OECD – Digital Finance Analytics (DFA) Blog

The “Middle Class” Is Under Pressure

The OECD has released a report Under Pressure: The Squeezed Middle Class which underscores the fact that relative to the more affluent, those in the middle are getting squeezed. 40% are financially at risk. Timely given the current Australian election!

Much of this is because of the high costs of housing relative to incomes.

The cost of a middle class lifestyle has increased faster than inflation. Housing, for example, makes up the largest single spending item for middle-income households, at around one third of disposable income, up from a quarter in the 1990s. House prices have been growing three times faster than household median income over the last two decades

The report includes Australian specific data. At 58%, the size of the Australian middle class is smaller than the OECD average.

Millennials are slightly less likely to be in the middle-income group than baby boomers.

The middle-income class in Australia is more highly skilled than 20 years ago

Australian middle-income households spend a relatively low, but growing, share of their budget on housing.

More generally, the report says that the middle class has shrunk in most OECD countries as it has become more difficult for younger generations to make it to the middle class, defined as earning between 75% and 200% of the median national income. While almost 70% of baby boomers were part of middle-income households in their twenties, only 60% of millennials are today

The economic influence of the middle class has also dropped sharply. Across the OECD area, except for a few countries, middle incomes are barely higher today than they were ten years ago, increasing by just 0.3% per year, a third less than the average income of the richest 10%

“Today the middle class looks increasingly like a boat in rocky waters,” said OECD Secretary-General Angel Gurría, launching the report in New York with Luis Felipe Lopéz-Calva, Assistant Secretary General, Latin America and the Caribbean, United Nations Development Programme. “Governments must listen to people’s concerns and protect and promote middle class living standards. This will help drive inclusive and sustainable growth and create a more cohesive and stable social fabric.

Gabriela Ramos, OECD Chief of Staff and Sherpa overseeing the Organisation’s work on Inclusive Growth, presented in more details the main findings of the report, saying “our analysis delivers a bleak picture and a call for action. The middle class is at the core of a cohesive, thriving society. We need to address their concerns regarding living costs, fairness and uncertainty.”

More than one in five middle-income households spend more than they earn and over-indebtedness is higher for them than for both low-income and high-income households. In addition, labour market prospects have become increasingly uncertain: one in six middle-income workers are in jobs that are at high risk of automation, compared to one in five low-income and one in ten high-income workers

To help the middle class, a comprehensive action plan is needed, according to the OECD. Governments should improve access to high-quality public services and ensure better social protection coverage. To tackle cost of living issues, policies should encourage the supply of affordable housing. Targeted grants, financial support for loans and tax relief for home buyers would help lower middle-income households. In countries with acute levels of housing-related debt, mortgage relief would help overburdened households get back on track

As temporary or unstable jobs – often offering lower wages and job security – increasingly replace traditional middle-class jobs, more investment is needed in vocational education and training systems. Social insurance and collective bargaining coverage for non-standard workers, such as part-time or temporary employees or self-employed, should be extended

Finally, to foster fairness of the socio-economic system, policies need to consider shifting the tax burden from labour income to income from capital and capital gains, property and inheritance, as well as making income taxes more progressive and fair.

Australia’s cooling housing market; is the economy at risk?

The OECD says Australia’s housing market is a source of vulnerability. Prices have more than doubled in real terms since the early 2000s and household debt has surged. The market has started to cool over the last year, with prices falling most notably in Melbourne and Sydney. So far, data point to a soft landing without substantial consequence for the overall economy. Nevertheless, risk of a hard landing remains.

To date the decrease in house prices has been gradual. Prudential measures taken by the Australian authorities restricting certain types of housing credit have played a role. So too has a pick-up in new housing supply and construction activity remains elevated. Furthermore, some evidence suggests that Australia’s house prices have not been hugely overvalued; the IMF has estimated that as of Q3 2017 prices were above equilibrium by only between 5 and 15% (Heilbling andLi, 2018).

Several features of Australian financing limit the risk of financial fall-out from a house-price correction. Banks are well capitalised and their liquidity position is sound. Indebtedness is concentrated in middle- and high-income households, and data indicate declining financial stress in recent years, despite rising mortgage debt. Moreover,many mortgage holders have accumulated substantial buffers of advance payments(“mortgage prepayments”).

Nevertheless, risk of a macroeconomic downturn from the cooling housing market remains. Not withstanding the estimates that Australia’s market is not greatly overvalued, house prices could fall more substantially. Should this happen, household consumption could weaken. Households would cut their spending due to lower housing wealth and due to increased economic uncertainty generated by downturn. Households would also reduce expenditures related to the purchase, sale and maintenance of housing (such as spending on renovation and interior decoration). Sustained decreases in house prices would also weaken construction activity. Weakened aggregate demand could in turn lead to losses on loans to businesses, putting stress on the financial sector.

The OECD’s 2018 Economic Survey of Australia recommends authorities prepare contingency plans for a severe collapse in the housing market. These should include the possibility of a crisis situation in one or more financial institutions.

Australian Property A Target For Money Laundering

An OECD report “Implementing The OECD Anti-Bribery Convention” was released this week and focused on Australia. This is part of the OECD Working Group on Bribery. Real Estate is in the spotlight, because sources in the banking and accounting sectors are warning that Australian real estate is at “significant risk” of being used for money laundering.

Among a raft of recommendations, is one saying Australia should be:

Taking urgent steps to address the risk that the proceeds of foreign bribery could be laundered through the Australian real estate sector. These should include specific measures to ensure that, in line with the FATF standards, the Australian financial system is not the sole gatekeeper for such transaction.

Here is a summary from The Adviser:

“Australia has stepped up its enforcement of foreign bribery since 2012, when the OECD Working Group on Bribery last evaluated Australia’s implementation of the OECD Anti-Bribery Convention, with seven convictions in two cases and 19 ongoing investigations,” the OECD said.

“However, in view of the level of exports and outward investment by Australian companies in jurisdictions and sectors at high risk for corruption, Australia must continue to increase its level of enforcement.”

The OECD report highlighted that one possible means of improving detection is through an increased focus on the proceeds of crime in financial flows back into Australia, particularly those involving the residential real estate sector.

It noted that Aussie property is “very attractive to foreign investors and is at ‘significant risk’ for money laundering”, according to a number of sources, including the 2015 Financial Action Task Force (FATF) Mutual Evaluation Report of Australia.

“Several participants at the onsite from civil society and the private sector also highlighted the significant risk of laundering foreign corrupt proceeds in the Australian real estate sector, including representatives from civil society, the banking sector and an international accounting and auditing firm.”

The review team noted the views of J.C. Sharman, an Australian academic and international AML/CFT and anti-corruption expert, on the Australian AML/CFT system’s failure to counter the flow of corrupt proceeds from abroad into the Australian real estate sector.

According to the report, Professor Sharman attributes the gap to a “lack of willingness” to take action rather than a lack of capacity, stating that Australia has some of the most powerful AML/CFT laws in the world.

He provides several examples where banks or AML/CFT authorities have failed to act on suspicious payments, and information from interviews with Australian bankers that believed the Commonwealth Government did not take seriously enough the issue of inward flows of corrupt proceeds.

Under Australian law, real estate agents, accountants and auditors, members of the legal profession and other Designated Non-Financial Business Professionals (DNFBPs) are not subject to AML/CFT obligations.

However, the OECD noted that Australia is currently considering the expansion of AML/CFT reporting obligations to real estate agents, lawyers, conveyancers, accountants, high-value dealers and trust and company service providers.

“This follows a statutory review of the AML/CFT regime (completed in April 2016), which recommended a cost-benefit analysis be undertaken (completed in June 2017),” the report said.

“The government is currently considering the report, which will inform any decision about the regulation of these sectors for AML/CFT purposes.”

FIRB to play a bigger role

The OECD believes that Australia’s Foreign Investment Review Board (FIRB) could potentially play a greater role in detecting and reporting suspicious transactions in the real estate sector, and leverage available information from the ATO, AUSTRAC and AFP to act on suspicious transactions relating to foreign investments.

The report explained: “Pursuant to the applicable legislative framework, the Treasurer is empowered to prohibit a foreign purchase of Australian property if satisfied that it would be contrary to the national interest, which includes considerations such as national security, competition, impact on the economy and character of the investor.

“The FIRB routinely consults with government agencies, including ASIC, AFP and Immigration and Border Protection, about applications. The ATO also meets regularly with these agencies to ensure that a cohesive, whole of government approach, is maintained.”

OECD Signals RBA Rate Hike

According to the OECD, Australia – Economic forecast summary (November 2017), things are looking better. As a result, they expect rate hikes next year to help cool the housing market. But they call out a number of risks to economic growth and says macro-prudential measures should be maintained. Also their growth rates are lower than than latest from the RBA!

The economy will continue growing at a robust pace. Business investment outside the housing and mining sectors will pick up, with exports boosted as new resource-sector capacity comes on stream. The strengthening labour market and household incomes will sustain private consumption, and inflation and wages will pick up gradually.

The central bank is projected to start raising the policy rate in the second half of 2018 and expectations of this move, together with macro-prudential measures, are helping cool the housing market. The fiscal position is sound and the government is committed to gradually close the budget deficit. In the event of an unexpected downturn, fiscal policy should be used to support activity and protect the incomes of the most vulnerable.

The prolonged period of low interest rates has fuelled high house prices in large metropolitan areas. Substantial mortgage borrowing has resulted in households being highly indebted. To contain risks associated with potential large house-price corrections and financial stress, macro-prudential measures should be maintained. Australia is also vulnerable to “too big to fail” risks, due to its highly concentrated banking sector.

OECD Paints A Sanguine Picture Of The Australian Economy, Includes Housing Risks

The latest OECD Report – 2017 Economic Survey of Australia says whilst Australia’s economy has enjoyed considerable success in recent decades, the economy shares the global risk of a “low-growth trap”.

Living standards and well-being are generally high, though challenges remain in gender gaps and in greenhouse-gas emissions, and further challenges arise from population ageing.

Low interest rates have supported aggregate demand but are also ramping up risk-taking by investors and driving house prices and mortgage lending to historical highs.

A fall in house prices and or demand could have significant macroeconomic implications. Specifically, the market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications.

Macrofinancial indicators underline the threat from the housing market, with house prices and related indicators (house indebtedness, bank size), pointing to continued vulnerability. Any impact will most likely be through aggregate demand than financial instability.

They advocate tight macroprudential measures, improved housing supply, and reducing banks’ implicit guarantees by developing a loss absorbing and recapitalisation framework.

They support a cut in company tax, and an expansion of the GST, switching from transaction taxes (like stamp duty) to land taxes.

They say the economy is now rebalancing following the end of the commodity boom, supported by macroeconomic policies and currency depreciation. The strengthening non-mining sector is projected to support output growth of around 3% in 2018 and spur further reduction in the unemployment rate.

Improving competition and other framework conditions that influence the absorption and development of innovation are key for restoring productivity growth.

Innovation requires labour and capital markets that facilitate new business models. Productivity growth could be boosted through stronger collaboration between business and research sectors in R&D activity.

Australia’s adjustment to the end of the commodity boom has not been painless. Unemployment has risen, and there are increasing concerns about inequality.

In addition, large socioeconomic gaps between Australia’s indigenous community and the rest of the population remain. Developing innovation-related skills will be important for the underprivileged and those displaced by economic restructuring, and can help reduce gender wage gaps.

Externally, Australia, as always, is exposed to the vagaries of global commodity markets and this might include a renewed plunge in prices (or, positively, a strong resurgence). Australia’s iron ore production is among the lowest cost in the world and therefore comparatively insulated from such developments, however its coal sector is relatively more exposed as its production is distributed across the cost curve. Interaction of downside scenarios is likely to exacerbate the negative macroeconomic outcomes.

For instance, a negative external shock could lift unemployment sharply which would result in significant fall in consumption and rising mortgage stress and falling house prices. The economy is well positioned to handle shocks. The speed and strength of the rebalancing processes in response to the end of the commodity boom auger well for the economy’s shock-absorbing capacity. In addition, Australia has more reserve capacity for monetary and fiscal stimulus than many other OECD economies.

The slideshow is available here.

OECD Reinforces Need To Raise Rates In Australia

The latest OECD commentary on Australia makes interesting reading. In particular they argue that interest rates should be raised, and fiscal rather than monetary support should play the leading role. Tax reform should be a core element of structural policy.

“Economic growth is projected to pick up to 3% by 2018. The decline in resource-sector investment will tail off and the non-resource sector will be supported by a steady increase in household consumption and investment as wages and employment rise.

Further falls in unemployment will help reduce inequality and are not expected to generate strong inflationary pressures.

Monetary policy tightening is expected to commence towards the end of 2017 and this is appropriate given likely monetary-policy developments elsewhere, the cyclical development of the domestic economy and the need to unwind tensions from the low-interest environment, notably in the housing market, which has in many places experienced rising prices for some time. The government envisages fiscal consolidation.

In the event of disappointing growth, however, fiscal rather than monetary support should play the leading role given the housing-market concerns and fiscal leeway. Tax reform should be a core element of structural policy. There is space for fiscal loosening given the low public-debt burden. Returns would be high for accelerated in infrastructure development and investing in skills, an area where Australia falls short of top-performing countries. Active measures to increase transfers to households could help address inequality, thereby making the recovery more inclusive.

Reallocation towards non-resource sectors continues
Global iron ore and, especially, coal prices have risen, and new liquefied-natural-gas (LNG) production is coming on stream. Nevertheless, resource-sector investment and employment continue to decline. Non-resource output and employment, assisted by currency depreciation, continues to strengthen, notably services exports. However, non-resource investment has yet to pick up. House prices and mortgage credit continue to grow, though macro-prudential tightening has recently helped lessen the pace of increase. Consumer price inflation remains low.

Continued policy support for economic adjustment and productivity growth is required
In August 2016, the Reserve Bank decreased its policy rate by 25 basis points to 1.50%, the second reduction in 12 months. No further easing is projected, and rate increases are projected to begin towards the end of 2017 as spare capacity fades. Fiscal consolidation of around ½ percentage point of GDP is projected, as envisaged by the government. Despite the employment of macro-prudential measures to cool the housing market, the net gain from monetary easing has narrowed. Significant housing market concerns remain and there is growing discord between financial market developments and rest of the economy due to the low-interest-rate environment.

General-government debt has risen but from a low level and the debt-to-GDP ratio, currently around 45%, is projected to begin to fall. There is already fiscal space to respond to an unanticipated downturn in activity. There is room for spending increases, notably an acceleration in the public investment programmes underway in telecommunications, roads and public transport systems.

Boosting productivity and combatting exclusion remain important structural challenges. Implementation of the National Innovation and Science Agenda, a wide ranging package to boost innovation, continues. Also, some tax reforms are underway, notably efforts to better target pension (“superannuation”) taxation by assisting low-income earners and lowering taxpayer support for retirement accounts. Reductions in corporate tax rates are also proposed. However, the reforms fall short of a major shift in taxation as recommended in OECD Economic Surveys, which stress the importance of efficient tax bases, such as the Goods and Services Tax and land tax. In the greenhouse-gas-reduction policy area, a welcome safeguard mechanism has begun operating that discourages firms from offsetting emission reductions achieved via the Emission Reduction Fund.

A gradual pick-up in growth with sizeable uncertainties
Output growth is projected to strengthen to about 3% by 2018. LNG production will boost exports and negative effects from shrinking mining investment will diminish. Rebalancing towards non-mining sectors will drive a gradual pick-up of overall activity, helped by supportive macroeconomic policies. Employment growth should result in a further decline in the unemployment rate. Household consumption growth is expected to remain solid, aided by further downward adjustment in the household saving ratio to the historical average. The pick-up in aggregate demand is not projected to generate significant inflationary pressure, due to remaining economic slack.

Australia has experienced 25 years without recession, but there are risks looking forward. Commodity market developments, particularly those linked to the Chinese economy, remain an important source of uncertainty and risk. Domestically, non-resource investment may remain lacklustre, damping growth prospects. Also, the housing market remains a risk, as an acceleration in price adjustment would weaken consumption demand and construction activity”.

Tax challenges, disruption and the digital economy

From The OECD Observer.

The digital economy is a transformative process, brought about by advances in information and communications technology (ICT) which has made technology cheaper and more powerful, changing business processes and bolstering innovation across all sectors of the economy, including traditional industries. Today, sectors as diverse as retail, media, manufacturing and agriculture are being impacted in some way by the rapid spread of digitalisation. In the broadcasting and media industry, for instance, the expanding role of data through user-generated content and social networking have enabled internet advertising to surpass television as the largest advertising medium.

In other words, “digitalisation” is pervasive, making it very difficult, if not impossible, to ring-fence the digital world from the rest of the economy, including for tax purposes. This is the first finding regarding the tax challenges of the digital economy agreed by all G20 and OECD countries, under the Base Erosion and Profit Shifting (BEPS) Project. BEPS refers to tax strategies that allow Multinational Enterprises to shift profits away from the locations where the actual economic activity and value creation takes place, into low or no-tax locations.

Action 1 in the 15-point Action Plan to address BEPS, the work on the tax challenges of the digital economy, aimed to consider whether the international tax rules were sufficient to meet the demands arising from new business models and ways of creating value that are emerging with the rise of new technologies.

While finding that the digital economy cannot be separated out from the rest of the economy, it was equally clear that some specific features of the digital economy may exacerbate the risks of base erosion and profit shifting for tax purposes–namely mobility (e.g. intangibles, business functions), reliance on data (and other forms of user input), network effects, and the spread of multi-sided business models.

Thanks to digitalisation, we now see businesses across all sectors having the capacity to design and build their operating models around technological capabilities, with a view to improve flexibility and efficiency and extend their reach into global markets. These advances, coupled with liberalisation of trade policy and reduction in transportation costs, have significantly expanded the ability of certain business models of the digital economy–e.g. electronic commerce, online advertising and cloud computing–to take advantage of BEPS opportunities. The techniques used to achieve BEPS by these businesses however, are generally not different from the ones used in other parts of the economy, and as such, countries agreed that the digital economy does not generate any unique BEPS issues, and that the solutions designed to tackle BEPS practices in the 14 other points of the BEPS Action Plan should suffice to address these concerns.

Second, beyond the issue of BEPS and tax avoidance, the key features of the digital economy raise more systemic challenges for tax policy makers that are generally grouped into three categories–the so-called “broader tax challenges”: (i) the difficulty of collecting VAT/GST in the destination country where goods, services and intangibles are acquired by private consumers from suppliers based overseas which may not have any direct or indirect physical presence in the consumer’s jurisdiction; (ii) the ability of some businesses to earn income from sales from a country with a less significant physical presence in the past, thereby calling into question the relevance of existing rules that look at physical presence when determining tax liabilities; (iii) the ability of some businesses to utilise the contribution of users in their value chain for digital products and services, including through collection and monitoring of data, which raises the issue of how to attribute and value that contribution.

On VAT/GST collection, the project resulted in international agreement on recommendations to allocate the collection of VAT on cross-border B2C supplies to the country where the customer is located. For the remaining two broader tax challenges, the continuing technological developments and business models–the Internet of things, robotics and the “sharing economy”, to name a few–may prove influential and disruptive in the near future, and accordingly, raise questions as to whether the existing paradigm used to determine where economic activities are carried out and where value is generated for income tax purposes continues to be appropriate.

It is still too early to determine whether these challenges are sufficiently critical in scale and impact to justify more fundamental changes of the existing international framework, beyond what is proposed in the package of measures to tackle BEPS endorsed by OECD and G20 in October 2015. Some potential options to address these challenges have been analysed, ranging from a withholding tax on digital sales to a new concept of nexus based on having a “significant economic presence”. In the coming years, the Task Force on the Digital Economy under the Committee on Fiscal Affairs will continue to monitor new developments–both in terms of technologies as well as new tax policy responses governments develop to address them, with a review of the 2015 report on BEPS Action 1 planned for 2020.

Needless to say, the stakes in this work are high, and so are the objectives: appropriate policy solutions need to be considered that address these challenges, even while the digital world continues to advance at an exponential rate. In a short period of time, it is possible that we may be confronted with a fully-digital world that disrupts some of the fundamental assumptions of the international tax system.

OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, http://dx.doi.org/10.1787/9789264241046-en

OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, http://dx.doi.org/10.1787/9789264202719-en

The Digital Economy in the Age of Disruption

Mexico hosts the OECD Ministerial Meeting on the Digital Economy. The first ministerial of its kind on this subject (then called “electronic commerce”) was held in Canada in 1998, and the second one in Korea in 2008; hence Mexico is the third county to have this distinction and the first Latin American country to organise and lead this undertaking. As the use of information and communications technology (ICT) is favourable for productivity across a large number of strategic industries in any economy, we have chosen “Innovation, Growth and Social Prosperity” as this year’s theme, three goals that can hardly be achieved without the impetus of digital technology. Their infographic highlights some of the challenges ahead.

Ildefonso Guajardo Villarreal, Secretary of Economy, Mexico, and Chair of the OECD Ministerial Meeting on the Digital Economy, writes:

As the use of information and communications technology (ICT) is favourable for productivity across a large number of strategic industries in any economy, we have chosen “Innovation, Growth and Social Prosperity” as this year’s theme, three goals that can hardly be achieved without the impetus of digital technology. Under this axis, we have defined four key areas of discussion to promote the advancement of the digital economy: (1) Internet Openness and Innovation; (2) Trust in the Digital Economy; (3) Building Global Connectivity; and (4) Jobs and Skills in the Digital economy.

Take the first topic, Internet openness and innovation. It is essential that the participating governments focus on keeping the Internet free and accessible, so that all individuals can use it to exchange information, build and link networks, without restriction or permission from authorities, as it has been to the present day. These data flows are important to trade, innovation, entrepreneurship, growth and social prosperity. Promoting the open, distributed and interconnected nature of the Internet and encouraging multi-stakeholder co-operation will be key to keeping us on the right path.

Regarding trust in the digital economy, we have come a long way: 18 years ago at the ministerial meeting in Canada, one of the main objectives was to promote the use of electronic commerce; today, in leading countries, for instance in the United States, 90% of Internet users undertake online banking transactions and 80% carry out purchases online. Despite this breakthrough, in some regions, distrust of electronic transactions prevails, so we must develop the mechanisms to ensure the security of users’ data.

Higher connectivity has been achieved in the last decade, allowing us to move from the era of “Internet People”, to the digital era of the “Internet of Things”, where the number of connected devices exceeds the number of connected people. And the trend will continue: it is estimated that by 2022 there will be 14 billion connected household devices in OECD member countries. This implies significant technological advances, but also policy challenges to facilitate the development of these technologies and at the same time, help strengthen the privacy of its users.

The Digital Economy and the Internet of Things are revolutionising not only the way we consume, but also the way we work, altering labour market needs. According to the OECD, 65% of today’s children will have jobs that have not yet been invented. This means that knowledge and skills required to enter the labour market will be very different from those provided by the current educational model. Therefore, the fourth area in which we must work, is to create new approaches to education and more flexible training and competencies, so as to allow the integration of students within highly technological environments.

The current period of rapid technological progress is leading us into a new era of disruption, where the way we interact, consume and work, is constantly being transformed by new technologies. This means that the results we achieve in these four key areas will be the foundation that will allow us to move forward..

In the era of disruption, governments along with all stakeholders, need to work together to design strategies and promote comprehensive efforts to facilitate the transition, for our economies and especially for human capital, towards knowledge-based, innovative, growth. The celebration in our country of the OECD Ministerial Meeting on the Digital Economy is an important step in that direction for Mexico. We will concentrate all of our efforts, so that the Cancun Ministerial Declaration can become a work agenda which, through collaboration, will promote growth and prosperity for all.

Angel Gurría, Secretary-General of the OECD writes about the social compact for the digital age:

The Internet is now an essential part of our lives and a critical element of the world economy. Internet penetration increased almost sevenfold in the past 15 years, from 6.5% of the world population in 2000 to 43% in 2015.

The expansion of broadband networks has already brought 3.2 billion people online worldwide. Some 116 billion devices are already connected to the Internet and this number is growing faster than the number of Internet users. Internet and software companies such as Facebook, Apple and Google have all overtaken traditional companies such as GE or Exxon Mobile.

These examples are just a foretaste of how fast the Internet is transforming our economies, our societies and our cultures. That is why we must strive to get the rules governing this incredible platform for growth and social well-being right. The “One Internet” report from the Global Commission on Internet Governance sets us on the right path.

Three lines of action in the report particularly resonate with the OECD:

First, the need to increase access for a truly inclusive global digital economy. Access to the Internet is essential to benefit from the digital economy. Yet, over 50% of the world population remains offline, most of them living in emerging and developing countries. To increase access and make it affordable, policy leaders must encourage private investments and promote competition among providers, while increasing digital literacy. But we must also support governments in developing countries who want to provide free access internet spaces for their citizens.

Second, the importance of promoting Internet openness. The Internet is a global network of networks. We can capture its full potential only if we preserve the global free flow of information and promote the cross-border delivery of services. As the report notes, the open and accessible qualities of the Internet are the very qualities that encourage creativity and innovation. This is why the OECD has made Internet Openness and Innovation one of the four themes of our ministerial meeting on the digital economy this June.

Third, the undisputed necessity of building an environment of trust. Lately, many important companies such as Target, Home Depot, eBay or LinkedIn reported hacks and data breaches. Public safety is challenged when criminal and terrorist networks exploit the Internet, while important financial losses can result from cybercrime. We need to do more to strengthen trust across borders. Policy leaders, the private sector and civil society must join forces to effectively manage digital risks. Otherwise, as the report notes, users will modify their behaviour, and the online engagement that has made the Internet such a successful platform for growth, development and innovation will be eroded.

Besides these key areas of action, the report also touches upon a wide range of forward-looking aspects that are worth pointing out. It includes a framework to understand the Internet as an ecosystem of technologies, protocols, hardware, software and content, as well as recommendations to ensure human rights for digital citizens.

The report is also a call on governments, corporations, civil society, the technical community and individuals to create a new social compact for the digital age: a social compact that may bring about a completely new mode of interaction, of exchange of ideas, of negotiation that could also enhance policymaking processes in all areas, with the idea of making them increasingly open, transparent and, in the end, democratic.

Getting Internet governance right has never been more pressing. In the past few years, we have benefited significantly from the expansion of the Internet, the most powerful information system the world has yet seen. But this outstanding evolution has brought new challenges that we must address, collectively, if we want to keep an accessible, inclusive, secure and trustworthy Internet.

Getting Government Debt In Perspective

A good piece in today’s The Conversation, examines the claim that the current government has lifted net government debt by $100 billion. This is proved to be correct, with caveats. However, some perspective is required in the debate. As highlighted in the piece, an important measure is debt to GDP. On that basis, on an international comparison, Australia is still well placed.

However, a recent report from LF Economics highlights that “while mainstream commentary and attention is firmly focused on public debt, the nation has accumulated a dangerously high level of private debt, including a moderately high level of external debt. Globally, Australia ranks near the top of indebted households. The exponential surge in mortgage debt issuance over the last two decades has generated the largest housing bubble in Australian economic history”. “Australia’s household debt ratio has grown above peaks established in countries where housing bubbles formed and burst, as in Ireland, Spain and the United States,” say report authors Philip Soos and Lindsay David. “So highly leveraged is the housing market that even small declines in residential land prices will have adverse consequences.”

Indeed, Australian households overtook the Swiss as the world’s most indebted this year, with outstanding debt equivalent to 125 per cent of GDP and no let up in sight. Combined owner-occupier and investor loans outstanding have risen from $1.2 trillion to $1.6 trillion in the past five years.

Here is the problem, the economic growth is being stoked by ever higher household debt, which is unsustainable. Why are we not getting better political discussion on this much more important issue during the election? The current economic path which has been set is unsustainable. The chart below makes the point – private debt should be the focus.

As we highlighted from the recent RBA chart pack, household debt to income is also sky high.

And here is data (from 2014) from the OECD showing the relative ratio of household debt to disposable income for Australia, in comparison with other countries.

The issue we SHOULD be talking about is the household debt overhang, and how we are going to deal with it. Government debt, in comparison is a side-show!

OECD Warns on Housing

The latest World Economic Outlook includes country specific observations. Of note is their view of the Australian housing market. “Domestically, the unwinding of housing-market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing”.

We think the risks are centred on the high-rise apartment sectors, especially in the east coast urban centres. In our worst case scenario, prices may fall up to 38%, in Melbourne but not immediately.

They also echo the latest GDP scenario, as reported, GDP was up thanks to LNG exports, but of course household income growth continues to languish.

Output growth will gradually strengthen towards 3% in 2017. Adjustment to declining resource-sector investment will continue. Growth in the non-resource sector will pick up, aided by dollar depreciation and a steady increase in household consumption. Further falls in the rate of unemployment are not expected to generate strong inflationary pressures and will help reduce inequality.

With receding risks from the housing boom, there is leeway for further monetary policy easing in the event of a new downturn. Close vigilance on housing-market developments is still required. Fiscal consolidation should be back-loaded in light of economic uncertainties. Tax reform should be a core element of structural policy.

Boosting productivity in Australia requires a focus on innovation. Targeted R&D policy, university-business linkages and effectiveness and efficiency of financial support for research are important. Ensuring strong competition, regulation that accommodates new internet-platform-based businesses, sound ICT infrastructure and continuing education reform are also key for productivity performance. In addition, education reform will boost inclusiveness through stronger low-end skills and better ICT infrastructure can reduce gaps in economic opportunity by improving access in rural areas.

Rebalancing away from resource sectors continues

Resource-sector investment and employment face ongoing decline and commodity prices remain low, although new liquefied-natural-gas (LNG) production is boosting exports. Non-resource activity continues to pick up, especially in services exports, in part reflecting past depreciation of the currency. Non-resource activity is now driving employment growth. In addition, house-price and mortgage-credit growth are slowing, assisted by macro-prudential tightening. Consumer price inflation remains low. Also, uncertainty about global economic prospects is impacting Australia’s stock market and business sentiment.

Continued policy support for economic adjustment and productivity growth is required

The Reserve Bank reduced the policy rate by 25 basis points in May to 1.75%, the first rate change in 12 months, prompting a depreciation of the exchange rate. The projection envisages no further easing and assumes that policy-rate increases begin in 2017. Nevertheless, room for further rate cuts remains in the event of below-par growth. Fiscal policy needs to let the automatic stabilisers operate while keeping a medium-term objective of reducing the public-debt burden.

In structural policy, the OECD has long emphasised the scope for improving Australia’s tax system, in particular through greater use of efficient tax bases, such as the Goods and Services Tax and land tax, and reforms in specific areas, such as the taxation of pensions (“superannuation”). Reform to the latter could lower inequality by narrowing differences across households and between women and men among older cohorts. Strengthening of consumer-protection regulation in banking would also benefit households. Australia’s greenhouse-gas reduction policy relies principally on the Emission Reduction Fund, which provides financial incentives for businesses to reduce emissions and as of July 2016 it will backed by a safeguard mechanism that discourages offsetting emissions.

Boosting productivity requires strengthening capacities for generating and absorbing innovation. Research collaboration between the university and business sectors remains a point of weakness. Also, ensuring value-for-money in financial incentives, such as R&D tax breaks, remains a challenge. Policy responses to “disruptive” internet-platform innovations have generally been positive. Australian product and labour market regulation is broadly conducive to resource re-allocation, thus helping innovation via “creative destruction”. However, ICT infrastructure and services require ongoing policy attention and there is scope for greater innovation in public services.

The pick-up in growth will be gradual, but risks and uncertainties remain sizeable

Output growth is projected to be just under 3% in 2017. Negative effects from shrinking mining investment are set to ease and new LNG production will boost exports. Exchange rate depreciation and supportive macroeconomic policy have helped rebalance activity towards non-mining sectors. Employment growth will drive a further decline in the rate of unemployment. Household consumption is expected to remain solid, helped by further erosion of the household savings ratio.The pick-up in activity will not generate significant inflationary pressure, due to remaining economic slack.

Australia’s exposure to commodity-market developments, particularly those linked to the Chinese economy remains an important source of uncertainty and risk. Domestically, the unwinding of housing-market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing. Uncertainties on future economic policy ahead of the Federal election, which is scheduled for 2^ndJuly, are also adding a degree of risk.