Budget to distinguish good and bad debt


Michelle Grattan, University of Canberra

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. The Conversation

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.”

https://www.podbean.com/media/player/r88ra-6a1eda?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Chevron is just the start: modelling shows how many billions in revenue the government is missing out on


Roman Lanis, University of Technology Sydney; Brett Govendir, University of Technology Sydney, and Ross McClure, University of Technology Sydney

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. The Conversation

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.

Roman Lanis, Associate Professor, Accounting, University of Technology Sydney; Brett Govendir, Lecturer, University of Technology Sydney, and Ross McClure, PhD Candidate, casual academic, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Explainer: what is reflation and is Australia experiencing it?


Lee Smales, Curtin University

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. The Conversation

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.

Seeing reflation

In its recent update on the World Economic Outlook, the International Monetary Fund (IMF) increased growth expectations both globally and in Australia.

The IMF noted there has been a recovery in investment, manufacturing, and trade. This is consistent with recent manufacturing data that signals there will be solid growth in the coming months.

The manufacturing data also noted that costs are increasing, largely thanks to rising prices for raw materials. Indications are that consumer prices are also turning upwards.

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%.

This pick up in economic activity has occurred at the same time as corporate earnings have improved. This is a global phenomenon, but Australia is able to benefit from this via trade, particularly in the resource sector.

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%.

What’s causing reflation?

Following the financial crisis, central bankers slashed interest rates to all-time lows, and greatly expanded their balance sheets by purchasing assets, in a bid to stimulate their economies. Until recently this had failed to stimulate global demand, but that appears to be changing.

The White House has moved to deregulate industries, and has promised to increase infrastructure spending in the US.

As the world’s largest economy, reflation in the US results in economic growth elsewhere, particularly in countries like Australia that sell goods and raw materials into the US.

Finally, the political uncertainty of the Brexit referendum and US Presidential election have passed. Both consumers and producers are confident, and this is feeding into other decisions.

Will reflation keep going?

Whether reflation continues is far from guaranteed.

For starters central bankers could raise interest rates more quickly than expected if they think inflation will get out of hand. Already, the US Federal Reserve has indicated discomfort with high share prices. Increasing interest rates, or selling some of its recent asset purchases, could impact demand.

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.

Finally, there are new sources of political uncertainty. Trump appears to have reversed course on engagement in the Middle East and North Korea. The UK faces a surprise general election and Marine Le Pen is still in the running in the French Presidential election.

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.

Lee Smales, Associate Professor, Finance, Curtin Graduate School of Business, Curtin University

This article was originally published on The Conversation. Read the original article.

The US, Russia and China: a twisted tale of personal ego, profound mistrust and foolish nationalism



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In Russia and China, Donald Trump now faces two centres of power that are no longer willing or feel the need to comply with America’s interests and priorities.
Reuters/Carlos Barria

Joseph Camilleri, La Trobe University

Alarm bells are ringing a mere three months into Donald Trump’s presidency. The two global flashpoints, Syria and North Korea, are worrying enough. The Conversation

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.

Militarism not isolationism

In his inauguration speech, studded by more references to “America” than any inauguration speech in US history, Trump vowed:

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:

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.

The Russia conundrum

In the case of Russia, Trump’s task has been greatly complicated by the findings of the US intelligence community that the Russian government interfered in the 2016 US election.

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.

Russia has been busy reasserting its global influence under the leadership of Vladimir Putin (left).
Reuters/Danish Siddiqui

China’s rise

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.

Trump and Putin lead countries that hold some 14,000 nuclear weapons, or close to 95% of global stockpiles. These arsenals cast a shadow over US-Russian security, which seems likely to darken with the advent of new technologies and rising levels of mistrust and suspicion.

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.

Joseph Camilleri, Emeritus Professor of International Relations, La Trobe University

This article was originally published on The Conversation. Read the original article.

Turnbull expects to meet Trump next week


Michelle Grattan, University of Canberra

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 Conversation

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.

https://www.podbean.com/media/player/jw7bg-69e505?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

English language bar for citizenship likely to further disadvantage refugees



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Prime Minister Malcolm Turnbull has proposed tougher language requirements for new citizenship applicants.
Lukas Coch/AAP

Sally Baker, University of Newcastle and Rachel Burke, University of Newcastle

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. The Conversation

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.

Impact of proposed changes

English is undoubtedly important for participation in society, but deciding citizenship based on a high-stakes language test could further marginalise community members, such as people with refugee backgrounds who have the greatest need for citizenship, yet lack the formal educational background to navigate such tests.

The Refugee Council of Australia argues that adults with refugee backgrounds will be hardest hit by the proposed language test.

Data shows that refugees are both more likely to apply for citizenship, and twice as likely as other migrant groups to have to retake the test.

Mismatched proficiency expectations

The Adult Migrant English Program (AMEP), where many adult refugees access English learning upon arrival, expects only a “functional” level of language proficiency.

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.

Bar too high?

The challenges faced in re/settlement contexts, such as pressures of work and financial responsibilities to extended family, often combine to make learning a language difficult, and by extension,
prevent refugees from completing the citizenship test.

Similar patterns are evident with IELTS. Nearly half of Arabic speakers who took the IELTS in 2015 scored lower than Band 6.

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.

Sally Baker, Research Associate, Centre of Excellence for Equity in Higher Education, University of Newcastle and Rachel Burke, Lecturer, University of Newcastle

This article was originally published on The Conversation. Read the original article.

The real reason Scott Morrison is playing down the budget


Phil Lewis, University of Canberra

Despite the Treasurer, Scott Morrison, describing the federal budget as “not a centrepiece”, it has always been regarded as just that – the centrepiece of fiscal policy in Australia. The Conversation

Any changes in federal taxes and expenditure are intended to achieve good outcomes for Australia’s economy, such as low unemployment, price stability and economic growth. In economic terms, government spending should increase and tax receipts fall during downturns in the economy, and the opposite should happen when the economy is booming. This is how the government is able to balance out cycles in spending by the private sector.

Importantly, the budget is made up of more targeted fiscal policies (referred to as “discretionary” by economists) as opposed to automatic processes (referred to as “stabilisers”). The distinction between the two is important.

Automatic processes refer to when government taxes and expenditure generally increase and decrease with the business cycle. They are automatic because these changes in taxes and spending occur without the government having to do anything.

For example, when the economy is growing strongly, employment increases and unemployment falls. This results in unemployment benefit payments to workers, who were previously unemployed, automatically decreasing.

Also, when the economy is expanding, expenditure and incomes for workers and for businesses rise and the amount the government collects in taxes increases. When economic growth slows or becomes negative, the opposite occurs: the amount the government collects in taxes will fall and expenditure on unemployment benefits will rise.

With more targeted fiscal polices, the government takes actions to change spending or taxes. But although the budget is the centrepiece, it is not a very effective means of managing the economy.

The government and parliament have to agree on changes in fiscal policy. The treasurer initiates a change in fiscal policy through the budget in May each year. This must be passed by both houses of federal parliament, which can take many months (some measures have been blocked by the Senate for much longer).

Even after a change in fiscal policy has been approved, it takes time to implement. Suppose, for example, that parliament agrees to increase spending on infrastructure to create “jobs and growth”. It will probably take several months or more to prepare detailed plans for construction projects.

State or territory governments will then ask for bids from private construction companies. Once the winning bidders have been selected, they will usually need time to organise resources, including hiring labour, in order to begin the project.

Only then will significant amounts of spending actually take place. This delay may well push the spending beyond the end of the low point in the economy that the spending was intended to counteract.

Indeed, if the economy has recovered by the time the construction and related jobs come on board then the government spending will mean a shortage of labour in other parts of the economy and few or no new jobs (unless shortages are filled through migration).

Because the budget is a very difficult means of carrying out targeted fiscal policy, it’s become more important as a centrepiece for the government to set out its broad economic strategy – its goals and how to achieve them. But it seems that both major parties are failing even with this goal.

In recent years the view of most economists has been the need to reduce the structural budget deficit and the level of government debt. In 2016-17 net government debt stood at A$326 billion, and was forecast in last year’s budget to increase until at least 2018-19. There is also quite widespread acceptance that our tax system is in need of reform.

There are two glaring omissions from recent federal budgets of both major parties: any plan to significantly reduce the deficit any time soon, and any proposal to embark on meaningful tax reform.

The Rudd and Gillard governments will be remembered for Wayne Swan’s budgets, which consisted of new spending initiatives including the National Disability Insurance Scheme, the National Broadband Network, and the Gonski education funding reforms, but featured no plan to raise revenues to fund them and manage the huge subsequent debts.

Joe Hockey and Tony Abbott’s attempt in the 2014 budget to address government deficit and debt was regarded as a disaster, resulting in the demise of both as leading politicians. Morrison and Prime Minister Malcolm Turnbull are desperate not to make the same mistake, and this severely limits their capacity to do anything meaningful to tackle the deficit and debt issue.

The major problem with successive budgets is that they have not provided a cogent strategy for improving living standards, including addressing inequity for the most disadvantaged Australians, which can only be achieved through economic growth.

Growth entails taking materials, labour and capital to produce goods and services of greater value that people want at prices they are willing to pay. This is best done by the private sector and cannot arise from wasteful government expenditure, accumulating debt or fiddling at the edges with markets, through such things as changes to superannuation or housing finance.

Growth and jobs can only arise from value-adding activities and government policies which facilitate this such as reducing debt, promoting free trade, reducing restrictions on business and labour market reform. This is hard to do and far more difficult than easy options, which explains why we can expect little from the budget to address real reform.

Phil Lewis, Professor of Economics, University of Canberra

This article was originally published on The Conversation. Read the original article.

East Timor, war, coffee and Australia’s debt of honour



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Coffee beans picked from a crop in Timor-Leste.
United Nations Photo, flickr, CC BY

Heather Merle Benbow, University of Melbourne

Australian soldiers have long relied on an East Timorese hospitality epitomised by its coffee. The Conversation

The fond appreciation for the nation’s beans traces back to the second world war, where Dutch and Australian commandos – known collectively as Sparrow Force – engaged in guerrilla warfare against the Japanese in what was then known as Portuguese Timor.

The commandos were only intermittently supplied with army rations. They relied heavily on the assistance of locals to meet their basic needs, as well as scouring the landscape for fruit, nuts, vegetables and wild or feral animals.

The soldiers’ enemy, the Imperial Japanese Army, were also following a principle of “local procurement”, which more often than not meant forced requisition and looting.

A bag of coffee harvested from crops in Timor-Leste.
Janina M Pawelz, Wikimedia Commons

This conflict was contemplated by one Dan O’Connor, of no. 4 Australian Independent Company, over a mug of warm coffee. His musings reveal the central strategic role of food in the Battle of Timor:

As I sipped the hot coffee made from beans grown and roasted by the natives and flavoured in the mug with wild honey, my mind was running over the events of the last few months. […] Lately […] the Japs had become bolder and were moving out from the coast. They burned the villages and stole the food and the women. […] It was only a matter of time before we would have no food at all, […] no hope of survival.

The Japanese and Australians respectively razed villages and destroyed the crops and food stores of the Timor natives, as a means to gain a strategic advantage in the Battle of Timor.

The Timorese also traded with the Australian soldiers, who paid for their food in coins prized mostly for their “ornamental value”. There are stories of “natives” emerging unbidden from the forest bearing bananas, of eating with local Portuguese priests and of Timorese “maidens” clothed only in grass skirts bearing water for the soldiers.

However, the Timorese were sometimes reluctant to sell their food, which was interpreted as unfriendliness in one history of the company.

Then there are accounts of mischievous behaviour towards the Australians by the Timorese. A young boy, for example, who pretended to enjoy eating native “berries” encouraged an Australian soldier to try them:

I tried one, God [it blew] the top of my head off. It was those real hot chillies. He stood there giggling like anything.

Intercultural bonds

Food and drink are often the catalyst for intercultural encounters in wartime. As scholar Katarzyna J. Cwiertka has argued, the cultural meanings of food can be amplified in war:

…it can become a weapon, an embodiment of the enemy, but also a token of hope, a soothing relief.

It is for this reason that the debt of gratitude to the Timorese is remembered so strongly in the Australian Army.

As O’Connor recalled, the soldiers formed strong bonds with their native “helpers”, dubbed “criados”:

Without them life would not have been possible. Each soldier had one as his personal servant, friend and general assistant. […] The criados provided food, washed clothes, carried equipment and did every other task required of them. They did it in a happy, cheerful way. They were magnificent.

One Australian soldier, Bill Beattie, expressed deep shame at Australia’s abandonment of the East Timorese following the Indonesian invasion and Portugal’s effective withdrawal in 1975 – a sentiment shared by other returned servicemen and women, even today.

Among those who strongly identify with the Independent Company soldiers is a group of peacekeepers from the 6th Battalion of the Royal Australian Regiment, including Shannon French. He fondly recalls the cups of coffee proffered to his battalion while on a peace-keeping mission in East Timor in 2000, after the independence referendum:

The Timorese villages had been plundered and burnt to the ground. The locals had nothing, but they would come out to greet us with plastic cups. We would stop and they’d give us hot sugary coffee.

It was on a subsequent mission in 2012 that French and fellow soldiers Tom Mahon, Cameron Wheelehen and Tom Potter, decided to help the East Timorese sell their coffee in Australia. In the chaos after the Indonesian invasion, coffee crops in the region of Aileu were allowed to grow wild through the forest. Here, the Robusta and Arabica coffee crops interbred, thus creating the unique Hibrido de Timor blend.

Coffee being processed in Timor-Leste.
Janina M Pawelz, Wikimedia Commons, CC BY

French recalls slashing through the forest while on peacekeeping duties, oblivious to the damage he was doing to the coffee plants – to the peacekeepers, they were indistinguishable from forest undergrowth.

The four later formed the Wild Timor Coffee company. Their mission to source “organic, ethical and direct” traded coffee from the Timor region is an initiative co-founder Mahon called “a debt of honour thing”.

Two cafes have since been opened in Melbourne’s inner north; their walls adorned with pictures of WWII soldiers in Portuguese Timor, and their shelves filled with Timorese cakes made by Ana Saldanha, who fled East Timor in 1975. Their efforts have funded health clinics and education initiatives back in Aileu.

But the extent to which East Timor’s people are served by the cultivation of cash crops such as coffee – which has a notoriously low global price – remains to be seen.

What is clear, though, is that the hospitality of the East Timorese in times of conflict created intercultural bonds with the Australian military that have endured through more than half a turbulent century.

Heather Merle Benbow, Senior lecturer in German and European Studies, University of Melbourne

This article was originally published on The Conversation. Read the original article.

How Dutton comes out of dispute about Manus claim goes to the question of character


Michelle Grattan, University of Canberra

Peter Dutton has put his credibility in the frame by sticking to his claim about the role of an incident involving a young boy in triggering the Manus Island disturbance that saw Papua New Guinea defence personnel fire shots at the detention facility. The Conversation

Dutton’s well-publicised but strongly disputed allegation will be tested by the investigations being done by the PNG defence and police authorities, while Senate estimates in a few weeks should also provide a chance to probe it.

Dutton is a former policeman, which is just one reason why he should be held to the highest standards of accuracy in making a claim.

How Dutton comes out of this dispute about facts is particularly important, because it goes to the character of the conservative Liberal from Queensland who is touted as a possible future leader.

In notable contrast to the obvious tensions between Malcolm Turnbull and Treasurer Scott Morrison, the prime minister and his immigration minister are walking in lockstep. Dutton is at the heart of Turnbull’s attempt to win voters’ support with tougher policies on foreign workers and citizenship.

When Dutton last week was asked on Sky what he knew about the Good Friday violence he said: “There was difficulty, as I understand it, in the community. There was an alleged incident where three asylum seekers were alleged to be leading a local five-year-old boy back toward the facility and there was a lot of angst around that, if you like, within the local PNG community.”

Pressed on why there was this angst, he said: “Well because I think there was concern about why the boy was being led, or for what purpose he was being led away back into the regional processing centre. So I think it is fair to say that the mood had elevated quite quickly. I think some of the local residents were quite angry about this particular incident and another alleged sexual assault.”

But Manus Province police commander David Yapu rejected this version. He told Fairfax the boy, who he said was aged about ten, had been given fruit in the centre about a week before the violence.

“Then Wilson Security had to intervene and get him out from the centre. That had nothing to do with the latest incident involving soldiers,” Yapu said. “The child incident is unrelated.”

Earlier Yapu was reported to have said the soldiers’ drunken rampage was retaliation following a clash between navy personnel and asylum seekers who were playing soccer in the navy base.

When it was put to Dutton on Sunday that what he’d said wasn’t true, he retorted: “It is true. And the briefing that I’ve had is particularly succinct and clear … I can give you the facts in relation to it or you can take the Twitter version.”

Reference to “the Twitter version” was an obvious attempt to denigrate the alternative account. But that alternative came in the form of direct quotes from a local police commander.

Dutton told interviewer Barrie Cassidy that “there are facts that I have that you don’t”. Pressed on the source of his information he said: “I have senior people on the island. We also have obviously significant contacts with the governor and people of Manus.”

Let’s hope that the evidence-gathering speedily produces “the facts”, whether those facts contradict or back Dutton.

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Ministers should not be allowed to slip away from taking responsibility – as former immigration minister Morrison did over his wrong claims against Save the Children personnel. On the other hand, if Dutton is so certain he’s got the right story, he has every interest in seeing the proof out in public to back it.

Meanwhile at the weekend US Vice-President Mike Pence reiterated that the Americans will stick by the deal the Turnbull government did with the Obama administration to take refugees from Manus Island and Nauru. But Pence didn’t miss the opportunity to again register the Trump administration’s unhappiness with the deal. The honouring “doesn’t mean we admire the agreement,” he told his news conference with Turnbull.

Pence cast the honouring in firmly alliance terms: “The decision to go forward I think can rightly be seen as a reflection of the enormous importance of the historic alliance between the United States and Australia,” he said.

“And whatever reservations the president may have about the details of agreements reached by the prior administration, we’ll honour this agreement, out of respect for that enormously important alliance.”

The firm message-behind-the-message seemed clear: don’t forget we’re doing you a big favour.

Newspoll postscipt

Labor leads the Coalition 52-48% in Newspoll, compared with 53-47% three weeks ago. The Coalition’s primary vote remains at 36% in the poll, published in Monday’s Australian, while Labor has slipped from 36% to 35%, and the Greens from 10% to 9%. Pauline Hanson’s One Nation remains at 10%.

Malcolm Turnbull’s net satisfaction has improved from minus 29 points to minus 25; while Bill Shorten’s net satisfaction has gone from minus 22 to minus 20.

https://www.podbean.com/media/player/jw7bg-69e505?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Pence visit reassures that the US remains committed to the Asia-Pacific


File 20170423 22929 1f9zqg3
Mike Pence and Malcolm Turnbull meet at Admiralty House in Sydney.
AAP/Jason Reed

Tony Walker, La Trobe University

Viewed through the lens of a traditional relationship between close allies, all might have seemed well as US Vice-President Mike Pence and Prime Minister Malcolm Turnbull sprinkled emollient words on a media contingent gathered on the lawns of Sydney’s Admiralty House. The Conversation

Ferries traversed Sydney Harbour in the background, yachts tacked back and forth, and the sun shone. But that pastoral scene hardly shielded a troubled world beyond, and one that is weighing on the US alliance.

In the age of Donald Trump and “Trumpism” – defined by its unpredictability – Pence’s mission was to reassure an alliance partner the US remained committed to an Asia-Pacific presence, and America’s relationship with Australia in particular. Pence put it this way:

I trust that my visit here today on my very first trip the Asia-Pacific as vice-president of the United States and the president’s plans to travel to this region this fall are a strong sign of our enduring commitment to the historic alliance between the people of the United States of America and the people of Australia.

Importantly, from Turnbull’s perspective, Pence put his imprimatur on a refugee deal that would see asylum seekers on Nauru and Manus Island resettled in the US subject to severe vetting.

The plain vanilla former Indiana governor and long-term congressman – polar opposite of the flamboyant Trump – did a reasonable job in his efforts to calm concerns that might be held about a new administration’s commitment to the region.

His message was similar to those delivered on previous stops in Japan and South Korea. America would stay the course, and it would stand with its allies against threats to regional security. If anything, it would act more assertively in seeking to preserve Asia-Pacific peace and stability.

Pence made no reference to the previous administration’s “pivot” to Asia, or its commitment to broaden engagement in the region via diplomatic means. If there is a defining characteristic of the new White House in its early months, it is that the threatened projection of American power is back more overtly as a diplomatic tool.

Had former vice-president Joe Biden been standing on the Admiralty House lawns, his words of reassurance to an Asia-Pacific ally would not have been much different. But the context has shifted significantly – and so, too, has the rhetoric.

North Korea’s belligerence, its provocations, its prosecution of a potentially deadly game of bluff, its quirkiness, its threats to launch ballistic missiles against the west coast of the US and as far afield as Australia, all are hardly new. But what has changed are the players: or to put it more bluntly, one player in counterpoint to North Korean leader Kim Jong-un.

Trump’s arrival in the White House has added a new layer of unpredictability to a set of circumstances North Korea’s neighbours have lived with for many years – that country’s development of a nuclear weapons capability.

The world might regard Kim as a cartoonish figure. But the reality is that he presides over a country whose firepower could leave swathes of the Korean peninsula in ruins.

More than half-a-century after the end of the Korean war, the Korean peninsula remains on a hair trigger. The South Korean capital, Seoul, is in split-second range of the north’s artillery and missile batteries.

If a response to Syria’s use of chemical weapons against its own citizens provided the first significant foreign policy challenge for a new administration, North Korea’s bombast represents a test of a different order.

No responsible public official can afford to ignore such threats, whatever judgements might be made about that country’s endless displays of brinkmanship.

Speaking of brinkmanship, America’s allies would be foolish not to recalibrate their own expectations of American behaviour under a Trump administration. In this regard Australia is – or should be – no exception.

While Turnbull might have emphasised his fealty to the alliance, the reality is that the Asia-Pacific – or as Australian officials emphasise these days, the Indo-Pacific (to include India and the Indian Ocean that laps at our shores) – has to accept that regional security increasingly will depend on Chinese engagement, whether we like it or not.

Both Turnbull and Pence made it clear they were looking to Beijing to help lessen tensions on the Korean peninsula and bring North Korea to heel. China has proved reluctant to assert its influence over its neighbour, but indications now are the Chinese accept that it is in their interests to calm the situation.

China has taken several significant steps to put Pyongyang on notice, including turning back coal shipments.

If Chinese and US pressure proves able to calm current tensions – and even bring about a freeze on North Korea’s nuclear ambitions – this may come to be regarded as an historic moment in regional security. It may also be a possible forerunner to the development of more formalised regional security arrangements.

American media reported that Pence’s visit to Australia and other regional countries was prompted partly by concerns in Washington that relations needed to be smoothed to combat reservations about the Trump administration’s commitment to the region.

Trump’s decision to pull the US out of the Trans-Pacific Partnership agreement, his criticisms of China so-called “currency manipulation”, his threats to launch a trade war with China, his description of efforts to combat global warming as a “Chinese hoax”, and other intemperate statements have rattled traditional allies.

If the American embassy in Canberra had been paying attention to local media it would have reported back to Washington that there is a groundswell of opinion in Australia that would like to see the country reposition itself between its traditional ally and its most important economic partner.

Influential voices, including those of former foreign minister Gareth Evans, have been calling for less “reflexive” support for US policies. Opinion polls indicate the majority of Australians have a poor regard for Trump.

Whatever Pence and Turnbull may have said on that sun-filled day on the shores of Sydney Harbour, the world is changing fast and with it the context within which Australia interacts with its security guarantor. And perhaps just as importantly, with its principal economic partner.

Tony Walker, Adjunct Professor, School of Communications, La Trobe University

This article was originally published on The Conversation. Read the original article.