Posts in "Opinion & Analysis"

Budget 2016: Why It Fails Australia 

The Coalition’s “election budget” of 2016 has in essence failed to deviate from Australia’s destructive trajectory set out by previous governments. While the budget offers little changes to spending and revenue, those it does alter function in the private interests at the expense of the wider public.

The 2016 budget removes a further $6 billion from welfare, Medicare, Universities and the public service, sectors which are already stretched to breaking point. For universities in particular, despite the fact that deregulation plans have been scuttled by the senate, the loss of funding in this year’s budget represents a 20% reduction in their funding. Unemployment benefits, while removing their “work for the dole” requirements, are replaced with mandatory privatise training similar to those deemed to be in violation of human rights in the UK.

In contrast defence spending has been increased in an attempt to move closer to the arbitrary 2% of GDP figure. Such increases in spending, in the face of white anting of public services, raise serious questions about the government’s priorities if it cannot effectively serve the basic needs of the society it is so desperate to protect.

Howard style hip pocket incentives are also being extended to sections of society from which the government is likely to garner support. The competitive advantage given to small business through tax breaks will be nullified with the extension of such cuts to medium and large business. In a similar fashion the $20,000 instant asset write off for small businesses has been increased to those with a turnover of up to $10 million. High income earners can also expect to receive an effective tax cut in mid-2017, through the scheduled end to the Budget Repair Levy. In a similar vein, changes that counter the impact of “bracket creep” only apply to those in the upper quartile of average earnings.

The 2016 budget maintains Australia’s national reduction in foreign aid spending, while maintaining the billions spent breaking the asylum seekers, or as they are better known in the mayor parties “political capital”, in offshore detention canters.

Finally it blatantly ignores the environmental challenges facing Australia and the world, by maintaining subsidies for big polluters through fossil fuel subsidies. Similarly the budget outlines $1.3 billion of cuts from the Australian Renewable Energy Agency, a move which for a nation banking its future on “innovation” is laughable. The $170 million of extra funding to protect the Great Barrier Reef are in fact funds that have been shifted across from similarly environmentally important Landcare programs.

The Government, in its desire to produce an electorally palatable budget, has produced a document that fails to meet the needs of Australia moving forward. It can be assessed as a politically motivated document working to serve the interests of the Coalition and its benefactors.

 

Budget 2016: A Good PaTH for Tackling Entrenched Disadvantage

A surprising thing happened in the 2016 budget. The Coalition included a youth unemployment policy that targeted the most disadvantage people and also got a tick of approval from the opposition.

There were no vestiges of the punitive policy announced in 2014 that punished young people for being unemployed. Instead, the government has come up with a policy that recognises the socioeconomic dimension to youth unemployment.

The new program is called the Youth Jobs PaTH (Prepare-Trial-Hire) and consists of the following stages:

1. Young job seekers (between the ages of 15-24) will be given training in what are called ‘employability skills’. These are the foundational skills needed to get and maintain a job, such; ability to work in a team, suitable presentation, workplace etiquette, and IT skills.

2. 120,000 internship places will be set up over four years for young job seekers after six months in the system. The job seeker will receive an additional $100 a week on top of their regular income support, and the business taking on the intern will receive an up-front payment of $1000.

3. Businesses will be incentivised to employ young job seekers through a wage subsidy between $6,500 and $10,000.

The government has also committed to greater investment in actuarial analyses that better target people at risk of long term welfare dependency.

But it did not take long before the policy was publicly derided. Unions believe it will result in job losses and young workers will be exploited. No doubt this is a possibility, and this will rest on the finer details of the policy when they are drafted into a Bill, but currently there is little evidence to suggest this outcome is inevitable.

Others, such as the journalist Tim Dunlop, believe PaTH is just another policy designed to discipline and punish young people for not finding jobs that don’t exist. Dunlop argues that technology is changing the nature of work, so that in the future there will be far less jobs for people to do. His policy to deal with this, which has now become quite trendy, is for the establishment of a guaranteed basic income.

The basic income idea has plenty of merit, yet Dunlop’s analysis misses an important aspect of the PaTH policy – this program is designed to help young people at risk of long term unemployment get jobs. It is not the same blunt instrument as ‘work for the dole’.

Disadvantaged young people are one of the groups most at risk of long-term welfare dependency. People with lower levels of education are more likely to be welfare dependent, and the longer a person is unemployed the more at risk they are of long-term unemployment. Longitudinal analysis by Francisco Azpitarte and Eve Bodsworth from the Brotherhood of St Laurence Research and Policy Centre, shows that disadvantaged groups are more likely to be unemployed for longer.

There is an alarming number of young Australians between the age of 15 and 24 that are not engaged in employment, education or training, often referred to by the acronym ‘NEET’. In 2015 over 90 thousand 15-19 year olds and 217 thousand 20-24 year olds were identified as NEET in Australian Bureau of Statistics (ABS) Education and Work survey. While this did not vary greatly by gender, when broken down into socioeconomic status (SES) deciles, the proportion of young people that are NEET is heavily skewed toward the lower SES deciles.

There are two ways to look at this.

The first, shown in Figure 1, is to look at all people identified as NEET in the each age group and then find out what the different shares are for each SES decile.

In a state of perfect equality, the proportion will be equal among SES deciles. That is, the lowest and the highest SES decile would each make up 10 per cent of people identified as NEET.

The actual shares are heavily skewed. The share of NEET people for the most disadvantaged young Australians represent more than triple that of the advantaged. The bottom three SES deciles make up over 45 per cent of all NEET 15-24 year olds.

Figure 1: People from disadvantaged backgrounds make up the largest share of NEET between the ages of 15 and 24 years old
Y-axis: SES decile share of all people aged 15-19 and 20-24 that are identified as NEETBeni_Fig1_PaTHSource: ABS (2015) Education and Work, 2015

Second, we can look at what proportion of each SES decile is identified as NEET, as has been done in Figure 2. A high proportion of the most disadvantaged 15 to 19 year olds are identified as NEET, but what is really striking is the 20-24 age bracket. Almost a third of the most disadvantaged 20-24 year olds, 40 thousand young people, are identified as NEET. More than a fifth of 20-24 year olds in the three lowest SES deciles are identified as NEET – more than 100 thousand young people.

This large jump occurs after the common school leaving age, suggesting that a substantial group of young people finish school ill equipped to take the next step into work or study.

Figure 2: People from disadvantaged backgrounds are much more likely to be NEET after school leaving age
Y-axis: Proportion of SES decile identified as NEETBeni_Fig_2Source: ABS (2015) Education and Work, 2015

By focussing on young people unemployed for more than 6 months, PaTH targets the most disadvantaged young people. The strength of the program is that it provides these young people with work experience, and makes it less risky for businesses to give them a chance.

Job training has been available for a long time now, but employability and targeted work experience programs are rare. For some young people from areas of entrenched disadvantage, this policy will give them chances they otherwise would not have. There are likely important debates to be had around the detail of the policy, but it cannot be said to be punitive, and it is certainly not punishing.

Budget 2016: Infrastructure

So the federal budget was released a little over a week ago, and you want to know what effects it will have on infrastructure. Fortunately for you, I have compiled a short summary of where Australians (and in particular, Victorians) stand. It’s not looking great, but there are some silver linings.

Commitment to the East-West Link continues on, with another $300 million in expenses from 2015-16 and then $600 million the following year. The Victorian government has ceased development on the project, and so the federal budget intends to account for a $1.5 billion withdrawal from unspent state funds. We are also left with this comment “…the Commonwealth remains willing to consider investing in other major infrastructure… in Victoria should the Victorian Government come forward with options.” Ouch.

While investment in roads and highways gets huge budget attention, our public transport system does not. A small $10 million seems to indicate the Government is far more open to dealing with traffic woes by changing the roads, instead of incentivising travel by public transport. The environment once again draws the short straw in this regard. A pleasant exception is the $857 million to be dedicated to the Metro Rail Project

The government is looking for savings of $105 million in the next 5 years by reducing expected costs of contingent projects in Queensland, and reductions in the funding towards Victorian and New South Wales projects. In particular, savings will occur in programmes such as Black Spot Programme (aimed at reducing high risk collision areas) and the National Highway Upgrade Programme.

Notable is a lack of attention to anything NBN. A $8.83 billion dollar final payment confirms the end of the investment in nbn.co, a project which has experienced huge budget blowouts. Australia continues to fall further and further behind in tech-infrastructure as major parties consistently fail to come to agreement.

Critics have noted that the budget is tough on Victoria. Despite population growth rate being the highest in Australia and the population being second only to New South Wales (ABS, 2015), less than 10% of the infrastructure budget will be given to Victorians.

So, the things to take away here is that funding for roads has increased significantly, air & sea benefit (although not quite as much) and rail loses out by a small amount: 1.4% less than last budget. Total dedication to transport and communication is overall up though, at $11.13 billion. Estimates indicate the total budget commitment to infrastructure is expected to fall over the next 4 years. Don’t expect great things from the National Broadband Network- but that’s nothing new. Congratulations – you’re now ready to talk budget at the pub.

No Surprises Government, Feckless Opposition

Constrained by a dire political situation of their own making the Prime Minister and Treasurer have handed down the only type of budget that they could; one which tries to offend no one, appeases the electorate, and attempts to resuscitate business confidence. Labor’s chance to seize the initiative with a more responsible alternative was passed up.
The Government has retreated to a position where it now resembles the ‘no surprises’, diligent Government that Abbott promised it would be. The 2015 budget is the antithesis of its predecessor in its rationale and aims. It seeks to undo the damage from the disastrous 2014 budget and restore business confidence with a range of spending initiatives.
Central to the thinking behind this budget were immediate political and economic considerations. And nowhere is this more evident than in its small business package, one of the budgets signature features.
Small business is given a 1.5% tax cut and urged by the Government to “have a go”. With business confidence in a protracted slump, no thanks to the Governments largely erratic and disappointing performance to date, the economic rationale behind this measure is obvious.
The second main aspect of this package is a superfluous $20,000 instant asset write off, effective immediately. This measure in particular is one that wouldn’t be out of place in the Howard Governments handout and tax cut rituals; acts of electoral appeasement to its core constituency of lower and middle income families dubbed the ‘Howard battlers’.
It is no surprise then that Abbott was quick to label the big winners from this measure as ‘Abbotts Tradies’ as the Government seeks to sure up the support of core Liberal constituencies.
Whilst clearly being an exercise in electoral appeasement, Abbott continues to argue that his Governments two budgets are consistent in their pursuit of deficit reduction. Indeed, the budgetary projections show a return to surplus in 2019-2020. Yet this is not due to any measures included in this budget. Most of this is driven by huge projected increases in income tax revenue through bracket creep- when inflation pushes incomes into higher tax brackets.
Belief in these projections is accompanied by trust in obscenely optimistic growth forecasts, as well as blind faith in the electorate’s tolerance for permanently increasing taxation – as a greater proportion of middle income earners are pushed into the second highest tax bracket. These conditions are unlikely, and the salience of the bracket creep issue will grow with each passing year.
This ticking political time bomb has been kicked down the road, to be defused by a Government with little concern for political survival.
Framed by the Government as ‘fair’ and as an affront to no one, this budget is definitive evidence that Labor was triumphant in its values-driven assault on the Government, and that the body politic remains centre-left in its economic outlook.
Unburdened by the dire perceptions which has forced the Government to unveil such a reform-lite budget, there was enormous opportunity for the Labor opposition to build upon its recently released superannuation policy, reject the Governments conspicuous efforts at vote buying, and chart a more credible path back to surplus.
Yet Bill Shortens budget reply was a disappointing and feckless display of one upmanship, and an appeal to the Labor heartland on issues such as education. He was left looking ridiculous when proposing a 5% small business tax cut with no explanation of how such a substantial reduction in revenue would be covered, and why exacerbating the inefficiencies of a two-tier company tax regime would be a responsible idea.
With the budget well received by the public, and with no substantial and credible criticism from the opposition, Abbott has been injected with a renewed sense of confidence. Having been under incessant fire for the best part of a year, the Prime Minister relished the opportunity to go on the attack against Labor’s modest superannuation policy, claiming that the Government will never reform superannuation.
It’s a depressing choice of tactic, and an ultimately unsustainable position, as superannuation tax concessions look set to overtake the pension as a percentage of Government expenditure in the coming years.
The result is a prevailing political dynamic in which neither party believes political gains can be made by fixing the nation’s worsening structural budget deficit. Yet a recent report commissioned by the Business Council of Australia revealed the public are aware that the nation is headed in the wrong direction, and receptive to the idea of reform to the tax system. The Government and opposition would be wise to heed such a report.
The Shorten Opposition, ascendant in the polls and facing a pugilist Prime Minister who is well versed in the art of scare tactics and negative campaigns, must be tempted to largely persist with a small-target strategy until the next election.
Yet Shorten would be wise to remember that Kim Beazley’s persistence with a small target strategy, against an unpopular first term Howard Government, only culminated in defeat and perceptions of Beazley as a man without convictions or beliefs.
This is the prevailing perception of Bill Shorten, and he would be wise to try and relinquish it.

The “Have a Go” budget

On budget night the government announced its selling point: to stimulate the economy through assistance to small business. Since the announcement Coalition politicians have been around the country telling small business to “get out there and have a go”.
The small business boost comes in the form of two main policies. The first is a 1.5 per cent reduction of the small business tax rate. The second is small businesses are now able to write off new asset purchases up to $20,000 against their tax. The hope is increased spending by small business will help stimulate the economy.
Already it seems the economy has responded. Just weeks after the budget was unveiled Tony Abbott gave a speech in South Australia, observing an increase in television advertisements made by car companies. Notable were specific advertisements of utility vehicles under $20,000.
Looking to the economics behind the new policies, the tax cut does little for small business. The tax deduction measures are only temporary, so the only real effect will be moving future spending back to the present. Overall the expected stimulus from these policies is almost negligible. Given the stimulus measures are overstated, the policy motivation appears to be predominantly for political gains. However, the reasoning may be more genuine.

In the first two years of my Finance and Economics degree our lecturers constantly told us that it doesn’t matter what is true, what matters is what people think to be true. The idea is that people respond to their perceptions of reality, rather than reality itself. The oft used example is the effect of perceptions on inflation.
In Australia the Reserve Bank of Australia (RBA) is tasked with many different objectives, but the main one is keeping the inflation rate within a band of 2% to 3%. Since 1980 Australia’s inflation rate has been contained within this band, highlighting the RBA’s effectiveness. They have done this even when the net effect has been a worsening of other macroeconomic indicators, (for example the rate increase post-GFC, and recent decreases now on the mortgage market) suggesting that the RBA will always act on inflation.
In many other Western countries the inflation rate has fluctuated much more than most countries’ respective reserve bank’s target rate. This has happened despite the RBA having relatively less power than other reserve banks. The reason for the success of the RBA has less to do with the powers it has, but is more likely due to maintaining a reputation for harnessing inflation. When everyone believes that the RBA will always act to constrain inflation, people are less likely to fuel inflationary conditions.
If our politicians are at least to some degree acting in the interests of the country, then the reasons for promoting these policies so heavily is to get people to buy in to the stimulus and take more risks.

Assuming that the vocal promotion of the small business policy is designed to improve confidence in the economy, it may be an overreaction from the government to correct the damage done in last year’s budget to business and consumer confidence. This suggests the government has learned that their message can influence the actions of society. It was not simply the policy changes in the previous budget that destroyed confidence in the economy.
While governments have used stimulus policies in the past, this particular stimulus is different. Instead of following the prescriptions of standard economics by using actual capital to stimulate the economy, this government is using its political capital. However, this won’t work if the public has no faith in the government.

So far this this year commentators have not attacked the budget directly, but have accused Treasury of bias in their forecasts. This is not uncommon. Treasury is frequently accused of being too optimistic in its forecasts. However, when the critics overlook Treasury’s forecasts, they implicitly agree with them. But to an outsider there appears to be nothing wrong with Treasury’s estimates. This suggests that the only thing wrong with Treasury is its reputation.
The Treasury’s reputation began to deteriorate while Ken Henry was the Secretary to the Treasury. The public began to lose faith in the independence of the Treasury during this time. The reputation was particularly smeared in their announcements leading up to the 2010 election. The current government tried to correct this by appointing John Fraser, but commentators seem to think this is simply more government intervention.

Reputation and public perceptions are simply too strong a force in the efficacy of our economic institutions. If governments want to achieve their broader economics goals, they need to pay higher regard to this and limit their interventions in the economic machinery of the public service.

The Real ‘Budget Crisis’: Housing Affordability

The 2015 Budget shows the language used in the last federal election – words like ‘crisis’ and ‘emergency’ – to be nothing but the over-the-top rhetoric that we’ve come to expect from our politicians. Economists all over the country have lamented this impoverished use of language and distortion of fact.

The real ‘budget crisis’ revolves around Australian household budgets, specifically the cost of housing. Much of the recent discussion on housing affordability has focused on property prices, but the ‘crisis & emergency’ concerns disadvantaged people, unlikely to ever afford their own home.

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The Abbott Government has done a good job of convincing people that, after ‘the mess Labor left behind,’ tough decisions need to be made to get Australia’s fiscal position back in order. However, after releasing the 2014 Budget they found, seemingly to their surprise, that the public – not to mention a number of representatives in the Senate – would not accept any proposals deemed unfair.

The most recent budget was crafted to ensure the government could deflect accusations of unfairness, while still continuing their objective of, eventually, getting the books back into the black. The latest data from Newspoll indicates they have done the job – certainly better than the last budget anyway. But has the government missed an opportunity to address the difficult, but extremely important, issue of housing affordability?

At the end of last year that old chestnut, the negative gearing debate, found its way back into the media cycle. It culminated in a showdown on an episode of Q&A between Joe Hockey and the Grattan Institute CEO John Daley, which was characterised by the Sydney Morning Herald and others as Hockey being ‘outclassed by an economist’ (despite Daley never having studied economics formally).

Hockey trotted out the usual argument against abolishing negative gearing: if investment in the property market is discouraged, then rents go up. If this is true, he has a point.

Sure, getting rid of artificial demand – which critics argue is created by negative gearing – might slow down growth in property prices, but it would also mean that people without the means to purchase their own home are made worse off. Removing negative gearing would improve affordability for potential buyers, but would lead to higher rents.

Daley countered by arguing that rents would not rise if the policy was changed. According to Daley, the ‘rise in rents’ argument is based on the fact that when the Hawke Government abolished negative gearing – 30 years ago – rents rose in Sydney and Perth, yet crucially they hardly moved in other major cities.

He also pointed out that economic theory shows abolishing negative gearing to be sound policy. Since investors at auctions are competing with other potential buyers, who are often renters, then one less house bought for investment means one less person who needs a rental property. This would imply no impact on the rental market.

Both arguments have merit. Yet the current debate rests on a false dichotomy between abolishing negative gearing altogether or keeping the status quo – there are better alternatives.

Negative gearing is a hot topic because it is perceived to be inequitable. The policy gives rich investors tax exemptions. As a result, Commonwealth tax revenues are reduced, and public resources for programs that benefit the poor are diminished.

Recent research by The Australia Institute (TAI) shows this view to be well founded. According to TAI the majority of people utilising negative gearing are average income earners. Yet this majority only receives a small share of the 3.7 billion dollars the tax break is worth annually. Only one fifth of this amount flows to the poorer 50 per cent of households. On the other hand over half of the benefit goes to the richest 20 per cent of households.

The capital gains tax (CGT) discount tells a similar story. The tax break is worth 4 billion dollars a year. Of this, 82 per cent flows up to the top 20 per cent of households, but only 7 per cent benefits the bottom 50 per cent.

The first implication of these figures is that many people that benefit from negative gearing are not on high incomes. Also the benefit gained by the majority of ‘negative gearers’ is fairly modest. Trimming the excessive benefits accrued by high income earners may be better policy than abolishing negative gearing.

The second implication is that the CGT discount is the bigger contributor to inequity. If people want a more equitable tax system then the CGT discount makes a more potent target for abolition.

A potent problem is that Australia has one of the highest homeownership rates in the world. This is likely why politicians are reluctant to alter negative gearing and CGT arrangements. Even modest proposals for change that affect only few, tend to alarm the large numbers of property owning constituents.

Some commentators point out that targeting the demand-side of the market with national policy changes to negative gearing and the CGT discount misses the problem. Instead the problem comes from the supply-side. Rising house prices in Melbourne and Sydney are cause for concern, but aren’t so bad in the rest of the country. Inadequate and overly constrictive planning policy is to blame for restricting potential housing supply in these large cities. If this is the case, local councils rather than the Commonwealth are the level of government to be held responsible.

Yet it would be dangerous for Federal policymakers to use this argument to back away from the problem. Most Australians live in capital cities, and the trend towards urbanisation will continue. Also, even though property prices are stable outside of capital cities, over the last few decades the gap between house prices and income has widened, as well as the gap between household debt and income. Of course there are many factors that affect these ratios. Some of them, such as monetary policy, are out of the government’s control. But there aspects of the housing affordability problem that the government can affect.

The statistics above make clear that there is no quick fix to the problem. Unfortunately many people will never afford their own home and will have to rent for the rest of their lives.

Taking this into account, as well as the earlier observation that property owners hold electoral power over those without property, rental affordability should be an immediate policy focus for the Commonwealth.

The creation of the National Rental Affordability Scheme in 2008 indicates that the federal government at that time recognised the imperative. But a report by Anglicare last month revealed shocking statistics that shows much more needs to be done.

Anglicare calculated that of the 65,614 rental properties listed nation-wide, only 1 per cent were suitable for a single person on government payments, and only 2.3 per cent for a single person on minimum wage. While 23.8 per cent of the dwellings were suitable for a couple living on minimum wage with two children, only 0.9 per cent were suitable for the same family composition on a Newstart allowance.

The common benchmark measures affordable rent as being no more than 30 per cent of a household’s income. Some might argue this is too ambitious. Yet figures from the ABS show that before 1988 low income households spent less than 30 per cent of their income on rent. Single persons spent well under 30 per cent of their income on rent. Middle and high income households spent less than 20 per cent of their income on rent, with the exception of single parents.

Surely people that can’t afford to rent privately can access affordable state-owned housing? The statistics tell another unfortunate story.

According to a factsheet by National Shelter, from 2008 to 2013 the amount of people on a waiting list for social housing increased by nearly 9 per cent, to over 200,000 people. There were just over 400,000 social housing dwellings in Australia. The 2011 Census counted the total amount of dwellings at about 9.1 million. This means that social housing accounts for an unbelievably small fraction of the total housing stock in Australia – less than 5 per cent.

These figures shouldn’t be particularly surprising.

According to the ABS, there has been a steady decline in construction undertaken by the public sector since the early 1990s. Public housing construction was 7 per cent of total housing construction in 1992, but by 2002 had fallen to just 2 per cent of total housing construction. This was accompanied by an increase in government housing assistance such as Commonwealth Rent Assistance.

In September last year, NSW Minister for Family and Community Services, Gabrielle Upton conceded that an increase in waiting times – the current average is 4 years but can reach 10 or more years in certain locations – was a sign that the social housing system needed reforming. She also said that one explanation for the increase is a lack of affordability in the private system for people on low incomes.

Housing affordability is a complex issue, but there is a simple solution which addresses all of the problems highlighted in this article.

The approach apparently decided on by policymakers to move away from social housing provision and instead concentrate on enabling low income earners to enter the private rental market has failed. Providing financial assistance to people who want to rent a home privately but are unable to does make sense, but it also means that landlords can charge higher rents, in the knowledge that taxpayer money makes up a portion of the income needed to cover rent increases.

There are better ways to improve housing affordability.

If governments increased the supply of social housing, there would be less demand in the low end of the private rental market. This would likely lower rents, reducing expenses for low income households, as well as expenses for the government departments responsible for providing financial assistance.

As shown above, a significant portion of money forgone under the current tax arrangements regarding negative gearing and capital gains is unnecessarily going to high income households. These arrangements should be altered so that money which investors in this demographic currently receive can instead be directed towards building more social housing.

This would improve affordability for those on low incomes and also increase accessibility for thousands of homeless people. At the same time it would mean decreased demand by investors in the mid-to-high end of the private rental market, where investors on high incomes are more likely to invest.

The effect of this, all other things equal, would be less upward pressure on property prices, since there will be fewer wealthy investors at auction sites who are able to outbid home buyers. Lower property prices means a greater incentive to buy a home instead of renting and therefore reduced demand in the rental market, pushing down prices there as well.

Understandably, the political difficulties surrounding this issue made the current government reluctant to make changes such as those proposed here in their first two budgets. But political capital can be gained here if policymakers are brave.

Doing something about housing affordability doesn’t just go to addressing that ever-present concern for voters of cost-of-living, it also addresses other issues that in the last few years have rightfully begun to gain more exposure.

Particularly since the Global Financial Crisis in 2008, wealth and income inequality appears to have become a greater concern for the public. Research conducted last year by Oxfam found that 79 per cent of Australians surveyed believed the gap between the richest and poorest members of society has widened over the previous decade, and 64 per cent said this has made Australia a worse place to live.

On the first count it is safe to say that they are correct. Despite Australia experiencing record long economic growth, inequality has not only been rising, it is actually worse than people realise. The issues raised in this article have been exacerbated due to governments failing to address this problem, but they are part of the cause of the problem as well.

Domestic abuse is also intertwined with housing affordability. There is increased pressure on the federal government to address the failure of the current system to prevent violent abuse of women by their partners. Some experts claim that the situation is endemic and that financial insecurity is an important part of the problem. Concerns about housing affordability contribute to victims of abusive relationships feeling like they have no escape and possibly even losing their lives as a result.

It is unfortunate that the Abbott Government didn’t take advantage of the opportunity to use these arguments in a budget released under the banner of ‘fairness’. But a recent Senate committee report on the issue which included members of all three major parties is encouraging. It made some 40 recommendations – looking at both demand and supply problems – and called for more leadership from the federal government, suggesting they develop and implement a plan for a national approach to housing affordability.

A recent commitment by the ALP to cut superannuation tax concessions also indicates they have identified that political ground can be made in the area of equity in the tax system. With the Coalition largely relying on tax bracket creep to reduce the deficit at the moment, it’s looking increasingly likely that they will have to consider widening or increasing the GST. Bracket creep and the GST hit middle and low income people hardest, so failing to address the issues raised in this article increases the risk of losing further ground in the equity battle.

However, the real costs of inaction are much more important than the politics. The impact of limited affordable housing on the livelihoods of Australians, particularly those on low incomes, has become a serious problem. In some cases it may even be costing lives. There is no doubt that this is the ‘budget crisis’ that deserves to be in the news.

More than Just a Song and Dance

Last month marked the 60th iteration of the Eurovision Song Contest (ESC). Representatives from 40 nations took to the stage in Vienna, with some presenting the best ethnic cheese they have to offer, and others opting for a more palatable song for the European market. However the contest has never just been about the music. The performances provide an opportunity to examine how these (mostly) European nations identify themselves, and how they interact with one another on the cultural stage.
Questions of identity and belonging have dominated the contest since its inception. The ESC was originally envisioned as a cultural glue for the continent following the destruction of the Second World War. It was a chance for the continent to knit itself back together under a banner of pan-Europeanism. This European unity through song was largely successful at promoting and strengthening regional ties, but only really existed as a Western European prospect. The Iron Curtain prevented Eastern European integration into the competition.
The success of the annual event as a regional unifier proved to be a cultural tool worth emulating. Across the ideological divide appeared the Intervision Song Contest: an almost identical competition with participant nations formed by those belonging to the Soviet Bloc. This equivalent only lasted from 1977 until 1980, when in host-nation Poland political unrest, due to the anti-Soviet ‘Solidarity’ movement, led to the cancellation of the contest. This also spelling the beginning of the end for the communist regime.
Intervision has since been revived and is due to return from its hiatus later this year. Helmed by Putin’s Russia, the contemporary edition of the contest will feature a number of entrants from former Soviet states, as well as members of the Shanghai Cooperation Organisation: China, the Central Asian ’-stans’, and Russia itself. Putin’s desire to revive Intervision exemplifies the utility of international cultural events in creating a sense of regional unity. Establishing an eastern cultural counterpart to Western Europe, as well as Western Eurasia, is of high importance to the state. In tandem with Russia’s recent expansionist goals in Crimea is a desire to reassert the nation on the world stage as part of a bloc, culturally distinct from Western Europe, and more in line with neighbouring allied Asian states.
In 2013 another international song contest appeared on the European stage. The Turkvision Song Contest was established in Turkey, with entry to the competition open to countries and regions that boast a prominent Turkic-speaking community. While the unifying intentions are similar to the other competitions, when observed within the context of the Turkish state and its relationship within Europe, a distinct identity crisis emerges. Since 1987 the nation, perched on a geographical boundary separating Europe and Asia, has been in the process of acceding to the European Union, which would signal further integration with Europe. A Eurovision win in 2003 for the state was observed by some as an initial acceptance of the rest of Europe. Yet since 2012 Turkey has not appeared in the competition, objecting to the status of the ‘Big Five’ Western European nations who contribute the most money for the competition, and automatically advance to the final round. Turkvision could be observed as simply a celebration of Turkish ethnicity and language, but taking their withdrawal from Eurovision into account, it can be perceived as a desire to identify primarily as Turkish over European. This directly conflicts with the desire to accede to the EU. Turkey is currently positioned to return to the ESC in 2016, as Turkvision continues to run alongside it. Perhaps the two clashing Turkish identities can coexist in Turkey’s unique intercontinental position, but this remains to be seen.
This is a predicament for Russia as well, as a nation straddling the two continents. While these two separate cultural events demonstrate the regional ambitions of Turkey and Russia, the fact remains that they are still a part of the Eurovision Song Contest. A cheesy Russian entry presenting a bastardised version of an ethnic asian minority could signal a shift of focus towards the East for Russia. A traditional European ballad sung by the Turkish representative could mean further desire to culturally integrate with the Western European states. Either way, their future entries into the competition are worth scrutinising, as is the contest as a whole.

The Asian Infrastructure and Investment Bank: Australia’s next move

Australian Prime Minister, Tony Abbott, has joined a Western cohort supporting the Asian Infrastructure Investment Bank (AIIB) proposed by China, marking an historical shift in Australian foreign policy. The AIIB is expected to be established by the end of 2015 and is designed to combat the growing infrastructure deficit in the Asia-Pacific region currently valued at an estimated $8tn. By harnessing China’s vast financial resources and expertise in infrastructure development; the AIIB claim they will play a vital role in providing economic assistance to the less developed parts of Vietnam, Laos, Cambodia and Thailand.

Jin Liqun, secretary general of the interim secretariat is establishing the AIIB and has said that they will be structuring the bank on existing international financial institutions, including the International Monetary Fund (IMF) and the World Bank. Beijing will also be providing at least 50% of the capital needed for the bank, estimated at US$50-100bn, with non-Asian countries making up a further 25% of AIIB shareholders. The Chinese President Xi Jinping has said the AIIB will follow international multilateral rules and procedures within developing countries in Asia, financing the bulk of loans for infrastructure projects.

For over sixty years the cornerstone of Australian foreign policy was fostering an alliance with so-called western states, particularly the US. Upon first hearing of the proposed AIIB, Washington warned its allies of China’s growing diplomatic clout and suggested that states should think twice before signing up to the AIIB, raising concerns about its governance and multilateralism. Despite Christine Lagarde, head of the IMF, and members of the World Bank supporting the AIIB and offering to cooperate, the US has warned of the potential for a new investment bank to weaken the existing international financial institutions. This opinion is not surprising given the US’s leading role in both the World Bank and IMF that has served its strategic interests since World War 2.

Under US primacy Asia has experienced more stability and higher economic growth than ever before but this era is coming to an end. States such as China, South Korea and Japan have grown in power, making US domination in this region nonsensical. As these Asian states continue to grow economically, Washington will have to bow out of Asia gracefully so as to avoid conflict and allow for continued order and development.

China is well aware that leading an operation like the AIIB will serve its strategic interests, as it tries to further cement its position as the major player in Asia. A lack of nuanced foreign policy from the US could lead to Chinese dominance over Asia and conflict in the region, instead, what the US must do is encourage powerful Asian states to work together in developing a new order of Asia. Australian foreign policy academic, Hugh White argues that it “defies the laws of strategic gravity” to assume US primacy will last forever and that pursuing this will lead to a diplomatic defeat for Washington.

Australia will continue to do what it has always done in foreign policy, and that is to continue to pursue Australia’s best interest. These recent power shifts in Asia is what’s causing the government to change its tact, but our self-interested values hold true. What is interesting about Australia’s decision to be a founding member of the AIIB is its value of economic links over our historical pursuit of security via our US buddy system. The rise of China continues to be seen as a threat to US hegemony as well as US security, with both nations upping their military power with each subsequent governmental budget.

US acquiescence to China will be one of the first times American exceptionalism has taken such a blow. It will take a lot for Washington to release their grip of Asia and move towards a new balance of power, but for the sake of rationalism they must. The AIIB and the consequential rise of China provides Australia with an opportunity to really make its mark as a key player in Asian foreign policy, proving itself to be an independent tactical power on the global stage.

What’s best for Australia is a peaceful US and an orderly, economically vibrant Asia. To pursue this ideal, Australian leaders should pressure the US to ease its control over Asia and international financial institutions. The US must concede primacy of Asia to not only China but Japan, South Korea and India so as to ensure cooperation rather than another hegemonic power struggle.

By recognising power shifts in Asia, Australia can play a pivotal role in shaping the region in the next 100 years. This new order should encourage cooperation amongst Asian powers without a dominant state. The AIIB and its orientation within Asia should be an economic and diplomatic goal for Australia. By contributing to the development of the AIIB, Australia can ensure the bank encourages development in Asia, whilst protecting our own geo-political interests.

 

Wild geese, black swans, and the goose that lays golden eggs.

In our economic exploits, we often get confused and chase wild geese rather than those that lay golden eggs. Engaging in this frivolous endeavour distracts from the black swans that lurk in the distant fog.

That is the story of the Federal Government’s budget over the last few decades.

Wild Geese

A blatantly unfair budget was handed down last May in the name of chasing a budget surplus. This wild goose chase for fiscal surplus has been unproductive, and has had a high opportunity cost.

A budget surplus in effect actually takes money away from citizens who spend and invest, in favour of some abstract notion of a ‘balanced budget’. This logic treats the theory of government finance as analogous to that of household finance. But a State is more than the sum of its households. Delaying urgent investments in infrastructure and human capabilities due to the notion of thrift, is lived sub optimality for present and future citizens. The idea that the Commonwealth needs to stockpile money before it can spend it is quite misguided. When the government is the issuer of currency, the axiom of balanced budgets breaks down.

Conventional wisdom demands that the government balances budgets over the business cycle to avoid excessive public debt. What is the reasoning behind this?

First, budget deficits ‘crowd out’ the financing of private investment. It is believed that public investment is less productive than private, and so when governments move into financial markets they push up interest rates and crowd out private entrepreneurs.

Second, persistent deficits are seen to be unfair. A build-up of debt puts higher costs on future generations.

Third, counter cyclical fiscal policy has been challenged by the idea of ‘Ricardian equivalence’. This trick, theorized by Robert Barro, postulates that households have perfect intergenerational altruism. There is no difference between using taxes or debt to finance government spending, because households compensate for the debt burden on future generations by saving proportionately. According to this reasoning there is no multiplier effect from government spending because citizens have the prescience to save for higher taxes in the future.

Fourth, recently the controversial claim has been made that too high a debt to GDP ratio lowers economic growth. The results of the study by Carmen Reinhart and Kenneth Rogoff show that after public debt to GDP levels reach 90 per cent, there is a fall in the GDP growth rate of roughly 50 per cent.

But the conventional wisdom is not as ironclad as its adherents would presume.

In the first instance, the empirical evidence shows that government incursions into financial markets have not driven up interest rates. In fact most advanced economies are characterised by historically high public debt and low interest rates. A more likely explanation is that the private sector has slipped into economic inertia, and rather than taking advantage of cheap debt by investing, is instead deleveraging and saving. This is secular stagnation, where there is too much saving in the economy and not enough investment.

The next point follows nicely from the first. Current generations should incur more debt to fund projects that increase the capabilities and potential of generations to come. Public investment can both stimulate economic activity throughout the economy and provide assets that yield benefits for future generations as well.

Ricardian equivalence does not factor this in. Even granting that people act as rationally as Barro would presume, the theory neglects to take into account the possibility that well invested public debt can amplify future income, and thus the debt bill as a proportion of income is less for future generations. Much ink has been spilled on even more arcane criticisms. But snapping back to reality, Barro assumes a Spockian level of rationality. People have bounded rationality at best, and cannot perform the mental contortions necessary for a Ricardian world to prevail.

Last, the Reinhart and Rogoff results are a classic case of the dictum: ‘correlation does not imply causation’. Despite the fact that their spreadsheets were found to have faults, all they have shown is a correlation between high levels of debt and low growth. But the causation can run the other way. Low growth, especially during recessions, often necessitates higher levels of public debt through stimulus spending, but also through the automatic stabilisers of lower tax revenue and higher welfare payments.

A better foundation for fiscal policy is to assess the function a given public financing position serves. In a ‘functional finance’ paradigm, deficits are irrelevant if the broader goals of a society’s public policy are met. Using deficits to finance projects and services that improve the welfare of society are necessary for a perpetual entity like a State.

Black Swans

To balance present and future needs of society, fiscal policy needs to be made with ‘black swans’ in mind. The black swan concept relates to the classic problem of induction: if I see 99 white swans does that then necessitate that the hundredth swan I see will also be white? Or to put it in another way, does not having seen a black swan negate its existence? Black swans do exist, but we can’t know they do until we see them. Public policy can reduce exposure to black swan events.

According to economist Bruce Chapman, governments should manage risk for its citizens. Life is risky; the future is uncertain and black swans lurk in the distant fog. At the micro and macro level, uncertainty needs to be coped with– by diffusing risks, the risk of adverse events in the future are minimised.

One way this can be done is by coordinating and mobilising unused resources in the economy. When the private sector is risk averse and lacks the animal spirits to invest, the State can play an entrepreneurial role in the economy.

Australia currently has plenty of unrealised capacity in the economy. The labour market underutilization rate is the amount of people unemployed, as well as people wanting more work. As figure 1 shows the youth underutilization rate is at its highest point on record. The general underutilization rate is also moving upwards at an alarming rate. It is also more difficult for recent university graduates to get a job than it was during the recession of the early nineties.

Figure 1: Labour market underutilization rate for 15-24 year olds and all age groups

(%)

Figure 1

Source: ABS 2015, selected labour force statistics

 

Conventional wisdom maintains that unemployment is stable in the long run. Even after a shock that causes sudden unemployment, over time unemployment will recover to its long run equilibrium position. But, to paraphrase the Polish economist Michal Kalecki: what happens in the short run changes real economic conditions in the future. An example is the phenomenon of hysteresis, where those out of work in economics downturns are less likely to find work when the economy recovers.

Since the late seventies, after the black swan of ‘stagflation’ – low growth accompanied by high inflation – macroeconomic policy has shifted from ensuring full employment, to targeting inflation. This is the result of an uncritical acceptance of the non-accelerating inflation rate of unemployment (NAIRU). Macroeconomic policy makers should set its sights on full employment and worry less about containing inflation. If extra money put into the economy is well targeted, than a monetary expansion can boost employment without being inflationary.

The goose that lays the golden eggs

Our future prosperity will come from long term investments in human potential.

In the short run, policies that focus on full employment are necessary. The NAIRU needs to be thrown out, and better measurements of ‘slack’ in the economy need to be used to guide a full employment macroeconomic objective.

Implicit in this is a radically different paradigm for monetary policy. Government, as the issuer of currency, can spend an unlimited amount of money to fund public works; the only real constraint is the amount of real capacity in the economy. Bill Mitchell, director of the Centre of Full Employment and Equity, has suggested that a bottom of the market, publicly provided job be made available for those that find themselves unemployed.

In the long run, investments need to be made in the Australian people.

Public investments in high quality childcare would yield high long term benefits and can serve two purposes.

First, it would remove some of the constraints on mothers wanting to return to work. High marginal tax rates and expensive childcare can be a potent deterrent. A 2012 report by the Grattan Institute found that furthering female workforce participation could add $25 billion to GDP. It is true, as estimated in a 1997 study by the ABS, that predominantly female, unpaid domestic labour is worth about a quarter of GDP. But the value added by higher female workforce participation is likely to cancel out this loss. Furthermore, financial independence is important for strengthening the bargaining position of women in households.

Second, high quality childcare provision can improve mobility and inequality if there is adequate access for people from disadvantaged backgrounds. The economist James Heckman has shown this to be one of the public investments that yield the highest payoffs for society.

More investment in education over all year levels is also needed; the Gonski reforms needs to be funded into the future, and stricter selection for teachers is necessary. Research and development also needs to be well funded by the public purse.

Better public transport infrastructure is essential with growing populations. Along the same lines, a shortage of housing supply near the CBD is causing problems of speculation, and making housing unaffordable. But the real and social costs of sprawling cities have become a problem due to inadequate transport and restrictive planning regulations that limit supply near to the CBD.

These geese will lay golden eggs for future generations. An enlightened Government should abandon the wild goose chase and invest in the human capabilities of the citizens it represents. It is only fair.

Back to square one

The government’s fanatical determination to repair the nation’s finances threw it drastically off course. Having retreated from its disastrous first budget, the government now resembles the cautious, diligent entity that it promised to be. Although still incredibly weak, it now has no choice but to deliver a ‘dull’ budget and return to square one.

From his days as Opposition leader, to the early months of his Prime Ministership, Tony Abbott gave numerous indications that he would pursue a conventional two-term strategy. He was to lead a ‘no surprises’ government: ruling out tax increases, changes to pensions, changes to university funding arrangements, cuts to health, education and public broadcasters in a now infamous election eve interview.

The government would meet its modest commitments, act with diligence and provide an atmosphere of stability. It would build momentum for change through the release of several reviews and white papers, and take a more ambitious reform agenda to the 2016 election.

As late as March 2014, Abbott resisted pressure from a hopeful business and the media, ruling out a raft of unforeshadowed changes. This approach would be sobering to expectant advocates of immediate budget repair, and uninspiring to the public. But for a government led by a man who would never gain the sort of widespread popularity needed to carry unpopular change, an approach with which it could earn the trust of the public would be essential.

Its commitments appeared modest, but it soon became apparent that its pledge to return the budget to surplus was anything but.

Collapsing commodity prices saw the nation’s budgetary position further deteriorate, yet the Prime Minister and the Treasurer would not dampen their rhetoric. The government, emboldened by its large parliamentary majority; and the Commission of Audits recommendations, and urged on by its media backers, moved to act, lest it be seen as a Fraser-esque ‘do nothing’ government.

It abandoned all aspects of its two-term strategy in its crusade for budget repair. Unveiling a first budget which offended every major interest group, broke a plethora of promises, and prevented it from gaining any momentum or political capital from its past or future successes and met commitments.

Fast forward 11 months, and the government is still locked in a protracted and often clumsy retreat from its politically disastrous first budget. The Coalition and its near deposed leader remain severely weakened, and now face a slowing economy in which business and consumer confidence has been hurt by its erratic actions.

Having ditched most of the measures for which they have received such unrelenting criticism, the government has stopped the rot. Now it is consolidating its position.

Finally we may be seeing the emergence of the pragmatic and diligent ‘no surprises’ government that we expected to receive in the first place. It now says that it won’t break its promise to refrain from reform to superannuation despite the Opposition indicating that it is open to the idea. But most significantly, it has now shed the zeal with which it originally sought to address the budget deficit, drastically softening its rhetoric – Abbott even going as far as saying that a debt-to-GDP ratio of 50% would be a “pretty good outcome”.

It’s a recognition that it gained nothing from its budget repair crusade, that the nation’s finances will not be brought into balance this term as the bottom line deteriorates due to declining commodity prices, and that repair will require substantial structural reforms for which a mandate will be required.

However, with the government in its current state, the prospects of it preparing the public for any meaningful reform that it may take to the next election are next to none. Just take the toothless handling of last month’s tax discussion paper as proof. Hockey released it, avoided starting any meaningful conversation, and ran, leaving the opposition to blow any prospects of a discussion over the GST out of the water.

The government must use the coming budget to get itself off the back foot and regain control of the agenda, lest the upcoming white papers and other reviews go to waste like the tax discussion paper, and like so many reviews before it.

Whilst some are lamenting the idea that the government appears set to unveil a “dull” and “almost boring” budget next month, there’s really not much else it can do. It can ill-afford to offend anyone after spending the last five months healing wounds, nor can it seriously cut spending in the context of a fragile economy. Crucially, it must provide the stability and certainty that both business and consumers crave. Better a budget in deficit then an economy in recession moving into the 2016 election.

There are likely to be cuts, though they will probably be more symbolic rather than anything of substance. The budgets central measure, the childcare package, will be designed to get everyone smiling and nodding. It’s an important step in regaining the trust of a cynical electorate, tackling the perception that it is a government addicted to unfairness, and getting the public listening again.

Unfortunately for the government, this apparent reversion to its initial cautious strategy may have come far too late. Abbott’s leadership is only being kept afloat by not-so-disastrous polling. If the government botches this budget or fails to regain control of events you can expect the Liberal Party caucus to engineer their own change of strategy by replacing the Prime Minister by the end of the year.