On the topic of transatlantic language differences, I was quite surprised to see this headline in the Washington Post. And I thought Australians took sport too seriously.
Category: Economic policy
Spot the arithmetic error
This story in the Oz reports a decline in the return to education, but the argument is undermined by a problem with averages. Here are the crucial bits
THE gap in earnings between university graduates and people without a degree is closing, as the cost of getting a degree escalates.
…
While the proportion of the labour force aged 15 to 64 with a degree had almost doubled since 1993, the salary gap was closing against average earnings, he [Michael Gallagher] said.The ratio of earnings for bachelor degree graduates to average earnings has fallen for both men and women but is more pronounced for women.
For example, between 1995 and 2001 it fell from 105.4 per cent to 93.9 per cent for women and from 96.8 per cent to 91.9 per cent for men.
Readers should not need a university degree to see the problem with this analysis, but I’ll spell it out over the page
Update Andrew Norton at Catallaxy has already made the same point
Read More »
A snippet on the Charter of Budget Honesty
At a tactical political level one important issue arises from the provisions of Clause 29 of the “Charter of Budget Honesty”, under which either party may request costings of their election programs from the Departments of Finance and Treasury. Obviously Labor will come under pressure to seek such a costing, pressure to which Kim Beazley succumbed last time around.
Although it’s hard to predict the politics in advance, Labor would probably be better advised to get an independent costing from a consultancy like Access Economics[1] before issuing its policies. Government pressure to submit policies to Treasury and Finance could be the occasion for an attack on the politicisation of the Public Service.
fn1. Just after I wrote this, I read an interesting story in the Fin, regarding large-scale illegal downloading of information from the computers at Access, much of it allegedly ending up in the hands of rival consulting outfit ACIL. An apparent target of the exercise was to determine whether Access was costing Labor’s promises, and, if so, to get hold of the costings. (Thanks to reader John Warburton for alerting me to this).
Where’s the money coming from ?
The classic problem facing an opposition is that of funding its promises. In most election campaigns, the government has first move by virtue of its capacity to bring down a pre-election budget. The government can snaffle appealing Opposition policies, while leaving little in the way of a Budget surplus to fund any new promises from the other side.
Here are some suggestions as to how Labor could answer the question “Where’s the money coming from”, and fund up to $10 billion in tax cuts and new expenditure
Read More »
Productivity takes a breather
That’s the headline the Fin gave to an Op-Ed piece by Dean Parham today. This is, as far as I know the first acknowledgement from official sources of the productivity growth slowdown of the last four or five years. It’s significant because Parham is the most prominent advocate of the hypothesis that microeconomic reform has generated a new economy.
Read More »
Children are the future*
Turning from the short-term politics of the budget, what does it do for Australia’s long-run future? At least one commentator has raised this question, and I’ve been asked in other contexts, so it’s probably time to organise my thoughts.
Most of the discussion of long-term issues has been framed by the Treasury Reports on Intergenerational Equity, which have not been very satisfactory. They’ve done their analysis primarily in terms of the “aging of the population”, which leads to a focus on retirement incomes and nursing homes. The retirement income problem is much overblown, as many analysts have pointed out. Health care is an issue but, as I’ll argue in a later post, thinking about it in terms of an aging population is highly misleading.
More importantly, this way of looking at the problem leads Treasury to ignore education almost entirely[1]. After all, if you’re thinking in terms of an aging population, it’s natural to ignore kids. But in reality the demographic change we’re looking at includes not only an increase in the length of lifetime but an extension of the initial period in which education is the main activity. Statistics on “working-age population” typically look at people aged 15-65. But in the current economy, the age at which people typically begin their first “real” job (as opposed to part-time jobs in conjunction with school or uni) is now in the early 20s. A substantial increase in education, along with a need for steadily higher standards, is going to cost a lot of money.
Read More »
Too clever by half ?
That’s my view of Costello in general[1]. And I think it may be true of the election budget he brought down on Tuesday night. The tight targeting of large lumps of cash was fairly transparent, and made it easy for Labor to get coverage for the converse observation, that lots of people, and crucial government services got nothing. The Courier-Mail is about as negative as I’ve ever seen in the immediate wake of a budget, running photo stories on a low-income student who gets nothing, and a mother-of-two who says the whole thing is a “vote-buying exercise”. The Oz has a series of negative stories.
Howard actually gets a better run in the Fairfax press, with both the SMH and the Fin running on a blunder made by Latham, who mistakenly said he wouldn’t benefit from the Budget (as a high-income earner he gets a tax cut). But this is the kind of story, beloved by journalists, that leaves the general public cold. The only time this kind of thing has any impact is when the person concerned is already on the ropes.
It’s now up to Latham to make a convincing response. He doesn’t need to present an alternative Budget but he does not some concrete alternatives. A good starting point would be promising to wind back the tax cuts for the top 20 per cent of income-earners, in order to fund an across-the-board reduction. I’m pleased to see that this is still on the table.
Update
Latham’s reply seems to me to have hit most of the right points.
More significantly, perhaps the Channel 9 news ran a story on Labor’s promise to fund pneumococcal vaccine, which had the government playing catch-up. This news story isn’t nearly as damaging as the version I saw on TV. but the government is faced with a nasty choice here. I can’t recall an instance where a Budget decision has been changed, during Budget week and in response to Opposition pressure, but that’s what looks like happening. The fact that Costello rolled Abbott (who lobbied for the vaccine funding) in the Budget process only makes the whole thing more piquant.
fn1. I’m sure quite a few people would have the same view of me. But if it takes one to know one, this only strengthens my assessment of Costello.
The Budget Part II
I’ve now had a chance to look at Budget Paper 2, and I think it might be more accurate to replace the observation “Nothing much for education, and nothing at all for health” with “Nothing or less than nothing for most areas of education and health”.
The Budget Papers have literally dozens of descriptions of “measures” in which the expenditure item is either a row of dashes (the government has left the program alone) or a row of negatives (the program hasn’t been abolished, but expenditure has been cut).
Now, there may well be areas of spending which ought to be cut. But a search of the Budget speech reveals only seven occurrences of the word “cut”. Five refer to tax cuts, one to income cut-offs for eligibility for Family Tax Benefit and one to not “cutting and running” in Iraq. There’s no hint of any cuts on the expenditure side.
Tax fallacies from Peter Saunders
While I’m on the topic of tax and public expenditure, this is a good opportunity to refute some spurious claims made by Peter Saunders of the CIS in a piece in the Oz recently. This isn’t too hard, since the claims have been made quite a few times before, and I’ve refuted them quite a few times previously, a task that becomes a bit frustrating after a while.
First, Saunders says
The top tax bracket was worth 15 times average earnings in 1960; nine times average earnings in 1970; three times average earnings in 1980; but is just 1.3 times average earnings today.
As I pointed out in my 1998 book Taxing Times
The tax reforms of the 1980s abolished the old top tax bracket, for which a marginal tax rate of 60 per cent was applied. An inevitable effect was that the former second-highest rate now became the top rate, even though it was lowered from 49 per cent to 47 per cent. Hence, even though taxes on high and middle incomes have been cut, the top marginal rate is now reached at a lower income, expressed as a proportion of average weekly earnings.
Even sillier comparisons are made with the tax system applicable in the 1950s. For example the Treasurer, Mr. Costello argues for reform on the basis that, in the 1950s, only people with incomes equal to 19 times average earnings paid the top marginal rate of taxation, whereas today people with incomes equal to one and half times average earnings pay the top rate. The ratio of tax revenue to GDP has, of course, risen since the 1950s, in Australia as in every other developed country. But the dominant effect arises from reductions in the progressivity of the income tax system. The current income tax system contrasts dramatically with that of the 1950s which had 29 brackets and a top rate of 67 per cent. Obviously in a system with so many brackets, very few people will have in incomes in the highest bracket.
The Parliamentary Library has a useful article on this topic, which shows how the increase in proportions paying the top rate was mainly driven by the reduction in the number of brackets. More detailed info is available from NATSEM (PDF file). Combining this with AWE data, I estimate that the 47 per cent rate applied at around 1.2 times Average Weekly Earnings in 1974 and about 1.4 times average weekly earnings in 1984, scarcely any different from today.
The main difference was in the very high rates applying to high incomes (the real target of Saunders’ concern, I suspect). The top rate in 1974 was 67 per cent, and it did not apply until income reached 40 000 per year, 5 times the threshold for the 48 per cent rate. Upper-income earners were taxed much more heavily in the past than they are today (though of course it’s necessary to take account of avoidance and evasion when considering actual rates of tax).
Second Saunders compares rates between countries saying
Not only does our top rate cut in too low – the rate itself (48.5 per cent including the Medicare levy) is much too high. In Britain it is only 40 per cent; in Germany it is 45 per cent (and coming down).
But this ignores the impact of payroll taxes and social security contributions. Australia has low payroll taxes and no separate contribution to social security[1]. By contrast, in most of the other countries mentioned by Saunders, these taxes are large. In Germany, for example The employer and employee each make a contribution of 21% (2004)This point has been made so often it’s hard to believe that Saunders is unaware of it.
fn1. It’s also necessary to take account of compulsory superannuation contributions in Australia. But unlike social security schemes in other countries, this is pure forced saving – there is no pooling of contributions in the accumulation schemes that are now standard (except for politicians). So although there’s compulsion used here, it should not be regarded as taxation.
The Budget: The good, the bad and the ugly
I’ve just watched the Budget speech, and seen the immediate wrapups, but haven’t yet had time to read the Budget Papers (late night ahead, as I have to go on Life Matters tomorrow to discuss it). Here’s my instant reaction in three categories
h5. The Good
* Howard’s attempt to reinstate the cultural dominance of the single-income family has been dumped, with lots of assistance for families following the model preferred by most Australian households with dependent children, that if one full-time and one part-time job.
* The baby bonus has been dumped, and Labor’s idea for a replacement stolen.
h5. The Bad
* Nothing much for education, and nothing at all for health. Costello spent the entire health section of the speech on two initiatives that would barely get coverage if they were issued as a press release by the Minister for Health, one on equipment costs for people managing diabetes and the other on a cochlear implant for which there are currently 130 people on the waiting list. Of course, if you’re one of the people affected, this will be welcome use, but for the other 19.9 million of us, there’s nothing here. In particular, the obviously unsatisfactory measures taken so far to arrest the decline of Medicare were touted as if they were the answer to the problem
* Regressive changes to the tax scales, with significant benefits for those on high incomes and nothing for anyone below $50 000. The large segment of the population on below-average incomes, but without dependent children or ineligible for family tax benefit gets nothing at all from the Budget except another round of bracket creep.
h5. The Ugly
* Resort to vote-buying lump-sum handouts on a scale I can’t previously recall. Obviously this is a reaction to last year’s “sandwich and milkshake”, but it’s very dangerous stuff. The Fistful of Dollars rides again.
* The announcement in the 2004-05 Budget of a raid on the 2003-04 Budget, to finance the first instalment of the handouts mentioned above. As far as I know, this is absolutely unprecedented. Since the amount raided is almost exactly equal to the projected surplus for 2004-05, it would be more accurate to describe the Budget as being in balance rather than in surplus.
John Quiggin 