The Victorian and Commonwealth governments have just announced a bailout of the Alcoa aluminium smelter at Portland, achieved primarily by pressuring AGL to supply cheap electricity. It’s unsurprising that a state government wants to save jobs: that is par for the course. The Commonwealth intervention reflects total policy incoherence. It’s entirely comprehensible, however, in terms of the culture war approach that drives the Abbott-Turnbull government. I have a piece on this at Crikey, reprinted over the fold.
I’m working on my long running book project Economics in Two Lessons, and I dug out this old post, originally written in 2008, which remains strikingly relevant today.
That’s the title of my latest piece in The Guardian. It’s a response to the Productivity Commission’s report on competition in human services. I wrote a submission in response to the draft report a while back, but it had no impact, and neither did any other evidence.. If anything, the final report is slightly worse than the draft.
My final para
Rather than close on a negative tone, I’ll make one suggestion for contestability. Private sector consulting firms have demonstrated a long-standing expertise in producing impressive looking reports to support the (predetermined) conclusion required by the client.
Given the predictability of the Productivity Commission’s conclusions on topics like this, private firms would have no difficulty in replicating them. Surely this is a service that could do with being opened up to the chill winds of competition.
When the SA Royal Commission on the Nuclear Fuel Cycle brought down its report, I welcomed the conclusion that there was no serious prospect that nuclear power generation would be feasible in Australia. That was unsurprising, since my own submission to the Commission had shown this pretty clearly. As regards the Commission’s recommendation for a waste dump, I argued that there could be no objection in principle, given that SA was an exporter of uranium and the waste had already been generated.
That left open the question of whether the waste dump proposal made economic sense. I’ve now looked at the case in more detail and concluded that it doesn’t. Countries with existing nuclear power industries have made arrangements that may not be satisfactory, but are unlikely to change. There is little prospect of any significant growth in the future. So, building a nuclear waste dump in the hope of attracting demand makes about as much sense as the actions of the protagonist in the movie Field of Dreams, who ploughed up his cornfield to make a baseball diamond for the ghosts of disgraced players.
I make the argument in more detail in this piece in New Matilda. Right on cue, Vietnam, which was one of the hypothetical users of the dump, decided that it would be better to dump nuclear power as uneconomic. Expect more announcements along these lines as the economics of renewable energy improve.
The one policy issue that was an unambiguous loser for Clinton was trade[^1]. Her grudging move to oppose the Trans-Pacific Partnership, choice of Tim Kaine as running mate and some unhelpful remarks from Bill Clinton meant that Trump had all the running. How should we think about trade policy after Trump? My starting point will be the assumption that, in a world where Trump can be President of the US, there’s no point in being overly constrained by calculations of political realism.
A few points and some suggestions
* So-called “trade” deals like the TPP were actually devices to enhance corporate power (and, in the case of the TPP, to isolate China), and deserved to be defeated regardless of views on trade
* No matter what policy is adopted, manufacturing jobs aren’t coming back, any more than farm policy can restore an agrarian society. The manufacturing share of total employment has peaked nearly everywhere in the world, notably including Mexico. As is often the case, Chinese data is too opaque to get a clear picture, but there’s plenty of evidence of contraction about
* The idea of manufacturing jobs as “good” jobs is historically specific particularly to the US, and reflects the fact that the dominance of manufacturing coincided with the New Deal and the unionisation of the labour force. It’s unions, not manufacturing that we need to bring back.
* The big problem facing workers, in the US and elsewhere, isn’t competition from immigrants, or from imported goods. It’s the fact that capital is freely mobile and unfettered by any social obligation. So, a profitable plant can be closed down if its owners get a better off elsewhere. Alternatively, the threat of a move can be used to bargain down wages.
So, instead of thinking about tariffs and trade agreements, the big question is: what can be done to change trade and capital flows in ways that yield more good jobs?
Some suggestions over the page
While doing a bit of work on electricity policy, I dug out this piece from 2001, which was published as ‘Market-Oriented Reform in the Australian Electricity Industry’ in The Economic and Labour Relations Review, June 2001; vol. 12, 1: pp. 126-150. The conclusion, written at a time when supporters of electricity reform were trumpeting it as a huge success, stands up pretty well 15 years later, I think.
Some problems, however, are likely to become more rather than less acute. The Australian National Electricity Market commenced operation in a period of oversupply so that problems of market power and excessive prices have not emerged until recently. It remains unclear whether an electricity auction market can produce adequate incentives for investment while generating appropriate prices for consumers.
Similar problems are emerging in relation to the regulated monopoly component of the industry, the transmission and distribution sector. Regulators must set prices that do not reward inefficiency or allow monopoly profits, but nevertheless provide appropriate incentives for new investment. This is a delicate balance.
In the longer term, the problem of the environmental impact of an industry relying predominantly on carbon-based fuels remains to be addressed. A market solution would involve the creation of emissions credits that could be traded along with electricity in national markets. Although limited steps have been taken in this direction, much remains to be done.
According to today’s news, the government has estimated that for-profit vocational trainers are three times as expensive as TAFE. That’s no surprise to me, but it’s a striking contrast with the barely qualified enthusiasm (until very recently) of the Productivity Commission.
I’ve put in a submission to the PC inquiry into Competition in Human Services arguing that
(i) there’s no reason to expect that competition will deliver improved “consumer” (that is, student) choice or better outcomes
(ii) the failure of the PC to foresee, or recognise until much too late, the disastrous failure of for-profit vocational education means that its judgements about areas that might be opened to competition in future should not be relied on.
My submission is here
That’s the title of the FH Gruen lecture I gave on Tuesday. The slides and a podcast (unfortunately interrupted by hail) are here.
My article on the failure of for-profit competition in human services included a hook to the recently published Productivity Commission report recommending more of the same. I haven’t had time to go through the report in detail, but I was struck by reports that the PC mentioned the FEE-HELP fiasco in the VET sector as an example of the way not to go about things.
It’s good to see some recognition of this but what matters here is foresight, not hindsight. So, I thought I’d check back to see what the PC was saying a couple of years ago, when the disaster was obvious, but was still being denied by those in charge of it. Here’s a quote from their submission to the Harper Competition review
The Commission’s study into the vocational education and training (VET) workforce (2011f) found that there had been a rising trend to harness market forces in the allocation of VET services, with principles such as user pays and user choice increasingly underpinning VET policy. The Commission suggested that, as the VET sector becomes increasingly competitive, a move towards greater managerial independence for public providers would give them the autonomy and flexibility they need to respond.
The Commission (2011f) also noted that opening up of the VET sector had not been a complete success, with some stakeholders raising concerns about quality assurance, monitoring and enforcement (especially in the international student sector).
Going back to the 2011 report, there is indeed a box referring to problems with international students, which drew a lot of attention at the time. But there’s nothing to suggest any awareness of the broader problems, which were already apparent*, let alone any capacity to predict them using the PC’s analytical framework.
* I wrote a report for the National Council on Vocational Education Research in 2012, making many of these points, and drawing on several years of evidence from Victoria. I was roundly derided for my pains by the private provider lobby.
I have a couple of pieces in The Guardian. The first, which came out a few days ago, points out the consistent failure of market competition and for-profit firms to deliver human services effectively and equitably. The second gives the mainstream economic analysis of the problem, in terms of market failure and the mixed economy, developed 40 to 50 years ago, and ignored by the policy class of today, which takes the assumptions of market liberalism (aka neoliberalism) for granted. My summary:
The problem is that the political class, along with much of the economics profession, have done worse than the Bourbons, of whom Talleyrand observed “they have learned nothing, and forgotten nothing”. … Our leaders, and the economists who advise them, have not only shown themselves incapable of learning from experience, they have forgotten much that we once knew.
The takeaway from my latest piece in The Guardian on the failure of for-profit provision of services like health and Education
Blair, and like-minded reformers throughout the English-speaking world, have delivered an Edison in reverse. Edison experimented with many things that didn’t work, but ended up with a light bulb. Market-oriented reforms, particularly in the provision of human services like health, education and public safety, have begun with a working system and replaced it with a string of failed experiments.
Another day, another article complaining that we have too many young people going to university. I’ll pick this one by Nicholas Stuart, not because it’s particularly good or bad, but because it covers all the main points. Then I’ll ask, the following question:
If you substitute the word “Menzies” for “Dawkins”, is there anything in the article that wasn’t being said 50 years ago, when the proportion of young people going to university was about a quarter of what it is now (that’s a guess, which I’ll try to correct when I get time)?
I’m reaching back to my childhood here,so I can’t remember when I first heard these points being raised. But the way in which they were discussed made it clear they were cliches even them. Those points include massification, dropout rates (higher then than now, I think) the large numbers of graduates doing jobs that didn’t require a degree (Arts graduates driving taxis was the standard example back then), the merits of getting a trade instead of a degree, the role of the university as part of the capitalist system and the corrupting effects of Commonwealth money.
Back in 2012, I wrote a piece arguing that Australia should abandon the policy of inflation rate targeting, and switch to one in which the target was the level of nominal GDP. As I argued then, inflation targeting is part of a package deal involving a number of propositions, most particularly
* Macroeconomic management should be left to an independent central bank
* Successful inflation targeting will also stabilize real GDP, and therefore fulfil the dual mandate of price stability and full (or as full as possible) employment
* The best policy approach for central banks involves modest regular adjustments of a key interest rate. In Australia this is the cash rate, which is the overnight money market interest rate.
The idea of nominal income targeting has recently been put forward by .Nick Xenophon and economist Danny Price, in relation to the contract with the new Governor of the Reserve Bank, Phil Lowe. The article mentions my support, and I commented on an earlier draft.
Writing in Crikey, Bernard Keane and Glenn Dyer criticise the idea, making three points
(a) Unlike other countries, we are not yet at the zero lower bound, so we can continue using interest rate policy
(b) Macroeconomic outcomes in Australia have been pretty good under inflation targeting
(c) A nominal GDP target can’t be achieved using monetary policy alone, we need fiscal policy as well.
My response to point (c) is “Yes, that’s the point of the shift. When we dump inflation targeting, we dump the entire package, including exclusive reliance on monetary policy”. On (a) and (b), it seems to me more sensible to make the change when we can, rather than be in the position of most countries, where inflation targeting remains notionally in force, but in practice the only instrument available is open market security purchases (aka quantitative easing). And in all those countries, macro outcomes in the inflation targeting era have ranged from poor to disastrous.
Although Australia is doing well right now, interest rates are heading down, and would certainly hit zero fast in the event of a crisis. So why not fix our policy now, while we still have time.
… It could be a blessing in disguise. That’s the title of a piece I wrote for The Guardian on the news that our rating had been placed on negative watch
When I posted the following piece two years ago, I didn’t suppose it would be enough to kill the absurd idea that “most Australians pay no net tax”. But, given its obvious kinship with Mitt Romney’s disastrous “47 per cent” catchphrase, I felt sure that hardheads on the political right would kill it off before it lined them up on the losing side of a class war. Not for the first time, I was wrong. So, here’s a reprint.
In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.
To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue, it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.
Next up: Why there is no net travel into the CBD
fn1. Romney wasn’t silly enough to push this line in public. He got caught using it at a donors meeting, when someone secretly filmed him.
fn2. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.
I’m currently working on a section of my Economics in Two Lessons book dealing with minimum wages in the context of predistribution policies, so I thought I would compare Australia with the US, where the idea of a $15/hour minimum wage is currently a hot topic. In Australia there are two kinds of minimum wage. The PPP exchange rate is estimated at $A$1.30 = $US, which is fairly close to the market exchange rate at present, so I’ll give both $A and estimated $US equivalents
The standard minimum wage for workers aged 21 and over is $A17.29 hour ($US13.30) applying to employees under standard award conditions. These include four weeks annual leave, sick leave, employer contributions to pension plans and so on.
More comparable to the situation of US minimum wage workers are “casual” workers, employed on an hourly basis. Casual workers get a loading of at least 25 per cent, bringing the wage up to at least $A21.60 an hour ($US16.60), to compensate for the absence of leave entitlements. In addition, they have entitlements including:
* “Penalty” rates for weekend and night work (usually a 50 per cent loading, 100 per cent on Sundays)
* For workers employed on a regular basis, protection against unfair dismissal.
The policy question is: what impact have these high minimum wages had on employment and unemployment. That’s too big a question to answer comprehensively, but we can look at the obvious data points: the official unemployment rates (5.7 for Oz, 5.5 per cent US) and the 15-64 employment population ratios (72 per cent for Oz, 67 per cent US). So, it certainly doesn’t look as if the Australian labor market has been crippled by minimum wages.
Note: I’ll respond in advance to the widespread misconception that Australia is a special case due to mineral resources. Mining accounts for about 2 per cent of employment in Australia, and (because most mines are owned by multinationals) its contribution to Australian national income is also so, probably around 5 per cent.
* Workers aged 18 get about 70 per cent of the adult minimum, equivalent to around $US11.50 for casuals. But the great majority of US minimum wage workers (about 80 per cent) are 20+.
Jan Libich of La Trobe University has a new book out called Real-World Economic Policy: Insights from Leading Australian Economists. Each chapter has a fairly accessible introduction to an economic policy issue, along with an interview with an Australian economist: examples include Bob Gregory, Andrew Leigh and Warwick McKibbin. It’s useful both as an intro text and to get a bit of insight into how some of our leading economists think about the issues facing Australia.
I’ll be talking tomorrow (Tuesday) at the Queensland Jobs Growth Summit organized by the University of Queensland School of Economics and The Australia Institute.
The core point of my presentation is that the resilience of the Queensland economy, despite the end of the coal boom reflects the transition to a knowledge based economy, symbolized by the Beattie government’s “Smart State” strategy and the opposite of the nostalgic and reactionary Four Pillars (agriculture, mining, construction and tourism) strategy pushed by the LNP.
In political terms, it’s hard to fault Labor’s call for a Royal Commission into the banking system. It’s a neat riposte to the government’s Double Dissolution trigger, the ABCC bill derived from the Royal Commission into trade union corruption, which spent $100 million to announce that it had discovered a handful of cases of petty corruption*, claimed to be “the tip of the iceberg”. (That was one of a string of Royal Commissions set up as political vendettas by the Abbott government, none of which found anything useful.) The hypocrisy of this effort, when we are daily bombarded with evidence of corruption in business, finance and the LNP itself is obvious, and the proposed Commission provides a convenient political hook. And doubtless there will be plenty of evidence of individual wrongdoing, real or alleged.
However, I don’t think this proposed Commission will be any more useful, in practice, than Abbott’s. The problem with the banks is not so much breaches of the rules but the rules themselves. What we need is another inquiry which, unlike the Campbell, Wallis and Murray inquiries is not run by advocates of financial deregulation.
The Royal Commission we should really have is one into Abbott’s Royal Commissions, taking the same nakedly political approach as those Commissions did. The Commissioners, the counsel assisting and the government ministers who called the Commissions should be questioned on the political understandings with which they approached the job, the waste of public money involved. With luck, that would deter any future use of Royal Commissions as partisan vendettas, and leave them to inquire into real issues of public concern, where the powers of Royal Commissions really are necessary.
Finally an observation and a question: Having been critical of the TU Royal Commission, I’ve tried to be consistent in the prediction that this one will be similarly ineffectual. Did any of those now arguing that we don’t need a Royal Commission into banking make the same observation about TURC?
* As far as I know, no union offical has yet been convicted of a corruption offence as a result of the Commission’s work, while at least four prosecutions have failed or been dropped. My guess is that the total number of convictions will end up below 10, and the total amount of money involved not much more than a million dollars. That’s a pretty appalling return for $100 million of public funds that could have been used to protect the community against armed robbers and burglars, not to mention white collar criminals.
A couple of days ago, I was one of fifty signatories to a letter opposing the proposed cut in company tax rate and rejecting the general idea that Australia needs lower taxes. We got excellent coverage from the ABC, Fairfax papers and so on. But by far the most extensive was from The Australian. I counted at least four stories all with a prominent run on the website
* A straight new story, though of course replete with phrases like “the left wing establishment”
* The IPA attacking the signatories as the “fatuous fifty”
* Shorten also attacking the company tax cut as a recipe for “mayhem”
* A front page piece saying a tax increase is a lazy way of solving our problems
Not so long ago, the Oz would have ignored a statement like this (or stuck it in a short story on the inside pages) with the plausible justification that it’s just a bunch of lefties saying what lefties usually say. The fact that they felt the need to reply over and over is revealing, in two ways.
Watching the flailing of the Abbott-Hockey-Turnbull-Morrison government on budget policy has been grimly amusing, for those who enjoy politics as theatre. But it has also provided a nice lesson in the policy process, related to an apocryphal story about (IIRC) Thomas Edison. After a thousand or so failed attempts to design a workable filament and design for a lightbulb, Edison was supposedly reproached with discovering nothing, and answered “On the contrary, I’ve discovered 1000 ways that don’t work”.
The AHTM government came to power with the twin slogans “axe the tax” and “fix the debt”, along with a commitment not to cut any public spending that people cared about, and to spend even more on the military than before. That created an obvious problem: how can we bring the budget back into something like balance, given that we have taken on substantial expenditure commitments, and that we can’t rely on bracket creep. To give them credit, they’ve tried just about every answer but one
* First, they tried the standard LNP approach of setting up a Commission of Audit, discovering a budget emergency and breaking promises on spending. That produced the disastrous 2014 Budget, which ended the careers of Abbott and Hockey in due course. Thanks to the backloading of the big cuts, it’s now destroying Turnbull and Morrison. Turnbull has backed off a little way on health, and is still stalling on education. But his disastrous floating of the idea of completely endingFederal funding for state schools means he’ll be in a politically untenable position when he tries to sell smaller cuts, while claiming not to want to kill the sector.
* Second, having killed the carbon and mining taxes, thereby making the deficit even worse, Abbott realised that it would be impossible to claw back the compensating tax cuts given to low income earners.
* Next Abbott called for a tax debate, but ruled out just about everything in advance. Turnbull and Morrison went one better, putting everything on the table, and then killing off each possible option as it ran into trouble. That included the GST, superannuation concessions, the tangle of negative gearing and concessional capital gains taxes, changes to dividend imputation and so on.
* Finally, long after the “all options” discussion was over, Turnbull popped up with the idea of giving income tax back to the states, which lasted all of two days. He is now trying the ludicrous spin that, having rejected his half-baked idea, the states are on their own financially.
So, the government has succeeded in finding lots of approaches that don’t work. The only one left is higher income tax for those who can afford to pay it. The first step would be to maintain the Temporary Budget Repair Levy until the budget is actually repaired. But the real answer is to recognise that the big gainers from the changes in the economy over the past decade or more have been high income earners, and this is the group who need to pay more.
I’m planning to do some proper calculations on this, when I get a little free time.
fn1. Retailing apocryphal stories is anachronistic, now that they can be falsified (or occasionally verified) with a quick Google search. But it’s habitual for old academics, and I regard it as a kind of performance art, like doing a high wire act without a net. In any case, Google is getting less and less useful for anything except selling stuff, so we may have to rely on old skills like memory again.
In keeping with his commitment to do exactly what Tony Abbott would have done, but with more style, Malcolm Turnbull has just announced that we are to spend a trillion dollars on fighter plans and submarines. Apparently, there are lots of problems with the hugely expensive F-35 Joint Strike Fighter, which Australia has on order. Rather than look at the details, it’s worth asking we are, yet again, arming ourselves to refight World War II.
World War II was fought on land, sea and air. Submarines and fighter planes played a crucial role. But since 1945, things have changed. The 70 years since 1945 have been marked by near-continuous land warfare in various parts of the world . On the other hand, there has been essentially no naval warfare, in the sense of battles between ships or carrier based aircraft, with the exception of the absurd and unnecessary Falklands conflict. Air combat between fighter planes lasted a bit longer after 1945, playing a big role in the Korean War, but has been pretty much non-existent since the 1980s. All warplanes, these days, are effectively bombers, usually hitting targets that have previously been rendered defenceless by missile attack. Yet the problems of the F-35 stem, in large measure, from its capacity to engage in hypothetical dogfights.
Fighter planes and their pilots still attract most of the attention, and nearly all the glory, in air warfare. But the real work is increasingly done by drone operators, commuting from the suburbs to undertake their task of destruction in air conditioned offices: since they see exactly what they have done, the job is apparently much more stressful than that of a fighter pilot. So far, only the US is using military drones on a large scale, but it’s obvious that this is the way of future wars. The specific problems of the F-35 are irrelevant in this context: it will in any case be obsolete by the time it’s delivered.
As for submarines, Wikipedia gives a list of submarine actions since 1945. There have been six of them, three involving the sinking of surface ships, and three involving the firing of cruise missiles, something that can be done from craft as small as corvettes.
Submarines have been much more notable for sinking themselves. Wikipedia lists four US submarines sunk at sea since 1945, two with all hands. The Russians have done far worse, losing 18 subs, most notably the Kursk, lost with all hands in 2000.
Submarines aren’t obsolete in all their possible uses. If the world ends in a nuclear holocaust, the final missiles will probably be fired from nuclear-armed submarines. But the revival of old-style submarine warfare, using our subs to sink (say) Chinese naval vessels seems remote: the increasing power and range land based anti-ship missiles will soon make naval power obsolete. Even more remote (thankfully) is the use of submarines to attack merchant ships without warning, as was done in both World Wars.
Of course, no one can be certain that seemingly obsolete modes of warfare won’t be revived: For example, there was a cavalry charge during the Afghan war. But spending a trillion dollars on weapons systems that haven’t been used anywhere in the world for decades does not seem like a sensible use of public money.
Having posted this, I’m fully prepared to get a hammering from military buffs who will point out that I have got this or that detail of air and naval warfare wrong. But the idea that detailed knowledge of tech specs or the minor points of military history constitutes expertise is, in this context, quite wrong. In the absence of any significant air or naval warfare within living memory, supposed expertise is about as useful as Scott Morrison’s knowledge of unicorns. The only important thing to know is that, like nearly all military expenditure and nearly all wars, these proposed purchases haven’t been subject to a cost-benefit test and would fail it if they were.
fn1. There’s a case that land warfare has become less frequent, or at least less bloody over time. But it’s hard to tell.
The sudden collapse of four for-profit vocational education enterprises including Aspire college is the latest in a string of scandals, failures and license revocations in the sector.
Meanwhile, in the US, the Apollo Education Group, owner of the “University” of Phoenix, has been taken private for $1 billion, a fraction of its peak market value. UoP pioneered the model of providing a bogus education to publicly funded students, ripping off both the students and the public purse. As the US has cleaned up the worst abuses, UoP and others have seen their profits shrink, to the point of bankruptcy in some cases.
The provision of public funds to for-profit operators has been a predictable, and predicted disaster. Of all the disasters perpetrated under the banner of microeconomic reform, education reform has probably been the worst.
In these circumstances, it would make sense for the national government, which has borne much of the cost, to take over the vocational education sector, properly fund the public TAFE system, and close down the for-profit sector, as was recently done in Chile.
The idea of a national takeover is, indeed, on the cards. But far from closing down the for-profit sector, it appears the Turnbull government plans to push the reform agenda even further.
Waist deep in the Big Muddy, and the big fool said, Carry On.
Forbes just released its annual list of the ten richest Australians. Of the top eight, four inherited their wealth. The other four range in age from 75 to 85, suggesting that new heirs are likely to be joining the rich list before too long.
This pattern isn’t yet representative of the Australian wealth distribution as a whole, but it is becoming more so. Piketty’s patrimonial society is not far away.
There are a lot of things we can do to promote a more equal distribution of opportunity and outcomes, but a return to taxes on inheritance (preferably levied on the recipient rather than the estate) would be a good start.
I posted this analysis in December, suggesting that, once the necessary compensation is paid for, an increase in GST wouldn’t be worth the effort. Apparently Treasury modelling (which I haven’t yet located) produces the same conclusion. Given that everything is supposedly on the table, maybe it’s time to look at some new options. An obvious example is inheritance taxes, which raised a fair bit of money before being scrapped in the late 20th century. As the inequality of wealth increases, the case for such taxes becomes every stronger.
The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.
Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:
Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.
Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.
As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)
That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.
So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.
There’s been a fair bit of fuss about reports that it’s now much easier to get into a university course than it used to be. This is the unsurprising result of decades of public policy aimed in this direction (with some brief reversals, most notably when David Kemp was minister). This piece by Leith van Onselen is fairly representative
Thanks to the former Labor Government’s uncapping of university places in 2012, allowing universities to recruit as many students as they can fit, actual tertiary entrance scores have plummeted, meaning every man and his dog can now get a degree, devaluing their worth in the process.
Implicit in this statement is the “screening” theory of education, that the point of getting a university degree (or finishing high school for that matter) is to show that you are smarter than the people who didn’t. The idea that doing a degree might equip you with useful specific knowledge, or with general skills in reasoning, writing and so on, doesn’t get mentioned.
Assuming, as is fair in this context, that the “worth” of a degree is being conceived in monetary terms, the claim that degrees have been “devalued” depends on the future earnings of the students now being admitted. We can’t know this (neither can van Onselen). However, the long-term evidence is clear: in Australia, as everywhere else in the world, the wage premium for graduates has remained large enough to make going to university a very good decision, even as the proportion of young people undertaking university education has risen from a tiny minority in the mid-20th century to around 40 per cent today.
One interpretation of this is that, over the past century or more, the entire world has been engaged in more and more elaborate screening for no good reason. A more plausible explanation is that technological change has eliminated the kinds of jobs that used to employ kids with a Year 10 education (the median level of achievement when I was young), and replaced them with jobs that need the skills (specific and general) of a university graduate.
There’s every reason to think that these trends will continue in the future, so we are going to need more education not less. In my view, just about everyone should undertake post-secondary education either at university or TAFE.
In this context, I shoud note that van Onselen is spot-on about the disaster area that is for-profit education, particularly in the vocational sector. As I’ve said before, the for-profit providers should either be shut down or turned into contract providers for the TAFE system.
The Turnbull government is apparently keen to undertake more reform, in this case applying to the welfare system. This weekend I saw a couple of media reports, unsourced but apparently based on material supplied by Social Services Minister Christian Porter, based on the “alarming” projection that welfare payments will rise from $154 billion to $270 billion in a decade, more than can be accounted for by inflation and population growth.
A huge dollar figure makes for a scary headline but not for sensible analysis. The prosaic facts underlying this projection are
(a) Welfare payments are dominated by the old age pension
(b) The value age pension increases in real terms over time, since it is linked to earnings
(c) Even allowing for an increased age of eligibility, and more reliance superannuation, the proportion of the population eligible for the old age pension is unlikely to fall
Put these facts together, and it’s virtually certain that the welfare bill will grow broadly in line with national income (usually measured by GDP), and therefore will outstrip growth in population and inflation. Indeed, a quick check suggests a compound rate of growth of about 6 per cent*, almost exactly in line with nominal GDP (assuming 3.5 per cent real growth and 2.5 per cent inflation).
The government’s proposed reforms appear to involve attacks on recipients of welfare in the popular media sense of the term (Jobstart, disability benefits and so on). But the only ways in which the growth rate of the welfare bill can be held much below that of GDP are
(i) Freeze the real value of age pensions, as has been done to Jobstart since the 1990s; or
(ii) Reduce access to the age pension, either by further raising the access age or by tigntening means and assets tests.
* Porter’s briefing apparently suggested 7 per cent, which I can’t replicate. Feel free to check.
Note I wrote two pieces in response to Piketty’s Capital . This one, on Australia, was based on one already published here, but I was asked to crosspost it and I’ve now done so.
Do we need a global tax to stop rising inequality (crosspost from Crooked Timber seminar on Piketty)
One of the more depressing features of Capital in the 21st Century is the air of inevitability attached to the much-discussed r > g inequality. This is exacerbated, on the whole, by the fact that Piketty’s proposed policy response, a progressive global tax on wealth, seems obviously utopian.
What about a much simpler alternative: increasing the rate of income tax applied to the very rich, and removing preferential treatment of capital income? Piketty’s own work with Saez yields the conclusion that the socially optimal top marginal rate of taxation, after taking account of incentive effects, would be 70 per cent or more. Such rates prevailed, at least nominally, in the mid-20th century, without obvious ill effects. Again, Piketty provides the relevant evidence.
So, is there something about a globalised world economy that renders a return to high marginal rates of taxation impossible?
NATSEM recently released modelling showing that discretionary tax cuts have more than offset bracket creep since 2005 (that is, taxes are lower than if the income tax scales had been indexed to the CPI or a wage index). The Centre for Independent Studies replied with a study pointing out that you get the opposite conclusion by looking at the period since 2013. Why 2013?
We chose 2013 as the starting year because this is when the last change to tax thresholds occurred
Well, yes. If you pick a period in which there have been no discretionary tax cuts, you will certainly find that discretionary tax cuts have not outweighed bracket creep. As author Michael Potter observes
This shows the importance of the starting year.
There’s no need to check the CIS numbers: given the setup, only one answer is possible.
Correction Michael Potter advises that the CIS study includes the impact of the tax changes in 2012-13, making it possible in principle that these could have offset bracket creep. But the 2012-13 changes weren’t a general tax cut aimed at offsetting bracket creep. They offered small tax cuts for low income earners to offset the very modest impact of the carbon price/tax. These were clawed back by higher marginal rates so that upper income earners (appropriately) bore the full cost of the carbon price. The key point, stated below, is that the Howard-Rudd tax cuts introduced after the 2007 election were so large that they have more than cancelled out all the subsequent bracket creep.