The government will highlight in its May 9 budget a distinction between “good” debt, incurred to boost growth, and “bad” debt, used to finance welfare and other recurrent spending.
Treasurer Scott Morrison will say in a speech to business economists on Thursday that while previously all debt, whether for capital or recurrent purposes, has been lumped together, in this budget it will be linked to spending.
This “will make clearer the share of expenditure that is contributing to investment that increases productive capacity and produces future income and the debt that is being incurred to deal with everyday expenditure”.
The budget will also assign the level of government debt across portfolios. “We all need to understand what is driving the growth in our public debt and we need to budget in a way that creates accountability for increasing public debt and the interest payments that go with it,” Morrison says in his speech, released ahead of delivery.
The government is beginning the process of changing the spending culture, he says. “Portfolios will be held responsible for the debts they are incurring for future generations as a result of their expenditure.
“At the same time we will be providing room for common sense decisions to invest in our economy, by utilising our balance sheets to support investment that boosts growth and the jobs and wages that depend on that growth.”
On the latest figures net federal government debt in this financial year is estimated at A$317 billion.
Net debt is projected to peak at 19% of GDP in 2018-19 and then decline over the medium term.
The government remains committed to budget repair and its first priority for that remains controlling growth in spending, Morrison says.
“It is not sustainable for Australia to continue to finance our recurrent expenditure by borrowings.
“Australians understand taking out a mortgage to pay for their home is a wise investment for their future. But they also know that putting your everyday expenses on the credit card is not a good idea. It doesn’t end well.
“That is basically the difference between good and bad debt. The same is true for government.
“It can be very wise for governments to borrow, especially while rates are low, to lock in longer term financing and invest in major growth producing infrastructure assets, such as transport or energy infrastructure. But to rack up government debt to pay for welfare payments, Medicare costs or other everyday expenses, is not a good idea.
“This is a critical part of ensuring that government lives within its means.”
On the Thursday before that terrible Sunday when John collapsed during a hike in the Grampians, he sent me an email, alerting me to a typo in a biographical essay I had published about him. I was so grateful to him for taking the trouble to check the text and for pointing out the error, and said so. “Sorry to be a pedant”, he replied. They were his last words to me.
We had been having a leisurely conversation about our doings: he telling me how much he was enjoying working with Shaun Micallef, and looking forward to “a little lie down” at Easter. In fact I have been talking to John about his life for about eight years now, on and off: in person, on the phone, by email and sometimes snail mail correspondence.
On many occasions our conversations lasted for hours, with him telling me extraordinary stories about touring the clubs of New Zealand as Fred Dagg with a couple of singers, or about how his friend Ginette Mc Donald talked him in to auditioning for a film role in London with Barry Humphries, Bruce Beresford, Barry Crocker and Nick Garland. He played one of Bazza’s drinking partners.
Once, only recently, he told me about his first radio interview with Robyn Williams in Australia; it took place in 1977 at the ANZAAS conference, in the toilets, so that they could escape the jabbering scientists, with John pretended to be a philosopher and addressed the topic The Meaning of Life.
When I spoke to John on the phone I would often laugh so much that my colleagues would rush along the corridor from their offices to see what was going on in mine.
John was not only an entertainer “on stage”, his conversations were full of hysterical laughter: mine, and usually his too, as he recalled events and people. Hilarity took over even if the main point of the story was serious: he recalled the funny and strange conversations he had with people such as Clive James, Peter Cook, Paul Cox and others, with whom he seemed to have had odd and interesting encounters.
The conversations I had with John are the funniest I have had with anyone in my whole life. They weren’t just funny, they were vivid, and full of John’s philosophies about everything. He particularly hated management speak, and after I had been talking to him one day, I noticed an email appear from “Senior Management”. When I opened it I realised it was from John. He continued to send me missives from this and several other addresses.
We talked about Seamus Heaney for hours, as both of us had encountered the man and remained in awe of him; John sent me a recording of Heaney reading his poetry in Melbourne a few years before Heaney died.
Both John and I had Protestant Irish family heritage, and enjoyed Irish poetry. John introduced me to the work of Irish writer John McGahern. We also talked about cartoonists. Both of us knew Nick Garland who drew the Bazza McKenzie character in the comic strip he created with Barry Humphries in the 1960s. And of course we talked politics.
In addition to the profile essay I published about John recently, I have a much longer essay in manuscript about his life for my forthcoming book on comic actors in Australia. It is ready. John has checked it several times and made many suggestions. He has shared photographs with me and provided me with everything I could need. When I was researching it he told me about his childhood, his parents’ unhappy marriage, his loathing of school as a student at Scots College in Wellington, his first few years at University and how he started in satirical revue.
He also told me about his meanderings on his bicycle as a boy on the country lanes around Palmerston North in New Zealand and how he felt when he first saw David Low’s cartoon of Hitler and Stalin meeting, published in 1939; he marvelled at Low’s unique manner of portraying evil.
Clarke was struck by its boldness and clarity, the terrible context and dead Poland, the perfectly mannered stances of the two liars, and by the fact that Low had used their own words to do it. Years later Clarke perfected in sketch comedy what he had seen in Low’s cartoons: he was able to tell a shocking political truth through humour, using the precise words of those in power to skewer them.
I first spoke to John when he kindly agreed to give me an interview when I was conducting research for a full biography of Barry Humphries back in 2008. One of the stories John told me about Barry makes me shiver at Humphries’ razor sharp wit even as I recall it now.
John told me that during the filming of The Adventures of Barry McKenzie, Joan Bakewell interviewed Humphries for a television program called Film ’72. Dressed as Edna Everage, Humphries slipped easily into the interview. Bakewell asked: “Why is this film set in England?”
Without a moment’s hesitation, Barry, referring to the constant strikes and blackouts then bedevilling England, replied, “The film is set in Calcutta but London looks like Calcutta and is cheaper.”
John overheard Humphries’ remark and gasped at its audacity. It was “marketing Dada”, he thought to himself. As I listened to this anecdote I thought, “Only John would use a phrase such as ‘marketing Dada’.”
John loved to talk but he also loved to listen, to find out what a person’s life had been like. He had a way of asking questions that drew out extraordinary answers. John knew all about Barry Humphries’ teenage years and what Barry read as a young man; he knew about Anthony La Paglia’s early life. As a child he had talked with Anthony Burgess about how Burgess cheated death. His warmth radiated from him and he made you feel optimistic – lighter and happier than before you had both talked.
The federal government could collect billions more in royalties and tax revenue if it changed the rules on debt loading and adopted alternative royalty schemes in dealing with oil and gas giants, new modelling shows.
Our modelling, funded by lobby group GetUp, found that over the four-year period from 2012 to 2015, Chevron’s average effective interest rate was 6.4%. However, it has been steadily reducing from 7.8% in 2012 to 5.7% in 2015.
We estimated that if Australia adopted a similar approach to Hong Kong to eliminate debt loading abuse, United States oil and gas giant Chevron would have been denied A$6.27 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period (2012-2015).
The issue of debt loading abuse was highlighted last week when the full bench of the Federal Court dismissed unanimously Chevron’s appeal against the Australian Taxation Office (ATO), ordering the company to pay more than A$300 million.
Chevron Australia was using debt loading, where, compared its equity, it borrowed a large amount of debt at a high interest rate from its US subsidiary (which borrows at much lower rates). It did this in order to shift profits from high to low tax jurisdictions.
Based on Australia’s existing “thin capitalisation” rules, there is a maximum allowable debt that interest deductions can be claimed on, in a company’s tax return. Companies can exceed this debt but the interest charges must be at “arm’s length” – at commercial rates.
Chevron’s size and financial strength allow it to negotiate very competitive (low) rates on its external borrowings and this was the main issue in the Federal Court case. As the court has now ruled on what constitutes a reasonable interest rate for inter-company loans, this benchmark will likely be adopted by the ATO.
It can now approach and enforce this benchmark in similar disputes with confidence that companies engaged in debt loading will want to settle rather than engage in a costly court battle.
What the government could save from addressing debt loading
Chevron’s tax avoidance measures meant the interest rate, adjusted for maximum allowable debt, varied only slightly from their effective rate. Our modelling showed that if the ATO had applied the thin capitalisation rules to Chevron’s accounts each year over the four-year period, it would’ve reduced Chevron’s interest deduction by A$461 million and potentially generate an additional tax liability of A$138 million.
We modelled a scenario where Chevron Australia’s interest deductions were limited to the group’s external interest rate, applied to its level of debt. This would have reduced in the interest deduction by A$4.8 billion over the four year period, potentially generating A$1.4 billion in additional tax revenue.
We also worked out what would happen if Australia applied the debt loading rules Hong Kong does currently. Hong Kong disallows all deductions for related-party interest payments, making abuse of the system difficult. According to the latest ATO submission to the Senate tax inquiry, investment in the extraction of Australian oil and gas is almost entirely in the form of related-party loans.
Chevron Australia’s debt is entirely made up of related-party loans. If the Hong Kong solution was operating in Australia, we found that Chevron would have been denied A$6.275 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period.
We also looked at ExxonMobil Australia, which also has high amounts of related-party debt (98.5%), and the Hong Kong solution would have denied ExxonMobil A$2.7 billion in interest deductions, potentially increasing tax revenue by more than A$800 million for the same period.
Changing the PRRT for more revenue
Our report also includes an analysis of the potential for additional revenue from replacing the Petroleum Resource Rent Tax (PRRT) with resource rent systems used in the US and Canada. Oil and gas sales have increased from an average of A$5.96 billion per year between 1988 and 1991, to an annual average of A$33.3 billion between 2012 and 2015, indicating the huge growth in this sector.
We modelled what would happen if the US and the Alberta, Canada, royalty schemes were applied to Australian production volumes and realised prices, to compare returns to those achieved by the PRRT.
The US royalty scheme charges a flat percentage royalty on production volumes, priced at the well-head. The royalty rate was progressively increased in the US from 12.5% to 18.75% between 2006 and 2008.
Based on the data from Australian production volumes and realised sales prices, the US royalty scheme could have potentially raised an additional A$5.9 billion in revenue for Australia since 1988, or A$212 million per year.
However, over the period from 2010 to 2015, the additional revenues would have been almost A$2.5 billion per year. This is because of both the decline in the PRRT revenues, relative to price and volumes, and the increase in the royalty rate in the US.
However, while the US scheme would raise more than the PRRT, the Alberta royalty scheme would raise substantially more revenue than both of these schemes. The Alberta scheme is progressive in nature, meaning the royalty rate increases with the realised price, similar to income levels and personal income tax rates.
The Alberta scheme has been amended many times and the current scheme only started in January 2017, so the full effects of this scheme will not be evident for some time. However, based on the data from Australian production volumes and realised sales prices, we calculate the Alberta royalty scheme would have raised an additional A$103 billion in revenue since 1988, or an additional A$3.7 billion per year.
As the scheme was only implemented this year, these results may be unrealistic, but are indicative of the level of revenue that could be raised. Over the period from 2010 to 2015, the additional revenue would have been A$11.3 billion per year.
The modelling done for our report considers just two multinational corporations, their use of debt loading and the PRRT. Now we can can hope for more revenue collection from many of the multinationals operating in Australia, as a result of the recent Federal Court ruling.
Critically, too often corporations are able to work within Australia’s tax rules to avoid paying for operating here, by constantly arguing they can’t develop business in Australia unless there are tax breaks. Our modelling demonstrates governments need to ensure corporations benefiting from the use of Australia’s resources are contributing the same as they do in other jurisdictions.
Since the 2007 global financial crisis, policy makers have been fighting deflationary (falling prices) and disinflationary (prices rising at slow rate) pressures. But the global economy finally appears to be entering reflation – a period of higher prices together with stronger growth.
This is good news for households, businesses and governments around the world.
Reflation means the end of below trend growth, and this has widespread benefits. As demand grows, firms will expand production and will require more staff. This is good for job seekers, but ultimately it should also lead to higher wages. Although there is scant evidence of that so far in Australia.
The federal government will also benefit from reflation via increased tax revenue, as corporate profits increase and individuals return to the workforce. Meanwhile, government spending should reduce as benefit payments fall.
In its recent update on the World Economic Outlook, the International Monetary Fund (IMF) increased growth expectations both globally and in Australia.
The latest figures show Australian inflation creeping into the lower end of the Reserve Bank of Australi’s target range, but smoothed underlying inflation (which takes out extreme price fluctuations) is still just 1.8%.
Investors have been taking advantage of the “reflation trade”, by piling into assets that benefit from rising growth and inflation – companies in emerging markets and who sell discretionary items, such as cars and jewellery, to consumers.
In the 6-month period since the US election, stock markets in the US and Australia have each increased around 11%.
Second, there are already questions about the Trump adminsitration’s ability to enact legislation. The prospects of tax reform and infrastructure spending are fading. The infrastructure package, especially, had potential to increase inflation.
More uncertainty inhibits firms making investment and employment decisions.
At present, the economic signs are good for a continued reflation of the global economy. This will benefit households as well as investors and corporations. However, this recovery is still fragile and may be thrown off course by policymakers and further increases in geopolitical tensions.
Alarm bells are ringing a mere three months into Donald Trump’s presidency. The two global flashpoints, Syria and North Korea, are worrying enough.
More troubling still are America’s relations with Russia and China. These are now mired in angst, uncertainty and mutual suspicion. They underlie the failure to create a viable system of crisis prevention and crisis management.
Global power shift
Trump’s first 100 days as president have dramatically demonstrated this failure. For all the rhetoric about “making America great again”, Trump is rapidly discovering that the US has limited capacity to impose its will on the rest of world.
The trend is visible everywhere – in international trade and finance, diplomacy, and numerous conflicts around the world.
In Russia and China, the US now faces two centres of power that are no longer willing to comply with America’s interests and priorities.
Under Vladimir Putin, Russia has been busy reasserting its influence after years of humiliation following the break-up of the Soviet Union.
Starting from a low base, China has sustained over the last three decades the most remarkable rate of economic growth in modern history. Now it is seeking to exert the political influence commensurate with its new economic status.
America’s relative political decline goes back to its military defeat in Vietnam. Temporarily obscured by the end of the Cold War, it became fully apparent during the Bush and Obama years. But Trump is the first president to have run on a platform openly stating that the US is in decline and promising to reverse the trend.
We will make America strong again. We will make America proud again. We will make America safe again. And we will make America great again.
The nationalist card – the one unifying plank of his otherwise chaotic discourse before and since his election – is meant to strike a chord with the many disenchanted Americans hankering for a “golden age” that has long since passed. Trump now faces the immense challenge of delivering on this pledge despite intractable problems at home and abroad.
On the international stage, he has chosen to rely on showing off America’s unmatched military might. This position is supported by some of the most powerful voices in the US military and political establishment.
Soon after taking office, Trump gave the military expanded authority in the conduct of operations against Islamic State in Syria, Iraq and elsewhere. In support of the Saudi bombing campaign against Houthi forces in Yemen, the US carried out 70 airstrikes in March alone. This is more than twice the number for all of 2016.
In the first two weeks of April, the Trump administration:
announced plans to increase US military spending (already four times greater than China’s and nine times greater than Russia’s) by US$54 billion;
Yet the utility of military power is diminishing. As one centre of power declines and another rises, new faultlines and tensions emerge, and with them new uncertainties. This helps explain why the US finds it so difficult to set a clear policy direction for relations with Russia and China.
Hoping to deflect attention from his campaign’s links with Russia, Trump has allowed relations with Russia to continue on their downward slide. Perhaps it was never his intention to reset the US-Russia relationship.
In any case, he is under considerable pressure from his most senior security advisers to act tough with Russia. Almost certainly, he failed to appreciate that his actions and statements on Syria would provoke Putin’s fury.
The end result is clear. In Trump’s words, US relations with Russia have reached “an all-time low”. Not surprisingly, he has now reversed his previous position on NATO, and announced the alliance is “no longer obsolete”.
Russia, for its part, remains unbending in its support of the Assad government in Syria. It has mercilessly denounced the illegality of the US missile attack, and used its veto power to block a UN Security Council resolution condemning Syrian President Bashar al-Assad for his use of chemical weapons.
And now Russia has forced the US to accept a significant watering down of the UN Security Council resolution condemning North Korea’s latest missile launch.
During his election campaign, Trump repeatedly lambasted China for its currency manipulation and threatened to apply tough restrictions on Chinese exports. Before and immediately after his election he flaunted America’s commitment to Taiwan’s security, and challenged China’s military build-up in the South China Sea.
Yet the tone has since changed markedly. Chinese President Xi Jinping’s visit to the US became an occasion to discuss differences on trade and agree to a 100-day plan for reducing the current US trade deficit with China.
At least in public, Xi stuck to his script about the virtues of bilateral co-operation. Trump presented the talks as forming the basis for “an outstanding relationship”.
The North Korea crisis has exposed the limits of US power. Neither increased US economic sanctions nor the threat of military action are likely to force the North Korean regime into submission.
The US needs China’s help to have any chance of reining in North Korea’s nuclear ambitions. China’s response has been to increase pressure on North Korea while issuing a stern warning to both parties.
And so, the relationship remains at best unpredictable. As much as China and the US need each other, the hawks in the Trump administration – and there are many – will not easily abandon their plans to contain China, challenge its claims to sovereignty in the South China Sea, and maintain the US military’s pre-eminence in the region.
However, none of this will halt China’s rise.
What does the future hold?
The months ahead are less than promising. The use and threat of force will do nothing to resolve any of the longstanding conflicts in the Middle East or east Asia.
The projection of military muscle and modernisation of nuclear arsenals are far more likely to produce greater local and regional instability, and heighten the risk of miscalculation from any of the three major centres of power.
Pursuing “America First” or “Russia First” policies in conditions of such mutual vulnerability is an exercise in futility.
A more profitable course for these three centres of power is to recognise each other’s legitimate interests, expand the opportunities for economic and diplomatic co-operation, and develop a co-ordinated approach in the management of actual and potential flashpoints.
To bear fruit, such efforts need to have solid foundations – in particular decisive steps to eliminate nuclear weapons, enhance the effectiveness of international law, and strengthen the UN’s capacity for conflict management and peace-building.
Professor Camilleri will explore these issues in depth at a keynote lecture to be delivered at St Michael’s on Collins, Melbourne, on May 9 and 16.
Malcolm Turnbull has flagged he expects to meet US President Donald Trump in New York next week, although late Tuesday his office said the government was still waiting for the formal invitation.
The occasion is the 75th anniversary of the Coral Sea battle.
Speaking at the Al Minhad Air Base in the United Arab Emirates during an Anzac commemoration trip that included Iraq and Afghanistan, Turnbull said he looked forward to discussions with Trump “at an early opportunity”. “We’ll be making announcements very shortly about that,” he said.
Turnbull would only make the visit for the Coral Sea anniversary if it provided an opportunity for his first face-to-face meeting with Trump. Even though it would be brief, the timing is awkward – he would be overseas only days before the crucial May 9 budget.
Turnbull, who has had talks with senior administration figures in the past few days, is anxious to get a first-hand feel for Trump.
During his visit to Australia at the weekend, US Vice-President Mike Pence briefed Turnbull on the new administration’s defence and foreign policy assessments, as tensions ramp up with North Korea.
Pence also reaffirmed the US would honour the deal to take refugees from Manus Island and Nauru, while again making clear Trump’s dislike of the agreement the Australian government forged with the Obama administration. Trump expressed this displeasure forcefully in his now-notorious phone conversation with Turnbull earlier this year.
While in Kabul, Turnbull had the opportunity for talks with US Defence Secretary James Mattis.
Asked at his news conference whether Australia needed to do more in the Middle East region, Turnbull said that in both the Afghan and Iraq theatres “there is going to need to be a long-term commitment”.
“But it is one of supporting, above all of training, the Afghan and Iraqi security forces, both military and police, to ensure that they have the ability to defend their own country, to push back the terrorists where they’ve made gains, and to secure the territory that the government is holding.”
He said that as the situation evolved “we’ll consider requests for further support”.
The government on Tuesday announced humanitarian and stabilisation help for Iraq worth an extra A$110 million over three years. This brings to more than $530 million Australia’s humanitarian help for Iraq and Syria since 2014.
During his trip Turnbull met both Iraqi Prime Minister Haider al-Abadi and Afghan President Ashraf Ghani.
Citizenship applicants will need to demonstrate a higher level of English proficiency if the government’s proposed changes to the Australian citizenship test go ahead.
Applicants will be required to reach the equivalent of Band 6 proficiency of the International English Language Testing System (IELTS).
To achieve Band 6, applicants must correctly answer 30 out of 40 questions in the reading paper, 23 out of 40 in the listening paper, and the writing paper rewards language used “accurately and appropriately”. If a candidate’s writing has “frequent” inaccuracies in grammar and spelling, they cannot achieve Band 6
Success in IELTS requires proficiency in both the English language, and also understanding how to take – and pass – a test. The proposed changes will then make it harder for people with fragmented educational backgrounds to become citizens, such as many refugees.
How do the tests currently work?
The current citizenship test consists of 20 multiple-choice questions in English concerning Australia’s political system, history, and citizen responsibilities.
While the test does not require demonstration of English proficiency per se, it acts as an indirect assessment of language.
For example, the question: “Which official symbol of Australia identifies Commonwealth property?” demonstrates the level of linguistic complexity required.
The IELTS test is commonly taken for immigration purposes as a requirement for certain visa categories; however, the designer of IELTS argues that IELTS was never designed for this purpose. Researchers have argued that the growing strength of English as the language of politics and economics has resulted in its widespread use for immigration purposes.
For many adult refugees – who have minimal first language literacy, fragmented educational experiences, and limited opportunities to gain feedback on their written English – “competency” may be prohibitive to gaining citizenship. This is also more likely to impact refugee women, who are less likely to have had formal schooling and more likely to assume caring duties.
There are a number of questions to clarify regarding the proposed language proficiency test:
Will those dealing with trauma-related experiences gain exemption from a high-stakes, time-pressured examination?
What support mechanisms will be provided to assist applicants to study for the test?
Will financially-disadvantaged members of the community be expected to pay for classes/ materials in order to prepare for the citizenship test?
The IELTS test costs A$330, with no subsidies available. Will the IELTS-based citizenship/ language test attract similar fees?
There are also questions about the fairness of requiring applicants to demonstrate a specific type and level of English under examination conditions that is not required of all citizens. Those born in Australia are not required to pass an academic test of language in order to retain their citizenship.
Recognising diversity of experiences
There are a few things the government should consider before introducing a language test:
1) Community consultation is essential. Input from community/ migrant groups, educators, and language assessment specialists will ensure the test functions as a valid evaluation of progression towards English language proficiency. The government is currently calling for submissions related to the new citizenship test.
2) Design the test to value different forms and varieties of English that demonstrate progression in learning rather than adherence to prescriptive standards.
3) Provide educational opportunities that build on existing linguistic strengths that help people to prepare for the test.
Equating a particular type of language proficiency with a commitment to Australian citizenship is a complex and ideologically-loaded notion. The government must engage in careful consideration before potentially further disadvantaging those most in need of citizenship.