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.

Read more >>

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.”

Read more >>

Our politicians aren't acting their age. That's a good thing

By MILLIE MUROI, Economics Writer

If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.

But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.

Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.

The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.

A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.

Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.

What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.

If our economy is a board game, the rules have changed. So has the starting point for our newest players.

Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.

To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.

Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”

We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?

But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.

Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.

While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.

If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.

And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).

But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.

A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.

Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.

Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.

In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.

At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.

The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.

And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.

While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.

It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.

Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.

If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.

It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O

Read more >>

Will Trump be disastrous for our economy? I doubt it

When, in its wisdom, the American electorate does something really stupid, it’s tempting to predict death and disaster for the whole world, including us.

But though the Yanks are embarking on a bout of serious self-harm – and this will have costs for the rest of the world economy – let’s not kid ourselves that we’ll be prominent in the firing line.

Leaving aside Donald Trump’s climate change denial – a topic I’ll get to another day – his most damaging stated economic policy is to make America great again by imposing a tariff (import duty) of 10 to 20 per cent on all America’s imports except imports from China, which will cop 60 per cent.

This is rampant populism – it sounds like a great idea to those who understand nothing about how economies work but it will make the US economy worse rather than better. Trump claimed this new tax would be paid by the foreign suppliers but, in reality, it will be paid by those American consumers and businesses that continue to buy imported items.

So the man who got elected because the punters hate inflation will be acting to worsen inflation. This isn’t likely to do much to increase the demand for locally made manufactures but, to the extent that it does, automation and digitisation will mean it does little to create more jobs in manufacturing.

Another reason protectionism doesn’t work is that America’s major trading partners – particularly China and Europe – are likely to retaliate by imposing tariffs on their imports from America. We know from history that trade wars end up leaving both sides worse off.

So the United States will suffer most, although all countries that trade with it will suffer to some extent. But get this: the US is not one of our major trading partners. It takes only about 5 per cent of our exports. Our big partners are China, Japan and South Korea.

Like many ignorant Americans, Trump believes any country that runs a bilateral trade surplus with the US must be doing so because they’re cheating in some way. Not a problem for us: we import more from the Yanks than we export to them. It’s China and the Europeans Trump will be going after, not us.

To the extent that Trump hurts the Chinese economy – as part of the Americans’ bipartisan obsession with trying to prevent China usurping their place as the world’s top dog – that will have an adverse flow-on to us.

But the Chinese have their own ways of fighting back. In any case, the greatest risk to our economy is not from what the Yanks do to the Chinese but from what the Chinese stuff up on their own account.

While it’s clear Trump is well placed politically to press on with implementing the crazy policies he has promised, that doesn’t mean he’ll do everything he’s said he’ll do to the full extent that he’s said. For instance, why would he tax all imports of goods and services when it’s manufactures he’s really on about? Also, not everything he tries to do will be done in next to no time.

We know the man. He’s nothing if not capricious. Dead keen one minute, moved on the next. And as someone who sees himself as the great dealmaker, he’s highly transactional. A 20 per cent tariff may be just the list price before the bargaining starts. ANZ Bank economists say the average tariff on Chinese goods will go from 13 per cent to 22 per cent, not 60 per cent.

The truth is that we’re too small to figure largely in Trump’s thinking. And why kick the US lapdog we’ve made ourselves?

Trump has made much of his promise to deport the many millions of undocumented immigrants. Most of these people are doing jobs Americans don’t want to do. Getting rid of them would reduce the size of the economy while increasing inflation as employers offer higher wages to attract other people to unattractive jobs.

But not to worry. It’s hard to see just how he’d round up all these people without calling out the military. It’s much easier to see him limiting himself to trying harder to stop more people crossing the Mexican border. In this case, the reduction in the economy and the rise in costs would be smaller.

So far, his policies on tariffs and immigration seem likely to increase America’s rate of inflation while reducing its economic activity. Great idea. But then we come to his promises for big tax cuts.

He says he wants to cut the rate of company tax and “extend” his 2017 personal income tax cuts, which greatly favoured the high-income earners more likely to have been too smart to have voted for him.

In principle, you’d expect tax cuts to be expansionary and thus possibly inflationary. But note this: according to a strange American custom, the personal tax cuts enacted in 2017 are due to expire at the end of next year.

So extending them means not that everyone gets a tax cut, but everyone avoids a tax increase. The troops’ after-tax income is unchanged. But, of course, the budget deficit is now worse than previously projected.

One thing we can be sure of is that Trump’s not a man to worry about deficits and debt. Republican congresspeople do have a history of worrying about such matters – but only when those irresponsible Democrats are in charge.

The Yanks do have many of the smartest academic economists in the world and, as the US government’s annual interest payments get to be bigger than its spending on defence, they’re starting to wonder how long America’s fiscal insouciance can continue before something goes wrong. But the reckoning is unlikely to come in the next four years.

All told, it does seem that Trump’s policies will cause America’s inflation and interest rates to be higher than they would have been had Kamala Harris won the presidency. But what doesn’t follow is that this will have much effect on our inflation and interest rates, and on our Reserve Bank’s decision about when to start cutting rates to prevent us having an accidental recession.

Read more >>

All the reasons house prices will keep rising until we wake up

Contrary to popular opinion, the cost-of-living crisis will pass. But the housing crisis will go on worsening unless politicians – federal, state and local – try a mighty lot harder than they have been.

The cost of home ownership took off – that is, began rising faster than household incomes – about the time I became a journo 50 years ago, and is still going. Even the (unlikely) achievement of Anthony Albanese’s target of building 1.2 million new homes by 2029 probably wouldn’t do more than slow the rate of worsening affordability for a while.

You’d think there must be some kind of limit to how much harder it becomes to afford a home of your own, but considering how long it’s been running, it’s difficult to see just how it will come to an end.

It’s the advent of the Bank of Mum and Dad that’s making the rise in prices seem self-sustaining. Housing prices keep rising, but this makes the existing home owners wealthier, giving them greater wherewithal to help their kids afford the higher prices, which keeps those prices rising, rather than falling back to a level young people could afford without a special leg-up.

Small problem: we end up with a country divided between those born into the wealthy, home-owning class and those born into the class where generation after generation has never been able to afford to own the home they live in. Is that the Australia we want to live in?

How on earth did we allow housing prices to rise faster than household incomes for the past five decades, with little reason to hope this gap won’t get ever wider?

By allowing the slow but steady decline in the rate of home ownership – which began in the mid-1970s – to be a problem we’d worry about later. Or worse, to be a problem the politicians only pretended to care about.

I call this the Howard Effect. John Howard takes the credit because he’s the polly who most clearly hinted at the political class’s true lack of concern about declining home ownership.

He was always repeating the line that he had yet to meet a home owner who thought rising house prices were a bad thing. Get it? The number of happy home-owning voters far exceeded the number of unhappy young couples unable to join the club.

But the rise of the Bank of Mum and Dad has changed this calculus. It’s proof of home owners’ dawning realisation that rising house prices are a two-edged sword. They’re not a problem only if you don’t give a crap about your kids.

It’s probably housing’s big part in the cost-of-living crisis that’s finally broken the dam of politicians’ disinterest in housing affordability. What is of lasting significance about the Albanese government’s efforts to speed up the rate of home-building is its shift to seeing blockage on the supply side of the housing market as the key to progress.

Until now, those seeking to do something about the decline in home ownership have focused on the way special tax breaks and pension exemptions add unhelpfully to the demand for housing.

But the misguided notion that its plan to reform negative gearing and the capital gains tax discount played a significant part in Labor’s loss of the 2019 federal election put paid to demand-side solutions.

The great strength of Albanese’s plan is its focus on reforming local government planning and zoning restrictions on the supply of medium and high-density housing in our capital cities.

Tax and pension problems are the responsibility of the feds. Planning and zoning restrictions are the responsibility of the states. As ever, the only way for nationwide state-level problems to be fixed is for the feds to take the lead. And, as ever, the only way for the feds to get the states to make changes is to flash the federal chequebook.

The state governments – NSW in particular – are making genuine efforts to overcome the long-standing NIMBY resistance to higher-density housing.

Great. But if you think fixing the density problem will stop housing prices rising faster than household incomes, you’re deluding yourself. Just as fixing negative gearing wasn’t a magic answer, nor is fixing density.

No problem as big and long-lasting as declining home ownership could be anything other than multi-faceted. Yes, we need to fix the supply side. But yes, we need to fix the demand side as well. And there’s more to the supply side than density, just as there’s more to the demand side than negative gearing.

Last week’s report of its Review of Housing Supply Challenges, by the NSW Productivity Commission, should be read by people in all states.

The report says local councils should lift their game in reducing the inordinate delays in accepting development approvals and in reducing unreasonable demands on builders.

I think government agencies are monopolies and, like all monopolies, they rarely resist the temptation to put their own convenience ahead of their customers’ needs.

As federal Treasury’s sermon on the housing challenge in this year’s budget papers also made clear, the NSW report notes that part of the problem is the inadequacy and inflexibility of our housing industry.

It’s simply not capable of expanding to meet the surge in demand for homes – something that, I suspect, doesn’t worry it greatly. It’s content to respond by “rationing by [higher] price”, a mechanism I explained in last week’s column.

But the NSW report says the housing industry simply doesn’t have enough tradespeople to increase its production. Workers have been lost to the major construction projects, thanks to the surge in state government spending on infrastructure.

This is no doubt right, as far as it goes. It’s certainly true that state governments would do better (and cheaper) if they timed their investment spending to fit with the ups and downs of private sector major construction spending.

But I think the ability to meet shortages of skilled workers simply by bringing workers from overseas when you need them has led the industry to neglect training sufficient apprentices to meet future needs.

Neither this report nor Treasury’s budget sermon acknowledges another possible supply-side problem, the one highlighted by the economists’ great alternative thinker on housing, Dr Cameron Murray. He argues that the developers keep house prices rising by limiting the release of land to fit.

When you look at the broader causes of ever-rising house prices, even the Reserve Bank doesn’t escape responsibility. The central bankers have always argued that housing prices are a consequence of the interaction of the demand for housing and its supply, so nothing to do with them.

Again, that’s true as far as it goes. But it sidesteps the more behavioural possibility that whacking interest rates up and down engenders an “irrational” FOMO – fear of missing out – that helps keep house prices rising when rates are falling and even when rates are rising and could rise further.

If so, that’s yet another reason why the economists need to come up with a better way of limiting demand than just screwing young people with big mortgages.

There’s more to ever-rising house prices than has ever crossed the minds of most economists.

Read more >>

We should stop using a blunt instrument to manage the economy

In the economy, as in life, it helps a lot if you learn from your mistakes. Or, if you’re in public life, from the mistakes of your predecessors.

Accordingly, the caning that former Reserve Bank governor Dr Philip Lowe got for his assurance that interest rates wouldn’t rise before 2024 does much to explain why his successor, Michele Bullock, has been so persistently cagey about the future of rates.

Even as she’s announced a decision that the official cash rate was to be left unchanged, she’s warned that it may need to rise in future. And indeed, that the case for raising it had been seriously considered.

But last week, with the herd sniffing in the wind the smell of rate cuts, she took her life in her hands and got a lot more specific – though not before muttering the incantation that she was not providing “forward guidance” (that was the crime Lowe was convicted of).

In a carefully rehearsed line, she said that a “near-term reduction in the cash rate does not align with the board’s current thinking”. Oh yes, and what does “near term” mean? The next six months, she said.

“Current” thinking. Get it? In other words, that thinking could change over, say, the next six months. Especially because, as she repeated, the board’s decisions would depend on what the economic indicators were telling it. And, as she keeps saying, “the outlook remains highly uncertain”.

It’s clear many people aren’t convinced the board’s thinking against cutting rates will stay unchanged for the next six months. Because the financial markets are so heavily into betting, their predictions are almost always based on what they expect the Reserve will do.

But there are plenty of other, simpler souls, whose emphasis is on what they believe the Reserve should do to ensure it avoids the recession it says it wants to avoid.

The other point about learning from your mistakes and adventures is the familiar problem that those who were around at the time of lesson-learning pass on, handing over to people who weren’t around to have learnt.

This is what worries me as the Reserve ploughs on, determined to ensure the inflation rate returns to the centre of its target range within a time that the Reserve itself judges to be the maximum time acceptable. This determination seems to be regardless of the source of the forces that are slowing the return to mid-target and making it “bumpy”.

When the Reserve was granted operational independence by the elected government in the mid-1990s, its bosses at the time understood a truth I’m not sure their successors still understand. When you’re not free of the politicians, you can leave the politics to them. But when you are free of them, you have to do your own politics.

Now, I’ve been a great supporter of central bank independence. It’s been one experiment that time has shown to be a big improvement on leaving interest rates to the pollies. But we, and the central bankers, must understand that central bank independence is an uneasy fit with democracy.

We now have a situation where the central bank has the most control over whether the economy is plunged into severe recession, but the only people the voters can punish for this are not the central bankers, but the government of the day.

So, to get specific, if the Reserve Bank decides inflation can’t be fixed without a recession or, more likely, miscalculates and leaves interest rates too high for too long, it won’t be Michele Bullock that voters punish, it will be Anthony Albanese and his government.

Guess what? Should that happen, Labor is likely to be angry and vengeful. And, as Bullock’s predecessors understood, should government pass to the Liberals, their strongest emotion is likely not to be gratitude, but a determination that the Reserve won’t be allowed to trip them up the way it tripped up Labor.

With independent central banks being the long-established convention throughout the developed world, would any government of ours be game to strip the Reserve of its independence? Probably not.

But politicians have other, less noticeable ways of bringing independent institutions to heel. The usual way – practised by the previous federal government with the Administrative Appeals Tribunal and the Fair Work Commission, and by Donald Trump with the US Supreme Court – is to stack appointments to the board with people who share the government’s predispositions.

So there will be a way for the politicians to pass the voters’ punishment on to the Reserve should it stuff up. This is why it does have to do its own politics.

And there’s another, far more positive way that could be used to clip the Reserve’s wings. This episode of tightening, much more than any previous episode since the day-to-day management of the macroeconomy was handed over to the Reserve in the 1980s, has revealed just how unfair and ineffective it is to make the manipulation of interest rates the dominant instrument for managing the strength of demand.

As research by Associate Professor Ben Phillips of the Australian National University has confirmed, the much-lamented cost-of-living crisis has been imposed on households with big mortgages far more than on any other households.

When you take account of the way rents actually fell during the lockdowns, renters haven’t been hard hit, while those who own their homes outright have been laughing. People on pensions or the dole have been protected by indexation.

So the reliance on interest rates to reduce demand is hugely unfair. But it’s also lacking in effectiveness. All of us have contributed to the excessive demand for goods and services, but only the minority of us with big mortgages have been pressed directly to pull back our spending.

This is why our management of the macroeconomy needs reform. We need another, much broader-based instrument that could be used as well as, or in place of, interest rates. Temporary changes in the rate of the goods and services tax are one possibility, but I’m attracted to the idea of temporary changes to the rate of compulsory superannuation contributions.

The two instruments – one interest rates, and the other budgetary – could be controlled by a new independent authority.

Despite all the Reserve’s apologies for having just a single, blunt tool and all the hardship it causes home buyers, we’ll wait a long time before it suggests sharing its power with a rival independent authority.

As well, the banks have ways of ensuring they benefit from rising interest rates, while financial markets want to keep betting at Reserve Bank race days.

So I’m tempted by the thought that only if the Reserve stuffs up and causes a severe recession are we likely to see the reform to macroeconomic management we so badly need.

Read more >>

The moribund political duopoly is rapidly self-destructing

Why do we have so many economic problems, and why do our governments make so little progress in fixing them? Because the two main parties just play politics and by now have boxed each other in. Neither side is game to make tough decisions for fear of what the other side will do to them.

Our tax system needs repair, but neither side dares to make changes somebody somewhere might not like. So we put up with poor government services, growing waiting lists, tax avoidance by the highly paid, bracket creep and phony tax cuts.

We have a system where people with mortgages get squeezed unmercifully whenever inflation gets too high. There are fairer and less painful ways to fix the problem, but neither side has the courage to change.

When occasionally the two sides agree on some policy, it’s often a bad one. Many defence experts quietly doubt the wisdom of AUKUS. By the time the nuclear subs arrive in many years’ time – if they ever do – they’ll probably have been superseded.

But the political duopoly’s most egregious failing is its inaction on climate change. For a while, it looked like the climate wars had ended, with the Albanese government making very cautious progress towards net-zero emissions.

Now, however, Peter Dutton has come up with a new reason for delay: let’s go nuclear instead. And we don’t have to do anything unpleasant for a decade or two. It will probably never happen, but what it has done is rob commercial investors of the certainty they need to keep investing in solar and wind farms at the rapid rate we need them to. With our ageing coal-fired power stations so close to the grave, our transition to renewable energy could be very bumpy.

So, what can we do to free ourselves from the clutches of a two-party political system that’s stopped working? Well, we’re already doing it. Voters are increasingly taking the law into their own hands by opting for the minor parties and independents. We saw this at the last federal election, in 2022, where the two big parties’ combined share of first-preference votes – which has been declining since World War II – fell to 68.3 per cent, its lowest level since the Great Depression.

So, the share of first-preference votes going to minor parties and independents is now just a little short of a third. In consequence, the number of crossbenchers in the House of Representatives rose to a record 16.

It’s not difficult to judge that the duopoly’s poor performance on climate change explains much of their decline. Labor loses votes to the Greens while, for the first time, teal independents took six previously safe seats from the Liberals.

Nor is it hard to believe that Labor’s caution and the Liberals’ nuclear red herring may add to the big parties’ loss of first preferences at next year’s election.

New research by Bill Browne and Dr Richard Denniss, of the Australia Institute, finds there are now no safe seats in House of Representatives. While some Labor seats are safe from being taken by the Liberals, and some Liberal seats are safe from Labor, such seats aren’t safe from the Greens or an attractive independent candidate.

In the supposedly safe Liberal seat of Mackellar on Sydney’s northern beaches, the teal independent Dr Sophie Scamps won the seat with a two-candidate preferred swing of more than 15 per cent. A strong independent candidate’s advantage is that they can pick up the preferences of the minor parties, plus those of the other big-party candidate who was never going to win.

It’s usual for the big parties to focus on the “marginal seats” that could be won or lost if a few “swinging voters” change their votes. And it’s mainly these marginals that one big party loses to the other.

But it’s not usual for the minor parties and independents to pick up such marginal seats. No, they’re much more likely to win supposedly safe seats.

So while the big guys focus on winning or retaining the marginals, they leave themselves open to the small guys when they neglect the concerns of voters in their heartland seats. Again, climate change would be the classic concern.

The standard way of predicting the results of elections using the psephologist Malcolm Mackerras’ famous pendulum has been overtaken not just by the lack of a uniform national swing between the two majors, but by the rise of the minors and independents.

I think it will be rare for governments to be elected with big majorities in future. Wafer-thin majorities will be the norm, with “hung” parliaments common. The big guys will warn us this will lead to chaos and inaction.

Don’t you believe it! It’s never been true at the state level where, at present, only five of the eight state and territory parliaments are dominated by a majority party.

I think a move to more power for crossbenchers at the federal level could be a good way to break the big-party logjam. It’s hard to see how it could be worse than what we’ve got.

Read more >>

Yes, we need tax reform, but it offers no easy answers

When we’re reminded that income tax cuts represent merely the partial return of the proceeds of earlier bracket creep, and that the process of clawing back the latest tax cut starts the same day it arrives, it’s easy to join the impassioned cry for tax reform. Sorry, it ain’t that simple.

Surely if we could end the crazy business of bracket creep, we’d pay less tax? Well, yes – but no.

Bracket creep occurs because our income tax scales ignore the reality of inflation. When our wages rise to take account of inflation, we’re no better off in real terms, but we’re often pushed into a higher tax bracket, which raises the average rate of tax we pay on the whole of our income. (If we’re not literally pushed into a higher bracket, our average tax rate still goes up because a higher proportion of our income is now taxed at a higher rate.)

So we’ve long known how to (largely) end bracket creep: do what the Americans do and increase all the bracket limits once a year, in line with the annual increase in the inflation rate. Then, it would only be rises in your real income that pushed up your average tax rate, which is fair enough.

Mission accomplished. Now we’ll all be paying less tax.

Except that the net profit the taxman makes after all the to-ing and fro-ing on bracket creep isn’t just kept in a jam jar somewhere. It’s used to help cover the ever-growing cost of all the services the government gives us, and thus to limit the size of budget deficits and government debt.

So, without the benefit of bracket creep, governments would be forced to keep making explicit increases in the rates of income tax, or to announce new taxes.

Wouldn’t that be an improvement? In principle, yes. In practice, our (politician-fed) aversion to paying higher taxes would just make politics an even bigger shoot-fight than it already is. The pollies would spend more time abusing each other and less time getting on with fixing our problems.

One thing we can be sure of is that it wouldn’t do much to slow the growth in government spending. Why not? Because our demand for more and better government services is insatiable. Because both sides of politics fight every election campaign promising more and better services – and by never showing us the tax price tag on whatever it is they are selling.

How can I be sure tax indexation would do little to slow the growth in government spending? Because that’s what happens in America. They keep running bigger budget deficits and amassing more government debt than the other rich countries (except Japan).

But they get away with it because their economy’s so big, and they’re the centre of the world financial system. A middle-level economy like ours could never pull it off.

So tax indexation isn’t high on my list of desired tax reforms. Bracket creep turns out to be just one of the dirty little tricks by which the politicians who’ve done so much to make our political system almost unworkable keep it staggering along.

It’s easy to agree on the need for tax reform, but its advocates want to reform differing things and have differing motives. “Reform” is a lovely, positive word, but you need to beware of people whose idea of reform is: I pay less, you pay more.

All the alleged reform advocated by the (big) Business Council, for instance, takes that form. They want a lower rate of company tax and a lower top rate of personal income tax – all paid for by a higher goods and services tax.

Spruikers for the highly paid make a big fuss about the government’s heavy reliance on income tax – which they exaggerate – and always claim discourages them from working and investing.

But economic theory doesn’t support these claims, and the empirical evidence – which would be more persuasive – doesn’t either. The people whose behaviour is influenced by the rate of tax on additional earnings are “secondary earners”, who have more ability to increase or decrease the hours they work because they have part-time jobs. But the nation’s executives don’t worry much about them.

No, the tax reform I think we need is higher tax on capital gains, less concessional tax on the superannuation of people such as me, a decent tax on highly profitable mining companies and, probably, a tax on big inheritances.

But don’t hold your breath waiting for that to happen.

Read more >>

Despite what we're led to believe, tax cuts are no free lunch

Isn’t it wonderful that the Albanese government – like all its predecessors – has been willing to spend so many of our taxpayers’ dollars on advertising intended to ensure no adult in the land hasn’t been reminded, repeatedly, about the income tax cuts that took effect on Monday, first day of the new financial year?

But believe me, if you rely only on advertising to tell you what the government’s up to with the taxes you pay – or anything else, for that matter – you won’t be terribly well-informed. The sad truth is there’s a lot of illusion in the impressions the pollies want to leave us with when it comes to tax and tax cuts.

For instance, none of those ads mentioned the eternal truth that, when we have income tax scales that aren’t indexed annually to take account of inflation, the taxman gradually claws back any and every tax cut the pollies deign to give us. And this slow clawback process – known somewhat misleadingly as “bracket creep” – begins on the same day the tax cuts begin.

So readers of this august organ are indebted to my eagle-eyed colleague Shane Wright, who asked economists at the Australian National University to estimate how long it would take these tax cuts to be fully clawed back, using plausible assumptions about future increases in prices and wages.

A tax cut reduces the average rate of income tax we pay on the whole of our taxable income. A middle-income earner’s average tax rate will fall from 16.9 cents in every dollar to 15.5¢. The economists calculate it will take only two or three years for inflation to have lifted most taxpayers’ average tax rate back up to where it was last Sunday.

So that’s the terrible truth the pollies rarely mention. But don’t let that make you too cynical about the tax-cut game. Just because this week’s tax cut will have evaporated in a few years’ time doesn’t mean it’s worthless today. Actually, as tax cuts go, this is quite a big one. Someone earning $50,000 a year is getting a cut worth almost $18 a week. At $100,000 a year, it’s worth almost $42 a week. And on $190,000 and above, it’s worth $72 a week.

Is that enough to completely fix your cost-of-living problem? No, of course not. But if you think it’s hardly worth having, please feel free to send your saving my way. I’m not too proud to take another $18 no one wants.

Remember, too, that had Anthony Albanese not broken his promise in January and fiddled with the stage 3 tax cuts he inherited from Scott Morrison, most people’s saving would have been a lot smaller, even non-existent.

Everyone earning less than $150,000 a year got more, while those of us struggling to make ends meet on incomes above that got a lot less. In my case, about half what I’d been led to expect.

But the politicians’ illusions are built on our self-delusions. Our biggest delusion is that government works quite differently to normal commercial life. We know that when you walk into a shop you have to pay for anything you want. If you want the better model, you pay more.

Somehow, however, we delude ourselves that governments work completely differently. That the cost of the services we demand from the government need to bear no relationship to the tax we have to pay.

The politicians actively encourage this delusion in every election campaign by promising us this or that new or better service without any mention that we might have to pay more tax to cover the cost of the improvement.

Any party foolish enough to mention higher taxes gets monstered – first by the other side and then by the voters. No one wants to admit that what we get can never be too far away from what we pay.

For the near-decade of the Liberals’ time in government, they drew many votes by branding Labor as “the party of tax and spend” while claiming they could deliver us the services we want while keeping taxes low.

This was always a delusion. So they squared the circle by using various tricks they hoped we wouldn’t notice, such as underspending on aged care, allowing waiting lists to build up and secretly ending the low- and middle-income tax offset, thus giving many people an invisible tax increase of up to $1500 a year.

But the main trick they relied on was the pollies’ old favourite: bracket creep.

Get it? When we delude ourselves that we can have the free lunch of new and better services without having to pay more tax, they resort to the illusion that income tax isn’t increasing by letting inflation imperceptibly increase our average tax rate.

This is the tax-cut game. As an economist would say, our “revealed preference” is for no explicit tax increases, but for tax to be increased in ways we don’t really notice and for tax cuts to be only temporary.

Read more >>

It's time to dig deep - but not deeper than the taxman expects

I have a request to make of all Australian taxpayers: please give more to charity because you’re making me look bad. Like a cheat, in fact. I’ll explain shortly, but first, a self-interested public service announcement. Hurry, hurry, hurry. You have only the rest of this week to make a tax-deductible donation if you want to get some of it back in your next tax refund.

June 30, the biggest day of the year for the nation’s accountants, is fast approaching. It’s also the most important time of year for the nation’s charities. If you’ve ever made a donation to any of them, I bet they sent you a letter in the last few weeks reminding you how good it would be if you did so again ASAP.

But, as we were reminded by a strategically placed story last week, this is likely to be a bad year for charities. Why? Because in a cost-of-living crisis many of us decide that charity begins at home.

According to polling by academics at the University of Queensland, 78 per cent of people have reduced their donations because of the crisis facing their own budgets.

This is particularly bad timing for those charities that help people having trouble affording food and other necessities, such as the Salvos. The demand for their services has jumped for the same reason people are finding it harder to give. (Yes, the Salvos have “reached out” to me lately. And as I did myself in my uniformed youth, they waved a collection box under my nose.)

Perhaps it’s the accountant in me that makes me particularly attracted to donations that are tax-deductible. As everyone soon learns, you can’t make a profit out of tax deductibility. You can only reduce a cost.

But I like it because it lets me send a bit of taxpayers’ money in a direction chosen by me, not the politicians. The pollies mightn’t give a stuff about the wellbeing of refugees and asylum seekers, but I do. And to some small extent, I can make them kick the tin.

Also last week, purely by chance, I’m sure, we were reminded that, though Australians like to think of themselves as generous, we’re actually tighter than people in other English-speaking countries. Even the Kiwis are more giving than we are.

Which brings me to my beef about donations. Now, I’ve long been a defender of the Tax Office. It does an important job in making sure we pay as much tax as we should. One reason I got out of accounting was because I decided the only interesting part of it was giving tax advice, but I didn’t want to spend my life helping the well-off avoid doing their duty to the community.

But a few weeks ago, I got a letter from the Tax Office, via the myGov website, naturally, that was the strangest I’ve ever had from them. And it really pee’d me off.

The standard form letter said they’d happened to notice that my claim for donations was a lot higher than other people’s, and they were just wondering whether I might possibly have made some mistake.

They hoped I knew you could only claim for donations to outfits that had been awarded tax deductibility. And they hoped I knew I shouldn’t be claiming for any donation for which I couldn’t produce a receipt.

If, on reflection, I realised I had made some terrible “mistake”, I was free to amend my return and thereby, they hinted without saying, avoid possible further investigation and penalty.

But, failing that, there was no suggestion I do anything about their veiled accusation, except, presumably, sit there shivering, waiting for the taxman’s knock on the door.

It may be true, as coppers always say, that if you’ve done nothing wrong you’ve got nothing to fear, but that doesn’t stop you resenting an unwarranted insinuation that you’re dishonest.

What gets me is that, knowing my claim was large, I would have happily included a detailed list with my return, but the taxman made no provision for me to do so. Nor, when he sent his accusatory letter, did he invite me to explain or substantiate my claim.

And I get the feeling that the taxman’s algorithm just found an outsized number and dispatched a letter without further consideration. Did he know that I always make a big claim? Did he allow for the likelihood that people on high incomes can afford to be more generous? Did he note that I’d been a tax agent for many years and so didn’t need reminding of the rules?

Well, I know the taxman doesn’t want to be burdened by any extra information from me, but I’ll give him a heads-up anyway. My claim for this financial year won’t be as big as last year’s, but the one for next year will be a whopper. I’m thinking of setting up a charity of my own. All above board, naturally.

Read more >>

The pollies have twigged that our crazy housing game can't go on

Last week, a fairly ordinary place in our street, similar to ours, sold for $4.7 million. I suppose I should be congratulating myself on how well I’ve done in the capitalist game. And it’s only fair since I’ve “worked hard all my life”. In truth, all we’ve done is pay the exorbitant price of $180,000 for our place, then hung around for 40 years. This makes sense? Surely, this crazy game can’t keep going onward and upward forever.

It’s now been two weeks since Treasurer Jim Chalmers delivered his budget, but I’ve only just realised its main content is not the one-year $300 electricity bill rebate we’ve obsessed over, it’s the evidence the government has finally accepted our housing system is dysfunctional and must be fixed. The budget papers include a long statement spelling out what’s wrong with housing with a candour I’ve not seen before.

The hard truth is that, until now, the pollies on both sides have only pretended to care about how hard the young were finding it to afford a home of their own. Why? Because the number of voters who own a home – whether outright or still with a mortgage – greatly exceeds the number who’d merely like to become a homeowner. As John Howard used to say, he’d never heard any homeowner complain about the rising value of their property.

All the things pollies do in the name of helping first-home buyers – such as cutting stamp duty on the purchase price – don’t actually help, and probably aren’t intended to. When they claim to be helping you afford the high price, they’re really helping to keep it high. If they helped you and no one else you’d be advantaged. But when they also help the people you’re bidding against, it’s actually the seller who benefits.

It’s the same with the Bank of Mum and Dad. The more parents help their kids afford the high prices – as I have – the higher those prices will stay. Again, the sellers benefit.

When the value of the oldies’ homes just keeps going up, this constitutes a transfer of wealth from the younger to the older generation. The Bank of Mum and Dad transfers some of the wealth back to the youngsters. The losers, however, are those kids who didn’t have the sense to pick well-off parents.

But what makes me think the Albanese government has seen the light?

Well, for a start, it makes more political sense than it used to. Not only are younger people having trouble affording their first home, they’re being hit with big jumps in rent thanks to an acute shortage of rental accommodation.

The budget statement admits that the median price of dwellings in the eight capital cities has more than doubled since the mid-noughties. So have advertised rents. It now takes more than 11 years to save a 20 per cent deposit on a house.

Politicians have been favouring the old at the expense of the young for decades, but the young are getting restive. Labor has more than its share of the votes of young adults. It risks losing those votes if it doesn’t start delivering for the younger generation.

Labor sees that house prices and rents are rising because the supply of homes has failed to keep up with growth in the population. Part of the reason for this is what the statement admits has been a “long-term, chronic under-investment in social housing”.

Why all these frank admissions? Because the Albanese government has decided to do something big to ease the problem. The budget announced new measures worth $6 billion which, added to those already announced, amount to a $32 billion plan to deliver 1.2 million new, well-located homes in the five years to June 2029. This would be equivalent to a city the size of Brisbane.

As with so many of our problems, the feds have most of the money needed to fix the nation’s housing, but the actual responsibility for housing rests with the states and even local government. The plan’s attraction is that it’s been agreed with the states and includes monetary incentives for them to co-operate.

The words “well-located homes” are code for many of them involving medium and high-density housing in the capital cities’ “missing middle”. It requires the states to take on their local government NIMBYs (see monetary incentives above).

It would be wrong, however, to see this plan as the simple solution to a housing system that’s been performing poorly for decades. It will be some years before it makes much difference, and experts have questioned whether so many new homes can be built in just five years.

It’s an advance to see the new emphasis on improving the system’s ability to supply more houses, but the vexed question of fixing the distortions to demand caused by misguided tax concessions remains to be faced.

Read more >>

Budget will make us better off now, but worse off later

It’s said you can tell a government’s true priorities from what it does in its budget. If so, the top priority of Anthony Albanese’s government is not to have any priorities.

Rather than focusing on fixing the most pressing of our many problems, his preference is to be seen doing a little to alleviate all of them. In this budget, (almost) every voter wins a prize.

Certainly, every powerful interest group gets something to placate it. Of course, when you’re handing out so many prizes, most of them aren’t all that big.

Unfortunately, it’s a strategy that works better politically – where every vote counts – than economically, where sticking to what you’re good at brings better returns.

Fortunately, however, this budget has been “back-end loaded”. Most of what’s likely to be wasteful spending will come sometime in the next 10 years. Most of the budgetary cost of the sensible decisions starts from the first day of the new financial year, in just seven weeks’ time.

So let’s start with the good half of the budget, and leave the bad stuff for later.

By far the greatest political pressure on the government is to ease the intense cost-of-living pressure that so many people are feeling. Since most of the pressure has been caused by rapidly rising prices, this is also the government’s most immediate economic problem.

The trouble for Treasurer Jim Chalmers is that the standard remedy for rapid inflation involves making the pressure worse to make it better. You use higher interest rates and a bigger tax bite out of people’s pay rises to make it harder for households to keep spending, which stops businesses from raising their prices as much.

This explains Chalmers’ repeated but contradictory statement that he wants to ease the cost of living without weakening the efforts – by the Reserve Bank and his own budget surpluses – to get inflation down.

But this is where Albanese’s predilection for the each-way bet actually makes sense. Chalmers has found a way to do the seemingly impossible: ease living pressures a bit, while weakening the inflation fight only a bit.

He’s done this, first, by introducing a $300 power-bill rebate for all households, increasing the rent allowance paid to people receiving welfare benefits, and freezing the cost of prescriptions for two years.

This not only helps those people; it also reduces the rise in the consumer price index somewhat. And this, in turn, brings closer the day when the Reserve Bank starts cutting interest rates.

But second, by his rejig of the stage 3 tax cuts. This may be old news, but it’s by far the biggest measure in the budget. Most wage earners will realise how big it is – and how much it helps – when it increases their take-home pay at the start of July.

Albanese and Chalmers took a tax cut the previous government had intended to be of real benefit only to those on incomes well above the average, and changed it to ensure all taxpayers got something.

See? Everyone gets a prize. Everyone on incomes below about $150,000 a year gets more; everyone above that gets less than first intended. As a measure to ease living costs, it’s now far more effective.

Why won’t this $23 billion-a-year tax cut weaken the inflation fight? Because it has been government policy since 2018. It’s likely effect on households’ spending has been built into the Reserve Bank’s decisions to raise interest rates 13 times. Good stuff.

But it’s when we turn to the longer-term Future Made in Australia plans that you see the folly of Albanese’s efforts to stay friends with every interest group on every side.

By far the most important task Albanese must accomplish to secure our economic future is to achieve a smooth transition from fossil fuels to renewables – most of it done by 2030 – without blackouts and avoidable jumps in the cost of electricity.

But, more than that, he must ensure our continuing income from exports by establishing new green, further-processing industries exploiting our new-found strength of being among the world’s cheapest producers of renewable energy. This can be what will keep us prosperous when the world stops buying our fossil fuels.

The government spending needed to get these green industries started is included in the Future Made in Australia project. Trouble is, so is money for a lot of crazy ideas, such as setting up in competition with China as a producer of solar panels.

Albanese’s problem is he wants to say yes to everyone and everything, not just stick to the main chance. He’s saying he can turn us into a renewable energy superpower with one hand while, with the other, he lets the gas industry steam on to 2050 and beyond.

This does not fill me with confidence in the Albanese government’s capability. Quite the reverse.

Read more >>

The budget is rent-seekers central

Last week we got a reminder that, among its many functions, the federal budget is the repository of all the successful rent-seeking by the nation’s many business and other special interest groups. Unfortunately, it added to the evidence that the Albanese government knows what it should do to manage the economy better, but lacks the courage to do more than a little.

Rent-seeking involves industries and others lobbying the government for special treatment in the form of grants, tax breaks or regulatory arrangements that make it hard for new businesses to enter their market or protect them from competition in other ways.

Whenever that rent-seeking involves grants or tax concessions it weighs on the budget. Decades of continuous rent-seeking weigh hugely on every year’s budget, limiting the government’s ability to ensure every dollar of taxpayers’ money is spent to great effect in benefiting all Australians.

For example, a big lump of the feds’ spending on education is devoted to achieving the Howard government’s goal of enhancing parents’ choice of which school to send their kids to. When the callithumpians decide to build their own schools, so their children can be educated without contamination by people of other religions, the federal taxpayer coughs up.

That all this spending on choice leaves the great majority of kids attending public schools that aren’t adequately funded is just an unfortunate occurrence, which we may get around to fixing if we ever have any spare dollars looking for a home.

What you certainly couldn’t do is cut back the money you’re giving the callithumpians. They’d kick up the devil of a fuss and start telling their followers not to vote for you.

When rent-seeking leads governments to make grants to special interest groups, the details of this spending are there to be found in the bowels of the budget papers. Where it leads to some activities getting special tax breaks, Treasury attempts to keep track of these “tax expenditures” in an annual statement.

When it comes to extracting rents from governments, few industries or occupations are better at it than the medical specialists. (That’s not true of the GPs, however. Their Medicare rebates were frozen for years, as part of the former Coalition government’s pretence that it could cut taxes while in no way harming the provision of essential public services.)

Some years ago, a Labor government decided to cut back the Medicare rebate for cataract surgery because advances in technology now meant a surgeon could perform far more operations in a day.

The rest of the medical profession knew what a rort it had become but, under the ethical principle of dog doesn’t eat dog – or maybe, honour among thieves – they stood silent while their eye-surgeon brethren fought dirty to protect their swollen incomes.

They pretended the sky was falling, telling their elderly patients the wicked government had left them no alternative to charging them thousands more in out-of-pocket payments. If their elderly patient didn’t think this was fair, perhaps they might like to have a word with their local federal member, saying how terrible it was to have their lovely doctor treated so badly.

Predictably, the government backed off and the rorting continued.

Last week it was the turn of the chemists. Few industries are so heavily regulated by state and federal governments, all with a view to protecting pharmacists’ incomes. There are limits on how many chemists may set up within an area and, in particular, prohibitions on supermarkets having pharmaceutical sections.

Anthony Albanese and his government have made much of the way their introduction of 60-day medicine prescriptions – as recommended by an expert committee – has saved patients money and helped ease the cost-of-living crisis.

But hang on. Surely, that means chemists receiving fewer dispensing fees from the government? This evil must be opposed. Enter a union more powerful than any workers’ union, the Pharmacy Guild. This iniquity will see shortages of medicine and hundreds of chemists closing down across the land, it assured us.

The government fought back, refuting the talk of shortages and revealing figures showing a surge in applications for new pharmacies in the months following the announcement of the prescription change.

It had already promised to plough back into pharmacies the $1.2 billion it expected to save on dispensing fees. But the guild claimed pharmacies’ losses would be $4.5 billion, and last week the guild negotiated a new deal, which would see the government pouring a further $3 billion into pharmacies over five years.

Also last week, we saw the government releasing the report of the aged care taskforce, chaired by Aged Care Minister Anika Wells, calling for the well-off elderly to contribute more to the cost of their own care.

What was the problem? Wells spelled it out in a speech last June: “We must act now. The Baby Boomers are coming … We are going to need a fair and equitable system to meet the needs of Baby Boomers who, with their numbers and determination to solve problems, have shaken every single system they’ve come across.”

The report argued for the present mechanism used to get more from the better-off, the refundable accommodation deposit, to be replaced by a rental-only system.

But it called for the deposit system to be phased out over five years, and postponed the proposed start of the phase-out to 2030. With all its talk of “grandfathering” – applying the changes only to new entrants to the system – it remains to be seen how keen Albo & co are to take on the entitled Baby Boomers.

Finally last week, the Commonwealth Grants Commission’s carve-up of the proceeds from the goods and services tax for the next financial year was announced, bringing a bad shock for NSW and Queensland, and good news for Victoria and the other states and territories.

It was an unwelcome reminder of the separate, but related, special deal then-treasurer Scott Morrison awarded the West Australians in 2018. So great was the uproar from the other states that they were promised more money to ensure the sandgropers’ special deal left the others “no worse off”.

Meaning? That the West Australians’ successful rent-seeking is costing federal taxpayers from other states a bundle in forgone federal spending.

As the independent economist (and proud Tasmanian) Saul Eslake never tires of demonstrating, the Westies had less than zero grounds for arguing that they were getting a bad deal from the carve-up formula.

The grants commission was set up in the 1930s in response to their congenital paranoia that the rest of Australia was having a lend of them. For as long as they were classed as a “mendicant” state cross-subsidised by Victoria and NSW, they were happy.

But from the moment the growth of their mining industry was so great that they were required to join Victoria and NSW in helping maintain the quality of government services in the other states, it suddenly became yet another plot by those “over east” to do them down.

So, here’s the moral of the story for our weak-kneed federal politicians on both sides. Once you give in to rent-seekers, you’re gone. They won’t give up their ill-gotten gains without a massive, vote-losing fight.

Meanwhile, everyone else wonders why, despite the huge sums you’re raising in taxes, the quantity and quality of the services you’re providing is so poor.

Read more >>

Contrary to appearances, the stage 3 tax cuts will leave us worse off

It’s time we stopped kidding ourselves about the looming tax cuts. They’re what you get when neither of the two big parties is game to make real tax reforms, and the best they can do is lumber us with yet another failed attempt to wedge the other side.

If you want real reform, vote for the minor parties, which may be able to use their bargaining power in the Senate to get something sensible put through.

The stage 3 tax cuts always were irresponsible, and still are. They’ve caused interest rates to be raised by more than they needed to be, and they’ll leave us with substandard government services, as well as plunging us back into deficit and debt.

Only an irresponsible (Coalition) government would commit themselves to making a huge tax cut of a specified shape more than six years ahead of an unknowable future, hoping they could trick Labor into making itself an easy political target by opposing them.

Back then, the Libs thought the budget was returning to continuing surpluses. Wrong. They didn’t think there’d be a pandemic. Wrong. They had no idea it would be followed by an inflation surge and a cost-of-living crisis.

Only an irresponsible (Labor) opposition would go along with legislating the tax cuts five years ahead of time, then promise not to change them should it win the 2022 election.

Let’s be clear. Just because Prime Minister Anthony Albanese’s changes made the tax cuts less unfair, that doesn’t make them good policy. And just because many families, hard-pressed by the cost-of-living crisis, will be pleased to have the relief the tax cuts bring, that doesn’t mean the tax cuts are now good policy.

Don’t be misled by the Reserve Bank’s acceptance of Albanese’s claim that his changes would not add to inflation. Any $20 billion-a-year tax cut is a huge stimulus to demand, imparting further upward pressure on prices.

All the Reserve was saying was that diverting a lump of the tax cut from high-income earners to middle and low earners wouldn’t make much difference to the degree of stimulus. Why wasn’t it worried about a $20 billion inflationary stimulus? Because it had known it was coming for years, and had already taken account of it, increasing interest rates sufficiently to counter its future inflationary effect.

Get it? Had there been no huge tax cut in the offing, interest rates would now be lower than they are, and causing less cost-of-living pain.

As the Grattan Institute’s Brendan Coates and Kate Griffiths have reminded us, the big loser from the stage 3 tax cuts – whether the original or the revised version – is the budget.

The budget has done surprisingly well from the return to full employment, the effect of continuing high commodity prices on miners’ payments of company tax and from wage inflation’s effect on bracket creep. So much so that it returned to a healthy surplus last financial year. It may well stay in surplus this financial year.

Great. But next year it’s likely to return to deficit and stay there for the foreseeable future. Why? Because we can’t afford to give ourselves a $20 billion annual tax cut at this time. As if we didn’t have enough debt already, we’ll be borrowing to pay for our tax cut.

In theory, of course, we could pay for it with a $20 billion-a-year cut in government spending. But, as the Coalition was supposed to have learnt in 2014 – when voters reacted badly to its plans for big spending cuts, and it had to drop them post-haste – this is a pipe dream.

No, in truth, what voters are demanding is more spending, not less. The previous government went for years using fair means or foul – robo-debt, finding excuses to suspend people’s dole payments, neglecting aged care, allowing waiting lists to build up – to hold back government spending as part of its delusional claim to be able to reduce taxes.

As Dr Mike Keating, a former top econocrat, has said, we keep forgetting that the purpose of taxation is to pay for the services that our society demands, and which are best financed collectively.

So when we award ourselves a tax cut we can’t afford, the first thing we do is condemn ourselves to continuing unsatisfactory existing services, and few of the additional services we need.

Those additional services include education – from early education to university – healthcare, childcare, aged care, disability care and defence. (Another thing the Libs didn’t foresee in 2018: our desperate need to acquire nuclear subs.)

But don’t hold your breath waiting for any politician from either major party to explain that home truth to the punters. No, much better to keep playing the crazy game where the Libs unceasingly claim to be the party of “lower, simpler and fairer taxes” and Labor says “I’ll see you and raise you”.

Anyone who knows the first thing about tax reform knows that achieving that trifecta is impossible. But if the Liberal lightweights realise how stupid repeating that nonsense makes them seem to the economically literate, they don’t care.

All they know is that the punters lap up that kind of self-delusion. Which, of course, is why Labor never calls them out on their nonsense.

The other thing we do by pressing on with tax cuts we can’t afford is sign up for more deficits and debt. Coates and Griffiths remind us that the high commodity prices the budget is benefitting from surely can’t last forever.

If you exclude this temporary benefit, Grattan estimates that we’re running a “structural” budget deficit of close to 2 per cent of gross domestic product, or about $50 billion a year in today’s dollars.

We’re ignoring it now, but one day we’ll have to at least start covering the extra interest we’ll be paying. How? By increasing taxes. How else? Ideally, we’d introduce new taxes that improved our economic efficiency or the system’s fairness. Far more likely, we’ll just be given back less bracket creep.

It’s the pollies’ bipartite policy of not stopping bracket creep by indexing the income tax scales each year that makes their unceasing talk of lower tax so dishonest and hypocritical. They’ve demonised all new taxes or overt increases in existing taxes, while keeping bracket creep hidden in their back pocket.

Which is not to argue we must eradicate it. Most of the tax reform we’ve had – notably, the introduction of the goods and services tax – has come with the political sweetener of a big, bracket-creep-funded cut in income tax. (Would-be reformers, please note.)

Another name for bracket creep is “automatic stabiliser”. When spending is growing strongly and inflation pressure is building, bracket creep is one of the budget’s main instruments working automatically to help restrain demand by causing people’s after-tax income to rise by a lower percentage than their pre-tax income.

The pollies can’t just let bracket creep roll on for forever. You have to use the occasional tax cut to return some of the proceeds. But July 2024 turned out to be quite the wrong time to do it.

So even if the Reserve starts to cut interest rates towards the end of this year, the tax cuts mean rates will stay higher for longer than they needed to.

Read more >>

How top earners kid themselves (and us) they're overtaxed

Apparently, the nation’s chief executives and other top people are groaning under the weight of the tax they pay. Is it any wonder they’re doing such an ordinary job of running the country’s big businesses? When you see what’s left of their pay after tax, it’s a wonder they bother turning up.

I know this will shock you – just as it does every time the business media remind their readers of it. According to the latest available figures, for 2020-21, the top-earning 1 per cent of taxpayers paid more than 18 per cent of the total income tax take.

Taxpayers in the top 10 per cent paid 46 per cent of the total income tax collection of $237 billion.

Think of it. Just the top 10 per cent pay almost half of all the taxes. Do you know that the bottom 50 per cent of taxpayers pay less than 12 per cent? Talk about lifters and leaners. Those lazy good-for-nothings have no idea how easy they get it. And still, they whinge unceasingly about the cost of living.

How’s your bulldust detector going? All the figures I’ve given you are true, but, like many of the things said in the political debate, they’re misleading. If you’re not smart enough to see how they’re misleading, that’s your lookout.

It’s true that because income tax is “progressive” – people at the top pay a much higher proportion of their income than those at the bottom – people at the top end up paying a much higher share of the total tax take.

That’s because they’re considered able to bear a bigger share of the cost of government. And remember that about two-thirds of those in the bottom half would have (often not well-paid) part-time jobs.

But what the people who bang on about how much tax they’re paying want you to forget is that although income tax is the biggest tax we pay, it’s just one of the many taxes – federal, state and local – we pay.

In fact, it accounts for only about half of all the tax we pay. And almost all the other taxes are “regressive” – they hit the bottom end proportionally harder than the top.

So, take account of all the other taxes, and the rich man’s burden is a lot less heavy than the rich old men try to tell us.

It’s clear that, of all the taxes we pay, it’s personal income tax that the well-off most object to and want to pay a lot less of. Whenever you see them arguing that we need major tax system reform to “sharpen incentives to invest, innovate and hire” and make the system “genuinely productivity-enhancing”, that’s what they really mean.

Most voters approve of Prime Minister Anthony Albanese’s decision to help ease cost-of-living pressure by diverting a big chunk of the stage 3 tax cuts from high-income earners to middle and lower earners, but the (Big) Business Council was distinctly disapproving.

“The [original] stage 3 package rewarded aspiration and started to address bracket creep with a simpler system”, but “the changes do not address any of the real issues with our tax system”, it said.

But if you’re not impressed by the argument that pretends income tax is the only tax that matters, the big business lobby has others. “Personal income contributes too much of our [total] tax revenue … [at] 51 per cent today,” it says, implying we should cut income tax and increase other, indirect taxes.

A related argument is that few countries are as reliant on income tax as we are. Figures for 2021 say our personal income tax as a proportion of total taxes is the fifth highest among the 38 member countries of the Organisation for Economic Co-operation and Development.

Again, it’s true but misleading. It’s a false comparison because, unlike almost all the other countries, Australia uses income tax to cover the cost of social security payments – such as unemployment and sickness benefits, disability and age pensions, as well as healthcare benefits – whereas other countries cover these with separate, income-related social security contributions imposed on workers and their employers.

Calculations by Matt Grudnoff of the Australia Institute show that if you add to income tax the social security contributions imposed in other countries (and, in our case, add the states’ payroll taxes), our ranking goes from fifth highest to seventh lowest. So much for that argument.

Some people argue that we should add our compulsory employer superannuation contributions to our income tax, now set at 11 per cent of wages. But that argument is wrong because the super levy is not a tax.

Taxes involve the government making you pay money into its coffers, which is then spent by the government as it sees fit. With super contributions, the money goes into an account with a super fund that has your name on it and is always yours to spend as you see fit once you reach a certain age. If you die without spending it all, what’s left goes to your rellos.

And here’s another thing. One reason income tax accounts for as much as half of Australia’s total tax collections is that the Abbott government abolished former prime minister Julia Gillard’s carbon tax and her mining tax.

The very business lobby groups who supported these anti-tax-reform measures are now complaining that we’re too dependent on income tax. If they were genuine, the problem could be easily fixed: take up Professor Ross Garnaut’s proposal for a new, bigger “carbon solution levy”, which, by raising $100 billion a year, would greatly reduce our reliance on income tax.

Finally, don’t let the rich guys’ talk of high taxes fool you into believing Australia is a high-tax country. That’s the opposite of the truth. When you take total taxes as a proportion of gross domestic product, the OECD average in 2021 was 34 per cent. Ours was less than 30 per cent, making us ninth lowest. And only three of the eight lower countries are rich like us.

Read more >>

Why fixing negative gearing would be a positive for our kids

Life wasn’t meant to be easy for our politicians – which is as it should be. Poor old Anthony Albanese. No sooner has he got away with breaking his promise on the stage 3 tax cuts than he’s besieged by people demanding more tax reform.

Trouble is, they all want different things, and every one of them could cost him votes as fat cats who stand to lose some tax break join forces with the opposition to run a great scare campaign, claiming it’s ordinary voters who’d be hit.

Despite the many things wrong with our tax system, the two big parties have wedged themselves into a corner on reform. Neither side’s game to do anything for fear of what the other side would say.

But when, unsurprisingly, polling showed that most people approved of Albanese’s decision to switch about $7 billion a year of the tax cuts away from those at the top and give them to those in the middle and bottom, the would-be reformers swarmed out of the woodwork.

First out was the (Big) Business Council, terribly worried about the lack of investment and the need for greater productivity. I’ll check their claims another day.

Then came two of our best economists, Professors Ross Garnaut and Rod Sims, proposing to bring back the carbon tax, only bigger and better. As I wrote last week, it’s a good idea.

But the one to watch, another old favourite, is the talk of finally doing something to curb the negative gearing of investment properties, which really took off 20 years ago after John Howard decided that the capital gain on property and other investments should be taxed at only half the rate applying to income from actual work.

A rental property is negatively geared when so much of the cost of buying it is covered by a loan rather than your own savings that the interest bill and other expenses exceed the rent you earn.

Why would anyone deliberately set up a business to run at a loss? Because the loss is deductible against your income from work. On a small investment of your own money, you sell the property a few years later at a big capital gain, only half of which is taxed. Not bad, eh?

Former Treasury secretary Dr Ken Henry reminds us that the rental property sector’s deductions are now so huge they exceed the rental income, making it not a net taxpayer. Taken together, all those landlords contribute nothing but are being subsidised by the mug workers.

What should worry Albanese is that the Greens are now pushing negative-gearing reform as part of their efforts to rebrand themselves as the party that cares about renters and first-home buyers.

If Labor doesn’t start showing it wants to improve the daunting prospects facing the younger generation, it risks losing its share of the youth vote to the Greens. The Libs needn’t worry, they’ve lost most of their share already.

Some years ago, the Grattan Institute proposed allowing landlords’ rental losses to be deducted only from other “passive” income, not wage income. There must be some recognition that capital gains shouldn’t be taxed at their full, inflated amount, so the 50 per cent discount should be cut to 25 per cent.

Another approach would be to allow losses to be deducted against wage income only if the investment property was newly built. This would overcome the objection that investors usually buy established homes, thus adding to the demand for homes without adding to their supply, and so pushing prices up out of reach of first-home buyers.

Now, the business people who see themselves as losing from the restriction of negative gearing – the real estate agents and home building companies – always claim it would do great damage to renters and home buyers alike. Don’t believe it. When economists try to estimate the likely effects, they find them to be small. Average house prices would fall by just 1 or 2 per cent, they say. So much for the death and destruction.

But these sums underestimate the likely benefit to young buyers. While the fall in the average price of all houses and units may be small, that’s because most house prices would be unaffected. Entry-level homes, the kind bought by mum-and-dad investors and first-home buyers, would become more affordable because those prices would fall by a lot more.

What’s more, a recent study finds that the share of households who own their home rather than renting it would increase by a huge 4.7 percentage points. Nor would it surprise me if, in practice, the effect was greater than the economists’ figuring suggests.

Even so, fixing negative gearing is no magic answer to housing affordability, and the Albanese government’s efforts to increase the supply of housing, particularly in the parts of cities where people prefer to live, is another part of the answer.

Albanese and Treasurer Jim Chalmers say they have no plans to change negative gearing, but that’s what they said about changing the stage 3 tax cuts – until they were ready to move.

And with the Greens using negative gearing as a bargaining chip in the Senate, progress is far from impossible.

Read more >>

We can't escape a carbon tax, which is good news, not bad

When economists are at their best, they speak truth to power. And that’s just what two of our best economists, Professor Ross Garnaut and Rod Sims, did this week. In their own polite way, they spoke out against the blatant self-interest of our (largely foreign-owned) fossil fuel industry.

They sought to counter the decade of damage done by the former federal Liberal government which, for short-sighted political gain, engaged in populist demonisation of Julia Gillard’s carbon tax.

And, by their willingness to call for a new “carbon solution levy”, they shamed the present Labor government, which dare not even mention a carbon price and isn’t game to take more than baby steps in the right direction, for fear of what Peter Dutton might say.

But the two men’s message is actually far more positive than that. In launching a new think tank, the Superpower Institute, they pursue Garnaut’s vision of how we can turn the threat of climate change into an opportunity to revitalise our economy, raising our productivity and our living standards.

Sims, former boss of the competition watchdog, says that, following a decade of stagnant production per person, real wages and living standards, Australia’s full participation in the world’s move to achieve net-zero global emissions is the only credible path to restoring productivity improvement and rising living standards.

Climate change is a threat to our climate, obviously. But it’s also a threat to our livelihood because Australia is one of the world’s largest exporters of fossil fuels. Garnaut points out that, as the rest of the world moves to renewables, two of our three largest export industries will phase out.

This will send our productivity backwards, he notes – as all the big-business people reading us lectures about productivity never do.

The good news, however, is that “putting Australia back on a path to rising productivity and living standards doesn’t mean going back to the way things were”. It’s now clear that “Australia’s advantages in the emerging zero-carbon world economy are so large that they define the most credible path to restoration of growth in Australian living standards.”

Garnaut says that “In designing policies to secure our own decarbonisation, we now have to give a large place to Australia’s opportunity to be the renewable energy superpower of the zero-carbon world economy.”

Other countries do not share our natural endowments of wind and solar energy resources, land to deploy them, as well as land to grow “biomass” – plant material – sustainably as an alternative to petroleum and coal for the manufacture of chemicals.

From a cost perspective, we are the natural location to produce a substantial proportion of the products presently made with large carbon emissions in North-East Asia and Europe.

The Superpower Institute champions a “market-based” solution to the climate challenge. We shouldn’t be following the Americans by funding the transition from budget deficits, nor become inward looking and protectionist.

Rather, everything that can be left to competitive markets should be, while everything that only governments can do – providing “public goods” and regulating natural monopolies – should be done by the government.

Sims notes a truth that, since Tony Abbott’s successful demonisation of the carbon tax, neither side of politics wants to acknowledge, that markets only work effectively if firms are required to pay the costs that their activities impose on others and, on the other hand, if firms are rewarded for the benefits their activities confer on others.

When the producers of fossil fuels don’t bear the cost of the damage their emissions of greenhouse gasses do to the climate, and the producers of renewable energy don’t enjoy the monetary benefit of not damaging the environment, these two “externalities” – one bad, the other good – constitute “market failure”.

And the way to make the market work as it should is for the government to use some kind of “price on carbon” – whether a literal tax on carbon, or its close cousin, an emissions trading scheme – to internalise those two externalities to the prices paid by fossil fuel producers and received by renewables producers.

The price on carbon that Garnaut and Sims want, their “carbon solution levy”, would be imposed on all emissions from Australian produced fossil fuel (whether those emissions occurred here or in the country that imported the fuel from us) and from any fossil fuel we imported.

Only about 100 businesses would pay the levy directly, though they would pass it on to their customers, of course. It would be levied at the rate of recent carbon emission permits in the European Union’s emissions trading scheme.

Imposing the levy on all our exports of fossil fuel, rather than just our own emissions, makes the scheme far bigger than the one Abbott scuttled in 2014. It would raise about $100 billion a year.

But it’s bigger to take account of the Europeans’ “carbon border adjustment mechanism” which, from 2026, will impose a tax on all fossil fuels imported from Australia that haven’t already been taxed.

Get it? If we don’t tax our fossil fuel exports, the Europeans or some other government will do it for us – and keep the proceeds.

What will we do with the proceeds of our levy? Most of them will go to a “superpower innovation scheme” that makes grants to support early investors in each of our new, green export industries. In this way it will lower the prices of carbon-free steel, aluminium and other products, helping them compete against the equivalent polluting products. The positive externality internalised.

Garnaut says we need to have the new levy introduced by 2031 at the latest. But the earlier it can be done, the more of the levy’s proceeds can be used to provide cost-of-living relief of, say $300 a year, to every household and business, as well as fully compensating for the levy’s effect on electricity prices.

Thank heavens some of our economists are working on smart ways to fix our problems while our politicians play political games.

Read more >>