Tag: OECD

Political finance needs tighter regulation and enforcement

Many economically advanced countries are failing to fully enforce regulations on political party funding and campaign donations or are leaving loopholes that can be exploited by powerful private interest groups, according to a new OECD report.

Financing Democracy: Funding of Political Parties and Election Campaigns and the Risk of Policy Capture says that private donors frequently use loans, membership fees and third-party funding to circumvent spending limits or to conceal donations. Tightening regulation and applying sanctions more rigorously would help to restore public trust at a time when voters in advanced economies are showing disillusionment with political parties and fear that democratic processes can be captured by private interest groups.

“Policy making should not be for sale to the highest bidder,” said OECD Secretary-General Angel Gurría, launching the Organisation’s first report on political financing at a meeting of the OECD Global Parliamentary Network, a forum for legislators from member and partner countries to compare policies and discuss best practices. “When policy is influenced by wealthy donors, the rules get bent in favour of the few and against the interests of the many. Upholding rigorous standards in political finance is a key part of our battle to reduce inequality and restore trust in democracy,” he said.

Many countries struggle to define and regulate “third-party” campaigning by organisations or individuals who are not political parties or candidates, enabling election spending to be channelled through supposedly independent committees and interest groups. Only a handful of countries have regulations on third-party campaigning, and these regulations vary in strictness.

Globalisation is complicating the regulation of political party funding as multinational companies and wealthy foreign individuals are increasingly integrated with domestic business interests. Where limits and bans on foreign and corporate funding exist, disclosure of donor identity is a vital deterrent to misuse of influence. While 17 of the 34 OECD countries ban anonymous donations to political parties, 13 only ban them above certain thresholds and four allow them.

Even when donations are not anonymous, countries have differing rules about disclosing donor identity. In nine OECD countries political parties are obliged to publically disclose the identity of donors, while in the other 25 OECD countries parties do so on an ad-hoc basis.

Only 16 OECD countries have campaign spending limits for both parties and candidates. While such limits can prevent a spending race, challengers who generally need more funds to unseat an incumbent may be at a disadvantage in the other 18 countries.

Finally, a lack of independence or legal authority among some oversight institutions leaves big donors able to receive favours such as tax breaks, state subsidies, preferential access to public loans and procurement contracts.

The report recommends that:

  • Countries should design sanctions against breaches of political finance regulations that are both proportionate and dissuasive.
  • Countries should strike a balance between public and private political finance, bearing in mind that neither 100% private nor 100% public funding is desirable.
  • Countries should aim for fuller disclosure with low thresholds, while taking privacy concerns of donors into consideration.
  • Countries should focus on enforcing existing regulations, not adding new ones.
  • Institutions responsible for enforcing political finance regulations should have a clear mandate, adequate legal power and the capacity to impose sanctions.
  • Political finance regulations should focus on the whole cycle – the pre-campaign phase, the campaign period and the period after the elected official takes office.

You can read the full report here, including case studies of Brazil, Canada, Chile, Estonia, France, India, Korea, Mexico and the UK.

G20 finance ministers endorse reforms to the international tax system for curbing avoidance by multinational enterprises

G20 finance ministers endorsed the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules during a meeting on 8 October, in Lima, Peru.

During a meeting chaired by Turkish Deputy Prime Minister Cevdet Yilmaz, the G20 finance ministers expressed strong support for the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, which provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.

They renewed a commitment for rapid, widespread and consistent implementation of the BEPS measures and reiterated the need for the OECD to prepare an inclusive monitoring framework by early-2016  in which all countries will participate on an equal footing. Ministers agreed to forward the BEPS measures for discussion and action by G20 heads of state during their summit on 15-16 November in Antalya, Turkey.

“Base erosion and profit shifting is sapping our economies of the resources needed to jump-start growth, tackle the effects of the global economic crisis and create better opportunities for all,” said OECD Secretary-General Angel Gurría. “The G20 has recognised that BEPS is also eroding the trust of citizens in the fairness of tax systems worldwide, which is why we were called on to prepare the most fundamental changes to international tax rules in almost a century. Our challenge going forward is to implement the measures in this plan, rendering BEPS-inspired tax planning structures ineffective and creating a better environment for businesses and citizens alike,” Mr Gurría said.

Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.

Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant

The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.

The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.

The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.

Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.

The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labour, academia and civil society organisations.

“Everyone has a stake in reversing base erosion and profit shifting,” Mr Gurria said. “The BEPS Project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”

Examples of BEPS schemes to be eliminated

For further information on the OECD/G20 Base Erosion and Profit Shifting Project, including the 2015 Explanatory Statement, the 2015 BEPS Reports, background information and FAQs, go to: www.oecd.org/tax/beps-2015-final-reports.htm

OECD’s new tax proposals won’t stop companies shifting profits to tax havens

From The Conversation.

The news has been full of stories about how companies such as Amazon, Apple, Google, Microsoft, Starbucks and others are able to shift their profits to low or no-tax jurisdictions by using novel, legally permitted corporate structures and complex internal transactions (known as transfer pricing schemes). Companies are able to do so because they are generally taxed at the place of their residence rather than where the underlying economic activity takes place.

The European Union is estimated to be losing about one trillion euros each year due to a combination of tax avoidance, evasion and arrears. This is bigger than the combined gross domestic product (GDP) of Norway and Sweden and requires political action.

Against the above background, in 2013, the governments of G20 nations asked the Organisation for Economic Cooperation and Development (OECD) to develop proposals for dealing with Base Erosion and Profit Shifting (BEPS).

As part of the BEPS project, the OECD has now completed the first phase consisting of 15 possible actions. These form part of its final reports which exceed 1,000 pages and a summary is available here. There is much to digest and the OECD does offer some ways of tackling BEPS, but ultimately the project is unlikely to make a significant dent in organised corporate tax avoidance.

Profit Shifting

Transnational corporate groups have been very adept at engineering inter-group loans. Under this, one subsidiary borrows from another and pays interest. No cash effectively leaves the group and the interest paid by the paying subsidiary attracts tax relief while the receiving company, often located in low or no-tax jurisdiction, pays no tax on its income. So the OECD suggestion that the tax relief on such interest payments be restricted may dissuade some from opting to adopt these ingenious and complex financial arrangements.

Where does a company like Starbucks make its money? Reuters/Chris Helgren

The OECD has supported calls for country-by-country reporting (CBCR). This requires companies to show the profit they make in each country together with sales, employment and other relevant information. This information can help to illustrate the mismatch between economic activity and profits booked in each country.

But the OECD only recommends that this disclosure be made by each multinational corporation to the tax authority in its home country. To secure this information, governments of other countries will need to enter into numerous treaties. Poorer countries will hardly be in a position to leverage negotiations with more powerful countries. A more efficient solution would be for companies to publish the required information as part of their annual accounts – something the European Parliament has called for.

Out of date

The current corporate tax system was designed nearly a century ago when the contemporary form of transnational corporation, direct corporate investment in foreign operations and the internet did not exist. The OECD has failed to address the three biggest fault lines in the current system. First, under various international treaties, companies are taxed at their place of residence rather than the place of their economic activity. The OECD reforms do not make any significant change.

Second, modern corporations, such as Starbucks and Google, are integrated entities. They coordinate the economic activities of hundreds of subsidiaries to achieve economies of scale, market domination and profits, but for tax purposes are assumed to be separate economic activities. So a single group of companies with 500 subsidiaries is assumed to consist of 500 independent taxable entities in diverse locations. This leaves plenty of scope of profit shifting and tax games.

Third, the profits of a group of companies are allocated to each country by using a system known as transfer pricing. This requires arm’s-length or independent market prices to calculate the price of intra-group inputs and value of outputs to estimate taxable profits. In the era of global corporations, independent prices can’t easily be estimated. For example, as I found in an investigation in 2011, just ten corporations control 55% of the global trade in pharmaceuticals, 67% of the trade in seeds and fertilisers and 66% of the global biotechnology industry.

The way forward

The OECD recognises the problem but does not offer any way forward. Instead, it seeks to repair the current broken system through improved documentation for transfer pricing and international treaties. An alternative approach known as unitary taxation can address the above shortcomings. It treats each group of companies as a single unified economic entity. It recognises that there can be no sale, cost or profit until the company transacts with an external party. Thus, all intragroup profit shifting is negated.

The global profit of an entity is allocated to each country in accordance with key variables, such as sales, employees and assets – and each country can then tax the resulting profit at any rate that it wishes. A system of unitary taxation has been operated within the US since the 1930s to negate the impact of domestic tax havens (for example Delaware) and profit shifting. The OECD could have studied this but chose not to.

The BEPS project is unlikely to be the last word on corporate tax avoidance.

Author: Prem Sikka, Professor of Accounting, Essex Business School, University of Essex

Why landmark OECD tax reform is doomed before it starts

From The Conversation.

The OECD’s final package of proposals for reforming the international system for taxing companies brings to an end the two-year BEPS project led by the OECD and other G20 countries which also included participation by representatives of developing countries, business, academia and NGOs.

Developing the BEPS, or Base Erosion and Profit Shifting reform package has been a remarkable endeavour involving thousands of hours of work and meetings – and thousands of pages of background work, interim proposals and commentary. All this has been in response to the undoubted need to reform a dysfunctional and ailing system.

It seems likely that, irrespective of the actual outcome, politicians will hail the BEPS project a success. Despite not having yet seen the final proposals we are prepared to disagree. The BEPS project may lead to some improvement but it will not lead to an international tax system fit for the 21st century. It might appear churlish to reach this conclusion before the final proposals have been published, so let us explain why.

In the February 2013 report that kicked off the project, the OECD made it clear that its aim was to close loopholes and tighten and extend existing rules to shore up the current system. It was equally clear that the fundamental framework underpinning the system was to remain in place. Subsequent BEPS documentation confirmed this.

However, the major problems afflicting the international tax system ultimately stem from flaws in the framework underpinning it. If that same framework remains in place, those problems cannot ultimately be resolved.

Double trouble

There are two major flaws. First, the current framework relies at its heart on concepts and distinctions that are not suited to the realities of a contemporary multinational enterprise operating in a global business environment.

Essentially, the international tax system addresses the possible double taxation of income arising from cross-border activity by allocating primary taxing rights between “residence” and “source” countries. In a “1920s compromise” in the League of Nations, source countries were allocated primary taxing rights to the “active” income of the business and residence countries the primary taxing rights to “passive” income, such as dividends, royalties and interest.

This might have been a sensible system in the 1920s but it is ill-suited to dealing with modern multinationals operating in a truly global business environment. Modern multinationals have shareholders scattered across the world, a parent company resident in one country, a potentially large number of affiliates undertaking an array of activities, such as research and development, production, marketing and finance that are located in many different countries, and consumers that could also be scattered across the world.

In such a scenario, there is no clear conceptual basis for identifying where profit is earned; all those locations may be considered to have some claim to taxing part of the company’s profit.

Best intentions? Reuters/Pool

Conceptually, the residence/source and active/passive distinctions do not offer much help. In practice, applying these distinctions in the context of intra-group transactions, where affiliated entities in different jurisdictions are assigned the status of “source” or “residence”, gives rise to extensive and significant problems, not least those relating to pricing transfers within the multinational group. Overall, they lead to a system which is easily manipulated, distortive, often incoherent and unprincipled.

Unhealthy competition

Second, the system invites governments to destabilise it by competing with each other for economic activity, tax revenue and possibly to try to advantage their own domestic companies. For at least 30 years this has led to gradual reductions in effective rates of taxation of profit. Governments around the world compete in this way while also demanding that companies should pay their “fair share” of tax, whatever that may be. This tension is particularly evident in the UK, where the goal of having the most competitive corporation tax regime in the G20 is held concomitantly with an active role in pushing forward the BEPS project.

Competition is not only on rates, but also on many aspects of the tax base. Over the years countries have introduced rules that enhance their competitive position or seek to give an advantage to domestic companies, but in practice facilitate the erosion of the tax base of both domestic and foreign jurisdictions and thus further destabilise an already fragile system. For example, as well as reducing tax rates, countries have introduced patent boxes with lower rates of tax on royalty income, and relaxed anti-avoidance measures intended to prevent international profit shifting.

These two flaws will continue to afflict the international tax system even if the proposals resulting from the BEPS project were to be implemented adequately by all states. For this reason, we do not believe it will lead to an international corporate tax system fit for the 21st century.

 

Authors: Michael Devereu, Professor of Business Taxation, University of Oxford, John Vell, Associate professor and Senior Research Fellow at the Oxford University Centre for Business Taxation (CBT), University of Oxford

 

Inequality Is Getting Worse

The latest OECD report on inequality was released today. The richest 10% of the population now earn 9.6 times the income of the poorest 10%; this ratio is up from 7:1 in the 1980s, 8:1 in the 1990s and 9:1 in the 2000s.  Tight fiscal conditions have resulted in social spending cuts, including in areas targeted to the most disadvantaged. In 2012, the bottom 40% owned only 3% of total household wealth in the 18 OECD countries which have comparable data. By contrast, the top 10% controlled half of all total household wealth and the wealthiest 1% held 18%! Wealth is considerably more concentrated than income, exacerbating the overall disadvantage of low-income households.

OECDInequalityMay2015At the launch, Angel Gurría, Secretary-General, OECD said:

For years now we have been underlining the toll that inequality takes on people’s lives. And I am proud of the contribution that the OECD has made in recent decades, putting inequality at the heart of the political and economic debate. Our 2008 report, Growing Unequal? sounded the alarm on the long-term rise in income inequality; and in 2011 Divided We Stand sought to diagnose the root causes that lay behind it.

But now we need to move the conversation forward. This is why today we are launching our new report In It Together: Why Less Inequality Benefits All in which we underline the toll that ever-rising inequality takes on people’s lives and the wider economy. But more than that, this report proposes concrete policy solutions to promote opportunities for more inclusive growth.

Where we stand: Trends in inequalities

Let me first remind you of the scale of the challenge. The latest data from In It Together make for stark reading. The richest 10% of the population now earn 9.6 times the income of the poorest 10%; this ratio is up from 7:1 in the 1980s, 8:1 in the 1990s and 9:1 in the 2000s.

During the early years of the crisis, redistribution via tax and transfer systems was reinforced in many countries. But now it is weakening again; tight fiscal conditions have resulted in social spending cuts, including in areas targeted to the most disadvantaged.

Even in those emerging economies where inequality has fallen, like Chile or Brazil, inequality remains at staggeringly high levels (26.5:1 in Chile and 50:1 in Brazil).

The story behind wealth is even worse. In 2012, the bottom 40% owned only 3% of total household wealth in the 18 OECD countries which have comparable data. By contrast, the top 10% controlled half of all total household wealth and the wealthiest 1% held 18%! Wealth is considerably more concentrated than income, exacerbating the overall disadvantage of low-income households.

The situation is economically unsustainable

In It Together finds compelling evidence that high inequality harms economic growth. The rise in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off cumulative growth between 1990 and 2010. And what matters for growth is not just the poorest falling behind. In fact, it is inequality affecting lower-middle and working class families. We need to focus much more on the bottom 40%; it is their losing ground that blocks social mobility and brings down economic growth.

We have reached a tipping point. Inequality can no longer be treated as an afterthought. We need to focus the debate on how the benefits of growth are distributed. Our work on inclusive growth has clearly shown that there doesn’t have to be a trade-off between growth and equality. On the contrary, the opening up of opportunity can spur stronger economic performance and improve living standards across the board!

Policies to promote inclusive growth

In It Together identifies four key policy areas to promote opportunities for more inclusive growth.

First, to increase equality of opportunity and boost our economies it will be absolutely essential to enhance women’s participation in economic life. Overcoming gender inequalities is vital to improving long-term growth prospects and has a profound impact on inequality. If the share of households with a working woman had remained at the levels of the early 1990s, the rise in income inequality would have been almost 1 Gini point higher, on average. And the fact that more women have worked full-time and earned higher wages since 1990 has limited the rise of inequality by an additional Gini point. But we cannot be happy with the slow pace of change.

Governments should be asking themselves whether they can afford to waste the potential of the many women who are excluded from the labour market. To help women make the best use of their talents, we need to make good quality and affordable childcare available and also encourage more fathers to take parental leave. 

Second, labour market policies need to address working conditions as well as wages and their distribution. Before the crisis, employment was at record highs in many OECD countries but inequality was rising. The increase in non-standard work was one of the culprits. In 2013, about a third of total OECD employment was in non-standard work, with about equal shares of temporary jobs, permanent part-time jobs and self-employment. Youth are the most affected group: 40% are in non-standard work and about half of all temporary workers are under 30.

Non-standard jobs are not always bad jobs, but work conditions are often precarious and poor. Low-skilled temporary workers, in particular, have much lower and unstable earnings than permanent workers. This would be less troubling if non-standard jobs were simply stepping stones to better and well-paying careers. But for the young, the part-time or self-employed worker this is often not the case. And among those on temporary contracts in a given year, less than half had full-time permanent contracts three years later.

The challenge is therefore not only the quantity, but also the quality of jobs. Better social dialogue and improved work conditions across the income range are crucial elements of an inclusive employment strategy.

Third, we cannot afford to neglect the education and skills of any part of our societies.  A focus on education in early years is essential to give all children the best start in life. This investment needs to be continued throughout the life cycle to prevent disadvantage, promote better opportunities and educational attainment.

In it Together  provides new evidence that high inequality makes it harder for lower-middle and working class families to invest in education and skills. An increase in inequality of around 6 Gini points reduces the time children from poorer families spend in education by about half a year. And it also lowers the probability of poorer people graduating from university by around four percentage points. This leads to an ever widening gap in education and life-time earnings.

Last but not least, governments should not hesitate to use taxes and transfers to moderate differences in income and wealth. There has been a fear that redistribution damages growth and this has led to a long-term decline in redistribution in many countries.  Our work suggests that well-designed, prudent redistribution need not harm growth. As top earners now have a greater capacity to pay taxes than before, governments should ensure that they pay their fair share of the tax burden.

We do not need new instruments, we simply need to use the ones we have: scaling back tax deductions, eliminating tax exemptions, increasing marginal tax rates, using property taxes and above all, ensuring greater tax compliance. And let’s not forget government transfers. They play an important role in guaranteeing that low-income households do not fall too far behind.

Ladies and gentlemen, ever rising inequality can be avoided. It is for us to re-imagine and create our economies anew, so that each and every citizen regardless of income, wealth, gender, race or origin is empowered to succeed.

Governments around the world need to take decisive action to promote inclusive growth. In that spirit, I urge each and every country to recognise that when it comes to economic prosperity we are not in it alone, we are “In It Together”.

Australians Trading Fixed For Mobile Broadband

According to the latest OECD data, published today, whilst we are lagging behind other developed OECD countries in fixed broadband, we rank third in the world for wireless broadband behind Finland and Japan. Some Australians have more than one wireless service and mobile growth is significantly higher than fibre.

Using June 2014 data, Australia ranked 20 out of 34 OECD countries based on the number of fixed broadband connections for 100 inhabitants, behind nations including Switzerland, UK Korea, New Zealand and Japan. Total penetration was around 27 per cent. About 81 per cent of connections were via DSL, 15 per cent and 3 per cent fibre. Our fibre rates are lower than the 17% OECD average.  OECDFixedBroadbandFeb2015Mobile broadband penetration has risen to 78.2% in the OECD area, making more than three wireless subscriptions for every four inhabitants, according to data for June 2014 released today.

OECDMobileBroadbandFeb2015

Mobile broadband subscriptions in the 34-country area were up 11.9% from a year earlier to a total of 983 million, driven by growing use of smartphones and tablets.

Seven countries (Finland, Japan, Australia, Sweden, Denmark, Korea and the United States as ranked in descending order of mobile broadband subscriptions) lie above the 100% penetration threshold.

Fixed broadband subscriptions in the OECD area reached 344.6 million as of June 2014, up from 332 million in June 2013 and making an average penetration of 27.4%. Switzerland, the Netherlands and Denmark remained at the top of the table with 47.3%, 40.8% and 40.6% respectively.

DSL remains the prevalent technology, making up 51.5% of fixed broadband subscriptions, but it continues to be gradually replaced by fibre, now at 17% of subscriptions. Cable (31.4%) accounted for most of the remaining subscriptions.

Annual growth of above 100% in fibre take-up was achieved in OECD economies with low to average ratio of fibre to total fixed broadband levels such as New Zealand, Luxembourg, Chile and Spain. Japan and Korea remain the OECD leaders, with fibre making up 71.5% and 66.3% of fixed broadband connections.

Full details are available from the OECD Broadband portal.

Did HSBC Help Wealthy Clients Evade Tax?

Claims that Britain’s biggest bank helped wealthy clients cheat the UK out of millions of pounds in tax via HSBC’s private bank in Switzerland have been made. HSBC may faces criminal investigations. The suggestion, based on leaked documents, is that they allowed clients to withdraw cash, often in foreign currencies of little use in Switzerland, marketed schemes likely to enable wealthy clients to avoid European taxes, colluded with some clients to conceal undeclared “black” accounts from their domestic tax authorities and provided accounts to international criminals, corrupt businessmen and other high-risk individuals.

Whilst a numbered bank account is now illegal in most western countries, it is still part of Switzerland’s banking system. This dates from 1934. Article 47 of the Federal Act on Banks and Savings Banks made it a criminal offence to disclose the identity of clients. A depositor’s true identity will be known to only a select group of employees, and in order to withdraw cash or make a wire transfer, the account holder is asked for a codeword. A breach of professional confidentiality, even for retired bankers or those who have had their licence revoked, is punishable by three years in jail. By 2018, Switzerland has committed to an automatic exchange of information about individual accounts, taxes, assets and income along with 50 other nations under an OECD agreement.

OECD Says Raise GST, Change Taxes, Use Macroprudential

The OECD survey of Australia, just released, makes a number of important observations and recommendations about how the quality of life experienced can be sustained as the mining boom ebbs. Here are the main findings:

Australia’s material living standards and well-being compare well internationally, reflecting a well-managed and successful economy. The economy is slowing as the prolonged mining boom recedes. Output growth of about 3% is expected for 2014 and 2.5% in 2015. Macroeconomic policies are appropriate for the current conjuncture while long term prosperity depends on ensuring that structural settings help all forms of economic activity and promote broad-based productivity growth.

Ensuring price and financial stability. Inflationary pressure is contained. Low interest rates are supporting activity and the rebalancing of growth. House prices have grown by about 10% over the past year, prompting construction activity but also attracting some speculative demand. Strong prudential regulation and a concentrated financial sector have supported financial stability, but the latter has also created concerns about competition and credit supply in some segments.

Pursuing fiscal consolidation and ensuring efficient tax and public spending. Gross public debt has risen from below 20% of GDP to over 30% since the global financial crisis. The budget faces significant volatility from movements in global prices for natural resources, and past spending commitments have created a medium-term structural fiscal challenge. Australia’s heavy reliance on inbound investment and exposure to resource market fluctuations provide strong arguments for fiscal discipline and low public indebtedness. The country has a comparatively light tax burden overall, but the heavy reliance on direct taxation is not ideal. Public-spending efficiency in some services is adversely affected by overlapping responsibilities and complex funding arrangements between federal and state governments.

Improving framework conditions for business. Improvements in productivity growth will require reforms across a wide range of structural policy areas including taxation, competition and deregulation. Government plans to ramp up infrastructure investment make sense, but only if funds are spent efficiently. Targeted business support needs to be judicious as it can be a short step from value-for-money subsidy to outlays on corporate welfare.

Encouraging employment, deepening skill, and addressing inequality. The importance of raising participation, combined with budgetary concerns, means effective welfare-to-work policies remain a priority. The government plans to incentivise unemployed youth, including lengthening the benefit waiting period. A proposed liberalisation of higher education tuition fees and reforms to student support aim to improve competition, access and choice. It will be important to monitor the impact of these reforms, particularly for students from disadvantaged backgrounds.

Tackling environmental challenges. The government is fundamentally changing Australia’s environmental policy, replacing a carbon tax with a suite of planned new measures, including a mechanism to provide incentives to businesses for reducing emissions. Ramping up road building provides opportunities to extend road pricing. Ensuring efficient supply chains for water is important.

Key recommendations

Ensuring price and financial stability
● Continue intensive monitoring of the housing market; maintain deep micro-prudential oversight and consider using macro-prudential tools to bolster credit safeguards and signal concern.
● Examine credit and competition issues in the financial sector; consider reducing banks’ implicit guarantees, tackling risk-weighting advantages in mortgage lending, improving credit databases.

Pursuing fiscal consolidation and ensuring efficient tax and public spending
● Prioritise medium-term fiscal consolidation to rebuild fiscal buffers in light of Australia’s exposure to external risk and consider establishing a stabilisation fund.
● Rebalance the tax mix; shift away from income and transaction taxes, make greater use of efficient tax bases such as the Goods and Services Tax and land tax.
● Reform federal-state financial relations; reduce grant conditionality further, instigate state-level tax reforms to enhance funding autonomy, and increase state-level responsibilities and accountabilities.
● Address federal-state shared responsibilities to improve efficiency; improve co-ordination and co-operation and in some cases, health care in particular, consider a reallocation of responsibilities.
● Strengthen capacity for assessing and comparing state-level public services; further develop performance indicators; and continue enhancing the availability and quality of data.

Improving framework conditions for business
● Ensure infrastructure delivers value for money through robust and transparent cost benefit analysis both to ensure economic use of the existing stock and appropriate selection of new infrastructure projects.
● Concentrate on broad support for business; prioritise corporate-tax rate cuts, reduce regulatory burdens and continue to be tough on corporate welfare and tax avoidance.
● Strengthen competition; continue adjusting network-industry regulation and improve the competitive environment more generally in light of the review currently underway.

Encouraging employment, deepening skills and addressing inequality
● Monitor the proposed welfare reforms to ensure they raise work-force participation cost effectively without adverse social outcomes. Better target superannuation (pension) tax concessions.
● Monitor the proposed higher education reforms to ensure that choice and quality is enhanced and access is not compromised.

Tackling environmental challenges
● Achieve greenhouse-gas emission targets; ensure the proposed Emission Reduction Fund is efficient through: i) robust measurement and verification methods; and ii) implementation of a safeguard mechanism that prevents offsetting emissions elsewhere in the economy.
● Make transport policy greener; enact the proposal to index excise duty on retail fuel, expand other use-based vehicle charges and extend public transport.
● Continue strong commitment to water reform including the Murray-Darling Plan.

OECD Warns Again On Housing

The OECD Economic Outlook 2014 Issue 2 has been released in a preliminary version. There are some important warnings which the RBA should heed. Essentially, OECD is highlighting again the risks in the current RBA policy of using low interest rates to drive housing growth in lieu of mining investment. They appear to believe rates should be taken higher and additional prudential measures should be taken.

Output growth is projected to dip to 2.5% in 2015 but recover to 3% in 2016. Declining business investment will be countered by gathering momentum in consumption and exports. Growth at the projected pace will be enough to lower the unemployment rate, although consumer price inflation will remain moderate due to economic slack.

Fiscal policy should continue to aim for a budget surplus by the early 2020s but given economic uncertainties, it should avoid heavy front loading. Short of negative surprises, withdrawal of monetary stimulus should start in the second quarter of 2015. The booming housing market and mortgage lending will require close attention by the authorities. There is room for both fiscal and monetary policy to provide  support in the event of unexpected negative economic shocks.

The Australian economy is going through a period of adjustment as activity has to shift from the previously booming resource sector. Cooling commodity prices and declining resource-sector investment have resulted in job and output losses, but a lower exchange rate is lifting employment and exports elsewhere in the economy. House price increases are encouraging construction and consumption, but are also a concern in that a sharp reversal could cut aggregate domestic demand.

The Reserve Bank of Australia’s (RBA’s) policy rate has remained at 2.5% since August 2013, well below historical norms. Though helping economic adjustment, this monetary support has intensified search for returns by investors. This requires close oversight of asset-market developments, particularly rising housing credit, which is now being driven by investors. Further prudential measures on mortgage lending should be considered as a targetted means to cool the market, thereby heading off risks to financial stability.

OECDNov2014

External risks remain prominent, with recent steep falls in some commodity prices exemplifying the potential for rapit change in resource revenues. Domestically, the momentum in property prices is uncertain and could unwind sharply. When and how quickly non-0mining investment picks up is uncertain, as is the degree to which households will dip further into savings to sustain their consumption.