Australia & NZ Archives - Page 48 of 96

May 28, 2014

War on entitlements doesn’t extend to military | | MacroBusiness

By Leith van Onselen, with kind permission from Macrobusiness:

I have noted previously how the Coalition has ear-marked tens-of-billions of taxpayer dollars to local defence manufacturing, including a $10 billion to $15 billion-program for 1,000 locally produced armoured vehicles, and locally designed and built submarines for around $40 billion. It has also flagged a multibillion-dollar warship project that will be built locally.Today, The AFR has revealed that an $8 billion contract for local shipbuilder, ASC, to supply three air warfare destroyers for the Australian Navy is running two-and-a-half years late and more than $300 million over budget because the company has no experience in shipbuilding:

An audit released in March… warned there could be further cost blowouts and delays to come…

The 320-page audit found defective drawings supplied by Navantia and an inexperienced Australian shipyard workforce were a devastating combination leading to hull blocks not joining up, pipes, air conditioning systems and cabling requiring modification, doors not lining up and equipment being left off and expensive and costly rework.

Surely the above schmozzle casts serious doubts over the Government’s plan to build military hardware locally.

While I acknowledge that there is an argument to retain your own military hardware building capacity, at what cost? The Coalition’s hard line on industry assistance appears to be in stark contrast to its defence procurement policy. Australia could easily purchase proven, fit-for-purpose, military hardware from abroad at a fraction of the cost of developing similar technology locally, saving taxpayers billions in the process.

Once again, it is these sorts of inconsistencies that undermine the Government’s goal of “ending the age of entitlement”. While it slashes benefits to vulnerable sections of the community, it is allowing egregious lurks and subsidies to remain in others, which is undermines the Government’s calls for “shared sacrifice”, whilst also ensuring that the burden of adjustment is not broad-based, reducing its efficacy. As I’ve said before, a much clearer framework for these decisions is needed.

Past experience of Australian military hardware (e.g. Collin’s class submarines) is that locally built generally means over-priced and second-rate (….be kind). While that does not necessarily extend to armoured vehicles, naval vessels such as frigates, destroyers and submarines appear beyond present capabilities. Commissioning local development is no doubt intended to create jobs, but is at the expense of selling short our soldiers and sailors — equipping them with second-rate equipment in situations where it can mean the difference between life and death. Which is why military procurement, like the selection of infrastructure projects, should be above the political process.

May 22, 2014

Norway teaches Britain how to choke house booms without killing economy – Telegraph Blogs

Ambrose Evans-Pritchard reports the resounding success of Norway’s central bank in using macroprudential tools to take the steam out of a housing bubble:

if the Bank [BOE] wishes to contain credit, it should learn from Norway’s success. Instead of raising rates, it has used “macroprudential” tools. It cut the loan-to-value ceiling on mortgages from 90pc to 85pc. It forced the banks to raise to capital buffers further.

The Norges Bank has recommended a 1pc counter-cyclical buffer based on its view of what constitutes a safe level of credit growth.

Contrary to claims that these tools never work, they worked splendidly, as you can see from this chart today from HSBC’s David Bloom.

The RBNZ adopted similar measures and it is puzzling why the RBA, which faces an equal threat, is not doing the same.

May 20, 2014

Use land taxes to plug budget holes || Macrobusiness

Great post from Unconventional Economist (reproduced with kind permission from Macrobusiness) gets to the heart of the current budget stoush.
Land Taxes

Cross-posted from David Collyer at Prosper Australia

Sometimes, through the smoke and fireworks of the national debate a political commentator sees the path forward and points the way.

Today in the Australian Financial Review, Alan Mitchell takes a far-sighted approach to the crisis provoked by the Abbott government in its attempt to raise and broaden the GST.

The Liberal Party has long been host to the clearest thinkers on the federal system embedded in Australia’s Constitution. Malcolm Fraser tried to unravel the ‘Canberra taxes, States spend’ dilemma that divorces revenue raising from program responsibility.

Civic society demands taxes and spending be tightly linked for accountability and fair scrutiny. Transparency is an essential feature of good government.

The first Abbott/Hockey budget seeks to end $80 billion in federal transfers to the states for health and education. The game plan is to force the states to beg for a tax on food.

Mitchell has a better idea, based on the principle of subsidiarity. This directs that matters ought be handled by the smallest, lowest or least centralised competent authority. Central government should perform only those tasks which cannot be performed at a more immediate or local level. This includes taxation.

State governments have quality tax bases – they just choose to use bad taxes and blame distant mandarins in Canberra for their self-imposed weakness. Voters struggle to see which level of government is responsible for which stuff-up.

Mitchell:

“In fact, they have all the efficient tax bases they need to raise a very large share of the spending now financed by grants from Canberra.

“They just prefer not to use them. They would rather rely on federal money and complain about “vertical fiscal imbalance.”

“Vertical imbalance is largely a myth perpetuated by state politicians who would rather avoid the responsibility for raising their own taxes.

Good can come from this Abbott/Hockey confected crisis. The Premiers are under no obligation to follow Canberra’s lead and destroy their narrow political capital by assuming responsibility for raising and broadening the regressive GST.

The states could instead take up the reforms urged on them by every genuinely independent tax review in living memory.

“Residential land tax also should be revived, and the most convenient way to do that probably is for state governments to gradually transfer more responsibilities to local government.

“Local government land rates based on unimproved property values are an efficient form of land tax, and while no one would enjoy paying higher rates, increased community control of schools, for example, might be quite popular. The availability of reverse mortgages also makes it more feasible for governments to rely more on the taxation of residential land.

State governments are sovereign. They do have choices. Rather than submit to a very bad deal from Canberra, they can reform themselves – and make Prime Minister Abbott responsible for the political costs of good public policy.

May 20, 2014

Five drivers point to more Australian dollar falls | | MacroBusiness

Greg McKenna (House & Holes) at Macrobusiness explains why the Aussie Dollar is falling:

Recently I posted that MB’s five drivers model for the Australian dollar was pointing lower. The dollar broke lower last night and appears biased for more. The five drivers are:

interest rate differentials;

global and Australian growth (more recently this has become more nuanced for the Aussie to be more about Chinese growth);

investor sentiment and technicals; and

the US dollar

May 19, 2014

Where are the Budget alternatives? | | MacroBusiness

Hats off to Leith van Onselen for his perceptive comments on Australia’s current budget stoush:

The point is, it’s fine to oppose Budget savings if you can provide an alternative plan to cut expenditure and/or raise taxes. But simply opposing measures without providing alternatives, as has been done by the opposition parties, ignores the very real structural pressures facing the Budget from falling commodity prices and an ageing population….

Some low hanging fruit that could be targeted by the opposition parties as alternatives to budgetary reform could include closing Australia’s more egregious tax expenditures – including overly generous superannuation concessions (which mostly benefit the wealthy), quarantining negative gearing so that losses from an asset can only be claimed against income from that same asset, removing the capital gains discount on investments, and removing tax concessions on company cars – as well as abolishing Abbott’s paid parental leave scheme.

Reforms to these areas alone would save many billions of dollars and improve equity in the process.

May 19, 2014

ASX 200 warns of correction

The ASX 200 reversed below its secondary rising trendline, warning of a correction. Oscillation of 21-day Twiggs Money Flow above zero, however, continues to indicate long-term buying pressure.

ASX 200

A correction would be likely to test the primary trendline and support at 5300. Another 13-week Twiggs Money Flow trough above zero would strengthen conviction of a bull market.

ASX 200

ASX 200 VIX rose to 13, but still indicates low risk typical of a bull market.

ASX 200

May 19, 2014

The Inequality Puzzle | Lawrence H. Summers

Larry Summers exposes the flaw in Thomas Piketty’s Capital in the Twenty-First Century. Piketty argues that inequality is rising because the rate of return on capital is higher than the economy’s growth rate.

Does not the rising share of profits in national income in most industrial countries over the last several decades prove out Piketty’s argument? Only if one assumes that the only factors at work are the ones he emphasizes. Rather than attributing the rising share of profits to the inexorable process of wealth accumulation, most economists would attribute both it and rising inequality to the working out of various forces associated with globalization and technological change. For example, mechanization of what was previously manual work quite obviously will raise the share of income that comes in the form of profits. So does the greater ability to draw on low-cost foreign labor.

Correlation does not imply causation. The fact that two events occur together does not prove that one has caused the other.

Summers also addresses whether returns on capital are largely reinvested:

A brief look at the Forbes 400 list also provides only limited support for Piketty’s ideas that fortunes are patiently accumulated through reinvestment. When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.

That income inequality is rising is undisputed, but the causes are not as simple as Piketty assumes. His proposal of a progressive tax on wealth is unlikely to see the light of day: the history of inheritance taxes is an indication of their ineffectiveness. But a shift away from income taxes towards land taxes and other flat rate, indirect taxes would provide a significant boost to the economy as illustrated by the following chart from the Henry Review.

Marginal welfare loss from a small increase in selected Australian taxes

Marginal welfare loss is the loss in consumer welfare per dollar of revenue raised for a small increase in each tax (the extent of compensation required to restore consumer satisfaction reflects the distorting effect of the tax on the economy). A decrease in the level of tax, on the other hand, would be likely to produce a similar-sized benefit. So a trade off between taxes at the top of the scale and those at the bottom would be expected to deliver a substantial net benefit.

May 14, 2014

ASX 200 signals advance

A monthly chart of the ASX 200 also gives a clearer perspective of market direction. Breakout above 5450 signals an advance while follow-through above 5550 would confirm a target of 6000*. A 13-week Twiggs Money Flow trough above zero is promising, but needs to be strengthened by a breakout above the descending trendline. Reversal below the secondary rising trendline on the index chart is unlikely, but would warn of a test of the primary trendline.

ASX 200

* Target calculation: 5500 + ( 5500 – 5000 ) = 6000

ASX 200 VIX below 12 indicates low risk typical of a bull market.

ASX 200

May 7, 2014

Is the market overpriced? Episode II

Using Warren Buffett’s favorite broad market valuation metric of market capitalisation over GDP*, we can see valuations are on the high side, near to levels from early 2006, but nowhere near the alarming bubble of two years later. The Dotcom bubble (not shown) was even more severe.

NYSE Market Cap/Nominal GNP

*I have used GNP (or GNI as some call it) as this more accurately includes offshore income.

Australian investors will be relieved to find the ASX, at 100, reflects fair value. Even if we ignore the 2007 property/resources bubble.

ASX Market Cap/Nominal GNP

April 30, 2014

No Alan, more income tax is not the answer | MacroBusiness

Leith van Onselen comments on Alan Kohler’s support for a proposed debt levy:

The first best solution is to shift Australia’s tax base away from productive enterprise (both individuals and companies) towards more efficient sources, such as land, resources and consumption. According to the Henry Tax Review, the marginal excess burden (i.e. the loss in consumer welfare relative to the net gain in government revenue) from the GST is just 8%, whereas it is near zero for taxes on land and resources. They also compare very favourably against the two biggest current sources of tax revenue – personal income tax (24% marginal excess burden) and company taxes (40% marginal excess burden) – offering the nation large productivity pay-offs from fundamental tax reform.