Wednesday, September 28, 2016

Continued globalisation requires more 'inclusive' growth

Remember globalisation? It was big news some years back. Now, however, the leaders of the global economy worry that public opinion is turning against it, pressuring governments to reverse it.

Globalisation is the process by which the barriers separating nations and their economies have been broken down by international co-operation and deregulation, but mainly by advances in technology.

We now have much more telecommunications, travel, trade, investment, money flows and migration between countries. News now travels around the world almost in real time.

Just how worried leaders have become about a reversal of this trend is revealed by a speech Christine Lagarde, managing director of the International Monetary Fund, gave in Canada this month.

She began by asserting the benefits of the process. The ability of countries to rise above narrow self-interest over the 70 years since World War II has brought unprecedented economic progress, she argues.

"Conflicts have diminished, diseases have been eradicated, poverty has been reduced and life expectancy has increased around the world."

The prime beneficiaries of economic integration and openness have been the developing countries, she says, a point the critics of globalisation rarely want to admit.

One of the most important developments was the entry of China, India and the former communist countries into the world trading system in the early 1990s.

According to the World Bank, international trade has helped reduce by half the proportion of the global population living in extreme poverty.

China, for instance, saw its rate of extreme poverty drop from 36 per cent at the end of the 1990s to 6 per cent in 2011.

In a single generation, Vietnam has moved from being one of the world's poorest nations to middle-income status, which has allowed increased investment in health and education.

But the rich economies have also benefited through higher living standards, caused by a more efficient allocation of capital between countries, improved productivity and lower prices for consumers.

"Research on the consumer benefits suggest trade has roughly doubled the real incomes for a typical [rich-country] household. And for the poorest households, trade has raised real incomes by more than 150 per cent," she says.

So what's the problem? Well, for a start, the opening up of world trade effectively doubled the size of the global workforce, putting downward pressure on the wages of lower-skilled workers in the advanced economies.

In the US, competition from low-wage countries has been one of the factors contributing to a decline in manufacturing employment, along with a wave of automation.

This decline has not been spread evenly across the economy, but concentrated in some states and towns that have faced deep and long-lasting effects from overseas competition, she says.

Similarly, the benefits from economic growth have not been spread evenly. In the major advanced economies, incomes for the top 10 per cent increased by 40 per cent in the past two decades, while growing only modestly at the bottom.

Then there is the globalisation of capital. Between 1980 and 2007 there was an eight-fold expansion in global trade, but a 25-fold increase in flows of financial capital.

This has greatly increased investment in developing countries. But much of the flows have been short-term and speculative, opening the door to financial contagion – sudden outflows sweeping from country to country – leading to concerns about the stability of financial systems.

"Growing inequality in wealth, income and opportunity in many countries has added to a groundswell of discontent, especially in the industrialised world – a growing sense among some citizens that they 'lack control', that the system is somehow against them," she says.

"Financial institutions are being seen as unaccountable to society. Tax systems allow multinational companies and wealthy individuals not to pay what many would consider a fair share."

Couldn't happen here, could it.

"And there is the challenge from uncontrolled migration flows, contributing to economic and cultural anxieties."

So what should we do? The goal should be to maintain the benefits from globalisation while sharing them more widely, she says.

Governments need to do more to encourage economic growth, but make it more inclusive, to "benefit workers across all economic sectors". (The need for growth to be "inclusive" is something leaders are talking about everywhere but here.)

We need to "step up direct support for lower-skilled workers" by greater public investment in education, retraining and by facilitating occupational and geographic mobility.

We need to "strengthen social safety nets" by providing appropriate unemployment insurance, health benefits and portable pensions. The US, for instance, could cushion labour market dislocations by increasing the federal minimum wage.

We need to "address the lack of vigorous competition in key areas. Think of major industries – from banking to pharmaceuticals to social media – where some advanced economies are facing large increases in market concentration."

Not here, of course.

"Boosting fairness also means clamping down on tax evasion and preventing the artificial shifting of business profits to low-tax locations," she says.

These measures can create a positive feedback loop: stronger, more inclusive growth reduces economic inequality and increases support for further reforms and openness.

But we must resist the temptation offered by "politicians seeking office by promising to 'get tough' with foreign trade partners through ... restrictions on trade".

We tried that in the 1930s as a solution to the Great Depression, and made things a lot worse for everyone.
Read more >>

Monday, September 26, 2016

Global leaders change direction while we play games

It's strange the way Malcolm Turnbull and Scott Morrison keep shooting off overseas to compare notes with world economic heavies, but come back none the wiser.

Fortunately, the wonders of the internet allow us to read for ourselves what they're being told by the trumps at the Organisation for Economic Co-operation and Development and the International Monetary Fund.

It's clear those at the leading edge are getting increasingly worried about the outlook for the world economy and are urging a marked change of policy direction.

But while the trumps see a need for policy to swing back to the centre, our unruly Coalition is intent on drifting off to the far right.

Our preoccupation is with protecting the aspirations of the richest superannuants, changing the Racial Discrimination Act, delaying same-sex marriage, protecting negative gearing and blaming the budget deficit on greedy welfare recipients.

Back where they still care about the economy, the OECD is worried that "the world economy remains in a low-growth trap, with poor growth expectations depressing trade, investment, productivity and wages.

"This, in turn, leads to a further downward revision in growth expectations and subdued demand. Poor growth outcomes, combined with high inequality and stagnant incomes, are further complicating the political environment, making it more difficult to pursue policies that would support growth and promote inclusiveness," last week's OECD interim economic outlook said.

Here's where you're supposed to think of Donald Trump, Brexit and the resurrection of One Nation. That's really gonna help.

What's turning the prolonged period of weak global demand into a trap – a Catch 22 – is the adverse effect on the growth in supply from weak business investment spending, weak productivity improvement and the atrophying skills of the long-term jobless.

The OECD estimates that, for its 35 member countries as a whole, their "potential" growth rate per person – the average rate of growth in their capacity to produce goods and services – has halved to 1 per cent a year, relative to their average growth in potential during the two decades before the financial crisis.

The organisation is worried that growth in global trade is "exceptionally weak" and that "exceptionally low and negative interest rates" are distorting financial markets – including overblown share and housing prices – and creating risks of future crises.

So what should we do to escape the low-growth trap? Change the mix of policies.

We've relied too heavily on loose monetary policy, which won't be sufficient to get us out of trouble. Worse, it's "leading to growing financial distortions and risks".

Rather, we should move to "a stronger collective fiscal [budgetary] and structural [micro reform] policy response". Note the word "collective" – fiscal stimulus always works better when every country acts at much the same time.

The goal with fiscal and structural measures is to boost demand and raise the economy's productive capacity.

"All countries have room to restructure their spending and tax policies towards a more growth-friendly mix by increasing hard and soft infrastructure spending and using fiscal measures to support structural reforms," the organisation says.

The OECD and the IMF have argued that Australia has plenty of "fiscal space" to increase borrowing for productivity-enhancing infrastructure; space that's been increased by the very low interest rates payable on our existing and any further debt.

The latest OECD economic outlook continues: "Concrete instruments include greater spending on well-targeted active labour market programs and basic research, which should benefit both short-term demand, longer-term supply, and help to make growth more inclusive."

And, in the present environment of weak demand, supportive macro-economic policies would create a more favourable environment for the short-term effects of structural reforms, we're told.

Now get this: easing the fiscal stance through well-targeted growth-friendly measures is likely to reduce the debt-to-GDP ratio in the short term, we're told. How? By adding more to nominal GDP than it adds to public debt.

"Furthermore, provided that fiscal measures raise potential output, a temporary debt-financed expansion need not increase debt ratios in the longer term," the organisation concludes.

To be fair, both our retiring and our new Reserve Bank governor (who also go to all the international meetings) have told the government monetary policy has done its dash and we need to rely more on spending on infrastructure.

The question is how long it will take our politicians to realise that their survival in government is more likely if they improve our economic performance and improve their electoral appeal by returning to policies of the "sensible centre" and ensuring growth is more "inclusive" – as they say in Paris and Washington, but not Canberra.
Read more >>

Saturday, September 24, 2016

The rules on how we conduct monetary policy

Something happened this week that occurs only about once a decade, an event that deserves much of the credit for our avoidance of a severe recession for 25 years and counting.

It was the announcement of a new agreement between the elected government, represented by the Treasurer, Scott Morrison, and the newly appointed governor of the Reserve Bank, Dr Philip Lowe, recorded in a "statement on the conduct of monetary policy".

The statement re-affirmed the government's willingness to allow the Reserve, our central bank, to set "monetary policy" - to manipulate the level of short-term and variable interest rates paid and charged in the economy, so as to influence the strength of demand - without reference to the wishes of the politicians.

The length of the period of continuous growth in the economy is measured from the end of June 1991, the last quarter of contraction during the severe recession of the early 1990s.

It's no coincidence that the era of central bank independence began just a few years later in 1993, first informally under the Keating government and then formally under the Howard government in 1996, at the time of the appointment of Ian Macfarlane as governor.

Handing control of interest rates from the pollies to the econocrats has been a huge success, though it's important to remember that, in the time since then, the economy contracted - got smaller - in the December quarter of 2000 and again in the December quarter of 2008, with unemployment rising significantly on both occasions.

That's why I always say it's been 25 years since our last severe recession. We've had two small recessions since then, though they were too short and shallow for anyone but economists to remember them.

But their very mildness is testimony to the success of the move to central-bank independence. The econocrats move interest rates up or down according to their best judgement on what's needed to keep the demand for goods and services as stable as possible.

The pollies were too inclined to let the approach of the next election influence whether rates should be going up or down.

Of course, another factor has contributed to the vastly improved management of our economy: all the "micro-economic reform" of the 1980s and '90s.

The floating of the dollar, the removal of import protection, the move to enterprise wage bargaining and myriad small acts of deregulation in particular industries have greatly increased the degree of competition within our economy, making it more flexible in its ability to cope with economic shocks and less inflation-prone.

So the managers of the macro economy have found it easier to keep the economy on an even keel, avoiding extremes in inflation or unemployment.

When we joined the rich-world fashion of making central banks independent, we adopted another new idea of making a target for the rate of inflation the main guide for decisions about changing interest rates.

While other countries set hard and fast inflation targets of zero to 2 per cent, we set a target that not only was higher - 2 to 3 per cent - but was also less hard and fast.

We were required to hit our target only "on average, over the cycle". So when you take the average of the inflation rate over a reasonable period, the result always has to be 2-point-something.

We were criticised for our target's fuzziness, but we've since won that argument. The others weren't able to achieve their "hard-edged" targets and had to modify them, whereas we've always achieved ours, even though we've been outside the range for 46 per cent of the time.

This week, in his regular testimony before a parliamentary committee - one of the conditions of accountability and transparency required in return for the Reserve's independence - Lowe argued that the target's flexibility meant there was no need to change it, even though it seems likely the world has entered a period of lower inflation.

This third version of the statement on the conduct of policy contained two minor changes.  "On average, over the cycle" became "on average, over time".

The two words mean much the same thing. How long is "over time"?  As the statement says, it means "the medium term". How long's that? We're not told, but I'd put it somewhere between five and 15 years.

The second change made clearer the link between monetary policy and the stability of the financial system.

In setting interest rates, the Reserve will take account of the need to ensure people can always borrow, lend and make payments, and ensure the failure of a particular financial institution doesn't cause any doubt about the stability of the others.

When the inflation target was first adopted, some people feared it meant the Reserve wouldn't worry about unemployment or growth. More than 20 years later, we know those fears were unwarranted.

The Reserve sees low and stable inflation as a precondition for achieving strong growth in employment and income.

And so it's proved. The Reserve has shown that the best way to keep unemployment low is to keep recessions as shallow and far apart as possible.

The flexibility built into the formulation of the inflation target is designed to keep inflation in perspective, absolving the Reserve of the obligation to crunch the economy whenever inflation pops its head above 3 per cent, or madly rev up the economy whenever inflation drops below 2 per cent.

Monetary policy is the primary "arm of policy" used to achieve "internal balance" - price stability and full employment or, more simply, low inflation and low unemployment.

It does need backup, however, from the other arm, "fiscal policy" - the manipulation of government spending and taxation in the budget - whose primary goal is "fiscal sustainability" - making sure public debt doesn't get too high.

There's much more to the story, but that's enough for now.
Read more >>

Wednesday, September 21, 2016

Brave minister wants us to think about road user charges

If you're searching for a politician with courage, smarts and foresight, meet Paul Fletcher, Malcolm Turnbull's Urban Infrastructure Minister. He's so unlike your typical gutless pollie he reminds me of Paul Keating.

Fletcher gave a speech last month in which he raised issues from which most politicians would run a kilometre. He thinks heavy vehicles – trucks weighing more than 4.5 tonnes – should pay road-use charges that more accurately reflect the huge damage they do to our roads. That's brave.

But he thinks ordinary drivers should also be paying a road-user charge. That's not brave, it's outrageous.

Fletcher, however, has his own arguments to persuade us it's really quite sensible.

He says he's worried about how the federal government will be able to maintain its contribution to building and maintaining the nation's roads when the move to more efficient cars causes its revenue from fuel excise to fall away.

He reminds us that, whatever the price of petrol, it's almost 40¢ a litre higher than it needs to be, thanks to the federal government's fuel excise.

This means, of course, that how much tax you pay is partly a function of your vehicle's fuel efficiency. So someone driving a 12-year-old Holden Commodore pays 4.5¢ a kilometre, whereas someone in a six-year-old Renault Megane pays 3.5¢.

But get this: someone with a late-model Toyota Prius hybrid pays just 1.5¢ a kilometre and someone who's paid $125,000 for one of the new all-electric Teslas pays exactly … nothing.

See the problem? As we all do the right thing and move to more environmentally friendly driving, the government's excise revenue will be going down, not up.

Today, electric vehicles make up only about half a per cent of our vehicles, but projections put that up to 30 per cent within 20 years.

Then how will we pay for our roads?

Fletcher's answer is that we need to move to funding them more directly by a user charge – say, one based on the number of kilometres you drive.

He stresses this isn't an argument for motorists to pay more. They already pay a lot more than federal excise to drive their cars, including state rego fees and stamp duty.

Indeed, if you pull together all the taxes and charges we pay that are in any way associated with cars and trucks – including under GST and the fringe benefits tax – you can get to a total of about $30 billion a year, of which fuel excise accounts for only about a third.

This compares with total spending on building, maintaining and operating roads – federal, state and local – of about $25 billion a year.

So Fletcher's idea is to rationalise this mish-mash of taxes and charges and replace them with a road-user charge that would be much more visible.

But this is where he reminds me of Keating, who often used wrong but more appealing arguments to persuade us to accept needed but unpleasant measures.

Fletcher has picked up a long-standing piece of motoring organisation propaganda – that every cent of tax paid by motorists should go back into roads – and given it the status of a self-evident fiscal truth.

The truth is there's never been any link – legal or informal – between the taxes and charges on petrol and cars, and the amount governments spend on roads.

Nor should there be. Governments have to pay for 101 services we demand of them apart from roads. So they have to raise a lot of revenue, which they do by taxing a wide range of activities and things, not just one or two.

What they tax tends to be what we're used to them taxing, since we have such knee-jerk opposition to anything we can condemn as a "new tax".

The feds' spending on roads is equivalent to only about two-thirds of what they raise from fuel excise. So should excise receipts decline in the future, this will be a problem for the whole budget, not for road spending in particular.

Fletcher is right to think that user charges would be an improvement because their greater visibility would encourage us to be more economical in our use of roads.

That's particularly true of heavy vehicles, because it's they that do most of the damage to our roads. We don't want goods being moved interstate by road rather than rail because we're charging semi-trailers and B-doubles only a fraction of the cost of the damage they do.

But if the rest of us had to pay a user charge whose purpose was to cover all the remaining costs of roads and to replace all the other taxes and charges, that might be neater and more visible, but it would be a lost opportunity to help us reduce a different, fast-growing cost for city motorists: congestion.

The cost of congestion is the cost I impose on other motorists by driving my car at the same time they do.

And the way to reduce it – as well as the spending needed for new motorways and even public transport – is to replace some of the tax we pay with a user charge that varies by location, time of day and distance travelled.

As Fletcher says, there's a lot more thinking to be done about how we pay for roads.
Read more >>

Monday, September 19, 2016

Faster growth demands better chief executives

Sometimes I'm tempted by the thought that a major economic reform would be for the Business Council of Australia to disband, so the nation's big business chiefs had to spend more time doing their knitting.

For them to spend less time attending committee meetings to decide what the government should be doing to make life easier for them and their business, and more time working on ways to improve their company's performance.

It always surprises me that economist upholders of free markets and business defenders of private enterprise so easily fall into the view that the fate of our largely private-sector economy rests on the actions of politicians.

Econocrats are susceptible to that misconception because their model's assumption that business decisions are always rational leads them to conclude any inadequacy in businesses' performance must arise from perverse incentives created by misguided government intervention.

For their part, it's almost unknown for business leaders to explain their company's poor performance as anything other than someone else's fault. The failures of our hopeless government – any government – have long been the favourite excuse of less-than-successful chief executives.

An entire career in the private sector has inoculated me against any delusion that businesses are always rational and never perform at less that their best.

One common human failing you won't find in any economics textbook is managers' tendency to be so busy fixing problems they find easy to fix that they have no time to grapple with more important problems they're not sure how to fix.

We worry about the era of low productivity and low growth our economy – and every other advanced economy – seems caught in, and it's true there are "reforms" governments could make that would improve our performance – though they're not the reforms highest on the business council's list.

But the deeper truth remains that the nation's productivity is fundamentally determined by the performances of its many businesses. And if our business leaders took it into their heads to lift their companies' performance, the nation's productivity improvement and growth would be faster.

If you don't believe that, you must be a socialist.

A study by Deloitte Access Economics for Westpac assembles evidence that there's plenty of room for improvement in the performance of Australia's managers.

A report prepared for the federal government in 2009 used the methodology of the World Management Survey to rank the quality of our management sixth of 16 countries studied, behind Canada, Germany, Sweden, Japan and the US.

A paper by Nicholas Bloom and others, from Stanford University, finds that well-managed firms perform better than their peers and make a greater contribution to a nation's total-factor productivity.

Differences in how well-run businesses are help explain differences in productivity between nations. For instance, thanks in part to its successfully run businesses, the US has one of the highest total-factor productivity levels in the world.

Bloom and colleagues estimate that, across all countries, 29 per cent of the difference in productivity between the US – which has the highest management effectiveness scores – and other nations can be explained by how well businesses are run.

Using this finding, Deloitte Access estimates that, if the gap in management quality between Australia and the US were halved today, our productivity would rise to 80 per cent of the US level, up from its present level of 77 per cent.

Achieving such an increase today would lead to a 4.3 per cent increase in gross domestic product over its present level.

This represents an increase in GDP of about $70 billion, equivalent to about $3000 a person per year.

Such a boost would raise our ranking on the league table of GDP per person (adjusted for differences in the purchasing power of particular currencies) from 19th to 14th in the world – just the "metric" that so appeals to the top dogs on the Business Council.

Deloitte Access concludes from other research that fast-growing businesses "take an attitude that success is in their hands and nobody else's.

"High-growth firms perceive issues they cannot control – such as economic conditions and competition – as less of a barrier to success than [do] low-growth firms, placing greater concern on issues they can control, such as recruitment and cash flow …"

So "businesses' own decisions and strategies drive their success. The state of the economy and industry trends are clearly important factors affecting business profitability …

"But business success can come during any market conditions, and opportunities can arise in any industry, provided there's the right leadership to seize potential."

So that's what our over-paid and under-performing chief execs are getting wrong.
Read more >>

Saturday, September 17, 2016

Banning new coal mines wouldn't cost the earth

If you want to shock and appal a politician, just suggest Australia join the United States and China in limiting the building of new coal mines.

Think of all the growth we'd be giving up, they protest. All the jobs that wouldn't be created. Some even argue we have a moral duty to sell more coal to the world. How else will the poor countries be able to develop their economies so they become as rich as we are?

Short answer: by relying more on other, less carbon-emitting forms of energy.

Surely the sooner we arrest global warming the better off we'll all be, rich and poor.

The goal of the moratorium on new mines is to hasten the process of decarbonising economic activity.

It's clear the world's growing commitment to action against climate change will see a decline in the demand for coal - the most emissions-intensive way to make electricity - so that much of our huge deposits of coal will stay in the ground.

It's true there's a lot more coal to be burnt before world demand dries up, but total consumption actually fell in 2014-15. Within that, China's consumption fell by 3.7 per cent.

The big fall in coal prices in recent years tells us the supply of coal now exceeds demand. With Australia accounting for 27 per cent of seaborne trade in coal, what happens if we expand our production capacity and start exporting more?

We push the world price down even further. Since the average cost of electricity from renewable sources is, as yet, higher than for coal-based power, this would worsen the comparison further, slowing the shift away from fossil-based electricity.

It would also lower the prices being received by our existing coal exporters, threatening employment in their mines. So a moratorium would benefit our pockets as well as the environment.

But how much would we lose by not building any more coal mines nor extending existing ones?

The Australia Institute set out to answer this question with help from modelling by Professor Philip Adams, of the Centre of Policy Studies at Victoria University, Melbourne.

The study found that, even with a ban on new mines, Australia's coal production would decline only gradually as existing mines reached the end of their economic lives. Existing mines and those already approved could still produce tens of millions of tonnes of coal into the 2040s, assuming other countries still wanted to buy them.

The modelling suggests the nation's economic growth would be barely affected, with the level of gross domestic product being just 0.6 per cent less than otherwise by 2040. Whether we did or we didn't, nominal GDP would roughly have doubled to $3 trillion by then.

Because coal mining is so capital intensive, the effect on national employment would be even smaller. By 2030, the level of employment would be 0.04 per cent lower than otherwise, but by 2040 this difference would have gone away.

Similarly, the value of our total exports of goods and services is projected to be only 1 per cent lower than otherwise by the final years of the period.

But our coal production is concentrated in NSW and Queensland, so the adverse effect on those state economies would be greater. By 2040, the level of gross state product would be, respectively, 1.3 per cent and 3.8 per cent less than otherwise, while the other states' GSP would be a little higher than otherwise.

Now, I trust that by now you've learnt to be cautious about accepting the results of modelling exercises, especially when they've been sponsored by outfits using the results to advance their cause, as is the case here.

The simple truth is that no-one knows what the future holds, and that's just as true for the econometric models economists construct.

Their models of the economy are more comprehensive and logically consistent than the model we hold in our heads. But relative to the intricacy and complexity of the actual economy, models are still quite primitive (this one doesn't have the official data to let it distinguish between steaming coal and coking coal, for instance).

Models are built on a host of assumptions, some based on economic theories about how the economy works and some about what will happen in the future.

The strength of this particular modelling exercise is that it's a lot franker about the model's limitations and about the specific assumptions.

It uses a dynamic "computable general equilibrium" model designed to capture the interrelationships between 79 industries, divided into states and regions.

The model takes account of "resource constraints" - it acknowledges that land, labour and capital are scarce; that everything you do has an opportunity cost.

This means that, unlike much "modelling" produced for the mining lobby, it doesn't assume that the skilled workers needed for a new mine just appear from nowhere rather than having to be attracted from jobs elsewhere, nor that when a new mine isn't built, all the labour and materials that could have been used sit around idle.

As is normal, the modelling starts by establishing a business-as-usual "baseline" projection out to 2040. For instance, real GDP is assumed to grow at an average annual rate of 3 per cent for the first five years, then 2.6 per cent for the remaining 20 years.

Once this baseline or "reference case" is established, the modellers impose the policy change (no new coal mines) and run the model again to see how this changes the baseline results.

That is, it's not a forecast, just an attempt to get an idea of the consequences of banning new coal mines.

The model's modest results make sense. The effects would be small because the coal industry is just a small part of the economy, because the phase-out would be gradual, and because other industries would expand to fill the vacuum it left.
Read more >>

Wednesday, September 14, 2016

Why the super tax changes mustn't be watered down

Everyone wants to know what achievements Malcolm Turnbull can point to after his first year as Prime Minister. Well, I can think of something: his reform of the tax breaks on superannuation – provided he gets it through without major watering down.

Why is it such a big deal? Because it ticks so many boxes. Because it makes the taxation of super much less unfair.

Note, I didn't say much fairer. It will still be an arrangement that gives the least incentive to save to those who find saving hardest, and the greatest to those whose income so far exceeds their immediate needs that they'd save a lot of it anyway.

A report by John Daley and others at the Grattan Institute, A Better Super System: Assessing the 2016 tax reforms, independently confirms the government's claim that the changes will adversely affect only about the top 4 per cent of people in super schemes.

That still leaves a lot of well-off people – including the top 4 per cent – doing very nicely out of super.

Remember this when Turnbull's backbenchers embarrass their leader and add to their government's signs of disarray by pressing for the changes, announced in this year's budget, to be watered down.

Whose interests did you say the Liberal Party represents? Why exactly does it claim ordinary middle-income voters can trust the party to look after their interests?

But back to the reform's many attractions. It would cut back one of the major loopholes that make tax paying optional for the well-placed but compulsory for everyone else; that allow very high income-earners to end up paying a lot less tax than they're supposed to.

A lot of the savings from reducing concessions to the high fliers (who, you should know, include me) would be used to improve the bad deal given to low income-earners and to make other changes but, even so, would produce a net saving to the budget of $770 million in 2019-20.

This saving would get a lot bigger over time.

So the super reforms would contribute significantly to reducing the government's deficits and debt, but do so in a way that spread the burden more fairly between rich and poor than the Coalition's previous emphasis on cutting welfare benefits.

A lot of well-off people have been using super tax concessions to ensure they leave as much of their wealth as possible to their children – a practice lawyers refer to euphemistically as "estate planning".

Wanting to pass your wealth on to your children is a human motivation as old as time. The question is whether it should be subsidised by other taxpayers.

If it is, rest assured it's a great way to have ever-widening disparity between rich and poor. In the meantime, it adds to (recurrent) deficits and debt.

The rationale for Turnbull's changes is the decision that superannuation's sole purpose is to provide income in retirement to substitute for, or to supplement, the age pension.

They fall well short of eliminating the use of super tax concessions to boost inheritance, but they make a good start.

This is the goal of the three main measures Turnbull wants. Reducing the cap on before-tax contributions to $25,000 a year will save almost $1 billion in 2019-20.

Capping at $1.6 million per person the amount that can be held in a retirement account paying no tax on the annual earnings. Any excess balance will have its earnings taxed at the absolutely onerous rate of 15 per cent – less dividend imputation credits. This will save $750 million a year.

Introducing a $500,000 per person lifetime cap on after-tax contributions, counting contributions since 2007, will save $250 million a year.

If those caps strike you as low, you're just showing how well-off you are. The huge majority of people will never have anything like those amounts.

They're set at levels sufficient to allow a comfortable retirement even for those anxious to maintain a high standard of living. Anything more and you're in estate planning territory – or you just want every tax break you can get because you're greedy.

The claim that starting to count contributions towards the $500,000 cap in 2007 (the time from which good records became available) makes it "retrospective" is mistaken.

The measure is prospective in that it applies to income earned after the day it was announced, not before.

Where contributions in excess of the cap have been made already, they won't be affected by the measure.

Any tax change is likely to affect the future tax consequences of actions taken in the past. That doesn't make it retrospective.

To say "I had planned to do things in the future to reduce my tax which now won't be effective" is not to say the changes are retrospective.

Sometimes politicians announce changes well before they take effect, to allow people to "get set". But it's common for them to make tax changes that take effect from the day of announcement, precisely to stop people getting set. That doesn't make the change retrospective, either.

As Daley says, "the proposed changes to super tax are built on principle, supported by the electorate, and largely supported by all three main political parties.

"If common ground can't be found in this situation, then our system of government is irredeemably flawed."
Read more >>

Monday, September 12, 2016

Our youth jobs report card: what's up with you people?

It's surprising how many of our politicians, economists and business people fail to see that our preference for looking after high-achieving young people and not worrying too much about the stragglers is a recipe for much more than social injustice and unfulfilled lives.

The earlier we identify and help kids at risk of doing poorly in education, training and employment, the more we help the community as well as the kids.

It's a social and economic investment. Neglect it and we lose much more later, as people spend more of their life on benefits and add little to the productivity of our workforce.

On the face of it, a report card on our performance, Investing in Youth: Australia – to be released by the Organisation for Economic Co-operation and Development at a forum hosted by the Brotherhood of St Laurence in Melbourne on Monday – gives us a pass.

Our education system "performs well overall, and school completion rates have been rising in recent years".

The labour market situation of youth in Australia is "quite favourable by international standards". Our youth unemployment rate is [a bit] "below the OECD average".

But this is not so terrific when you remember that "Australia was hit much less heavily by the Great Recession than most other countries".

"After continuous decline in youth unemployment rates since the early 1990s, rates have started rising again, while youth employment has fallen."

But the report focuses not on youth unemployment, but on NEETs – the share of youth (people aged 15 to 29) who are "not in employment, education or training". And, at 11.8 per cent, the share of NEETs was higher in 2015 than it was before the global financial crisis in 2008.

That's well over half a million young Australians out of education and work. About a third of those are looking for work, but the other two-thirds aren't.

The first factor driving the high proportion of NEETs is low educational attainment. Quelle surprise.

Youth with, at best, a year 10 certificate, account for more than a third of the NEETs. And their risk of being in that state is three times as high as for those with tertiary education.

Worse, "many NEETs lack foundational skills (numeracy and literacy) and non-cognitive skills, which are important prerequisites for labour market success," the report finds.

But there's hope if we bother helping. "Recent research demonstrates, however, that non-cognitive skills, like cognitive skills, remain malleable for young people through special interventions."

Get this: the risk of being NEET is 50 per cent higher for women, and women account for 60 per cent of all NEETs.

So the biggest single explanation of why so many NEETs aren't looking for work is that many of them are young mothers with a child below the age of four. And don't assume they're all sole parents on welfare.

The report adds that NEET rates are substantially higher among Indigenous youth, who represent 3 per cent of the youth population, but 10 per cent of all NEETs.

And the likelihood of being NEET is substantially higher for youth with disabilities.

In case you're tempted by visions of all those lazy loafers out surfing, or with their feet up watching daytime television, the report says NEETs "tend to exhibit higher rates of psychological stress and lower levels of life satisfaction" than other youth.

In its own ever-so-polite way, the report notes our less-than-stellar performance. The completion rate for vocational and educational training certificates and apprenticeships "remains low by international standards".

That's one way to acknowledge the awful stuff-up we've made of VET.

Australia has a wonderful, very flexible, market-based network of employment service providers that "cover, however, only about 60 per cent of NEETs, leaving around 200,000 youth unserviced". Oh.

"Young jobseekers' participation in training programs increased over the last years, but this trend came to a halt with the recent expansion of Work for the Dole", we're told.

"Given strong evidence on positive employment effects of training, including for disadvantaged jobseekers, Australia should continue promoting training program participation as an effective way of moving young jobseekers into stable employment."

Translation: what's up with you people?

The report praises our Youth Connections program and its effectiveness in improving educational attainment for youth at risk of dropping out of school – before noting it was phased out in 2014.

"The recent tightening of eligibility criteria for unemployment benefits may create additional incentives to actively look for work, but it also bears the risk of pushing the most disadvantaged youth into inactivity and possibly poverty," we're told.

Translation: you mean Aussie bastards.
Read more >>

Saturday, September 10, 2016

Economy steams on for another quarter

Just about everyone who doesn't look at the numbers - which is most people - is convinced the economy is "slowing", suggesting disaster may be just around the corner.

How do they know it's slowing? Because almost all the economic news is bad. They don't notice that most of the bad news comes from somewhere else - Britain, Europe, Japan, China, even the US.

And people who warn that the economy is slowing always sound wiser and more knowing than people who say it seems to be going OK and will probably stay OK.

Of course, if you do look at the figures you find little sign the economy is slowing. Indeed, the national accounts we got from the Bureau of Statistics this week show that real gross domestic product grew by 3.3 per cent over the year to June.

Three months earlier, the figures tell us, real GDP grew by 3 per cent over the year to March. Before that we had growth of 2.8 per cent over the year to December and 2.6 per cent over the year to September 2015.

During all that time we've had people confidently telling us the economy is "slowing". What's more, within a week they'll have forgotten this week's good news from the national accounts - as they did all the other times - and be back telling us the economy is "slowing".

The good thing about the national accounts is you can always find something that's not looking too hot - provided you ignore all the things that are going OK.

This time you can say that, since the economy grew by 1 per cent in the March quarter, but by only 0.5 per cent in the June quarter, it must be "slowing".

But you have to be an amateur to believe the accounts can be taken so literally.

They're too subject to lumpiness (big transactions, such as the purchase of jumbo jets, which happen irregularly rather than smoothly from quarter to quarter), to error (such as a big transaction getting into the wrong quarter) and to frequent revision (there's a lot more statistical guesswork in the first estimate of growth during a quarter than people imagine, mainly because a lot of the figures needed are collected only yearly) for them to be treated as God's truth.

You could also say that growth in consumer spending of just 0.4 per cent in the quarter was surprisingly weak but, again, we shouldn't be too literal. Growth of 2.9 per cent over the year is pretty healthy.

Actually, if you're looking for something that really is "slowing" you'll find it not in the national accounts, but in the monthly job figures. They show that employment hasn't grown as strongly this year as it did in the last half of last year, meaning the rate of unemployment seems to have stopped falling and plateaued at 5.7 per cent.

This tells us there's been some instability in the normally fairly stable relationship between growth in the economy and growth in employment.

It would be more worrying if growth in the driver of that relationship - the economy - weren't holding up so well, and possibly increasing. This being so, employment should start behaving more normally in time.

The real growth in GDP over the year to June of 3.3 per cent was generated by, in descending order of contribution, growth in: the volume of exports of 9.6 per cent (with extra help from a 0.5 per cent fall in the volume of imports), consumer spending of 2.9 per cent, public consumption spending of 4.4 per cent, public infrastructure spending of 13.9 per cent, and home building of 8.3 per cent.

All of which was reduced by a negative contribution to growth of 2.2 percentage points from the 13.8 per cent fall in business investment spending, as the continuing fall in mining construction activity swamped still fairly flat growth in non-mining business investment.

If those figures make you think the public sector - federal, state and local - has been spending like crazy, don't be misled. Public sector spending is lumpy, and June quarter spending was overstated (and business investment spending correspondingly understated) by state governments buying prisons and other facilities previously built by the private sector.

Here's some indisputably good news: the productivity of labour in the market sector improved by 1.5 per cent during the quarter and by 2.9 per cent over the year.

There's an old rule that one quarter's figure doesn't equal the start of a new trend. Remembering this, there are some encouraging figures in the accounts we can hope will turn out to be improving trends.

The most significant is that, after deteriorating for nine quarters in a row, our terms of trade - export prices relative to import prices - improved by 2.3 per cent in the quarter.

This means stronger growth in real gross domestic income (real GDP adjusted for the terms of trade) of 1.9 per cent over the year. That is, the international purchasing power of the goods and services we produce wasn't cut back this quarter the way it has been.

When export prices fall far enough, nominal GDP grows more slowly than real GDP. This is a problem for the Treasurer because the taxes we pay are levied on our nominal income and spending.

But the improvement in the terms of trade helped nominal GDP to rise by 1.3 per cent in the quarter and 3.4 per cent over the year. This is the strongest result in more than two years.

The final good news is proof the economy is now well advanced in making the much ballyhooed transition from mining- to non-mining-led growth.

Over the year to June, the mining sector contributed about a quarter of the overall growth of 3.3 per cent, whereas the (much larger) non-mining sector contributed about three-quarters.
Read more >>

Wednesday, September 7, 2016

Let's not blow our big chance for progress on climate change

Our attitudes to climate change are becoming like our attitude to death: we know we must face up to it one day, but right now we'd prefer to think about something else.
This may explain why the media's coverage of a potentially breakthrough report from the government's Climate Change Authority focused on environmentalists' criticisms of it rather than its actual content.
Similarly, why focus on the world's two biggest greenhouse gas emitters, China and the United States, using the G20 meeting in Hangzhou to ratify the Paris climate change agreement – thus encouraging other countries to do likewise and raising hope the deal will come into effect this year – when you can speculate about conflict over the South China Sea and foreign investment?
Forgive me, but I'd never make a card-carrying greenie, righteously condemning any proposal to act on climate change that's less than heroic – as both the Paris agreement and the climate authority's report on the policies we need to ensure we deliver on our commitment, most certainly are.
I've never believed that if you can't have it all, you're better off having nothing. Nor that if you make a less than perfect start, this precludes you from getting better over time.
Our commitment – reached when Tony Abbott was still in charge – is to reduce our emissions of carbon dioxide by 26 to 28 per cent on their level in 2005 by 2030.
This is less demanding than many other countries' commitments and, in any case, all the commitments aren't enough to achieve the stated goal of limiting global warming to below 2 degrees.
Although the climate authority was established by Julia Gillard, the Coalition has replaced most of its members with people not known for their deep commitment to environmentalism.
It's chaired by a former director of the National Farmers Federation, joined by, among others, a former Liberal chief minister and boss of a top industry lobby, and a former National Party minister.
When Abbott abolished Gillard's euphemistically named "price on carbon" – it was an emissions trading scheme, but initially with the price set by the government at $23 a tonne of carbon dioxide – he replaced it with a "direct action plan" consisting of a taxpayer-funded emissions reduction fund used to pay farmers and others to reduce their emissions.
This was combined with a "safeguard mechanism" designed to prevent gains from the purchased reductions being undone by increases in emissions elsewhere in the economy.
Under the safeguard, about 140 large businesses that each have plants with direct emissions of more than 100,000 tonnes a year have been given an emissions "baseline" they must not exceed.
Many experts have criticised direct action as inadequate to achieve our new commitments, especially considering the government's budget pressures.
The greenie evangelists are calling on the government to confess the error of its ways, repent its manifold sins, scrap its evil direct action plan and replace it with measures so politically painful as to prove it is truly born again.
The climate authority's proposals are a little more conscious of politicians' aversion to losing face. They thus have a good chance of being accepted.
Whatever it says, the government must know its present arrangements are insufficient to meet its international commitments without hugely increased cost to taxpayers.
That's particularly true since, as the authority points out, the Paris agreement itself requires countries to review and improve their commitments over time.
The authority avoids the trap of proposing the government scrap what it's doing and start again from scratch. Rather, it shows how the government can build on its existing policies to strengthen its efforts.
Rather than proposing restoration of an emissions trading scheme, or the imposition of some economy-wide carbon tax, the authority takes the less economically virtuous but more practical approach of choosing between price-based and regulation-based measures, depending on the circumstances of particular industries.
That's why its report is titled Towards a Climate Policy Toolkit.
Since electricity generation is by far the greatest emitter of greenhouse gases, the authority proposes that the industry's present baseline under the safeguard mechanism be replaced with an "emissions intensity scheme", whose baseline would be reduced to zero between 2018 and "well before 2050".
In practice, this would require fossil fuel-based generators to subsidise renewable generators, eventually causing almost all generation to be from renewables. It would raise retail electricity prices somewhat, but by far less than under the Gillard scheme.
For other industries covered by the safeguard mechanism, their emissions baselines should decline in line with our Paris commitments.
Elsewhere, the authority wants the government to impose emissions reduction standards on new vehicles, continue and strengthen household appliance standards and building codes, and tighten regulation of emissions from landfill waste.
This toolkit approach minimises the risk of hip-pocket opposition from consumers. Building on existing arrangements rather than starting again is attractive to business groups.
The proposals not only build a bridge for the government to move to policies more adequate to the challenge we face, they build a bridge to a bipartisan climate change policy because the authority's proposals fit well with those Labor took to the election.
And bipartisan policy provides just the certainty needed for business to stop arguing the toss and accept that, since our move to a decarbonised economy is now inevitable, it should get on with adjusting.
Read more >>

Monday, September 5, 2016

Morrison's unplanned plan to fix the budget

Scott Morrison can use scare tactics in seeking greater support for his task of getting the budget back on track, but he'll do better by spreading the needed sacrifice more fairly. That means holding the line on his superannuation reforms against his own backbenchers.

Morrison isn't alone in fearing that our completion of 25 years of continuous economic growth has left many of us complacent, unaware of the tough measures we needed to put up with to make this success possible and, equally, the further discomfort needed to keep it going.

There's truth to this, no doubt. But I doubt that scare tactics are the way to puncture that complacency and win wider acceptance that we all need to take some pain for the greater good.

Morrison's claim in his latest speech that, given a host of dire but unstated assumptions, federal gross debt could reach a trillion dollars in a decade, is an easy way to get a headline but is unlikely to make anyone more amenable to unpopular budget measures.

Does the man not realise that, after decades of dishonest dealing with voters by both sides of politics, no politician has the credibility to have such extreme claims believed – or even remembered?

More fundamentally, do Morrison and his Treasury advisers not realise that their practice of exaggerating the budget deficit by refusing to distinguish between capital and recurrent spending – by, in effect, claiming that failing to pay for long-lived public infrastructure fully in the year of construction is financially irresponsible – is wearing thin and robbing them of support from the more economically literate?

The truth, if the budget papers are to be believed, is that the recurrent budget is already close to balance – which is not to say we shouldn't now aim for a period of recurrent surpluses so as to liquidate the part of our accumulated debt arising from earlier recurrent deficits.

No, a better way to win public acceptance of unpleasant budget measures is to demonstrate that the burden of restraint is being spread fairly between the bottom, middle and top income-earners.

The biggest single reason the Coalition has, from the beginning, met such resistance to budget repair from the public – and, therefore, the Senate – is its blatant lack of concern for fairness.

Remembering our tightly means-tested welfare system, to start from the premise that the budget has a spending problem, but not a revenue problem, is to pre-ordain that your savings measures will focus on spending programs benefiting the bottom and middle, while ignoring the "tax expenditures" favouring the top.

The Coalition's first term is testament to the truth that making budget repair conditional on achieving smaller government – lower government spending without any increase in taxation – is a recipe for failure on both.

Ostensibly, Morrison's talk of "the taxed and taxed-not" and repetition of his mendacious claim that "you don't encourage growth by taxing it more" suggest he's learnt nothing about the compromises he himself must make if he's to succeed in repairing the budget.

But things have changed, as witness Morrison's weasel-word acceptance of the need for measures to "protect the integrity of our tax base".

This year's (still unpassed) budget was aimed not at budget repair but at tax reform. To this end it nicked Labor's plan for further huge increases in tobacco tax, introduced convincing measures to greatly increase taxes paid by multinationals and cut back and redistributed superannuation tax breaks for high-income earners.

Even its $6-a-week tax cut for the top quarter of taxpayers is insufficient to prevent income tax increasing through continuing bracket creep, let alone give back proceeds from the creep that occurred under the Coalition's previous two budgets.

These tax increases were made to help cover the initial costs of the 10-year phase-down in the rate of company tax, of course. Over its life, however, the tax package looked to be "budget negative".

But here's the trick: Morrison looks a lot more likely to get his various tax increases through the new Senate than his cut in company tax.

If so, he'll end up doing a lot to improve the budget balance, and doing it in a much fairer way than all the collected penny-pinching in his $6 billion "omnibus bill", as revealed by Jessica Irvine.

But the perception of greater fairness, as well as the saving to the budget – both initially and in subsequent build-up – will be hit hard should the revolt by a few government backbenchers over the super changes succeed in letting a handful of rich Liberal supporters off the hook.
Read more >>

Saturday, September 3, 2016

Combatting climate change: let's try Plan D

Just as they say there's more than one way to skin a cat, so there are a lot of ways to reduce greenhouse gas emissions and "decarbonise" the economy. We've tried three ways so far, and now we may try a fourth.

The Rudd government tried to introduce an emissions trading scheme in 2009, but it was blocked in the Senate when the Greens joined the Tony Abbott-led opposition in voting it down.

When the Greens came to their senses, the Gillard government introduced a carbon tax in 2012, which it preferred to refer to euphemistically as "a price on carbon".

When Abbott came to power in 2013, he abolished the carbon tax and replaced it with "direct action" - using an emissions reduction fund to pay farmers and others to cut their greenhouse gas emissions.

But this week the government's Climate Change Authority recommended that the fund be supplemented by imposing an "emissions intensity scheme" on the nation's generators of electricity, so we could be sure of achieving the commitments the Abbott government made at the Paris climate conference last year.

Confused? Let me explain how an emissions intensity scheme would work and how it differs from its three predecessors. I think, given all the circumstances, it would be an improvement.

All four approaches are "economic instruments" which seek to use prices - rather than simple government laws about what we may and may not do - to encourage people to change their behaviour in ways the government desires.

Direct action just involves paying people to do things, whereas the other three are more sophisticated schemes, designed years ago by economists, to change market prices in ways that discourage some activities and encourage others.

Historically, economists have debated the relative merits of carbon taxes and emissions trading schemes, even though they are close relations.

If you look closely, however, you find that Julia Gillard's "price on carbon" was actually a hybrid of the two. It started out as a carbon tax because the government fixed the initial price at $23 a tonne.

But the plan was that after a couple of years, the price would be set free to be determined by the market, thus turning it into a trading scheme.

An emissions trading scheme - also called a "cap and trade" scheme - involves the government setting a limit on the total quantity of carbon emissions it's prepared to let producers emit, then requiring individual producers to acquire a permit for each tonne of carbon they let loose.

Producers who discover they're holding more permits than they need are allowed to sell them to (trade them with) producers who discover they're not holding enough.

The government would slowly reduce the number of permits it issued each year. This reduction in the supply of permits relative to the demand for them would force up their price.

The higher cost would be reflected in the retail prices of emissions-intensive goods and services, but particularly the prices of electricity and natural gas.

This, in turn, would encourage businesses and households to use energy less wastefully, as well as encouraging producers to find ways of reducing emissions during the production process.

The third scheme economists have invented, the emissions intensity scheme (a class of "baseline and credit" schemes), has similarities with emissions trading schemes.

The government takes the total emissions of an industry - in this case, the electricity industry - during a year and divides it by the industry's total production of electricity during the year, measured in megawatt hours, to give the industry's average "emissions intensity" - C0₂ per MWh.

Those producers within the industry whose emissions intensity exceeds this "baseline" must buy "credits" to offset their excess emissions, from those producers whose intensity is below the baseline, or face government penalties.

In practice, this would mean brown and black coal generators having to buy offset credits from combined-cycle gas, wind and solar generators, benefiting the latter at the expense of the former.

The Climate Change Authority recommends that the intensity baseline be reduced each year by a fixed percentage until it reaches zero "well before" 2050.

If the scheme began in 2018 and was to reach zero by, say, 2040, the baseline would have to be reduced by 4.5 per cent a year (100 divided by 22).

So the absolute size of the reduction in emissions required would be high in the early years, but get smaller over time.

A great political attraction is, whereas the other schemes raise the price of every unit of electricity, the intensity scheme just shifts costs between different parts of the industry, meaning the average price increase should be small.

There would be some price rise, however, because the production costs of renewable generators are higher than those for fossil-fuel generators, and the scheme would increase the proportion of renewable energy in total production.

Just how high the price had to go would depend to a big extent on the effects of further economies of scale and further advances in technology in reducing the average cost of producing renewable energy.

An economic advantage of the intensity scheme is that it wouldn't be open to trading permits with other countries' emissions trading schemes (especially the European Union's, where the carbon price has collapsed) nor to dodgy emissions credits from developing countries.

The main economic drawback of an intensity scheme is that, by not doing a lot to raise the price of electricity, it wouldn't do much to encourage businesses and households to reduce their demand for electricity.

To counter this, the authority proposes that generators needing to buy offset credits be allowed to meet their requirements by purchasing "white certificates" from existing state government schemes which offer incentives to firms that do things to reduce their power use.

Let's hope the new approach brings some action.
Read more >>

Wednesday, August 31, 2016

There are few "taxed-nots" apart from the elderly

It's a sad day when economic commentators like me have to spend so much time explaining what's wrong or misleading about the things the federal Treasurer says, rather than backing up his efforts to educate the public on economic realities and helping him fight for sensible though unpopular policies.

To be fair, Scott Morrison did have useful points to make in his big speech last week, his first major contribution since the election.

But then he veered off onto reinforcing the mythology of the greedy well-off, who resent being taxed to help those less fortunate than themselves.

He announced there was a new divide in the community – "the taxed and the taxed-nots".

"A generation has grown up in an environment where receiving payments from the government is not seen as the reserve of those who unfortunately will be forever dependent on support or in need of a hand up, but a common and expected component of their income over their entire life cycle," he said.

"On current settings, more Australians today are likely to go through their entire lives without ever paying tax, than for generations.

"More Australians are also likely today to be net beneficiaries of the government than contributors – never paying more tax than they receive in government payments."

Get it? Here are you and I, working hard all our lives, having far too much of that income taken off us in tax. Yet out there somewhere, living in suburbs we rarely visit, is a growing army of bludgers who don't bother working, but find some way of conning the government into paying their way.

Now, apparently, a lot more of them will go their entire lives without paying more in tax than they get back in benefits.

This is self-pitying fantasy. It's not the disadvantaged we should feel sorry for, it's you, slaving away in Mosman or Brighton.

It's an imaginary picture of the world. It's the conspiracy theory you'd expect from One Nation, not the federal Treasurer.

It's built on a few simple tricks. It hopes you won't remember that Australia's social security system is the most tightly means tested among the developed countries, paying flat amounts that aren't at all generous – which is the main reason we pay less tax than most.

And it hopes you won't remember that we pay many more taxes than income tax. Personal income tax accounts for only a little over half the federal taxes we pay. Add in state and local taxes, and income tax accounts for 40 per cent of all taxes.

So the notion that people who don't work don't pay tax is silly. Even taking account of benefits received, next to no one goes through their life being "taxed-not".

It's true we spend almost $160 billion a year on social security – most of it going on pensions and benefits – which accounts for more than a third of all federal spending.

Official figures show there are about 5.2 million recipients of federal "income support". So who are these bludgers? People on the dole? They account for just 13 per cent.

Sole parents? They're 5 per cent. People at home being "carers"? Just 4 per cent.

I know, all those people faking bad backs on the disability support pension. Sorry, that's only 16 per cent.

So where are the rest of the people not pulling their weight and expecting us to support them? Well, half the people on income support are people on age or service pensions.

Oh. You mean the people who keep saying they're entitled to the pension because they "paid taxes all their lives". The people whose investment advisers helped them have lots of other income, but still get the pension.

And that doesn't count all the retired people paying no income tax on their income from superannuation, at present no matter how huge.

Nor does it count all those bludging parents getting the family tax benefit or those bludging mothers expecting us to help with the cost of childcare so they can go to work.

Family benefits and childcare subsidies account for more than a quarter of federal spending on pensions and benefits.

What, not quite so many lazy loafers as you expected?

The Australian Bureau of Statistics conducts a study where it attempts to allocate as many taxes as possible from all levels of government to each of Australia's 8 million-plus households, while also allocating as many cash and in-kind benefits as possible from all governments.

Morrison ought to look at the most recent study, for 2009-10, particularly page 41. It shows that whether we pay more to the government than we get back in benefits changes as we move through the life cycle.

It shows that, on average, single people of working age pay a lot more than they get back, as do couples without dependent kids.

Couples with a few kids pretty much break even or get back a bit more than they pay, but the people who really clean up are the retired.

Elderly couples are ahead to the tune of about $690 a week, on average, with elderly singles getting $475 a week, mainly because they pay little income tax but get huge health benefits along with the pension.

ScoMo isn't smart enough to know it, but in disparaging the "taxed-nots" he's really attacking the old.
Read more >>

Monday, August 29, 2016

Our other problem: xenophilia towards foreign investment

There are few topics on which there's more irrational thinking than foreign investment. Trouble is, the illogic comes as much from economists and policy makers as it does from uncomprehending punters.

Sometimes I think the wonky thinking by the economic literates is an overreaction to the crazy prejudices of the economic illiterates.

The punters think we can decide not to sell off the farm – not to allow foreigners to buy Australian businesses – without that having any economic consequences. Without the decline in foreign capital inflow leading to slower economic growth and a slower-rising material standard of living.

Of course, there's no reason the electorate shouldn't decide to trade off less foreign ownership for a standard of living that's lower than it could be, provided people understand the price they're paying.

The econocrats go the other way, exaggerating our dependence on foreign investment and other capital inflow.

Econocrats have the knowledge that we're a "capital-importing country" burnt into their brains. They live in eternal fear that one wrong move could reduce the inflow to a trickle, stuffing us completely.

They preach the need for us to attract more foreign investment even while they worry that the dollar's too high – another example of how long it's taking economists to adjust their "priors" (long-held beliefs) to a world of floating exchange rates.

I can't think of a time when we've had too little foreign investment. Even when the dollar briefly fell below US50¢ in 2000 there was no obvious problem.

Another silliness about the econocrats' conviction that we can never have enough foreign investment is their assumption that prices – specifically, the rates at which various taxes are set – will be the overwhelming factor determining how much we get.

Treasury continually lectures us on how globalisation has made it easier to move financial capital between tax jurisdictions, thus making the quest for foreign investment far more "competitive".

This, we're assured, makes it imperative we have tax rates that are competitive with far less attractive investment destinations, including developing countries a fraction of our size, where cronyism and corruption are rife, and you can't be sure of getting fair treatment in the courts.

Only economists, mesmerised by their model – which ignores all factors that can't be measured in dollars – would be silly enough to imagine that decisions about where in the world to set up business would be made without reference to non-quantifiable factors.

That global companies such as Google or Apple would refuse to do business in Australia because our company tax rate is higher than Singapore's.

Yet the need to be more price-competitive in the quest for foreign investment is advanced as almost the only argument needed to justify a cut in company tax. That there'd be nothing in it for domestic shareholders is treated as beside the point.

John Howard's decision in 1999 to discount by half the rate of tax on capital gains was justified on the grounds that it would attract lots of investment by foreign fund managers. Never mentioned again.

In their revulsion against the public's "economic nationalism", the econocrats have gone to the opposite extreme of assuming all foreign investment is good and we can never get enough.

When it suited the world's big mining companies to come to Oz and engage in a decade-long frenzy to build more mines before China went off the boil, it never occurred to our policy makers to make the miners form an orderly queue.

Rather, we let them turn our economy upside down. We saw our job as ensuring the miners' frenzy didn't cause an inflation surge, using high interest rates and tolerating a hugely overvalued exchange rate to suppress the non-mining economy and allow the miners to get all the resources they wanted.

We did lasting damage to our manufacturing and tourism industries to allow the miners to have their rowdy party.

We're left with a huge, capital-intensive, 80 per cent foreign-owned mining industry that employs just a handful of Australians.

Its foreign ownership wouldn't matter so much if it was paying its fair whack of tax. But we let the miners con us out of imposing a sensible resource rent tax, and now we discover they're turning legal somersaults to minimise the company tax they pay.

The econocrats have become so defensive towards foreign investment they've forgotten the most basic reason for having and managing an economy: self-interest.

Foreign investment is a means, not an end. It's not our job to make our economy a playground for foreign companies.

We should welcome them and tolerate their self-interested, rent-seeking behaviour only to the extent that it leaves us better off.
Read more >>

Sunday, August 28, 2016

Foreign investment helped to make us rich

If foreign investment in Australian businesses is so unpopular with so many people and such a hot potato for Malcolm Turnbull and his government, why do we persist with it?

Short answer: because we prefer our material standard of living to go up, not down.

This week an Essential poll revealed the full extent of the public's reservations about foreign investment. Foreign investment in mining was regarded as "bad for the economy" by 28 per cent of respondents.

For investment in ports it was 37 per cent and for investment in agriculture it was 44 per cent. For investment in infrastructure such as electricity it was 45 per cent and for investment in real estate it was 54 per cent.

The most opposed to foreign investment were voters for minor parties such as One Nation and the Xenophones​, but Greens voters weren't far behind. Then came Labor voters and, finally, voters for the Coalition.

But even among Coalition supporters there were almost always more saying it was bad than saying it was good.

When you remember that our level of material prosperity has been dependent on foreign investment since the arrival of the First Fleet, it's a wonder so few punters can join the dots.

Viewed through economic eyes, the First Fleet was just the arrival in this country of its first foreign investor, in boats laden with labour, materials and supplies, intent on getting a new subsidiary going.

There were a lot of imports with, on the other side of the transaction, an inflow of foreign capital owned by the British government.

The term's gone out of fashion, but since white settlement Australia has always been a "capital-importing country".

To develop a country economically you need lots of money - known here as financial capital - to pay for all the construction and equipment, known as physical capital. Where does this money come from? Someone has to save it by not consuming all their income.

Ideally, all the savings necessary to finance the economic development of our country would come from Australians. Then we'd own everything ourselves and all the profits would belong to us.

But we've always had a small population relative to the huge opportunities to farm our land, exploit our untold mineral wealth and develop our economy in many other respects, such as making ourselves an attractive destination for tourists and university students.

So, from the beginning, we've always invited foreigners to bring their savings to Australia and help us develop our economy much faster than we could if we relied solely on our own savings. That's what makes us a capital-importing country.

The attraction to the foreigners is that they own the businesses they build and keep the profits they make.

The attraction to us is we get a bigger economy than we otherwise would. The foreign firms provide a lot of employment for Aussies, buy a lot of their supplies from local businesses and, of course, pay tax to our government on their profits.

That's always been the deal. Had we kept the foreigners out, our economy and population would now be much smaller than they are and, in consequence, our standard of living would be much lower than it is.

At first the foreigners most willing to invest in Oz were the Brits. Then it was the Americans, then for a few decades the Japanese, and now the Chinese.

I'm old enough to remember when it was American investment that people objected to when we first started worrying about "selling off the farm".

But when the Japanese economy was riding high in the 1970s and '80s, and Japan began looking for profitable investments here, I remember how much the farmers carried on. They thought Japanese feed lots were the beginning of the end of Oz.

The Japanese came and stayed and eventually the farmers realised they were no threat. But now it's the Chinese, and farmers are back to manning the barricades. They're going to dig up our farms and take them back to China.

You know they will because their skin's a different colour. Or maybe they'll sabotage the communications and power networks they now own, just before they invade us.

The globalisation of financial markets has made it much easier for money to move between countries and thus complicated the picture I've just described.

These days, we can borrow foreigners' savings, not just let them set up new businesses here. And it's easier to sell them existing businesses.

It's easier for foreigners to buy some shares in listed Australian companies (known as "portfolio investment") rather than acquiring a controlling interest in a new or existing business ("foreign direct investment").

Before globalisation, countries tended to be either owners of many foreign businesses ("equity capital") or to have a lot of their businesses owned by foreigners. They either owed a lot of money ("debt capital") to foreigners or foreigners owed them a lot of money.

These days, every country does a lot of both. At March this year, we owed $2126 billion to foreigners, while foreigners owed us $1098 billion, leaving us with net foreign debt of $1028 billion.

Foreigners had equity investments in Oz worth $996 billion, while we had equity investments in other countries worth $1012 billion, leaving us with net foreign equity assets of $16 billion. You read that right.

But if this makes you think we'd be better off borrowing all the savings we need rather than selling off the farm, remember this final complication: foreign direct investors in Australian businesses don't just bring their savings, they also bring their managerial skills and often their more advanced technology, which Australian workers learn to use and then take on to local businesses.

And in this ever more integrated world, foreign investment and international trade tend to go together. Going for trade without investment is another way to be poorer than necessary.
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Wednesday, August 24, 2016

We shouldn't feel bad about leaving public debt to our kids

There are a lot of nice people in the world, people who worry about all the debt we're leaving to our kids and grandkids. I know this from the letters I get from people.

I got an email from a retired couple who said they'd be happy to pay more – a 15 per cent goods and services tax, medical co-payments or even a 10 per cent increase in income tax – if only it was guaranteed that the money was spent "to pay down debt, not rack up more with populist promises".

Unfortunately, there are no nice people in politics. Or, if a few start out that way, they soon get it beaten out of them.

Last week, in his first big speech since he was re-elected – the one so rudely interrupted by some woman who thought the mistreatment of asylum seekers on remote islands was something worth drawing to our attention – Malcolm Turnbull decided to tug on the heartstrings of nice people everywhere.

"We sing Advance Australia Fair," he said, "but there's nothing more unfair than saddling our children and our grandchildren with mountains of debt that we have created because our generation could not live within its means.

"If we aren't prepared to make the tough choices today – younger Australians, future generations, will be forced to pay back the debt through a combination of higher taxes and a lower quantity or diminished quality of government services. In short, through lower living standards than they would otherwise have enjoyed."

Sorry, but that's not true. It's roughly the opposite of the truth. And I don't believe someone as smart as Turnbull actually believes it.

But before we go on, how's this for one of the "tough choices" about fairness Turnbull wants our elected representatives to agree to in this year's budget: cutting the dole – which is a princely $38 a day – and other welfare payments by $4.40 a week, while agreeing to tax cuts of $6 a week for people earning more than $87,000 a year.

The justification for the cut in benefits is that it represents the belated removal of the "energy allowance" originally paid in compensation for the carbon tax. Since Tony Abbott abolished that tax, the allowance is no longer needed.

Now that is a tough choice. Is it fair to cut the benefits of low income-earners because we're "living beyond our means" while we cut the taxes of high income-earners?

But are we living beyond our means? What does that phrase mean, anyway?

Is any person or government that's borrowing money living beyond their means? That's what the politicians who keep repeating that line hope we'll assume.

A moment's reflection reveals its weakness. Say your offspring borrow a frighteningly large amount so they can live in a home of their own. Does that mean they're living beyond their means?

No, of course not. Not if they can afford the repayments. And not when you remember that the house they've bought will deliver them a flow of services for as long as they own it.

What service? It's providing them with somewhere to live – and thus relieving them of the expense of renting.

If I told you of a couple with a debt of $600,000, would you automatically assume they had nothing to show for that debt? No, you'd assume they must have bought a house and may well have made a sound investment.

But when politicians tell us the government owes many billions of dollars, many of us assume there's nothing to show for all that spending and borrowing. Which is just what game-playing politicians hope we'll assume.

But it's usually not true. What do governments have to show for all their borrowing? Public infrastructure – roads and motorways, bridges, railways and bus fleets, hospitals and schools, prisons and police stations and all manner of other facilities.

All those things contribute to our standard of living and to the efficiency of our economy. Do you think we'd be better off had the money not been borrowed and those things not been built?

Since we worry about our children and grandchildren, what kind of physical Australia do we want them to inherit? One with rundown and inadequate public facilities – one where it's really hard to get around, where roads and trains and hospitals and schools are grossly overcrowded?

If we continue letting our politicians demonise public debt, that's the world we'll be leaving for our descendants.

It's true we'll be leaving debt to our children. But we'll also be leaving them a better equipped, better educated and healthier Australia. Does this add up to something to worry about or feel guilty over?

According to the federal budget papers, almost all of the expected underlying cash deficit of $37 billion this financial year will be spent on infrastructure.

Most infrastructure spending is done by the state governments. Much of what they spend each year building facilities that will serve the community for 30 or 40 years or more is covered by that year's tax revenue (including federal grants), the rest is borrowed – to be serviced and repaid by the people who'll still be using those facilities.

It's the self-same bargain that was made with our generation. Sounds a fair and sensible way to keep building a better future.
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