Policy Partners

Mounting housing stress underscores need for expert council to guide wayward policy making

noreply@blogger.com (Anonymous) — Fri, 29 Sep 2017 23:50:00 +0000

Stronger, better-founded evidence about the nature and extent of the affordable housing problem may help build consensus about how to tackle it effectively. But the Abbott Government disbanded the National Housing Supply Council. Now the Opposition is talking about reinstating it. Hal Pawson (UNSW) and Oliver Frankel (UTS) why this may help.

A recent policy pledge by Shadow Treasurer Chris Bowen has given fresh heart to campaigners for the restoration of the former National Housing Supply Council (NHSC).

The Abbott government axed the council in 2013. With housing stress intensifying across much of Australia, a reinstated and revitalised council could strengthen policymaking in this contested area.

NHSC Mark 1

The Rudd government created the NSHC in 2008. The council’s role was to put housing policy on a sound base of evidence. It was guided by expert members drawn from the construction industry as well as senior planning, social housing, economics and academic ranks.

The council provided ministers with housing supply and demand estimates, projections and analysis. It also investigated the influence of infrastructure investment, housing-related taxation and urban planning. Its remit included a focus on:

… the factors affecting the supply and affordability of housing for families and other households in the lower half of the income distribution.

Importantly, NHSC reports explicitly recognised that untargeted supply-enhancing measures were not the sole answer to easing this group’s housing stress. The council also examined influences on housing demand. These included the price-stimulating effect of tax incentives for residential property investors.

The case for restoring the NHSC

Unaffordable housing and homelessness of course remain burning issues in national media and policy debate. Across most of the country, these problems have mounted since the NHSC’s demise.

In Sydney, for example, median house prices have climbed 40% since 2013. Rents are up by more than 12%. Average New South Wales earnings, however, have risen by only 8% in this time.

From 2011 to 2016, census data show that, nationwide, the proportion of tenants having to spend more than an “affordable” amount on rent rose in every state capital other than Perth. And latest published statistics reveal homelessness service users rising at 5% per year (2016 census data on this are still awaited).

Housing affordability is subject to complex influences – regulatory, economic, demographic and other factors. Most of these transcend state and territory boundaries, and many call for improved data. As a landmark official report acknowledged only last year, the lack of information essential to underpin housing policymaking is highly problematic.

Overcoming these data deficiencies would be central to the mission of a restored NHSC. This includes metrics on the supply pipelines of serviced land, dwelling demolitions and underused housing.

In its day, the NHSC drew support from many quarters, notably spanning the property industry and the affordable housing lobby. Leading property sector groups lamented its abolition. And, alongside Bowen, the Property Council of Australia is among recent advocates for NHSC reinstatement.

A government wanting to beef up its understanding of this area could assign a wider and more analytical role to other official data-gathering or research bodies. But neither the Australian Bureau of Statistics nor the Australian Institute of Health and Welfare possesses the in-house policy expertise or industry-connectedness to provide a credible alternative to a restored NHSC. And the Australian Housing and Urban Research Institute (AHURI) is not set up for this role.

A reinstated NHSC can be improved

A new NHSC should be established by statute, not just by executive decision. This would strengthen its hand in obtaining required data from possibly reluctant state and territory ministries. In addition, this would provide more protection against arbitrary abolition by a future federal government in “wrecking mode”.

It will be vital that a reinstated NHSC’s remit includes a more granular, localised focus on supply and demand imbalances. Housing supply is only productive when suitably located in relation to jobs, infrastructure and services.

Housing provided needs to be of a type and configuration that matches demand, and at a price that people in that locality can comfortably afford. Property market conditions may be quite diverse even within a single capital city. Oversupply in one part of a metropolis can co-exist with shortages elsewhere.

Beyond calibrating overall housing demand and supply, the reborn NHSC must monitor the supply-demand balance by market segment, including low-cost rental. Similarly, the council’s former brief should be extended so it specifically assesses Australia’s unmet need for social and affordable housing. That’s both the current shortfall and the newly arising need predictable within a given period.

As recently instanced in Wales and Scotland, methodologies of this kind have a long lineage in UK housing policymaking. While Australia has residential stress metrics galore, none provide an ideal basis for government-supported rental housing construction. Such a program should be a central plank of national housing policy.

As Bowen has argued, a restored NHSC can also help hold states and territories to account for their supply commitments under the new National Housing and Homelessness Agreement. This is currently under negotiation between the two levels of government.

Reinstating the NHSC in a revitalised form would help government make more rational and informed policy choices on which supply and demand levers to pull to improve housing affordability. This is especially important for the lower-income renters who are doing it tough in cities like Sydney and Melbourne as well as in many other areas, such as the resort settlements along much of the east coast.

Stronger, better-founded evidence about the nature and extent of the affordable housing problem may help build consensus about how to tackle it effectively. And that is an outcome we badly need.

This article was originally published in The Conversation and is republished under creative commons licence.

Is coal still cheaper than renewables as an energy source?

noreply@blogger.com (Anonymous) — Tue, 15 Aug 2017 23:18:00 +0000

Coal-fired power is only cheaper than renewable energy where the capital cost of the plant is sunk. For new power facilities, renewables is already cheaper. A factcheck by Ken Baldwin (ANU) Dylan McConnell (Uni Melbelbourne) and Tony Wood (Grattan Institute)in The Conversation runs through the numbers.

One of the biggest debates underway in Australia (and around the world) is about electricity, and how it should be generated. One of the major pressure points is prices.

During an episode of Q&A, audience member James Newbold said renewable energy is “now cheaper than coal and other fossil fuels”. Senator Matt Canavan (then-Resources Minister) disagreed, saying: “I don’t accept that renewables are, at the moment, cheaper than coal.”

Let’s look at the numbers.

Checking the sources

The Conversation contacted Matt Canavan’s spokesperson for sources to support his statement but did not hear back before deadline. Nonetheless, we can test his statement against publicly available data.

What do the data show?

Based on the electricity generated now by old coal-fired power stations with sunk costs (meaning money that has already been spent and cannot be recovered), Matt Canavan was right to say: “I don’t accept that renewables are, at the moment, cheaper than coal.”

In 2017, the marginal cost of generating power from an already existing coal station is less than $40/MWh, while wind power is $60-70/MWh (explained below). So why do people say renewables are now cheaper than coal?

Well, they’re often talking about what would be the cheaper option if old coal-fired power stations were replaced today – in other words, the new-build price.

Making the distinction between the cost of existing energy generation, and the cost of new-build energy generation in this debate is very important. Comparing the two is like comparing apples and oranges.

Current prices are based on existing installations, while new-build prices compare the costs of different technologies if their operating lives started today. This matters because Australia’s existing coal-fired power stations are ageing and will need to be replaced.

Comparing new-build prices is more complicated than comparing current costs, as I’ll discuss later in this FactCheck.

How do we measure the cost of electrical power?

Let’s cover the basic terminology first.

Electrical energy is measured in kilowatt-hours – the units generally used for metering and charging residential electricity use. One kilowatt-hour represents the amount of energy a device that draws one kilowatt of power (like a household heater, for example) would use in one hour.

A megawatt-hour is 1,000 times larger, and it’s what we typically use to measure large electricity loads or generators. So when we’re comparing the cost of electrical energy generated by different sources, we’ll be talking about Australian dollars per megawatt-hour ($/MWh).

Comparing prices for different sources of electricity

There are a few things we need to take into account when we’re calculating the cost of electricity created by different technologies.

First, we need to factor in how much it costs to establish the source in the first place – whether that’s a coal-fired power station, a wind farm or a hydro-power plant. Then we need to factor in how much it costs to operate, fuel and maintain that facility over its lifetime.

These factors and the cost of capital (like the interest rate) are commonly combined into a metric called the “levelised cost of electricity” (or the LCOE). This provides a measure of the total cost in current dollars per unit of electrical energy generated ($/MWh) over the lifetime of the facility.

We also need to know the time frame in question. A coal-fired power station that’s nearing the end of its operating life may have recovered its original capital investment. So the marginal cost of coal-fired electricity may be low, compared to the levelised cost of a new wind farm that’s yet to recoup its initial capital cost.

Using the levelised costs of electricity created by different technologies does always not provide a perfect comparison. Comparing such different technologies will never be comparing apples with apples. But it’s the best measure we’ve got for a simple “plug-and-play” replacement of a single generating source.

Current prices for coal-fired and wind power

Today, most of Australia’s electricity is sourced from coal-fired power stations. In their discussion on Q&A, Newbold and Canavan referred broadly to “renewables”. Currently, wind power is the cheapest form of renewable energy. So we’ll use that as the basis for comparison with coal-fired energy.

In 2017, the marginal cost of generating power from an already existing black coal-fired station is less than $40/MWh. Brown coal-fired power is even cheaper.

To establish the current price of wind power, we can look at the announcement in May 2017 by Origin Energy, when the company agreed to buy all the power to be generated by the Stockyard Hill Wind Farm in Victoria between 2019 and 2030 for less than $60/MWh.

A similar price was struck in March 2016 when the Australian Capital Territory government conducted its second “wind auction”. The government uses wind auctions to buy contracts for future energy supplies. The lowest price in the 2016 auction yielded around $60/MWh in current prices. This figure is based on a flat rate of $77/MWh for 20 years and assuming around 3% inflation, which is the upper end of Australia’s inflation rate target of 2-3%.

Combining the total price range for that auction with this inflation range gives around $60-$70/MWh in current prices, with wind farms currently operating in that adjusted range.

So, based on the marginal cost of energy generated by existing coal-fired power stations with sunk costs, Canavan is correct in saying that renewables are not “at the moment, cheaper than coal”.

However, the story is different if we are talking about new-build electricity prices. And this is often where conversations and debates become confused.

Why new-build electricity prices matter

Coal-fired power stations in Australia have operating lives of around 50 years. As can be seen from the table below, nine of Australia’s 12 biggest operating coal-fired power stations are more than 30 years old.

In preparation for the retirement of those older coal-fired stations, policymakers, energy companies and other investors are debating whether to replace them with new coal-fired power stations, or other types of energy generation. This is where the comparison of new-build costs comes into play.

New-build prices for coal-fired and wind power

FactChecks rely on data from events that have already occurred. So we can’t say with factual certainty whether or not renewables would be cheaper than coal as a new-build energy source, because no coal-fired power stations have been built recently.

But we do have recent prices for the cheapest form of new-build renewable energy, which is newly-installed wind power.

And we do have recent levelised price projections for the cheapest new-build fossil fuel energy, which is supercritical coal power.

The projected price for new supercritical coal power comes in at around $75/MWh from the recent Finkel review of the National Electricity Market, based on data produced by Jacobs Consultancy. That is consistent with the price of $80/MWh from the 2016 report from the CO2 Cooperative Research Centre, and less than the $84-94/MWh from the 2012/3 Australian Energy Technology Assessment .

These projections for new supercritical coal power are higher than the recent prices for newly-installed wind power (outlined earlier in the FactCheck) at around $60-70/MWh in current prices over the 20-year contract period (which is similar to a levelised cost).

So, if we look at recent wind power prices and recent price projections for new supercritical coal power, it’s reasonable to say that – as things stand today – wind power would be the cheaper new-build source of electricity.

Future prices

There are important additional factors that need to be taken into account when considering the costs of new-build coal-fired electricity and new-build renewable electricity as we look further into the future. Three of the main considerations are:

upgrades to the energy grid (including energy storage) to balance the use of intermittent renewables, especially once renewable energy exceeds around 50% of all energy supply (this would increase the price of renewables)
the introduction of a price on carbon emissions (this would increase the price of coal), and
improvements in technology (this is expected to reduce the price of renewables more so than coal).

It is possible to make educated assumptions about how these factors would affect prices in the future. But I won’t include those projections in this FactCheck, for two reasons:

firstly, we are yet to see the outcomes, and
secondly, the Q&A audience member and Canavan were discussing prices as they are “now” and “at the moment”.

So that’s what I’ve addressed in this FactCheck.

Verdict

Based on the electricity generated now by old coal-fired power stations with sunk costs, Matt Canavan was right to say: “I don’t accept that renewables are, at the moment, cheaper than coal”. In 2017, the marginal cost of generating power from an already existing coal station is less than $40/MWh, while wind power is $60-70/MWh.

The Q&A audience member may have been talking about new-build prices.

Based on recent prices for newly-installed wind power of around $60-70/MWh, and recent price projections for new supercritical coal power at around $75/MWh, it is reasonable to say that – as things stand today – wind power would be cheaper than coal as a new-build source of electricity. – Ken Baldwin

Review

The author has provided a sound FactCheck that covers a lot of the complexities around a challenging issue. I would add one remark which doesn’t detract from the author’s verdict.

The cost of new-build coal is likely to be higher than reported in the FactCheck.

The author was correct to point out that the introduction of a price on carbon emissions would increase the cost of new-build coal-fired electricity.

The mere possibility of the introduction of a price on carbon or carbon regulation in the future actually affects the costs of new-build coal-fired electricity today. The risk of increased costs or regulation for emission intensive generators manifests itself as a higher “risk premium” applied to current financing costs. The overall effect is a higher weighted average cost of capital (basically, a higher average interest rate) for emission intensive generation.

In the Finkel review, the weighted average cost of capital for coal is projected to be 14.9%, compared to 7.1% for renewables. Risk adjusted financing costs would result in the levelised cost of new coal being higher than the figures presented in the FactCheck. – Dylan McConnell

Review

The cost of electricity produced from a new wind farm is competitive with the best estimates for the cost of electricity produced from a new coal station, and cheaper than the cost of new coal quoted in very reputable analyses (CO2CRC 2015 and CSIRO 2017).

As noted by the author, the comparison in this FactCheck does not include the cost of intermittency for renewables. Recognising that no technology runs 100% of the time, there is a backup cost to be added to wind to make it as firm (or stable) as a fuel-based plant. Available costs for such backup, such as large scale battery or pumped storage, are based on estimates and are the subject of much current study.

New wind with backup could very well be very competitive with new coal, particularly if the cost of emissions is recognised. However, at present, the contention either way is unproven. – Tony Wood

This article was originally published in The Conversation and is republished under creative commons.

Is Australia's economy really a world-beater?

noreply@blogger.com (Anonymous) — Mon, 12 Jun 2017 01:58:00 +0000

The claim that Australia has gone twenty-six years without a recession is true, but only if you accept three assumptions. Unfortunately, none of them has any official or intellectual basis. Tim Colebatch explains in Inside Story that that economics has no accepted definition of a recession. In public debate, the gap has been filled by the silly measure journalists love to use: a recession occurs when seasonally adjusted GDP goes backwards for two quarters.

Just to take three examples from Australia’s modern history:

1974: On the two-consecutive-quarters rule, Australia didn’t have a recession in 1974, even though everyone could see it happening around them. Seasonally adjusted GDP grew by 0.01 per cent in the March quarter, fell by 2.1 per cent in June, clawed back 1.3 per cent in September, and then rose by 0.03 per cent in December. Sure, by the end of 1974 our output had fallen 0.8 per cent from a year earlier, shops and factories had shut down in their hundreds, and unemployment had almost doubled, but we didn’t have two consecutive quarterly falls. So there was no recession!

1990–91: Remember that? Well, on the two-consecutive-quarters measure, we barely had a recession at all. Seasonally adjusted GDP fell in December 1989, rose in March 1990, just edged up in June, fell in September, rose again in December, fell again in March 1991 – and then it just edged down in June 1991, to give us a second quarter of negative growth. But that fall in June 1991 was tiny – 0.1 per cent – and at one point the Bureau revised it away entirely.

If it hadn’t subsequently revised it back in, there wouldn’t have been a recession at all on this definition. Yet we lost 417,400 full-time jobs, unemployment rose by 453,700 and reached 11 per cent at its peak, and real net disposable income per head fell by 6.7 per cent. That was clearly a recession. Yet on the two-consecutive-quarters measure, it was only a borderline one.

2000: The downturn when the GST came in was really just a speed bump compared to what happened a decade earlier, but on this measure it was a fingertip away from being a full-blown recession. Seasonally adjusted GDP rose just 0.04 per cent in September 2000, then fell 0.24 per cent in December. That September growth could well be revised away some day, which on this definition would make it a recession. That would spoil our record twenty-six years without one, wouldn’t it?

Fancy government financing could still cost the taxpayer

noreply@blogger.com (Anonymous) — Mon, 12 Jun 2017 01:24:00 +0000

Project financing should minimise the level of public subsidy needed to deliver the project; and where risk is borne by the private sector, it should be transparently priced and deliver clear value for money for the taxpayer. Marion Terrill (Grattan Institute) explains.

No sooner is one complicated financing idea from the government batted down, than another one pops up. We can expect more of them, now that the federal budget has established a new Infrastructure and Project Financing Agency.

We’ll get “innovative” financing options for everything from the massive Inland Rail project, down to a bond aggregator to finance community housing. The idea is that we get new public assets, but the money spent is rather marvellously “off balance sheet”.

The problem is these financing schemes are not very good at meeting the government’s stated aims of minimising the public subsidy for public infrastructure and transferring risk effectively.

Look no further than recent enthusiasm for tax increment financing, a financing scheme idea borrowed from the US. It takes the expected increase in land tax, stamp duty or council rates from landowners near a new bridge or railway station, as security for finance on the project.

The idea is that a private-sector financier borrows the upfront capital for construction, and makes an arrangement with the government to earmark those expected increases in future revenue. This is used to guarantee the debt used to finance the project for a set period, such as 20 years. But look a little closer: lurking in the background of tax increment financing, just as with bond aggregation, usually lies a government guarantee.

The idea that financing can be “innovative” obscures the central point that all capital originates in savings. As the eminent British economist John Kay puts it:

People talk about ‘new sources of finance’ when what they mean is new ways of channelling existing sources of finance; they confuse the channels of intermediation with the origin of funds.

Why would Australian governments want private financiers to borrow on their behalf for public infrastructure? Australian governments, state and Commonwealth, have strong credit ratings and can borrow money extraordinarily cheaply. The five-year government bond rate is around 2.3% in NSW and Victoria, and an astoundingly low 2.1% for Commonwealth bonds.

Government borrowing is pretty close to the cheapest it’s ever been. By contrast, when a private operator borrows the capital cost of a public infrastructure project, they typically do so in the form of A-rated and BBB-rated corporate bonds. These bonds have interest rates around 1.3 to 2 percentage points higher than government borrowing costs.

The usual argument for involving the private sector in these financing schemes is that the sector can better allocate risks to whichever party is best placed to manage them. But there is a difference between the private sector assuming the risk and management responsibility for construction and operations on the one hand, and private sector involvement in the mere channelling of finance on the other.

The potential benefits of private sector involvement rely on well-specified contracts that are enforced. On this score, the history of private public partnerships in Australia is mixed.

Many risks never eventuate or are managed successfully. And when things do go wrong, it may be that the contract is watertight and enforced so that the private investor wears the contracted cost. But unfortunately, sometimes government wears the cost too.

If there’s a government guarantee behind these contracts, then the risks may not be transferred effectively, and we taxpayers don’t get what the government paid for on our behalf. Take a British example: despite millions of pounds in fees for contracts to modernise London’s underground rail network, the arrangements unravelled when one of the two principal companies behind it, Metronet, failed.

Metronet’s extensive borrowings were guaranteed by a US bond insurer – on the basis that 95% of payments would be met by the UK government. In other words, despite all the complication and expense, the real borrower turned out to be the UK government all along.

The key question is what happens if the earmarked tax revenue isn’t enough to pay the loan. Does the financier take a hit? Do the taxpayers near the new bridge or railway station get a bigger-than-expected tax bill? Or does the government step in and pay up? If the government is ultimately guaranteeing the loan, it would be cheaper for the government to borrow on its own account.

The many spruikers of “innovative” finance schemes argue it is too simplistic to ask who pays when things go wrong. And they are absolutely right that there’s no shortage of complications in these schemes. But consider three simple facts.

First, the costs of infrastructure projects in Australia are systematically under-estimated, and therefore the debt may well be bigger than expected, even if the revenues flow through as planned. Second, any revenue shortfalls are likely to happen when the economy is slowing – that is, when the government can least afford to make good on a guarantee. And third, the politicians who embrace the guarantee will probably be long gone when the dreaded call comes to make good on it.

In the end, the government’s own principles are clear, and they should be followed: project financing should minimise the level of public subsidy needed to deliver the project; and where risk is borne by the private sector, it should be transparently priced and deliver clear value for money for the taxpayer.

So let’s hear more detail about these government guarantees – the promises that bind future governments, whether it’s with Inland Rail, “bond aggregators” or tax increment financing, or the next “innovative” financing idea that pops up.

This article was originally published in The Conversation and is republished under creative commons licence.

Do Australian banks have double the return on equity of banks in other developed economies?

noreply@blogger.com (Anonymous) — Thu, 18 May 2017 23:17:00 +0000

Jim Minifie (Grattan Institute) checks, and Rodney Maddock (Monash University) reviews the Treasurer's claims that Australian banks have a return on equity about twice that of overseas banks. While they find that claim is true, its not because Australian banks are earning super profits - it's because the banks of the US and Europe were affected badly by the Global Financial Crisis and are still under-performing.

The banks in Australia have a return on equity which is about twice, if not more than that, what you see particularly in other parts of the advanced developed economies of the world. Treasurer Scott Morrison, ABC Insiders, May 14, 2017.

In its 2017 federal budget, the Australian government included a 0.06% levy on Australia’s biggest five banks: ANZ, the Commonwealth, NAB, Westpac and Macquarie Bank. The levy will collectively cost the banks A$1.6 billion a year, and by some estimates will raise the overall cost of funding for the affected banks by around 0.03%. Many commentators have suggested this cost will be passed directly onto customers.

In an interview on the ABC’s Insiders program, Treasurer Scott Morrison said the banks could absorb the cost of the levy, given the size of their profits.

He said Australia’s large banks have between a 0.2% to 0.4% advantage because of the way Australia’s regulatory regime works and that Australian banks have a return on equity about twice that of banks in other advanced developed economies.

Is that right?

Checking the source

When asked for sources to support his statement, a spokesperson for Scott Morrison referred The Conversation to evidence presented by the Reserve Bank of Australia to the House of Representatives Standing Committee on Economics at its hearing on September 28, 2016.

In the report, the Reserve Bank included a chart provided below.

The spokesperson added that:

Importantly, the chart doesn’t adjust for M&A [mergers and acquisitions] activity, given NAB’s 2016 sale of Clydesdale brings down average (unadjusted) ROE [return on equity] for Australian banks quite substantially.

Let’s check the facts.

What is the return on equity for Australian banks?

Return on equity, or ROE, is a measure of profit, expressed as a percentage of shareholder equity. It shows how much profit a company generates with the funds invested by its shareholders.

The figure below (from the Reserve Bank’s Financial Stability Review) shows the return on equity of the large banks in Australia was around 15% in 2015.

Including the smaller Australian banks, which have about 20% of the market, the average return on equity is somewhat lower and more variable than for the big four only, but it is above 12%.

Financial Stability Review April 2016, Reserve Bank of Australia, page 12. RBA

A decade ago, Australian bank returns on equity were a few points higher, and not much different from those earned by banks in other developed markets.

However, during the global financial crisis, banks in the US and Europe sustained large losses, leading to negative returns for couple of years. US banks have since recovered somewhat. European and UK banks, however, continue to perform weakly: the returns on equity of large banks in Europe are about 5%, compared to about 3% in the UK. The ROEs of large Canadian banks have, like those of large Australian banks, remained higher and more stable.

Looking ahead, the Reserve Bank notes that:

analysts’ expectations are for Australian banks’ [return on equity] to remain on average around 12.5% over the next couple of years. While this is high by international standards and appears to be above banks’ cost of equity, it is lower than the returns to which Australian banks and their investors have become accustomed.

Do Australia’s biggest banks have an added advantage over smaller rivals?

The treasurer also claimed that “our major banks have about a 20 to 40 basis point [funding cost] advantage because of the nature of the regulation and structure of our financial system”.

Big banks do indeed appear to be able to borrow more cheaply because their lenders expect them to receive government support during crises.

In 2010, the International Monetary Fund (IMF) used a range of approaches to estimate the value of “implicit government support” – such as the bailouts provided to some US banks during the global financial crisis – for banks and other financial institutions in the Group of 20 nations, including Australia.

While the answers from the different approaches varied, the IMF concluded that implicit government support “provides too big to fail financial institutions with a funding benefit between 10 and 50 basis points, with an average of about 20 basis points”.

Here in Australia, the Reserve Bank has concluded that “the major banks have received an unexplained funding advantage over smaller Australian banks of around 20 to 40 basis points on average since 2000”.

Macquarie University researchers James Cummings and Yilian Guo found that the funding cost advantage was about 30 basis points from 2004 to 2013, but has declined to about 16 to 17 basis points since then, in part due to prudential reforms that obliged banks to increase the share of lending contributed by shareholders.

Verdict

Scott Morrison was correct: Australian banks do “have a return on equity which is about twice, if not more than that, what you see particularly in other parts of the advanced developed economies of the world”.

Australian banks currently have higher returns on equity than banks in many other major developed markets. Those returns are about twice as high or more than the returns of the troubled European and UK banks. But returns in Canada are close to the Australian level, and the returns earned by large US banks are only a few points below the Australian level.

The treasurer is also correct to point out that the major banks enjoy a funding cost advantage on the basis of expected government support in financial crises. However, the size of the support is less clear. While IMF and RBA studies are in line with the treasurer’s range, there is some evidence that the funding cost advantage may now be somewhat lower. – Jim Minifie

Review

This FactCheck is clear and accurate. Two other points need to be made.

The first is that the recent data on bank return on equity is a lot weaker than the graph presented. This one comes from the Reserve Bank’s March 2017 Bulletin, authored by David Norman.

Reserve Bank of Australia Bulletin March Qtr 2017.

The second point that needs to be made is that the Macquarie University study referred to in the FactCheck, which examined the possible funding advantages that large banks have over small banks, is calculated as a residual. That means that the studies try all the possible explanations they can think of, and then say the bit they cannot explain must be the result of some implied government subsidy. It may be, but the methodology is very indirect. – Rodney Maddock

This article was originally published in The Conversation and is republished under creative commons licence.

Tax on ‘unearned gains’ is the missing piece of the affordable housing puzzle

noreply@blogger.com (Anonymous) — Mon, 08 May 2017 22:28:00 +0000

Extending capital gains taxation to cover annual improvements in land value would improve discourage housing speculation and improve housing affordability. Brian Feeney (University of Queensland) explains.

With housing prices still consistently in the news, could the ideas of 19th-century philosopher John Stuart Mill help improve affordability?

In 2015, some landowners near the proposed Northern Beaches hospital in Sydney were offered more than twice the area’s normal market value for their properties. They stood to make large windfall profits from zoning changes and infrastructure upgrades associated with the A$1 billion-plus public investment in the hospital.

While many may say “good luck to them”, Mill – a champion of individual freedom – may well have questioned those windfall profits by asking:

Who is entitled to the increase in land value created by planning approvals, new infrastructure, population growth or the general development of town and cities?

For Mill, the answer would have been that the increase, which he called the “unearned increment”, rightly belongs to the community rather than the individual landowner. Until well into the 20th century, many political leaders, including Winston Churchill, agreed with Mill.

What’s this got to do with housing affordability?

The main reason Australians invest in property is the expectation of future (after-tax) capital gains (that is, unearned increments) rather than rental income. Consequently, they are willing to pay more than the price that reflects rental income.

The current taxation system, while imposing some tax on capital gains, encourages this strategy, mainly through negative gearing and a discount on capital gains tax. The federal government’s 2014 Financial System Inquiry concluded:

The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing.

Could recouping more of Mill’s unearned increments through a higher capital gains tax on investor housing help make housing more affordable?

The Henry tax review accepted that a tax on land value would reduce the price buyers were willing to pay. The same principle would apply to a tax on capital gains from land, which could be seen as a type of deferred land value tax. The Reserve Bank of New Zealand also expects that increasing taxes on capital gains from property would reduce pressure on housing prices.

How to recoup more of the ‘unearned increment’

A federal capital gains tax (CGT) was introduced in Australia in 1985, with capital gains added to other income. Since 1999, capital gains may qualify for a 50% discount for taxation purposes.

Capital gains are taxed at the individual’s tax rate, providing an incentive to time the sale of the asset or use other means to minimise the impact of the CGT.

Therefore, to be more effective in reducing land prices, CGT on property would need to be reformed so it applies at a flat rate (without deductions) rather than being part of general income. Notably, this reformed CGT would capture some of the land value increases resulting from planning approvals.

The flat tax rate could be progressively increased from a lower rate during an adjustment period. Each step in the transition could be evaluated for its effect on prices.

Because Mill’s unearned increments relate to land only, the property CGT would be levied on the increase in the unimproved value of the land (indexed for inflation). That is, it would exclude the value of improvements. The principal residence would continue to be excluded, and tax would be payable only when the property was sold.

Capital gains tax or land value tax?

The Henry review and other commentators agree that a land value tax would reduce property prices. This tax would necessarily include all landowners.

In comparison, the proposed CGT reform would also be likely to reduce land prices, but would, in practice, affect investors only. Relocating homeowners would not be affected as the lower prices would be on both sides of the buying-selling equation.

In summary:

Housing not only provides shelter but is also a form of investment.

Favouring investment over shelter – as current tax policies do – tends to raise property prices and to crowd out some of those wanting to own their own home and so have a better chance of putting down roots in their selected local community.

Making housing more affordable, such as by more effective taxing of capital gains, would promote a more “cohesive and just society”, as a 2008 Senate inquiry into housing affordability found.

Most investors are motivated by expectations of future after-tax capital gains and so moderating those expectations by raising the tax on capital gains from land is likely to reduce the price investors would be prepared to pay.

A period of transition would be needed to allow property investors to adjust to the new arrangements.

As Mill observed, these capital gains are created by others – governments, immigrants and other private investors – so there is an ethical basis for effectively taxing these “unearned” gains.

This article was originally published in The Conversation and is republished under creative commons licence.

Government spending from Howard to Turnbull

noreply@blogger.com (Anonymous) — Mon, 08 May 2017 22:17:00 +0000

Alan Duncan and Rebecca Cassells (Curtin University) explain Commonwealth expenditure patterns since 1998.

Successive Australian governments are usually judged on how they balance the budget and spend taxpayers’ dollars. The stereotypes are that Liberal governments keep a tight hold on the purse strings, while Labor governments are spendthrifts.

While total government spending has increased from around A$240 billion in 1998-99 to a predicted A$451 billion in the 2016-17 financial year, it’s also accompanied by an increase in revenue from around A$250 billion to A$417 billion over the same period.

But the pressure on the budget under a Turnbull government is more acute now than ever before, because spending is outpacing revenue. It’s now at an estimated 26.6% of GDP in 2016-17, higher than at any point since before the start of the millennium.

When you look at the mix of government spending over the the past fifteen years, you start to see some of the drivers of the growth.

To compare spending over time, we have adjusted for the effect of inflation by using real measures.

The Conversation/Emil Jeyaratnam, CC BY-ND

Social security continues to dominate government spending at A$161.4 billion, constituting around 35% of all government outlays on latest figures. This has fallen from a high of 39% during the Rudd government stimulus package in 2009-10 and is similar to levels at the beginning of the millennium.

In the graph below “other” spending includes the distribution of GST revenues to states and territories as well as spending in areas such as job seekers assistance, industrial relations, vocational training, tourism and immigration. This constitutes the second highest share of government spending, at 18% (A$83.4 billion) of the total spend. General revenue assistance to states and territories accounts for two thirds of spending in this category.

Governments spend almost as much on defence and public safety (around A$32.6 billion) as they do on education (A$34.3 billion), although the states ultimately pick up most of the education bill.

The global financial crisis saw a temporary blip in the mix of general government spending. Social security spending rose by 22% in the year to June 2009, and education expenditure jumped 60% a year later as a result of Rudd’s economic stimulus package.

Government spending on public debt interest has more than tripled in real terms to A$15.4 billion since the start of the global financial crisis, and now accounts for 3.7% of all government spending.

The Conversation/Emil Jeyaratnam, CC BY-ND

Many of the changes in real government spending between 2008 and 2010 were driven by the impact of the global financial crisis, which resulted in a slowdown in economic growth, rising unemployment and a negative hit on the sharemarket.

The Rudd government response was a stimulus package. The main spending increases came from a combination of accelerating public debt interest, increased payments to assist the unemployed, but mainly the government’s stimulus measures channelled through increased spending on education, housing and cash payments to families.

If a spending measure is truly temporary, a rise in real spending should be followed by an equivalent fall in subsequent years when the spending runs out or the program ends. This is evident to some degree for the social security and welfare and fuel and energy portfolios, but less so in other areas.

For example, the 45% rise in fuel and energy spending in 2008-09 was primarily driven by the introduction of the Energy Efficient Homes package within the Rudd stimulus suite. The scheme ended in February 2010, resulting in a 33% drop in spending.

On the other hand, spending on education rose by A$16 billion as part of the Rudd stimulus package, but remained A$10 billion higher than pre-global financial crisis levels in subsequent years.

Overall government spending has continued to grow since 2010-11, but less dramatically than during the heart of the global financial crisis, by around 8% in real terms over the five years to 2015-16.

The Conversation/Emil Jeyaratnam

Social security and welfare spending constitutes the largest spending commitment of any government budget. It has risen by 70% in real terms over the past fifteen years, from A$91 billion at the turn of the millennium in 1999-00 to A$155 billion in 2015-16.

The biggest welfare spending is for assistance to the aged, families with children and people with a disability. Together, these three items make up almost 85% of all welfare spending.

The 2008-09 Rudd stimulus package had a substantial yet temporary effect on welfare spend, with “bonus” cash payments to families in the 2009 calendar year increasing assistance to families by around A$10 billion. Additional cash payments were also made to students, pensioners and farmers under the stimulus program. And 8.7 million Australian workers earning $100,000 or less also received a cash payment.

Australia’s ageing population and increases in both disability prevalence and disability support are the main driving forces behind welfare spending growth. These factors will continue to exert pressure on future government budgets, especially with the full rollout of the National Disability Insurance Scheme (NDIS).

The Conversation/Emil Jeyaratnam, CC BY-ND

More than 40% of the government’s 2015-16 health budget of around A$71.2 billion was committed to community health services spending. At A$28.7 billion, spending in this sector has nearly doubled since the start of the millennium and by a quarter since the start of the global financial crisis in 2008-09.

This stems from the need to deliver medical services to a growing – and ageing – population, and the increased prevalence of chronic disease. In this respect, Australia is little different to most countries around the world.

Specific measures contributing to this growth included the expansion of health infrastructure, the costs of enhanced primary care attracting higher Medicare rebates, and indexation of health related payments to states and territories. Pharmaceutical spending increased by 12%, from A$1.4 billion year-on-year to A$12.1 billion in 2015-16.

The Conversation/Emil Jeyaratnam, CC BY-ND

Education spending rose dramatically during the global financial crisis, with spending on primary and secondary education increasing 81% to A$24.7 billion in the year to 2009-10 as part of the economic stimulus package.

Rudd’s “education revolution” led to a 12% growth in education spending in the 2008-09 budget, quickly followed by a further 61% spending increase in 2009-10 as part of the economic stimulus package. Spending in the following year fell as the temporary stimulus measures came to an end, but overall, education spending has remained significantly higher in real terms than pre-global financial crisis levels.

Spending on the university sector rose to around A$10.9 billion over the same period, but has remained relatively stable since.

The Conversation/Emil Jeyaratnam, CC BY-ND

Federal government money given to the states and territories

The federal government committed A$60.8 billion in general revenue assistance to states and territories in 2015-16, almost all of which came through the distribution of GST revenue. General revenue assistance spending rose A$3.8 billion in real terms in 2014-15, up 7% on the previous year, but has since stabilised.

Spending on superannuation interest has grown by a quarter since the end of the Howard years, reflecting the increase in the government’s superannuation liability. Lower public sector wages and employment have led to superannuation interest payments stabilising over the last two budgets to around A$9.4 billion in 2015-16.

Immigration spending rose between the Gillard and Abbott governments to a peak of A$4.7 billion in 2013-14, but has since fallen back to around A$3.8billion in 2016 dollars.

Much of the growth in immigration spending occurred during the Rudd and Gillard governments, by an average of 23% annually. This compares to an average of 7% during the previous Howard years. Additional government spending on detention facilities for irregular arrivals was the principal reason for this spending growth.

Natural disaster relief spending spiked between 2009 and 20-11 to assist with the damage and recovery costs from the Black Saturday bushfires in Victoria in 2009, and the 2010 Queensland floods.

The Conversation/Emil Jeyaratnam, CC BY-ND

Government approaches to supporting various industries has typically been applied on an ad hoc basis. Budget spending on specific industries has risen from A$3.2 to A$5.6 billion in real terms. Agriculture, forestry and fishing typically received a greater share of industry spending during the Howard budgets, reaching a high of A$4.8 billion in Swan’s final 2007-08 budget.

Growth in industry spend slowed during the Rudd years, picking up again with the Gillard and Abbott governments, with a greater preference towards spending in mining, manufacturing and construction projects.

The Conversation/Emil Jeyaratnam, CC BY-ND

Spending on housing and community amenities has increased from A$2.7 billion to A$7.6 billion, reaching a high of almost A$12 billion in the Rudd years. Spending in this portfolio increased with the Rudd stimulus package, incorporating a number of housing affordability measures including the First Home Buyers Grant Scheme and a boost in investment in social housing.

Spending on sanitation and protection of the environment also expanded rapidly during the Rudd/Gillard government, relative to the Howard years. The establishment of the Climate Change Action fund introduced by Rudd in 2009-10 and the Clean Energy Futures package in 2010-11 have been the main drivers behind this increase. Spending in each has been pared back since the Liberals came to power with Abbott at the helm.

The Conversation/Emil Jeyaratnam, CC BY-ND

Commonwealth spending on transport and communications projects has more than doubled from A$3.1 to A$7.5 billion over the last 15 years. Spending remained relatively stable under Howard’s government, and then got a further injection on roads in the last two Swan budgets. The Rudd government continued this trend, with Gillard following suit with increases in both road and rail projects.

Spending in this portfolio has been clawed back since the Abbott government, falling from A$9.2 billion to A$7.8 billion billion between the final Labor government budget (2013-14 financial year) and the first Liberal government budget (2014-15 financial year). The most recent Turnbull/Morrison budget has reaffirmed spending commitments under this portfolio, committing to more than A$11 billion in 2016-17.

The Conversation/Emil Jeyaratnam, CC BY-ND

The Howard/Costello years were characterised by good economic times, with an extended period of strong revenue growth, yet this prosperity wasn’t matched with any significant spending growth. In fact, overall government spending fell as a share of GDP – from 25.7% in 2000 to 23.6% in 2006-07 – the lowest share since the start of the millennium. And the combination of strong revenue and limited spending commitments under Howard drove down public debt, and public debt interest payments.

We saw some pretty dramatic increases in real spending when Rudd came into power in December 2007. Rudd’s first budget in 2008-09 saw some substantial spending commitments in the area of education but nothing exorbitant.

However, the major turning point in government spending has been driven by the response to the global financial crisis. There were significant spending commitments over the course of the crisis, some of which are still present.

Spending on public debt interest has increased to A$15.4 billion since the global financial crisis - more than the spending on transport and housing combined. And it’s projected to increase further to A$18.7 billion by 2019-20. This just emphasises how high the stakes are for Scott Morrison in delivering a credible budget repair strategy.

The spending of incumbent governments inevitably draw from the commitments of previous administrations, especially for those programs – in infrastructure, education or housing - that involve medium-term funding commitments.

The growth in real spending in areas that directly affect households – social security, NDIS, health or pensions - is an issue that no government can ignore. NDIS costs have been hugely underestimated already, and social security and health spending will inevitably increase with the ageing population.

Set against this context, it’s clear that a piecemeal approach to budget repair is unsustainable. A drop in revenue has ramped up budget pressures, and highlights the compelling need to return to a sustainable spending path and a credible budget repair strategy.

The Turnbull government cannot shy away from making the big decisions that secure a sustainable future for Australia. And the roadmap towards a sustainable future has to include revenue as well as spending as part of the recovery narrative.

This article was originally published in The Conversation and is republished under creative commons licence.

The graphs in this article were created by The Conversation’s Multimedia Editor Emil Jerayatnam

The government is swimming against the tide on Westpac’s Adani decision

noreply@blogger.com (Anonymous) — Wed, 03 May 2017 23:33:00 +0000

No one is going to make even short-term profits out of the Adani coal mine, with its huge upfront capital investment, unless they get a substantial subsidy from the taxpayer. And the long-term prospects look grim. David Peetz and Georgina Murray (Griffith University) explain that those who argue that Westpac’s decision was “illogical” are swimming against both the financial and technological tides.

The Australian government’s strident criticism of Westpac for not financing the Adani Carmichael coal mine is out of step with the economics. As the cost of renewable energy falls and its adoption increases, fossil fuels are becoming a riskier investment.

It’s not just Westpac. This shift is reflected right across the finance industry. The big four Australian banks have all declined to finance this mine, as have many large international financial institutions.

The Commonwealth Bank quit as the project’s financial adviser in August 2015. NAB ruled out financing the mine in September 2015. ANZ effectively ruled out financing in October 2015 and again, more firmly, in December 2016.

Big overseas financiers Standard Chartered, Barclays, Royal Bank of Scotland, Citi, HSBC, Morgan Stanley, Société Générale, Crédit Agricole, JP Morgan Chase, Deutche Bank and BNP Baripas have also already abandoned or made clear their lack of support for the mine.

Adani’s coal was to be used to generate electricity in India, recently seen as the future for the product given China’s shift away from coal. But Indian demand for coal is slipping. Its new National Electricity Plan has renewables rising from the current 15% to 56% of installed power capacity by 2027.

The Indian government itself now thinks it may not need any new coal power plants for at least a decade.

As mines require a huge initial investment that pays itself off over many years, this increases the risk that the Carmichael mine will become a “stranded asset”.

Shifting economics of coal

Sure, financial institutions are under pressure from customers and activists to avoid investments that damage the climate. But for these institutions, such pressures only make a difference at the margin. For them it is the poor economics of coal that is fundamental.

The long-term prospects of coal are weakened by the rapid changes in technology and the deterioration of the climate outlook.

Solar energy prices have fallen more rapidly than most expected, and battery technology and use is rapidly improving.

A recent study found that solar energy is on a trajectory to supply at least 3 terawatts (TW) of power globally by 2030, and potentially up to 10TW if certain barriers to installation can be overcome. For comparison, the world’s total electricity capacity from all sources as of 2014 was just 6TW.

Financiers’ minds may be focused still further by the fact that, if anything, scientists appear to have underestimated the effects of climate change on sea levels, polar ice caps, and methane emissions from thawing permafrost and lakes.

From short- to long-term thinking

The fact that the financial industry is reluctant to fund the Carmichael mine is just one example of the phenomenon described in a report by the Asset Owners Disclosure Project (AODP) as “a fundamental power shift … from short-termers to long-termers”.

There are several reasons for this, besides the changing economics of renewable technology, the worsening climate outlook, and the shifting policies in countries like China and India.

New tools are being developed to enable investors to quantify the impact of climate on their investments. In financial circles, the more things can be counted, the more they count.

Superannuation funds and overseas pension funds need to invest over long periods of time, and so are now forced to invest with climate change in mind. They can’t afford to have a stranded asset on their books.

Reinsurers - essentially large firms that provide insurance for insurance companies - face the same issue. They need to minimise exposure to extreme weather events, which are increasingly influenced by climate change.

Fund managers are creating financial products to enable investment in climate change adaptation. And some investors are taking more control over their investments, rather than leaving them in the hands of fund managers, so they can give appropriate priority to climate issues.

This is not to say that financiers around the world are uniformly reacting to climate issues. The AODP report shows that, on average, European and Australian asset owners and fund managers have done well in acting on climate risk, whereas American, Middle Eastern and (until now) Chinese ones have done poorly.

It’s also not true that finance has uniformly abandoned short-termism. “Climate-interested investors” currently account for just a third of the ownership of the world’s very large corporations.

But no one is going to make even short-term profits out of the Adani coal mine, with its huge upfront capital investment, unless they get a substantial subsidy from the taxpayer. And the long-term prospects look grim.

Those who argue that Westpac’s decision was “illogical” are swimming against both the financial and technological tides.

This article was originally published in The Conversation and is republished under creative commons licence.

Why biased budget forecasts make poor politics

noreply@blogger.com (Anonymous) — Wed, 03 May 2017 23:12:00 +0000

Budget outcomes have continued to surprise because of systematic revenue forecast errors by Treasury, which dwarf actual policy changes in explaining changes to the budget bottom line. These are compounded by the wilful blindness of politicians, happy to use these forecasts to justify avoiding difficult decisions. John Daley and Danielle Wood (Grattan Institute) explain.

For the last eight years, budget outcomes have consistently been much lower than previous budget forecasts. But in each year, the treasurer has again forecast a happy return to balance over the next four years. Over-optimistic forecasts have made it easy for treasurers to avoid making the really tough decisions on budget repair.

Budget outcomes have continued to surprise because of systematic revenue forecast errors by Treasury, which dwarf actual policy changes in explaining changes to the budget bottom line. These are compounded by the wilful blindness of politicians, happy to use these forecasts to justify avoiding difficult decisions.

Grattan Institute, Author provided

How the budget estimates were wrong about economic outcomes

Nominal GDP is the most important economic driver of budget outcomes. But nominal GDP outcomes have differed from forecasts by an average of almost 1.5% of GDP, over the past two decades.

An external review of Treasury forecasts conducted in 2012 found that over a 20-year period, the GDP estimates were unbiased. But this glosses over bias at different points of the cycle. The projections systematically underestimated nominal GDP in the boom years, and overestimated it when mining prices fell.

This flies in the face of predictions from economists such as the International Monetary Fund, and the US Federal Reserve who suggest that long-run economic growth in developed countries trended lower even before the global financial crisis, and that future expectations should be lower again.

This debate is not just for policy wonks. Nominal GDP growth influences nominal wages growth. If wages just grow at the rate of the last 12 months, rather than at the higher growth rates forecast for the next four years, income tax collections will be A$7 billion less than the budget estimate for 2019-20.

This mismatch between actual growth and forecast growth is a result of the built-in optimism generator in Treasury’s budget estimates methodology. This assumes that a period of below-trend growth will always be followed by a period of above-trend growth, and so projects much higher growth in nominal GDP and wages in 2018-19 and 2019-20.

If Treasury’s forecast of wage growth of 12% over the next four years were unbiased, then a plausible downside to this forecast would be as likely as the equivalent upside. If wages stay at their current levels - a very plausible scenario - cumulative growth would be 9% (3% lower than Treasury’s forecast). The corresponding upside (3% higher than Treasury’s forecast) would be nominal wages growth of 15% over the next four years - which few would think remotely plausible.

Grattan Institute, Author provided (restricted)

How the budget estimates were wrong about tax revenue

Problems with estimating nominal wage growth explain why the reality of income tax collections has been disappointing. There have been different problems in estimating company, capital gains, and superannuation taxes.

Treasury continues to assume very rapid increases in the revenue from these taxes. Over four years, company and superannuation taxes are projected to increase by half. Capital gains tax collections are projected to almost double in four years.

Grattan Insitute, Author provided

Forecasting a big lift in company tax revenues may be warranted. The tax is collected in instalments based on the previous year’s profits, with catch-up payments or rebates for the following year based on actual profits.

As a result, revenues should jump during an economic upswing, as there are simultaneously both higher instalments and catch-up payments from the previous year. Tax revenues should increase further once companies have used up all the tax losses they incurred during the global financial crisis by offsetting them against subsequent profits.

But it’s harder to defend the capital gains tax (CGT) forecasts. Treasury believes that CGT revenue over the last few years has been suppressed, as gains were offset by capital losses incurred during the global financial crisis.

Its estimates assume that these tax losses have mostly been used up as offsets against gains in previous years, and CGT revenues will now increase rapidly. Similar assumptions have proved wrong for several years in a row. Maybe 2017-18 will be different.

But there may be another explanation for low CGT revenues, which implies they may stay low for longer. Much of the capital gains tax collected in the past was from earnings on superannuation funds.

These superannuation funds are now under more pressure to report after-tax, as well as pre-tax returns. And so, many now work harder to avoid crystallising CGT liabilities. In particular, super funds shuffle assets between exiting members and members who are contributing new funds.

If this is the reason for lower superannuation and capital gains tax revenues, they are unlikely to return to pre-global financial crisis levels, as the budget estimates assume.

Why bad forecasting promotes bad politics

Unbiased projections matter because of the way estimates play into political debate. When the budget is projected to float back to near surplus over the following four years, then it seems less urgent to make politically difficult decisions to repair the budget.

Successive governments have engaged in forecast-led denial of the need for more active budget repair.

For example, Wayne Swan’s rhetoric for the 2011-12 budget claimed:

We are on track for surplus in 2012‑13, on time, as promised — and this provides the solid foundations for the targeted investments we announce tonight.

Similarly, Scott Morrison’s take in late 2016 was that:

This budget keeps us on a sustainable path to bring the budget back to balance.

Although focusing on the bottom line number is psychologically and politically inevitable, Treasury does warn governments about uncertainty in the numbers. The revenue forecasts come with a particularly large error margin.

Looking out four years, Treasury is 90% confident that government revenues will fall within 17.5 and 23.5% of GDP. This range is so large that if receipts were at the upper end, there would be a healthy surplus, and at the lower end, the current deficit would almost double.

Within this range, politicians are hitching their wagon for budget repair to forecasts where the upside and downside risks are not obviously symmetrical. In practice, this budget strategy has for eight years shifted the costs and risks of budget repair onto future generations.

To hit a four-year target, budget estimates should instead have a pessimistic bias. If there are happy surprises, it’s politically easy to loosen the budget purse strings. By contrast, when reality disappoints, then it is politically hard to make up lost ground by either increasing taxes or reducing expenditure.

So it’s time for a new approach that adopts more conservative forecasts, and makes a genuine commitment to budget repair. How about it, Mr Morrison?

This article was originally published in The Conversation and is republished under creative commons licence.

WA’s economic mismanagement is not a reason to review how the GST is carved up

noreply@blogger.com (Anonymous) — Tue, 02 May 2017 22:13:00 +0000

The questions in the terms of reference, that the Treasurer has given to the Productivity Commission, were answered almost five years ago by a similar inquiry, which found many of the concerns about the current system were overstated. And, contrary to the Treasurer’s insinuation that “the current approach of horizontal fiscal equalisation creates disincentives for reform”, the previous inquiry concluded there was not enough evidence of efficiency losses in the economy. Saul Easlake (University of Tasmania) explains.

Treasurer Scott Morrison has acceded to pressure from his Western Australian colleagues in announcing another review of the way GST is divided up among the states and territories. But the current system shouldn’t be tossed aside just because the WA government was unable to control its spending.

Australia has long gone much further than other federations in seeking to “equalise” the way state and territory governments provide public services to their citizens. That’s one of the principal reasons why the disparity in living standards between Tasmania (Australia’s poorest state) and WA (our richest), is a lot less than that between, say, Mississippi and Massachusetts in the United States or even Mecklenburg-Vorpommern and Bavaria in Germany.

The Grants Commission was established in 1933, this is the body that decides how much GST revenue the states get in our current system. Since its establishment right up until the year 2000, WA has been the main beneficiary of “horizontal fiscal equalisation”(HFE).

That’s the principle that GST is assigned by. It assumes each state and territory should be making an equal effort to raise revenue from its own sources and by being equally efficient in its spending, to provide the same range and quality of public services as every other state or territory.

However, since the early 2000s, WA has become Australia’s richest state. This is the result not of any particular effort on the part of successive WA state governments, but rather of China’s almost insatiable appetite for the iron ore with which WA has been uncommonly endowed.

Over the five years to 2014-15, WA’s per capita gross product (what it produced) averaged almost 50% above that of Australia as a whole. This is a margin without precedent in Australia’s history.

This enabled WA to raise far more revenue per head of population than it, or any other part of Australia, had been able to in the past. This is also why in recent years WA’s share of the revenue from the GST has fallen to such a low level, relative to its share of Australia’s population.

Between 2005-06 and 2015-16, WA’s share of the revenue from the GST fell by about A$2 billion, from A$3.8 billion to A$1.8 billion. But its revenue from mineral royalties rose by almost A$3 billion over the same period, from A$1.2 billion to A$4.1 billion.

Despite the sharp decline in its share of GST revenues, the WA government’s total revenue per head of population in 2015-16 was just A$67 (or 0.7%) below the average for all states and territories. By contrast, by 2015-16 the WA government was spending over A$1,000 (or 10.5%) more per head of population on “operating expenses”, than the average of all states and territories.

WA’s present fiscal woes are the result not of a flawed system of distributing revenue from the GST among the states and territories, but rather of its inability to control its own spending.

Although an equal per capita distribution of GST revenues has become commonly used as a benchmark by government for assessing redistribution, it’s never been generally accepted that GST revenues should be distributed on an equal per capita basis.

Neither the federal government, nor the states and territories, allocate their spending programs on an equal per capita basis. Nor do they collect revenue in that way. There is no reason why an equal per capita distribution of GST revenues should be regarded as some kind of desirable norm.

As you can see in the chart below, if you did allocate GST in equal per capita, according to my calculations Queensland, the North Territory, South Australia and Tasmania would lose millions. But it would give Victoria, NSW and WA more of the GST revenue.

It would be akin to reducing the top rate of personal income tax, paid by those earning more than $180,000 per annum and raising the bottom rate, paid by those earning less than $37,000 per annum, to the same figure.

Allocating GST per capita like this is not based on need or any policy and is quite abitrary.

The questions in the terms of reference, that the Treasurer has given to the Productivity Commission, were answered almost five years ago by a similar inquiry. This was conducted by former NSW Premier Nick Greiner and former Victorian Premier John Brumby, together with Adelaide businessman Bruce Carter.

Even though these state premiers had voiced the same concerns as the current government about the way GST is distributed, their inquiry recommended against any radical changes. They found many of concerns about the current system turned out to be overstated.

And, contrary to the Treasurer’s insinuation that “the current approach of horizontal fiscal equalisation creates disincentives for reform”, the previous inquiry concluded there was not enough evidence of efficiency losses in the economy.

I doubt that the Productivity Commission will find differently. There is room, to be sure, to make the Grants Commission’s procedures less complex and more transparent. But the principle which has underpinned the Grants Commission’s recommendations for more than 80 years has served Australia well, and shouldn’t be tossed aside merely to salve the self-inflicted wounds of Australia’s richest state.

This article was originally published in The Conversation and is republished under creative commons licence.

Budget explainer: has there been a blowout in social security and welfare spending?

noreply@blogger.com (Anonymous) — Mon, 17 Apr 2017 20:56:00 +0000

It is difficult to reach the conclusion that the share of the population receiving social security payments has been increasing significantly, or that spending has been growing at an unsustainable rate relative to the size of the economy. Peter Whiteford (Australian National University) explains.

For some time, the largest single component of federal government spending has been social security and welfare. In the last federal budget it made up an estimated 35.2% of total expenses and this was projected to rise to 37.5% by 2019-20. Given this, it’s not surprising that it’s also has been a prominent target for expenditure cuts.

However, if you look at past budgets, the proposed cuts in social security programs are disproportionate to the amount the government spends. For example, in the first budget of the Abbott Government in 2014-15, out of total projected expenditure cuts of A$29.4 billion between 2014–15 and 2017–18, A$15.4 billion, or 52%, would have come from programs of the Department of Social Services.

Even more strikingly, around 10% of that budget’s proposed cuts would have come from unemployment benefit recipients under the age of 30 years – who account for less than 1% of total government spending.

Government and commentators alike argue spending is growing in this area at an unsustainable rate. But if you look at inflation and this spending as a percentage of Gross Domestic Product (GDP), these claims seem less convincing.

How much is spent

Spending on social security is forecast to increase from A$153 billion to A$192 billion between 2015-16 and 2019-20. This appears to be attributable to a large growth in spending on the aged – from A$60 billion to A$73 billion. This is coupled with very large increases in spending on people with disability – from A$29 billion to close to A$53 billion.

However, it’s important to note that the spending and revenue figures in the budget papers are in nominal dollars – that is, they do not take account of inflation or the growth of the economy. In this sense, they provide the most dramatic picture of trends that is possible, since adjusting by inflation will generally reduce the apparent rate of growth, potentially significantly.

To understand changes in welfare spending we also need to factor in changes in the context in which welfare dollars are spent. For example, population growth, the impact of an ageing population and changes in government policies and welfare categories, will all influence this.

A better way to look at this is comparing spending over time, expressed as a percentage of GDP.

Overall, total social security and welfare spending is projected to increase from just under 9.3% of GDP to just over 9.6% of GDP, an increase of about 2.8% compared to an increase in nominal spending of more than 25%. It’s also apparent that spending on many sub-programs, such as the Age Pension, Veteran Affairs pensions, Disability Support Pension, Family Tax Benefit, Paid Parental Leave and Parenting Payments are all projected to fall as a percentage of GDP.

It’s worth noting that these are estimated from the last federal budget, and many of the proposed changes in spending in this and earlier budgets were blocked in the Senate and have not proceeded. These are the so-called “zombie measures”, estimated to have been worth around A$10.7 billion over four years.

More recently a number of these measures have been passed by the Senate, but the increase in child care spending will not be as substantial as proposed in last year’s budget and the cuts in Family Tax Benefits will not be as significant.

However, in effect all of the increase in spending on social security and welfare is due to the introduction of the National Disability Insurance Scheme (NDIS), spending for which is projected to increase from A$1.1 billion to more than A$21 billion by 2019-20, or by close to 1% of GDP.

Who receives these payments?

With the exception of the year immediately before the global financial crisis, data for 2016 shows we’re currently at the lowest rate of receipt of income support in the last 20 years. Overall, at 30 June 2016 27.5% of the adult population were receiving an income support payment.

In total, there are around 2.7 million people receiving either an Age Pension or a Department of Veterans Affairs Service Pension, and around 2.6 million people receiving other “working age” income support. In addition, there are around 1.54 million families with nearly 3.0 million children receiving either or both Family Tax Benefit Part A or Family Tax Benefit Part B. Although 680,000 of these families are also receiving an income support payment and 855,000 are receiving the Family Tax Benefit only.

This shows number of recipients of the main income support payments at 30 June 2016, derived from administrative data from the Department of Social Services and data from the Department of Veterans Affairs.

Since the 1990s, overall rates of receipt for the adult population have fallen from 34.1 per cent in 1996, while rates for the working age population have fallen from 24.9% to 16% and for the population aged 65 and over from 84.2 % to 76.1%.

Moreover, the number of children for whom Family Tax Benefit Part A are paid has fallen from around 3.5 million in 2006 to just over 2.9 million in 2016. This is while the number of children less than 15 years of age has increased from 4.0 million in 2006 to 4.5 million in 2016. This means that the “coverage rate” of Family Tax Benefit Part A has fallen from around 85% to closer to 65%.

Overall, it is difficult to reach the conclusion that the share of the population receiving social security payments has been increasing significantly, or that spending has been growing at an unsustainable rate relative to the size of the economy. The future ageing of the population will put pressure on social spending and the NDIS will need to be paid for, but these are largely predictable and not the result of a “welfare blow-out”.

This article was originally published in The Conversation and is republished under creative common licence.

The need for new housing solutions for low-income groups is clearly a pressing requirement

noreply@blogger.com (Anonymous) — Sun, 09 Apr 2017 21:46:00 +0000

Growth in the national housing stock has kept pace with population growth for almost a decade. However, the picture differs across state and territory capitals. Official figures (June 2015) reveal there were 154,000 households on state housing authority waiting lists for public housing, but it is likely that the length of these waiting lists underestimates the need for public housing. The need for new housing solutions for low-income groups is clearly a pressing requirement. Gavin Wood (RMIT University) and Rachel Ong (Curtin University) explain.

Despite a relatively healthy supply-side picture for the general housing market, the expected trickle down of housing opportunities to low-income households in Australia has failed to materialise.

The UK Department for Communities and Local Government boasted this year of a seven-year high in construction starting on new houses; in the 12 months to December 2015, there were a little over 143,500 housing starts. With a population of 54.3 million, the English housing sector is adding one new dwelling for every 380 persons.

Over the same period there were 231,411 housing approvals in Australia. With a population of 23.5 million in 2014, the Australian housing sector is adding one new dwelling for every 102 persons.

The supply of new housing has matched Australian population growth in recent times. The figure below profiles growth of the housing stock between 2006 and 2014, and compares it to population growth over the same period Australia-wide, as well as across the state capitals, Canberra and Darwin.

Growth in the national housing stock has kept pace with population growth for almost a decade.

However, the picture differs across state and territory capitals. In Perth and Sydney, increases in the housing stock are insufficient to match the increase in these state capitals’ populations. But there are different patterns underlying this common outcome.

In Perth, population growth was exceptionally strong. It was faster than any other city: its population soared (by 2014) to more than 28% above 2006 levels. Such rapid growth would stretch the capacity of most housing construction sectors, even in the absence of any supply-side impediments.

Sydney’s population growth (at 14%) is below the average across all cities (17%). Despite this relatively low increase in its population, housing supply failed to produce a matching increase in the housing stock.

A housing system under pressure

The balance between growth in population and expansion in housing stock through new housing supply is thought to be relevant to an understanding of housing affordability pressures. New housing construction that matches population growth should ease price and rent pressures, where all else is equal.

Although most new housing is built and sold in the higher price ranges and therefore purchased by higher-income groups, the housing they vacate will fall in price. It therefore becomes accessible to middle-income groups. And, as they shift upmarket, the housing they move out of falls in price and becomes accessible to lower-income households.

Eventually, this filtering process opens up new opportunities for the homeless.

Housing affordability is generally thought to be worsening, especially for low-income households. Homelessness numbers remain stubbornly high. And official figures for June 2015 reveal there were 154,000 households on state housing authority waiting lists for public housing.

It is likely that the length of these waiting lists underestimates the need for public housing. We have modelled the income rules determining eligibility for public housing, and estimate that there are nearly 900,000 households satisfying these income eligibility criteria.

More than two-thirds of these households (650,000) contain one or more persons who:

are aged 65 and over;
have a long-term health condition or disability; or
have children aged under 15.

These are people who value the security of tenure that has typically been offered by public housing, but who are unlikely to be able to buy their own homes. There are nearly 1 million individuals in these households – a group that is currently ill-served by Australia’s housing system.

Housing solutions through private-public partnerships

The need for new housing solutions for these low-income groups is clearly a pressing requirement. However, raising the capital funding to expand public or social housing to meet their housing needs seems improbable.

Secure leasing is a private-public partnership option that offers a rent premium to those private landlords willing to offer long-term leases to those satisfying the income tests for public housing. They would also be either of pension age, disabled or caring for children.

In the unregulated Australian rental housing market, leases are almost always short term. This gives landlords the option to realise investments in the near term. Hence, a long-term lease proposal requires Australian governments to offer landlords a rent premium to compensate them for the money sacrificed when they enter into a long-term arrangement.

Consider a reform scenario in which landlords are given an incentive to offer five-year secure leases to households eligible for public housing who are now living in the private rental sector, with rent increases capped at increases in the consumer price index over the secure lease period.

We estimate that, over five years, the budgetary cost to the government to house these 650,000 households in secure lease arrangements is A$13.4 billion.

The uneven distribution of these households across states and territories means the program’s cost varies across the five most-populous states. Our estimates are $4.7 billion in New South Wales, $3 billion in Victoria, $2.5 billion in Queensland, $1 billion in South Australia, and $1.8 billion in Western Australia – with the remainder borne by Tasmania and the territories.

This cost is much more affordable than the capital funding required to expand the social housing stock through the construction of new social housing dwellings.

The Australian tax system currently provides indirect support for the supply of private rental housing through tax concessions such as negative gearing and capital gains tax discounts. Is it now time to harness some of the private investment stimulated by these concessions to help improve the supply of affordable and secure housing opportunities for low-income households.

This article was originally published in The Conversation and is republished under creative commons licence.

Mortgage stress isn’t as bad as we are told

noreply@blogger.com (Anonymous) — Sun, 09 Apr 2017 21:21:00 +0000

The debate about housing affordability has recently drifted into the issue of systemic financial system risk. However, the risk of people not being able to repay their home loans appears small and there is no clear case that the household sector has borrowed excessively.
A lot of the confusion about housing arises because people make inappropriate comparisons. One common mistake is to compare the amount of housing debt with national income - this is highly misleading. Rodney Maddock ( Monash University) explains
.

The current debate about housing muddles two separate issues: the affordability of housing, and the risk in the banking system of any significant fall in house prices. Clearly, they are both important issues and the link between them is the potential for a lot of home owners to overreach in their finances, to not be able to repay their loans, and so to bring down their banks.

But when you look at the data on mortgage stress the systemic risk of this overreach looks small. Data from the Australian Prudential Regulation Authority (APRA) reveals the average balance on housing loans has barely trended upwards over the last five years (see our first chart below).

This was during a period when house prices have risen quite strongly. In effect, this means that, on average, people have more equity in their houses to stand behind their borrowings.

This is not just true for the average but also if you look at investor loans or for low documentation (loc-doc) loans (these are aimed at those who cannot provide the usual required paperwork, for example self-employed people). The same trends emerge. It’s not clear from this that people are taking on excessive risk – and certainly not recently.

Even for new loans you get the same basic picture. The chart below shows the loan to valuation ratios for new loans. What is clear is that for most new loans people are borrowing between 60% and 80% of the value of their houses.

The proportion of people who have very high exposure to a fall in house prices – those with loan to valuation ratios above 90% – has been declining over time. Once again, the basic picture is one of prudent households, rather than a community of people gambling on house price rises.

A lot of the confusion about housing arises because people make inappropriate comparisons. One common mistake is to compare the amount of housing debt with national income. This is highly misleading.

A more correct comparison is between your income and the amount of your income needed to service your loan. At a national level, this means we should look at the size of national income and the amount of income needed to service the debt (not the amount of debt).

An alternative that the Reserve Bank uses is to compare the amount of debt people have with the amount of assets they hold. As we can see in the chart below, the value of household liabilities has been increasing but the total value of assets held by households appears to have been rising faster. Again, there is no clear case that the household sector has borrowed excessively.

None of this is to deny that house prices can fall, or that some people are finding it very hard to buy somewhere to live in Sydney. Houses are much cheaper in other parts of Australia and property prices have even been falling recently in some regions.

This article was originally published in The Conversation and is republished under creative commons licence.

Australian politics explainer: the writing of our Constitution

noreply@blogger.com (Anonymous) — Thu, 06 Apr 2017 21:38:00 +0000

Ryan Goss (Australian National University) explains the development of Australia's Constitution, its impact at the time, and its relevance to politics today.

Since coming into effect in 1901, Australia’s Constitution has shaped – and been shaped by – our political history.

The Constitution is the highest law in Australia. It shapes the laws the federal parliament may pass, how it administers those laws, the way our courts work, and how the federal government interacts with the state and territory governments.

The British parliament passed the Commonwealth of Australia Constitution Act in 1900. Museum of Australian Democracy

What happened?

In the late 1800s, there were six British colonies on the Australian continent. These stand-alone colonies had their own parliaments and governments, their own colonial constitutions, and even their own militaries.

When travelling from one colony to another, people had to pass through a customs check before crossing the border. And they had to pay taxes on goods they were carrying.

In the 1880s and 1890s, representatives of the colonies began the discussions that would lead to federation. They wanted to join together to create a national government while maintaining political power for each colony’s own government.

These discussions, which culminated in the Constitution we have today, were driven by many factors. Among these were the need to make trade easier within Australia, a desire to control immigration, and to improve defence arrangements for the continent.

In part, the Australian Constitution’s drafters were inspired by the United States and its Constitution; the structure of our Constitution looks quite similar to the Americans’.

But, crucially, Australian Federation did not involve a revolution against Britain. Instead, at Federation, Australia would maintain close links to the parliament in London, the British courts and the British monarchy.

Aside from some discriminatory provisions, the Constitution would not include acknowledgement or recognition of Indigenous Australians. Our system of government became a mixture of British-inspired elements, American-inspired elements and uniquely Australian elements.

Voters were asked to approve the draft Constitution at referendums held in all the colonies. All the colonies eventually voted in favour – though some only narrowly, and with most women and Indigenous Australians excluded from voting.

After being passed into law by parliament in London, the Constitution came into effect on January 1, 1901.

Edmund Barton and Alfred Deakin are considered founding fathers of Australia’s federation. National Library of Australia

What was its impact?

All this history has shaped our Constitution, and continues to shape our political history. Our Constitution establishes:

a federal system of government – not every national government is a federal government;
a system of representative government: we vote for those who govern us, and hold them accountable;
a system of responsible government: our prime minister and ministers are members of parliament, chosen by the parliament and accountable to the parliament; and
a constitutional monarchy: Queen Elizabeth II is the constitutional head of our executive government, and our head of state.

But it’s also important to remember that much goes unmentioned in our Constitution. Many key elements of our system of government don’t appear in the text of the Constitution. The prime minister, for instance, doesn’t rate a mention.

To help make up for the omissions, our political and legal history has been guided by rules known as constitutional conventions. These conventions are shaped by British history and by Australian history, and have occasionally proven very controversial.

Unlike many constitutional systems, Australia lacks any form of comprehensive bill of rights protections. Instead, Australia’s constitutional system was built on the principle that:

… the rights of individuals are sufficiently secured by ensuring, as far as possible, to each a share, and an equal share, in political power.

Nonetheless, the text of our Constitution shapes what our governments can do, and the way in which they can do it. The Constitution affects how governments spend money, the position of Indigenous Australians, and policy in areas ranging from industrial relations and marriage to the environment and asylum seekers.

Significantly, the Constitution also protects our role as citizens in choosing our representatives and in holding them accountable.

What are its contemporary implications?

The Constitution is hard to change. The federal parliament first must approve any proposed amendment. The amendment must then pass a referendum by a “double majority”: approved by a majority of voters as well as a majority of voters in a majority of states.

In 116 years, 44 attempts have been made to change the Constitution. Only eight have succeeded.

The failed attempts have included efforts to switch parliamentary terms from three years to four years, multiple efforts to protect basic civil rights, and the unsuccessful republic referendum to replace the monarch with an Australian. The last time the Constitution was successfully amended was in 1977.

Some may see this inflexibility as a strength: the Constitution is stable and enduring. But it also makes the Constitution very hard to update in response to changing times and changing values.

As a result, the Constitution is a document that reflects the priorities of the late 19th century more than the early 21st century.

Unsurprisingly, after 116 years of federation, there are many contemporary debates about the Constitution. Some are about how we should interpret the Constitution we have. Others are about finding ways to update our system of government without having to amend the Constitution.

But there are also debates about changing the Constitution, such as whether Indigenous Australians should be recognised in symbolic or substantive ways, whether the role of local government should be enshrined, or whether to replace the monarchy with an Australian head of state.

Or should we undertake a much more serious overhaul?

These questions reflect our history, and the answers to them will shape our future. But they also raise broader questions for all Australians: what do we expect from our politics? And what do we expect from our Constitution?

This article was originally published in The Conversation and is republished under creative commons licence.

The Cashless Debit Card causes social and economic harm – so why trial it again?

noreply@blogger.com (Anonymous) — Thu, 30 Mar 2017 20:58:00 +0000

The economic and social effects of the the Cashless Credit Card Trials are described by Elise Klein (University of Melbourne).

The federal government’s Cashless Debit Card trials in the East Kimberley and Ceduna were recently extended.

In the space of a day, the government not only released the limited evaluation of the trial, but used this to justify its extension. The extension is puzzling given that the trial has led to further economic and social harm among people compulsorily included.

Background to the card

The card compulsorily quarantines 80% of a person’s welfare benefits. It restricts purchases, with the aim of promoting “socially responsible behaviour”. Its trial was legislated with bipartisan support in 2015. This followed mining magnate Andrew Forrest’s recommendations for the expansion of income management.

But in 2014, a government-commissioned evaluation of income management in the Northern Territory provided conclusive evidence that the compulsory income management regime did not make a significant difference. It fell well short of meeting the trial’s objectives – despite the A$410.5 million spent.

The government quickly put rhetorical distance between the renamed Cashless Debit Card and the failed compulsory income management. It simply claimed that the card was not income management.

While now some non-Indigenous people are on the Cashless Debit Card, the reality is that both trial sites have a high proportion of Indigenous people. Thus, it is invariably racially targeted.

The evaluation

The Cashless Debit Card evaluation claims the trial has led to changes in the community. But its methodology is questionable, and the authors are unable to separate their findings from other programs operating in the trial sites, such as the Takeaway Alcohol Management System in the East Kimberley.

Nonetheless, government ministers Alan Tudge and Christian Porter have run with the evaluation’s dubious conclusion that it found “proof of concept” – that is, evidence the card works. This is despite their own evaluation finding that 49% of participants said it had made their lives worse and, on average, one in five participants reported that their children were worse off.

It is astonishing that the government is proceeding with another trial given these findings. Successive governments have been eager to use concern for children in particular as a pretext for heavy-handed intervention in Indigenous communities.

The evaluation of the card in the East Kimberley also shows limited understanding of its negative economic and social impacts on vulnerable populations.

The card’s economic effects

The card’s logic is based on a distorted perception that alcohol, drug use and gambling are the primary causes of poverty.

Interestingly, the evaluation shows that most people on the card – and their families – did not gamble and did not report consuming illegal drugs or alcohol in excess.

Despite demeaning rhetoric in reports to government suggesting that welfare poverty is a choice not to seek employment, the Kimberley Development Commission has shown the key cause of unemployment in the East Kimberley is the absence of formal jobs. This situation has deteriorated since the government abolished the Community Development Employment Program.

The government’s response was to launch a remote work-for-the-dole scheme, the Community Development Program. It claims to prepare people for work that is simply not there.

So, not only are people in the East Kimberley subjected to quarantining of their welfare payments, they must also endure work for the dole with extreme punitive measures. This has led to breaches at a level 33 times higher than for the non-remote and mainly non-Indigenous jobactive program. Breaching has led to welfare payments being withheld from already struggling families.

The link between the card and the scheme is not examined in the evaluation. However, it warrants investigation.

Despite having to contend with material poverty, the trial has exacerbated economic insecurity for poor families. It limits the cash they have to pay for informal renting arrangements, second-hand goods, cash purchases of locally grown produce, and pocket money for children.

And when the card was introduced, many struggled to use it. The user manual was filled with technical jargon, and the mobile app was inappropriate. This is shown by the high rate of transaction errors recorded by Indue, the company contracted to roll out the card.

Social effects

The evaluation is silent on how socially disempowering the trial has been for many.

The government failed to consult, let alone obtain freely given, prior and informed consent from the broad community. Instead, it engaged only a select group of like-minded individuals and their organisations to roll out the card to their communities.

Despite this, many of those who agreed to host the trial in the East Kimberley did so for the $1.5 million sweetener for badly needed services.

The clear opposition to the card expressed at public meetings, strikes and petitions has been dismissed and ignored. People on the card are subjected to a community panel – the amount quarantined can be reduced only after being scrutinised by fellow community members.

Some argued that the card would be important to curb gender-based violence. However, there are reports that domestic violence has actually increased since the card was introduced. Crime has also increased, yet the government and its evaluation have overlooked such inconvenience in claiming “proof of concept”.

Politicians and officials have deployed the card to tackle the supposed bad behaviour of vulnerable populations. Yet a deeper review of it suggests it is the government and its poorly conceived, ideologically driven policy that needs scrutinising. Perhaps the forthcoming Senate inquiry into the Community Development Program will be a good place to start.

This article was originally published in The Conversation and is republished under creative commons licence.

Houses aren’t more unaffordable for first home buyers, but they are riskier

noreply@blogger.com (Anonymous) — Mon, 27 Mar 2017 21:18:00 +0000

Comparisons of housing affordability typically compare the ratio of house prices to incomes - ignoring interest rates, which have a greater impact on changes in affordability. Jamie Alcock (University of Sydney) explains.

Climbing house prices seem to scare people but houses are relatively more affordable today than they were in 1990, it’s actually interest-rate risk that’s the bigger problem for first home buyers.

If you look at latest numbers on house prices, as a measure of affordability, they use a “median measure” – that is, the ratio of median house price to median salary. According to the latest Demographia survey, the price of the median Sydney house is 12.2 times the median salary, and it is 9.5 in Melbourne.

But it’s simply misleading to compare median-based measures of housing across different time periods in the same location. These simple median measures do not take into account differences in interest rates in different time periods.

A house in 2017 that costs nine times the median salary, when mortgage interest rates are less than 4%, is arguably more affordable than a house in 1990 that costs six times the median salary. Interest rates in 1990 were 17%.

Consider this simple example. In 1990 a first home buyer purchases an average house in Sydney priced at A$194,000. With mortgage interest rates at 17%, the monthly mortgage repayments were A$2,765 for a 30-year mortgage. But in 1990 the average full-time total earnings was only A$30,000 per annum, so the buyer’s mortgage repayments represented over 111% of before-tax earnings. In 2017 a first home buyer purchasing a Sydney house for A$1,000,000, with interest rates at 4%, is only required to pay A$4,774 every month, or 69% of their before-tax average full-time total earnings.

So, relatively, houses are substantially more affordable today than they were in 1990. The lower interest rate means the costs of servicing a mortgage is lower today than it was 25 years ago, or even 50 years ago.

However, those lower interest rates also mean today’s first home buyers face greater perils than their parents or grandparents.

Interest-rate risk

Interest rate risk is the potential impact that a small rise in mortgage interest rates can have on the standard of living of homeowners. This does not consider the likely direction of interest rates, rather how a 1% change in interest rates affects the repayments required on a variable rate mortgage.

When interest rates rise so do mortgage repayments. But the proportional increase in repayments is higher when interest rates are lower. For example, if mortgage interest rates were 1%, then increasing interest rates by another 1% will double the interest costs to the borrower. When interest rates are higher, a 1% increase in interest rates will have a lower proportional affect on their repayments.

If we go back to the example from before, the interest rate risk of the first home buyer from 1990 is much lower than that of the 2017 buyer. If mortgage interest rates rose by 1% in 1990, repayments would rise by only 5.7% to $2,923. For the 2017 buyer on the other hand, a 1% increase in interest rates would see their repayments rise by over 12% to $5,368 per month.

This has the potential to financially destroy first home buyers and, due to the high reliance of the retail banking industry on residential real estate markets, potentially create a systemic financial crisis.

Interest rate risk has an inverse relationship to interest rates – when interest rates fall, interest rate risk rises. As a result, interest rate risk has been steadily increasing as mortgage interest rates have fallen. Given that we have record low interest rates at the moment, interest rate risk has never been higher.

Putting it all together

Compounding all of this is the general trend of interest rates.

In 1990 mortgage interest rates were at a record high and so our first home buyer could reasonably expect their repayments to decrease in the coming years. They could also reasonably expect that, as mortgage interest rates fell, demand for housing would increase (all else being equal) and so would house prices, generating a positive return on their investment.

But our 2017 first home buyer is buying when interest rates are at record lows. They cannot reasonably expect interest rates will fall or for their repayments to go down in future years. It’s also unlikely that house prices will increase as they have for previous generations.

So while the current generation of first home buyers find housing much more affordable than their parents, they face substantially higher interest-rate risk and a worse outlook for returns on their investment. If we wish to address the concerns of first home buyers we should look into these issues rather than exploiting misrepresentative median-based measures of house affordability.

Apart from addressing issues with the supply of housing, governments need to investigate ways to reduce interest rate risk over the longer term.

This article was originally published in The Conversation and is republished under creative commons licence.

Business investment is weak, but an unfunded company tax cut won’t fix it

noreply@blogger.com (Anonymous) — Sun, 26 Feb 2017 20:58:00 +0000

The overwhelming reason why companies undertake investment is to exploit market opportunities for the goods and services that the investment supports. Cutting the rate of company tax can lead to a marginal increase in the after-tax rate of return of an investment - but only if the project is profitable in the first place, and that depends on demand and broader economic growth.

Because of dividend imputation in Australia, the role of company tax in influencing investment decision is even more marginal than in other countries - it is mostly only foreign shareholders that would benefit from a cut in Australia's company tax rate.

Jim Minifie (Grattan Institute) explains the importance of economic growth for investment decisions.

Eight years after the global financial crisis (GFC), economic growth remains weak in many rich nations. Australia has been an exception to the malaise, but growth has slowed as the mining boom winds down.

Business investment is vital to economic growth and to lifting living standards, but a new Grattan report explores why Australian business investment is plummeting. Australia is now experiencing its biggest ever 5-year fall in mining investment, as a share of GDP. Non-mining business investment fell from 12% to 9% of GDP after 2009 and remains unusually low. Why is it low, and what should we do?

The shift to services has reduced investment

Most of the gap in investment between today’s non-mining investment rate and that of the early 1990s is due to long-term structural changes in the economy.

The non-mining market sector slowly became less capital intense, it shifted towards capital-light services, and it shrank as a share of GDP. Together, these factors have reduced non-mining business investment by almost 2% of GDP since the early 1990s. In the chart below, the decline in investment needed to offset “capital consumption” reflects declining capital intensity across the non-mining economy.

These declines are benign. Many non-mining industries now require less capital per dollar of output than they did in the past, because equipment is better and cheaper, in part thanks to the rise of China as a manufacturer. The shift to capital-light services largely reflects households choosing to spend more of their income on these services as their incomes grow.

The role of output growth

A less benign factor, slow output growth, has cut non-mining investment by about a percentage point of GDP compared to 1990, and about two percentage points since the boom years of the mid-2000s, when above-trend growth and buoyant financial conditions drove very strong investment. The role of growth can be seen in the chart above.

In turn, output has grown more slowly for two reasons: slower potential output growth, and a widening gap between actual and potential output.

The potential growth rate of the economy has declined in recent years. The International Monetary Fund (IMF) estimates that potential GDP is now growing at just over 2.5% a year, about a percentage point below its pace between 1995 and 2004.

Potential growth (the rate of output if all resources are being used efficiently) has declined mainly because productivity growth has slowed and the working-age population is growing more slowly. Productivity growth was exceptionally weak between 2004 and 2010. It recovered in recent years, but remains weaker than it was in the 1990s and early 2000s. The working-age population is growing more slowly, mainly because of a decline in net migration since its peak in about 2012 and, in part, because the population is ageing.

In addition, actual growth has been a bit slower than potential in recent years. The IMF estimates the gap between actual and potential output to be about 1.7% of GDP, though it is difficult to estimate with much precision. Several pieces of evidence suggest that actual output is below potential. Inflation is relatively weak and there is some spare capacity in the labour market. The capital stock is ample given the current level of output: office vacancy rates are high, while business capacity utilisation is close to its long-term average.

Transition from the mining boom may have made it difficult for the economy to operate at potential. As mining investment falls, demand for construction, in particular, weakens. In theory, as the terms of trade and mining investment decline, the real exchange rate and other prices can change to maintain full employment. But in practice, slow output growth is common after mining booms, perhaps because businesses and workers take some time to reassess their opportunities.

What next?

Looking ahead, if output growth remains subdued, the current level of non-mining business investment may be the “new normal”. If the economy continues to rebalance, non-mining investment is likely to increase. There are encouraging signs that non-mining investment responds to the exchange rate and other aspects of the business environment in the medium term: it has begun to pick up in NSW and Victoria. Output could even grow above potential for a few years, as the IMF and RBA both forecast. But investment is not likely to return to the levels of the mid-2000s.

Is a company tax cut the answer?

The government has proposed cutting the company tax rate from 30% to 25%, largely on the basis that the competition for mobile capital has intensified (see chart below). That would attract more foreign investment and could increase total business investment by up to half a percent a year. But such a cut would also reduce national income for years and would hit the budget. Committing to a tax cut before the budget is on a clear path to recovery risks reducing future living standards.

Other company tax changes could help. An allowance for corporate equity would make currently marginal investment projects more attractive, though highly profitable firms would pay more tax.

Accelerated depreciation would encourage investment, as would moving from today’s model to a cash flow tax. Both of them help firms to reduce tax paid at the time they make investments. But they would hit the budget hard in the early years, and would have to be phased in slowly.

An allowance for investment (for example, permitting firms to claim over 100% of depreciation) would support new investment without giving tax breaks on existing assets, but may be costly to administer, as firms could be tempted to relabel some operating expenditure as capital expenditure.

Government should ensure any company tax changes are offset by other tax increases or spending cuts.

What else should policymakers do?

Government stimulus and interest rate cuts can encourage business investment if there is spare capacity in the economy. Australia does have some spare economic capacity. But there are constraints on both arms of macroeconomic policy. The RBA is reluctant to cut interest rates from their already low levels, as it is concerned about risky lending. Public debt has grown (though it is still not high by international standards), though bank balance sheets remain large compared to GDP, limiting the scope to expand public sector debt.

Monetary policy should remain supportive, and tough prudential standards can help limit risky lending. There may be modest scope to build more public infrastructure, if governments can improve the quality of what they build.

Broader policies to support economic growth would also lead to more and better private investment. They include reducing tax distortions, boosting labour participation, encouraging competition, improving the efficiency of infrastructure and urban land use, tightening regulatory frameworks, and more reliable climate policy.

No single policy is a silver bullet, but together, they can help make better use of Australia’s existing assets and make new investment more attractive.

This article was originally published in The Conversation and is republished under creative commons licence.

Latest Murray-Darling squabble sheds light on the plan’s flaws

noreply@blogger.com (Anonymous) — Sat, 25 Feb 2017 22:22:00 +0000

Lin Crase (University of South Australia) explains that federal governments using the plan have found shifting water away from irrigation at least as difficult and costly as it is for the states.

Tempers have flared once again over the long-term plan to return water to the Murray-Darling River and improve its health.

The Murray-Darling Basin Authority has released its report into the northern basin (in Queensland and New South Wales). The report finds that the plan, agreed in 2012, has already affected communities. It recommends that less water be returned to the river.

The plan aims to recover 2,750 gigalitres of water from human uses for the environment, but also allows for an extra 450GL to be recovered.

Federal Agriculture Minister Barnaby Joyce has signalled that returning the extra 450GL would be extremely difficult – which has outraged South Australian politicians at state and federal level. In response, Prime Minister Malcolm Turnbull has promised extra monitoring.

While it may seem like a political bunfight, the current argument sheds light on serious flaws in the management of the river.

Liquid gold

The Murray-Darling Basin Plan originates in national water legislation developed as a response to the Millennium Drought. Since the plan was passed in 2012, rains have given breathing space for those seeking to massage the detail around rebalancing Australia’s most famous river system.

The premise of the plan and the related Water Act is shifting water away from irrigation to the river to improve long-term sustainability. Leading up to and during the Millennium Drought, ecosystem health declined.

Too much water was being taken from the river, and it seemed the states were too weak to deal with the politics of sharing water allowances.

However, Joyce’s recent comments show that federal governments are equally susceptible to backsliding on commitments to securing water for the environment.

Flaws in the plan

The plan has two main flaws.

First, the states and federal government are relying on a single planning instrument to miraculously optimise water-sharing for social, economic and environmental outcomes.

Second, the only mechanism for achieving these outcomes is by adjusting the volume of water allocated to the environment.

Various interests have exploited both of these weaknesses since the plan came into force.

First, the requirement to blend multiple policy objectives into a single plan has provided an opportunity for disaffected parties to claim all manner of fallout. This has led to governments opting for high-cost reallocation mechanisms, such as providing infrastructure to farms in return for water for the environment.

Simply buying entitlements from willing sellers would have been much more cost-effective and likely better in the long run. This remains the case. But buying back is now off the table, at least while the next round of expensive infrastructure-for-water swaps occurs.

Second, focusing solely on the volume of water returned to the river is now being exploited by those who know that the environmental needs of riverine systems are more complex than simply “add more water”. Complexity means opportunity for some, and there are two groups at play here.

One is the irrigation enthusiasts reluctant to transfer their water rights. In part, this is because they know if they hold out they can secure more benefits through subsidised on-farm infrastructure that can be capitalised into private assets. These forces are obviously more pronounced in the upstream states where irrigation is most developed – NSW and Victoria.

The second group are environmental groups with particular agendas for which they have struggled to gain support.

Turning wine into water

Collectively, these groups have been active in persuading upstream states and some at the federal level that there are alternatives to simply taking water from irrigators and returning it to the environment. These alternatives have become known as “works and measures”.

In simple terms, some infrastructure can be used to mimic environmental processes but with less water. For instance, a series of water regulators could be constructed on a riverside wetland to mimic natural flood events.

The proponents of works and measures are primarily upstream and have sought to count these interventions as equivalent to water returned to the river – meaning they count towards state targets. Similarly, there are efforts to convert programs that reduce invasive species, such as carp, into an equivalent volume of water.

In practice, the challenge of converting these programs into water is scientifically problematic.

While the Water Act and the basin plan were always flawed because of their heavy focus on water volumes, the prospect of adding alternatives has simply created opportunities for more blurry metrics.

There is also a real prospect that these measures are simply not equivalent. As an ecologist explained to me privately: “It’s like saying the environment is thirsty and offering a hamburger.”

The hamburger may be welcome for some, but ultimately it won’t do the same as a drink of water. We need both water and non-water measures and it would be foolish to think the politically expedient hamburger is a perfect substitute for the politically sensitive water, as others have noted.

The South Australian government has been keen to prevent backsliding by upstream states through these types of deals. Ideally, this would be out of concern for the status of the river system, but history shows that states, including South Australia, are equally keen to use the rivers for their own consumptive ambitions.

Nonetheless, the South Australian government does have a point, even if it has been expressed recently with zeal.

The lesson, of course, is that federal governments using the plan have found shifting water away from irrigation at least as difficult and costly as it is for the states.

This article was originally published in The Conversation and is republished under creative commons licence.

How Australia decides who is a genuine refugee

noreply@blogger.com (Anonymous) — Thu, 23 Feb 2017 22:28:00 +0000

Mary Anne Kenny (Murdoch University) explains the process of determining refugee status.

Every year, Australia provides protection to thousands of refugees under its humanitarian program. In 2015-16, the government issued 15,552 visas to people in need of humanitarian assistance overseas. These included people determined to be refugees by the United Nations High Commissioner for Refugees (UNHCR) in camps outside Australia.

A further 2,003 people received “onshore” permanent protection visas after being found to be refugees by the Australian government.

The term “genuine refugee” is thrown around often, yet many take for granted the complicated process of how someone is deemed to be one. So, what is a refugee? And how does the Australian government make the decision?

Who is a refugee?

Australia has signed and ratified the United Nations Convention Relating to the Status of Refugees and several other human rights treaties. These set the definition of a refugee and create a legal obligation not to return a person to a country where they will face persecution or serious harm.

Australia resettles refugees from camps outside the country as part of the government’s humanitarian program, not out of legal obligation. In choosing these refugees, Australia works with the UNHCR to resettle those considered most vulnerable.

We do have a legal obligation to determine whether those who seek asylum when already in Australia need protection. This is regardless of whether they arrive by boat or plane.

A refugee is defined as someone who does not want to return to their country of origin owing to a “well-founded fear of persecution” on the grounds of race, religion, nationality, membership of a particular social group or political opinion.

The person can also receive complementary protection if there are “substantial grounds for believing that there is a real risk he or she will suffer significant harm”.
What is the refugee determination process?

The Refugee Convention does not set out the procedures that must be followed to determine whether a person is a refugee. But, to comply with its international obligations, Australia must have a procedure to identify accurately the people to whom it owes protection.

The onshore refugee determination process begins when a person applies for a protection visa. The Department of Immigration and Border Protection assesses their claim. The purpose of this assessment is to decide whether the person engages Australia’s protection obligations as set out in the Migration Act.

Essentially, the decision-maker must decide whether the person faces a “real chance” or “real risk” of serious harm if they return home. The ultimate objective of refugee determination is humanitarian, so the refugee status isn’t based on a standard of “beyond reasonable doubt” or “balance of probablities” as it would be in other areas of law.

In Australian law, “real chance” means the fear of persecution is “likely” and not remote or far-fetched.

How is ‘real chance’ determined?

The Immigration Department considers the applicant’s personal account along with independent information about their country of origin. The department will interview the person about their claim. Interpreters are present if needed, and the person may have a migration agent in the interview.

For example, a woman may claim she cannot return to Afghanistan because she fears violent attacks from other community members due to her work as a human rights activist. The department would need to assess if her fear is well-founded by considering evidence that may corroborate her story. This may be independent information from government sources, NGOs and the UNCHR about the treatment of female human rights defenders in Afghanistan.

If the department decides she fits the definition of refugee, they will grant a permanent protection visa. The applicant will have to satisfy other health, character and security requirements.

People who have their initial application for protection refused can apply for an independent merits review. A tribunal member will have a hearing with the asylum seeker and consider the case again. They will take into account any new or additional evidence, such as country information that might have changed since the original decision was made.

The member may find the person to be a refugee and return the case to the Immigration Department for reconsideration. Or the original decision may be upheld.

What about those who come by boat?

In 2014, the government introduced a different determination process for those who arrived in Australia by boat after August 2012. Under the fast-track assessment process, timeframes for the provision and assessment of claims are truncated.

If the department rejects the claim, it may be referred to the Independent Assessment Authority. Reviews by the authority are on the basis of the original information provided by the asylum seeker. Only in “exceptional circumstances” will the authority accept new information or interview the applicant.

If found to be owed protection, boat arrivals will be eligible only for a three-year Temporary Protection Visa or a five-year Safe Haven Enterprise Visa.

People who arrived in Australia by boat after July 2013, and who have been transferred to Manus Island or Nauru, undergo refugee status determination in those countries. Papua New Guinea and Nauru are both signatories to the Refugee Convention and have their own refugee determination procedures.

Is the process fair?

Asylum seekers rarely have documentary evidence that strongly supports their claim for protection. They may also have difficulty presenting a comprehensive account of their claims due to literacy, language, culture, shame, problems with memory and difficulty in recounting traumatic experiences.

Determinations may also vary depending on the decision-maker. Some studies have identified a “culture of disbelief” in certain areas of decision-making, including claims based on sexual orientation. Some decision-makers who hear many cases may consciously or unconsciously form predetermined views on certain types of claims.

In 2014, the government made cuts that severely limited access to vital legal assistance for asylum seekers. Research conducted in the UK and Ireland shows legal assistance increases the confidence of asylum seekers and improves the quality of decisions.

The UNHCR and other human rights organisations have raised concerns that accelerated assessments of protection claims may lead to vulnerable people being returned to places where they are at risk of serious harm.

It is unclear whether Australia’s fast-tracking process allows the possibility to arrive at a fair and true decision.

This article was originally published in The Conversation and is republished under creative commons licence.

What economists and tax experts think of the company tax cut

noreply@blogger.com (Anonymous) — Wed, 01 Feb 2017 20:29:00 +0000

In a perfectly stylised model of the economy, a company tax rate reduction to 25% could be expected to deliver modest economic gains. But the evidence overwhelmingly rejects such a notion. Jenni Henderson (The Conversation) explains why Australia's leading economists disagree with the Government's economic justifications for a company tax rate cut.

Prime Minister Malcolm Turnbull and the Treasurer Scott Morrison are still trying to sell their plan to cut the company tax rate to 25% by 2026-27. The current rate is 30% and has been since 2001.

The tax cut was introduced in the 2016 federal budget. The government indicated small to medium businesses turning over less than A$10 million would pay a company tax of 27.5% initially. The company turnover threshold for the tax cut would then increase over time from A$10 to $25 million in 2017-18 to A$50 million in 2018-19 and finally A$100 million in 2019-20.

But before any of this happens, the government needs to convince the senate crossbenchers to pass the legislation. It seems the government hasn’t won over tax experts and economists with this policy, here’s some articles that explain why.

Don’t expect an instant wage increase

In a national press club address Malcolm Turnbull justified the tax cut by saying, “company tax is overwhelmingly a tax on workers and their salaries.” It follows that cutting it would increase salaries right?

However there’s a whole lot of decisions businesses need to make before they even consider raising wages. It’s not just as simple as the government makes out, as professor John Freebairn from the University of Melbourne notes:

Individuals benefit from lower corporate tax rates with higher market wages. But the higher wage rates will take some years to materialise, and the magnitude of increase attributed to the lower corporate tax rate, versus other factors, is open to debate.

Businesses would need to consider the savings of international investors, what resources the business might need, what the return for investors would be on these. All of this before it would consider a wage increase for its workers.

The enlarged stock of capital, technology and expertise per worker becomes a key driver of increased worker productivity. In time, more productive workers are able to negotiate higher wages. Via this chain of decision changes, employees benefit from the lower corporate tax rate.

Any modelling on how much a tax cut could be worth to our economy is up for debate

Modelling is sensitive to whatever assumptions the government makes and these assumptions can be oversimplified. ANU principal research fellow Ben Phillips points out that tax reform like this inevitably has winners and losers and is influenced by powerful lobby groups.

In thinking about tax reform it is important to keep in mind that the gains from modest tax reform are not likely to be a revolution in Australia. The models themselves only estimate relatively small gains from tax reform.

Here’s a little something to bear in mind when hearing any figures thrown around on how much a company tax cut could be worth:

Over the past 25 years Australia’s living standards have increased by around 60% whereas the sorts of gains estimated from tax reform are expected to be little more than 1 or 2%. It remains important that in securing such modest gains we don’t ignore fairness.

The benefit to the domestic economy won’t be that big

The idea behind the cut is that companies will be motivated to provide jobs and other economic benefits because they are receiving a tax break. In theory this kind of tax should boost the economy in the long term, but as John Daley and Brendan Coates from the Grattan Institute explain it’s not that simple.

In Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.

The Grattan researchers point out that if companies pay less tax then they might reinvest what they save, but in practise most profits are paid out to shareholders. So the tax cut won’t have much of an impact on domestic investment.

They also pick holes in the Treasury’s modelling on the tax cut’s boost to Gross National Income (GNI).

Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.

It doesn’t make much of a difference

Another argument for cutting Australia’s company tax rate is to deter companies from shifting their profits to other countries where the tax rate is lower. Recently President Trump promised to cut the United States federal corporate tax rate from 35% to 15%.

Antony Ting, associate professor at the University of Sydney notes most countries have been reducing their company tax rates over the past two decades. This hasn’t changed the incentive for multinationals to avoid taxes.

The tax-avoidance “success” stories of multinational enterprises such as Apple, Google and Microsoft suggest this argument is weak. The fact is that the profits these multinationals shift offshore often end up totally tax-free.

A FactCheck by Kevin Davis, research director at the Australian Centre for Financial Studies, reviewed by economist Warwick Smith, says there’s no point to comparing Australia’s company tax rate with other countries anyway.

Australia’s dividend imputation tax system means that any comparison of our current 30% rate with statutory corporate tax rates elsewhere is like comparing apples and oranges.

Small and medium businesses actually lose out

Due to the way the proposed company tax cut is structured, foreign investors get a windfall while local employers including small and medium businesses cop a cost because they remain uncompensated.

Economist Janine Dixon from Victoria University modelled how the cut would play out.

Local owners of unincorporated businesses are taxed at their personal tax rate. Because of Australia’s dividend imputation system, Australian shareholders in incorporated business are also taxed at their personal rate, not the company tax rate.

She explains that 98% of small businesses (employing four or fewer people) are wholly Australian owned and because of this are indifferent to the cut, but 30% of large businesses (employing more than 200 people) have some component of foreign ownership.

An increase in foreign investment is generally understood to be a driver of wage growth. This is the basis for the argument that at least half of the benefit of a cut to company tax flows to workers… We find that benefit to foreign investors will exceed the total increase in GDP. In the domestic economy, benefits to workers will be more than offset with a negative impact on domestic investors and the need to address additional government deficit.

Other things are just as important

Even if some businesses are keen for a tax cut, meaning more money in the kitty, it’s how these businesses spend this money that counts.
Jana Matthews from the Centre for Business Growth at the University of South Australia says many CEOs are uncertain about what to do in order to grow their business and are fearful of making the wrong decisions.

We need to focus as much attention on the management education of founders, CEOs and MDs [managing directors] of medium-sized companies as we do on providing them with more money. Once they learn how to grow their companies, they will definitely need money to become the engines of growth, and they will certainly hire more people, creating the jobs we all want.

This article was originally published in The Conversation and is republished under creative commons licence.

What are the facts on Australia’s foreign aid spending?

noreply@blogger.com (Anonymous) — Mon, 30 Jan 2017 23:26:00 +0000

A news report highlighting the fall in Australia’s foreign aid spending quoted World Vision Australia Chief Advocate Tim Costello as saying aid was at its highest under Prime Minister Robert Menzies, at 0.5% of gross national income – at a time when per capita income was much lower.

Aid was at its highest under Menzies, at 0.5% … when per capita income was much lower. World Vision Australia chief advocate Tim Costello, quoted in The Sydney Morning Herald, December 28, 2016.

Robin Davies (ANU) reviews whether that is right in The Conversation.

Checking the source

When asked for sources to support his statement, Reverend Tim Costello referred The Conversation to Organisation for Economic Co-operation and Development (OECD) data published here. He added:

If anything, I perhaps understated the case because aid was actually a bit higher than 0.5% in the 1960s.
Aid first went over 0.5% in 1963, dipped slightly in 1964, then went over 0.5% again from 1965 and every subsequent year into the 1970s. In 1967 and again in 1970 it hit 0.62%.
The highest single year was 1975 at 0.65% but the highest decade taken as an average was the 1960s under Menzies.

You can read Costello’s full response here.

Is it true Australia’s foreign aid spending was at its highest under Menzies?

In making his statement about foreign aid spending, Costello relied on data published by the OECD that go back as far as 1960.

Given the difficulty of obtaining data from Australian government sources on aid spending during the Menzies era (meaning 1949-66 for present purposes, though Menzies also served as Prime Minister from 1939-1941), this is understandable. However, it’s not safe to depend upon OECD aid statistics in this instance.

Based on the most up to date Australian government data, the highest aid to gross national income ratio under any Australian government since annual reporting began was 0.48%. That was in the financial year 1967-68 under three Prime Ministers in quick succession: Harold Holt, John McEwen and John Gorton.

Costello’s broader point is correct. Australian aid generosity is a fraction of what it once was. Australia’s share of aid to gross national income is projected to decline to its lowest level ever in 2016-17, 0.22%. Generosity under Menzies was twice as high as it is now, even though gross national income per capita was less than half of its present level in real terms.

What’s the problem with using OECD data on aid spending?

A careful review of the statistics published by relevant Australian government agencies, including some that are tricky to find, indicates that the OECD’s aid to gross national income ratios for Australia are quite inflated for the three decades or so from the early 1960s to the mid-1990s.
This inflation is mainly down to differences between the OECD’s estimates of Australia’s gross national income and Australia’s own estimates.

While OECD data on Australia’s gross national income over time are based on the Australian government’s reporting to the OECD, the Australian government periodically revises its estimates of past gross national income. Such revisions appear not to have been reflected uniformly in OECD data.

On average, the aid to gross national income ratios for Australia published by the OECD up to 1995 are inflated by about 20%. For some individual years, including 1975, the ratios are inflated by more than 40%.

How else can we track Australia’s aid spending?

The Development Policy Centre’s Aid Tracker uses the most readily available Australian government statistics to show Australian aid flows since the financial year 1971-72. The highest aid to gross national income ratio between then and now was 0.47%, in 1974-75.

But what about the Menzies era?

It’s no straightforward matter to obtain statistics from Australian government sources on annual aid flows under Menzies, or any other prime minister before Whitlam. But they can be found with a little detective work. Data on annual aid spending as far back as 1961-62 are buried in old Australian Bureau of Statistics Year Books.

Australian government data, including the old Australian Bureau of Statistics data just mentioned, show that the highest aid to gross national income ratio under any Australian government was 0.48%. That ratio was seen under Prime Ministers Holt, McEwen and Gorton in 1967-68.

The chart below compares Australia’s actual aid to gross national income ratios (blue line) with those asserted in OECD statistics (orange line). The red line represents the 0.5% aid spending target that both major political parties had, for a time, pledged to meet by 2015. The purple line represents the 0.7% United Nations target for foreign aid spending.

The Conversation/Data from: ABS Annual Year Books, 1970-72; AusAID Blue Book 2012-13; DFAT Green Book 2013-14; Federal Government Budget Papers 2014-15 to 2016-17; OECD Development Assistance Committee Official Development Assistance database.

See this spreadsheet for a collation of the data on which the above chart is based. You can read more about my methodology, including how the chart was constructed, here.

How has Australia’s foreign aid spend changed over time?

There have been unprecedented reductions in Australia’s overseas aid spending since the Coalition came to office in 2013.

Australia’s aid budget for 2016-17, at $3.8 billion, is around one-third less in real terms than the $5.1 billion spent in 2012-13.

The $5.1 billion spent in 2012-13 represented the peak of Australia’s aid effort in dollar terms. But in terms of the ratio of aid to gross national income, it was well below the levels of the 1960s and 1970s.

Based on the economic growth forecast contained in the government’s December 2016 Mid-Year Economic and Fiscal Outlook, Australia’s 2016-17 aid budget is estimated to amount to 0.22% of Australia’s gross national income.

In dollar terms, that’s 22 cents in every $100, compared with 34 cents in every $100 in 2012-13 and 48 cents in every $100 in the late 1960s.

In recent years both major Australian political parties have made and subsequently abandoned time-bound commitments to meet an aid to gross national income ratio of 0.5%.

A ratio of 0.5% would be well below the United Nations target of 0.7%, which was met or exceeded by six OECD donor countries in 2015 (the United Kingdom, Netherlands, Denmark, Luxembourg, Norway and Sweden).

Given that estimates of gross national income have been revised over time, it’s important also to consider policy intentions. Australian Bureau of Statistics Year Books from the early 1970s show that Australian governments believed, in the late 1960s and early 1970s, that they were allocating more than 0.5% of Australia’s national income to aid.

Australians are much wealthier than they were 50 years ago

Costello is certainly right to say per capita income (gross national income divided by the number of Australians) was much lower in the Menzies era than it is now.

Growth in per capita income has slowed lately, and household disposable income has fallen over the last several years. But Australia’s per capita income remains well above the average of OECD member countries, and of all high-income countries.

The Conversation/Data from World Bank - World Development Indicators

So while Australians have grown richer, our aid generosity has declined.

Verdict

Tim Costello’s underlying point is correct, even if his specifics were a bit out.

The highest aid to gross national income ratio under any Australian government was in fact 0.48% under Holt, McEwen and Gorton in 1967-68.

Costello relied on OECD statistics that are unreliable for the period in question. Even so, he was only out by a year and a fraction of a percentage point. Moreover, governments at the time did believe they were spending more than 0.5% of Australia’s national income on aid.

Costello’s broader message – that Australia’s foreign aid generosity has diminished while Australians have become wealthier – is correct.

Aid generosity under Menzies was twice as high as it is now, even though per capita income was less than half of its present level. – Robin Davies

Review

This is a sound FactCheck. The author has provided a careful, sophisticated and impartial analysis of Australia’s foreign aid spending from the 1960s to the present day. We know little about how Australian aid spending levels prior to 1971 compare to today’s and it is terrific that the author has delved into this area despite the data-related and methodological challenges.

I would add that it is worth considering how the Australian government has measured foreign aid spending, whether this has changed between the early 1960s and the present, and — if there have been changes — whether they affect our ability to compare aid to gross national income ratios across this time period. I expect that doing so will not materially affect the analysis but it would be useful to know. – Andrew Rosser (University of Adelaide)

This article was originally published in The Conversation and is republished under creative commons licence.

Difficult task ahead for reforming health

noreply@blogger.com (Anonymous) — Thu, 19 Jan 2017 00:27:00 +0000

Sussan Ley launched a series of major reviews of health spending programs. The proposals from these reviews are now on the table, and Jim Gillespie (University of Sydney) argues that Greg Hunt will have a series of difficult tasks in implementation.

Greg Hunt was today announced as federal health (and sport) minister following Sussan Ley’s expenses scandal and subsequent resignation. Hunt will be the third minister to hold this portfolio since the Coalition was elected in 2013. Successful health ministers need well-honed political skills, a lot of patience and even more backbone for the very public battles needed for real change.

So far, the Coalition has not covered itself with glory in the health portfolio. Ley took over in 2014 from the hapless Peter Dutton – whose main achievement was to unite almost all sectors of health against his plans for co-payments for GP visits.

The freeze on GP payments was inherited from the Gillard government, but now seems to be a permanent part of primary care policy. The pressure on GP earnings creates strong incentives to introduce or increase co-payments. The result will be continued pressure in the sensitive area of bulk-billing rates.

Implementation of Ley’s many health reviews

Ley launched a series of major reviews of spending programs – especially the Medicare Benefits Scheme. The proposals from these reviews are now on the table, and Hunt will have difficulty implementing them.

Private health insurance provides one of the government’s most intractable quandaries. Some 20 years ago, then Prime Minister John Howard devised an assistance program to prop up a failing industry. Government subsidies, through the private health insurance rebate, now stand at more than A$6 billion, increasing at well over inflation and outstripping wages growth.

Last year Ley pushed funds to reduce their original claims. Hunt will shortly have to consider the next round of increases.

The core problem is costs, especially of hospital services. However, the government abandoned a significant attempt to reduce the costs of prostheses, so that private insurers would pay closer to the much lower prices negotiated by public hospitals. After intense lobbying from the private hospitals and manufacturers that benefit from the current system, these issues were shunted to yet another committee of inquiry.

More broadly, the private health insurance industry has been struggling to find a long term and sustainable place. For the first time since the 1990s, there has been a significant decline in the proportion of Australians buying insurance policies. Attempts to broaden its base – such as Medibank’s links with GP services – resulted in a backlash from consumers and medical practitioners.

The costs of unnecessary or low-value medical services has been at the heart of the government’s review of the Medicare Benefits Schedule (MBS) – the list of Medicare payments for services.
A recent series of articles in the prestigious Lancet journal, with substantial Australian content, has underlined the importance of improving the use of evidence-based approaches and value for money. The Lancet authors have stressed the need for system reform:

… policies must move beyond the purely incremental; that is, policies that merely tinker at the policy edges after underuse or overuse arises.

Expert taskforces led by clinicians to review the almost 6,000 MBS items have made detailed recommendations of changes to the use of items and levels of payment. Hunt will need to chart the government’s response to these recommendations. The MBS review has maintained an admirable air of consensus so far. This is unlikely to last as particular areas are singled out for action.

Primary care trial for 2017

The other areas of unfinished business offer more prospects. The government’s Health Care Homes pilot, commencing in July 2017, is a response to calls for a health system that is more focused on community-level primary care.

The experiment has been heavily criticised for a lack of funding and attempts to micromanage systems that are meant to be increasing GP initiatives.

With more political commitment, it could shift Australian health care towards rewarding prevention and more effective management of chronic illness. The alternative is expensive, disconnected high-tech patches to a system increasingly inaccessible to ordinary consumers.

This article was original published in The Conversation and is republished under creative commons licence.

Investors and speculators aren’t disrupting the water markets

noreply@blogger.com (Anonymous) — Thu, 08 Dec 2016 02:12:00 +0000

All water users have a vested interest in maintaining the functionality of Australia’s water markets. Erin O'Donnell (University of Melbourne) and Adam Loch (University of Adelaide) argue that fear of water speculators is a red herring.

For over a decade, Australian state and federal governments have used water markets to manage water resources. Although there remains room for improvement in terms of environmental outcomes, water accounting accuracy, and managing social impacts, these markets are very successful at achieving efficient, flexible water transfers between users.

These markets are also huge – the estimated total value of water entitlements in the Murray-Darling Basin (MDB) was over $A11.5 billion in 2015-16. The sheer size of the markets has led investors to join the fray.

But there is now rising concern about investors in water markets. Will speculation drive up water prices, pricing out farmers? Do investment firms take water away from irrigators, or the environment? Is speculation impacting water resource management in the MDB?

The data shows these fears to be overblown. Investors make up only a tiny proportion of the water market and there are far greater concerns for those reliant on it – the climate, efficiency drives and political uncertainty among them. In fact, speculators may even be beneficial as they add flexibility to the market.

How water is traded in Australia

Water markets offer farmers the flexibility to manage risk by transferring water to its highest value or most profitable use. They also allow water to move to other socially-valued uses such as environmental watering. This is best exemplified during a drought, when farmers with perennial crops (e.g. trees or vines) can buy water rights from farmers with annual crops (e.g. cotton or rice), who decide not to produce. Water markets have saved many farmers and their crops during previous droughts.

Water resource management in the MDB is an example of the “cap and trade” system. The cap is a limit on how much water can be allocated for consumption. Under this system, water is “owned” either as shares or entitlements (a permanent right to receive ongoing water allocations). Available water is allocated against those shares/entitlements each year (e.g. during a drought farmers may receive 40% of their entitlement).

Both shares and entitlements can be owned by, or transferred to, other water users. This includes investors and “the environment”, under the guise of an organisation like the Commonwealth Environmental Water Holder. The decision by any owner to use or trade water will depend on the price of water, which varies among different parts of the catchment, and across years.

Functional water markets depend on four fundamentals – well-defined water rights, many buyers and sellers, easy transfer between different users/uses and locations, and reliable and adequate information. All four are present to varying degrees in the southern-connected MDB water markets as a result of a combination of historical factors and ongoing government investment.

What water speculation ‘looks like’

Speculation in any market takes two main forms – short-term arbitrage (simultaneous buying and selling where there is a price difference between different markets or exchanges) or long-term investing in water entitlements and then selling or leasing annual water allocations to users. Therefore, speculation, especially the long-term kind, can lead to “hoarding” of water by non-users (those without farm land), which could distort supply for farmers and increase prices.

But if we look at the changes to available water over the last decade there is little evidence that speculation is impacting the water market. The vast majority of water rights are still held by farmers. At most, Victorian estimates put speculation activity at around 5% of water market activity, which is not a significant proportion and unlikely to distort trade. Speculators also remain a very small proportion of total water holdings without land. Most water rights not attached to land are still owned by farmers.

In fact, water entitlement prices are mainly driven by periods of low/high supply climate events, as shown in the chart below. The millenium drought saw prices rise dramatically from 2006/07 until 2009/10 when the drought broke. Increases from 2013/14 correspond again to low supply, which in recent months has been reversed.Goulburn Murray Irrigation District trade prices 1993-2016 (source: author provided).

Some may argue that water purchased from willing sellers through buybacks for environmental use has increased prices, but again this is unlikely. This argument is based on the idea that reallocating water to the environment has removed huge volumes from trade. But it ignores the fact that Commonwealth purchased entitlements are only around 13% of the total entitlement volume in the southern connected MDB and far, far less in the northern part of the Basin.

The concerns are unwarranted

According to the data, speculation is neither affecting water prices, nor driving significant changes in the way water is used. In fact, given the broader trends of water use in the MDB towards high value, perennial crops, as well as government incentives encouraging farmers to transform toward such systems, increasing the volume of water held by speculators could be beneficial.

By definition, speculators aren’t making use of their water entitlements. This water is effectively “uncommitted” to existing crops, which means during a drought the allocations can be sold to perennial farmers, enabling them to keep their crops alive.

All water users have a vested interest in maintaining the functionality of Australia’s water markets. But fear of water speculators is a red herring, and any negative impacts of speculators on the water markets are likely to be dwarfed by that of government intervention, efficiency incentives and ongoing political uncertainty.

This article was originally published in The Conversation and is republished under creative commons licence.

Government response to Infrastructure Australia offers no grounds for optimism

noreply@blogger.com (Anonymous) — Thu, 08 Dec 2016 01:53:00 +0000

For as long as the government avoids rigorous, transparent processes, there is no reason to expect any real discipline in how it spends infrastructure dollars. Marion Terrill and Hugh Batrouney (Grattan Institute) expect more regional boondoggles until we can tie the government to the mast of disciplined investment.

How wonderful, you might think, that the Australian government is in furious agreement with its independent infrastructure advisory body on how to tackle the country’s present and looming infrastructure challenges.

Of Infrastructure Australia’s 78 recommendations in its Infrastructure Plan, the federal government opposes only three outright. But, in reality, the government has ducked some hard choices by either supporting “in principle” or supporting with caveats. This means it can’t be criticised for being hostile to a good idea, but at the same time it doesn’t actually have to do anything.

Ducking hard choices means avoiding change that could make a real improvement to the effectiveness of Australia’s infrastructure.

A transparent and rigorous process is perhaps the most critical element underpinning an effective infrastructure investment program.

Infrastructure Australia believes this, and so does the Australian government. That’s why the Infrastructure Plan recommends publication of full project business cases, including supporting data and analysis, and preparation and publication of robust post-completion reviews once a project has been delivered.

How disappointing, then, that the government is silent on the first recommendation and passes the buck on the second.

A need to scrutinise investment decisions

Failing to publish business cases and their supporting analysis and assumptions means the public, experts and the media are unable to scrutinise government decisions. This is no coincidence: politicians misuse public money for electoral gain.

Over the past ten years, governments have spent more per person in New South Wales and Queensland, where federal elections are largely won and lost, than in less electorally sensitive states. They have also spent disproportionately outside the capital cities – even though most GDP, GDP growth and population growth is generated in the big cities.

This behaviour is still going on. In the 2016 federal election campaign, all major parties committed most of their transport spending promises to proposals that Infrastructure Australia had yet to assess.

Only 15% of the Coalition’s spending promises were on projects with a favourable assessment from Infrastructure Australia. For Labor, it was a mere 3%. For the Greens, 0%.

So, even though the major parties have all made serious promises about how important it is to listen to the independent advisory body, their behaviour shows they do not do this.

Taking responsibility for taxpayer dollars

The government’s evasive response on post-completion reviews passes the buck.

Despite supporting the recommendation to make project funding contingent upon post-completion reviews, the government says this should be the responsibility of the asset owner – usually a state government. At the same time, the federal government insists it is:

… no longer an ATM, simply handing over grants to state and territory governments for infrastructure with little involvement in how the money is spent.

Given the billions of dollars it spends, the federal government should take responsibility for auditing the effectiveness of the funds it provides. It should also demonstrate leadership by coordinating the publication of post-completion reviews from the asset owners.

A welcome step up in reporting practice

In welcome and remarkable contrast, the government has committed to transparent disclosure of infrastructure “community service obligations”.

This appears to mean the government will publish the underlying rationale and community impact of infrastructure investments it would not undertake if commercial considerations applied.

If the government is serious about supporting this recommendation, it will be a major step up in reporting practice.

It means if the government decides to fund a highway or railway line that doesn’t stack up economically, it will identify the social purpose – for example, connecting a rural community to a regional centre – and fund it explicitly as a community service obligation. It will be intriguing to see how this is implemented, and just how long this list could be.

Community service obligations are the real reason for much investment in rural and regional areas, since many infrastructure projects in the bush just don’t make sense economically. But governments usually pretend they are building in the regions to create jobs and economic opportunity.

Making hard choices with finite funds

Building in the bush on the pretext of creating jobs is exactly what politicians of all stripes frequently propose.

Not only does the government plan to increase investment in the larger capital cities, but also in the smaller capital cities, the outskirts of cities and, in principle, both the fast-growing and economically important regional centres and the smaller or slower-growing regional centres. In other words, the government plans to spend more everywhere.

This may well be what the government actually does. However, there is a world of difference between investment in the effective functioning of the economic powerhouses that are the big four capital cities, and spending in depressed regional areas in the hope that this might prop them up.

In fact, the government goes so far as to support the notion that governments should try to get people to move to smaller centres. But governments have been trying for years to get economic water to flow uphill, and we are poorer for it.

Trying to stop people from moving to where they want to live and work, or using the infrastructure pipeline as a tool for redistribution, is inefficient, opaque and runs counter to Infrastructure Australia’s role to identify and promote nationally significant infrastructure.

Rural and regional Australians will applaud the commitment to keep spending in their areas. And why wouldn’t they?

When there is very little transparency about the costs and benefits that underpin decisions to invest, there is a great payoff to lobbying for your particular area. The winners are happy, while it’s hard for everyone else to see that the cost of this trade-off is more congestion in fast-growing cities.

For as long as the Australian government avoids the responsibility of rigorous, transparent processes, there is no reason to expect any real discipline in how it spends this year’s A$6 billion or next year’s A$9 billion on transport infrastructure.

The government’s response to the Australian Infrastructure Plan provides no real grounds for optimism. Expect more regional boondoggles until we can tie the government to the mast of disciplined investment.

This article was originally published in The Conversation and is republished under creative commons licence.

Australia should support the US abandonment of the TPP

noreply@blogger.com (Anonymous) — Wed, 23 Nov 2016 20:30:00 +0000

The primary goal of “free trade” agreements is the promotion of rent-seeking by entrenching monopoly rights. Elizabeth Thurbon (University of NSW) and Linda Weiss (University of Sydney) explain that this is why the United States should abandon the TPP – and why Australia should support its abandonment.

President-elect Donald Trump is right: The Trans-Pacific Partnership (TPP) is a damaging deal and deserves to be killed off.

But he tells a half truth about why the trade accord among a dozen Pacific Rim nations is a bad deal. In Trump’s view, trade agreements like NAFTA have allowed developing countries to “steal” American manufacturing jobs and decimate the well-waged middle class. This is why he says that America should reject the TPP.

But shifting the blame for American joblessness and stagnant incomes obscures the more complex, largely home-grown pressures that led U.S. companies to offshore manufacturing production to low-wage jurisdictions. Promising to tear up certain trade deals and impose tariffs on imports (chiefly from China and Mexico) will do very little if anything to reverse the problem.

The real problem is that these agreements don’t actually do enough to support freer trade. We’ve been studying trade agreements and the political foundations of industrial competitiveness in the United States, East Asia and beyond - for decades. We have witnessed how so-called “free trade deals” have become less and less about opening markets and more about entrenching monopolies. Australia, where we’re based, is also a member of the proposed TPP and, like America, stands to benefit from the deal’s abandonment.

Who’s really to blame for America’s manufacturing decline?

When Trump blames globalization for having “wiped out our middle class,” he misses the point that the main actors behind successive waves of globalization since the 1990s have been U.S. corporations themselves. And when Trump blames China (or Mexico) for stealing American jobs, he misses the point that it is U.S. companies that have been most aggressively downsizing their labour force and distributing production abroad.

Blame shifting also misses the point. It’s American corporations themselves, the key drivers of globalization (which have been the chief beneficiaries of this “downsize and distribute” approach) racking up “super profits” from what is effectively rent-seeking. They do this by exploiting - and aggressively seeking to extend - generous monopoly rights granted to them through intellectual property laws.

While Trump rails against America’s growing trade deficit with China, the reality is that the largest category of imports from that country (about 28%) is electrical equipment (for example information technology (IT) products) very often generated (designed, outsourced or contracted) by U.S. companies. These companies, like Apple, hold the patents, copyright and trademarks.

This has paved the way for some serious distortions in accounting. For example, recent research has shown that the full value of the sale of iPhones in the United States (which are assembled in China) are counted against China’s trade deficit with America.

In reality, China contributes only around 3.6% of the value of iPhone sales in parts and labor, itself importing the remainder of the more (and less) technologically advanced parts (from Japan, Germany and South Korea and beyond). U.S. companies contribute only 6% to the total parts and labor of an iPhone, but Apple takes the lion’s share of the final sale price thanks to its patent and trademark ownership.

So when an iPhone sells in the United States for about $500, only $159 of this reflects content imported from China. The rest goes to American firms. And while that $159 is counted against China’s deficit with the United States, China itself only accounts for $6.50 of that value.

Seen in this light, we should not be surprised that 55% of the price U.S. consumers pay for goods imported from China actually goes to U.S. companies. Following from this, were Trump to make good on his promise to slap tariffs on imports from China, this would effectively penalize many U.S. companies.

The related problem is that decades of downsizing the manufacturing workforce and moving production overseas have gradually denuded America’s industrial ecosystem whereby the networks of equipment makers, suppliers and manufacturers needed to turn innovative ideas into products are disappearing. As one of us has shown in research, extreme offshoring is not only undermining skilled employment in the U.S. but also putting at risk the innovation that has underpinned American technological dynamism since the end of World War II.

Consequently, it’s increasingly difficult to find workers with the skills necessary to make the technologically sophisticated goods associated with the better-paid jobs of yesteryear. For example Silicon Valley, the home of most U.S. technology companies, is now a misnomer since very few semiconductors, which are primarily made of silicon, are produced there. Indeed, a more appropriate name today would be “App Valley” – and apps are not exactly the basis for a vibrant economy.

So why abandon the TPP?

Here’s where free trade deals do come into it.

Successive American administrations have further reinforced this extreme downsizing process by pushing trade agreements like the TPP that pay lip service to market access (free trade). In reality, these agreements entrench monopolies and tie the hands of governments that would otherwise take a more proactive approach to building new advanced industries and upgrading existing ones with new technology.

The creation of the World Trade Organization in 1995 marked the first major shift in international trade deals away from those that prioritize freer market access and towards those that entrench monopolies through the award of generous intellectual property provisions – even at the expense of economic and social goals like encouraging innovation and protecting human health.

Subsequent reforms to the WTO’s intellectual property agreement (for example the trade-related aspects of intellectual property rights) gave governments at least some scope to redress the organisation’s most economically and socially distorting impacts. And the WTO’s Doha round of trade negotiations sought (albeit unsuccessfully) to focus attention on the primary issue of trade liberalization rather than further extending monopoly rights.

But the improvements being made at the WTO level are sorely missing from most bilateral and regional trade deals, especially those being driven by the U.S. Many of these - from the Australia-U.S. Free Trade Agreement to the now defunct TPP – have sought to further extend the monopoly rights of IP-protected firms. These are the very corporate actors that most aggressively pursue the “downsize and distribute” approach.

From Apple and Dell in the IT space to Pfizer and Merck in pharmaceuticals and Nike and Gap in clothing, America’s patent, copyright and trademark-rich businesses reap major rewards for their shareholders by aggressively reducing labor costs through outsourcing. They also do it through extracting monopoly rents from their patented and trademarked technologies and designs. As recent research revealed, this also has major, negative implications for corporate investment and wage levels in the United States.

A better approach to trade

Obviously, the promotion of rent-seeking by entrenching monopoly rights has nothing to do with free trade. But the reality is that, for the United States at least, this has become a primary goal of its “free trade” agreements.

This is why the United States should abandon the TPP – and why Australia should support its abandonment. Abandoning the TPP, and requiring our governments to focus their efforts on trade deals that take a prudent approach to market access and a tough line on rent-seeking - would be beneficial for both our countries.

This article was originally published in The Conversation and is republished under creative commons licence.