Tag: The Conversation

The federal budget is hard to ‘fix’ …

…but here are some solutions. From The Conversation.

Why, after decades of relatively good budgetary management in Australia, is the Commonwealth budget so hard to fix? And why don’t many people seem to care?

We have had 24 years of economic growth, yet are now facing our eighth actual deficit in a row, with Budget Papers forecasting another three ahead, and more may come after that.

The combined recent deficits as this budget year rolls out (2015-16) now total a staggering $320 billion (with almost $40 billion still expected in the forward estimates). Moreover, most economic predictions are for much lower economic growth rates well into the future than occurred with the two mining booms of the 2000s to 2012.

Have governments given up on a balanced budget?

While former Labor Treasurer Wayne Swan was ever the muscular “spruiker” of budget surpluses, his promise in May 2010 to do so by 2013 – revised to a small budget surplus of $4 billion by June 2013 in May 2011 – never eventuated.

Following him, Joe Hockey merely spoke of his efforts at reducing the combined deficit from the one left to him by Labor, but sheepishly admitted the Commonwealth would have a projected annual deficit of $7 billion by 2019 under Coalition management. In his 2015 budget speech Hockey claimed the government inherited a running deficit totalling $123 billion by mid-2013 (when it was in fact more like $210 billion) and that he’d would have brought this figure down to $80 billion by 2019.

Both sides of politics have apparently now given up on balancing the budget in the medium term. Labor’s Shadow Treasurer Chris Bowen is now talking of a 10 year fiscal plan to repair the budget and so is not expecting a balance until around 2026! Not only is that date is four parliamentary terms away, it assumes that abstemious governments will actually spend less than they receive in income over all that time – recent track records on both sides suggests this is pure folly.

The Coalition’s new Treasurer Scott Morrison is not setting himself tricky target dates, preferring to accede with the previous Hockey mantra that the Coalition will arrive at a surplus before a Labor government would – a counter-factual we might reflect upon but cannot prove.

The persistent deficit problem is not just down to lower tax returns (the so-called “revenue problem”) because taxes are indeed growing moderately, but perhaps not by as much as Treasury would wish. The problem is largely down to levels of higher spending than we are prepared to pay for (the so-called “expansionary bias”). We seem to be running a structural deficit of around $30 billion per annum, with politicians continuing to spending now and leaving their successors to pay.

The problem of Consolidated Revenue and “magic pudding” thinking

The parlous state of the budget is due to systemic dysfunctionality. We have kept an anachronistic system inherited from the Royal Budget (the King’s Chest) – keeping all resources in one consolidated revenue account while separating expenditures from revenues.

For years, this was seen as a good way of keeping accounts clean and providing flexibility in expenditure terms. But now it is supremely dysfunctional to have one “magic pudding” fund against which all manner of claimants make audacious bids. The way we have allowed federalism to develop further compounds this sloppiness – because federal governments want to spend their huge tax take to gain most exposure, while the mendicant states and territories continue to cry poor and have few other tactics than going “cap in hand” to the Commonwealth for “more funds”.

Our central budget institutions no longer hold the line as guardians of the public purse; they are out-manoeuvred. The year-round budgetary bidding system constantly ratchets up spending levels as agencies ask for more like Oliver Twist. Many of our public policies are irresponsibly demand-driven with few caps, so people enjoy goods or services and the Commonwealth pays the eventual bill.

Some 85% of the federal budget is non-discretionary (entitlements, transfers, ongoing grants) which can’t be trimmed without a major fight in parliament. And we have enshrined a culture of compensation all-round (the “no discrimination” mantra) – and this applies to any changes in either entitlements or taxation levels.

Small fixes that could have big results

This is paralysing our ability to conduct real reform. If nearly 70% of households are likely to be compensated by a rise in the GST from 10% to 15%, then what is the point in raising the consumption tax at all? And if it doesn’t raise much more growth revenues there will be pressure in a few more years to raise it again.

There are some small incremental fixes that are available to redress our budget problems – such as hunting for savings across the portfolios, or reducing the number of bids, or getting agencies to raise some of their own revenues. More serious temporary fixes might include a complete ban on bids for two years making agencies themselves reallocate their resources to areas of most priority (as we did in 1986-87).

We could go further, like Sweden or Korea, and legislate fixed expenditure ceilings up to four years out which are very difficult to change without subsequent parliamentary approval. Such hard ceilings would force federal and state agencies to manage within budgets over the medium term, because there would be little chance of augmentation. So states running hospitals would have to manage within their imposed allocation and not manufacture waiting lists to claim more money from the Canberra pudding.

Canada uses a different prudential system to limit federal spending within the current budget year by initially only allocating some 70% of the budget outlays in the Main Estimates, and then trickling out additional supplementary allocations as and when its revenues are known and received. It prevents agencies’ overspending against revenue that has not yet eventuated (or will never materialise), and allows governments to direct greater spending ‘in-year’ to any pressing priorities.

More ambitious solutions

We might want to extend levies and charges more broadly, imposing costs on direct users rather than generic taxpayers – for roads, health care, GP visits, aged care, vocational education, pharmaceutical drugs, even public transport. Reverse mortgages for elderly home-owners to help pay for government aged pensions is also a proposal being floated around. Another important idea to help manage the provision of public goods or services is to hypothecate funds for dedicated purposes, as most of continental Europe does.

A specific contributory levy, say, for pharmaceuticals would be set and paid into a hypothecated account which could only be used to pay for subsidised prescriptions, and managed actuarially. If people wanted extensive low-cost prescriptions, then the levy would be set to cover that level of spending; if people wanted less subsidised medicine then a lower contribution could be imposed. Hypothecated provision would compartmentalise these items from consolidated revenue, make them self-funding and annually balanced, making the job of funding and managing core government activities so much easier.

More radical measures include a constitutional provision for balanced budgets (no planned deficits allowed to be introduced into the legislature) or a statutory provision for balanced budgets over a three year period (toughening the euphemistic accountancy jargon used in the Charter of Budget Honesty designed to give governments all the wiggle room they need). Some aspects of Singapore’s budget processes are also worth considering.

Each year accurate projections about economic growth are made which determines a fixed formula of revenue income (roughly 17% of GDP); the expected actual revenue figure is directly transposed into a precise aggregate expenditure limit; no more, no less, it has to balance the revenue.

The expenditure budget is then allocated on a stipulated formula basis whereby each major policy sector of public spending receives a prescribed fixed share; there is no bidding or lobbying for more funds, but agencies have relative autonomy to recalibrate their priorities within their spending envelope.

They can shape their spending strategically. But the only avenue through which any budget growth can occur is if the economy as a whole grows; so agencies have enormous incentive to direct their thinking (and the majority of their funding) towards driving economic growth, from within their own budgets or in conjunction with other stakeholders.

Systemic change is needed

Singapore offers a markedly different way of deploying and investing public spending in a developed society; and it is worth remembering that Singapore’s achievements have occurred over the past 40 years of so. Before this it was once one of the destitute basket cases of South-east Asia with very low living standards, but now has a higher standard of living than most of the West and a per-capital income getting close to twice the Australian average.

Proposals to bring about systemic change to the traditional patterns of budgeting will be resisted by the conservative establishment and those that like the present dysfunctional system, or perhaps do well out of it themselves. But the public interest is not served by retaining perverse budgetary practices, or the perverse incentives that riddle the system. It is not served by sticking our heads in the sand in an ostrich-like mindset believing the problems will just go away.

The budget will not correct itself on automatic pilot; and the longer it doesn’t, the more we will pay in interest payments on mounting debt, the more our children will pay in years to come and the less we will have for today’s areas of genuine need.

Author: John Wanna, Sir John Bunting Chair of Public Administration, Australian National University

A land value tax could fix Australasia’s housing crisis

From The Conversation.

The major cities of Australia and New Zealand are experiencing an extraordinary wave of speculation in their respective real estate markets. Over the past three years, the median house price to median income ratio has increased by 21.2% in Australia and 18.1% in New Zealand, a rate reminiscent of Ireland’s 20.5% before its housing crash at the time of the global financial crisis.

The rapid increase in property unaffordability on both sides of the Tasman has enriched a number of homeowners and speculators and made countless more eager to join the game. But it has had dramatic effects for businesses and landless families who find it exceedingly difficult to afford a place to live, work or operate.

Unsurprisingly, a lot of column space and political deliberation have been dedicated to finding a solution to the problem. Much of the analysis points to a lack of housing supply at a time of increasing demand as being the main driver of rising prices, resulting in a simple policy prescription: increase the supply of housing.

The main problem with this argument is it ignores the fact that it is land, not physical structures, that appreciates in value, making it an obvious area for speculation. Unlike houses or genuine capital, land does not depreciate or require maintenance. Instead, the value of land reflects its economic potential due to public expenditures on infrastructure (such as roads, schools or railway stations) in its vicinity and the effort and entrepreneurship of local workers and entrepreneurs.

When land prices soar, residential real estate becomes a more attractive investment opportunity than productive businesses. Land bubbles tend to produce two seemingly contradictory effects. Firstly, it produces urban sprawl as businesses and families are forced to seek cheaper land outside of the urban centres. Secondly, as owners are more interested in expected capital gains than any productive activities, much valuable land become idle.

Eventually, the burden of debt, lack of affordable land and investments based on wrong signals (e.g. luxurious condominiums promising high-profit margins) start affecting the real economy. As workers lose their jobs, they become unable to repay their debts and are forced to sell. Land prices finally stagnate and then fall, taking leveraged banks, speculators and people’s life savings with them. It is, therefore, clear that to escape this never-ending cycle, we need to focus on land.

Over a century ago, American economist Henry George suggested instead of taxing workers and entrepreneurs, governments should raise their revenue from land via a land value tax (LVT).

Indeed, both Australia (land taxes at the state level) and New Zealand (property rates at the council level) already have some taxation of land in place. But over the last century these taxes have become significantly debased due to the influence of various interest groups that secured exemptions or low rates. It is time to reconsider shifting the fiscal balance back onto land.

Unlike the land taxes already in place or the often suggested capital gains tax, LVT does not punish anyone for constructing houses or factories in the way that our current taxes do. As the supply of land is fixed, LVT becomes a cost of owning it. Consequently, it can bring in a decrease in prices as the owners of inefficiently used sites might feel compelled to sell or lease them to those willing to use them productively. Increasing the cost of owning land would drastically reduce the incentives for speculation.

Imagine central Auckland or Melbourne without vacant sites or dilapidated buildings. What is more, encouraging more efficient use of land is not only beneficial to economic growth and housing affordability, but also has a potential to substantially lower the costs of public infrastructure and encourage more efficient use of space and natural resources.

LVT would be a transparent and efficient alternative to our current taxes which are not only burdensome on businesses and families but also difficult and expensive to administer and enforce. It is impossible to hide land in a tax haven or a trust (trusts are not exempt from the current land taxes). Taxing it can be done cheaply and on the basis of publicly available information.

While LVT might persuade some modest-income earners to sell their valuable properties, most workers and homeowners would get net benefits from a reduction in taxes falling on their income (income taxes) and consumption (GST). Furthermore, a citizen’s dividend could be introduced in which part of the revenue raised from LVT is directly paid out to all citizens on a per-capita basis.

Given the multiple problems stemming from the rapidly expanding housing bubbles in Australia and New Zealand, introducing a tax on unimproved land values makes sense. Not only would it undoubtedly address house price inflation, it could also result in a more efficient use of land, mitigate urban sprawl, lower the burden on the natural environment and reduce the risk of real estate bubbles; all this without undermining the foundations of economic growth.

 

Author: Nicholas Ross Smith, Professional Teaching Fellow, University of Auckland;  Zbigniew Dumieńsk, Lecturer, University of Auckland.

 

It’s time for an eAustralia Card

From The Conversation.

Australian e-government is a long way behind many other developed nations. Our national leadership has utterly failed to comprehend why e-government should have been a national priority decades ago, and continues to offer little in the way of policy direction.

Hence, our current solutions are a bizarre mish-mash of inconsistent approaches, making it confusing and frustrating for Australians. Every mis-step sets back public trust in online government services. Usability, reliability and security are the keys.

The Australian Tax Office (ATO), for example, provides online data entry, but inadequate explanatory guidance. Searching the ATO website is risky because it also contains obsolete material from previous years.

The ATO communicates by print-formatted electronic documents to a separate MyGov email inbox, making reference to non-existent additional information, yet two-way communication is not possible through this service.

If the Digital Transformation Office is appropriately funded, empowered and motivated, then a top-down review of government services may be able to address the usability and reliability issues over time. Of much greater concern and urgency is the challenge of digital identity.

Who are you?

The Australian MyGov identity system was developed by the Department of Human Services (DHS) for the online delivery of Centrelink and Medicare transactions in particular.

According to the Department’s own website, it has no role in the development of government-wide online services. So it is perplexing that the ATO has adopted an identity solution from a non-specialist department, developed to address a particular application and its own list of security concerns.

Whether those particular security concerns are relevant to the ATO is not clear. It’s also not clear whether a top-down threat assessment was ever conducted for either the DHS or the ATO.

The security threat is not just that government agencies want to protect their own systems, it is also that the users of these services need to be able to trust that their private information is accurate, correctable, auditable and secure.

The key issue is establishing that the digital identity of an account truly belongs to the physical person. Unfortunately, personal health records, social security payments and tax details provide a strong incentive for identity theft, and MyGov’s identity verification process is weak.

So how else could you establish that you really are who you say you are?

The UK and New Zealand

The UK government rightly puts identity front and centre in the mission of the Government Digital Service. And the UK government has been at pains to consult and to explain publicly how the digital identity system will work.

In the UK model, identity is established by one of a small number of private service providers, using multiple identification sources. In most cases, this can be done entirely online. The UK government also believes that the private sector is the most efficient way to develop evolving solutions to minimise the risk of emerging identity fraud attacks.

There is a further requirement that identity verification for a particular government service is proportionate to the service. Passports need biometric verification, but other services have less stringent requirements.

We have similar familiar in-person processes in the form of a 100 point check for financial service providers such as banks, and multiple identity documents for passports.

New Zealand has followed the UK model with RealMe. However, the service is provided by the Department of Internal Affairs in collaboration with the New Zealand Post Office rather than private providers. Once identity has been established, details can be shared with service providers.

Of particular interest in New Zealand is that RealMe is sufficient to open a bank account and apply for a passport entirely online.

The Estonian approach

The mature and battle-hardened Estonian e-government approach includes digital signatures, electronic prescriptions, online voting, and opening and operating both bank accounts and online businesses. Estonia has also extended its digital services to so-called e-Residents.

Estonia’s identity solution requires a smart identity card to be issued in person, which is when they collect biometric information, including a photograph and fingerprints. A smartphone application also provides identity validation for lower risk services.

The underlying system architecture provides a very robust and secure platform for both government and private sector services, even enabling users to verify who has been accessing their private information, and why.

The Estonian approach works in no small part because of strong and effective leadership in the 1990s, which brought with it public support. Whether or not Estonians like their current government, there is an inherent sense of trust in the security of government services.

What is happening in Australia?

If you search hard enough in the Digital Transformation Office website, you’ll eventually find a glib reference to digital identity. Just A$254 million has been budgeted over four years to begin the transformation of Australia’s Commonwealth services to online delivery. That’s less than half the cost of the Adelaide Oval redevelopment, but with enormous and quantifiable long term benefits to Australia’s economy and society.

In 1985 the Hawke Labor government proposed a national identity card, the Australia Card, which was subsequently abandoned in 1987. Politics got in the way of our nation’s leaders to grapple with real policy substance, to Australia’s detriment.

Robust policy debate still might not have delivered the Australia Card, but whatever solution emerged might have set up Australia to be a world leader in the delivery of modern government services.

Policy needs to be driven by open public discussion and consultation. The UK and New Zealand models are compatible with Australian expectations, although the Estonian smart-card based solution is far more robust and versatile.

We have two clear choices: an eAustralia Card would offer flexibity, security and convenience, not to mention eliminating a half-dozen cards from a typical wallet; or we can continue to fail to innovate, swallow our pride and follow New Zealand’s lead.

In the absence of well-considered policy driving e-government services, Australians will continue to have no good reason to trust our government to keep our private information secure.

Author: Matthew Sorell, Senior Lecturer, School of Electrical and Electronic Engineering, University of Adelaide

Central banks can deliver on a ‘divine coincidence’ – but…

… Glenn Stevens is a not a miracle worker.  From The Conversation.

Inflation-targeting central banks usually benefit from what some economists have labelled a “divine coincidence”.

This is when the best policy response to inflation also turns out to be the best response to unemployment. A central bank should raise its policy rate when inflation is high and the unemployment rate is low — and vice versa. All else equal, the effect of such a policy response is that inflation and unemployment will return to their long-run levels.

An absence of a trade-off in achieving an inflation target and stabilising unemployment makes the lives of central bankers relatively easy — most of the time. But, alas, this divine coincidence doesn’t always hold.

The stagflating ‘70s

In the 1970s, central bankers faced a dilemma due to massive spikes in oil prices that resulted in less-than-divine sounding “stagflation” – that is, simultaneously high inflation and unemployment. If central banks pushed interest rates high enough to put a lid on inflation, they would increase unemployment further. But if they tried to hold interest rates down, they risked inflation spiralling out of control.

Most economists believe that central banks were too timid in the 1970s and inflation targeting was developed in the late 1980s and early 1990s as a way to make sure central bankers would keep their eye on the inflation ball whenever the divine coincidence failed again.

A surprising downside to the divine coincidence

The divine coincidence hasn’t really failed since the 1970s. For example, the recent global financial crisis led to lower inflation and higher unemployment in most countries. In this case, central bankers faced no dilemma in pushing interest rates downwards. Their only dilemma was what to do after their policy rates hit the zero lower bound.

But there is a surprising downside to the divine coincidence holding over the past quarter century. It seems to have lulled most everyone into thinking central bankers are miracle workers who can hit two targets with one arrow.

Worse yet, if central bankers can hit two targets, why not ask for more? Shouldn’t they also keep house prices under control? Stock prices? The exchange rate? Bank lending rates?

This idea of targeting bank lending rates has received much attention over the past few weeks in Australia, where the major banks have raised their mortgage rates, supposedly to cover increased costs related to changing capital requirements from Basel III.

Following this increase in bank lending rates, there were public calls for the Reserve Bank of Australia (RBA) to cut its policy rate to help bring mortgage rates back down. The RBA wisely chose not to listen.

But it is notable how easily the (implicit) idea that the RBA should target mortgage rate spreads could become such a focus of the public discussion surrounding monetary policy.

What’s the problem?

Public officials should want to cool an overheating housing market. They should want to minimise anti-competitive practices in the banking industry. And surely they should want a low and stable rate of inflation.

But they just can’t use one instrument – that is, the policy rate — to achieve all of these wonderful outcomes at the same time.

In the absence of more widespread divine coincidences, different desired outcomes will always require different policy instruments. And most practical tools to achieve outcomes other than just low and stable inflation have big distributional consequences.

For example, if policymakers really want to prevent an overheated housing market, they need to design tax and planning policies that influence demand and supply of housing. These have very different effects on homeowners and renters and are clearly more the domain of governments (national and local), rather than a central bank.

Likewise, if policymakers really want to make the banking system more competitive, they should do so via the regulatory environment. To be sure, any policy changes along these lines ought to involve consultation with the central bank given that there is a likely trade-off between a more competitive banking system and greater systemic risks, at least if the recent experience of the global financial crisis is any indication.

But the point is that such policy should not be conducted by a central bank alone. And it definitely shouldn’t be done by adjustments to the policy rate. This would be a misguided “duct tape” solution to a more serious architectural flaw.

Who is steering the ship?

Inflation targeting central bankers need to focus on their main objective of stabilising inflation and not be sidetracked into trying to correct all other macroeconomic and financial problems. They are not miracle workers — although they have generally delivered on their inflation targets.

To the extent the divine coincidence has held, inflation targeting central bankers have been lucky enough to also help stabilise unemployment. But they should not be expected to offset the effects of an uncompetitive banking system — or ill-conceived fiscal policy, for that matter. Their objective of low and stable inflation should always guide their decisions, not a response to the decisions of others with different objectives.

We should expect central banks to be focused on the inflation horizon, not to be divine.

Author: James Morley, Professor of Economics and Associate Dean (Research), UNSW Australia

China flags 6.5% growth rate, but needs real financial reform to get there

From The Conversation.

Overnight, Chinese President Xi Jinping gave the strongest indication yet the country will revise down its economic growth goal to 6.5%.

The official target will not be known until China releases its highly anticipated 13th five-year plan in March next year, but play has already been made on the idea of the “economic new norm”. This means lower percentage rates of economic growth (although rates still high in international terms) coupled with structural economic reform.

Undoubtedly, the primary goal is to keep the economy growing strongly. The latest interest rate cut on October 30 was intended to stimulate the economy. As a result, the financial institution interest rate was reduced by 0.25% to 4.35%. This remains high by current international standards and leaves room for further significant cuts, a luxury not currently available in many economies.

The cut can hardly be considered a sign of economic desperation. It may have been prompted because last quarter’s GDP growth missed the 7% mark, but 6.5%, even allowing for the alleged suspect nature of Chinese economic statistics, is still a rate many economists consider consistent with the “transitioning” economy. Certainly percentage growth rates higher than these are unlikely to be seen again and growth is in fact sure to trend lower as China moves to become a developed economy.

The transition to a more consumer-based economy offers opportunities for private investors, especially given signs of official support for continuing economic liberalisation.

The services sector has grown to 52% of the country’s GDP, as opposed to 44 % in 2011. China now accounts for 34% of the world’s smart phone market, 12% of the diamond and high end jewellery market, and 18% of the online games market. But poorly developed financial markets are an impediment to investment. Accordingly, financial market reform is a matter of government concern.

The path of reform in the financial sector has proven to be difficult. The government is encouraging private capital to enter the banking sector via the privately-funded banks, but the sector remains dominated by government controlled banks. Credit provided by banks still makes up 90% of all financing.

Of course, from the perspective of lenders, financing state-owned or controlled entities (SOEs) involves less risk than financing small to medium enterprises (SMEs). One perceived problem with the economy is this lack of funding for SMEs, and naturally a goal of reform is to provide adequate credit for smaller organisations. There has been an attempt to promote private finance companies as an alternative source of credit to the state controlled bank lending markets.

The government’s overarching goal is to establish a multi-layered capital markets system including shares, debt, futures, and private equity markets. The objective is to allow markets to play a decisive role. But the continuing influence and position of the SOEs and their structure, in which the main shareholders remain local or central government authorities who exercise managerial control, makes this difficult.

Listed companies mostly remain SOEs, which need to be supported for political and social reasons, and these capture most of the credit available from the state dominated banking system and capital from risk averse investors. The protected position of SOEs discourages lenders from investing in places other than the banking sector, and in particular from supporting SMEs. The protected position of SOEs inevitably distorts the capital markets.

There has so far been little success in making SOEs more market responsive. This means further development of financial markets in China depends on the growth of credit companies, privately funded banks, and also the “third board” market, which focuses on SME listings.

Author: He Weiping, Lecturer in Law, Monash University

RBA leaves cash rate unchanged at record low 2%: experts respond

From The Conversation.

The Reserve Bank of Australia has decided to leave the official cash rate unchanged at a record low of 2%, but said there was scope for a rate cut down the line.

In a statement on the RBA website, governor Glenn Stevens said:

At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.

The US Federal Reserve is expected to start increasing its policy rate in the period ahead, the statement said.

Recent attention has focused on the widening gap between the official cash rate and the mortgage rates set by the major lenders.

All of the big four banks have raised their variable home loan rates, after the introduction of tougher new capital requirements designed to act as a buffer in case of financial crisis. The new prudential regulations followed the Murray report into the financial system.

Australia’s estimated seasonally adjusted unemployment rate for September 2015 sits at 6.2%. The RBA said today that there had been “stronger growth in employment and a steady rate of unemployment.”

The RBA said inflation is low and should remain so, forecasting it to be “consistent with the target over the next one to two years, but a little lower than earlier expected.”

We asked experts to respond to the RBA decision.

Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National University:

This is the right decision. There are signs of weakness in the economy and financial conditions have changed, with the four big banks raising their home loan rates and global financial markets remaining nervous, but there’s not enough there to lower rates further. They are already very low by historical standards.

Inflation is low, that’s true – but a number of the CAMA Shadow Board members are still concerned about easy money and the danger of fuelling asset prices bubbles. I think several Shadow board members would not be unhappy about the banks recently increasing the mortgage rate.

Moreover, this year has witnessed a dramatic fall in energy prices, which would have exerted downward pressure on prices, albeit only temporarily. At this stage it is not clear to what extent lower inflation is supply-side or demand-side driven.

Monetary policy has been expansionary for a long time and this is helping to rebalance the Australian economy, away from the resource sector to manufacturing and the service sector. Whatever slack is left in the system is probably best left to other policy measures, like fiscal and micro-economic policy.

Today’s decision will probably not affect the gap between the official cash rate and the big four rates. When the banks lifted their mortgage rates, they presumably did not do this in anticipation of the RBA changing policy. It would have been interesting had the RBA dropped rates – would the banks have reversed their recent rate increase? Probably not. I cannot judge whether the additional regulatory measures imposed on the banks exactly justify the increase in their home loan rates. No doubt these measures were also a welcome excuse for the banks to squeeze a little but of extra profit margin for their shareholders.

Recent events have confirmed that the RBA is not the only institution assigned with macroprudential objectives. There’s been a vigorous debate, both in policy and academic circles, about whether central banks should be concerned with asset price inflation and excessive credit growth and whether they should use interest rates to prevent asset price price bubbles from becoming too large. It is reassuring to see the Australian Prudential Regulation Authority taking its role seriously and assuming responsibility.

Guay Lim, Professorial Fellow, University of Melbourne

I support and agree with the no-change, wait-and-see decision. I have concerns that further cuts will fuel asset prices with little effect on real spending.

In coming weeks, we will probably better understand what’s happening with fiscal policy and what’s happening with the US rate.

Richard Holden, Professor of Economics, UNSW Australia

The RBA’s announcement following their decision to keep the cash rate on hold at 2% had a fair bit of hedging language including:

Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.

So, basically, the RBA will cut rates down the track if it decides to cut rates down the track. Got it!

The big four banks are unlikely to further change mortgage rates in response, having already hiked recently in response to heightened capital requirements, but a cut in the months ahead by the RBA still looks like a definite possibility.

The root of Sydney and Melbourne’s housing crisis

From The Conversation.

As is well known, the shortage of affordable separate housing in Sydney and Melbourne means that most first home buyers and renters cannot currently find housing suited to their needs in locations of their choice.

The dominant response from the housing industry and commentators is that governments must unlock the potential for more intensive development of the existing suburbs. From this standpoint, the recent surge in high-rise apartment construction in Sydney and Melbourne is part of the solution.

For those looking at the issue from a financial perspective, escalating housing prices is seen as a reflection of low interest rates, as well as incentives for investors to take advantage of negative gearing and capital gains tax concessions. For the Australian Prudential Regulation Authority, this means the answer is to restrict access to borrowing.

While these factors are important in contributing to the affordability crisis in housing, the issue has deeper roots that lie in the changing demographic make-up of Sydney and Melbourne’s populations.

Our new study on new household and dwelling projections for Sydney and Melbourne from 2012 to 2022, highlights the need for rigorous academic research to inform public urban policy.

To date, policy has been driven by advice from commentators using a flawed evidence base. None have grasped the scale of need for family-friendly housing, or understood the full effects of ageing in place on the availability of detached houses in Sydney and Melbourne.

The projections build on the widely-assumed expectation that Net Overseas Migration (NOM) will continue at 240,000 to 2022 and that Sydney and Melbourne will receive almost of this number.

The household projections assume that the propensity to form households by age group and family type will remain the same as in 2011 in both cities. Projections for dwelling needs were then computed for both cities on the assumption that households will occupy the same type of dwelling (separate house, flat) by family type, age group and migration status in 2022 as was the case in 2011.

On these assumptions, Sydney will need to provide dwellings for an additional 309,000 households and Melbourne an additional 355,000 households over the decade 2012 to 2022.

The key finding is that contrary to most housing industry opinion, the greatest need will be for family friendly dwellings. This is because of the large number of young resident and migrant households who will be entering each city’s housing market. Most of these households are likely to start a family and when they do so, will look for a separate house.

Author provided
Author provided

It is true that there will be a large increase in the number of single person and couple families over the decade. However, most of this increase will be amongst older, already established households. The evidence indicates that the great majority are ageing in place. (See Table 11 in the report.)

The surge in the number of older households is a consequence of population ageing as successive ten-year cohorts replace smaller cohorts born in earlier years. This ageing effect is having an enormous but largely unrecognised effect on Sydney and Melbourne’s housing markets. It will generate the need for an additional 109,570 extra dwellings in Sydney over the decade to 2022 and 161,990 in Melbourne. In addition, net overseas migration will add a dwelling need of 198,810 in Sydney and 193,140 in Melbourne by 2022.

This combination of high dwelling needs of young residents as well as from NOM, along with the blocking effect of the ageing population, is contributing to a severe and continuing squeeze on the detached housing markets in Sydney and Melbourne. This is particularly marked in the inner and middle suburbs.

The reason is that, by 2011, 50 to 60% of this housing stock was occupied by householders aged 50 (See Table 10 in the report). This situation will get worse as the number of these older households increases.

The study compared the recent pattern of dwelling approvals by housing type in Sydney and Melbourne with the needs implied by the dwelling projections. The conclusion was that there are too few separate houses being approved in both cities and too many apartments, especially in Melbourne.

Current policies of urban renewal or urban consolidation in established suburbs will add little to the supply of affordable family friendly dwellings. This is primarily because of the increase in the price of potential building sites. There is a vicious circle in play as the scarcity outlined above contributes to further increases in the price of separate houses and thus to the cost of possible sites for higher density dwellings.

Implications

Because few families can afford detached housing in the inner and middle suburbs, more are being pushed into the outer suburbs and the fringes of Sydney and Melbourne. It is still possible to find such affordable housing in the outer and fringe suburbs of Melbourne, but not in Sydney. A detached house costs a minimum of $600,000 even in the remotest corners of Sydney. The only affordable option for most of these home seekers is a unit in these outer suburban locations.

There is no short term fix. In the long term more resident and migrant families are likely to seek affordable housing elsewhere, or in the case of migrants, may by-pass Australia altogether. Those who choose to stay will have to make adjustments to their life-style as by delaying starting a family.

On the other hand, a glut of high-rise apartments is inevitable, although it is being masked by the long lead time in the completion of newly approved apartment projects.

Author: Bob Birrell, Researcher , Monash University

 

The accounting trick that helps multinationals avoid paying tax

From The Conversation.

Chevron Australia’s aggressive tax strategies have resulted in an additional $322 million tax bill, but this may only be the beginning of the energy giant’s woes with the Australian Taxation Office. And others could face the same headache.

The recent Federal Court decision suggests significant accounting disclosure implications for large subsidiaries of other multinational companies operating in Australia which have employed similar strategies, and there will be other revelations to follow.

The Chevron issue involves an accounting measure that is commonly used by these subsidiaries which contributes to a lack of transparency around tax paid in Australia, as well as the web of companies tied to tax havens used by its parent company.

Central to the court case was a loan between Chevron Australia Holdings Pty Ltd and Chevron Texaco Funding Corporation under which Chevron Australia received $2.5 billion worth of advances through a Credit Facility Agreement.

Importantly, the CFA did not breach the thin capitalisation rules nor any other anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA). The critical issue is whether other provisions of the Act were contravened.

But the ATO argued that the CFA was not at arm’s length – where a related party transaction is made between companies and the acquisition price (in this case the interest on the CFA) exceeds a commercial amount. The ATO applied section 136AD(3)(d) of ITAA, allowing it to restate the true nature of the transaction as equal to the arm’s length amount, where a taxpayer has acquired property under an international agreement without arm’s length considerations. A penalty of 25% of the avoided amount is also allowed under the act.

Currently the ATO is also examining a similar, much larger transaction – $35 billion – by Chevron.

Chevron Australia is one of the largest companies in Australia with revenues predicted to reach over $10 billion and employing thousands of people. It has to be held to the highest levels of public accountability.

However, in preparing its financial report Chevron Australia applies the Reduced Disclosure Requirements (RDR) which is allowed under the Australian accounting standards.

The RDR allows large proprietary companies that do not have public accountability to voluntarily apply the disclosure requirements of just a few accounting standards. Applying the RDR relies on the idea that the only companies which have such accountability are those which issue publicly tradeable equity or debt securities.

The consequences of allowing large proprietary companies such as Chevron Australia (and almost every other subsidiary of a multinational operating in Australia) to use RDR are enormous in terms of transparency. The ATO, in the past, has indicated that it relies on the annual reports of companies for related party disclosures in identifying tax avoidance.

Non-disclosure of this information by large proprietary companies makes it difficult for the ATO and anyone else in Australia to identify tax avoidance. Hence, in July, the head of the Senate economics references committee inquiry into corporate tax avoidance, Senator Sam Dastyari, requested Chevron Australia provide five years of additional information around the operations of the US parent company Chevron Corporation’s subsidiaries in tax havens, and related party transactions between those subsidiaries and Chevron Australia.

The rationale behind disclosing related party transactions is that they cannot be presumed to be at arm’s length. For example, while Chevron Australia discloses that it has been charged for interest on a loan, information on who provided the loan and what interest rate was charged on this loan are not disclosed. As a result, users do not know whether the rate charged on the loan was commercial.

Furthermore, Chevron Australia does not disclose the key individuals’ remuneration. Knowing how these individuals are remunerated would help the users of annual reports understand their incentives to be involved in related party transactions. For instance, disclosures on related party transactions deter companies from engaging in “unfair” transactions. Such as related party transactions aimed at minimising taxes.

Chevron presented the requested additional subsidiary and related party transactions disclosures in a submission.

But as presented, these appear not to meet the requirements of the relevant accounting standards. At the same time Chevron Australia’s auditor, whose US affiliate earned more than $60million in fees over the last two years from Chevron, gives its use of the RDR the green light.

Our analysis is that that subsidiaries of multinationals should not be able to apply the RDR to lessen their financial disclosure obligations as required by all Australian accounting standards.

The Australian public deserves to have large proprietary companies to be fully accountable with respect to financial disclosure. As Green’s leader Senator Di Natale commented: “Rather than chase these millions of dollars after they’ve been funnelled offshore, it would be more efficient to force public disclosure of comprehensive financial accounts.”

Authors: Roman Lanis, Associate Professor, Accounting, University of Technology Sydney; Anna Loyeun, Lecturer, University of Technology Sydney; Brett Govendi, Lecturer, University of Technology Sydney.

 

Woolies’ new loyalty program offers a glimpse into the future

From The Conversation.

Woolworths is set to launch its new loyalty program, Woolworths Rewards, claiming that the new scheme will enable shoppers to redeem cash discounts off their shopping basket, much faster than ever before.

It is estimated shoppers will acquire the necessary points to save $10 automatically of their grocery bill within seven weeks.

Resembling the model used by UK retailer Morrisons, the new Woolworths Rewards program is a smart move for the retailer hoping to claw back some market share and curtail operational costs. However, there is no such thing as a free lunch.

While it will remove the costs of maintaining the Qantas-Woolworths relationship, estimated to be around AUS$80 million a year and allow them to re-invest at least AUS$65 million into stores, it may force shoppers into “brand switching” behaviour.

Interestingly, shoppers will only accrue points toward their $10 savings on selected ticketed items. Hence, the cost of maintaining the program will be met by suppliers who elect to have their brands featured with the big orange ticket. This is simply a way of moving supplier funded promotional allowances into a loyalty program, rather than a direct price discount.

Commentators have often voiced concern about the power of our supermarkets in encouraging us to purchase one brand, over another brand. When faced with the prospect of purchasing Brand A which attracts “Woolworths Dollars” versus Brand B, that doesn’t, it’s most likely shoppers will purchase Brand A. It is expected that shoppers may be critical of being forced into a brand switching situation to attain “Woolworths Dollars”.

Customers tiring of points loyalty programs

The larger issue facing Woolworths and others is there is no exclusivity when every supermarket, department store, dress shop and coffee cart offers you a membership card. As a result, shoppers grown tired of endlessly collecting points to eventually redeem on gifts, discounts or possibly a flight. Studies show that a third of members never redeem points.

Retailers imbedded loyalty programs to encourage repeat shopping, protect themselves from price wars and most importantly collect valuable shopping data. The first retailer in Australia to offer a loyalty program was Fly Buys, a joint venture between Coles Myer (now Wesfarmers) and Loyalty Pacific, 20 years ago.

Then, shoppers were quick to sign up, with the promise of “free” flights in return for their loyalty and of course their valuable personal shopping data, which included brands purchased, location, frequency and demographics.

Back then, the only way retailers could accurately track and target shoppers was through loyalty card usage, and while this still happens today, retailers have other more efficient channels, such as linked credit cards, like Coles Credit Card (Mastercard) and Woolworths Money (Visa).

As shoppers are more frequently “tapping and going”, retailers can now access a wider range of data, outside of simply their loyalty program members. Such programs also allowed retailers to distract shoppers from focusing on price by simply getting shoppers to focus on the ‘prize’ than the price.

Need for speed

Points fatigue occurs when shoppers are faced with months, if not years, of collecting points to ultimately redeem on a desired item or reach that elusive gold or platinum level. Today, shoppers are seeking immediacy and customisation.

Recently, Morrisons moved away from its complex “price match” loyalty scheme to a more simplified program where shoppers now earn five loyalty points for every £1 they spend.

Once a shopper earns 5,000 points they immediately to receive a £5 voucher. Other retailers are also moving away from long-term points accruing programs to deliver instant and non-monetary rewards to shoppers, such as free newspapers or coffee.

The UK’s Waitrose recently re-launched their loyalty program of “pick your own offers”, where shoppers can choose from a list of 1000 relevant products and immediately save 20%. Over time, the list changes, and shoppers get to select new products. The scheme has seen more than 850,000 shoppers sign up.

Non-monetary loyalty

The other problem with existing loyalty programs is that retailers have confused “loyalty” with “rewards”. Loyal shoppers will always consider their favourite brands and stores first and frequent them consistently. True loyalty programs should also strengthen the relationship between the retailer and customer.

UK retailer Marks and Spencer recently moved away from their strictly points-based shopping frequency scheme to reward shoppers for other positive behaviours, such as completing online surveys, writing online reviews or referring friends.

The program of “non-monetary” rewards – such as invitations to exclusive food and drink master-classes or fashion parades – demonstrates shoppers are seeking more than just generic deals and discounts. The program also allows M&S to demonstrate its corporate social responsibility credentials, with shoppers earning “sparks” points for donating unused clothing when purchasing new outfits, termed “shwopping”.

The future: Big brother is watching

What is the future of loyalty? While we see retailers around the world actively move away from long-term, points based schemes to programs that offer immediate gratification and non-monetary rewards, the next frontier will be instant customised offers.

Already, French retailer Carrefour and US retailer Macys have begun using Near Frequency Communications (CFC), which “pushes” targeted offers to their shoppers while they are in-store, or nearby.

It is expected that the opt-in technology would be the natural evolution of loyalty programs, where members receive immediate and customised offers based on where they are standing and what they are looking at within a store.

Author: Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of Technology

How big data and The Sims are helping us to build the cities of the future

From The Conversation.

By 2050, the United Nations predicts that around 66% of the world’s population will be living in urban areas. It is expected that the greatest expansion will take place in developing regions such as Africa and Asia. Cities in these parts will be challenged to meet the needs of their residents, and provide sufficient housing, energy, waste disposal, healthcare, transportation, education and employment.

So, understanding how cities will grow – and how we can make them smarter and more sustainable along the way – is a high priority among researchers and governments the world over. We need to get to grips with the inner mechanisms of cities, if we’re to engineer them for the future. Fortunately, there are tools to help us do this. And even better, using them is a bit like playing SimCity.

A whole new (simulated) world

Cities are complex systems. Increasingly, scientists studying cities have gone from thinking about “cities as machines”, to approaching “cities as organisms”. Viewing cities as complex, adaptive organisms – similar to natural systems like termite mounds or slime mould colonies – allows us to gain unique insights into their inner workings. Here’s how.

Complex organisms are characterised by individual units that can be driven by a small number of simple rules. As these relatively simple things live and behave, the culmination of all their individual interactions and behaviours generate more widespread aggregate phenomena. For example, the beautiful and complex patterns made by flocking birds are not organised by a leader. They come about because each bird follows some very simple rules about how close to get to each other, which direction to fly in, and how to avoid predators.

Similarly, ant colonies can exhibit very sophisticated and seemingly intelligent behaviour. But this sophistication doesn’t come about as a result of a good leader. It is the result of lots of ants following relatively simple rules, without any regard for the bigger picture. It is easy to see how this perspective could be applied to human systems to explain phenomena like traffic jams.

So, if cities are like organisms, it follows that we should examine them from the bottom-up, and seek to understand how unexpected large-scale phenomena emerge from individual-level interactions. Specifically, we can simulate how the behaviour of individual “agents” – whether they are people, households, or organisations – affect the urban environment, using a set of techniques known as “agent-based modelling”.

Using The Sims to build your own city. haljackey/Flickr, CC BY

This is where it gets a bit like SimCity. It’s apt that the computer game was originally based on the work of Jay Forrester, a world-renowned system scientist with an interest in urban dynamics. In the game, individual agents are given their own characteristics and rules, and allowed to interact with other agents and the environment. Different behaviour emerges through these interactions and drives the next set of interactions.

But while computer games can use generalisations about how people and organisations behave, researchers have to mine available data sets to construct realistic and robust rule sets, which can be rigorously tested and evaluated. To do this effectively, we need lots of data at the individual level.

Modelling from big data

These days, increases in computing power and the proliferation of big data give agent-based modelling unprecedented power and scope. One of the most exciting developments is the potential to incorporate people’s thoughts and behaviours. In doing so, we can begin to model the impacts of people’s choices on present circumstances, and the future.

For example, we might want to know how changes to the road layout might affect crime rates in certain areas. By modelling the activities of individuals who might try to commit a crime, we can see how altering the urban environment influences how people move around the city, the types of houses that they become aware of, and consequently which places have the greatest risk of becoming the targets of burglary.

To fully realise the goal of simulating cities in this way, models need a huge amount of data. For example, to model the daily flow of people around a city, we need to know what kinds of things people spend their time doing, where they do them, who they do them with, and what drives their behaviour.

Without good-quality, high-resolution data, we have no way of knowing whether our models are producing realistic results. Big data could offer researchers a wealth of information to meet these twin needs. The kinds of data that are exciting urban modellers include:

  • Electronic travel cards that tell us how people move around a city.
  • Twitter messages that provide insight into what people are doing and thinking.
  • The density of mobile telephones that hint at the presence of crowds.
  • Loyalty and credit-card transactions to understand consumer behaviour.
  • Participatory mapping of hitherto unknown urban spaces, such as Open Street Map.

These data can often be refined to the level of a single person. As a result, models of urban phenomena no longer need to rely on assumptions about the population as a whole – they can be tailored to capture the diversity of a city full of individuals, who often think and behave differently from one another.

Missing people

There are, of course, serious practical and ethical considerations to take into account, when integrating big data into urban models. The volume of background noise in new data sources can make it difficult to extract useful and reliable information. For example, it can often be difficult to distinguish Twitter messages posted by bots from those by real people.

Some of us still do things the old-fashioned way. from www.shutterstock.com

We must also make sure that we understand who is well-represented in our data, and who is not. The digital divide is alive and well and research suggests a class divide separating those who do and do not produce digital content. This means that there are probably large sections of the population missing from data sets.

We also need to find new ways of making these methods ethical. Traditionally, consumer and research ethics have been structured around informed consent. Before taking part in interviews or surveys, participants need to sign consent forms that give the researchers permission to use their data. But now, individuals are digitising aspects of their lives such as moods, thoughts, feelings, and behaviours that have historically gone undocumented. And, importantly, these are often released publicly on the internet.

And while an individual might have ticked a box that gives permission for their data to be used, that’s no guarantee that they’ve read and understood the terms. iTunes’ June 2015 terms and conditions, for example, are more than 20,000 words long (20 times the length of this article). Researchers and service providers need to ask themselves how many people really get to grips with these documents, and whether their agreement fulfils our idea of consent.

We may never be able to simulate every individual in a city, and we’ll probably never want to. But we are getting closer to being able to simulate the richness of the fabric that weaves together to shape our cities. If we can do this, then we will be able to provide useful input on how best to shape cities in the future – perhaps even down to the last street light, bus and block of flats.

Authors: Alison Heppenstal, Associate Professor in Geocomputation, University of Leeds; Nick Malleso, Lecturer in Geographical Information Systems, University of Leeds.