Time for pragmatism, not panic, for the electricity market



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There are many viable options for Australia’s energy future.
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David Blowers, Grattan Institute

There was a familiar kneejerk reaction to last week’s announcement by the Australian Energy Market Operator (AEMO) that there are risks to our electricity supply after the scheduled closure of the Liddell coal-fired power station in New South Wales in 2022. The sight of the Prime Minister looking for options to keep Liddell open raises the spectre of further reflexive government intervention that can’t end well.

Governments, understandably, want to make sure the lights stay on. But now is the time for perspective, not panic. Because, as the latest Grattan Institute report – Next Generation: the long-term future of the National Electricity Market – shows, there are emerging challenges to the NEM that need dealing with. Make the right decisions now and a return to affordable and reliable electricity supply is on the cards.


Read more: The true cost of keeping the Liddell power plant open


The NEM is an energy-only market. This means that generators only get revenue when they sell their electricity into the market. All costs – including the capital costs of building the plant – need to be covered by the revenue they make when they sell electricity. Anyone who wants to build new generation capacity wants to be pretty certain that the market is going to deliver the revenue they need to cover their costs.

But right now no one is building any generation, unless it is government-backed renewables. This is despite a ripe environment for investment: high current and future prices in the wholesale market and the closure of old power stations. The result, as AEMO pointed out last week, is potential shortfalls in generation and potential blackouts in South Australia, Victoria and NSW over the next few years.

Much of the blame for this investment hiatus can be placed on politicians and the climate change policy mess that is creating so much uncertainty for potential investors.


Read more: Turnbull is pursuing ‘energy certainty’ but what does that actually mean?


But the rise of wind and solar power is also causing problems. Wind and solar energy have zero marginal cost: once the facility is built, the energy produced is essentially free. And they are intermittent suppliers: they don’t produce energy unless the wind is blowing or the sun is shining. So when wind and solar plants are operating, the wholesale price of electricity is forced down. This means there needs to be high prices – sometimes very high – when wind and solar are not operating. This price volatility makes investors nervous that they will not be able to cover the costs of building new generation.

Governments may be tempted to conclude that the market has failed. But intervention may be premature.

There are still five years until Liddell is scheduled to close. Just because a new coal-fired power station will not be built in time to fill the gap doesn’t mean the market cannot respond. Coal was never going to be the market response, given climate change risks. But new gas-fired generators, or batteries to store electricity, could be built in this time frame. Or the market could finally get its act together on what is called demand-response: that is, paying consumers to reduce their electricity consumption during periods of peak demand, so that less new generation is required.


Read more: Managing demand can save two power stations’ worth of energy at peak times


There are no guarantees for government, however. The risks that the market won’t deliver the new generation that is needed are increasing. If nothing changes, Australia will need, in the words of AEMO, “a longer-term approach to retain existing investment and incentivise new investment in flexible dispatchable capability in the NEM”.

Many countries have responded to these same pressures by introducing a capacity mechanism. A capacity mechanism pays generators for being available, regardless of whether they actually sell electricity. Payments for capacity provide extra income for generators, giving them greater assurance that they will make enough revenue to cover their costs.

Any new market-based mechanism in Australia is likely to be better than the scattergun approach of various governments in recent years. Building Snowy 2.0, extending Liddell’s life, or providing state-based backing for new renewable generation might deliver the results needed. But the lack of coordination, planning and strategic thought that sits behind these policies means they probably won’t.

Getting it right

Our report suggests a better way. First, governments should give the market a chance. This means sorting out climate change policy, and quickly. Dithering about a Clean Energy Target, or arriving at a solution that cannot be supported across the political spectrum, will guarantee that investors’ hands remain firmly in their pockets.

Second, work should begin immediately on an additional capacity mechanism, so it is ready if needed. Capacity mechanisms are complex and take a long time to design and implement. There is no one-size-fits-all approach, so careful consideration needs to be given to how one would work in the Australian context.

Finally, AEMO should be asked to provide a more robust assessment of the future adequacy of generation supply. On the basis of this information, the newly formed Energy Security Board should make the judgement on whether an additional capacity mechanism is needed to make sure enough new generation is built.

The ConversationIt is understandable that politicians feel the need to act when faced with the threat of blackouts. After all, they are the ones who get the blame when the lights go out. But caution is needed. Capacity mechanisms are expensive; the peace of mind they bring comes at a price. A pragmatic and planned approach is the best way to ensure that, if a decision is made to redesign our electricity market, that decision is the right one.

David Blowers, Energy Fellow, Grattan Institute

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

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What about the people missing out on renewables? Here’s what planners can do about energy justice



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Solar panels are integrated into a block of flats in the Viikki area of Helsinki, Finland.
Pöllö/Wikimedia, CC BY

Jason Byrne, Griffith University and Tony Matthews, Griffith University

The rapid shift to new energy sources is outpacing land use planning in cities. As interest in renewable energy burgeons, another concern has emerged – energy justice.

Improvements in renewable energy generation, energy efficiency and storage technology benefit more advantaged populations like homeowners. These innovations are generally beyond the reach of more disadvantaged groups like renters, pensioners, students and the working poor. Researchers see this as an emerging energy justice concern.

Energy costs hit the poor harder

Rising power bills hit lower-income households particularly hard.
shutterstock

A recent report, prepared by the Australian Council of Social Service, The Climate Institute and the Brotherhood of St Laurence, highlighted the disproportionate impacts of energy poverty. Current policy settings and energy price rises make life even more difficult for people who are already struggling to pay their power bills.

Energy price rises can affect residents’ ability to cool or heat their homes, cook food and get hot water. Ultimately, this can have dire consequences for people’s health and wellbeing.

Attention has been drawn to the inability of such households to tap into renewable energy in Western Australia and the Northern Territory. Less well known are the emerging opportunities to reduce energy poverty. These include solar leasing, energy co-operatives and landlord incentives.

Solar leasing

Solar leasing is a strategy where a homeowner signs an agreement with a company to install solar panels. Up-front costs are limited and the system is paid back incrementally over its lifespan. In theory, this could enable landlords and low-income owners to gain access to cheaper solar energy.

There are many variations on such leases. One involves the owner buying power back from the leasing company, which sells surplus power to the grid. Another is where the owner obtains a low-cost loan, such as those offered by the Fannie Mae foundation in the US.

Some caution is warranted before entering such agreements, not least because leases can make homes harder to sell.

The relative vacuum of Commonwealth energy policy in Australia is prompting some local governments to step in. The City of Darebin in Melbourne is an example. Its Solar Saver Program aims to help pensioners and other low-income earners get solar panels on rooftops. The panels are installed up-front and paid back through rates.

Some councils are helping pensioners and other low-income earners to install solar panels to cut their energy bills.
Michael Coghlan, CC BY-SA

Community renewable energy co-operatives

A second idea is to increase competition in the energy market by enabling communities to generate their own energy. Community renewable energy projects are an example.

But such projects need not be market-based. A recent innovation in New South Wales has been the development of an energy co-operative in Stucco apartments, a non-profit, student housing complex. This small-scale co-operative generates solar energy and stores it in batteries, selling it to tenants in the building, who are low-income students.

Larger versions exist in Germany. There whole villages have become energy co-operatives of sorts, achieving energy self-sufficiency.

Landlord incentives

A landlord who makes improvements such as double glazing should be able to claim these as a tax deduction.
Paul Flint/flickr, CC BY-SA

Several commentators have identified the need for better incentives and penalties to encourage landlords to retrofit properties to make them more energy-efficient.

This includes changing the tax system. If rental properties are upgraded – with insulation, more efficient hot water systems, energy-efficient stoves or windows – these costs should count as legitimate tax deductions. Currently, these improvements are not treated as repairs and instead are depreciated over time.

Similarly, new minimum standards for energy efficiency in rental properties are needed. The NSW BASIX system is a step in this direction.

The energy justice challenge for planners

Land use planning systems are typically future-oriented. But most of the buildings that will exist in the middle of this century are already built.

We need to update planning systems to better manage systemic changes in existing built environments. These changes include the transition to renewable energy and associated energy justice concerns.

There are possibilities for improvement. For example, planners can learn from early innovations like the Stucco model. Working proactively with community energy co-operatives could reduce uncertainty for all stakeholders, minimise time wasted and maximise returns for participants.

Planners can also develop new policies and processes – such as model town planning schemes – to work with communities in delivering other small-scale renewable energy projects such as community solar farms and microgrids. Another possibility is to alter strata title laws to make it easier to install solar in apartment buildings.

The ConversationModern land use planning was driven in large part by a desire to improve public health and social justice by regulating development. Today’s planners should regard efforts to improve energy justice as a new but entirely appropriate professional responsibility.

Jason Byrne, Associate Professor of Environmental Planning, Griffith University and Tony Matthews, Lecturer in Urban and Environmental Planning, Griffith University

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

What would it take to raise Australian productivity growth?


Roy Green, University of Technology Sydney

While productivity is once again growing in Australia, we face a big challenge in getting it to a level that would restore the rate of improvement in our living standards of the last few decades.

Yet the measures required to meet this challenge may not be the ones usually promoted by economists and editorial writers. We need innovation not just in the technologies we use but in our business models and management practices as well.

The problem, according to new Treasury research, is that national income growth can no longer be propped up by the favourable terms of trade associated with our once-in-a-generation mining boom.

Does this mean we are back to the hard grind of productivity-enhancing reform? There are (at least) two opposing schools of thought on this. Some believe reform is needed, but mainly corporate tax cuts and labour market deregulation. Others deny any such reform is even necessary.

What has happened to productivity?

Productivity is a complex issue, but may be simply defined as output produced per worker, measured by the number of hours worked. On this basis we have seen a modest spike in productivity growth over the last five years to 1.8% per year.

This is primarily due to “capital deepening”, an increase in the ratio of capital to labour. Contemporary examples include driverless trucks in iron ore mines, advanced robotics in manufacturing and ATMs in banking.

Before this five-year period, productivity growth was much lower, even negative. This was especially the case during the mining boom itself when capital investment was taking place but had not yet translated into increased output.

The Treasury paper argues that to achieve our long-run trend rate of growth in living standards of 2% a year, measured as per capita income, we now need to increase average annual productivity growth to around 2.5%.

This will require not just capital deepening, but also improvements in the efficiency with which labour and capital inputs are used, otherwise known as “multifactor productivity”.

The hype cycle

Australia is not alone in facing this productivity challenge. Globally, amidst what would appear to be an unprecedented wave of technological change and innovation, developed economies are experiencing a productivity slowdown.

Again, explanations for this vary. Some economists question whether the current wave of innovation is really as transformative as earlier ones involving urban sanitation, telecommunications and commercial flight.

Others have wondered whether it is still feasible to measure productivity at all when innovation comprises such intangible factors as cloud computing, artificial intelligence and machine learning, let alone widespread application of the “internet of things”.

However, there is an emerging consensus that we are merely in the “installation” phase of these innovations, and the “deployment” phase will be played out over coming decades.

This has also been called the “hype cycle”. New technologies move from a “peak of inflated expectations” to a “trough of disillusionment” and then only after much prototyping and experimentation to the “plateau of productivity”. Think blockchain in financial transactions and augmented reality for consumer products.


Read more: A guide to deconstructing the battery hype cycle


The world is bifurcating between “frontier firms”, whose ready adoption of digital technologies and skills is reflected in superior productivity, and the “laggards”, which are seemingly unable to benefit from technology diffusion.

These latter firms drag down average productivity growth and, lacking competitiveness, they inevitably find it more difficult to access global markets and value chains.

The increasing gap between high- and low-productivity firms is less a matter of technology as such than the capacity for non-technology innovation. In particular, this encompasses the development of new business models, systems integration and high-performance work and management practices.

Many of the world’s most successful companies, such as Apple, gained market leadership not by inventing new technologies but by embedding them in new products, whose value is driven by service design and customer experience.

Engaging our creativity

Recent international studies have shown that a major explanatory variable for productivity differences between firms, and between countries, is management capability.

It is noteworthy that Australian managers lag most behind world-best practice in a survey category titled “instilling a talent mindset”. In other words, how well they engage talent and creativity in the workplace.

Most organisations today would claim that “people are our greatest asset”, but much fewer provide genuine opportunities for participation in the decisions that affect them and the future of the business. Those that do are generally better positioned to outperform competitors and demonstrate greater capacity for change.

More survey work on this issue is under way.

A more inclusive approach

Wages are also related to productivity but not always in the way that is commonly assumed. It is said that productivity performance determines the wages a company can afford to pay, with gains shared among stakeholders, including the workforce.

But evidence is emerging that causation might equally run in the reverse direction, with wage increases driving capital investment and efficiency.

This casts the current debate on productivity-enhancing reform in a very different light. It may now be a stretch to argue that corporate tax cuts will be much of a game-changer in the absence of any incentive to invest in new technologies and skills. The same may be said about the ideological insistence on labour market deregulation, if all that results is a low-wage, low-productivity economy.

The populist revolt against technological change and globalisation has its roots not just in the failure to distribute fairly the gains from productivity growth, but in a longstanding effort in some countries to fragment the structures of wage bargaining and to exclude workers from any strategic role in business transformation. This has assigned the costs of change to those least able to resist, let alone benefit from it.

The next wave of productivity improvement, if it is to succeed, must be based on a more “inclusive” approach to innovation policy and management.

The ConversationAs jobs change or disappear altogether, Australia’s workforce can make a positive contribution. But workers will only be able to do so if they have the skills and confidence to take advantage of new jobs and new opportunities in a high-wage, high-productivity economy.

Roy Green, Dean of UTS Business School, University of Technology Sydney

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

The costs of a casual job are now outweighing any pay benefits


Joshua Healy, University of Melbourne and Daniel Nicholson, University of Melbourne

Low wages growth has been a spectre hanging around the Australian economy for some time. In our series What We Earn we unpick the causes for this and why some workers might be feeling it more than others.


Workers aren’t being compensated as much as they should be for precarious work in casual positions.

One in four Australian employees today is a casual worker. Among younger workers (15-24 year olds) the numbers are higher still: more than half of them are casuals.

These jobs come without some of the benefits of permanent employment, such as paid annual holiday leave and sick leave. In exchange for giving up these entitlements, casual workers are supposed to receive a higher hourly rate of pay – known as a casual “loading”.

But the costs of casual work are now outweighing the benefits in wages.

Costs and benefits of casual work

Casual jobs offer flexibility, but also come with costs. For workers, apart from missing out on paid leave, there are other compromises: less predictable working hours and earnings, and the prospect of dismissal without notice. Uncertainty about their future employment can hinder casual workers in other ways, such as making family arrangements, getting a mortgage, and juggling education with work.

Not surprisingly, casual workers have lower expectations about keeping their current job. For example the Australian Bureau of Statistics (ABS) found 19% expect to leave their job within 12 months, compared to 7% of other workers. Casuals are also much less likely to get work-related training, which limits their opportunities for skills development.

The employers of casual workers also face higher costs. High staff turnover adds to recruitment costs. But perhaps the main cost is the “loading” that casual workers are supposed to be paid on top of their ordinary hourly wage.

Australia’s system of minimum wage awards specifies a casual loading of 25%. So, a casual worker paid under an award should get 25% more for each hour than another worker doing the same job on a permanent basis. In enterprise agreements, the casual loading varies by sector, but tends to be between 15 and 25%.

The practice of paying a casual loading developed for two reasons. One was to provide some compensation for workers missing out on paid leave. The other, quite different, motivation was to make casual employment more expensive and discourage excessive use of it. However this disincentive has not prevented the casual sector of the workforce from growing substantially.

Casual jobs aren’t much better paid

One approach in determining whether casual workers are paid more is simply to compare the hourly wages of casual and “non-casual” (permanent and fixed-term) employees in the same occupations. This can be done using data from the 2016 ABS Survey of Employee Earnings and Hours.

We compared median hourly wages for adult non-managerial employees, based on their ordinary earnings and hours of work (i.e. excluding overtime payments). If the median wage for casuals is higher than for non-casuals, there is a casual premium. If the median casual wage is lower, there is a penalty.

The 10 occupations below accounted for over half of all adult casual workers in 2016. In most of these occupations, there is a modest casual wage premium – in the order of 4-5%.

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The size of the typical casual wage premium is much smaller, in most cases, than the loadings written into awards and agreements. Only one occupation (school teachers) has a premium (22%) in line with what might be expected.

Three of the 10 largest casual occupations actually penalise this sort of work. And overall for these 10 occupations there is a casual wage penalty of 5%. This method of analysis suggests that few casual workers enjoy substantially higher wages as a trade-off for paid leave.

Taking a closer look involves controlling for a wider range of differences between casual and non-casual workers. One major Australian study in 2005 compared wages after taking account of many factors other than occupation, including age, education, job location, and employer size.

All else equal, it found that part-time, casual workers do receive an hourly wage premium over full-time, permanent workers. The premium is worth around 10%, on average, for men and between 4 and 7% for women.

These results imply that most casual workers (who are in part-time positions) can expect to receive higher hourly wages than comparable employees in full-time, permanent positions. However, the value of the benefit is again found to be less than would be expected, given the larger casual loadings mentioned in awards and agreements.

It seems that while there is some short-term financial benefit to being a casual worker, this advantage is worth less in practice than on paper.

A recent study, using 14 years of data from the Household, Income and Labour Dynamics in Australia Survey (HILDA), finds no evidence of any long-term pay benefit for casual workers.

The study’s authors estimate that, among men, there is an average casual wage penalty of 10% – the opposite of what we should see if casual loadings fully offset the foregone leave and insecurity of casual jobs. Among female casual workers, there is also a wage penalty, but this is smaller, at around 4%.

This study also finds that the size of the negative casual wage effect tends to reduce over time for individual workers, bringing them closer to equality with permanent workers. But very few casual workers out-earn permanent workers in the long-term.

Inferior jobs, but fewer alternatives

The evidence on hourly wage differences leads us to conclude that casual workers are not being adequately compensated for the lack of paid leave, or for other forms of insecurity they face. This makes casual jobs a less appealing option for workers.

This does not mean that all casual workers dislike their jobs – indeed, many are satisfied. But a clear-eyed look at what these jobs pay suggests their benefits are skewed in favour of employers.

Despite this, the choice for many workers – especially young jobseekers – is increasingly between a casual job or no job at all. Half of employed 15-24 year olds are in casual jobs.

The ConversationIn a labour market characterised by high underemployment and intensifying job competition, young people with little or no work experience are understandably willing to make some sacrifices to get a start in the workforce. The option of “holding out” for a permanent job looks increasingly risky as these opportunities dwindle.

Joshua Healy, Senior Research Fellow, Centre for Workplace Leadership, University of Melbourne and Daniel Nicholson, Research Assistant, Industrial Relations, University of Melbourne

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

Egalitarian or Edwardian? The rising wealth inequality in Australia



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Perceptions of the levels of both income and wealth inequality are derived from our day-to-day experiences.
AAP/Dean Lewins

Jennifer Chesters, University of Melbourne

Recent commentary on levels of inequality exposes the myth that Australia is an egalitarian society in which the privileges of birth have little currency.

Focusing on inequality in the distribution of incomes ignores an equally important dimension of inequality: wealth. Wealth is much more unequally distributed than income. Therefore, ignoring wealth inequality skews perceptions of social inequality.

Perceptions of the levels of income and wealth inequality are derived from our day-to-day experiences. This means that not mixing with people from the other end of the wealth distribution can colour our perceptions of inequality.


Further reading: Here’s why it’s so hard to say whether inequality is going up or down


The lack of official data on the wealth holdings of Australians hampers research into trends in wealth inequality. Between 1915 and 2003-04, there is almost no official wealth data to examine.

In 2003-04, the wealthiest 20% of Australian households held 58.6% of total household wealth, and the poorest 20% of households held just 1.4% of total household wealth. In 2013-14, the wealthiest 20% of households held 61% of total household wealth, and the poorest 20% of households held just 1% of total household wealth.

These figures indicate that wealth inequality increased over the decade to 2013-14.

The table below details trends over time in various measures of wealth inequality. The P90 to P10 ratio compares the wealth of households at the 90th percentile with that of households at the tenth percentile. A larger ratio indicates greater levels of inequality.

In 2003-04, households at the 90th percentile held 45 times as much wealth as households at the tenth percentile. In 2013-14, households at the 90th percentile of the distribution held 52 times as much wealth as households at the tenth percentile. This indicates that wealth inequality increased in that decade.

Using the mean and median household wealth figures, it is possible to calculate the ratio of median to mean wealth.

The closer this ratio is to one, the lower the level of inequality. In 2003-04, the ratio was 0.63. In 2013-14, it was 0.57. This also indicates that wealth inequality increased.

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The distribution of household wealth also varies between Australia’s state and territories, and by location within states and territories.

Households in the ACT recorded the highest mean household wealth (A$890,100). Households in Tasmania recorded the lowest mean household wealth ($595,600).

When these figures are disaggregated by location into capital city households and households located in the rest of the state, the largest wealth gap occurs in New South Wales. The mean wealth of households in Sydney was $971,700, whereas the mean wealth of households in the rest of NSW was $534,700.

The median-to-mean-wealth ratios show wealth was most unequally distributed in Brisbane and Perth.

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Given a relatively large proportion of household wealth is held in the form of property assets, the recently released Household, Income and Labour Dynamics in Australia Survey report identifies property as the key driver of increasing wealth inequality.

The percentage of 18-to-39-year-olds with property declined by 10.5 percentage points between 2002 and 2014. And the level of debt of those with a mortgage doubled in real terms.

So, fewer young adults have mortgages now compared to a decade ago, and those who do have mortgages have higher levels of debt.

Two other sources of publicly available data on wealth are the lists of the super-wealthy published annually by the Business Review Weekly in Australia and Forbes in the US.

Figures published in the Business Review Weekly show that, after adjusting for inflation, in 1984 the wealthiest 20 Australians held $8.25 billion in assets. In 2017, the wealthiest 20 Australians held $104 billion.

Forbes’ lists of billionaires (in $US) show that the number of billionaires living in Australia increased from two to 26 between 1987 and 2014.

Having an increasing number of billionaires would not be an issue if all Australians’ wealth was increasing at a similar rate. However, if the gap between the wealth of the billionaires and that of the average residents increases dramatically, there is likely to be discontent.


Further reading: Don’t listen to the rich: inequality is bad for everyone


Drawing on figures published in the Credit Suisse Wealth Report, it is possible to compare the wealth of the billionaires with that of average Australians.

In 2014, the wealth of the 26 Australian billionaires was equivalent to 214,914 adults with average wealth.

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Recent turmoil in the UK and the US may be an indicator that the “peasants are revolting” and are not willing to return to the 19th century, when the very rich lorded over the masses.

The ConversationAustralia has yet to experience mass demonstrations and voter backlashes. But events overseas should be ringing alarm bells among our politicians in Canberra.

Jennifer Chesters, Research Fellow, Youth Research Centre, University of Melbourne

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

Don’t listen to the rich: inequality is bad for everyone



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Having only a few people with most of the wealth, motivates others. This theory is actually wrong according to research.
Aakkosia sosialistien lapsille (1912)/Flickr, CC BY-SA

Chris Doucouliagos, Deakin University

A world where a few people have most of the wealth motivates others who are poor to strive to earn more. And when they do, they’ll invest in businesses and other areas of the economy. That’s the argument for inequality. But it’s wrong.

Our study of 21 OECD countries over more than a 100 years shows income inequality actually restricts people from earning more, educating themselves and becoming entrepreneurs. That flows on to businesses who in turn invest less in things like plant and equipment.

Inequality makes it harder for economies to benefit from innovation. However, if people have access to credit or the money to move up, it can offset this effect.

We measured the impact of this by looking at the number of patents for new inventions and then also looking at the Gini coefficient and the income share of the top 10%. The Gini coefficient is a measure of the distribution of income or wealth within a nation.

How inequality reduces innovation

From 1870 to 1977, inequality measured by the Gini coefficient fell by about 40%. During this time people actually got more innovative and productivity increased, incomes also increased.

But inequality has increased in recent decades and it’s having the opposite effect.



Author provided/The Conversation, CC BY-ND

Inequality is preventing people with less income and wealth from reaching their potential in terms of education and invention. There’s also less entrepreneurship.

Inequality also means the market for new goods shrinks. One study shows that if incomes are more equal among people, people who are less well off, buy more. Having this larger market for new products, incentivises companies to create new things to sell.

If wealth is concentrated among only a small group of people, it actually increases demand for imported luxuries and handmade products. In contrast to this, distributed incomes means more mass produced goods are manufactured.

What’s been driving inequality since the 1980s is changes to economies – countries trading more with each other and advances in technology. As this happens old products and industries fade while new ones take their place.

These changes have delivered significant net benefits to society. Reducing trade and innovation will only make everyone poorer.

The declining number of people in unions has also contributed to inequality, as workers lose collective bargaining power and some rights. At the same time, unions can adversely affect innovation within firms.

Unions discourage innovation when they resist the adoption of new technology in the workplace. Also if innovation creates profits for firms but some of these are taken up by higher wages (lobbied for by unions), these reduced profits provide less incentive for firms to innovate.

Where workers’ jobs are protected, for example with union membership, there’s often less resistance to innovation and technological change.



Author provided/The Conversation, CC BY-ND

Giving people access to credit could change this

Most countries have much higher levels of inequality than the OECD average. This combination of high inequality and low financial development is a major obstacle to economic prosperity.

When financial markets work well, everyone gets access to the amount of credit they can afford and can invest as much as they need. We found that for a nation with a credit-to-GDP ratio of more than 108%, low income earners are less discouraged by not having a share of the wealth. There’s less of a dampening affect on innovation.

Unfortunately, most countries (including many in the OECD) are far from this threshold. In 2016, the credit-to-GDP ratio averaged 56% across all countries, and only 28% for the least developed. Until 2005, Australia was also below this threshold.

This means governments should look at providing more people with more access to credit, especially to the poor, to stimulate growth.

For financially developed nations like Australia, increased inequality actually has less of an effect on innovation and growth. So tackling inequality might not be as easy as increasing access to credit.

Spending and taxing are already historically high and growing inequality makes it harder to further raise taxes. Countries like Australia are not unequal societies in the sense of having significant barriers to people improving their income.

Australia is a relatively egalitarian nation. In 2016, the top 1% owned 22% of the wealth in Australia, compared to 42% in the USA, and 74% in Russia.

The ConversationGovernments in more developed nations can instead try to maintain a stable financial sector to improve growth or by training and education.

Chris Doucouliagos, Professor of Economics, Department of Economics, Deakin Business School and Alfred Deakin Institute for Citizenship and Globalisation, Deakin University

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

Bottom of the canal: Pfizer’s billion-dollar tax ploy



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The Netherlands is where nearly $1 billion from Australia was sunk into two companies liquidated three years later.
Alex de Haas/flickr, CC BY-NC

Michael West, University of Sydney

Pharmaceutical giant Pfizer has engaged in a series of paper transactions to create a A$936 million loss in Australia. It is, for all intents and purposes, a billion-dollar exercise in tax avoidance.

Pfizer and its auditor KPMG, the “Big Four” global accounting firm, refused to comment on the transactions or to defend them when presented with questions by this columnist. Pfizer was contacted on numerous occasions and refused. Both parties refused to return emails and phone calls.

These are transactions housed within a byzantine corporate structure. We will outline, in brief, the series of transactions with Pfizer associates in the Netherlands which led to this “bottom of the canal” tax scheme, then provide the background to the company’s activities.

The sequence of transactions

2011: Pfizer Australia Investments Pty Ltd issues $728 million in shares to Pfizer companies in the Netherlands, the US and Luxembourg.

Pfizer Australia Investments (PAI) then uses the cash from this share issue to buy two subsidiaries incorporated in the Netherlands. These are called Pfizer Australia Investments B.V. and Pfizer Pacific Cooperatief U.A.

There is no record of these two companies in Pfizer’s global accounts before December 31 2010.

2014: PAI issues more shares and invests another $208 million in the two Dutch companies. This brings the total investment in these companies to $936 million.

By the end of 2014, the Dutch subsidiaries have been liquidated with zero return for PAI. The financial effect of this round-robin transaction is that share capital of $936 million has been created in Pfizer’s Australian entity and losses of $936 million are recorded in Australia.


Michael West/Rachell Li, Sydney Democracy Network

This ring-a-ring-a-rosy has all the hallmarks of a transaction designed to create almost a billion dollars in losses which can be used for tax purposes in Australia. The Australian company has “invested” almost a billion dollars into two overseas companies which were suddenly liquidated – with no value left for shareholders. Nothing is heard of them since.

It brings to mind the infamous Bottom of the Harbour tax schemes of the 1970s and ’80s where the financial engineers – aided by the top end of the accounting community – made investments in companies, stripped those companies of their assets and left nothing for the taxman.

In Pfizer’s case, almost $1 billion of cash was “invested” in two companies in the Netherlands which went belly up within three years. That left the Australian entity – indeed Australian taxpayers – carrying the can for its losses as the freshly created $1 billion in share capital is now sitting pretty for tax-effective distribution to Pfizer overseas.

A company with form

Pfizer has form on such transactions.

Back in 2011, another Pfizer entity, Pfizer Australia Holdings, created new share capital of $733 million after it bought two subsidiaries from Pfizer Inc. The two subsidiaries were acquired for hundreds of millions of dollars.

Pfizer issued shares, rather than paid cash, to buy these assets from themselves. So, new shares were created at a value of $733 million. This enormous price relied on a fancy asset valuation for the intangible assets held by these subsidiaries, notably “product development rights” of $461 million. These were the main assets acquired.

By 2014, share capital of $408 million of this new share capital had been returned in cash, repatriated to Pfizer companies overseas. And the product development rights had already evaporated (amortised) by $161 million.

Share capital created, assets written off, again. This is the Pfizer pattern. Share capital is created and its assets vanish.

On December 1 2014, yet another Pfizer entity here, Pfizer PFE Pty Ltd, acquired the Innovative Products Oncology and Consumer business from Pfizer Australia Holdings for nil consideration. This included the mysterious product development rights. Nil consideration. These are the rights valued three years earlier at $461 million.

Traditionally, when one company acquires a business from another company, one company is the buyer and the other company is the seller. This immutable principle of commerce does not necessarily pertain to Pfizer.

Pfizer Australia Holdings describes the transfer of this Innovative Products business as a “distribution”, a “transaction with owners in their capacity as owners”, according to its statutory financial statements.

In reality it is no such thing. Pfizer PFE is not an owner of Pfizer Australia Holdings. It holds no shares. It is merely a related party with a common ultimate parent in the US, Pfizer Inc.

Behind this narrative of a “distribution to owners” is tax. When you make profits of hundreds of millions of dollars, avoiding the 30% corporate income tax rate is big business.

Then and now

In 2007, Pfizer Australia Holdings was at the helm of Pfizer’s tax consolidated group in Australia and prepared “General Purpose” financial statements, full financial statements and full disclosures.

In 2008, it switched to preparing “Special Purpose” financial statements with far less disclosure, especially about income tax. KPMG’s 2008 audit report gave this special purpose report a clean bill of health even though required disclosures of changes in accounting policies were not made.

From 2009 to 2012, Pfizer Australia Holdings paid franked dividends to shareholders of $576 million; that is more than half-a-billion dollars going overseas. This is the good stuff, though, the above-board stuff, dividends paid out of profits already taxed in Australia.

After 2012, Pfizer ran out of Australian profits to distribute. It had hit the “patents cliff”. The blockbuster drugs Lipitor and Viagra were coming off patent and being challenged by generic competitors. Pfizer’s sales peaked at $2.2 billion in 2012. This used to be the biggest pharmaceutical company in the country.

Yet Pfizer had hit another cliff. The company was running out of Australian profits to distribute as dividends. It needed another way to rake the money offshore. And it came in the guise of return of share capital – better than dividends as there are far lighter tax obligations.

In 2014, a return of capital of $408 million was made offshore. And now, in 2016, Pfizer has made sure, through transactions with associates in the Netherlands, that there is another billion dollars ready to go offshore when the US overlords make the call.

Two things stand out, two takeaways from the “magic pudding” of Pfizer share capital creation and its bottom-of-the-canal tax scheme.

One, PAI’s audited financial statements claim that two Netherlands subsidiaries were incorporated in Australia. We can find no record of this.

Two, in 2014, PAI invested $208 million in the two Netherlands subsidiaries that were liquidated in the same year for no return. What is an observer to make of that?


The ConversationThis column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of Sydney

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

Affordable housing shortfall leaves 1.3m households in need and rising – study



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Around one in seven Australia households either cannot get into housing at market rates or are struggling to pay the rent.
shutterstock

Steven Rowley, Curtin University and Chris Leishman, University of Adelaide

A new report by the Australian Housing and Urban Research Institute (AHURI) reveals, for the first time, the extent of housing need in Australia. An estimated 1.3 million households are in a state of housing need, whether unable to access market housing or in a position of rental stress. This figure is predicted to rise to 1.7 million by 2025.

To put it in perspective, 1.3 million is around 14% of Australian households. This national total includes 373,000 households in New South Wales, where the number is expected to increase by 80% to more than 670,000 by 2025 under the baseline economic assumptions of the modelling.

The first graph below shows the average annual level of housing need to 2025. The second, showing the percentages of households, permits a direct comparison by state. NSW and Queensland are in the worst position. The ACT is calculated to have the lowest proportional level of need.

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What does this mean for households in need?

Housing need is defined as:

… the aggregate of households unable to access market-provided housing or requiring some form of housing assistance in the private rental market to avoid a position of rental stress.

This includes potential households that are unable to form because their income is too low to afford to rent in the private rental market. These households would traditionally rely on public housing and community housing to meet their needs. However, more and more are being forced into the private rental market, paying housing costs they are unable to afford without making significant sacrifices.

To 2025, on average 190,000 potential households in NSW will be unable to access market housing in a given year. The graph below is the most revealing as it illustrates the gap between affordable housing demand and supply.

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The lack of social housing and subsidised rental housing prevents such households forming under affordable conditions. Many will manage to form but will have to spend well over 30% of their income on housing costs to do so, putting them in a position of financial stress.

The results also reveal the increasing pressure the affordable housing shortfall places on the housing assistance budget, notably Commonwealth Rent Assistance.

The absence of a significant new supply of affordable housing – there has been no large-scale program since the National Rental Affordability Scheme (NRAS) began in 2008 – has left state governments trying to find ways to plug the affordability gap.

Responses have been largely on the demand side, such as first home buyer concessions recently announced in NSW. But such incentives are no use for low-income households. To help them, intervention needs to be on the supply side.

How does Australia compare?

The AHURI research built on ideas emerging from research into housing need in the UK. It revealed interesting differences between the two countries.

UK government policy prior to 2010 emphasised the role of the planning system in helping to substantially increase affordable housing supply. This reflected evidence from England and Scotland that found a link between low levels of new housing supply and higher and rising house prices.

In this project, we found plenty of evidence of deteriorating housing affordability in Australia. But we did not find a particularly strong relationship between housing supply and price growth. This might reflect how other drivers of deteriorating housing affordability are more important in Australia – such as tax incentives for investors.

These findings suggest we need to look more closely at how new supply and investment demand interact, and in what circumstances boosting new supply is likely to improve affordability.

From our analysis of individuals’ labour market circumstances and incomes, it was also clear that the Australian workforce has not escaped the erosion of secure, full-time employment opportunities seen in other countries.

The combination of widespread insecure, part-time employment opportunities, high housing costs and low supply of rented social housing means the housing of many working Australians is extremely precarious.

How was the research done?

The research modelled housing need at the state and territory level to 2025 using an underlying set of economic assumptions and interrelated models on household formation, housing markets, labour markets and tenure choice.

The models were underpinned by data from the Housing, Income and Labour Dynamics in Australia (HILDA) Survey, the Australian Bureau of Statistics (ABS) and house price and rent data.

This research delivers, for the first time in Australia, a consistent and replicable methodology for assessing housing need. It can be used to inform resource allocation and simulate the impact of policy decisions on housing outcomes.

The intention is to further develop the model to assess housing need at the level of local government areas.

So, what are the policy implications?

The scale of the affordable housing shortfall requires major action from federal and state governments.

NRAS had its problems but at least delivered a supply of below-market housing. Australia cannot rely on the private sector to deliver housing for low-income households without some form of government subsidy as it is simply not profitable to do so.

The ConversationThe question is what government is going to be prepared, or even able, to spend big to close the affordable housing supply gap?

Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University and Chris Leishman, Professor of Housing Economics, University of Adelaide

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

Security gets $1.2b, community programs to counter violent extremism $40m – that’s a foolish imbalance



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Police raided several Sydney properties over the weekend in relation to possible terror plots.
AAP/Dean Lewins

Clarke Jones, Australian National University

The arrests and raids in Sydney over the weekend, as well as the 12 so-called “terrorist plots” disrupted by police since September 2014, ought to raise questions over whether Australia’s efforts to counter violent extremism are actually working.

A spending and policy imbalance

Australia has spent more than A$1.2 billion since 2015 on strengthening sharp-end counter-terrorism arrangements such as increasing intelligence and security capabilities. Millions more will be spent when the government’s proposed Department of Home Affairs opens.

Over roughly the same period, only about $40 million has been spent on countering violent extremism and community cohesion programs.

Of this $40 million, only around $2 million was given out in 2015 to 42 of the 97 applicants. This money was to support grassroots organisations to develop new, innovative services to move people away from violent extremism. This funding round was developed to improve Australia’s capability to deliver localised and tailored intervention services.

So, there is a significant imbalance between sharp-end funding and piecemeal, short-term, community-level grants. The money is clearly not being invested wisely or even reaching the right places, such as those at-risk communities willing to engage and desperately seeking funding. Many more terror-related arrests will follow in the foreseeable future as a result.

All the while, it’s been full steam ahead in relation to security, legislation, corrections, police and intelligence. This has come at the expense of community resilience and building up protective mechanisms within vulnerable youth and communities.

From my research with Muslim communities over the past two years, the government’s approach is verging on being counter-productive. It now risks trampling on the basic rights and freedoms of young Muslims, their families and their communities more broadly.

This approach will actually worsen the many underlying issues – such as discrimination, alienation, marginalisation and rejection – that seem to contribute to offending in the first place.

The safety of all Australians should remain a key government priority. And getting the balance right between security and youth and community welfare is difficult. But the government seems hell-bent on pre-crime arrest, prosecution and punishment, while falling short on providing the necessary long-term support for the young vulnerable people it really needs to protect and prevent from engaging in serious anti-social behaviour.

For those from minority communities in particular, the criminal justice system is a very slippery slope. Once in it, the prospects of positive and meaningful futures are slim.

Where Australia’s approach is lacking

As with the UK’s Prevent program, Australia’s approach suffers from multiple, mutually reinforcing structural flaws. Its foreseeable consequence is a serious risk to the wellbeing of young Muslims and Australian multiculturalism more broadly.

Much of the centrepiece of the government’s countering violent extremism strategy rests on the theory of radicalisation and the social engineering of radical views and cultures to become more conservative and “Australian”.

However, for the concept of radicalisation alone, there seems to be very little clarity about the term and the tools that measure it. If such tools are used to help determine the destiny of a young Muslim person, whether it be in a school or criminal justice situation, then these must be made more available for wider peer review – rather than held in secrecy within the government.

For those deemed “radicalised” or on the pathway to radicalisation, there are very few community-based secondary-level intervention programs designed to support them. Nor are there programs they are willing to participate in voluntarily. This is largely because most current programs are led by government and police, which seem to lack a crucial understanding about the many cultural, religious and ethnic nuances required for effective intervention.

Without close community partnerships and community-led approaches, programs will never be able to fully understand the highly complex nature of families and communities.

Getting access to vulnerable youth and their families, and then encouraging them to participate in interventions, requires close and trusted community partnerships. To date, partnerships between government and the more conservative community groups have not been fully developed. This is particularly the case with the more hard-to-reach groups, which have many of the young people requiring support or intervention.

Put together, this has limited the government’s capacity to support and fund communities working with the most at-risk or vulnerable youth.

The government’s position on these communities is that they are too risky to work with. In reality, it is too risky not to work with them.

To make us truly safe – not just from terrorism, but from other serious crimes too – the government needs to go back to basics. Australia should invest a lot more in longer-term community partnerships and develop more preventive measures, such as community-led interventions. These interventions must be developed by those outside the government’s national security apparatus.

The ConversationA major government rethink is required if it is truly going to keep us safe.

Clarke Jones, Research Fellow, Research School of Psychology, Australian National University

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

Government calls for release of costings as Labor unveils trusts crackdown



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Bill Shorten says Labor’s targeting of trusts is about delivering a level playing field in tax.
AAP/Sam Mooy

Michelle Grattan, University of Canberra

Labor has taken another step to put tax and fairness at the centre of its policy agenda by proposing a crackdown on discretionary trusts, which it claims would raise A$4.1 billion over the forward estimates and $17.2 billion over a decade.

A Labor government would apply a minimum 30% rate of tax on discretionary tax distributions to beneficiaries over 18 years old. According to the Parliamentary Budget Office, the change will affect 318,000 discretionary trusts.

The policy would not apply to farm, charitable and philanthropic trusts. Also unaffected would be non-discretionary special disability trusts, deceased estates trusts, fixed trusts, cash management unit trusts, fixed unit trusts, and listed and unlisted public unit trusts.

Announcing the crackdown, Opposition Leader Bill Shorten said it was about delivering a level playing field in tax, “so high-income earners can’t opt out of paying income tax”.

“Tradies and retail workers and mechanics and cleaners don’t get to choose how much tax they pay – and neither should anyone else,” he said.

With the government claiming the change would hit small business, Labor insists “small business will continue to enjoy asset protections”.

The trusts policy comes on top of Labor’s commitment to tighten negative gearing and capital gains tax concessions and to reimpose the deficit levy on high-income earners, among other measures.

The opposition has yet to announce what it will do about the already-legislated tax relief – being phased in – for businesses with turnovers of up to $50 million. It is expected a Labor government would want to retain that only for smaller businesses.

The ALP policy document points out that wealthy people are much more likely to have a trust than those with lesser incomes. The average amount in private trusts by the wealthiest 20% of households is more than $123,000, compared with $4,000 for the next quintile.

Discretionary trusts are used by individuals and businesses to reduce their tax by shifting income to those in a lower tax bracket. “This practice of ‘income splitting’ through discretionary trusts is used frequently by wealthy Australians to minimise their tax,” the policy says.

“Income splitting allows high-income Australians to avoid paying the marginal tax rate that should apply to their income level – something ordinary PAYG taxpayers can’t do,” it says.

The policy gives the example of a surgeon, “Sam”, with a non-working wife “Melissa”, and two non-working adult children. The surgeon earns $500,000 from his work income, and pays PAYG tax at the top marginal rate.

In the example, the couple has a discretionary trust which produces $54,000 from their investments. They attribute $18,000 each to the wife and children, who all pay no tax because their incomes are under the tax-free threshold. “This represents a tax saving of $14,460 had the investment income been attributed to just Sam and Melissa in equal proportions, and a tax saving of $25,380 had the investment income instead been part of Sam’s normal PAYG salary.”

The number of discretionary trusts has nearly doubled since the late 1990s to more than 642,000. The increase in non-discretionary trusts – without the same tax minimisation opportunities – has been much lower. In 2014-15, more than $590 billion of assets were in discretionary trusts.

13% of individuals in the lowest-income tax bracket receive distribution from a discretionary trust. This is much greater than for those on higher incomes.

“This indicates that a significant amount of income is being shifted from the wealthiest individuals to those earning little or no other incomes (for example, non-working members of the family such as spouses and young adults in full-time study) to reduce the amount of tax paid,” the policy says.

Labor says the proposed 30% rate “strikes the right balance between ensuring a fair amount of tax is paid on all trust distributions, while also aligning it with the rate for passive investment companies which also face a 30% rate of tax”.

Labor stresses the reforms “will not affect 98% of all individual taxpayers in Australia, with virtually all the revenue raised from people receiving trust distributions who have little or no other work income”.

Asked why farmers were being exempted, Shadow Treasurer Chris Bowen said they had “issues when it comes to lumpy income and various issues relating to agriculture”.

Michael Sukkar, the assistant minister to the treasurer, called for Shorten to release the full Parliamentary Budget Office costing, including the assumptions Labor had used to come up with the revenue being claimed.

The Conversation“Australians know that Bill Shorten cannot be trusted. This also goes for his latest $17 billion tax-grab that will once again hit small business and their families,” Sukkar said.

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Michelle Grattan, Professorial Fellow, University of Canberra

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