Pearls and Irritations

Category: Economy

  • John Menadue. Taxes – public or private

    The Commission of Audit has recommended that a Medicare levy surcharge be applied to individuals earning more than $88,000 a year and $176,000 for families. This is designed to force high income earners to take out private health insurance. This is one of the most economically stupid and dangerous proposals that I have seen for a long time. The Commission of Audit foolishly thinks that this would reduce public taxes, but it would result in increased private taxes (premiums). Higher premiums are the inevitable result of increased reliance on private health insurance. This is what has brought disaster for healthcare in the US. Private healthcare premiums have gone through the roof and the US now has one of the worst and most expensive healthcare services in the world. 

    Furthermore, the Commission of Audit’s proposal would move us a long way towards a two-tier health system, with a high quality and very expensive healthcare service for the rich and a welfare type health service for the poor. It strikes at the heart of social solidarity and social cohesion which is essential in a good society. It would end Medicare as we know it, a high quality service available to all regardless of income.

    Below I have reposted an article of 1 February about the fallacy of assuming that public taxes are bad but private taxes (premiums) are good.

     

    It has become commonplace for opponents of government and the public sector to suggest that functions like health care and broadcasting should be moved from the public sector to the private sector in order to reduce taxes. They usually add in that the private sector is also much more efficient in performing such functions.

    There are good social and economic reasons why certain functions should remain in the public sector – defence, education and health. But there is also a great fallacy that somehow public taxes are bad and private taxes/premiums are fine.

    Let me give you two examples.

    The private health insurance industry claims that Medicare is unsustainable and that more people should take up private health insurance to reduce the demands on the public health system. The suggestion is that by doing so, governments will not have to keep increasing taxes to fund public health. But there is a fundamental error in this argument. Private health insurance (PHI) has been raising its premiums at an alarming rate and much faster than Medicare through taxation. The PHI premiums are really the same as taxes that finance Medicare, except that one is public and the other is private.

    Since 1999, when rebates for PHI were introduced, the average PHI premium (private tax) has increased 130% whilst overall prices have increased by less than 50%. These private taxes or premiums are rising dramatically for a whole range of reasons that I set out in my blog of December 26 – ‘Health insurance – here we go again’.

    The other important reason for these high private taxes/premiums by PHI is that their administrative costs, including profits, run at about 15% to 16% of total costs. For Medicare, including the cost of tax collection, administrative costs are about 6% of total costs. So with the administrative costs of PHI about three times those of Medicare it is not unreasonable to conclude that the public gets far better value for money in its taxes paid to finance Medicare than paying premiums/private taxes to PHI. Expanding the role of PHI would greatly increase the level of these private taxes. The fact that they are private taxes misses the point. They are taxes on the consumer just the same as public taxes.

    The experience of the US should also warn us about private health insurance premiums/taxes. In the US, healthcare expenditure is over 18% of GDP. It is the highest in the world. In Australia it is about 9% to 10% of GDP, as is the case for most comparable countries that have a single public insurer like Medicare. Of the 18% costs in the US( as a proportion of GDP), about 9% is due to private insurance. Private health insurance in the US has been unable to control price demands by private doctors and private hospitals. If in theory the US had a single public insurer and followed the example of other single public insurer countries like Australia, the US could reduce its health expenditure by 9% of GDP. In such a situation the 9% of GDP paid to private health insurance funds would be unnecessary. If those premiums to private insurance were then redirected into public revenue, the US budget deficit of 7% of GDP would be eliminated. I said this was theoretical and there are clearly enormous political difficulties for President Obama to wind back the mess that private health insurance has wrought. But the figures do illustrate that the US would be better off with a robust public insurer funded by taxes rather than by the grossly unfair and inefficient privatised taxes that private health insurance imposes on the community. The US experience shows quite conclusively that shifting insurance out of the government and into private health insurance would be a disaster for everyone. To finance health care through the private taxes or premiums of PHI would result in much higher imposts on the public, than paying for health care through public taxes.

    The other example of privatised taxes is illustrated in the case that is often made against the ABC and other public broadcasters that are funded by taxes or special licence fees. Yet the critics of public broadcasting like Murdoch impose their own taxes – what is in effect a sales tax on products that are advertised in the commercial media. In my blog of December 19 ‘Murdoch and Abbott and the ABC’, I drew attention to the argument by Ian McAuley about the high cost of these privatised taxes. He said ‘We are paying about $1,500 per year per household for advertising, of which $500 is for commercial TV and radio… By contrast we are paying about $120 per year for the ABC’. Commercial media collects “taxes”, but it is called ‘advertising revenue’. This revenue is a cost to the advertiser and is loaded into the costs of the products when we purchase a car or holiday travel.

    The private sector has its own forms of taxation. Just by shifting functions from the public to the private sector, does not necessarily reduce what we have to pay out of our own pockets. In many cases public taxes are much more efficient and serve a much more desirable social objective than privatized taxes

  • John Menadue. The Commission of Audit and facing the wrong way.

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

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

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

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

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

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

     

  • John Menadue. Do our governments spend too much or do they raise too little in taxation?

    This a repost and provides a summary of the submission that Ian McAuley, Jennifer Doggett and I made to the Commission of Audit.  John Menadue

    The Minister for Health, Peter Dutton, has said that we must reduce waste and cut costs in health. (I responded to this in my blog on 3 February “Cutting waste and costs in health”).

    The Minister for Social Services, Kevin Andrews, has said that our welfare system is ‘not sustainable’ and that we are headed down the high cost welfare path of European countries. (The ABC examined this assertion and found that it was incorrect. It found that ‘There is nothing to indicate that as the population ages, Australia is headed towards the big welfare spending of some European countries. Treasury projections to 2050 show welfare spending as a proportion of our GDP will remain steady over the next three decades. www.abc.net.au/news/2014-02-03/kevin-andrews–makes-unfounded-welfare-claims.)

    The Treasurer, Joe Hockey has said that ‘The days of entitlement are over and the age of personal responsibility has begun’. This has been interpreted by some as suggesting that government welfare and other entitlements should be reduced.

    In a submission to the Senate Select Committee into the Abbott Government’s Commission of Audit, Jennifer Doggett, Ian McAuley and I contend that the problem is not that government expenditures or that the public sector is large in Australia compared with other countries. We contend that the problem is a short-fall of revenue and that on international comparison, our tax revenues are low.

    In our summary to the Committee we say …

    The Commission of Audit’s brief is based on assumptions that Australia is burdened with “big government” and that taxes are an impediment to business investment and workforce participation.

    There is no evidence for either assumption. The trend in Commonwealth expenditure has been downwards since the mid 1980s, falling from a peak of around 28 percent of GDP to a range of 24 to 26 percent of GDP in recent years. In comparison with similar prosperous countries Australia has one of the smallest public sectors.

    The problem a body such as the Commission should address is our inadequate tax base, which is the main reason the Commonwealth has had a structural deficit for most of this century. We aren’t collecting enough revenue to fund the public services needed if the economy is to thrive.

    We should not shy away from raising taxes. Evidence from international comparisons and from surveys on competitiveness suggests that reasonable levels of tax do not impede countries’ economic performance. In fact, countries which compete on the basis of low taxes do so to compensate for competitive weaknesses, such as inadequate infrastructure and poor standards of education – in other words impoverished public sectors.

    Such evidence, however, seems hard to convey to those gripped by a zeal to cut spending and taxes. Even in a “small government”/low-tax country like Australia it is possible to find areas where private funding and provision of services can displace public funding and provision.

    But such displacement is usually at high economic cost, simply to achieve an arbitrary fiscal objective. There is no point in reducing taxes if the private costs are greater than the saving in taxes, with no improvement (and in many cases a deterioration) in the services provided. We illustrate this in the case of health care funding. This is an area of significant public outlay and where, because of ongoing growth in demand, there are voices – often the voices of self-interest – calling for a shift from public to private insurance. Such a shift would be costly on all economic criteria – technical efficiency, allocative efficiency and equity.

    The rushed and secretive processes of the Commission are not the path to good public policy. There may be areas where a change in the public/private mix is justified on economic grounds, but these are not one-way towards the private sector as implied in the Commission’s brief. Because we already have a small public sector it is likely that a proper process, with research and consultation, would find a need for a net expansion of Australia’s public sector. By shutting off that possibility those who drafted the Commission’s brief are imposing a constraint which may be contrary to the community’s wishes and sound economics.

    The full submission to the Senate Select Committee can be found by going to my website. Click on ‘John Menadue Web Site’ top left of this blog page.

  • Ian McAuley- Picketty and the gap between rich and poor. Inequality of wealth is the problem rather than the inequality of income.

    The Observer/Guardian carried a recent story/review about Thomas Picketty’s address to the Institute of New Economic Thinking in Toronto. The story was headed “Capitalism simply isn’t working and here are the reasons why” The story draws also  on a recently published book by the French economist Picketty  “Capital in the 21st Century” The newspaper story  asserted “You have to go back to the 1970’s and Milton Friedman for a single economist to have such an impact (as Picketty)”

    The Financial Times labelled Picketty a “rock star economist”. Paul Krugman in the New York Review of Books described Picketty’s book as “awesome” and that it was transforming economic discourse. “We will never talk about wealth and inequality the same way we used to” he said.

    In this blog Ian McAuley outlines Picketty’s thesis that an apparent small gap between the return on capital and the rate of growth can in the long run have powerful and destabilising effects on the structure and dynamics of social inequality.   John Menadue

    Like Marx, Picketty recognizes the consequences of an excessive concentration of wealth – loss of markets, eventual diminution of profit, and social conflict leading to revolution.  His prescriptions, however, for a progressive tax on wealth, are within the field of orthodox capitalist economics.

    He presents convincing evidence that the compression in incomes in the mid-20th century was a unique event. The natural tendency of market capitalism is for concentration of wealth, particularly when there is low economic growth and a high return on capital.  (High growth reduces the relative power of established wealth.)  A tax on wealth has immediate and minor redistributive benefits, but that’s not its purpose, which is to dampen the positive feedback loop of concentration of capital, because a tax on capital reduces its effective return and therefore weakens the positive (self-reinforcing) feedback of an exponential concentration of wealth.

    Picketty puts the unique compression in the mid-20th century down to the events of 1914 to 1950 – an intermittent but destructive war, a depression, and post-war inflation, which combined to wipe out a lot of physical and financial wealth in both the victorious and defeated countries.  The expanding inequalities we are now seeing is simply a return to the natural dynamics of market capitalism.

    His fundamental thesis, I think, does a lot to explain Australia’s history.  We hardly get a mention, but he does point out how the rapid economic growth of the New World (mainly the USA in his examples) made for egalitarianism.  I would like to see his thought on why the same high growth did not make for egalitarianism in Argentina in 100 years ago, or in the Middle East 40 years ago.

    While I find his analysis convincing, I think he attributes too much to war, depression and inflation wiping out wealth as the sole causes of the compression of incomes.  I had the good fortune to be at Harvard when the last of Roosevelt’s liberals were still around – Ray Vernon, Tom Schelling, and JK Galbraith – and they saw the post-war liberalism as a result of deliberate policy, played out domestically in the New Deal and internationally in the Bretton Woods arrangements.  Another strong view, certainly influential to the Hawke and Keating Governments, was that the post-war rise of Germany and Japan, while helped by US anti-Soviet policy, was also helped by the war’s destruction of “distributive coalitions” – groups of rent-seekers blocking economic modernization.

    Picketty is dismissive of human capital theory.  He doesn’t deny its existence (as Marx and Ricardo did), but he thinks its role is overstated.  While he celebrates mass education, he does point out that it has not done much to help distribution – we have simply all moved up a notch or two, and there is something of an arms race at the top.  But he does present strong evidence that high university fees (particularly in the USA) work against intergenerational mobility.

    I find his single prescription somewhat limiting. War, depression and inflation do wipe out wealth, but so too do other disruptions re-allocate wealth.  Galbraith, for example, saw the Australian gold rush as a great social re-distributor (not a leveller, however). New technologies do the same.  In this regard I find the policies of the current Australian Government, in opposing the disruptive technologies of the NBN and renewable energy, as an attempt to freeze an industrial structure to preserve and strengthen the privileges of existing wealth-holders.  Also their policies on superannuation and tax are highly regressive at the top end, and we have a migration program which gives almost free entry to anyone with enough money, regardless of the means by which it was accumulated.  Whether this policy is crony capitalism or a misguided application of Reagan’s “supply-side” economics, the consequences are the same – there is a concentration of wealth and an erosion of meritocracy.

    Picketty’s greatest contribution is in looking beyond income distribution as an indicator of inequality.  (I, for one, have been very critical of the Australian “left” for its narrow focus on income while overlooking wealth.) He looks at the sources of income, and distinguishes between income from labour (which can go up to very high levels of course) and income from wealth.  On the way through he looks at the salaries of “supermanagers”, and points out (as many other researchers do) that their salaries have nothing to do with contribution and that they essentially set their own salaries in a self-referential process.

    But his greatest concern is with the top one percent with incomes greater than $350,000 and whose income comes from wealth.  It is at this level, particularly in the USA, where the bulk of inequality arises – they are taking a huge proportion of the proceeds of economic growth, and damaging any sense of legitimacy in the economic system.  In fact, he points out, the very rich enjoy a certain economy of scale – their return on investment is much higher than is available to lesser mortals with only five or six figure amounts to invest.  Hence their positive feedback cycle is strengthened.  He also points out that the moderately well-off, “petite rentiers”, do very well, while a large proportion of the population has no wealth or negligible wealth.  We, the petite rentiers, should pay more tax – in fact redistribution from the top 20 percentile will be more effective in terms of immediate redistribution than simply taxing the very rich – but it’s hard to convince us when we see the very rich getting off so lightly.

    His main concern is with the very rich, who are on the way to establish an economic and social order, an oligarchy with inherited privilege, similar to that which existed in Europe in the early nineteenth century – an order which Marx correctly saw as unsustainable.  He does not speculate much on our political reaction – perhaps, rather than a revolution, it will be a retreat to protectionism and dirigiste politics.

    Reading his book I have come to ask, in relation to the 2008 crisis, “what would Keating have done?”  Keating, the fellow who talked about the recession “we had to have”.  Perhaps we have been too generous with counter-cyclical levers, thereby accumulating moral hazard in economic systems, while spending a lot of our fiscal ammunition.  To reconstruct a right wing metaphor, a hurricane damages all boats, but the damage to a 4 meter tinnie is easier to rectify than the damage to a 30 meter cabin cruiser.  Can we achieve a destructive re-distribution without the sort of damage that occurred in the 1930s?  My view, taken in part from my time working for the Hawke-Keating Government, and in part from the teaching of Ron Heifetz, is that a task of government is to manage disruption – to steer a policy path between complacency where rent-seekers throttle economic progress as seems likely under Abbott and distress, where the pace of change leads to backlash as occurred under Whitlam..

    It’s a rich work of 700 pages.  If you do buy or borrow it, I suggest you read the first two chapters and the four chapters in part 4.   But be patient. The book is sold out almost everywhere.

     

     

     

  • John Menadue. AMP excess and dud products.

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

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

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

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

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

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

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

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

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

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

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

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

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

     

  • Kieran Tapsell. Things are improving.

    Héctor Abad Faciolince, El Espectador, Colombia, 29 December 2013, http://www.elespectador.com/opinion/el-espantoso-mundo-vivimos-columna-466312

    Summary: The world we live in is frightening, but it is less frightening than it used to be.

    One of the best definitions of the word, “intellectual” that I have read is: “a person who has studied beyond his own capacities”.

    There are those incapable of comparing the world of today with that of yesterday, of weighing up the gains and losses; their obsession consists in outraged criticism, arrogant moralising, scorn for any progress, enjoyment or happiness, in the conviction that there is no creature more repugnant that the human being, nor a place more inhospitable than the Earth.

    The intellectuals I am talking about are the ones wallowing in the culture of complaint, for whom contemporaneous society (especially the West) is a kind of invention of the devil: the most vulgar, unwieldy and hellish thing that has ever existed in the history of the world.

    The modern world, for them, is the most violent, aggressive, exploitative and unjust place: a society that we will have to destroy to start another on its ruins. The worst thing about this nauseating whine, this permanent moral indignation, is that this supposed “elite of the intelligentsia” has managed to convince millions of young people – as Karl Popper deplored years ago – that we are living in the worst world that has ever existed.

    Increasingly I come across young people who are convinced that having children is an awful thing to do, because they will be bringing into the world new human beings whose only fate is to suffer.  And most of these willingly sterile are young people who have studied the most, that is to say, those who have been most exposed to this evil influence of that “intelligentsia” for whom the achievements of humanity are one big lie.

    These “intelligentsia” are immune to all criticism and logic, and it makes no difference to point out the undeniable: comparing the world of today with the world without anaesthetics, without antibiotics, and without pain killers (they believe that in the “natural” world, where there were no illnesses and where humans would have lived 600 years, like the biblical patriarchs).

    It’s pointless telling them that there has been moral progress since the times of slavery (they say that the slave of yesterday was a pampered child compared to the worker of today; as if they were being branded with red hot irons).  Demonstrating with figures that life expectancy has increased exponentially in the last century only creates scorn because the only thing that we have achieved now is more people.

    Nor does it seem to them important that a poor person today – in Colombia – receives much better medical attention than a Renaissance king, nor that we have better transport, better clothing and shoes. That infant mortality – even amongst the poor – was much higher than amongst the poor in the countryside today.

    You can’t say to these intellectuals, without causing outrage, that things have been improving for decades in almost the whole world. That sexual or racial discrimination was much worse 50 years ago; that never before could homosexuals better defend their right to be free. That never in history have there been so many women studying and working in important ositions – thanks to, amongst other things – the existence of contraceptive methods, and that they themselves have managed to make sure that they are respected.

    Poverty also – even in Colombia – has been dropping in absolute and relative terms in recent decades. Violence itself, as Pinker has demonstrated, to the disgust of the pessimist intellectuals, is today one of the lowest in the whole history of humanity.

    When you are an optimist, the intellectuals of indignation and complaint look on you like an idiot. Of course, we are confronting very serious problems (global warming is the worst of them), but perhaps never before in the history of humanity have we been better prepared to confront them. Because of those convictions, we can wish and even hope that the year 2014 will be a little less bad than the 2013 that is just finishing. The world in which we live is frightening, but it is less frightening than it used to be.

    A guest blogger, Kieran Tapsell drew to my attention some good writing from Colombia on issues of international importance. Kieran is a Spanish  translator. I hope you enjoy something a little different.   John Menadue

  • John Menadue. Tony Abbott in Japan

    Tony Abbott has just completed his visit to Japan. The media has been full of  stories about the improvement particularly in agricultural exports from Australia to Japan. It should all be taken with a grain of salt. There have been some improvements particularly for our beef exports but the hype and spin does not obscure the fact that the so-called deal in Japan is only of marginal benefit.It is a third rate result. The best result would be a multilateral result. The second best result would be unilateral tariff reductions. Bilateral  Free Trade Agreements are third rate.

    In my blog of March 29, I pointed out that the proposed FTA with Japan was more about hype than substance. I pointed out how FTAs are regarded as sub-optimal; they divert trade from one partner to another rather than create new trade; FTAs invariably benefit the larger and stronger partner in any negotiation, e.g. USA, Japan and China; they increase the cost of doing business because of complex ‘rules of origin’; 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 size country is more likely to serve our interest.

    The best way for Australia to secure freer trade is through multilateral negotiations rather than through hyped-up bilateral FTAs that are held up as political trophies when in fact they don’t achieve much of substance.

    It is significant that the Abbott Government has now called this new arrangement with Japan an ‘Economic Partnership Agreement’ (EPA) and not an FTA. This suggests that there is now at least some understanding by the government that this agreement is not very much about free trade.

    The business editor of the AFR, Alan Mitchell, yesterday put the problem of bilateral arrangements succinctly. ‘Both nations [Japan and Australia] deny their economies the bulk of the benefits of genuine trade reform whilst they spoon out market access to one trading partner after another in stupid, long drawn out negotiations.’

    In the short term we will get some advantages over other food exporters to Japan, but there is no doubt that other food exporters to Japan, and particularly the US, will seek similar or greater concessions from Japan. As a result our short-term benefits will be largely eroded.This will happen in two to three years when the Trans Pacific Partnership promoted by the US is expected to take effect. We have a  brief window of opportunity.

    The TPP negotiating group includesUS, Japan, Australia, Canada, Malaysia, Singapore, Mexico and Vietnam.

    The President of the National Farmers’ Federation of Australia, Brent Finlay, said that the EPA had fallen short in several respects. At best it only marginally improves for dairying, sugar, grains, pork and rice.

    The Cattle Council President of Australia, Andrew Ogilvie, expressed disappointment ‘that substantial tariffs will still exist on Australian beef’. The tariff reductions on beef are useful but they will not be fully implemented for up to 18 yeas.

    There will be a 5% tariff reduction in Japanese autos exported to Australia, which should result in some reduction in the price of Japanese cars in Australia. But with the end of our own car manufacturing industry, it was only a matter of time before this 5% tariff was abolished on all car imports and not just from Japan.. We could do it unilaterally. It really is not a significant concession to Japan.

    The Abbott Government has criticised the Gillard and Rudd Governments for the delay in completing an FTA/EPA with Japan. That is not surprising in lieu of the fairly meagre benefits from the present negotiations. Shinzo Abe was probably anxious to collaborate with his conservative colleague, Tony Abbott, but our Prime Minister severely weakened Australia’s stand by flagging in advance how desperate he was to conclude an FTA.That is a strange way to conduct negotiations.

    The broad outline of the agreement with Japan will now need to be ‘lawyered’. There may yet be important details that will be revealed.

    Apart from the trading and economic discussions, Tony Abbott referred to a shared commitment by the two countries to ‘democracy, freedom and the rule of law’. He also said that the relationship was about ‘respect, it’s about values’. Tony Abbott indicated approval for Japanese Government’s plans to reinterpret the pacifist constitution of Japan. At least in the media reports there was also no mention of the issues that Shinzo Abe has been promoting which have inflamed attitudes in the Republic of Korea and China. There is no indication that Tony Abbott raised Shinzo Abe’s visit to Yasukuni Shrine, ‘comfort women’ and acknowledgement of the massacre of Chinese by the Japanese army.

    Time will tell whether this FTA/EPA with Japan is as unhelpful as the 2004 bilateral Trade Agreement that John Howard negotiated with the US and concluded despite the advice of officials that he should not sign. It turned out to be a dud.

    Tony Abbott is the Chair of the G20. He could use that position and influence to restart the DOHA round of multilateral trade negotiations that have been stalled for years. It is in multilateral trade negotiations where Australia’s interests are best served – not in a string of bilateral FTAs that have more hype than substance. They will not “turbo charge” our trade with Japan as out Trade Minister has suggested.

  • Ian McAuley. Inequality in Australia.

    A Financial Review article on March 24 claimed “Inequality in Australia has not deteriorated over the last 25 years, according to Reserve Bank of Australia research that undermines claims the gap between rich and poor has worsened”

    The essence of the argument is that while, between 1993-94 and 2009-10, the distribution of income has become more unequal, we have all increased our consumption – what we spend on food, transport, housing health care, recreation etc – by the same amount. Therefore we aren’t becoming more unequal.

    The argument is superficially credible, but it’s a sloppy piece of journalism.

    For a start, the relevant Reserve Bank article, “The Distribution of Household Spending in Australia” in the latest Bulletin, is a carefully qualified study, and in relation to the change in consumption over the 16 years (not 25 years) to 2009-10 it concludes:

    “The top 10 per cent of spenders have experienced slightly faster growth in real consumption than other households over recent decades, though the difference in growth is less pronounced than in the case of income.”

    That is, even when consumption is used as a measure of wellbeing, there has been a rise in inequality. That is easily confirmed by comparing the 1993-94 and 2009-10 ABS Household Expenditure Surveys, which shows, in real (CPI-adjusted) terms, that the highest income fifth of households increased their consumption by 41 per cent, the middle fifth increased theirs by 32 percent, and the lowest fifth by only 19 per cent.

    Second, as the RBA article points out, “consumption is not a complete measure of wellbeing”. One reason is that household expenditure statistics cover only what we spend from our own pockets, and do not include our enjoyment of publicly-provided services such as health care and education. If we spend more on these services because we believe, rightly or wrongly, that the quality or scope of publicly-provided services has deteriorated, then we can hardly be said to be better-off.

    For example, between 1994 and 2010, the proportion of Australians with private health insurance rose from  36 per cent to 45 per cent, and between 1996 and 2010 the proportion of students in non-government schools increased from 29 per cent to 34 per cent. Household expenditure data shows that for the households in the middle income band 14 percent of their increase in expenditure was for education and health care, but for the highest income households health and education took only 11 per cent of their increased expenditure. The well-off already had private health insurance and children in private schools.

    Third, while most economists agree that over the long term consumption is a reasonably good measure of material wellbeing, the compelling reality is that it has to be financed. Therefore if consumption and spending diverge for a period, it must be financed by borrowing or running down saving.

    Robert Reich and other American economists point out that in the USA, while real incomes for all but the rich have stagnated or fallen for many years, people have maintained or improved their living standards by going further into debt. Australia’s situation is  similar but a little more complex. Around 2002 we stopped running down our savings and started saving again.  Our officially-measured savings rates in 1994 and 2010 were much the same, at around 10 percent of income. But those figures do not show the increasing tendency over that period to draw on increasing equity in our houses through financial innovations such as mortgage re-draw facilities. Our house price boom allowed us to use our houses as ATMs, a phenomenon eloquently described by a young man caught by a roving microphone on the evening of Howard’s 2004 election victory, who said.  “Of course I voted for Johnny Howard. When he was elected my house was worth only $200 000; it’s now worth $500 000.  Why wouldn’t I vote for someone who’s made me $300 000 richer?”

    That debt, financed by illusory wealth, eventually catches up with us. Indeed, in recent years (since 2009-10) it has been manifest in widespread complaints about the cost-of-living.  Work by Tim Soutphommasane of Per-Capita and research I have done for The Centre for Policy Development shows that although incomes have been rising faster than prices, Australians generally believe it is getting harder to make ends meet.  The most compelling explanation for this apparently contradictory finding is that we are at last finding that we have been living beyond our means.

     

  • John Menadue. Privatising Medibank Pte – who cares?

     

    This is a repost from 28 November 2013. My own view is that all the private health insurance companies, including Medibank Pte are parasitical and undermine Medicare. The only important political issue in my mind is whether the policy holders who have contributed over decades to Medibank Pte should receive appropriate recompense rather than the government taking the money for itself.  John Menadue

    I won’t lose any sleep if the Abbott Government proceeds to privatise Medibank Pte. It is anticipated that the sale could realise $4 billion. That will go almost half way towards the $8.8 billion that Treasurer Joe Hockey is providing as a reserve fund for the Reserve Bank, even if the Bank didn’t ask for it.

    Whether all of that $4 billion should go to the Treasury from the sale of Medibank Pte is a moot point. Don’t the policy-holders, some with as many as 37 years membership, have an entitlement to some of that accumulated value? I declare a personal interest as I became a contributor to Medibank Pte when it was established by the Fraser Government in 1976.

    Medibank Pte was established then because of the Fraser Government’s hope that it could be an alternative to the universal health insurance scheme which the Whitlam Government introduced and which later became known as Medicare under the Hawke Government.

    I am quite indifferent to whether Medibank Pte is publicly or privately owned. As Ian McAuley and I set out in an article for the Centre for Policy Development in January 2012, private health insurance is ‘high in cost and low in equity’.  See this article on my web by clicking on ‘website’ at top left hand of home page, then ‘health’ and then article of January 2012.

    Whilst Medibank Pte. Is publicly owned, it acts just like all the other health insurance firms that are privately owned.  I t serves no special social role. It is the largest health insurance fund out of the total of 40 funds. It has a market share of about 30% followed by BUPA with about 27%.

    I won’t repeat all of my objections to government subsidies for health insurance firms which cost about $7 billion p.a. for the taxpayer. But my objections remain strong.

    • The administrative costs, including profit, of health insurance funds including Medibank Pte are three times those of Medicare. Just look at the money they waste on television advertising.
    • With government approval, health insurance premiums have increased every year at well ahead of the CPI. The increase in Medibank Pte premiums are close to the industry average.
    • Private health insurance benefits high income earners at the expense of low income earners.  The more wealthy Australians use health insurance to jump the hospital queue
    • Gap insurance by health insurance funds has underwritten the largest increase in specialist fees in 25 years.
    • These health insurance firms limit the ability of Medicare to put a cap on cost increases, particularly by private hospitals and private specialists who are paid multiples of the salaries paid to equally competent specialists in public hospitals.
    • The US is the stand-out example of the havoc which high cost private health insurance (PHI) can cause. As I pointed out in my blog of March 4, 2013, ‘If the US had a health service like those in countries without heavy reliance on PHI, such as Australia, it could solve its budget deficit problem.’ Health services in the US scream out ‘Beware of private health insurance’.

    I have been a member of Medibank Pte for 37 years. It has been a waste of money. All it provided was some irrational ‘peace of mind’. I have found it hard to admit to myself that all those tens of thousands of dollars in premiums I paid over 37 years have been largely wasted. In the same way health bureaucrats in Canberra, under pressure from very powerful vested interests find it difficult to face the fact that their policy advice to governments on the subsidies to high cost  health insurance companies has resulted in appalling public policy.

    My forlorn hope is that an Australian Government will one day eliminate the $7 billion corporate welfare which the Australian taxpayer presently provides to PHI. There would be a bonus in money saved by the government, but more importantly it would shore up Medicare’s position as a single payer that could better control costs. Until that happy day occurs, I don’t really care whether Medibank Pte is public or privately owned. It makes no difference.  It is part of a high cost parasitical industry. All private health insurance is undermining the universal, efficient and equitable public health insurance system called Medicare.

  • John Menadue. An enormous financial heist is underway.

    We saw the enormous power of the mining sector when the foreign-owned mining companies forced the Rudd government to ignominiously back down on its super profits tax. For less than $20 million in an advertising and public relations campaign the miners secured for themselves tax savings of over $60 billion. The public interest was surrendered to the mining lobby. Now the banking lobby is well on the way to pushing aside the public interest again.

    After a lengthy public enquiry and public discussion, the Gillard Government passed the Future of Financial Advice legislation (FOFA). That legislation was designed to legislate against the conflict of interest in the financial advising sector. The Coalition Government is now well down the track to restoring the privileged position that the financial advising sector held before FOFA. As Peter Martin in the SMH on 18 March put it ‘The government is removing the catch all requirement for financial advisers to act in the client’s best interest.’ The watering down of FOFA ‘will also re-allow sales commissions and other forms of conflicted remuneration where advice is general in nature.’

    This is a dramatic wind-back of FOFA. It is done in the name of ‘reducing red tape’ but it will ensure a bonanza for the financial advising industry which the previous government set out to curb. The so called “red tape” is often where the public interest is expressed.

    The growth of the Australian superannuation industry has become a honey pot which can now be more easily plundered. Last year the financial advisory industry pulled in funds of $21 billion from the super pool. With compulsory superannuation the super pool is growing rapidly. Last year it grew by $300 billion. Now Arthur Sinodinos, Assistant Treasurer and a former banker, is setting up the financial advising sector and the banks in particular to do even better in future.

    Under FOFA the Gillard Government made substantial changes.

    • Future commissions and other ‘conflicted’ payments were banned. (The Coalition will now allow commissions and allow conflicted payments on most products).
    • A legal obligation was placed on financial planners to act in the client’s best interest. (The Coalition will allow this legal obligation to be narrowed.)
    • A financial adviser who charges a continuing fee must obtain permission of the client every two years for the arrangement to continue. (The Coalition will remove this need for the client’s permission every two years.)
    • The client must receive an annual disclosure of fees. (The Coalition will limit this to new clients only.)

    The banks will be the major beneficiaries to these changes. They are finding the industry funds with their lower fees too competitive and bank profits and executive salaries clearly need boosting! Not surprisingly the bank public relations machines have been telling us every day in the media about the need to wind back FOFA and reduce red tape.

    As Daniel Brammall pointed out in this blog on February 25, there are 18,000 financial planners in Australia and four out of five of these are owned by a bank or an insurance company. He said ‘The big end of town … has influenced the new government to the extent that the issue of conflicts has been quietly brushed under the carpet. Last week the Assistant Treasurer said “The current ban on conflicted remuneration captures a far wider range of circumstances than was originally intended and has resulted in significant compliance costs for industry. Here’s the point … many thousands of Australians collectively lost hundreds of millions of dollars – some of them their life savings – in collapses like Westpoint. Conflicts of interest were primarily behind it and the intention of FOFA was to avoid this ever happening again. However, the new government is dismantling the reforms because industry has convinced it that they cost too much. In doing so, industry has successfully transferred the cost to the consumer because without reforms that squarely address conflicts of interest, Westpoint will most certainly happen again.’

    FOFA was designed to legislate against conflicts of interest in an industry riddled with conflict. FOFA is now being unwound.

    It is reported that the government is planning to unwind FOFA by regulation rather than by legislation. It is suggested that the new regulations will be put to the Governor General and Executive Council on March 28, the day after parliament rises for a six weeks break. This means that parliament would not be able to disallow the regulations for at least six weeks.

    This is a deplorable story of rent-seeking by lazy, but powerful vested interests. What a shoddy performance it has become. This heist may turn out to be even bigger than the miners’ heist a few years ago.

    Public life and the public interest are being corrupted by the power of vested interests with their lobbying power. As Ross Garnaut puts it, this power has become a “diabolical problem”. One after another these powerful interests are corrupting public debate and putting their snouts deeply into the public trough… the gaming industry, the alcohol and hotel industries the polluters and the miners. The finance lobby now looks likely to become the most powerful and dangerous of all

  • John Menadue. Gina Rinehart and the age of entitlement.

    It is a bit rich for Gina Rinehart, with the enormous privileges she has inherited, to be telling us that we all need to work harder, cut taxes and curb wasteful government spending. Born on third base, as baseball enthusiasts would understand, does give a very jaundiced view of yourself and others.

    There is a quite dishonest campaign being run about the need to cut spending and reduce taxes. It looks as if we are being softened up to help the “deserving rich”.

    The facts are clear however that Australian taxes are very low by world standards. At 28% of GDP our taxes are well below the OECD average of 34% of GDP and much lower than the taxes in some northern European countries that have very successful economies and where taxes reach about 45% of GDP.

    It is our tax system that needs attention as Ken Henry keeps reminding us, including could I suggest a stiff inheritance tax that would bring some people back at least to second base!

    One of the reasons why we have such lower tax revenue is because of ‘tax expenditures’ as economists call them. These “tax expenditures” cost our tax revenue $115 billion in 2012-13. “Tax expenditures” are government revenue foregone as the result of differential or preferential deductions and treatment of particular sectors and taxpayers. Deductions for superannuation are the most blatant of these rip offs. Ross Gittins calls those that benefit so much the “super fat cats.”

    In a working paper in January this year the IMF showed that Australia has one of the highest “tax expenditures” in the world. . We topped the list of 16 countries with “tax expenditures” as a percentage of GDP at 8.5%. For big spenders like Italy, it was 8%; for the US  7.5%; UK 6%; France 4%; Canada 2%; Germany 1% and South Korea 1%.

    The Australian Parliamentary Library in its report on January 28 this year was headed “Australia tops the charts in tax deductions”

    In Australia the “tax expenditures” that put us at the top of world ranking are in key areas  that benefit high income earners — superannuation, retirement incomes, health insurance, capital gains on short-term investment, housing (both owner occupied and investment), family trusts and the absence of inheritance taxes. These generous concessions have been designed to preserve the incomes of the wealthy and the middle class which both political parties have tried to keep onside. Such concessions have also favoured older Australians, to the disadvantage of the young, who have faced increases in university fees and more expensive housing and have been cajoled into private health insurance to pay for the healthcare of the aged.

    The IMF Working Paper highlighted the problems that high levels of “tax expenditures” cause.

    • They compromise fairness. The report says ‘Tax expenditures can be a poor way of pursuing equity objectives in a progressive tax system. For instance any policy that reduces taxable income will benefit most those in the highest marginal tax bracket and convey no benefit to those out of the tax system.’ It is surely unfair and unsustainable that if we are over 60 and regardless of the level of our income, we do not have to pay any tax on our superannuation income.
    • They can be inefficient and poorly targeted. ‘ … the current deduction of mortgage interest for instance may encourage leveraged housing finance’.
    • They are vulnerable to lobbying. ‘Special interest groups may find it easier to argue for tax breaks than for explicit spending support. Tax expenditures often bypass the scrutiny according to spending in the regular budget. … This lack of transparency may explain some of the appeal they hold … ‘

    In short, “tax expenditures” are unfair, inefficient and provide wonderful opportunities for rent seekers like the superannuation and the private health insurance industries in Australia to secretly lobby for concessions.

    If we reduced these tax expenditures by 50% we would be well on the way to meeting the $60 billion long-term structural budget deficit that we face.

    The problem is not in our spending or support for persons with handicaps or low incomes. The problem is in our taxes and particularly the system of “tax expenditures” that benefits the wealthy. But we don’t want to know about it. We complain about electricity prices and the carbon tax but they are small beer compared with the enormous rip offs by the wealthy in superannuation and aged pensions.

    The previous government made a few changes like means-testing the private health insurance rebate but it ignored the general thrust of the Henry Report for tax reform.

    Gina Rinehart and the deserving rich want to defend and expand middle-class concessions like “tax expenditures”. It is galling that people born on third base think that everyone else is wasteful and lazy.

     

     

  • John Menadue. The Carbon Tax and Flat-Earthers.

    Despite all the political rhetoric and hysteria, the evidence is mounting almost daily that the carbon tax is largely working as planned and that its impact on electricity prices is quite small, particularly compared with the ‘network costs’, the poles and wires, which have been the main drivers of increased electricity prices.

    But the flat-earthers in the government and News Ltd refuse to face the facts. They have run one dishonest campaign after another on the carbon tax, then pink batts and then the education revolution. We are paying an extraordinarily heavy price for the abuse of power by the Murdoch media in the dishonest and partisan campaigns they run. Are they all as ignorant as Rupert Murdoch’s favourite editor Rebekah Brooks who told a London court this week that she didn’t know that phone tapping was illegal!

    Just recall the extremist and exaggerated language of Tony Abbott in association with News Ltd on the carbon tax.

    • Whyalla will be wiped off the map.
    • Julia Gillard is trying to close down Gladstone.
    • The carbon tax is socialism masquerading as environmentalism.
    • It is a ‘great new tax on everything’.
    • The impact of the tax will be ‘almost unimaginable’

    It says something about the corruption of public debate that Tony Abbott’s campaign with News Ltd’s backing was successful. It was based on fiction and not fact.

    In October last year, one year after the introduction of the carbon tax, the impact on the CPI was almost undetectable. Treasury had estimated that a $23 per tonne emission tax would result in an increase of $9.90 in the cost of living for an average household. It turned out that the impact was even less than the Treasury has forecast.

    Earlier this week Michael West in the SMH on February 24 drew attention to the work of the Energy, Economics and Management Group at the University of Qld. These researchers found that network costs and retail costs which included the profit margin of energy retailers made up 62% of NSW residential electricity prices in 2013. The carbon tax made up only 10% of prices.

    In comparing increases in electricity prices in NSW and Qld between 2007 and 2013, the University of Qld Group found that price increases per kWh were due to the following.

    • Network costs – +7c
    • Retail costs, including profit margin – +2/3c
    • Green schemes, including carbon tax and renewable energy target, – less than 3C

    Generating costs were relatively stable over the period.

    The main increase in prices has been due to the ‘gold plating’ of the networks and the price-gouging by retailers along with large executive bonuses. Green schemes including the carbon tax have a much smaller impact – about 25% of the total increase in prices.

    Michael West put it this way. ‘Tony Abbott [must recognise] that it is not the carbon tax and renewable energy costs that are primarily responsible for energy hikes. The culprit is network costs and state governments that are making a killing’.

    Last week in Sydney the IMF chief, Christine Lagard, said that ‘environmental degradation’ [carbon pollution] was an external cost to the economy that had to be priced. She said that these ‘externalities’ must have a price. Almost every economist will tell us that a tax on ‘externalities’ like a carbon tax is much preferred to Direct Action that the Abbott Government is adopting.

    Tony Abbott has done enormous damage to good policy making to curb carbon pollution and global warming. The flat-earthers have so far won the day in Australia. But surely it cannot last. Is the Australian public so gullible to put up with these scare campaigns on the carbon tax? The flat-earthers in the coalition and News Ltd have done a great disservice to Australia.

    On top of this Tony Abbott is now hemming himself in with people who reject the overwhelming scientific evidence. The head of Tony Abbott’s business advisory group Maurice Newman and Dick Warburton the head of the review of the Renewable Energy Target both think that climate science is “group think”. Newman goes even further and describes climate science as a “scientific delusion”

    When will all this nonsense stop?

    For the sake of our children and grandchildren the flat-earthers must be strongly opposed

     

  • Daniel Brammall. Financial advisers and the conflict of interest.

    In December last year the new government announced how it was going to ‘make financial advice more affordable’ by amending the previous government’s ‘Future of Financial Advice’ (FOFA) proposals (1).

    Recall that the FOFA legislation was introduced in response to hundreds of millions of dollars of Australians’ savings  being lost in the corporate collapses of investments like Opes Prime and Westpoint, as well as financial planners like Storm Financial. These spectacular corporate implosions and the actions of incentivised planners largely took place between 2005 and 2007 — in what we now remember as the good times, before the GFC. Of the nearly $400m invested in the Westpoint group of companies, nearly half was recommended by financial planners (2).

    Given that financial planners propose to advise us on the $1.5 trillion we have in superannuation (4), what do we do about the Financial Services industry’s pink elephant: is this a sales or advice industry?

    In 2009 this prompted an investigation into the Financial Services industry by the Parliamentary Joint Committee on Corporations and Financial Services (3) which asked the question “what is the role of financial advisers in this country?”.

    The answer was unambiguous: “On the one hand, clients seek out financial advisers to obtain professional guidance on the investment decisions that will serve their interest, particularly with a view to maximising retirement income. On the other hand, financial advisers act as a critical distribution channel for financial product manufacturers, often through vertically integrated business models or the payment of commissions and other remuneration-based incentives” (3). The ASIC, as Financial Services watchdog, was more strident: “Remuneration structures used in the financial advice industry create real and potential conflicts of interest that can distort the quality of advice (5).” The ASIC says that not only are conflicts of interest inconsistent with providing quality advice but they are often not evident to consumers. It believes the most effective way to deal with this is to remove the remuneration structures that give rise to these conflicts.

    What could that look like? Simple: to hold yourself out to be a financial adviser, you must be impartial. This means no links to product manufacturers, no commissions and no ‘asset fees’ (commissions by another name). This doesn’t necessarily mean that no one can work for a bank or insurer anymore. It just means that you can’t hold yourself out to be giving impartial advice.

    However on the whole the Financial Services industry is not set up that way. Of the 18,000 financial planners in this country, four out of five are owned by a bank or insurance company. Of the remainder, virtually all of them receive commissions or charge fees calculated on the size of your wallet. In fact, fewer than 30 advisers Australia-wide appear to meet these criteria (8). A small band of independents is gathering under the brand of the Independent Financial Advisers Association of Australia (IFAAA) which last year trademarked a ‘Gold Standard of Independence’, specifically forbidding these three conflicts.

    The big end of town, though, has influenced the new government to the extent that the issue of conflicts has been quietly brushed under the carpet. Last week the Assistant Treasurer said: “The current ban on conflicted remuneration captures a far wider range of circumstances than was originally intended and has resulted in significant compliance costs for industry” (7).

    Here’s the point …

    Many thousands of Australians collectively lost hundreds of millions of dollars – some of them their life savings – in collapses like Westpoint. Conflicts of interest was primarily behind it and the intention of FOFA was to avoid this ever happening again. However the new government is dismantling the reforms because industry has convinced them it costs too much. In doing so industry has successfully transferred the cost to the consumer because without reforms that squarely address conflicts of interest, Westpoint will most certainly happen again.

    — Daniel Brammall, Brocktons Independent Advisory

    References:

    (1)   http://axs.ministers.treasury.gov.au/media-release/011-2013/

    (2)   https://westpoint.asic.gov.au/wstpoint/wstpoint.nsf/byheadline/Actions+against+financial+planners?opendocument

    (3)   http://www.aph.gov.au/binaries/senate/committee/corporations_ctte/fps/report/report.pdf

    (4)   http://www.superannuation.asn.au/resources/superannuation-statistics/

    (5)   http://www.apesb.org.au/uploads/attachment-4-c-asic-submission-to-pjc-inquiry.pdf

    (6)   http://www.smh.com.au/business/profit-above-all-else-how-cba-lost-savings-and-hid-its-tracks-20130531-2nhde.html

    (7)   “Retreat on planners to hit investors”, AFR 8 February 2014.

    (8)   http://www.superguide.com.au/how-super-works/truly-independent-financial-advisers-in-australia

     

  • John Menadue. Cutting waste and costs in health.

    Last night on lateline, the Minister for Health Peter Dutton called for a public debate on health reform. I therefore have taken the liberty of reposting a blog of February 3 on ‘Cutting waste and costs in health’.

    The Minister for Health, Peter Dutton, has said that we must reduce waste and reduce costs in health. I agree. In 2011/12 total health expenditure in Australia was $140b up from $83b in 2001/2. Costs are rising rapidly, partly due to population increase.

    In a paper in July 2007 I estimated that there was at least $10 billion in possible savings and productivity improvements in health. That represented about 10% of our total health costs in that year. I have spoken and written extensively on the matter. See my web site.

    It is important however that as we work to reduce waste and costs we do it in a way that is fair to all and does not prejudice quality care.

    But to reduce waste and costs requires political will to stare down the powerful interests and rent seekers that are determined to protect their territory and their high costs –e.g.  the AMA, the Private Health Insurance firms, the Pharmacy Guild of Australia and Medicines Australia. In the past no governments has been game to tackle these vested interests.

    The lack of accountability in health

    Despite the rapid increases in costs and escalating demand in the healthcare industry, there is no accountability in any meaningful way for what the health industry produces. Doctors are accountable for malpractice but not for their overall performance particularly in general practise. This is despite the fact that taxpayers pay 80% of doctors’ incomes. Taxpayers have a legitimate reason to ask – ‘Are we getting value for money?’  In a survey a couple of years ago by the Health Council of Canada, 97% of over 1,800 senior respondents said that healthcare providers should be required by law to reach certain service benchmarks in such areas as patient outcomes , the use of preventive strategies like screening and waiting times.

    The Council also asked the group ‘Do you believe healthcare in Canada will improve if the government spends more money on healthcare?’  58% said ‘no’. There is the same lack of accountability in Australia.

    Managing the demand for health services

    The demand for health services is increasing rapidly across all age groups and not just among the old. We are over-diagnosed and over-treated. In 1984-85, medical services per head were 7.1 per annum. In 2007-08 they were 13.1 per annum – about double. The trend continues. We need to address this over servicing particularly by GPs and specialists such as pathologists and radiologists.

    • We must accept that we cannot have all that we want in health and that governments, in consultation with the community, have to set priorities. Can we afford continuing existing levels of funding for IVF and end-of-life treatments at the expense of funding for mental health and indigenous health?
    • We need to rationalise our co-payments to make them efficient and equitable. We all should take more responsibility for the way we use health services, particularly as we are now much wealthier than we were 30 years ago when Medicare was introduced. A universal health scheme does not have to be free. But it must be fair and efficient. But co-payments are a dog’s breakfast! We pay about 18% of health costs out of our own pockets, but there is very little rhyme or reason in how this is done. The $6 GP levy would make the confused situation worse.
    • We need to change the perverse incentives, such as fee-for-service, which is associated with bulk-billing. Clinicians are rewarded by the number of transactions rather than health outcomes. FFS is particularly inappropriate for chronic care like mental health and services with high fixed costs and low variable costs, such as imaging. The government should move away from fee for service and set budgets for general practitioners when they prescribe drugs, order pathology tests or imaging services. We need more doctors on salaries and capitation payments for caring for patients-not on a service by service basis.
    • We need to tackle the wide variations in the incidence of clinical practice across the country, e.g. caesarean sections and cataracts. Medicare should be much more proactive in exposing and limiting very expensive and inexplicable variations in clinical practice.

    Getting costs down

    •  The government should abolish the subsidy for private health insurance which costs all up about $6-7 billion p.a. This subsidy favours the wealthy, is inefficient, has underwritten rising specialist fees through gap insurance, has not taken the pressure off public hospitals and has weakened Medicare’s ability to control costs. The immediate abolition of this subsidy would do more to improve our health system than almost anything else. This is corporate welfare big time-more even the welfare to the motor industry.
    • We need a more productive workforce. Health is the largest and fastest growing sector in the Australian economy. Despite all the talk of improving productivity in Australia no-one has been game to take on the entrenched privileges in the health workforce.Where is the honesty and consistency here? The blue collar workforce is fair game but not doctors and lawyers. We need expanded roles across the board particularly for nurses, pharmacists, allied health workers and ambulance officers. The Productivity Commission in its February 2007 report estimated that a 5% improvement in the productivity of health services would deliver savings of about $3 billion p.a. This is a very conservative estimate. The health sector in Australia is rife with demarcations and restrictive work practices. eg 5 % of normal births in Australia are delivered by mid wives. In the Netherlands it is 70%, in the UK 50% and in NZ 95%. We have a few hundred nurse practitioners when there should be thousands. The work practices at Holden, Toyota and Ardmona are light years ahead of the work practices in the health sector.
    • We could save about $2 billion p.a. in drug costs if we paid drug suppliers the same prices that are paid in NZ. See my blog of January 17.We also pay a high price for the protection of  pharmacists through the 5000 limit on the number of community pharmacies and the restrictions on where new pharmacies can be located. Pharmacies cannot be established in supermarkets.
    • We need to raise productivity in our hospitals. The Productivity Commission suggests that the productivity gap from best practice in public hospitals ranges from 3% to 89%. In private hospitals the range is 22% to 37%.  There is major governance problems in many hospitals with a dis- connect between management and clinical functions. Running hospitals is very difficult with clinicians coming and going from private practise like the cottage industries of old.
    • The Commonwealth/State fragmentation in healthcare results in blame-shifting, the evasion of responsibility and higher costs. If for example the Commonwealth Government or a joint Commonwealth/State body had responsibility for all health care in a state, there would be a clear incentive for focus on treatment in the community and in homes to ensure that the high cost hospitals are really a last resort. They are now often a first resort.
    • The real elephant in the room in health care cost reduction is avoidable mistakes, including deaths. They are euphemistically called “adverse events”. But Ministers, clinicians and managers do their best to avoid the issue. Based on earlier surveys in NSW and SA I estimated, very conservatively the cost of avoidable mistakes in our health sector at $5b pa (see my blog of June14, 2013). Despite a great deal of money and effort there is no sign of improvement. Insiders won’t solve the problem Good people are caught in a bad system

    We need to address waste and cost-cutting in a measured way. We should not panic, but we should get it done.  Australian healthcare costs are 9-10% of GDP. This is not high by world standards. It is below the OECD average. A major reason why we have been able to do better than others is that we have Medicare as a public insurer. One lesson is clear all around the world. The countries that have high levels of private health insurance, like the US, have high costs.

     

  • John Menadue. Opinion and fact on climate change.

    Tony Abbott keeps telling us that climate change is not a factor in the current drought in eastern Australia. Last October he ruled out climate change as a factor in October’s early season bushfires in the Blue Mountains.

    He keeps giving us opinions when the facts, supported by overwhelming scientific research, tell us that Australia is already experiencing more frequent and more intensive heatwaves, and that we can expect the number of hot days to continue to increase. He said that the climate change will not be a factor in the drought aid package he will announce soon. That aid package should take into account climate change and the necessity for marginal farmers on marginal land to find other occupations.

    Tony Abbott’s confusion of opinion and fact reminds me of the comment made by the late Senator Daniel Moynihan that ‘Everyone is entitled to their own opinion, but no-one is entitled to their own facts’.

    Reputable people and reliable organisations are all pointing to the challenge that climate change presents to Australian agriculture.

    CSIRO says ‘forecasts show Australia will have to cope with less rainfall, longer dry periods and struggling crops’. (ABC News 15 January 2013). Mark Howden from CSIRO’s Climate Adaption Flagship Program tells us that ‘Increases in temperature … and decreases in rainfall will increase drought periods and increase dry spells’. (ABC News 3 February 2013). Steve Crimp, a Senior Research Scientist at CSIRO says that southern Australia faces ‘warmer and dryer conditions’. (ABC 3 February 2013).

    The Garnaut Climate Change Review said ‘Climate change is likely to affect agricultural production through changes in water availability, water quality and temperatures. Crop production is likely to be affected directly by changes in average rainfall and temperatures, in distribution of rainfall during the year and in rainfall variability. The productivity of livestock industries will be influenced by the changes in the quantity and quality of available pasture, as well as by the effects of temperature increases on livestock. … A range of studies indicate that grain protein contents are likely to fall in response to combined climate and carbon dioxide changes. There could be substantial protein losses … which would lower prices.’(p129)

    The Department of Environment of the Australian Government reported last year on “Climate Change Impacts in Australia” which included the impact on agriculture.

    • For NSW it said that ‘potential changes in climate may reduce productivity and output in agricultural industries in the medium to long term through higher temperatures, reduced rainfall and extreme weather events.’ It predicts possible falls in agricultural production in NSW by 2030 of 8.4% for wheat, 8.1% for sheep meat and 5.5% for dairy.(p35)
    • In respect of Queensland this report says ‘Future productivity growth in agriculture may be affected by climate change in the medium to long term…’ It mentions that ABARE estimates possible production declines by 2030 of 19% for beef and 12% for sugar (p45).
    • The report says in respect of WA, ‘By 2070 south-west WA is likely to experience yield reductions in wheat. Cropping may become non-viable at the dry margins with strong warming and significant reductions in rainfall.’ The report highlights that wheat production could decline by 9% by 2030 with similar declines for sheep meat.(p34)
    • For SA the report says ‘Since 1997 SA’s agricultural regions have experienced a marked decline in growing season rainfall. This decline is mostly due to a drying trend in autumn and to a lesser extent in winter. … Overall the trend in annual rainfall since 1950 shows a decline across the agricultural region. … Rising temperatures are likely to have a major influence on wine grapes bringing the harvest forward by a month and yielding lower quality grapes. … ‘(p35)

    In 2011 CSIRO published a report by Chris Stokes and Mark Howden on “Adapting agriculture to climate change” They say ‘The Australian climate is already changing and these changes have a measurable impact on primary production as the drying of the Murray Darling basin and the wheat belt bear witness” (p85) They add “ areas of farming that are economically marginal today are among the most vulnerable to climate change; here impacts are most likely to exceed the regions adaptive capacity, stressing their communities, farming systems and natural resources. Such areas include outer wheat belt zones subject to drying, warmer dairying or fruit growing areas, or irrigation communities whose water resources are in decline-all areas where quite small changes in climate can have quite large economic and social consequences”

    Tony Abbott refuses to face these facts.

    At the same time US Secretary of State John Kerry calls climate change “a weapon of mass destruction” and the IMF calls on Australia as the Chair of the G20 to show leadership on the issue

    What is just as remarkable is that the National Party which claims to represent farmers and country people is as quiet as mice in the haystack on climate change. The National Party relies on people like Gina Reinhart for financial support. It ignores the long-term interests of its own farming constituency by following the climate sceptics in the Liberal Party.

    No group in Australia is as vulnerable to climate change as Australian farmers. Historically they have shown themselves very good at adapting to change but they are not helped by the lack of leadership by the National Party.

  • John Menadue. The squandered mining boom.

    We are now paying a heavy price for our failure to manage the mining boom. The consequences are all too clear, particularly in the manufacturing sector. The mining boom drove up our exchange rate and wage costs. A Sovereign Wealth Fund (SWF) and the Resource Super Profits Tax (RSPT) would have minimised the problems. However, few seriously proposed a SWF. The Coalition and the powerful mining companies did everything possible to destroy the RSPT.

    The squandering of the benefits and opportunities of the mining boom is causing major disruption across the economy. What have we really got to show for the national treasure that we have squandered?

    We can take some late remedial action by cutting back on business and middle class welfare which I have written about. We should also increase our very low levels of taxation, particularly to fund our long term infrastructure needs, both physical and human.

    The Norwegians point the way for us in their establishment of a SWF in 1990. It was called the Government Pension Fund Global.

    • Last month each Norwegian became a theoretical millionaire through ownership in the Fund, but they would not have been able to spend the money. It was saved and invested for future generations.
    • The fund was set up to avoid the temptation by governments and the public to splurge the windfall returns following the discovery of oil and gas in the North Sea in 1969.
    • The funds the government receives in oil and gas revenue are invested almost exclusively abroad, rather than in Norway.
    • Exchange rate remained relatively stable and cost rises were checked. Unemployment has been kept low.
    • The Norwegian Finance Minister in January this year said “Many countries have found that temporary large revenues from natural resource exploitation produce relatively short-lived booms that are followed by difficult adjustments”.

    This is not to say that Norway doesn’t have problems but the fund has helped iron out big swings in oil and gas prices, stabilised the economy and allowed Norwegians to invest for the future rather than squandering money in the boom times

    We should have done the same. But at least we can be ready for the next mining boom which will inevitably come. Will it be in gas?

    Our Futures Fund just does not cut it alongside the successful funds established in Norway and elsewhere. Large SWFs operate in Saudi Arabia, UAE, China, Kuwait, Hong Kong, Singapore and many other countries.

    Instead of a SWF, we could have run much larger budget surpluses from 2003 onwards when the China boom kicked in. But there was always a political temptation of the Howard Government followed by the Rudd and Gillard Governments to win political popularity by spending the revenue from the mining boom. An SWF would have made it much easier to persuade Australians that we needed to save for the future and invest in key infrastructure. We showed that in our political support for the Disability Scheme. We were willing to pay the tax levy for the scheme because we agreed with the objectives of the scheme.

    The mining boom produced enormous profits for the mining industry. The industry squandered a great deal of it in foolish investments and wage increases that flowed through to other parts of the economy. The miners acted as if they were playing with monopoly money. Rio Tinto alone had to write off $35 billion in failed investments. Its business management in China was a debacle. With so much money flowing through its hands it lost any sense of rigor and discipline. Just imagine what the Institute of Public Affairs and its bulletin board the Australian Financial Review would say if any government in Australia lost money on such a grand scale.

    In addition to their foolish investments, they paid extremely high wage rates to attract skilled staff to the mining areas. In the five years to June 2013 hourly rates of pay in the mining sector increased by 24%, excluding bonuses. These pace-setting wages dragged up wages in other sectors – manufacturing up 17%, construction up 20% and retail trade up 16%.

    With so much income flushing through the mining companies a Resources Super Profits Tax (RSPT) would have helped average out mining company profits with high taxes in boom times and lower taxes during periods of lower prices. Paul Keating would have called it an automatic stabiliser. It was just what we needed in terms of equity in sharing the benefits of the mining boom, but it was also desirable for good economic management to slow down the boom and force companies to be more realistic about spending “monopoly” money. The RSPT would have better secured our future, bringing the budget into surplus much earlier.  We also know that taxing profits is a better means of raising revenue than through royalties based on production.

    We also know that the Rudd/Gillard Governments made a political mess of the RSPT.And in taking advantage of this mess the Coalition sided with the powerful mining lobby which was very good at engineering and protection of its narrow interests but not very good in prudent investments for the future.

    There is a painful adjustment ahead. We should make sure we learn from the failures of our last squandered mining boom.

     

  • Mark Gregory. NBN – ageing copper network and structural separation.

    The Australian telecommunication industry is in crisis and centre stage is an ageing copper network that some would have you believe is good for another hundred years and others argue it is time to move to an all fibre access network.

    But the problems extend far beyond copper versus fibre and go to the heart of what an industry needs if it is to be a successful contributor to the Australian economy. As Australia struggles to find out how this sorry saga will end, questions should be asked of our politicians and telecommunication industry leaders why there is no plan for the future.

    To understand why criticism can be levelled at the development of one of Australia’s most important industries it is necessary to wind back the clock to 1982 when the Davidson Enquiry recommended the introduction of a competitive telecommunications industry.

    At the time Australia had three telecommunication organisations. The Australian Telecommunications Commission (ATC), trading as Telecom Australia, was responsible for the provision of terrestrial telecommunication services within Australia. Aussat Pty Ltd was responsible for satellite telecommunication and broadcasting services within Australia, and the Overseas Telecommunications Commission (OTC) was responsible for the provision of international telecommunication services. Aussat was established with a restrictive license that prevented competition with Telecom Australia, and to ensure this was adhered to, Aussat was effectively prevented from raising the capital it needed to flourish and two directors of Telecom were appointed to the Aussat Board.

    The Davidson Enquiry’s recommendation was timely and if it was implemented carefully the Australian telecommunications industry could have entered a period of expansion, competition and prosperity. So what went wrong? Everything.

    The first mistake, which has never been corrected, was a failure to map out the future of the fixed infrastructure, which at the time was largely copper in the access network and coaxial cable, microwave radio or copper pairs in the transit links.

    Optical fibre was new in 1982 and the Telecom Research Labs had started the process of introducing optical links into the Australian telecommunications network. Enough was known about the potential future capabilities of optical fibre for forward network planning to incorporate it into all major trunk routes by year 2000 and access networks thereafter.

    During the 1950s the then Postmaster General’s Department expanded the copper network beyond urban areas and commenced an ongoing maintenance and upgrade program. A key reason the copper network expanded beyond the urban areas was the recently adopted universal service principal by government that resulted after a robust campaign by regional and remote Australians for telephone services.

    The modern Australian copper network was progressively rolled out in the 1950s, first in urban areas and then to regional areas, with an anticipated lifetime of 50 years. In some areas the copper network is now more than 10 years beyond the anticipated lifetime. Copper networks do degrade over time, due to the effects of water leakage, the environment and mechanical damage. Over the decades the cost of maintaining the copper network has been steadily climbing.

    In the period 1982 to 1992 the fate of the three monopoly telecommunications providers was debated within the federal government, and initially the focus appeared to be on how to ensure each organisation remained viable rather than how to promote competition. For example, proposals for Aussat and OTC to merge were rejected in favour of OTC being merged with the ATC which was renamed AOTC in 1991 and finally became Telstra Corporation in 1993. Aussat was sold to a new entrant, Optus, as part of a deal enabling it to share a duopoly with Telstra in 1991-97 as a first step towards national infrastructure competition.

    Guidance on how the fixed infrastructure network could be expected to change over the next 50 years was not provided and was put into the hands of the telecommunications market to best determine, within the constraints of an amended Trade Practices Act (1997). But the reality was and remains that the future of the fixed infrastructure remained largely in Telstra’s hands until the advent of the 2009 National Broadband Network (NBN) policy, though this policy was flawed and Telstra retained ownership of exchanges, pits, ducts, traps and other infrastructure to be utilized by the NBN.

    In 1997 the government made extensions to the Trade Practices Act 1974 that guaranteed access to Telecom (Telstra) infrastructure on terms that were to be negotiated and ultimately regulated by the Australian Competition and Consumer Commission (ACCC). In 1997 the Australian telecommunications market was formally opened to full competition in accordance with the Telecommunications Act 1997.

    Or so the government would have us believe, because by carefully restructuring the existing incumbents the government created two monopolies that remain today: Telstra (national copper access network) and Aussat (later Optus – satellite broadcasting).

    Whilst other companies have launched satellites, installed undersea cables, installed fibre networks and built mobile cellular networks, Telstra and Optus remain dominant because each was provided with public infrastructure and in Telstra’s case the public infrastructure included the thousands of telephone exchanges and tens of thousands of kilometres of pits, ducts and traps that house the copper network.

    So Australia slipped into a regime where “competitors” would pay Telstra and Optus to utilise their infrastructure at rates negotiated or set by the ACCC, which ultimately include a profit component that ensures Telstra and Optus remain viable. The degree to which Optus retains an anti-competitive advantage has diminished more than Telstra’s anti-competitive advantage.

    Telstra in particular has taken every opportunity to leverage its infrastructure to optimise profit, often arguably at the expense of competition. As mobile telephone networks became more prevalent Telstra was able to convince the government that the mobile network should be used to provide aspects of black spot remediation, provision of emergency information and services that might be considered to be better provided under the universal service for which Telstra was most recently awarded another contract for 20 years in 2012.

    What this means is that Telstra has been able to draw on local, state and federal government funds to assist in the build out of the Telstra mobile cellular network. The extent of public funding received by Telstra for mobile network expansion has been difficult to quantify.

    At the last election the government announced that $100 million would be provided to assist with mobile cellular network expansion and black spot remediation. Telstra will argue that its network is best placed to facilitate the government’s aims, but only if all the money or the greater proportion goes its way.

    By the early 2000s Telstra found itself with two infrastructure competitors in the mobile cellular market and about 10 infrastructure competitors in the provision of DSL over the copper network. Prior to 2008 Telstra charged DSL providers for fixed telephone connection line rental in conjunction with a line rental cost for the provision of DSL. Effectively for every DSL provider customer Telstra would benefit through the provision of a fixed telephone service ensuring Telstra’s profit related to the copper network remained high.

    The decision by the ACCC, which Telstra fought all the way to the High Court in 2008, to introduce unconditioned local loop provisions effectively ended Telstra’s ability to force DSL providers to include fixed telephone connections with DSL.

    The loss of this income and the ACCC’s ongoing review of the charges that Telstra could levy DSL providers for DSL only connections meant that Telstra put the fixed network infrastructure into a holding pattern whilst Telstra focused its investment on expanding and upgrading its mobile cellular network.

    In the Howard government years between 1996 and 2007 questions were asked of Telstra about upgrading the copper network to FTTN for broadband delivery, and as time progressed the FTTP option was also discussed. The Rudd government asked the same questions and received the same answers, which amounted to Telstra asking for a government handout to upgrade to FTTN or overbuild to FTTP.

    By the 2000s there was a dawning realisation that effective competition would only flourish if there was a way to do what should have been done in the mid-1980s and that was to split Telstra into retail and wholesale organisations, so that future privatisation would facilitate effective retail growth whilst ensuring the wholesale organisation could go to the market when demand dictated to upgrade or overbuild infrastructure.

    In the Australian context this means upgrading or overbuilding the entire network, no piecemeal approach, no urban cherry picking of high value areas, because the universal service legislation effectively enshrines the right of every Australian to fair and equal access to a standard telephone service (it does not dictate fair and equal access to broadband or mobile services, which are left to the market). The 2012 government review and update of the universal service obligation did not include the provision of data services in the legislation and for this reason the outcome was flawed. Any thought that regional and remote Australia would accept anything less than a socially acceptable national outcome would return us to the robust campaign days of the early 1950s that led to the universal service in the first place.

    Whilst not discussing the national broadband network at this point, but staying focused on the reasons why the Australian telecommunications industry is not truly open and competitive, it needs to be pointed out that by “leasing” access to Telstra’s infrastructure for the national broadband network the government has effectively ensured that Telstra will retain its market dominance, because it can undercut any provider using the national broadband network knowing that it can make up the income shortfall through the profit it receives through the infrastructure lease agreement and maintenance arrangements.

    So where to from here? Australia is long overdue for a non-political rethink of how to facilitate an open and competitive telecommunications industry that results in effective structural change that includes Telstra’s separation into retail and wholesale organisations and also provides forward looking guidance on what the industry’s infrastructures needs will be over the next millennium.

     

    Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University. His blog can be found here.

     

  • John Menadue. Cutting back government spending – does it include middle-class and corporate welfare?

    Tony Abbott told his listeners recently at Davos that small government was the best form of government.

    The Minister for Health, Peter Dutton, has said that waste must be reduced in our health sector.

    The Minister for Social Services, Kevin Andrews, has told us that our welfare system is unsustainable and has appointed Patrick McClure to review welfare in Australia.

    And the Treasurer, Joe Hockey, has established a Commission of Audit to look at ways to reduce ‘big government’ with priority to reducing government outlays. He said that the age of entitlement had to end. But for whom! He said ‘it is .. essential that the Commonwealth government lives within its means and begins to pay down its debt’. We know of course that by any international measure we do not have a debt problem but let us pass on that for the moment.

    Before we look at fair and efficient ways to improve our public finances, there are a few broad issues to be considered.

    First, we do have a long term ‘structural deficit’ of about $60 billion p.a. The IMF has told us that the most recent culprits were the Howard/Costello governments that reduced tax rates year after year when we were flush with revenue from the mining boom. The Gillard and Rudd governments did face the GFC and sensibly increased government spending. They made some attempt to reduce middle class welfare, but they failed to grasp the major recommendations of the Henry Review to reform our tax system.

    Second, Australia does not have a growing public sector. As Ian McAuley, Jennifer Doggett and I have set out in our submission to the Senate Select Committee on the Commission of Audit, there is no evidence of any sustained increase in government spending (see my website by clicking on at top left of this blog). In fact, outlays have been trending downwards since the mid-1980s. Andrew Podger, who is Professor of Public Policy at the ANU and former Secretary of the Department of Health and Ageing, said on January 22 in the AFR, ‘The claim that Australia’s welfare system is unsustainable would surprise observers in most other OECD nations which spend a much higher percentage of their GDP on social security payments. Our emphasis on flat rate, means-tested payments rather than earnings-related social insurance has limited the burden on Australian taxpayers.”

    Third, our tax as a percentage of GDP has fallen steadily since 2002 from 30% to 28%, well below the OECD average of 34%.

    Fourth, our health expenditure runs at about 9% to 10% of GDP which is much the same as the OECD average, mainly because of the efficiency of our public insurer, Medicare. We could save substantial amounts in the health sector however if the government would confront the vested interests in health that force up government spending – the AMA, the Private Health Insurance firms, Medicines Australia and the Pharmacy Guild of Australia.

    The issue that stands out is that we need to improve our revenue base. This is where middle class and business welfare is a major problem – the tax-deductions or ‘tax expenditures’ that reduce the effective level of tax and provides disproportionate benefits to the well-off in the community. FlagPost, published by the Australian Parliamentary Library noted on January 29 2014 that Australia has the highest level of tax deductions in the OECD

    • Treasury estimate that the concessions for super contributions and tax-free payments of superannuation to persons over 60 years of age, like me, costs about $32 billion p.a. A phase-in of a 15% tax on superannuation draw-downs would quickly raise $5 billion p.a.
    • The Grattan Institute estimates that property investors get a benefit of about $7 billion p.a. through negative gearing and the capital gains tax discount. These concessions help inflate property prices and push home ownership out of the reach of young people.
    • The Grattan Institute also estimate that the government provides about $36 billion p.a. in benefits to home owners through exempting the principal house of residence from capital gains tax and aged pension entitlements. The aged pension is asset-tested, but that test excludes the principal residence. The Minister for Social Services is not prepared to address this issue. The aged pension is excluded from his review. Yet the aged pension costs $36 billion p.a. and accounts for roughly half of the welfare budget. If the government was serious about winding back welfare it would not exclude the aged pension from any review.
    • The government has also excluded from the McClure Review Tony Abbott’s $5.5 billion pa parental leave scheme in which the baby’s primary carer would receive six months leave on full pay up to a maximum of $75,000 p.a. This is middle class welfare in neon lights.

    There are also large hand-outs to the corporate sector, particularly the finance sector

    • There is a subsidy of $6 billion to $7 billion p.a to the high cost Private Health Insurance companies who keep pushing up their premiums which are really private taxes.
    • If we had blinked just before Christmas, we would have missed the largesse that Assistant Treasurer Sinodinos handed out to the financial services industry. The previous government took action to stop superannuation advisers automatically collecting commissions year after year – trailing commissions. It was estimated by the Industry Super Network that this reform by the previous government in stopping these commissions would add $144 billion to private savings by 2027. But Arthur Sinodinos has announced that the Abbott Government will roll back this reform and give financial advisers a chance to plunder our superannuation savings again. The government has given the all clear to the financial advising industry to re impose a private tax on superannuation contributors. There is also no sign that the government is acting to stop the super funds owned by the big banks funnelling their cash exclusively into their parent banks for relatively low returns. It is a private tax on super contributors. That is surely abuse of power or worse but neither ACCC nor APRA seems concerned!
    • The Abbott Government has announced that it will retain the fringe benefits salary packaging for expensive, mainly foreign cars at a cost of almost $2 over four years.
    • The government shows no interest in saving $2 billion pa in drug costs by being as rigorous as New Zealand in negotiating drug prices with suppliers in Australia.
    • Large polluters will be subsidised by removing the market discipline of a price on the carbon that they emit.

    There are also other ways that the Commonwealth Government could address the structural deficit. It should expand the GST to include food, education, health and financial products. Most countries do not have the exclusions that we have. The extension of the GST would raise about $16 billion this year and $70 billion by 2016-17.

    In short, we need to lift taxation. Taxes in Australia are too low. It is the truth we refuse to name.

    In global terms we don’t have a government expenditure problem, although a great deal of middle class and business welfare should be rolled back.

    We also need to look urgently at areas of real need, particularly the disabled, those in need of special help in social housing, those who receive meagre benefits in Newstart (the dole) and refugees.

    We should all share the pain in getting our budget into shape, even though the problem is nowhere as severe as we were told in the election. My concern is that so-called “dole-bludgers “of talk back fame will be the target and the wealthy and politically powerful will be largely exempt. The government has already cut aid to the poor in developing countries.

    I live in hope but I am not expecting an end to the age of entitlement for the rich and powerful. Just think executive salaries, transfer pricing and tax havens! But maybe Joe Hockey has something up his sleeve!.

    Given the present weakness in the Australian economy it is also  important that the reduction in our structural budget deficit is done carefully and not in the drastic way that brought so many problems in Europe.

  • Jennifer Doggett. Cutting waste and costs in health.

    ​Cut expensive and low-value services: Health funding is not allocated to areas which deliver maximum output. We spend too much on expensive low-value services and not enough on preventive, high –value care.  Recent research shows that a number of routine tests performed in the Australian health system do not improve clinical outcomes. These include x-rays for lower back pain, liver function tests for people on statin therapy and routine glucose tolerance tests for pregnant women.

    Structural reform: There is significant duplication of functions, gaps and poor coordination across areas of Commonwealth and State/Territory responsibility.  There needs to be a single funder and/or single point of accountability for all health care (as recommended by the NHHRC)

    Reform the funding system:  Funding arrangements for health services often do not reflect their value. We need a funding system which ties subsidies to value and which steers consumers towards the more cost-effective treatment option. For example, where physiotherapy is a more efficient treatment for a soft tissue sporting injury than conventional medical treatment it should be subsidised at a higher rate.

    Remove interest groups: Powerful vested industry groups, such as the pharmaceutical industry and the medical profession, influence policy and funding decisions resulting in anti-competitive and rent seeking practices that disadvantage consumers.

    Move away from fee-for-service: A (largely) fee-for-service payment system does not support doctors to provide comprehensive, preventive and multi-disciplinary care for people with complex and chronic health problems.  At least for these people we should investigate alternative payment systems, such as a capitation model.

    Workforce reform: Doctors in Australia undertake many tasks which in other countries are safely and efficiently done by nurses.  Breaking down professional barriers should allow for the lowest cost person to provide the care, where they can do so safely and effectively.

     

  • Ian Webster. Cutting waste and costs in health

    Waste in health care conjures up several pictures.

    One picture is of community nurses, psychologists and Aboriginal health workers in the community centre I visit anchored to their computer screens, endlessly it seems, trying to fulfil the demands of data entry. They are obviously frustrated by the lack of relevance this has for solving the problems of their patients. It takes time away and it is disempowering. About one third of each day is lost in this way.

    While not so apparent, there is a certain cynicism amongst the local hospital’s specialists about ‘gaming’ to preserve the local hospital’s funding and the administrative demands made on their time. The Garling Special Commission of Inquiry into Acute Care Services in NSW Public Hospitals in 2008 highlighted how non-clinical workload takes time away from clinicians who should be able to dedicate this time to clinical tasks. And the Greater Metropolitan Clinical Taskforce in 2004 reported on the conflicts between the information needed for clinical decisions and the data used by the administrators and funders. John Menadue, in his speeches on health care reform, has described the mismatch between vertical bureaucratic accountability and reporting and the horizontal and shared communication and working relationships of health professionals.

    There is much disillusionment in the current health care system where there should be enthusiasm and pride. Not only is time wasted in an atmosphere of excessive checking, rechecking and codification – to protect the Minister and the system – but good people and good-will are being wasted. Despite the demands and impediments on their time and commitment there are still front-line heroes who “go well beyond the call of duty” to pick up the pieces left undone by others. These people are the pivots around which the services revolve and they should be celebrated and encouraged.

    To prevent waste, data collection and information technology must be ‘practice-worthy’; they must help solve clinical problems and assess the progress of patients if they are to contribute to effective and efficient patient care.

    The second picture is of the waste of misdirected efforts.

    In the National Report Card on Mental Health and Suicide Prevention of 2012 the National Mental Health Commission, on behalf of the mental health community, expressed disquiet about the Activity Based Funding (ABF) being developed for the National Hospital Pricing Authority. The Commission said, “The new ABF system should be designed to meet the needs of people with mental health difficulties regardless of whether services are provided in hospitals, in the community or elsewhere. Alternatives to hospitals must be a priority.” The fear is that ABF will inevitably suck funding for mental health back to hospital activities rather than support and care in the community. If any part of ‘health’ demands a community-based approach, mental health does.

    The Commission’s view is that people should be supported to have contributing lives where they live and work and not be dependent on hospital-based services, necessary as this may be at critical times. Exactly the same can be said in the prevention and management of physical health generally – especially in the management of chronic disease and the intractable complexities of the increasingly prevalent multiple conditions. For people with these conditions hospital admissions are but punctuated interludes along pathways lived out in the community.

    Waste will mount inexorably so long as we neglect to invest in primary health care and community health.

    Professor Ian Webster is Emeritus Professor of Community Health at the University of New South Wales.

     

  • John Dwyer. Cutting waste and costs in health.

    ​

    Tactics and strategies for a six year journey to sustainable, equitable excellence

    (1) Move to a single funder for our national health scheme (The Commonwealth). The funder would contract with States and other potential providers to deliver integrated patient focused care. The health bureaucracy would be reduced by 80% with greater efficiency, better outcomes and less duplication saving at least $ 4 billion per year.
    (2) Remove Tax-payer support for Private Health insurance. Health Insurers are making large profits. Australians will retain their PHI as other sticks make that a certainty. The introduction of the subsidy saw PHI increase by only 2%.
    (3) Introduce peer and craft approved critical pathways to see more evidence based decision making re tests and procedures . Savings $20 billion per year.
    (4) Focus on reducing avoidable expensive hospital admissions ( more than 600,000 per year) through cheaper and better timely community interventions. Requires the introduction of Integrated Primary Care teams. Will need to broaden Medicare funding to cover health professionals other than doctors but net savings anticipated at least $7 billon per year.(5) Introduce slowly but steadily capitated funding for the management of”chronic and complex”diseases with mandatory reporting of health outcomes.

    Professor John Dwyer is Emeritus Professor of Medicine at the University of New South Wales.

  • Ian McAuley. Cutting waste and costs in health.

    There are three areas of saving to be made in health care – real savings rather than movement of costs from public budgets to consumers.

    There can be savings in technical efficiency — savings any engineer or cost-conscious manager seeks in a workplace. A strong example is making better use of information technology.

    There can be savings in purchasing.  Australia used to negotiate some of the world’s lowest pharmaceutical prices.  We now pay high prices.

    My concern is the third area – improvements in allocative efficiency.  That is, ensuring scarce resources are allocated where they will result in greatest benefit.

    The priority should be to remove private health insurance as a source of funding.  Administratively, it does at high cost what the Australian Tax Office and Medicare do much better.

    Its big costs are in terms of allocative inefficiency, for it simply re-shuffles queues, allocating resources to those with subsidized insurance, pushing others to the back of the line.

    Getting rid of private health insurance would save around $1.5 billion a year in administrative costs alone. The Grattan Institute estimates net savings of $3.5 billion a year.

    Other savings in allocative efficiency can be found in making better use of nurses, more careful prescribing of pharmaceuticals, and rationalization of co-payments so that people are not directed to “free” services in preference to more effective and lower-cost services involving upfront fees.  And, of course, there are big savings in all-of-government initiatives to encourage good health.

    Ian McAuley is a teacher and researcher in the fields of  public sector management and public policy.

  • John Menadue. Our lack of business and political skills in Asia.

    The Business Council of Australia and business executives keep reminding us of the need to increase our productivity by up-skilling and better use of our labour resources. Unfortunately the business sector is spectacularly lagging in equipping itself for opportunities in Asia.

    Last week The Australian Financial Review surveyed the schools and educational backgrounds of the CEOs of our top ASX100 firms. It found that one third of these CEOs went to secondary schools outside Australia. But not one of them had spent their formative schooling years in Asia.

    This confirms the dismal record of Australian business in Asia.

    • I have yet to learn of a single chairperson or CEO of any of our major companies who can fluently speak any of the key Asian languages.
    • A recent survey by the Business Alliance for Asian Literacy, which represents 400,000 businesses in Australia, found that ‘More than half of Australian businesses operating in Asia had little board and senior management experience of Asia and/or Asian skills or languages’.
    • Because of the lack of integration of human resources and business strategy in Australian firms, many executives who are posted to Asia leave within a few years of their return.  They find the culture in the Australian head office quite unsympathetic to Asia and the experience that they have gained.
    • Australian firms do recruit Australian-born citizens of Asian descent, but they are more likely to be recruited for their good grades and work ethic than future leadership potential. It is hard to break into the Anglo clubs that dominate so many of our large companies.

    Equipping ourselves for Asia has been on and off our agenda for many years. In 1989 the Garnaut Report pointed the way that Australia should respond to the North East Asian Ascendancy.  Through the Hawke/Keating Government periods we responded. We opened up our economy. More skilled people began working in the region. The media became more interested in Asia and exchange programs were established.

    And then in the Howard years we went on smoko. We were encouraged to be relaxed and comfortable and not get too excited about equipping ourselves for Asia.

    The Rudd and Gillard Governments slowly tried to get us back on track. Ken Henry reported in 2012 on Australia and the Asian Century, and how we should respond. A few targets were suggested, but little was really done before the September 2013 elections. The Rudd/Gillard Governments were distracted by other issues.

    The Abbott Government shows signs of pushing us off track again with its clumsy handling of our relations with China and Indonesia. Tony Abbott talks about his belief in the “Anglosphere”. It is not clear what he really means but most observers would conclude that it excludes Asia

    Foreign Affairs Minister Julie Bishop is now telling us that ‘our single most important economic partner is in fact the United States’. The blinding and obvious fact is that the two-way trade between Australia and China is $130 billion p.a. compared with $60 billion p.a. between Australia and the US. To bolster her amazing assertion, Julie Bishop adds in US investment in Australia. Where is she getting this US-centric nonsense from?  It is trade flows that traditionally determine economic relationships, not investment. To top it off Julie Bishop then added that the US is our ‘best friend in economic terms’ when clearly it isn’t.  For the second time in three weeks we have gone out of our way to offend China.

    At least the Gillard/Rudd Governments pointed to the direction we had to head – Asia. Now the Abbott Government seems to be suggesting that Asia could be the wrong direction.

    Our business sector seems to be in agreement with the Abbott Government that Asia is not as important to our future as we all thought

  • The power of vested interests and why drugs cost so much in Australia. John Menadue

    Why does the widely used cholesterol reducing drug Atorvastatin cost $A19 in Australia and $A2 for the same package in NZ? Why does the widely used cancer drug Anastrozole cost $A92 in Australia when the equivalent drug in the UK costs $A3.30. The answer is the political power of Medicines Australia and how it twists the arm of governments.

    In a blog on January 7, I drew attention to the political power of vested interests to undermine the public interest and good policy development in Australia. I referred  particularly to the miners and their role in destroying the super profits tax, the polluters’ opposition to the carbon tax, the hotel and liquor industry which is responsible for violence on our streets and poor health in the community, and the gambling industry particularly Clubs Australia, that successfully opposed proposals to shield problem gamblers. Just consider how James Packer has been able, so easily, to use his political power to avoid any public process in obtaining a licence for his “high-rollers” casino in Sydney.

    What makes these vested interests so dangerous is their power to persuade or threaten politicians. The media is ill-equipped to contest their power. In some cases, The Australian and the Australian Financial Review newspapers become outlets for these vested interests.

    Medicines Australia (MA) is a classic case. It represents the pharmaceutical industry in Australia. Its members supply 86% of the medicines that are available in Australia under the Pharmaceuticals Benefits Scheme. (PBS)

    The Grattan Institute has pointed out how, with the cooperation of pliant governments, MA has been able to exploit Australian consumers and taxpayers. The facts are quite clear. For March last year, the Grattan Institute reported as follows:

    • For Atorvastatin, the cholesterol reducing drug, the PBS in Australia paid more than $51 for a box of 30 tablets. NZ paid $A5.80 for a box of 90 tablets.
    • Grattan also looked at the ‘top 73 doses that are prescribed most often in Australia’. It found that Australian wholesale prices were eight times higher than NZ’s. For identical drugs, NZ prices were six times cheaper than in Australia.
    • Grattan also compared prices in some public hospitals in Australia who buy drugs outside the PBS. It found that on average these hospitals obtained drugs eight times lower than the prices under the PBS.

    Those comparisons where for March last year. In December last year, under what is called ‘price disclosure’ arrangements, prices were reduced.  However, the Grattan Institute found that even with these reductions, Australia was still paying sixteen times more than the UK and NZ for seven key drugs. For example the cost of Atorvastatin dropped from $A30 to $A19 for a pack in Australia. The same pack sold for the equivalent of $A2.84 in UK and $A2.01 in NZ. For Anastrozole, the cancer drug, the wholesale price in Australia is $A92 and in the UK $A3.30.

    How can these outrageous differences occur?

    Before a drug can be registered on the PBS it has to be cleared by the Therapeutic Goods Administration for safety and efficacy. Then it is assessed by the Pharmaceutical Benefits Advisory Committee for cost effectiveness and clinical benefit. The Pharmaceutical Benefits Pricing Authority (the Pricing Authority) then determines the maximum price that can be charged and how much the Government will pay manufactures or importers under the PBS.

    The Pricing Authority, a non statutory body is set up by the Minister and is within the Department of Health and Aging. The Authority includes, amongst its six members, two representatives of drug companies. That is extraordinary-building vested interests into the price setting process. They should be excluded completely.  The whole process is opaque, and political. It is ready made for manipulation by vested interests.

    In NZ, politicians decide how much is spent by the government on drugs and an independent and professional expert panel sets prices. In Australia we have the process the other way round. Our politicians should determine the budget for drugs at the beginning of the process and then get out of the way and let market competition work and leave final price decisions to independent experts.

    The vested interests get their fingers all over the price of drugs on the PBS. In NZ they are excluded from the process.

    Grattan Institute estimates that Australia’s wholesale prices for identical drugs are now six times the prices paid in NZ. In some cases they are as much as twenty times higher. Grattan Institute estimates a saving of almost $A2 billion p.a. if we paid the same price as in other relevant jurisdictions.

    The Chief Executive of MA is Brendan Shaw. He was formerly a staffer for Dr Craig Emmerson. It is typical of the pedigree of vested-interests and their political lobby that they choose persons well-known and influential in the political corridors of power in Canberra. .

    In response to Grattan’s findings, Brendan Shaw in the Australian Financial Review made an irrelevant point that because of budget restraints in NZ, fewer new medicines were available in that country. He avoided completely the issue of price comparisons. I would rather rely on the professional advice of independent experts on what drugs should be on the PBS and the prices we pay.

    When will we seriously tackle the exploitation of the public that Medicines Australia inflicts upon us?

    The Department of Health and Ageing should be spending its time developing and implementing improved health policies. Instead it spends its energy and time placating the powerful rent-seeking vested interests in our health services – Medicines Australia, the AMA, the Pharmaceutical Guild of Australia and the Private Health Insurance companies.

    The Rudd and Gillard Governments did little to curb the abuse of political power by these groups in the health field. In fact they made the situation worse. The Rudd Government appointed a senior executive of BUPA, the second largest private health insurance firm in Australia, to head the National Health and Hospital Reform Commission enquiry.

    Ross Garnaut described the power of vested interests in Australia as a ‘diabolical problem’.  He is right. If the Commission of Audit wants to save some real money and curb rent seeking it could start with vested interests like Medicines Australia.

    Governments and particularly conservative ones extol the virtues of markets. But all too often this is a diversion, designed to advantage corporations, like the members of Medicines Australia, rather than letting markets work and promote competition and lower prices.

  • Is Pope Francis a Marxist?

    On 16 December last year, Eureka Street carried an article by Neil Ormerod about Pope Francis and his economic, social and political message. That article can be found on the link below.  John Menadue

    ​

    http://www.eurekastreet.com.au/article.aspx?aeid=38645#.Us8a9j0XBt8.email

  • A 100 billion dollar tale of piracy in the Timor Sea. Michael Sainsbury

    Although it sits on a vast undersea gas reserve, Timor-Leste remains deeply impoverished.

    Deep under the Timor Sea, there is a huge reserve of gas. Geologists now believe it is worth upwards of US$100 billion; a figure more than twice the amount estimated by Australia as recently as 2006. It is perhaps ironic that the nation with the strongest claim to ownership of that gas, by dint of proximity to it, is Timor-Leste, which is also among the world’s poorest nations.

    But will it ever get the benefit of it?

    There have been numerous treaties over the last 42 years between Australia, Indonesia and Timor-Leste, regarding the fate of the gas. All of them have heavily favored Australia. None of them have been in accordance with international maritime boundaries and laws. Australia has sought to protect these favorable borders using means that have been illegal and unethical at times – not to mention mighty un-neighborly.

    The last treaty signed with Timor-Leste in 2006, known as CMATS, is now under dispute at the UN Permanent Court of Arbitration, the PCA.

    CMATS was based on two earlier treaties. These were inked with Indonesia’s Suharto dictatorship in 1972 and 1989, and since dismissed by many lawyers as illegal. The treaties carved up the seabed between the two countries at a time when Indonesia was illegally occupying Timor-Leste, an occupation that only Australia among its international peers recognized.

    There is much at stake. Impoverished Timor-Leste, which is 95 percent Catholic, would obviously welcome a massive boost in assets and income, as would any country, including Australia.

    But Australia has even more to worry about. Its greatest fear is that if its 2006 treaty with Timor-Leste comes unstitched, then Indonesia, its vast northern neighbor, now far wealthier and more powerful than it was in the 1970s and 1980s, may want to renegotiate its own maritime borders with Australia – and that has far reaching strategic and economic implications.

    “Well, they didn’t have to sign the treaty, no one forced them to,” Alexander Downer, Australia’s Foreign Minister from 1996-2007, now says of Timor-Leste.

    It was Downer who made the key decision, only two months before Timor-Leste’s independence in 2002, to “withdraw” Australia from the maritime jurisdiction of the PCA.

    Now that some gas revenues are coming in, and under pressure from UN negotiators, Australia has agreed to hand over a larger share of them to Timor-Leste. But it has refused to budge on a 50-year clause that prevents Timor-Leste from challenging the boundaries established with Indonesia; boundaries that one former Indonesian foreign minister described as “taking Indonesia to the cleaners”.

    Timor-Leste has long been unhappy with CMATS. But then last year, the dispute stepped up several gears when it went public with allegations of spying by Australia during the treaty negotiations.

    Timor-Leste claims that Downer authorized the installation of wiretapping equipment in the walls of the new cabinet room in the capital, Dili. The building was being constructed, ostensibly as part of an “aid project,” in 2004 as the treaty negotiations were commencing. The allegations originated from an intelligence officer who worked for Australia’s overseas spy agency, now known in the PCA case as Witness K, to his government-approved lawyer Bernard Collaery in 2008.

    Timor-Leste took the case to the PCA last April. Then on December 3, more than a dozen officials from Australia’s domestic spy agency raided Collaery’s office and removed many high-level, evidential documents relating to the case. They also raided Witness K’s home, canceling his passport.

    The government claims this was done for national security reasons. The following day, Australia’s attorney-general George Brandis, under parliamentary privilege, stated the raid had nothing to do with CMATS. But Collaery, an approved lawyer for both domestic and overseas intelligence officers, told ucanews.com this claim is rubbish; there were no national security grounds for the search. He added that Witness K “was simply fulfilling his obligation as a Commonwealth officer to report illegal acts”.

    At the time, Australian and Timor-Leste officials were debating how Witness K would be handled, including a possible witness protection program, so the December raid does look extremely pre-emptive.

    It was hardly surprising that later in December, Timor-Leste’s Prime Minister Xanana Gusmao sent both an official letter and his foreign minister, Jose Guterres, to Canberra, demanding a re-negotiation of CMATS and an explanation for the alleged spying.

    In a piece of especially inept statesmanship the incumbent prime minister, Julia Gillard, sent diplomat Margaret Twomey as her envoy for a three-hour meeting in Dili. Twomey pleaded for the East Timorese to cease their legal actions but it fell on deaf ears. The fact that Twomey was the Australian ambassador in Dili when the alleged spying took place, and the Timor-Leste government nursed its own suspicions about her role, would hardly have helped.

    Looming over all this is the cozy relationship between Canberra and Woodside, Australia’s biggest home-grown oil and gas company. Woodside controls Great Sunrise, the largest gas field opened so far in the disputed territory. Woodside has been “saved” once before, by government fiat, from a takeover by rival Royal Dutch Shell in 2001. More recently it has also enjoyed consultancy services from Downer’s company, Bespoke Approach.

    There can be little doubt that the well-connected, armor-protected Woodside will have strongly lobbied the Australian government for the best deal in the Timor Sea; even less doubt that its requests would have been favorably heard.

    This furore is just the latest sign of the Australian government’s current struggle to understand or deal effectively with its Asian neighbors. In recent months it has fallen out with Indonesia on the question of illegal immigrants. More damagingly, it has emerged that Australia spied on Indonesian President Bambang Susilo Yudhoyono, his wife and others.

    Australia’s new conservative government, led by Tony Abbott, has also decided to slash its aid budget by a cumulative A$4.5 billion in coming years, the vast majority of which goes to its nearby Asian neighbors.

    And in Timor-Leste, Minister for Energy and Petroleum Alfredo Pires has said that the episode is turning hearts and minds against Australia, even though Australia’s defense forces came to its rescue in its desperate battle for independence in 1999.

    Referring to the spying allegations, Pires said: “It was all done under the cover of an Australian aid project. Now we are even suspicious of Australian aid. Many people, particularly young people, have become very disillusioned with Australia over this.”

    The bottom line is that once again the people of Timor-Leste, who have been through so much for so long, are just collateral damage.

    Michael Sainsbury is an Australian journalist based in Bangkok.

    This article was published by CathNews   on 8 January 2014.  See link below. 

  • The mooted $6 fee for GP visits trivialises the problem. Guest blogger: John Dwyer

    There is a lot that is disturbing about the federal government’s flirtation with a $6 co-payment for a service from a GP. Most commentators have rejected this approach as poor public policy as it will act as a deterrent for poorer Australians to seek the care they need to provide paltry savings in a 120 billion dollar a year health system. This policy will cost all of us dearly as avoidable chronic illness among those less economically secure already absorbs so many of our tax dollars. With the exception of illness caused by excessive alcohol consumption, all risk factors for serious disease are more prevalent in less advantaged Australians. Studies show that already too many patients delay seeking help and fail to take prescribed medications because of the costs involved. Health care in our wealthy country is distressingly and increasingly inequitable.

    However the major frustration with the current debate is associated with the lack of political understanding of the changes we do need to make to provide better health outcomes from a system that is financially sustainable. Cost effectiveness can only be tackled with a whole of system analysis not just a focus on the federally funded Medicare program that supports our delivery of primary care.

    The compartmentalisation represented by Minister Dutton’s focus on the cost of Medicare is the price we pay for the wretched jurisdictional separation of funding arrangements for Hospital and Primary Care services in Australia, the only OECD country so burdened.  Hospital expenditure dwarfs primary care expenditure so looking at the cost of funding Medicare divorced from a system wide analysis of health care costs is nonsensical.  In the actual health care delivery world the success or otherwise of our Medicare funded primary care system has a major influence on how much we need to spend on hospital care. Indeed the pertinent truth is that hospital funding into the future will only be manageable if a modernised and remodelled primary care system can reduce the demand for hospital admissions.

    We need and want a national health care system characterised by its resourcing of evidence based strategies that prevent avoidable illness and the provision, in a timely manner to those who are ill, cost effective quality care available on the basis of need and not personal financial wellbeing. These are not Utopian goals but their delivery will require additional spending in a number of areas. However there are major savings that can be made in our current system that would fund a remodelled health system.  For example, nine departments of health to service 23 million people are not only cost ineffective ($4 billion a year in duplication costs) but also makes proper integration of services impossible. 30 years of working closely with State and Federal health bureaucrats has taught me that the system sees good people more concerned about saving dollars in their patch and maintaining their power base than providing patient focussed integrated care. We need the Commonwealth to be the single funder for our public health system contracting with providers to deliver the integrated system describe above.

    Remodelled Primary Care with the infrastructure for the support of prevention programs is the most important initiative we need to implement in Australia. Around the world the trend is to establish primary care systems that encourage citizens to enrol in a wellness maintenance program and benefit from the delivery of health care by teams of health professionals working as “first among equals” in the one practice (Integrated Primary Care” (IPC). The psychology associated with voluntary enrolment is important .The philosophy involves acceptance of the concept that we need to take more responsibility for our own health but with personalised and ongoing assistance, when necessary, from appropriate health professionals. 85% of our New Zealand cousins are voluntarily enrolled in a “Primary Healthcare Organisation”.

    The Productivity Commission reports that between 600,000 and 750,000 public hospital admissions could be avoided annually with an effective community intervention in the three weeks prior to hospitalisation. An average hospital admission costs at least $5000 while a community intervention to prevent that admission would cost about $300. Primary Care infrastructure in Australia needs to resource the needed community interventions. The savings would more than cover the expense of introducing Integrated Primary Care into Australia.

    The introduction of IPC in Australia is likely to attract more medical graduates into a career as a GP.  Research tells us that only 13% of medical graduates in Australia plan a career in Primary Care. Remuneration is poor compared to other specialities.The need to bulk bill puts time constraints on episodes of care resulting all too often in “turnstile medicine “which is unsatisfactory for both doctor and patient. A young graduate will not be impressed with the Abbott government’s decision to cap Medicare payments to doctors for four years. Many younger doctors considering general practice would prefer to move away from the traditional “fee for service” payment system to salaried or contractual payments. Watching the journey that is leading to IPC in other countries can teach us a lot. In New Zealand over 85% of GPs have voluntarily forsaken “fee for service” payments in favour of guaranteed remuneration in a capitation model.

    The Abbott Government should commit to taking us on a health reform journey that embraces the above changes and the introduction of a single funder for our health system. To be talking about $6 is to trivialise a major policy challenge.

    Professor John Dwyer is the Emeritus Profess of Medicine at the University of NSW.

     

  • More on pink batts. Guest blogger: Dr Michael Keating

    I would like to add a further comment to your post on 3 January on the Pink Batts.

    First, I would further contest the evidence that this scheme was poorly conceived and badly implemented. On this point it should be noted that the Auditor General’s finding that 29 per cent of 13808 completed jobs had minor or serious problems was based on a departmental survey, which suggests that the government was following up. Furthermore the survey was not wholly random and as the Auditor General noted this particular finding constituted only weak evidence. Later evidence showed that of  44,300 inspections, again not randomly chosen, only 3215 led to rectifications being required – a rate of around 7 per cent, which does not seem to me to be particularly high for the building industry.

    The other major concern arose out of the death of four installers. Leaving aside the fact that regulation of health and safety is a responsibility of the States and employers it should be noted that one fatality was caused by a pre-existing electrical fault; another electrocuted installer was employed by an electrician; and a third death occurred when a contractor elected to work in oppressive heat. In addition, the Commonwealth required more of contractors than most States as it required installers to agree to employees holding a nationally recognised occupational health and safety certificate demonstrating that “the holder is competent to work safely in the construction industry”.  To the extent that there was a failure of health and safety it would seem to reflect a general failure of health and safety regulation in the building industry and not a failure of this particular program.

    Second, the other important aspect that I would like to raise is why did the Rudd and Gillard Governments decide to throw in the towel and not defend the program? I suggest that it was their decision to stay silent and not respond to the criticisms that has now given the HIS program such a bad reputation, and has come at a considerable cost to their own reputations. I think that it was this decision to stay silent, when a substantial defence was possible, that is deserving of further exploration by those who are interested in how our political system is working these days.

    Dr Michael Keating AC was formerly Secretary of the Department of Prime Minister and Cabinet 1991-96. 

     

  • Repost: We all see our doctor too much; and it’s not just the aged. John Menadue

    The media have been discussing a proposal to impose a $5 or $6 levy for GP visits. There has been a dramatic increase in the number of times we each see our GP. It needs addressing, but not with a simplistic GP levy. See also piece below by Ian McAuley.

    Following the Grattan Institute’s recent work on budget deficits there was a focus by the media on rising health costs. The media commentators didn’t seriously examine the Grattan work about ageing but hopped onto an old and overworked hobbyhorse – that rising health costs are largely due to the ageing on the Australian population. The Business Council is also a repeat offender on this fiction about ageing.

    Increases in health services have been across all age groups, particularly in the band 25 to 54 year olds. The following figures compare Medicare services per head and by age 1984/85-2011/12. They are extracted from the Department of Health and Ageing website, although the figures are not easy to find.  Below I have combined male and female figures, assumed a 50/50 gender split. It should also be noted that some Medicare services and items were not around in 1984/85 when Medicare was established by the Hawke Government. This would not detract from the thrust of the figures.

    Medicare services per head and by age 1984/85 to 2011/12

    Age group

    1984-85

    2011-12

    % Change

    0-4

    6.97

    8.87

    27

    5-9

    4.25

    5.04

    18

    10-14

    3.49

    5.06

    45

    15-19

    4.68

    7.59

    62

    20-24

    6.43

    8.58

    34

    25-34

    7.05

    10.78

    53

    35-44

    6.54

    12.15

    86

    45-54

    7.99

    14.75

    85

    55-64

    9.47

    20.32

    115%

    65-74

    11.80

    28.61

    142%

    75-84

    15.22

    39.08

    157%

     

    It is noteworthy that the rate of increase in Medicare services levelled off in the over 65s but grew very strongly in the 35-54 band. Age is only a part of the problem.

    The Productivity Commission confirmed this in its report in 2005 on Medical Technology “to date population ageing does not appear to have been a major driver of increased demand for health services’.

    Professor Jeff Richardson of Monash University’s Centre for Health Economics, in his paper on the ‘Lamentable state of Australian health reform’ in March 2009 put it ‘Ageing per se in the absence of technological change would have minimal effects on expenditure… the link between ageing and health expenditure as a percentage of GDP is simply disinformation’.

    The Grattan report referred to  said ‘Contrary to widespread belief, it is not just the ageing of the population that is driving health spending but the fact that people of all ages are seeing doctors more often, having more tests and operations and taking more prescribed drugs”

    The Health Council of Canada in a survey a couple of years ago of more elderly users of health services concluded ‘the largest controlling factor in this rise [in health costs] is neither ageing nor population growth … it is increased use’.

    In future blogs I will look at some of the major drivers of increased demand and increased costs in health care that should be addressed. It is not just the ageing of our population.

    But we should keep a sense of perspective. At 9% of GDP committed to healthcare in Australia, we are in the middle range of comparable countries and slightly below the OECD median. Medicare has served us well. We spend about a half of what the US spends on health as a proportion of GDP.

    The US is a standout example that we should not entertain any idea of increased government support for private health insurance companies that are no match for powerful providers…doctors and private hospitals including “charitable” hospitals.

    John Menadue

  • Repost: The Asian Century and the Australian Smoko. John Menadue and Greg Dodds

    The Asian Century and the Australian Smoko was first published in April 2012. This repost might be interesting holiday reading.

    The Gillard Government has commissioned Ken Henry to report on Australia and the Asian Century. Our trade with China, Japan, India and other Asian countries is booming.  Our luck is still holding.  But our key sectors – business, education and the media – are no more Asia-ready than they were two decades ago.

    This may seem counter-intuitive with the superficial signs pointing in the other direction – the number of Asian faces on our streets, staffing in our hospitals, our holidays in Bali and foreign students at our universities. But the quality and depth of our relationship with the diverse countries of Asia is quite superficial. Dig below the surface and we find a worrying situation.  We have booming trade but little real engagement.

    Reading the submissions to the Henry Review one has a sense of deja vu.  The dates and the figures are different, but the concerns raised are substantially the same as those that we ‘debated’ in the 1980s. Lee Kwan Yew joined in the debate and warned that we risked becoming the cheap white trash of Asia. Paul Keating warned that we could become  a banana republic

    That debate culminated in the Garnaut Report at the end of the decade in 1989 – ‘Australia and the Northeast Asian Ascendancy’. Garnaut pointed to the sustained growth in Japan, Korea, Taiwan and Hong Kong, and how Australia needed to respond. Rather than seeing Asia as a threat, he argued that we should see it as an opportunity. We needed to reduce trade barriers. We needed to back this with greater efforts in education, language and research. Our immigration policies should also be more sensitive to the region.

    The Hawke Keating Government’s opening of the Australian economy forced change. We saw rapidly growing mineral exports to Japan and Korea. The back of White Australia was broken. Government and business responded with more skilled people working in the region. The media became more interested in Asia. Exchange programs with the region were established. Asian students flooded into our universities. Protection was reduced.  Productivity growth lifted to 2.1 pa in the 90’s

    But in the mid-1990s we went on smoko, even as we continued to dig up more of our ores and coal for export. We are now less dependent on Japan but more so on China and India.  Today, 48% of our exports are fuel and mineral products, a proportion way ahead of most comparable countries. Coal, our second largest export (19% of total exports), is a major contributor to greenhouse gasses. We are dependent on a few markets and a few exports.

    The economic changes of the Hawke-Keating years, whilst beneficial, were painful for some. On top of these changes there were considerable social and ethnic changes brought about in part by the Fraser Government’s successful Indochinese settlement of 240,000 people. Some populists saw it as a chance to take us back to what Garnaut had warned us about – fear of Asia. Today the populists continue to promote fear of Asia but now call it border protection.

    The Queen of England continued as our Head of State and we remained at the beck and call of faraway and fading empires at the expense of attention to our region.

    John Howard gave us permission to be ‘relaxed and comfortable’, to have a break from the Asian challenge and opportunities.

    In the two decades since Garnaut, the performance of our businesses, universities, schools and the media has been disappointing. DFAT and Austrade have done better and have more Asia trained staff in the region, but nowhere near enough.

    Let us look at the performance of key sectors in this Asian readiness.

    Business

    Only four Australian companies in the top 150 bothered to put in a submission to the Henry Review. They were ANZ Banking, ASX Group, IAG and Rio Tinto. BHP didn’t make it! That says a lot.

    Far too many Australian businesses see Asia as customers rather than partners.  In the long term trade and investment is about relationships of trust and understanding.

    • At the most there would only be a handful of Chairpersons or CEOs of any of our major companies who was born and educated in Australia, who can fluently speak any of the key Asian languages? This failure is stark. It is obviously too late for them now, but it is not at all clear that they are recruiting executives for the future with the necessary skills for Asia. It is hard to break into the cosy club. A recent survey by The Business Alliance for Asian Literacy, representing over 400,000 businesses in Australia found that ‘more than half of Australian businesses operating in Asia had little board and senior management experience of Asia and/or Asian skills or languages’.  There are now tens of thousands of Australian-born citizens of Asian descent at our universities. But they are likely to be recruited for their good grades and work ethic rather than their cultural and language skills.
    • Maybe we don’t need an Asian language or indeed much business sophistication to dig up and sell iron ore and coal to very willing buyers, but we certainly do to sell wine, elaborately transformed manufactures and services, particularly tourism.
    • Some Australian expats in Asia have developed Asian skills and sensitivities, but there are downsides.  Coming home for an expat is often harder than going offshore. His or her world has changed, but the culture of head office has not. Some join foreign companies or leave Australia. We know of many such instances.
    • Tourism boomed but we did not get enough repeat business. We skipped from one new market to another – first Japan, then Korea and now China. Not surprisingly, the Australian Tourism Export Council told the Henry Review that we needed to improve our tourism product.
    • Success in Asia requires long-term commitment, but the remuneration packages and the demands of shareholders are linked to short-term returns.

    Asian Languages and Education Funding

    In the 1980s Professor Stephen FitzGerald and several others of us campaigned for a national language policy. In October 1982 the department of Immigration and Ethnic Affairs organised the first National Language Conference. In 1985, the Senate Committee on Education endorsed the need for a national language policy. In 1987, the Hawke Government adopted a national policy on languages. This was followed in 1994 by a COAG commitment to fund Asian languages in Australia. Later Kevin Rudd supported this, but the renewed interest and commitment was short-lived. Asian language learning in Australia is in crisis again today as it was in the 1980s.If anything the situation is worse.

    This is spelled out in spades in the submissions to the Henry Review. The Australia-China Council advised that ‘for the last 20 years successive Australian Governments attempted to boost Asia literacy and particularly the study of Asian languages in schools… these attempts produced limited results’. In its submission, the Australia-China Council quoted from the Business Alliance for Asian Literacy 2011  ‘50% of schools teach very little about Asia, only 6% of Year 12 students study an Asian language and just 3% pursue these studies at university, and only 2.5% of Year 12 students study Chinese.’

    Tertiary education funding is also a key to Asian competence. As Ian McAuley has  pointed out, our public funding of tertiary education fell sharply between 1995 and 2000, and has stayed low ever since. The shortfall has been covered by income from foreign students. Teaching and research has suffered. Instead of adequately funding education from the budget, we have diverted public funds to middle-class welfare e.g. superannuation and private health insurance subsidies. This has crowded out funding for our future preparedness in Asia.

    Media

    Australia’s media relationships with the world are embedded in our history of relationships with UK, Europe and then the US.

    Our TV news, commentary and entertainment are heavily dependent on the BBC, CNN, et al. Media programs about Asia shown in Australia are often recycled UK or US material. Our media is full of it. Just compare the current coverage of the US Republican primaries and the much more critical National People’s Congress in China. Japan, except for disasters, India, Korea and Vietnam are covered intermittently, almost as an after-thought. It will require a real wrench to change the nature of Australian media that history has laid down.

    People exchanges

    The first working holiday agreement in Asia was with Japan in 1980. We didn’t have another one in Asia until the 1996 agreement with the ROK. In the last 10 years there have been another six working holiday agreements with Asian countries, but most of them have caps of 100 persons per annum. We still have no agreements with China, India or Vietnam. Outside the four key North-east Asian countries identified by Garnaut in 1989, fewer than 1% of working holiday makers to Australia come from the new and rising developing countries of Asia.

    Getting ready

    To take advantage and integrate ourselves in the region will require continuing openness in trade, investment, ideas and people. It will require substantial investment in skills for Asia and a new generation of business leaders who see the opportunities in our own region, and not a region they fly through on their way to Europe. We need to reengage in economic reform alongside reengagement with Asia beyond the superficial.

    We are both enriched and entrapped by our Anglo-Celtic culture.

    Postscript: There are follow up posts on this subject on April 2, 2013 and June 13, 2013.

    John Menadue AO is Board Director of the Centre for Policy Development. He was Australian Ambassador to Japan, Secretary Department of Immigration, Secretary Department of Trade, and CEO of Qantas

    Greg Dodds was Director, Australia Japan Foundation in Japan, Senior Trade Commissioner Japan and Executive General Manager, Austrade, North East Asia

    Edited versions of this article were published in The Melbourne Age and Sydney Morning Herald on April 5, 2012