Most of the discussion of the Abbott government’s recently announced revenue raising measure has focused on semantics: is there a meaningful difference between a levy and a tax, has the government broken its promises and so on. All of this is boringly predictable. The last government to treat its election promises as binding obligations was Whitlam’s. Perhaps Rudd would have kept his promises if it weren’t for the GFC (I don’t think he broke many before that), but with that exception we’ve got used to the various theatrical devices associated with ditching promises: Black Holes, debt crises, Commissions of Audit and so on. The reaction of Bill Shorten and the Labor Opposition is equally predictable. The job of the Opposition is to oppose, and in particular to excoriate the government for breaking any promise, no matter how ill advised.

On the other hand, I’m disappointed that the Greens have taken the same line. Their job, in my view, is to use their leverage to promote sustainable social democratic policies, and to oppose regressive market liberal and environmentally destructive policies, regardless of source. So, for example, they were sensible to wave through Hockey’s abolition of the debt ceiling, even though it involved breaking a silly promise. They can’t stop the government breaking lots of promises on the expenditure side, so they should try and achieve balance by supporting sensible proposals to raise additional revenue.

The case in favor of an increase in taxes for higher income earners[1] is obvious. The big cuts promised by Howard in the leadup to the 2007 election, and largely matched by Rudd were unaffordable at the time and became even more so when the GFC led to slower growth in real and nominal incomes and therefore to less of the bracket creep that normally pays for such cuts. Along with Costello’s massive handouts to “self-funded” (but publicly subsidised) retirees the previous year, these cuts are the main reason it has been so hard to achieve a return to surplus after the GFC stimulus was wound back under the Labor government.

So, it makes sense to increase the rate, and to keep it high until bracket creep finally works its magic and restores the revenue raising capacity of the income tax to something like its pre-2007 level. I haven’t done the numbers but it seems as if four more years ought to do it. So, a temporary increase that can be called a levy makes sense. And, if everything else is held constant, an increase in revenue translates one-for-one into a reduction in debt.

Summing up, if Abbott wants to increase income tax on high earners, I’ll support him. And, if he wants to call this policy a “debt reduction levy”, I don’t have a problem with that.

fn1. Doubtless, we’ll get objections that taxpayers on $80 000 a year aren’t really high income earners, although the median wage for full time workers is around $60 000. But the extra tax payable by someone on $80 000 is precisely zero: the levy is only payable on income in excess of that level. Even at $180k, the levy is only $2000/year or about $40/week – a small fraction of the discretionary spending of most people earning this kind of income.

Only a few weeks until Budget Day and Joe Hockey is sitting on, or rather, selectively leaking the report of the so-called Commission of Audit. As promised, I’ve written a review in advance, which I presented to a Senate Committee a couple of weeks ago. It will be interesting to see what, if anything, needs changing when the actual report is released.

Ross Gittins has a piece, drawing on research by Jeff Borland of the University of Melbourne, in which he presents a “glass half-full” view of the Australian manufacturing sector. He makes some good points, but the overall picture is misleading.

It’s true that, on standard statistical definitions of the manufacturing sector, there’s still a fair bit of employment and output, though both have declined in recent years and will almost certainly continue to do so, given the recent closure announcements. But what’s left of manufacturing looks very different from the mental image the word ‘manufacturing’ produces, at least for me: a large factory, with hundreds of manual workers producing complex industrial products (consumer goods, motor vehicles, industrial equipment and the like).

A closer look at Borland’s data reveals the following:

* Within manufacturing, the main growth area is food processing typified by the production of meat, bread, milk and wine. More traditionally manufacturing-oriented parts of the sector like canning fruit are in decline as we saw recently with the near-closure of SPC.

* As regards employment, the share of managerial and professional staff is expanding, while that of laborers and machinery operators, the kind of jobs we would typically think of as ‘factory work’, is falling. [1]

On the latter point, Borland shows that laborers and machinery operators now represent 30 per cent of a manufacturing workforce of 955 000, implying around 285 000 jobs in total, around 2.5 per cent of all employment. By contrast, in 2011, there were 290 000 schoolteachers in Australia.

To sum up, manufacturing in the traditional senses of the term, is no longer a significant part of the Australian economy. This has a number of implications.

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The LNP government in Queensland is launching a massive and expensive campaign to persuade voters to accept the sale of publicly owned assets. This follows an earlier campaign by the Bligh-Fraser Labor government (remember how well that worked out!) and looks likely to make the same claims, with the additional (self-contradictory) claim that the Labor government, whose policies the LNP is now adopting, drove the state to dangerous levels of debt. In particular, the LNP campaign repeats the central error of Labor’s, namely the claim that selling assets provides a way to fund public expenditure without taxation.

Technology moves own. Whereas Labor gave us a printed pamphlet (reproduced on the web), the LNP offers an interactive website where we can make our own choices. This would in principle, be quite a useful contribution to public debate. If it were available generally, it would be possible for voters to weigh up various proposed initiatives, and assess whether new public services are worth the revenue measures that would be required to fund them.

Unfortunately, but unsurprisingly, this version is rigged. The website claims that it is necessary to reduce gross public debt by $25-30 billion and offers three ways to do so: raising taxes, cutting spending or selling assets. The more we do of one, the less we have to do of the others. I assume (and will check later) that the amounts listed for the tax and spending measures are derived from the forward estimates (four years). By contrast, the asset sales are a once-off measure.

The real dishonesty in the setup comes at the end. If we do want the government wants and agree to all the proposed asset sales, the estimated proceeds are $34 billion. The reward is a $1.7 billion saving in interest, which we are then invited to spend on desirable things.

There’s just one problem. The calculation has omitted the fact that, if we don’t own public enterprises any more, we forgo their earnings. Fortunately, there’s a relatively easy fix. The 2013-14 Budget Paper 2 has a section devoted to public non-financial corporations. The total Earnings Before Interest and Tax of these enterprises was $3.7 billion. Of this sum, $1.2 billion was paid to the state in dividends, about $500 million in tax-equivalent payments (state-owned enterprises aren’t subject to company tax, but make these payments in the interests of competitive neutrality) and the rest was either paid in interest on debt or retained to finance future investment.

How much will the public lose from the asset sales?. Most obviously, we will lose the dividends, which virtually wipe out the proposed interest savings. The tax equivalent payments are a loss to us as Queensland citizens, but (assuming the private owners pay similar rates of tax, which is not guaranteed) are offset by a corresponding benefit to the Commonwealth. And the debt calculation almost certainly includes the debt held by these enterprise, so part of interest we save is has already been covered by their earnings which will no longer be available. Finally, retained earnings contribute to future growth and are a real loss when an asset is sold.

So, if we sold everything, we would forgo $3.7 billion in income, far more than the $1.7 billion the government suggests we can gain. However, a close reading of the options indicates that the proposal isn’t for a complete sale. Electricity transmission and distribution assets are going to be retained, with some form of private participation. This is supposed to save $28 billion, whereas an outright sale would fetch more,

Still, an honest presentation of the proposal would have the asset sale yielding a net loss of up to $2 billion. Like its predecessor the LNP proposes to cash in the proceeds of privatisation and ignore the loss of revenue it entails

Just about every incoming conservative government since the 1980s has instituted a Commission of Audit report on taking office. These Commissions are pieces of political theatre rather than serious attempts to examine the whole of the government’s operations – given a small secretariat and a short period in which to work, it could hardly be otherwise. The conclusions are entirely predictable: the outgoing Labor government left a financial disaster; drastic action is needed, mostly consisting of measures the new government has always favored but which it chose not to mention (or to disavow explicitly) during the election campaign; there will be pain, but we will all be better off in the long run

What’s less predictable is the use that the government makes of the report. In general, this depends on the polls. If the government is riding high, the report is released in a blaze of publicity and the new government’s first budget contains deep cuts. The idea is that an expenditure of political capital early makes room for sweeteners in the leadup to the next election. On the other hand, if things are already going badly (eg the Baillieu government in Victoria) the report may be suppressed altogether. The middle path is to keep the report under wraps until close to Budget day, when the choices about how to respond have to be made in any case.

That’s the way the Abbott government has gone. The Audit Commission finished its interim report (usually the most important one) in February and its final report in March, but neither has seen the light of day.

So, I’m preparing a ‘review’ of the report based on a combination of past precedent and the leaks emanating from the Treasurer’s office. It’s surprisingly easy, and it struck me that I could enhance my productivity by turning the review into a template which could then be used for generations to come. Just plug in the names of the new PM and Treasurer, the LNP credentials of the Commissioners, the number of billions in the shock-horror headline number and so on. The section on policy recommendations would be easiest of all. Just start with the standard list of 1980s micro=reform and fiscal policy agenda items (along with my standard rebuttal), then delete those already implemented, add back any that have been repealed, and voila, the job would be done. It seems as if this could all be done in MS Word, but maybe a report generator is what I need. Would anyone care to help me with the tech aspects?

I tend to be a little bit behind on buzzwords, but suddenly I’m hearing this one all the time. The politically toxic idea of privatising public assets is being repackaged as ‘recycling’. The idea is that the public sells one asset, and uses it to buy another.

There is one version of this idea that is, at least arguably, sensible. Suppose the public sector has a greater capacity to bear the demand risk associated with some kinds of projects (for example, ports) and that this risk is greatest in the early years of operation, after which revenue streams become predictable. Suppose also that the public sector wants to keep its gearing ratio (debt to assets) low for one reason or another. Then it would make sense to undertake development in the following sequence. The government decides a new port is needed and contracts for its construction on a fixed price basis (with rewards and penalties for early or late completion). When the port is built, it is operated as a government business enterprise until the demand risk settles down. Then it is sold and the proceeds are used to build a new port, or some other piece of income-generating infrastructure. So, at any given time, construction companies are bearing construction risk, the government is bearing demand risk and the private sector owns and operates various ‘mature’ assets. This process of recycling can, in principle, be carried on indefinitely

There are arguments for and against this kind of recycling, but they are irrelevant to the proposals actually on the table, which involve selling income generating assets and notionally allocating the proceeds to projects that generate no income. For example, according to Warren Truss, the NSW government

have sold the Port of Botany and they have raised a lot of money from that which is now being put into road systems. They’re interested in selling the Port of Newcastle and that is be used to revitalise the central city of Newcastle.

It seems highly unlikely that the road systems can be recycled to fund new investment, let alone a revitalised central city. This isn’t recycling in the proper sense of a sustainable process – it’s melting down your tools for scrap, and using the money to pay the rent.

Recycling’ public assets is a one-way trip to the fiscal scrapyard

I’ll be on Radio National Bush Telegraph this Friday, talking about the proposals for massive tax expenditures on a “Northern Economic Zone” being pushed by Gina Rinehart, her lobby group Australians for Northern Development (ANDEV) and the Institute of Public Affairs, now heavily reliant on funding from wealthy individuals of whom Rinehart, directly and via ANDEV is the most prominent.

Back in 2000, the IPA was describing the Alice Springs to Darwin rail link, a heavily subsidised Public Private Partnership, as “the modern equivalent of the stupendously wasteful Ord River irrigation scheme“. This was one of the rare occasions on which I agreed with the IPA.

And it has historically been critical of deductions, rebates and other tax expenditures, correctly describing them as a disguised form of public spending
. Again I agree. It’s very rare to find a tax subsidy that achieves a public policy goal more cost-effectively than direct spending.

Having been exposed to Ms Rinehart’s persuasive mode of argument, the IPA has changed its tune, and plays a melody sweeter to her ears. It’s now fully on board with dams, tax subsidies to promote Northern development, and even special visa conditions on migrants, a policy that ought to be repugnant to libertarians of all kinds.

I’ll be interested to see how the IPA reconciles its former free-market line with its current position as advocate for yet more subsidies for someone who is arguably the world’s greatest welfare queen.