In truth, most of us get much of our identity, self-worth and satisfaction from our jobs. Some people hate their jobs, of course, but that’s the point: they would be a lot happier if they could find a job they enjoyed.

Rodrik adds that jobs can be a source of pride, dignity and social recognition. It’s clear that Australians hugely value having a secure job. One where they don’t have to worry about where their next meal’s coming from. Where they know they’ll be able to keep up their mortgage payments. Where their job classification is permanent, not temporary.

Good pay is nice, but work is about a lot more than pay. Psychologists tell us that job satisfaction is helped by having a degree of autonomy in the way you do your job. A more obvious need is a boss who treats you fairly and with respect. No one wants to work for an idiot who thinks they should treat ’em mean to keep ’em keen.

I have no doubt that all workers want the pleasure of being loyal to their boss and their company. But they have to be receiving loyalty to give it back.

So here’s my radical thought: what if, instead of pursuing an ever-higher material living standard, governments focused on improving Australian workers’ job satisfaction? Would that be better or worse? A good way to lose votes? I doubt it.

It could even be that a more satisfied workforce was more productive.

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Roundtable: When they say 'modelling' grab your bulldust detector

The warm-up for next month’s three-day economic roundtable has begun, and this week we’ll start hearing from worthies who know exactly what we should do to improve our productivity. What’s more, they have the modelling to prove it.

Did you see last week’s headline that “Productivity boost would make workers $14,000 richer”? It was attached to the news that this week Productivity Commission boss Danielle Wood will release a report recommending the government overhaul company tax, speed up planning approvals for infrastructure projects and embrace artificial intelligence.

And doing this would lead to Australia’s full-time workers being $14,000 a year better off within a decade, would it? Well, no. That’s not what she said. It was that if our productivity performance could return to its long-term average, then that would translate into every full-time worker being $14,000 a year better off by 2035.

So, there was no actual link between what she wanted us to do and this mere calculation of what a return to the higher rate of productivity improvement in our past would do to our pay cheques in the present.

But even this simple calculation assumes that, should a return to a higher annual rate of improvement in productivity come about, the workers would get their fair share of the proceeds.

My point is, we’re about to hear many worthies proposing we do more of this or more of that particular thing because it will improve the economy’s “productivity” – its ability to turn the same quantity of labour, capital equipment and raw materials into a greater quantity of goods and services than before.

Sometimes they’ll advocate change X because they genuinely believe it would make the rest of us better off, and sometimes it’s just themselves they’re hoping to benefit. But, either way, many of them will try to make their argument more persuasive by producing “modelling” showing how much better off we’d be.

Let me tell you something, the politicians, businesspeople and economists who wave it in our faces never bother to: modelling isn’t all it’s cracked up to be. It can’t tell you much you didn’t already know except the answer to very complicated sums.

It allows to you to say, “if I assume A, B, C ... and K, what would that do to the rate of economic growth, employment and incomes, given that the economy works the way economic theory says it does?”

There’s a class of modelling using “computable general equilibrium” (CGE) models that’s very popular in Australia, though less so overseas. These models are often used to measure the likely effects of a change in government policy or of a proposed major infrastructure project.

It’s a safe bet we’ll be told the results of a lot of such modelling exercises before, during and after the roundtable. Just remember that modelling is more about helping me sell my idea to you than about finding out whether my great idea would actually work and, if so, how well.

The problem with economists is that they’re much more about religious faith than scientific inquiry. Our economics profession’s leading sceptic is Dr Richard Denniss, director of the Australia Institute. Other economists know what he knows and share his reservations, but they keep it to themselves.

With Matt Saunders, Denniss has written a paper on the limits of CGE modelling, which would make enlightening reading for many. “General equilibrium” means the model is designed to take in the whole economy, not just one part of it.

“Part of the persuasive power of CGE models comes from the perception that they contain a large amount of objective mathematics and theory,” they say. But while these models “contain many equations, this is not the same thing as a large amount of objectivity.

“The modeller needs to make decisions about the values of thousands, potentially millions, of model variables. It is not the model that estimates the many inputs for which no good data is available, it is the modeller and the modeller’s client that makes such choices.”

One way of viewing the economy is to say that the growth in real gross domestic product is determined by “the three Ps”: population growth, the proportion of the population that participates in the labour force, and the rate of improvement in the productivity of labour.

With these models, all three of those Ps are “exogenous variables”. That is, the modeller makes their best guess on what will happen to population growth, the rate of participation and the rate improvement in labour productivity, then punches them into the model and turns the handle to see what it says will happen to economic growth, employment and all the rest.

This means modelling can tell us little about productivity. If you had a list of things you wanted to do because you thought they’d improve productivity, the model couldn’t tell you whether each of them really would improve productivity, nor by how much all of them would improve it.

So, for instance, modelling can’t tell us whether cutting the rate of company tax would do more for productivity than, say, doubling government support for research and development. When it comes to productivity, it’s always the modeller telling the model what to think, not the other way around.

The great contradiction of modelling is that, while you have to be really good at maths to run a model, let alone build one, and really good at economics to build one that makes sense, the economy you end up modelling is so grossly oversimplified it’s like a world inhabited by stick figures.

Unlike all the people happily quoting modelling results to us, Denniss and Saunders tell us that, although these models spit out many numbers with dollar signs in front of them, there is no actual money in the model, no interest rates, credit, loans or savings.

The models usually assume that inflation has no effect on the real economy, most assume that the profits in each industry are minimal because competition competes them down, and capital equipment can be repurposed at no cost.

It’s fortunate for economists that their profession has never worried too much about ethics.

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The ABS just had to bin some statistics. Here's what went wrong

By MILLIE MUROI, Economics Writer

Within the world of chaos and uncertainty that economists – and, in fact, many of us – constantly work, the Australian Bureau of Statistics is usually a comforting presence.

Like clockwork, at 11.30am most weekdays, the national bureau releases the latest wave of data: everything from what’s happening in our jobs market to how much prices have risen and how many houses are being built.

These are key numbers that the Reserve Bank uses to set interest rates, politicians use to inform policy, and that we use to hold the government to their word.

So when the bureau declared last week that it would not be releasing statistics from its latest survey of income and housing this year, it came as a bit of a shock … at least to the nerds (myself included) keeping a close eye on the bureau’s homepage.

And it’s actually bad news for everyone.

In a statement to the media, the bureau said this particular set of data – from a 2023-24 survey – failed to meet its high standards.

“While we were compiling the statistics … we found serious shortcomings in the questionnaire design and data collection processes that we could not overcome, despite our best efforts,” deputy Australian statistician Dr Phillip Gould revealed.

It might not seem like a big deal. But it means one of our best trackers of income, housing costs such as mortgages and rent, assets and liabilities such as property, motor vehicles, investments and credit cards – from 30,000 households across the country – has essentially been thrown out the window.

Wasted data is never good. And it’s especially painful during a housing affordability crisis when we need the information to formulate good policies.

And it’s especially a problem given we haven’t had an update to this particular set of statistics since 2019 because of disruptions during the pandemic – and won’t get an update until at least 2027 given the lag with which the results are released.

So, what exactly went wrong?

First, it’s worth noting that the bureau (also known as the ABS), is not alone in some of the hurdles it faces. National statistical organisations around the world are finding it increasingly difficult to collect information from households.

The UK’s statistics agency – the Office for National Statistics (abbreviated to the less, or perhaps more, fortunate ONS) – has had to start fixing some of its “virtually unusable” employment figures as well as some of its data on inflation and trade. Experts have warned these issues have left the UK’s central bank, the Bank of England, “flying blind”.

The problem with its employment data mostly came down to the response rate which plummeted to 17 per cent at its lowest point. Jonathan Portes, an economist at King’s College London, said UK households had become more reluctant to respond to surveys – an issue that worsened during the pandemic.

But he also flagged years of tight budgets and low pay for the office’s statisticians compared with private sector peers as further possible factors in the falling quality of the data.

Independent economist Nicki Hutley says the bureau – which in 2023-24 received about $417 million in government funding – is probably also not adequately funded.

“It would be great if we had a properly resourced bureau that could make sure that it was able to do things in ways that it was comfortable,” she says.

While a spokesperson for the bureau said the overall response rate for the survey of income and housing was “acceptable”, they said the mix of responses was not representative of the population.

There are a few reasons for that, including that people now prefer to interact with the government online, at a time that suits them, with some people being especially difficult to reach.

That’s driving up the cost of conducting these surveys because households are becoming less available and willing to engage, the spokesperson said: “[This] means field interviewers may need to make more frequent contact attempts, including in-person visits, to households.”

While the bureau says it generally receives excellent cooperation from households, it can legally direct people to provide information.

Besides being more annoying and knocking on more doors, the spokesperson said the bureau would make it easier for households to participate in surveys by improving the design of surveys and the ways in which they could offer help and receive feedback.

In December last year, the government committed $98 million over four years for the bureau to improve how it collects data and interacts with Australians, including improving the digital experience for key surveys.

But the bureau has also learned some lessons. It will, for example, monitor response rates more closely and frequently so that it can intervene earlier if the data isn’t looking up to scratch – and therefore avoid having to bin all the findings at the end.

It has also set clearer targets to allow for better tracking of the results as they come in.

While the bureau didn’t point to specific issues with the design of its 2023-24 survey, its spokesperson said some wording of questions had been changed from previous years.

When it came to changes to its 2025-26 survey of income and housing, the bureau undertook “extra user testing”, testing updates with the Australian public more vigorously before sending the survey out widely.

That testing was aimed at more carefully checking the public’s understanding of the questions to make sure it aligned with the things the bureau wanted to measure, and looking at how people worked their way through the survey forms to make sure they were easy to use but collected the necessary information.

While Hutley says the missing data is not catastrophic, she says it is pretty painful.

“A lot of people might think that this is not necessarily significant because there are other indicators that are available and some workarounds for some things, but there’s certainly things you can’t do, and this data gets used for an awful lot of research, especially around things like income inequality which is a growing issue in Australia” she says.

“Being told, ‘well, we’re not confident in the series’, is a little bit concerning.”

It’s also a problem given the data is meant to be an ongoing measure that allows changes and conditions to be tracked over time.

In a comment on LinkedIn, UNSW professor of housing research policy, Hal Pawson, said the missing data, which is supposed to be updated every two years, was a “shocking slip-up” by the bureau.

“This survey provides invaluable official data on rental affordability and housing under-utilisation, as well as on broader topics including the distribution of income and wealth,” Pawson said. “A data series that should be refreshed every two years will be badly damaged by a gap of at least five years [since the last release].”

Although this particular oversight may not be the end of the world, it will have consequences, and it’s an issue the bureau will be acutely aware of for some time.

As the census, the biggest survey of them all, enters the testing phase before its five-yearly distribution in 2026, the stakes will be even higher. That survey is one the bureau can’t afford to get wrong – or ghosted on.

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Cutting HECS debt is not the best way to help young Australians

It may seem an age since the federal election, but the new parliament has just convened for the first time. Anthony Albanese will be giving top priority to enacting his election commitments – “an honest politician? Really?” – and starting with his promise to cut uni graduates’ HECS debt by 20 per cent.

Unsurprisingly, the promise was popular, meaning the Coalition and the Greens won’t want to make themselves unpopular by blocking the cut in the Senate. In any case, the Greens’ policy is to abolish uni fees – a fairyland promise that’s easy to make when you know you’ll never have the numbers to keep it.

But just because a cut in graduates’ debt is popular doesn’t necessarily make it good policy. Is it? No and yes.

HECS – the higher education contribution scheme – now called HECS HELP because some imaginative smarty thought of adding the moniker “higher education loan program”, began life 36 years ago as an eminently fair and sensible way of helping the government afford to provide university education to a much higher proportion of our youth.

Over the years, however, successive governments have stuffed around with it, making it less generous and less sensible. So something needed to be done, but simply cutting the size of graduates’ debts doesn’t really fix the problem.

It’s clear that being provided with a uni education gives a young person a great private benefit: a lifetime of earning a wage usually much higher than most non-graduates earn. So it’s fairer to non-graduates to ask graduates to contribute towards the cost of their education.

It’s also true, however, that those taxpayers who don’t benefit from higher education still benefit from being able to work in an economy alongside more highly skilled workers. This “public benefit” justifies not requiring graduates to pay anything like the full cost of their education.

But the trouble with bringing back uni fees was the risk that it could deter bright kids from poor families from seeking to better themselves. This is where the designer of HECS, Bruce Chapman, an economics professor, came up with a brilliant Australian invention, the “income-contingent loan”, which should be up there with the Hills Hoist and the stump-jump plough.

You don’t pay the tuition fee upfront – the government pays the university on your behalf, and you repay the government. But, unlike any commercial loan you’ll ever get, when you to have start repaying, and the size of your repayment, depend on how much you’re earning. So, in principle, you should never be paying more than you can afford.

You don’t pay interest on the loan, but the outstanding balance is indexed to the rate of inflation – which, to an economist’s way of thinking, means you’re paying a “real” interest rate of zero.

If you never earn enough to be able to repay the loan – say because you become a monk – you never have to pay the loan back. That’s by design, not accident.

Trouble is, successive governments have not only made the scheme less generous, the post-COVID inflation surge has added greatly to people’s HECS debts. Debts have become so big they reduce the size of the home loans banks are willing to give graduates.

Worse, in the name of encouraging young people to take supposedly “job-ready” courses such as teaching, nursing and STEM (science, technology, engineering and maths), in 2021 the Morrison government reduced their annual tuition fees, whereas fees for courses such as business, law and the humanities were greatly increased.

Fortunately, this half-brained scheme did little to change students’ choices, but did mean abandoning the previous arrangement in which the fees for various courses were geared roughly to the size of the salaries those graduates were likely to earn.

The cost of an arts degree is now about $17,000 a year, or a massive $50,000 for the full three years. So it’s people who have studied the humanities who now have debts quite out of whack with their earning ability. Smart move, Scomo!

Albanese’s 20 per cent cut in debt levels will do little to fix this crazy misalignment of fees with future earning potential. The cut will have a cost to the budget of about a huge $16 billion in theory, but more like $11 billion when you allow for all the debts that were never going to be repaid anyway.

By making it a percentage cut rather than a flat dollar amount, too much of the benefit will go to highly paid doctors and lawyers. And, in any case, of all the young adults having trouble with the cost of living in recent years, those on graduate salaries are hardly the most deserving.

On the other hand, at a time when, justifiably, the young feel the system has been stacked against them, I can’t be too disapproving of Albo’s flashy measure to help keep the younger generation’s faith that, in the end, the democratic process will ensure most age groups get a reasonable shake.

The young are right to feel bitter about the way earlier generations have enjoyed the ever-rising value of their homes while allowing the cost of home ownership to become unreachable for an ever-growing proportion of our young. And that’s before you get to other features of our tax and benefits system that favour the old.

Thankfully, the government is making the rules for HECS repayments much less onerous, making them work the same way as the income tax scale. The minimum threshold for repayments will be raised from income of $56,000 a year to $67,000. Your income between $67,000 and $125,000 will require a repayment of 15 per cent, and 17 per cent on income above that.

This will yield significant savings to those with debts. But, of course, the lower your repayments, the longer it will take to clear your debt and the more your outstanding balance will be indexed for inflation.

The government’s changes offer justice of a kind, but the rough and ready kind.

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How Chalmers can fix the budget despite stagnant productivity

As if Treasurer Jim Chalmers didn’t have a big enough problem trying to improve the economy’s productivity, we now know Treasury has privately reminded him he’ll need to find additional tax revenue and reduce government spending to keep the budget “sustainable” – that is, to stop the government’s debt getting a lot higher.

Some of the measures he’d like to take to get the economy’s productivity improving could involve reducing certain taxes but, with the budget already overextended, he can’t afford them. He’s had to stipulate that all proposals for improving productivity at the productivity roundtable next month must involve no net cost to the budget.

This suggests productivity improvement and budget repair will need to be kept in two separate buckets. If so, Chalmers will probably end up avoiding tax changes and sticking to reforming the regulation of certain industries, which would have little cost to the budget.

But some measures to improve productivity may lead to increased tax collections. If so, it may be better to put together a big package of interlocking measures that together would help improve both problems.

The successful reforms of the 1980s involved big packages, with their size actually helping to reduce opposition to them. When you propose reforms one at a time, those who lose from the measure can make such a fuss that the government decides it’s not worth insisting.

But you can put together a package so big that most industries and individual taxpayers would gain something as well lose something. So if I oppose the package because of my loss, I put my gain at risk. And not only that; I get a lot more pushback from the many groups and individuals who see themselves as net winners from the package.

Even so, if I were Chalmers and cuts in government spending were needed, I’d tread carefully. The independent economist Saul Eslake sees government spending likely to be about 2 percentage points of gross domestic product higher in coming years than it averaged over the 40 years before COVID.

In contrast, the former top econocrat Dr Mike Keating thinks that to balance the budget while making adequate provision of government services will leave a gap to be filled of about 4 per cent of GDP.

We know from the voters’ frighteningly hostile reaction to the big spending cuts proposed by Tony Abbott in the 2014 budget that proposals to slash government spending are delusional. Voters want more services not fewer.

But smaller, more carefully considered spending cuts ought to be possible. Years of performance audits by the federal auditor-general have revealed how common it is for particular spending programs to be failing to achieve their stated objectives.

Trouble is, it’s just as common for such programs to roll on with only superficial efforts to fix their ineffectiveness. That’s partly because even programs that aren’t working still put money in the hands of their recipients, who will fight hard to keep their money coming.

What’s more, the people who earn their living delivering ineffective programs – the public servants and private-sector providers – have little interest in changing the status quo. The truth is, the auditor-general’s performance audits reveal a public service that doesn’t put enough effort into ensuring taxpayers are getting value for money.

This may be because, under previous governments, public service numbers were run down, and more money spent on expensive private sector consultants, none of whom had any great interest in ensuring government spending delivered the expected benefits.

Another part of the problem was the many failings of the grand experiment of attempting to increase “efficiency” by transferring the provision of public services to private businesses. Too often, the private businesses did what came naturally and sought to maximise their profits at the expense of a government driven by ideology – “public bad/private good” – rather than common sense.

The governments’ neoliberal delusions stopped them remembering to make sure the remaining public servants managed all the private businesses to stop them overcharging and underdelivering to a customer they regarded as an easy cop. Meanwhile, the remaining public servants went into a sulk, watching the private providers rip off the government, but not bothering to tip the pollies off.

The point is, while it’s idle to imagine governments can simply slash spending on public services, there’s solid evidence that much money is being misspent. So there is scope for reducing spending on particular programs without great loss to voters.

Just stop spending on programs that aren’t achieving their stated objectives. Governments should try a lot harder to reduce waste, and the public service should be made to see that alerting their political masters to instances of waste is a big part of their job.

Reducing wasteful spending matters also because voters’ misperception that most of their taxes are wasted is a big part of their justification for opposing increases in tax. It strengthens the argument so many pollies are afraid to make: “Guess what? If you want more and better government services, you’ll have to pay for them.”

But if I were Jim Chalmers, I wouldn’t consider simply increasing the rate of taxes such as the goods and services tax before I’d tackled the “waste” in the existing tax system. The people – usually the well-off – and industries that should be paying more under the present arrangements but aren’t, thanks to deliberate exemptions or inadvertent loopholes. Picking off the undeserving should cost fewer votes than just whacking up the tax on the unfavoured majority.

As Treasury told Chalmers, the first place to look for higher revenue is the superannuation tax concessions, which offer the well-off (including me) huge scope to minimise the tax they pay. The well-off get a much higher proportion of their income from sources other than wages, sources that are taxed far more lightly.

So, as Saul Eslake says, much extra revenue could be raised by reducing the 50 per cent tax discount on capital gains, curbing negative gearing, taxing trusts as though they were companies, and taxing payouts from super. And that’s before you get to the hugely undertaxed mining industry.

Balancing the budget wasn’t meant to be easy, but less politically risky solutions are there if you hunt them out.

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Like ChatGPT, we need clear goals and rules - on the environment

By MILLIE MUROI, Economics Writer

If there’s one thing that ChatGPT has taught us, it’s that what we get from it is heavily dependent on the goals we set and the boundaries we spell out for it.

The chatbot is not always predictable (and sometimes outright wrong), but it often works much better when we give it specific targets and clear confines to work within.

We humans are remarkably similar. Most of us like to think we make good decisions with the information we have. We even have a field that looks at optimising our choices: economics.

Yet, we make plenty of bad decisions daily and, when it comes to the environment, over many decades, despite knowing better.

It’s why former Treasury secretary Ken Henry, who led possibly one of the best-known reviews of the Australian tax system, is so furious.

He has previously described our failure to manage our natural resources as an “intergenerational tragedy”, “intergenerational theft”, and a “wilful act of intergenerational bastardry”.

“I guess I’m in danger of running out of printable descriptions to convey the gravity of the situation,” he admitted in a speech to the National Press Club this week.

It was in this speech, too, that Henry pointed out why we seem to be failing so badly at protecting our environment.

Opposition Leader Sussan Ley and Social Services Minister Tanya Plibersek – both former environment ministers – have spoken about the need to fix our national environment laws.

And, after an independent review led by the former chair of the competition watchdog Graeme Samuel recommended a series of big reforms in 2020, both ministers – from opposite sides of the political fence – promised to act on them.

“Yet here we are, in the winter of 2025, and nothing has changed,” Henry points out.

That’s despite the clear warning signs and relatively broad support for such change.

Could it be that political focus has shifted to the economic issue of the day? Treasurer Jim Chalmers, having moved past inflation, has made it clear the government’s second term will be focused on boosting the country’s lagging productivity growth. Never mind the existential issue we face.

But as Henry points out, even if productivity is our focus, no reform is more important to the country’s ambition to pump out more of what we want (with less work hours or materials) than environmental law reform. “If we can’t achieve [that], then we should stop dreaming about more challenging options,” he says.

There’s been no shortage of activity on environmental reform – from policy papers to bills and endless rounds of consultation – yet little to show for it.

Henry rejects the idea that this “policy paralysis” comes down to a conflict between climate warriors and those wanting to charge ahead with economic growth. If this were the case, then why, he asks, is the pace of environmental damage speeding up at the same time our economy is stagnating?

Henry acknowledges reforms won’t be easy. Businesses and politicians are good at seizing moments of uncertainty when new changes are floated to send those changes to the graveyard.

For some, he says, the stakes are high: “We have whole industries with business models built on the destruction of the natural world.”

But we’ve done hard things before. And Henry points out it’s now or never.

While Prime Minister Anthony Albanese and his team won’t want to hear it, changes have to be made within this term of parliament.

The Labor Party may have been swept into a second term in power with a huge majority despite doing little to improve environmental laws. However, the growing national vote for the Greens is solid proof that voters have more appetite for environmental reform than the major parties have been serving.

Many of these reforms are clear and supported by a wider range of people with different interests.

So, what reforms are we actually talking about?

Well, Graeme Samuel’s review made 38 recommendations. But a big focus was on fixing what’s known as the Environment Protection and Biodiversity Conservation Act, which Samuel said was complex, cumbersome and essentially powerless.

Samuel’s suggestions ranged from introducing a set of mandatory National Environmental Standards and enforceable rules to apply to every environmental decision made around the country. These standards would be detailed, based on data and evidence, use clear language and leave very little wriggle room.

He also recommended wiping out all special exemptions and moving from a species-to-species and project-by-project approach, to one that focused on the needs of different regions: areas that shouldn’t be developed, those needing to be revived, and those where development assessments could be waved through more quickly.

This would help give businesses greater certainty, but also help us overcome one of our biggest shortcomings.

Because nature is so vast, when we assess the negative environmental impact of one project at a time, it will often seem tiny and irrelevant. That leads us to underestimate the environmental damage we are allowing over time, especially in particularly vulnerable ecosystems.

The remarkable thing is that Samuel’s recommendations were – and still are – widely supported by both business and environmental organisations.

Yet, there has been no movement five years on.

That’s a problem because there are plenty of big projects we need to get cracking on: huge investments in renewable energy generation and the government’s ambitious target of building 1.2 million homes by 2030.

In 2021, assessment and approval of a wind farm or solar farm blew out to 831 days – up from 505 days in 2018.

And between 2018 and 2024, 124 renewables projects in Queensland, NSW and Victoria needed to be assessed under the Environment Protection Act. Only 28 received a clear “yes” or “no” answer.

There could also be a way to give accreditation to state and territory decision-makers if they proved they could protect the national interest. That would remove the double-ups and complexity in approvals processes, and cut down the time taken to assess development proposals.

Of course, developers have stressed the importance of the types of reforms which fast-track development, while environmentally-focused groups have pushed for more focus on new protections.

Samuel also recommended an expert, independent and trusted decision-maker, in the form of a national Environmental Protection Authority, to work with the government to protect the national interest.

Us humans are full of shortcomings, but by recognising them and changing the frameworks we work with, we can improve the way we look at our choices and make decisions.

One of our problems is that, under the current Environment Protection Act, we tend to undervalue the environment. Part of that, as we’ve discussed, comes down to the vastness of nature (which needs to be matched by a broader regional lens, rather than our project-by-project approach).

The other is our short-sighted view. Because the cost of damaging nature is overwhelmingly shouldered by future generations, Henry points out we have found it very difficult to stop ourselves stealing from the future.

Like bad eyesight, these issues are not unsolvable. We just need clear goals, rules and accountability measures to keep us on track.

As Henry puts it, economics is concerned with optimising choices. That requires carefully defining what we’re wanting to achieve and, just as importantly, determining the constraints that shape the choices we’re incentivised to make. “If the constraints are mis-specified, then decisions will be suboptimal,” Henry says.

Unlike ChatGPT, we can set our own rules and guardrails. But we must choose – and act on – these ourselves before the damage we do forces limitations on us against our will.

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Trump wants us to spend a bomb on defence. Why exactly?

While I was on holiday, I had a kind of nightmare: suddenly, every rich country in the world – including us – is vowing to spend many billions more on defence each year. This will cost taxpayers an absolute bomb. Why exactly are we doing this?

Has some new existential threat to each of the countries emerged? Or is the fear that a few countries may come under foreign invasion but, since we don’t know which few it will be, all of us are arming ourselves to the teeth just in case?

Let’s assume we spend these many trillions on armaments rather than lesser worries such as health, education and climate change, and nothing untoward occurs. Will this prove the money was well spent, or that it was a complete waste? We stocked up for a party, but no one came. We’ll never know.

Unsurprisingly, this strange behaviour was in response to a pronouncement of Donald Trump, who told us and his other presumed allies we should no longer rely on America’s defence shield, but spend more on our own security.

Initially, his demand was for us to increase our spending from 2 per cent of national income to 3 per cent, a rise of about $28 billion a year. This would swell defence spending by more than half, with the increase almost as much as federal spending on public hospitals.

But then Trump’s Defence secretary, Pete Hegseth, said the countries of South-East Asia should boost their spending to 5 per cent of national income.

The European members of NATO have been told the US will be shifting forces away from Europe, so they should greatly increase their own spending. They’ve agreed to increase it to 3.5 per cent. In Britain’s case, that would be up from a bit more than 2 per cent.

It’s remarkable how few people have remarked on what a strange way this is to decide how much more needs to be spent. You’d think the defence people would decide it based on the cost of the extra weapons and programs they judged to be needed to complete our security.

Assessing it as a fraction of national income makes you wonder if the goal is spending for spending’s sake. Or maybe they’re planning to fire decimal points at the enemy.

But who is the enemy? Which is the country preparing to invade us? We keep being told the world has become more threatening but, from our perspective, I don’t see it. It may be true that there are more wars at present, but how do they threaten us?

There’s been another breakout in the Middle East, but how are we affected? How’s it going to spread as far as Oz? Or do we need to increase our capacity to intervene on the side of the Palestinians?

Then there’s Russia’s long-running attempt to take over Ukraine. Not going too well and, it seems, a great drain on Russia’s ailing economy. Europe has lived in fear of attack from Russia since World War II – that’s what NATO used to be about.

But let’s assume Russia’s glorious victory over Ukraine is near at hand. Will they lose no time in moving in on some other country? And even if they were, how high would Oz be on their little list?

Maybe the Indonesians could turn on us at any moment? Ah no, to the truly paranoid among our defence experts, the imminent threat is China. Those baddies could be coming after us at any moment. And the proof? China is building up its military. What other possible reason could there be for this than their desire to invade us?

Well, I can think of a few. Maybe they’re doing it because, if you want to be a superpower, you need to impress people with the size of your army. Take the US. It likes to intervene in other people’s wars, but no one thinks it’s gearing up to take over any other country (barring Canada and Greenland, of course).

So why does the US spend far more on defence that many other countries combined? Because that’s what superpowers do.

Of course, China might be building its defence forces because it’s readying for a war with the US. And maybe the US is staying strong for the same reason. If so, that’s a reason for us to keep well out of the way, not for us to increase our own defences.

It’s worth noting that Trump’s instruction to his erstwhile allies that they’ll get less protection from the US and should shoulder more of the burden of their own defence has involved no reduction in America’s own spending.

Trump being Trump, maybe what he’s after is for us and the other allies to spend more on buying defence equipment from US companies.

Here’s a thought: does having every country armed to the teeth deter war, or make it more likely?

And here’s another: in the hugely unlikely event that the Chinese were coming down to take us over, how could we possibly have a military big enough to stop them?

What gets me is the ill-disguised glee with which our defenceniks – most of them with a vested interest in greater defence spending – accepted without question or justification that our spending must be greatly increased.

Why has there been so little discussion of how any extra spending would be paid for? When our richest woman, Gina Rinehart, opined that our spending should be increased to 5 per cent of national income, I wanted to ask her how much of that she was offering to pay.

I don’t think Anthony Albanese will be taking orders from Trump on this. But to the extent that, without thinking, we do increase defence spending, we’ll all be paying higher taxes. Unless, of course, we borrow it all and leave the bill for our offspring to pick up.

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If the RBA is muddled on interest rates, we'll suffer from its fumbling

Taken in isolation, the decision last week by the Reserve Bank’s new interest-rate setting committee to defy all expectations and delay a cut in the official interest rate of a mere quarter of a percentage point, by a mere five weeks, is neither here nor there. Even so, the fuss it has caused damages the Reserve’s credibility – “do these guys know what they’re doing?” – and thereby its ability to manage the economy successfully.

And the coincidental timing with the first application of the new rule that the Reserve publish the numbers of committee members voting for and against – a supposed reform intended to encourage greater debate before such decisions are made – won’t help the Reserve convey confidence that it’s charting a steady course to peace and prosperity.

It was obliged to reveal that while six board members wanted to delay a rate cut, the other three wanted to get on with it. I don’t have any doubt that the six included governor Michele Bullock and her deputy, Andrew Hauser.

And, though I have no inside information, it wouldn’t surprise me if the new Treasury secretary, Jenny Wilkinson, was among the dissenters. Why? Because her predecessor, Dr Steven Kennedy, quietly made it clear in a succession of speeches that Treasury saw no reason for the Reserve’s great fear that wage growth could explode at any moment. (In passing, note that the recent changes to the Reserve’s Act make it clear that, while the Treasury secretary’s seat on the board is “ex officio”, he or she acts in their individual capacity, and cannot be directed by the Treasurer.)

The Reserve’s insistence on delaying the next rate cut – based, apparently, on the flimsy argument that the inflation figures for the month of May may have somewhat overstated its rate of fall – came at a most inauspicious time.

While Trump’s erratic pronouncements are adding greatly to uncertainty – prompting consumers and businesses to delay making big new spending commitments – the last thing the authorities should be doing is adding to it. By this silly decision, the Reserve has shaken the faith of the financial markets, businesses and households in its predictability and desire to steer a steady course to low inflation and higher growth.

Not that this means I have much sympathy for the red-faced participants in the financial markets and the media. They’re just playing their own games for their own commercial reasons. The reason the financial markets are so obsessed by predicting whether the Reserve will or won’t jump at its next rate-setting meeting is that they place bets on the outcome.

So a different headline for stories about the unpredictable decision is: 100-to-1 outsider wins the Reserve Bank Stakes at Martin Place on Tuesday.

As for the media, we have no shame. We use the financial markets’ placement of bets, plus the business economists’ opinions, to pander our customers’ insatiable desire to know what the future holds. Psychologists explain our addiction to forecasts as part of humans’ delusion that, if only we can know the future, we can control it.

When the media’s prediction that the Reserve is almost certain to cut interest rates on Tuesday proves to be dead wrong, the media’s not embarrassed, it’s excited. The routine rates story has suddenly got a lot more interesting. Two stories for the price of one.

It doesn’t do a lot for the media’s credibility, of course, just as the Reserve’s needless unpredictability is ill-judged at a time when the greatest threat to the economy is uncertainty and the suspension of spending intentions, particularly by business.

The fact is that our economy’s recent growth is weak. Hesitant. The risk that the economy will wallow, far exceeds the risk that inflation will take off. The message the Reserve needs to be getting through is: “Good news. Inflation’s coming down and so are interest rates, so now’s the time to look to the future with confidence. Don’t be the last to clamber onto the expansion train”.

Part of the economy’s hesitance is explained by the news that people with mortgages aren’t using the fall in interest rates to reduce their mortgage payments. In which case, the fall in interest rates isn’t strengthening consumer spending as much as could have been expected.

Particularly because of Australia’s unusual prevalence of variable-rate mortgages, the use of higher interest rates to fight inflation puts most of the burden on people with big mortgages. This is not only unfair, it’s inefficient: the two-thirds of households without mortgages are under little pressure to reduce their spending. So those with mortgages have to be hit all the harder to achieve the desired reduction in overall demand for goods and services.

It may be that people with mortgages have been hit so hard in recent years that, rather than using the lower interest rates to increase their spending, they’ve decided to leave their mortgage payments unchanged to reduce their exposure to those unfeeling blighters in Martin Place. If so, that’s a strike against our use of the manipulation of interest rate to smooth the growth in demand.

Readers’ letters to the editor of this august publication strongly supported the Reserve’s decision not cut rates. Huh? It’s easily explained. People with their homes paid off, and their savings held in fixed-interest bank deposits, gain when rates rise and lose when they fall.

This is another strike against the use of interest rates to fight inflation and smooth demand. When rates rise to discourage people with mortgages from spending on other goods and services, they actually encourage the retired to spend more. So the negative effect on the spending of people with mortgages is partly offset by its positive effect on the spending of the retired.

Maybe one day we’ll wake up and find a better way to manage the strength of demand. Meanwhile, we’ll suffer from the Reserve’s reluctance to stop fighting the last war against inflation and start fighting the next war against uncertainty and weak growth in the economy.

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