Peter Martin Economics

The Coalition wants to dump our 2030 emissions target, yet somehow hit 2050’s. Behavioural economics has a name for that

noreply@blogger.com (Unknown) — Wed, 12 Jun 2024 05:51:00 +0000

If you are anything like me, the nearer you get to a deadline, the more desperately you want to postpone it, no matter how much harder that makes things down the track.

It’s what the Coalition wants Australia to do about its 2030 emissions reduction target – the one signed into law in 2022 and registered with the United Nations Framework Convention on Climate Change.

The Coalition says it remains “fully committed” to the more challenging target of net zero by 2050, but it wants to postpone some of the work needed to achieve it until later, nearer 2050.

It’s a human impulse that until the 1980s had economists baffled. That’s when they came up with a new name for it: “hyperbolic discounting”.

Most of us put things off

Before then, economists had no problem explaining people putting things off. We’d long had the concept of a “discount rate” to explain why we do it.

If I offered you a choice of finishing an unpleasant task this month in return for $100, or finishing it a year later for 5% less, you are pretty likely to opt for finishing it a year later in return for 5% less.

Economists would say that meant your “discount rate” (the rate at which you discount what happens in the future) was greater than 5% per year.

It’s an incredibly useful concept, and one of the reasons we want to be paid interest when we lend money or deposit money in a fixed-term account.

Yes, it will be nice to get our money back – but getting it back when the loan ends won’t feel as good as having it now. If our discount rate is 5% per year, getting the full amount back then will be worth 5% less to us per year, so we will want interest of 5% per year.

Voters and politicians discount the future

It’s also how governments and businesses decide whether to fund major projects. If their discount rates are 5% (they are usually higher) and the eventual payoff from the project works out at less than 5% per year, it isn’t worth it. As a species, we are more concerned about what happens now than what happens in the future.

At least that’s what was taught at universities in 1970s: everyone has their own personal discount rate. For patient people it is low, and for impatient people it is higher. If you can find out what it is, you can find out what they should do.

Except that many of us don’t behave like that at all. We appear to have a discount rate, but it changes – dramatically – the closer we get to a deadline.

Near deadlines, our behaviour becomes extreme

Remember when I asked about finishing an unpleasant task this month or a year later? You might well have given an answer that implied a discount rate near 5%.

You would have probably given a similar answer if I asked about finishing the task a year after that, in 2027 instead of 2026. Your discount rate would be near 5%.

Except for the week before the task is due. In that week, you might well be prepared to sacrifice almost anything – an awful lot – to put it off for another week or another month, or two months or a year. Your discount rate would be off the charts.

On a chart, it wouldn’t look like a straight line – 5% or so per year – it would like a hyperbola, a line that had suddenly climbed enormously high. That has also been used to describe the concept of hyperbolic discounting.

Acting like a hyperbolic discounter – pushing out a deadline as it becomes imminent, even if it costs more to meet it later – as the Coalition now says it will do the 2030 emissions reduction target, is a way to never meet a deadline.

Of course, the Coalition says it won’t cost more to meet the final deadline of net-zero by 2050 because by then we will have nuclear power.

It’s a familiar argument to those of us who want to put things off. Something will come along that will make them easier to do later. If it doesn’t, maybe we will behave like a hyperbolic discounter again. Not that we expect to.

Nuclear power mightn’t make future choices easier

Except that the unexpected happens. Cost overruns are notorious in building nuclear power plants, even in countries that have lots of them and they are often delivered late.

And electricity is responsible for only one-third of Australia’s greenhouse gas emissions. Cutting electricity emissions to zero (a road we are already on, they’ve been falling since 2015) will leave another two-thirds of emissions untouched.

That’s unless we rapidly electrify other sources of emissions such as cars and trucks and the use of gas for heating, a transition the Coalition remains reluctant to embrace.

It’s hard to meet deadlines. Right now the government is on track to miss its 2030 emissions target of 43% below 2005 levels, although its officials say it is on track for 42% and it thinks it can make up the difference.

It’s tempting to put things off. If the Coalition persuades us, it’s because we are highly persuadable. Most of us don’t like hard choices now. We like them later.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Spare us the talk about a wages explosion. There’s nothing wrong with lifting Australia’s lowest wages in line with inflation

noreply@blogger.com (Unknown) — Wed, 05 Jun 2024 05:49:00 +0000

What is it with the Coalition and wages?

When, in the final days of the 2022 election campaign, the then opposition leader Anthony Albanese backed an increase in award wages to keep pace with inflation, his opposite number in the Coalition, Prime Minister Scott Morrison called him a “loose unit”.

“He just runs off at the mouth, it’s like he just unzips his head and lets everything fall on the table,” Morrison said.

Allowing the wages of low-paid Australians to climb with inflation would

make interest rates rise even higher, it would threaten the strong growth we have had in employment, and ultimately it would force small businesses, potentially, out of business altogether.

Now, two years on, after yet another Fair Work Commission decision that lifted award wages in line with inflation, the Coalition has returned to the fray.

On Monday, Shadow Finance minister Jane Hume asked Treasury Secretary Steven Kennedy at a Senate hearing how he could support a wage increase linked to inflation at a time when productivity growth was uncertain.

She was, she said, just asking for treasury’s position.

The Fair Work Commission had just given Australia’s lowest-paid workers 3.75%.

The approach goes back some time. In 2014 the Coalition’s recently-installed industrial relations minister Eric Abetz warned of something akin to the “wages explosions” of the 1970s and early 1980s unless “weak-kneed” employers stood up to unions.

At the time, only 17% of Australian workers were members of unions, down from more than half in the early 1980s. It’s now just 12%.

Far from setting off a wages explosion, increases in award wages (those awarded by the Fair Work Commission to predominately low-paid workers) appear to barely move the dial at all.

Last year the Commission awarded low-paid workers 5.75%. In the year that followed, overall wages climbed 4.1%. The previous year the Commission awarded 5.2%. In the year that followed, overall wages climbed 3.7%.

Overall wages – those received by the three quarters of workers who aren’t paid by awards – have been climbing by less than awards, and for most of the past three years, by less than the rate of inflation.

Conditions were ripe for pay rises

It isn’t because the conditions haven’t been right. For the past two years, unemployment has been lower than it has been in the previous four decades.

From 1974 right through until 2022 unemployment never fell below 4%, and rarely fell below 5%. Yet the past two years haven’t sparked a wages explosion.

It should have been one of the easiest times in our lives to walk into a new higher-paying job, yet the share of us doing that has dived from almost 20% per year at the start of the 1990s to less than 10% today.

At the peak of what was then the biggest mining boom in a century in 2012, only 6,200 Australians were crossing the Nullarbor to live in Western Australia. Five times as many new arrivals were pouring into Western Australia from overseas.

In the past year, in the midst of a new and bigger mining boom, only a net 11,200 Australians have moved west for a better life.

Our remarkable passivity when it comes to moving to earn more and our lack of interest in joining unions has collided with a wage-setting system that for those of us not on awards makes it easy for employers to resist paying more.

Workers are finding it hard to bargain

Individual contracts are usually offered on a take-it-or-leave-it basis. Those of us not interested in leaving (most of us) take them.

Enterprise bargains typically last three years. When they expire there is nothing to stop employers stringing negotiations out or simply not commencing them, leaving their workers on so-called “zombie agreements”.

The Business Council says they can “act like a wage freeze”.

Australia’s total wage bill has been climbing much more slowly than prices. In part this is because decisions on awards, like the ones handed down this week, apply only to awards.

Awards, applying mainly to low-wage jobs, make up only 11% of the total wage bill.

Services inflation is high for other reasons

It is true, as several senators said on Monday, that inflation in the price of services is now greater than inflation in the price of goods. But Treasury Secretary Kennedy doesn’t think that’s because of excessive wage growth.

He said inflation took off as economies ran short of goods when they restarted after closing down in the first wave of COVID. Then Russia invaded Ukraine, pushing up the prices of oil and food.

Inflation in the prices of those goods has receded, but goods are an input to services. Kennedy says what’s happening to the price of services is an echo of what happened earlier to the price of goods.

It will take a while for that to flow through, and for services inflation to follow goods inflation down.

As unthreatening as the latest 3.75% increase in award wages is to inflation, it’ll be welcome to those who receive it.

The national accounts released on Wednesday are likely to show living standards as measured by GDP per person have gone backwards for four consecutive quarters, the first time that’s happened in 40 years. The extra pay will help.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Stand by for a pay rise on top of a tax cut. Here’s why things will feel better from July

noreply@blogger.com (Unknown) — Tue, 28 May 2024 05:45:00 +0000

At the moment, things look awful.

The latest Bureau of Statistics count of retail spending (spending online and in shops) released Tuesday shows we spent less in April than in February.

The Westpac card tracker, which tracks spending by Westpac customers, shows spending on essentials has fallen 1.6% since April. Spending on non-essentials (what Westpac calls discretionary spending) has fallen 2.2%.

Each month for decades now the Melbourne Institute has asked Australians whether “now is the right time to buy a major household item”.

This month, in a survey conducted just before and just after the federal budget, only 15.2% said it was. That’s the second-lowest percentage in the three decades I have been keeping results.

Go back a few years to the time before COVID (and even during COVID in the lockdowns) and the proportion was typically double – 30-40% of Australians said now was a good time to buy a major household item.

The economic growth figures due for release next week might well show living standards, as measured by GDP per person, going backward for the fourth consecutive quarter – for an entire year.

It’s something that hasn’t happened since the early 1980s, in more than 40 years.

The good news (and there is good news) is things are about to get a little better, beginning very soon, in July.

Reasons to be (more) cheerful

Already well publicised (probably over-publicised given its size) is the $300 per household electricity rebate, which will work out at $75 per quarter, or 82 cents per day.

In some states there will be more. The West Australian government is offering an extra $400, and the Queensland government an extra $1,000.

Added to this will be lower electricity prices for most customers not already on a good deal. The Australian Energy Regulator has announced cuts in the maximum that can be charged of 2% to 4% beginning in July.

Tax cuts hit pay packets in July

Much more important will be the long-awaited (and revamped) Stage 3 tax cuts due finally to hit pay packets in July.

For a middle-earning Australian (half earn more than this, half earn less) on $67,600 it’ll mean a tax cut of $1,369, or $52.60 every fortnight.

And there’s something likely to make an even bigger difference to the one in five Australian workers whose pay is set by an award rather than an enterprise agreement or an individual contract.

For many, wage increases will be bigger

Next Monday the Fair Work Commission will announce the increase in award wages due to take effect four weeks later on July 1.

In headline terms (and there’s more to it than the headline this time, as I’ll outline shortly) the Australian Council of Trades Unions is asking for 5%.

One of the employer groups, the Australian Chamber of Commerce and Industry, is asking for much less, and much less than the rate of inflation – just 2%.

Its chief executive Andrew McKellar says employers’ legislated superannuation contributions are set to climb by 0.5% of most wages in July, meaning the cost to employers of a 2% increase would be 2.5%.

Another employers body, the Australian Industry Group, is suggesting 2.8%, which is also less than the rate of inflation.

The government itself wants at least the rate of inflation for workers on low pay. It has asked the commission to ensure the “real wages of Australia’s low-paid workers do not go backwards”.

It’s a fair bet the commission will award at least the rate of inflation.

On only two occasions in the past decade has the commission awarded less than the published annual rate of inflation at the time. One was when businesses were in danger of going under as COVID hit in 2020 and the other was last year, when inflation was an unusually high 7%.

The most recent quarterly inflation figures point to an annual rate of 3.6%. (There will be an update on the more experimental monthly figure on Wednesday, but the commission is unlikely to pay too much attention to that).

That’ll mean an increase of 3.6% to 4% from July highly likely, which for an Australian on an award wage of $67,600 will mean an after-tax increase of at least $1,703, which is $65.50 per fortnight, on top of the fortnightly tax cut of $52.60.

There was a bizarre moment at last week’s hearing when the Australian Industry Group tried to argue that whatever increase the commission thought was fair should be cut to take account of the benefit workers would get from the tax cut.

Fair Work Commission President Adam Hatcher pointed out the commission had never boosted pay to compensate for the higher tax payments that flowed from bracket creep, and asked rhetorically: “why should we go in the other direction now?”

Wage decision unlikely to feed inflation

History suggests that if the wage rise the commission hands to Australians on awards is substantial, it won’t spark broader wage inflation. Only about 20% of workers are on awards. Many of them have low rates of pay, and many of them work in retail and hospitality.

Last year the commission awarded them 5.75%. Overall wages didn’t jump in response, climbing just 4.1%.

And there might be something else for low-paid workers. By law, the commission is now required to redress the undervaluation of work in industries traditionally dominated by women.

The Australian Council of Trades Unions has asked that, as an interim measure, workers in industries that require “emotional labour” be given an extra 4%.

We will find out on Monday.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Top economists give budget modest rating and doubt inflation will fall as planned

noreply@blogger.com (Unknown) — Sun, 26 May 2024 07:03:00 +0000

Wes Mountain/The Conversation

Asked to grade Treasurer Jim Chalmers’ third budget on his own criteria of delivering on “inflation in the near term and then growth in the medium term”, most of the 49 leading economists surveyed by the Economic Society of Australia and The Conversation have failed to give it top marks.

On a grading scale of A to F, 17 of the 49 economists – about one-third – give the budget an A or a B. Two have declined to offer a grade.

The result is a sharp comedown from Chalmers’ second budget in 2023. Two-thirds of the economists surveyed conferred an A or a B on that budget.

The economists chosen to take part in the post-budget Economic Society surveys are recognised by their peers as leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among them are a former head of the Department of Finance, a former Reserve Bank board member and former Treasury, International Monetary Fund and Organisation for Economic Co-operation and Development officials.

Thirteen of those surveyed – more than a quarter – give the budget a low mark of D or an E. None have given it the lowest possible mark of F.

Asked whether the budget was likely to achieve its aim of getting inflation back within the Reserve Bank’s 2-3% target band by the end of this year, and back to 2.75% by mid next year, 17 thought it would not. Only ten thought it would.

A greater number – 21 – were not sure.

In his budget speech, Chalmers predicted inflation would come back to the Reserve Bank’s target band sooner than the 2025 expected by the Reserve Bank itself, “perhaps even by the end of this year”.

The budget papers forecast an inflation rate of 2.75% by mid-2025, well within the target band and a half a percentage point lower than the bank’s forecast.

The papers say two measures in the budget, not known to the Reserve Bank when it produced its forecasts in early May, explain why the budget forecast is half a percentage point lower.

They are an extra year of energy bill relief of $300 per household and $325 for eligible small businesses and a further 10% increase in the maximum rate of Commonwealth Rent Assistance.

If the lower budget forecast is correct, and if the Reserve Bank sticks to the letter of its agreement with the treasurer that requires it to aim for consumer price inflation between 2% and 3%, the bank is likely to cut interest rates late this year or early next year as inflation approaches its target zone.

But economists including Flavio Menezes from The University of Queensland say while the budget measures might “mechanically” suppress measured inflation, they are:

unlikely to alleviate underlying inflationary pressures and may even exacerbate them; for households not experiencing financial strain, lower energy bills could simply lead to increased spending in other areas.

Former Reserve Bank board member Warwick Mckibbin says the bank is likely to “see through” (ignore) the largely temporary mechanical price reductions and “raise interest rates to where they should be”.

Others surveyed, a minority, argue the economy is too weak for the extra spending in the budget to boost inflation through consumer spending. Former Finance Department Secretary Michael Keating says any stimulus is “likely to be swamped by the economic slowing well under way”.

Independent economist Saul Eslake said the subsidies for energy and rent would inject only $3 billion into the economy in 2024-25. This meant any boost they would give to underlying inflation would be hardly “material”.

Tax cuts matter more than energy rebates

More important for boosting the economy would be previously budgeted Stage 3 tax cuts. These are set to inject $23.3 billion per year from June, climbing to $107.2 billion over four years.

Eslake said the decision to reskew the tax cuts toward middle and lower earners had saved the government from the need to direct extra specific support to these people. Politically, the government could not have got away with doing nothing.

But Eslake was appalled to discover that the cost of the single biggest spending item in the budget, the untied grants to the states, had blown out even more than expected. The special top-up for Western Australia is now set to cost $53 billion over 11 years instead of the $8.9 billion over eight years expected in 2018.

How the national government could justify gifting $53 billion to the government of Australia’s richest state was beyond his comprehension.

Big issues unaddressed

A repeated theme among the economists was that the budget did very little to boost productivity or address persistent problems.

Several described it as an election budget, others a budget driven by polling.

Macquarie University’s Lisa Magnani said the lack of attention to home prices, the funding of public schools and the poor performance of Australian firms was concerning, given Chalmers’ claim it was a budget for “decades to come”.

Former Department of Foreign Affairs chief economist Jenny Gordon said the budget had failed to tackle the distortions in the housing market and the financial sustainability of needed services including health care, aged care and childcare.

Independent economist Nicki Hutley said crunch time for tax reform was coming, given the large baked-in increases in spending on defence, health and disability insurance and Australia’s over-reliance on income tax and company tax.

Warwick McKibbin said Australia’s main economic problems were its lack of productivity growth, the big changes needed to bring about the energy transition, the surge in artificial intelligence, the risk of much lower export prices and geopolitical uncertainty.

The government should have tried to build a bipartisan consensus about how to fix these.

Private investors were hanging back knowing that whatever the government did could be reversed at the next election.

Although many of those surveyed welcomed the Future Made in Australia Act, some criticised its approach of “picking winners” and “wasting precious resources” by putting money into activities such as the manufacture of solar panels, which could be done more cheaply elsewhere.

Bigger government

Former Industry Department chief economist Mark Cully said it was in some ways one of the most consequential budgets in years.

It locked in a clear shift towards higher spending and revenue, which, at around 26% of GDP, was higher than any other time Australia had been near full employment.

Future Made in Australia was the most marked intervention by a government in shaping the future direction of the economy for decades.

Individual responses. Click to open:

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Dutton makes Labor’s case. Tax breaks for landlords should be restricted to those who build homes

noreply@blogger.com (Unknown) — Tue, 21 May 2024 04:15:00 +0000

Opposition Leader Peter Dutton might have done us a favour.

As part of his budget reply speech on Thursday night he promised to stop foreigners buying existing Australian homes.

He didn’t only want to stop foreigners buying existing homes to live in, something they are able to do while here temporarily, as long as they they sell within three months of moving out.

He also wanted to stop them buying existing Australian homes to let to renters. He wanted to stop them being landlords. Not because landlords deprive us of homes to live in (they don’t) but because they deprive us of homes to own.

Every existing home that is owned by a landlord is a home that isn’t owned by an owner-occupier. It’s maths.

Foreign investors outbid residents

It was, Dutton said, pretty unfair to be at an auction “bidding against somebody who has very deep pockets and somebody who’s not an Australian citizen”.

Stopping foreign investors would help restore the “dream of home ownership”.

Here’s the favour. Dutton has pointed out something that’s true for all investors. By bidding against people who want to buy existing homes to live in, they are pushing up the price of those homes. When they succeed in buying an extra home, they ensure an owner-occupier does not.

Dutton has spelled out the maths.

He has acknowledged that, for foreign investors, the numbers aren’t big. It’s already hard for them to buy existing properties. In 2021-22, the most recent year for which we have figures, only 1,339 foreign investors bought existing properties.

But he told 3AW’s Tom Elliott that if there was anything that could be done, no matter how little, he would “jump at it”.

Local investors also outbid residents

There is something much bigger that could be done, which is to extend his idea to all would-be investors – every one of them who turns up at an auction for an existing property and bids against someone who wants to buy it to live in.

It’s hard to think of reasons why investors should be supported to bid against intending homebuyers. In the quarter century since the headline rate of capital gains tax was halved in 1999, investors have been supported by a particularly effective blend of negative gearing and capital gains tax concessions.

An extraordinary 2.2 million Australians now own investment properties – one in every six taxpayers. Thirty percent of them own two investment properties or more.

In the census before the change, 25.5% of households headed by someone aged 35-54 rented. In the most recent census it was 33.7%.

This isn’t because of a shortage of supply. It’s because a bigger chunk of the supply has been grabbed by landlords at the expense of Australians who in earlier years would have owned.

Had that bigger chunk not been grabbed, hundreds of thousands more Australians would own the homes they live in.

No one objects to investors who build new homes, increasing supply – certainly not Dutton. The two-year ban he put forward in his budget reply speech would have only stopped foreign investors buying existing properties. There would be nothing to stop them building and letting out new ones.

That’s how you would design a grander Dutton-style plan that applied to all investors. Labor put one forward at the 2016 and 2019 elections.

Labor had a plan like Dutton’s

Under Labor’s 2019 plan, negative gearing – the tax break that allows investors to write off losses they make from renters against their wage income – would no longer be available to new investors, except those who actually provided new homes.

Labor planned to

put negative gearing to work by limiting it to new investment properties to help boost housing supply and jobs

Negative gearing isn’t being put to work right now.

In March, the most recent month for which we have statistics, only 2,048 of Australia’s 16,948 property investment loans were for building new homes. Most of the rest went to investors who were going to compete against would-be residents to buy existing properties.

Labor says restricting negative gearing is no longer its plan.

On ABC Q&A on Monday Treasurer Jim Chalmers said he “wasn’t attracted” to the idea of changing negative gearing, yet he repeatedly said there was “no substitute for building new homes”

What Labor proposed in 2016 and 2019 would have directed investors towards building new homes.

It’s worth doing both because it would help create new homes and because it would reduce the number of would-be landlords going up against would-be homeowners at auctions.

Q&A. ABC

One of those intending homebuyers, Jessica Whitby, who was outbid at an auction in Chalmers’ electorate, asked him on Monday to “disincentivise people who are purchasing multiple investment properties to assist first home buyers to get into the market sooner”.

Chalmers replied the thing that mattered most was supply, but he didn’t mention that what Whitby was proposing used to be Labor Party policy, didn’t acknowledge that it would encourage supply, and didn’t acknowledge that (in theory at least) Dutton appears to agree.

Support from many quarters

And not only Dutton. Scott Morrison expressed concern about the “excesses” of negative gearing as treasurer in 2016. His predecessor, Joe Hockey, said on leaving parliament that negative gearing should be skewed toward new housing so there was “an incentive to add to the housing stock”.

It’s as if almost everyone can see the sort of thing that needs to be done.

Australia’s negative gearing and capital gains tax concessions are incredibly expensive. The treasury costs negative gearing alone at $2.7 billion per year.

At least in principle, there’s agreement about how to make it work for us.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

If the RBA’s right, interest rates may not fall for another year. Here’s why – and what it means for next week’s budget

noreply@blogger.com (Unknown) — Tue, 07 May 2024 04:13:00 +0000

The Reserve Bank is now assuming Australians will see no interest rate cuts this year – and quite possibly none before the next federal election, due next May.

That’s a big change compared to just three months ago. Back in February, the Reserve Bank assumed three rate cuts before the middle of the next year.

Its newly-updated assumptions have interest rates remaining high for the rest of this year, then declining only slowly, with a cut by May 2025 about as unlikely as it is likely.

The assumptions are based on financial market pricing, which the bank says is “the best predictor of the future cash rate path”.

What changed the market pricing and the bank’s forecasts? Inflation.

That’s posing a big challenge for the Albanese government as it prepares for next week’s federal budget.

Rates on hold amid rising inflation

In its statement on Tuesday explaining why it was leaving its cash rate on hold at 4.35%, the Reserve Bank board sharpened its language about inflation.

It’s now forecasting an increase in inflation later this year and warning that getting it down is proving harder “than previously expected”.

The updated forecasts have the annual rate of inflation climbing from its present 3.6% to 3.8% in June and staying there for the rest of the year, before falling back in line with the bank’s previous forecast released in February.

Both forecasts have inflation remaining above the bank’s 2-3% target band until late 2025, and both have it not returning to the centre of the band until mid-2026.

US rate cuts are also on hold

It’s a similar story in the United States, with the expected date of rate cuts blowing out there as well.

There, as here, the monthly measure of annual inflation rate remains stuck at 3.5%. In both countries, it’s no lower than it was late last year.

The chair of the US Federal Reserve Jerome Powell now says he won’t cut rates until he is more confident inflation is heading back down towards his target, adding it is likely to take longer than expected to get that confidence.

The budget will focus on more than inflation

So what’s Treasurer Jim Chalmers planning to do on budget night next week to give the Reserve Bank more confidence inflation is clearly heading down?

Not that much – and certainly not nearly as much as in previous budgets.

Chalmers’ opposite number, Coalition Treasury spokesman Angus Taylor, says the treasurer should “stop the spend-a-thon”, by which he means containing growth in government spending to take pressure off inflation.

It’s advice Chalmers and Finance Minister Katy Gallagher won’t be following this time. And not because they don’t understand the thinking behind it.

Restraining spending (and pushing up tax) would indeed take pressure off prices. Chalmers and Gallagher could say they’ve cut $50 billion off spending over the past two years. But a further big cut might push the economy into free fall.

We’re buying and dining out less

The Australian economy is alarmingly weak. As the Reserve Bank board met on Tuesday, the Bureau of Statistics released its latest estimates of the volumes of goods and services bought from online and physical stores.

The estimates are price-adjusted, which in this case means that while what we spent climbed (a tiny) 0.8% over the year to March, what we bought fell 1.3%.

The amount of food we bought fell 1.5%. The amount of household goods we bought fell 1.8%. And the amount we bought from cafes and restaurants fell 2.5%.

The only category in which buying has climbed over the past year was clothing and footwear, and only by 0.3%.

All this has happened in a year in which the Australian population grew by more than 2% – which means the reduced amount of things we have bought has had to feed, clothe and service about an extra 600,000 of us.

Chalmers knows this. It’s consistent with the national accounts, which show the amount we’ve spent and earned per person has shrunk over the past year, in a so-called per capita recession.

The Australian National University’s latest ANUPoll finds us more financially stressed than during the depths of the COVID lockdowns.

Twenty per cent of us say we have borrowed money from friends or relatives over the past year, up from 16% during the lockdowns. Meanwhile, 21% have fallen behind on our bills, up from 17%; and 62% of us have cut our spending on groceries and essential items, up from 43%.

A ‘scorched earth’ budget risks recession

It means that a further big cut in government spending – right now – could push us from a per capita recession into an actual recession.

It’s why Chalmers said on Monday now was “not the time for scorched earth austerity”. He won’t slash and burn while the economy is weak.

After three budget updates in which he has spent less than previously forecast, in next Tuesday’s budget he will spend more – at least for some of the years for which he will produce projections.

Gallagher added this week she’s been as good as forced to spend more in some areas. Several programs introduced, but not properly funded, by the previous government are set to end abruptly. One is the leaving violence payment, which began as a trial.

Don’t expect rates to change soon

In fairness to the Reserve Bank, it too knows the economy is weak. Its updated forecasts released on Tuesday have downgraded expected economic growth to just 1.2% for the year to June and 1.6% for the year to December.

And it knows its 13 interest rate rises to date are yet to have their full effect.

Speaking at a press conference after the board’s decision to keep rates on hold, Governor Michele Bullock gave the impression that lifting rates further was still one of the furthest things from her mind.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australians lose $5,200 a minute to scammers. There’s a simple thing the government could do to reduce this. Why won’t they?

noreply@blogger.com (Unknown) — Wed, 01 May 2024 03:37:00 +0000

What if the government was doing everything it could to stop thieves making off with our money, except the one thing that could really work?

That’s how it looks when it comes to scams, which are attempts to trick us out of our funds, usually by getting us to hand over our identities or bank details or transfer funds.

Last year we lost an astonishing A$2.74 billion to scammers. That’s more than $5,200 per minute – and that’s only the scams we know about from the 601,000 Australians who made reports. Many more would have kept quiet.

If the theft of $5,200 per minute seems over the odds for a country Australia’s size, a comparison with the United Kingdom suggests you are right. In 2022, people in the UK lost £2,300 per minute, which is about A$4,400. The UK has two and a half times Australia’s population.

It’s as if international scammers, using SMS, phone calls, fake invoices and fake web addresses are targeting Australia, because in other places it’s harder.

If we want to cut Australians’ losses, it’s time to look at rules about to come into force in the UK.

Scams up 320% since 2020

The current federal government is doing a lot – almost everything it could. Within a year of taking office, it set up the National Anti-Scam Centre, which coordinates intelligence. Just this week, the centre reported that figure of $2.74 billion, which is down 13% on 2022, but up 50% on 2021 and 320% on 2020.

It’s planning “mandatory industry codes” for banks, telecommunication providers and digital platforms.

But the code it is proposing for banks, set out in a consultation paper late last year, is weak when compared to overseas.

Banks are the gatekeepers

Banks matter, because they are nearly always the means by which the money is transferred. Cryptocurrency is now much less used after the banks agreed to limit payments to high risk exchanges.

Here’s an example of the role played by banks. A woman the Consumer Action Law Centre is calling Amelia tried to sell a breast pump on Gumtree.

The buyer asked for her bank card number and a one-time PIN and used the code to whisk out $9,100, which was sent overseas. The bank wouldn’t help because she had provided the one-time PIN.

Here’s another. A woman the Competition and Consumer Commission is calling Niamh was contacted by someone using the National Australia Bank’s SMS ID. Niamh was told her account was compromised and talked through how to transfer $300,000 to a “secure” account.

After she had done it, the scammer told her it was a scam, laughed and said “we are in Brisbane, come find me”.

How bank rules protect scammers

And one more example. Former University of Melbourne academic Kim Sawyer (that’s his real name, he is prepared to go public) clicked on an ad for “St George Capital” displaying the dragon logo of St. George Bank.

He was called back by a man using the name of a real St. George employee, who persuaded him to transfer funds from accounts at the AMP, Citibank and Macquarie to accounts he was told would be in his and his wife’s name at Westpac, ANZ, the Commonwealth and Bendigo Banks.

They lost $2.5 million. Sawyer says none of the banks – those that sent the funds or those that received them – would help him. Some cited “privacy” reasons.

The Consumer Action Law Centre says the banks that transfer the scammed funds routinely tell their customers “it’s nothing to do with us, you transferred the money, we can’t help you”. The banks receiving the funds routinely say “you’re not our customer, we can’t help you”.

That’s here. Not in the UK.

UK bank customers get a better deal

In Australia in 2022, only 13% of attempted scam payments were stopped by banks before they took place. Once scammed, only 2% to 5% of losses (depending on the bank) were reimbursed or compensated.

In the UK, the top four banks pay out 49% to 73%.

And they are about to pay out much more. From October 2024, reimbursement will be compulsory. Where authorised fast payments are made “because of deception by fraudsters”, the banks will have to reimburse the lot.

Normally the bills will be split 50:50 between the bank transferring the funds and the bank receiving them. Unless there’s a need for further investigations, the payments must be made within five days.

The only exceptions are where the consumer seeking reimbursement has acted fraudulently or with gross negligence.

The idea behind the change – pushed through by the Conservative government now led by UK Prime Minister Rishi Sunak – is that if scams are the banks’ problem, if they are costing them millions at a time, they’ll stop them.

New Zealand is looking at doing the same thing, as is Singapore.

But here, the treasury’s discussion paper on its mandatory codes mentions reimbursement only once. That’s when it talks about what’s happening in the UK. Neither treasury nor the relevant federal minister is proposing it here.

Australia’s approach is softer

Assistant Treasurer Stephen Jones is in charge of Australia’s rules.

Asked why he wasn’t pushing for compulsory reimbursement here, Jones said on Monday prevention was better.

I think a simplistic approach of just saying, ‘Oh, well, if any loss, if anyone incurs a loss, then the bank always pay’, won’t work. It’ll just make Australia a honeypot for these international crime gangs, because they’ll say, well, ‘Let’s, you know, focus all of our activity on Australia because it’s a victimless crime if banks always pay’.

Telling banks to pay would certainly focus the minds of the banks, in the way they are about to be focused in the UK.

The Australian Banking Association hasn’t published its submission to the treasury review, but the Consumer Action Law Centre has.

It says if banks had to reimburse money lost, they’d have more of a reason to keep it safe.

In the UK, they are about to find out. If Jones is right, it might be about to become a honeypot for scammers. If he is wrong, his government will leave Australia even further behind when it comes to scams – leaving us thousands more dollars behind per day.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Beyond the spin, beyond the handouts, here’s how to get a handle on what’s really happening on budget night

noreply@blogger.com (Unknown) — Tue, 23 Apr 2024 03:32:00 +0000

Three weeks from now, some of us will be presented with a mountain of budget papers, and just about all of us will get to hear about them on radio, TV or news websites on budget night.

The quickest way to find out what the budget is really doing will be to listen to the treasurer’s speech, or to peruse online the aptly-named “glossy” – a document that last year was titled “Stronger foundations for a better future”.

But they will tell you exactly what the government wants you to hear, exactly as it wants you to hear it.

If you are looking instead for the truth – what the government is actually trying to achieve and what it is holding itself and its officials to, I would suggest something else, tucked away on about page 87 of the main budget document.

It is required by the Charter of Budget Honesty Act introduced in 1998 by Peter Costello, the treasurer under Prime Minister John Howard.

On taking office in 1996, Costello set up a National Commission of Audit to examine the finances he had inherited from the Hawke and Keating governments, presumably with an eye to discovering they had been mismanaged.

But the members of the commission weren’t much interested in that. Instead, they decided to deal with something more fundamental.

Budget as you wish, but explain your strategy

Governments were perfectly entitled to manage money in whatever way they wanted, and they were perfectly entitled to spend more money than they raised (which they usually do, it’s called a budget deficit).

What the commission wanted was for governments to make clear what they were doing, and to spell out the strategy behind it.

Only part of it was about being upfront with the public. The commission also wanted governments to be upfront with themselves – to actually develop frameworks for what they were doing, rather than doing whatever they felt like.

The commission recommended a Charter of Budget Honesty, which among other things requires officials to prepare independent assessments of the finances before each election, requires budget updates six months after each budget, and requires tax expenditures (tax breaks) to be accounted for like other expenditures.

And it requires the publication and regular updating of a fiscal strategy statement.

Where treasurers hold themselves accountable

The fiscal strategy can be thought of as an exam question set by the student who is being examined – something along the lines of “this is what you say you want your budget to achieve, please set out the means by which you plan to achieve it”.

It turns out to have been exceptionally effective in getting governments to organise their thoughts, make budgets at least try to achieve something, and let the rest of us know what they are trying to achieve.

Every few years, treasurers change the strategy, as is their right. Treasurer Jim Chalmers says he’ll change it again this budget, to de-emphasise the fight against inflation and to more greatly emphasise the need to support economic growth.

His statement will tell us what’s behind his actions in a way the glossy words in his brochure and speech might not.

The strategy that has signposted 26 years

Previous statements have signposted all the important turns in what the budget is trying to do.

The first, in 1998, committed Costello and Howard to achieving a budget surplus on average over the economic cycle and whenever “growth prospects remain sound”.

Making that commitment more difficult was another “not to introduce new taxes or raise existing taxes over the term of this parliament”.

Two years later, after the government had won an election promising a new goods and services tax, that commitment was changed to “no increase in the overall tax burden from its 1996-97 level”, a condition met by calling the GST a state tax.

Hockey and Morrison wound back spending

The Labor budgets from 2008 loosened the tax target to the average share of GDP below the reference year, which they changed to the higher-tax year of 2007-08.

The first Coalition budget under Treasurer Joe Hockey in 2014 changed the target from tax to spending, pledging to bring down the ratio of payments to GDP, and pledging a surplus of 1% of GDP by 2023-24.

Any new spending would be more than offset by cuts elsewhere, and if the budget did receive a burst of unexpected revenue it would be “banked” rather than spent.

In 2018 Treasurer Scott Morrison reintroduced tax as a target, that he spelled out precisely. Tax was not to increase beyond 23.9% of GDP.

Then during COVID, Frydenberg spent big

In 2020, in the face of a COVID-induced recession and soaring unemployment, Finance Minister Mathias Cormann and Treasurer Josh Frydenberg pushed the old strategy to one side.

They would spend big now to keep the economy afloat so they wouldn’t have to spend more bailing it out later, and they wouldn’t return to their old concern about the deficit until the unemployment rate was “comfortably below 6%”.

So well did they succeed that in 2021 Frydenberg made the momentous decision to keep going, abandoning the promise to return to worrying about the deficit when unemployment fell below 6%.

Instead he promised to keep spending big until unemployment was “back to pre-crisis levels or lower”.

The decision propelled unemployment down to a 50-year low of 3.5%.

Along with high iron ore prices, that one change of strategy has probably helped deliver Chalmers two consecutive budget surpluses – the one he announced last year for 2022-23, and the one he is set to announce this year for 2023-24. More of us have been in jobs paying tax, and fewer have been out of jobs on benefits.

It’s a powerful demonstration of the real-world difference budget decisions can make, and the way in which the fiscal strategy tells the story.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Biden is cancelling millions of student debts – here’s what to expect from Albanese

noreply@blogger.com (Unknown) — Wed, 17 Apr 2024 03:30:00 +0000

So weighed down have Americans become by student debt, and so potent a political issue has it become in the US, that President Biden plans to waive interest or write off money owing by 30 million of them.

He is doing it bit by bit, in the face of resistance from the US Supreme Court. He has already axed or wound back 4.3 million debts, and on Friday cancelled 277,000 more.

The benefits, as he keeps telling anyone who will listen in the lead-up to the November election, are likely to be increased consumer spending, better mental health and credit scores for borrowers, and increased home ownership.

In Australia, Prime Minister Anthony Albanese is under pressure to do something – anything – for Australians under the same sort of pressure.

Every June, the amount owed jumps

Every June the amount that someone who has borrowed under the Higher Education Loan Program (HELP) jumps. Because the jump is linked to inflation, and because inflation has been low for decades, in most Junes the jump has been small, until last June.

On June 1 2023, Australians who had made no payments over the previous year faced a jump of 7.1%. Someone who had owed $25,000, suddenly owed $26,770, and so on.

A quarter of a million Australians have signed a petition asking for change.

The good news is there’s likely to be some change, and we are likely to hear about it soon, in the lead-up to the May budget.

The bad news for borrowers is it won’t be debt relief of the kind Biden is offering.

It’s worse in the US

While in both Australia and the US it’s the government that lends to pay student fees rather than private lenders (who don’t like the risks) in the US the loans are really onerous, requiring fixed monthly repayments over a set period of time, regardless of the borrower’s circumstances.

In Australia, the United Kingdom, New Zealand and some other countries that have copied Australia’s system, the loans are income contingent, meaning they only need to be repaid when the borrower’s income rises to a certain level.

At the moment Australia’s repayment threshold is A$51,550 per year, meaning anyone who earns less than that doesn’t need to repay a cent, perhaps forever if their income never climbs that high.

Where payments are required, they are taken out in the same way as income tax is, each fortnight for pay-as-you-earn employees.

Buried within Biden’s announcement is a decision to move towards an Australian-style plan he has called SAVE, which stands for Saving on a Valuable Education.

If it becomes law, single Americans won’t have to repay until they earn US$32,800. For an American supporting a family of four, the threshold will be US$67,500. It will be an Australian-style system.

Easy wins for Albo

While Australia’s system is much better than the one in the US and has been copied around the world, it is far from perfect.

A simple change, identified by the report of the Australian Universities Accord delivered to Education Minister Jason Clare, in February is to increase the amount owing each year by either the rate of increase in prices or the rate of increase in wages, whichever is lower.

Usually, prices increase by less than wages, which is why the system was set up in 1988 to index amounts owed to prices.

But last year, unusually, prices increased faster than wages. In those years it would be simple to lift the amount owed only in line with wages, as the report recommends.

The amount owed needs to increase in line with something, because otherwise its value would shrink rapidly as prices rose. The government doesn’t charge interest (which would hurt) so instead it lifts the amount owed in line with prices to ensure that compared to other things it remains little changed.

Make repayments more like tax

Although we repay student loans through the income tax system, we don’t do it like income tax.

Here’s how it works for tax: on our first $18,200 of income we pay nothing, then we pay 19 cents in the dollar for each extra dollar we earn up to the next threshold, and so on. The key words here are “for each extra dollar”. We continue to pay nothing on the first $18,200 we earn.

Higher education loans work differently. For them, we repay nothing until we earn $51,550, and then at that point, even if we earn just one dollar more, we pay one per cent of all our annual income, the entire $51,550 (which amounts to $515).

It’s a repayment cliff that sends us backwards. It means earning an extra dollar costs more than $500 in that year. That’s an effective marginal tax rate of 500%.

The cliff matters. Each year, there’s an impressive cluster of taxpayers who happen to be earning just under the threshold. More likely to be women than men, they might be deciding not to work in order to keep their incomes below the threshold.

Make it easier to get home loans

Britain and other nations that copied Australia’s system don’t impose large repayments in one hit, and the economist who designed Australia’s system now says that part of the system was “an error, a mistake”.

That economist, Bruce Chapman, has suggested a redesign that would require collections only on extra rather than total incomes, a proposal the report to the government endorses.

And there’s something else Albanese can do. Right now Australia’s banking regulator requires banks to count student loans as debt for the purpose of determining who can get a housing loan, knocking some former students out.

Chapman says it would make more sense to treat the compulsory payments as tax, which is how they function. All they do is reduce after-tax income, and for low earners, they don’t even do that. It’d get more people into housing.

Now it’s over to Albo.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Scrap the West Australian GST deal set to cost $40 billion – leading economists

noreply@blogger.com (Unknown) — Sun, 14 Apr 2024 03:26:00 +0000

Australia’s top economists overwhelmingly want Prime Minister Anthony Albanese to scrap a special deal with Western Australia that’s set to deliver it an extra A$40 billion in Commonwealth funding by the end of the decade.

Albanese pledged to maintain the special treatment for Western Australia in a visit to Perth in February. He even signed a promise on a newspaper front page and on a reporter’s arm with a marker pen.

The deal was struck in 2018 by the then Western Australian premier, Mark McGowan, and then federal treasurer, Scott Morrison. It gives Western Australia a much greater share of the centrally collected goods and services tax than it is entitled to under the formula administered by the Commonwealth Grants Commission.

In place in various forms since Federation, the formula distributes funds in such a way as to ensure each state and territory would be able to deliver comparable services if it made a similar effort to raise revenue from its own resources. It has been used to distribute GST collections since 2000.

For most of the past 100 years the formula has delivered more to the smaller states (including Western Australia) than would be expected on the basis of population, and less to the larger states of New South Wales and Victoria.

In the leadup to 2018, the mining boom changed that. The amount of GST delivered to Western Australia was pushed down to only 45% of what it would have got if the GST was split on the basis of population, in recognition of its much greater ability to raise revenue.

Morrison and McGowan’s deal phased in a floor under how much of the GST each state could get. In June it will climb to 75% of what the state would get on the basis of population, and from 2026 to no less than what the strongest of Victoria and NSW get, no matter how strong the state’s economy.

Haul of $30 billion to $50 billion

The extra payments to Western Australia will initially be funded from general Commonwealth tax revenue, rather than by cutting GST payments to other states.

Estimates of the cost by 2030 range from $30 billion to $50 billion. Independent economist Saul Eslake puts the cost at $39.2 billion, assuming the iron ore price falls in line with budget assumptions.

Beyond 2029‑30, any extra payments to Western Australia will come from the GST total at the expense of other states.

Asked whether the long-standing method of distributing GST revenue in accordance with need and ability to pay is broadly the best one, 25 of the 38 top economists who responded to the Economic Society of Australia poll said yes.

Ten said no, five of them saying it would be better to move towards a system where revenue was distributed on the basis of population or gross state product.

Asked whether the 2018 changes that advantaged Western Australia should be kept or scrapped, 28 of the 38 wanted them scrapped.

Only four wanted them kept.

The 38 experts who took part are recognised by their peers as leaders in fields including tax and budget policy. Two are from Western Australia.

Several observed that the natural resources with which Western Australia is endowed are a matter of luck, “even acknowledging that it takes skill and effort to extract them”.

Sue Richardson from the University of Adelaide argued that minerals were a national rather than a local resource and it undermined the integrity of the nation to have the benefits from mining them concentrated in the part of the nation in which they sat.

Eslake said that even if Australia had no state governments and just one central government, as did Japan and New Zealand, it would still make sense to distribute resources to the parts of the nation with the greatest need in much the same way as the Grants Commission has traditionally done.

Consultant Rana Roy said that distributing resources away from the rich states in order to make the poorer states more liveable was actually in the rich states’ best interests.

“Paris would not benefit if an impoverished rest-of-France were to decamp to Paris,” he said. “And London would not benefit if an impoverished rest-of-Britain were to decamp to London.”

Tasmania’s Hugh Sibly added that Australians move between states and many retire in a different state to the one in which they paid taxes, giving the entire nation an interest in ensuring all parts of the nation were liveable.

Equalisation good, but complex

Others surveyed said the calculations used to deliver what was once known as “full equalisation” and since 2018 has been known as “reasonable equalisation” were complicated – “almost farcical” – and should be replaced by something simpler, even if it made the system less fair.

One suggestion was that GST revenue should be allocated on the basis of the size of each state’s economy. Another was that it be allocated on the size of each state’s population, with top-up grants used to meet particular needs.

Former OECD official Adrian Blundell-Wignall said the needs of Indigenous Australians in particular should be addressed directly rather than by GST distributions as the governments that got GST money on the basis of their high Indigenous populations did a very poor job of spending it on those populations.

Two of the economists surveyed suggested a Commonwealth resource tax of the kind promoted by former Treasury head Ken Henry who said earlier this month Australia should stop revering plunder and dumb luck, and abandon its “finders keepers” approach to minerals.

The Productivity Commission will review the Western Australian deal in 2026.

Individual responses. Click to open:

This article is republished from The Conversation under a Creative Commons license. Read the original article.

How about this time we try, just try, to report on budgets and tax differently?

noreply@blogger.com (Unknown) — Tue, 09 Apr 2024 03:24:00 +0000

There are just five weeks until the budget, and the usual lists of winners and losers.

Among last year’s winners were said to be single parents, renters and first home buyers. Among the losers were said to be vapers, truckies and consultants.

It’s also how we talk about tax: winners and losers.

On budget night when the changes to the Stage 3 tax cuts are re-announced, we will be told they will make Australians earning less than A$146,000 better off than they would have been, and Australians earning more than that worse off.

It’s terribly predictable, but it’s also worse than that.

It’s part of a way of thinking and reporting that makes changes that could actually help us all but impossible.

Making that point passionately in Canberra last week (and apologising for his own role in it) was Ken Henry, the government’s chief economic advisor as head of the treasury between 2001 and 2011, and the head of the 2009 Henry Tax Review.

Confessions of a gun for hire

Here’s Henry’s confession. Shortly after he joined the treasury as a tax expert in the lead up to the 1985 tax summit convened by Treasurer Paul Keating and Prime Minister Bob Hawke, he was taken aside by his treasury bosses and told that arguments about making Australia better weren’t going to fly.

His bosses told him:

all anybody would want to know is what was in it for them, how many dollars they were going to get – and that’s also all the newspapers would want to know, that’s what they would be printing on their front pages.

What would matter would be the immediate “overnight” estimates of who would win and who would lose. Beyond not costing the government money, nothing else would matter – not how the changes would affect society by funnelling people into doing some things and not others, and not what they would do over time to the people who won or lost on the night.

So, presumably with a heavy heart, Henry developed a computer model that spat out nothing more than immediate winners and losers and ignored what the changes would do to Australia over the longer term.

Winners and losers are (almost) beside the point

Henry says looking back it is easy to understand “why we did what we did”.

“But I can’t escape the sense that, in developing the tools that facilitated squabbles over the distribution of gains and losses among the households of Australia in 1985, we were participating in a conspiracy against future Australian households.”

Henry did it again in 1991, helping build a much more precise version of the model whose exaggerated precision was used by Keating as prime minister to kill off Opposition Leader John Hewson’s plan for a raft of tax changes including a 15% goods and services tax and to end Hewson’s political career.

But it worried Henry. He says Hewson’s package was a genuine attempt to break out of the winners and losers mindset and argue for changes on the basis they would benefit society.

Then in the late 1990s Henry dusted off the model again and used it in the opposite way – to help the Howard government get its 10% GST over the line.

‘A conspiracy against future Australians’

Henry’s confessions tell us about more than the flexibility needed to serve the government of the day. They tell us the thing that matters most, making Australia work better, can’t really be spoken about.

And the more it is not spoken about – the more people are merely told what’s in it for them – the harder that is to change.

Here’s what Henry says really matters, and what he says he tried to address in his 2009 tax review.

The things we ought not to celebrate, and ought to tax heavily, are plunder, dumb luck, and a “finders keepers” approach to resources, including mineral resources.

The things we ought to avoid taxing are income from work, the normal rates of return for businesses, and transactions. They are the things we need more of to build our living standards.

We need less tax on wages and ordinary profits, and more on unreasonably large profits, windfall capital gains, wealth and the use of land and natural resources.

By lightly taxing the things that take from the rest of us (such as the superprofits earned by companies with some sort of monopoly) and heavily taxing the things that give to the rest of us (such as the effort put in by workers and businesses) we are bequeathing to our children a weaker Australia.

What’s winning matters as much as who’s winning

As Henry puts it, Australia’s young people are being screwed – not necessarily by what the tax system is doing to them today (although what negative gearing and capital gains tax breaks are doing to home prices can’t be helping) but by the way we are choking attempts to build the economy they’ll inherit.

He says we’ve got to level with them and level with ourselves, which is also the argument of Mixed Fortunes, the book detailing the history of tax reform in Australia by former treasury official Paul Tilley that Henry launched.

It’s an argument the journalists in the audience (I am one) and the lone politician in the audience (Assistant Treasury Minister Andrew Leigh) should take to heart. I’ll still report on winners and losers next month, but I’ll also aim to go deeper – to report on what’s winning as well as who.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

From where we work to what we spend, the ABS knows more about us than ever before: here’s what’s changing

noreply@blogger.com (Unknown) — Tue, 02 Apr 2024 02:22:00 +0000

How much were prices rising in January when Shadow Treasurer Angus Taylor said inflation was “rampant”?

The prices that give us a good steer on inflation were falling, by 0.4%.

That’s the change that month in what the Bureau of Statistics calls the consumer price index “excluding volatile items”. The items it excludes (because they are often affected by supply disruptions) are fruit, vegetables and fuel.

Apart from that, the measure of prices I just quoted is the best monthly measure of the prices of everything that households buy in the proportions they buy them.

Not all prices were falling. The price of alcohol was up, the price of bread was down, the price of rent was up, and the price of tourist accommodation was down. It’s only on balance (excluding volatile items) that prices fell.

This is the sort of thing we wouldn’t have known about until just a few years ago. Up until late 2022, the consumer price index was calculated only four times a year, and even that was a herculean feat.

A ten-fold increase in data

The bureau had to collect what used to be 100,000 separate prices for each of those four surveys – a huge number collected in person, either over the phone (“hello, can you tell me your current price for…”) or in stores via handheld devices.

The cost to the bureau, and the number of staff involved, was enormous – big enough to make a monthly measure impossible, as important as that would have been to a Reserve Bank that set interest rates monthly and needed a monthly read on inflation.

But in the last few years the use of supermarket scanner data, “web scrapping” to collect online prices, and data feeds direct from the computers of rental agents and all sorts of other businesses have cut costs enormously and increased the number of prices collected each quarter almost ten-fold to 900,000.

The bureau says the monthly index isn’t as comprehensive as the quarterly index yet, but it will be by the end of 2025, at which time the bureau will use it to replace the quarterly index, delivering something of the same quality 12 times a year.

That’s just one of the ways in which an explosion of previously-inaccessible data is transforming the way the bureau goes about its job and is set to make statistics that used to be only fairly reliable suddenly very reliable.

Retail figures set for the chop

For more than half a century, every month since April 1961, the bureau has published an update on retail spending – how much we are spending in shops.

The survey used to be quite useful. Back when it started, we did more than half our spending in shops. These days it’s only one third, the rest is on services.

And the retail survey was always a pretty rough-and-ready way to find out what we spent in shops. Each month the bureau surveys about 700 large businesses and 2,700 smaller businesses selected at random. It uses phone calls and paper forms.

Meantime, in part due to the national emergency created by COVID, it’s been given access to something better. Australia’s big four banks agreed to give the bureau de-identified card and transaction data to enable it to quickly get a handle on how much we were spending early in the pandemic, and they’ve kept providing it.

It turns out to be very good indeed. It covers far more retail outlets than the retail survey ever did, as well as spending on services and spending overseas, and it divides spending into categories based on the type of merchant.

It doesn’t directly cover what we spend in cash, but there’s a lot less of that than there used to be. It’ll replace the retail survey from the middle of next year.

Millions instead of thousands

The mammoth monthly employment survey of 24,000 households remains in place, as do the doorknocks that begin each household’s eight-month turn at completing the survey, but alongside it the bureau is developing a far more comprehensive measure using payroll data submitted to the tax office.

While payroll numbers can’t tell us everything the employment survey does (they can’t yet tell us the hours people work and whether are looking for work) they cover millions of Australians instead of thousands, and come out weekly.

The bureau is doing the same sort of thing almost everywhere. For more than a century it has surveyed farmers to find out what they are growing. It’s begun supplementing that with data from satellites and the machines used on farms.

The ultimate goal of all of these changes, gathered together under the banner “Big Data, Timely Insights” is to ask as few questions as possible. Why run a survey, when you can find out directly?

Big data, timely insights

It’s far harder than it looks. A lot of the so-called administrative data provided to banks and other organisations isn’t sorted in a way that makes it useful. That’s where the bureau is concentrating its efforts. The more it succeeds, the less it will need to bother us and the better the information it will produce.

In the meantime, here’s an update on those inflation figures, the ones that come out monthly. In February, the consumer price index excluding volatile items did not change, meaning in that particular month, inflation was zero.

Even better, adding the past six months together (and multiplying by two) gives you an annual inflation rate of 2.5% – slap bang in the middle of the Reserve Bank’s 2-3% target band, suggesting things are moving in the right direction.

It’s too early to declare victory over inflation that was at one stage heading towards 8%, but at the moment the monthly figures show things heading down.

If the direction changes, the bureau will tell us, quick smart.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Uber has settled a class action lawsuit for $270 million – what was it accused of?

noreply@blogger.com (Unknown) — Tue, 26 Mar 2024 02:21:00 +0000

Who’d want to go back to the days before Uber? The days in which you could never be certain you could get a taxi, the days of long wait times trying to order one on the phone, and the days in which you would never know for sure how your driver would treat you.

So much has Uber improved the experience of getting a ride (young people rely on it in a way their parents were never able to rely on taxis) that it might seem incomprehensible Uber has just agreed to pay almost A$272 million to stop a class action against it going to court.

The $271.8 million settlement is the fifth-largest in Australia, eclipsed only by two for Victoria’s 2009 Black Saturday bushfires, one for Queeensland’s 2011 floods and one for Johnson & Johnson for defective pelvic mesh implants.

So what exactly did Uber do wrong – or at least be so unwilling to defend it was prepared to pay a quarter of a billion dollars not to have aired in court?

The statement of claim presented on behalf of 8,000 taxi drivers and licence holders to the Supreme Court of Victoria paints a picture of an organisation prepared to break the law in order to build a large base of customers it could use to lobby to change the law to make what it had been doing legal.

‘Greyballing’ and ghost cars

The statement of claim points to internal Uber documents that indicate Uber knew in advance of its 2014 launch that its so-called UberX drivers were not licensed to operate commercial passenger vehicles, and that the fines were small.

Its aim was to quickly get to 2,000 trips per week in both Melbourne and Sydney, to ensure it had “as many people as possible to support UberX leading up to what will inevitably be a regulatory fight in both cities”.

Uber told drivers it would pay their fines, and in Victoria paid $1,732 at a time.

The class action said where inspectors tried to collect evidence, Uber engaged in a practice known as “greyballing” in which the apps of selected users get shown a fake view of ghost cars that won’t stop for them.

The claim said Uber also used “blackout geofences” that made it impossible to hire Ubers near the buildings used by enforcement officers and regulators.

Case settled at the last moment

By settling just before the case went to court, Uber managed to avoid these claims being tested, and also managed to avoid the court airing the trove of documents leaked two years ago in which one international Uber executive joked he and his colleagues had become “pirates” and another conceded: “we’re just f***ing illegal.”

Uber succeeded in getting each state’s laws changed, at a cost of devaluing to near zero taxi licences reported to have been worth as much as $500,000 each.

But in its defence (and I may as well defend Uber because it decided not to in court) most taxi drivers never paid anything like $500,000.

And taxis provided a pretty poor service. That’s because the number in each state was limited, which helped ensure drivers had work, but worked against customers in two ways – it ensured there weren’t enough taxis available at busy times, and by pushing up the price of licences it pushed up the price of fares.

Taxis served cities poorly

In a landmark 2012 report, Customers First, two years before the arrival of Uber, former competition chief Allan Fels recommended Victoria issue licences without limit, charging a simple fee of about $20,000 per year for anyone who wanted one.

It’s this recommendation, adopted by Victoria and publicised in other Australian states, that began devaluing licences before the arrival of Uber.

And the Fels report found most of the owners of licences weren’t drivers.

Most were passive investors, some of whom had done well by punting that the value of their licences would rise, and all of whom should have taken into account the possibility the value could fall.

Uber has gone mainstream

Now that Uber has won the right to do what was illegal (and settled a class action that would have exposed how it did it), it has lifted its prices to something closer to taxi fares and allowed customers to book taxis from its platform.

It has become mainstream in other ways. In Australia, it has entered into an agreement with the Transport Workers’ Union on employment, and in the US it wants to work with transport authorities to replace lightly used bus services.

The path Uber has forged – becoming an outlaw, building public support for a change in the law, then becoming entrenched – has become something of a model for new firms in all sorts of other industries, from online gambling, to cryptocurrency trading to footpath scooters.

Uber has shown it works. In this case, the class action has shown that ultimately there can be a cost, but it took a long time and it wasn’t at all certain until the last moment that Uber would buckle.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

What’ll happen when Facebook stops paying for news? Here’s what happened when radio stopped paying for music

noreply@blogger.com (Unknown) — Tue, 19 Mar 2024 02:18:00 +0000

Why are musicians so keen to get played on the radio?

It can’t be because of the money.

In Australia they are paid at rates so low they come close to making streaming services look generous. By law, no radio station can be made to pay more than 1% of the station’s gross revenue for all of the music it plays, even if it is an all-music station. By the time the labels have had their cut, the artists get a lot less.

Legislation now before the Senate would remove the ceiling, allowing radio stations and the representatives of musical artists to negotiate freely, with a final decision made by a tribunal in cases where they can’t reach agreement.

It’s a bit like the legislation set up to arbitrate disputes between platforms such as Facebook and news organisations about the amount to pay for news.

The parallels tell us an awful lot about where the power lies in disputes between platforms and providers. Here’s a hint: it doesn’t lie with providers, whether they provide music, or news, or, for that matter, fruit to Coles and Woolworths.

Radio pays little for music, and always has

Here’s what happened with radio.

Legislation dating back to 1968 has given Australian radio stations a blanket right to play whatever music they want so long as they negotiate a payment rate with the relevant collecting society.

If the station and collecting society can’t agree on the rate, the decision is made by an independent tribunal, but, for commercial stations, the tribunal is limited to awarding no more than 1% of the station’s gross revenue, and for ABC stations, a mere half of one cent per Australian resident per year.

The attorney-general introduced the ceilings to “allay the fears” of radio stations and initially promised a review after five years, a provision he later dropped from the final draft of the legislation. A half a century of inflation has rendered the ABC’s ceiling of half a cent per person worth a fraction of what it was.

The ABC pays half a cent per person

The ceilings only apply to radio stations and only to the recordings. Television stations (including ABC stations) pay much more per track.

And composers, who are paid separately with no legislated limit, get much more.

This means the composers of You’re the Voice get paid quite well, but the performer, John Farnham, does not.

The record industry has tried time and time again to remove the ceiling.

In 2010 it even went to the High Court, arguing along the lines of the case depicted in the movie The Castle that the constitution prevented the Commonwealth from acquiring property other than “on just terms”.

The High Court said “no”, no property had been acquired.

Now, independent Senator David Pocock is trying again.

‘Fair pay for radio play’

Pocock’s Fair Pay for Radio Play bill would remove the ceilings, allowing the radio industry and the record industry to negotiate “a fair rate” subject to adjudication by the Copyright Tribunal.

The radio industry says, if that happens, it will play less Australian music. It would also ask to be freed from the legislated requirement to play Australian music.

The recording industry talks as if the radio industry is bluffing.

Annabelle Herd, head of the Phonographic Performance Company of Australia, told the Senate hearing

even if the radio networks stopped playing all Australian music, they would still have to pay to play UK music, Canadian music and music from pretty much every other country in the world.

It’s a point she might not want to push too far.

In 1970 that’s exactly what happened. In response to what it felt was an over-large demand from the Phonographic Performance Company, the commercial radio industry said no, and refused to play any of its music.

Instead, it played records from independent Australian labels who didn’t charge and got their records pressed in Singapore, and American music, lots of it.

While the industry couldn’t play music from the UK, Canada and a bunch of other countries that were signatories to the relevant copyright treaty, it could play music from the United States, which didn’t charge, and hadn’t signed the treaty.

When radio called the labels’ bluff

A disc jockey quoted at the time said he didn’t think the average listener would notice, and there’s nothing on record to suggest the average listener did.

The Beatles album Let it Be was released on May 8. The record ban, as it was called, came into force on May 16. The Long and Winding Road cracked the top five just about everywhere it was released, apart from Australia.

Five months later, the record companies caved. The only thing the radio industry offered it was a guaranteed number of advertisements per week. Which had been the radio industry’s point all along. The record companies needed radio play for exposure. Without it, people were unlikely to buy their discs.

It’s possible to stretch parallels too far, but when Facebook temporarily stopped linking to pieces from Australian news sites in 2021, traffic to those sites slid 13%.

The common theme is that – as unfair as it seems – platforms have an awful lot of power over providers. If Coles and Woolworths say no, fruit growers won’t be able to distribute their product; if radio stations say no, artists won’t be as widely disseminated; and if Facebook and its ilk say no, news sites will get fewer clicks.

Facebook has been paying millions of dollars to Australian news sites since the news media bargaining code began in 2021. In February it said when the agreements expire, it will pay no more.

The code allows the government to force Facebook to pay, but only if it continues to link to news, and it has given every indication it won’t.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economists say Australia shouldn’t try to transition to net zero by aping the mammoth US Inflation Reduction Act

noreply@blogger.com (Unknown) — Sun, 17 Mar 2024 02:14:00 +0000

Australia’s top economists are pressing Prime Minister Anthony Albanese not to ape US President Joe Biden’s “think big” approach to clean energy.

Biden’s so-called Inflation Reduction Act – dubbed the largest climate investment in US history – directs nearly US$400 billion (A$605 billion) in federal funding to support clean energy through tax breaks, grants and loan guarantees. Its goal is to halve US emissions by 2035.

Among the biggest beneficiaries will be US firms producing hydrogen, wind turbines, solar cells and batteries.

In the lead-up to this year’s May budget, Albanese said that, like in the US, he wanted Australia’s government to be a partner in the energy transformation, not just an observer.

He wanted to “think big”.

While Australia need not go “dollar-for-dollar” against the US and other nations in the scale of its spending, it could go “toe-to-toe” on the impact of its programs.

Not dollar-for-dollar, not toe-to-toe

Today, in a survey commissioned by the Economic Society of Australia and The Conversation, an overwhelming majority of Australia’s pre-eminent economists cautioned against special support for projects that will drive the energy transition. Instead, most backed grants to innovative firms across the entire economy.

The 44 leading economists who took part have been recognised by their peers as Australia’s leaders in fields including economic modelling and budget policy.

Asked whether Australia should ape the US Inflation Reduction Act by subsidising firms in the same industries, provide access to credit for firms that would supply the US, or merely provide more grants to innovative firms across the entire economy, two-thirds voted for supporting innovation across the economy.

Only four wanted Australia to copy the US.

Two of the experts surveyed declined to pick an option. Economic modeller Warwick McKibbin said labour market and tax reforms were the best ways to encourage new firms. Energy specialist Frank Jotzo said government support needed to deliver returns to the nation, not just prop up company profits.

McKibbin said any support for particular Australian businesses should be in the form of contingent loans, ensuring successful recipients with high cash flows paid back a proportion of their profits.

Mark Cully, a former chief economist with the federal Department of Industry, said there was no point in going head-to-head or toe-to-toe with the United States, the European Union or South Korea in doing things such as making batteries.

Supply the US revolution, don’t copy it

Cully said Australia was well placed to supply the resources those countries will need to develop green industries as well as to benefit from what they produce.

But Australian investment in research and development has been falling as a share of GDP for a decade, endangering productivity. The public component of this investment is now just 0.5% of GDP, the least on record.

Funding should be directed to research and development across the economy through institutions such as the CSIRO and business-university linkages, steering clear of “picking winners”.

Speaking before last week’s announcement of A$840 million in government loans to support a rare earths mine backed by Australia’s richest person, Gina Rinehart, economic modeller Janine Dixon said Australia should do all it could to ensure the benefits of public investments stayed with the public rather than private companies.

Economist Saul Eslake said corporate rent-seeking (businesses getting special favours) helped Australia slide from being one of the richest countries in the world at federation to being about 26th by the early 1990s, when governments became less supportive.

John Quiggin supported advancing loans to firms that supplied US projects. He said while it was less than optimal, the government was almost certain to support manufacturing, and this was better than building AUKUS submarines.

Consultant Rana Roy, who voted for no government support, said Australia was experiencing the biggest dive in living standards in half a century. He said the government would be

better advised to spend the remaining months until the next election concentrating for once on the modest task of preventing a further collapse in Australian living standards.

The United States would shortly elect its next president and Congress. They might be much less well disposed to the Inflation Reduction Act, leaving Australia with little to respond to.

Impose conditions

Many of those surveyed reiterated their support for a carbon tax as the best way of cutting emissions. Many more bemoaned what they said was the futility of “picking winners”. Economist Stefanie Schurer said it had never been a good policy in the past, and would not be in the future, adding:

this remains true even if other countries do it.

While eschewing picking winners, economists Adrian Blundell-Wignall, David Byrne, Nicki Hutley and Lisa Magnani said a well-designed grants scheme could encourage investment if it ensured the recipients provided value for money.

Support should be temporary and come with conditions, as in the United States.

Individual responses. Click to open:

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Prepare to hear about an ‘official recession’. Unofficially, we’ve been in one for some time

noreply@blogger.com (Unknown) — Mon, 04 Mar 2024 22:51:00 +0000

Australians are set to find out if we are on the edge of a so-called “official” recession.

Due out mid-Wednesday, the national accounts will either show spending, incomes and production continued to grow in the three months to December, or show they fell.

If they fell, it would be the first of the two strikes needed for what some people call an “official” recession. (Though surprisingly, there’s no such thing here in Australia, as I’ll explain later.)

The second strike would be a fall in the following three months, the so-called March quarter. If we get two quarters in a row, all manner of people – probably including the treasurer – will declare it a recession.

But whatever Wednesday’s data shows, the truth is we are already experiencing the biggest dive in living standards in half a century – and have been for two years.

How to spot a genuine recession

The figures due out on Wednesday will give us an indication of whether ordinary Australians are better or worse off, if we know where to look.

The first thing to do is to put to one side the headline increases or falls in gross domestic product (GDP). Those are spending, income and production over the entire economy each three months.

Those figures show GDP growth was weak before the pandemic, very weak during lockdowns (shrinking for two successive quarters), then strong as lockdowns ended. It’s been exceedingly weak since.

But this tells us little about spending and income per person, which is how each of us experiences daily life.

Adjusted for our current very high rate of population growth, GDP per person is extremely weak. It’s been falling, or barely growing, for three quarters now.

And even this doesn’t tell us enough.

What matters most for each one of us – in the view of Chris Richardson, formerly of Deloitte Access Economics – is real household disposable income per capita.

Unfortunately, the bureau of statistics doesn’t display this on its website. But it’s easy enough to calculate from the bureau’s spreadsheets.

It’s the income accruing to households, adjusted for the prices paid by households, and then adjusted some more.

The bureau also subtracts taxes paid (which have climbed because of the expiry of the temporary tax offset in mid-2023). And it subtracts net interest payments, most of which are mortgage payments.

In his public presentations, Richardson says he refers to real household disposable income per capita as “living standards”, because that’s what it measures.

It shows weak spending, rising prices, a greater tax take, and much greater payments on mortgages have been shrinking living standards for two years.

That’s how it has felt for two years, even if the way the pain has been spread has been different than in the past.

The biggest dive in living standards in half a century

Previous dips in household disposable income per capita have been accompanied by high unemployment, concentrating the pain in the unlucky group looking for work at the time.

In contrast, this dip in living standards has been accompanied (so far) by low unemployment, pushing more of the burden onto working taxpayers.

Looked at through a longer-term lens (the longest the bureau’s spreadsheets allow) the latest dive in real household disposable income per capita is the biggest in half a century.

The broad picture is of fairly steady living standards until the mid-1990s, accelerating living standards during the 2000s mining boom, and then fairly flat (rising slowly) after the 2008-2009 global economic crisis.

They jumped for a bit during the COVID lockdowns, because of all the government assistance. But they’ve been diving since.

There’s no such thing as an official recession

Perhaps surprisingly, given how much we talk about “official” recessions, even the Reserve Bank of Australia says “there is no single definition of recession” here.

Many people talk about a recession meaning two quarters in a row of shrinking spending and income. This appears to date back to a 1974 New York Times article, written by a US business cycle expert Julius Shiskin.

He said two quarters of shrinking economic activity was one of the criteria you could use to decide whether or not an economy was in recession.

Shiskin’s pronouncement was subsequently latched on to by journalists all over the world, who made it the definition because it was simple.

But it has led to nonsensical conclusions.

How Australia and the US differ

Three decades ago, after the release of the September 1990 national accounts on November 29, Treasurer Paul Keating declared they showed Australia in recession.

Keating famously added:

the most important thing is this is the recession that Australia had to have.

Those words live on, but the so-called “recession” didn’t. It vanished soon after. What had been a small decline in economic activity, followed by a big decline, got revised to become a small increase, followed by a big decline.

How? The Australian Bureau of Statistics revises the national accounts as a matter of course, each time new information comes in.

Its revisions moved Australia’s early 1990s recession to the March and June quarters of 1991.

A “recession” even briefly appeared after revisions to the 2000 national accounts, under Prime Minister John Howard and Treasurer Peter Costello. Then it disappeared, after further revisions.

In the United States, they’re not nearly as mechanical. There, there isn’t an official recession until a committee of elders convened by the National Bureau of Economic Research says so. Its proclamations have broad support.

If Wednesday’s figures show Australia’s economic activity shrinking, we will hear a lot more about an “official” recession. But it will make little difference to Treasurer Jim Chalmers as he prepares this year’s May budget.

Just like the rest of us, he knows things are going backwards.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Worried about price gouging? For banks, there’s a simple solution

noreply@blogger.com (Unknown) — Tue, 27 Feb 2024 11:14:00 +0000

Does it feel like you’re being charged more for all sorts of things these days, from groceries to banking? Turns out, you’re right.

While we might be more likely to remember prices that go up than prices that go down, the very best evidence – assembled by Australia’s Treasury, the federal government’s lead economic adviser – says your suspicions are right. We really are being charged more than we used to be two decades ago.

Coupled with the latest profit reports from Australia’s biggest supermarkets and banks, including Tuesday’s half-year results from Coles, it suggests we are contributing more to company profits than we used to.

Climbing price markups

The Treasury estimates show in the 13 years between 2003-04 and 2016-17, the average price markup – the difference between the cost of a product and its selling price – across all Australian industries climbed 6%.

That’s extra profit, taken from your wallet, going to the people selling you things.

Those Treasury estimates are contained in a background paper prepared for the competition inquiry being undertaken by a panel including Productivity Commission chair Danielle Wood, former Competition and Consumer Commission chief Rod Sims, and business leader David Gonski.

At the same time, the average share of each industry held by its biggest four firms edged up from 41% to 43%.

Profit margins are also higher here than in more competitive markets overseas.

This is true in banking, where the big four have taken over St George, BankWest, and the Bank of Melbourne – and are about to take over Suncorp.

It’s also true in supermarkets, where the big two, Woolworths and Coles, have taken over or seen off Franklins, Bi-Lo and Safeway.

Bigger profit margins than overseas

Coles supermarkets reported earnings before adjustments of A$1.73 billion on sales of $19.778 billion in the half year to December – a profit margin of 8.7%.

Last week, Woolworths supermarkets reported earnings of $2.45 billion on sales of $25.648 billion – a margin of 9.6%.

By way of comparison, the dominant UK supermarket group, Sainsbury’s, has a profit margin of 6.13%.

In banking, the Commonwealth Bank has just reported a return on equity (profit as a proportion of shareholders’ funds) of 13.8%. National Australia Bank reported 12.9%.

While on a par with the big banks overseas, those recent returns are a good deal higher than CommBank’s 11.5% and NAB’s 10.7% reported two years ago.

Little hope for groceries

For supermarkets, there’s not a lot the government can do, apart from launching an inquiry, and perhaps giving Australian authorities the power to break up firms that abuse their market power.

But Prime Minister Anthony Albanese has said he isn’t keen on giving Australian authorities the sort of powers available to authorities in the United States and the United Kingdom, saying (incongruously) Australia is “not the old Soviet Union”.

And doing anything short of that would be unlikely to have much effect. Australia’s two supermarket giants have invested a fortune in high-tech warehouses and distribution systems, which new rivals would be hard-pressed to match.

Hope for more competitive banking

But for banks it’s altogether different. Richard Denniss of the Australia Institute has come up with the idea, and it’s a beauty.

It’s for the government to provide a low-cost banking service – expanding on services it already offers.

The costs would be so low, other banks might decide to add features and resell them in the same way as resellers sell mobile phone and NBN services.

The primary function of any bank is to provide a numbered account into which Australians can deposit and withdraw funds.

The Australian Tax Office does this already, at an incredibly low cost.

The tax office gives every working Australian a tax file number. Employers deposit money into these accounts, and – should the tax office owe a refund – taxpayers withdraw them.

Some taxpayers ensure their tax is overpaid, so they withdraw later.

Denniss describes it as a bank account with the world’s clumsiest interface.

The government could offer bank loans

It wouldn’t be much of a stretch from improving that interface to offering government loans.

In fact, government loans are already provided in some circumstances: such as to retirees with home equity through the home equity access scheme, and to Centrelink recipients through advance payments.

It woudn’t be much more of stretch to provide loans more broadly, at an incredibly low administrative cost. The government already lends against the value of homes.

Back in the days when the federal government owned the Commonwealth Bank, it had to cover the high costs of running bricks and mortar branches.

Freed from those costs, the government could now offer a low-cost, technology-enabled basic banking service that would tempt us away from the big four banks – unless they offered better value.

Of course it would cost money, although a lot of it has already been spent setting up the system of tax file numbers and accounts. And of course the banks would hate the idea. That would be the point.

But doing what we can to stop Australians being overcharged is important, not only for wage earners but also for businesses.

The competition inquiry the government has launched is a good start. It shouldn’t be frightened about where it might lead.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

What would a vehicle efficiency standard for new cars cost – or save – Australian drivers?

noreply@blogger.com (Unknown) — Tue, 13 Feb 2024 11:09:00 +0000

Opposition leader Peter Dutton says Labor’s proposed fuel efficiency standard for new cars would push up the price of a Mazda CX30 “by about $19,000”.

Given that right now the Mazda CX30 costs A$33,140, that’d be one hell of an increase.

So what should we really expect if Australia finally introduces fuel efficiency standards here – decades after the US and Europe? What could it cost us upfront for buying new cars? And how much could we save later in lower fuel bills?

Here’s what we do know, based on decades of international experience, new federal government analysis – and even cost estimates from a previous Coalition government.

Car efficiency standards are common overseas

Labor is proposing a so-called new vehicle efficiency standard of the kind proposed by the Coalition in 2016, championed by the Coalition in 2022, and common in the rest of the world.

Here’s how it works in Europe, the United States and Japan, and just about every advanced economy other than Russia and Australia.

Every car manufacturer has to meet an average efficiency standard for the new vehicles it sells each year, whether expressed in miles per gallon (the US) or carbon dioxide emitted per kilometre (Europe).

Europe has been doing it since 2009. When it tightened its standards in 2020, average CO₂ emissions of new passenger cars sold fell 12% and a further 12.5% the following year.

In the US, fuel efficiency has doubled

The United States has been doing it since 1975.

In that time, the average efficiency of its new cars has doubled, and it is about to tighten standards further.

After decades of being the odd one out, Australian passenger cars on average use 20% more fuel than passenger cars in the US.

And that isn’t only because Australians like SUVs and utes. In both Australia and the US, SUVs and utes account for four out of every five new light vehicles sold.

But the new SUVs and utes sold in Australia produce on average 24% more emissions than those sold in the United States. The new smaller cars sold in Australia produce 31% more.

Standards change the mix of what’s sold

Efficiency standards don’t prevent carmakers from selling inefficient vehicles. What they do is ensure they make those vehicles more efficient, or balance their sales with sales of more efficient ones.

At the moment, it means the vehicles sold in the US and elsewhere get advanced emissions technologies not generally offered in Australia.

It’s easy to understand why. With efficient vehicles prized in the US, Europe, and other places, because they are needed to balance up the sales of less efficient vehicles, they get diverted to those places – rather than Australia.

In the words of Volkswagen Group Australia chief Michael Bartsch, it makes Australia a “dumping ground” for older and less efficient vehicles.

Labor has put forward three options for targets: a slow start, a fast start, and its preferred option: “fast but flexible”.

Its preferred option would require carmakers selling in Australia to catch up with the standards of countries including the United States by 2028.

For motorists, the biggest benefit is fuel savings – calculated at A$107 billion between now and 2050. Against that sit vehicle technology, electricity and battery replacement costs of half as much, leaving motorists a long way ahead.

But would it push up the price of cars, as Dutton suggests?

‘No systemic, statistically significant increase’

The government’s consultation paper says the evidence consistently shows no price impact or a negligible price impact.

But common sense suggests it’ll make the price of gas guzzlers somewhat more expensive, and lean, fuel-efficient machines less expensive, as carmakers adjust the mix of what they trying to sell.

When the Coalition looked at this back in 2016, it found the standard it proposed would increase the price of an average-performing petrol passenger vehicle by between $800 and $2,000, and the price of an average-performing diesel light commercial vehicle by between $750 and $2,000.

At the petrol price at the time, $1.30 per litre – far less than we’re paying now – motorists would have been ahead after four years.

Maybe Labor’s plan will push up car prices more than the Coalition’s 2016 plan, because it is more ambitious, as Dutton suggests. Or maybe it will push up prices by less because vehicle technology has improved.

In the US, a statistical analysis of prices from 2003 to 2021 found “no systemic, statistically significant increase in inflation-adjusted vehicle prices” during two decades in which standards were tightened and fuel economy improved 30%.

And standards will need to tighten. Cars and other light vehicles account for 13% of Australia’s carbon emissions. Both this government – and its Coalition predecessor – committed to cutting Australia’s net emissions to zero by 2050.

Without vehicles pulling their weight, along with heavy industry and electricity, we won’t get there.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

How Albanese could tweak negative gearing to build more new homes

noreply@blogger.com (Unknown) — Tue, 06 Feb 2024 11:09:00 +0000

There are two things the prime minister needs to get into his head about tax. One is that saying he won’t make any further changes no longer works. The other is that negative gearing doesn’t do much to get people into homes.

Anthony Albanese seemed to have taken the first point on board when he spoke to The Insiders on Sunday.

Rather than promising flat-out not to change the rules around negative gearing, he merely said he was

supportive of the current rules, we have not considered changes to them

But he was less careful when it came to the virtues of negative gearing. He said there was

a whole lot of analysis that says they encourage investment in housing, the key when it comes to housing is housing supply.

His official advisers in the treasury don’t think negative gearing does much to increase the supply of housing – or, if they do, they omitted it from the six-page briefing note headed “negative gearing”, prepared to help the treasurer answer questions about it in parliament.

Our rules reward bad management

Negative gearing is a particularly Australian tax benefit, which – unlike in other countries – benefits dud landlords: those who can’t make money by renting out properties.

If they lose money (by paying out more in interest, maintenance and other expenses than they are receiving in rent) we let them offset that loss, not only against income from other investments, but also against income from their wage or salary.

It means they can cut their wage for tax purposes, cutting the tax they pay on it. And at the same time, they can hang on to a property they can later sell for a profit, which will be taxed at only half the normal rate, thanks to Australia’s 50% discount on capital gains.

It isn’t allowed in the United Kingdom or the United States. There, if you are a landlord who can’t make money, you can offset your losses against profits from other investments – but not against your wage.

In Canada you can offset rental losses against wages, but there must have been an “an intention to make a profit”. That would probably rule out most Australian negative gearers.

Most gearers don’t build homes

In Australia, an astounding one million of us negatively gear – more than one in nine taxpayers. In 2020-21 they claimed losses amounting to $8.7 billion – 3.5% of the income tax collected – meaning if they didn’t do it (if they didn’t claim for what seem to be deliberate losses) the rest of us could pay less tax.

What Albanese said on the weekend was half right. Negative gearing encourages investment. Most months, more than one in three new home loans is for an investment property.

But most of those loans don’t increase supply – the thing Albanese says matters.

That’s because the overwhelming bulk of investor home loans go to “investors” planning to buy existing homes – to bid against and likely beat would-be owner-occupiers.

In December 2023, only 23% of the loans to investors was used to build a home or buy a newly-built home. In November only 19%.

As a means of getting more homes built, negative gearing leaks like a sieve. As a means of ensuring Australians continue to rent, rather than buy, it’s effective.

In the 20 or so years since the headline rate of capital gains tax was halved, supercharging negative gearing, the proportion of Australian households renting has climbed from 26% to 30%. If those extra renters become owners, an extra 400,000 Australians would be in homes they could call their own.

How to get better value from gearing

The really bizarre thing is that Albanese has it in his power to ensure negative gearing does exactly what he said it did – supercharge the building of houses.

All he would need to do is what Labor promised to do in 2016 and again in 2019. In those elections, Bill Shorten went to voters promising to limit the use of negative gearing to newly-built homes.

As Shorten put it, taxpayers would

continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

The sieve would no longer leak. Every dollar of tax lost to a negative gearer would help build a home.

What would have happened if Shorten had got his way: if Australia both focused the use of negative gearing and cut the capital gains discount as he had proposed?

Modelling just published in Australian Economic Papers finds the share of households who own their home rather than renting it would have climbed 4.7%.

That’s security worth having, especially if it is accompanied by more homes.

An idea whose time is coming?

Australia’s Treasury has begun publishing estimates of the cost of the present unfocused system of negative gearing. Its latest, released last week, puts the cost at $2.7 billion per year, to which should probably be added a chunk of the $19 billion per year lost as a result of the capital gains concession.

The estimates are new. Until Jim Chalmers became treasurer, his department didn’t publish estimates of the cost of rental deductions.

Chalmers is far from the first treasurer to be curious about what the concession does. Scott Morrison expressed concern about the “excesses” of negative gearing.

And Morrison’s predecessor, Joe Hockey, said on leaving parliament that negative gearing should be skewed towards new housing, so “there is an incentive to add to the housing stock rather than an incentive to speculate on existing property”.

Albanese is normally cautious. But as he is showing us right now with his rejigged Stage 3 tax cuts, there are times when he is not.

If he really wants to throw everything he has got at building more homes, he knows what to do.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Mortgage and inflation pain to ease, but only slowly: how 31 top economists see 2024

noreply@blogger.com (Unknown) — Sat, 03 Feb 2024 11:03:00 +0000

Wes Mountain/The Conversation, CC BY-ND

A panel of 31 leading economists assembled by The Conversation sees no cut in interest rates before the middle of this year, and only a slight cut by December, enough to trim just $55 per month off the cost of servicing a $600,000 variable-rate mortgage.

The panel draws on the expertise of leading forecasters at 28 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.

Its forecasts paint a picture of weak economic growth, stagnant consumer spending, and a continuing per-capita recession.

The average forecast is for the Reserve Bank to delay cutting its cash rate, keeping it near its present 4.35% until at least the middle of the year, and then cutting it to 4.2% by December 2024, 3.6% by December 2025 and 3.4% by December 2026.

The gentle descent would deliver only three interest rate cuts by the end of next year, cutting $274 from the monthly cost of servicing a $600,000 mortgage and leaving the cost around $1,100 higher than it was before rates began climbing.

Six of the experts surveyed expect the Reserve Bank to increase rates further in the first half of the year, while 20 expect no change and three expect a cut.

Former head of the NSW treasury Percy Allan said while the Reserve Bank would push up rates in the first half of the year to make sure inflation comes down, it would be forced to relent in the second half of the year as unemployment grows and the economy heads towards recession.

Warwick McKibbin, a former member of the Reserve Bank board, said the board would push up rates twice more in the first half of the year as insurance against inflation before leaving them on hold.

Former Reserve Bank of Australia chief economist Luci Ellis, who is now chief economist at Westpac, expects the first cut no sooner than September, believing the board will wait to see clear evidence of further falls in inflation and economic weakening before it moves.

Inflation to keep falling, but more gradually

Today’s Reserve Bank board meeting will consider an inflation rate that has come down faster than it expected, diving from 7.8% to 4.1% in the space of a year.

The newer more experimental monthly measure of inflation was just 3.4% in the year to December, only points away from the Reserve Bank’s target of 2–3%.

But the panel expects the descent to slow from here on, with the standard measure taking the rest of the year to fall from 4.1% to 3.5% and not getting below 3% until late 2025.

Economists Chris Richardson and Saul Eslake say while inflation will keep heading down, the decline might be slowed by supply chain pressures from the conflict in the Middle East and the boost to incomes from the tax cuts due in July.

Slower wage growth, higher unemployment

While the panel expects wages to grow faster than the consumer price index, it expects wages growth to slip from around 4% in 2023 to 3.8% in 2024 and 3.4% in 2025 as higher unemployment blunts workers’ bargaining power.

But the panel doesn’t expect much of an increase in unemployment. It expects the unemployment rate to climb from its present 3.9% (which is almost a long-term low) to 4.3% throughout 2024, and then to stay at about that level through 2025.

All but two of the panel expect the unemployment rate to remain below the range of 5–6% that was typical in the decade before COVID.

Economic modeller Janine Dixon said the “new normal” between 4% and 5% was likely to become permanent as workers embraced flexible arrangements that allow them to stay in jobs in a way they couldn’t before.

Cassandra Winzar, chief economist at the Committee for the Economic Development of Australia, said the government’s commitment to full employment was one of the things likely to keep unemployment low, along with Australia’s demographic transition as older workers leave the workforce.

Slower economic growth, per-capita recession

The panel expects very low economic growth of just 1.7% in 2024, climbing to 2.3% in 2025. Both are well below the 2.75% the treasury believes the economy is capable of.

All but one of the forecasts are for economic growth below the present population growth rate of 2.4%, suggesting that the panel expects population growth to exceed economic growth for the second year running, extending Australia’s so-called per capita recession.

The lacklustre forecasts raise the possibility of what is commonly defined as a “technical recession”, which is two consecutive quarters of negative economic somewhere within a year of mediocre growth.

Taken together, the forecasters assign a 20% probability to such a recession in the next two years, which is lower than in previous surveys.

But some of the individual estimates are high. Percy Allen and Stephen Anthony assign a 75% and 70% chance to such a recession, and Warren Hogan a 50% chance.

Hogan said when the economic growth figures for the present quarter get released, they are likely to show Australia is in such a recession at the moment.

The economy barely grew at all in the September quarter, expanding just 0.2% and was likely to have shrunk in the December quarter and to shrink further in this quarter.

The panel expects the US economy to grow by 2.1% in the year ahead in line with the International Monetary Fund forecast, and China’s economy to grow 5.4%, which is lower than the International Monetary Fund’s forecast.

Weaker spending, weak investment

The panel expects weak real household spending growth of just 1.2% in 2014, supported by an ultra-low household saving ratio of close to zero, down from a recent peak of 19% in September 2021.

Mala Raghavan of The University of Tasmania said previous gains in income, rising asset prices and accumulated savings were being overwhelmed by high inflation and rising interest rates.

Luci Ellis expected the squeeze to continue until tax and interest rate cuts in the second half of the year, accompanied by declining inflation.

The panel expects non-mining investment to grow by only 5.1% in the year ahead, down from 15%, and mining investment to grow by 10.2%, down from 22%.

Johnathan McMenamin from Barrenjoey said private and public investment had been responsible for the lion’s share of economic growth over the past year and was set to plateau and fade as a driver of growth.

Home prices to climb, but more slowly

The panel expects home price growth of 4.6% in Sydney during 2024 (down from 11.4% in 2024) and 3.1% in Melbourne, down from 3.9% in 2024.

ANZ economist Adam Boyton said decade-low building approvals and very strong population growth should keep demand for housing high, outweighing a drag on prices from high interest rates. While high interest rates have been restraining demand, they are likely to ease later in the year.

In other forecasts, the panel expects the Australian dollar to stay below US$0.70, closing the year at US$0.69, it expects the ASX 200 share market index to climb just 3% in 2024 after climbing 7.8% in 2023, and it expects a small budget surplus of A$3.8 billion in 2023-24, followed by a deficit of A$13 billion in 2024-25.

The budget surplus should be supported by a forecast iron ore price of US$114 per tonne in December 2024, down from the present US$130, but well up on the US$105 assumed in the government’s December budget update.

The Conversation’s Economic Panel

Click on economist to see full profile.

Download the answers as XLS PDF

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Why Australian workers’ true cost of living has climbed far faster than we’ve been told

noreply@blogger.com (Unknown) — Tue, 23 Jan 2024 11:00:00 +0000

Why is Prime Minister Anthony Albanese suddenly so keen to deliver extra cost-of-living relief – keen enough to summon Labor members of parliament to Canberra for a briefing on Wednesday, followed by a National Press Club address on Thursday?

One immediate reason is he is keen to make sure Labor wins the upcoming byelection in the outer-Melbourne electorate of Dunkley on March 2.

But the cost of living wouldn’t matter much for Dunkley – and it wouldn’t matter much for the rest of us – unless it was really biting.

And despite what the treasurer himself has been trying to tell us, it is biting.

Treasurer Jim Chalmers has been pointing out that in the June quarter and the September quarter (the three months to June and to September) real wages grew for the first time in years. By that he means that the wages index compiled by the Bureau of Statistics began growing faster than the consumer price index.

It’s better than growing more slowly, but it tells us next to nothing about what’s happening to buying power. Here’s why.

Why CPI understates today’s living costs

Way back in the late 1990s, more than a quarter of a century ago, the consumer price index (CPI) used to actually reflect the cost of living. It included all of the big costs incurred by households, including – importantly – mortgage interest payments. At the time, mortgages accounted for an average of $5 of every $100 each wage earner spent.

Then in September 1998, in response to representations from the Reserve Bank and the Treasury, the bureau changed the way it calculated the index. It excluded mortgage and other interest payments, in a decision it acknowledged would make the index worse at measuring living costs.

It still carries the warning on its website, saying the consumer price index is

not the conceptually ideal measure for assessing the changes in the purchasing power of the disposable incomes of households.

The index actually does a pretty good job of measuring changes in living costs at times when mortgage rates aren’t much changing. But at times when they are tumbling, it’ll overestimate living costs. And when mortgage rates are soaring – as they have been lately – it will way understate what’s happening to living costs.

We know by how much. For years, the bureau has also published a separate set of measures it pointedly calls “living cost indexes”. These do include mortgage and other interest charges, and for households headed by employees (for whom the buying power of wages matters) they are substantial.

Living costs are up 9%, rather than 5.4%

While the consumer price index (the one quoted by the treasurer) increased 5.4% in the year to September, the living cost index for households headed by wage earners climbed 9%.

For these working households, the price of food climbed 4.8% in the year to September, the price of electricity 14.5% and the price of mortgage interest charges 68%.

It’s the increases in mortgage rates that have made the increases in the other prices hurt so much.

The overall increase in prices faced by wage-earners – 9% – is way above the typical wage increase of 4%.

Bill Mitchell of the University of Newcastle points out that on this measure, the correct one, the buying power of wages has been falling for two and a half years. He says it puts the treasurer’s comments in a wholly different light.

Why we should distrust the CPI

Working Australians are right to distrust the consumer price index, which is something the Australian Council of Social Service warned the bureau about when it made the change.

Each month, the Melbourne Institute asks Australians whether their family finances have deteriorated over the previous year. Usually, about one-third of those surveyed say they have.

But for more than a year now, around 50% of those surveyed have been saying their finances have got worse. That’s a peak not seen since the global financial crisis, and one that has lasted longer.

Asked about family finances over the next 12 months, more than 30% say they’ll worsen further. It’s usually 20%.

Looked at from today’s perspective, the arguments put forward in 1997 for weakening the consumer price index as a measure of living costs are unimpressive.

Back then, the Treasury noted that many welfare recipients didn’t have mortgages and that a consumer price index that excluded them would better reflect their living costs.

The Reserve Bank argued interest rates were “conceptually different from other prices”. In any event, it wanted them excluded because it found it hard to use higher interest rates to bring down inflation if those higher rates pushed the measure of inflation up.

The change attracted little attention at the time, because mortgage rates weren’t moving much. By the time they did, the change had been bedded down.

But here’s some good news

For most of the time since the change, mortgage rates have either increased gradually or been cut, meaning the difference between what the consumer price index has been telling us and what’s been happening to us hasn’t been too stark. It’s been stark lately because interest rates have been rising quickly.

The good news – and there is good news – is that financial markets expect rates to begin falling this year, with the next move down.

Inflation as measured by the consumer price index (inflation excluding mortgage rates) is already falling.

We get the next official update on the consumer price index next week (and the update for the lesser-known living cost indexes a week after that).

It makes now a particularly good time to announce measures to address the cost-of-living crisis. We need them because we really are in something of a crisis. Things are a lot worse than the official index suggests.

And there’s a chance that soon they’ll begin to get better, allowing the prime minister to claim a win.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Will the RBA raise rates again? Unless prices surge over summer, it’s looking less likely

noreply@blogger.com (Unknown) — Tue, 05 Dec 2023 10:58:00 +0000

If you’re looking for clues about whether the Reserve Bank has any interest rate rises left, Governor Michele Bullock offered several in her statement after Tuesday’s board meeting, saying:

the latest monthly figures showed inflation “continuing to moderate”
inflation expectations remained “consistent with the inflation target”
wages growth was “not expected to increase much further”.

The statement reads not only as an account of why the board kept rates on hold this month – as expected, after increasing them in November – but also an account of why it might not need to lift rates again.

Much will depend on “data and the evolving assessment of risks”. The board will make that assessment at its first meeting for the year in February.

Here’s why that next meeting matters so much.

Inflation’s headed in the right direction

The monthly measure of annual inflation has been falling since it peaked in December. Last week we learned that in October it fell from 5.6% to 4.9%, meaning it’s now closer to the Reserve Bank’s target of 2-3% than to the December peak of 8.4%.

A few special government measures helped push it down.

An increase in Commonwealth rent assistance decreased recorded rents; energy bill rebates decreased recorded electricity prices; and changes to the childcare subsidy decreased recorded childcare prices.

Those government measures won’t depress future inflation readings, suggesting that from here on inflation might bounce back.

But on the other hand, from here on the very large inflation outcomes recorded at the end of last year will drop out of the 12-monthly figures.

The mathematics of falling inflation

Simple maths suggests that if this year’s November and December readings are like the average of the other readings this year, annual inflation will fall to 3.1%.

The November figure will be released on January 10 and the December figure on January 31. Both will be available to the Reserve Bank board when it meets on February 5 and 6, along with the latest quarterly measure of inflation.

If that quarterly measure is the same as the average of the past two quarters, it will show annual inflation of 4%.

Such outcomes – which are likely if inflation continues along its present trajectory – would see inflation closing in on the Reserve Bank’s target band and relieve it of any need to further lift rates.

Of course, it mightn’t happen. But there’s a lot driving down inflation.

Prices we don’t much notice are falling

The prices we pay attention to are those we see in the supermarket, what we fork out on mortgage payments and household bills, and what we pay at the petrol pump. (Petrol prices have been falling for weeks now.)

Prices we notice less are far less troubling than they were.

During 2022, the price of household appliances climbed 8.2%. So far this year it has fallen 2%.

The price of furnishings climbed 5.3% during 2022. So far this year it has fallen 1.6%. The price of clothing climbed 5.4%. So far this year it has fallen 2.6%.

All sorts of prices are coming down, partly because the supply bottlenecks driving them up last year are being reversed and partly because – thanks to 13 near consecutive interest rate rises – we are not buying at anything like the rate we used to.

Retail spending grew by just 1.2% over the year to October – the least since the COVID lockdowns.

Likely population growth of 2.4% and what Westpac believes to be retail price growth of 3.6% means the amount bought per person actually fell 4.5%.

Even this year’s more hyped Black Friday spending was up only 0.6% to 1% compared to Black Friday in November last year. Given our population growth was higher than that, it suggests we spent less on those sales per person this year.

Dentistry and haircuts are more expensive

What about the prices that are climbing strongly?

With the exception of rents – up 7.6% over the year – it’s hard to find many.

In a speech after the last Reserve Bank board meeting, Governor Bullock said inflation was increasingly being driven by the price of services, which stands to reason given inflation in the price of goods has been ebbing away.

She nominated increases in the prices charged by hairdressers and dentists, as well as restaurants. And there’s definitely something to see there, for dentists.

During 2022, the statistician’s measure of the price of dentistry climbed 3.9%.

In the first three quarters of this year, it climbed by that much again, meaning the pace picked up. But the increase is not that much more than the overall increase in wages, suggesting dentistry is not being priced much further out of reach.

Haircuts climbed in price a hefty 6% during 2022 and continued to climb at that pace during the first three quarters of 2023, which is uncomfortable, but at least not accelerating.

The price of restaurant meals climbed 6.7% during 2022 but only 3.8% in the first three quarters of 2023, meaning the pace is easing.

Wage growth a risk, but not yet a worry

The governor is concerned high wage growth will become embedded in the price of services. But at 3.9%, wage growth isn’t particularly high.

About a third of workers are covered by enterprise agreements. Jeff Borland of the University of Melbourne points out the increases in most of the newly-lodged enterprise agreements are flat or trending down. Many of us got a top-up at the start of our three-year agreements, which won’t be continued.

Borland’s statistical analysis suggests individual agreements aren’t pushing up wage growth either, but increases granted by the Fair Work Commission to the 20% of workers on awards are. Yet, by design, these increases reflect, rather than drive, inflation.

If inflation does accelerate over the holiday season, the Reserve Bank probably will push up rates further. But as the governor seemed to acknowledge on Tuesday, it’s not looking likely.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Governments have been able to overrule the Reserve Bank for 80 years. Why stop now?

noreply@blogger.com (Unknown) — Tue, 28 Nov 2023 10:55:00 +0000

Pay close enough attention to parliament these next few days, and you’re likely to witness something truly remarkable: politicians from both sides of politics uniting to remove the power of politicians to overrule the Reserve Bank.

As an instance of self-loathing, it’s hard to top.

Sure, a good many of us don’t trust politicians. But surely politicians ought to trust politicians. Surely politicians ought to realise that we put them there to make decisions – not usually the day-to-day decisions, but the ultimate big decisions. They are meant to be where the buck stops.

That Treasurer Jim Chalmers could be even thinking about axing his ultimate power to veto decisions of the Reserve Bank board shows just how far the myth of an “independent Reserve Bank” has spread.

Scroll through the treasurer’s website, and you’ll find 195 documents referring to the “independent Reserve Bank”, many multiple times.

‘Independent’, but not according to the law

Saying the Reserve Bank is independent suits the treasurer and it suits the prime minister, just as it has suited many of their predecessors. As soon as the bank does something that’s necessary but unpopular (such as pushing up interest rates) they are able to say – wrongly – there’s nothing they can do.

The government’s Reserve Bank is dependent on the government in myriad ways.

The government set up the Reserve Bank. The government appoints every member of its board. The government directly appoints its chief and deputy chief. And from time to time the government gives it running instructions.

But – most importantly – the government can overrule it.

The mechanism is built into the Reserve Bank Act.

In the event of a disagreement, the treasurer can

submit a recommendation to the governor-general, and the governor-general, acting with the advice of the Federal Executive Council, may, by order, determine the policy to be adopted by the bank.

The government is to accept responsibility for the decision taken, and the Reserve Bank board must

thereupon ensure that effect is given to the policy determined by the order and shall, if the order so requires, continue to ensure that effect is given to that policy while the order remains in operation.

After so directing the bank, the treasurer is to table in parliament a copy of the direction, along with a statement explaining the reasons, and a statement from the Reserve Bank board putting the case that failed to convince the treasurer.

These are the clauses – until now unused – that in April the outside review of the Reserve Bank asked the government to do away with.

Its thinking was that the government can’t be trusted.

As the review put it,

if an elected government controls monetary policy there are risks that it may try to push the economy to run above its capacity, resulting in higher inflation but with no lasting impact on employment.

On releasing the review’s recommendations, Treasurer Jim Chalmers said straight away that he agreed in principle with all of them.

Shadow Treasury Angus Taylor said much the same thing, although he now says the Coalition will wait until sees the legislation Chalmers is about to introduce before deciding its position on it.

The veto power is there for a reason

On the face of it, a reasonable position would be that the government’s ability to overrule the bank in extreme circumstances has caused no problem so far.

The review counters this by warning of “the possibility that established conventions cease to be observed”.

But, if that did happen, it would be because there was a serious (and ultimately public) rift between the elected government and an unelected board.

With the exception of judges in Australia’s courts, unelected officials can’t normally overrule elected governments. It’s how our system is designed.

The Reserve Bank tried to overrule the government once, and succeeded, which is why the provision we have was written into the law.

Back in 1930, in the early years of the Great Depression, the Reserve Bank was part of the Commonwealth-owned Commonwealth Bank, run by a board appointed by the government which reported to the government.

In The Conversation earlier this year, Alex Millmow outlined what happened.

Desperate to support the economy, the government begged the government-owned bank to help it finance public works.

The bank refused. Its government-appointed chairman, Sir Robert Gibson, wrote to Treasurer Ted Theodore warning a point was being reached

beyond which it would be impossible for the Commonwealth Bank to provide further financial assistance for the governments in the future

Theodore replied complaining the bank was trying to

arrogate to itself a supremacy over the government in the determination of the financial policy of the Commonwealth, a supremacy which, I am sure, was never contemplated by the framers of the Australian Constitution

While the government did not question the right of the bank’s board to offer such comment or criticism as the board thought proper, the control of the public purse had “heretofore always been regarded as an essential prerogative of the people”.

In the end, it was the government that backed down. But to ensure it could never be overruled again, Labor wrote the veto power into the Commonwealth Bank Act of 1945 and the Coalition wrote it into the Reserve Bank Act of 1959.

That’s the veto power today’s Labor Party, quite possibly with the support of the Coalition, is about to try to remove.

I understand why the Reserve Bank review made the recommendation it did: it wants monetary policy to work well. But I don’t think that’s enough of a reason for the government to attempt to abrogate its responsibility.

And ultimately, it can’t. The Australian public is going to hold the government responsible for the state of the economy even if it succeeds in tying one hand behind its back. But I don’t think it’s wise. One day it might need it.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Why further RBA rate hikes are less likely now than even 1 week ago

noreply@blogger.com (Unknown) — Tue, 21 Nov 2023 00:46:00 +0000

Since Australia’s Reserve Bank hiked interest rates two weeks ago, there have been two important developments – one in the United States and the other in the United Kingdom.

If it’s not clear to you why events overseas influence Australia’s interest rates, which are meant to be set to control Australian inflation, read on.

US and UK inflation close to zero

We haven’t been complete masters of our own destiny since the Australian dollar was floated 40 years ago next month.

What happened in the US last Tuesday was news of dramatically lower US inflation. When increases and decreases in prices were taken together, overall US prices moved not at all in the month of October. That’s right, inflation was zero.

While zero movement in one month doesn’t mean zero over the entire year, it helps bring down the rate over the entire year. US inflation fell from 3.7% in the year to September to 3.2% in the month to October.

Then the next day we got similar news from the UK.

Taken together, prices in the United Kingdom scarcely grew at all in October, climbing just 0.1%. The screeching halt to UK monthly inflation took the annual rate down from 6.7% for the year to September to 4.6% for the year to October.

In both the US and the UK, there’s talk there will be no need for further interest rate hikes, and very probably a case for interest rate cuts as soon as next year.

We don’t yet know what happened to Australia’s inflation rate in October – the Bureau of Statistics will tell us next week.

But we have an early indication.

The Melbourne Institute inflation gauge, which roughly tracks the bureau’s measure, fell 0.1% in October. If that is what the bureau finds – that overall prices barely moved (or fell) in October – Australia’s annual inflation rate should fall from 5.6% for the year to September to around 5.2% for the year to October.

Inflation down all over

All over the world, inflation is falling for much the same set of reasons: the price of oil is heading back down after Saudi Arabia and Russia tried to restrict supply in the middle of the year, and the price pressures caused by shortages are easing.

As Australia’s Reserve Bank conceded in the minutes of the November board meeting, in which it pushed up rates, there has been “an easing in supply chain pressures and raw materials prices”.

Not that this means the bank is relaxed about what’s happening to inflation; far from it.

In the minutes released on Tuesday and in remarks delivered at a conference ahead of their release, Governor Michele Bullock said what concerned her was stronger-than-expected demand pressures. Australians remained keen to spend.

And she drew attention to disturbing

growing signs of a mindset among businesses that any cost increases could be passed onto consumers

But what has just happened overseas will help, big time. Here’s why.

Australians’ buying power just jumped

As soon as the news of low US inflation came out last Tuesday, the US dollar slid.

Investors became less keen to hold US dollars when it became less likely that US interest rates would rise further, and a good deal more likely they would fall.

Against the Australian dollar, the US dollar fell 2%. From an Australian’s point of view, the buying power of an Australian dollar jumped from 63.7 to 64.9 US cents and has since jumped to 65.8 US cents.

A sudden jump in the value of the Australian dollar

Value of Australian dollar in US cents. Yahoo Finance

This means that, for as long as it lasts, Australian dollars will buy more than they did.

Australians will pay less in Australian dollars for the goods and services ultimately paid for with US dollars. The changed interest rate outlook in the US will act to keep Australian prices low.

In this way, decisions made in the US not to increase interest rates or even to cut them make it easier for Australia’s Reserve Bank not to increase rates – or even to cut them.

A higher dollar means lower inflation

The effect isn’t big. The RBA believes it takes a 10% change in the value of the Australian dollar to move the Australian inflation rate 0.4 percentage points.

But it is better than things moving in the other direction, which is what has been happening until now.

For more than a year now, whenever interest rates have climbed in the US, Australia’s Reserve Bank has been under pressure to push up its rates to stop the Australian dollar falling and prices climbing.

No longer. After last week’s news from the US and the UK, Australian financial markets began pricing in a close to zero chance of further interest rate rises – with a fair chance of a rate cut next year.

It’s always impossible to tell for sure what the Reserve Bank will do to rates. A lot will depend on what actually happens to inflation.

But for the first time in a long time, the Reserve Bank has tail winds from overseas, rather than headwinds.

For the first time in a long time, the bank won’t feel pressured to push up rates just because rates have been pushed up overseas.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

We could make most Australians richer and still save billions – it’s not too late to fix the Stage 3 tax cuts

noreply@blogger.com (Unknown) — Tue, 14 Nov 2023 01:36:00 +0000

The Albanese government is about to have to make a really important decision.

It’s going to have to decide what’s more important: supporting Australians who are financially under water, or keeping an election promise.

And it’ll have to do it soon. It’s already working on its May budget, now just six months away.

That choice will affect almost every Australian, and it could shape whether you’re thousands of dollars a year better off – or not – from July next year.

Household budgets are shrinking

When Labor took office in May 2022, Australians were doing well. Consumer spending and economic growth were on the up and up, and mortgage rates and rents were only starting to climb.

A promise to keep the proposed multi-billion dollar Stage 3 tax cuts – announced but not implemented by the Coalition back in 2018 – seemed worth making to clear away any reasons any voters might have not to vote Labor.

Since May 2022, just about everything has got worse for ordinary Australians – those on typical incomes, which are about $85,000 for full-time workers and $43,000 for adult part-time workers.

The best measure of the buying power of after-tax incomes is real household disposable income per capita. During the past year, it shrank 5.3%, which is more than it shrank in either the early 1990s recession or the global financial crisis.

On my calculations, it’s the worst collapse in 40 years.

From those incomes have to be taken rents and mortgage payments.

The Reserve Bank says scheduled mortgage payments are now taking up a larger share of household disposable income than at any time in history – 10% when averaged over all households including those that don’t have mortgages, and many times that for those that do.

This means when you go to the supermarket and find you can’t afford what you used to, you’re not imagining it. It hasn’t been like this in decades. And it’s about to get worse.

The Christmas bonus is missing

In the lead up to each of the past four Christmases, ordinary earners have received a bonus from the tax office - the so-called low and middle income earner tax offset, initially worth $1,080 and increased to $1,500 in 2022.

This year, it’s gone. It means middle-earners’ pre-Christmas tax refunds will be up to $1,500 smaller or replaced with bills. Taxpayers who normally have a tax bill will get a bill up to $1,500 bigger.

An estimated 10.5 million Australians submitted their tax forms by October 31.

Most of them – most of those earning up to $90,000 and previously eligible for the full $1,500 offset – are about to find themselves a good deal worse off.

Average earners will lose, while the rich get thousands

The very expensive Stage 3 tax cuts (costing $20 billion in their first year, and $313 billion over ten years) were meant to come to the rescue. They begin next July.

Speaking notes prepared for Treasurer Jim Chalmers and released under freedom of information laws say they will provide relief to low and middle earners and kick in at $45,000.

But someone on that income will get no relief. That person will lose an offset of $1,275 in return for a tax cut of zero. Someone on a higher wage of $50,000 will lose $1,500 in order to gain $125, and someone earning the typical full-time wage of $85,000 will have to lose $1,500 to gain just $1,000.

That’s right, a typical full-time worker will get relief of $1,000 from the Stage 3 tax cuts in return for losing the axed tax offset of $1,500.

Higher earners will do much, much better. An Australian earning twice as much as is typical – $190,000 – will get $7,500. An Australian earning a bit more than that again – $200,000 – will get $9,000.

Labor has been handed an opportunity

Handing $9,000 to a high earner but only $1,000 to an ordinary full-time earner is an indulgence that might have seemed okay when it looked as if ordinary earners were doing alright, or wouldn’t notice.

But it’s about to happen, and it’s about to cost $20 billion in its first year. That’s as much as the government plans to spend on the pharmaceutical benefits scheme in that year and almost twice what it plans to spend on higher education.

What if it kept the tax cuts, but reoriented them to Australians who actually needed them – to the more than 80% of Australians who earn less than $120,000 a year – while still providing generous cuts to those who earned more than $120,000?

That’s a task Matt Grudnoff and Greg Jericho set themselves at the Australia Institute, coming up with four options. Each of those four would cost less than Stage 3 cuts, deliver more to Australians on less than $120,000, and even fund a $250 per fortnight increase in the JobSeeker unemployment benefit.

Jericho’s punchline, delivered to the revenue summit at Parliament House last month: “I actually wish it was harder than it was”.

Option 4 costs $70 billion less over ten years but leaves every taxpayer earning up to $132,000 better off.

It doubles the tax cut Stage 3 gives to a typical full-time earner on $85,000, and still gives high earners $2,197 a year each.

Stage 3 vs Australia Institute Option 4, tax cut as percent of taxable income

The Australia Institute, A better Stage 3: fairer tax cuts for more Australians, October 2023, CC BY-SA

His point isn’t that this is the best option. It is that there are options, many of which give the bulk of Australians – the stressed ordinary voters Labor and the Coalition will need in the next election – much more than Stage 3.

What’s wrong with making 80% of the electorate better off at a time when they desperately need it, and cutting future budget deficits by $70 billion?

Only that it would break a promise, and Prime Minister Anthony Albanese likes keeping promises.

But when asked in an Australia Institute survey what was more important – keeping a promise or reacting to changing economic circumstances – 61% picked reacting to changing circumstances.

Even among Coalition voters, 56% supported reacting to changing circumstances.

It puts the Stage 3 tax cuts in play. There’s still time, and plenty of electoral and economic reasons to rejig them.

This article is republished from The Conversation under a Creative Commons license. Read the original article.