Expert verdict on MYEFO: A stinker

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This week Treasurer Scott Morrison delivered Australians a Mid‑Year Economic and Fiscal Outlook (MYEFO) statement, announcing that debt and deficit is likely to stretch for more than a decade.

Unsurprisingly, the reaction by economists was similar to the one where somebody stumbles upon a bag of raw prawns under a hot Christmas Day sun.

We said MYEFO shows the government has barely made a dent in fixing our national overspending problem, and others were equally as critical of the mid‑year statement.

Writing in The Australian, Judith Sloan pulled no punches when she said:

Let’s face it, we are stuffed fiscally. … This year’s budget deficit is going to be even higher than was expected in May — up from a tad over $35 billion to $37.4bn. Over the four years of the forward estimates, the accumulated budget deficits now total $26bn more than was expected just eight months ago, an increase of nearly one-third. Yes, I did mention we are fiscally stuffed.

Economist Peter Smith conveyed an even more dire warning in his MYEFO response:

The budget is now forecast to move into surplus in 2020-21, a year later than forecast in May. Take this with a pinch of salt. The electorate will not easily give up free stuff and politicians will toe the line to get re-elected. In the end, as in Greece, it will result in misery of one kind or another; unless, of course, beneficial external developments save the day. Fingers crossed for the Lucky Country.

Do we dare mention that prior to the supposed surplus magically appearing in 2020‑21, both major parties will be fighting two elections to win over voters with debt‑funded goodies?

There are no two ways about it: MYEFO is a stinker, and Australia’s budgetary situation is dire.

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Innovation statement: picking winners revisited

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The Turnbull government has today released its long‑awaited plan to bolster Australian innovation and scientific capacities, which it hopes will unleash an ‘ideas boom’.

The innovation statement is being packaged by the government as, essentially, a four‑pronged plan to boost entrepreneurship, increase industry‑research collaboration, attracting skilled labour, and positioning government as an innovation leader (seriously!).

But getting past the spin, and not to mention the slick website, the reality is altogether something different.

With the package estimated to add another $1 billion to the overspending burden, think of the innovation statement, in truth, as a recombination of tired, old public sector strategies to override the market process by picking winners.

If anybody is looking for significant measures that bolster bottom‑up innovative activities through economic freedom, smaller government, unambiguously lower taxes for all, or even sentiments supporting the legalisation of the sharing economy, one will be out of luck if the paltry returns on the website’s search engine is of any guidance.

Another disappointing feature of the statement is that additional funding will be directed to the Australian science establishment, including the effective reversal of recent funding reductions for CSIRO, but without any detailed cost‑benefit analysis to show that the big‑spending package will be worthwhile.

All in all, mark this innovation statement down as a win for resurgent industrial policy at the expense of economic reform.

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Budget emergency continues, with no end in sight

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Various economic forecasters have been chancing their arm at predicting the federal budget position, in advance of the mid‑December Mid-year Economic and Fiscal Outlook (MYEFO) statement.

The prognosis is that the budget is still looking in a sickly state as ever:

A top budget expert warns Australia is inexorably drifting towards bigger government because the federal government appears unwilling to curb spending despite tax shortfalls that will contribute to $120 billion of budget deficits over the next four years.

Predicting deficits as far as the eye can see, Deloitte Access Economics partner Chris Richardson blames China’s slowdown and falling national income from commodities for 90 per cent of the deterioration, which has worsened the fiscal bottom line by $38 billion since the May budget.

In the mid-year update in a fortnight, Treasurer Scott Morrison will most likely unveil an underlying cash deficit in 2015-16 of $40.3 billion – some $5.2 billion more than foreshadowed in the budget and a significant deterioration from last year’s deficit of $37.9 billion, Mr Richardson estimates.

There is something of a mixed picture concerning how various economic aggregates, such as wage growth and output growth, will shape the forthcoming budgetary outlook to be revealed in MYEFO, but one thing is almost depressingly certain.

The budget emergency, which the former Treasurer Joe Hockey once diagnosed, persists as a result of overspending pressures, and without reforms to reduce expenditures the harder the task of budget repair will become.

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A costly venture into tobacco nationalisation

It has been reported by major press outlets today that the federal opposition plans to radically increase the tobacco tax burden, should it be elected to government. In the Australian Financial Review today:

The cost of cigarettes will surge to more than $40 a pack under a future Labor government and put Australia back in line with the world’s most aggressive anti-tobacco jurisdictions.

Opposition Leader Bill Shorten will announce on Tuesday Labor’s plans to increase the excise rate by 12.5 per cent for four years from mid-2017, raising an extra $47 billion over a decade for Canberra’s coffers.

According to World Health Organisation data, tobacco excise accounts for 49 per cent of the retail price of a pack of 25 cigarettes in Australia. With the GST adding another nine per cent, total taxes represent 58 per cent of retail tobacco prices.

With reports saying the proposal aims to set tobacco excise at 75 per cent of the retail price of a pack of 25 cigarettes, what we have here is little more than a cynical exercise in tobacco product nationalisation.

Governments in recent years have effectively taken complete control over the packaging attributes of cigarettes sold in formal markets, and are steadily exerting price control over the product itself.

Politicians paternalistically exhort Australians to give up their smokes, but not too many all at once because government itself is becoming hooked on tobacco revenue to close its overspending budget gap.

The continuing existence of smokers also gives health bureaucrats an alibi to control the features of tobacco products themselves, despite plain packaging proving ineffective in reducing smoking.

The irony of this situation would not be lost on most Australians.

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Public versus private wage growth is the latest budget blow

Recent data from the Australian Bureau of Statistics points to some economic developments that will make a return to balanced government budgets even more difficult.

In the three months to September 2015, private sector wage growth has grown at 0.5 per cent (or 2.1 per cent over the previous year), making it the slowest rate of growth in 17 years.

Slowing wage growth – a significant cost of employment – could encourage business to hire additional staff. But a persistent trend could hit government budgets on the revenue side (as well as adverse terms of trade effects).

Of at least equal concern is that public sector wages keep growing despite a subdued Australian economy. The ABS wage index shows public sector wages increasingly a little more rapidly, at 0.7 per cent over the last three months (2.7 per cent), adding pressure to government budgets on the spending side.

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The main culprits for the rising public sector wages bill appears to be the state and local governments. During 2014‑15 the federal government cut its wages bill by $462 million compared with the previous financial year, whereas states and councils increased their wages bill by $2 billion and $458 million, respectively.

Putting the three levels of government together, we find the total wage bill to have hit a record $141 billion in 2014‑15, up from $139 billion in 2013‑14.

Since the 2013 election the federal government has done its bit to reduce its bureaucracy and wage costs, albeit too slowly, but we also need to keep a closer eye on profligate states and local governments.

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The GST inflates the state

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The current tax debate has been dominated by calls to increase the GST burden, either by raising its rate (say, to 15 per cent) or extending its base (say, to fresh food, education, or health).

Slugging Australian consumers with additional indirect taxes has enjoyed serious momentum in the mainstream media, but thankfully there are now voices raising doubts about the merits of this tax reform exercise.

Writing in the Australian Financial Review today, former Treasury Secretary John Stone argues the contemporary GST reform argument merely represents a tax increase by stealth:

[Raising] the GST solely to reduce taxes commensurately on personal and/or corporate income would produce net benefits to productivity and growth. But the proceeds should definitely not facilitate more spending by either federal or state governments. At the political level, however, no “reform” proponent has suggested such a clean swap. Everyone stressed the need to ensure “no disadvantage to the most vulnerable Australians.”

With that “wedge” accepted, … any GST rise must result in a rise in total government spending ‑ and, hence, ultimately, a rise in total taxation. That was what happened when the Howard/Costello government introduced the GST.

The Turnbull government has, so far, appeared happy to entertain the prospect of taking Australia down the GST/VAT‑hike path, and current polls suggest the GST talk hasn’t dented the Prime Minister’s popularity.

But the crucial point here is that we’re presently not in an election campaign. If anti‑GST sentiment builds up, as it did during the 1998 election to almost fatally wound the Howard government politically, the proposed tax hike could easily be shelved.

To put this another way, it is not a foregone political conclusion at this stage that Australia will be burdened by a bigger GST.

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Inheritance tax: A harmful solution to the revenue deficiency non-problem

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The latest bad policy idea to come out of the woodwork, encouraged by the Turnbull government’s continuing refusal to rule‑in or rule‑out anything, is the suggestion that Australia reintroduce inheritance taxes.

The Marxian economist based at University of Sydney, Frank Stilwell, last week recommended a tax targeting bequests in excess of $2 million, believing ‘the wealthy … can make the payments without social distress.’

A similar suggestion was made by columnist Tim Dick: ‘inheritance tax, estate tax, death duty ‑ call it what you will ‑ a tax on large inherited windfall gains should be a part of any fair tax system.’

As recounted in this paper, Australian governments have not imposed any form of inheritance tax since the early 1980s.

This has meant, thankfully, generations of Australians have enjoyed a large measure of freedom in electing who they can pass their accumulations to, without the grabbing hand of the state taking their slice (although, it should be noted, government does this, and excessively at that, during one’s lifetime by taxing income, consumption, and so on).

These taxes are highly damaging in that they reduce the rate of investment pivotal to economic growth, and are particularly prone to tax evasion. They are also often seen as a solution for suppressing wealth inequality ‑ debatable given it would diminish incentives for people to aspire to become rich themselves ‑ but it doesn’t address several direct causes of government‑induced inequality such as land use regulatory restrictions, ultra‑low interest rates by central banks, and corporate welfare.

All in all, inheritance taxation is a terrible idea for Australia and the government should swiftly rule it out.

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Polling reveals voter hostility to GST increase

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There has been much discussion from within the Australian policy commentariat for increasing the burden of the GST on taxpayers, but it would be wise to ask what do voters think of the idea?

Of course, the Turnbull government hasn’t offered any plan, and we don’t even know if the next election will be fought on the issue, but snippets of focus group polling suggest the punters might not like the prospect of a GST rate increase or base broadening:

Swing voters remain hostile towards a GST increase, according to research that echoes rising fears among the Coalition backbench that talk of an increased or broadened consumption tax is eroding support for reform.

The focus group polling, conducted by veteran pollster Tony Mitchelmore, underscores the challenge facing the government in that it finds swing voters tend to perceive talk of an increased GST in isolation and regard it as “unaffordable”, “making the cost of living even worse”, and “hitting poor people”.

The polling was conducted after Malcolm Turnbull supplanted Tony Abbott as Prime Minister and canvassed the views of marginal seat voters in western Sydney who switched from Labor to the Coalition at the 2013 election.

The partisan cynic might counter by saying the pollster concerned has been involved in Labor Party campaigns, but this doesn’t diminish the veracity of the basic point that the GST isn’t harmless, and that raising it further will only cause greater harm. It has been estimated an average family could be worse off in the order of thousands of dollars annually.

As I have said many times, it is best not to go down the European path by letting the GST‑increase genie out of the bottle and it seems the voters know this, too.

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ASIC’s plan to put warning labels on financial products

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It has recently been reported that financial regulator the Australian Securities and Investments Commission (ASIC) wishes to apply warning labels, not unlike those seen on cigarette packets, to various financial products.

Investor warnings could be slapped on a host of complex and risky financial products in the same way as the graphic warnings on cigarette packets, under new safeguards being considered by the corporate regulator. … ASIC could use the power to impose conditions on risky investment products such as restricting access for self-managed super funds, requiring retail investors to obtain financial advice before they could invest or slapping warnings on product disclosure statements and prospectuses for example telling investors, “Your capital is at risk”.

This kind of proposal, when bureaucrats elect to involve themselves in consumer calculations about the balance between risk and return, is plainly inconsistent with a liberal society in which we are meant to lean toward dignifying people with the capacity to make their own financial choices.

In this case, ASIC would privilege themselves with standing in for consumers when making decisions balancing the costs and benefits (as filtered by risk-return considerations) when purchasing certain financial products. This substitution of political for individual decision making is, if nothing else, particularly elitist in its character.

Another concern would be that consumers might well elect to take government recommendations about risk assessments at face value, depriving themselves of learning opportunities about what financial product configurations best suit their needs.

As Chris Berg noted in his book, The Growth of Australia’s Regulatory Statethe trouble with mega-regulators such as ASIC is that they see very few limits to their regulatory domain and this leads to undue costs imposed upon the productive economy.

When ‘everything is on the table’ in policy terms is the time many illiberal ideas come out into the open. Let’s hope Treasurer Scott Morrison has the energy and foresight to prevent ASIC indulging any further with this particularly illiberal idea.

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New gambling tax thought bubble would hurt more than help

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A common complaint about gambling taxation levied by the states and territories is that by virtue of receiving over $5 billion per annum from these taxes, governments become addicted to gambling itself.

But with the federal government itself crippled by a persistent overspending problem, it was only a matter of time before someone in Canberra would float thought bubbles to take their slice of the gambling revenue pie.

And so it is with news Nationals senator Bridget McKenzie is suggesting a new federal gambling tax:

The guts of the proposal would see a uniform tax applied to the gaming industry, with revenue to be distributed across the states that currently regulate the industry. Some revenue would be reserved for regional development projects and for harm minimisation programs.

Based on the reporting, and a reading of her submission to the Tax Review in June this year, the proposal for additional taxes on gamblers seems predicated on a desire to quell online gaming – particularly the sports betting market – presently accessed by Australians.

Regardless of whether the betting games are being played in a hotel or a casino, or on somebody’s smartphone, the fact is that taxes on gambling tend to be regressive in their incidence.

When Prime Minister Malcolm Turnbull mentions that “fairness” ought to be a criterion when judging the efficacy of policy change, it becomes entirely appropriate to ask if a proposed new federal gambling tax is at all reasonable.

Senator McKenzie might decry the lack of a “national approach” to the gambling issues that concern her, but intimating that federal intervention in this area will come without cost remains very much an open question.

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