Posts in "Opinion & Analysis"

The Price of our Political Work Culture

I read two interesting pieces today. The first was a study from the field of psychology, a discipline I have not given as much time to as would like. The other was an essay documenting the work culture of federal politicians.

A Scalable Goal-Setting Intervention Closes Both the Gender and Ethnic Minority Achievement Gap

This study documented an intervention intended to improve the academic performance of males and minority students. Those have poorer academic outcomes and higher dropout rates. Amazingly, this was achieved using a written online goal-setting programme. More equity between blocks, better marks, scalable, low cost and particularly effective with low performers. I was trained mostly in economics and public policy. As such I tend to think about problems a certain way. Thinking about societal problems from the perspective of individual mental health, or physical wellbeing is not my first instinct.

But it is good that I have the time to read widely, and explore new disciplines and ways of thinking. It’s not just good because it is a pleasant way to live. It’s good because, if I am to be of any use to my society, I need to be creative and used to exploring new ideas. New ideas often come from other disciplines. And it takes time to explore them, but every now and then you find a valuable new perspective to add to your cognitive toolkit. Gold.

Then I read this essay:

The Political Life is no Life at All

The essay spoke about long working hours, snap decision making and stress, a lot of stress. It’s nothing new really, I learned about this in my Masters. Public servants, and aspiring hopefuls, are trained to tailor their communications to this work culture. I had a lecturer once tell me to break down the information for a policy brief into two parts ‘the things the politicians absolutely must know, and the things they really really should know, then chuck out the second part.’

I was once assigned a reading on writing policy briefs that began like this:

“Imagine your minister getting on the red-eye flight from Perth. It leaves at 0.40am and arrives in, say, Melbourne five hours later. Think about this person and imagine their circumstances and condition. At this time of night, all ministers will have put in a 16-hour day. Most will be tired. Most will be stressed. Some will be poorly fed. A rare few will be watered too well. Once settled into the flight, some 36,000 feet in the air, some ministers order a red. Most then out of a sense of duty will open their briefcase and start to read a pile of briefs that had been screaming out for attention.”

I have also heard identical firsthand accounts from personal contacts who have a better vantage point than I do to judge political culture. Bad for your health, depressing, stressful and full of conflict. It sounded like the sort of environment that I had heard of before, in a podcast I heard. It introduced me to the term “scarcity mindset”. Essentially, people lacking friends, peace of mind, food or other human needs don’t think too well.


Good policymaking requires the time to reflect deeply, read widely, think creatively, ask open ended questions, and engage in dialogue with many different kinds of people and, well, our politicians are not in an environment to do that. It is not obvious that this is a problem unique to politics.

The labor market is changing. Those who work a 40 hour week are becoming less common. Replaced by some who work 50-60 hour weeks, and others who work 25-30. (From Andrew Leigh’s book, Disconnected)

A brief gander at depression and anxiety rates amongst lawyers suggests our politicians are not alone.

There is a name for this sort of situation. A situation where something is happening that hurts society, but it makes sense to contribute to it from the perspective of any one individual. It is called a “collective action problem”.

Maybe tomorrow I’ll read about how to deal with those.

Budget 2017/18: Should we repair the Budget? Or our Democracy?

Should the Government repair the Budget? Or should they repair our democracy?

Reading the 2017 Federal Budget papers may have led you to ask questions such as, ‘What does that mean?’ and ‘Are they kidding?’. One question it probably didn’t lead you to ask is: ‘Are democratic systems fundamentally flawed?’

Well, it turns out that the answer is: probably not. However, it is also probably the case that a country’s education level plays a vital role in the performance of their democracy.

Recently, Professor Bob Gregory delivered the Freebairn Lecture, a free guest lecture put on annually by the University of Melbourne and timed to coincide with the release of the Federal Budget. This year’s topic, fittingly, was federal fiscal policy in Australia – or, more specifically, the Federal Government’s alleged desire to ‘balance the budget’.

Professor Gregory reminded the audience that each Federal Treasurer since 2007 has valiantly pledged to achieve a budget surplus. But their plan was never to do it the easy way. They wouldn’t simply increase taxes, they would do the responsible thing and cut spending, while at the same time making the system fairer and more efficient.

We now know that none of them were able to achieve their goal, and it is unlikely that our current Treasurer will be around to claim credit for a future surplus either.

According to Professor Gregory, we should not be surprised.

A closer look at the Budget papers over this period reveals that while each Treasurer touted this plan to decrease spending rather than increase revenue, they intended to do the opposite. Over the past ten years, government spending has continued to increase, so any progress made on cutting down the deficit was brought about by increasing tax revenue.

The personal income tax system offers a convenient option for those in charge of fiscal policy. This is because of the slightly sinister-sounding phenomenon known as ‘bracket creep’, whereby tax revenue automatically increases as taxpayers move into higher brackets. Treasurers can take advantage of this to collect more revenue each year while claiming they haven’t increased taxes (because they haven’t increased the rates) and every now and then (usually before an election) they can even take credit for being the generous bloke who came along and ‘cut taxes’ by adjusting the brackets.

But while the increasing revenue from bracket creep helped their courageous cause, in each case the government hoped to further benefit from national income rising to an optimistically high rate of growth. Of course, governments don’t tell voters they are relying on hope and optimism to keep their promises. Instead they order public servants to calculate forecasts and then they show us a neat, official-looking graph. Tellingly, these forecasts are almost always wrong.  Whether you view this fact as the result of honest mistakes or as evidence of deliberate attempts to mislead the public depends on your own level of cynicism.

It would be unfair to put all the blame for these fiscal failures on the government. Forecasting is difficult to get right (although that is a reason to try and under-forecast, rather than over-forecast) and this is because there are many factors that influence fiscal outcomes besides the policy itself. Two notable problems the government has run into over this period are the worst global recession since the Depression, and the slowing economic growth of our most important trading partner, China. But this issue nonetheless throws up several interesting questions.

These include economic questions, such as whether it’s sustainable to rely so heavily on personal income tax, rather than other, more efficient (and therefore more predictable) taxes. Political questions, such as the question of what it might take for voters to accept an increase in the income tax rate – or, more to the point, an increase of the size that would allow governments to fund an apparently ever-increasing array of government services.

But perhaps the most interesting question is one a little more philosophical in nature: Is there something fundamentally wrong with democracy if politicians apparently feel the need to tell voters one thing while doing the exact opposite?

This question is part of a debate that is as old as Western civilisation. In the 4th century BCE, Plato argued that democracy is an unjust (and undesirable) system because it results in a society that is ruled by carnal desires. Democracy leads to a lack of authority which means that society isn’t organised according to rational design but is rather like an anarchic society where all that matters is what each person decides they want. This leads to Plato’s famous argument that society should be ruled by an elite group of ‘philosopher-kings’, who could be trusted to think things through before making decisions.

In a more contemporary work – a report called ‘The Crisis of Democracy: On the Governability of Democracies’ published in 1975 by a controversial organisation called the Trilateral Commission – a similar argument was put forth, this time with a modern context. The authors argued that as democratic decision-making became more prevalent during the 20th century, Western governments became increasingly overburdened with providing the services demanded by citizens, while at the same time their authority to use expert advice to make decisions was eroded.

Since the release of that report, the ‘crisis of democracy’ has been a popular topic in academia. But recently, it seems to have become popular outside of academia, as well.

Electoral results in the United States and parts of Europe have become a common source of worry, particularly among progressives and advocates of international trade. The well-publicised economic success of an authoritarian China has led some casual observers to question whether democracy is all it’s cracked up to be, as a relatively small group of technocrats appeared to lift 700 million people out of poverty. Then there was the shock of the ‘Brexit’ referendum result, while in Eastern Europe there was the democratically-sanctioned annexation of part of the Ukraine.

But when approaching this topic, it’s important to be clear about which question we are trying to answer. Two caveats are in order.

The question should not be, ‘Do we need to improve democracy in Australia (or any other democratic country)?’. In the real world, no system is perfect, so there are always ways to improve the mechanisms that determine how well a system works. In the case of democracy these mechanisms are institutions – the rules that prevent things such as corruption, lobbying and media manipulation from adversely affecting outcomes. That we can and should improve these institutions goes without saying.

Another question we might ask is if democracy is the most ethical system. An argument can be made that authoritarian systems are more efficient at improving a society’s wellbeing, but that democracy is the superior system because the ability of citizens to participate in decision-making is more important than the outcomes. Where one stands on this issue depends on their moral values.

Both of those questions are important, but the question that Plato and the Trilateral Commission report were addressing is arguably more important. From a practical point of view, why would we choose a democratic system over an authoritarian system?

The most obvious reason is that democracies are better able to prevent corruption. Provided that the aforementioned institutions are doing their job, democracy creates a level of accountability that doesn’t exist in authoritarian systems.

There are factors that provide some accountability in authoritarian systems: it’s possible that poor performance by a dictatorship will lead to a revolution, and a dictator’s own ego and desire for a positive legacy could drive them to at least appear to be doing a good job. But a well-functioning democracy will certainly be better at incentivising leaders to improve the wellbeing of their citizens (rather than focus on their own wellbeing, or the wellbeing of their friends and family).

A less obvious reason that democracies work better than authoritarian systems is that they can utilise a larger pool of cumulative knowledge.

Theoretically, a democratic government asks the opinion of an entire population before making any decision. But the information they receive amounts to more than just conventional knowledge (such as language and maths skills) and wisdom (knowledge gained from experience). Perhaps the most important information that democracies have at their disposal is local knowledge – a farmer in a rural town will likely have a better idea about the effect of a policy or the demand for a service in their town than a politician who spends most of their time in capital cities. This may explain why China, despite being authoritarian on-the-whole, holds direct elections at the local level.

The problem is that making the most of this informational advantage is not straightforward. Again, the role of institutions is clearly important, but a population’s education level also becomes crucial.

The level of education in this case refers to the rate of attainment, the level of attainment and the quality of the education received. When any of these attributes are lacking then a government is less able to rely on the information it gets, which means that the population is less able to rely on the government to make well-informed decisions.

The ability to read and perform basic statistical analysis is less likely to lead to worthwhile knowledge unless a voter knows how to ask the right research questions. Wisdom gained from experience is virtually useless if a voter is easily tricked by fallacies such as the ‘post hoc ergo propter hoc (correlation proves causation)’ fallacy. And local knowledge about the services a community requires is less useful unless a voter understands how to think about basic economic problems.

It follows, then, that the level of education is an important determinant of how well a democracy performs. This makes sense intuitively but it is worth investigating empirically, as well.

The Economist Intelligence Unit (EIU) releases a report each year which includes an index containing 167 countries called the ‘Democracy Index’. It rates countries according to a score based on answers to 60 questions covering five categories: electoral process and pluralism, civil liberties, functioning of government, political participation and political culture. If a country scores between 8 and 10 they are categorised as a ‘full democracy’, if they score between 6 and 8 they are a ‘flawed democracy’. A score below 6 indicates the country is either ‘authoritarian’ or a ‘hybrid regime’. (To learn more about how the index is compiled, check out this article.)

Finding a standardised measure for the education level of a population is more difficult. The best statistic to use is arguably tertiary (post-secondary) education attainment rate. This is certainly an imperfect measure, partly because each country measures this slightly differently, but also because there is likely a large difference between the education levels of, for example, someone with a Doctorate in Theoretical Physics and the holder of an Associate Degree in Business.

However, students who complete post-secondary education were likely required to demonstrate a greater ability to perform research and analysis than the average secondary school graduate. Furthermore, to complete the qualification, they require not only the ability to learn but also a certain amount of inquisitiveness.

The following graph plots 2016 Democracy Index scores for X countries against attainment rate data from the Organisation for Economic Cooperation and Development (OECD). As expected, it shows a positive relationship, indicating that a higher attainment rate is correlated with a higher level of ‘democratic performance’. (Note: the graph only includes countries that scored above 6 on the Democracy Index, so each of the countries included is categorised as a democracy.)

Democracy Graph

This graph doesn’t allow us to conclude that a higher attainment rate leads to better democratic performance. However, it does throw up some more interesting questions. For example, why is the United States categorised as a ‘flawed democracy’ by the Index despite having one of the highest attainment rates?

One explanation for this is that the Americans’ institutions are letting them down. Indeed, political scientist Francis Fukuyama has argued that the United States is an example of a country suffering from what he coined as ‘institutional decay’.

Another explanation is that the high attainment rate of the United States doesn’t reflect a high level of quality in the education Americans receive. It has been argued that the quality of American universities – long considered the world’s benchmark – has been declining in recent years. But it may also be the case that the quality at lower education levels is lacking. Surveys indicating that American literacy rates are below the OECD average suggests this is the case. (While a large immigrant population explains part of these results, a low rate for Black Americans is evidence that poor educational outcomes are also a significant part of the story.)

Australia enjoys a privileged position in the top 10 of the Index at number 6. However, the distance between our score and that of the impressively-rated number 1 Norway, which has a similar attainment rate, tells us that there is room for improvement.

One of the spending reduction measures in the 2017 Budget is a cut in university funding. If this cut leads to a lower attainment rate or a reduction in the quality of Australian universities then it would be a poor policy. However, the fact that the cut will be largely neutralised by an increase in tuition fees, which can be covered by the HECS-HELP loan scheme, means that both of those outcomes are unlikely (or at least that the effect will be minimal).

Alongside this policy is a proposal to direct more funding to disadvantaged secondary schools. There is a strong argument to be made that education funding at the secondary or early education level is more likely to increase the tertiary education attainment rate – particularly in Australia. Due to a largely merit-based system, access to university in Australia depends almost entirely on educational outcomes at the secondary level.

Furthermore, if a student enters university with a higher quality secondary-level education, then they are more likely to complete the degree, and they will probably get more out of the degree, as well. This would mean the end-result is not only a larger university-educated population, but also a smarter one.

If this occurs then it may be that as our tertiary education attainment rate increases, the quality of our democracy will move closer to Norway, rather than towards the United States.

Astronomer Carl Sagan is perhaps most famous for his efforts to popularise science. He believed that being human means living in a ‘demon-haunted world’, where our own irrationality makes us vulnerable to becoming a victim of potentially harmful things such as pseudoscience and superstition. In a brilliant interview recorded shortly before his death, he summed up his view on the importance of education with the following words:

“If we are not able to ask sceptical questions, to interrogate those who tell us that something is true, to be sceptical of those in authority, then we’re up for grabs for the next charlatan, political or religious, who comes ambling along … People [have] to be educated, and they [have] to practice their scepticism and their education. Otherwise, we don’t run the government, the government runs us.”

Budget 17/18: ScoMo’s Gift to the Retail Sector

There’s plenty in the 2017 budget for the struggling retail sector to be happy about.


The retail industry met Scott Morrison’s 2017 budget with a shrug and a lingering pout.

Retailers weren’t expecting much, which explains the shrug, but they were also hoping for something, hence the pout. Employer group aficionado Russell Zimmerman mustered the term “mixed bag” to described the apparent malaise, which is essentially the lobbyist equivalent of ‘move on… nothing to see here’. Myer CEO Richard Umbers was slightly more pointed, declaring that there is little in the papers to bolster ailing consumer fundamentals.

Perhaps the most entertaining part of ScoMo’s toils for retailers were the Treasury estimates for the domestic economy, which likely led to several extended laughing fits in Boardrooms. After all the idea that spending would pick up amid continuing wage stagnation and historic levels of household debt is a herculean effort of economic gymnastics that only Treasury could stick.

Nevertheless, it’s hard to blame retailers for wanting a bone, especially after retail figures for March left analysts warning that the sector is on the verge of recession. To top it all off international brands – which have been the subject of much taxation related discussion- are biting into the pie at record rates. That’s to say nothing of Amazon, the impending arrival of which has sent investment banks and their analysts into a frenzy, with several downgrades this month moving share prices into an even steeper downward spiral than is the trend.

But while it’s true that the retail sob story has merit, complaining about how a 0.5 per cent Medicare levy and hand-balled bank tax will hit consumer hip pockets is the type of short sighted quarter-to-quarter earnings nonsense that’s been leading retail’s downhill charge. Citi analyst Craig Woolford’s numbers peg the average benefit of the budget to households at $55 by 2018-19, which is nothing to write home about. But what’s harder to model and ultimately of greatest possible impact to retailers is the sizeable fiscal cannon the government has aimed at the country.

Under new plans the federal government will spend $75 billion over the decade on large scale infrastructure projects, including the long awaited inland rail and western Sydney airport developments. Aside from just turning over the macroeconomic engine, these projects will provide retailers with new trade opportunities in the medium to long term, particularly for large format retailers who have found it difficult to secure floor space in inner-urban areas.

Compounding that are housing affordability measures and their likely effect on dwelling starts, a key metric for anyone selling something that goes in a home, as well as investment in Melbourne’s northeastern and Sydney’s western suburbs.

To his credit Zimmerman welcomed the measures, alongside plans to return the budget to surplus -ever the optimist- but Umbers’ subsequent assertion is an ostensible admission that he doesn’t believe in animal spirits.

It’s no secret that developed economies, including Australia, are currently falling prey to economic stagnation, and irrespective of whether you’re willing to attach the term secular, it’s fairly rich to turn around and partly blame the “subdued” economic environment for a sales slide while saying that tens of billions in fiscal stimulus won’t help.

Those maintaining hope that the RBA will pull economic growth out of thin-air, even as record low interest rates continue to battle against persistently low inflation, are pining for the days of full employment and mining sourced returns. Indeed, retailers seem to enjoy maintaining hope for days long passed, having been slow to adapt to rapidly changing consumers in the last decade they are now paying the price of disruption. But, aside from taking a good look at taxation reform, there’s not much the government can do about continually compressing retail margins.

Like it or not international retail is here to stay and the relatively healthy margins Australians have enjoyed from our previously isolated pacific island are long gone, never to return.

The best the government can do is to act in the interests of Australia’s long term economic prosperity, which is what this infrastructure focused budget is shooting for. Prosperous consumers make for prosperous retailers, but which brands will enjoy that success is overwhelmingly a question for the Boardroom – not parliament house.

Fiscal Policy and Pickles for the Economic Potato

 

Budget talk can be nauseating but it is important. Understanding what all the fuss is about is even more important.

Some of you may not care for politics. Some of you may not care for economics. Naturally a lot of you don’t care about the Government’s yearly budget announced last week. Even if you’re the kind of person who would rather spend their Monday evening removing their own kidney with a blunt piece of cutlery than have to listen to a politician justify themselves on ABC’s Q&A; even if you’re the kind of person who thinks to negative gear has something to do with a car’s reverse function; politics, economics, and the budget affect you. It effects the type of society you live in, what you collectively choose to value, who deserves what, and what means are justified to achieve said ends. So, if this paragraph has got you walking toward the cutlery drawer, tracing an outline to locate your kidney whilst also kinda sorta making you want to know more, then this article is for you.

Politics is about conflicts in ideology. Economics is about the allocation of resources. Neither are black and white or good and bad. It’s very rare that people agree in all things politics and all things economics.This is why you will so often find yourself rolling your eyes at some of the pointless argy bargy in popular debate while you continue scrolling in the eternal search for the next fresh meme.

The truth is the world is in a bit of an economic pickle. What we’re experiencing is a sluggish hangover from the excessive largesse that came to a grinding halt around ten years ago. The most notable halt being the Global Financial Crisis (GFC) that revealed itself in the financial system as a result of excessive lending. The ripple effects are still showing themselves today. Europe is grappling with government debt issues that make ours look about as scary as a miniature dachshund puppy. While even China is staring down the Y-axis of slowing economic growth.

Australia itself avoided such a debt crisis in 2007-09 thanks to a healthy government surplus to the tune of $20 billion. This is no thanks to the oft-touted ‘fiscally conservative’ Howard-Costello era (the short one with the eyebrows and his tall mate). It instead had everything to do with Chinese demand for the stuff we dig up out of the ground. The International Monetary Fund have since pointed out that of the periods of excessive spending by Australian government 2003-07 take home the meat platter for fiscal profligacy. Feel free to use that the next time your conservative Liberal Party hack uncle tries to tell you “Howard was the best thing to ever happen to this country”.

As income earners we keep the economy ticking through our consumption habits and our saving habits. Large chunks of household saving is put back into the economy in the form of investment that naturally then goes to the pocket of someone else who in turn consumes, saves and/or invests. During economic pickles however the certainty that we can consume and invest in the same way we did previously goes out the window. Households and businesses tighten their belts and incidentally the pickle becomes even more ominous.

Enter fiscal policy. Fiscal policy is the tool of government that allows it to adjust its spending levels and tax rates so as to monitor and influence the nation’s economy. The role of fiscal policy during a time like we are currently seeing is to bring the economy back to producing at its optimum level.

In times of economic downturn fiscal policy is the hero that steps in to replace loss of economic activity. The government should not be tightening it’s belt as Abbott and Hockey circa 2013-14 would have us believe. Job creation through infrastructure spending like Turnbull’s $20 billion pledge for an inland railway in last week’s budget is fiscal stimulus designed to make us humble consumers feel more comfortable waving our credit cards around.

Overdo fiscal policy however and the public spending crowds out potential investment from the business sector. The Howard era did not necessarily overdo fiscal policy but they did rely too heavily on consumption trends that came from an increase in household debt. They most definitely relied too heavily on the possibility of the mining boom continuing on forever and ever.

Enter politics. It is very difficult politically to wind back spending. Even with amazing brains such as Ross Garnaut warning us that the economy would soon be entering the ‘Dog Days’, Howard had elections to win. It is even more difficult to wind back tax breaks given to wealthy people during times of economic largesse as they are often the source of political power. Instead it is easier to pretend the future looks bright.

In 2010 Julia Gillard was facing the beginning of the government ‘debt emergency’ narrative you might remember. Labor governments had spent the surplus inherited from the Howard government on fiscal stimulus and the opposition were out for blood. The mining boom was predictably coming to a grinding halt so the worst days were yet to come. And yet, Wayne Swan as treasurer in 2010 claimed a government surplus was just three years away.

At the time Swan had incorporated a new assumption into the budgetary estimates. It’s a built-in optimism generator that assumes a period of below-trend growth will always be followed by a period of above-trend growth. The idea was not so crazy at the time as it was based on real figures of the 1990s. Rainbows, sunshine, lollipops and a surplus-riding treasurer beaming with pride was only a few years away. Turnbull himself has branded this years budget as “Better days ahead”. This assumption, along with a plethora of other overly optimistic truth avoiding predictions has remained each year since and each year it has been wrong.

The risk of political failure sees successive treasurers using such flimsy assumptions to encourage our trust and improve their popularity. The result is optimistic fiscal policy that is handed down on a false promise of fruitful returns. This in turn means the level of government debt is here to stay with a hefty net interest payment of $13.4 billion this year alone. To put this in context this year the government is spending more on the interest accrued from its debt than it is on the pharmaceutical benefits scheme at $12.4 billion. So you see like so many things in life fiscal policy and the resultant government debt is neither good nor bad but depends entirely on contexts and forecasts for the future.

Policies like the medicare levy that put an emphasis on healthy people and healthy workers have good returns. Funding students based on their level of disadvantage creates structural security with a long-term vision. These examples of Turnbull’s vision are promising. Demonising the unemployed through mandatory drug testing for the sake of political fodder is not promising (not to mention hugely costly). Consistently schizoid attempts at housing reform to protect the wealthy from losing precious tax breaks through negative gearing and the capital gains tax concessions are not promising. Ignoring the threat of climate change so as not to upset industry is not promising. Ironically a carbon tax that puts a price on the pollution that is set to be hugely costly to Australians in the future could in fact be the kind of policy that sets meaningful budget reform on track. When politics is involved the need for truth is bumped by the need to appease those with power. Our political leaders have asked us to trust them but why should we?

Betrayal erodes trust and for younger generations especially there is little cause for trust and a lot of evidence of betrayal. Australia in its current situation is not facing the economic trauma of other parts of the advanced economic world. We are relatively safe. To stay safe however we need to trust that our future is in good hands. This requires the truth from both sides of politics. It requires an educated and economically literate voting polity. It requires our political leaders to leave their differences at the door and make some attempt to co-ordinate and deliver the politically difficult outcomes needed.

The future lies in the hands of millennials. The most educated and connected generation yet, millennials face a future of uncertainty never experienced by their elders. In this uncertainty though is a chance to explore the future of ideas, economics and politics and do it better than predecessors. A future that is less divided and not dictated by bullshit argy bargy. A future that instead faces hard truths and political difficulty. A future where articles about potatoes and pickles can only be about potato salad and not the economic security of Australians.

Budget 2017/18: Birmingham goes for Emerson 2.0

Birmingham goes for Emerson 2.0 – Trading off higher education spending for schools


Voters will be forgiven for thinking the Federal 2017 budget looked more ALP than LNP as the ghosts of Labor budgets past have been conjured up. The Gonski needs-based schools funding appeared dead after the Coalition’s 2014 budget, but like the good Lord it has been resurrected again three budgets later – now as ‘Gonski 2.0’. Savings to fund Gonski over the next four years have been found in higher education, a strategy hauntingly reminiscent of the Labor Government and then Minister Craig Emerson in 2013.

The budget context

In 2013 Craig Emerson as Tertiary Education Minister announced a 2 per cent efficiency dividend on universities recurrent teaching funding – the Commonwealth Grant Scheme (CGS) – which, alongside changing a student start-up scholarship into a loan, equated to $2.3 billion of savings. Yet for Emerson and the Gillard Government, the cuts were carried out for the best of causes: to help fund needs based schools funding policy. Alongside the new National Disabilities Insurance Scheme (NDIS) Gonski was a large expenditure commitment which put further pressure on a deteriorating Government budget.

Yet over the last decade revenue has not kept pace with spending, leaving what the boffins at the Parliamentary Budget Office (PBO) call a ‘structural budget deficit’ . Where controlling for cyclical fluctuation reveals recurrent government expenditure exceeds recurrent revenue. The revenue gap was in part due to the lower price of iron ore and coal and the end of the construction phase of the mining boom which dampened company tax receipts. The big factor though was the long-term erosion in the income tax base caused by large income tax cuts handed out by John Howard and Kevin Rudd. According to the PBO, these tax cuts account for two-thirds of the reduction in revenue between 2002-03 and 2011-12. Yet Labor also neglected to make the necessary but difficult decisions to increase the revenue base after the ‘salad days’ of high iron ore prices were over.

When the Coalition came back into power their 2014 budget strategy was to declare a budget emergency, cut public spending, and deny insufficient revenue was even an issue. As we all know, this resulted in perhaps the most scorned budget in living history. After a few years in the wilderness with an intransigent Senate and a leadership change, the Coalition has both toned down the rhetoric of ‘deficit and debt disasters’. More surprisingly, they have tentatively embraced the social spending of Labor, and have consolidated the NDIS putting forward a viable funding plan for Gonski 2.0. At the same time, it is still a political aspiration of both major parties to bring the budget back into surplus. The 2017 budget engages in substantial revenue raising measures, most notably the levy on big banks.

The budget papers reveal the $2.8 billion cut to higher education as the single biggest savings measure for the Government, and not far off the extra money assigned to Gonski 2.0 over the next four years. It is perhaps not surprising that, as Michael Sercombe has argued, cutting higher education funding is politically safe for the Coalition with only 22.6 per cent of Australians under 30 with bachelor degrees voting for the Coalition in the 2016 election. There are certainly other areas the Government could have looked to for savings. Some include; abandoning the commitment to cut corporate tax, as well as plugging up tax expenditures such as negative gearing, the 50 per cent capital gains tax discount, and superannuation tax concessions. Yet the Government remains committed to the corporate tax cuts, and are keenly aware at the electoral damage removing tax expenditures would cause them. Simon Birmingham, the Minister responsible for both schools and universities, has both had to find savings and find a way to fund Gonski 2.0. In doing so, he has engaged in a budget strategy we will call ‘Emerson 2.0’.

Emerson 2.0

Universities, students, and graduates have been called on to help offset some of the new funding towards Gonski 2.0, which adds $2.2 billion more to schools funding compared to the 2016 budget. The case for university cuts is assisted by a recent Deloitte report that was commissioned by the Government. The report found that university teaching costs per student in most university disciplines were less than the sum of the Commonwealth and student contribution that the universities received in revenue. As a result, universities have been dealt out a 2.5 per cent cut to their base funding in each of 2018 and 2019, and the Government will concurrently also reduce tuition subsidies for students by 7.5 per cent over the next four years. Alongside other measures, this will save the Government budget about $2.8 billion over the next four years in underlying cash terms.

The Government will allow universities to make up part of this reduction in the CGS with a gradual 1.8 per cent per annum rise in the maximum student contribution universities can charge students, amounting to a 7.5 per cent rise overall by 2021. The fee increase will see students paying between $700 and $3,900 more for their degrees by 2021. Holders of HELP debt will also begin repaying earlier, with a new repayment threshold to be set at $42,000, and crucially a lower starting rate of 1 per cent. For a graduate earning just above $42,000, this amounts to about a $400 annual repayment. Crucially, the indexation of the threshold will be changed from average weekly earnings (AWE) to the consumer price index (CPI).

The Government has consolidated support for the demand driven system, which has been under fire over the last few years amidst problems of worsening student retention, completion, and graduate underemployment. Demand driven funding will be extended to approved diploma, advanced diploma, and associate degree courses. The opaque system of postgraduate Commonwealth Supported Places (CSP) allocation, which favours the Group of Eight institutions, will be replaced by a student centred voucher system which allows students to take their voucher to any university of their choice.

The Higher Education Participation and Partnership Program (HEPPP), designed to build aspiration for higher education among disadvantaged students to improve their university outcomes, will be reformed and importantly enshrined in legislation. Alongside the efficiency dividend, the Government will quarantine 7.5 per cent of each university’s base funding to be put into a performance based funding pool, beginning in 2018. By 2019 a set of so far undecided performance benchmarks will help determine how much cash each university will be able to draw from the pool.

Efficiency dividends can hurt efficiency and performance funding can hurt performance

The best thing that can be said about the efficiency dividend to university base funding is that it really could have been worse. This budget officially abandons the so-called ‘zombie measures’ from the 2014 budget, which would have seen a 20 per cent cut alongside uncapped fees which the universities could use to make up the Commonwealth shortfall. Relative to 2014 this cut is smaller, and the sector can absorb some of the cut through the full fee international and postgraduate student market. The international student market has improved solidly after a slump in 2011. International enrolments are now growing faster than domestic, and international tuition fees made up nearly a fifth of total revenue for the sector in 2015.

Figure 1: Net operating balance for Australian universities in 2015

Figure 1: Net Operating Balance for Universities in 2015
Notes: This includes a number of one-off payments, and so overstates the extent to which recurrent revenue contributes to the net operating balance. Once these one-off payments have been accounted for more universities would be in deficit. Sources: Higher Education Finance, 2015

Figure 1 shows the net operating balance for universities in 2015. A significant few universities that struggle to attract international and postgraduate students already have budgetary issues, and the cuts will really hurt. They are likely to result in cutting academic and student support programs, which will ultimately affect the student experience. The cuts may also threaten the long-term financial health of universities. For instance, in their most recent audit of the sector in Victoria, the Victorian Auditor-General’s Office advised that, despite strong revenue growth, university investment in buildings and equipment was not keeping pace with the rate that current stock was depreciating.

The cuts also come just as the National Tertiary Education Union (NTEU) has entered the next round of enterprise bargaining with university administrations. The NTEU began the round aiming for a 15 per cent pay rise over the next four years, but the immanent cut to university budgets alongside slow wage growth across the economy puts a great constraint on their claims.

It is likely that the cut will be a catalyst for further staff cuts across the sector, and aggravate a trend towards the greater casualisation of the academic workforce. Since 2012 in full-time equivalent terms, the share of academic casual staff as a proportion of all academic staff has continued to rise, from 21 per cent in 2011 to 23 per cent in 2015. In full-time equivalent terms, between 2012 and 2015 an additional 1,759 casuals are now employed compared to just 1,260 extra full-time and fractional full-time academics. Casual staff are cheaper, and they can be hired and fired more easily. This helps universities manage volatile student demand, as well as uncertainty around Government funding. University balance sheets reflect this, with academic staff costs as a proportion of total expenditure continually declining since the introduction of the demand driven scheme, from 29.7 per cent in 2012, to 28.7 per cent in 2015.

The performance funding measures are yet to be developed, but caution is required. Performance funding can be counterproductive if incentives are not properly aligned to the real outcomes policy makers seek to achieve (see Goodhart’s Law). Performance funding may also be punitive to universities that may have poor student outcomes, through no fault of their own. Regional universities, universities which serve greater proportions of disadvantaged groups, or universities in areas experiencing poor economic times, will have very different natural performance benchmarks based on their unique missions. If these factors aren’t taken into account, performance funding is likely to be a Procrustean bed – cutting the funding out from universities that most need them. Furthermore, it is not obvious as to why future members of a university community – students, academics, and administrators – should be funded according to the performance of their predecessors. It is a good sign the Government has flagged both a long consultation period and a more tailored approach to devising performance benchmarks. Still, in the worst case scenario after combining the efficiency dividend and the loss of performance funding, some universities could lose up to 10 per cent of their recurrent funding over the next few years.

Higher student contributions are fair

In his budget reply speech, Bill Shorten rejected the Government’s fee increase measures declaring that, ‘a university is an opportunity you earn – not a privilege you inherit’. Yes, quite. Yet the data shows the opposite tends to prevail – universities are still predominantly occupied by the beneficiaries of inherited privilege. Since 1989 the proportion of low SES students attending university has remained the same at around 15 per cent, although the move to a demand driven system in 2012 led to an increase that has persisted. In the first half of 2016, only 16.6 per cent of all higher education students were from low SES postcodes.

While nobody likes to have to pay more for university, there is little evidence that higher fees would deter disadvantaged students. Despite fee hikes both in the United Kingdom, and here in 2005, the proportion of low SES students continues to grow. One reason higher fees have little effect on disadvantaged students has to do with the nature of the student loan scheme, which removes any up-front cost to studying, and protect loan holders against downside risk. HELP loans are income contingent, meaning repayments are only required above a certain income threshold.

Another reason is that, even if the Government completely removed the tuition subsidy and replaced it with student contributions, a university degree would likely still have substantial net financial and non-financial benefits. Compared to someone who has only finished Year 12, the median male graduate earns about $1.4 million more over their lifetime, and for the median female graduate nearly $1 million. Graduates are also much less likely to be unemployed, more likely to experience better health outcomes over their life, and are more likely to be employed in meaningful and secure jobs. Low participation amongst disadvantaged students is more likely driven by sociocultural rather than financial factors. Students from disadvantaged backgrounds require no up-front money to pay their fees, yet universities will only offer places to students deemed academically prepared. In a 2009 study using longitudinal survey of Australian youth (LSAY) data, Buly Cardak and Chris Ryan found that, after controlling for a student’s university entrance scores, university participation rates were approximately equivalent between students from different socioeconomic background.

What matters for getting into university is prior learning opportunities. To support this claim, I have gathered index of community socio-educational advantage (ICSEA) scores for Victorian senior secondary schools from the My School website. ICSEA measures a school’s educational advantage based on parent’s education and occupation, geographical location, and proportion of Indigenous students. I matched this against data from the Victorian Government’s On Track survey, which tracks the 2016 activity of Year 12 completers in 2015.

Figure 2 shows the plot of university participation rates and ICSEA scores for Victorian secondary schools. There is a strong relationship between a school’s ICSEA value in 2015 and the proportion of 2015 Year 12 completers that enrolled in bachelor degree in 2016. In some of the most disadvantaged schools less than a third of the Year 12 cohort go on to university, whereas in the most advantaged schools nearly the entire cohort does.

Figure 2: Victorian schools by ICSEA scores in 2015, and the proportion of 2015 Year 12 completers enrolled in higher education in 2016
Higher Ed ICSEA Correlation
Notes: Includes 389 schools in the analysis. The proportion of students enrolled in higher education also counts those that deferred their place in 2016. Sources: My School website; On Track (2016)

Parental education and occupation is also important. According to the Australian Bureau of Statistics (ABS) 2014 General Social Survey, 57 per cent of all people aged 18 to 70 that had a male parent with a bachelor degree or above, had a bachelor degree or above themselves. In contrast, only 25 per cent of the same age-brackets, except with a male parent with no post-school qualifications, had a bachelor degree or above. As figure 2 shows, 57 percent of 20-24-year-old people with parents in managerial or professional positions either had, or were studying, a bachelor degree or higher. In contrast this was only true of 20 per cent of the sons and daughters of machinery operators, drivers, and labourers.

Figure 3: Highest education attainment or enrolment of 20-24 year old’s by parent occupation 2014

HILDA Higher Ed

Notes: Original data taken from the 2015 HILDA survey. Sources: See Table 3 in Norton and Cakitaki (2016)

Lowering the repayment threshold

A lower repayment threshold makes the HELP system more sustainable over time, but it does throw into question the underlying philosophy behind the HELP scheme. One of the ticking time bombs in the budget is the HELP program. HELP loans have two main costs to the budget: first is an implicit subsidy on the borrowing costs students face, because HELP is indexed to CPI but the Government has to borrow the money it lends out at the market rate; second is debt not expected to be repaid (DNER). It was never intended in the design of the loan scheme that everyone would repay their HELP debt in full, yet as more people enter the HELP system the potential cost of HELP to the budget becomes much higher. According to recent Australian Tax Office figures, over 2.4 million people had nearly $48 billion in HELP loans remaining outstanding, and only 22 per cent of debtors made a repayment in 2013-14. The lower threshold will bring an estimated additional 183,000 HELP debt holders into the system. The architect of HELP, Bruce Chapman, has also argued that the lower threshold improves the case for expanding the demand driven system to include sub-bachelor places, the graduates of which typically earn much less than bachelor graduates.

Yet the new proposed threshold changes the philosophy of HELP as it is conventionally understood. HELP has traditionally been seen less as a loan, and more as an extra contribution graduates make once they begin earning incomes higher than the average Australian. The new threshold of $42,000 is nearly $5,000 below median earnings, which in 2014-15 was $46,854. While this is still substantially above the minimum wage, the policy discourse has changed to one of personal responsibility. Rather than insure graduates against the event of lower than average incomes, HELP is now being reimagined as insurance against financial hardship. Now it’s more a safety net than socioeconomic mobility insurance.

1.0 cheers for Emerson 2.0

As a strategy, Emerson 2.0 is probably the best of the worst options, or as the late Neville Wran would say, ‘a shit sandwich’. The cuts were probably expected by the sector, but they will still hurt, and are likely to affect the student experience over time. The shift to more performance based funding leaves room for concern on the specific details. Increasing the student contribution was probably the least damaging cut, and a better outcome may have been to increase the contribution further instead of an efficiency dividend. The lower repayment threshold will help the budget over the long run, but it also fundamentally changes the philosophy underlying HELP. In an ideal world there were better places to find savings to fund Gonski 2.0, including winding back corporate tax cuts, and removing tax expenditures. Yet given the political constraints Simon Birmingham faces, his Emerson 2.0 strategy deserves a single cheer.

Budget 17/18: Drug Testing Welfare, does it add up?

The federal government has announced, in their 2017 budget, plans to drug test welfare recipients and link payments to their test results. They plan to test 5,000 recipients as part of a trial. This includes the possibility of selecting areas for testing based on testing the sewerage of certain suburbs for traces of drugs.

A similar program in New Zealand over three years saw just 0.47% of tested welfare recipients failed the drug test. In 2015, New Zealand spent $1m testing 8001 people and 22 tested positive, a mere 0.27%. Similar programs have been run in various parts of the United States. In Missouri they spent $336,297USD in 2014 testing 446 of the 38,970 welfare applicants for drug use and 48 tested positive, a mere 1.1%. In 2015, 10 U.S. states spent a total of $850,909USD testing welfare recipients and found 321 positive cases out of 2,996, a total of 10.7% and one percentage point higher than the national drug use rate of 9.7% – although Kansas and North Carolina only apply tests to those under ‘reasonable suspicion’ of drug use and Maine tests those previously convicted of drug offences only. Utah, a state which does not base tests on suspicion or convictions, had only 18 of 460 test positively, less than half the national rate at 3.9%.

With positive results from drug testing payment recipients often turning out lower the national rate, it may be the case that those who are worse-off simply cannot afford to spend their incomes on much else besides necessities.The Prime Minister has stated that this policy is “doing them a favour”, and that “substance abuse and drug dependency have a high correlation with unemployment”. In his own words, “The lesson is: don’t do drugs”. While it is true that substance abuse and drug dependency have a high correlation with unemployment, it is not necessarily the case that drug use causes the user to be unemployed. It is perfectly believable that someone without work may be more likely to turn to substances due to their unhappy situation. As these programs have consistently cost more money than they have saved, as seen in both the United States and New Zealand, the question which arises is: why drug test welfare recipients at all?

If the government does not wish for people to engage in illegal activity such as using illicit drugs then perhaps they should randomly drug test all citizens and avoid targeting a particular, more vulnerable, group. If the government does not wish for people to use government support to engage in illegal activity then perhaps they ought to drug test and monitor pensioners, people who negatively gear, people in industries which receive subsidies or beneficial regulations, students and indeed politicians. Indeed, the government could test the sewerage of suburbs with high levels of pensioners or investment property owners. Of course these programs would also be likely to cost more to implement than they would save, so while they would be a net negative to the budget, perhaps they would enable the government to sleep more soundly at night knowing that less people are using government transfers to buy drugs.

When discussing his proposal and design for a negative income tax, economist Milton Friedman argued that the government should simply not waste administrative resources policing the activities of recipients of welfare. Ultimately targeting people on welfare may prove to be a popular move politically for the government, and although I believe it will be a net negative for the budget, they may push ahead with the program even as costs add up if what they are really paying for is votes.

Daughters of War

New Wars Through a Gendered Lens of Feminist Theory

(In October 2016, The PPE Society hosted a panel discussion inspired by this article. Click here to see the recording.)

The study of new wars highlights a distinction between traditional warfare, or old wars of the nineteenth and twentieth century, and the “wars of the era of globalization” (Kaldor, 2013). There are prominent differences between old and new wars in their actors, goals, methods and finances. Old wars were between state actor’s, fighting for geopolitical or ideological reasons through structured battles between armed forces and financed through the state, often by taxation of the citizens. New wars transcend these traditional boundaries, they are fought by an array of actors including but not limited to state actors in collusion with non-state actors, mercenaries, jihadists, warlords and others, fought over and for identity using tactics directed towards civilians and financed by “predatory private finance” that includes questionable taxation, Diaspora support, kidnapping, smuggling and other criminal means (Kaldor, 2013).

Feminist International Relations (IR) theory is a multi-faceted paradigm that encompasses a range of different approaches towards IR, wars, conflict and peace resolutions. Liberal feminists concentrate on women’s representation and the impact of female participation in conflict and conflict resolution, radical feminists focus on the notions of difference between men and women, and critical theory feminists look towards the social construct of gender and its implications (Whitworth, 2012).

Just as new wars have changed an array of factors of warfare, so too has there been a drastic change in the role of women in conflicts and the impacts on gender. Old wars saw women as an entity to fight for and protect, a driving force to evoke bravery in soldiers (Sjoberg, 2014) as well as a providing support either “back home” as mothers, wives and placeholders for jobs men have left behind, or as periphery support roles as nurses or administrative roles in the military. The overarching “gender stereotypes that assume men experienced the conflict as soldiers and women experienced it as victims or noncombatants” (MacKenzie, 2009) has scarcely changed for new wars.

Roles for women in an age of new wars diverge into two starkly different directions. The changed the mode of warfare has created an unnerving focus on civilians as recipients of violence which has in turn changed the role of women to intended targets in one direction, and secondly, “provides some women with opportunities to pursue political goals through violence.” (Slyvester, 2013).

Women are used as targets of violence, persecution and other attacks based on their gender in a multitude of ways in contemporary conflict. These can include the systematic use of rape, such as the mass rape by Serbian forces towards Bosnian women in the Bosnian War 1992-1993, the establishment of “rape camps” (Hansen, 2000), women being targets for genocidal rape, where gender crimes such as mutilation, murder as well as  sexual mutilation and rape in the Rwanda genocide of 1994 (Sjoberg, 2013), systematic rape as a military tactic seen in Sierra Leona, often with the abduction of women and forced accompaniment with fighting forces performing a variety of sexual acts, forced domestic labour, forced pregnancy and motherhood (Kaldor & Chinkin, 2013). Women are also being increasingly used through human trafficking and the sex industry as avenues for finance in new wars. Men and boys are also victim to gendered crimes and violations designed to emasculate and humiliate. With the use of a gendered lens provided by a feminist IR theory to new wars, there can be a much needed focus on acknowledging the differences in the ways women and men are impacted by new wars and allow for new avenues of gender based violence prevention and support during post-conflict times. Here, especially liberal feminism calls for increased female representation, which can begin to deliver an alternative to the previous, masculinity centred processes of conflict prevention, resolution and post conflict.

While some of the suggestions of the liberal feminist IR theory offers have been implemented, seen in The United Nations Security Council (UNSC) Resolution 1325, formally recognising the differing impacts of conflict on women during and in the aftermath and calling for increase participation of women in the peace processes and peacekeeping operations, there is still a significant void in the changing role of women in conflict. “Common place understandings of war today can still be starkly sex-differentiated: men do war and women suffer, support, or protest war” (Slyvester, 2013). The use of women in combat, not just as observers and victims is also often overlooked, Megan Mackenzie tackles this cleavage head on in her extensive interviews with women battling with the solider/victim dichotomy woman face in a post-conflict Sierra Leone (MacKenzie, 2009). In her study, MacKenzie comments on the “systematic and historical omission of women from post-conflict planning and development activities” (MacKenzie, 2009), referring to the implementation of the DDR in Sierra Leone that catered to chiefly males regarded only as soldiers and women only as victims, bringing to light the contrast in the number of women involved as combatants and the low numbers that participated in the DDR process (MacKenzie, 2009). A mere 6% of the adult combatants that were disarmed were female, and 8% of the child soldiers were girls, despite the estimates of female combatants being from 10% to 50% (MacKenzie, 2009). Women and girls involved in the conflict were responsible for a range of tasks including leading lethal attacks, screening and killing pro-rebel civilians,  poisoning captured war prisoners, killing and maiming pro-government officials, gun trafficking, planning and implementing public attacks, the murder of children, and more (MacKenzie, 2009). These women and girls defied traditional ideas of a soft, nurturing victim of war and now represent the violence women are equally capable of in conflict.

Further challenging preconceptions of women as nurturing and non-violent, there has been increasing numbers of female suicide bombers around the world in new wars. Between 1985 and 2010, over 257 suicide attacks have been committed by females in a range of terrorist organisations, representing about a quarter of the total of suicide attacks in this time (Bloom, 2011). Female suicide bombers are attractive choices for terrorist organisations due to their ability to evade detection of security based on the perceptions of women as protectors and not aggressors.

Radical and critical theory feminists can offer invaluable insight into the discussions of women as aggressors. By acknowledging the differences between men and women and the social constructs that have led to the increased occurrences of women as aggressors, feminist IR theorists can begin to address the motivation and prevention of increased violence, as well as working towards more effective security control that caters to the contemporary mode of warfare new wars have created.

“As the international system and the world change… many of IR’s traditional ways of understanding the sources of war, combatants, and the way war is waged and resolved, must also change” (Slyvester, 2013), this approach being highly beneficial for the analysis of new wars due to their diminishing focus on state actors. While traditional political theories, such as realism and liberalism, tend to focus on a gender neutral approach to conflict, feminist IR theory adds a gendered lens to the study of conflict and wars, new and old. This new gendered lens that acknowledges the differences in impacts felt by men and women in conflict as well as recognises the roles women play in conflicts can offer further, insightful and inclusive ways to resolve and prevent conflict.

 

Bibliography

Ashworth, L.M., 2011. Feminism, War and the Prospects for Peace: Helena Swanwick (1864-1939) and the lost feminists of inter-war international relations. International Feminist Journal of Politics, 13(1), pp.25-43.

Bloom, M., 2011. Bombshells: Women and Terror. Gender Issues, 28, pp.1-21.

Hansen, L., 2000. Gender, Nation, Rape: Bosnia and the Construction of Security. International Feminist Journal of Politics, 3(1), pp.55-75.

Kaldor, M., 2013. In Defence of New Wars. Stability, 2(1), pp.1-16.

Kaldor, M. & Chinkin, C., 2013. Gender and New Wars. Jounrnal of Internation Affairs, 67(1), pp.167-89.

MacKenzie, M., 2009. Securitization and Desecuritization: Female Soldiers and the Reconstruction of Women in Post-Conflict Sierra Leone. Security Studes, 18(2), pp.241-61.

Sjoberg, L., 2009. Feminist Interrogations of Terrorism/Terrorism Studies. International Relations, 23(1), pp.69-74.

Sjoberg, L., 2013. Gendering global conflict : toward a feminist theory of war. 1st ed. New York: Columbia University Press.

Sjoberg, L., 2014. Gender, War and Conflict. Cambridge: Polity.

Slyvester, C., 2013. War as Experience: Contributions from International Relations and Feminist Analysis. 1st ed. New York: Routledge.

Whitworth, S., 2012. Feminisms. In P.D. Williams, ed. Security Studies: An Introduction. New York: Routledge. pp.107-19.

How do we solve Australia’s housing affordability crisis?

The first step in fixing any problem is acknowledging that there is one.

After a long period of enjoying asset wealth creation and lecturing young people on the value of hard work, most of the country is finally beginning to understand the negative economic consequences of extreme property prices.

Inner city businesses face exorbitant rents and difficulty retaining workers, while the average Australian faces record levels of household debt that limits our ability to spend disposal income back into the economy.

For those worried about their ability to ever own a house, the last few months finally have some positive signs as debate on policy controls, like negative gearing, are the centrepiece of the national conversation.

But considering at the turn of the year, median property in Sydney costs twelve times the median yearly income (in Melbourne it’s nine and a half times), something must be done to quell a problem that may cause an entire generation to be locked out of purchasing their own assets.

Negative gearing – What is it and why is it a problem?

Negative gearing in Australia functions in a basic way. When an investor purchases an investment property, whatever loss they make on that property (running costs, paying interests on the loan used to purchase it etc.) can be leveraged against their taxable income.

In a nutshell, people are limiting their tax bill by claiming losses by one source of income against another.

According to Jennifer Rayner’s book ‘Generation Less’, just under 2 million Australians declared rental income to the tax office in the 2012-13 year (most recent full figures). Only 706,000 of them declared a net profit on their rentals, meaning six in ten landlords were running properties at a loss.

On average, those landlords lessened their tax bill by an average of $21,000. It’s an issue because it’s driving investor demand, as many taking advantage of the tax write off and the halving of the capital gains tax under John Howard when flipping their properties to another buyer.

Ultimately, its wealthy investors driving demand at the expense of the first home buyer.

 

Does government assistance make housing affordability worse?

During the government’s election budget, some were wondering about the relief that first home owners would receive – specifically whether it would be through various government remedies. Through conversation on social media, the topic of grants came up. Australia has wound back the First Home Owners Grant, but it hasn’t stopped Queensland at state level stumping up $15,000 for first home buyers.

But the question is does government intervention in this way make the problem worse? Catherine Cashmore, a real estate and taxation expert from the non-profit think tank Prosper Australia, believes there is no doubt about the effects of grants on housing prices.

“The evidence is unequivocal, grants push house prices upwards,” she tells upstart.

Cashmore was adamant that grants drive demand, which leads to the driving up of house prices.

“It’s sort of like if gave people an interest rate cut tomorrow and then we’d be again giving them more money that when they go and buy a house in a market that is limited in supply, and it’s not that we haven’t got enough land to supply, but limited in locational supply,” she says.

“Everybody wants to live close to the city or in a certain suburb, and it just gives many average people more money to compete with. And the evidence has been proven again and again, that these grants are nothing more than a vendor grant. They don’t assist buyers – they assist sellers.”

Former ANZ Bank chief economist Saul Eslake said similar in 2011, slamming the First Home Buyers Grant policy by calling it “a complete waste of money” and “useless” despite its popularity.

 

Land tax – an unorthodox solution?

So if negative gearing proves too hard to defeat politically and government grants do the opposite of their intention, what can there be done to curb what is now a generational crisis?

Many states have some variation of land taxes, but they exist in a form of a yearly tax on the value of property against a certain threshold.

Cashmore is an advocate of bringing in land tax at the expense of stamp duty and other transactional taxes that have influenced demand and fuelled the property speculation that’s caused prices to skyrocket.

“If you just strap it on the land tax as an extra tax, then it doesn’t really help the economy and it wouldn’t help affordability. An argument for an increased land tax is that it’s a replacement for something else and at the moment the main argument for that has been as a replacement for stamp duty,” Cashmore says.

“Stamp duty, like all transaction taxes, tends to lock people in to housing because they imply a cost into the moving process. It reduces people’s propensity to move, so therefore it stagnates the housing market and it stops people from downsizing or upsizing into property closer where they need to work or if they need to change job.”

Cashmore’s argument is that it would work in that land would be taxed by the value of the land per square meter.

The analogy she uses is that in Albert Park, 100 square meters of land and is extremely valuable – where as if we would go out to Melton, 600 square meters of land wouldn’t be anywhere as near valuable as the 100 square meters of land in Albert Park.

Essentially, the point is that land is only valuable due to what’s around it, not the actual land itself.

“They could tax the unimproved value of land, so if they build a train station next to your house and that puts the value of your land up, that’s an ‘unearned’ value. You haven’t earned that gain,” she says.

“That gain has just come to you from what the government has chosen to spend in the area. And that’s how essentially how we would value the land, how much the land price has gone up and then you would tax that.”

The tax would ultimately apply to everything that’s been added to the property value from external sources, rather than improvements such as home renovations.

Cashmore also argues there are a range of good side effects to stop the inflation of property prices – lower mortgage debt, encourages decentralisation, higher density and less chance of property being unused.

Ultimately, there is nothing wrong with idea of promoting property ownership. You could be borrowing against it to start a business in twenty years to employ others. Maybe you’re using it to fund your retirement or passing it on to your children as an inheritance.

But solving the crisis is not only economically and socially critical, but philosophically important. As Rowan Moore in the UK Guardian points out, the current set-up has completely perverted the Thatcherist concept of ‘hard work’.

Many sit and do nothing with property are rewarded, while others who toil endlessly are completely locked out of the market. Not only is reform needed, but our values regarding property need a stark reassessment.

Budget 2016: Company Tax Cuts – Catalyst for Growth or Waste of Money?

One of the “centrepieces” of the Federal Government’s 2016 Budget is a 10-year plan to lower the company tax rate. Unfortunately, partly due to a gaffe by Mr Turnbull on Sky News, much of the commentary has focused on the  cost rather than the merits of the policy.

The plan is as follows. From July 1st this year there will be an immediate cut from the current rate of 30% to 27.5% for firms turning over between $2 million and $10 million. Over the next four years the upper threshold will progressively rise to $100 million. It will eventually apply to all firms by 2023-24, and then finally in 2026-27 it will drop to 25% for all firms.

A cut in the company tax rate has long been anticipated—the Henry Tax Review recommended it way back in 2010, and both sides of government have previously said they were committed to it. Like the villagers in the Aesop fable, The Boy Who Cried Wolf, a lot of us had stopped believing it would ever happen. Indeed, if the Coalition government is not re-elected, it probably won’t happen, since both Labor and the Greens have apparently decided to launch a ‘class warfare’ campaign in response to the Budget.

It is the job of the opposition and the media to hold the government to account on issues such as transparency and fiscal responsibility, but as one commentator has pointed out, requesting the forecasted cost of a policy over 10 years is quite absurd. There is so much uncertainty involved, particularly in regards to this policy, that such a forecast is unlikely to be worth the paper it’s printed on. And Treasury does not have a good track record with even 6-month forecasts in recent times.

But cost aside, we need to ask: is a company tax rate cut a good idea?

The unapologetically left-wing think tank, the Australia Institute recently released a report that argues the answer is no.

The report’s conclusion is based on a number of findings.

First, there is no correlation between company tax rates and economic growth rates of OECD countries (and in fact, there is a positive relationship between living standards and company tax rates).

Second, time-series analysis of Australian macroeconomic indicators shows that the gradual increase of the company tax rate between 1960 and the late 1980s—from 40% to just under 50%—and the gradual reduction to the current rate of 30% both seemed to have no effect on the economy. Indeed, the economy performed better when the high tax regime was in place.

However, the conclusion that a cut would not improve the economy based on these findings is problematic. As the report notes, there are many other variables that must be considered when comparing countries, and the existence of a correlation in Australia between high tax rates and good economic performance does not mean high tax rates lead to good economic performance.

Further, these findings still provide no evidence against the argument that a company tax cut will lead to “jobs and growth,” as the Treasurer claims. Indeed, an argument such as this, which needs to take so many factors into account, is difficult to provide evidence for or against.

A recent, peer-reviewed journal article has provided some evidence.

The article first discusses the two empirical challenges involved: changes in tax policy are not random—they are influenced by many factors, including economic conditions—and even if they were random, it is not possible to observe counterfactual outcomes, as is necessary for a true scientific experiment.

One way that economists attempt to overcome these challenges is by seeking out what are called ‘natural experiments’—occurrences that by chance happen to resemble random assignment of some ‘treatment’. In the case of this article, the authors were able to exploit the fact that US states who share borders tend to have similar economic conditions. Provided that a tax change doesn’t lead to firms shifting operations interstate—which can be tested—then bordering states could be used to observe counterfactual outcomes.

The study looked at 140 increases and 131 cuts in 45 states going back to 1969. Its main findings are that, historically, increases in corporate tax rates have a negative impact on employment and wages, while cuts have fairly little impact unless they occur during a recession. A 1% reduction in corporate tax during a recession was found to cause around a 1% increase in wages, and a 0.6% increase in employment.

These findings make intuitive sense. Investment decisions are unlikely to be significantly altered unless tax changes or economic conditions make the investment more risky or less profitable. A tax increase reduces potential profit, and while a tax cut increases potential profit, it is unlikely to be a large enough increase that the business would not have gone ahead with the investment anyway—unless economic conditions also made it less attractive. A tax cut during a recession works as a nudge to businesses to go ahead despite their trepidations.

Again, a word of caution is in order. The authors note they are hesitant to extrapolate their findings to the potential effects of corporate tax changes at a federal level, since their study only looked at the effect of tax changes on employment and wages. However, this means that the positive effect of a tax cut on the economy is probably understated, since the observed increase in wages and employment is likely caused by increased investment, which also affects economic growth through other avenues, such as increased capital income.

Their findings are also fairly consistent with studies on the effect of federal-level corporate tax cuts, which generally find a moderate-to-high positive effect on GDP, implying a positive effect on wages and employment, as well.

Other favourable evidence comes from Ireland.

A government report examining the economic impact of Ireland’s famously low tax rate looked at data from 26 European countries and found that corporate tax has a ‘strong negative effect’ on where multinational firms decide to invest. The report argues that their highly competitive tax rate has been necessary for Ireland to address the economic limitations of their ‘peripheral geographical location’.

It also cites research by the OECD which used data on 21 OECD countries over the period 1971-2004 and found corporate income taxes to be the ‘most growth-damaging form of tax’, when compared to taxes on personal income, consumption and property.

Each of these studies are relevant to Australia’s current situation, for the following reasons.

First, much of the recent tax debate in Australia has rightly focused on how to address an increased need for funding of services that are predominantly the responsibility of state governments, such as health and education. Many argue that an increase in the GST is crucial to deal with this issue, while others convincingly argue that an increase in property tax would also be effective.

If we need more tax revenue to fund health and education, we should be looking at these taxes, since they are more efficient and less damaging to growth. And if a lower company tax rate leads to higher growth, then it will also increase the revenue take from these taxes, as well as from personal income tax.

Second, while our growth rate is currently keeping its head above water, some economists are predicting a recession by 2017. Evidence suggests that cutting company tax at a time of limited growth leads to more enhanced results, and is therefore an effective way to help the economy out of a hole.

Third, one of the Government’s arguments for cutting the rate is that it’s too high relative to the rates of our Asian neighbours. As the rest of Asia grows, we need to look at ways to make ourselves unique in the region, besides the fact that we have a lot of iron ore in the ground.

Australia has no choice but to transition away from being a resource-based economy. To do this we must begin to rely on new areas of the economy for growth, and generating growth in new areas requires investment and job growth in those areas. The evidence suggests that cutting company tax may be one way to do this, but the extent to which the results will be positive is not clear. This is perhaps why the Government’s plan is such a cautious one—the uncertainty may have them worried that a lack of results will leave them with too much of a revenue hit.

However, the evidence also suggests that less of a delay may mean the cut will have a greater effect, due to the relatively poor state of the economy.

Further, if the government is banking on attracting foreign investment, then they may want to consider a greater cut in company tax, and a greater reliance on revenue from more efficient sources of tax, such as property and consumption.

Budget 2016: Securitization Discourse and the Defence Budget

The morning after the release of the 2016 Budget, opposition leader Bill Shorten was interviewed by a commercial radio breakfast team. He was given an opportunity to say what was right about the budget. His first, brief response before continued political rhetoric about how the budget is good for big business and high income earners was succinct and telling:

“Defence spending is good.”

We are living in a new world order and face new warfare. We have new enemies and new allies. Our troops are in battlefields fighting with new tactics, new intelligence and new weapons (Kaldor, 2013). We honour the old alliances and build new ones to fight new common enemies. Since 1938 when defence spending was at the same level, we have seen a rise in defence force personnel from 10,000 to 58,000, with 18,000 public servants “looking at threats, guiding policy and planning for security” from the mere 57 in 1938 (Baldino & Carr, 2016).

So what do our governments do? They talk about it. Securitization is the theory that given the right context, issues progress outside the realm of “normal politics” and into a matter of security (Balzacq et al., 2015).  The advantages of using such rhetoric to convince an audience that an issue will impact national security gives politicians, military and law enforcement more justification in their actions and in their policy changes. Take for example, airport screening: we are happy to take longer to get through airport security with comprehensive bag and personal checks under the proviso that these measures will reduce the risk of terrorist attacks or airplane hijacking.

At the end of the day, do we question the recent increase in defence spending in the same way we question funding cuts to education and tax breaks for big business? Rarely. National security concerns stands outside of realms of normal politics, so it needn’t follow the same scrutiny. A state that cannot protect its citizens and sovereignty is rightfully considered a failed state.

We allow this to happen because of innate ideas that trained and experienced military advisors and governments know what is best for national security. The general public is not privy to all government intelligence regarding Australia’s national security as it can be informed about all areas of education funding debates, so we cannot expect to be able to make clear judgement as normal, everyday citizens on defence policy.  We are expected to trust in the choices made by our military in return for the reassurance that out sovereignty and individual freedoms are held safe. If waiting in line at the airport takes longer than it did before to ensure our safety, so be it.

In this new world order, what do we need to know about the budget and defence?

“Defence spending is good.”

Bibliography

Baldino, D. & Carr, A., 2016. The end of 2%: Australia gets serious about its defence budget. [Online] (1) Available at: http://theconversation.com/the-end-of-2-australia-gets-serious-about-its-defence-budget-53554 [Accessed 10 May 2016].

Balzacq, T., Léonard, S. & Ruzicka, J., 2015. ‘Securitization’ revisited: Theory and cases. International Relations, pp.1-38.

Kaldor, M., 2013. In Defence of New Wars. Stability, 2(1), pp.1-16.