“Australia continues to swim strongly against the global tide, shrugging off China’s slowdown, rotten commodity prices and a fast fading resource construction boom to chalk up good growth,” said Deloitte Access Economics partner Chris Richardson…..
“A stronger Australian dollar … could, if it is sustained, start to take the cream off the cake of the non-mining growth story,’ said Mr Richardson, “with some of the recent gains in tourism and international education potentially at risk, and the possibility of the blowtorch to the belly going back onto the nation’s long-suffering manufacturers and farmers.”
The Australian Dollar is too strong given the current headwinds facing the economy. Having closely tracked commodity prices since 2009, recent divergence has the Aussie rallying to test resistance at 80 US cents. Failure of negotiations among major oil producers, in Doha, to institute a production freeze, may be just the catalyst needed to spark another decline. This time with a target of 60 US cents.
The Australian’s Adam Creighton has written a ripper post explaining why, in the wake of tax avoidance scandals (e.g. multinational and the Panama Papers), a broad-based land tax is needed more than ever, but will never see the light of day due to vested interests and weak politicians:
Windfall gains to private land owners stemming from developments outside their control are a far better object for taxation than income and consumption, which prop up vast avoidance industries…
Taxes on land are unique economically because they can’t be avoided and they don’t distort supply…
In fact, over time land tax (which should apply only to the unimproved part) could even reduce rents by encouraging development, including more apartments, on undeveloped land…
Land taxes may well be fairer, too. Just as the owners of land adjacent to new railway stations have done nothing to generate their windfall, land owners don’t lift a finger to generate increases in unimproved land values…
A comprehensive national, flat rate tax on unimproved land taxes was part of Labor’s platform from 1891 to 1905. The party should consider resurrecting this policy and using the proceeds entirely to slash personal income and/or company tax to unleash a productivity, investment and spending boom. This would help affordability; property prices would automatically fall…
A 1 per cent annual land tax without any exemptions could raise around $44bn based on the ABS’s estimates…
The economic ignorance and self-interest of land owners will, however, prevent any shift towards land tax, however beneficial it might be in the long run for almost everyone.
Vested interests would launch a hysterical defence of existing arrangements, wrongly claiming poor renters would be harmed.
Others would argue even stupid policies can’t be changed because some people have arranged their affairs around them.
Creighton has nailed it.
Land taxes are one of the most efficient sources of tax available, actually creating positive welfare gains to the domestic population of $0.10 for each dollar raised, since non-resident home owners are also taxed (see below Treasury chart).
Even just switching inefficient stamp duties (which cost the economy $0.70 per dollar raised) to a broad-based land tax would produce an estimated 1.5% increase in GDP, or $24 billion, without changing the amount of tax raised.
Unfortunately, while the arguments for shifting the tax base towards land taxes are impeccable, there are several key factors holding politicians back.
Consider the proposal to merely junk stamp duties in favour of a broad-based land tax levied on all land holders.
As shown by the RBA, only around 6% of the housing stock is transacted on average in a given year:
This means that in a given year, only a small minority of households pay stamp duty (albeit tens-of-thousands of dollars of dollars). And once they pay it, they automatically become a roadblock to reform (“why should I pay tax twice”, is the common retort).
While having such a small group of taxpayers supporting services for the whole community is ridiculous, rather than governments sharing the tax burden by levying each household a much smaller amount on a regular basis, it is far easier politically to tax a small group than everyone.
The other major roadblock with land taxes is that they would be levied on retirees that are asset (house) rich but cash poor. They would, therefore, squeal like stuffed pigs if they were required to pay tax.
The obvious solutions to these roadblocks are:
To overcome concerns around “double taxation”, provide a credit to anyone that has purchased a home in the past 10 years, equal to the amount of stamp duty paid, and then subtract the hypothetical land tax that would have been paid since the home was purchased.
Allow retirees to accumulate their land tax liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first), with interest charged on any outstandings.
However, even with such arrangements in place, politicians would still face the option of maintaining the status quo and taxing only a small number of people each year (easy) versus reforming and taxing almost everyone (hard).
Add in a fierce scare campaign from the property lobby – especially if land taxes were extended beyond just stamp duties to replace income taxes – and the likelihood of achieving meaningful reform is slim, especially with the current useless crop of politicians.
…..the banks’ reliance on offshore funding hit an unprecedented 54% of GDP in the December quarter:
As always, the key risk is that the banks’ ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending them credit. This willingness will be tested in the event that Australia’s sovereign credit rating is downgraded (automatically downgrading the banks’ credit ratings), there is another global shock, or a sharp deterioration in the Australian economy (raising Australia’s risk premia).
The Federal Budget, too, is now hostage to the banks’ offshore borrowing binge as it cannot borrow to spend on infrastructure or other initiatives for fear that Australia will lose its AAA credit rating, potentially leading to an unraveling of the private debt bubble created by Australia’s banks.
That APRA could stand by and allow the banks’ to borrow externally like drunken sailors is a hallmark of regulatory failure.
One in four dollars of bank assets is funded by offshore borrowing. A precarious position even for a stable economy (like Ireland?), let alone one hitched to the boom and bust commodity cycle. Smacks of moral hazard by the banks.
From Andrew Batson’s interview with Cai Rang, chairman of the China Iron & Steel Research Institute Group:
China’s current steel production capacity is 1.2 billion tons, but domestic demand cannot completely absorb this capacity. In 2015 China exported about 100 million tons of steel products; this was a relief for domestic capacity but a shock to the international market. Already nine European countries have made antidumping complaints, and Japan, Korea and India have also complained. This shows that our country’s current steel production capacity is not sustainable, and must be genuinely reduced.
Now the relevant departments are drafting the 13th five-year plan for the iron and steel industry, and the preliminary plan is to first cut 200 million tons, and eventually stabilize steel capacity around 700 million tons.
How will a 40 percent cut in Chinese steel production impact on Australian iron ore exports? Not well, I suspect.
Elizabeth Knight quotes prime minister Malcolm Turnbull speaking at Westpac’s 199th birthday lunch:
Meanwhile Turnbull – himself a former head of the Australian chapter of Goldman Sachs – told those attending the Westpac lunch that bank culture must shift from one that traditionally had been all about profit to one that took into account broader social responsibility.
Remuneration and promotion cannot any longer be based solely on direct financial contribution to the bottom line.
While bank bosses have been talking the same kind of talk for a while now, the growing number of instances where the behaviour of the banks had fallen short as a result of the drive to increase profit (and personal bonuses derived from making returns) are becoming harder to explain away using the excuse of a few bad apples.
“We expect our bankers to have higher standards, we expect them always, rigorously, to put their customers’ interests first – to deal with their depositors and their borrowers, with those they advise and those with whom they transact in precisely the same way they would have them deal with them,” he said.
Turnbull has hit on a key risk area for banks: remuneration structures that reward short-term profit objectives promote a risk-taking culture. Bank deals often look impressive at the start only to sour later. Incentives that encourage employee share purchases align staff interests with those of shareholders — a prudent, long-term outlook — while share options and bonus schemes encourage a short-term focus, aggressive risk-taking and divisional rivalry that can damage long-term value.
APRA may consider remuneration structures as outside their risk management ambit but it is time for a re-think. Toxic management culture is the biggest risk of all.
“Only when the tide goes out do you discover who’s been swimming naked.” ~ Warren Buffett
While the decision to keep rates unchanged was widely expected, analysts were speculating that the governor would show some concern about the recent steep rise in the Australian dollar’s exchange rate, which gained nearly 12 per cent from its January lows to a peak of US77.23¢ last week.
Mr Stevens duly added a paragraph to this month’s statement, noting that the currency had appreciated “somewhat”.
“In part, this [the recent rise] reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” he said, referring to recent monetary easing by other central banks including the Bank of Japan and the European Central Bank, as well as the decision by the US Federal Reserve to reduce the pace of interest rate hikes.
“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” he added.
But anyone hoping for a stronger “jawbone” was disappointed and the Australian dollar shot up by about half a cent to the day’s high of US76.32¢, before falling back in late trade to around US76¢.
Central banks around the globe are destabilizing financial markets and the RBA responds with a polite acknowledgement at the end of its statement. Someone please tell the governor: If you want to run with the big dogs, you’ve got to learn to pee high.
Where oil goes, stocks will follow. Crude oil prices are the canary in the coalmine at present. June 2016 Light Crude futures retreated from resistance at $43/barrel. Breach of medium-term support at $38 warns of another test of primary support at $32/barrel. Failure of support at $32 would offer a target of $22/barrel*, while respect of support would suggest that a bottom is forming.
* Target calculation: 32 – ( 42 – 32 ) = 22
The ASX started Monday with an early rally but ran into a spate of selling before the close. ASX 200 follow-through below 5000 would warn of a test of primary support at 4750. Declining 21-day Twiggs Money Flow, below zero, indicates medium-term selling pressure. Failure of primary support would reaffirm the long-term target of 4000*.
…..George is back, this time with The Australian Panic in a new Quarterly Essay:
In this urgent essay, George Megalogenis argues that Australia risks becoming globalisation’s next and most unnecessary victim. The next shock, whenever it comes, will find us with our economic guard down, and a political system that has shredded its authority. Megalogenis outlines the challenge for Malcolm Turnbull and his government. Our tax system is unfair and we have failed to invest in infrastructure and education. Both sides of politics are clinging defensively to an old model because it tells them a reassuring story of Australian success. But that model has been exhausted by capitalism’s extended crisis and the end of the mining boom. Trusting to the market has left us with gridlocked cities, growing inequality and a corporate sector that feels no obligation to pay tax. It is time to redraw the line between market and state.
Balancing Act is a passionate look at the politics of change and renewal, and a bold call for active government. It took World War II to provide the energy and focus for the reconstruction that laid the foundation for modern Australia. Will it take another crisis to prompt a new reconstruction?
The high financial overhead of private insurance in Australia means that only 84 cents in every dollar collected by private insurers is returned as benefits, with the rest going to administrative costs and corporate profits. By contrast, Medicare returns 94 cents in the dollar, even after the cost of tax collection is taken into account. In the United States, which is highly dependent on private insurance, only 69 cents in the dollar are returned as payment for health services.
More importantly, competing private insurers have less ability to control prices demanded by powerful service providers. If one insurer tries to bargain hard with hospitals to keep prices down, the hospitals simply choose to do business with another insurer.
By contrast a single national insurer has the market power to push down costs and improve utilisation. The below chart of health costs across 18 OECD countries highlights this point: single national insurers provide cheaper (and often better) health care than systems heavily reliant on private health insurance:
This is an argument for abandoning private health insurance, not private health care. Experience of Italy’s Lombardy region suggests a level-playing field, with open competition between public and private health care providers, delivers superior results. From Margherita Stancati at WSJ online:
Like other European countries, Italy offers universal health-care coverage backed by the state. Italians can go to a public hospital, for example, without involving an insurance company. The patients are charged a small co-pay, but most of the bill is paid by the government. As a result, the great majority of Italians don’t bother to buy private health insurance unless they want to seek treatment from private doctors or hospitals, which are relatively few.
Offering guaranteed reimbursements to public hospitals, though, took away the hospitals’ incentive to improve service or rein in costs. Inefficiencies were rampant as a result, and the quality of Italy’s public health care suffered for years. Months-long waiting lists became the norm for nonemergency procedures—even heart surgery—in most of the country.
Big changes came in 1997, when Italy’s national government decentralized the country’s health-care system, giving the regions control over the public money that goes to hospitals within their own borders…..
In much of the country, regions have continued to use the standards of care and reimbursement rates recommended by Rome. Some also give preferential treatment to public hospitals, making it more difficult for private hospitals to qualify for public funds.
Lombardy, by contrast, has increased its quality standards, set its own reimbursement rates and, most important, put public and private hospitals on an equal footing by making each equally eligible for public funds. If a hospital meets the quality standards and charges the accepted reimbursement rate, it qualifies. Patients are free to choose between state-run and publicly funded private hospitals at no extra cost. Their co-pay is the same in either case. As a result, public and many private hospitals in Lombardy compete directly for patients and funds.
…..Around 30% of hospital care in Lombardy is private now—more than anywhere else in Italy. And service in both the private and public sector has improved.
State hospitals have improved their service levels while private hospitals have lowered costs in response to the increased competition. A win for all …..except private health insurers.
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