Saturday, June 08, 2013

Saturday Morning Musings - Australia's economic consensus

In an earlier post, I commented on the way that the peculiar structure of the this Federal election campaign had in some ways created as policy free zone. There I wrote:

The commenters on this blog appear to share the general view that the policy positions of the current Gillard Government no longer count, but the opposition doesn't count either because, with the exception of the NBN, it doesn't have any articulated policies. With such a long period to the Federal election, a policy vacuum has been created. Into that vacuum others are now rushing to enter, including most recently the Business Council of Australia. 

Since I wrote this, we have seen the the Commonwealth budget, the apparent bedding down of the National Disability Insurance Scheme and the attempt by the Commonwealth Government to lock in its Gonski school education funding changes. The budget itself was marked by a degree of convergence from both sides, while both sides support the NDIS, leaving the Gonski changes as a major area of dispute. Mr Abbott has continued his small target approach. The only effective challenges to some of his policy positions including especially the paid parental leave scheme have come from within his own party.   

Outside the party political sphere, policy debate has continued, marked by specific campaigns by the press and by particular special interest groups. An example is the Smartest Investment campaign being run by Universities Australia, the peak body representing Australian universities. Many of these campaigns, including that being run by the universities, are struggling for oxygen in the current environment. However, in all the hurly burly a consensus appears to be emerging in the economic policy area although, as always, there is considerable disagreement on detail.Graph: GDP growth rates, Volume measures, quarterly change

The most recent national account figures for the  March quarter 2013 showed a continued weakening in the Australian economy. You can see this clearly in the attached graph from the Australian Bureau of Statistics showing quarterly changes in GDP. You can see the upward trend and then a progressive weakening. That weakening trend is associated with the end of the mining investment boom whose affects have been accentuated by the strong Australian dollar.

The first element in the emerging consensus is that Australian Governments at all levels in some ways wasted the opportunities offered by the mining boom.

We overspent and in some ways undertaxed. By undertaxing I am not referring to the discussion around the mining tax, but rather to the various tax reductions that, in the end, proved unsustainable. We also. and this includes the mining industry itself, failed to focus sufficiently on productivity improvement, allowing rising costs to choke investment.

This leads to the second element in the emerging consensus, the need to focus on productivity improvement.  This has short and long term elements.

Looking at the short term, this mining boom was unusual in that it did not flow through to the general price increases and excessive economic activity that marked the end of previous booms. The price effects were especially contained to the mining sector, while the rest of the economy remained relatively flat. It is quite normal for other sectors of the economy to be flat or even decline when one sector expands rapidly, since the growth sector has to attract resources from elsewhere. However, the pattern this time was unusual.   

The overall failure of the broader economy to grow during the boom and now to expand to pick up the slack associated with the end of the boom has been the subject of much discussion. Part of that discussion focused on the exchange rate,

On December 12 1983, the then Hawke Labor Government with Paul Keating as Treasurer floated the Australian currency. This was really the first mining boom under a floating exchange rate, The fall in the value of the Australian dollar in the period immediately prior to the global financial crisis provided an important economic buffer to this country. Its subsequent rise helped choke the boom through, among other things, the pressure it placed on the trade exposed non-mining sectors.

Short term discussions on productivity have therefore focused on the cost explosion in mining, along with the role that slow productivity growth elsewhere in the economy played in impeding growth and adjustment, including  adjustment to the high dollar. This then fed into a longer term discussion on productivity improvement centred both on broader trends such as the aging population, as well as the apparent weaknesses in the broader economy and what that might mean for the longer term future of the country. I think it fair to say that while there is consensus on the need to improve productivity, there is not agreement as to the best way of achieving this.

Discussions on productivity have linked to a second theme, Australia's failure to improve basic infrastructure. There seems to be common agreement that the country has under invested in infrastructure at all levels for decades and that we need to do something about this. A variety of solutions have been put forward. To my mind, however, those discussions have failed to address a very basic question: why has Australia failed to invest in infrastructure? It's not as though the country hasn't had the resources to do so. We just haven't. Until you can answer the why question, you can't then answer the how question.

Debates on productivity and on infrastructure feed into discussion on another consensus area, the need for renewed microeconomic reform. There appears to be consensus that microeconomic reform has stalled, that it needs to be renewed. As with productivity and infrastructure, there is as yet no agreement as to how this might be done. However, there does appear to be emerging agreement on three elements.

The first is the need to reduce Government regulation that is choking economic activity and responsiveness. Again, there is disagreement as to how this might be done. But the consensus is there.

The second is the need to re-balance the tax system, while giving especially state governments access to more revenue. For the first time, there is an emerging consensus that the goods and services tax needs to be increased. Mr Abbott is strongly opposed to this at present on political grounds. Still. watch this space.

The third and related element is the need to restructure Commonwealth-state relations. Australians know that the current Federal system is not working, that the processes have become clogged. The problem here is a simple but almost insoluble. The Commonwealth needs to get out of state space, but no Commonwealth Government will do this.

In all this, Australia has one great advantage. Despite my sometimes criticisms, Australia's top economic technocrats (past and present) are very good. Further, they still have the capacity to provide independent views. They are still prepared to do so within the constraints set by their positions.

When I listen to or read something from the Commonwealth Treasury or the Reserve Bank, I listen or read with respect. I may not agree and will challenge, I know their constraints, but I trust them. If you think about it, that's pretty remarkable! And that's why I think that Australia is in good hands.        


Scott Hastings said...

The "heretical" economists who do not go along with the consensus (since when was economic theory a majority-rules democracy?) do not agree with the productivity theory per se. Australia is producing a lot, but the economy is not growing strongly as a result for a number of reasons.

These economists who include Krugman etc. rightly point out that increased production only yields increased consumption (which is the true goal of our government and the BCA which is pulling the strings) under certain conditions, namely 1) that the consumer has enough extra money to buy the extra goods and 2) that they will actually buy goods made domestically. These are both iffy at best in the current climate.

When the wealth created by production goes to an overseas company, that doesn't grow the domestic economy very much. Also when wages are not rising for the middle class and the (gasp) lower class, there's no money in pockets to drive the extra consumption the BCA so badly wants.

I've been called a communist for this but a lot of people with unquestionable capitalist credentials, for example Nick Hanauer also believe in this.

Jim Belshaw said...

Hi Scott. The concensus is important because it finally determines what will be done.

One issue that I was addressing was productivity, not production. Improved productivity means that we can do the same things with less resource inputs, freeing up resources for other things. Whether that leads to increased production is another thing.

Now if you take the overseas investment case, they bring in capital. That leads to increased production from which we take our cut. Then we take our cut from profits. Now if we are not getting a return from the investment, something else is wrong.

Now on consumption, its not just the money in our pockets, but also how secure we feel in spending that money. If the investment, overseas or local, is expressed in rises in asset prices, then we don't get a benefit, just a skew in income distribution. If incomes do go up but people won't spend because they are insecure, the multiplier effect is cut off.

Does that make sense to you?

Anonymous said...

A reconsideration of both the scope, and rate, of GST has been a drum I've banged on about quite ineffectively for years. What started as a good idea in theory quickly degenerated into a camel decided by a wide swathe of self interests, and seems to have become some sort of 'set in stone, never touch' item for pollies of all persuasion.

But maybe, just maybe:

- and to think about possible consequences on your 'typical' Australian, this summary is very useful, I think:

Whereas I've had nothing but contempt for many years about the way governments of any colour seem to treat our superannuation arrangements, at least with GST (alteration thereof) the effects would be immediate and reasonably transparent - and no doubt would become 'set in stone' once again :)


Scott Hastings said...

It makes sense to me, I'm just not that convinced that the ordinary Australian is seeing the benefits of the investment.

What the rich get: richer
What the rest get: artificially high dollar hurting several other sectors, unemployment higher than it needs to be, long term ecological consequences of plunder-the-earth industries.

Not a deal I'm keen on.

Jim Belshaw said...

Thanks for these links, kvd. The first, the Financial Review piece is part of that paper's reform campaign. The second is quite fascinating. I think that the GST has to be broadened and increased. However, it remains a regressive tax, so I would start with a one per cent increase on the current base.

Jim Belshaw said...

You have a point Scott, although I'm less convinced on plunder the earth industries. But that's actually a very different story.

Evan said...

Does this consensus include those on the dole?

Anonymous said...

Evan, I most certainly hope your 'consensus' would include those on the dole. Wouldn't be fair otherwise. That $500 per week is possibly spent in the main on basics like food and accommodation; neither of which presently attracts gst.

But let's say that maybe one third of everything spent attracts gst; so that would be roughly $170 per week - inclusive of gst - i.e. roughly $15 gst.

Now suppose it was increased to 15% - and don't worry, it won't happen without some sort of 'offset' built in just for you.

But if that wasn't the case; if everyone was asked to 'contribute' via the sacrifice of extra gst, then your extra weekly impost would be about $7.50 per week.

A bit over a $dollar a day.


Evan said...

kvd, Single person dole (with rent assistance) is currently c.$300/wk.

Anonymous said...

So Evan, reduce that $1 a day back to about 60 cents? Pleased to see you agree.


Evan said...

I dislike indirect taxes that fall disproportionately on the poor.

Jim Belshaw said...

kvd, I am going to take Evan's side.

The base dole is $248 per week. Now if you are getting rent assistance, the maximum is a bit over $61 if you are living on your own. So that's pretty close to Evan's c $300 per week.

Now if as a consequence of a broadening of the GST, your food and rent cost go up by 10%, you starve more so.

Unless you are lucky enough to live in social housing, and the waiting lists grown and grow, you are stuffed.

Anonymous said...

Geez Jim

You thought that link I gave you was 'fascinating'? I thought it talked about the 'average Australian household' - so I figured to be fair to all concerned I'd work on $500 per week, not Evan's less than average single recipient.

And then you say - "as a consequence of broadening the gst base" - when I specifically said "let's say roughly a third attracts gst". i.e. I did not even get into the murky area (which I believe should happen) of widening the gst base.

Spare me the costless angst. We are spending more than we tax; gst is an effective way of raising revenue. That is, of course, if you are not seriously suggesting that government will somehow become more efficient?

Pull the other one; and pay your (relative) 60 cents extra a day.


Evan said...

Housing Pathways (what used to be housing commission) costs about 25% of income - and I don't think you get rent assistance for it either!

Anonymous said...

Evan, unless you live in a tent on the beach, behind the bushes, just about everybody pays about 25% of their income for accommodation - in one way or another. (That's exactly why it is set at 25% - thank your government statisticians for that) But this of course assumes you are willing and able to pay your way.

And I'd just politely suggest that the whole joint doesn't (and most certainly shouldn't) work on the basis of your mythical tent-person.


Evan said...

It's not my mythical tent person kvd it's yours. I didn't mention them.

Anonymous said...

Two adults, two kids, after tax income of $90,000 means you are some sort of "average" family unit. Assume one third attracted gst. Therefore gst you paid was roughly $3,000 per annum (allow me to say one tenth, not eleventh)

So if gst went from 10 to 15% - which would cause rioting in the streets, but bear with me...

That mythical "average" household would be up for an extra $1500 per year.

$30 per week

$4 per day

1 cup of polystyrene coffee; half a sandwich.

(tent hire is available, and with rent assistance)

Evan said...

As you say 'mythical'

Anonymous said...

'mythical' as in, if your income after tax was $90k, and you were a couple, with two kids, then you would be more well off than 50% of the population; and less well off than the other 50%

If you are a single adult, $43000 is said to be the equivalent.

Not sure how to 'equivalise' a cup of bad coffee between a unit of four, back to a single economic unit? Maybe take two sips, then throw the rest away - as excessive consumption?

Funny thing about my comments, and reactions thereto:

I stated that an increase from 10 to 15% was politically unthinkable; I proposed no 'broadening' of the base; I suggested that the vulnerable would probably be taken care of.

The only reason that economists refer to gst as a "regressive" tax is that "flat" doesn't have sufficient gravitas to justify (paid) investigation.


Anonymous said...

I am actually on the dole. I get $300pw plus a little extra if I'm in W4D.

For very modest rural housing I pay 41% of my income in rent. By the time I buy 14 days food and pay my bills, I'm down to coins each fortnight, I can save nothing.

I am utterly unable to buy new clothes, go to the city, or have a social life on this income.

Now... I don't smoke, drink, or put fuel in a car at all, so you can imagine many are right on the brink as it is.

Jim Belshaw said...

Thank you latest anon.

I thought that this comment stream had gone a little off track, so I let it alone for the moment.

kvd, the reason I thought that that Cargill piece was interesting because of the stats.

Just trying to disentangle things a little.

The standard definition of rental stress is households paying more than 3o per cent of gross income in rent -

According to that same ABS publication, the proportion of low income renter households in rental stress has remained fairly constant over the past 10 years (36% in both 1997-98 and 2007-08). The proportion of low income private renter households in rental stress declined from 55% in 1997-98 to 44% in 2007-08. Over the same period the proportion of low income public renter households in rental stress increased from 5% to 17%.

The standard social housing theoretical income rental percentage is 25%. In fact, its higher than that because of the way rent is calculated and can exceed 30%. Tenants in public housing do not get rental assistance, those in community housing do. However, rents are set so as to attract and extract maximum CRA. A significant part of the social housing system depends upon this for its viability, so when the Henry Tax review recommended better targeting of CRA they actually threatened the limited viability of the social housing. That's a different issue, but one I am conscious of.

More in next comment.

Jim Belshaw said...

Comment continued.

The Cogill post cited by kvd provides some useful data on incomes. It suggests, among other things, that median incomes are lower than people realise. On one measure, the median Australian taxable income for all workers was $48 864 in 2010-2011. Now as the article shows, you can calculate this in various ways depending, among other things, on household type.

Rent data for NSW is provided Housing NSW figures. In the March quarter, median rent for all dwellings in Greater Sydney was $460 - The median rent for a one bedroom flat was %420. These rents vary across Sydney, but you can see why a significant proportion of low income earners in the private rental market display rental stress.

As kvd notes, GST is not presently paid on certain things. I was the one who raised the question of a widening of the GST base.

The impact of a GST increase depends on your income. For someone on a very low income, an increase in GST on electricity alone may have a significant impact, especially when combined with other price increases.

My point is, that when you come to consider the distributional effects of these changes, you have to examine the detail.

Evan said...

That is indeed where the devil is!

Anonymous said...

Not sure where this leaves the discussion, Jim. Your quoted 'median rent' is for the most expensive rental market in Australia, let alone greater NSW. I do not think it is appropriate to base any discussion about either increasing or widening the GST regime upon the rental statistics of Sydney.

There seems to be a disconnect between what you tag as 'Public Policy' (which in this context is Australia-wide, not just limited to the unemployed of Sydney) and the 'down on the ground' effects of any change.

Somewhere buried back in the comments I made the point that an increase from 10 to 15% was politically unthinkable, and also that I had no doubt that the less fortunate would be taken care of. Those points seem to have been lost.

Simply, I find it easy to work out that someone on $400 per week cannot possibly be hit with more than $36 of GST - which assumes all expenditure is taxed - and if such an implausible rise as that to 15% actually happened, then the extra impost cannot mathematically exceed $18. That said, I fully accept the such a figure would cause enormous distress to, for instance, Anon above - if there were no compensating measure.

But the thing is, a more likely scenario is that which you mentioned yourself: a rise of maybe 1 or 2%. That gets us back to worrying about an Australian policy change costing what?

My answer is, not very much, and no doubt any such change would provide for the 'regressive' effect upon the unemployed, pensioned, or otherwise welfared.

This I stress is not to in any way discount the struggles under which such citizens operate; more to suggest that 'public policy' per se should probably start from a more realistic consideration of the costs attaching to so-called 'average households' - however you wish to define those.

And the news is that even allowing for my exaggerated 50% increase in GST, the end costs per week boil down to not very much at all for those households, when you get right down to it.

Regressive on not, I like taxes which are transparent, and right up front, in your face - to which citizens can react immediately. I mentioned superannuation earlier. That is a classic example of a 'good' government initiative which has resulted in profoundly unfair outcomes, the effects of which are never immediate - hence popular tinkering for whatever government is in power.

That leaves the alternative possibility unexplored: no increased taxes; reduced, or at least, more efficient 'government'. Personally I'd place very little faith in that option.


Evan said...

kvd, you might be confident the poor will be taken care of.

Those of us who are poor are a good deall less confident. If you wish to look at rents in the capitals or major regionals and compare it with the rate of the dole I think you will find reason for this lack of confidence. One complication is that those on the dole aren't allowed to move to lower employment areas. (And the rate that Centrelink taxes extra income is unconscionable - I could say more but not politely.)

Anonymous said...


Those of us who are poor are a good deall less confident.

: your worries are not evidenced by past significant movements in revenue laws. But it's good to keep shouting. Squeaky wheel, and all that.

One complication is that those on the dole aren't allowed to move to lower employment areas.

a) why would you ever wish to move to 'lower employment areas'?
b) who is it that doesn't 'allow you to move' anywhere in Aus? That's news to me.

I could say more but not politely

Evan, why not just say what you wish, as I try to do? Polite is good, but honesty is better...

Anon above put a plain case. But I don't think that case is indicative of where the 'meat' of any change (in any changed taxation laws) is either particularly relevant, or necessarily requiring of particular consideration.

Seriously Evan, I do get that 'the poor' are poor. But to place their needs central? Not for mine.

With respect.


Evan said...

Moving to lower employment areas: Because rents are cheaper in lower employment areas. This is (just one) poverty trap.

Centrelink penalises you. You can be breached and lose your income for moving to an area of lower employment.

If you don't care about the poor that is up to you. I would like the poor to have their own concerns central.

Anonymous said...


You can be breached and lose your income

You need to disabuse yourself of this concept that social services, in any form, is 'income'. I don't work for you.

If you don't care about the poor that is up to you.

If you interpret my comments in that way we don't have much more to talk about.

I would like the poor to have their own concerns central.

Can't argue with that. Good for you, to place self interest front and centre in Jim's 'public policy' discussion. Would expect nothing less of myself.


Evan said...

If you believe it is civilised for people to be deprived of support by government department you are entitled to your opinion.

It is pretty clear from your comments that you have no care for the poor.

Funny - you accuse me of doing what you do. You think the middle should be the concern.

Anonymous said...


You think the middle should be the concern.

I think 'the middle' is of far more economic significance than either end of the Bell Curve, in terms of public policy.

And as for 'the poor' I employ two of them - paid over award, for six hours a day - but they never work more than four and a half hours. And I also know that every time I give them a pay rise the NSW government ups their rent one fourth of same.

One has been sick for a fortnight. Although she's a casual (paid well over award) I have made sure she had her (public housing) rent paid, and contributed to her other ongoing expenses.

So forgive me if I find your comments offensive. The rest of your rant I leave you to make sense of - because I cannot relate it to the point of Jim's post.

Sorry Jim.


Jim Belshaw said...

First a general point. I actually support an increase in and a widening of the GST.

Next. kvd, greater Sydney as defined in those stats includes Sydney, the Illawarra, the central coast and Newcastle and the lower Hunter, so a big slab of the NSW population. You also get some considerable variations in the numbers across the whole area.

Social welfare is income to those receiving it, if classified as a transfer payment.

My concern is the analysis of the distributional affects. If compensation is paid to the lowest income earners, then that balances. However, that could be messy. If you just compensate those on welfare,then you further disadvantage those on lower incomes not on welfare.

If GST is broadened, then you also have to avoid other cost effects. For example, if school fees go up, so may government subsidies to education. Ditto health.

I think that I will probably leave this thread now! It really requires a more detailed analysis.

Anonymous said...

Hi Jim

Thoughtful and to the point comments, only some of which I agree with. But nice to see a more impersonal view.

The more I think about it the more I have come to think that the rate could be changed much more easily than the base. I believe the effects on the lower income bands would be much worse from a change in base than a (deep breath, simple) change in rate. I'd be interested in your thought on that simple proposition?

Social welfare is not 'income'. This may be just a disagreement between us on terminology, but I regard this as significant in the wider sense of how such payments are perceived, and equally importantly, received. I accept I may be very much in the minority with this view - and am quite comfortable with that.


Jim Belshaw said...

Increasing the rate is easier than broadening the base, kvd, especially if the increase is relatively small.

On the last point, define income for me!

Anonymous said...

Thank you Jim. My question was poorly put, but I'll leave it.

As to 'income', I think of it as 'recompense'; my basic view is that income is a 'second step' after or as a result of the provision of some form of value, be that goods or effort or service or licence.

We each come at terms from different viewpoints. That is as simple as I can phrase mine, and I would not expect that it reflects your own.


Jim Belshaw said...

I thought that I answered the first question, kvd, but my focus was more on the politics. The effects on the lower income earners of widening the base to include basic food would be more significant. But it may be that the biggest impact would be middle class - school fees!

On the second, the reason I asked the question was covered in your answer. How about the rentier class? Is that unearned income?

The difficulty with defining income other than in the hands of recipients as opposed to definition based on source are the value overlays.