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tag:blogger.com,1999:blog-86970131870771425072016-07-24T03:20:33.562+10:00ROSS GITTINSECONOMICS EDITOR, SYDNEY MORNING firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-76484157692502243452016-07-16T08:27:00.000+10:002016-07-16T08:27:35.522+10:00Government outsourcing has many pitfallsLabor's Mediscare will have a benefit if it causes our politicians to think twice before they resort to "outsourcing" or "contracting out" the provision of government services, a practice that's led to a string of disasters.

The pretext for Labor's claim that the Coalition was planning to "privatise" Medicare was the Turnbull government's intention to save a little money by shifting the processing of Medicare's many bank transfers from its giant cheque-writing agency, the Department of Human Services, to a private provider.

We wouldn't even have noticed this back-office switch, but Malcolm Turnbull felt obliged to swear the proposal would be abandoned.

This probably means he'll also have to give up any thought of outsourcing all the many other, pension, allowance and benefit payments the department makes.

One reason for doing so was that the department's computer system is old and clunky and needing to be replaced – a prospect that always seems to frighten governments, especially those trying to keep their budget deficit low by postponing needed asset replacement.

Since polls show the public is strongly opposed to all privatisation, it's not hard to imagine most voters wouldn't like the sound of outsourcing.

But if this realisation comes as a surprise to the Coalition, it may also be a caution to Labor, which over the years has also engaged in much outsourcing.

Much of it has gone on, at state and federal level. When a woman rang me the other day to do a government security check on someone I'd worked with, I was surprised to hear she worked, not for ASIO, but for a Canberra company called Key Vetting Services.

In principle, it's very simple. You call for tenders and if a private outfit can do the job more cheaply than your public servants can, you give it the job.

In practice, it's never simple. For a start, you can't be sure that what we're assured is saving the taxpayer money really is, once you measure it properly.

For instance, one of the ways federal and state governments seek to retain their AAA credit ratings is by using "public/private partnership" agreements to have the borrowing for motorways and other big projects done by some private enterprise. This way, the debt appears on its balance sheet rather than the government's.

Small problem: hiding the government's debt in this way ends up being far more costly to taxpayers. The oh-so-holy credit rating agencies turn a blind eye.

Federal and state departments spend a fortune each year on private sector consultancies. It's possible this saves money.

But it's also possible it was done to get around some directive to reduce staff numbers and is actually more expensive. Or maybe they got rid of people they later realised they couldn't do without, and had to pay top dollar to get 'em back.

Another dubious scheme is the sale and lease-back of government offices. The budget deficit takes a big dip in the year you sell the office off, but is worsened in subsequent years by the big rents you now pay.

These schemes are notorious for the outrageously good deals used to entice private sector players to take up the properties and rent them back.

A related version of outsourcing follows the notion that the provision of government services should be made "contestable". Services normally provided by government agencies or by non-profit community groups are opened up to for-profit providers.

Successive governments have done this with Job Services Australia, childcare centres and vocational education and training. The pink batts scheme was left entirely to for-profit providers.

With childcare, the government let one aggressive provider, ABC Learning, take over more than half the nation's centres before collapsing, at great inconvenience to parents and expense to taxpayers.

The disaster from the outsourcing of VET – again, federal and state – is still being cleaned up. The loss of future trained workers may hurt the economy for years.

Many people assume the private sector will always do things more efficiently – or less inefficiently – than those tea-drinking public servants.

Maybe. The private sector has a big advantage over the public sector: it has just one objective, to make a buck.

But what those who think this way often forget is that private sector tenderers have to undercut the public service's price and make room for their profit, which they hope to make as big as possible.

Often they do this by cutting corners on the quality of the service they deliver. Leave a loophole in your contract and they'll jump right through.

The public sector's big disadvantage is also its big advantage: it always has a range of objectives, imposed on it by politicians who know that voters will hold them responsible should the service prove really bad.

And here's a point you won't find in any textbook, but all the stuff-ups of recent years should have woken us up to: when you give businesses access to the government's coffers, a surprisingly high proportion of them lose all sense and start acting like robbers in Aladdin's cave.

Witness: all the unsafe behaviour by outfits trying to make a killing in the pink-batt boom; all the operators using inducements to sign up students for unsuitable courses, the costs of which were borrowed from the government; all the operators using the lure of permanent residence to rip off foreign students with phoney courses.

I also suspect that, for the Coalition, there's an additional, political motive: outsourcing some government service shifts economic activity to private enterprise, the part of the economy whose interests the Coalition champions, and to the people who are your friends and donors.

If so, why does outsourcing also need to save the taxpayer money?

The Turnbull government's intention to implement the Harper competition report's proposal for greater contestability in the delivery of "human services" is now likely to be approached with caution. No bad thing.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-84224341359231188852016-07-13T10:36:00.000+10:002016-07-13T10:36:42.269+10:00Election result need not be a setback for good governmentMaybe those who complain about a boring election campaign are condemned to an exciting election finish. Many in the establishment – particularly the business establishment – have convinced themselves the country is off to hell in a handcart, but it doesn't have to be like that.

The nation won't be ungovernable provided Malcolm Turnbull is willing to negotiate with the minor parties when necessary – hardly a new experience for governments, which rarely have a majority in the Senate.

Nor does it follow that the government will be unable to hasten the budget's return to surplus.

As a study by the Australia Institute has demonstrated, much of this year's budget can be legislated, particularly with a little compromise.

In any case, the budget is not the economy. And, contrary to any casual impression you may have absorbed, the prospects for the economy remain reasonable.

Brexit is bad news for the Brits, and adds to Europe's many problems, but it's not big enough to greatly affect the rest of us. The US economy is gathering speed.

The messy election result won't have much effect on the economy. Business loves whingeing about "uncertainty" – when it's got nothing else to do or say, that's what it does – but the period of transition from the mining investment boom is getting towards its end and, as it does, the rest of business will be getting on with it.

The economy has been growing at a rate that's about average, and the best guess is it will continue doing so. It has been creating additional jobs and this should continue.

For all that, however, there are messages for politicians on both sides from this election. How well they listen will determine how well we are governed over the next three years.

(Don't fall for the one about how we'll be back to the polls in no time. The more-excitable always say that at times like this.)

The first message comes from the continuing decline in people voting for the major parties. The proportion of voters giving their first preference to a minor party reached almost one in four.

This is not surprising when you remember how standards of conduct have fallen: the broken promises, the scare campaigns, the negativity and automatic opposition to whatever the other side says, the statements that are true in some sense but have been crafted to mislead.

The plain fact is that the mainstream politicians have forfeited our trust and lost our respect.

Many of us have concluded they're all liars, and we tune out whenever they start slagging each other off, or arguing about who has the bigger hole in their costings. They could save themselves much energy if they learnt not to bother doing this.

The message for the government is that it must broaden its appeal if it wants to attract a comfortable majority of two-party-preferred vote.

Any lapse into infighting between Abbott and Turnbull supporters will be the final proof the Coalition is no different from Labor.

The Coalition campaigned on its plan for jobs and growth (which boiled down to a cut in the rate of company tax), while Labor campaigned on the public's worries about cuts to government spending on education and health.

Labor's success in this argument explains why it did so much better than expected.

The Coalition suffered from the lingering resentment and suspicion provoked by Tony Abbott's first budget, which attempted to fix the deficit almost solely through cuts to the spending on health, education and welfare depended on by low and middle income-earners, while protecting the earnings of businesses supplying services to government and the tax breaks enjoyed particularly by high income-earners.

Many of those measures were abandoned, though some remain "zombie measures", rejected by the Senate but still on the government's books.

The memory of that deal-breaker budget was kept alive by Scott Morrison's insistence that the budget had a spending problem, not a revenue problem. (Surely Turnbull will use this opportunity to find Morrison "a job to which you're better suited".)

The message for the Coalition is obvious: it must switch to budgeting for all Australians. That means tax increases as well as spending changes that seek genuine efficiencies in contracting with business suppliers (drug companies, for instance), not just cost-shifting to the public.

The message for Labor is that its strategy of not being as obstructionist towards the government as Abbott in opposition was towards it, and of making itself a big target in the election by proposing "positive policies" (such as limiting negative gearing), worked well.

So now is not the time to revert to Abbott-like spoiler behaviour – if I wreck the joint they'll have to give up and hand over to me.

When they combine, the two sides can get anything through the Senate. Labor can win itself voter respect for being sane and sensible without bowing to the government's every wish.

It can help with the compromises. And when the government's fighting the good fight against powerful interests (such as the two big pathology companies, and the Coalition greedies making spurious claims about retrospective super changes) it can resist the unworthy temptation to take advantage of it.

With Labor now hopeful of winning next time, any budget nasty it helps the government fix now will be a problem it won't have to fix then.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-15878673713357943022016-07-11T11:02:00.000+10:002016-07-11T11:02:29.732+10:00Oh no, not a credit rating downgrade Sorry, but I've put Standard and Poor's and the two other big American credit rating agencies on a negative watch.

For me, the rating agencies' involvement in the global financial crisis has destroyed their credibility forever. I can no longer take their solemn pronouncements seriously, nor hear them with the reverence or contrition they imagine themselves entitled to.

The rating agencies were one of the private sector institutions charged with upholding standards of behaviour in America's financial markets, putting investors' interests ahead of their clients' and their own.

They were supposed to be a bastion against crisis and collapse, but they betrayed their trust.

The way their system works is that institutions wishing to borrow money by issuing bonds or other securities have to pay rating agencies to give those securities a rating of their credit worthiness.

The agencies' job pre-crisis was to be the hard-headed wise men who could see through the smoke and mirrors created by "innovators" on the make. They failed.

While everyone else in Wall Street was making money hand over fist, they didn't resist the temptation to get in for their cut.

They obliged their paying customers by awarding AAA credit ratings to securities subsequently exposed as "toxic debt".

In the process, they exposed the obvious conflict of interest involved in the common practice of governments attempting to protect the interests of investors and others by requiring businesses to buy "independent" certification from other businesses.

To an extent, governments around the world give the rating agencies a captive market by requiring certain organisations to hold only those securities certified as AAA.

This was how some Australian local councils got sucked into America's toxic debt crisis.

Trouble is, with this monumental blot on their record, we can no longer be sure what game the ratings agencies are playing and in whose interests they act.

In the case of government ("sovereign") borrowers, the agencies take it upon themselves to issue ratings. They then have the temerity to present the government with a bill for their services, though no self-respecting treasury pays up.

They seem to be pretty tough on government borrowers, though the lines they draw between safe and unsafe levels of debt seem pretty arbitrary.

What I wonder is if they have higher and holier standards for government than they have for their private sector fellows.

Why not? Everyone in business (and a lot of people in treasuries) know that governments, because their actions are not the product of market forces, are therefore non-rational and prone to being either mad or bad.

The agencies want us to believe their deliberations are highly scientific and sophisticated, applied consistently across the world.

But it's open to doubt how true that is.

After all, many of us believed the line that the whole towering edifice of ever-multiplying derivatives and synthetics built up before the financial crisis was the product of amazing advances in statistics and the science of finance, which had rendered us far smarter than we used to be at "managing risk".

When it comes to signalling changes in the riskiness of particular borrowers, the agencies purport to be the leaders: their vigilance causes them to be the first to see the problems looming, with the market following their lead.

But it's common for the market to turn against some borrower, leaving the agencies scrambling to adjust their ratings to fit. Are they just purveyors of conventional wisdom?

Whenever a downgrading of one of our governments is threatened, the media unfailingly assure us this would be a bad thing because the government would have to pay higher interest on its debt.

If this is still true, it's much less so than it used to be. And if there is still a premium to be paid, it's smaller than it's made to sound.

The rating agencies' loss of authority since the financial crisis is evident.

When, in 2011, in a rush of blood to the head – or maybe a touch of the megs – Standard and Poor's announced it had cut the US Government's credit rating to AA+, the other two did not follow suit and the market took not a blind bit of notice.

The yield (interest rate) on US Treasury bonds continued falling. Moral: don't try to get smart with the world's reserve currency.

But something similar happened when the three agencies downgraded Britain to AA- in the wake of the Brexit vote. Yields on British bonds have since fallen, along with those of other "sovereigns", including us.

Sometimes there are forces more powerful than a bunch of for-profit rating agencies.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-73196066091127927662016-07-09T06:06:00.000+10:002016-07-09T06:06:17.782+10:00Workforce participation a key for Turnbull's new planNow it's likely the Turnbull government will scrape back to office, what's next? What will it do to improve our economic prospects?

Malcolm Turnbull went to the election offering a "national plan for jobs and growth" that was supposed to secure our future.

Trouble is, it now looks unlikely he'll be able to implement the centrepiece of that plan, the phased reduction over 10 years of the rate of company tax, from 30 per cent to 25 per cent.

Unsurprisingly, the proposed cut in company tax did not impress the voters, who think companies are paying too little tax, not too much.

Labor opposed the cut, save for the immediate reduction to 27.5 per cent for genuinely small business.

With the government now facing an even more hostile Senate, it's unlikely Turnbull will get any more than that.

This would be no great loss in the quest for jobs and growth. The government's own modelling suggested the tax cut would do virtually nothing to create jobs, and the boost to growth in Australians' incomes would be tiny and come only after a decade or three.

But what about the other parts of Turnbull's "five-point plan"? It's a muddle of things that will be done, things already done and a point saying what the plan will achieve.

Point one is "an innovation and science program bringing Australian ideas to market". Already done; benefits likely to be modest.

Point two is "a new defence industry plan that will secure an advanced defence manufacturing industry in Australia". Or a highly protectionist and costly way of buying votes in South Australia, of debatable defence value.

Point three is "export trade deals that will generate more than 19,000 export opportunities". This refers to preferential trade deals already made with Japan, Korea and China.

As my colleague Peter Martin has demonstrated, this is one of the big lies of the campaign. Such trade deals usually add more to our imports than our exports (which, of itself, is no bad thing).

Point four is the company tax cut and point five is "a strong new economy with more than 200,000 jobs to be created in 2016-17". This is just Treasury's budget forecast for growth in employment. Few of those extra jobs would have been "created" by anything the government did.

Get it? The "plan for jobs and growth" is a (now-thwarted) plan to cut company tax, plus a lot of packaging. That is, Malcolm Turnbull has no plan.

And, as we've been reminded by noises coming from one of the credit rating agencies, nor does he have a plan to get the government's budget back to surplus anytime soon.

His projection of that happening in 2020-21 relies heavily on a host of forecasts and assumptions.

Many people conflate the need for action to get the budget back to surplus with the need for "reform" to hasten our rate of productivity improvement and economic growth.

The two are related, of course, but they're not the same thing and we should consider them separately.

Remember that whereas productivity improvement is what you could call a "positive" objective, leaving us clearly better off materially, fixing the budget is a "negative" objective – it would just reduce the risk of problems down the track.

Obviously the longer we take to get back to balance, the more our interest bill grows. If this arises from borrowing to cover recurrent spending at a time when the economy is back to growing at about its trend rate, this is a bad thing.

However, if the borrowing is needed to cover spending on infrastructure (as you discover is largely the case when you study the information buried on page 6.17 of the budget papers) this is no cause for concern – provided the money hasn't been spent wastefully.

The cost of any credit rating downgrade is overrated, but it is true that, if we've got the budget back to surplus by the time we're hit by the next recession, we'll feel freer to respond as we should: allowing the downturn to push us back into deficit and adding temporary stimulus spending on the top.

Getting the budget back to surplus will do nothing to create "jobs and growth". Indeed, if you go about it the wrong way, it could come at the expense of jobs and growth.

A lesser-known point is that improvements in our productivity performance do little to improve the budget balance.

That's because it does about as much to increase government spending (directly and indirectly) on public sector wages and wage-indexed welfare payments, as it does to increase economy-wide wages and profits and, hence, tax collections.

As he casts about for a real plan to implement in the coming term, Turnbull should remember the thing that does help both the budget and Jobson Grothe: increased participation in the workforce.

This truth was lost when Turnbull was led astray by the rent-seeking of the Liberals' generous big business supporters and their obsession with cutting their own taxes in the name of "reform".

So one obvious place for Turnbull to start is with women. The Abbott government made a good start with the reform of childcare subsidies, but this has been blocked in the Senate because of the insistence on linking it with a crazy attempt to save money on paid parental leave in a way that would discourage employers from offering paid leave at their own expense.

The government should ensure that lack of available childcare isn't limiting young mothers' participation and continuing progress in their careers.

It could do much more to reduce the amazingly high effective marginal tax rates that discourage "secondary earners" (aka married mothers) from moving from part-time to full-time.

And then it could take a more careful run at winning public support for raising the age pension age to 70. We can get on with a slow phase-in, or wait until it's unavoidable.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-11635751028038918362016-07-06T11:21:00.001+10:002016-07-06T11:21:49.288+10:00Who really wins from MediscareThe success of Labor's "Mediscare" in this election is worrying - but not for the reason you may imagine. Its greatest effect may be to fatten the incomes of medical specialists and corporate medical suppliers.

Scare campaigns are often effective politically, but they can impose a high price on the country's good government.

Tony Abbott's highly successful scare about depredations of the carbon tax at the last election has left us bereft of an effective and relatively low-cost means of reducing our greenhouse gas emissions at a time when climate change is worsening and we've been obliged by international pressure to agree to a tighter target.

Bill Shorten's claim that the Coalition is bent on privatising Medicare could leave us with politicians of all colours lacking the courage to do anything to restrain the rapid growth in federal and state spending on healthcare by insisting on greater efficiency and more realistic charges for medical services.

The people who work in the House with the Flag on Top take just a few days after an election to reach agreement on why the winners won and the losers lost.

Right or wrong, this conventional wisdom sticks in the minds of pollies on both sides for many years.

Should the politicians conclude that the wrath of voters will descend on any government caught making any change that could, by any stretch, be described as privatising Medicare, the people making excessive incomes out of healthcare will be laughing and the rest of us will be paying.

Labor's Mediscare was more subtle than Abbott's crude claims that the carbon tax would wipe out Whyalla and lift the price of a lamb roast to $100.

Its distortion and exaggeration was based on the meaning attached that emotive word "privatisation". We know from repeated polling that voters overwhelmingly disapprove of all privatisation.

The righteous indignation with which ministers condemned Labor's claim as "extraordinarily dishonest", an "absolute lie" and "some of the most systematic, well-funded lies ever peddled" rest on a narrow interpretation of the word.

Privatisation means taking a profitable government-owned business and selling it off to private interests. Since Medicare isn't a profitable business, the claim is absurd.

Labor, however, was using the word more broadly to mean any change that involves reducing the role of government and increasing the participation of private businesses.

Its pretext for making its claim was the Turnbull government's intention to save a little money by shifting the processing of Medicare's many bank transfers from its giant cheque-writing agency, the Department of Human Services, to a private provider.

We wouldn't even have noticed this back-office switch, but Malcolm Turnbull felt obliged to swear the proposal would be abandoned.

But the effectiveness of this scare - and the vehemence of the Coalition's denials - rests on its large element of truth.

Labor was relying on voters remembering Abbott's broken promise to leave Medicare untouched with his first budget's plan to impose a $7 co-payment on pathology tests and GP visits.

The outcry forced him to abandon that plan. In subsequent budgets, however, the government has sought to achieve savings by ending the extra bulk-billing incentives paid to providers of pathology tests and by continuing from 2014 until 2020 the freeze on increases on the schedule fees doctors receive under bulk-billing.

Here the doctors' union has been doing Labor's work by scaring their patients with claims this would force them to abandon bulk-billing and charge big co-payments.

This is untrue in the case of path tests (where the schedule fee far exceeds the costs incurred by the two big public companies that bulk-process three-quarters of our tests) and greatly exaggerated in the case of the continuing freeze on schedule fees.

But what does the public take the word Medicare to mean? I think we're mainly referring to bulk-billing and the federal grants for state government public hospitals, which are conditional on hospital services being free of direct charge.

The public loves bulk-billing because it provides the illusion of something for nothing. But the Coalition has decades of hostility to bulk-billing. The $7 co-payment was an attempt to break it down immediately and the continuing freeze on schedule fees will break it down slowly.

This was the element of truth in Mediscare. What's more, the Coalition still plans to press on with most of Abbott's cuts in grants for public hospitals of $57 billion over 10 years.

The public's attachment to bulk-billing may be irrational, but health economists have two rational reasons for wanting it to survive.

First, it adds to the overall efficiency of the healthcare system by reducing the amount doctors need to spend on billing and collecting money. This is why doctors' initial opposition to bulk-billing turned to support.

Second, because its continuation is so valuable to doctors, bulk-billing gives the government of the day the ability to limit the annual increase in GPs' and pathologists' fees - provided it doesn't push the doctors too far.

Ever-rising healthcare costs are the biggest single threat to combined federal and state budgets. There is scope for the removal of inefficiencies that do more to line medical pockets than benefit patients.

In every case, doctors will resist the removal of those inefficiencies by telling their patients it's an attack on Medicare, not the doctors' wallets. That's why the success of Mediscare is a worry.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-73768249342123938402016-07-04T10:22:00.001+10:002016-07-04T10:22:38.680+10:00Voters reject economics as usualAssuming the government scrapes back in, this surprisingly poor election result for the Coalition carries hard lessons for politicians and those who seek to influence the policies they pursue: business people, economists and econocrats.

In this election economic issues dominated, and those hard lessons are about economic management and economic reform: what voters will let you do and what they won't.

It was a fight between a "national plan for jobs and growth", and health and education. Guess what? Spending cuts lost more votes than tax increases did, or than tax cuts won.

The temptation to explain the Coalition's disappointing result in terms of personalities ("I've never liked Malcolm and now I have proof") and poor political tactics, shouldn't be allowed to obscure the lessons for economic policy.

There are two. First, the strategy of trying to fix the budget deficit solely on the spending side has been a dismal failure. Only a more balanced approach is likely to be politically acceptable.

The Coalition will do itself a disservice if it believes its own bulldust that it did so poorly purely because of the success of Labor's big lie about privatising Medicare. More on that another day.

The strategy of the Abbott government's first budget was to return the budget to surplus by cutting government spending while avoiding tax increases or cuts in tax concessions almost completely.

The public's reaction was so hostile Tony Abbott was rendered unre-electable. But, though few of those measures went through, Scott Morrison has persisted with the strategy by repeatedly claiming the budget has a spending problem, not a revenue problem.

Such a strategy involves fixing the budget at the expense of low and middle income-earners, while largely shielding high income-earners and business.

The political arithmetic of this was always what Sir Humphrey would call "courageous" and so it proved on Saturday.

Remember, the Turnbull government's plans still included huge cuts in grants to the states for public hospitals and schools, plus measures doctors claimed would force them to stop bulk-billing. Plus an unspecified future increase in university fees.

Many voters would also remember the enormous stuff-up of the attempt to privatise technical and further education.

On the other side of the budget, the Coalition has acted as though fixing the deficit by increasing taxes or cutting tax concessions was economic and political anathema.

This is nonsense - as the election shows. The government actually went to the election with plans to increase taxes, on tobacco and on multinational companies, which drew no criticism.

Its plan to cut superannuation tax concessions drew noisy criticism from a few people who would never have not voted Liberal.

Its heavy past – and future – reliance on bracket creep drew no criticism. Nor did Labor's plan to continue the temporary "budget repair" levy on high income-earners.

Point is, the Coalition's willingness to propose tax increases came only to help pay for its planned phase-down in the rate of company tax, not as part of its efforts to return the budget to surplus.

It lost votes for wanting to cut company tax, thus reducing any political benefit from its plan for jobs and growth. In any case, the cuts are now unlikely to get far in the Senate.

Message: we won't achieve much in fixing the budget until we're prepared to increase tax as well as cut spending and, in the process, share the burden more fairly between the top, middle and bottom.

The election result's second lesson is that, in our efforts to make "reforms" that increase economic efficiency and improve our productivity, we should stop gratifying rent-seeking by big business and start listening to other advice, including the majority of recently polled economists saying the long-run growth dividend from spending on education is greater than an equivalent amount spent on business tax cuts.

We should abandon the voter-rejected experiment with reform via tax changes and shift to productivity-enhancing reform of education, infrastructure and, would you believe, health (because health is one of our biggest and fastest growing industries, but quite inefficient).

If you think this conflicts with all I've just said about repairing the budget in ways voters will accept, it's clear we – and, more particularly, our pollies and their econocrat advisers – have a lot more thinking to do.

Lifting our productivity via education, infrastructure and health doesn't have to involve spending a lot more on them, and may well involve achieving slower rates of spending growth.

That's because it mainly involves making spending in these areas more efficient and effective. That is, genuine reform, not just the mere cost-shifting we tried – and voters have rejected.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-38372387562892916602016-07-02T17:55:00.000+10:002016-07-02T17:55:04.209+10:00Infrastructure spending isn't good if it's just vote-buyingThere's a great weakness in the (otherwise sound) argument that borrowing for infrastructure is a good thing, adding to demand in the short term and improving productivity and supply in the medium term. We should be doing a lot more of it, which would impose no unfair burden on our children.

That weakness has been exposed by the election campaign. Marion Terrill, of the Grattan Institute, has looked at the parties' promises to build new transport infrastructure and found that a lot of them would be a waste of money. If so, all bets are off.

The fancy arguments don't work if the projects are chosen for their ability to buy votes rather than for the value of their contribution to improving our transport.

On some measures, by the way, transport projects – including roads, rail, ports, public transport, airports and bicycle infrastructure – account for about 70 per cent of our total infrastructure effort. They leave out the national broadband network and state spending on water and power.

With the two big parties committed to returning the budget to surplus, to changing the mix of government spending in favour of capital rather than recurrent spending, and to using the expertise of Infrastructure Australia to improve the evaluation and selection of projects, you might expect – especially if you'd just arrived from Mars – to find all this influencing the promises they made at this election.

It will amaze you to learn that, come elections, the parties don't practise what they preach.

One of the biggest steps towards getting more economic benefit from our infrastructure spending was the establishment by Kevin Rudd in 2008 of the semi-independent Infrastructure Australia. The Coalition has fully supported it and various states have set up similar bodies.

As Terrill says, now we've got IA, the parties' selection of projects should be simple. It examines projects worth more than $100 million that are of national significance.

It assesses the "business case" – buzzword for a cost-benefit analysis – of such projects and sorts them into three categories.

Those that are fully assessed and pass the test are classed as a "project". Those that fail their full assessment – that are judged not worth doing – have their evaluation published on the IA website.

Those that are yet to be fully assessed are classed as an "initiative". A case in point is the Melbourne Metro Rail.

Terrill examined the Coalition's list of transport promises (worth $5.4 billion) the Greens' list ($6.5 billion) and Labor's ($6.7 billion).

The Greens have no projects that are IA-approved, and almost half the cost of their promises is for schemes that aren't even being assessed.

Only the tiniest part of Labor's spending is on IA-approved projects, with about a third going on schemes it isn't even looking at.

Of the three parties, the Coalition has the highest spending on IA-approved projects and the lowest on schemes it isn't assessing. Even so, most of its spending would go on initiatives still being assessed.

In other words, all three parties have selected their projects with little reference to the IA's evaluations. In fact, they make a mockery of the IA process and its efforts to ensure taxpayers get value for money, which they profess to support.

But why? In a word: politics. For a fuller answer, Terrill offers circumstantial evidence.

One clue is that both big parties have plenty of projects worth less than $100 million each, which thus can't be assessed by IA.

Whether it makes sense for the federal government to get involved with such small-beer projects when they can be handled by state and local government is a good question.

Another clue is that there are only six projects on the IA's list of things worth doing: the WestConnex motorway and the M4 motorway upgrade in NSW, the Ipswich motorway and the M1 Pacific motorway in Queensland, the Perth freight link in Western Australia and the Brisbane-to-Melbourne inland freight railway.

The Coalition has only four of these on its list of promises. Labor has just one. The Greens have none, having chosen to nominate one major public transport project in each capital city.

One of the six worthwhile projects – the Sydney M4 motorway upgrade – isn't supported any of the three.

Clue three is that Australia is a federation of states and territories. Clue four is that parties attain government by winning the most electorates.

Though it may be that some states don't have any projects of national economic significance while others have quite a few, it wouldn't be surprising to see projects being spread across the states in a way that roughly fits their shares of population.

Sorry, doesn't fit. Terrill divides the value of the three parties' promised projects between the states, ensuring no double-counting. Queensland gets the most and Victoria gets quite a bit more than the larger NSW. WA also gets a disproportionate share.

Actually, she says Queensland has been getting more than other states for a decade. Maybe it's the state where elections tend to be won or lost.

Whereas almost all of the projects IA approves are in capital cities – improving commuting and connections with ports and airports – the two main parties prefer to spend in the regions.

Perhaps the regions have more marginal seats (or National Party electorates needing to be squared away by the Coalition).

The Coalition is promising $185 million to duplicate the Princes Highway from Winchelsea to Colac in Victoria, which IA has found would yield benefits worth 8¢ for every $1 spent.

You don't have to be Einstein to conclude a lot of spending on capital works – federal and state – is used to buy votes, not to make worthwhile additions to our infrastructure than improve our productivity.

If so, such spending will leave a burden for our kids.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-33965550761652794152016-06-29T10:39:00.000+10:002016-06-29T10:39:03.181+10:00Parties' similarities and differences on economicsI get criticised by rusted-on supporters of both sides of politics when I say this, but that doesn't stop it being true: there are differences between the two sides' policies, but they're not as great as they want us to believe (and their supporters do believe).

So let's identify the main points of agreement and disagreement. Most argument in election campaigns is about economic issues, with much less disagreement on other issues.

On economic management the parties are agreed on the issue which, though it's rarely acknowledged by either side, is by far the most significant: that the day-to-day management of the economy be left to the Reserve Bank, acting independently of the elected government.

That just leaves the government in control of its budget, which does have effects on the economy in the short and longer term but, because it's all the pollies have left to argue over, gets more attention than it deserves.

On getting the budget back into surplus – and so getting the level of public debt falling rather than continuing to rise – there's little to choose from. The Coalition isn't in any hurry, and nor is Labor.

Malcolm Turnbull says his policies won't have the budget back to surplus until 2020-21, after which the surplus will stay tiny.

Bill Shorten's plans say he will get back to surplus in the same year, though he'd spend an extra $16.5 billion over the four years, but then add an extra $27 billion to the surplus in the following years to 2026-27.

(You can say who knows what will happen in four years' time, let alone 10. True. But remember this applies equally to both sides' figuring. All we can do is focus on the estimated effects of the measures each side promises to take.)

The main differences between Labor and the Coalition occur because Labor would not proceed with the government's planned cuts to spending on education and health while, on the other hand, it would continue the 2 per cent "deficit levy" on income above $180,000 a year but wouldn't proceed with the government's planned cut in company tax.

It's because the cost of the company tax cut grows strongly in the later years, as do the savings from Labor's plan to "grandfather" its limits on negative gearing and the capital gains tax discount, that Labor's budget plan would take so long to improve the budget balance.

It's clear from this that when the Liberals accuse Labor of being into "spending and taxing" it is guilty as charged.

The harder question is whether government spending and taxes would be all that much lower under the Coalition. If so, it won't be by as much as it would have us believe.

It's not clear, for instance, that the Coalition will have the political courage to press on with the cuts in grants to the states for public hospitals and schools that are built into its budget figures.

The main difference is likely to be in the categories of spending that grow faster or slower under each side, and in the types of taxes and tax concessions that are cut or increased.

For instance, it's clear to me that the high cost of cutting the rate of company tax will have to be covered by more bracket creep and fewer income tax cuts.

On particular tax promises, though both sides are promising cuts to superannuation tax concessions, the Coalition's plans are clearly superior, whereas Labor's plan on negative gearing is far more attractive to young would-be home buyers.

The public's conviction that the Coalition is the better manager of the economy seems to roll on regardless of evidence. In truth, it's not supported by the record. Both sides have had their achievements and their stuff-ups.

Economic threats don't come bigger than climate change. Here, both sides' plans fall short. The Coalition has announced no credible plan to achieve the commitments it made in Paris which, in any event, were inadequate.

Labor is braver, but not by much. It plans a hugely ambitious target for growth in renewable energy, but doesn't show how it will be achieved. It plans a quite innocuous emissions trading scheme.

Both sides descend to dishonest scare campaigns. Both sides have previously supported policies they now vociferously oppose. Both may oppose policies simply because the other side supports them.

In some cases their disagreement is greater than they want to admit (penalty rates, for instance), whereas in others they disagree more in words than deeds (foreign aid; the national broadband network).

One rule-of-thumb that still works is that, in their decisions about spending and taxing, the Coalition will tend to favour business and higher income-earners, whereas Labor will tend to favour "middle-class and working-class Australians". Take your pick.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-29652489977091258422016-06-27T11:28:00.000+10:002016-06-27T11:28:17.226+10:00Business lobbies sell out Aussie shareholdersOne thing we've learnt from this election campaign: whoever's interests our business lobby groups represent, it's not Australian shareholders.

That's clear from their vociferous defence of Malcolm Turnbull's hugely costly promise to cut the company tax rate from 30 to 25 per cent, even though our system of dividend imputation means local shareholders have little to gain from the cut.

Local shareholders would have the present 30 per cent rate of their "franking credits" cut back in line with the fall in the company tax rate. Something similar would affect all Aussie workers with superannuation.

The business lobbies carry on about the company tax cut as if the loss of revenue to the budget had no opportunity cost. In truth, the gap would mean higher budget deficits (and a higher interest bill to taxpayers) unless it was covered by cuts in the provision of government benefits and services, or by higher taxes.

It would probably be some combination of the three, with most weight taken by higher income tax, brought about by further bracket creep in the absence of tax cuts.

The budget's tiny tax cut for income-earners on more than $80,000 a year was almost a tacit admission that this was the last tax cut any of us would be seeing for many a moon.

Point is, while local shareholders have little to gain from the company tax cut, they'll bear their share of its cost.

There could be no more convincing refutation of the eternal fiction that company executives represent the interests of their shareholders. Economists have recognised this conflict of interests since the work of American economists Berle and Means in 1932.

So what's motivating the business lobby groups in their enthusiasm for a company tax cut? Well, though Australian shareholders would be little better off, the company itself would be paying less tax, which its executives may regard as an improvement.

Of course, the shareholders who would benefit from a lower tax are the foreign owners of Australian shares, since they receive no imputation credits to be reduced.

Provided, however, their home country doesn't have a company tax rate higher than ours. This means American shareholders – who supply at least a quarter of our equity capital – ultimately have nothing to gain from the cut.

The Internal Revenue Service taxes US owners of foreign shares at the American company tax rate of 36 per cent, less whatever tax they've already paid to a foreign government.

So, in principle, cutting the tax we extract from them actually benefits the IRS, not our foreign shareholders.

Of course, many big American multinationals turn legal cartwheels so as to have their Australian profits taxed at a nominal rate in some tax haven. But they escape paying the US's higher tax rate on those profits only for as long as they keep them offshore (and thus unable to be passed on to their US shareholders).

It's not so surprising that the most untiring urger of the company tax rate cut, the Business Council, should be so uncaring about its lack of benefit to local shareholders.

It's a club of the chief executives of our biggest companies. Its conception of what's good for business is what's good for company executives.

What's more, many of the council's Australian chief executives would be answerable to head office executives in foreign countries. So they'd be pleased to see a tax change the primary beneficiaries of which were foreign shareholders.

Similarly, it's not surprising to see the Minerals Council so supportive of the proposed cut. It's dominated by the three foreign global mining giants that dominate our mining industry: BHP-Billiton, Rio Tinto and Xtrata-turned-Glencore.

To those guys, Oz is just a place to be exploited – in both senses of the word.

What's harder to comprehend is why the other business lobby groups – the Australian Chamber of Commerce and Industry and the Australian Industry Group – have been so enthusiastic about a cut that would bring so little benefit to local shareholders.

It's surprising because both groups purport to represent the interests of small business. Almost by definition, small business is Australian-owned.

And with a genuinely small business – where the owner-manager is also the chief shareholder – the business's profits (those not taken as salary and perks) will always ultimately be taxed in the owner's hands, meaning most of the benefit from the lower rate of company tax is lost through the equivalent cut in franking credits.

But so great was AiG boss Innes Willox's lust for a lower company tax rate that at one stage he proposed paying for it by abolishing dividend imputation. Not sure he'd thought that one through.

ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-973212279733528412016-06-25T09:57:00.000+10:002016-06-25T09:57:04.572+10:00Productivity and fairness should go togetherThey say we get the politicians we deserve but recent weeks convince me we also get the election campaigns we deserve. When we're moved more by scare campaigns than by policy debate, guess what the pollies give us?

To the extent that we have been debating policy choices, we've had economic policy but much less social policy.

That's pretty standard for elections. The Coalition's offering has been mainly about its "plan for jobs and growth".

What could be more important than that? Ignoring climate change, not much – provided we remember that the income from jobs and growth needs to be shared widely and fairly, including with people unable to work.

They haven't mentioned it much in the campaign, but our politicians and their economic advisers are worried that our prospects for economic growth are weak because our productivity – production per worker – isn't improving as much as it used to.

In its latest annual economic outlook, the Organisation for Economic Co-operation and Development – a club of mainly rich nations – very much shares that concern.

But here's the trick: unlike our economic managers, the OECD brackets weak productivity improvement with worsening inequality of incomes, describing them as "a twin challenge".

The two issues are interrelated. Although the report doesn't canvas the respects in which inequality may be contributing to weaker productivity improvement, it does emphasise that the policy measures we choose to improve productivity could come at the expense of worsening inequality, or could improve both productivity and income equality at the same time.

That's one of the big discoveries of the international economic agencies in recent years: whereas economists have long assumed that "efficiency" and "equity" (fairness) are conflicting objectives, there are various policy choices that can bring us more of both.

Part of this is their realisation that the size of a country's government – its level of taxes and government spending – has little bearing on its government efficiency and rate of growth.

The report notes that most advanced economies have experienced slower rates of productivity improvement since the early 2000s.

Income inequality – the gap between the highest and lowest incomes – has been widening for the past two or three decades.

"The productivity slowdown and the rise in inequality have impacted the wellbeing of many workers and their families. Low- and middle-income households have had to cope with slow-growing, and in some cases stagnant or falling, real incomes," the report says.

"These trends are threatening progress in living standards, fiscal sustainability and social cohesion."

(If you wonder why so many Americans have flirted with a clown like Donald Trump, I think it's their uncomprehending way of reacting against the fact that so many of them have gained so little extra real income from the United States' economic growth over the past 30 years.)

In a well-functioning economy, wages – real, not just nominal – should rise in line with the improvement in the productivity of labour.

So the report says lower rates of productivity growth have been bad news for workers, since this has reduced the room for productivity-driven growth in real labour income (wages).

But it's worse than that, for two reasons. First, average real labour income across the OECD's rich member countries has grown less than productivity has grown.

That's particularly true for the US but, according to the OECD's calculations at least, also for us.

Second, the inequality of labour income has increased, with some employees getting much bigger wage increases than others.

Over the period from 1990 to 2013, the rich members' labour productivity grew by 3.1 per cent a year until 2000, then by just 0.9 per cent a year for the past 13 years.

But whereas productivity improvement averaged 1.8 per cent a year for the full period, average real labour income improved by only 1.5 per cent a year.

And remember that, because of the presence of a relatively small number of very highly paid employees, the average (mean) income is always higher than the more-representative "median" (dead middle) income, which improved by just 1.3 per cent a year.

But it's worse even than that. Since 1990 the real disposable income of the top 10 per cent of households has increased by 30 per cent, whereas that of the bottom 10 per cent has increased by only 4 per cent.

(Note that "labour" income becomes "market" income when you add households' capital income – from profits, dividends, rent or interest earnings – and then becomes "disposable" income after you allow for taxes paid and welfare benefits received.)

So what can be done to tackle the "twin challenge" of weak productivity improvement and worsening inequality? You look for those policy changes that create "synergies" between the two.

The report says productivity growth has slowed partly because of weak demand since the global financial crisis. Governments need to stimulate demand (spending) by making more use of fiscal (budgetary) policy, it says, implicitly criticising the resort to policies of "austerity" by governments in Europe and elsewhere.

This would not only reduce inequality immediately by reducing unemployment, it would help reduce inequality more permanently because "long-term unemployment erodes the skills of workers and their earnings prospects".

In resorting to fiscal stimulus, the emphasis should be on increased public investment in infrastructure because this adds more to demand than do tax cuts or increased recurrent spending – it has a larger "multiplier" effect.

The report says government effectiveness in delivering high quality services – such as education, health and transport – is empirically associated with higher economic growth and productivity, plus lower income inequality.

"The empirical links of better and more education [particularly early childhood education] with higher growth, productivity and equality suggest long-term benefits from a greater share of education in public spending," it says.

If we were having a more adult election campaign, these are issues we'd be debating.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-88409796324636583302016-06-22T11:05:00.000+10:002016-06-22T11:05:39.202+10:00Baird's budget is the model of conservatism, not reformIf, in these strange times, you have ever wondered what a genuinely conservative government would look like, consider the Baird government as revealed by its budget.

Premier Mike Baird and his Treasurer, Gladys Berejiklian, are cautious and responsible to a fault, putting retention of the government's AAA credit rating above all other objectives.

But, almost by definition, this makes them complacent, unimaginative and lacking in initiative. They are also claiming far too much of credit for the NSW economy's strong performance in recent years, especially relative to the other states.

It's true the state economy has been performing much better. But though the Coalition government has done more to help than to hinder, most of what happens in the economy is outside its puny control.

It's swings and roundabouts. Sometimes other states are growing more strongly than we are; at others - like now - it's our turn to lead the pack. In this our tendency to recurring property booms is a great help (though not to first home buyers).

Berejiklian tells us that "since coming to office in 2011, the NSW government has created 338,600 jobs". Really? Private enterprise played no part in it, eh?

Over the past year, we're told, NSW has created more jobs than any other state and now has the nation's lowest unemployment rate.

True. But what's equally true is that NSW has the lowest proportion of its population in employment - 60.7 per cent, against a national average of 61.1 per cent.

The economy's strong, property-fuelled growth, combined with the effects of privatising various government businesses, has led to rapidly rising budget revenue.

By maintaining fairly tight controls on government spending - particularly on the wages of government employees - Berejiklian has achieve ever-growing budget surpluses.

These surpluses have allowed a big increase in spending on infrastructure without much increase in government debt, thereby preserving our top credit rating.

With so much expansion and renewal of infrastructure needed, a government so well-placed financially and politically could afford to defy the strictures of the discredited American ratings agencies, but that's not the conservative way.

A truly conservative government is largely content with the world as it is and leaves "reform" to the radicals on the other side.

That's certainly been this government's approach. This budget only now honours an eight-year-old commitment to abolish three minor taxes on business transactions.

The government has done so because it has belatedly realised it could make up most of the lost revenue by imposing extra conveyancing duty and land tax on foreign purchasers of real estate.

Is this economically efficient? Does it fit with all the Coalition's talk about the need to encourage foreign investment?

Who cares? The government knows the impost on foreigners will be popular with voters, and is (rightly) confident it will do little to discourage investment - meaning, however, it will do little to make homes more affordable to locals.

Where did this bright idea come from? Although Berejiklian claims NSW is "leading the way in innovation" it came - as did other tax reforms adopted - from those hopeless Victorians. And Queenslanders.

This budget will keep us well away from financial bother. But it could have been much better.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-16952597419426949332016-05-30T10:44:00.000+10:002016-06-22T10:49:01.206+10:00How not to cut government spendingThe bloke who really runs the economy, Reserve Bank governor Glenn Stevens, has spoken: "There are quite some years of hard repair work ahead for whoever is the government over the period ahead."

He was endorsing the earlier warning of Treasury secretary John Fraser and Finance Department secretary Jane Halton that, given the Turnbull government's professed commitment to limiting the growth in tax collections, getting the budget back to surplus won't be possible "without considerable effort to reduce spending growth".

Trouble is, "reducing spending growth has proved difficult in practice", they said. Really?

This year's budget does little to reduce government spending and has trouble even in sticking to the Coalition's resolve to ensure all new spending (of which there's always a fair bit) is offset by spending cuts.

The practice of requiring spending departments to nominate equivalent cuts to cover their new spending programs may seem a healthy discipline.

But when you've been playing that game for years, the departments adapt, learning that their inefficiencies are valuable currency, not to be offered up except in return for some exciting new program.

It's a similar story with the ironically named "efficiency dividend" imposed on government departments and agencies, which is to be ramped up for a further three years, saving $1.4 billion on top of the normal "dividend".

Truth is that, contrary to popular impression, the cost of public sector wages, paperclips and so forth is such a tiny proportion of total federal (as opposed to state) spending that no amount of "efficiency dividends" could make a noticeable difference to the deficit.

But that's not to deny that yet further penny-pinching will worsen public service efficiency. The cuts have gone on for so long that "efficiency dividend" is now a euphemism for further compulsory redundancies.

The people who get the bullet tend to be those who could help their department and the government formulate better policies – not to mention the long-gone people in Treasury and Finance who knew where the real inefficiencies are still buried.

The point is that when you see a government resorting to yet another round of indiscriminate, no-brainer cost cutting you realise it isn't fair dinkum about "reducing spending growth".

Another sign of unthinking half-heartedness is when – as in this budget – you see the pollies taking the path of least resistance: picking on only those interest groups that lack political clout and public sympathy.

Such as? Well, public servants, for openers. We could cut the funding and staff of the Australian Securities and Investments Commission (until the opposition demands a royal commission into bank misbehaviour) and the Tax Office (until the punters get wind of how little tax the big multinationals are paying).

But also the unemployed, sole parents, overseas aid (with a budget deficit we can't afford to give money to poor foreigners, though we can afford to give tax cuts to rich foreign shareholders), legal aid and domestic violence (until Rosie Batty caught up with us).

Point is, if screwing the politically defenceless is the best you can do to control government spending you're never going to make it. They don't have enough to cut.

Until you're prepared to take on the powerful interest groups with their hands in the taxpayer's pocket – starting with the doctors, chemists, drug companies and private health funds, then moving on to the mining companies and even, dare I say it, the farmers and the self-seeking "self-funded retirees" – you won't make a dent.

Malcolm Turnbull does get big points for finally catching up with Costello's Battlers aka rich superannuants. The budget's superannuation reforms are a good example of expenditure control (in this case, tax expenditure) measures, carefully worked up by the econocrats over many weeks.

Treasury has had the reform of super high on its to-do list for yonks. My fear is that Finance – which has primary responsibility for the spending side – doesn't have any well-developed ambitions for genuine increases in the efficiency and effectiveness of major spending categories such as health, education and even defence.

There's been far too little championing of sophisticated measures invented by applied economists – such as income-contingent loans and case-mix funding of hospitals – and investing in later spending control, such as preventive healthcare.

When the econocrats aren't working up and pushing genuinely efficiency enhancing reforms, when they don't want to waste money on studies to determine what works and what doesn't, they and their political masters end up falling back on ad-hoc, end-justifies-the-means, no-brainer savings such as inefficiency dividends and cuts to grants to community groups that care more and try harder than any public servant would. Great Idea.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-63026882863266384962016-05-28T07:31:00.000+10:002016-05-28T07:31:29.613+10:00Economists' faith in cutting company tax found wanting

Malcolm Turnbull and the many economists supporting his plan for a 10-year phased cut in the rate of company tax have failed to make the case that this expensive measure would deliver a significant increase in "growth and jobs".

Economists are meant to be too hard-headed to believe in the existence of a magic bullet – the single measure that will work wonders in solving our problems.

Yet economists throughout the world have come close to seeing a cut in company tax as almost magical in its ability to improve the economy's prospects. Ask them to name the one reform likely to do most good and this is what they'd pick.

A lot of studies have found that economies grow faster after they've cut their tax on companies' profits. It's a move that the International Monetary Fund and the Organisation for Economic Co-operation and Development have urged on us in successive reports on our economy.

It's a move recommended by the Henry tax review of 2010, and one high on Treasury's to-do list.

And now Turnbull has promised to do it, cutting the rate from 30 per cent to 25 per cent, with the phase-down starting this July and ending in 2026-27. For big companies, however, the phasing doesn't start until July 2024.

The phase-in will have a cumulative cost to the budget of $48.2 billion and, when completed, an ongoing annual cost of $8.3 billion (according to modelling by Independent Economics).

So the company tax cut is the centrepiece of this year's budget and the centrepiece of Scott Morrison's "economic plan for jobs and growth".

Trouble is, the more economists think about the plan and examine the Treasury modelling supporting it, the less enthusiastic they become. John Daley and Brendan Coates, of the Grattan Institute, are distinctly unimpressed.

The first reservation comes from a factor peculiar to Australia: our system of "dividend imputation", introduced by Paul Keating in 1987 to eliminate the "double taxation" of the dividends people receive from the companies in which they hold shares.

To match their dividends, shareholders receive a "franking credit" set at the same rate as the company tax rate – presently 30 per cent – which has the effect of returning to them the company tax paid on their dividend and so ensuring their dividend is taxed only at their marginal income tax rate, like any other income.

Imputation has encouraged Australian companies to pay out a high proportion of their after-tax profits as dividends, rather than retain them for re-investment in the business.

Reserve Bank research shows companies are paying out more than 80 per cent of their underlying earnings.

Trick is, only Australian shareholders in our companies receive franking credits; foreign shareholders don't. In consequence, Australian shareholders (who include everyone with superannuation savings) have little to gain from the cut in company tax. It gives them no reason to change their behaviour.

Imputation has turned our company tax into little more than a tax on foreign shareholders. Which means almost all the benefit from the company tax cut goes to foreigners.

This is intended to induce them to greatly increase their investment in Australia – which is where the jobs and growth are supposed to come from – though they'll pay less tax on their present Aussie share investments whether or not they decide to invest more.

In modelling the effects of that assumed increase in foreign investment, it's natural for Treasury and others to look at the effect on real gross domestic product. Natural, but misleading.

It seems to have taken rival modelling by econometricians at the Centre of Policy Studies at Victoria University to oblige Treasury and its allegedly independent consultants to acknowledge that, because so much of the benefit of the cut goes to foreigners, and because foreigners will own all the extra share investment (and consequent dividend income) the cut induces them to make, GDP significantly overstates the expected benefit to Australians.

That's because GDP measures the value of goods and services produced in Australia, not how the income generated by that production is shared between Australians and foreign investors. The right measure is thus gross national income.

A good feature of Treasury's modelling is that it didn't just model the tax cut in isolation. It acknowledged that the cut would leave the government short of revenue and thus needing to fill the gap somehow. Its least unrealistic scenario is that it would be filled by increasing income tax – say, by allowing years of bracket creep.

Treasury's modelling of this scenario finds that the cut in company tax would cause the level of real GDP to be 1 per cent higher than otherwise in the "long term" (taken to be about 20 years).

But the level of real GNI would be only 0.6 per cent higher than otherwise. Daley and Coates put that into context by noting that if GNI per person increases by 1.5 per cent a year (as the budget papers routinely assume), over 25 years it will have risen by 45.1 per cent.

Cut company tax (not in one go, as the modelling assumes, but over 10 years) and incomes rise over the period not by 45.1 per cent, but by 45.7 per cent. Wow.

For reasons only an economist would believe (because it comes from their theory, not from empirical evidence), most of this gain would go to wage earners. After 20 or 25 or 30 years, the level of real after-tax wages will be 0.4 per cent higher than otherwise.

And get this: although voters are encouraged to believe that "jobs and growth" is really about jobs, the Treasury modelling finds that the level of employment in 20 or 30 years' time will be just 0.1 per cent higher than otherwise.

If you wanted to create jobs, cutting the tax on foreign investors isn't the way to do it.

ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-84382733895031224342016-05-25T10:24:00.000+10:002016-05-25T10:24:59.122+10:00Shorten gains tactical advantage over TurnbullVarious of the tax changes the Coalition government is taking to the election are things it earlier said it wouldn't do. And various of the tax changes it now says it wouldn't dream of doing are things it earlier dreamt of doing.

What's more, various of the tax increases it ended up copying from Labor – the further swingeing increases in the excise on tobacco, the crackdown on multinational tax shirkers and the cutbacks in superannuation tax concessions for the wealthy – it had earlier criticised Labor for doing.

Partly because of its change of leader, the Coalition has had trouble deciding what it will or won't do. But also, I suspect, Malcolm Turnbull is the kind of leader who tends to make up his mind in semi-public, weighing the pros and cons before deciding which way to jump.

Labor, on the other hand, made up its mind early about its key policies. That's partly in response to the public's reaction against Tony Abbott's extreme negativity while in opposition.

It's also because, lacking much to offer in the personality department – and anxious to counter memories of division and instability in the Rudd-Gillard-Rudd years – Labor decided to be the first Opposition since John Hewson and his phonebook-sized Fightback! program to make itself a large target not a small one.

It's been announcing policies for about a year and talking incessantly about its "positive policies" on 100 topics.

The broader point, however, is that the parties aren't nearly as far apart as it suits them to have us believe during election campaigns, when they're whipping up partisan feeling and trying to convince us the choice we make between them will determine whether the economy heads for heaven or hell.

What in recent months we've observed more clearly than usual is the parties manoeuvring for advantage in this year's election campaign.

Most of us have highly stereotypical, caricatured views of the parties' respective strengths and weaknesses.

The Liberals, being the party of the bosses, are better at running things, particularly the economy. They're better at keeping inflation and interest rates low (except that, at present, they're probably too low). They're better at keeping the budget on track, avoiding wasteful spending and excessive taxation.

Labor, being the party of the workers, is better at ensuring wages and working conditions are reasonable. It will do more to keep unemployment low. Being less of a monetary taskmaster, it will do more to ensure government spending on health and education is adequate.

Or so we imagine.

The goal of the parties' manoeuvring is to ensure the main issues over which the election is fought are those that suit their perceived strengths relative to their opponents'.

When an issue arises that favours your opponents, you neutralise it as quickly and quietly as possible – even if that involves going against your stated values.

When, for instance, Abbott tells us of his implacable opposition to higher taxes, so Julia Gillard tries to "wedge" him by proposing a 0.5 percentage-point increase in the Medicare levy to help pay for the national disability insurance scheme, hoping he'll oppose it, he quickly agrees to the increase.

Since the media know election campaigns are about conflict – not about making sure your audience understand what the pollies are doing to them – this two-party conspiracy to raise our taxes is never mentioned again.

Bill Shorten may not have Turnbull's good looks, but I suspect his long experience in the union movement makes him better at political tactics.

Turnbull's vulnerability is that he's easily portrayed as a rich man – Mr Harbourside Mansion – who's out of touch with ordinary Australians, and is in politics to deliver for the Libs' big business backers.

There's a spate of stories about the banks mistreating their customers, so Labor promises a royal commission into banking. Turnbull says that would be quite unnecessary, especially since we already have that ferocious attack dog the Australian Securities and Investments Commission on the job.

What's more, though he's been cutting the commission's funds until now, now he'll increase them.

Who do you think won that skirmish?

At a time when young people are being priced out of home ownership, Labor promises to act against negative gearing. Turnbull thinks of doing something similar, but decides against it. He's defending negative gearers, claiming Labor would cause house prices to collapse.

Who do you think won that skirmish?

There's a spate of stories about big foreign companies paying next to no tax in Australia. Labor promises new taxes to catch them. Turnbull follows suit. What's more, though he's been cutting the Tax Office's funds until now, now he'll increase them.

Because Labor is, as we're always being told, the tax-and-spend party, it has proposed some big tax increases to be paid by smokers, foreign companies and rich superannuants.

It proposes to use the proceeds mainly to restore the funding to health and education cut by the Coalition.

Turnbull copies Labor's three tax increases, but uses the proceeds to help pay for a tiny tax cut for the top quarter of income-earners and a 10-year phased cut in the rate of company tax which, he claims, will do wonders to generate "jobs and growth".

The public believes companies should be paying more tax, not less. Who you think jumped the right way on that one?ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-10184012932980099812016-05-23T12:58:00.000+10:002016-05-23T12:58:12.950+10:00Econocrats' report card: Turnbull not really tryingEconomically and fiscally, the Turnbull government is flying by the seat of its pants. It hasn't done enough to secure future "jobs and growth", nor to get the budget balance improving strongly and government debt falling in coming years.

That's the conclusion you draw from the econocrats' oh-so-politely worded commentary in their "pre-election economic and fiscal outlook" issued on Friday, independently of the elected government, as legally required.

Treasury secretary John Fraser and Finance Department secretary Jane Halton made virtually no changes to the budget estimates and economic forecasts and projections contained in the budget delivered less than three weeks earlier.

What they did was highlight the key vulnerabilities they had alluded to deep within the voluminous budget papers they had prepared for the government.

The 10-year budget projections out to 2026-27, they warned, were underpinned by an assumption that annual growth in productivity would be the same as the average of recent decades.

However, "continued economic reform would be required in order to achieve this growth," they said.
The "crucial importance" of increased productivity would require "renewed vigour in encouraging and delivering structural reform across all parts of the economy" – something they'd seen little sign of so far in the election campaign, they hinted without saying.

Doesn't sound to me like a ringing endorsement of the adequacy of the budget's "economic plan for jobs and growth".

They warned further that these "medium-term projections" showing the budget returning to surplus in 2020-21, then staying at 0.2 per cent of gross domestic product for the following six years, were "very sensitive to the underlying assumptions".

In other words, with such a wafer-thin surplus – equivalent to just $3.5 billion in today's dollars – the budget could easily fall back into deficit.

And "should Australia experience a significant negative economic shock, the fiscal [budgetary] position would be expected to deteriorate rapidly".

Since Australia had run current account deficits on the balance of payment for much of its history – the consequence of our heavy reliance on foreign investment to exploit our rich endowment of natural resources – it was "prudent for Australia to run a relatively conservative fiscal stance".

But the stance isn't looking too prudent at present, they implied.

The medium-term budget projections – the device successive governments have used to reassure us that everything in the budgetary garden is going fine, and thus a fit subject for the off-the-leash econocrats to zero in on – assume that tax receipts will be capped at 23.9 per cent of GDP (the average during the period from 2000 to the global financial crisis) from 2021-22, by means of annual tax cuts.

But that being the case, the econocrats warned, it wouldn't be possible to get the budget surplus rising to 1 per cent of GDP [and thus make big strides in paying off government debt] "without considerable effort to reduce spending growth".

"Reducing spending growth has proved difficult in practice", they said with monumental understatement.

Indeed, after the beating Tony Abbott took in the polls thanks to his one attempt to reduce government spending, both he and his successor have retreated to doing no more that ensuring they don't actually add to spending by finding sufficient cuts to offset their new spending programs (of which there are always plenty).

The econocrats said that, even if spending were reduced from the levels projected for 2026-27 in this year's budget to their long-term average of 24.9 per cent, achieving a surplus of 1 per cent of GDP by then would require tax receipts to be allowed to rise to 24.2 per cent. (Don't forget the government also receives non-tax revenue.)

See what they're saying? Let me say it more bluntly.

It's all very well for Scott Morrison to keep saying the budget has a spending problem, not a revenue problem, but if you're not actually game to cut spending – because you know full well the electorate won't let you – then your only remaining choice is between higher taxes or higher debt.

In the election campaign, it's all very well to say Labor is high spending and high taxing. It's true enough. But what reason do we have to believe it's not true of the Coalition?

Its plan to cut the rate of company tax will be hugely expensive. The budget shows that, over the first four years of the phase-down, the cost will be covered by increasing the tax on smokers, multinational tax shirkers and people with too much superannuation.

The medium-term projections imply that the remaining phase-in cost of $43 billion will be covered by allowing bracket creep to rip until 2022-23 and by running a wafer-thin surplus.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-54007933006893003492016-05-21T07:18:00.000+10:002016-05-21T07:18:56.405+10:00Why wage growth is so weakAre we waiting with ever-growing impatience for the economy to get back to normal, or has the economy shifted to a "new normal"?

I think that's the central question in macro-economics today – not just in Oz but throughout the developed world.

To put that question in econospeak, are the changes we see before us "cyclical" – just part of the normal ups and downs of the business cycle – or are they "structural", a lasting change in the way the economy works.

Trouble is, neither I nor anyone else can say with confidence what the answer is.

But further evidence that things in our economy are looking far from normal came this week with the news that wage growth over the year to March – as measured by the Bureau of Statistics' wage price index – decelerated to 2.1 per cent, the slowest since this series began in 1997.

Why is wage growth so weak? Because the rise in consumer prices is so weak. Why are prices growing so slowly? Because the rise in wages is so weak.

Yes, there is a circular, chicken-and-egg relationship between wages and prices. When prices rise, workers need a pay rise of at least that much just to preserve the purchasing power of their wages.

But when they have to pay higher wages, firms pass their higher costs on to customers. That's why – in normal times, at least – we always have some degree of inflation.

So don't bother wishing prices were rising faster so wage growth would be higher – that wouldn't get you anywhere.

No, what matters to wage-earners is the difference between the rise in their wages and the rise in consumer prices – that is, the change in their "real" wages. In normal times, wages should be rising comfortably faster than consumer prices.

Why? Because increased business investment in more and better machines increases the productivity of workers' labour (output per hour of labour input), and competition for the services of workers should ensure they receive a share of the improved value of their labour.

Here the news is better, though not great. Although wage growth over the year to March slowed to 2.1 per cent, the rise in consumer prices over the same period slowed to 1.3 per cent, implying real wages grew by about 0.8 per cent.

This is better than for most of the past two years, but the "normal" rate of productivity improvement should be nearer 1.5 per cent a year, even 2 per cent.

So what's going on with wages? This is what Professor Jeff Borland, of the University of Melbourne, tried to discover in a recent paper. He used a different measure of wage growth – average weekly earnings for adult male full-time employees – because the series goes back much further to the early 1980s (when the stats were more sexist than they are today).

He found that the rate of growth in "nominal" wages – that is, before adjusting for the effect of price inflation – is lower than at any time in the past 30 years.

Real wage growth – after allowing for inflation – is also low, but real wage growth has been negative in several periods over the past 30 years.

Borland tests to see how much of the weaker growth in nominal wages over the two years to the end of 2015 can be explained by lower growth in consumer prices and labour productivity, which he does by comparing them with the figures for the five years to 2013.

He finds that weaker prices and productivity growth explain about 70 per cent of the weaker wages growth but, obviously, that leaves 30 per cent of it unexplained.

Next among the usual suspects is weaker growth in employers' demand for labour. It's well established that the strength of wages growth varies to some extent with the business cycle.

Wages should grow faster when demand for goods and services is strong and firms need to attract more workers, but grow more slowly when demand is weak. Indeed, it's common for employers to skip wage rises during recessions, when workers are more worried about hanging on to their jobs.

Economists use the "Phillips curve" (named after the Kiwi economist Bill Phillips) to study the relationship between wage inflation and the demand for labour, using the rate of unemployment as an inverted "proxy" (stand-in) for labour demand. Borland uses a broad definition of unemployment by adding to the official rate the rate of under-employment.

He finds, as expected, that wage growth is lower when unemployment is higher. But he also finds that a structural shift in the relationship between wage growth and broad unemployment occurred in the mid-1990s.

His figuring suggests that any level of demand for labour is now associated with a lower rate of wage growth than it used to be, and that an increase in labour demand now leads to a smaller increase in wages.

He lists various potential explanations for this structural shift, of which I think the most plausible is our move in the early 1990s from centralised wage-fixing to enterprise bargaining.

But a change so long ago can't explain why wage growth has been abnormally low in just the past two years or so – more than can be accounted for by lower inflation and productivity improvement.

Borland's best explanation for this is the weak growth in "output prices" – the prices charged to customers by employers, including the prices of exports. Slower growth in output prices will have constrained employers' capacity to pay higher wages.

So maybe wage growth will return to the post-1990s norm once coal and iron ore prices have stopped falling.

But my suspicion is that other global developments – including digitisation and the greater ability to move businesses to cheap-labour countries – has permanently weakened workers' bargaining power.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-27530508576947952852016-05-18T10:19:00.000+10:002016-05-18T10:19:33.236+10:00Why Turnbull's Google tax would be reasonably effectiveSo, Malcolm Turnbull and Scott Morrison are introducing a "Google tax" to ensure multinational companies "pay their fair share of tax in Australia". Really? You could be forgiven for being sceptical.

Does the Coalition really want to crack down on their generous mates at the big end of town? And, even if they do, how do we know a Google tax will work?

My sceptical mind (professionally trained by 40 years of living and breathing politicians) can see it all.

Big business had become disillusioned with Turnbull who, like Tony Abbott before him, had balked at increasing the goods and services tax. On no, is he a dud, too?

Turnbull knew he had to deliver "reform" for the big end of town and a cut in the rate of company tax was what it had its heart set on.

Further, he knew he had to have a project to be getting on with, a reason we needed to re-elect him, a way he could be seen to be doing what we expect of governments: adding to jobs and prosperity.

But polling shows most voters don't think cutting company tax is a good idea. Those blighters should be paying more, not less. What about all those internet companies defiantly telling a Senate committee they pay every cent they're legally required to? What about the Panama Papers?

My sceptical mind sees Turnbull realising that, if he wanted to get away with cutting company tax, he'd have to balance it by doing something big on multinational tax avoidance.

I know, let's copy the Brits' diverted profits tax, and not discourage the media from calling it the Google tax.

Look up the government's "tax integrity package" in the budget papers, and your scepticism deepens. It contains eight measures, but six of them only rate an asterisk, denoting that "a reliable estimate [of the revenue expected to be saved] cannot be provided".

The diverted profits tax is expected to raise a mere $100 million a year, and not start doing so until 2018-19.

So how come we're being told the package will raise a net $3.3 billion over four years? Because all the money will come from establishing a new "tax avoidance taskforce" and hiring hundreds more people to audit "large corporates and high wealth individuals".

Hang on. Isn't this something the government could and should have done years ago? Hasn't it actually been cutting Tax Office staff until now?

Right. Got all that? Now get this: although much of that scepticism is no doubt justified – especially in terms of motivations – I'm convinced the crackdown on multinational tax avoidance is genuine, that it started a couple of years ago, and that the new diverted profits tax is likely to be reasonably effective in collecting more revenue.

The fact is that – no doubt in response to pressure from voters and their own difficulties finding the revenue to cover all the spending they want to do – the developed countries have finally got serious about countering tax avoidance by the "transnational corporations" (including some headquartered in Oz) that have come to dominate global commerce.

This requires a high degree of co-operation between countries, and this was initiated by the G20 a few years ago, using the services of the Organisation for Economic Co-operation and Development.

During our year in the G20 presidency, Joe Hockey and Treasury became heavily committed to the organisation's BEPS – base erosion and profit shifting – project, pushing it along and vowing to set a good example to others.

A key part of the project is the "country-by-country reporting requirement" which requires big multinationals to report details of their profits, sales, employees, assets and income taxes paid in each of the countries in which they operate.

They should do this in their home country but, if they don't, any country in which they operate can demand the full report and share it (confidentially) with the other countries involved.

We put our end of the BEPS agreement through Parliament last year. Once this arrangement gets going it will greatly improve national tax authorities' ability to counter transfer pricing.

The Brits got impatient and introduced their own diverted profits tax, which involves the taxman making an estimate of the amount diverted, without the benefit of the detailed information that will soon be available. Their new tax took effect in April last year.

There are plenty of campaigners against multinational tax avoidance and they weren't impressed by the Google tax, just as they were disappointed with the final report on the BEPS project.

By now, however, they've decided the tax is reasonably effective. And Amazon has announced that it will avoid the diverted profits tax by paying ordinary tax on its retail sales in Britain rather than booking sales through Luxembourg.

That's an important point. Our version of the tax, which would apply from July next year, would be levied at the penalty rate of 40 per cent, rather the present big-company rate of 30 per cent.

So it's designed not to raise tax directly, but to encourage multinationals to avoid it by paying the right amount of ordinary company tax. Our expected collections of only $100 million a year would come just from the slow learners.

Fortunately, sometimes it's possible for our pollies to do the right thing for the wrong reasons.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-27699164332232461392016-05-16T10:55:00.000+10:002016-05-16T10:55:08.544+10:00Hard-working Aussies help pay for company tax cutI often think Scott Morrison does a remarkably good Joe Hockey impression, but in this budget he's performed a Wayne Swan sleight-of-hand that's better than Swanny ever did.

Consider this. Big business has been desperate for a higher goods and services tax. Why? Because this was the only way the government could afford to grant them their longed for cut in company tax.

So when Malcolm Turnbull balked at increasing the GST, it seemed he wouldn't be cutting company tax either.

When the budget was unveiled, however, we still saw the government committing itself to cutting the company tax rate from 30 to 25 per cent over 10 years, and making an immediate start by cutting the rate to 27.5 per cent for all companies with turnover of less than $10 million a year, from July 1.

For good measure, Turnbull and Morrison threw in a small personal tax cut for the top quarter of earners. How on earth did they afford this without a higher GST?

Over the four years of the forward estimates, the company tax phase-down will cost $5.3 billion. Add $4 billion for the personal tax cut and we have $9.3 billion to account for.

The measures in the "tax integrity package" – which include the Google tax – should raise a net $3.3 billion.

The reforms to superannuation tax concessions will save a net $3.2 billion over the period, and the further hikes in the tobacco excise should raise $5.2 billion, meaning the three big revenue-saving measures will raise a combined $11.7 billion.

This leaves the government – the one so committed to lowering taxation – $2.4 billion ahead on the deal.

Satisfied all is in order? I'm not. Once fooled by Swanny, twice shy.

This government has done nothing but complain about how Labor committed itself to two expensive new spending programs – the national disability insurance scheme and the Gonski school funding – which proved to be "uncosted and unfunded".

What Swan did was stagger the introduction of the two schemes so that they didn't cost all that much in the first four years (the ones shown in the forward estimates) but got a lot more expensive in the following years (which we couldn't see).

Get it? This is the same trick Turnbull is using to hide the unaffordability of his vastly more expensive plan to cut the company tax rate over the next 10 years.

Little wonder he was so reluctant to reveal that the cumulative cost of the company tax "glidepath" was a paltry $48.2 billion.

So we've been told how the first $5.3 billion will be funded, but not the remaining $42.9 billion.

A key figure we haven't been told is the annual cost of the tax cut once it's fully introduced. But Deloitte Access Economics' Chris Richardson's estimate is about $16 billion a year.

Clearly, this is far more than the budget's tobacco excise increase, super reforms and company tax "integrity package" are likely to be able to cover.

In the last year of the forward estimates, 2019-20, those three measures are expected to raise only about $5.1 billion.

So if Morrison can now claim that the 10-year company tax cut phase-in has been costed, can he also claim it's been funded?

He's making the same claim Swan used to make by producing the "medium-term projection" of the budget showing it returning to surplus (in 2020-21, no change from the mid-year update) and staying in surplus until 2026-27.

Trouble is, whereas in last year's budget the government's "budget repair strategy" required it to deliver surpluses "building to at least 1 per cent of gross domestic product by 2023-24", this year's projection shows the surplus plateauing at 0.2 per cent for the last six years to 2026-27.

Why? Because progress in increasing the surplus (so as to pay back more debt) has been sacrificed to covering the ever-growing cost of the cut in company tax.

The cut really becomes expensive in the last three years, when big businesses join the phase-in. You can bet this "glidepath" has been carefully structured to stop the medium-term budget projection looking too sick.

Note too that the medium-term projection assumes tax collections are capped at 23.9 per cent of GDP after 2021-22, with the possibility that any excess is used to fund bracket-creep-returning tax cuts for Morrison's "hard-working Australians".

So the projections purporting to show that the company tax cut can be funded by our settling for seven years of a budget surplus no higher than $3.5 billion in today's dollars, also rely on the assumption of no further personal tax cuts for another six years.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-18379324877362719042016-05-14T07:02:00.000+10:002016-05-14T07:02:00.603+10:00How the budget stacks up as tax reformWhen politicians announce a tax cut to be delivered after they've been re-elected, there are no prizes for guessing it's an electoral bribe. But they never fail to sanctify the exercise by assuring the lucky recipients that the money they're getting will do wonders for the economy.

Malcolm Turnbull is going into this election promising a pathetically small tax cut to the top quarter of taxpayers, which starts – officially, anyway – the day before the election.

Plus a one-sixth cut in the rate of company tax that's to be phased in over the next decade, starting small and ending big.

Company tax will be cut because Turnbull & Co Ava Plan to help Jobson Grothe.

Which sounds nice. But is it good enough?

Before the last election, Tony Abbott promised to devote his first term to laying the ground for major tax reform. There'd be a full inquiry – with no restrictions on what could be considered – a green (discussion) paper and finally a white paper setting out exactly what the government planned to do in its second term if re-elected.

So we're entitled to view the tax measures announced in the budget against the major renovation we were promised.

How does the budget stack up as an exercise in tax reform? How does it measure up against the two big reform criteria of efficiency and equity (fairness)?

Well, the budget contained five big tax measures, but they don't add up to an integrated whole.

First is the tiny tax cut, which will have an annual cost of about $1 billion, and a combined cost of almost $4 billion over the four years of the "forward estimates" shown in the budget.

Then there's the plan to slowly cut the company tax rate from 30 per cent to 25 per cent, but starting with small business and working up in size, not getting to big business until 2024-25 and reaching the finishing line in 2026-27.

This will cost $700 million in the budget year, 2016-17, rising to $1.7 billion by the last year of the forward estimates, and costing $5.3 billion over the first four years.

We've subsequently been told (reluctantly) that, by 2026-27, the total cost of the phase-in will be just a fraction higher at $48.2 billion. Chris Richardson of Deloitte Access Economics estimates that, by then, the annual cost of the full cut will be $16 billion. Not cheap.

Helping to cover the cost of these personal and corporate tax cuts will be a big rise in the excise on tobacco (raising $5.2 billion over four years), the crackdown on multinationals' tax avoidance (raising about a net $3.3 billion over four years), and the net saving from various reforms of superannuation tax concessions ($3.2 billion over four years).

Let's start with equity: how do the tax measures affect the distribution of income between rich and poor households?

Since the tiny tax cut ($6 a week) goes to only the top quarter of income earners, it's "regressive" (reducing high earners' average tax rate by a higher proportion than low earners' average rate). But, obviously, not by much.

On the other hand, the superannuation changes hit the top few per cent of fund members quite hard, then give about half of those savings to members with lower incomes, particularly women. So, quite "progressive".

Strictly speaking, taxes on tobacco are highly regressive – and getting more so as the better paid give up smoking or never take it up.

But is discouraging poor people from smoking doing them harm? Not in my book.

It's a lot harder than you may imagine to determine whether cuts in company tax and reduced tax avoidance by multinational companies are progressive or regressive.

But I'll unpick that knot on another day so we can move on to efficiency. An economically efficient tax system is one that raises the revenue we need with least distortion of the choices each of us makes about working, spending, saving and investing.

Since most taxes do have effects on our choices, the efficiency objective is about choosing the combination of taxes that does least to affect them.

It's a stretch to imagine the tiny tax cut will have much effect on incentives.

And despite the government's claims about the fabulously beneficial effects of the company tax cut, if you actually read its own modelling you discover the benefits are tiny – and would take 30 years to arrive.

People hit by the super changes will tell you they'd discourage saving, but don't believe them. Their effect – if any – will be on which tax-preferred vehicle wealthy people use for their saving. Studies show high income-earners save a lot of their income regardless of the incentives offered.

But there's a class of taxes that are consciously used to discourage certain forms of behaviour. High taxes on tobacco are an example. So is a tax on emissions of carbon dioxide.

And there's another small class of taxes that can't distort behaviour because they tax only "economic rent" – the profits or other benefits people enjoy that are in excess of the returns they need to keep them doing whatever it is they've been doing.

A good example is a resource rent tax. Another is a tax on the unimproved value of land.

Judged as tax reform, this budget does little to improve efficiency by shifting the mix of taxes away from taxing "goods" (such as work) to taxing "bads" (such as pollution). Nor has it done anything to shift towards taxes than don't distort behaviour.

Though one of its first acts was to abolish a tax on a bad – the carbon tax – and a tax designed not to distort choices – the mining tax – the government has done little to replace them with anything better.

This budget is a plan for jobs and growth? Only at the rhetorical level.
ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-17606524913498810672016-05-11T10:38:00.000+10:002016-05-11T10:38:31.867+10:00Why Turnbull's super changes are sorely neededI'll never forget the budget of May 2006. It was during the first half of the resources boom, before the global financial crisis. The economy was booming, tax dollars were pouring into the government's coffers and it was embarrassed at the way the budget surplus kept piling up.

John Howard and Peter Costello were competing with each other to shovel money back out the door. Howard liked spending it on middle-class welfare, whereas Costello wanted to use it to cut taxes.

He was more than halfway through his eight tax cuts in a row, but in the 2006 budget he found a way to go one better. He had to fix some problems with the superannuation system, and he hit on the idea of making sweeping changes to the various super tax concessions that made them far more generous.

The changes would be pretty expensive, likely to grow rapidly every year. But that didn't matter because the budget was overflowing and mineral export prices would stay high forever. An election was coming in 2007 – when the changes would start – and voters would love 'em.

I remember business people saying privately the largesse was too good to last. Big-name economists were saying publicly the new concessions were unsustainable.

That was 10 years ago. Turned out the doubters were right, and last week it fell to the next Coalition government to correct Costello's monumental miscalculation.

People say the politicians are always tinkering with super. It's true. That's partly because, in the intervening Labor years, Wayne Swan chipped away at Costello's excesses in almost every budget.

But the measures announced last week were much more comprehensive, and braver, than anything Labor did – or has promised to do if it wins this election. This is the Libs cleaning up their own fiscal mess, and doing it at the expense of their own supporters.

You've seen all the articles by personal finance journos explaining how the changes will work and heard all the complaints from the well-lined.

So let's focus on the changes from the perspective of public policy, not your pocket. You start to understand their rationale when you realise that, until now, all the tax concessions for super have never had a formally stated objective.

The new objective is "to provide income in retirement to substitute or supplement the age pension". Which is a nice way of saying we're no longer going to let you use super to amass far more than you're ever likely to need to live on – that is, to get a tax break on savings you're intending to leave to your kids.

In principle, there are three points at which the government could tax money being saved for retirement: when you make contributions to your fund from your annual income, when the money in the fund earns interest and dividends, and when, in retirement, you withdraw money from the fund.

Under the rules Costello established, contributions are taxed at a flat 15 per cent (rather than at your "marginal" rate of income tax which, depending on the size of your income, can vary from 21c in the dollar to 47c).

Earnings in the fund are taxed at a flat 15 per cent and withdrawals are tax free.

Malcolm Turnbull's new rules would lower the annual cap on concessionally taxed contributions and lower the threshold at which concessional contributions are taxed at 30 per cent rather than 15 per cent.

They would limit to $1.6 million the amount you could have in the pension part of your fund, where no tax is charged on annual earnings. Anything in excess of that would have to stay in, or return to, the pre-retirement "accumulation" part or your fund, where earnings are taxed at 15 per cent (less tax credits from dividends).

The new rules would also impose a $500,000 lifetime cap on non-concessional (after-tax) contributions. This affects people who want to transfer other savings or inheritances or the proceeds from selling investment properties into low-taxed super.

Treasury calculates that only the top 3 or 4 per cent of fund members will be affected by these measures. So the plan is to chop back the tall poppies. Even so, because they (including yours truly) have been getting the lion's share of the concessions, by their third year these measures would be saving the budget $2.1 billion a year – and rising.

Some of this saving would be used to pay for changes that made it easier for women to build up bigger super balances despite their years of broken and part-time service.

The changes would make it much harder to use "salary sacrifice" to boost super balances (at one stage Costello was letting people like me sacrifice up to $100,000 a year – a stretch, even for me) but would encourage more savings-splitting as husbands helped wives to get higher balances.

Rather than making super concessions fairer, I'd prefer to say Turnbull's plans would make them less unfair. It would still be true that people on less than $37,000 a year got no concession on their contributions, whereas people on $180,000 to $230,000 got a saving of 32c in the dollar.

The biggest "incentives" – which apply to contributions that are compulsory anyway – go to well-off people who could, and would, save a lot of their income even without any concessions.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-89366704279491805862016-05-09T11:06:00.000+10:002016-05-09T11:06:47.076+10:00How to unspin the budgetYou can't look hard at the budget and its glitzy packaging without being reminded of Rob Sitch's highly educational TV show, Utopia.

My colleague Peter Martin has detected that the Turnbull government, as distinct from its Coalition predecessor, is less ideological and more evidence-based in its policy making. Its reforms to superannuation and Work for the Dole are prime examples.

That's good news. Even so, the more intelligent and articulate Malcolm Turnbull hasn't been able to withstand the pressure to use spin doctors to massage his messages to the electorate.

A better term for that dubious profession is "perception manipulators". They "operationalise" one of modern politicians' core beliefs: the perception is the reality.

The world of government is such a complicated place that reality is seen only in glimpses - which is hugely fortunate for our pollies because the reality is usually much harder and more costly to fix. It's a lot easier to manipulate the punters' perceptions of that reality.

Scott Morrison has been relentless in insisting that the budget is not just another budget, but an economic plan for jobs and growth.

Really? Name the budget that hasn't been a plan for jobs and growth.

So why the fuss this year? Because, to quote Morrison, "Australians have clearly said we must have an economic plan". How does he know what Australians have clearly said? Because that's what a few of them said to the Liberal Party's focus groups.

Feeding back to voters the sentiments they've expressed in your focus-group research is a standard perception manipulators' trick.

My guess is the government had a collection of end-of-term and pre-election bits and pieces it wanted to get up, but felt it should package them as an "overarching narrative" by saying they were a plan.

A plan about what? The usual: jobs and growth. Just about everything you do - raise the tax on cigarettes, stop wealthy people like me saving too much in tax-sheltered super accounts - can be portrayed as helping to promote jobs and growth. And they were.

Every non-plan plan needs to come in impressive packaging. The plain and earnest budget papers prepared by Treasury and Finance have long been accompanied by an overview booklet prepared by the spin doctors and disparagingly referred to by the econocrats as "the glossy".

This year there are four glossy documents, not one. And whereas the original majored in fancy graphs and tables, the extras add a lot of colour pics of good looking punters. It's fiscal bling.

Even the budget website has had the interior decorators in. You now have to click through a host of pretty fluff to find what you need.

Key to the success of perception manipulation is the use of magic words - words with strong positive or negative connotations, words that arouse emotions.

What words are guaranteed to frighten punters? Try "debt" and "deficit". What word gladdens the hearts of business people? "Growth".

And of the punters? "Jobs". They may not claim to know anything much about economics, but one thing they do know: there can never be enough jobs. Claim to be creating them and you're well on the way to the punters' tick.

This time the magic-word workhorse is "middle". Almost all Australians believe themselves to be middle class, on incomes near the middle. The higher your income, the less your ability to know where the middle is.

Morrison never actually said his tiny tax cut for people earning more than $80,000 a year was aimed at middle-income earners, all he said (correctly) was that the threshold had been set just above the average full-time wage.

That was enough to have innumerate political journalists - particularly at the ABC - saying it for him.

Trouble is, almost a third of wage-earners are part-time, not full-time. And plenty of taxpayers aren't employees. What's more, the relatively small number of people on super-high incomes means that the "average" or mean taxpayer's income is well above the middle (or median) taxpayer's income.

All this explains why the tax cut will go to only about the top quarter of taxpayers. That's the middle?

These days, no self-respecting perception manipulator fails to pull some "modelling" out of his bag of tricks. The results of the modelling are almost invariably misrepresented, being made to sound more significant than they are.

The spin meisters pray the media won't actually look at the modelling, and their prayers are almost always answered.

You can blame it all on ever-declining standards of political behaviour - which Turnbull's arrival has failed to arrest - or you can share the blame with a media that allows itself to be manipulated.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-31867023778003733422016-05-07T07:35:00.001+10:002016-05-07T07:35:56.473+10:00Just where are all the jobs and growth in the budget?As you may have heard Scott Morrison mention a time or two this week, this isn't an ordinary budget, it's an economic plan for "jobs and growth". Sorry, Scott, that's what they all say.

Jobs and growth – without worsening inflation – are the objective of what economists call "macro-economic management".

And, along with monetary policy (the manipulation of interest rates), budgets (fiscal policy) are the instruments they use.

The obvious and quickest way a budget can attempt to boost growth and jobs is to use increased government spending or cuts in taxes to "stimulate" the economy and make it grow faster.

Is that what Morrison has done? No, not really. The short-cut way the econocrats assess a budget's likely effect on the economy is to examine the direction and size of the expected change in the budget balance.

This shows the net effect of the government's spending (which puts money into the economy) and its revenue-raising (which takes money out).

Morrison is expecting a budget deficit of $40 billion in the present financial year, which should fall to $37 billion in the coming year, 2016-17.

That expected fall in the deficit of just under $3 billion may sound big, but relative to the value of the nation's expected production of goods and services – nominal gross domestic product – of $1.7 trillion, it's equivalent to less than 0.2 per cent.

So, though the expected fall in the deficit suggests the budget will be working to inhibit the economy from growing and creating extra jobs, the effect is so tiny it doesn't count.

An alternative, more textbook Keynesian way of making that assessment is to focus only on the policy changes announced in the budget and the combined effect they are likely to have on the economy's growth and job creation.

The budget papers reveal that, in the coming financial year, the measures announced should reduce budget revenue by $1.7 billion and increase government spending by $1.4 billion.

So, judging it this way implies the budget will stimulate growth rather than work against it – that is, have a "contractionary" effect. But, again, the size of the net effect – $3.1 billion – is too tiny to matter.

Thus, at the macro – economy-wide – level, there's no evidence to support Morrison's claim that the budget will do great things for growth and jobs.

This conclusion is supported by the budget's forecasts that the economy (real GDP) will grow no faster in the coming financial year than it's expected to grow this year – by a below-potential 2.5 per cent a year – and improve just a little to 3 per cent in 2017-18.

But that's not the end of the story. What can we say about the budget if we switch from examining its likely effects at the short-term, macro level to viewing it as an exercise in using longer-term, micro measures to foster growth and jobs?

"Micro-economic reform" is about making changes to the way the government intervenes in particular markets, or is affecting people's incentives, with the objective of improving the economy's ability to grow (and create more jobs in the process).

Morrison offered a list of things the government has been doing to encourage growth.

But his chief exhibit is his new "10-year enterprise plan" to support growth and jobs. The plan involves cutting the rate of company tax from 30 per cent to 25 per cent over the 10 years to 2026-27, biasing the phase-in towards small and medium-size businesses, so big business's tax rate doesn't start to phase down until 2023-24, as well as widening access to accelerated depreciation by about 90,000 medium-size companies.

These reforms, Morrison assures us, will boost business investment and make Australia more competitive as a destination for foreign investment, thereby leading to "more job opportunities, more secure jobs and higher real wages".

And get this: Morrison has Treasury modelling to prove it. Delivering tax cuts for companies is expected to "permanently expand the economy by just over 1 per cent over the long term".

Impressed? Don't be. The Treasury modelling has been summarised and separately released. First, it's not an annual increase in real GDP of 1 per cent. It's saying that, by the end of the long term, the level of real GDP would be 1 per cent higher than otherwise.

In econospeak, "long term" means about 20 years. Divide 1 per cent by 20 and you get an annual increase too small to see.

Second, Treasury didn't actually model the government's complicated 10-year phase-down with priority to smaller companies. Econometric models are far too simplified to measure real-world policy changes.

It modelled a simple cut in the rate from 30 per cent to 25 per cent. So it could take even longer than 20 years for the full benefits to flow through.

Third, Treasury has accepted that, particularly because much of the benefit from a cut in company tax would go to foreign shareholders in Aussie companies and much of the new investment would be funded by foreigners, for Australians the change in real GDP exaggerates the benefits of the move.

A better measure is the change in real gross national income, which reduces the expected long-term level increase from 1.1 per cent to 0.7 per cent.

The modelling says much of this benefit would show up as an ultimate long-term increase in the level of real, after-tax wages of 0.8 per cent.

But note this: the ultimate long-term increase in the level of employment would be 0.2 per cent. So, even on the government's own modelling, the increase in growth would be small and the increase in jobs would be trivial.

To be fair, many economists believe that cutting the rate of company tax is the biggest and most obvious thing to do to improve our economic performance.

Sorry, but I can't see it.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-27033067589814692992016-05-04T10:38:00.001+10:002016-05-04T10:38:58.727+10:00Budget more about politics than jobs and growthYou get the feeling this budget was pulled together with the use of a checklist. "We've got to have something on super, bracket creep, women, company tax, cities, multinationals, infrastructure . . ."

It involves a lot of imminent-election tidying up of loose ends from projects the government has supposedly been working on for three years, plus much squaring away of key interest groups.

What it's not is any kind of carefully considered "plan" for the economy, whatever Scott Morrison's claims.

It is, of course, a plan to get Malcolm Turnbull re-elected. Its measures are much more easily explained in political terms than justified as doing wonders for "jobs and growth".

Coming from the man in whom we held so much hope, it's uninspired and uninspiring. It's neither agile nor innovative, with not a spark of greatness.

That doesn't make it a bad budget, however. It's competent. It will play its part in ensuring the economy keeps chugging on for another year.

It contains all the Coalition biases you'd expect in a Coalition budget.

It's a cautious budget, with little to which many people will take great exception. Most voters' pockets won't be greatly affected one way or the other - certainly not in the near future - which, of course, is the reason for the caution.

If you believe the government should be pressing on with reducing debt and deficit - as it repeatedly promised it would - the budget is a great disappointment.

Turnbull and Morrison have achieved little more than their Coalition predecessors did. They inherited from Labor an expected budget deficit for 2013-14 of $30 billion (or 1.9 per cent as a proportion of gross domestic product).

Now Turnbull and Morrison are expecting a deficit of $40 billion (or 2.4 per cent of GDP) in the present financial year, falling only to $37 billion (2.2 per cent) in the coming year.

They expect government spending to grow by 4.7 per cent and tax revenue by 5 per cent.

Morrison boasts that the budget "outlines a path back to surplus", but that's true of every previous budget, back to the one Julia Gillard took to the 2010 election. The path first supposed to end in 2012-13, now stretches to 2020-21 - if you can believe it.

Up to now, the slow progress is explained partly by continuing falls in export prices. Much of what progress the Coalition has made is explained by it keeping the proceeds of bracket creep.

The truth is Turnbull and Morrison have abandoned any attempt to cut the deficit. Their best effort is to avoid doing anything that adds to it, while they wait for nature - "growth" - to take its course.

But while this lack of enthusiasm for the axe will disappoint those who've been convinced our debt is perilously high, I'm not among them. Morrison is right to say the "transitioning" economy is still too "fragile" to cope with public sector slashing and burning.

To that extent the budget wins high points for its steady contribution to the management of the macro economy.

It doesn't win many points for fairness, however. We now know what more than three years' big talk about tax reform adds up to: not a lot.

Low to middle income-earners have been saved from an increase in the goods and services tax, but gain nothing.

For years we've been told bracket creep is a terrible thing, hitting people on low taxable incomes harder than those on high incomes.

So what's the remedy? A tiny tax cut which, because it starts with people on more than $80,000 a year, will benefit only about the top quarter of taxpayers.

Thus the government gets to keep all the bracket creep to date and most of the bracket creep to come. But remember, only Labor stands for higher taxes.

What else do high earners get? No reneging on ending the 2 per cent temporary deficit levy. No change to negative gearing schemes, to the 50 per cent discount on capital gains tax, to family trusts or to deductions for professional development courses in Hawaii.

Big business missed out on its longed for increase in the GST and on a cut in the top rate of income tax but, even so, did get the promise of a company tax rate falling by 5 percentage points to 25 per cent, starting in the early 2020s and continuing until 2026-27 - if you can believe it will happen.

The big exception to this, however, are the changes to superannuation tax concessions, which will be less generous to high earners and less mean to women and low earners.

In other key areas of reform - particularly improved effectiveness in healthcare, education and infrastructure - after three years the government has hardly scratched the surface, with little further progress in the budget.

"Jobs and growth" is a slogan, not a plan. Its purpose is to create the illusion of a busy, striving government and divert attention from the lack of progress in achieving the much-promised return to budget surplus.

Name the budget - or the government - that hasn't claimed to have jobs and growth as its overriding goal.

To claim that a tiny tax cut and a "glidepath" cut in company tax will have any significant effect on jobs and growth is an exercise in over-optimism and exaggeration.

The tax cuts for small business, and their extension to a relative handful of medium businesses, is more about politics than jobs and growth. Small businesses have votes; big business has most of the jobs.

This is not the budget we were entitled to expect when Turnbull ousted Tony Abbott last September.

It's probably better than Abbott and Joe Hockey would have delivered, but only by a bit.

This is the last of three budgets from a government seeking re-election on the basis that only the Coalition is any good at managing budgets and running the economy.

That was a lot easier to believe at the last election than it is today.ross gittinshttps://firstname.lastname@example.com:blogger.com,1999:blog-8697013187077142507.post-4219348531127112462016-05-02T11:08:00.000+10:002016-05-02T11:08:27.829+10:00What not be believe in the budgetLike every budget, Tuesday's will be a combination of measures and arguments, each with political and economic dimensions and motivations. Distinguishing the politics from the economics will be the hard part.

It promises to be a budget in which the government does a lot of crying poor. That's partly because Malcolm Turnbull is likely to call an election within a week of the budget, but is prevented mainly for political reasons from making many big spending promises.

Politically, this government made so much fuss about debt and deficit while on its way to power that, though it's made little progress in reducing the budget deficit and halting the growth in debt, it dare not be seen consciously adding to it.

Economically, returning to surplus isn't urgent, and increased borrowing for worthwhile infrastructure would make much sense.

As part of the crying poor, when state politicians hit the feds for more money, federal ministers reply that they can't help because, though the states are running surpluses, the Commonwealth is still in deficit.

Don't believe it. When the states say they're in surplus, they're referring to their "operating" balance, which is their revenue less their recurrent spending. When the feds say they're in deficit, they're subtracting from revenue not just their recurrent spending, but also their infrastructure spending.

Add the states' infrastructure spending to their operating surpluses and you find that – measuring it the way the feds do – they're still in heavy deficit. (Which is as it should be. If anything, they should be investing more.)

Or, to put it a better way, by insisting on their antiquated practice of including capital spending in their measure of the deficit, the feds are exaggerating the size of their deficit problem.

This financial year's budget papers forecast a deficit of $35 billion (since revised to $37 billion), which included capital spending of about $21 billion.

Further capital spending of $17 billion (including on the National Broadband Network) is hidden in the "headline" deficit, meaning capital spending accounted for 8 per cent of headline spending. Last year it was 9 per cent.

Another thing we'll hear a lot of on Tuesday night is that the government is "living beyond its means" and must mend its ways and live within its means, just as households do.

This is nonsense. It's Scott Morrison doing his best Joe Hockey impression. If you measure them the way Morrison does for the government – that is, by including borrowing for investment in with day-to-day expenses – our households are living way beyond their means.

Indeed, Australia's households have one of the highest debt ratios in the developed world.

Do you think it's a crazy, irresponsible thing for so many households to borrow many multiples of their annual income to buy the home they live in?

Of course not. For most it makes lots of sense. Is a government – state or federal – that borrows to build public infrastructure that will serve the community for decades, adding to our productivity, living beyond its means? Of course not.

National governments may be said to be living beyond their means when their recurrent spending exceeds their revenue, but even that is too simplistic.

Why? Because governments aren't the same as households and it's ignorant to pretend they are. Governments have responsibilities households don't have and also have powers households don't have – such as the ability to impose taxes and even, for national governments, to print money.

One highly relevant government responsibility is to help limit economic slowdowns by running operating deficits – by allowing their recurrent spending to exceed their revenue – while spending by the private sector is weak.

Does that sound too Keynesian for a Coalition government? Too Keynesian for Turnbull who, while opposition leader in 2008, vigorously attacked Kevin Rudd's fiscal stimulus?

Don't believe it. It's clear we'll hear a lot of the argument that Turnbull and Morrison can't cut government spending much at present because the economy is "in transition" and so not yet growing strongly.

That's a Keynesian argument, the antithesis of an austerity policy – though both men would die before uttering the K-word. And it's a sound argument – which is why we've been hearing it since Labor was in power. It was just excuse-making then, but it's true now, apparently.

Of course, it's also true that no politician wants to cut spending just weeks before an election.

Economically, there's no problem with continuing recurrent budget deficits. A better question to ask on Tuesday night is whether the spending that makes up the deficit is going on good programs or poor ones.ross gittinshttps://email@example.com:blogger.com,1999:blog-8697013187077142507.post-19594861903732813372016-04-30T11:05:00.000+10:002016-04-30T11:05:15.057+10:00The prospect for workers is brighter than many thinkA lot of people are convinced it's just going to get worse and worse for workers in coming years. A lot of oldies think that and, unfortunately, too many youngsters believe them.

Many older people worry that, with the decline of manufacturing in Australia, and the end of the mining boom as well, they just can't see where the jobs will come from.

Young people, on the other hand, believe jobs are getting ever harder to find and, when you do find one, it's likely to be pretty scrappy: casual, part-time, short-term.

What's true is that young people have borne the brunt of the weak economic and hence employment growth since the financial crisis in 2008.

It's taking them longer to find entry-level full-time jobs than it used to and, in the meantime, they've had to get by with casual jobs. More employers have been willing to exploit them by asking them to do unpaid internships.

What's not true is that there's been continuing growth in insecure forms of employment. The proportions of such jobs haven't been increasing.

At a time of "transition" and uncertainty, it's always easy to err on the gloomy side. When you do, be sure the media will broadcast your bad vibes to the world.

But it's not hard to see plausible reasons why things could get better for workers, not worse. And when the ANZ Bank's chief economist unit and the Australian Institute for Business and Economics, at the University of Queensland, peered into the future and ran their best guesses through a model of the economy, that's just what they found.

Everyone loves to dwell on the decline in manufacturing, and the pathetic number of lasting jobs in mining, but few people get excited by the truth that almost all the additional jobs we've created in the past 40 years have been in the services sector.

Nor that most of these jobs have been cleaner, safer, more highly skilled and more rewarding – intellectually as well as monetarily – than most of the jobs no longer being created in manufacturing, farming and mining.

The study makes the highly plausible assumption that this longstanding trend will continue. "Declining material intensity has been observed in all [developed] countries, in part because wealthier consumers buy 'experiences' once their primary material needs are met," it says.

The ageing of the population is almost invariably portrayed as a bad thing, but the study points to a widely ignored way in which it's good news for the younger generation.

With a higher proportion of the population retired (and thus adding to the demand for labour but not to its supply) but low fertility meaning a lower rate of young people entering the workforce from education, demand for the services of young workers will increase.

Here's a tip: employers are chancers. If they think they can get away with screwing workers (because there are more than enough available) they will. That's what's been happening lately.

But if they don't think they can get away with it (because workers have plenty of other bosses who'd like their services), they don't. And if it gets to the point where bosses have to start sucking up to workers to attract them and hold them, they will.

The study puts it more politely. By their nature, service industries rely less on machines and more on people, particularly highly-skilled workers. So if the services sector's share of the economy continues to grow "this could prove challenging for Australian businesses given our ageing population and changing workforce composition".

A third factor the gloom-mongers neglect is that our continuing move to the "knowledge economy" requires a better-educated, more highly-qualified workforce.

Today, more than half the population has completed the last year of schooling and gained at least a post-school certificate. That's more than twice what it was in 1981.

Since the oldest Australians have the lowest levels of educational attainment, the proportion of people with post-school qualifications could exceed 70 per cent by 2030.

Even so, the study predicts that "the fight to retain skilled workers will intensify", implying that, though the supply of qualified workers will grow, the demand for their services will grow faster.

In such circumstances, employers will be trying to bind their skilled workers to them, not cast them adrift with insecure employment contracts.

If we foresee further growth in the share of the economy accounted for by labour-intensive service industries, employing better qualified and higher-paid workers – over whose bodies employers are fighting – labour's share of national income should rise.

If so, "some of the consequences of a falling labour share, such as growing income inequality, may begin to unwind as well", the study says.

A final factor to remember is that our exports of services are likely to keep growing as Asia's middle class gets bigger and more prosperous.

At present, the goods sector of the economy (agriculture, mining, manufacturing and construction) accounts for 28 per cent of total employment, while the services sector accounts for 72 per cent. The study predicts that, over the next 15 years, the services share will increase by 5 percentage points.

It finds that the industries with the most intensive demand for labour are also those with the strongest growth prospects.

The strongest growing service industries are likely to be healthcare (fed by demand for new medical technologies as well as ageing), education (growing demand for qualifications) and professional services.

These industries are projected to grow by at least 5 per cent a year, on average, over the next 15 years. Demand for labour across the economy is projected to grow by an average of a solid 1.6 per cent a year.

No one – certainly, no economist – knows what the future holds. But don't be led into assuming the only things that could happen are bad.ross gittinshttps://firstname.lastname@example.com