Tag Archives: Economics

Social Science and Society

Interest rate cuts, jobs, debt and absent vision

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The Reserve Bank cut interest rates by 25 basis points in the jargon on Tuesday to a new low cash rate of 2.25%. This is the first cut since August 2013, just before the last election. Back then Joe Hockey lambasted the Rudd government for the sluggish economy requiring such stimulus. Now he hailed the RBA decision as good news for families, businesses and jobs.

ABC business editor Ian Verrender comments:

Make no mistake, this is an emergency cut to a level well below what already was considered crisis level.

Verrender explains that the RBA has two main roles. The first and primary role is to maintain steady prices, that is, to keep inflation under control.

Secondly, it has a responsibility to maintain the labour market as close as possible to full employment.

Verrender suggests that the RBA has now adopted a third role – massaging the level of the currency. This indeed seems to be supported by the Reserve Bank governor Glen Stevens’ continual commentary on the currency.

What really has spooked Mr Stevens are the actions of his global central bank contemporaries, many of whom have either embarked on programs specifically designed to depress their currencies or to cut interest rates.

Despite the Australian dollar falling sharply in the past year, from around US94 cents last September to US77 cents early this week, Mr Stevens argued the currency was still overvalued, given the crash in commodity prices and the decline in our terms of trade.

Last year Stevens called for a currency level of US75 cents. His comments indicate that he has an eye to the Trade Weighted Index, which measures our currency against a parcel of our trade partners. The TWI has not fallen as much, essentially because of the successful massaging done by other central bankers.

The Guardian quotes Stevens thus:

The Australian dollar remained above “most estimates of its fundamental value”, Stevens said, and reducing rates would therefore bring more downward pressure on the currency “to foster sustainable growth”.

Problem is that interest rates in other countries are down to almost nothing or less, so we will still attract money looking for yield, putting upward pressure on the currency.

On the box tonight one economist was suggesting that the RBA should trim a whole 100 basis points off the cash rate over the next year and take the currency down to US70 cents or thereabouts.

BT chief economist, Chris Caton, says the RBA is rightly concerned about employment and the investment needed to transition the economy out of its dependence on the mining construction industry. He sees Hockey as overly concerned about debt and deficits, which is not a big issue. Certainly it would be nice to reduce the deficit, but not at the expense of killing the economy.

Caton sees one more cut of a similar order down the road.

Chris Bowen (see at the bottom of the Hockey link) reminded Hockey of his 2013 comments.

“Joe Hockey and Tony Abbott both used to say that falling interest rates were a sign of a weak economy and a bad government,” he said.

“Instead of engaging in hypocrisy and spin, the Government just needs to start producing a proper economic plan with economic growth and jobs at its core.

“Making it harder for low and middle-income families to make ends meet while gutting science, research and development funding is no economic plan, it does nothing other than undermine future sources of economic growth.”

Peter Martin at The Age pointed out before the RBA move that our 10-year bond rate was now about 2.5%, basically the same as inflation. Effectively the government could borrow money for nothing.

Martin suggests that the government should borrow $100 billion or so to use in nation-building projects.

That’s enough to build the long-awaited Brisbane to Sydney to Melbourne high-speed rail line, or to build Labor’s original national broadband network, or Sydney’s $11 billion WestConnex road project plus Melbourne’s $11 billion metro rail project plus Melbourne’s $16 billion East West Link plus something big in each of the other states.

Or we could buy all the coal-fired power stations, shut them down and install solar with battery storage everywhere.

It’s a once in a lifetime opportunity. All we need is vision and confidence.

But that would mean ‘picking winners’, and increasing our debt numbers, so we’ll do exactly nothing.

Politics & Government, Social Science and Society

Hockey: dark strategy or a muddle?

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Some of each, I think.

In one sense the MYEFO (Mid-year Economic and Fiscal outlook) statement was not so bad. The bottom line is $10 billion worse and the budget will reach a surplus a year later, in 2019 instead of 2018. Ross Gittens gives Hockey a tick for not panicking.

Yet the MYEFO assumes that the Senate will co-operate in the new year and pass all those lovely cuts to higher education and welfare benefits along with other measures like the GP visits co-payment scheme.

Laura Tingle finds little to show that the Government has a clue on what to do about the collapse in revenue from the terms of trade and long-term fiscal consolidation. It’s blindingly obvious that we need to pay more tax, but the Government has taken the soft option of soaking the unseen poor by taking $3.7 billion from foreign aid.

Ben Eltham in an excellent budget review finds the Coalition’s economic policy “hopelessly confused”.

Last week Ian McAuley took a look at the Government’s economic strategies, which he finds based on three planks:

The first plank, revealed in the 2014 Budget, is an attempt to tilt income distribution towards the already well-off. The idea is that, given enough breaks, the rich will save and invest, providing employment for everyone else.

It’s a policy based on heroic assumptions about how the rich behave, most notably an assumption that rich people are rich because they are clever and industrious. Suffice to say that this was the disastrous approach known as “supply side economics” or “Reaganonomics” in America in the 1980s. If it stimulates any employment it is likely to be among workers in BMW car plants in Bavaria and real-estate agents in Sydney’s north shore.

The Australia Institute’s report The budget’s hidden gender agenda points out that this also favours men over women.

The second plank is about sustaining material living standards as long as possible on the back of the resource boom.

The benefits of the resources boom have been distributed in tax cuts and middle class welfare. Wayne Swan in his book The Good Fight points out that Peter Costello received a total of $334 billion in revenue upgrades and managed to spend $314 billion of it. A once in a century chance to upgrade our infrastructure was missed.

The Coalition’s third plank is pursuit of “small government”, even though Australia has one of the smallest public sectors of all developed countries, and we have pushed privatization to the extent that we are paying far more for poorer services than we would be had we retained public ownership of assets such as roads, airports and energy and water utilities.

Yet Eltham tells us:

With spending at 25.9 per cent of GDP, the Abbott government is indeed spending more than Julia Gillard’s government – more, in fact, than every year of the Rudd-Gillard era, except the stimulus year of 2009-10.

I’ve always thought there was an ideological dimension to Howard-Costello’s distribution of goodies. We are expected to take more responsibility for ourselves. But why does Labor follow suit? Purely for political reasons, I think. To avoid the ‘big spender’ tag and demonstrate economic management.

Labor might do better to take a different and more honest approach. Australia could become a better, fairer and more decent place to live if we taxed and spent to, say, 30% of GDP. We’d still be near the bottom of the league tables.

I’ll leave you with this graph of the underlying cash balance as a percentage of GDP from MYEFO via the AFR:

Cash balance 2 001_cropped_600

You’ll notice that Swan had the balance down almost to minus one percent before Hockey came and created a mess. I agree with Chris Bowen, Hockey is simply not up to the job.

Politics & Government, Social Science and Society

Whitlam’s economic performance: time to think again!

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The Whitlam years were certainly tempestuous years. There is a tendency, even by acolyte’s, to think that the economic turmoil of those years was made in Australia, by EGW, his treasurers and his ministers.

Whitlam_3960008-3x2-600

Who can forget the Khemlani loans affair, where Minister for Minerals and Energy, Rex Connor, was seeking to borrow US$4 billion, a lot of loot for the time, for resources projects without going through Treasury. My understanding is that the scheme was hatched by Connor, Whitlam and a small kitchen cabinet, perhaps including Lionel Murphy. After it became public and Cabinet put the kybosh on the scheme, Connor was still found to be liaising with the shadowy Tirath Khemlani. Whitlam dismissed Connor.

Khemlani, it is said, never made a loan in his life, and perhaps had contacts with the CIA.

Cairns was dismissed a few months later over a separate loans affair, where he (as claimed) unknowingly signed a letter and misled parliament by saying he hadn’t.

For these and other reasons, the Whitlam government at times looked highly shambolic.

Yet economic turmoil was not confined to Australia. That first Khemlani link reminds us that the price of oil quadrupled between 1973 and 1974. That’s why the Middle East was awash with petro dollars and a Khemlani figure could exist. Ian Verrender, the ABC’s busianess editor, now invites us to think again.

Verrender riffs off a piece in the AFR by John Stone, former treasury secretary and National Party senator, plus “outspoken critic of multiculturalism and a supporter of the Samuel Griffith Society, which he helped found”. Stone was also at one time John Howard’s finance spokesman in opposition. In his piece The economic policy madness of the Whitlam era Stone outlines a tale of woe. But:

As Stone rightly points out, Australia did not go into recession. What he fails to mention is that America did. So did the UK. And they were no ordinary recessions.

Both our northern hemisphere allies endured long and painful slumps, the chaotic fallout from which reverberated through the global economy, including Australia.

Not only that, inflation ran wild in both the northern hemisphere economic superpowers and throughout the developed world. It was a global recession that marked the dramatic end of the post-war boom.

This was the time of rampant stagflation, a rare phenomenon in economics where inflation and unemployment rise simultaneously. It’s a nightmare scenario for policymakers. Raise rates to dampen inflation and you exacerbate unemployment. Try to fix the jobs crisis and you fuel inflation.

There were a number of factors behind the global recession.

The Bretton-Woods financial system – instituted after the war that tied the US dollar to the price of gold – collapsed in the early ’70s, itself enough to engineer a significant slump in global activity. This followed attacks on the currency as the US ran up a constant series of balance of payments deficits.

The sudden collapse of the system and the immediate devaluation of the US dollar, which from then on became a fiat currency valued against other currencies, created havoc on trade and current account balances throughout the developed world.

Add to this that the Arab world had formed the Organisation of Petroleum Exporting Countries and in 1973 deliberately squeezed supplies.

The price of oil quadrupled between October 1973 and the following January. That’s correct, energy prices rose 400 per cent in four months, sending shockwaves through developed world economies, underscoring the dramatic price rises that, in turn, fed through to wage demands.

Between 1973 and 1975, the Whitlam era, inflation in the UK grew from 7.4 per cent to 24.89 per cent – vastly higher than anything experienced in Australia.

Great Britain was wracked by industrial disputes. Miners walked off the job, coal supplies dwindled. So dire was the energy situation, UK prime minister Edward Heath instituted the three day week as commercial electricity users were restricted. Food queues formed.

America, meanwhile, endured its worst recession since the Great Depression between November 1973 and March 1975. While the unemployment spike was relatively short-lived inflation soared from a relatively modest 3.65 per cent in early 1973 to a 12.34 per cent peak at the end of 1974 before tapering off during 1975.

Certainly under Jim Cairns stewardship the money flowed. Verrender says:

Gough Whitlam’s first two treasurers, Frank Crean and Jim Cairns, were widely criticised for their performances. Cairns, especially, appeared to be distracted by assets of another kind, and spending during his reign blew out spectacularly.

But Bill Hayden’s budget, delivered shortly before The Dismissal, had many in the Opposition worried. It was a responsible document designed to bring inflation and unemployment under control.

Personally I had a couple of long conversations with Bill Hayden when he was Treasurer and was impressed. The Whitlam Government had a further 18 months to run and things may have settled down.

It should be remembered that Malcolm Fraser only had the capacity to block supply courtesy of highly unorthodox senate replacements. First, in March 1975 the independent Cleaver Bunton was appointed by NSW Premier Tom Lewis to replace Lional Murphy who Whitlam had appointed to the High Court. Secondly Albert Patrick (Pat) Field was appointed by Queensland under Joh Bjelke-Petersen following the death on 30 June of Queensland ALP Senator Bert Milliner. Field had been an ALP member, but offered himself, promising never to support Gough Whitlam.

These were highly improper and undemocratic acts that were accepted by Malcolm Fraser.

Back to the economy, it could be that Cairns’ profligacy acted like a massive Keynesian stimulus package, saving Australia from recession.

More generally, figures like Immanuel Wallerstein see capitalism in its main centres doing it tough from the early 1970s. Capitalists sought to maintain their profits by beating down wages, by outsourcing, by financialisation, including increasing privatisation of human activities and experience. It’s well-known that American workers struggled to maintain real wages from the 1970s onwards. The modern manifestation of neoliberalism seems to date from about this time.

Thomas Piketty’s work on inequality is startling. This graph shows the rise in inequality in the US by charting the top decile’s share of income:

chart-01

The 2012 data, too late for inclusion in the book, sees a new high of over 50%.

There’s a similar pattern if you look at the top 1% in the Anglo-Saxon economies:

chart-03

Clearly something broader and deeper is going on that Whitlam’s whole program of social investment perhaps helped to protect us from. Certainly as Verrender says, Stone “still fails to grasp the impact the global economic upheaval had on Australia.”

Politics & Government, Social Science and Society

The oligarchs are here and active in our midst!

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Rob Oakeshott tells us he “poked power in the eye and got an almighty punch on the nose in return.” He laments the influence of the monied class in politics, which he sees as subverting democracy.

Swan is very clear about how a small but growing number of very rich people penetrate the political system in a reflective chapter of his book, The Good Fight. There is a negative review in Newscorp and an amazingly positive one in Fairfax. Who would have thought! I’m not sure they read the same book! I’ll not attempt a review here. Rather, I’m focussing mainly on his chapter Enemies worth having and his paper The 0.01 per cent: the rising influence of vested interests in Australia originally published in The Monthly, now included in an appendix.

Swan accepts the market economy and the value of entrepreneurship, and accepts that many business leaders are concerned about the national interest as well as the welfare of their corporations. Unfortunately a growing number, he says, suffer from ‘the blindness of affluence’ based on materialism and selfish individualism, and are aggressive and ruthless in pursuing their ends. He says:

Many of the winners from our prosperity just don’t see poverty and injustice any more, let alone the persuasive case that a fairer society produces an even more prosperous economy. The logic and the economics put forward by Joseph Stiglitz and Thomas Piketty, and in Australia by people such as Andrew Leigh, are ignored. And in their world, higher quality universal education and health services are a drain on the budget, not a platform for a fairer and more prosperous economy. (Emphasis added)

Such selfish corporates preach competitiveness and productivity for the economy as a whole, but in practice are only interested in the short-term benefits to their own corporations. What they are seeking is wealth transfer to them from consumers and taxpayers.

This small but growing group throw their weight around quite directly. The classic case was the public campaign over the mining super tax, where they sought to destroy a government rather than offer up one cent. They blatantly lied about consultations that had been held with them and mounted a $20 million media blitz against the Government.

In this case their bluff was called by Gillard when she attained power. She told the miners that the tax would be implemented in spite of them. They had a choice of entering discussions to have an input, but only on condition that they withdrew their campaign. This worked and the discussions were amicable.

I’ll leave it to others to judge whether the miners nevertheless got much of what they wanted. I’ll just note that it is a super profits tax and that the industry pays considerable normal royalties and taxation. Nevertheless the point in question is that the minerals are owned by the people, not the companies, and the people should get a fair reward.

This example encouraged the club industry, where the independents, Oakeshott and Windsor, were certainly spooked by their campaigning against the proposed pokies legislation. The extent to which the Labor Government was similarly spooked is not clear.

The tobacco industry is one case where the Labor Government stared the industry down.

A case where the industry won hands down was the superannuation industry. The fees accruing to the funds management industry are in the range of $20 to $40 billion each year. The industry can thank Labor for creating the industry and Labor had just approved a graduated increase from 9 to 12%, thus increasing the size of the industry by a third through that decision alone. Swan details how he planned to close the super tax loophole for the very wealthy, looking for funds to pay for the NDIS (National Disability Insurance Scheme).

John Brogden, head of the Financial Services Council, requested a meeting, which was arranged with Swan, Shorten and advisors. Brogden advised that his industry had a media campaign against the Government ready to go, and if they altered super in any way at all they would launch it.

Swan told Brogden he didn’t play that way and terminated the meeting, but in fact in the end he soaked the universities instead.

In looking at the Henry tax review a Business Tax Working Group was formed. When considering reducing the corporate tax rate, Swan wanted to pay for it by rescinding a raft of business tax concessions. The BTWG insisted that it be paid for by consumers with an increased GST. The BWTG subverted the consultations by backgrounding the media, producing negative press commentary. In the end nothing happened.

Business too lined up against carbon pricing and the greenhouse mafia appear alive and well in the current consideration of the Renewable Energy Target.

Swan sees the conservative political parties as tools of business with sections of the media playing their part.

Swan says you enter politics to make a difference and if you forget the little people you sacrifice part of your nation’s soul. Strange he doesn’t mention what happened to unmarried mothers under his watch, but he does regret that fiscal discipline is a brutal game and often brings into play what he would call Labor values.

In the end he gives himself a tick. A bit over a month after he resigned as Treasurer the ABS Household Income and Income Distribution data was published showing that inequality had fallen again between 2009-10 and 2011-12.

According to Swan, Obama described income inequality as the defining issue of our time. I wonder whether he too would get a koala stamp!

Social Science and Society

A glass more than half full

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Economist John Edwards questions the notion of an economic crisis (Laura Tingle in the AFR, paywalled, unfortunately) in relation to the resources boom. For at least nine years, Ross Garnaut has been warning about “The Great Complacency”, that we are squandering the benefits of the resources boom and are ill-prepared for its aftermath. Andrew Charlton, talking to Phillip Adams, has a nuanced view, but sees difficult days for us if China crashes, builds less infrastructure and needs less of our iron and coal.

Charlton regrets the eight tax cuts delivered by Costello and Howard. People often talk of Norway, but Chile too has long created a sovereign wealth fund to lock in permanently the benefits of mining. We have largely spent the benefits on consumption.

Edwards fingers those tax cuts also, but questions the very nature of the ‘boom’. Edwards points out that in the 10 years prior to the resources boom Australia grew more rapidly than during the socalled boom years. Other factors, such as the GFC, have had a greater impact.

He says we haven’t just “complacently dozed through an unparalleled opportunity to reshape their nation and prepare for the challenges ahead.”

“Australians have been saving more, investing more, working more and learning more”, he says.

“During the mining boom Australia’s capital stock has increased by nearly two-thirds, a larger share of Australians have jobs, the share of young people in training and higher education has increased markedly, household saving has increased from zero to one-tenth of household disposable income, national gross saving has risen to well over one fifth of GDP, the current account deficit has narrowed, household credit growth has slowed sharply, and Australian banks have dramatically reduced their dependence on foreign borrowing and thus the vulnerability of Australia’s financial system to global shocks.

“Of the biggest investment boom in Australian history, well over four-fifths has been matched by Australian savings.”

(I wonder how that last fact matches with the often repeated claim by Hockey et al that we are borrowing overseas to pay the interest on our government debt.)

Edwards big emphasis is on human capital, which we have been developing and will serve us well, with further development, in the future.

Economic change is about more than money. During the years 2003 to 2013 a net 2 million long-term migrants settled in Australia.

“This vast, transformative migration, the full effect of which has yet to unfold, has occurred not only without serious controversy, but almost without notice”.

The socalled budget ‘crisis’ is mainly a revenue problem. It will be fixed by some restraint, certainly, but mainly by restoring revenues to historic percentages of GDP. I pointed out here that Hockey has manufactured a crisis by limiting revenues to 23.9% of GDP. Lifting that by a notch or two, manageable over time by bracket creep, would do wonders for the deficit.

Edwards argues that we need “continuous reform and adjustment to entrench our prosperity, but in order for it to be deliverable it has to be based on a recognition of success and making sensible claims for the outcomes”. In that we need to be careful that ‘reforms’ don’t advantage one group to the disadvantage of another.

Nevertheless, the high dollar, now based on our comparatively high interest rates rather than the price of commodities, which have been falling, is still a drag on traditional areas such as agriculture and tourism as Charlton notes. But overall, he says, mining employs far fewer people than knowledge based services and elaborately transformed manufacturing.

Edwards says that it is in these areas, exporting services and goods to the developing markets of Asia, that our future opportunities lie.

Edwards says that people no longer believe the crisis story, “the story of prolonged failure; imminent catastrophe, sweeping advantages that flow from the kinds of reforms that are sometimes advocated.” Tingle says this:

poses some big questions for our political class about whether they need to, or are even able to envisage, a different script to the one that has dominated their working lives and institutional memories.

There’s an opening for a political leader who excites us with vision, just as Kevin 07 did perhaps a little in an era now fading into the past.

John Edwards is an economist who is a member of the Board of the Reserve Bank of Australia, Visiting Fellow at the Lowy Institute for International Policy, a member of the Board of Skills Australia and Adjunct Professor at the John Curtin Institute for Public Policy at Curtin University. In January 2012 he was appointed one of three members of the Australian Government’s Review of the Fair Work Act. He just published ‘Beyond the Boom’, a Lowy Institute booklet.

Lateline also has the story.

Politics & Government, Social Science and Society

Resolving the budget ‘crisis’

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We definitely have a looming political budget crisis. Whether there is a fiscal/economic crisis is a separate question. First the politics.

Mark has an excellent post wherein he poses three alternative scenarios. I have only two, because I don’t see Abbott, Hockey et al being able to negotiate the maze that faces them in the senate. Nor do I see the Liberals changing leaders. There simply isn’t anyone. Hockey has broken his brand. Turnbull isn’t interested and not enough will have him. They couldn’t choose Morrison, could they, although his stocks are said to be riding high, having stopped the boats.

1. Abbott fails to negotiate important elements of the budget, such as eliminating the carbon ‘tax’, the proposed changes to Newstart and Youth Allowance, the changes to the age pension etc. As promised, Abbott would call a double dissolution election, after some bipartisan changes to senate voting practices. But note well, Antony Green for complex reasons says:

In my opinion there is not going to be a double dissolution in the near future, and even in the more distant future, I cannot see any possibility of a double dissolution before late 2015 or the first months of 2016.

2. Antony Green thinks that Abbott will only call a double dissolution if he thinks he can win. In this scenario Abbott fails to negotiate the senate, and the polls stay unfavourable. Abbott wimps out and limps on to a regular election in the second half of 2016.

I would discount the second option. Someone pointed out recently that when challenged, Abbott becomes more determined; if you like, more pugilistic. Moreover it would be manifestly foolish to struggle on with a government that lacks authority in the parliament and can’t effectively govern without Clive Palmer, who would maximise his leverage.

Of course, the polls might change. Apparently the feedback from the electorate to the party room was horrendous. For example the Oz gives us a taste:

JOE Hockey’s friends say he has been taken aback by the poor response to his budget from Coalition MPs. Well, Treasurer, you’d be horrified to know what some of them really think.

“There’s been no narrative. It’s been all over the shop. One minute we say there’s an emergency, the next there’s $8 billion for the Reserve Bank, $12bn for fighter jets, and we’re still splashing out on the paid parental leave scheme,” says one.

Now the government is considering a budget ad campaign. Except that there won’t be any radio, TV or newspaper ads. The campaign will fill our letter boxes with letters and pamphlets. Apparently the recalcitrant and benighted voters need to understand that this was the budget that the country needed. Needed, that is, to fix the “Labor debt and deficit mess”. You’ll hear that phrase a million times before the next election.

Which brings us back to whether there is a crisis in the fiscal/economic sense.

Jacob Greber and Phil Coorey had an article on the front page of the AFR Budget crisis is real, says PBO:

Parliament’s independent budget adviser has rejected Labor and Greens’ claims the Abbott government has ­concocted a budget crisis, saying ­without action Australia’s debt will grow at one of the fastest rates in the developed world.

In remarks that effectively endorse government warnings that if left unchecked, gross debt would balloon to $667 billion, Parliamentary Budget Officer Phil Bowen said it was time to begin the return to surplus to protect the economy against future crises.

“It is time to start coming out [of debt and deficit], otherwise the longer you leave it the more exposed you become and the harder it is to wind it back,” he told The Australian Financial Review.

This is sad, really sad. On page 47, buried in the middle of a tiny opinion piece by Andrew Leigh we had the truth. Labor in the Pre-election Fiscal and Economic outline had the budget coming back to surplus in 2016-17 in an orderly way. Hockey plans to do it by 2017-18, with the most horrendous cuts.

The document Leigh refers to was prepared by Finance and Treasury and released in August 2013 as part of the charter of budget honesty. Remember this table from ABC Factcheck?

PEFO_cropped_600

Mainstrean journalists are too thick or too lazy to look at the facts. Instead they accept the LNP narrative.

With friends like that who knows what the polls will do?

Sensible people realise that there is no crisis, though we do need to bring the budget back to surplus within a reasonable time. After the confusion and sense of affairs out of control under Swan/Gillard, few seem to understand that finally, under Rudd/Bowen order had been restored. According to the independent umpire. Hockey has added the chaos and crisis in so far as it exists.

I’m inclined to think that Hockey/Abbott et al have fractured the basic contract with the people, that the people will not want to go back to the world of the pre-Whitlam era, which is where Trevor Cook compellingly thinks the reactionary tea party is aspiring to take us:

When they attack the so-called age of entitlement, they are really attacking the pillars of modern, Whitlamite Australia where concerns about access were more important than reducing the tax rate for business and rich individuals.

And the biggest stalking horse of all is Abbott’s efforts to get rid of Labor’s commitment to a national system of government and revert to a pre-federation style competition between increasingly impoverished states.

The intended victims of this charade are the poor and the middle class.

Abbott knows the states will be forced to cut spending – he wants them to do it.

Australia is at a turning point. And Abbott is no moderate, no centrist, not even a genuine conservative.

Perhaps the tea party utopia is best captured in this image from an anti-liberal site via Mark’s Facebook:

save the rich_10300316_320260274792507_5516613108870449871_n_500

Social Science and Society

Cap super, says Richard Denniss

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Treasury secretary Martin Parkinson says the superannuation system is being used as a wealth creation vehicle for the rich.

Paul Drum from Certified Practising Accountants Australia says there is nothing wrong with wealth creation as such. If you want to provide income for the future you need to create a pile of wealth. (By my calculations, for example, if you don’t buy a house and need to pay $400 per week in rent, then you’ll need capital of at least $416,000 with growth capacity at least equivalent to the CPI. Of course if you buy an equivalent dwelling it will cost you more than $416,000 in most places around the country.)

Drum says we need to look at equity aspects, but doesn’t elaborate.

Richard Denniss of the Australia Institute says we’ve created an intergenerational wealth transfer system rather than a retirement incomes system:

So if we want to create a system that helps the majority of Australians have slightly higher incomes when they retire, that’s fine, we can talk about that.

But the idea that superannuation is used as a tax minimisation vehicle of very high income earners to pay far less tax than we’ve deemed fair, and then in turn to pass tens of millions of dollars onto their children, this isn’t the retirement income scheme, this is a intergenerational wealth transfer scheme.

The Treasurer himself said that in 2050 the proportion of people getting a pension or part pension will be about the same as now – roughly 80%. As a retirement incomes system super is a failure.

Tax concessions for super are about to pass total expenditure on pensions and in a few years will exceed the GST. Something needs to be done.

Part of the problem here is that superannuation assets are not included in the will and are not sold up when a superannuant dies. The benefits simply flow on to the next of kin. Directly held shares, on the other hand, must be sold, triggering capital gains tax.

When one spouse dies the benefits go to the other. Also, if I’m right the other spouse could cash out the super, tax free.

Family trusts provide similar intergenerational tax free wealth transfer.

Richard Denniss says cap super, to limit the call on the public coffers.

That is one change among others that is certainly needed, but what should the limit be?

When super was an issue with the Gillard government in 2013, we were told that a pile of $1 million would provide a ‘comfortable’ retirement income of $50,000 for a couple who owned a house.

In calculating income from super the rule of thumb is that you can draw an income of 5% of capital, so $2 million could produce an income of $100,000 per annum. That’s about 50% above average household income. More than enough, I should think!

Do it, please, Labor, when you get the chance and ignore the cries of class warfare. The LNP are more likely to be concerned about those who ‘waste’ their super on trips away, then rely fully on the pension.

Politics & Government, Social Science and Society

To GST or not to GST

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Tony Abbott and Joe Hockey have been seen as herding the states and territories towards increasing the GST, rightly or wrongly. I suspect rightly.

Richard Denniss in the AFR says Forget GST, hit the rorts on super.

The Commonwealth government will collect $363 billion in taxes this year, with state and local governments collecting a further $83 billion in taxation. The GST accounts for around $51 billion, or 11 per cent, of total revenue. Increasing the GST to 12 per cent would collect an additional $10 billion or so. In an economy with a nominal GDP of $1521 billion and a population of more than 22 million it is, quite simply, small change.

If raising the GST is “the solution” then ‘the problem can’t be very big, which, of course, is exactly what the World Bank, the IMF, the OECD and the rest of the world have been trying to tell us. Australia is a low tax, low-debt country.

The pension is costing about $40 billion each year and is growing at 6% pa, only 1% faster than nominal GDP. Superannuation concessions, by contrast, cost about $35 billion, of which $13 billion flows to the richest 5%, and are growing at 12% pa.

Economists tend to favour taxing consumption, because it is efficient and less distorting than many other taxes. They tend to downplay the fact that it is regressive, once again selectively hitting those who can afford it least. They wave that argument away, saying that the needy can be compensated by increased transfer payments. Whether such payments would hit the mark is highly questionable. Moreover the better off in the community tend to see such payments as undeserving.

Denniss identifies other “rorts” such as the 50% capital gains concession, and the exemption of the family home, which can store massive value for the rich.

An alternative to increasing the rate is to increase the coverage. The list of exempt goods and services is actually quite large. I’ve copied it here for convenience:

  • medical and other health services, hospital services, residential or community care and medical aids;
  • education courses, course materials, student accommodation;
  • child care services registered under the Childcare Rebate, eligible child care centres or other child care services
  • exports of goods and services from Australia if exported within 60 days after the earlier of the day payment is received or the invoice is issued;
  • religious services;
  • non-commercial activities of charitable institutions;
  • water and sewerage goods and services;
  • sales of businesses as going concerns;
  • sales of precious metals after refinement by the supplier and delivery to a precious metal dealer
  • inwards duty free goods sales to a relevant traveller;
  • sales of freehold interest in land or long-term lease made by a Commonwealth, State or Territory Government;
  • subdivided farm land
  • cars for use by disabled people.

I’m not sure about sales of precious metals and subdivided farmland, but I think Australia has its exemptions about right. It’s late but I can’t find food on the list. Most but not all food is exempt as explained here.

I’ve been explaining that Bowen and Rudd did not leave the budget in a mess (see ABC FactCheck). By adding $68 billion to the deficit, however, Hockey has created quite a mess of his own. Treasury boss Martin Parkinson explained that brave assumptions were required to fix it:

Prior to this budget, we were banking the house on 33 years of uninterrupted economic growth and there’s no precedent for that. We’re banking on another 10 years of fiscal drag and that being pocketed, and that has quite significant regressive impacts, and even then, we still don’t get back to surplus.

“Fiscal drag” means bracket creep.

Thanks Joe!

Tax the rich, I say. At least 80% for incomes of over half a million and a wealth tax for those who organise to have no income. Peter Martin points out that the wealthiest 75 have an average taxable income of $82.

Meanwhile NATSEM modelling has found that low earners do most of the heavy lifting:

The budget hits 1.25 million low and middle income families with children on average by about $3000 a year in 2017-18 while it actually benefits upper middle and upper income families through removing the carbon price, according to modelling done by NATSEM at University of Canberra.

That’s apart from the young unemployed, where a 26 year-old loses $6944.

10262004_10154113572330198_5995357860786883638_n_500

Clearly there is a need for a thorough review of the total tax system, which Labor undertook and then largely ignored. That was a major blot on the legacy of Swan’s treasurership and the Rudd/Gillard years, having commissioned the Henry review and then largely ignored it.

Politics & Government, Social Science and Society

Poll anger or a shift in the tectonic plates?

36 Comments

The polls are disastrous for the LNP. Nielsen is 56-44 to Labor, Newspoll is 55-45 and Morgan is a staggering 56.5 to 43.5. Historically Morgan tends to favour Labor, Nielsen was the most accurate at the last election.

The question is now whether these results represent short term anger at the budget or whether the tectonic plates have shifted. Laura Tingle comes out in favour of the latter:

Just every so often in politics there is a moment when you can almost hear the tectonic plates shift, and they don’t necessarily come with elections.

We saw one of these in 2010 when it emerged that Kevin Rudd was dumping his commitment to an emissions trading scheme.

The Fairfax-Nielsen poll suggests the 2014 budget is proving another such moment when politics can be turned on its head.

It is not just the dramatic slump in the government’s primary and two-party preferred vote, or the fact that Labor is, for the first time, the major beneficiary of this slump. It is not just that voters – in spectacular, angry numbers – think the budget is both unfair and not good for the country.

It is not even that Tony Abbott’s barefaced refusal to confront the fact he is breaking promises has enraged voters in a way that makes his position with them unrecoverable.

It is the fact that this poll suggests Tony Abbott and Joe Hockey will have little choice but to go back and rethink the entire political and economic strategy on which this budget is built.

Unfairness, not good for the country, broken promises, lies.

We are often told that Labor needs a 4 in front of its first preference vote in order to win. Suddenly it has one, for the first time since 2010, and the LNP doesn’t. There has been a cross-over:

Labor LNP vote_cropped

Perhaps notably, the Greens have lost three points and the indies have picked up three.

This graph shows the Nielsen two-party preferred vote, ending with May 19:

2PP vote_cropped

Labor lost its way when Gillard announced the carbon ‘tax’ early in 2011. It looks as though there has been a shake-out since Rudd’s second coming, with the latest poll marking a decisive shift. Time will tell, but Tingle thinks the LNP will need to rethink it’s entire economic and political strategy.

In other aspects of the poll:

    The only demographic where the LNP tops Labor is in the 55+, were it is now 43-39 to the LNP compared to 49-33 in April.
    Shorten is now ahead of Abbott as preferred PM 51-40.

    Abbott’s approval rating has gone from a net -7 to -28. Only 34% approve whereas 62% disapprove.

    Shorten’s approval rating has gone from +2 to +12.

    A staggering 63% say the budget is unfair, the first time ever there was a majority, compared with 33% who say it was fair. Gillard/Swan in 2013 scored 43-46.

    53% thought the budget was good for Australia, again the first majority ever, compared with 42% who say it was good. Gillard/Swan scored 42-44.

Abbott said that the LNP was in a similar position after Howard’s first budget in 1996. He lied.

Abbott said there would be no cuts to health and education for several years. Again he lied. There will be $1.8 billion in hospital cuts from July.

Finally I want to emphasise again that Abbott, Hockey, Cormann and company are lying about Labor leaving a budget mess. This ABC FactCheck shows that Bowen and Rudd left the budget in good shape:

PEFO_cropped_600

Elsewhere Mark’s excellent post stresses the unfairness of the 2014 budget and its attack on a foundational Australian value. It’s not too much to say, I think, that it has breached the social compact on which the Australian polity is based.

Politics & Government, Social Science and Society

On a mission to upset everyone

28 Comments

Having upset the rich with their ‘debt levy’, and with 72% of people thinking it a broken promise, Abbott and Hockey are on a mission to upset the rest of us by re-indexing the fuel excise.

Richard Denniss told the 7.30 Report that the tax was good policy.

Sinclair Davidson told Waleed Aly that if you must tax, then taxing consumption is better than taxing production. The fuel excise taxes consumption. He forgets that sole traders (like me) driving a ute or a van would pay the tax. Nevertheless the LNP backbencher Ken O’Dowd in the linked article appears to be wrong:

A Federal Government MP has spoken out against plans to raise the fuel excise, warning it will force up the cost of everyday groceries.

Farmers and miners don’t pay fuel excise. That tax concession is worth some $13 billion, which the Greens would like to abolish.

Davidson also pointed out that fuel excise was a regressive tax, it disadvantages the poor. Those with time to ring up are letting Mr O’Dowd know:

“The phones haven’t stopped, especially with our older folk. We got off on the wrong leg, talking about increasing the pension age, I don’t think it was explained too good. It really concerned a lot of old people that they were going to lose their rights.”

It hardly matters now what the budget detail turns out to be – the damage has been done.

Meanwhile company directors are losing faith. Only 30% of company directors expected the new administration to have a positive impact on their business decision making, down from 70% when the LNP took over. Furthermore:

This loss of confidence has also translated into a fall in the proportion of directors who believe the Federal Government understands business – from 55 per cent last year to 48 per cent now.

Fully 80% say that achieving a budget surplus in the next three years is not a priority.

Wayne Swan says he left the budget in good shape. Chris Bowen has been saying that Joe Hockey has doubled the deficit by changes to Government spending and changes to Government assumptions. The ABC FactCheck verdict:

Since the election, the official forecast deficit has doubled. The economic assumptions are different from those used before the election, and spending decisions have been made that were not in the previous forecasts. Mr Bowen’s claim checks out.

Here’s the table that tells the story:

PEFO_cropped_600

The PEFO of August 2013, prepared independently by Treasury and Finance, shows a surplus for 2016-17. Leaving aside Hockey’s moral austerity crusade, it does appear that he has confected the crisis.