What's happened to the cost of living is trickier than you think

It’s been a year of wearying in the fight against inflation. But if you think you know what it all proves, you’re probably kidding yourself. The first mistake is to subject it to too much rational analysis.

While voters in Oz complain incessantly about “the cost of living”, the mug punters who put Donald Trump back in the White House were said to be on about “inflation”. Aren’t they the same thing? Well, maybe, maybe not.

A penny dropped for me when I heard some woman in America justify voting for Trump by saying that the prices went up and they never came back down. What? Since when does inflation go away because retail prices have come back down?

Well, only in economics textbooks. In the real world, inflation is the rate of increase in prices, and you fix it not by reducing the level of prices, but by reducing the rate at which they continue rising.

So what was that woman on about? Don’t ask an economist. Ask a psychologist, however, and they’ll tell you that the reason people give you for doing something – buying this house rather than that one; voting for Trump rather than Joe Biden – isn’t necessarily the real reason. Indeed, the person may not actually know why they jumped the way they did.

Their subconscious mind made a snap decision to favour A rather than B and then, when asked why, their conscious mind came up with a reason they thought would sound plausible. The woman’s subconscious may simply have liked the look of Trump rather than Biden. Or maybe a lot of the people she knew were voting for Trump, so she did too.

Biden and his supporters – plus many rational economists – couldn’t see why everyone was so upset about inflation. The rate of inflation had come back a long way, wages were growing solidly and all without unemployment worsening much. Pretty good job, I’d say. What’s the problem?

Ah, said the smarties, you don’t understand that people care far more about inflation than about unemployment. Inflation hits everyone, whereas unemployment affects only a few.

Is that what you think? If so, you’re probably too young to know what happens in a real recession. When unemployment is soaring and the evening news shows pictures of more workers getting the sack every night, believe me, the punters get terribly frightened they may lose their own job.

It’s a Top 40 effect. No matter how few tunes are selling, there’s always one that’s selling a fraction more copies than the others. That’s what’s topping the pops this week. If people aren’t worried about their jobs, they can afford to be worried about high prices. When they are worried about their jobs, they stop banging on about prices.

This means the managers of the economy – and the government of the day – are often in the gun. Whatever dimension of the economy, and people’s lives, isn’t travelling well at the time is what the punters will be complaining about.

But also, it’s worth remembering that whenever pollsters ask Aussies what’s worrying them, “the cost living” always rates highly – even at times when economists can’t see there’s a problem. Why? Ask a psychologist. It’s because retail prices have “salience” – they stick out in the minds of people who shop at the supermarket every week.

The one thing voters know is that prices keep rising. And they’ve never liked it. They don’t like it whether prices are rising by 2 per cent or 10 per cent – and the highly selective consumer price index they carry in their heads always tells them it’s nearer 10 per cent than 2.

Why? Salience. They remember every big price rise indelibly, but soon forget any falls in prices. And get this: in their mental CPI, all the prices that don’t change get a weighting of zero.

When Australian voters complain about the “cost of living” and American voters complain about “inflation”, are they talking about the same thing? Logically, they shouldn’t be, but actually, they are.

To a rational economist, determining what’s happening to the cost of living involves comparing what’s happening to prices on the one hand with what’s happening to wages and other income on the other. Strictly, the comparison should be with after-tax income.

But that’s not how voters in either country see it. They keep prices in one mental box, but wages in another. The pay rises they get are taken for granted as something they’ve earned by their own hard effort. But then, when I got to the supermarket, I discovered the cheating bastards had whacked up all their prices. I’ve been robbed!

Does this mean workers don’t mind if their take-home pay isn’t keeping with prices? Of course not. They feel the loss; they’re just confused about what’s causing it. I think that, for many people, what matters, and sticks in their mind, is how often they run out of money before their next payday.

My theory is that, because wages rose a bit faster than prices for so many years, many people have developed the unconscious habit of spending a little more each year. But when wages stop rising a little faster than prices – as they have done since March 2021 – people do feel it. They look around for someone to blame and the first thing they see is Woolies and Coles.

But there’s one factor causing pain that’s so well concealed that few people – even few economists – have noticed. One reason take-home pay has fallen well behind prices – a reason the unions and Labor thought was a great thing, and the Morrison government was too weak-kneed to stop – was the mandatory rises in employers’ contributions to their workers’ superannuation savings, which have lifted it from 9.5 per cent of your wage in 2021 to 11.5 per cent in July this year, and will take it to 12 per cent in July next year.

To the naked eye, it’s the employers who’re paying for this. But there’s strong evidence that the bosses reduce their ordinary pay rises to fit. If so, this will be a pain wage earners are feeling without knowing who to blame.

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Why bribery is key to boosting our economic prosperity

By MILLIE MUROI, Economics Writer

Of all the incentives in the world, money must be among the most powerful. Since its birth thousands of years ago, dosh – chasing it, saving it, and paying it back – has driven us to ruin but also some remarkable feats. So, it shouldn’t be any different when it comes to the “p” word.

Before your eyes glaze over at the mention of productivity, you should know that had it improved more in recent years, we’d all probably have a lot less to complain about when it comes to issues such as cost of living – and the Reserve Bank wouldn’t be so worried about wage rises feeding into inflation.

What if I told you that boosting our productivity starts with bribing our state governments?

In a speech to the Queensland Economic Society of Australia in Brisbane last week, economist and former corporate watchdog boss Karen Chester identified one of the biggest hurdles to lifting our living standards: a problem called “vertical fiscal imbalance”.

Here’s the issue. Some of our most fundamental needs are taken care of by the state government: education, health, transport, and law and order to name a few. This all requires mountains of cash which the state governments have little ability to raise.

It’s the federal government that has the power to raise a lot of money – mostly through taxation, meaning there’s a mismatch: state governments might be tasked with the big asks, but it’s the federal government that has the cash to splash. As Chester puts it: “The states wear the political pain and the budget loss in doing the right thing.”

Money can’t buy happiness or solve all our problems, but without it, it’s hard to pay for – or incentivise – fixes in some of our biggest sectors, including boosting productivity.

Our productivity improves when we increase the quantity or quality of the goods and services we produce with a given set of resources, such as workers. Making people work longer hours doesn’t count towards improving productivity, but using better technology or other innovations does.

The reason we care so much about productivity is that it’s the main way capitalist economies have kept making us better off – at least materially – over the past few centuries. Innovations from the lightbulb to the assembly line to the internet have made us faster and better at doing our jobs.

Right now, we’re in a productivity slump. Despite a record-breaking increase in hours worked in 2022-23, the amount we’re producing hasn’t been climbing all that much.

Over the long-term, Australia’s productivity has grown by about 1.3 per cent every year. In 2022-23, our labour productivity – the amount of GDP we pump out for each hour we work – actually fell 3.7 per cent.

While pay rises are awesome, there’s a problem when we get them without productivity growth as we’ve had recently: it can feed into inflation. Why? Because it means we push up the cost that goes into providing goods and services without much change in how much we’re actually producing.

So, how do we push up productivity? And how do we fix the vertical fiscal imbalance problem strangling state governments’ ability to take some bold action? Chester says one way is for the federal government to take over chunks of the states’ existing debt which they’ve used for things such as building roads and other public infrastructure.

Why should the federal government scoop up this debt which they aren’t responsible for spending? Because it significantly cuts states’ annual interest bill and boosts their ability to borrow more for new projects. Why is this? Because the federal government can borrow at a lower interest rate than the states – mostly because those who lend to them see a smaller risk of the federal government defaulting, meaning it has a better credit rating.

The total amount being borrowed by the public sector can stay the same but the interest paid on it can be squashed down.

Now, this transfer of debt has to come with some strings attached. Namely, it should be conditional on the states making progress in implementing agreed reforms.

Chester says these reforms should be aimed at resuscitating flat-lined productivity through changes such as tax reform, jack-hammering entrenched disadvantage through measures such as more social housing for people with chronic and debilitating mental health, and relieving structural inflation pressures such as those arising from natural disasters and soaring insurance costs.

Instead of the federal government spending 96 per cent of its natural disaster budget on mopping up the mess, it should give states more money (the amount could also be matched by the states) to spend on mitigation efforts: reducing the risk of future harm from natural disasters such as floods, cyclones and bushfires. This would also put a brake on surging insurance costs.

It’s not the first time we’ve had the idea to give states more headroom to make meaningful reform. In the late 1990s, there were three tranches of payments from the Australian government to states and territories based on their populations – and only if they made satisfactory progress on their reform commitments.

These payments, known as national competition policy payments, cost roughly $1 billion annually (in today’s terms) over six years. But they helped push through reforms such as removing restrictions on retail trading hours, setting up the national electricity market and abolishing price controls on dairy. The Productivity Commission estimates the payments helped lift GDP by at least 2.5 per cent.

By comparison, Treasurer Jim Chalmers last month set up a $900 million fund to prod states and territories into enacting productivity-boosting reforms: a baby step forward – especially, as Chester says, because we confront a much bigger to-do list than we did a few decades ago.

The idea to transfer debt from the states to the Commonwealth government would be a lot cheaper than the old competition policy payments – and it’s a huge opportunity to make big steps forward in improving productivity and wellbeing.

Why do we need this? Because of the sad truth that the vertical fiscal imbalance we’ve talked about has sunken the states into a mentality where they don’t want to make any reforms that the Commonwealth government wants them to make unless they’re bribed into doing so.

Chalmers this week said his government was bold and reforming. But reform needs to take foot in some of our most consequential sectors including health and education. To achieve this, we need states to buy into the vision and, most importantly, act on it.

The good news? Chester says implementing the buyback program is relatively quick. We just need the guts to do it.

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Don't worry, you'll have enough in retirement ... with one big proviso

Sometimes I think I should appoint myself chief ageing reporter for this august organ. Why? Because I’m the only one left around here to know about – and care about – what’s happening to the oldies. But the truth is it’s not a lot more oldies we need to attract to secure this masthead’s future. That’s why we’re training up bright young economists such as Millie Muroi.

But, while we’re having old folks’ day, let me ask you a personal question: are you sure you’ve saved enough to ensure a comfortable retirement? Now, you probably hate being asked that question. Your conscience has long been telling you the answer’s most likely “no”. Ask someone from the superannuation industry, and they’re almost certain to leave you feeling inadequate.

But if you think that’s what I’m on about, you’re wrong. Prompted by an eye-opening article by the Grattan Institute’s super expert Brendan Coates, on my second-favourite website, The Conversation, I’m here to tell you the opposite: the independent experts say the superannuation system will ensure most people retire with enough superannuation to live comfortably and, indeed, many will have more than they need.

It’s only natural to fear you haven’t saved enough, but the sad truth is that the financial market people who earn their living by managing all the money we save via super have gone for many years playing on our fears, giving us a quite exaggerated impression of how much we’ll need.

If you’re trusting enough to ask the Association of Superannuation Funds lobby group how much a couple would need to live at a comfortable standard, it will tell you they’ll need an income of more than $73,000 a year, which would require a super balance of $690,000.

What the lobby group doesn’t tell you is that this “comfortable” standard is higher than what 70 per cent of couples enjoy while they’re working. Nor does it tell you that the only way to have more in retirement is to have less while you’re working.

It makes sense to use super to shift some of your income from your working years to the years when you’re not working. But is it sensible to shift so much you’re denying yourself during your working life so you can have a much higher standard of living in retirement?

Whereas the lobby group represents the interests of the people running super schemes, Super Consumers Australia represents the interests of their members. It calculates that couples who want a “medium” standard of living in retirement – that is, where they’re able to spend more than the bottom half of retired couples – need a super balance of about $370,000 on retirement, which would let them spend $60,000 a year.

Only if a couple wants to be in the top 30 per cent of retirees, able to spend $80,000 a year, would they need to retire with a super balance a bit over $1,000,000.

Do these more honest estimates strike you as too low? That’s probably because people of working age tend to overestimate how much they’ll need in retirement. Coates lists the many savings you make after you retire.

For a start, you don’t have work-related expenses. And retirees have more time to do things for themselves. Don’t forget that most people retire on some combination of super and the age pension. Remember too that, rightly or wrongly (wrongly in my book), the aged pay much less tax on their income than workers do. This makes a big difference to how much you need to live on.

Pensioners get discounts on council rates, electricity, medicines and public transport, and other benefits. These can add up to thousands of dollars a year. And whatever income you need at the start of your retirement, it typically falls as you get older. Coates says retirees tend to spend 15 to 20 per cent less when they’re 90 than they did when they were 70.

I don’t know if you’ve noticed in your own parents – I certainly did in mine – that oldies reach a point where they could afford to go out and spend money (another overseas trip, for instance) but they don’t feel like it. It surprises many that it’s common for oldies to save part of their income, simply because they didn’t have a reason to spend it.

Of course, deteriorating health stops people from spending. But most health and aged care costs are picked up by the taxpayer.

All this says people don’t need to spend as much as you may think in retirement. But everything I’ve said comes with a big proviso: that retirees own their own home. It’s been true for many decades that the great majority of retirees own their homes outright. That’s still true, though less so. These days it’s more common for people to retire still owing money on their mortgage. In coming decades, however, it won’t still be true that most retirees own their homes.

Meanwhile, I’m definitely not saying that people who have to rent in retirement have it easy. Far from it. But when you’re a home owner in retirement your spending on housing is far lower than for people still servicing a mortgage or renting.

The Retirement Income Review conducted in 2020 for the Morrison government judged that anyone with retirement income equivalent to between 65 and 75 per cent of their pre-retirement income would be able to live comfortably. It also found that, by this standard, most retirees will be doing fine.

But that was when compulsory employer contributions to super stood at 9.5 per cent of your wage. By now they’re 11.5 per cent and will rise to 12 per cent in July.

That’s why I say that those retiring in coming years won’t just be comfortable, they’ll be rolling in it.

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Oligopolists gouge power and gas prices, Albanese cops the blame

If, as seems likely, Anthony Albanese and his government lose seats at next year’s federal election, one thing we can be certain of is that the nation’s economists and econocrats won’t be admitting to their not insignificant contribution to Labor’s setback.

Economists have such a limited understanding of how the behaviour of the real-world economy differs from the economy described in their textbooks and measured in their econometric models, and are so woefully bad at predicting where the economy is headed, that their profession has become hugely defensive. And so, like Peter Dutton, they never ever admit to getting anything wrong.

It seems a safe bet that, should Labor’s vote be down, it will be for one overwhelming reason: the voters’ ire at what they call the “cost-of-living crisis” – the sudden surge in retail prices in the aftermath of the pandemic.

Many factors have contributed to that surge, but the Reserve Bank attributes much of the responsibility to the authorities’ excessive stimulus of the economy during the lockdowns. This, by causing the demand for goods and services to outstrip the economy’s ability to supply them, allowed businesses everywhere to get away with whacking up their prices.

Economists regard such price rises as completely normal and unexceptional, part of the God-ordained mechanism by which market forces return the economy to equilibrium. The public, however, sees such rises as utterly opportunistic and illegitimate, condemning them as “price gouging”.

But while the Reserve has frequently offered this “demand-pull” explanation as justification for its protracted increase in interest rates, it’s been much less willing to acknowledge that it was among the “authorities” who stuffed up.

Of course, the retail prices of some goods and services have made a much bigger contribution to the higher inflation rate than others have. And a prominent role has been played by the prices of electricity and gas. Over the three years to June this year, electricity prices rose by 20 per cent and gas prices by more than 30 per cent.

We’ve been told the leap in energy prices has been caused by Russia’s invasion of Ukraine in February 2022. But as new research by the Australia Institute’s David Richardson reveals, that’s just a tiny part of the story.

The truth is that electricity and gas prices have been rising much faster than the overall consumer price index since at least the end of 2007, with prices really shooting up over the past four years.

Richardson has used the latest annual reports of AGL and Origin Energy to derive some astonishing figures for what consumers are paying for electricity and gas. On average, he calculates, AGL’s electricity costs households $377 a megawatt hour, while Origin households pay $343 a MWh.

So what are the costs that cause those electricity prices to be so high? He says the total retail price consists of five components. First is the cost of the generation of electricity by power stations, including the cost of the coal and a bit of gas used to power the generators.

Second are the “network costs” of moving the electricity from the power stations to homes, businesses and offices, first transmitted across the countryside by high-voltage power lines, then distributed by “poles and wires” at the local level.

The third component is an annual allowance for the depreciation of all the equipment, which must eventually be replaced. Fourth is “other costs” incurred by the electricity retail companies – most of it being the cost of advertising – and fifth is the retailers’ profit before interest payments and tax.

Now get this. Richardson calculates that, for every $100 paid by a retail customer of AGL, a mere $12 goes on generating the electricity. So much for the evil Russian invaders being the cause of the problem.

Next come network transmission and distribution costs of $34, $4 for depreciation and $15 for advertising and other retailing costs. Which leaves AGL’s retail company with a profit before interest and tax of a measly $35.

What! About 35 per cent of our bill goes on profit to the retailer? Woolies and Coles eat your heart out. Qantas – you’re not really trying.

According to Richardson’s calculations, Origin’s retail profit share is a bit lower at 29 per cent. Turning from electricity to gas, he puts AGL’s retail profit margin at 36 per cent, and Origin’s probably a bit higher.

Richardson’s conclusion that consumers are being gouged in the electricity market is consistent with the findings of Professor Allan Fels in his report for the ACTU earlier this year. Fels made the economists’ point that every company’s electricity is identical. It’s also something that every home must have.

So why do retailers need to spend so much on advertising, “inappropriate door-to-door marketing activities” and other forms of “obfuscation”, Fels asked.

And Richardson’s figuring reveals something else. The overcharging of household customers of electricity and gas involves requiring them to cross-subsidise AGL and Origin’s business customers. They pay prices for electricity and gas that are about half what household customers pay. And the profit margins extracted from business customers are tiny.

But why should economists and econocrats share the blame for all the inflationary price gouging that’s helped make the Albanese government so unpopular? Because all the malfunctioning we’re seeing has occurred under the National Electricity Market that the econocrats designed and still regulate, and assured us would be a great reform.

The wonder-working NEM has turned five state-government-owned monopolies into a national oligopoly dominated by just three huge operators – AGL, Origin Energy and the foreign-owned and tight-lipped EnergyAustralia. The three are highly “vertically integrated”, meaning they each own big slabs of the market’s three levels: generation, transmission network and retail provision.

The NEM is owned by the five state governments plus the feds – that is, by everyone and no one – and regulated by two separate government authorities using a rule book running to thousands of pages. But it seems to have been captured by the oligopolists.

The economists have done little to stop consumers across the nation from being grossly overcharged for electricity and gas. But not to worry. It’s only some politician that will be left carrying the can.

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Trade deficits don't have to be wicked, unless you believe Trump

By MILLIE MUROI, Economics Writer

While the US president-elect would have you believe a trade deficit is a wicked thing, it’s not a hard and fast rule. In fact, it can actually be good. We’ve become used to the word “deficit” being synonymous with “bad” (think about how many governments highlight when they’ve got a “budget deficit” – not a lot!). But deficits don’t have to be bad.

Since late 2016, Australia has had a run of trade surpluses, meaning the value of all the goods and services we export has been bigger than the value of all those we import. That doesn’t make us any better than countries like the US which have run a trade deficit every year since the 1970s.

Generally, countries are better off when they’re importing things other countries can make more efficiently and cheaply. For Australia, that includes cars, electronics and pharmaceuticals. If we tried to make more of these things ourselves, just to improve our trade balance, we’d be wasting resources we could use to tinker away at other things we’re better at making.

We can always buy, more cheaply, the things we’re worse at making – unless of course we’re trumped by tariffs (which, note to Trump, almost always leaves both countries worse off).

A “current account” deficit is not a bad thing either. Australia had one for more than 40 years, until September 2019. The current account records how much is flowing in and out of Australia when it comes to the value of goods, services and income.

We learnt last week that in the latest September quarter, for instance, the value of our exports ($156 billion) minus the value of our imports ($153 billion) gave us a trade surplus for the quarter of about $3 billion. And the value of interest and dividend payments we were paid by foreigners ($28 billion) minus what we paid them in interest and dividends ($45 billion) gave us a “net income deficit” of about $17 billion.

Combining the net income deficit and the trade surplus leaves us with a deficit on the current account in the September quarter of about $14 billion.

It’s one of the two big parts of what’s called the “balance of payments”: a map of Australia’s economic transactions with the rest of the world.

The balance of payments records the flow of money from everything including exports and imports of goods, services and financial assets (such as shares and bonds) – even transfer payments like foreign aid. Basically: payments to foreigners and payments from foreigners.

Of course, by “Australia’s transactions” we mean those made by Australian residents. Loosely, this means people who live here, businesses operating here, and our governments, which all do deals with the rest of the world.

Now, back to the current account. Why has Australia recorded so many current account deficits?

Historically, we’ve tended to import more than we export, and we’ve paid more in dividends and interest to foreign owners and lenders than they have to us for our foreign shareholdings and loans.

Whenever we import, or pay income (such as dividends) out to people in other countries, it’s recorded as a “debit” in our current account and an equal “credit” in what’s known as the “capital and financial account” – which we’ll come back to. When we export, or receive income from overseas, it’s a “credit” in our current account and an equal “debit” in the other account.

Because of this, the two accounts are, in theory, meant to balance out (because of measurement issues, they usually don’t). When the debits exceed the credits, an account is in deficit. When the credits exceed the debits, it’s in surplus.

The main reason we’ve run so many current account deficits through the years is that we’ve tended to have a heap of investment opportunities (more than we could hope to finance with our own savings).

The inflow of foreign capital meant we were able to grow our economy, paying out dividends and interest to foreign investors for their help. Now, where do we record all this investment?

Enter the capital and financial account. The financial account takes up the lion’s share of the combined bucket. It records any transactions involving assets and liabilities changing hands. This includes things like direct investment (long-term capital investment such as buying machinery or when an investor owns 10 per cent or more of a company through shares), and portfolio investment (smaller purchases of shares in a business, or bonds).

When we sell foreigners shares in an Aussie business, borrow from them or sell them some real estate, that’s a credit in the capital account. When they sell us shares or land or lend us money, that’s recorded as a debit.

The much smaller capital account, meanwhile, captures transactions where nothing tangible is received in return: things such as debt that has been forgiven, foreign aid to build roads, or transactions involving intangible assets (such as trademarks or brand names) or rights to use land.

For some time in the past decade, we briefly went into a current account surplus and a financial and capital account deficit. This was partly thanks to rapid industrialisation in China which turbocharged our exports of minerals, energy, education and tourism (remember: credit in the current account, debit in the financial and capital account), but also our increased tendency to save and cut down our local investment spending on new housing, business equipment and public infrastructure. At the same time, the proportion of our savings going into superannuation, which invests partly into shares of foreign companies, had grown.

Recently, we’ve switched back to running a current account deficit. Is this bad? Not necessarily. It’s partly due to a continued fall in commodity prices such as iron ore and coal, for which demand has weakened, which is bad news for our exporters. But we’re also paying more income to non-residents (remember: this is mostly because they’ve been investing or lending to us, usually to help us grow by helping to finance our investment spending).

But the current account deficit is also thanks to factors such as a rise in service imports. We’ve been travelling more, meaning our spending overseas has increased. A bad sign? Hardly.

So, while we have a current account deficit, that doesn’t automatically mean we’re doing badly. Deficits can help us grow and surpluses don’t always leave us better off. Trump should be careful playing his cards.

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We've entered the era of gutless government

Sorry to tell you that I’m finishing this year most unimpressed by Anthony Albanese and his government. I’m still reeling from his last two weeks of parliament, pushing through 45 bills just to show how much he’d achieved and give himself the option of calling an election early next year should he see a break in the clouds.

Some of the measures pushed through at breakneck speed merited much more scrutiny, while some reforms that should have been put through were abandoned. One measure he’d hoped to rush through, fortunately, didn’t make it.

It all left me more conscious of his government’s weak performance, capping off 2 ½ years in which Labor turned its mind to many of the problems left by its Liberal predecessors, did a bit to help, but never nearly enough.

Why not? Because there were powerful interest groups Labor didn’t want to offend. And because it lives in fear of what the Libs might say. The two-party duopoly has painted itself into a corner, with neither side game to do what needs to be done.

Take the greatest threat to our future: climate change. Labor was elected in May 2022 partly because it seemed to be genuine in its determination to see Australia play its part in reducing greenhouse gas emissions, whereas the Coalition seemed only to be pretending to care.

In government, Labor kept its promise to legislate its target of reducing emissions by 43 per cent by 2030. It strengthened its predecessors’ “safeguard mechanism”, limiting emissions by major industries. It made speeches about how nice it would be for Australia to become a world superpower, using clean electricity to manufacture green iron, green aluminium and other things, then export them to Asian countries with far less sun and wind than we have.

So clearly, we’ve now accepted that our industries exporting coal and natural gas will start to phase down and out. What? Gosh no. No, no, if the coal industry wants to extend its mines, that’s fine. If the West Australians want assurance of the need for offshore gas beyond net zero emissions in 2050, that’s fine.

Under the shiny new slogan of Nature Positive, Labor had promised to end further degradation of our natural environment, including by setting up a federal environment protection authority. This was opposed by the Coalition, proudly proclaiming itself to be the mining industry’s great friend, but the necessary legislation could go through thanks to a deal Environment Minister Tanya Plibersek had reached with the Greens.

But then the WA premier phoned Albanese to advise that the state’s miners were most unhappy about further efforts to protect the environment, so the deal was squashed. But not to worry. Should Albo decide against an early election, the bill would be back on the drawing board when parliament resumed for a short sitting in February.

In his timidity, Albanese has introduced to politics the each-way bet. Strong support for the move to renewables? Of course. Continuing support for the use and export of fossil fuels? Of course. Welcome to the era of gutless government.

From the greatest threat to our future on this planet to the greatest example of populist cynicism. To great applause from voters – and with the whole world watching this Aussie reform, up there with the secret ballot – Albanese rushed through his bill banning children under 16 from using social media.

Had he figured out a foolproof way of enforcing the ban? Could the kids soon find ways around it? Would we all be forced to provide trustworthy tech giants such as Facebook and TikTok with documentary proof of our age? No. Let’s just push the bill through and worry about such details later. And never mind the experts saying what’s needed is to train our young people how to detect misinformation and disinformation.

This is politicians acting on their cynical maxim that “the appearance is the reality”. They don’t need actually to fix a problem, just create the appearance of fixing it. Just do something the unthinking punters, and the shock jocks who lead them on, happily imagine will fix things.

The promised measures that were dropped from Albanese’s frenetic bill-passing included action to curb the advertising of sports gambling and the plan – announced in February last year – to raise the tax on superannuation balances over $3 million (a needed reform despite what it would have cost a poor battler such as me).

One bit of good news was the disappearance of Labor’s bill to reform election fundraising. Although it included various valuable changes, its claim to be taking “big money” out of politics was a thinly disguised plot to knock out Clive Palmer and the teals’ funding from Climate 200 while ignoring the political duopoly’s funding from the unions and big business.

Fortunately, the duopolists couldn’t agree to push it through.

The sad part of Albanese’s unimpressive performance is that there’s little reason to believe the Peter Dutton-led Coalition would do any better at fixing the many problems the Morrison government left for Labor to deal with. One of which, of course, was the cause of what soon unfolded after the May 2022 election to become the “cost-of-living crisis”. Much of the surge in prices came from overseas disruptions to supply. The rest, according to the Reserve Bank’s reasoning, came from the stimulus applied by the Morrison and state governments that turned out to be far more than needed.

Albanese and Treasurer Jim Chalmers have done a good job in managing the unfinished return to low inflation, but they have no control over when the Reserve will decide to start cutting interest rates. If, as seems likely, Labor loses seats at next year’s election, that will be voters punishing it for the cost of living, over which it had little control, not for its weak performance in so many other areas.

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The Australian economy is behaving strangely

By MILLIE MUROI, Economics Writer

Australian consumers are usually the engine room of the economy. Every extra dollar we spend drives economic growth higher – and there’s so many of us that we’re usually a force to be reckoned with. In the three months to September, though, something strange happened.

We had more income to splurge but shied away from spending much of the extra cash according to national accounts data from our number-crunchers at the Australian Bureau of Statistics this week. Instead, a bigger share of our pay made its way into piggy banks, mattresses and bank vaults.

Households, while still accounting for nearly half the economy, took a back seat. So, how did the Australian economy still manage to step up?

The size of our economy can be measured in three ways: output (the amount of goods and services we pump out), income (the amount of profit pocketed by businesses and pay that has flowed into households) or by looking at all the spending that happens.

That last one includes money spent by the government, businesses, foreigners (buying up our exports) and our heavy lifters: households. Since the mid-2000s, household consumption has accounted for at least half the size of our economy. It’s only this September quarter that household spending dropped to less than half of gross domestic product (GDP).

Does that mean households are struggling? Well, it depends on how you look at it.

If people’s shopping receipts are any indication of their living standards, you could argue things are looking pretty stagnant. Household spending came in flat at 0 per cent growth.

And, in fact, if we look at spending per household, we’re grinding backwards. Why? Because our population has been boosted by migration. While overall household spending has stayed flat in the September quarter, we’re individually spending less than we were earlier in the year. And that’s after we saw total household spending growth turn negative the previous quarter.

Growth for the wider economy has also been slipping into reverse when we account for population growth. Looking at economic growth per person, we’ve been sliding backwards for nearly two years.

Back to households, though. It’s not all bad news. We actually spent a touch more on discretionary goods and services – things we may not need but are nice to have, such as new clothing and recreation. Spending on essentials, meanwhile, fell. We spent more on things such as rent and staying healthy, but dished out far less on electricity and gas thanks to a warmer-than-expected winter, and partly thanks to the government’s energy bill relief that took the heat out of our energy bills.

Household disposable income – the amount we have left over to spend or save after paying our taxes – also grew. Not only did our income (at least collectively) grow by 1.3 per cent, mainly thanks to pay rises, many of us also had our taxes slashed, too. Stage 3 tax cuts came into play in July, pushing down the income tax we paid during the quarter by 3.8 per cent. Those who had money stashed in the bank also got a boost from interest rates on deposits.

But we didn’t do what a lot of economists (and the Reserve Bank) expected us to do – or at least not to the degree they thought we would. Instead of going on a spending spree with our extra cash, we squirrelled a lot of it away. It’s common for people, especially when they’re worried about their finances, to take a while to work out how they are going to spend their extra money.

The household ratio of saving to income – which tells us how much of our disposable income we stowed away for a rainy day – grew from 2.4 per cent last quarter to 3.2 per cent. Since our incomes grew, but we weren’t spending any more than we were in the June quarter, the slice of our pay going towards savings increased.

The saving-to-income ratio is still much lower than the 10 to 20 per cent we were at during the pandemic when the rivers of stimulus payments gushed in, and our spending options were locked down, but it has been climbing back from a low of 1.5 per cent in March last year.

Of course, the money we save ends up sitting idle – at least while it stays in our coffers. We don’t spend it, so it doesn’t flow back into businesses, and doesn’t stimulate the economy to grow.

But our decision to save a lot of the money we got to keep thanks to tax cuts doesn’t explain the slow – but positive – upward crawl of the economy. If households didn’t spend any more than they did in the previous three months, then how did the economy still manage to expand?

A big driver of our economic growth was spending – not by households or businesses – but by the government. It contributed 0.6 percentage points to growth in the three months to September. Part of this was thanks to a pick-up in public investment by state and local governments on infrastructure projects such as roads and renewable projects.

But a big chunk of the government spending was on cost-of-living relief, such as the energy rebates, which basically just shifted what would have been paid by consumers to cook and heat their homes, to the government’s shopping list. It meant overall government spending hit a near-record-high share of the economy at more than 28 per cent.

Since overall economic growth only came in at 0.3 per cent (notably lower than the 0.5 per cent economists had been expecting), government spending made the difference between our economy shrinking and treading water.

There were also other factors with a smaller impact on growth, including a slight uptick in the construction of new homes, which pushed up private investment spending. There was also a fall in inventories (generally stock held by companies) and net overseas trade – as imports fell and exports grew – which contributed 0.1 percentage points to GDP.

Although the economy’s usual star player – households – spent less than expected in the September quarter, there are signs things will pick up in the final three months of the year. For one thing, retail trade picked up 0.6 per cent in October, even before all the major discounts started kicking in last month, coaxing customers (and their wallets) out for Black Friday and Cyber Monday.

So, how does this position the Reserve Bank?

While economic growth and household spending growth are running below its forecasts, the bank has previously said the level of demand – how much we’re spending now as opposed to how fast our spending appetites are growing – is still too high unless we improve how much (or how efficiently) we can produce things.

It’ll take more weakness in spending, or more progress on slamming a lid on inflation, for the Reserve Bank to start cutting rates. So far, Australian households – and their spending – seem stuck in the holding pen.

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How Albanese is tighten up on tax-dodging multinational companies

By MILLIE MUROI, Economics Writer

Earlier this week, a crucial piece of legislation made its way through parliament. It didn’t receive a lot of fanfare, but it’s a long-overdue tweak to our tax system.

You probably know companies such as Amazon, Apple and Microsoft. They’re multinational corporations that make hundreds of billions of dollars in profit every year, some of it right here in Australia – and probably from you as a customer.

Yet, the taxes they pay are not always proportional to the profit they’re pocketing. That’s something laws passed earlier this week seek to change.

Apple raked in an income of more than $12 billion in the 2022-23 period, according to the government’s transparency report. But it only paid 1 per cent tax on that income. How is that possible?

While the company tax rate in Australia is 30 per cent for most businesses with a turnover of $50 million or more, firms can reduce their taxable income and, therefore, the amount of tax they pay.

Some deductions are fair and reasonable: for example, claiming deductions for day-to-day business expenses including materials you need to supply a good or service. Other strategies are … questionable.

A business like Apple may not be breaking the law, but it can take advantage of different tax rates across the world.

Australia’s company tax is among the highest in the world. According to the Organisation for Economic Co-operation and Development, we were only trumped by one country: Colombia, where companies paid about one-third of their income in tax.

By contrast, countries such as Hong Kong, Singapore and the United Arab Emirates have much smaller company tax rates, making them attractive tax havens. Companies can sneakily shift their income to these countries or use cunning tactics to play the system to their favour.

Former economics professor turned Assistant Minister for Competition, Charities and Treasury Dr Andrew Leigh says the share of multinational companies’ profits passing through tax havens has soared. Back in the 1970s, virtually no multinational profits went through tax havens, he says. “Now it’s up to about 40 per cent.”

Stronger reporting requirements and wider availability of data have made it easier to spot when a company is skirting the rules, acting as a deterrent for businesses hoping to fly under the radar with sneaky tactics.

And in 2017, the Australian Taxation Office found itself in a legal battle in the ongoing crusade against companies paying less tax through loopholes in the system, coming out on top against resource giant Chevron.

The Federal Court ruled against Chevron’s use of an arrangement called related-party finance – commonly used by multinationals to reduce the tax they have to pay in Australia.

It’s where the local entity of a multinational firm borrows funds from its offshore counterpart, which sets much higher interest rates than would usually be reasonable. That interest flows back to the offshore part of that company and allows the Australian branch to claim higher tax deductions because interest payments can be a tax-deductible expense.

Chevron’s Australian subsidiary had taken a $4 billion loan from its US parent company to develop Western Australian gas reserves. This added to the local subsidiary’s debt pile, but allowed it to sidestep Australia’s 30 per cent company tax rate, with those interest payments instead being taxed in the US where the corporate tax rate was lower. In 2017, Chevron had paid no company tax in five of the previous seven financial years.

The Federal Court eventually ruled Chevron’s Australian subsidiary should not be allowed to claim interest on its borrowings from the rest of Chevron Group as if they were two standalone companies. In the 2022-23 period, Chevron paid more than $4 billion in tax.

However, Mark Zirnsak, secretariat for the Tax Justice Network, says that ruling has not closed the loophole entirely. Instead, he says Chevron got too greedy. “It’s still legal to claim the interest rate payment to yourself like Chevron did,” he says. “What the ATO contested was the rate of interest.”

Get it? If Chevron had just charged itself a standard rate of interest – similar to a bank – there would have been no issues.

Related party finance is just one of the many tricks multinationals use to dodge the Aussie taxman.

There’s also something called “transfer pricing” which companies such as mining giant BHP have been penalised for. For years, BHP was selling Australian iron ore and coal to its Singapore operation. Now, there’s nothing wrong with that – except that BHP was then selling these commodities for much more from its Singapore marketing hub to other nations.

Since Singapore has a much lower corporate tax rate, BHP was reducing its tax bill despite the coal and iron ore originally coming from Australia.

This week, the Australian government finally joined the growing army of countries – more than 135 so far – that have agreed to a global minimum tax of 15 per cent: A company with more than $1.2 billion in global revenue must pay at least 15 per cent tax across its global operations. Otherwise, the countries they’re doing business in can now get a bite of its untaxed profits.

This is supposed to deter companies from creating artificial structures in low or no-tax territories, such as the Cayman Islands, in a bid to avoid paying taxes in places where they actually do their business.

It’s also supposed to prevent a “race to the bottom” where countries compete for the lowest company tax rates to attract businesses. How? Because if countries charge company tax rates below 15 per cent, then other countries can impose “top-up” taxes.

Australia, for example, can now apply a “top-up tax” on a multinational operating in Australia if that multinational pays less than a 15 per cent tax rate wherever it does business globally.

Zirnsak says the 15 per cent rate is too low, but a positive change for now.

“The Biden administration would have liked to push it higher, and the Europeans were pushing for it to be lower, so at the end of the day, 15 per cent was a compromise,” he says.

“It’s no longer going to be a game where you can simply try and cheat the governments of the countries you’re actually doing business in through your artificial legal structures and working with governments that are happy to assist you in tax avoidance and profit.”

Leigh says the next step for the government is to crack down on tech giants, which have been more difficult to pin down. That’s partly because of the virtual nature of their services which has made taxing them properly an elusive exercise globally.

Of course, it’s a long-overdue change, and there’s lots left to do. But shifty multinational taxation tactics are being squeezed out.

It’s not just the big guys playing sneaky games. But as Leigh says, the local cafe you bought your coffee from today probably doesn’t pay an accountant exorbitant amounts to figure out how to minimise their tax.

“They don’t sit down at their weekly planning meeting and decide which country they want to pay tax in to minimise their tax.”

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