Greece and EU troika likely to compromise after talking tough on debt

In The Australian today:

‘ “IN the ancient world,” Karl Marx famously wrote, “the class struggle took the form mainly of a contest between creditors and debtors.” Ever anxious to breathe new life into old theories, Greek voters on the one side and the EU on the other seem set to give Marx’s claim a fresh run. ‘

Posted in Uncategorized | 1 Comment

Don’t expect US economy to carry the world

In The Australian today:

“Although the US economy is growing more strongly than the International Monetary Fund expected in last October’s World Economic Outlook, that acceleration will not suffice to boost global economic growth.

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Open Forum: January 31, 2015

Posted in Open Forum | 144 Comments

The PM discusses IR reform

There is a difference between fixing our industrial relations problems and merely throwing out the system we have had since just after Federation. The first most assuredly must be done, but is not the same as the second. Let me quote the Prime Minister, who was trying to get people to understand the difference. The story from The Australian is headed, Abbott defends Fair Work Commission’s ability to set penalty rates. He does not deny that they are too high, only that there is a mechanism for adjusting penalty rates to a rate that will allow employment to grow. From The Oz:

TONY Abbott says he will defend the Fair Work Commission’s ability to set penalty rates, as Joe Hockey called on Labor to “stop scaring people” over industrial relations. . . .

Mr Abbott, speaking in Colac, southwest Victoria, set out a “statement of principle” that industrial relations reforms should aim to achieve “more jobs and better paid workers”.

“If the Australian workforce earns more and is as productive as possible that’s going to be good for everyone. Good for jobs, good for families, good for business, good for prosperity, and that’s what I want to see,” he said.

“In terms of penalty rates, we have a very well-established system in this country — it … began back in about 1903, as I recollect — and under our system it’s the Fair Work Commission which sets these rates, that’s how it is, that’s how it was, that’s how it will be.”

I think giving HRH an Australian knighthood was a distraction and made the government an easy target for its enemies. But this is not why I would or wouldn’t vote for some government. But knowing that the only way to fix our industrial relations problems is to go through our established system of labour relations is what needs a more clear-headed understanding by everyone on this side of the fence. On this, he had the vocal support of the Treasurer so we can see that the PM was speaking for the entire government.

On a related note: what does John Howard have in common with Sir Stanley Bruce? The answer to that might help make things a bit more clear.

Posted in Federal Politics, Unions | 37 Comments

Everything belongs to the government: the TES is released

download (13)Here we go again: the atrocious, shameful and laughable Tax Expenditure Statement has been released by Treasury.  And again the central assumption is that all income and capital gains belong to the government and anything that is returned to taxpayers is a concession or tax expenditure.

Memo to John Fraser, new Treasury secretary: I know it is a legislative requirement to produce a TES, but not this document.  Way too many resources are devoted to making up figures for this fairy story (and note the enormous numbers of items which are simply starred).  There is even a concession that a very large number of the estimates have low reliability.

A few pages would suffice.

Is there anything interesting in the 2014 TES?

  • You’ll all be pleased to note that capital gains tax exemption of the main residence, including the discount component, is now ‘costing’ $46 billion.  This is notwithstanding the fact that no one is talking about imposing a capital gains tax on owner occupied housing, but what the heck.
  • (Maybe next year, the Treasury could estimate the revenue foregone in not taxing the imputed rents of owner occupied housing.  Oops, perhaps I shouldn’t have mentioned that.)
  • And then’s the favourite of the Left – the revenue foregone from what is regarded as the concessional taxation of superannuation: $30 billion.  It’s less on a revenue gain basis: $27 billion.  (Note to Treasury officials: superannuation is saving and so the appropriate comparator is the consumption tax not income tax.)
  • Actually, I think there is one figure in the TES that the government should take note of: the combined impact of the egregious exemption from FBT of public hospitals, ambulance services and public benevolent institutions (including some of the appalling ‘public health’ organisations) – think wealthy doctors paying very little tax – now amounts to nearly $2. 8 billion per year.  (Come on down, Joe, this is low hanging fruit.)

I would also add that lots of the estimates look very wrong and therefore are.  Take imposing the GST on education: in revenue foregone terms, the figure is $3.95 billion but in revenue gain terms, it is $3.55 billion.  The implicit elasticity is way too low and one wonders how any estimate was made in the first place.  There are lots of other obvious errors.

It’s worth reading Treasury’s explanation of all this:

A tax expenditure arises where the actual tax treatment of an activity or class of taxpayer differs from the benchmark tax treatment.

• Tax expenditures typically involve tax exemptions, deductions or offsets, concessional tax rates and deferrals of tax liability.

• A positive tax expenditure reduces tax payable relative to the benchmark. A negative tax expenditure increases tax payable relative to the benchmark. Benchmarks represent a standard taxation treatment that applies to similar taxpayers or types of activity.

• Benchmarks may also incorporate structural elements of the tax system; for example, the progressive income tax rate scale for individual taxpayers.

• The benchmarks used in the 2014 TES are outlined in Appendix A. Determining benchmarks involves judgment. Consequently, the choice of benchmark may be contentious and benchmarks may vary over time.

• To facilitate discussion and understanding of the impact of using different benchmarks, the 2013 TES included an illustrative case study which showed the differences in the estimates for superannuation tax expenditures if an expenditure tax benchmark was used rather than the usual income tax benchmark – see Appendix A, 2013 Tax Expenditures Statement. Although that exercise has not been repeated for this year’s TES, the conceptual points that were discussed last year remain.

 The choice of the benchmarks in the TES tells us all you need to know about the depth to which the intellectual integrity of Treasury has sunk.

Posted in Uncategorized | 31 Comments

Are interest rates going down?

Looks like it. I just saw the RBA go-to journalist Terry McCrann saying that the rates need to go down to at least 2% this year and that the RBA might start moving as early as next Tuesday.

That is consistent with the Futures Market (this page updates every week day).

Interest rates 29 Jan 2015

I’m not convinced this is wise. True the headline rate does appear subdued but the RBA analytic series (Trimmed Mean and Weighted Median) are higher and have been trending up more or less since 2012. The figure below shows the average of the two series on an annual and quarterly basis and the RBA cash rate.

Inflation 30 Jan 2015

While our inflation rate is high by international standards.

Inflation international

Australia is the thick red line. As can be seen in the past two and bit years Australian inflation (measured by the change in CPI) excluding housing, insurance and financial services (that is the comparative data the ABS report) has gone up while many other economies inflation has fallen or remained at low levels.

I’m not convinced that lowering interest rates is going to stimulate economic activity. In the past few months I’ve seen RBA officials bemoaning the lack of “animal spirits” in the economy and saying there is a dearth of risk-taking. I suspect this isn’t due to a lack of finance but rather entrepreneurs responding to regime uncertainty. In an environment when budget deficits are blowing out, public debt rising and future taxation liabilities growing, it is unsurprising that business is being particularly cautious.

In the meantime I expect economic growth to remain sluggish and unemployment to remain at high levels.

Update: Terry McCrann interview here.

Posted in Economics and economy | 67 Comments

Obama and the Israeli election

Obama has only one enemy in the world, American’s closest ally in the Middle East. From Drudge today:

BIBI BE BAD…
White House ratchets up criticism of Netanyahu…
Inside HQ of ex-Obama staffers’ campaign…
Iran Targets Netanyahu Children for Assassination…

In case you are not keeping up with the latest from the White House, this is where we are:

A U.S. State Department-funded group is financing an Israeli campaign to oust Prime Minister Benjamin Netanyahu, and has hired former Obama aides to help with its grassroots organizing efforts.

U.S.-based activist group OneVoice International has partnered with V15, an “independent grassroots movement” in Israel that is actively opposing Netanyahu’s party in the upcoming elections, Ha’aretz reported on Monday. Former national field director for President Obama’s 2012 reelection campaign Jeremy Bird is also reportedly involved in the effort.

He would probably send in the troops if he thought he could. We are dealing with such insanity that it is hard to understand why this remains so low key. Is this now how things are? The stories that the CIA brought on the dismissal back in 1975 is a story that won’t go away, but that, at least, was supposed to have been clandestine. This is right out in the open, and as public as you could wish.

Posted in International | 35 Comments

Most people don’t like hard decisions

This is the story from today’s Australian, Queensland election 2015: ‘some people don’t like hard decisions’.

QUEENSLAND Premier Campbell Newman has put his party’s dramatic fall in the polls to “hard decisions” he made that “some people didn’t like”.

The Liberal National Party (LNP) annihilated Labor in the state election three years ago, scooping 78 seats in the 89 seat parliament.

The opposition was left with just seven seats, but polls suggest the LNP and Labor are now neck and neck.

This is how politics seems to work. There is one side who wrecks things and the other side who tries to put them back together. Think of the following pairings: Whitlam-Fraser; Keating-Howard; R-G-R-Abbott. But because the wreckers had their heart in the right place, and will almost never be attacked by the media, we keep going. The interesting part of the latest is that Shorten has misunderstood his own part in the process, and is stopping the Coalition from repairing what everyone agrees is broken (see W. Swan). If Labor wins at the next election, it will be just in time to have to deal with all of the worst fiscal horrors left behind by R-G-R, and they will no longer stop the boats.

I don’t think it is the case that people don’t like hard decisions, but they certainly don’t like not having things explained to them in ways that bring to the surface the nature of our emergency. When you have a PM who thinks he needs to leave his imprint on knighthoods and our literary awards, and leaves economic policy for others to sort out, you have a problem, with the even bigger problem to come, that the spending party may return to government before the party of restraint has actually fixed things up.

Posted in Economics and economy, Federal Politics | 37 Comments

Shame on them

(HT: MT via Twitter)

Posted in Hypocrisy of progressives, International | 20 Comments

How to lose a bill or so, Dan-style

download (12)Here’s the thing: the government is the government until the caretaker period commences. Any contract entered into by one government binds the next.

Now our Dan knew all this, but decided it was electorally attractive to assert that the East West Link contracts were invalid and there would be no need for compensation.  He even got a tame lawyer and ex-judge – Labor inclined Finkelstein – to back him up, although in fact his advice did admit that payment for damages to the contracting parties was a possibility.

Now the CFMEU-backed, my name is now Dan, is in office, it doesn’t seem that simple.  In fact, the Labor government hasn’t even given notice under the contract to the relevant parties.

To think that over a billion dollars of taxpayer money could be blown away on a tacky political ploy – it simply beggars belief.

Here is the update from the Fin:

A billion-dollar compensation bill payable by the Victorian government for breaking the East West Link road contract is mounting by the day.

Talks over the disputed pay-out have stalled as the Andrews government delays formally terminating the $6.8 billion contract while advisers ponder taxpayers’ liability.

Separately, the government’s own sunk costs on the cancelled road project could take a direct hit if the Reserve Bank of Australia cuts interest rates in response to weak inflation.

The government’s sunk costs are already about $300 million for land acquisition and managing the road project, which has been in the works since the last Labor government.

Losses on $6 billion of finance – interest rate swaps and hedges – put in place when the deal closed in September would also swell if the RBA cut rates.

Premier Daniel Andrews has previously claimed the compensation clause is not valid because Labor warned before the contract was signed it would cancel the project if it won the election.

That reversed Labor’s position. But formally giving notice under the contract could be seen as an action ­consistent with its validity, weakening the government’s argument. It is understood the government has not approached the East West consortium since an acrimonious meeting before Christmas at which Mr Andrews declared the contract was invalid.

Consortium members say they were dealing with the government and faced penalties themselves if they withdrew from negotiations at that late stage.

The termination for convenience clause in the East West contract replicates a standard clause in public private partnerships in Victoria and other jurisdictions in recent years.

The government refused to say why it had not activated it, given it only requires them to send one formal letter to the Lend Lease-led consortium for the compensation bill to stop climbing.

The twist is that any failure to proceed if the courts ruled the planning approvals for the project invalid in a case brought by inner-Melbourne councils would be treated as termination for convenience. In the standard compensation clause, if the government terminates for convenience it effectively pays out future profits, one source said.

Such a clause has never been triggered in a major infrastructure project in Australia. After the councils challenged the planning approval, East West Connect sought a letter guaranteeing the state would pay the contracted compensation, which the then treasurer Michael O’Brien supplied.

The amount of compensation from cancelling the project is devised from an equation. It is understood that the compensation bill hit $1 billion in January and could reach $1.1 billion by March.

The termination for convenience clause is a somewhat standard clause for the government to include and was used in the Parkville Comprehensive Cancer Centre Project. By not activating the clause in an attempt to get out of paying any compensation, the government could be costing taxpayers more.

Sources suggest the contract is “water tight” and the compensation bill will have to be paid out, not just the costs already incurred.

Consortium members can always accept a lesser amount than the contracted compensation. But doing so would weaken the position of international groups like Bouygues and Acciona if governments in less-stable countries terminate contracts on them.

East West Link investor Queensland Investment Corp – the Queensland government owned fund manager – would also find it hard to justify short-changing its superannuation fund members in order to get Victorians out of a hole.

Posted in Uncategorized | 41 Comments