$89b shipbuilding plan is a major step forward – but sovereignty remains a problem


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The naval shipbuilding plan is undoubtedly a major step forward for industrial capability in Australia.
AAP/David Mariuz

Graeme Dunk, Australian National University

Australia’s long-awaited naval shipbuilding plan, released earlier this week, claims it is a national endeavour: The Conversation

… larger and more complex than the Snowy Mountains Hydro-Electric Scheme and the National Broadband Network.

Irrespective of this particular claim’s validity, the investment of A$89 billion for nine new frigates, 12 submarines and 12 offshore patrol vessels is a substantial commitment to Australia’s security. The plan is a comprehensive approach to establishing a continuous program for building these platforms in Australia.

Apart from the future introduction of these and other vessels into service, one of the plan’s key outcomes is a “sovereign Australian capability to deliver affordable and achievable naval shipbuilding and sustainment”. The development of a sovereign capability is stated as “the government’s clear priority”.

But what is sovereignty in this context? And is it attainable from the naval shipbuilding plan?

Two clear weaknesses

The plan has two interconnected weaknesses when it comes to sovereignty.

First, the Australian defence industry environment is dominated by companies whose parentage and ultimate control rest offshore. This is not necessarily a bad thing. But given the shipbuilding plan’s focus on Australian jobs and resources, it is a reality that needs confronting.

To that end one might have expected to see, both in this document and in earlier ones, a definition of Australia’s defence industry – what it is and, importantly, what it is not.

The UK’s 2005 description of its defence industry embraces the combination of local and offshore companies contributing to defence outcomes in terms of:

… where the technology is created, where the skills and intellectual property reside, where the jobs are created and sustained, and where the investment is made.

A similar definition for Australia would provide a foundation for sovereignty in the shipbuilding environment to be properly assessed. The plan suggests the Australian subsidiaries of offshore companies will be considered as sovereign without discussing how local control might be maintained, and how Australian sensitivities might be tackled.

The proposed definition for defence industry also highlights the second weakness of the shipbuilding plan: it is focused on building and sustaining the structural component (the “float” and “move” aspects), rather than the total capability the ship or submarine represents.

The lists of skills cited as necessary are those primarily associated with building and sustaining the structure. The shipbuilding plan gives scant coverage to the important combat system and weapons elements upon which the war-fighting capability rests.

The plan does not address the industrial capabilities necessary for the local maintenance and improvement of these ships. Access to the detailed design information for the combat and sensor systems in particular is required so that such systems can be upgraded locally if required. An offshore equipment supplier may not give the same priority to our needs.

The plan for naval shipbuilding in Australia says it will source many systems of the future frigate and other naval platforms from the US. However, the closest it gets to recognition of this reality in the context of sovereignty is that:

Australia’s alliance with the US, and the access to advanced technology and information it provides, will remain critical.

The plan therefore implies that sovereignty is sought for the “float” and “move” aspects of the naval capabilities, but not necessarily for the important “fight” aspects. This means the systems elements of ships and submarines will be tackled in some other context – outside the naval shipbuilding plan.

More than just ‘doing stuff’

The naval shipbuilding plan is undoubtedly a major step forward for industrial capability in Australia.

A successful implementation will provide significant benefits for the Navy in terms of force structure, for industry in terms of a long-term enterprise upon which to grow overall capability and capacity, for innovation, for workers in terms of continuity of effort, and for the development of shipbuilding-related STEM skills. These are all worthy outcomes.

But sovereignty is more than just “doing stuff” in the country.

If the plan really wanted to tackle sovereignty, it should have provided a foundation on which aspects of industrial and operational sovereignty could be properly assessed, prioritised and managed. It would also have addressed the systems aspects of ships, rather than just the structure.

Graeme Dunk, PhD Candidate, Australian National University

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

Ratings agency S&P keeps Australia’s AAA rating but doubtful about government’s surplus timetable



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Shadow Treasurer Chris Bowen told the National Press Club that a Labor government would “show the ratings agencies the quality of our plans.”
Mick Tsikas/AAP

Michelle Grattan, University of Canberra

Standard and Poor’s Global reaffirmed a negative outlook and is questioning the government’s projection about when the budget will return to surplus, but has still maintained Australia’s AAA credit rating. The Conversation

The agency’s maintenance of the AAA credit rating following last week’s budget will be a relief to the government, but its detailed outlook is less than confident.

The initial negative outlook from the agency was made in 2016. In continuing it, it points to “risks to the government’s fiscal consolidation plan and risks to the economic, fiscal, and financial stability outlook should the rapid growth of credit and house prices continue”.

The budget projects a return to surplus in 2020-21. But S&P Global says it continued to think surpluses “could remain elusive beyond fiscal 2021”.

“The balance of risks to government revenues remains negative. On the policy front, enacting further savings or revenue policies could remain a challenge, given the Senate’s unwillingness in recent years to legislate many of the government’s fiscal policy measures or doing so after considerable delay.”

“This dynamic, which could continue, presents further downside risk to the outlook for fiscal balances.”

Craig Michaels, director of sovereign & public finance ratings at S&P Global was blunt: “We have seen governments forecast surpluses for many years now and they haven’t materialised. They’ve continued to be pushed back. So we don’t think further pushback on the surplus target is consistent with the AAA rating here on in.”

“We will continue to assess the likelihood or otherwise of whether the government will reach a balanced or surplus budget by 2021 and that will have a large bearing on whether we leave the AAA rating where it is or whether we downgrade it,” he told the ABC.

The S&P Global report cites the potential for low wage growth and low inflation as a “downside risk” for the projections on getting to budget balance. In the wake of the budget many commentators threw doubt on the budget’s wage growth projection – to get to more than 3% – as likely to be too high.

Noting that the outlook has been negative since July last year, S&P Global warns:
“We could lower our ratings within the next two years if we were to lose confidence that the general government fiscal deficit will revert into surplus by the early 2020s.”

S&P Global says “a strong fiscal position is required to offset Australia’s weak external position. It is also needed to allow for a strong buffer to absorb the fiscal consequences if the ongoing boom in the credit and housing market were to abruptly end.”

The report expresses concerns about the financial stability risks in the housing market in Sydney and Melbourne.

S&P Global highlights the debt problem. “Australia’s high level of external indebtedness creates a high vulnerability to major shifts in foreign investors’ willingness to provide capital”, it says. “We consider that strong fiscal performance and low government debt are important to help ameliorate this risk.”

Scott Morrison tweeted:

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Responding to the S&P Global report, Shadow Treasurer Chris Bowen said that if he became treasurer he would talk to the ratings agencies early in the term, taking them through an ALP government’s plans, which would also be clear before the election. “We’ll do what is necessary to work with the ratings agencies and show the ratings agencies the quality of our plans.”

Bowen said the budget showed new record debt for the next three years, a deficit for 2017-18 which was 10 times larger than was predicted in the Coalition’s first budget, and gross debt equivalent to A$20,000 for every man, woman and child in the country.

https://www.podbean.com/media/player/55eic-6aa7da?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

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

Research shows the banks will pass the bank levy on to customers


Fabrizio Carmignani, Griffith University and Ross Guest, Griffith University

Studies of European countries show that bank taxes similar to the 0.06% bank levy introduced by the government in the 2017 federal budget will be largely borne by customers, not shareholders. The Conversation

The levy could also make the banking system more, rather than less risky. The fact that a bank is asked to pay the levy is a confirmation that it is “too big to fail”. This could in turn encourage riskier behaviour. The levy might also trigger a higher probability of default by reducing a bank’s after-tax profitability

But it is difficult to say whether banks will pass the levy on to customers by increasing their loan rates, fees or both.

In its response to the levy, NAB confirmed it will not just be borne by shareholders:

The levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry. This includes NAB’s 10 million customers, 570,000 direct NAB shareholders, those who own NAB shares through their superannuation, our 1,700 suppliers and NAB’s 34,000 employees. The levy cannot be
absorbed; it will be borne by these people.

Aware of this problem, the government has asked the Australian Competition and Consumer Commission (ACCC) to undertake an inquiry into residential mortgage pricing. The ACCC can require banks to explain changes to mortgage pricing and fees.

When banks pass on these taxes

The bank levy is similar to taxes recently introduced by some G20 economies, including the UK. These had the dual purpose of raising revenues and stabilising the balance sheets of large banks in the aftermath of the global financial crisis.

An analysis of bank taxes in the UK and 13 other European Union countries shows that the extent to which taxes are passed on to customers depends on how concentrated the banking industry is.

The more the industry is dominated by a small number of banks, the greater the share of the tax that is passed on to customers and the less that is borne by shareholders. In more concentrated industries customers have relatively fewer alternative options and therefore tend to be less mobile across banks. This in turn gives the large banks greater market power to increase interest rates and fees without losing customers.

Australia’s banking industry is quite concentrated. In fact, we’re around the middle of the pack of OECD countries, much higher than the US, but lower than some European countries. From this we can surmise that at least some of the cost of the bank levy here will be passed on to borrowers through higher loan rates, fees or both.

An IMF study of G20 countries suggests that a levy of 20 basis points (i.e. 0.2%, approximately three times higher than the Australian government’s bank levy), could lead to an increase in loan rates of between 5 and 10 basis points. This means that the monthly repayment on a loan (assuming an initial rate of 5.5%) would increase by approximately A$6 for every A$100,000 borrowed.

The IMF also found that the bank levy doesn’t just hit customers. A 0.2% levy would reduce banks’ asset growth rate by approximately 0.05% and permanently lower real GDP by 0.3%.

The impact on customers

If the banks pass on the levy to customers then it becomes just another indirect tax, similar to the GST. The question then is whether this is regressive – does it have a greater impact on those on lower incomes than higher incomes.

Lower income earners are likely to borrow less than higher income earners. However, lower income earners are also less able to bear an interest rate increase. They are also more likely to be excluded from borrowing when the cost of borrowing increases.

In this sense, then, if the bank levy is passed on to customers it could become a barrier to home ownership for some lower income borrowers.

More generally, if the value of bank transactions is a higher proportion of low incomes than of high incomes, then the bank levy would operate as a regressive tax and contribute to sharpening (rather than smoothing) inequalities.

Both of these would be unintended, but undesirable, consequences of the levy.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University and Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

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

The Belt and Road Initiative: China’s vision for globalisation, Beijing-style



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World leaders, led by Chinese President Xi Jinping, meet for the Belt and Road Forum in Beijing.
Reuters

Benjamin Habib, La Trobe University and Viktor Faulknor, La Trobe University

China’s Belt and Road Initiative (BRI) is a multifaceted economic, diplomatic and geopolitical undertaking that has morphed through various iterations, from the “New Silk Road” to “One Belt One Road”. The Conversation

The BRI imagines a US$1.3 trillion Chinese-led investment program creating a web of infrastructure, including roads, railways, telecommunications, energy pipelines, and ports. This would serve to enhance economic interconnectivity and facilitate development across Eurasia, East Africa and more than 60 partner countries.

First proposed in September 2013, it is the signature foreign policy initiative of Chinese President Xi Jinping. It is a project of unprecedented geographical and financial scope.

BRI has two primary components: the overland Silk Road Economic Belt (SREB), and the sea-based 21st-century Maritime Silk Road (MSR). Together, they form the “belt” and “road”.

SREB’s overland infrastructure network encompasses the New Eurasia Land Bridge and five economic corridors: China-Mongolia-Russia; China-Central Asia-West Asia; China-Pakistan; the China-Indochina peninsula; and Bangladesh-China-India-Myanmar. The SREB’s connective sinews will be high-speed rail and hydrocarbon pipeline networks.

The MSR is focused on developing key seaports that connect to land-based transportation routes.

China has been at pains to emphasise the co-operative nature of the initiative and its objective of “win-win outcomes”. In his address to the Belt and Road Forum for International Co-operation in Beijing, Xi framed the BRI in terms of “peace and co-operation”, “openness and inclusiveness”, “mutual learning”, and “mutual benefit”.

Yet behind the rhetoric of harmony and mutuality lies a substantive strategy for growing an emerging China-led operating system for the international economy. This could potentially succeed the US-led Washington Consensus and Bretton Woods system.

What China gets from the BRI

BRI projects are likely to increase China’s economic and political leverage as a creditor.

China has established the multilateral Asian Infrastructure Investment Bank (AIIB) and the $40 billion Silk Road Fund. These are financial vehicles for BRI infrastructure projects, yet the vast bulk of funding to date has come from China’s big state-owned investment banks.

The prospect of access to Chinese financial largesse to fund much-needed infrastructure investments has attracted attention from many prospective partner nations. Many of these appreciate the minimal political conditionalities that come with Chinese finance, in comparison to finance on offer from the International Monetary Fund, the World Bank, and the Asian Development Bank.

The BRI has been viewed as a way for China to productively use its enormous, $3 trillion capital reserves, internationalise the renminbi, and deal with structural issues as its economy navigates the so-called “new normal” of lower growth.

Perhaps foremost among these is the issue of industrial over-capacity. Having maxed out investment-driven growth through a frenzy of domestic infrastructure building following the 2008 global financial crisis, the BRI represents an international stimulus package that will utilise China’s idle industrial capacity and safeguard jobs in key industries such as steel and cement.
This is a significant political dividend for the Chinese government. The Chinese Communist Party’s legitimacy rests on maintaining economic growth and improving people’s standard of living.

In relation to energy security, the BRI will assist China in diversifying its energy sources through greater access to Russian and Iranian oil and gas. This will be achieved by linking with pipeline networks from Russia and Central Asia.

By investing in pipelines from Gwadar, on the coast of Pakistan, to Xinjiang, and from coastal Myanmar to Yunnan, China also can diversify its transportation routes for maritime energy supplies. This reduces its vulnerability to energy supply disruption at maritime choke-points in the Strait of Malacca and the South China Sea.

The establishment of port facilities in the Indian Ocean will also be advantageous to the emerging blue-water capability of the People’s Liberation Army Navy. This would assist in keeping vulnerable critical sea lines of communication open for maritime energy supplies from the Middle East.

Collectively, these measures could reduce the ability of the US Navy to blockade China’s energy supply routes in any future conflict scenario.

Geopolitical implications of the BRI

After more than a decade of conjecture about China’s increasing international assertiveness, the Chinese government has now clearly signalled its intention to assume a more prominent global leadership role through the BRI.

China is aiming to spur a new round of economic globalisation, but in a changed international order that it has a pivotal role in shaping.

The Asian Infrastructure Investment Bank, the BRICS New Development Bank, and the Regional Comprehensive Economic Partnership are the “software of integration” – the financial pillars of trade and investment in this vision.

The BRI is the development vehicle – the “hardware of trade and investment” and the final pillar on which China’s claim to global leadership rests.

Somewhat paradoxically, given the investment focus on hydrocarbon pipelines, the BRI also represents the vehicle through which China is likely to shape the contours of the emerging international post-carbon economy. The Paris Agreement in the UN Framework Convention on Climate Change is a keystone document in this respect.

A combination of the climate emergency and market behaviours are making fossil fuel energy production increasingly uneconomic. This has spurred an accelerating transition away from fossil fuels and toward renewable energy generation.

China is a world leader in green and alternative energy technologies. Through the BIR it is well-placed to be the dominant player in facilitating the transition and roll-out of renewable energy infrastructure across Eurasia. This is especially so since the Trump administration has ceded American influence in international climate politics through its repudiation of proactive climate policies.

Leadership on international climate action is one area in which China can develop significant soft power cache, particularly with developing countries of the global south.

China’s BRI announcement is also reflective of the relative decline of the US as the world’s pre-eminent power. A declaration of intent as bold as that made in Beijing over the weekend at the Belt and Road Forum for International Co-operation would have been inconceivable prior to the 2016 US election.

The Trump administration’s clumsy foreign policy manoeuvrings have damaged US prestige, weakened the integrity of a liberal international order already under duress, and opened a window for China to stake its claim.

The BRI also signals a deepening of the Sino-Russian strategic partnership. This is based on a complementary supplier-consumer energy relationship and a mutual antagonism to the US.

However, not all regional countries see the BRI as a boon. The Indian government has expressed reservations over the BRI’s China-Pakistan Economic Corridor and China’s Indian Ocean ambitions.

The BRI now ups the ante for regional middle powers like Australia that have deftly attempted to hedge between the US and China. Australia’s foreign policymakers must weigh up the case for engaging with the BRI and having a seat at the table as China’s vision takes shape.

Benjamin Habib, Lecturer, School of Social Sciences, La Trobe University and Viktor Faulknor, PhD Candidate in International Relations, La Trobe University

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

Australia risks missing out on China’s One Belt One Road


Alice de Jonge, Monash University

Australia is late to the party in only recently expressing real interest in China’s One-Belt, One-Road initiative (OBOR). And if Australian businesses don’t take advantage of the opportunities available in this project now, there are plenty of regional competitors that will take their place. The Conversation

Australia became an unofficial OBOR partner in 2016, with the launching of a public-private NGO known as the Australia-China OBOR Initiative (ACOBORI), less than a year after the signing of the China-Australia Free Trade Agreement.

Australia has so far declined China’s offer to formally link the Northern Australia Project to OBOR. However, more recently Trade Minister Steve Ciobo, has said he sees merit and opportunities for collaboration (particularly around the northern Australia initiative) arising from OBOR, adding the caveat that decisions about such collaborations would be taken “on the basis of what is Australia’s national interest”.

Following the old silk road

China’s One-Belt, One-Road initiative (OBOR) comprises a land belt and a sea road. The land belt connects China’s underdeveloped hinterland to Europe, traversing 65 countries across the land terrain of the ancient Silk Road land route. The sea leg comprises a network of railways and ports crossing an ocean route that connects Europe with the Middle East, Africa and Southeast Asia.

OBOR has significant backing in China, including from the China-led Asia-Infrastructure Investment Bank (AIIB).

OBOR is backed not just by the AIIB, but also by two other recent development finance initiatives – the Silk Road Infrastructure Fund and the New Development Bank. The infrastructure fund is made up from Chinese foreign exchange reserves and will act like a Chinese sovereign wealth fund. The bank was established by the BRICS nations (Brazil, Russia, India, China and South Africa) in 2014.

For the government, OBOR provides a policy tool for channelling investment from China’s wealthy seaboard provinces to the under-developed central and western regions. It channels China’s investment into projects that will have longer-term benefits, and not just into assets that are vehicles for parking hot money. All at a time when China is seeking to curb the flight of money from the country.

Australian business involvement

There are many risks and challenges to be faced in such a vast initiative as OBOR – with its cross-border projects involving a variety of different countries, each with its own historical baggage and current preoccupations.

An inaugural ACOBORI report identified a number of established and emerging sectors of opportunity for Australian industry arising from OBOR. Both inbound and outbound trade and investment with China can, importantly, pave the way for greater diversification of the Australian economy.

University of Melbourne affiliate, Asialink, identifies opportunities in sectors such as: agriculture, financial and legal services, education, tourism, healthcare, energy, architecture engineering and planning expertise.

The Australian services sector has so far demonstrated the keenest interest in OBOR, especially in finance and law. The list of those already involved include three of the big four banks, law firms King Wood and Mallesons and Minter Ellison, and global engineering consulting firms Worley Parsons, SMEC and Norman Disney & Young.

It’s the smaller firms and those in challenged sectors (particularly manufacturing) that appear less willing to investigate the risks and opportunities. This isn’t helped by the Australian government, which appears to be torn between a fear of Chinese influence and a desire not to miss out on potential opportunities for lucrative involvement in OBOR projects.

There are two key reasons why Australia needs to remain involved in both the AIIB and OBOR. The first is the risk of missing out if Australian businesses don’t take advantage of the opportunities available.

Foreign firms are already taking advantage of the situation. For example, Hutchinson Ports, controlled by CK Hutchison Holdings of Hong Kong’s richest man Li Kashing, already operates ports at 22 locations in 18 countries along the OBOR route. Hutchinson Ports is planning to start operations in another three countries along the route in 2017, and enlarge capacities of existing terminal facilities to ride on growing demand.

At the moment researchers describe the situation surrounding China’s OBOR as “contested multilateralism”. This is where states and businesses use new multilateral institutions to challenge established institutions, rules, practises or missions.

The AIIB has been seen as a challenge to the established institutions of the (US-dominated) World Bank and (Japan-dominated) Asian Development Bank. China’s OBOR initiative can similarly be seen as a challenge to the dominance of US and European investment presence in the region.

In such a world, clever businesses are not seeing any need to choose sides. So far as possible, they are playing the field; taking advantage of opportunities as they arise, all the while keeping careful track of changing risks.

The second reason why Australian businesses need to remain actively engaged, is to ensure that the country is in a position to influence the longer-term future of the region. Australia should be using its influence to emphasise the potential for OBOR initiatives to help achieve the sustainable development goals including reducing hunger, poverty and inequality, to name a few.

Alice de Jonge, Senior Lecturer, International Law; Asian Business Law, Monash University

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

The budget is the government’s Plan B, but what’s Plan C if polls stay bad?



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Scott Morrison addresses the media on Sunday.
Julian Smith/AAP

Michelle Grattan, University of Canberra

The government inoculated itself against the post-budget polls. Budgets don’t produce bounces, people said. The Conversation

True for the most part – though there were Newspoll bounces (three points or better) in 1996, 1999, 2000, 2009, and 2012.

Nevertheless the fact that the first four post-2017 budget polls were all bad must have been a disappointment for Malcolm Turnbull. Newspoll and Fairfax-Ipsos on Monday both had the Coalition trailing Labor 47-53%; on Friday two ReachTEL polls, for Sky and Channel 7, had it behind 47-53% and 46-54% respectively.

Given that polling has found that the main budget measures are in themselves popular – from which Turnbull appears to be taking heart – the government might have hoped for something better in the voting results.

“Polls are not news,” Turnbull told a news conference on Monday, though he admitted to John Laws: “I do take notice of the polls naturally”. His throwaway “not news” line just invited a rerun of the clip from the day he challenged Tony Abbott, when he pointed to the Coalition losing 30 Newspolls on the trot. This week marks his loss of a dozen of them in a row.

Accepting, however, that bounces are not the norm, the Coalition backbench will be holding its collective breath in coming months.

Treasurer Scott Morrison said Australians will be absorbing the budget “over time”. From the government’s point of view, he’d better be right, and they will need to absorb it positively.

If there is not a clawback for the Coalition later this year – and of course factors other than the budget will be feeding into public opinion – things will be looking pretty dire. Some predict Turnbull’s leadership will be in the frame unless the numbers improve; on the other hand, another change would be extremely hard.

Budgets disappear quickly but not before an intense selling effort. On Monday night Morrison was mixing it at a Sky News forum on the New South Wales central coast, where the audience ranged from One Nation supporters and the party’s NSW senator Brian Burston to local Labor MP Liesl Tesch, who scored a question.

Morrison was tackled on debt, housing (at length), the banks, immigration and identity politics. A woman bluntly told him his reference to “mum and dad investors” in the property market was “ludicrous – they are all investors”. A man who described himself as editorial cartoonist to Mark Latham’s Outsiders declared the government had shifted too far to the left and wanted to know “when we’ll get the government we voted for”.

As he’s done in and since the budget, Morrison stressed eschewing ideology and just “getting things done”. The Liberals believed in investing in education and sustainable services, he said; the difference between a Liberal and Labor budget was “the Liberal budget is paid for”.

Morrison reiterated that the banks should absorb the levy the budget has placed on them. The audience thought it would be passed on – something Turnbull admitted earlier in the day the government could not actually stop, although “there are plenty of factors that will inhibit them from doing so”.

For those watching the Liberal Party’s internals, one of the notable reaction to the budget has been Abbott’s. Given that, at its core, the 2017 budget is about trashing the remnants of the 2014 Abbott-Hockey effort, one might have expected him to be much more critical, though his words have had an edge.

He said on 2GB on Monday (in the spot formerly occupied by Morrison): “We would have liked to have had a savings budget. The Senate doesn’t like savings budgets as they showed in 2014, so instead we’ve got a taxing budget but this is the best that the budget can do in these circumstances.”

In contrast, his former chief-of-staff, Peta Credlin, has been bitterly critical, saying on Sky “the budget is about the Liberal Party junking everything that it has stood for”.

One assumes Abbott’s views are much stronger than he is expressing. So why is he being careful, when often he’s anything but?

Credlin said she thought “he’s trying hard not to be accused … of fuelling an anti-Malcolm sentiment”.

If those polls don’t turn around, Abbott doesn’t want people being able to point fingers of blame at him. He’d been keen for all the responsibility to be squarely on the shoulders of the prime minister and his treasurer.

The government has been candidly admitting that this budget, so out of character for a Coalition government, is not its preferred choice. In other words, it is Plan B. But if Plan B doesn’t help do the trick with the polls, it is not clear what Plan C would be.

https://www.podbean.com/media/player/55eic-6aa7da?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

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

Shifting the tax burden to middle-income earners will undermine jobs and growth


Patricia Apps, University of Sydney

The government’s idea of raising the Medicare levy, while also removing the 2% budget deficit levy on incomes above A$180,000, is less “transformational” and more signature Liberal policy. It shifts the tax burden towards middle income earners, as opposed to Labor’s plan to direct higher tax rates towards higher income earners. The Conversation

Rather than introducing a simple flat rate rise of 0.5% in the marginal tax rate across all taxpayers, the government has chosen to increase the Medicare levy. The reason lies in the fact that the levy contains the equivalent of a low-income tax offset due to the phasing out of the low-income exemption.

For example, in the current financial year, the thresholds for the phasing out of the Medicare levy exemption is A$21,665 for singles and A$36,541 (plus A$3,356 for each dependent child/student) for families. At these thresholds, tax rates rise by the rate of the withdrawal of the exemption, which works out to be 8% (calculated as 10% less the 2% Medicare levy rate).

In the case of a two-child family, this means an 8% rise in the marginal tax rate at an income from A$43,253, to an upper income limit of A$51,803. If a Medicare levy increase of 0.5% were introduced in the current tax year, the upper income limit for the higher marginal tax rate would rise to A$54,066.

In combining a rise in the Medicare levy with the removal of the budget deficit levy, the government is therefore proposing a rise in marginal tax rates across a wide band of middle incomes and a marginal tax rate cut for the top.

This direction of tax reform is a continuation of the incremental shift in the overall tax burden towards middle income earners over recent decades. And because the threshold for the Medicare levy exemption is based on family income, the reform will reinforce the move towards higher effective tax rates on low income second earners in a family.

This shift in the tax burden from top to middle income earners, and to middle income families, will undermine aggregate demand and, in turn, “jobs and growth” in the future.

In contrast to the government’s policy, Labor’s policy limits the rise in the Medicare levy to incomes above the top two bracket points and retains the budget deficit levy. Raising taxes on top incomes is not only a fairer policy, but a more efficient one in the conventional economic sense.

The impact of taxes on hours worked declines as earnings get higher, and has close to no effect on the hours worked by those with top incomes. And by avoiding higher taxes on second family earners, Labor’s policy should have a less negative effect on second earner hours of work and therefore the tax base.

The government’s and Labor’s tax reforms therefore represent very different policies.

Patricia Apps, Professor of Public Economics, Faculty of Law, University of Sydney

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

Don’t be fooled, the Medicare Guarantee Fund provides no real guarantee



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The Medicare Guarantee Fund appears to be no more than an accounting trick.
from shutterstock.com

Stephen Duckett, Grattan Institute

Treasurer Scott Morrison pulled a health-related rabbit out of his hat on budget night, announcing the government will “guarantee” the future of Medicare. The Conversation

It will do this by allocating revenue from the recently increased (from 2% to 2.5%) Medicare levy, after paying for the National Disability Insurance Scheme (NDIS), into a Medicare Guarantee Fund.

The government will then cover the shortfall to cover the costs of Medicare – defined in these budget announcements as a combination of expenditure from the Medicare Benefits Schedule (MBS) and Pharmaceutical Benefits Scheme (PBS). In Morrison’s words:

Proceeds from the Medicare levy will be paid into the fund. An additional contribution from income tax revenue will also be paid into the Medicare Guarantee Fund to make up the difference.

Based on the sketchy information so far available, this fund appears to be no more than an accounting trick. The size of the fund will be determined each year based on projected MBS and PBS expenditure. The balancing item, which is the extra proportion of non-NDIS revenue, will also be adjusted each year in line with those expenditure projections.

The guarantee part is that only the MBS and PBS expenditures can be paid from the fund, “by law”. This might sound good, but don’t be fooled. The Medicare Guarantee Fund is nothing more than a rebadging exercise: it changes the badge on a policy in the hope people might think it is a new policy.

It merely provides an additional line in the budget papers, supplementing information that was already there for MBS and PBS expenditure, albeit separately. And by defining Medicare as MBS and PBS expenditure, the government has seamlessly airbrushed public hospitals out of the picture.

What is Medicare?

Until budget night this week, most people would have thought of Medicare as the medical services and public hospital scheme, and probably still do.

When Medicare was introduced in 1984, it changed funding arrangements for medical services and public hospitals, removing or reducing financial barriers to access to these services. It did not touch PBS arrangements.

It may now be appropriate to add the PBS as a third component of Medicare, as it is about access to health care. But the PBS should be an addition to how Medicare is defined. It shouldn’t be used to airbrush public hospital access out of any Commonwealth definition of Medicare.

To put it more simply, the Medicare Guarantee Fund does not include the Commonwealth’s contribution to public hospital funding. But it does include the PBS, adopting a unique and idiosyncratic definition of Medicare.

The Medicare Guarantee Fund is being created using a partial statement of Medicare spending: if the public were to assume the Medicare Guarantee Fund is purely about a public commitment to Medicare, they would be misled.

So despite Morrison’s claims the fund will provide “transparency about what it really costs to run Medicare”, Medicare funding will actually be less transparent.

What does the fund guarantee?

The government probably hopes the Medicare Guarantee Fund will be its armour against a revised Mediscare campaign, like the one Labor ran before the 2016 election. The word “guarantee” linked with “Medicare” sounds good, costs nothing and does not bind the government in any way. But it may be enough to ward off the Mediscare vampires.

Mediscare resonated in 2016 because of the 2014 budget decisions. These were seen as a breach of trust as they were policies that had been explicitly ruled out in the previous election campaign.

The controversial 2014 budget proposals aimed to reduce Commonwealth expenditure by shifting costs onto consumers and onto states. One way of doing this was through co-payments that required patients to make an out-of-pocket payment when they see a doctor.

Another cost-shifting policy was the Medicare rebate freeze, which froze MBS rebates for visits to doctors at 2013 levels, despite inflation since then which has been tracking at around 2% a year. Since rebates are also paid to consumers, this was another example of a consumer cost shift, although the burden of this strategy probably fell on providers, particularly general practitioners.

Some of the 2014 changes (like the co-payment) required legislation to implement, while others (like the rebate freeze) could be implemented by administrative action without requiring parliamentary approval.

Importantly, none of the changes that required legislation were successful. The only changes in the 2014 budget that were eventually implemented were the ones that didn’t require legislation, such as the rebate freeze and draconian public hospital budget cuts. These tore up a previous agreement under which the Commonwealth matched cost increases in public hospitals.

Even these two measures have now been partially wound back – the hospital cuts before the 2016 election, and the rebate freeze in the 2017 budget.

What should a Medicare guarantee look like?

A Medicare guarantee worth its salt would be one that protects the public from the administrative assaults of the 2014 budget. This would involve enshrining in legislation the Commonwealth-state health care agreements – as well as the “partnership” payments, which are other Commonwealth grants to the states for health care – and introducing automatic indexation of Medicare rebates.

The Medicare Guarantee Fund as proposed in the 2017 budget does not do this. It provides no guarantee of policy stability, no guarantee of additional funding, and no guarantee that a future budget will not tear into the Medicare fabric in the way that characterised the 2014 debacle.

Stephen Duckett, Director, Health Program, Grattan Institute

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

Budget 2017: welfare changes stigmatise recipients and are sitting on shaky ground


Peter Whiteford, Australian National University

Some of the budget changes on welfare appear to be about sending the message that receiving welfare is undesirable. Whether these changes actually reduce social security spending and encourage independence to any significant extent remains to be seen. While the 2014 rhetoric of “lifters” and “leaners” may have been dispensed with, the dichotomy between “them” and “us” remains an underlying signal. The Conversation

There’s actually little current evidence of an unsustainable growth in spending on social security and welfare. So it begs the question as to why these measures are needed.

One of the areas attracting the most controversy is the focus on payments for people of working age, particularly the unemployed and lone parents. Some of these measures appear to be more about signalling a stigmatising approach to welfare than identifying what works most effectively.

For example, “a commitment to reduce social harm in areas with high levels of welfare dependency,” will continue through the expansion of the Cashless Debit Card to two new locations and an extension of Income Management for a further two years to June 2019. As academic Eva Cox has pointed out, the official evaluations of Income Management didn’t find evidence of significant changes as a result of the policy, even on some its key objectives including changing people’s behaviours.

Then there’s a new approach to compliance for job seekers, a demerits points phase will be followed by a “three strikes” phase to engage with welfare recipients early and prevent them from incurring financial penalties for not meeting their obligations.

The government has also signalled that it will promote “self-reliance before welfare” through changes to the liquid assets test. Currently, there is a waiting period for people making a new claim for Newstart Allowance, Sickness Allowance, Youth Allowance, or Austudy of between one and 13 weeks. It applies if claimants have funds that are equal to or more than A$5,500 for single people with no dependants, or A$11,000 for those who are partnered or single with dependants.

From September 2018, the maximum Liquid Assets Waiting Period will double from 13 to 26 weeks when a claimant’s liquid assets are equal to or exceed $18,000 for singles without dependants or $36,000 for couples and singles with dependants – that is, people with savings above these levels may have to wait up to six months before receiving payment.

Stigmatising welfare recipients, but at what cost?

The government appears to be implementing a number of the substantive recommendations of the 2015 McClure Review of the Welfare System. In particular, from March 2020, the government will introduce a new, single “JobSeeker Payment”, which will progressively replace a number of payments such as the Newstart Allowance, Sickness Allowance, Wife Pension and Partner Allowance.

While this is presented as simplifying the system, over 99% of people will have no change to their payment rates. The government expects there will be around 800,000 people receiving Newstart at the time of the change and between 15,000 and 20,000 receiving all other payments, to be combined into the new payment.

Work requirements for the unemployed will also increase. Jobseekers will also have to spend more time looking for work or working for the dole – around 270,000 people aged between 30 and 49 years of age will be forced to spend 50 hours a fortnight. That’s 20 hours more than they do currently. This is despite a recent OECD report finding that Australia already has the heaviest set of obligations on the unemployed of seven countries.

In the government’s new approach to job seekers, they accrue demerit points for failing to turn up or being intoxicated. Once four demerit points are incurred over a six-month period, they will be assessed for the next phase. This involves escalating financial penalties for each additional failure; with the first strike leading to a loss of 50% of a fortnightly payment, the second strike leading to a loss of 100% of a fortnightly payment, and the third strike resulting in the cancellation of payment with a four-week exclusion from re-applying.

The rhetoric of “three strikes” (and you’re out) is clearly derived from changes in criminal sentencing.

Another of the more striking initiatives in the budget was the announcement that from 2018, 5,000 Newstart Allowance and Youth Allowance claimants, in two trial locations, may be subject to randomised drug testing for cannabis, methamphetamine and ecstasy, as a precondition of their welfare payment.

Job seekers who test positive will be placed on welfare quarantining to reduce the cash available to spend on drugs. After an initial positive test, the recipient would have further random drug tests, a penalty will only be applied for failing to comply with a test request. It’s notable that the cost of this measure is classified as commercial-in-confidence in the budget papers and has not been published.

In a related initiative, the government will close “loopholes” which allow welfare recipients to be exempt from job seeker requirements solely due to drug or alcohol abuse. The government estimated that because of this 11,000 exemptions annually would no longer be granted. This measure will cost A$28.8 million to implement over four years.

From July 1, 2017, people will also no longer be able to qualify for Disability Support Pension on the basis of their substance abuse alone. It’s estimated by the government that 450 fewer people will be granted Disability Support Pension each year due to this measure, saving about A$22 million over five years.

But the testing of welfare recipients doesn’t end there, from January 2018, a stronger “relationship verification process” for existing single parents will ensure people are not getting higher income support payments by claiming to be single when they are not. From September 2018, people applying for the Parenting Payment (single) or single parents claiming Newstart Allowance will be required to have a third party sign a new form verifying that they are in fact single. Penalties of up to 12 months in prison may be applied to referees – presumably families or friends – who provide a false declaration.

There doesn’t seem to be much concrete evidence for the effectiveness for all these types of measures.

An Australian Institute of Health and Welfare report in 2013 did report that use of illicit drugs was more prevalent among the unemployed. It reported people who were unemployed being 1.6 times more likely to use cannabis, 2.4 times more likely to use meth/amphetamines and 1.8 times more likely to use ecstasy than employed people.

But the same report notes that people with the highest socio-economic status were more likely to consume alcohol in risky quantities and to have used ecstasy and cocaine in the previous 12 months than people with the lowest socio-economic status. It also appears these figures don’t control for differences in the demographic profile of the unemployed and those in paid work.

Welfare quarantining policies of this sort have been tried in the United States in recent years. According to the National Council of State Legislatures at least 15 American states have passed legislation regarding drug testing or screening for public assistance applicants or recipients.

Reports of the effectiveness of this testing vary widely.

In the United States, a 2011 review by the federal Department of Health and Human Services estimated the prevalence rate of substance abuse among US welfare users ranged between 4% and 37%. However, a review by US academics in 2005 found substance abuse disorders are less common among welfare recipients there than other serious barriers to self-sufficiency (such as physical health, poor academic skill and transportation difficulties, among a range of factors). These academics argued widespread substance abuse is not a major cause of continued economic dependence.

Earlier research pointed out that in the results of drug testing of welfare recipients there was a large group of “false positives” with no apparent disorder; and that drug-testing could not distinguish “false negatives” who may may be alcohol dependent or experiencing psychiatric disorders and need assistance.

There have also been a number of court cases in the US about the constitutionality of these drug tests when applied randomly, and it has been noted that similar proposals in Great Britain may violate EU based rights to privacy.

It’s worrying that the budget papers do not identify the costs of the proposal nor the expected savings. Overall, it’s difficult to escape the conclusion that this proposal is symbolic, rather than designed to have a positive impact on the well-being of those to be tested.

Budget spending on welfare continues to increase

Social security and welfare remains the largest single component of government spending, and is projected to increase from A$164 billion in 2017-18 to A$191.2 billion in 2020-21, or from 35.3% to 36.6% of total expenses.

Overall social security and welfare spending is projected to grow by 0.22% of GDP over the projection period. Spending on the National Disability Insurance Scheme (NDIS) is projected to grow by 0.46% of GDP, compared to other measures such as the spending on child care by 0.07% of GDP and spending on unemployment and related benefits by 0.05% of GDP. Most other components of social security and welfare expenditure are projected to fall over this period, with the largest impact being on spending on Family Tax Benefits.

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The development of the NDIS is clearly the most significant source of new social spending in this year’s budget. The additional 0.5% increase in the Medicare Levy to guarantee funding for the project will apply from July 1, 2019 and will raise an extra A$3.55 billion in revenue in its first year, rising to A$4.25 billion in 2020-21. There are also positive initiatives in continued funding for valuable longitudinal surveys, such as HILDA and the Parents Next Programme.

The main area of savings is in the area of Family Tax Benefits, where savings are to be used to fund changes in child care – although the savings over the period are more than twice as great, as the increased spending on child care. These savings of A$1.9 billion over five years are made possible by not indexing payment rates to inflation until July 2019.

In addition, a further A$415 million will be saved over five years through adjustments to the rate at which Family Tax Benefit A is income-tested when family incomes exceed the higher income threshold of around $94,000 of joint family income. As a result, around 24,900 families will lose access to Family Tax Benefit Part A, and around 71,800 families will see a reduction in their family payments.

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Overall, the 2017-18 budget has abandoned many of the most regressive welfare measures that have led to their blocking in the Senate since 2014. However, it remains the case that the freezing of payment rates for Family Tax Benefit will have the largest proportional effect on low income families with children, since these payments form a larger proportion of their disposable incomes.

There are projected increases in spending on income support and services for the aged as a result of the ongoing and predictable ageing of the Australian population. There’s also smaller increases in income support for parents and for the unemployed – perhaps partly due to the simplification of support for working age recipients – but these are more than offset by reductions in other areas of welfare spending.

To a large extent, the challenges facing government in providing the services and benefits that the Australian population values are predictable and manageable, so there is a need to base policies on evidence and not myths or stereotypes.

Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

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

Mental health funding in the 2017 budget is too little, unfair and lacks a coherent strategy



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Mental health remains chronically underfunded.
from shutterstock.com

Sebastian Rosenberg, University of Sydney

This week’s federal budget allocated A$115 million in new funding over four years. This is one of the smallest investments in the sector in recent years. The Conversation

For instance, the Council of Australian Governments (CoAG) added more than $5.5 billion to mental health spending in 2006. The 2011-12 federal budget provided $2.2 billion in new funding.

This compounds a situation in which, in 2014-15, mental health received around 5.25% of the overall health budget while representing 12% of the total burden of disease. There is no reason those figures should exactly match, but the gap is large and revealing.

They speak to the fact mental health remains chronically underfunded. Mental health’s share of overall health spending was 4.9% in 2004-05. Despite rhetoric to the contrary, funding has changed very little over the past decade.

We lack a coherent national strategy to tackle mental health. New services have been established this year, but access to them may well depend on where you live or who is looking after you. This is chance, not good planning.

Hospital-based services

The general focus of care when it comes to mental health remains hospital-based services. Inpatient – when admitted to hospital – and outpatient clinic care or in the emergency room represent the bulk of spending. (The Australian Institute of Health and Welfare includes hospital outpatient services under the heading “Community”, which makes definitive estimates of the proportion of funding impossible.)

Outside of primary care such as general practice, or Medicare-funded services (such as psychology services provided under a mental health care plan), mental health services in the community are hard to find.

An encouraging aspect of this year’s budget is the government’s recognition of this deficiency. The largest element of new mental health spending was a commitment to establish a pool of $80 million to fund so-called psychosocial services in the community.

As Treasurer Scott Morrison said in his budget speech, this money is for:

Australians with a mental illness such as severe depression, eating disorders, schizophrenia and post-natal depression resulting in a psychosocial disability, including those who had been at risk of losing their services during the transition to the NDIS.

Yet, the money is contingent on states and territories matching federal funds, meaning up to $160 million could be made available over the next four years if the states all chip in with their share of $80 million. But this commitment was made “noting that states and territories retain primary responsibility for CMH [community mental health] services”. Whether the states agree is another matter.

This new funding seems partly a response to the federal transfer of programs such as Partners in Recovery and Personal Helpers and Mentors to the National Disability Insurance Scheme (NDIS). Both these programs offered critical new capacity to community organisations to provide mental health services and better coordinate care.

Partners in Recovery was established in the 2011-12 budget with $550 million to be spent over five years. Personal Helpers and Mentors (along with other similar programs) was established in the same year with $270 million in funding over five years.

With these programs now (or soon to be) cordoned off to recipients of NDIS packages, the 2017 budget measure appears to be designed to offset their loss. However, not all states may choose to match the federal funds. And some may choose to do so but try to use new federal funds to reduce their own overall mental health spending.

States already vary in the types of services they offer. All this raises the prospect that people’s access to, and experience of, mental health care is likely to vary considerably depending on where they live. In a budget espousing fairness, this is a recipe for inequity.

Lack of coherent strategy

The budget does attempt to improve the uneven distribution of mental health professionals by providing $9 million over four years to enable psychology services to rural areas though telehealth. It’s well known mental health services in the bush are inadequate.

This investment seems sensible, but $9 million pales in comparison to spending on the Better Access Program, which I have calculated to be $15 million each week. This program provides Medicare subsidies for face-to-face mental health services under mental health care plans. While this program is available for those in rural areas, accessing it is more difficult than in cities.

This budget’s commitment to mental health shows a lack of an overarching strategy. Rather than offering a coherent approach to mental health planning, this budget continues Australia’s piecemeal, patchwork structure, where the system is driven mostly by who pays rather than what works or is needed.

The development of a national community mental health strategy would be most welcome now. This would demonstrate how the primary and tertiary mental health sectors will join up to provide the blend of clinical, psychological and social support necessary to finally enable people with a mental illness to live well in the community.

You could be forgiven for thinking that, albeit slowly, the well-known problems in mental health across Australia are being addressed. But the small pool of funding in this year’s budget says otherwise. And the lack of coherent strategy is a shame. You can’t complete a jigsaw puzzle if you keep adding new pieces.

Sebastian Rosenberg, Senior Lecturer, Brain and Mind Centre, University of Sydney

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