Pearls and Irritations

Category: Economy

  • The Failure of the South Korean National Security State – The Sewol Tragedy.

    Earlier this year, the Sewol ferry sank off Korea’s southern coast with 304 passengers drowned, mainly school children. An article by Jae-Jung Suh draws attention to an abdication of responsibility by the Korean Government and many others. He says ‘The whole tragedy serves as a reminder of how neoliberal deregulation and privatisation puts people’s safety and life at risk through a process of state collusion with business interests and how a powerful national security state may fail to protect its own people from internal dangers it helps create.’

    Jae-Jung Suh has been Head of Korean Studies at John Hopkins University in Washington for over a decade.

    The link to his important and disturbing report can be found below.  John Menadue

    http://www.japanfocus.org/-Jae_Jung-Suh/4195

  • Geoff Hiscock. Abbott on the friendship trail with Modi

    China rightly dominates most discussions of Australia’s economic outlook, but Tony Abbott has made it plain he also wants to be good friends with the other emerging Asian heavyweight, India.

    A tangible example came during his visit there early last month (September), when he handed over two ancient Hindu statues that allegedly were stolen from temples in Tamil Nadu and subsequently acquired by Australian art galleries.

    It was a gesture that prompted Indian Prime Minister Narendra Modi to express his gratitude and to say Abbott had shown “enormous respect” for India’s cultural heritage.

    Next month, the two leaders will have another opportunity to get closer. As well as attending the G20 summit in Brisbane, Modi has accepted Abbott’s invitation to make a bilateral visit to Australia — the first such trip by an Indian prime minister since Rajiv Gandhi in 1986.

    As a pro-business leader, Modi’s priority is domestic economic development, including in the manufacturing sector – hence his mantra of “Make in India.” To speed up the process, he needs funding from abroad, which is why he is courting big potential investors in Japan, China, the United States, and to a lesser extent, Australia.

    In his first four months in office, Modi has made a string of overseas visits and played host to some key leaders. Under his “neighbourhood first” approach, Bhutan was Modi’s first destination in June, followed by Brazil in July and Nepal in August. In the last month, he has visited Japan to meet the man he describes as a “dear friend,” Prime Minister Shinzo Abe, and has just caught up with US President Barack Obama in Washington. At home, he welcomed Abbott in early-September and then hosted Chinese President Xi Jinping in mid-September. During his visit, Xi committed China to investing a further US$20 billion in India over the next five years.

    That suits the pragmatic Modi, who made some valuable Chinese contacts when he was drumming up business as Gujarat’s chief minister. China, of course, is the object of as much attention in India as it is in Australia. India wants a lot more Chinese investment, but the border issue continues to weigh on overall ties.

    In a September 19 joint statement in New Delhi, Modi and Xi agreed that pending a final resolution of their disputed boundary, the two sides would continue to make an effort to maintain “peace and tranquillity” in the border areas.

    India’s relationship with Beijing is nowhere near as comfortable as the one Modi has with Abe’s Japan. “India considers Japan among its closest and most reliable partners,” Modi told an approving audience during his visit to Tokyo, adding that as “two peace-loving and democratic nations,” India and Japan could “play an influential role in shaping the future of Asia and the world.” Abe has committed Japan to doubling its Indian investment and financing to US$35 billion, also over the next five years.

    Modi’s other big bilateral challenge is the relationship with the United States, where business ties have not developed as rapidly as both sides might have liked. Issues such as civilian nuclear power liability, intellectual property rights, foreign investment regulations and delayed financial reforms remain impediments to the fivefold increase in trade that Obama and Modi envision in their September 30 joint statement. Two-way trade in goods and services now stands at just under US$100 billion a year. The leaders also committed to a joint investment initiative on infrastructure. But in agricultural trade, India’s recent action to block a World Trade Organisation deal on food security upset Washington, despite Modi arguing that India had to retain the unfettered right to make food available to its poorest people.

    Like the US, Abbott wants to quickly grow Australia’s two-way trade with India from the current modest figure of $17 billion. He would also like to have some more big-ticket Australian investors entering India. “We are not as close as we should be,” Abbott said in New Delhi on September 5. “My visit to India reflects Australia’s desire for India to be in the first rank of Australia’s relations.”

    The on-the-ground reality is that India is not the easiest place to do business. Plenty of big international investors have burnt time and money trying to make headway there: Wal-Mart and Carrefour in modern retail, for instance, or Posco and ArcelorMittal in steel. Bureaucratic inertia, domestic opposition from vested interests, entrenched corruption in the police, judiciary and government layers, and an ongoing Maoist insurgency in parts of the country, combined with poor infrastructure, difficult labour laws and poor levels of skills and education all make for a testing investment environment.

    That said, with 1.25 billion people and a growing middle class of several hundred million, there is no denying India’s promise. Energy demand is rising rapidly, gross domestic product is approaching $2 trillion (still well behind China’s $10 trillion), economic growth this year should finish above 5 per cent and comfortably pass 6 per cent next year, and there is a big push for more and better food, and more consumer comforts in general. All of that plays to Australia’s strengths in energy, agribusiness and technology.

    Abbott’s focus in recent weeks has been on security at home and abroad, but his long-term economic agenda is unchanged: how best to maintain and expand the prosperity Australia has enjoyed virtually without interruption for the past 23 years. China, Japan, the United States and India are all crucial to that effort (as are South Korea and Indonesia). So far, Abbott has established good relations with their various leaders, but is the first to acknowledge that ties with India in the past have been under-done because of Australia’s fascination with China.  November’s visit by Modi will be a good pointer as to how quickly that situation might change.

    Geoff Hiscock writes on international business and is the author of Earth Wars: The Battle for Global Resources, India’s Global Wealth Club, and India’s Store Wars, all published by Wiley.

     

  • John Menadue. Reform of our banking sector.

    In my blog of May 30, 2014, ‘Are our bankers listening or caring?’ I drew attention to a conference in London on ‘Inclusive Capitalism’.  At that conference the Governor of the Bank of England and the IMF Chief both 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 the Governor and the IMF Chief said that the actions of the banks were excluding them from mainstream society.

    Just look at the combined salaries of our four bank CEO’s, $35 m last year to see the validity of those comments

    Money and finance are critical in a modern economy and society. But is the financial sector making a social contribution to match its size, profitability and very high executive salaries?

    Our four major banks made a combined profit of over $27 b last year. They are the most profitable in the developed world thanks in part to government guarantees and lender of last resort guarantees. It is not all due to the skill of our bankers. Australia has a population of only 25m But the Commonwealth Bank of Australia has a market capitalisation that is more than Goldman Sachs or American Express

    The global savings glut in the 1980’s was fuelled by China keeping its exchange rate artificially low and its staggering trade surplus. This created the condition that encouraged US banks to sell more risky products to increase their returns. We saw dubious new ‘products’ like packaged sub-prime mortgages and various “derivatives”. There was excessive profiteering and excessive salaries by dealers.  The selling of shonky financial products out of New York gave us the GFC.

    The financial sectors in many countries have become so large and powerful that governments find it hard to control them. They are too big to fail. So governments inevitably step in to prop them up and in the process reward those who take excessive financial risks. No-one went to goal in the US, but millions of US citizens lost their homes and their savings. .

    In 2001, the Australian financial sector accounted for about 9% of our GDP and less than 4% of our total employment. A decade later our financial services sector had grown to 11% of our GDP. Has there e been an increase in social value to match this growth? I doubt it.

    A lot of Australian business is focused on rent seeking through lobbying rather than real wealth creation. Negative gearing and the discount on capital gains taxes which largely benefits the wealthy are funded by the banks. They have also lobbied successfully to wind back consumer protection in superannuation advice. With their lobbying and networks of influential business and political colleagues they are very powerful.

    Most of the business economists we see on television or read in our newspapers are employed by the banks. They are not likely to side with consumers against the banks in their rapacious fees for superannuation advice or the conflict of advice that banks exploit to the cost of clients; Most of our business economists that we see and hear so much of are caught up in the bank drag net.

    In 1972 Professor Tobin proposed a tax to ‘throw some sand into the wheels of international markets and to reduce speculation’. But the problem was how national governments could impose an effective and a comprehensive tax on international transactions.

    However eleven leading countries in the EU have now signed on to developing by 2016 a financial transactions tax to raise money but also to limit risky market speculation. Good luck!

    The G20 meeting in Brisbane in November will be also considering higher capital requirements for the banks to strengthen their balance sheets.  These increased capital requirements would also require the amount of capital to be adjusted according to the riskiness of the bank’s assets. In principle this should remove the financial incentive to back risky investments.. Also on the ‘too big to fail’ problem the authorities are seeking to ensure that while deposits are guaranteed, the value of bank shares are not. In other words shareholders cannot be expected to be bailed out in the future and that will also mean that executives that destroy shareholder value will be dismissed and their stock options being worthless.

    These reforms would need to be carefully managed. For example the Europeans are worried that if the repair of bank balance sheets too quickly it might lead to a drying up of bank lending and so damage the fragile European recovery.

    The interim report of the Financial Systems Inquiry made some useful suggestions but major concerns are likely to continue. Three of the five members of the inquiry are former senior bankers. David Murray was CEO of the CBA for 13 years. What do they know of banking who only banking know! There must also be a major governance concern when RBA Governors and Treasury Secretaries join major bank boards after leaving office. Three have done so.It all sounds very incestuous.

    We have a long way to go in banking reform. The biggest obstacle will be the banks themselves and the powerful networks they have constructed.

  • Andrew Kaldor. Are We Paying Too Much To Stop The Boats?

    One of the claims that some commentators like to make about Australia’s asylum seeker policy is that it saves money. It’s got to be cheaper to stop the boats than to have people coming to our shores that way to seek refuge. Right?

    Wrong. It is not easy to find the actual total costs of Australia’s policy of mandatory detention and offshore processing across all agencies because no government has ever provided a total figure. But the National Commission of Audit recently released data which shines a light on the huge and rapidly increasing costs of our policies.

    By the Audit Commission’s reckoning, Australia now spends the same as the United Nations High Commission for Refugees (UNHCR) spends on its entire global refugee and displaced persons operations.

    The UNHCR is responsible for helping and protecting some 50 million displaced persons around the world, including 11.6 million refugees. It expects to spend about $3.5 billion (US$3.3bn) in 2014. To cover 10,000 staff and all relief for the emergencies in Syria and Iraq, and Africa, as well as the protracted situations worldwide.

    Compare that with the $3.3 billion Australia spent in 2013-14 on the detention and processing of boat arrivals. It has been the fastest growing Government programme over recent years, increasing from $118 million in 2010 at the average annual growth rate of a staggering 129 per cent.

    Next year, the Department of Immigration’s budget is about $2.9 billion for that operation. But this number probably understates the total costs. It appears to ignore the extra aid to Papua New Guinea for signing the Manus Island deal, $420m over four years. It also ignores the costs of the AFP, ASIO, and State judicial system. Moreover, the value of current contracts issued by the Immigration Department, just for offshore detention for the 2014-15 fiscal year, has been estimated to be $2.7 billion [Source: data compiled by Nick Evershed, The Guardian, 25 August 2014].

    The most expensive and least efficient part of Australia’s policy is offshore detention. The commission calculated that offshore processing costs Australian taxpayers is 10 times more than letting asylum seekers live in the community while their refugee claims are processed. The cost for detaining one asylum seeker offshore for one year is over $400,000, compared with $239,000 for onshore detention and under $100,000 for community detention. The cheapest option is a bridging visa which costs $40,000 a year. Moving all the asylum seekers to bridging visas, which are no guarantee of permanent settlement, would save the Federal Budget around $2 billion.

    The huge cost of overseas detention should be carefully examined particularly when other programmes are subject to budget cuts. An assessment should include a comparison of our expenditure with other countries, other government programmes, and particularly to the UNHCR.

    Given that Australia currently has about 34,000 people at various stages of the asylum process, expenditure of $3.5bn is extraordinarily expensive and wasteful.

    Sweden, which received around 54,000 asylum seekers in 2013 and expects more than 60,000 this year, spends some $1bn (7B kroner ) – a third of our costs – to manage almost double the number of asylum seekers.

    The UK will spend $3.13 billion (1.8bn pounds) on its entire immigration and border operations in 2014-15. Compare this with the Immigration Department’s total budget for 2015 of $4.8 billion.

    Compare this also with our spending priorities domestically. Proposed higher education cuts will save a total $3.1 billion over the next four years, equal to the costs of deterring the boats for one year.

    Using the data made publicly available, the savings from placing all asylum seekers on bridging visas for one year would equal, for example, the revenue gained from the unpopular fuel excise indexation over the next four years.

    Australia spends more on managing maritime asylum seekers than the total government funding for R & D. Total budgeted funding for research in 2014-15 is $2.55 billion.

    The $7 Medicare co-payment, designed to build a $20 billion research fund, is forecast to raise about $2.7 billion next year – still less than our cost of deterring asylum seekers.

    And to put these costs into a cultural perspective, stopping the boats costs about as much as funding the ABC, SBS, Arts Council, Australian Institute of Sport and National Parks put together.

    The “Winning Edge” plan by the Australian Institute of Sport to move our performance from world class to world best, receives an appropriation of $180 million. That is equivalent to holding about 450 asylum seekers in offshore detention for one year.

    In a new book Refugees: Why Seeking Asylum Is Legal And Australia’s Policies Are Not, authors Jane McAdam and Fiona Chong argue that the extraordinary expense of our deterrence measure is not justified by empirical evidence about the behaviour, threat or legitimacy of asylum seekers. We have better, cheaper options.

    The economic burden of stopping the boats is massive and unnecessary. Politicians on all sides of the debate should take the cost of our current approach into account.

    The question we should all be asking is this: is stopping the boats as important as our spending on research, or the entire budget of recreation, sport and culture?

    Andrew Kaldor is a Sydney businessman, philanthropist and founder of the Andrew and Renata Kaldor Centre for International Refugee Law at NSW.

     

     

     

  • John Menadue. Why health reform is so hard. It’s about power.

    You may be interested in this repost.  John Menadue.

     

    I have been actively involved in health policy for over twenty years. Throughout that period Medicare has been the shining light that has well and truly stood the test of time. But necessary health reforms are hard. They are deferred or avoided.  Without ministerial leadership there is an enormous lethargy in the health system.

    The major reason I suggest for reform being hard is the power of “insiders” and the way they exercise that power. At one level there are those insiders that administer health services. Health is a highly technical, large and complex field that is difficult for outsiders to come to grips with. This gives disproportionate power to health administrators on the inside. Then at another level which is ‘joined at the hip’ with these administrators are the vested interests or rent seekers who batten on the health service and dominate the public debate. It was the same type of vested interests who so selfishly led the opposition to Medicare in 1975. They are still with us today but in a different guise.

    .These vested interested who can delay or veto reform must be recognised for the power they exercise.– the AMA, the Australian Pharmacy Guild, the private health insurance funds, Medicines Australia and the state and territory health bureaucracies..

    The AMA is opposed to reform of the perverse incentives of the fee for service system of remuneration.FFS is not appropriate for chronic care; it encourages over servicing, over referrals and over prescribing. The financial incentive should be to keep people healthy through contracts and capitation in general practise and not financially reward doctors when the patient is sick.  .

    The AMA is turning a blind eye to the growing corporate takeover of general practise and the associated vertical integration into radiology and pathology. The health sector is seen as easy picking by business, if only the government would get out of the way.

    No government will lightly challenge the AMA

    The Australian Pharmacy Guild stands in the way of competition and the need for pharmacists to become more health professional and less like shopkeepers. The APG often threatens to use its power through pharmacies across the country.

    The private health insurance companies are expensive financial intermediaries who receive a $7 b annual taxpayer subsidy. PHI’s benefit the wealthy and most importantly weaken the power of Medicare to control prices. Gap insurance has underwritten an enormous increase in specialist fees. Now PHI’s want to move into general practice.  Government subsidized PHI is a major threat to health care in Australia as it has become so disastrous in the US. PHI sees governments as a relatively easy pushover.

    Medicines Australia, that represents the manufacturer and distributor of drugs charges Australians $2b per annum more pa than New Zealanders for equivalent drugs. It is a powerful lobby group.

    We have 8 state and territory health bureaucracies supported by their ministers that are very concerned to protect their own turf at the expense of an integrated national system. The federal government is reluctant to stare down the parochialism of the states

    Unless we take the health debate to ‘outsiders’ and break the power of the insiders-the  rent seekers and vested interests-, we are unlikely to see significant progress in health reform. The vested interests invariably win out over the public interest.

    There has been incremental change in response to political and budgetary pressures, but that has produces a patchwork set of arrangements that lack guiding values or principles. The debate is about ‘managing’ the health system and not about the values and principles that should drive it.

    Eight years ago, Ian McAuley and I in New Matilda suggested some key reform that we believed were necessary to ensure universality and the improvement in both the equity and efficiency of our health sector. Those suggested reforms were.

    • To focus program delivery in primary healthcare which can provide an integrated range of services?  But the debate is focussed on iconic hospitals.
    • To move to a single, universal insurer and to avoid going down the US path.
    • To organise healthcare programs around the needs of users rather than in response to providers.
    • To rationalise user payments so as to achieve equity and not distort resource allocation.
    • To retain Commonwealth responsibility for funding and standard-setting and deliver programs through joint Commonwealth/State administrations.
    • To involve citizens in healthcare to counter the strong lobbies of service providers/vested interests.
    • To focus ministerial concern on health rather than health services because many of the key services to advance the health of the population are outside the health portfolio. E.g. poverty, diet and distance.

    The public ‘debate’ on health is between the powerful rent-seekers with their well-funded public relations machines and the minister. The public is excluded from the debate and the media is ill-equipped to undertake the important examination of key policy issues. Under-resourced journalists are forced to rely increasingly on handouts by the rent-seekers.

    Commonwealth  Ministers  for Health are very dependent on the Department of Health and Ageing, particularly, as is often the case with ministers who are not across the issues and don’t have a clear policy program themselves. Unfortunately ministers who rely on the DHA will be disappointed. The Department is ill-equipped .It is structured in ways that reflects the interests of providers, e.g. doctors and pharmacists, rather than structured on the basis of community interests, such as acute care, chronic care or demography.  DHA has little economic expertise. One very senior Commonwealth official said to me, DHA does not have any strategic sense in health policy. It doesn’t effectively integrate the Commonwealth’s own expensive programs, let alone make any real progress in bridging the Commonwealth and State divide. During the difficult negotiations with the states on health reform during the Rudd Government period, the Department of Prime Minister and Cabinet effectively had to step in because DHA was not up to the job.

    The role-out of e-health by DHA is an expensive mess. DHA sees Medicare as a funding vehicle and not a policy instrument. Medicare is not even within DHA. The Department clearly sees its major role to keep the peace and keep the minister out of any public brawl or argument.  Health reform and health policy is an after-thought.

    The Ministerial/Departmental model in health has failed. It is incapable of contesting the power of the rent seekers.

    Governments are invariably captured by their own health insiders who are people of good will and professional skills but they have often spent their whole professional lives working in the health sector. Take the example of the appointment in 2008 of the National Health and Hospital Reform Commission. The Commission was overwhelmingly composed of health insiders with their limited horizons. The Chair was a senior executive of BUPA. Not surprisingly NHHRC produced very little worthwhile reform. Labour governments as well as Coalition governments like to smoodge the powerful vested interests and avoid political trouble.

    I have been urging for many years two ways to overcome the problem of the powerful insiders and vested interests.

    The first is to bring the Productivity Commission and Departments of Treasury and Finance into active involvement in health policy. The rigour and the outside view that they can bring is essential.

    Secondly, because of the failure of the ministerial/departmental model which is intensified by the poor performance of DHA I have proposed the establishment of a Commonwealth Health Commission composed of professional and independent people to take responsibility for health policy administration, subject to government policy guidelines. The Reserve Bank has shown the value of an independent and professional body that can lead public debate on important issues and implement government policies. And not get waylaid by powerful vested interests.

    Unless the governance problem in health is addressed we can forget serious reform. As part of this governance reform we need to drastically cut the power of lobbyists, both third party and in house lobbyists. Secret discussions and deals by vested interests with politicians and senior public servants must be stopped.

    Health is too important a matter to be left to the health insiders.

    What do they know of health who only health knows?

    If there was one word I would use to describe the obstacle(s) to health reform it would be ‘POWER’

     

     

  • John Menadue. What does Labor stand for? Part 5

    Democratic Renewal

    At the same time as addressing overarching ‘Labor’ principles that could guide Labor policies and programs, there are two immediate issues which must be given high priority.

    The first is democratic renewal in our public institutions, including the ALP

    Our democratic systems, almost everywhere, are under great challenge.

    We are increasingly alienated from our institutions. This suits the conservatives who implicitly seek to protect private corporate interests from public intervention. Loss of faith in parliament inevitably leads on to denigration and a loss of faith in government. Those that Labor has traditionally represented and the wider community are the losers.  In the last parliament the Coalition deliberately set out to destroy faith in our public institutions, public policy and politics. The government was ‘corrupt’ or ‘illegitimate’.

    The signs of democratic decay and lack of respect for politicians are everywhere. According to an ANU Social Research study 43% of Australians believed that at the last election it did not matter which Party was in power. Young people have particularly expressed disillusionment with politics. About 20% of eligible people did not enrol at the last election, did not vote or voted informal. According to a recent Lowy poll 40% of Australians did not believe that democracy was the best form of government.

    Executive governments monopolise information flows and policy advice. Policy advice is increasingly given by ministerial advisers while the public service is co-opted into providing political support to government.

    Governments are overly-influenced by powerful lobby groups and donors, e.g. miners, developers, licensed clubs and hotels. We have seen in the NSW ICAC enquiry how wealthy donors are corrupting our democratic system. Politicians are being bought with money.

    The health ‘debate’ is not with the public, but between insiders – the Minister and the AMA/pharmacists/private health insurance companies.

    Because Labor does not have a consistent principle-based set of policies – some would say a ‘narrative’ – it has little capacity for defence or explanation when its policies are misrepresented or misinterpreted in the media.  In the last Parliament Senator Conroy bungled a very modest attempt to limit media power and abuse

    Labor is no longer representative of those that vote for it or has empathy with it.

    The concentrated media does not properly expose abuse of power and directly skews the public debate towards personalities, the whims of proprietors, conflict and celebrities, rather than serious policies. We had an enquiry about the failure of our intelligence agencies over Iraq, but the greater failure was in the media, particularly News Corp.

    Democratic renewal is urgent – reform of the parliament, political parties, party factions, lobbyists, donors and the media.

     

  • John Menadue. What does Labor stand for? Part 4

    Ethical responsibility

    Those in prominent office should promote those qualities which draw on the best of our traditions and the noblest of our instincts.

    The duty of those with public influence is to encourage hope and redemption rather than despair and condemnation, confidence rather than fear. It is to promote the common good – to encourage us to use our talents. It is to respect truth and strengthen learning to withstand the powers of populism and vested or sectional interests. This would set a tone of public discourse which nurtures public institutions

    Business cannot hide behind the corporate vale. As the late Bernie Banton reminded us during the dispute with James Hardy over asbestos ‘it is people that make decisions, not corporations’

    Areas where we fall short in ethical responsibility include

    • Leaders who appeal to our worst instincts, e.g. dog whistling on refugees,
    •  Media-drenched commercialism and the values it projects.
    •  Executive salaries,
    •  Undue influence of vested interests, corporate lobbyists and political donors e.g. NSW ICAC enquiry.
    • Those in public office should help the community to deal with difficult problems which may require painful adaptive change, such as climate change, rather than provide the false comfort of ignoring or downplaying them.

  • John Menadue. What does Labor stand for Part 3

    Citizenship

    We are more than individuals linked by market transactions.

    Our life in the public sphere is no less necessary than our private lives. As citizens we enjoy and contribute to the public good. It is where we show and learn respect for others, particularly people who are different. It is where we abide by shared rules of civic conduct. It is where we build social capital – networks of trust. We need to behave in ways that make each of us trusted members of the community. ‘Do no harm’ is not sufficient.

    Citizenship brings responsibilities – political participation, vigilance against abuse of power and paying taxes.

    Areas where we fall short in citizenship include

    • Our withdrawal into the private realm –there are growing gated communities, private entertainment,
    • Use of private rather than public transport and resulting reluctance of influential people to support investment in public transport.
    •  Disregard of neighbours,
    •  Opting out of community through ‘vouchers’,
    • Government subsidies to private health insurance and private schools discourage the coalescence of socially mixed communities around shared hospitals and public schools.
    • There is a lack of respect in the language of denigration – ‘bogans’ and ‘losers’.
    • NGO’s have increasingly become part of government
    • People are valued as celebrities and their wealth rather than as contributing citizens

    Stewardship

    We have inherited a stock of assets or capital; environmental (forests/water), public and private physical capital (roads/ports), human capital (education), family capital (family and friendship bonds), social capital (trust), cultural capital and institutional capital (government and non-government institutions). That stock of assets must be retained and where possible enhanced.

    We must use our resources as efficiently and productively as possible.

    Areas where we fall short in stewardship include

    • Our infrastructure, particularly urban rail is dilapidated.
    • We are amongst the highest per capita carbon polluters in the world.
    • We are placing a heavy strain on the planet which prejudices our future. Despite the overwhelming scientific evidence on climate change we are still influenced by the sceptics who ignore the facts and cling instead to ideology.
    • We waste water and degrade the land.
    • We continue to log old growth forests
    • We are degrading the Great Barrier Reef

     

     

  • John Menadue. What does Labor stand for.  Part 2

    From values to principles

    The purpose and role of a Labor Government could be to give expression to the values set out below – to achieve as far as possible the ‘common good’.

    Values such as fairness, freedom, citizenship, stewardship and ethical responsibility would be generally accepted by most people. As the values are translated into practices however Labor makes a choice that can be further defined as principles that then lead to policies, e.g. the value of fairness can be expressed in the principle of a stronger link between contribution and reward- a link which has become severed by hugely disproportionate executive pay, high returns to rent seekers and financial speculators and the long head-start of inherited wealth.

    The following is indicative of a set of values and their expressions in principles which could underpin a Labor platform/policy statement.

    Fairness or equity

    A ‘fair go’ is primarily about economic opportunity.

    People should be provided with a good education and those who put it to socially useful ends should be rewarded. Governor Lachlan Macquarie was no socialist but his ‘tickets of leave’ gave the outcasts and underprivileged of this country another chance. We built a nation from many of this underclass. We must give a chance for newcomers and all people to have another opportunity.

    Fairness promotes social mobility and limits division and resentment.

    Fairness should not be restricted to education.

    The path to prosperity with fairness is through productivity and well-paid employment rather than government handouts. The Scandinavians have demonstrated that education and incentives for participation do produce fairness and economic prosperity.

    Fairness implies that we are tough towards ‘bludgers’, whether they be tax-dodgers, the vulgarity and indulgence of those with inherited wealth, protection from competition, government hand-outs and favouritism or cheating on social services.

    Fairness implies full employment as a macro-economic goal to ensure human capabilities are not wasted.

    Areas where we fall short in fairness include

    • neglect of early childhood education,
    • treatment of the needs of indigenous people and refugees,
    • diversion of education funding to wealthy schools,
    • neglect of public infrastructure
    • Inadequate ODA.  In Joe Hockey’s last budget we cut ODA to $5b per annum, the largest cut in spending. Yet we spend over $8b per annum on our dogs and cats. Does that reflect our values?

    Freedom

    We all have rights to the extent that they do not lessen the rights of others.

    Except where the rights of the vulnerable are at stake, the government should not intrude into the private realm.

    Denial of freedom does not happen overnight. It is eroded step by step.

    We must be vigorous in promoting our freedoms-freedom of speech, freedom of religion, the rule of law and free and fair elections

    The potential abuse of power should be minimized by the separation of powers and the separation of church and state and clear opposition to sharia law

    Areas where we fall short in freedom include

    • The growing power of cabinet and executive which is not adequately balanced by parliament. We have an ‘elected monarchy’.
    • We have no Human Rights Act.
    • We have reduced freedom as a result of counter-terrorism legislation.
    • The media increasingly fails to protect our freedoms and often facilitates abuse of power by lobbyists e.g. miners.

     

     

  • John Menadue. The Great Complacency

    Professor Ross Garnaut has spoken many times about our great complacency and our unwillingness to undertake the types of economic and social reform that we saw in the Hawke/Keating periods and in the early days of the Howard Government – think, GST.

    Have the golden days of reform gone forever?

    The former head of Treasury Ken Henry said that he has never known a period in which the standard of public debate on important issues is as bad as it is today. Ross Garnaut has spoken with obvious frustration about the ‘diabolical problem’ of sensible policies on climate change.

    In April 2012 Greg Dodds and I posted an article on this blog ’The Asian Century and the Australian smoko’. We argued that whilst we responded well to the opportunities in Asia for over a decade we went on ‘smoko’ from the mid-1990s. Our Anglo-Celtic both enriched and trapped us. Fear of Asia was promoted.  John Horward gave us permission to be ‘relaxed and comfortable’ again, to have a break from the Asian challenge and opportunities. The result was two decades of drift by business, universities, schools and the media in equipping ourselves for the region .Complacency set in.

    Ross Garnaut poses questions for us again…

    ‘Do we have a problem that requires business adjustment, income restraint and new reforms to lift productivity? Or is the Australian ‘she’ll be right’ approach to economic policy in the early 21st Century good enough? Economic modelling for today’s Forum by Victoria University’s Centre of Policy Studies suggests that Australia does indeed have a sizeable problem with the real prospect of falling living standards to 2020 if nothing is done to avert it.’

    Can we counter those vested interests in the community, those ‘diabolical problems’ that consistently run good policies off the rails? And there are serious obstacles to address. There are powerful vested interests that are hostile to risk taking and want to hold on to privileged positions. They don’t want reform and change.

    Media

    In our 24/7 media cycle the short-term, the partisan, the confrontational and personalities dominate. The attention span of the media on important policy issues is very short. Our Canberra press gallery, including the ABC, is more concerned about politics than policy. News Corporation, which controls 70% of the metropolitan newspaper circulation, runs a partisan agenda that is unprofessional and self-serving. Just look at its denialism on climate change. News Corp distorts and debases almost every public policy issue it touches. What an awful legacy Rupert Murdoch will leave!

    The mainstream media is a serious problem not only because of concentration of power but it still influences the agenda in other under resourced media. Social media, even bloggers are filling some of the vacuum but it is nowhere near enough.  Why doesn’t the ABC establish a high quality online policy portal committed to articulating the key issues that we face?

    Lobbying

    The World Economic Forum in its 2013/4 Global Competitiveness Report on ‘favouritism in decisions of government officials’ ranked Australia poorly, well behind such countries as Singapore,Sweden,Netherlands, ,Norway,Japan, Germany and the UK. In transparency in government decision making we also ranked poorly.

    So much of the influence on governments is not exercised in public and contested discussion. The secret lobbying in Canberra and the state capitals has shown how lobbyists can effectively twist the arms of ministers. Lobbyists know that they cannot win an open debate with the public, so they exercise their enormous influence in secret. Think of what the Australian Minerals Council has done to corrupt good public policy in the resources sector. Consider what happens in the health field with the secret influence of the AMA, the Australian Pharmacy Guild, the Private Health Insurance funds and Medicines Australia. We will never get worthwhile health reform until these secretive and powerful vested interests are publicly confronted and forced to publicly defend their positions. And beyond these few examples there is the influence of the Australian Hotels Association in promoting the scourge of alcohol. We need to address the destructive power of the lobbying industry and its corruption of the public interest and public debate. Favouritism in government decision making and a lack of transparency is a major obstacle to good policy making.

    Political donations

    Associated with the corrupting power of both in house and third party lobbyists is the ability of powerful and wealthy groups to win favours from politcians with political donations. The NSW ICAC inquiry has shown what charade donations have made of any sense of an open and honest public discourse. We need to consider the banning of all donations at both national and state levels. Our political system is being bought by wealthy vested interests.

    Think Tanks

    Think tanks should be providing us with independent and public advice on important public issues. But the most influential ‘think tank’ is the Institute of Public Affairs, which is secretly funded by wealthy companies like big tobacco and the mining sector. It runs phoney campaigns in service of wealthy private and secret funders. The Sydney Institute pretends that it is an independent forum, but never discloses the sources of its funding. These ‘think tanks’ that refuse to disclose their donors should be refused media access, certainly by the ABC, and denied tax deductibility for donations. If we are to have an honest and transparent public debate action must be taken against these phoney think tanks.

    Business Economists

    Most of the business economists that we see so regularly on TV or read in our newspapers are employed by the banks. The 19 member Committee of Australian Business Economists is dominated by bank and financial service employees. Some of these business economists make an important contribution to public debate on broad economic issues, but how often do they challenge the power of their employers who increasingly dominate our economy, particularly in the fast-growing area of superannuation and funds management.

    We used to have a number of independent “public intellectuals” usually from the universities. But with the exception of a few university people such as Professor Ross Garnaut, Professor Bob Gregory and Ian McAuley, these public commentators are few.

    With a few notable exceptions our climate scientists are remarkably tongue tired in the face of so much self-interest and crude ideology. Don’t they care about climate change? Do they feel that politics is beneath them?

    Dubious ‘contributors’ to this public debate are the large number of accounting and consulting firms who undertake ‘modelling’ to produce what their clients want. I am not sure how professional and independent some of this modelling is. Ross Gittins has described the problem of recent modelling on the effect on electricity prices if the Renewable Energy Target is abolished. He said ‘regrettably economic modelling has degenerated into a device for bamboozling the public’

    Leadership

    A key to the earlier periods of policy reform was political leadership supported broadly by business and the trade unions. I do think that we respond to strong leadership if we feel that the sacrifice is worth it in the national interest and that it is fair. Unfortunately today we so often have a lack of leadership and a partisan and coarse public dialogue.

    Strong and capable leaders will help to outflank the obstacles I have mentioned. But the obstacles are major reasons why complacency is winning the day.

    We are still enjoying the benefits of the reforms of the 1980s and 1990s. Can we shake ourselves free of our complacency and partisanship and stop fooling ourselves that ‘she’ll be right’.

  • Michael Keating. The mining tax debacle

    Tony Abbott has finally achieved another “triumph” with the end of the mining tax.  Of course mining royalties continue, and have even been increased recently, and oil and gas are subject to a similar sort of resource rent tax that Abbott decried when it was applied to mining.

    No doubt the mining industry, their largely foreign owners and the cheer squad in the Murdoch press are pleased, but what about the rest of the Australian community? After all it is we who are the actual owners of the resources, and we have now lost a useful source of revenue. And what does this sorry saga say about the chances of getting genuine tax reform in this country in the future?

    Why we need a mining tax

    The Government and the mining industry would have us believe that a resource rent tax on mining will reduce investment and cost jobs. Nothing could be further from the truth. Of course for most industries a tax on profits will generally reduce the rate of return on the investment, leading to less investment and fewer jobs. But mining, which involves the extraction of non-renewable resources is different for the following reasons:

    1. The resources are owned by the community, and the community should receive a return for allowing the private firms to exploit those resources
    2. Present taxation arrangements frequently fail to collect a sufficient return for the community because they fail to reflect and obtain a fair share of the super profits, or economic rents, that mining can generate
    3. The reason why mining, unlike other industries, can generate these super profits (or economic rents) is because the supply of the resource is finite; that is the supply of minerals cannot be readily increased, so if demand rises relative to that supply it will sell at a price that more than covers its cost of production and thus generate super profits. Even if other mines later come on stream in response to these super profits, this normally takes a lot longer than for most other goods and services, and the new mines typically involve less attractive deposits that cost more to mine. Consequently the market will settle at a new price that exceeds the costs (including a normal return on capital) of the most productive mines, which are thereby enabled to generate super profits, especially in the short run and even in the long run.
    4. Given that a properly designed resource rent tax is only ever taxing super profits over and above the normal rate of return on the investment then, contrary to the Government’s and the industry’s protestations, such a resource rent tax cannot deter investment nor lead to a reduction in employment. Indeed, if further empirical evidence in support of this logical conclusion is needed, think of the history of the Petroleum Resource Rent Tax, which is now nearly thirty years old, and during this time there has been massive investment in the oil and gas industry in this country.

    Indeed the Henry Review of Australia’s Future Tax System, considered the amount of taxation revenue that we have been missing out on by not having a resource rent tax for the mining industry. Thus back in 2001-02 taxation absorbed almost 50 per cent of mining profits, but as minerals prices and profits rose in the mining boom, by 2008-09 taxation’s share of the profits fell to a bit less than 15 per cent of mining profits. By comparison in the petroleum industry that had a resource rent tax, taxation’s share of profits stayed fairly stable fluctuating between around 30 and 40 per cent over this decade. Of course the prices of some important minerals have now fallen compared to 2008-09, but they are still higher than a decade ago and we are still missing out on an important potential source of revenue.  Indeed, at the height of the mining boom a rough estimate is that the Government missed out on about $10 billion in a single year compared to if it had taxed minerals in the same way as oil and gas are taxed.

    How best to tax mining super profits

    In 2010 the Rudd Government introduced the ‘Resources Super Profits Tax’ (RSPT) covering all minerals, based on the recommendations of the Henry Review. Furthermore, the intention was that this new tax would replace the existing State Government royalties with consequent efficiency gains.  Overall this RSPT appeared to be an academically elegant way of raising revenue while having a perfectly neutral impact on future investment decisions. It was, however, complex and difficult to explain. Furthermore it depended on the government being accepted as a full (but silent) partner in each mining project, taking 40 per cent of both the losses and the profits. However, as the government postponed taking on its share of the losses, and only contributed its share of the capital as the mine was written down through depreciation, there was a legitimate question as to whether the cost of capital to a mining company was in fact as low as assumed in these taxation arrangements.

    In any event, in the face of strenuous opposition from the mining industry, the Labor Government panicked and the new Prime Minister Gillard and Treasurer Swan negotiated with just the three biggest mining companies – BHP Billiton, Rio Tinto and Xstrata – a replacement ‘Minerals Resource Rent Tax’. This tax only applied to iron ore and coal, had a lower tax rate, allowed accelerated depreciation, and brought in far less revenue.

    What is surprising, and not only in retrospect, is that the Labor Government did not elect to just extend to all minerals the existing petroleum resource rent tax (PRRT), which also has a 40 per cent tax rate. This would have been much easier to explain, and as acknowledged by the Henry Review, the PRRT can approximate the impact of the RSPT, although the particular features of the present PRRT are a bit more generous to the mining companies than under the proposed RSPT.

    Clearly Gillard and Swan’s Minerals Resource Rent Tax (MRRT) was inferior to the PRRT. Its coverage was limited, and as no attempt was made to rationalise the interaction of MRRT with the State’s existing royalties, the tax rate for the MRRT had to be kept low. Another criticism was that the MRRT did not raise the expected revenue. However, a principal reason for lower than expected revenue was the accelerated depreciation, so while mining investment was booming, the miners were able to write down their profits for taxation purposes enormously.  But that also means that these new assets will be depreciated quickly and then these allowances will cease. Now the irony is that the MRRT could have been expected to raise more revenue from here on if it had not been abolished. Thus despite its flaws, the Parliamentary Library has estimated that the MRRT would have raised a handy $1 billion this year, $1.4 billion next year, and $2.2 billion in 2016-17. 

    State taxes and their role

    The RSPT as proposed by the Henry Review and subsequently by the Rudd Government was intended to supersede the existing State royalties, with the States receiving adequate compensation from the new Commonwealth RSPT revenue.  That compensation would, however, have been fixed so that the Australian Government did not fund any future increases in State royalties. Indeed it may have been necessary for the Australian Government to introduce financial penalties on the States so as to discourage them from introducing any such future increase in royalties. Unfortunately the States, possibly sensing the political winds, showed no inclination to negotiate with the Rudd Government so as to achieve a better rationalisation of mining taxes.

    In the rush that followed the change in Prime Ministers, the new Gillard Government did not even consider the value of rationalising the State royalties so that they were absorbed into a profits-based system of mining taxation. Instead there were two systems: with the new Commonwealth MRRT co-existing alongside the pre-existing State royalties which were typically based on the quantum of production or its value, and which accordingly paid no regard to the profitability of the mine. As such the opportunity to shift to a more neutral system of mining taxation was lost, thus foregoing a principal objective of the Henry Review. Furthermore, despite Abbott’s hysteria about taxing resource rents, two conservative State governments have seen fit to increase their mining royalties since the introduction of the MRRT, thus adding to the confusion, and the Gillard Government apparently felt unable to intervene.  

    The flawed policy process and how this mess eventuated

    Nevertheless, whatever its faults, the MRRT was still better than nothing. But now with the abolition of the MRRT that is where Australia has returned, with the additional disadvantage that it will now be that much more difficult in the future to introduce a more adequate and neutral system of mining taxation. So how did this sorry situation come about and what does it say about the policy process in Australia at this time.

    In my view the principal culprits are first, the Henry Review’s proposals which while academically elegant were clearly too complicated for any government to sell. Instead the Review, and later the Rudd Government, should have had the wit to embrace an extension of the existing PRRT. This would have been relatively easy to sell, especially as it clearly had not damaged investment or employment in the oil industry, thus negating Tony Abbott and the mining industry’s main stated reasons for opposing the tax.

    Second, the Rudd Government clearly failed to consult, as promised, before introducing this major tax change. This led the industry to lose trust in the Government, and may have helped the industry to justify its opposition – at least to itself.  Instead the Rudd Government should have released the Henry Report much earlier when it was received, and then used it as the basis for consultation. The recommendations in the Report would have given the Government the necessary authority, rather than trying to impose a tax that neither the Prime Minister nor the Treasurer ever seemed to really understand, and certainly could not explain.

    Third, the Gillard Government put quickly ending the dispute with the mining industry ahead of obtaining a good policy outcome. As a consequence that Government far too readily accepted the terms devised by three big mining companies with insufficient thought and expert advice regarding the consequences.

    Fourth big business was distinguished by its silence through all this process. While quite prepared to pontificate about lower taxes for themselves, it seems that big business will shy away from any engagement, let alone taking some responsibility, for the difficult decisions and trade-offs that genuine tax reform will inevitably require. Indeed judging by its performance over recent years, big business is more a hindrance than a help in the pursuit of tax reform.

    Finally the Australian Government for the most part ignored the States in introducing its mining tax proposals. But like it or not, the States are necessary partners in mining taxation (and in a number of other important policy fields) and reform is difficult unless they are brought into the consultations fairly early.

    Michael Keating was formerly Secretary of Prime Minister and Cabinet.

     

  • Ian McAuley. A Year Of Tony Abbott.

     The Abbott Government was elected one year and one day ago. Ian McAuley celebrates the countless successes that have slipped under the radar.

     A year into the Abbott Government’s term we can reflect on its impressive economic achievements.

    The highlight is the repeal of the carbon tax. It’s easy to stand up against tree huggers and left‑wing romantics who prat on about global warming, but it takes political courage to stand up against scientists and economists.

    A close second has to be repeal of the mining tax. Some people refuse to understand how Australia works. For 200 years, ever since Macarthur opened up the wool trade, we have been selling raw materials for cleverer people to make into useful products.

    For a few years after 1945 we thought we could be clever ourselves and make things like cars and airplanes – even Menzies got carried away by that delusion – but thankfully that era of unreality has passed.

    The world needs a quarry and we’re in the business of providing it.  Australia can be the Saudi Arabia of the twenty‑first century.

    The Government hasn’t scrapped the Renewable Energy Target, but, with a bit of help from Dick Warburton, it has created enough uncertainty to kill this crazy scheme. Joe Hockey is right when he says windmills are ugly – they distract one’s attention from advertising billboards on the roadside.

    More seriously, all this renewable energy eats into power companies’ profits.

    Some say that Australia shouldn’t break a long‑standing bipartisan commitment on the RET because to do so increases our sovereign risk, but don’t they realize that there has never been a sovereign risk as bad as six years of a Labor Government?

    Six years when foreign investment fell to the lowest on record! (The ABS statistics on investment erroneously show high foreign mining investment mining during Labor’s term – proof if ever you needed it that you can’t trust public servants).

    Australia is open for business, but not all businesses – certainly not businesses that undermine our world‑standard coal industry.

    The cuts to science are well‑directed: $75 million from the Australian Research Council; $120 million from the Defence Science and Technology Organisation; $8 million from the Institute of Marine Science; and $111 million from the CSIRO.

    We don’t need all these boffins. The CSIRO served us well in the past when it focussed on crop yields and sheep fertility; it could serve us well in the future if it concentrates on mining research.

    One of the Government’s least‑understood achievements is reversal of most of the Future of Financial Advice changes – Labor’s meddle in the financial market, which made it hard for financial advisers to reward themselves with ongoing commissions.

    These are proper, respectable, upstanding people, not like the unionised riff‑raff who work in car plants or in companies like SPC‑Ardmona. Their jobs need support. In fact, with re‑training, unemployed scientists could find useful work in the finance sector, or in the tax avoidance salary packaging industry.

    Then there is repeal of small business tax concessions. These concessions – instant asset write‑offs and offsetting future losses against past losses – were highly favourable to new companies and to companies expanding into new ventures.

    The trouble with encouraging such businesses is that they put competitive pressure on existing businesses to improve their performance or lower their prices. That’s just not fair.

    In any case the concessions were introduced by the Labor Government – a clear indication that they were not good for the country.

    An achievement which has passed almost unnoticed is the abolition of the Australian National Preventative Health Agency. ANPHA was one of those wacky Labor nanny‑state bureaucracies, all about getting people to lead healthier lifestyles in order to take pressure off health care resources.

    Had it survived it could have moved through the health sector like a wrecking ball, putting specialists out of work, and hitting the profits of pharmaceutical firms and private health insurers.

    Worse, their first campaign was on obesity – an obvious threat not only to the bariatric surgery industry (literally one of our promising growth industries) – but also to our successful fast food chains.

    Don’t they realize that corpulence is the new chic? Public money should not be in the hands of scrawny vegetarian do‑gooders.

    Getting rid of that fibre‑to‑the‑premises National Broadband Network idea was timely – nipped in the bud before it got its own momentum. It could have spelled the end of telegram boys and could have put the telex network out of business.

    Unfortunately some of the Coalition’s most far‑reaching reforms are having a hard time in the Senate.

    One of these, the proposed changes to higher education, are truly far‑reaching. Let’s face it, there are just too many over‑educated people in this country.

    We need a few mining engineers and technicians, but we can get them on 457 visas. Our economy needs more taxi drivers, nannies, cleaners and others to attend to the worthy classes.

    The Coalition is having a hard time putting to rest Labor’s highfalutin idea that Australia could become an internationally competitive industrialised country. It’s hard to put down a stupid idea like that.

    People just don’t understand the Coalition’s education and labour market policies. We need people who can read and write if they’re going to operate a mining truck or work in the market gardens of our northern food bowl. But take education too far and people become sceptical and start thinking critically.

    It’s dangerous in a democracy if people think too much for themselves. Our state education system should take people to the level that they can read Sydney’s Telegraph or Adelaide’s Advertiser, but no further.

    Our private schools can teach higher‑order skills, such as negotiating with a BMW dealer or getting a coal loader proposal past legislative roadblocks.

    Another set of blocked initiatives are the cuts to the Newstart allowance, the extension of retirement age to 70, and the reductions in the Age Pension.

    These are all designed to get people into the workforce. Some armchair economists say there aren’t enough jobs, particularly not enough unskilled jobs, but they don’t see the vision in the policy.

    It’s intended to put supply‑side pressure on the minimum wage. If Australia can get rid of the minimum wage we can have a labour market more like America’s – a tremendously successful economy to emulate.

    If only people would stop whingeing about unfairness in the Government’s Budget measures. There’s nothing wrong with giving a leg‑up to those who have done well.

    The rich wouldn’t be rich unless they were competent and deserving. The poor blow their money on things like rent, food and fuel: it’s the rich who invest and create jobs for the less deserving.

    That was the essence of President Reagan’s successful “supply side” economics, a policy which has generally been followed by both Democratic and Republican administrations. OK – there has been a little collateral damage, like the GFC, but give America’s business‑friendly policies time and it will all come good.

    About the only economic idea the Coalition has wrong is the plan to re‑introduce fuel tax indexation, sensibly dropped by the Howard Government in 2001.

    There’s plenty of oil in the world, and one of life’s few remaining pleasures in a country where the nanny state has encroached on almost all our freedoms is to hoon around in a hotted‑up V8 ute, topping it off with a drag race and a burnout.

    That’s the freedom our diggers fought for when they thrashed the Turks at Gallipoli. Thankfully the Greens have the good sense to block this proposal.

    And lest readers believe this contribution to be partisan, I should give credit to the Rudd‑Gillard Government for their demonstrated commitment to cutting taxes.

    Out of the most prosperous 18 OECD countries, only the USA has lower taxes than Australia. That’s some achievement.

    While high‑tax countries like Germany have wasted money on schools, universities, public transport, fast trains, and autobahns, we have wisely made sure the government hasn’t crowded out productive private sector investments, such as casinos and dinosaur parks.

    Perhaps the Coalition’s greatest economic achievement, however, has been to convince the electorate of its economic competence.

    The Essential opinion poll shows they are well ahead of Labor on the question “which party – Labor or Liberal – do you think is best when it comes to handling the economy well?”

    Labor scores only 23 per cent, while the Liberal Party scores 37 per cent.

    Not all credit for this score goes to the Government, however, for Labor still seems to be reluctant to engage with the community on economic policy.

    This article by Ian McAuley was published in New Matilda on Sunday, 7 September 2014.

  • John Menadue. Who owns Medibank Private (continued)

    In my blog of August 14 I examined the question of who owns Medibank Private (MBP) particularly in light of the Abbott Government proposal to privatise the business. This is not an idle question or an academic issue only. MBP has 3.5 million members and the government has estimated its sale value at $4 billion.

    The Government has now announced that MBP will be sold by Christmas

    It is clear that for many years it was assumed that the policy-holders/members owned MBP. That is clear from an examination of the accounts and the comments of a former chairman of MBP. John Deeble who was an architect of Medibank/Medicare and who was a director of the Health Insurance Commission which operated MBP put the issue as follows ‘The question of ownership in 1976 (when MBP was established) wasn’t raised because it was never considered that the government owned MBP.’

    The Commonwealth Government put $10 million as seed capital into MBP. This amount was repaid. The operating capital of MBP over the years was then contributed by the members through accumulated profits… No further capital contribution by the Commonwealth Government was made until 2005 when the Howard Government injected $85 million into the business. This amount has remained unchanged for nine years.  Last year MBP paid a dividend of $450m to the government. In one year the government received in a dividend more than five times what it had contributed in equity.

    In addition to the policy issues, it is also important to consider the legal advice which has been offered to the Commonwealth Government.

    In 1981 the Fraser Government considered selling MBP. According to Cabinet documents that have been released, the issue of selling MBP was considered by the Fraser Government’s Expenditure Review Committee – ‘the razor gang’. Members of this committee were Phillip Lynch, Margaret Guilfoyle and John Howard.

    The government’s legal adviser was the Attorney General’s Department which together with the Government Actuary and the Department of Health advised the ‘razor gang’ that the Commonwealth government did not own the assets of the Health Insurance Commission. We know from publically released Cabinet documents that on 19 March 1981 the Expenditure Review Committee decided that ‘the Commonwealth does not in any legal sense have equity in the Health Insurance Commission or its assets’.

    Three days later the Committee recommended to Cabinet that the proposed sale of MBP be abandoned. And it was abandoned.

    In 1988 the Hawke Government was contemplating the sale of MBP. The chairman of the Health Insurance Commission set out clearly in the authority’s annual report at that time that the Commonwealth had no beneficial rights in the fund’s assets.

    It is hard to see that anything has materially changed since 1981 when the clear view of the Fraser Government, based on legal advice was that MBP was owned by its members and not the Commonwealth government.

    The 3.5 million members of MBP have a major interest in this business which the Commonwealth Government now values at $4 billion.

    According to Peter Martin in the SMH today, policy holders are petitioning the government for ‘free shares’. This would seem essential but will it be fair? We know that there are a lot of hanger’s on clipping the ticket- co-lead managers, co-managers, brokers, advisers, lawyers and MBP executives. They will all be making a motza. But as for the members!!

    I am indebted to George Lekakis and The New Daily for the work they have undertaken on the ownership of MBP.

  • Michael Keating. Budget Choices

    Faced with the rejection of a significant part of its Budget, the Government is reportedly looking around at alternative compromises. Essentially the Government wants to ensure that the Budget is balanced by 2017-18. Consequently if some of the present savings are rejected the Government wants to insist that alternative expenditure cuts are adopted or there are more tax increases, or we finish up with some combination of alternative expenditure savings and tax increases.

    Unfortunately, however, there is considerable public confusion about what the Budget delivered last May actually does and how it achieves its apparent return to balance in 2017-18. In order to properly debate Budget alternatives it is essential that we all have a clear understanding of the Government’s original Budget as it will be the starting point for any future negotiations.

    First, there appears to be considerable agreement about the desirability of returning to a balanced budget. Certainly the Labor Party was equally committed to restoring fiscal balance, and the projected rate of fiscal consolidation over the next four years – an annual average of 0.6 per cent of GDP – seems about right given the present softness of the economy.

    Second, of the actual policy decisions in the Budget, 77 per cent of the savings come from changes to expenditure programs, and only 23 per cent from decisions to increase revenues, such as the increase in petrol excise and the 2 per cent “temporary Budget repair levy”. In fact the level of public expenditure by all governments in Australia is lower than in any other developed country relative to GDP. Thus there is no compelling economic case for reducing public expenditure, and given the already tight targeting of the Australian welfare system, further reductions in public expenditure in Australia are difficult.

    Nevertheless, when it took office, the Government was facing a large increase in expenditure, with real outlays projected to increase by as much as 5.9 per cent between 2016-17 and 2017-18, mainly because of the large increases in expenditure associated with the Gonski reforms of school funding and the National Disability Insurance Scheme.  In the circumstances it is not altogether surprising that the Government focussed so heavily on trying to reduce its expenditures. Instead my criticism is that the Government has focussed far too heavily on reducing people’s access to assistance and services, whereas it would have been better to achieve expenditure savings by improving the efficiency of services and the value for money, especially in relation to school education, health and infrastructure (see my posting on May 21).

    Third, an often unremarked feature of this Budget is that despite the focus of decision-making on expenditure savings, total government expenditure is still projected to be 24.8 per cent of GDP in 2017-18, which is actually more than it was in 2012-13 when Australian Government outlays were only 24.1 per cent of GDP[1].  In effect without the Government’s expenditure savings decisions, the projected budget balance would have been $20.3 billion worse in 2017-18, which would have meant a projected Budget deficit in 2017-18 equivalent to 1 per cent of GDP.

    Fourth, because the Government has in net terms only been able to stabilise the growth of expenditure and not actually reduce it relative to GDP, this has meant that much of the real heavy lifting to restore the Budget balance in this Budget is on the revenue side. Furthermore, this increase in revenues does not come from actual decisions to increase taxes, but rather from bracket creep as peoples’ incomes rise and they move into higher tax brackets. Thus Budget receipts are projected to rise from 23.1 per cent of GDP in 2012-13 to 24.9 per cent of GDP in 2017-18. That is over this period receipts are projected to rise by 1.8 per cent of GDP whereas expenditures are projected in the Budget to fall only marginally as a percent of GDP and arguably they will actually rise a little, depending on the base date chosen.

    So what are we to make of these key facts describing the Government’s Budget? Perhaps the most important conclusion is that the Government does not really have a plan to restore the Budget to surplus even if it could get its Budget passed in its entirety. This is because as it stands the Budget is relying heavily on increasing taxes through bracket creep, rather than adjusting the tax scales for inflation, and it must be questioned whether this is really sustainable.

    Indeed the Secretary of the Treasury, Martin Parkinson, has pointed out that the Government’s present budget projections, which keep the income tax scales fixed, will ‘pull someone on average full-time earnings into the 37 per cent tax bracket from 2015-16, and will increase the average tax rate faced by a taxpayer earning the projected average from 23 to 28 per cent by 2024-25 – an increase in their tax burden of almost a quarter’.  Furthermore, Deloitte Access Economics has calculated that fixing the Budget in this way will be highly regressive. For example, someone earning between $35000 and $40000 will be paying 25 per cent more tax by 2017-18, with their average tax rising from 13 per cent to 16.3 per cent, while high income earners with salaries of $200000 or more will face only a 1.8 per cent lift in their tax.

    Realistically it must be expected that in the next few years the Government will feel compelled to introduce tax cuts at least sufficient to offset these effects of bracket creep. But that means that the Government’s projected budget balance by 2017-18 then disappears unless there are further expenditure cuts or there are other forms of tax increases.

    In a previous comment on an ‘Alternative Budget Strategy’ (posted July 22/ 23) I showed how additional revenue totalling some $42 billion could be raised in 2017-18 by real tax reform that reduced various tax expenditures (ie concessions) and closed a number of tax loopholes that are presently used to avoid paying tax. This alternative approach would result in a much fairer budget and would still restore the budget balance. Furthermore this alternative would be much more credible than the Government’s budget which rests on increases in taxation that cannot be sustained. Instead for the moment the Government’s budget projections of a return to balance represent a sleight of hand, and really cannot be believed. Sooner or later the Government will have to introduce further measures, but after all the recent fuss and distrust, what chance will these have?


    [1] The estimated Budget outlays for last year, 2013-14, was reported in the Budget to be equivalent to as much as 25.9 per cent of GDP, but this high figure reflects some deliberate bringing forward of expenditures by the new Abbott Government, and also the payment of $8.8 billion to increase the capital of the Reserve Bank, which has no direct economic impact. Without this payment Budget outlays in 2013-14 would have only been 25.3 per cent of GDP compared with the reported 25.9 per cent and only half a percentage point above the projected 24.8 per cent of GDP in 2017-18.

  • Michael Keating. Government Concedes and Declares Victory

    For months the government and its various spokesmen in the Australian have been warning us that the nation faces a catastrophe if the Budget does not pass the Parliament intact. Essentially we were told that there was ‘no alternative’ if economic progress and certainty were to be maintained. Indeed Paul Kelly, to the considerable delight of many in the business community, waxed eloquent in the Australian about how the country risked becoming ungovernable if the government did not get its way.

    For the government, this line made political sense so long as the government was confident that its Budget would eventually pass, after the Senate changed on 1 July. In effect its strategy was to characterise the Labor Party and the Greens as being irresponsible, while it could soon expect to bask in the glory of achieving its chosen path to restoring the Budget surplus over time.

    Now, however, the government has had to recognise that the new Senate since July is just as obdurate as the last, and possibly even less predictable.  Instead, compromise is now the order of the day. Accordingly the spin also has to change. So now the story, faithfully reported in today’s Australian, is that most of the Budget has already been passed by the Parliament. The measures still outstanding will no doubt be watered down in the present negotiations, but despite the previous dire warnings, none of the still-to-be-announced changes will matter.

    Well I agree they will not matter much. Indeed they may matter even less than the government lets on as the proceeds of the higher fuel excise and the medicare co-payment were going to be spent on extra road funding and health research respectively, and in themselves did not represent a saving to the budget bottom line; now that extra money can be saved, which probably represents a better economic outcome.

    But what does matter to the government is that it will declare another victory as it properly moves to restoring the Budget surplus. And what should matter to the rest of us is that this required restoration of the Budget surplus over time could have been achieved more efficiently and fairly in other ways, with much less of the burden being imposed on the most disadvantaged members of our community, by relying more on real tax reform. See my three earlier postings ‘An alternate budget strategy’ on July 21, 22 and 23.

     

  • John Menadue. Who owns Medibank Private?

     The government has announced that it hopes to raise $4 billion from the sale of Medibank Private. But like many of its budget ‘savings’ it might find that it has to rely in this case  on the High Court rather than the Senate to decide if the $4 billion ‘saving’ can be realised.

    The case has been made by many people that the government is not the owner and certainly not the sole owner of Medibank Private. A view is strongly held that Medibank Private is owned by members/policy holders of Medibank Private. There are 3.8 million members. There is not much doubt that Medibank Private’s equity including accumulated reserves has come overwhelmingly from members’ contributions. At 30 June 2013 issued capital was $85m. Retained earnings were $1.3b. The market value of Medibank Private is estimated to be $4b by the government’s financial advisers.         .

    Medibank Private was first launched in 1976 with operations placed in the hands of the Health Insurance Commission (HIC).

    An examination of Medibank Private’s accounts by The New Daily (George Lekakis) reveals that before 1997

    • In 1988 the Chairman of Medibank Private, Fred Miller, wrote to Health Minister Neal Blewett that ‘Medibank Private is a non-profit organisation based solely on its contributors’ funds. The government has no financial interest in Medibank Private’s assets and reserves. Medibank Private’s assets and resources are the property of its contributors.’ This view by the Chairman was spelt out many times in statements and financial disclosures.
    • Members were officially recognised as ‘equity holders’ in the business from 1993 to 1996.
    • The balance sheets of Medibank Private before 1997 clearly show that the members owned the net assets of the company and not the government.

    The accounting treatment of Medibank Private was changed in 1997 by the Howard Government. This established government control and ownership of the fund.

    • In 1997 the term ‘members’ equity’ was removed from the balance sheet and replaced with a new concept of ‘fund equity’.
    • The Howard Government then directed the Health Insurance Commission to transfer equity of the fund to a new government-owned company known as Medibank Private.

    It would seem that the actions of the Howard Government and later the Rudd Government were designed to extinguish the rights of the members/contributors.

    The Australian Government can acquire the private assets of citizens under Section 51 of the Constitution but the acquisition must be on ‘just terms’. It is arguable that extinguishing completely the rights of contributors – the early ‘equity holders’ – can hardly be said to be on ‘just terms’.

    I must confess that I have a personal interest.  I have been a contributor/’equity-holder’ since 1976. I have contributed tens of thousands of dollars in premiums. Most of it has been a waste of money, but I suppose it gave me something called ‘peace of mind’ but not much more.

    Who owns Medibank Private? The High Court may be called upon to tell us.

     

    In my blog of March 26, 2014 ‘Privatising Medibank Private, who cares’ I argued the all health insurance, whether public or private is parasitical. Warren Buffett described PHI as the tapeworm that is destroying the US health system.

  • Peter Sivey. Health budget: GP care isn’t the problem, costly specialist care is.

    The opening of eight new medical schools in Australia in the past decade has seen a massive increase in the number of new doctors entering the workforce. The number of new junior doctors graduating in Australia doubled between 2004 and 2011. But while fears of an overall shortage of doctors seem assuaged, we don’t have the right mix of doctors.

    A recent trend is the increasing specialisation of the medical workforce. In 1999, 45% of Australian doctors were general practitioners (GPs) but this proportion had fallen to 38% by 2009. Similar trends can be observed in the United States and United Kingdom.

    This trend is concerning because primary care, provided by general practitioners, is the most efficient and equitable type of health care, particularly preventive care and the management of chronic disease. These components of GP-provided care have the potential to improve health outcomes, lower costs and reduce the need for future more costly interventions.

    In contrast, specialists tend to be reactive and expensive, seeing patients only when a health condition has taken a turn for the worse, when surgery, expensive pharmaceuticals, or other intensive treatments are required.

    Of course, a modern health-care system needs a high-quality specialist sector; specialists are the doctors patients rely on when they’re sickest. But workforce planners should strike the right balance between primary care and specialist physicians.

    So what is causing the growing imbalance towards specialism in medical career decision making?

    Our recent study asked junior doctors in Australia about their job preferences. We did this using a discrete-choice experiment, where respondents made hypothetical but realistic choices about their future career. By analysing their responses statistically, we could tell what factors drove their choices.

    Our results show a range of factors affect choice of speciality. Opportunity to practice procedural work and academic opportunities are some of the factors that drive junior doctors to specialise rather than choose general practice. But the elephant in the room is money.

    Specialists in Australia earn almost twice as much as GPs. Survey data shows average earnings in 2012 of $194,000 for GPs and $360,000 for specialists. Even when adjusted for the longer hours that they work, specialists’ hourly wages are still 60% higher than GPs.

    We found expected earnings have a large effect on choice of speciality. But lowering the income gap could redress the situation. Our modelling shows that increasing GPs’ earnings by A$50,000 per year (a 28% increase from 2008 levels) would increase the number of junior doctors choosing general practice by 11%, or 247 more trainee GPs per year.

    So, how can policymakers increase GPs earnings relative to specialists?

    The main policy tool available is Medicare. Medicare influences GPs’ earnings via rebates for the consultations they provide. Increasing Medicare rebates for GP services would therefore be a simple way of increasing their earnings. Of course, this is entirely the opposite of current government policies to introduce co-payments for bulk-billed consultations and reduce rebates.

    Innovative payment mechanisms may provide a more cost-effective way of increasing GPs’ relative earnings. Introducing additional funding sources using capitation (where doctors are paid for looking after enrolled patients for a whole year, not just per consultation) and pay-for-performance would allow earnings increases to be linked to higher quality of care, rather than just the number of consultations provided.

    Increased earnings for GPs needn’t blow a hole in the budget either. Offsetting savings could come from targeted reductions to Medicare rebates for specialist services, which would reduce the earning power of specialists, especially those working in private hospitals on privately-insured patients.

    In 2012/13, the government spent $3.9bn subsidising private specialist consultations. A proportion of these Medicare subsidies could be redirected to GP consultations.

    Together, these measures could reduce the relative earnings advantages of specialists over GPs, encouraging more junior doctors into general practice.

    Peter Sivey is Senior Lecturer, School of Economics at La Trobe University. This article was first published in The Conversation on 7 August 2014.

     

  • Michael Keating. Australia’s productivity performance.

    For most of our history too much of Australian business was focussed on rent seeking, rather than the creation of wealth. Manipulating government to obtain protection, or other forms of favoured treatment by way of regulation or taxation, was far too often pursued as the easiest way to increase profitability. While the economic reforms of the 1980s and 1990s put an end to much of this behaviour by denying many of the opportunities for rent seeking, business is still too inclined to look to government; hence the cacophony of calls for government to introduce further ‘reforms’, when much more of the responsibility for improving Australia’s economic performance should lie with business itself.

    As John Menadue posted last week, productivity is important. It is a key source of long-term economic growth, business competitiveness, and our living standards. But business associations, some leading employers and their camp followers in the media are insisting that future reform must focus on alleged labour market rigidities and reductions in taxation, as if these were the most important influences on productivity. Instead what follows is an assessment of the key facts regarding our productivity performance and how it might be improved.

    Technological Change

    Over the many centuries before the Industrial Revolution productivity increased very little. What changed with the Industrial Revolution was a series of technological breakthroughs, and since then the steady upward climb in productivity in all the industrialised countries has been largely ascribed to technological progress. More recently, however, since the 1970s, the development of human capital through increasing skills and education has also been recognised as another important driver of productivity improvement.

    So it might be expected that the critics of Australia’s recent productivity performance over the last decade would examine what has been happening to technological progress and skills.  Furthermore, one of the features of technological progress in a globalised world is that any new technology is quickly available to all, or at least to all the developed countries. Consequently if most advanced economies have exhibited much the same variations in their rate of productivity growth, then this increases the likelihood that a change in the rate of technological progress is the main cause, and not something that is unique to an individual country such as its labour market institutions and regulations or its tax system.

    In fact, as has been widely remarked, Australia’s rate of growth of (labour) productivity does seem to have slowed down since around 2000, or perhaps more accurately since 2003-04. Thus in the fourteen years leading up to 2000 – the years of the widely applauded economic reforms – labour productivity in Australia rose at an average annual rate of 1.8 per cent compared with an average annual rate of only 1 per cent since then (Table 1 below). But this decline in the rate of productivity increase does not of itself prove that we have become ‘complacent’ in this new century and that our slower productivity growth is all the fault of a lack of reformist zeal. Instead, what is equally interesting is that the rate of increase in labour productivity seems to have slowed by much the same amount in almost every other advanced economy, with the only exception being the US among the countries and regions shown. Furthermore, even in the case of the US, the rate of productivity increase has fallen substantially over the last three years since the Global Financial Crisis, whereas it has picked up in Australia during this period. Robert Gordon, who has been widely recognised as the leading analyst of US productivity over many years, is inclined to attribute this slower productivity growth to the ICT revolution playing itself out, and in his opinion ICT was never as powerful a disruptive technology as electricity or the motor car. 

    Investment and the influence of specific industries

    The other key factor influencing labour productivity is the amount of capital per worker, although again new technologies often create the requirement for new investment and increasing capital intensity of production. Ideally the immediate direct influence of technology is captured by considering changes in total factor productivity (TFP) which is the increase in output per unit of labour and capital combined. Unfortunately international data for TFP are not available, but in Australia’s case it is the poor performance of TFP since the beginning of this century that most worries the critics (Chart 1 below).

    Table 1: Comparative Growth Rates of Labour Productivity in Selected Countries and Regions
    Per cent

    Country/Region aver 1986-2000 aver 2000-2013 aver 2010-2013
    Australia 1.8 1.0 1.5
    Canada 1.3 0.5 0.7
    United Kingdom 2.5 0.8 0.0
    USA 1.5 1.6 0.8
    Euro Area 1.6 0.6 0.5
    OECD 1.9 1.1 0.8

    Source: OECD Economic Outlook, accessed 27 July

    Investment and the influence of specific industries

    The other key factor influencing labour productivity is the amount of capital per worker, although again new technologies often create the requirement for new investment and increasing capital intensity of production. Ideally the immediate direct influence of technology is captured by considering changes in total factor productivity (TFP) which is the increase in output per unit of labour and capital combined. Unfortunately international data for TFP are not available, but in Australia’s case it is the poor performance of TFP since the beginning of this century that most worries the critics (Chart 1 below).

    chart1

    Closer examination of the performance of TFP for individual industries suggests, however, that about half of the fall in the total Australian TFP since 2003-04 is accounted for by mining and the utilities. In fact what seems to have happened is that the investment phase of the mining boom was associated with a huge increase in capital but no immediate increase in output. In addition, it seems likely that the very high prices for minerals a couple of years ago, led to some marginal mines with lower ore content being kept open, and this also lowered productivity. But looking ahead these factors dragging down mining productivity can be expected to reverse themselves in the years ahead.  Somewhat similarly investment has surged in the various utilities in the last decade, partly in response to demands for greater security of supply, but also problems of increased peak demand and water restrictions. Again, however, these factors seem unlikely to continue forever, and will soon stop dragging national productivity down. Finally manufacturing TFP has also fallen a little, but all that fall can be explained by the fall in output, and again this decline in output was caused by the high exchange rate, and has not been a response to labour market rigidities or taxation.

    Labour market reforms

    As John Menadue pointed out in his blog last week, serious examinations of the Australian labour market have shown that it has proved to be very flexible in achieving the necessary adjustment of relative wage rates to support the transfer of labour to the fast growing mining and construction industries. Indeed, as the Secretary of the Treasury, Martin Parkinson commented ‘if it were not for our flexibility … Australia would not have avoided the worst of the impacts of the Global Financial Crisis’.

    Only two years ago there was an independent and comprehensive review of the Fair Work Act which received over 250 submissions. This review found that ‘since the Fair Work Act came into force important outcomes such as wages growth, industrial disputation, the responsiveness of wages to supply and demand, the rate of employment growth and the flexibility of work patterns have been favourable to Australia’s continuing prosperity, as indeed they have been since the transition away from arbitration two decades ago’. The Review was concerned by the slower rate of productivity growth, but it was ‘not persuaded that the legislative framework for industrial relations accounts for this productivity slowdown’. In fact this slowdown dates from around the time that Work Choices was introduced by the Howard Government in an attempt to radically alter the industrial relations framework in favour of employers. So insofar as workplace relations legislation could affect productivity, perhaps we should blame that legislation for contributing to slower productivity growth by destroying the necessary trust and goodwill between employers and workers and their representatives.

    Going forward it is, of course, always possible to do better in the future. One key aspect of Australia’s economic performance which we could improve is our development and use of skills. And, as already noted, skills do matter for productivity.

    While governments have responsibilities for education and training, employers also have responsibilities for the development of workplace skills.  Perhaps even more importantly, the organisation of work, so that the skills that we already have are used optimally, is an area of employer responsibility where we could improve significantly. For example, even at a time of skill shortages encompassing the traditional trades, one third of people with trade qualifications were found to be working in jobs that were apparently less skilled. Survey evidence of why they were not using their trade qualifications reported that almost always it was because they felt their trade skills were not being used adequately. In other words employers had dumbed down the work of trades people, reducing the amount of discretion, so that many tradesmen preferred driving a taxi because of the autonomy and discretion that work allowed. 

    Conclusion

    Any reasonable interpretation of the available evidence clearly suggests that the slower rate of increase in productivity in Australia experienced over the last decade has little to do with labour market rigidities or our taxation regime.  A slower rate of technological progress and increasing capital intensity which has not yet paid off, loom as much more likely explanations of this slower productivity growth. There is scope for improved labour relations to make a modest contribution to improved productivity by improving workforce development and the use of existing skills, but the main responsibility for improvements in that regard lie with employers themselves.

    In sum, the best thing that employers and their trade associations could do is to stop passing the buck to everyone else for their own failings, and get on with making their workplaces more productive using the existing freedoms that they undoubtedly have.

  • Wiryono Sastrohandoyo. The new Indonesian President Joko Widodo.

    ​Joko Widodo is an upright, decent and honourable person.

    It is the general feeling in Indonesia that his election is a victory for the Indonesian people and the generally peaceful election process. This is a sign of the growing maturity of Indonesia’s young democracy.
    Jokowi was great during his two terms as mayor of Solo, a small city of half a million people in central Java. He has been less impressive during his two years as Governor of Jakarta with a diverse population of more than ten million people. Now he has to deal with a larger and even more diverse population of 240 million.

    Indonesians are proud that their nation is the third largest democracy. But we also know that whilst our democracy is maturing , the democratisation process must continue. It will not be easy. But since the first elections in 1999 in the post-Suharto period, Indonesians have been able to have free and fair elections. So I am hopeful.

    Probowo’s rejection and withdrawal from the electoral process reflects the inability of his party’s elites and himself to see the reality of his loss. What we need is reconciliation with his supporters who won 47% of the popular vote. They are a significant part of the Indonesian population and must be heard.
    ,
    But Jokowi’s electoral victory was achieved in a very close race. If the president was elected by parliament, the Prabowo-Rajasa team would have beaten Jokowi-Kalla easily. Jokowi-JK is supported by a coalition of parties controlling only 37% of the seats in Parliament while Prabowo-Hatta is supported by a coalition controlling 52.1% of the seats.

    But the president is directly elected and a majority of parliamentary seats does not mean victory. The new president’s first problem, if he is to govern effectively, is how to swing enough of the Prabowo’s coalition parties’ MPs to his side. At this time it is not clear how he is going to do it. But it is not impossible. Party discipline is weak and some politicians have indicated the willingness to swing. Usually – politics being what it is – at a price.

    A problem is how independent is Jokowi going to be? During the campaign Party Chairwoman Megawati Sukarnoputri stressed that Jokowi is mandated by the party and that he is to implement party policy. This involves reviving what is known as Trisaki, that Indonesia is sovereign in the field of politics, self-sufficient in economic affairs and with its own distinctive cultural identity. Fortunately this was not  so strongly emphasized later in the campaign but the relationship between President Jokowi and the Party leadership will have to be worked out. Time will tell. Coalition building is not only done for the purpose of implementing desired policy goals but also as rewards.
    .
    During the campaign, Jokowi indicated that he wanted a cabinet of professionals. This will be a good indicator of his intentions and priorities.

    Jokowi sees foreign policy as a tool for obtaining benefits for the sake of domestic economic and political growth. He said that Indonesian ambassadors should be the salesmen of Indonesia. In other words: promoting business. And in business relations, business usually takes a longer term and more consistent view. It is in other areas of relations that we usually have worrying problems.

    On the South China Sea issue Jokowi’s statements suggest that he does not see Indonesia in dispute with China. Indonesia will seek to play a constructive role for we need both China and the West in the Pacific. We need to ensure that the rising power of China and the pivoting US do not end in conflict.

    Relations with Australia will continue to be over shadowed by other more important issues. This is particularly so because Jokowi sees that foreign investment should serve domestic economic growth. His focus of attention in this will mainly be people at the bottom, those who are surviving on one dollar a day. Their living standard has to be improved and fast. During his youth he was one of them. But he is also an experienced businessman who knows that Indonesia needs foreign investment. His view on Australia is still to be developed but  he is not confrontational by nature although not unwlling to be tough. In the past there has been too many breakdowns of dialogue. Australians tend to hold dialogue on a head-to-head basis. The Indonesian way is to hold a dialogue on a heart-to-heart basis. The challenge is for both countries to have more cross cultural communication. Australia and Indonesia need to know how to communicate better.

    Wiryono Sastrohandoyo was Indonesian Ambassador to Australia from 1996 to 1999.
    This article is in response to questions I asked.   John Menadue

     

     

  • John Menadue–King Coal to be dethroned.

    On May 1 last year I posted “A canary in the coal mine”. It focussed on the growing and wide concern about the damage to the climate caused by coal fired electricity generation. It also drew attention to the action of Jonathon Moylan who sent a hoax email concerning Whitehaven Coal to the ANZ Bank about the risk of investing in coal. The worthy and powerful tut tutted his action but I likened it to the canary in the coal mine warning of danger ahead.

    In the Supreme Court a few days ago. Jonathon Moylan pleaded guilty but it seems unlikely that he will receive a custodial sentence. Good luck to him for acting out his concerns about our planet, the dangers of coal and that the banks should be careful in funding more coal projects

    Only a few days earlier in Texas, Tony Abbott our apparent self-styled “ambassador for coal” said “for many decades at least, coal will continue to fuel human progress as an affordable energy source for wealthy and developed countries alike”

    But the evidence is pointing in the other direction. At the recent midyear climate negotiations in Bonn, an unprecedented 60 countries including Germany called for a total phase out of fossil fuels by 2050 as part of a global agreement on climate change to be concluded in Paris in 2015. If the Paris conference next year is successful the future of coal will be even more bleak than it is now, particularly for steaming coal

    The future of coking coal produced for steel making will be more secure, but not steaming coal. About 13 % of global coal is mined for coking and steel making. Coking coal is about 40% of our total coal exports. The remainder is steaming coal.

    On a global basis 41 % of 0f the world’s electricity is generated by highly polluting steaming coal.

    The International Energy Agency has advised that even if we aim to limit the world temperature rise to only 2 degrees – it could be more in practice – we would have to achieve a reduction of 50 % in the share of global energy from coal by 2035.

    Coal may seem a cheap fuel now but it does not carry the cost of the ‘externalities’ it incurs, the damage it does to our environment and health. That is why proper pricing of coal is essential. As the real cost of steaming coal increases the cost of renewables is moving strongly downwards.

    The signs are everywhere that steaming coal pollution must be reduced in favour of less polluting alternatives. Why in the world would Joe Hockey tell us that the wind farms around Canberra are ‘utterly offensive…I think they are blight on the landscape’? Does he prefer dirty and polluting smoke stacks?

    President Obama has taken executive action to mandate a 30 % reduction in carbon emissions from fossil burning power plants by 2030. As Japan restarts its nuclear power plants it will buy less Australian coal. China is committed to reducing power generation from coal. It is a national imperative. European consumption of coal continues to fall with new air pollution requirements from 2016.

    There are reports that Deutsche Bank, HSBC, Credit Agricole and the Bank of Scotland have withdrawn their support for the Abbott Point Coal loader in Queensland. The Bendigo and Adelaide Bank have said that they would not fund coal projects.

    We are also hearing of new coal projects being deferred and many existing mines losing money. Some of this may be short term but the longer term prospects for steaming coal are bleak. In May the Queensland Resources Council said that 10% of coal mines are “in a very precarious state”

    Or as John Hewson has put it “The days of fossil fuels being burnt unabated are over. Investing in these projects is a losing bet” (AFR 11 June 2014)

    More and more pain is coming for steaming coal.

    Minister Greg Hunt told us a few days ago that clean coal is just around the corner with new technology. But we have been hearing that for over 20 years. It is politics designed to try and prop up a declining industry and shows the risk of Direct Action in handing out money to industrial friends and political supporters.

    Tony Abbott says that action on carbon must not be allowed that damages our economy.  He thinks that the planet and our economy are separate.  Just as there will be no jobs in the Murray Darling Basin if we pollute the river so our economy and jobs will be at risk if we do not safeguard our climate and planet. If our planet is severely damaged, as is in prospect, so will our economy and lot more as well.

    Interestingly the Mining Division of the CFMEU whose members jobs at risk is far more constructive about addressing climate than Tony Abbott. The union has consistently supported a price on carbon with appropriate safeguards and compensation.

    We need to stop shoring up industries that are carbon polluting. As Ian McAuley has put it capitalism thrives on change and the opportunity for countries like Australia to modernise the energy sector can be a major driver of change. There are jobs in de commissoning coal fired plants, in building solar and wind plants and the accompanying infrastructure in energy research and development and in making domestic buildings and industrial plants energy efficient. If this isn’t economic activity, what is?

    King coal is not the energy source of the future regardless of what Tony Abbott says. The canary in the coal mine is screeching louder and louder and we had better take notice.

  • John Menadue–A lot of nonsense about productivity.

    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.

  • Michael Keating. An alternative budget strategy – part 3

    Part 3. An Alternative Budget Strategy 

    The previous comment in this series showed that there are alternatives to the Government’s particular strategy for restoring a Budget surplus over the next four years. In particular, it was shown that action to protect the revenue could raise around $42 billion in 2017-18. That is about 2¼ per cent of 2017-18 GDP and meets the Government’s Budget targets. Furthermore this objective is achieved without relying on bracket creep that would move a full-time male worker on average earnings into the 37 per cent tax bracket from 2015-16.

    However, it was also recognised in the first part of this series, that Australia faces a continuing budget problem of matching expenditure and revenue over the longer term. On the basis of Treasury projections in its last Intergenerational Report (2010), it is estimated that resolution of this problem will require further budget tightening in some form or other roughly equivalent to another 2¼ per cent of GDP between 2017-18 and 2049-50. The aim of this third comment is therefore to briefly discuss some of the alternatives which might need to be considered in the future. It is further suggested that these alternatives will essentially involve improving expenditure program effectiveness so that more is achieved with less, or if then necessary, increasing existing taxes.

    Improving expenditure effectiveness

    The projected increase in public expenditure relative to GDP over the next 30 years or so mostly reflects increasing health expenditures, much of it associated with an aging population, and similarly increases in age related pensions and aged care. Indeed expenditures on these three areas were projected by Treasury to increase by 5 per cent of GDP between 2010 and 2050 if then present policies were continued, and so far that is pretty much the case.

    The introduction of superannuation was intended to limit future demands for the age pension, and some further tightening up of superannuation to further limit dissipation of superannuation entitlements would help further reduce expenditure on age pensions. But the big demands for additional expenditure are concentrated in health, and that is where there are the greatest opportunities for future expenditure restraint by improving the cost effectiveness of care.  Already the introduction of activity based funding by the Rudd Government provides the opportunity to move to funding on the basis of cost effectiveness, noting that very substantial differences in costs have been sustained over long times for what are the same procedures. In addition, there are other ways of funding health care, particularly for those suffering chronic conditions, that would improve the incentives for cost effective care, compared to the incentives towards over-servicing with fee for service arrangements.

    Schools represent another major area whose demands for funding might be reconsidered. Real public funding per student in primary government schools increased by 31 per cent between 1999 and 2011, while there was a 20 per cent increase for government high schools. There is no evidence that this increase in funding (and the further increase since 2011) has led to improved student results. Instead the key equity objectives of the Gonski reforms should be capable of being realised by redeployment of funding within the education system. In short, instead of promising that no school should ever lose through funding changes, we need to accept that genuine reform has to involve some of the funding to the schools that are most generously funded relative to need should be transferred to other more needy schools. Not to do so is the worst possible example of ‘middle-class welfare’.

    The final major area of expenditure that stands out as a source of potential waste is the sacred cow of infrastructure. Australia has a history of over-investing in public infrastructure in the sense that proposals have been poorly evaluated, or not at all, and the returns (including the non-financial returns) have been totally inadequate relative to the costs. Indeed, as Bert Kelly, the former ‘modest member of Parliament’ remarked many years ago, he knew an election was coming on whenever he heard an announcement for a new dam.

    In the last ten years expenditure on infrastructure by Australian governments has grown at twice the rate of GDP, and in the present Commonwealth Budget the Abbott Government’s extra spending on infrastructure reduced the total medium term expenditure savings achieved by about one third. Now this might be a good outcome if that additional infrastructure spending were warranted, but in fact a number of the infrastructure proposals that have been approved for funding in this Budget have not completed a proper cost-benefit evaluation.

    Increasing taxes

    The balance between expenditure restraint and increasing taxation is of course a matter of political values and an area for some discretion.  If in the event, a decision is reached that expenditure restraint should not be solely relied upon to achieve fiscal sustainability there are really only three substantial taxes capable of raising the amounts of additional funding that might then be needed in the longer term out to 2049-50:

    • GST
    • Company tax, and
    • Personal income tax

    As has been widely remarked the Abbott Government’s Budget does seem to envisage allowing the States to demand an increase in the GST if they consider that they cannot restrain their health and education expenditures sufficiently. So an increase in GST revenue seems quite possible sometime in the future, either through base broadening to include at least food, or through an increase in the rate or both. That may represent a reasonable solution, although the way in which it is implemented might have been better if there were a proper conversation in COAG (and more widely) about how best to proceed and the possible alternatives.

    The common view is that company tax should be reduced rather than increased. The argument relies heavily on the view that capital is highly mobile, and so competitively we need to match the company tax rates of other countries or we will lose investment. This view however deserves a little more scrutiny. First it takes no account of the fact that Australia is unique in allowing dividend imputation. That means that Australian investors have much less incentive to invest overseas than their equivalents in other countries. Second, it is arguable whether we need lower company tax rates to attract overseas investors. In most instances the rates of returns here are high enough after allowing for risk. Indeed right now the Reserve Bank is on record as considering the present exchange rate to be too high, and the most obvious reason is the attractiveness of Australia to foreign capital. So while an increase in company tax may not be likely, there is a good case, especially given the long term fiscal outlook, for resisting any decrease in company tax.

    Finally, it may be that an increase in personal income tax will (eventually) be considered to be at least part of the optimal approach to sustaining a balanced Budget in the longer-run, if we want to maintain our traditional social values and the services that we expect from government. In that case it is suggested that an increase in income tax should be achieved by an increase in the tax rates, rather than by stealth through bracket creep leading to effectively lower tax thresholds.

    There is nothing sacrosanct about the present income tax rates. First, the top rate has been as high as 60 per cent in the past, compared with a current 48.5 per cent rate[1], and no great change in any behaviour was observed when that 60 per cent was lowered. Second, other countries operate successfully with markedly higher personal tax rates than we have in Australia. Third, we are already raising income tax rates, but failing to recognise it, as the adjustments are described as temporary (the deficit levy) or hypothecated (the Medicare levy). Instead maybe we would be better off if our government(s) just came clean and acknowledged that we will not be able to pay for what we want in the way of future public services without a modest upward adjustment of the income tax rates.

    Conclusion

    Like most countries, Australia is facing a potential long-term structural problem with its public finances.  With the modest resources available to the author it is not possible, nor even desirable, to propose a complete and detailed solution. Rather the point of this series is to show that there are a range of plausible alternative strategies for achieving long-term fiscal sustainability.  The argument that the Government’s proposed Budget strategy is the only way forward is false.

    Moreover as a nation we are unlikely to succeed in charting a viable way forward to fiscal sustainability until governments are prepared to subject their views to a proper conversation based on a clear appreciation of the pros and cons of the different alternatives.  Only in that way can the public support be built that is required to achieve future fiscal sustainability.  In present circumstances it is hardly surprising that this necessary support is not forthcoming, when less than twelve months ago the government promised in the election to both spend more and tax less and now seeks to impose a most unfair Budget on the community with no prior warning nor any such mandate.

    If, instead, we are to chart a way forward and establish the necessary public understanding and consensus, we particularly need to drop the ideology surrounding the merits of taxation versus expenditure and consider the claims of each tax and expenditure proposal on their merits. Unfortunately for the moment at least the Government, egged on by its cheer squad, seem determined to prevent any further discussion of other alternative fiscal options and strategies on the basis that only the present government can be trusted to fix a mess that they themselves have helped create.

    [1] This rate of 48.5% includes the 1.5% Medicare levy and the Government’s proposed 2 per cent ‘temporary budget repair levy’.

  • Michael Keating. An alternative budget strategy – Part 2

    Part 2. An Alternative Budget Strategy 

    In the previous part of this comment, I suggested that the Budget did need to return to surplus over much the same time path as intended by the Government. There is nothing new in that, and as previously noted, Labor also had the same intention when it was in Government.  The issue in dispute is whether an alternative Budget Strategy is available to restore a Budget surplus over the next four years and which would be more equitable and less damaging to future economic growth. What follows shows that such alternatives are available; in particular the alternative explored here would rely more on taxation and would avoid the cuts to welfare and education and to research and innovation that are central to the Government’s Budget.

    The scope for increasing taxation

    In the most recent financial year, 2013-14, government receipts represented 23.0 per cent of GDP compared to a long-run average over the previous twelve years of 24.3 per cent. Some of this current low level of receipts reflects the soft economy, and the ratio of receipts to GDP can be expected to improve somewhat as economic growth recovers. Indeed the Government’s Budget projects that revenue will rise to 24.9 per cent of GDP by 2017-18; that is by almost 2 percentage points, which on its own goes a long way to removing the present Budget deficit.

    As John Daley at the Grattan Institute has pointed out, however, three quarters of this improvement in receipts and the budget bottom line represents the impact of bracket creep as (with no tax indexation) people find themselves moving into higher tax brackets as their incomes rise with inflation. As a result someone on average full-time earnings will be pulled into the 37 per cent tax bracket from 2015-16, and the average tax rate faced by a taxpayer earning this projected average income will rise by nearly a quarter from 23 to 29 per cent by 2024-25[1]. Accordingly it seems prudent to assume that any government is likely to raise the tax thresholds from time to time and that the projected income tax receipts will be reduced accordingly.

    So what are the other options for improving the revenue? It is suggested that these broadly comprise action to:

    • Reduce tax expenditures which in many cases are equivalent to outlays
    • Limit tax avoidance
    • Restore the Carbon Tax and the Mining Resources Rent tax
    • Removing the tax rebates for the fuel excise for miners and farmers and the private health insurance rebate
    • Lift tax rates but in a considered way

    The potential for each of these actions are considered briefly below. 

    Reduced tax expenditures

    Many of the largest tax expenditures would be seen as justified and/or have considerable popular support. For instance the list of tax expenditures published by the Treasury includes no capital gains tax on people’s principal residence, deductions for philanthropic gifts, and the exemptions of education and health from the GST, and it seems unlikely that any government will want to remove these “concessions”. Instead it is suggested that reform of tax expenditures should focus on only two – the special taxation treatment of superannuation contributions and earnings and the capital gains discounts for individuals and trusts. Some might question adding negative gearing, but it is not included, as it is not considered by Treasury to be a tax expenditure, and there are legitimate issues of principle for allowing interest deductions against a taxpayer’s income irrespective of how that income was earned.

    In 2013-14Treasury estimated that the revenue foregone from the concessional tax treatment of superannuation was $32.1 billion. Rough projections by the author suggest that this amount might increase to around $39 billion in 2017-18 if there is no change to these concessions. However, not all of that $39 billion would be saved if the concessions were removed because some behavioural response could be expected. Even more significantly, some concessional treatment of superannuation savings is probably justified, given its compulsory nature and the restrictions put on accessing superannuation accounts. Clearly a number of options for possible reform of the tax treatment of superannuation are available for further consideration, but further exploration of those options would be a major exercise in its own right. For present purposes it is the author’s judgement that savings of the order of the order of $15.5 billion should be available in 2017-18 if the tax treatment of superannuation were reformed. Savings of this order would not be so much as to change the incentive for people to continue to save through superannuation.

    As part of its 2001 tax reform package, the Howard Government introduced a 50 per cent deduction for capital gains for individuals and trusts. Realised capital gains are just as much income as any other form, and there was never any justification for this 50 per cent discount, especially in a tax system which ensures that there is no double taxation of dividends accruing to Australian residents.  Furthermore, the Murray Inquiry into Australia’s Financial System concluded last week that the concessional treatment of capital gains “encourages leveraged and speculative investment – particularly in housing”.  The resulting high levels of household debt represent the major financial risk to the economy – much more than government debt.  Accordingly there is a strong case for   restoring the full taxation of capital gains, which is projected here to save around $5 billion in 2017-18.

    Reducing tax avoidance

    Before the Labor Government fell last year it introduced legislation to protect the corporate tax base from various loopholes. The most significant of these was “thin capitalisation” whereby the operating Australian subsidiary of an overseas company is loaded up with debt to its parents, so that it makes little or no profits in Australia. The Abbott Government has seen fit to drop these reforms, but if they proceeded the author projects (on the basis of information provided by the Labor Government last year) that these anti-avoidance measures could produce around $1.5 billion extra revenue in 2017-18.

    In addition, with the third biggest mining corporation operating in Australia (Glencore) reportedly paying next to no tax in Australia, it would seem that the time is ripe to review the tax treatment of transfer pricing arrangements. These arrangements occur when Australian subsidiaries sell at below market prices to their parent company so as to minimise their profits and tax paid in Australia. However, in the absence of more precise information, no allowance has been made for extra revenue from this source.

    Restore the carbon and mining resource rent tax

    While these taxes seem to have been contentious, there is a very good economic case for both of them. Indeed most economists strongly favour pricing carbon as the best way to reduce the harmful effects of carbon pollution. And the MRRT is only levied on above normal profits and as such cannot be a disincentive to mining investment. Indeed, if any further proof were needed, the experience over almost 30 years since the PRRT was introduced for offshore petroleum and gas shows that properly constructed resource rental taxes do not affect resource investment.

    Based on information in the 2012-13 Budget, the author estimates that in 2017-18 restoration of the carbon tax and the MRRT would bring in around an extra $3 billion and $2.5 billion respectively.

    Removing tax credits for fuel and private health insurance

    There is no economic justification for providing tax credits to farmers and miners for their fuel use. First, why subsidise the use of any particular input into the production process? And if fuel is subsidised why not also subsidise other input costs, including for example, labour costs? Second, why subsidise some of the costs of two particular industries – farming and mining – but not other industries, including other industries that are competing with these two industries for resources such as labour.

    Equally many evaluations have pointed to the cost ineffectiveness of the subsidy for private health insurance. Contrary to the alleged justification for this subsidy, more patients would be treated if the same amount were spent on public hospitals rather than subsidising the inefficient operations of the private health funds and the overcharging by private medical practitioners.

    Technically these two subsidies are not regarded as tax subsidies and instead are reported on the expenditure side of the Budget. On the basis of the forward estimates of these expenditures it is projected by the author that in 2017-18, $7.6 billion and $7.2 billion could be saved by abolishing the fuel credits and the private health insurance rebate respectively.

    Total revenue savings

    The sum of the budget savings identified above is estimated to be around $42 billion in 2017-18 or equivalent to about 2¼ per cent of the projected GDP (see table below). This structural saving to the Budget of an annual $42 billion by 2017-18 is about the same as the total turnaround that the Government expects to achieve in its Budget.

     

    Possible Budget Savings on the Revenue Side

    2017-18, $billion

    Tax Expenditures
    Reduce favourable treatment of superannuation

    15.5
    Capital gains discount for individuals & trusts

    5
    Restoring anti avoidance measures dropped

    1.5
    Restoring tax measures dropped
    Carbon pricing

    3
    MRRT (net after allowing for impact on Company tax)

    2.5
    Removing tax credits
    Fuel excise rebate

    7.6
    Private health insurance rebate

    7.2
    Total budget savings

    42.3

    Of course, the list of revenue measures identified here can only be illustrative of what can be achieved on the revenue side of the Budget.  It may be that others would want to amend the list in various ways. For example, it may be that in the present political climate the carbon tax would not be renewed, but even if not all the measures identified were taken up or only partially adopted, what is clear is that there is a lot of scope for raising additional revenue and achieving a fairer Budget outcome.

    In addition, as noted above, most of the Government’s Budget turnaround is also achieved through higher income tax revenue, but that revenue is brought about by bracket creep rather than efficient decisions.   Indeed, after allowance for the one-off payment of $8.8 billion to the Reserve Bank last year, and for various additional expenditures principally on new infrastructure and defence, the Government’s budget actually achieves very little in expenditure savings on a net basis, amounting to only 0.3 per cent of GDP in 2017-18. By contrast the proposals presented here do not make the unrealistic assumption that bracket creep in the tax system will be allowed to continue to bring in extra revenue without any of those proceeds being handed back through tax cuts. Instead if most of the measures proposed in this comment were substituted for the government’s budget then there would be scope for tax cuts by increasing tax thresholds to offset the impact of bracket creep.

    Nevertheless, as pointed out in the first part of this Alternative Budget Strategy, Australia faces a longer term fiscal problem, and the assessment is that over time by 2049-50 further structural savings will be needed of the order of another 2¼ per cent of GDP – that is as much again.  Those issues will be discussed further in the next part of this series.

    Suffice for now to say that while clearly more work would be needed to determine the details of where savings should be made to achieve the necessary restoration of the Budget surplus by around 2017-18, enough has been shown here to establish that credible alternative budget strategies are available. Conservatives should not be allowed to hide behind the convenient myth that their strategy is the only one, and that any questioning of it is irresponsible and a failure of governance and our political system.

    [1] This fact needs to be considered in perspective. In reality around 80 per cent of the full-time male employees earn less than average full-time earnings. If allowance is made for those who work less than full-time, who are females, and who do not work at all, then considerably less than 20 per cent of the adult population have an income equivalent to full-time average earnings or more.

  • John Menadue–Power prices – we ain’t seen nothing yet!

    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.

  • Michael Keating. An alternative budget strategy – Part 1

    In May this year I posted five articles by Dr Michael Keating on the economic and social consequences of the recent Hockey budget. Over the next three days I will be posting three follow-up articles by Michael Keating on an alternative budget strategy.  Dr Michael Keating was formerly Secretary of the Department of Finance and Secretary of the Department of Prime Minister and Cabinet. John Menadue

    Part 1. An Alternative Budget Strategy 

     Two months later and the Abbott Government’s Budget is the worst received in living memory. There is widespread community agreement that this Budget is basically unfair.

    Readers will not need reminding of the various cuts to welfare, health and education, but in the absence of the usual Budget information from the Government, perhaps the best summary of the distributional impact of this Budget has been provided by NATSEM. In short, NATSEM modelling found that by 2017-18, “Low income families with children (bottom 20 per cent) are worse off by around 6.6 per cent while single parents are worse off by around 10.8 per cent”.  In contrast “High income families are marginally better off thanks to the carbon tax removal”. And this analysis does not include other measures such as the Medicare copayment, the cuts to education and training, and possibly the harshest measure of all, the denial of access to any income support for young unemployed people every other six months.

    But is there an alternative to the Government’s budget strategy  –  contrary to the assertion by the Government and its supporters that in fact ‘there is no alternative’ (which is of course a familiar refuge for conservatives)?

    First, the Government is right that we do need to restore the Budget to surplus; indeed the previous Labor Government was equally committed to that, and over much the same time-frame. Furthermore, the projected rate of fiscal consolidation over the next four years – 0.6 per cent of GDP – is not draconian and seems to get the balance about right in terms of its impact on a still soft economy.

    Second, Australia also faces longer term fiscal pressures, partly because of our aging population, but more importantly because of rising expectations for increasing public services as incomes rise, combined with new technological enhancements impacting particularly on health services. In short, the Treasury estimated in its most recent 2010 Intergenerational Report that these structural budget pressures were likely to add as much as a net 4½ percentage points of GDP to total outlays by 2049-50 if the (then) present policies were maintained. And since then spending pressures under the previous Labor Government probably further increased, notwithstanding some savings initiatives, because of big new spending programs associated with the Gonski reforms of schools funding and the National Disability Insurance Scheme. Three years out from now, in 2017-18, these fiscal pressures start biting significantly, and given the long lead-times in effecting budget reform, prudent budgeting would start making preparations for financing these demands now by some combination of greater revenue and/or greater efficiencies.

    Where the Government and its cheer squad are wrong, however, is their assumption that their proposals represent the only tenable strategy to achieve the goal of a budget surplus. In effect the Government asks us to believe that the Government’s ‘tough’ budget decisions were absolutely necessary because no alternative course was possible. For example, the retiring Secretary of the Treasury, Martin Parkinson, in an almost unprecedented intervention into the political debate, has seemed to suggest that ‘vague notions of fairness’ should not be invoked to oppose the government’s program of fiscal consolidation.  Equally Paul Kelly has pontificated in the Australian that our budgetary problems are such that the ’harsh medicine’ being handed out is necessary, and that opposition ‘reveals an immaturity in political debate that the nation was meant to have left behind decades ago’.

    In fact, quite to the contrary, it is a sign of the maturity of our democratic system if there is a proper debate about the best policies for the future.  We should not be silenced by claims that any opposition to the Government’s particular strategy for restoring a budget surplus is irresponsible. Equally, however, that proper debate does require some appreciation of what are the alternatives to the Government’s proposed fiscal strategy.

    Clearly the country needs something better than the present approach by the Senate. The necessary budget surplus cannot be restored while the Senate rejects so many of the Government’s savings measures, while passing most of the tax reductions. Indeed at the time of writing it is reported that the Senate’s votes have led to a situation where so far the Budget will be $7 billion worse off over the next four years than if the Budget had contained no policy changes at all.

    In the following comment I therefore sketch the outlines of an alternative approach to restoring the Budget to surplus over the next four years and sustaining that surplus in the long run. Fundamentally this comment attempts to sketch how a fairer outcome could be achieved by relying more on measures to increase the revenue, and less on cuts to welfare.  By comparison, of the decisions taken in the Government’s Budget, 77 per cent of the projected improvement reflected decisions to reduce spending.

    It is contended that this proposed rebalancing in favour of higher taxation can be done without damaging economic growth. In fact there is no correlation between levels of taxation and the rate of growth in GDP per capita among the developed OECD countries. Of course, there is likely to be a point where a particular tax is so high that it could affect economic growth and/or employment, but the ratio of government revenue to GDP is lower in Australia than in almost all other Western democracies, and our starting point fiscal position is also much better (see Table below). Indeed, spending some of the proceeds from higher taxation, so as to avoid the cuts to tertiary education and training and research and development, would even help to improve the rate of future economic growth.

    Country*

    Total Tax Revenue as a proportion of GDP 2011

    (%)

    General Government Net Lending as proportion of GDP 2013 (%)

    General Government Net Financial Liabilities as proportion of GDP 2013 (%)
    Australia

    26.5

    -1.4

    11.8
    Canada

    30.4

    -3.0

    40.4
    Japan

    28.6

    -9.3

    137.5
    United Kingdom

    35.7

    -5.9

    65.4
    United States

    24.0

    -6.4

    81.2
    OECD

    34.1

    -4.6

    69.1

    *The figures for each country refer to all levels of government, and the net lending by general government is equivalent to the Budget deficits of all governments

    Source: OECD Statistics, http://www.oecd-ilibrary.org/economics/government, accessed 13 July 2014.

    Note that Australia is the lowest on each of the three indicators except for tax revenue, but if borrowing is added tax revenue then Australia is the lowest at about 28% of GDP compared to more than 30% in the US.

  • Bugger the planet, ignore our children and trash our reputation.

    The repeal of the carbon tax is a political victory for Tony Abbott but it is hard to imagine a worse combination of poor reasoning and bad policy making. It shows little appreciation of economics. It will increase the budget deficit. It shows a mistrust of the market. Tony Abbott’s political legacy will be defined by the repeal of the carbon tax. It is one of the worst examples of policy vandalism in our history.

    As the world’s greatest carbon polluter per capita, we are now probably the only country in the world going backwards on carbon reduction. We will be left with a nonsense called ‘Direct Action’ which Malcolm Turnbull rightly described as a fig leaf when you don’t have a real policy to reduce carbon.

    All the expert advice around the world from the climate scientists and economists is that we have a real problem which is best addressed through a market mechanism – either a carbon tax or an emissions trading scheme. Our own Treasury, Ken Henry, Bernie Fraser and Ross Garnaut, all tell us that the best and cheapest way to reduce carbon pollution is through a market mechanism rather than direct action. Tony Abbott prefers to take the advice on climate change – not of the experts but of Rupert Murdoch and other foolish people.

    Our political system and our political leaders have failed us badly. John Howard reluctantly said in 2007 that he would introduce an emissions trading scheme, but told us later that he really didn’t believe in it but he had to do it because of political pressure. Kevin Rudd’s emissions trading scheme was pursued more in the end to skewer Malcolm Turnbull. It was at the cost of a good policy outcome. When the Liberal Party dumped Malcolm Turnbull for Tony Abbott, Rudd refused to call a double dissolution on the ‘great moral challenge of climate change’. Julia Gillard told us that she would never introduce a carbon tax, and then did just that under pressure from the Greens. Then Tony Abbott, despite having favoured a carbon tax in his Daily Telegraph blog of 2009, played the carbon tax issue like a dog with a bone. No untruth was out of the question. No scare was too great.  He played to the climate sceptics and the extreme right wing of his own party and in the community. As the chair of the G20 in Brisbane later this year, he will do his best to keep climate change off the agenda.

    And then there were the Greens who must bear a huge responsibility for their policy purity that denied us a sensible outcome in 2009. The Greens joined with the Coalition in the Senate to vote down Kevin Rudd’s proposals because they ‘locked in an inadequate 5% target’. Five years later we still have a 5% target with no clear or efficient way to get there. The Greens should hang their heads in shame. They took no risks but kept parading their policy purity. Their hypocrisy continues on one issue after another. Just think asylum seekers when they sided with Tony Abbott and Scott Morrison on critical issues. In parading their self-righteousness the Greens invariably ask for more than is on the table and finish up with nothing. It is often better to hold your nose and make some real progress.

    But in it all, Tony Abbott stands out as the greatest vandal. He warned us about dramatic increases in power prices that the carbon tax would incur. Those scare tactics are turning out to be largely nonsense. The price rises due to carbon tax have been so small that the Australia Bureau of Statistics has had trouble measuring them. There certainly have been increases in electricity prices but they have little to do with the carbon tax. Only 7% of power prices are due to the carbon tax and another 7% is due to various other means to encourage energy saving and use of renewables. The big increase in electricity prices has been the gouging by the state-owned networks in NSW and Qld. On top of this gold plating by the networks which has forced up prices, we are likely to see a doubling of gas prices in the next two years as the domestic price of gas rises to the world price.

    The price increases from the carbon tax have been minimal, the economy has continued to grow and Whyalla has not been wiped off the map.

    And the carbon tax has been doing what it was designed to do in reducing carbon emissions. Only yesterday Frank Jotzo, Director, Centre for Climate Economics and Policy at ANU said in The Conversation

    ‘Carbon emissions in Australia’s national electricity market would have been 11 to 17 million tonnes higher if Australia had not introduced a carbon price. New research using the latest data indicates that the policy was working despite its imminent Senate repeal. Over the first two years of operation of the carbon price (July 2012 to July 2014) carbon emissions were down by 29 million tonnes or 8.2% across the national electricity market compared to the two years prior. The conclusion from our research is that the carbon price has been performing well in its main job; delivering emission cuts in the power sector, which is the largest source of emissions and the sector with the biggest opportunity for cuts.’

    Frank Jotzo adds that the reduction in carbon emissions would have been higher if companies had been confident that the carbon tax was here to stay. With Tony Abbott raising doubts some companies deferred decisions to reduce pollution.

    We are out of step with all other major countries. A month ago China and the UK signed an agreement to work together towards a global framework for combatting climate change. China has emission reduction schemes in six major provinces which will lead to a national scheme. China is the largest investor in renewable energy and coal use is being scaled down. President Obama is pushing ahead with ambitious carbon reduction policies. Ten US states are well ahead in carbon reduction. The Europeans have had an emissions trading scheme since 2005. Commenting on the Abbott government’s decision to abolish the carbon tax, the European Union’s Climate Commissioner said today ‘The EU regrets the repeal of Australia’s carbon pricing mechanism just as new carbon pricing initiatives are emerging all around the world. The EU is convinced that pricing carbon is not only the most cost-effective way to reduce emissions but also the tool to make the economic paradigm shift the world needs.’

    The repeal of the carbon tax will have some short term benefits for business. The chief beneficiaries will be the heavy polluting electricity generators in the La Trobe Valley who burn brown coal. But there will be significant down-sides in the long term. A carbon tax or an emissions trading scheme is essential in both reducing carbon emissions and helping organisations switch to low emissions technology. Companies will not be able to avoid making this transition. The sooner they do it the better. But there will now be fewer incentives for Australian businesses to develop low emissions technology. We will continue to depend on fossil fuels both as a major domestic energy source and an export product.  Tony Abbott prides himself in becoming an ambassador to the world for highly polluting thermal coal.

    Direct Action is not a serious policy. The cost will be higher than a market mechanism. The carbon tax penalised polluters, but Direct Action will be paid by taxpayers as an incentive for polluters to reduce pollution. What an absurd idea! Perhaps Tony Abbott has in mind paying people to give up smoking!

    If the world and Australia are to grow and prosper our polluting industries must decline and industries based on renewable sources of energy must expand. To delay that process is foolhardy…

    Tony Abbott and all Australians will come to rue the decision to abandon the carbon tax and an emissions trading scheme. Politics has won in the short term but at great cost to our future.

    Can Bill Shorten lead us out of this mess? He bears a heavy responsibility

  • An Alternative Budget Strategy by Michael Keating

    In this blog in May this year I posted a five-part series by Michael Keating on the government’s May budget and the economic and social consequences.  There has been a great deal of discussion and confusion, particularly in the senate, over this budget. This has caused Joe Hockey only a few days ago to warn that he is ready to bypass parliament and force through new spending cuts if Labor and the Greens do not come to the table on millions of dollars of budget savings.

    Next week I will be posting three-part series by Michael Keating on an alternative budget strategy. In that series, Michael Keating says ‘there is an alternative to the government’s budget strategy – contrary to the assertion by the government and its supporters that in fact “there is no alternative”.’

    This three-part alternative will be posted on Monday, Tuesday and Wednesday next week.  John Menadue

  • How does Australia’s health system compare.

    The Treasurer, the Minister for Health and the Commission of Audit have warned us in one way or another that the Australian health service is unsustainable, particularly with an ageing population. The Treasurer tells us that the age of entitlement has to end in health as elsewhere.

    We need to keep modernising Medicare but by almost any international comparison we have one of the best and most sustainable health services in the world. We need to keep our problems in perspective.

    The Commonwealth Fund publishes a regular research report on health systems in major countries. The Commonwealth Fund is a highly regarded private US foundation that compares major systems around the world to stimulate innovative policies and practices in the US and elsewhere.

    In its 2014 report ‘Mirror, mirror on the wall’ it compares the performance of healthcare systems in eleven major countries. The comparisons cover quality of care, access, efficiency, equity,‘healthy lives’ and health expenditures per capita.

    Its overall health ratings for these eleven countries were as follows:

    1. UK
    2. Switzerland
    3. Sweden
    4. Australia
    5. Germany and Netherlands (equal)
    6. .
    7. New Zealand and Norway
    8. .
    9. France
    10. Canada
    11. US

    On almost all the measures the UK with its National Health Service is a stand-out performer. It has well and truly stood the test of time. The single payer nature of the UK health service is its strength. The regular laggard in almost all these rankings is the US. It tells us a great deal about the failure of a health service based on multiple private insurance payers. (Our private health insurance lobby is trying to take us down this disastrous US path.)

    When one looks at the break-down of these rankings, the UK ranks at the top in quality of care, access, efficiency and equity. US ranks last in access, efficiency and equity. What is more, the UK system is the cheapest at $US3,405 per capita in 2011 compared with the US, the most expensive at $US8,508 per capita in that same year.

    As indicated above, Australia stands at number four in overall rankings amongst the eleven countries. In particular areas we ranked as follows

    • In quality of care we ranked number 2.
    • In access, we are well down the list at number 8. This reflects in part our high level of co-payments or out of pocket costs. The proposed $7 co-payment will add to our problem of access.
    • In efficiency, we rank number 4.
    • In equity we rank number 5, which reflects in part our failures in mental health, indigenous health and in remote healthcare.
    • In ‘healthy lives’ we rank number 4.
    • In health expenditure per capita in 2011 at $US3,800 we were the third lowest amongst the 11 countries.

    Another measure of our success of course is our high life expectancy.

    It is quite clear that by world standards we rank quite well. We are behind the UK, but far ahead of the US. The single payer Medicare has also stood the test of time.

    But there are ways that we could improve our health services.

    • Mental health, indigenous health and remote healthcare are major shortcomings.
    • Our co-payments are confused and inequitable.
    • Subsidised private health insurance makes it harder for Medicare to control costs. (I find it hard to put up with the gall of the private health insurance funds that will never publicly debate their cause, privately lobby ministers in order to achieve results that will take us down the disastrous US path.)

    There are many ways in which the efficiency of our system could be improved and costs better managed.

    • The split of commonwealth and state responsibilities adds to costs and hinders integration of hospital and non hospital care.
    • The remuneration of doctors through fee-for-service is a perverse incentive which encourages over-servicing and over-prescribing. It also hinders the treatment of long-term chronic sufferers.
    • The government subsidy to private health insurance adds $5 billion plus per annum to government costs, benefits the wealthy and weakens Medicare.
    • Australian drugs cost substantially more than in NZ..at least $2b. pa.. because of the clout of Medicines Australia in negotiating prices with the Australian government.
    • With its lobbying power, the Australian Pharmacy Guild protects pharmacists from competition.

    There is a lot we can do to improve healthcare in Australia and better manage costs. But overall, we have a very good and sustainable health service which ranks well against comparable countries. We need to keep a sense of proportion.

    For further information on the Commonwealth Fund Report, including the overall rankings, google The Commonwealth Fund and search Mirror, Mirror on the Wall 2014 Update.

  • Turning the federation clock back to 1901.

    The Commission of Audit has made many unhelpful suggestions about budgetary and economic issues. It seems to have been driven more by ideology than fact.  See my blog of May 1 2014 “The Commission of Audit and facing the wrong way”.

    One of its most unhelpful suggestions is that Australia returns to the 1901 intentions of the federation fathers and with clear lines of responsibility drawn between the commonwealth and the states as set out in Section 51 of the Constitution. The Abbott Government’s terms of reference for its White Paper on Federalism also suggest that his government would like us to go back to the arguments about sovereignty. We are being urged to look back to 1901 rather than focus on the way our constitution has evolved to date and will need to evolve in the decades ahead.

    This sterile debate about states’ rights comes and goes, but the issue is never resolved. Malcolm Fraser attempted to do what Tony Abbott now suggests – defining sovereignty clearly between the commonwealth and the states. But Malcolm Fraser’s plans went nowhere. The same will happen over the present intentions of the government.

    In his blog on the Federation on May 23, 2014, Michael Keating set out very persuasively I thought why the national government has become pre-eminent and why that trend is likely to continue.

    • We now have a national market and face strong global competitors in a way that our founding fathers would never have dreamt of.
    • The powers of the commonwealth government have grown remarkably eg pensions, health services, managing the national economy and migration.  The exercise of these powers by the commonwealth government has been necessary and beneficial.
    • The commonwealth government dominates the taxation field and that will continue. The states could impose state income taxes but have chosen not to. High Court decisions over the long term have been consistently against the states in key areas.

    With three levels of government, commonwealth, states and local government, we are over-governed. With the territories we have nine departments of health, nine departments of education, nine departments of transport, and so on. There is great waste and duplication.

    The best solution would be to abolish the states as Jeff Kennett and others have suggested and replace them with fewer local government bodies that have substantially increased powers and coverage. That would best serve Australia’s interests but unfortunately the abolition of the states is not going to occur.  The states remain poor and proud.

    But there are possible ways that we could reduce duplication, waste and the blame-game between the commonwealth and the states.

    The two biggest areas of overlap, confusion and expenditure by the states and the commonwealth are in education and health. In 2010-11, education spending by the states and territories was $48.1 billion or 24.3% of total state spending. In that year, spending by the states and territories on health was $49.9 billion or 25.1% of total state spending. Health funding by the states is likely to remain the fastest area of expenditure growth.

    Together education and health are responsible for over one half of state budgets. Reducing overlap, confusion and spending in these two areas would make a substantial contribution to our federation and particularly the delivery of improved education and health services at lower cost.

    For years I have argued that in the health field the best solution to end the blame-game and confusion, and to integrate health services and improve the quality of care, would be to establish a small joint commonwealth-states health commission in any states where political agreement could be achieved. See my blog of June 3 ‘The blame-game in health’. A small planning commission would cost very little compared with large likely cost savings. Further the cost could be reduced by scaling back commonwealth and state government health department costs.

    A joint agreement on governance in health, the pooling of all commonwealth and states health funds in that states, and the implementation and monitoring of an agreed health plan in that state would be a major improvement in health services. Those services would continue to be delivered by the existing suppliers – commonwealth, states, local or private. An obvious example of the benefits of such a joint health commission is a reduction in hospital admissions. It is estimated that about 750,000 admissions to public hospitals each year in Australia could be significantly reduced if the commonwealth government improved the services available in primary care in the critical weeks before hospital admission. The problem is that the commonwealth largely funds primary care and the states largely fund public hospitals with poor integration between the two.

    Implementation of such a joint arrangement would be relatively easy. The real obstacle is securing a political agreement.

    We should also keep in mind that when Kevin Rudd proposed a takeover of states hospitals as a last resort, there was strong public support for this action as shown in opinion polls. Unfortunately he backed down and the health confusion continues.  The public would be open to a major reform in health.

    I am confident that joint arrangements in health that I have suggested would be the best way to end the confusion between commonwealth and state responsibilities. It would be more in keeping with our current needs and aspirations than going back to the federalism of 1901.

    It was a great achievement for Australians to come together in the federation of 1901. It was a real break-through at the time but the split of commonwealth and state responsibilities in 1901 is not particularly helpful for us in this century or the next.

    The key features of such an arrangement in health could be applied in the education field.

    Although with some rancour, our federation has evolved since 1901. We should look forward to the sort of society and economy that we should become in the future rather than nostalgically looking back to 1901.

  • John Menadue. Free Trade Agreement with Japan – ‘turbo charging’ our trade or mainly hype?

    Next Tuesday Prime Minister Abe will visit Australia. I expect the Free Trade Agreement with Japan or its new name the Economic Partnership Agreement with Japan will feature prominently.  I repost below what I said on March 29 about the limited value of these bilateral agreements.

    Only last week, the Productivity Commission expressed similar reservations. It said ‘Australia recently agreed to bilateral trade agreements with Korea and Japan. Trade agreements can distort comparative advantage between nations and consequently reduce efficient resource allocation. The rules of origin in Australia’s nine bilateral agreements  vary widely and are likely to impede competition and add to compliance costs of firms engaging in trade‘. 

    I expect that we will see more hype about these bilateral trade agreements. The results are invariably disappointing.  John Menadue.

    Repost

    Tony Abbott and Andrew Robb have been hyping up the Free Trade Agreement (FTA) that has recently been concluded with the Republic of Korea, although most of the preparation and negotiation had been conducted by the Rudd and Gillard Governments.

    Andrew Robb the Trade Minister has now escalated the rhetoric by saying that the pending FTA would “turbo charge” our trade with Japan. If only!

    There are many more FTAs in the pipeline, including with China. Seven FTAs are in force including one with the US.  The proposed agreements with Japan and China have both been under negotiation for 9 years!

    Unfortunately the record shows that FTAs don’t achieve very much.

    The most important way to free up trade is through multilateral agreements, not bilateral agreements. Failing multilateral agreements, the next best approach is unilateral action by ourselves to reduce protection. The third best way to improve trade and economic prospects is through bilateral FTAs. But they are seen as political trophies rather than a genuine liberalisation of trade.

    Bilateral FTAs are regarded as sub-optimal for a number of reasons.

    • They divert trade from one partner to another partner, rather than create new trade.
    • FTAs entrench the power of the larger and stronger partner e.g. USA and potentially Japan and China.
    • They increase the cost of doing business because of complex ‘rules of origin’.  A tangled and complex web of FTAs increases the cost of implementing and administering diverse FTAs.
    • They marginalise peripheral countries with smaller markets, and polarise regions.
    • Most importantly, they divert time and energy of governments, ministers and officials, from the more important issues of multilateral negotiations, which, for us, as a small to medium sized country is more likely to serve our interest.

    The FTA concluded with the US in 2004 is an example of the limited economic and trade benefits of bilateral agreements. The agreement with the US was politically hyped up but the outcome was very marginal for Australia

    • The outcome in agriculture was far less than Australia hoped and sugar was excluded completely. The US Farm Bill which subsidises US agriculture across a wide field was untouched.
    •  Australia effectively conceded that agricultural trade is different to other trade, something that Japan has always maintained.
    • Our export growth has been minimal

    Australian officials recommended that the government not sign the agreement with the US, but John Howard over-rode their objections because he wanted a deal that would be politically and strategically useful for him in Australia’s domestic politics and in our relations with the US.  Australian trade policy was subordinated to electoral, political and strategic concerns. It may happen again with Japan and China.

    A survey undertaken by the Australian Industry Group found that”5 years after the much heralded Australia-US FTA the US market remained difficult for Australia. Almost 80% of respondents said the FTA was not very effective in improving export opportunities and 85% said it had failed to help in setting up an operation in the US”.

    Rod Tiffin the Professor of  Government and International Relations at Sydney University described the agreement with the US as “a dud”( SMH March 3 2010)  He commented that “Australia’s exports to the US in the 5 years(since the agreement was signed) grew by only 2.5 % compared with double digit growth for exports to all the major Australian trading partners. America has slipped from third to fifth among Australia’s export destinations.”

    The previous government was aware of the poor quality of a lot of earlier FTA’s and was trying to improve the quality. That was a reason for slow progress. But the Abbott Government seems more intent on a rush to a good media headline than making real progress in trade liberalisation and the quality of trade agreements.

    Andrew Robb is showing inexperience and naivety about FTA’s He said he is giving priority to concluding an FTA with Japan and doesn’t want the whaling dispute to get in the way.  Furthermore in being so politically anxious he is undercutting our bargaining position.

    Tony Abbott should use his position as Chair of the G20 to breathe some life back into the stalled MTN (Doha) round. That is where our best interests lie and where we should put our effort .There is not mush political glamour in messy and lengthy international negotiations but that is where we should put our effort both in our own interests and also in the interests of other agricultural exporters.

    A second-best approach would be to unilaterally reduce our own trade barriers. That makes sense for consumers who would pay lower prices. It promotes competition, innovation and productivity.  The Productivity Commission in 2010, in examining regional and bilateral agreements said that the economic gains from trade come more from access to cheaper imports rather than from increases in exports.

    The third and least satisfactory way is to keep pursuing FTAs where the trade benefits are quite modest. These agreements are politically hyped out of all proportion to the benefits they secure.

    Few trade experts take a rosy view of bilateral FTA’s. Unfortunately governments see them as political trophies.  John Howard hailed the FTA with the USA as a great political success but it was a dud in economic and trading terms. Just wait for a lot of political exaggeration on the upcoming “agreements” with Japan and China.