Category: Economy

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

Part 1. An Alternative Budget Strategy 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr Abbott in his 2013 book, Battlelines, wrote that in government he would balance social values with pragmatic policy for the common good of the country.

Yet one could be forgiven for thinking government policy is being driven by neoliberal ideologues, with a very heavy stress on policies of privatisation of public assets, further deregulation (including in banking and finance), expanding free trade agreements, and creating more flexible labour markets (reducing wages and conditions).

Mr Hockey’s budget has created a toxic reaction for its astonishing unfairness to the most vulnerable groups, most notably the 600,000 unemployed, while doing nothing to wind back the tax subsidies and other ‘entitlements’ for higher income groups. Election promises were broken like plates at a Greek wedding. Even many Liberal supporters were dismayed at the brazen effrontery of this.

Mr Abbott might reflect on his own words in Battlelines: Australians “rarely forgive a government that makes promises before an election to win votes, but abandons them afterwards to hold power.” (p. xiii).

Budget exaggerations

Many of the claims made in the 2014 budget speeches have been shown to be misleading or simply wrong (see John Legge, The Age, 29 April). Most contentious is the view that the economy was facing an economic crisis that justified severe cuts to the welfare sector.

Various leading economists have insisted there is no need for panic about Australia’s debt, which can be managed over time. Merrill Lynch chief economist, Saul Eslake, said it would involve serious risks to move too quickly. His views were supported by Chris Richardson of Deloitte Access Economics, Paul Bloxham, HSBC chief economist, and Kieran Davies, Barclays Australia chief economist. Michael Pascoe in The Age (20 June) called for the Treasurer to stop “scaring people with dire warnings of economic disaster unless the lower classes keep their place.” The economist, John Edwards, has outlined the way forward for Australia by increasing exports in services, farm products and manufactures (AFR, 27 June).

The Coalition government appears to have gone out of its way to alienate and antagonise vast sections of the population, from pensioners to university students, State governments with the unprecedented withdrawal of $80 billion of funding for schools and hospitals, migrant communities (Senator Brandis’s right to bigotry views and the $100,000 fee needed to bring parents to Australia), the Aboriginal constituencies, social welfare networks, lifting the pension age to 70, introducing co-payments for medical care, cutting $7.6 billion from overseas aid over five years (while spending billions to fund offshore detention centres), along with cuts to university funding and research organisations like the CSIRO. At least Clive Palmer has saved the renewable energy industry.

No wonder support for the Coalition has fallen so dramatically. Are these really the policies the Prime Minister wants? It is a far cry from what he wrote in Battlelines:

I‘m a Liberal because our party has always stood for the decent, the humane and usually for the practical too… We know that without honesty there is no trust and without trust there is no fairness and without fairness civil society cannot long survive. (p.19).

Growing inequality

As everyone knows, the richer are getting far richer, astronomically so at the top end, far beyond imaging in earlier ages. Nobel laureate and former chief economist at the World Bank, Joseph Stiglitz, captured the extent of extreme inequality in his Vanity Fair article of May 2011, “Of the 1%, by the 1%, for the 1%”, and chronicled in his books the corruption and mismanagement propelling the Global Financial Crisis. In his mind, the crisis is fundamentally a moral one, with the collapse of values into a free-market mindset as a relentless pursuit of wealth, without acknowledging that economies are meant to serve all human beings, not just the rich. In the United States, the real median income of full-time male workers is lower than it was 40 years earlier. So much for ‘trickle-down’ economics.

The worst of it is, in Stiglitz’s view, that financial markets have not learnt the lessons or changed their ways, and the GFC may well be repeated. Currently lecturing in Australia, Stiglitz draws on his extensive experience at international institutions to stress the need for adequate oversight of markets to ensure they do not fall prey to powerful sectional interests.

It would seem little has changed since Adam Smith warned two centuries ago about manipulation of markets by powerful business interests, as he campaigned to advance the living standards of the ordinary people as much as possible. Neoliberals, please read your Adam Smith.

Banking and finance: “fear versus greed”

The neoliberal problem has infected Australia. Though we escaped the worst of the financial contagion because of our better bank regulation, our four big banks earned over $27 billion last year, exceptionally high cash profits; and the enquiry into the Commonwealth Bank shows how badly ethical standards declined in recent years.

The chairman of the Australian Securities and Investments Commission, Greg Metcraft, stressed the need for closer regulation by ASIC. “As a former investment banker, unfortunately it is fear versus greed” that is needed to police financial planning (AFR, 28-29 June). Thousands of Australians lost financially because of corrupt advice from CBA personnel, some even losing their homes. Yet financial interests have been pressuring the government to wind back Labor’s Future of Financial Advice laws introduced to protect investors against conflicted advice not in their best interest.

According to Philip Dorling in The Age (20 June), WikiLeaks documents show that the government is in secret negotiations aiming at radical deregulation of our banking and finance sectors, which could allow foreign banks to set up in Australia, and undermine our ability to respond appropriately to financial crises.

The policies of the Abbott government are difficult to reconcile with the Christian convictions of many of its members, especially with church leaders, including Pope Francis, appealing for greater fairness and social equity in economies, and a focus of alleviating poverty.

The budget has been a disaster for the Abbott government, and one hopes that its leaders move aside their neoliberal advisers in favour of sounder economists and the professional advice of seasoned public servants.

Bruce Duncan is a Redemptorist priest lecturing in social ethics at Yarra Theological Union in Melbourne. He is one of the founders of the advocacy organisation Social Policy Connections.

The last budget kept our Overseas Development Assistance (ODA) unchanged at a nominal amount of $5.03 billion. In real terms that was a cut of 2.25% or over $100 million.  Julie Bishop told us that it was a contribution that ODA would have to make to repair our budget deficit.

At the same time the government is abolishing the mining tax. We are obviously expected to believe that we cannot continue helping the world’s poor. It is more important to give money back to the miners.

The mining lobby keeps telling us about the great contribution it makes to the Australian economy. There is a lot of exaggeration in this and often much worse.

• As Ross Gittins in the SMH and others point out mining accounts for about 10% of our national production, but only 2% of employment. The large increase in mining investment in recent years has mainly been to purchase equipment from overseas.
• About 80% of our very profitable mining industry is foreign owned. BHP/Biliton is 76% foreign owned, RioTinto 83% and Xstrata 100%. This means that 80% of mining profits accrue to foreign shareholders and not to Australians. In this situation it is important for the owners of the minerals; we Australians, that we get some worthwhile return either in taxes or royalties.
• The Coalition government is planning to abolish the mining tax, just when it is likely to produce some worthwhile revenue. See my blog of May 6, 2014, ‘The cost of abolishing the mining tax’.
• State governments do receive royalties from mining companies for the exploitation of our national resources, but they hand a lot back to the mining companies. According to the Australia Institute, the states gave the mining companies $3.2 billion in concessions last year – mainly in providing railway infrastructure and freight discounts. In Queensland, these concessions or subsidies were equivalent to about 60% of the royalties the Queensland government received.
• We would expect that even if mining companies could dodge the mining tax, they would at least pay the 30% company tax. But not so. Michael West in the SMH on 27 April 2014 points out that Australia’s largest coal miner, Glencore/Xstrata paid no company tax at all over the last three years despite an income of $15 billion.( In response Glencore has said that over those three years “it paid $3.4 b in taxes and royalties”. But royalties are not taxes. They are a cost of production. So in my view Michael West’s assessment that Glencore did not pay company tax in the three years stands.) According to West it achieved this remarkable result of paying no company tax by paying 9% interest on $3.4 billion in loans from overseas associates.  This 9% incidentally was about double the interest it would have had to pay in the open market or from a bank. Having paid 9% on these borrowings to load up its “costs” in Australia it then lent money to ‘related parties’ interest-free. We are not told who these related parties were. But there is more. Apparently there has been a large increase in Glencore’s coal sales to ‘related companies’ from 27% to 46%. This would seem to indicate transfer pricing to shift income to lower tax countries. In this regard Michael West reported on the complex Glencore company structure. ‘The Glencore structure is now run as a series of business units controlled by one company [Glencore/Xstrata Plc) which is incorporated in the UK, listed on the London and other stock exchanges, with its registered office in Jersey (a tax haven) and its headquarters in Baar, Switzerland. It is probably all legal but is it right?

The latest BRW 200 Rich List ranks Ivan Glasenberg, the CEO of Glencore Xstrata, as the fifth wealthiest Australian with $6.63 billion in wealth – up from $5.61 billion in the last twelve months. His current wealth is $1.1 billion more than we spend each year on ODA to help the poor of our region and the world.

The BRW top 200 richest people in Australia have a combined wealth of $194 billion. That is almost forty times more than we spend each year in ODA.

The poor of the world will just have to put up with a cut in our ODA. We can’t help the poor when we need to dole out enormous benefits to foreign-owned mining companies.

The rich are really inheriting the earth – our earth!

Oxfam Australia has just released a report ‘Still the Lucky Country?’ which highlights the widening gap in wealth and incomes in Australia.

It found that the nine richest people in Australia have wealth that equates to the poorest 20% of the community. That 20% represents about 4.5 million people.

The nine richest people have a combined net worth of $67.7 billion. They are: Gina Rinehart, $17.7 billion; Anthony Pratt, $7 billion; James Packer, $6.6 billion; Ivan Glasenberg, $6.3 billion; Andrew Forrest, $5 billion; Frank Lowy, $4.6 billion; Harry Triguboff, $4.3 billion; John Gandel, $3.2 billion and Paul Ramsay (now deceased), $3 billion.

The top three wealthiest in Australia inherited most of their wealth. As American devotees of baseball would say ‘They were born on third base’.

Oxfam took a national poll of 1,000 people which revealed that Australians were concerned about inequality.

• 76% said that the wealthy don’t pay enough tax.
• 75% want the government to close the wealth divide.
• Two thirds of people said that it is unfair that the richest 1% of Australians own more than the poorest 60%.

Oxfam noted that inequality in the world is growing with 68 billionaires. They are as rich as a half of the rest of the world.

Pope Francis has been denouncing inequality as ‘increasingly intolerable’ and the ‘seat of social evil in the world’. But it is not only the Pope who is expressing major concerns. The plutocracy has been joining him.

Paul Pulman, the CEO of Unilever, describes this growing inequality as a ‘capitalist threat to capitalism’. The Lord Mayor of London Fiona Woolf warned that capitalism needed to be ‘for all and not just the gilded few’.

Prince Charles said ‘The long term job of capitalism is to serve people, rather than the other way round’.

The managing director of the IMF, Christine Lagarde, and a former Conservative French minister called for ‘more progressive income taxes and greater use of property taxes’.

The Governor of the Bank of England, Mark Carney, said that ‘rising income inequality was real and international … just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself’.

Mark Carnegie an Australian venture capitalist puts it this way ‘The enemy that we face at the moment is growing inequality, growing divisiveness, growing disengagement….in America you see society just absolutely sheering because the rich and the poor are just getting further and further apart.’

A wide range of people are now raising serious concern about growing inequality. We are all being called to account for this growing inequality and the economic and social consequences that it will inevitably bring. We need to consider wealth and property taxes as well as raising the rate of personal tax on high income earners, like the CEO’s of our banks.

Surely Joe Hockey must soon become more careful about preaching to us about ending the age of entitlement and the need for Australians to be less reliant on welfare.

Facts are getting in his way.  The latest reality check has been the release of the Melbourne Institute of Applied Economic and Social Research’s Household, Income and Labour Dynamics in Australia (HILDA) which surveys 17,000 people each year in Australia. The HILDA report found that Australians are becoming less dependent on welfare.

• In 2001, 23% of Australians aged 18 to 64 received weekly welfare payments. It has now fallen to 18.6%.
• The proportion of retired people who relied on welfare benefits as their main source of income has declined over the last decade from 68.5% to 65.8%.
• In 2001, there were 7.1% of Australian households where more than 90% of income came from welfare. A decade later the figure has fallen to 4.8%.

Professor Roger Wilkins, the report’s author, said ‘The long-term trend away from welfare reliance was largely the result of the long boom, although a succession of welfare reforms, tightening eligibility, had also contributed.’ Professor Wilkins added ‘I’m absolutely bewildered by Hockey’s obsession on welfare reliance in Australia. It’s lower than it’s been in a couple of decades, possibly longer.’

I have pointed out in earlier blogs that Australian government expenditure by all levels of government as a percentage of our GDP is one of the lowest in the OECD.

The major problem is the erosion of our tax base by deductions, or as economists calls them, tax expenditures that favour the wealthy. The higher the marginal rate of tax, the greater the benefit of these deductions. These deductions include superannuation, negative gearing and the discount on capital gains.

The “debt and deficit” crisis has been wildly overplayed. Now the facts on welfare dependence are running in the opposite direction to what Joe Hockey is telling us.

Many have grown tired of the exaggerations by the Coalition about debt and deficits. The fact is that, as least as far as public debt is concerned, we don’t have a problem. The public debt emergency is confected. Our public debt is about $300 billion which in world terms is a very low figure.

But the real debt we have is household debt which is approaching $2 trillion, one of the highest in the developed world. Our household debt is 1.8 times household disposable income. This compares with 1.1 times in the US.

A contributor to this enormous household debt is negative gearing. Under our tax system an investor can borrow on a property or asset even if the income generated is unlikely to cover the interest on the loan. Losses on the so-called ‘negatively geared’ properties are income tax deductable. These deductions are estimated to cost the budget about $15 billion p.a. The main beneficiaries are people on higher incomes. The Abbott Government didn’t go near this problem in his budget. Successive Labor governments have also avoided it.

There is not only the loss to the budget of about $15 billion p.a. Negative gearing also skews the market. According to the Reserve Bank, almost 95% of investors in dwellings buy existing and not new dwellings.  This results in increased prices for existing dwellings.  The proportion of investors buying new dwellings has fallen spectacularly since negative gearing was introduced I 1987.This makes it very difficult for first-home buyers to afford a home. With so little negative gearing going to new buildings, there is little boost to the supply of new houses.

This issue must be addressed on both budgetary and equity grounds. Politically it should be possible to ‘grandfather’ arrangements for existing investors and only allow negative gearing in future on new dwellings. This wouldn’t save the $15 billion mentioned above but there would be a saving to the budget in the early years of about $4 billion pa.

Negative gearing makes big calls on the budget. It forces up prices of existing buildings and it makes it very difficult for new home buyers to get into the market.

Domestic household debt, encouraged by negative gearing financed by the banks, is a far greater problem than the low level of public debt that the Coalition keeps telling us about.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax avoidance and tax bludging however are much greater problems.

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

Let us look at a few recent examples.

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

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

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

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

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

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

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

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

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

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

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

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

On Wednesday 11 June at Parliament House Canberra, former Liberal Leader, Dr John Hewson will launch a report on ‘What do do about growing inequality in Australia’. The report has been prepared by Australia21, ANU and the Australia Institute. The report can be found by clicking on below. It is embargoed until Wednesday at 11am.

Final InequalityinAustraliaRepor (1)

If you would like more information please contact CEO Australia21, c/- Lyn.stephens@australia21.org.

John Menadue

Yesterday I posted a blog ‘Are our Bankers Listening or Caring’. It referred to speeches by the IMF Chief, Christine Lagarde, and the Governor of the Bank of England, Mark Carney. They were speaking at a ‘Inclusive Capitalism’ conference in London. 

Today the New York Times has carried an op ed piece by Roger Cohen entitled ‘Capitalism Eating Its Children’. Cohen draws extensively on the speech by Mark Carney. The op ed piece in the New York Times can be found at:

http://nyti.ms/1owYMKI

John Menadue

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

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

Mark Carney said

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

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

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

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

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

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

There are measures in this Budget that rip the guts out of what remains of a fair and egalitarian Australia. These measures will not help people into jobs but they will force people into poverty.

You don’t help young people or older people or people with a disability or single mums into jobs by making them poor. You don’t build people up by putting them down.

This Budget is deeply offensive to the people who wage a daily battle to survive. The content of the Budget is offensive. The lies told to justify the Budget are offensive.

As philosopher Slavoj Zizek explains:  “…we are told again and again that we live in a critical time of deficit and debts where we all have to share a burden and accept a lower standard of living – all with the exception of the (very) rich. The idea of taxing them more is an absolute taboo: if we do this, so we are told, the rich will lose the incentive to invest and create new jobs, and we will all suffer the consequences. The only way to escape the hard times is for the poor to get poorer and for the rich to get richer.”

The government wanted us to believe that its first Budget was tough but fair. It has since explained that its outright cruelty to people living in poverty is actually good for them because by strengthening the economy everyone, especially the poor, will benefit. Wealth, you see, trickles down, when the wealthy are treated well and their privilege preserved. Thus goes the message it has been trying to dangle before us.

It is still trying.

But all we can hear is the sound of the excluded still waiting for the trickle-down to trickle down.

Budget 2014, you see, has the wealth trickling up! Not that this is all that unusual when market forces are allowed to trample on the lives of people who bear the brunt of inequality.

Even Pope Francis has something to say about this: “Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralised workings of the prevailing economic system. Meanwhile, the excluded are still waiting.”

When you’ve got a rich country like ours “unable” to afford to ensure that the more than 100,000 people experiencing homelessness or the more than 200,000 people on the waiting list for social housing have a place to call home, it is not a misfortune or a mistake. It is the sound of the excluded still waiting

When you’ve got more than 700,000 people unemployed and around 900,000 underemployed, on top of those who are set to lose their jobs due to company closures, the dismembering of the public service and government cuts to social spending, it is also the sound of the excluded still waiting. Let us not forget the woeful inadequacy of the Newstart payment, at only 40% of the minimum wage. Neither let us forget the single mums who were forced onto the Newstart payment at the beginning of last year, and let us not forget the working poor for there are some who would like to squeeze them even more by reducing the minimum wage and taking away what little rights they have.

When you’ve got David Gonski, not generally seen as representing the vanguard of the working class, working alongside his fellow review panellists to recommend a package of education funding reforms to address the outrageous inequality that besmirches education funding in Australia, and then the government does a triple back-flip and declares it is not committed to seeing this redistribution of resources through, you loudly hear the sound of the excluded still waiting.

The long, fruitless wait of the excluded for some of the wealth, some of the resources, some of the hope, to trickle down, is one of the most audacious and sadly successful con jobs in modern history. It is not misfortune. It is not a mistake. It is certainly not, as perversely asserted by those who put the boot in, the fault of the excluded themselves! Rather, it is an attack, sometimes by omission as well as by commission, against ordinary people, from the First Peoples to the most recently arrived asylum seekers and everyone in-between who has been residualised and demonised and made to bear the burden of inequality.  That is why there is absolutely nothing unusual about understanding this as an issue of class. And why Warren Buffett was quite correct when he said: “There’s class warfare alright, but it’s my class, the rich class, that’s making war, and we’re winning.”

The public response to the Budget reflects the deep feeling of injustice in the community. The powerful thing about the Budget response is that people are banding together to defend our egalitarian values of fairness and respect. People are saddened not only because the Budget affects them but because it hurts and humiliates the people they love and care about: young people, older people, people with a disability, single mums, struggling families. As we can see from the strength of the response to it, now is the time not to watch and weep but rather to stand and fight.

Dr John Falzon is Chief Executive of the St Vincent de Paul Society and the author of The language of the Unheard.

During the last two weeks a Professor from the Paris School of Economics, Thomas Piketty, has been touring the US speaking about his book; Capital in the Twenty-First Century. His audiences have been overflowing. Public television described the reception he has received as reminiscent of that given the Beatles, in their first visit to the US, fifty years ago. The book was briefly sold out on Amazon.

Capital is not an argument, a Manifesto. It is a proof based on research conducted over ten years, analyzing data from twenty countries, in the 18^th, 19^th and 20^th Centuries. It shows that when the returns to capital exceed the rate of growth in the overall economy, extreme inequality results. In the past, this has led to extreme political breakdown. It could do so again.

Amazing though it might seem, that a 685 page book of economic analysis should attract such popular attention, there are comprehensible and very serious reasons for this.

The global financial crisis of 2008 exposed, among many things, the massive and pervasive greed within the financial system called Wall Street. The standout winners in this system were a handful of financial industry leaders who took home annual pay in the hundreds of millions. The losers were tens of thousands of little mortgage owners who lost their homes.

The State declared that the Banks were “too big to fail” and rescued them with taxpayer-funded bailouts. Let’s assume that this was a sound macroeconomic judgment, designed to head off a full-blown depression. What should then have followed, is that by state regulation and reformed behaviors by the Banks, this would not happen again.

Last week it was reported that the “bundling” of mortgages, for trading, is now at a level exceeding that of 2008 and the take home pay of senior Wall street executives is again in the $300-500 million mark. So, it’s happening again.

The larger picture continues to include these facts: 1% of Americans dispose of 35-40% of the national wealth; 20% live at the official poverty line; the minimum wage continues to be $7.25 per hour; 1%, some 3 million persons, are in goal.

Americans are aware of these disturbing realities and for this reason as well as their attachment to the idea of scientific proofs, as such, there is great interest in Piketty’s book. Indeed, he does suggest some rational solutions: regulation, taxation policies etc.

But, there is a deeper problem which must be addressed: the transformation of the original notion of liberty which was an important part of the establishment of the United States, from a political and communal notion, into an individualized, economic and selfish one.

Simply, today the word and term liberty now means the right to make as much money for yourself as possible. This is dignified by terms such as initiative, enterprise, risk taking. But, its major feature is outright hostility to taxation and government expenditures, and perhaps above all, regulation; for example, financial or environmental regulation. Public goods are to be provided voluntarily by citizens who care. The community is to rely on trickle down.

In this context, Opposition Leader Bill Shorten, speaking in reply to the Abbot/Hockey Budget, drew an accurate comparison between their approach and that of the Tea Party Republicans in the US.

The notion of the American Dream, advanced by James Adams in 1931, fired popular imagination. It was quintessentially optimistic and communal. Through hard work and because progress was inherent in the American way, our children could be better off than we were and our community would be too. This simplified picture, Norman Rockwell’s pictures, a dream, was to be disturbed by the coming to terms with the pervasive racism of America.  But, it is relevant that the political leader who did address racism, Lyndon Johnson, accompanied this with the economic egalitarianism of his Great Society programs.

Today, the term American Dream is recited as a mantra, particularly by conservative politicians, but now unambiguously means the right to be selfish. This is proving to be deeply destructive of America, where it counts: destructive of any acceptable level of belief in the political system; belief in fair reward for effort, or in distributive justice generally; and willingness to forego immediate gratification in favor of longer-term projects. A cursory look at America’s crumbling infrastructure demonstrates this, latter, awful failing.

Piketty’s possible solutions include regulation. But his means political action within a democratic system and the assent of the Courts in their role as referee. And, this is possibly the bleakest part of the present outlook. Conservatives within the US political spectrum are trenchantly opposed to any active or worse, interventionist role, of Government. They worship at the shrine of liberty defined as the right to personal greed. Indeed, they often say it is God’s way. Lest they falter, they are shored up by financial support of a previously unheard of magnitude from private groups themselves possessing transparently clear personal interests, such as the coal billionaires the Koch brothers, who reject the existence human made climate change.

And, keeping the most disturbing element to last, the ultimate referee, the US Supreme Court, in two recent judgments has interpreted the Constitution as meaning that Corporations are individuals and the dollars they spend, on political campaigns, are the exercise of free speech; and they have removed almost all limits on such spending. There is widespread alarm that the Court has sold the democracy.

While, Piketty may have proven that inequality is the inevitable outcome of a system of disparity between rewards to capital and growth in the economy and, as if this needed proof, will destroy any effective polity, the elemental American dilemma is in fact one of grasping reality rather than preferring a dream, a cartoon.

Richard Butler was former Australian Ambassador to the United Nations, Governor of Tasmania, now Professor of International Affairs at Penn State University.

Fundamentally there is a problem with the rhetoric from the government and its cohorts such as the Commission of Audit. They insist on describing taxation as a ‘burden’ that should be lightened at every opportunity; thus implying that taxation is somehow illegitimate. On the contrary, however, taxation represents our mutual obligation to one another as citizens. Instead of being a ‘burden’, taxation is what we should pay to ensure the sort of society that we want.

It is only by changing the rhetoric and accepting the legitimacy of taxation that we can hope to match the community’s expectations for publicly funded services and assistance with our willingness to pay for them. This inconsistency between our expectations and willingness to pay is the fundamental budget problem that I highlighted in my initial comment. Furthermore, the longer we delay the worse that problem risks becoming because there are good reasons why the public’s expectations will rise further and even faster over the next decade or more.

Future Expectations for Expenditure

The Government itself often refers to the impact on demands for public expenditure as a result of the population ageing; indeed the Treasury has documented these demands in its Intergenerational Reports. But the evidence is that population ageing is relatively unimportant as a source of future expenditure growth.

More important factors influencing the demand for publicly funded services are

• rising living standards which tend to translate into a switch in consumer demand in favour of services such as education and health that are largely publicly funded, and
• technological change that has improved the quality of health care and to some extent education, but at increasing costs.

Beyond these factors, and more generally, Thomas Picketty has recently provided comprehensive evidence that over the last forty years the distribution of private incomes in capitalist economies, including Australia, has become increasingly unequal and that there are good theoretical reasons to expect that this trend towards greater inequality will continue. On the other hand, the evidence also shows that governments can intervene to maintain equality if they are willing to use the tax-transfer system pro-actively.

In addition, in Australia’s case over the last three decades we have significantly de-regulated the economy, and while the additional competition did increase productivity and living standards of the “winners’, the quid pro quo should have been a willingness to assist the “losers” to adapt. So those “parrots” calling for more economic reform need to also accept that not everyone will benefit and successful reform may well depend upon a willingness to support and assist those who are disadvantaged to adapt to the changes being imposed upon them.

Taxation and the risks to economic growth

Of course, those who are calling for lower taxes always claim that it will be in the public interest because it will lead to higher economic growth. But frankly where is the evidence?

Internationally the advanced OECD countries with the fastest rate of growth in per capita GDP, like the Scandinavian countries and Germany and the Netherlands, are not the countries with low rates of taxation revenue relative to GDP, while the US with a low ratio of taxation has had very low growth in productivity and participation over the last thirty years. In addition, the econometric evidence regarding individual behaviour does not support much impact from lower taxation on work or saving effort. Indeed some of us can remember when the top marginal rate of income tax in Australia was 60 per cent compared to 46.5 per cent now, but nothing much has changed in the savings or work patterns of the people concerned. In short any objective analysis shows that there is plenty of scope to increase taxation without damaging economic growth.

Taxation opportunities

So how should taxation be increased over time to achieve a sustainable budget? Fundamentally there is a choice between:

• Introducing more effective anti-avoidance measures,
• broadening a tax base, by removing a variety of concessions, or
• increasing tax rates.

It is to the discredit of the Coalition Government that they immediately scrapped the legislation introduced by the previous Labor Government to tighten up on avoidance where in particular many major foreign owned companies pay a ridiculously small amount of tax in Australia. But even strict anti-avoidance measures are unlikely to be sufficient, and more substantial action will be needed over time. In that case, many of the present income tax concessions operate like subsidies on the expenditure side of the budget, but they are subject to far less scrutiny, should be reviewed. So in the same way as expenditure should be closely examined for its effectiveness before resorting to increased taxes, the same is true of taxation concessions. Nevertheless, in the end some increase in tax rates may also be necessary.

Second, the two biggest sources of revenue are the taxation of incomes (company and personal income taxes) and expenditure (GST).  Given that all the GST revenue goes to the states, the balance between increasing the two may partly depend upon which level of government most needs assistance. But looking ahead both taxes will need to be increased over time.

This Budget and future revenue needs

This Budget projects a return to a budget balance in 2018-19, building to a surplus equivalent to at least 1 per cent of GDP by 2023-24, assuming that taxation revenue is capped at an average of 23.9 per cent of GDP. In other words the Government’s future fiscal strategy does not allow for any increase in revenue relative to GDP and expenditure will need to be further reduced relative to GDP despite the future demands identified above. Equally it also means that, like all previous governments, this government envisages that ‘tax reform’ will be revenue neutral, and will instead be limited to changing the tax mix.

Furthermore, considering what we know so far, this future change in the tax mix is likely to further re-enforce the trend to greater inequality. Already the Government’s first priority has been to cut the rate of company tax which principally favours the rich. The alleged justification is that we have to remain competitive with the rates of company tax in other countries, but this sort of simplistic comparison is not really justified. It takes no account of the fact that Australia is the only country that offers dividend imputation, so that effectively Australian residents pay no company tax on the majority of corporate profits because more than half are typically distributed as dividends. Quite frankly if the foreign shareholders are not benefiting from dividend imputation does that really matter, especially if as I have argued in a previous comment we should be saving more and relying less on foreign investment.

The two taxes that are actually increased in this Budget are

• the so-called “temporary Budget repair levy”, but this is temporary and thus provides no help in resolving our longer-term and more fundamental fiscal problems. And most importantly it is far too small an adjustment to income tax rates and consequently raises far too little extra revenue.
• a long over-due increase in petrol excise, which on scarcity and environmental grounds should never have been de-indexed in the first place. In addition, what revenue it does raise is to be hypothecated for investment in roads, much of which will not provide an economic rate of return, is therefore unproductive, and makes no contribution to ensuring fiscal sustainability.

Finally, the Government has given every indication in this Budget that it is contemplating increasing the revenue from the GST, but wants the States to wear the blame. Again, whatever, the merits of such an increase, and there are some, the fact is that it will further lead to a redistribution of spending power from the poor in favour of the rich.

In sum we do need tax reform, but any such reform should start from a consideration of the revenue needed to meet Australia’s long-term fiscal needs. At present we are trying to provide an adequate social safety net and a decent cohesive society with just about the lowest amount of taxation in the OECD – for example, according to the latest OECD statistics, in 2011 total tax revenue in Australia was 26.5 per cent of GDP, compared to an average of 34.1 per cent for the OECD as a whole, and 30.4 per cent in Canada, 31.5 per cent in New Zealand, 35.7 per cent in the UK; all countries with similar traditions to us and with whom we readily identify. And while this ratio of revenue to GDP was only 24.0 per cent in the US, if allowance is made for the much larger Budget deficits in the US, our taxation is effectively lower than there as well. So in effect, and unlike the US, we are trying to maintain a decent social safety net with extremely low levels of taxation. We have been getting away with this because, as I explained in my second comment on Tuesday, we have the most efficient income support system in the world. But there is little more that can be extracted by efficiency of the welfare system, and looking further ahead into the future, it seems pretty certain that unless we increase our revenue we risk finishing up with the sort of inequality and rundown in social infrastructure that is too often experienced in the US.

It is therefore a matter for considerable regret that this Budget gives us little hope that the Government understands the risks to society that it presents, and the associated doubts about whether this government is capable of delivering the tax reform that we actually need.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Each day this week I will be running a series of blogs by Michael Keating on the Budget and its repercussions. The posts will be 

• Australia’s Fiscal Challenge
  
• The Budget and our Values
• A Better Alternate Budget Structure
• Taxation
• Federalism

I am sure that these five posts will make a substantial contribution to our understanding of the Budget and its implications for Australia. Mike Keating was formerly Secretary of the Department of Prime Minister and Cabinet. Perhaps more relevant to his comments on the Budget is that he was Secretary of the Department of Finance under the Hawke/Keating governments, during which time real outlays were reduced in three successive Budgets. This has never happened before or since. These reductions in real outlays occurred while still introducing many of Labor’s major reforms of social welfare that led to substantial increases in assistance to the poor. Much of the credit for this of course belongs for the Cabinet, particularly to Paul Keating and Peter Walsh. But I know that quite a few of the ideas that were implemented came from the Department of Finance when Mike Keating was Secretary.  John Menadue

Mike Keating. Part 1. The Budget and what it means for Australia’s Future

In the run up to the last election Tony Abbott told us that the nation’s finances were in a mess, but notwithstanding that mess he promised to match all Labour’s new spending initiatives, protect education and health, increase defence spending, and all without any increases in taxation.  Frankly none of us, not even the fawning Murdoch press, should have believed him.

Understandably Labor is now tempted to harp on about the broken promises. But that would be to miss the real point.  The real point is that for several decades Australia, like many other developed countries, has had a continuing problem of meeting the public’s expectations for publicly funded services and how to pay for them.   Trust in government will not be restored until one or other political party offers a credible way forward that reconciles these conflicting public expectations of government.

So what is the immediate fiscal challenge that this budget needed to address and how well has it responded to that challenge? In this series of comments I want to consider:

1. how bad is our fiscal situation and the fiscal strategy required from  here on
2. the choices before us in terms of the values that we espouse and what the Budget decisions and Audit Commission recommendations imply for the future nature of our society
3. the consequences and efficacy of many of the specific policy decisions in the Budget

Australia’s fiscal challenge

Is public debt a problem?

The Government has talked incessantly about Australia’s debt problem, and government debt is undeniably higher than when the previous Coalition Government lost office in 2007. The Commission of Audit for its part thought that low or even zero debt is such an important objective that the first priority for the fiscal strategy should be the achievement of an arbitrarily chosen debt ceiling.

Others, however, have noted that Australia has a triple AAA credit rating, whatever that is worth. More pertinently general government net financial liabilities in Australia in 2013 represented only 11.8 per cent of GDP, compared to an average of 69.1 per cent for the OECD as a whole, including 81.2 per cent in the US, 40.4 per cent in Canada, 65.4 per cent in the UK, and as high as 137.5 per cent of GDP in Japan, and all these countries have low interest rates and no particular difficulty in financing their debt. Furthermore, although low debt is properly seen as providing increased scope to intervene in the event of an economic downturn, each of these countries had much higher debt than Australia in 2008 and they were still able to intervene and further increase their debt in response to the Global Financial Crisis (GFC).

Instead Australia’s problem is not so much the financing of its government debt, but the extent to which we rely on foreign capital to finance total investment in Australia. Essentially our national savings from all sources, both public and private, fall well short of the investment opportunities. In particular, Australian households increased their borrowing very substantially during the Howard Government years up to the onset of the GFC. Consequently by the end of 2013 the amount that Australian households owed was nearly 1.8 times the amount of household disposable income received in that year. Moreover this level of household debt in Australia was not only high by Australian standards, but also by international standards, with household debt in Italy and Germany, for example, being less than a year’s worth of disposable income.

So on balance the Government’s fiscal target to achieve budget surpluses on average over the course of the economic cycle seems a worthwhile goal, but it is not an absolute imperative and should not be pursued at all costs.

How quickly should the Budget return to surplus and how?

The Government acknowledges that at present the economy is soft, although some improvement is expected through the next financial year. Accordingly something close to a neutral budget in terms of its impact on the economy might have been the best strategy, with monetary policy left to fine tune the level of economic activity. By contrast, Treasury project that the structural Budget deficit will decline by about 1 per cent of GDP. On the face of it this is a fairly rapid rate of contraction of government support for the economy, although probably not devastating. Furthermore, the projected rate of fiscal consolidation over the next four years – 0.6 per cent of GDP – is reasonably well paced, so overall in terms of its impact on the economy this Budget seems to have got it broadly right.

How fair is the fiscal strategy

In the current financial year, 2012-13, government payments are expected to represent 24.1 per cent of GDP; a bit less than their long term average over the previous twelve years since 2000-01 of 24.5 per cent. By comparison, government revenue represents only 23.1 per cent of GDP compared to an average of 24.3 per cent over the previous twelve years. In other words if we have a fiscal problem it does not seem to have been caused by excessive expenditure, but by a drop in taxation revenue, and the prime cause of that was miscalculations by the Howard/Costello Government when they embarked on their 2001 tax reforms, which have turned out to cost more than expected at the time.

So in the first instance it might have been expected that restoration of a fiscal surplus would have been sought primarily by way of increases in revenue. But consistent with government rhetoric and the demands of its supporters, 80 per cent of the projected budget consolidation  is from net savings in expenditure, and only 20 per cent from increased taxation. This in itself raises basic questions of fairness, which will be explored in the next comment.

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

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

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

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

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