Author: John Menadue

A lot of nonsense about productivity

For years the Business Council of Australia and News Corp have been warning us about our poor productivity record and the need to change our industrial relations laws to bring trade unions to heel.  A part of this campaign against unions is now being played out in the Royal Commission into Trade Union Governance and Corruption. The partisan nature of this action is obvious when we see that the government has refused a Royal Commission on governance and corruption by the Commonwealth Bank of Australia and other banks in the treatment of thousands of investors in superannuation. But the unions are easy game for a vindictive government.

It is not that productivity is not important, as the BCA reminds us. It is important, but we have been doing much better than the BCA is prepared to admit. We are also doing much better in labour flexibility than the BCA is prepared to admit. But invariably business interests take the political path of urging changes to industrial relations legislation rather than focussing on improved relations in the work place. That is where real labour productivity is and must be achieved…in the workplace and by members of the BCA.

In his speech in Hobart to the Econometrics Society on 3 July this year, the Governor of the Reserve Bank of Australia, Glen Stevens, pointed out that the value of output produced per hour of labour time, increased at an annual rate of 2% in the three years to June 2013. They were the three years of the Rudd/Gillard governments. Stevens commented ‘[This] better trend for [labour] productivity, if we can sustain it, and especially if it can be further improved, would be a reliable base for optimism about the longer-run prospects for the economy and our living standards’.

There has been no productivity crisis despite what the BCA and News Corp have been telling us month after month.

The BCA and other large employers were also telling us that the labour market under Fair Work Commission was too rigid and that employees should be much freer to change jobs and move into areas of high demand like mining. But again the facts pull the rug out from under this specious argument.

In the same week that Glen Stevens was speaking in Hobart, Dr David Gruen of Treasury spoke of a survey of nominal wages over the decade to March 2014. Wages in mining rose 9.7% more than the aggregate increase. Wages in construction rose by 5.4% more than the aggregate. And wages in the professional, scientific and technical sectors rose by 2.5% more than the aggregate. By contrast, wages in the manufacturing sector rose by 0.9% less than aggregate wages. In retail the increase was 4.3% less than the aggregate and in the food sector 7.6% less.

As Ross Gittins in the SMH has pointed out ‘We now have a genuinely decentralised and more flexible wage fixing system, delivering wage growth in particular industries more appropriate to their circumstances’.

The clear facts are that productivity and wage flexibility have been improving. Unfortunately much of the rhetoric about industrial relations legislative reform distracts from the need for both employers and employees to concentrate on the work area, in the work place where productivity and wage flexibility is best achieved. The outcomes we seek will not be obtained in ideological campaigns about industrial relations law like the Fair Work Act. Competent and engaged employers know that. But the shrill spokespeople for the BCA and News Corp don’t want to listen. They want to blame others.

We have seen wild exaggeration about the effects of the carbon tax on prices and the economy. It has all turned out to be quite a fizzer. The price increases we have seen have little to do with the carbon tax and the economy continues to grow steadily. Whyalla has survived.

But we have a real problem just around the corner in energy policy. The price of domestic gas is likely to at least double in the next year or so as the domestic price of gas rises to meet the international price. Compared with the impact of the carbon tax, this increase in domestic gas prices will be quite severe.  By comparison, the carbon tax will be seen like a blip on the horizon.

Deloitte Access Economics has just warned that if the gas rise goes unchecked, the manufacturing sector alone will contract by as much as $118 billion by 2021, with nearly 15,000 jobs lost. It suggests the mining sector might contract by $34 billion and agriculture by $4.5 billion.

Australian gas consumers are naturally concerned because of the $70 billion coal seam gas export project at Gladstone. It is nearing completion and it is likely that our domestic prices for gas will increase to match the export prices from Gladstone.

Gas is vital for a whole range of industries in Australia – electricity generation, glass and plastics, fertilisers, cement, metals and ceramics – and of course home heating and cooking. Our manufacturing sector has been struggling with the high dollar, but relatively low gas prices have been very important. That is going to change.

As Bruce Robertson in the SMH has pointed out, historically our east coast had relatively cheap gas from Bass Strait and the Cooper Basin. It was a domestic market largely shielded from world prices. That will change dramatically with the export gas terminal in Gladstone which will draw gas out of the domestic market into the export market because of higher prices overseas, particularly in Asia.

The coal seam gas moratorium in NSW and Victoria is peripheral at the moment. The main driver of increased gas prices in the years ahead will be the catch-up to export prices driven by the very large coal seam gas project at Gladstone.

This seems absurd for a country that has some of the richest energy and gas fields in the world. Tony Abbott says that Australia aspires to be the ‘affordable energy capital’ of the world.

We need to seriously consider reserving necessary gas for Australia’s domestic purposes including the 40% of our gas used by industry.

Free marketeers will tell us that we should not interfere in the market – that we should let domestic prices rise to export prices, otherwise it will discourage investment. But how ‘free’ is the market? There is concentrated ownership of reserves and limited competition with tightly held gas fields reserved for LNG export. The major companies have joint marketing arrangements which limit competition. There is really a cosy club of big international players that distorts the market.

We have given some of these major international companies the right to reserve our gas for export. Some of our very large gas resources are, or will be, held back for export where there will be higher prices.

In 2012, the OECD observed ‘these [gas] markets are far from being liberalised. [They are] characterised by a lack of competition both upstream [where relevant] and downstream’.

Many countries insist that their substantial gas reserves must pass the test of ‘value-adding’. Gas is reserved for domestic use if it can be demonstrated that that ensures greater value for the supplier country. After all, the gas belongs to the country and its people – and not the international companies. In WA the government has enacted legislation to shield domestic gas consumers. In the US, domestic gas prices are kept low by limiting export licences. In different ways most other countries with large gas reserves ensure that there is adequate domestic supply.

On the ABC on the 30th April this year, asked by Tony Jones ‘Should a national energy policy include putting aside gas reserves for domestic use’, Jeff Kennet replied ‘Well, certainly, if you don’t provide for your own you, very quickly find out that your own aren’t there or they are of a sub-class in terms of the region in which we live’.

The ‘debate’ about the carbon tax is really just a curtain-raiser to the very serious discussion we need to have about the reservation of Australian gas for domestic use.

To what extent are we prepared to limit export licences for gas until the domestic market is adequately supplied? I am not persuaded that the large international gas companies will put Australia’s interests first.

In his speech to the Sydney Institute last night, Joe Hockey said that the criticism of the budget was unfair and reminiscent of ‘class warfare’ of the 1970’s.

Joe Hockey was right on one thing. There is class warfare and he is waging it particularly against the young and the aged in Australia. Warren Buffet a multi billionaire put it pungently in the US recently ‘There is certainly class warfare going on and my class is winning it’.

There has been wide-spread commentary about the unfairness of the budget. Ross Gittins for example has said: ‘This is the most ideologically driven budget we have seen … They cut the real growth in pensions but left high income earners absurdly generous superannuation tax concessions untouched. They tightened up the family allowance and cut young people’s access to the dole, but didn’t tackle the concessional taxation of capital gains, negative gearing or company cars, while ignoring the miners’ diesel fuel rebate and other business welfare. They imposed a co-payment on GP visits, but didn’t abolish the private health insurance rebate. … So it’s the “end of entitlement” for people in the bottom half, but no change to the entitlements of the well-off, save for a small three year tax levy.’ (SMH June 9)

Joe Hockey complains about welfare in Australia, yet government outlays here as a percentage of GDP are one of the lowest in the world. The OECD recently published a report on government outlays for the 18 highest income OECD countries in 2012. Australia was the second lowest in terms of government outlays. Only Switzerland was lower. Countries such as Denmark, France, UK, Germany, Norway, Japan and the US all spent more on government outlays than we did.

At less than 36% of GDP (all levels of government ) Australia’s public sector is a dwarf. The OECD average size of government is 40.4% of GDP and successful northern European countries such as Germany, Netherlands and the Nordic countries, all have public sectors above 43% of GDP.

Furthermore Australia has one of the most effective means-tested welfare systems in the world. This needs continual updating but it does ensure that support goes to those in greatest need. This means of course that if welfare payments are reduced it’s going to hit hard those least able to afford it.

There is increasing concern around the world about growing inequality in developed countries. It is much worse elsewhere such as in the US but the trend in Australia is significant. In the blog which I posted on June 9. ‘What to do about growing inequality in Australia’ you will find the following.

• In Australia in 2011-12, the mean household net worth of the lowest 20% of our population was $31,205. The highest 20% had a mean household net worth of $2,215,032.
• The same report quoted from a paper by Andrew Leigh, ‘from the mid-1970s, full-time wages for the bottom tenth of the income distribution had grown only 15%, while full-time earnings for the top tenth have increased by 59%. In recent decades the income share of the top 1% has doubled, the wealth share of the top 0.001% has more than tripled and the share of the top 0.0001% (the richest one millionth) has quintupled. In 2009, the top 20 CEOs earned more than 100 times the average wage. (We saw an example of this this week with the CEO of Australia Post being paid $4.8 million p.a., almost ten times the salary of the Prime Minister whilst sacking 900postal workers.)

There are numerous examples of corporate welfare and subsidies for the wealthy. This is where the real ‘welfare’ is to be found. Some examples include

• Superannuation concessions costing $36 billion p.a.
• Negative gearing costing $4 billion p.a.
• Subsidies to private health insurance costing $5 billion p.a.
• Income-splitting trusts costing $3 billion p.a.
• Capital gain discounts costing $5 billion p.a.
• Fossil fuel subsidies for polluters costing $11 billion p.a.
• Funding of private schools costing $9 billion p.a. that benefit a lot of wealthy schools
• Tax avoidance that I mentioned in my post of June 10 costing perhaps $10 billion p.a. or a lot more!

There is enough corporate and high income welfare here…$82b pa and counting …to more than meet the “structural budget deficit” of $65b pa. And of course there is also  paid parental leave.

In the face of growing inequality, government largesse and benefits are being increasingly distributed to the more prosperous members of our community. Joe Hockey probably regards all these benefits as incentives rather than welfare.Or as he more insultingly puts it, the government “should be rewarding lifters and not leaners”

His comments about class warfare are an ideological smoke screen to hide the unfairness of his budget. It is he and his supporters who are waging class warfare. And they are winning. The age of entitlement is still very much alive for the people Joe Hockey listens to…like the people on the Business Council of Australia or his own North Sydney Forum.

We need a just and efficient society. Growing inequality acts counter to both those objectives. But in the end the case for greater fairness and equality is a moral one. Taxes are the price we have to pay for a civilised and decent society.

Our tax system is in a mess. It is easily exploited by the wealthy who can afford expert financial and taxation advice. We hear from Alan Jones and the Daily Telegraph about dole-bludgers. The Minister for Social Services Kevin Andrews says that disabled pensioners should get off the couch.

Tax avoidance and tax bludging however are much greater problems.

The Henry Review of Taxation addressed many problems but by and large the Rudd and Gillard Governments did not grasp the tax nettle. The scandal continues.

Let us look at a few recent examples.

Peter Martin in the SMH on 13 May reported that the latest tax statistics show that 75 ultra-high-earning Australians paid no tax at all in 2011-12.  Their average income from investments and wages was $2.6 million each. They paid no income tax, no Medicare levy, no Medicare surcharge, even though 60 of them paid private health insurance premiums. PHI always favours the wealthy. These 75 ultra-high-earning Australians had a taxable income of $1.10 each. It is hard to believe but it is true.

The AFR on 23 May reported that ‘Almost 9,200 self-managed super funds have a balance of more than $5 million, a rise of 75% in the past three years, and that the number of funds with over $10 million had doubled. These self-managed superannuation funds are really on shore tax havens for the rich. The AFR continued ‘A lot of these tax strategies involve shuttling money in and out of super funds to trigger a lower tax rate or glean tax deductions on personal expenses. The most popular are 55 year old executives who start drawing a tax-free pension from their fund, while tipping their entire salary into it and effectively reducing their tax rate from 46.5% to about 15%. Another common strategy is to put money into super to get a tax deduction and then pull the money straight out tax-free.’

The AFR of 21 May this year, reported the Deputy Commissioner of Taxation, Mark Konza, as saying ‘While the global debate about how to tax multi-nationals has centred on such companies as Google and Apple, energy and resources companies were also a target. The tax office is reviewing international transactions by 233 multinationals and has identified 86 of these as high risk.’ In 2011-12 according to the AFR, Australian companies shifted $130 billion offshore, mainly to minimise tax.

In its last annual report Google Australia disclosed annual revenue of $3.6b and paid tax of only $296,000.  What was that about ending the age of entitlement!

There are numerous tax havens. Mark Zirnsak of the Uniting Churches’ International Mission Unit examined the tax subsidiaries of Australia’s top 100 companies. He found that News Corp topped the list with 146 such subsidiaries. AMP had 15, Telstra 19 and Toll Holdings 64. All the banks had them.

In its 2010 annual report Westfield had 56 subsidiaries. But surprise, surprise we learn from the Saturday Paper that the Westfield report of 2013 did not mention a single subsidiary in Jersey or Luxembourg.

In May last year Business Day revealed that all but one of Australia’s top 20 companies listed on the stock exchange have subsidiaries in low tax countries or tax free jurisdiction including Hong Kong and Singapore. At least half those companies have subsidiaries in tax havens such as Bermuda, Switzerland, Jersey and the British Virgin Islands.

We have the continuing problem of hobby-farmers who purchase vineyards or dairy farms for lifestyle reasons and also to minimise tax. In the wine industry, these hobby farmers are responsible for a significant part of the over-production of wine. to the detriment of full-time wine producers.

According to Roman Lanis at UTS, the Westfield empire paid an effective tax rate of only 8% over the last decade. That 8% tax rate was well below the 22% average rate paid by ASX 200 companies which in turn is below the 30% company tax rate. Lanis said that tax minimisation like this is common in the real estate sector. If the full 30% tax rate had been paid Australians would have an extra $2.6b in tax revenue. This behaviour of Westfield is undoubtedly legal, but is it right?  Further the privileged children of Frank Lowy are the highest paid executives in Australia. Last year Peter Lowy was paid $11.5 m up 43% on the previous year.  Steve Lowy was paid $10.9 m, up 23%.  Westfield’s small business lessees, consumers and taxpayers are subsidising these excessive salaries. As the Americans say it is an enormous advantage to be born on third base.

The Auditor General, Ian McPhee, has just released a report on the Australian Tax Office’s handling of high wealth individuals (HWI). He said that ‘Tax compliance of the 2,650 HWIs and 3,700 potential HWIs who had a total estimated wealth of $500 billion in 2012-13 represented a “significant revenue risk”. He added ‘These wealthiest people use a complex web of trusts and companies to hide what could be potentially billions of dollars from the tax office.’

All this sounds like a catalogue of artful tax dodging. The age of entitlement is not over for the rich, particularly for those with inherited wealth and with tax havens littered around the world. Don’t tell me about dole bludges and people lounging on couches.

Our problem is not government spending. It is overwhelmingly the decline in government revenue. There are some good examples above of why and how that is occurring

On Wednesday in London at a conference on ‘inclusive capitalism’ the Governor of the Bank of England, Mark Carney, and IMF Chief, Christine Lagarde, gave the international banking community the most severe pasting that I can ever recall of a  particular industry, or at least one that  operates “legally”.

They said that bankers regarded themselves as different and not bound by the need for economic and social inclusion that is essential in a modern society. Both Carney and Lagarde said that the actions of the banks were excluding them from mainstream society. It is true of banks in Australia as much as banks in Europe and the US.

Mark Carney said

• “Capitalism is at risk of destroying itself unless bankers realise that they have an obligation to create a fairer society”
• “Bankers had operated a heads-I-win-tails-you-lose system”. He questioned whether “Traders met ethical standards and that those who failed to meet high professional standards should face ostracism.”
• “The basic social contract at the heart of capitalism was breaking down with rising inequality.”
• “The most severe blow to public trust was the revelation that there were scores of too-big-to-fail institutions operating at the heart of finance. Bankers made enormous sums in the run-up to the [GFC] and were often well compensated after it hit. In turn taxpayers picked up the tab for their failures.”
• “One of the lessons of the GFC was that compensation schemes had delivered large bonuses for short-term returns and encouraged individuals to take on too much long-term risk. In short, the present was over-valued and the future heavily discounted.”

Christine Lagarde also cut through the bankers’ self-deluding spin.

• “The financial services industry had not changed fundamentally in a number of dimensions since the crisis”. She reeled off ‘a list of scandals, including money-laundering and the manipulation of bench marks such as Libor.”
• “Progress on building a safer financial system has been too slow, primarily because of industry attempts to halt the introduction of tougher new laws.”
• “While some changes in behaviour are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.”

The details of banking behaviour in Australia may be marginally different but the thrust of Carney and Lagarde’s criticism is valid in Australia. The moral centre of gravity of our bankers and their boards of directors is hard to discern. Consider

• The combined cash profit of the big four Australian banks last year was over $27 billion. They enjoy a government guaranteed oligopoly.  Time and time again the banks refused to pass on reductions in official interest rates in Australia or the reduction of offshore rates. Surely we need a banking supertax and a Tobin tax on international financial transactions. A 0.2% levy on bank assets above $100m would raise an estimated $11 b over four years The super profits of the banks are promoting the “rising inequality” that Mark Carney warned about.
• The CEOs of the our four banks last year had a combined take-home pay of over $35 million; Cameron Clyne, NAB $7.8 million; Mike Smith, ANZ, $10.4 million; Gail Kelly, Westpac, $9.2 million and Ian Narev, Commonwealth Bank, $7.8 million. There are various share rights on top of this. These salary packages are ethically indefensible. The market is rigged by so called independent remuneration “experts”, board directors and senior executives’. Why should such CEOs expect wage restraint from anyone else? In 2001 CEOs in Australia were paid about 20 times average weekly earnings. It is now over 70 times. I see no reason why anyone should be paid more than the $500,000 salary package of the Prime Minister who works harder and takes more risks than any bank CEO. If shareholders won’t address this corporate greed, the government should do so through the tax system. The banks are working against a “fairer society” that the Governor of the Bank of England referred to.
• We recently saw on 4-Corners the Commonwealth Bank financial planning scandal which victimised thousands of retirees. Instead of facing up to the moral issues involved, the bank set its spin doctors to work. It is the sort of “scandal” that the IMF Chief would have had in mind
• The banks have been leading the charge to roll back the Future of Financial Advice (FOFA) which is designed, amongst other things, to protect superannuation contributors from the conflict of interest of financial planners employed by financial institutions. Financial advice has become a honey pot for the banks.  Last year the financial advising industry pulled in $21 billion from the superannuation pool. There are 18,000 financial planners in Australia and four out of five of these are owned by a bank or an insurance company.  In the name of ‘winding back red tape’ the bankers are lobbying hard to protect their oligopoly rents. Their greed must be contained. But as Christine Lagarde put it the banks want to “halt the introduction of tough new laws”
• We have grown tired of the campaign by the Coalition concerning our public debt of $300 billion. But the serious debt is household debt owed principally to the banks of almost $2 trillion. In proportion to our household disposable income this is one of the highest debts in the world. But where are the business economists, mainly employed by the banks, in warning us of the risks of this level of private debt which has been induced mainly by their employers. The banks are promoting what  Mark Carney warned about  ,”individuals taking on too much long term risk”

The warnings of Carney and Lagarde are highly relevant to the behaviour of Australian banks. They still regard themselves as a privileged and untouchable elite. They are losing our trust fast. They are eroding our social capital.

In recent months we have been partly appalled and partly amused by the urgers and spivs from both sides of politics that have been paraded in Sydney before the Independent Commission against Corruption. Most recently we have seen developers and others using fronts to launder money to hand on to political parties. Even the Young Liberals have decided to get into the act with their ‘Black Ops’.

But there are other more serious problems with think-tanks that receive large amounts of money, seldom disclose their sponsors or donors and then conduct overt political campaigns, invariably on behalf of business and the conservative side of politics. These cash for comment think-tanks hawk themselves around as ‘independent’! They are often nothing of the sort. They are propagandist fronts for the laundering of money for special interests. Yet organisations like the ABC give them remarkable free time to espouse the views of their secret funders.

Consider the Institute of Public Affairs (IPA). In 2010 an IPA Director, Alan Moran, told the Productivity Commission ‘We’ve got about 4,000 funders … there are occasions when we may take decisions which are somewhat different from those of the funders. Obviously that doesn’t happen too often, otherwise they’d stop funding us, but it does happen occasionally.’  I could rest my case there but the IPA has a colourful record in fronting for special interests.

In his 2007 book on the PR industry ‘Insider Spin’ Bob Burton wrote ‘A little funding routed by a think-tank [like IPA] enables the policy agenda of corporate funders to be projected to a broader audience with more credibility than if it did it for themselves’.

In 2008 the IPA wrote an article “Big Fat Beat up” questioning the relationship between obesity and junk foods. We were not told whether the junk food industry was a funder of IPA

In 2010 the Gillard Government announced legislation to force all cigarettes to be sold in plain packages. With the help of the ABC, the IPA attacked the government at every opportunity on this issue. The ABC gave IPA’s Tim Wilson almost unending interviews. He also got a run on seven commercial radio stations. Asked by Media Watch whether the IPA received funding from Big Tobacco, Tim Wilson’s response was ‘The IPA does not disclose its membership list’.

IPA’s John Roskam argued last year for more investment in dams and roads in the Northern Territory together with special economic zones. What IPA did not mention was that its policy proposals on the Northern Territory followed very closely what Gina Rinehart had been saying. Interestingly she was the guest at IPA’s 70^th anniversary dinner last year. Asked if Gina Rinehart was a donor to IPA, James Patterson responded ‘The IPA is funded by voluntary contributions of our 3,256 … members and supporters. We are very grateful for their support and we respect their privacy’.

IPA’s major successful campaign has been to give a platform to client change sceptics. It funded two full-page advertisements in The Australian, costing about $100,000. The advertisements attacked the government’s climate change policies.  Who funded this campaign?  The IPA did not tell us. Was it the fossil fuel industry? Was it Exxon, Shell, Caltex and BHP Billiton? With a policy of non-disclosure IPA provides a front for powerful rent-seekers.

In the year to June 30, 2010, the IPA hosted forty events around the country against the carbon tax. I suspect that the polluters paid the cash and the IPA provided the comment.

The IPA told us in the Drum those pub lockouts and 3 a.m.  closing where a bad idea “because the Australian public consumes a large quantity of alcohol and gets into very few fights” How much does IPA receive from the alcohol industry.

A few years ago the IPA launched a sustained attack on NGOs as being unaccountable, unrepresentative and not worthy of charitable status. But the IPA enjoys charitable tax status. Has the Tax Commissioner examined the murky financial world of the IPA?

Why should the ABC which the IPA so desperately wants to get rid of, give the IPA extended coverage to its ‘scholars and fellows’. The ABC does this on a wide range of its programs – The Drum, TV Breakfast, Radio National and more.

Businesses are attracted to front organisations which will espouse and promote their views. The IPA and others are part of a rigged and prejudicial public debate. They are doing more to damage our democratic life than the shifty developers we see parading before the ICAC.

The Free Enterprise Foundation of the NSW Liberal Party and Joe Hockey’s North Sydney Forum are small beer compared with the IPA which fronts for rent-seekers who hide behind the scenes.

Professor Ross Garnaut has spoken of the ‘diabolical problem’ of conducting in Australia a balanced and informed debate on important public policy issues. We had such a debate during the Hawke and Keating periods of the 1980s and the early days of the Howard Government. The IPA and their ilk are a major part of the “diabolical problem” that Ross Garnaut refers to. They are debasing public debate. They will not disclose who funds them and organisations like the ABC give them an armchair ride.

Surely at the least, the ABC should not put to air anyone from a “think tank” that does not disclose its donors because the assumption must be that they are a cash for comment enterprise.

Think tanks are important players in the battle of ideas but this battle needs to be conducted honestly and transparently

I was founding Chair and am a Fellow of the Centre for Policy Development. We disclose our major supporters and donors.

I will be writing further about the corruption of public debate; the role of lobbyists, the influence of News Ltd, a rogue organisation and the public influence of “independent” business economists who are employed by vested interests and particularly the banks. Where are the independent and informed public commentators? They seem to have abandoned the field and their public responsibilities.

Joe Hockey talks endlessly that the days of entitlement are over. They may be over for the unemployed, students, the sick and pensioners – in fact the majority never had days of entitlement. But they are certainly not over for the miners and the financial sector. These two sectors survived unscathed from the budget. This tells us a lot about who is running this government.

For the miners, the mining tax and the carbon tax will end at a cost to the taxpayer of at least $10 billion per annum. The rebate on diesel fuel will remain. The government tells us that it had to honour these promises.  The same commitment to honouring promises was easily discarded in the case of the unemployed and the sick.

And then there were the promises to the financial sector and particularly to the superannuation industry and the private health insurance industry. Promises to them had to be honoured. There was no attempt to scale down the tens of billions of dollars in rip-offs in these sectors that benefit the rich. Not only is the government determined to protect the privileged position of the financial sector, but it is also trying to water down the Future of Financial Advice (FOFA) legislation to advance the position of the banks and AMP. Senator Sinodinis and the government are obviously determined to allow the conflict of interest by the banks and the AMP and their financial planners to continue.

The $5b p.a. corporate welfare subsidy to private health insurance sector will continue. But not content with this corporate handout PHI will seek to get a foothold in the new Primary Health Organizations, formerly known as Medicare Locals.

Just look at who is untouched in this budget – the miners and the financial services sector. That tells us a lot about who is pulling the strings. This is crony capitalism. As Paul Keating put it the Liberals are about business, not markets. Or as Tony Abbott put it on election night – ‘Australia is open for business’ – the business of the miners and finance sector. Their entitlements will continue.

There was a real risk that Tony Abbott and Joe Hockey believed their windy rhetoric of the last two years about debt and deficits. Having won the election they have had to face the reality that they have been grossly exaggerating our economic problems.

The real risk was that Tony Abbott and Joe Hockey would act on their own exaggerations and savagely attack the economy. Fortunately, the Budget tells a very different story. In terms of managing the macro-economy, the government has got it about right in the budget. It hasn’t cracked down in the way many feared.

But what the Budget has done is to inflict pain on the poor and the vulnerable in our society; the unemployed, young people, the sick and the poor. Unlike Robin Hood, Joe Hockey robs the poor to protect the rich. And more pain is to come for the disabled and pensioners. The $80 billion cutback in health and school funding for the states will also result in severe problems. State Premiers are already protesting. This hit on the states will probably force them to press for a broader and/or an increase in the rate of the Goods and Services Tax. Perhaps that is what Joe Hockey intends.

The most glaring example of cruel policies is the cut in our overseas development assistance program.  It is the largest single saving in the Budget. The political logic must be that the poor in the world that we should help can’t vote in Australia and can’t protest. They are an easy target, like vulnerable asylum seekers. As a wealthy country we should hang our heads in shame.

I have written before about the need to address our revenue shortfall and the enormous advantages that flow to rich taxpayers in Australia. Our tax as a percentage of GDP has fallen steadily since 2002 from 30% to 28%. This is well below the OECD average of 34% of GDP. We need to fix our revenue base and not punish the poor and vulnerable.

A major reason for our revenue shortfall is not so much our low tax rates but the high level of tax expenditures or tax deductions that we have. In 2012-13, Treasury reported that there were 363 ‘tax expenditures’ under our tax system. Those tax expenditures had a total value of $115 billion. These tax expenditures range across the field – deductions for charities, religious, scientific and community organisations. The largest of all tax expenditures is for superannuation. This ‘tax expenditure’ costs the Budget over $30 billion per annum. About 30% of these superannuation tax deductions or concessions go to the top 5% of income earners.

The IMF has reported that Australia forgoes more revenue as a proportion of GDP from tax expenditures than all other OECD countries. It is in this area of tax expenditures that we need to direct our attention.

Quite apart from the scale of these tax expenditures or deductions and loss to revenue, there is very little transparency. Direct welfare payments for example are easily identified. The IMF points out those tax expenditures are often granted as a result of secret lobbying. The IMF recommends regular and systematic reviews of tax expenditures in the same way we review direct government expenditures, like unemployment benefits. Parliament and the Parliamentary Budget Office would do a great service if they conducted and published such a regular review. If they did, a large number of these expensive tax expenditures like superannuation, negative gearing and subsidies for private health insurance would be brought to public attention and curbed or abolished.

The ‘welfare cheats’ and ‘dole bludgers’ which are so much part of the stock in trade of tabloid newspapers and talk-back radio are easy game. The real rackets are run by vested interests that reap enormous benefits from tax expenditures which are often largely hidden from view.

We badly need revenue reform and of tax expenditures in particular.

Taxes are the price we pay for a civilised society. We need to face up to the need for adequate tax revenue to ensure that all Australians can live in a civilised way.

There is a campaign underway to cut weekend and holiday penalty rates particularly in the restaurant and hospitality industries. True to form the Australian Financial Review says that weekend penalty rates are a relic of times past.

A report leaked to the ABC indicates that the government will ask the Productivity Commission to undertake a comprehensive review of workplace laws. This will include penalty rates, pay and conditions, unfair dismissal, enterprise bargaining flexibility and union activities. It is proposed that this review by the Productivity Commission will consider the performance of the Fair Work Act. The Commission is expected to report to Joe Hockey by April 2015. He is ministerially responsible for the Commission. He makes the references to the Commission.

What is of concern is the political relationship between Joe Hockey and John Hart, the CEO of Restaurant and Catering Australia who is pressing for a review of penalty rates by the government. John Hart is also the Chair of Joe Hockey’s North Sydney Forum which has featured prominently in Fairfax media in recent days.

According to the SMH of May 5, 2014, membership fees are paid to the North Sydney Forum, chaired by John Hart, as part of the North Sydney Federal Electorate Conference. Joe Hockey is the Member for North Sydney. A full member pays $5,500, a corporate business member $11,000 and a private patron $22,000. Depending on the package, there are membership benefits which include board room events, end-of-year receptions, private VIP board room functions and policy forums and receptions. There is also provision for memberships of “Friends of Joe”.

John Hart is clearly a key man for Joe Hockey and John Hart wants action by the government on penalty rates.

Most of us would agree that we would rather not work at weekends, but if there is a need for such work, people should be fairly compensated for loss of time away from friends, family, recreation or church. Even God rested on the seventh day. Having forced governments to extend shopping hours and arguing that penalty rates were necessary compensation we now see a campaign by the same vested interests to wind back penalty rates.

Restaurants and catering businesses say that many are going out of business because of weekend penalty rates. But how much of the problem of those businesses is due to bad business decisions rather than penalty rates? John Hart, Joe Hockey’s fund raiser tells us that there is a 20% annual turnover of restaurant businesses.  I suspect that many of them close because they have made bad business decisions and not because of penalty rates. It is tempting to blame the “system” rather than admit a business mistake.

With changes in lifestyle, higher incomes and with two working parents, we do eat out more. Statistics from the industry reveal that restaurant business income has grown at a rate of 5.6% annually over the last five years. The Bureau of Statistics has just told us that while total retail sales were up by only 0.1% in the March quarter, restaurant sales were up by 1.8% It is an industry that is growing rapidly despite the alarm about penalty rates. There seems to be a lot of special pleading when John Hart says that we should freeze minimum wages or restaurants will shut down.

As Ross Gittins has pointed out, many of us see the benefits of living in a market economy, but we don’t want to live in a market society. There must be limits to anti-social intrusions by markets. We should reject any suggestion that market are supreme and can invade our private lives on a 24/7 basis. Do we really need to have so many businesses open all weekend? Clearly we need people like nurses to cover for illness seven days a week, but do we need the same access to restaurants and shops?  And if we do, employees should be properly compensated.

If the last twenty years has taught us anything about industrial relations, it is that continual change is costly for all concerned.  In 1993 the Keating Government abandoned our centralised IR system. In 1996 Peter Reith downgraded the role of IR tribunals. In 2005 John Howard gave us Work Choices. Then in 2009 Julia Gillard gave us the Fair Work legislation. Now Tony Abbott, Joe Hockey and John Hart want more change. We need more stability in our industrial relations framework because in the end good relations at the work level depend on effective local management and employee participation.

Industry leaders tell us that we need to lift productivity. And we need to do this. But a lot of the productivity slow-down is a statistical mirage reflecting the massive mining investment which is just now beginning to show results in increased mining production.

The vested interests that want to cut penalty rates claim that we have an inflexible labour market which results in high wage costs. Yet at present, the annual pace of wages growth has slowed from about 4% p.a. three years ago to a record low of 2.6% in recent months. Our labour market is showing considerable flexibility.

Clearly we need to review penalty rates and all industrial relations from time to time, but we seem fixated with the problem, mainly for ideological reasons. . We don’t want the market to intrude into all aspects of private life. Markets are to serve people and society, not the other way around.

Just when the mining tax looks like raising some worthwhile revenue, the Coalition proposes to abolish the tax.

The Rudd Government made a mess of the Resources Super Profits Tax (RSPT). We know from the Henry Tax Review and other commentators that such well-designed rent-based taxes are likely to be more efficient and even out the effects of volatile mineral prices. We also know that such taxes are superior to state government royalties.

But the mining companies advertising and public relations campaign of $22 million scuttled the RSPT. For an expenditure of $22 million in lobbying and advertising the miners were saved about $60 billion in tax over the next ten years. Despite the fact that all surveys at the time showed that the majority of Australians supported the RSPT, the combination of the miners, the Coalition and the Murdoch media forced the government to give way.

As Ross Gittins in the SMH of March 17 this year put it ‘A great opportunity was lost for our economy and our workers to benefit adequately from the exploitation of our natural endowments by mainly foreign companies [who own about 80% of the mining industry] our government has to ensure that it gets a fair wack of the economic rent these foreigners generate.’

But having lost the critical battle over the RSPT, the government then introduced a watered-down mining tax called the Minerals Resource Rent Tax (MRRT). In its weakened political state, the Gillard government allowed the three big foreign miners, BHP (76% foreign owned), Rio Tinto (83% foreign owned) and Xstrata (100% foreign owned) to re-design the new mining tax – the MRRT – to suit their interests.

And what happened? The miners were allowed to deduct the market value of existing assets instead of deducting the book value over five years. In this way the miners could maximise their deductions up front. That is why the mining tax has raised far less revenue than expected.

As Ross Gittins has put it ‘Once these deductions are used up, the [mining] tax will become a big earner’. Gittins went on to say that abolishing the tax will be ‘An act of major fiscal vandalism’.

According to the Greens, the Parliamentary Budget Office has advised. that a mining tax of 40%, as originally proposed ,on  all minerals with fixed state royalties and a change to depreciation will raise $35b over 4 years.

It is also interesting to see the continuing strong hold which the miners have over the coalition, indeed over all major parties. There has been media speculation that the May 13 budget would abolish the diesel fuel rebate. The miners mounted strong on the government to drop any such proposal. In a letter to the government the miners said. ‘We have run the numbers on any substantial change to the rebate and the impact would be profound. Most likely far greater than any MRRT and probably a little less than the first mining tax”. So the miners win again. The fuel rebate will be unchanged. Persons with disability, pensioners, the unemployed and the sick will not have such luck.

See below polling which shows strong public support for mining taxes.

(See my blogs of October 17, 2013 ‘Short-sighted miners …’ and February 18, 2014 ‘The squandered mining boom’.)

 Public attitudes towards mining taxes from Essential Research

Re RSPT

• In May 2010, 52% approved higher taxes on the profits of large mining companies and 34% disapproved.
• In the same month, 43% said they supported the RSPT and 36% opposed.

Re MRRT

• In November 2011, 50% approved the tax and 28% disapproved.
• In April 2012, 56% approved the tax and 28% disapproved.

Tony Abbott and Joe Hockey have been leaking confusing stories in the lead-up to the budget. A consistent theme however is that they must take tough action because of all the problems left by the previous government. They also need to justify the exaggerated rhetoric they used during the election campaign. A lot of it is confected.

The Commission of Audit will add to the confusion in focussing on expenditure when the main problem is declining revenue. The neglected Henry review of taxation will be a better guide for the future than an ideological and partisan Commission of Audit

In all this media static, I think there are several key issues that we need to keep in mind.

• We do have a long-term structural budget deficit of about $60 billion per annum in current prices. That needs fixing. A lot of this structural deficit can be attributed to the policies of the Howard and Costello governments. During their tenure, we frittered away the large government revenue gains from the mining boom. We had one tax reduction after another. We should have been repairing the budget rather than reducing taxes. The IMF is quite clear that the Howard Costello governments must bear the major responsibility for the structural deficit. The Rudd/Gillard governments took some action but clearly not enough to address this structural budget problem. During the global financial crisis, the Rudd government increased spending and was successful in helping steer our way through a threatening world recession. Unfortunately the Rudd/Gillard governments ignored the report of Ken Henry about the need to reform our taxation system.
• The structural deficit is caused mainly by a shortfall in revenue rather than a surge in spending. Our tax as a percentage of GDP has fallen steadily since 2002 from 30% to 28%. This is well below the OECD average of 34%. We need to give priority to fixing our revenue base which was what the Henry Review was largely about. Reducing tax deductions for superannuation, which benefit mainly the wealthy would be a good way to start.
• We do not have a growing public sector. Our budget outlays have been trending downwards since the mid-1980s. We do need to further means test our welfare spending but compared with other OECD countries we have a more efficient and equitable welfare system than most. The Commission of Audit will be focussing on spending when the real problem is we need to focus on revenue. The Commission  is likely to face us in the wrong direction
• Our overseas debt is increasing but it is very low compared with most other countries. Our overseas debt as a proportion of GDP is one of the lowest in the OECD. Our government debt is around 20% of GDP. For Canada it is 89%,France 94%,Germany 78%,japan 227%,Norway 29%,Singapore 104%,ROK 34%,UK 91% and US 102% As the CEO of the National Bank, Cameron Clyne, put it several months ago “Australia does have a debt problem. We don’t have enough of it. We have a lazy balance sheet. We are a AAA economy. We are having a very immature debate about debt.”
• We must avoid the drastic action taken in Europe to reduce budget deficits where the consequences were disastrous for many governments and a lot of people. The fetish and obsession with deficits tipped many European countries into recession. There was low growth and record unemployment particularly amongst the young. This drastic action in Europe on deficits helped spawn ultra-rightist and anti-immigration political parties. We must learn from the European experience and not over-react in getting our budget deficit back under control.
• This month the IMF told us that we face a period of sustained and lower growth. The Australian economy is struggling to grow at a sufficient rate to avoid significant increases in unemployment. Youth unemployment is now over 20% and growing rapidly. Joe Hockey should not go too hard in his first budget to reduce spending, despite the exaggerated and windy rhetoric we have had from him for many months. It is damaging consumer and business confidence. Reform has to occur but calamity is not around the corner. The Australian economy is one of the best performing in the world. In the current confused debate which has been triggered by Tony Abbott and Joe Hockey one would think that we faced dire problems. We don’t and we should be careful not to worsen the situation.

The most worrying prospect is that the government looks like believing its exaggerated political rhetoric about debt and deficits.

I have outlined in my blog of February 4 ’Do our governments spend too much or do they raise too little in taxation?’ further arguments to support the above case. This blog, which I have reposted below summarises the submission which Jennifer Doggett, Ian McAuley and I made to the Commission of Audit.

I have posted several blogs on how powerful insiders bend governments to their will. Just think of the power of the polluter lobby, the mining lobby, the health lobby, the gambling lobby and the hotel lobby.

But the superannuation lobby is probably the most powerful and the most lucrative gravy-train of all. The superannuation industry receives over $32 billion subsidy each year through ‘tax expenditures’ or what we normally call ‘deductions’. In addition there is the tax-free superannuation income for those over 60, like me. In addition to these enormous subsidies to boost the superannuation industry, federal governments require that 9% of employee incomes must be put into superannuation. Not content with these enormous benefits the four banks and the AMP have been lobbying the government and particularly Senator Sinodinis to bury any attempts to outlaw conflicts on interests by financial advisers. Typically this conflict of interest occurs when the financial adviser also supplies the product, as is the case with the four banks and the AMP. But the superannuation industry, and particularly the retail funds, overplayed their hand and the Future of Financial Advice (FOFA) “reforms” under the guise of reducing red tape have been deferred.

But not the AMP. In the SMH on 26 April, Michael West tears the veil from the superannuation junkets which the AMP runs to promote its products. The AMP arranged a ‘professional development conference’ in the Bosporus last week. Michael West put it quite colourfully.

‘In the footsteps of the Romans and the Ottoman Turks centuries before them, the hordes of AMP descended on the jewel of the Bosporus last week. Some 400 of them; the crème de la crème of AMP’s financial planners, and a host of advisers from Hillross, too, also owned by AMP. In contrast to the Romans who decided to build their empire’s new capital Constantinople there in 330 and the Turks whose troops overran the city in 1453, the throng from 50 Bridge Street(AMP head office in Sydney) descended on the ancient metropolis in planes. In the company of their spouses they overran Istanbul in five star opulence. Unlike the Emperor Constantine and Sultan Mehmed II, AMP and its grand vizier of financial services, Steve Helmich, did not underwrite their Ottoman odyssey from the fruits of empire. It was bankrolled by the ransacking of a mandatory superannuation system. Our latter-day sultans of superannuation have breezily lavished a $20 million junket on their sales force and themselves to boot. Before this year’s Byzantium bash, the AMP held its ‘conference’ in Dublin, South Africa, Amsterdam, Colorado and Buenos Aires. … Surely financial planning should be about the adviser using best endeavours to maximise the wealth of the client.  … . If this was really about education, rather than reward for flogging AMP product, and an enticement to flog more, we solemnly promise to eat our fez. … Let superannuants ponder no more that a third of their life savings can vanish in poorly disclosed fees and commissions. Their advisers are swanning around the grand bazaar like Suleiman the Magnificent, sauntering through the Blue Mosque before a spot of shopping in the ritzy boutiques of Nisantasi.’

The bottle of Grange Hermitage which Barry O’Farrell received from a financial and Liberal Party lobbyist was nothing compared with this orgy and excess by the AMP in the name of ‘professional development’. Or as Michael put it “the ransacking of the mandatory superannuation system”

I must confess I have more than a public policy interest in this extravagance by the AMP. I have a personal interest as well.

About ten years ago my adviser recommended I invest about $55,000 of my super funds in a product called ‘AMP Capital Enhanced Yield Fund’. It turned out to be a dud investment, although small scale dud compared with the cost of dud investments like in Opes Prime and West Point and financial planners like Storm Financial.

In 2008/9, during the Global Financial Crisis the AMP Capital Enhanced Yield Fund decided to limit redemptions. For over five years since then I have been attempting to redeem this investment. Capital loss has been considerable and the income return has been minimal. Over five years I have received small redemptions in dribs and drabs.

With this locked or suspended fund, I received regular advice that ‘managed funds [like AMP Capital Enhanced Yield Fund] are suspended …Please be aware that there is no guarantee that the suspended fund will start processing transactions in the future.’

It is not as if the AMP has been struggling over the long period that my investment has been locked. In the years 2009 to 2013 AMP has made annual profits after tax of $739m, $775m, $759m, $689m and $672m. In 2009, when my investment was locked, Craig Dunn, the CEO of AMP had a 30% pay rise. His total remuneration in 2012 was $3.157 million. Craig Meller, Managing Director of AMP Financial Services had a salary package of $1.917 million per annum. Stephen Dunne, Managing Director of AMP Capital had a salary of $2.133 million p.a.

I have no doubt that AMP acted legally in respect of my foolish investment in a dud product, but have they any shame in the way they continue to pay their executives, or any sense of moral culpability. The payment of these excessive salaries to senior executives is quite consistent with the behaviour of the AMP in splurging $20 million to indulge the sellers of their new products. It’s all about new products. Forget about the dud products they have sold in the past.

But some might say that the government has now set up a Financial System Inquiry to sort all this out. But we should not hold our breath. There is no indication from what I have seen that the issue of vertical integration, which allows the four banks and AMP to rip off customers through their conflict of interest, is in the terms of reference of the FSI. Furthermore Craig Dunn, the former CEO of AMP who received that remuneration package of over $3 million per annum, is a member of the FSI panel. All the panel members are from the finance sector .The public or consumer interest is not to be found. The insiders are in charge.

Can the victims of dud superannuation products look forward to all-expenses paid “professional development conference” next year in Constantinople or some other attractive luxury tourist destination?