Ian Verrender

For generations, it has been the nation’s most exclusive club. Entry is strictly invitation only. And while acceptance is difficult, once you’re in, you’re in for the long haul.

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A little over a decade ago, then-West Australian premier Alan Carpenter had his back against the wall with threats from the gas and oil companies.. But he insisted on a gas reservation policy for WA.  Exxon quickly came to heel. (more…)

Where do you start? A total clean-out of the board and management of the Commonwealth Bank, a complete rethink of the role of our financial institutions, or a subjective investigation on the impact of new technology and whether it can replace human involvement? (more…)

We are the landlords. The energy companies are tenants. If we had a controlling stake in the business, it would be much easier to ensure the kind of chicanery that has taken place in the past few years was never repeated. There would never be shortages.  

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Has there ever been a more demoralising time to be Prime Minister?  There’s been the expected sniping from the sidelines and the continued calls for the Coalition to shore up its base and prevent leakage to parties like One Nation. 

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This election isn’t one that anyone would want to win. The global economy is uncertain, our debt is rising, and it seems we’ll be relying on luck rather than management to avoid a recession, writes Ian Verrender.

It was hardly the kind of message an incoming Prime Minister would wish to hear.

Not long after he seized power late last year, Malcolm Turnbull met with senior econocrats to get a handle on the economy.

His meeting with Reserve Bank governor Glenn Stevens did little to inspire confidence. Business confidence had been shattered during the Abbott/Hockey era, he was told, business investment was abysmal, wages were all but stagnant and the terms of trade were collapsing.

This shouldn’t have come as a surprise, for Stevens was traversing familiar ground.

For months he’d been issuing warnings to anyone who’d listen about the limits of monetary policy; that it was time for government to pull its weight. But the idea that the nation was on the cusp of a potential recession, particularly with a looming election, was confronting.

Turnbull quickly flicked the optimism switch to overdrive. There never was a more exciting time to be an Australian. We would transform from mining to something else via the magic of innovation. The economy was already well into the process of transition.

The rhetoric was fine. But that was as far as it went. While boosting confidence is important, it is no match for solid fiscal management. And so, in the process, the new Prime Minister missed a once-in-a-lifetime opportunity to seize the moment.

Australia’s economy is at an inflexion point. The boom days are gone but the tax rorts and the spending remains. Clamping down, right when the global economy was slowing, would have been tough, painful even.

At that point, however, Australians were prepared to follow what appeared to be a dynamic leader, certainly an intelligent one.

For that brief period, had the brutal truth been outlined along with a plan – where the pain would be borne fairly – to fix the nation’s finances, we may have been able to steer a course back to economic strength over the medium term.

Just as Paul Keating’s “banana republic” call galvanised the nation, the electorate would have worn spending cuts and perhaps even a higher GST, had it all been balanced by closing the tax loopholes for the wealthy.

Strong leadership was required. What no-one realised was that Turnbull had signed away his freedom, that he was a captive of the factions that had installed him, that wanted no change, just a popular leader who could win an election and maintain their jobs.

At first, it appeared negative gearing, the capital gains discount and the exorbitant tax breaks for the wealthy via superannuation were all under investigation. But almost every policy, apart from superannuation, was jettisoned.

Incredibly, the Prime Minister now has become the great advocate of negative gearing and the capital gains tax discount, just to have a point of difference with the Opposition.

Rather than a grand vision for the nation and the economy, he has switched to an Abbott style three world slogan election campaign. Except that in place of the DDD (Debt and Deficit Disaster), we’ve reverted to the time-honoured BBH (Budget Black Hole) and now JAG (Jobs and Growth).

The one acronym missing from any political discourse, however, is the AAA, as in triple A credit rating. Each of the three major credit ratings – Fitch, Moody’s and Standard & Poor’s – has issued thinly veiled warnings that gold star rating is under threat unless action is taken to halt the deterioration in our fiscal position.

As Fitch’s director of sovereign ratings, Mervyn Tang, said in an interview with Elysse Morgan on PM, Australia’s triple A rating is safe, so long as all the expectations about growth released in the recent budget are met and there are no unforeseen domestic or international shocks.

That’s a couple of mighty big ifs. For starters, the budget, now barely a month old, carries a series of assumptions that at this stage are looking hopelessly optimistic.

Iron ore last week was trading about $US10 a tonne below the estimate. Wages growth has slipped to its lowest since the last recession in 1992, to just 2.1 per cent in the March quarter, well below the 2.5 per cent budget forecast for the new financial year.

If that persists – and there is every indication it will – tax revenue will fall well short of forecasts and we will see yet another deficit blowout in the December half year update, as has become tradition.

Then there is the plunge in business investment. The March quarter figures, released last week, showed a whopping 5.2 per cent decline, far worse than expected.

The problem is that we don’t have a balance sheet strong enough to cope with this kind of downturn. Australia historically has run large current account deficits, importing more than we export and financing the difference with debt and imported capital. That’s a problem in this environment.

Government debt, meanwhile, continues to climb. It’s now at $435 billion, not far off the $500 billion ceiling, which will soon require lifting, or perhaps even a second storey addition.

While our government debt is low by international standards, that’s not the full story. Our total international debt clicked over the $1 trillion mark late last year and has continued to rise.

That’s because our banks have been borrowing like drunken sailors offshore to help pump up the dangerously inflated Australian property market. Given the federal government now guarantees Australian offshore bank debt, that bank debt is a taxpayer problem.

Last week, the Reserve Bank calculated the guarantee effectively subsidised our big banks to the tune of about $4 billion a year because it allows our banks can borrow at cheaper rate.

That has a two-fold effect. First, it places even greater strain on the AAA rating. And second, if the credit rating is cut, mortgage rates would rise immediately.

Oddly, there has been nary a peep of this during the campaign. Instead, the Prime Minister is adamant that the best way to ease the deficit is to cut taxes to corporations and the wealthy; a counter-intuitive concept if ever there was one.

If this campaign has achieved anything, it has demonstrated the impotence of our political masters and just how beholden they are to the vested interests that deliver them to power.

Take the ludicrous debate over the proposed superannuation changes, announced in the budget. Rather than a retirement savings plan, superannuation has morphed into a tax effective wealth accumulation vehicle for the rich.

The changes, bold as they are for a Coalition Government and long overdue, will affect a miniscule proportion of the population. From now on, rich superannuants will only receive tax free earnings on balances of up to $1.6 million. Earnings on anything above $1.6 million will attract just 15 per cent tax.

The howls of outrage have been deafening. The usual lobby groups kicked into action, decrying the shift as retrospective. Except, no-one complained about the retrospective nature of Peter Costello’s decision in 2007 to make it open slather for the rich, when he eliminated all income tax from retirement earnings.

And what about younger Australians, many with degrees and trades but no job security and no chance to buy a house, earning $60,000 a year? They pay tax. And it is their taxes that will pay for wealthy superannuants to live tax free in the palatial style to which they have become accustomed.

This election is not one that anyone would want to win. The next three years will be hard going. The global economy is uncertain and the chances of recession are rising. We will be relying on luck rather than management to avoid a recession.

Ian Verrender is the ABC’s business editor and writes a weekly column for The Drum. This article first appeared in The Drum on 30 May 2016. See link below:

http://www.abc.net.au/news/2016-05-30/verrender-election-2016-who’d-want-to-inherit-this-budget-mess/7457808

 

Malcolm Turnbull is hardly going to win votes by spruiking the economic record of his predecessor. And yet he hasn’t exactly made any headway on his own tax reform or budget repair agenda, writes Ian Verrender.

History, they say, is written by the victor.

Try telling that to vanquished former prime minister Tony Abbott, who appears to be taking great delight in reminding us at every opportunity that the Turnbull Government will go to the next election on the record of the Abbott administration.

When it comes to economic management, however, that’s not really the kind of record likely to win too many votes. For on any reading of the numbers, the Abbott-Hockey era was a bitter disappointment.

After convincing the electorate in 2013 that we were facing an economic calamity, dubbed the “Debt and Deficit Disaster”, Abbott presided over a budget deterioration during his two years in office that sent government debt soaring.

From $153 billion when he assumed office, net debt since has ballooned to $279 billion. It has risen from 10 per cent to almost 17 per cent of GDP.

Curiously, given the scale of the deterioration, there has been an odd silence from the Government about how to rectify the problem. Budget repair quietly has been swept off the agenda and under the carpet.

That is because it necessarily involves an overhaul of the tax system to lift revenue. Instead, the debate has devolved into a contest between those demanding ever greater tax concessions, which would apply even greater pressure on the budget.

Missing is any discussion about the broader economic challenges we face or recognition of the opportunities that have been wasted.

We’ve just emerged from a once-in-history resources boom, with virtually nothing to show for it. For a short period, it boosted our purchasing power – courtesy of a stronger currency – and made us all feel wealthier even as it hollowed out the economy. That period rapidly is coming to an end.

Unlike farming, services or manufacturing, resources are non-renewable. And the national tragedy is that the vast bulk of the profits from those never-to-be-replaced resources flowed to offshore investors.

The initial nobbling and eventual abolition of the Minerals Resources Rent Tax was a textbook study as to how an industry, with minimal investment, could shape public policy for maximum private gain.

As Professor Ross Garnaut correctly postulated at the time, the mining tax debate would mark the end of a brief period when Australian politicians felt empowered to enact economic reform in the national interest. He concluded:

At this dangerous time for the world and for Australia, it is important that we restore a capacity for Australian governments to implement policy in the public interest, independently of pressures from private interests.

Six years on and the times are no less dangerous. Nor have the lobbying powers of the various sectional interests abated.

Tax hikes have always been politically difficult. Now they spell almost certain political death.

John Howard barely scraped across the line in 1998 with his proposal to introduce the Goods and Services Tax, an experience that Malcolm Turnbull clearly is keen to avoid.

Having let slip vague hints of a broad overhaul of the tax system shortly after his ascension, involving possible changes to everything from the GST to negative gearing, capital gains tax and superannuation concessions, the prospect now is that if any changes are enacted, they will be minor.

If that’s the case, the impact on the deficit will be minor. Part of the problem is that Turnbull and his Treasurer, Scott Morrison, have promised that any changes to the tax system would be revenue neutral; that it’s all about improving the efficiency of the system.

That’s all well and good, but it ignores the fact that we have a structural deficit; our long-term spending is out of whack with our long-term revenue. Fixing it will require spending restraint and raising more revenue, all the while convincing the electorate of the desperate need for change.

According to the former prime minister, his replacement should abandon any plans of raising new taxes and concentrate instead on spending cuts to get the deficit under control.

If it were that easy, it would already have been done, perhaps even by Abbott when he was running the country.

Abbott’s supporters claim that it was all the fault of a hostile Senate that refused his spending cuts, an argument that ignores basic mathematics. Not approving cuts should merely have kept the deficit steady.

As Scott Morrison explained to the National Press Club earlier this year:

Over the last two years … we have saved over $80 billion. But we have also had new spending of more than $70 billion.

Even more damaging to the budget was the decision to axe the carbon and mining taxes. The carbon tax removal alone denuded the coffers of $7.6 billion a year. It was replaced by a subsidy called Direct Action, estimated to cost $1.5 billion over three years.

Election promises they may have been, but removing such a large whack of revenue has limited any opportunity for tax relief elsewhere. There’s just no more wriggle room.

When it comes to new taxes, Abbott’s abhorrence appears to be a relatively new phenomenon. It’s worth remembering that Joe Hockey’s first budget contained a temporary levy on higher income earners, a Medicare co-payment for GP visits and an increase in the fuel excise; taxes by another name.

One of the biggest challenges facing Turnbull on budget night and at the ballot box – whenever an election is called – will be how to keep the nation’s schools and hospitals functioning.

The Abbott government effectively stripped $80 billion out of health and education, passing on the funding responsibility to the states. That’s money they don’t have and it explains why NSW’s Mike Baird and South Australia’s Jay Weatherill were such strident supporters of an increased GST.

All these concerns, however, appear to have drifted into the shadows as the new PM pontificates on innovation and confidence.

The business lobby groups, in the meantime, continue to press the case for tax cuts, even in the face of revelations by the Australian Tax Office that show a third of all public companies and the largest private companies pay no tax at all. If recent statements from senior ministers are anything to go by, it appears they have succeeded.

The property industry looks to have scored a win too.

The PM has voiced his staunch opposition to the ALP’s plan to wind back negative gearing, a tax concession that has deployed hundreds of billions of dollars into loss-making assets, has made Australia among the world’s most expensive places to conduct business and transformed the country into a nation of landlords and renters.

If tax reform or budget repair ever was on a table, it may well have been the marble one that splintered under the weight of a former treasurer the night his boss was dumped.

Ian Verrender is the ABC’s business editor and writes a weekly column for The Drum.

This article was originally published on ABC’s The Drum.

There has been much comment about Gough Whitlam’s performance as an economic manager. Ian Verrender, the Economics Editor at the ABC, presents an alternative view.  See link below.  John Menadue

http://www.abc.net.au/news/2014-10-27/verrender-think-whitlam-ruined-our-economy-think-again/5842866