Three charts on: G20 countries’ stealth trade protectionism


Giovanni Di Lieto, Monash University and David Treisman, Monash University

It is clear that trade protectionism is alive and well in the G20, whose countries account for 78% of global trade. But this protectionism isn’t in the form of tariffs, which are duties placed on imports, making imported goods and services more expensive than they would be otherwise. Instead, trade protectionism is being pursued through “non-tariff barriers” such as import quotas, restrictive product standards, and subsidies for domestic goods and services.

This shows that while countries are reducing the obvious barriers to trade, like tariffs, they are still pursuing stealth forms of trade protectionism through non-tariff barriers.

Our research on trade protectionism in the services sector shows that the lower the barriers to trade, the greater company profits. Lower trade barriers create a larger market for Australian goods and services.

We also found that increased domestic regulation leads to higher profits as standards improve across the sector. For Australia this is very significant because the services sector employs four out of five Australians and accounts for 20% of Australia’s total exports.

Eliminating trade protectionism is also good for consumers, as it means a larger market for goods and services. This leads to lower prices and more choice of goods and services.

https://datawrapper.dwcdn.net/2wyoE/2/

The World Trade Organisation uses the term “trade restrictive activity” for measures like the imposition of a tariff. “Trade facilitation” refers to the simplification of export and import processes, making it easier to trade across countries. “Trade remedies” refers to actions taken by states against certain imports that are hurting domestic industries.

For example, in 2016 the Australian Anti-Dumping Commission slapped duties on Italian tomatoes that were being sold in Australia for less than they sold in Italy.

The data show that tariffs have been declining in the G20 over the past few years, while countries have been easing the processes of exporting and importing. However there have been a lot of trade remedies, as countries try to protect their domestic industries.

But looking at data on non-tariff barriers to trade tells a very different story.

https://datawrapper.dwcdn.net/6KdJA/1/

Until 2015 there was a huge increase in non-tariff measures, which then sharply declined. Since then not many measures have been removed. This shows that non-tariff barriers are currently the major mechanism for trade restrictions in the most developed economies.

As in the case of technical standards and regulations, non-tariff barriers can be used as a form of covert trade protectionism.

Technical standards and regulations can be quite legitimate and necessary for a range of reasons. They could take the form of a limit on what gases cars are allowed to emit, earthquake standards in regions prone to seismic activity, and even nutritional information on food and drinks.

But having too many different standards makes life difficult for companies that wish to access a market, as one product or service will need to comply with different standards in many countries.

https://datawrapper.dwcdn.net/SC3Wl/2/

What has occurred in Australia echoes what has happened throughout the G20. There has been little activity recently in tariffs, but a significant use of non-tariff and technical barriers to trade.

This is a huge shift in Australia’s economic policy, which had until recently emphasised trade liberalisation as a recipe for growth.

According to the Australian Productivity Commission, trade restrictions directly raise the cost of both foreign and domestic goods and services, negatively impacting both Australian consumers and businesses.

Where to from here?

President Donald Trump’s trade agenda aims to distance the United States from the World Trade Organisation, which was setup to remove barriers to international trade.

In response, companies in the United States are now filing a huge number of anti-dumping cases against foreign goods and services.

At first glance, Australia appears to be off the hook when it comes to Trump’s hardline approach. We already have a bilateral trade agreement with the United States, not to mention a US$28 billion trade deficit with the US.

The ConversationBut the dangers of Trump’s trade doctrine could affect other countries and this disruption to global supply chains and financial security would eventually flow on to Australia.

Giovanni Di Lieto, Lecturer, Bachelor of International Business, Monash Business School, Monash University and David Treisman, Lecturer in Economics, Bachelor of International Business, Monash Business School, Monash University

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

What income inequality looks like across Australia


Nicholas Biddle, Australian National University and Francis Markham, Australian National University

With affordable houses increasingly out of reach, wage growth slow and household debt high, Australians are certainly feeling poor. But how do they compare to their neighbours? New Census data confirms there’s a lot of variability in income.

The Census breaks the country up into 349 geographic regions (named in quote marks below), some of which cover more than one major town and some of which group related suburbs within cities. We examined 331 of these regions, excluding those containing fewer than 1,000 households.

The data show there are high levels of income inequality within these regions. A simple way to measure this is to look at the ratio of income between those who are well off (the top 20% within a region) and of those who are relatively disadvantaged (the bottom 20%) in the Census data. In Australia the weekly household income for the top 20% (A$1,579 per week) is 3.5 times the income of the bottom 20% (A$457).


https://cdn.theconversation.com/infographics/111/f2b689c1ab84b5613696b7ec6810186798244fac/site/index.html


The “Melbourne City” region has the most unequal incomes in Australia, where the top 20% have an income that is 8.3 times as high as those in the bottom 20%. “Adelaide City” (ratio of 5.5) and the “Sydney Inner City” (4.8) also have quite high levels of inequality.

Two of the poorest regions in the Northern Territory also have very high inequality. These are the vast region that encircles Darwin, called “Daly, Tiwi, West Arnhem” (ratio of 5.2) and the “East Arnhem” region (5.3).

However, there are regions with varying income levels, that also had relatively low inequality ratios. The region of “Molonglo”, in South Canberra (ratio of 2.2), “West Pilbara” in Western Australia (2.4) and “Kempsey, Nambucca” on New South Wales’ north coast (2.5) all have low levels of inequality.

For our analysis, we used equivalised household income. Equivalisation is a technique in which members of a household receive different weightings, based on the amount of additional resources they need.

The Australian Bureau of Statistics assumes that the first adult in a household has a weighting of 1, each additional adult a weighting of 0.5, and each child a weighting of 0.3. Total household income is then divided by the sum of the weightings for a representative income.

Incomes across Australia

For the whole of Australia, the equivalised median household income (the income in the middle of the distribution) is A$878 per week. The region with the lowest median income was “Daly, Tiwi, West Arnhem” in the Northern Territory, at A$510 per week.


https://cdn.theconversation.com/infographics/109/19cd8878d4e989ae653c8c1338ef8552106a1e10/site/index.html


However, several regional areas like “Maryborough, Pyrenees” (northwest of Ballarat in Victoria), “Kempsey, Nambucca” (NSW), “Maryborough” (between Bundaberg and the Sunshine Coast in Queensland), “Inverell, Tenterfield” (in NSW’s Northern Tablelands) and “South East Coast” in Tasmania all had median incomes of A$575 per week or less.

At the other end of the distribution, households in leafy suburbs of North Sydney – “Mosman” (NSW) had a median income of A$1,767 per week. Areas like “South Canberra” (ACT), “Manly” (in Sydney’s east) and the mining-dominated “West Pilbara” (WA) all had median incomes of A$1,674 or more per week.

We also looked at the extremes of the distribution. We define high income as those households with an income of A$1,500 or more per week. This equates to about 22% of the population. We defined low-income households as having an income of less than A$400 per week (about 14% of households).

Around 40% of households in the “Daly, Tiwi, West Arnhem” region were classified as being in poverty compared to around 6% in “North Sydney, Mosman” region. Conversely, around 60% of households in this region were classified as having high income, compared with only 6% of households in “Kempsey, Nambucca”.

How segregated are we within regions and cities?

While government policy is often delivered at the regional level, people live their lives at the local or neighbourhood level. However, the relatively disadvantaged and the upper-middle class are often segregated within these regions.

Richard Reeves of the Brookings Institute argues the segregation of the upper-middle class in Australia means this group “hoards” the benefits in the region they live in. Among the location advantages he lists are: access to the best schools, opportunities to network with the wealthy and powerful and the ability to disproportionately accrue capital gains on housing assets. To avoid this kind of “opportunity hoarding”, the rich and poor would need to be evenly spread within a region.

A simple way to look at this is through a “dissimilarity index”. In essence, this measures the evenness with which two groups are spread across a larger area. It ranges from zero to one, with higher values indicating a more uneven distribution and zero indicating complete mixing.

Looking at the distribution of the high income. Across Australia, the dissimilarity index has a value of 0.27. This means that around 27% of high-income households would have to move neighbourhoods to make the distribution completely even.

This varies quite substantially by region. “Far North” (encompassing Cape York in QLD) has a dissimilarity index of 0.42. “Auburn” (in western suburbs of Sydney, NSW) and “Playford” (on Adelaide’s northern fringe) also have quite large values.

Our richest regions tend to have the most even distribution of the wealthy, with “North Sydney, Mosman”, “Molonglo” and “Manly” having values of 0.06 or less.

“East Arnhem” has a very high level of concentration of low income individuals by neighbourhood, with a dissimilarity index of 0.70. The next two highest regions (“Katherine” and “Alice Springs”) are also in the Northern Territory, with index values of 0.53 and 0.55 respectively.

We can also compare the measures we used, to find out how they relate to each other. The following figure shows that the richest regions tend to be those with the highest level of income inequality.

However, as inequality goes up, there tends to be a greater concentration of low income households by neighbourhood (there’s also less of a concentration of high income households).

Have and have nots

It’s true that the level of income mobility is higher in Australia than it is in the US. However, Australia also has prominent examples of economic policies that disproportionately benefit the upper-middle class, such as the capital gains tax discount and superannuation tax incentives.

Australia also has a geographically concentrated income distribution, with the rich living in neighbourhoods with other rich people. The poor are also more likely to live in close proximity to people who share their disadvantage.

If Richard Reeves is right, and the spatial segregation of high and low income households reinforces inequality across the generations, then policies that encourage the mixing of different social classes in the same neighbourhood and region should be a way forward.


The ConversationThis article was put together with research assistance from Hubert Wu, Australian National University and Harvard University.

Nicholas Biddle, Associate Professor, ANU College of Arts and Social Sciences, Australian National University and Francis Markham, Research Fellow, College of Arts and Social Sciences, Australian National University

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

The G20’s economic leadership deficit


Adam Triggs, Australian National University

Few have heard of the Baltic Dry Index. It measures the demand for bulk shipping carriers, used for international trade. It usually attracts little attention. But nine years ago this index had the undivided attention of the 20 most powerful leaders in the world.

It was when the global financial system was on a precipice. Stock markets were crashing. Credit markets were freezing. Rolling failures across financial institutions were shattering confidence. Unable to wait for monthly trade data, the Baltic Dry Index showed in real-time what many leaders feared: global trade and commerce were grinding to a halt.

Leaders faced the real prospect of another Great Depression. But they were determined not to make the mistakes of the past. They resisted a return to protectionism. They slashed interest rates and buttressed the International Monetary Fund and development banks. Over the next three years, they implemented US$5 trillion of co-ordinated fiscal stimulus, the largest in history.

That leadership is needed again today. The risks leaders face at the latest G20 meeting in Hamburg, Germany, might not be as serious as those the leaders who met in Washington faced back in 2008. But the risks are present, and leaders are disengaging with the G20’s ever-expanding agenda. They are more likely to use the G20 for cheap political point scoring than for advancing co-operation on critical global challenges.

Australia can play a role in helping the G20 to deliver this leadership.

Economic challenges

Protectionist measures are on the rise. Protectionist rhetoric is rising faster. The World Trade Organisation shows that the stock of trade-restrictive measures is growing, up 8.5% in the 12 months to May 2017 alone.

The G20’s growth agenda from 2014 is in tatters. The G20 committed to make G20 GDP 2.1% bigger by 2018. Instead, the International Monetary Fund forecasts it to fall short by almost 6%.

A strong, effective G20 is manifestly in the interests of the global community, but particularly of Australia. Three-quarters of our merchandise trade is with G20 countries. Our banks rely on them for wholesale funding. Our tourism sector relies on them for two-thirds of our tourists. Our universities rely on them for the vast majority of their students.

Critically, the G20 is an opportunity for Australia to have a say in how global governance will be shaped in the years ahead and to be a regional champion for Asia.

Through in-depth interviews with over 40 central bank governors, ministers and officials from G20 countries, my research suggests there are practical things the G20 could do to increase its relevance. Importantly, participants see Australia as a developed economy, closely integrated in Asia and which promotes the values of the open, rules-based international order. This makes Australia well placed to push for pragmatic changes to improve the G20 process, particularly having hosted the 2014 meeting.

My interviewees warned that the G20’s agenda is too heavily dictated by the host country. In 2011, when France hosted the meeting, President Nicolas Sarkozy asked UK Prime Minister David Cameron to produce a report on reforming global governance. This instantly elevated the issue and saw substantial involvement from other leaders. Australia should push for allowing more leaders to champion the issues important to them, rather than leaving it all to the host country.

Participants similarly suggested that the G20’s peer-review process is too weak. This is the process through which countries review and give advice on each other’s policies. It’s critical to the G20’s ability to generate peer pressure, which is how a non-binding forum influences policies.

But participants saw this process as being a “tick and flick” exercise, isolated to junior officials in G20 working groups. Australia should advocate to change this, elevating the peer-review process to the level of ministers, governors and leaders. This will allow the people who have political capital to raise substantive points with one another.

For the G20 to demonstrate global leadership, participants suggest that it needs a genuine agenda for growth, with a stronger focus on making growth more inclusive. The OECD has some suggestions for this, such as investment in infrastructure, education and microeconomic reforms that lift workforce participation and create new opportunities for quality investment. The IMF shows that GDP gains can be 25% larger if structural reforms like this are co-ordinated between countries.

Participants also wanted progress on trade but warned that reaching agreement has been difficult. Recent research suggests the G20 should seek to promote consistency between the plethora of global, regional and bilateral trade agreements and develop a framework for how they can be scaled up into a global, WTO-led agreement.

The research shows that countries benefit most when trade liberalisation happens globally, but the “noodle bowl” of existing trade agreements is a nightmare for exporters to navigate. Australia, as a strong advocate for free trade, is well placed to show leadership on this issue.

Outcomes on trade are also vital for inclusive growth. Research shows that the poor can afford 63% more goods and services because of free trade, more than twice the benefit that flows to the rich.

But talk is cheap. It’s easy to commit to reforms but only half of G20 commitments are being implemented.
Australia should push for a serious accountability framework to monitor implementation and identify the countries that fall short.

The ConversationA weakening of the G20 is a weakening of Australia’s international influence. Few countries have a greater incentive to put solutions on the table.

Adam Triggs, Research fellow, Australian National University

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

Vital Signs: how likely is another financial crisis? It comes down to what we believe


Richard Holden, UNSW

Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.

This week: let’s take a break from the data and analyse why the Chair of the United States Federal Reserve says another financial crisis is unlikely in our lifetimes.


Last week I wrote in this column that Reserve Bank of Australia Governor Philip Lowe was not taken to giving boring speeches. This week, Federal Reserve Chair Janet Yellen went him one better with her remarks to the British Academy.

Yellen said of the prospect of another financial crisis like that of 2008:

I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t think it will be.

Her rationale was that the regulatory changes put in place since the crisis have made the system a great deal safer.

Yellen expressed her hope that these regulations would not be overturned, saying of attempts to do so:

We’re now about a decade after the crisis and memories do tend to fade, so I hope that won’t be the case, and I hope those of us who went through it will remind the public that it’s very important to have a safer, sounder financial system and that this is central to sustainable growth.

One piece of evidence supporting Yellen’s view were the so-called “stress tests” that the Federal Reserve has performed on US banks since 2011.

Just hours before this writing, the Fed approved plans for proposed dividend payouts for all 34 firms taking part in their annual stress tests. This is the first time since the annual stress tests began that all participating firms got a passing grade from the Fed.

So what should we make of Yellen’s prediction? This doesn’t have the ring of “confidence-boosting” rhetoric. It seems as though this is her genuine view.

At this point I should make two things clear. One: I have enormous respect for Janet Yellen, and two: I was fairly surprised by her remarks. So how does one reconcile these?

We still don’t know what caused the global financial crisis

It’s important to understand that the proximate cause of the financial crisis was a kind of “bank run on the system”. In a classic bank run – like the ones of the Great Depression – depositors go from believing that other depositors think their banks are safe, and are therefore willing to leave their money there, to believing that others consider the banks unsound.

Once investors believe that other investors are going to run on the bank, they want to run too (because banks typically hold less than 10% of the cash required to pay back all depositors). In the language of game theory, there is a switch from the “good equilibrium” to the “bad equilibrium”.

In the financial crisis there wasn’t a run on traditional banks so much as on investment banks and other financial institutions. This led to credit markets drying up (such as the commercial debt and “repo” markets).

What caused this shift in beliefs is a hotly debated issue. The large increase in US house prices and imprudent lending by US mortgage originators played an important role. The use of collateralised debt obligations (CDOs) and synthetic versions of CDOs were important. Lack of regulator controls allowed these things to happen, and incentives within financial institutions facilitated and encouraged risk and bad behaviour.

Yet for quite a long time the “good equilibrium” prevailed. What caused the switch?

That is the big question, and I’m pretty confident that not even Yellen knows the answer.

It all comes down to what we believe

What Yellen does seem to be saying is that regulatory responses to the crisis have made it much less likely that bad behaviour is going to occur. That certainly seems plausible. And if there is no – or very little – bad behavior, then beliefs about what other believe may not be particularly important.

But if there is a view that some new form of moral hazard is taking place, and people lose faith in the regulatory regime, then perhaps 2008 could occur again. And soon.

As game theory – and the lessons of the classic depression-era bank runs – teach us, it all comes down to what people believe about what other people believe.

The ConversationThat seems like a pretty slippery object to me.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

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

Rumours of the death of multinational tax avoidance are greatly exaggerated


Michael West, University of Sydney

The Australian government took out newspaper ads earlier this month boasting of unequivocal victory in the fight against multinational tax avoidance.

It is no small irony that taxpayers have forked out for this bald-faced lie. “Multinational corporations earning Australian dollars now pay their fair share of Australian tax,” decreed the ad.

The Australian government advertisement falls a long way short of telling the whole truth about multinationals’ tax.
Commonwealth of Australia

Hardly. While it is true that the Australian Tax Office (ATO) and the federal government have reaped more income tax from multinationals this year than they had earlier anticipated, this is a fight that has only just begun.

Were it not for increasing community awareness of multinational tax avoidance – the world’s biggest rort – and rising concern over tax fairness, things would be worse. So the positive perspective is that, yes, inroads are being made via the diverted profits tax, the ATO’s tax avoidance task force and the multinational anti-avoidance law, which was enacted late in 2015.

Tax Office people privately confide, too, that another A$2 billion may drop this year. That’s A$2 billion on top of earlier expectations – A$1 billion from tightened enforcement and another A$1 billion from “behavioural” factors: better behaviour by some multinationals, in other words.

As the swathe of December year reports have flowed through this month and last, it is evident that some companies such as Google and Facebook have been paying more tax, albeit slightly more and still well short of reasonable amounts.

Same old tricks

Others, such as oil giants Exxon, Shell and Chevron, digital players Booking.com, Airbnb, Expedia and eBay, and assorted others such as American Express are up to their same old tricks. We are presently analysing Big Pharma, a sector that is swimming in taxpayer subsidies thanks to the Pharmaceutical Benefits Scheme (PBS) and then has another bite of the cherry via transfer-pricing shenanigans as well.

To a couple of serial offenders, Goldman Sachs and News Corporation. The 2016 financial statements for “Goldies”, as the Giant Vampire Squid is affectionately known in financial markets, are utterly inadequate.

For a start, they are not even consolidated, so don’t provide a true picture of the profitability of Wall Street’s famous, or infamous as many would put it, investment bank. Its head entity in Australia, Goldman Sachs Holdings ANZ Pty Ltd, discloses revenues of just US$24 million, the same as the prior year and well shy of the US$45 million booked in finance costs. Then the profit and loss statement shows an income tax “benefit”, yes benefit, of US$2.4 million, compared with last year’s benefit of US$18.5 million. There was a bottom-line loss in both years.

On this, it would appear that Goldman has paid zero tax in the past three years in Australia. Travelling along to the cash-flow statement, though, they disclose US$286 million was paid in tax last year (down from tax received of US$8.5 million). But when you get to the notes to the accounts it shows an income-tax benefit of US$2.4 million.

All of this is meaningless, of course. As the accounts are not consolidated, they don’t disclose what has been going on in the whole group. Further, tax may have been paid in Hong Kong, the domicile of the immediate parent, or elsewhere.

The usual feature of high finance charges and large related party loans are there, not to mention “service fee expenses” with related parties. Merchant banks such as Goldman Sachs, being banks, get away with a lot on the tax front.

Our very own Macquarie Bank had a keen reputation for tax structuring until it got pinged by authorities three years ago. In 2008, it even recorded a tax rate of 1.7% after a jumbo “tax arb” transaction, a currency swap so successful that it delivered a profit of A$850 million in Asia and a matching loss in Australia.

So a billion-dollar profit bore almost no tax.

At least Macquarie pays homage to financial accounting standards and doesn’t file a pitiable and arguably non-compliant set of accounts like Goldman. ASIC could issue an edict tomorrow, if it had the courage and a burst of energy, decreeing that any multinational company operating in Australia had to file proper “General Purpose” accounts.

Feeling the heat

This brings us to the entity formerly identified as the nation’s number one “tax risk”, Rupert Murdoch’s News Corporation. That mantle has probably gone to Chevron now. After being rapped over the knuckles by the Senate Inquiry into Corporate Tax Avoidance two years ago, News has begun to pay more tax: A$110 million last year.

https://datawrapper.dwcdn.net/kFdQN/2/

The main ruse was to create A$7 billion in “goodwill” in 2004 via a string of related party transactions and then to rip out A$4.5 billion in profits to the US.

News is still deploying this “repatriation of capital” subterfuge to this day. This practice may be legal but it is unethical. The creation of “internally generated goodwill” could be described as suspect in the least. A “magic pudding” was the way former University of NSW accounting academic Jeffrey Knapp labelled it.

Over the ten years to 2015, Rupert Murdoch’s companies paid income tax equivalent to a rate of 4.8% on A$6.8 billion in operating cash flows, or just 10% of operating profits.

The basic numbers for the past two years are: A$110.5 million tax on revenues of A$3.1 billion and profit of A$156 million. In
2015, it was A$109 million tax paid on revenues of A$2.95 billion and profit of A$287 million.

They are still aggressively debt loading, however, or giving themselves loans from overseas so they can rip out interest before paying tax. The critical numbers are A$2.6 billion in related party borrowings on which they paid A$130 million to themselves in related party interest charges offshore. Overall, debt jumped from A$2.4 billion to $4.3 billion.

A A$411 million loan to Foxtel, which News owns with Telstra, remains. The interest rate on this loan is 10.5%, more than double what the average wage earner pays on a mortgage. This is another ruse to avoid tax.

All in all, it’s a better effort from News, but the evidence on multinational tax avoiders is in. There is improvement, but still a very long way to go.


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.

Australians want insurance against the burden of old age



File 20170622 3042 eqzgn0
Aged care costs are rising.
Shutterstock

Susan Thorp, University of Sydney

With the cost of caring for the elderly increasing, and the population ageing, Australia needs new sources of funding for aged care. In many parts of the world some of the cost is borne by private insurance, and new research shows there is demand for this in Australia as well.

There are several models of insurance to help fund aged care. One model is similar to what is found in the United States, where a customer pays an insurance premium each year and the insurance provider then covers (at least part) of the actual cost of getting professional care. But this restricts the customer to getting formal professional care if they become disabled or incapacitated.

Another model, somewhat similar to the system in France, has customers paying a premium each year and then receiving cash payments if they require aged care. Under this arrangement the insurer pays an agreed amount of money each year if the customer is disabled or incapacitated. There is no restriction on how that money might be used. This model is more flexible, and allows the customer choice over who provides care (it might be a family member) and where they reside.

Aged care is costly and growing

People now aged 65 have close to a three in five chance of needing some type of formal care over the remainder of their lives and around a two in five chance of spending at least some time in residential care.

The cost for this care can run from around A$1,000 each year for basic home support, to around A$65,000 each year for residential aged care. The cost is typically shared between the care receiver and the federal government.

Home care supports people to live independently in their own home. This can range from help with housework or managing medicine, to nursing services and palliative care. Residential care is for people who depend on ongoing nursing and includes accommodation in an aged care institution.

People on the full Age Pension pay 17.5% of their pension as a basic fee for in-home care, or 85% of their pension for residential care. Better-off pensioners also pay an additional fee that rises with their income up to certain limits.

But despite the cost sharing, the federal government’s share is high and rising. Federal government expenditure on aged care is now around 1% of GDP and is expected to rise to around 1.8% by 2050.

Around 80% of people who receive some aged care also get informal help, often from family or friends. While this care is unpaid and hard to value, it is likely to be worth around 4% of GDP and can lead to a loss of earnings and emotional strain for the care giver.

There is demand for insurance

Insurance could be a solution to the scale, scope and cost of aged care. But in Australia, there is little on offer. Our research shows that a majority of middle aged Australians would purchase aged care insurance in the form of an income stream that pays extra if they suffer ill health.

We asked people to choose between several options for funding their aged care. A life annuity (a regular, life-long income of around A$25,000 p.a. including the Age Pension), aged care insurance (paying about A$26,000 in ill health or disability), and an account-based pension (such as superannuation).

Men chose to use 25% of their retirement savings of A$175,000 on the life annuity, about 15% on aged care insurance and placed the remainder in the account based pension. Women made similar allocations. Overall, people chose insurance payments that were similar to the actual costs of aged care.

Insurance that provides an income rather than reimbursements suits people who prefer informal, in-home care. This is most likely to be women who think they need high level, informal care. Men who thought they would need informal care did not choose the insurance.

Women’s willingness to fund informal care with income could be related to an anticipation that they will outlive their partners, a desire not to “be a burden” to their family, an intention to make gifts to children who care for them, or a wish for flexibility and control.

The ConversationLarge scale, long term aged care expenses are a relatively recent problem – the outcome of population ageing and rising health costs. Our study shows that many people want help to manage these risks. However the current design and marketing of aged care insurance products present an array of difficult financial and communication problems for the financial services sector.

Susan Thorp, Professor of Finance, University of Sydney

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

Bust the regional city myths and look beyond the ‘big 5’ for a $378b return



File 20170623 27880 7ozx6i
Geelong’s relatively high creative industries score, coupled with a robust rate of business entries, provides a solid foundation for steady growth.
paulrommer from www.shutterstock.com

Leonie Pearson, University of Canberra

Investing in regional cities’ economic performance makes good sense. Contrary to popular opinion, new research out today shows regional cities generate national economic growth and jobs at the same rate as big metropolitan cities. They are worthy of economic investment in their own right – not just on social and equity grounds.

However, for regional cities to capture their potential A$378 billion output to 2031, immediate action is needed. Success will see regional cities in 2031 produce twice as much as all the new economy industries produce in today’s metropolitan cities.

Drawing on lessons from the UK, the collaborative work by the Regional Australia Institute and the UK Centre for Cities spotlights criteria and data all Australian cities can use to help get themselves investment-ready.

Build on individual strengths

The Regional Australia Institute’s latest work confirms that city population size does not determine economic performance. There is no significant statistical difference between the economic performance of Australia’s big five metro cities (Sydney, Melbourne, Brisbane, Perth and Adelaide) and its 31 regional cities in historical output, productivity and participation rates.

https://datawrapper.dwcdn.net/LSkSm/1/

So, regional cities are as well positioned to create investment returns as their big five metro cousins. The same rules apply – investment that builds on existing city strengths and capabilities will produce returns.

No two cities have the same strengths and capabilities. However, regional cities do fall into four economic performance groups – gaining, expanding, slipping, and slow and steady. This helps define the investment focus they might require.

For example, the report finds Fraser Coast (Hervey Bay), Sunshine Coast-Noosa and Gold Coast are gaining cities. Their progress is fuelled by high population growth rates (around 2.7% annually from 2001 to 2013). But stimulating local businesses will deliver big job growth opportunities.

Rapid population growth is driving the Gold Coast economy, making it a ‘gaining’ city.
Pawel Papis from www.shutterstock.com

Similarly, the expanding cities of Cairns, Central Coast and Toowoomba are forecast to have annual output growth of 3.2% to 3.9% until 2031, building on strong foundations of business entries. But they need to create more high-income jobs.

Geelong and Ballarat have low annual population growth rates of around 1.2% to 1.5%. They are classified as slow and steady cities. But their relatively high creative industries scores, coupled with robust rates of business entries, means they have great foundations for growth. They need to stimulate local businesses to deliver city growth.

Get ready to deal

Regional cities remain great places to live. They often score more highly than larger cities on measures of wellbeing and social connection.

But if there’s no shared vision, or local leaders can’t get along well enough to back a shared set of priorities, or debate is dominated by opinion in spite of evidence, local politics may win the day. Negotiations to secure substantial city investment will then likely fail.

The federal government’s Smart Cities Plan has identified City Deals as the vehicle for investment in regional cities.

This collaborative, cross-portfolio, cross-jurisdictional investment mechanism needs all players working together (federal, state and local government), along with community, university and private sector partners. This leaves no place for dominant single interests at the table.

Clearly, the most organised regional cities ready to deal are those capable of getting collaborative regional leadership and strategic planning.

For example, the G21 region in Victoria (including Greater Geelong, Queenscliffe, Surf Coast, Colac Otway and Golden Plains) has well-established credentials in this area. This has enabled the region to move quickly on City Deal negotiations.

Moving past talk to be investment-ready

There’s $378 billion on the table, but Australia’s capacity to harness it will depend on achieving two key goals.

  • First, shifting the entrenched view that the smart money invests only in our big metro cities. This is wrong. Regional cities are just as well positioned to create investment returns as the big five metro centres.

  • Second, regions need to get “investment-ready” for success. This means they need to be able to collaborate well enough to develop an informed set of shared priorities for investment, supported by evidence and linked to a clear growth strategy that builds on existing economic strengths and capabilities. They need to demonstrate their capacity to deliver.

While there has been much conjecture on the relevance and appropriateness of City Deals in Australia, it is mainly focused on big cities. But both big and small cities drive our national growth.


The ConversationYou can explore the data and compare the 31 regional cities using the RAI’s interactive data visualisation tool.

Leonie Pearson, Adjunct Associate, University of Canberra

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

Income inequality exists in Australia, but the true picture may not be as bad as you thought



File 20170511 21615 hbimrh
Wealth inequality remains a problem in Australia, but it is lower now than in the years leading up to the GFC.
Flickr/Sacha Fernandez, CC BY-NC-SA

Roger Wilkins, University of Melbourne

We hear a lot about inequality in Australia but the true picture is much more complicated than the headlines usually suggest.

The data indicate that wealth inequality has grown but is lower now than before the global financial crisis (GFC). And while the personal incomes of the very rich have gone up, overall household income inequality has barely shifted since the start of this century.

Economic inequality refers to the extent to which material well-being differs across people – how rich are the rich, how poor are the poor. But there are different ways to be rich, and different ways to be poor.

Income inequality is about the gap between people with high incomes and low incomes. Wealth inequality, on the other hand, looks at the gap between people with high net worth (for example, a lot of houses, stocks or other assets) and people with low net worth (few or no assets). People could have very similar incomes but be at opposite ends of the scale when it comes to their wealth, for example.

In practice, attention typically focuses on income inequality, although it is also important to consider wealth inequality.

Since 2000-01, there have been three key data sources for examining income inequality in Australia: the Australian Bureau of Statistics’ (ABS) Household Income and Wealth surveys, the Household, Income and Labour Dynamics in Australia (HILDA) Survey that the Melbourne Institute has been running since 2001, and the Australian Taxation Office’s tax records data.

The first two can also be used to examine wealth inequality.

For various reasons, the three data sets do not tell exactly the same story about income inequality trends since the beginning of this century. Nonetheless, there are some key conclusions we can draw.

1. The top 1% got richer, faster – but overall household income inequality has barely changed

The first conclusion is that the personal incomes of the very rich have grown somewhat more strongly than the personal incomes of the rest of the population.

For example, data compiled by the World Wealth and Income Database (WID World) show that the share of income going to the top 1% rose from 7.5% in 2000-01 to 9% in 2013-14.


WID World

Despite this increase in inequality of personal incomes at the top, measures of overall inequality of household incomes (as opposed to personal incomes) show relatively little net change this century.

One way to track this is to look at the Gini co-efficient, a commonly used measure of inequality that ranges from zero to one. Zero means total equality, with everyone on the same income. A Gini coefficient of one means complete inequality, the equivalent of one person having all the income.

HILDA survey data show that Australia’s Gini coefficient was 0.303 in 2000-01 and 0.296 in 2014-15. In other words, it has barely shifted.

https://datawrapper.dwcdn.net/rPb7b/2/

The ABS income survey shows a small increase from 0.311 in 2000-01 to 0.333 in 2013-14, but this increase can be attributed to changes made by the ABS between 2003-04 and 2007-08 to the definition and measurement of income:

https://datawrapper.dwcdn.net/1sSSg/2/

Being a longitudinal study, the HILDA Survey also allows us to consider inequality in incomes measured over longer intervals than one year. Incomes can fluctuate from year to year, and so we may get an exaggerated picture of income inequality if we examine only annual income. Some people who appear poor in one year may in fact have high incomes in other years and so, overall, are not really poor.

The HILDA Survey indeed shows that inequality of income measured over five years is lower than inequality of annual income. However, of some concern is that measures of inequality of five-year income have been trending upwards since the early 2000s — although the increase is very slight.

https://datawrapper.dwcdn.net/jCXat/2/

2. Wage inequality has increased

While that’s been happening, however, the labour market has become more unequal.

Wage inequality is typically thought of in terms of inequality in earnings per hour worked, while labour market inequality more broadly could be thought of as inequality in total (annual) earnings across all persons in the labour force.

Wage inequality has steadily risen and, moreover, the share of employment that is part-time has risen. Research published last year showed that the higher your pay relative to others, the more likely you are to get a better pay rise.

https://datawrapper.dwcdn.net/U6pJF/2/

On the surface, it is remarkable that the large rise in labour market inequality has not — at least, not yet — translated to large increases in income inequality.

The reasons for this are complex, but an important contributor has been the relative concentration of employment growth in low-income households.

Another potential reason why increased wage inequality has not translated to increases in income inequality is our system of progressive income taxes and transfers. However, this seems largely to not be the case in the 2000s in Australia, since the tax and transfer system actually became less redistributive (was doing less to reduce income inequality) over this period.

So while the tax and transfer system has probably moderated the effects of increased wage inequality on income inequality, it has not completely neutralised it.

3. Wealth inequality grew – but is lower now than in the years leading up to the GFC

In terms of wealth, both the ABS income surveys and the HILDA Survey indicate that wealth inequality grew strongly in the years leading up to the global financial crisis (GFC).

The HILDA Survey, which has collected detailed wealth data every four years since 2002, shows that the wealth required to be in the top 1% of the wealth distribution increased by 140% in real terms between 2002 and 2006. This was a period in which both house prices and the share market were rising strongly.

However, wealth inequality appears to have moderated slightly since the GFC, with the wealth required to be in the top 1% actually 9% lower in 2014 than in 2006. This appears to primarily derive from weaker share market performance. The ASX200, for example, was approximately 20% below its October 2007 peak in late 2014 (and even now is still over 10% below the peak).

Perception and reality

In light of the minimal changes in overall income inequality this century, and the evidence that wealth inequality is lower now than in the years leading up to the GFC, it is perhaps surprising that public perceptions appear to be that inequality is growing strongly.

Income inequality has grown in the US more sharply than it has in Australia.
World Wealth and Income Database WID World

Perhaps also important is that household income growth in Australia has slowed since 2008-09, and indeed has essentially stalled since 2011-12. In part, this reflects slowing wage growth, but also important has been relatively weak growth in employment, and in particular full-time employment.

For example, the forthcoming HILDA Survey Statistical Report will show that, at December 2015 prices, the median “equivalised” household income – that is, household income adjusted for household size – was A$46,031 in 2011-12 and was still only A$46,007 in 2014-15.

The ConversationThis stagnation in average living standards is arguably likely to lead to greater focus on the fairness of the income distribution.

Roger Wilkins, Professorial Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, University of Melbourne

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

New tax treaty will close loopholes that allow multinationals to avoid tax


Miranda Stewart, Australian National University

Australia, with another 70 countries, has signed a multilateral treaty to create more coherence in fighting tax avoidance by large multinational corporations. The Multilateral Convention to Implement Treaty Measures to Prevent Base Erosion and Profit Shifting, or BEPS Convention, aims to close loopholes in the international tax system that result from differences in individual country tax systems.

Countries are fiercely protective of their own tax sovereignty and claim the right to set their own company tax rate and base. But this can result in lower company tax around the globe, as multinational enterprises can move capital investment to lower tax jurisdictions and take advantage of tax havens to reduce their global tax bill. This latest treaty will help to overcome this problem.

Since the global financial crisis, nearly a decade ago, the G20 countries have tried to reform international tax with a Base Erosion and Profit Shifting (BEPS) project. Australia has been a strong supporter of the BEPS project since it started, including as chair of the G20 in 2014.

This project resulted in 15 actions that were endorsed by the G20 in 2015. The signing of this tax treaty implements action number 15 to amend existing tax treaties to limit international tax planning.

The other BEPS actions aim to strengthen enforcement, remove inconsistencies in national tax rules, enforce disclosure of corporate tax profits in havens and encourage sharing of tax information between country revenue agencies.

Australia can’t go it alone on international tax

International tax cooperation remains critical and this BEPS Convention enables an anti-abuse framework to be embedded in Australia’s treaty network.

In the last century, countries around the world have negotiated bilateral tax treaties, producing a network of thousands of treaties. Australia alone has about 45 bilateral income tax treaties.

The main goal of bilateral tax treaties has been to prevent double taxation of international business where it operates in more than one country. But the terms of tax treaties can also be used to minimise tax. For example, a company may have significant business sales in a country – like Google in Australia – but under a treaty rule, it may not be treated as having a business presence there.

How does the BEPS Convention amend tax treaties?

Without this multilateral convention, it could take decades for countries to renegotiate these bilateral tax treaties. Where countries sign up, the new rules will take effect as soon as each country has ratified the convention.

The BEPS Convention is the first ever multilateral tax treaty that modifies substantive tax rules. Even the speed of signing the BEPS Convention is unprecedented: from treaty mandate to signature has been only 18 months. Most multilateral treaties take much longer, such as the Trans-Pacific Partnership, which has been in negotiation for more than nine years (and may not ever be agreed).

A leading British tax lawyer observed that the BEPS Convention is “not tax peace in our time”. But it is still significant.

The convention inserts a new anti-abuse rule which states that tax treaties are not to be used to abuse national tax laws, if a taxpayer uses a treaty rule for the principal purpose of reducing its tax liability in a country. The convention will also make changes to prevent mismatches in treaty tax rules and to end the artificial avoidance of a business tax presence in a country, for example by using a separate company to do its operations under a contract.

To push governments to resolve tax disputes, the convention inserts an arbitration clause into treaties. If two countries cannot resolve a treaty dispute, then after two years (and if no court case is on foot), it will go automatically to an independent arbitrator who can make a decision that binds the governments and taxpayer. Its controversial and many countries may not agree to arbitration but Australia has signed up to it.

Australia has adopted most of the BEPS Convention measures, as being consistent with its current tax treaty policy. But many countries, including Australia, will need to enact domestic legislation to bring the convention into law.

Once countries sign up, the treaty changes will take place immediately – this could amend as many as 30 of Australia’s treaties.

The future international tax architecture – but without the US?

The BEPS Convention was signed by more than 70 countries. This includes leading signatories such as China, Germany (the current G20 Chair), the United Kingdom, France and Japan and also several low tax financial centres like Singapore and Ireland. But the United States did not sign.

The US failure to sign is hardly surprising. It comes one week after President Trump withdrew the US from the Paris Climate Agreement. It’s another example of the US retreating from multilateral cooperation on issues affecting all nations.

The US also did not sign the Tax Administrative Convention, now with 111 country members, which provides the legal basis for the country by country exchanges of information about global profits for billion dollar companies, including with the Australian Tax Office. Instead the US insisted on “going it alone” with its Foreign Account Tax Compliance Act, or FATCA regime, which demands foreign countries provide data on US citizens.

Many US tax treaty provisions are in line with the BEPS Convention. But surely that misses the point of multilateralism in tax or any other field of global concern. Instead, we see China is taking a leading role in multilateralism. It is unclear what the US stance will mean for international tax in the longer term. However, this treaty will give some help to other countries aiming to tax global profits of US multinationals, including Google, Apple and Uber, while those companies lobby for the US to reform its own company tax laws.

The ConversationThe pace of international tax change is usually glacial and most country co-operative efforts go nowhere. The BEPS Convention provides, for the first time, an international legal architecture for future multilateral tax reform.

Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

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

Chinese influence compromises the integrity of our politics


File 20170606 3674 1jdxpk4
Former trade minister Andrew Robb walked from parliament into a high-paying post with a Chinese company.
Mick Tsikas/AAP

Michelle Grattan, University of Canberra

This week’s ABC Four Corners/Fairfax expose of Chinese activities in Australia is alarming – not just for its revelations about a multi-fronted pattern of influence-seeking, but also for what it says about our political elite.

Are its members – on both sides of politics – naive, stupid, or just greedy for either their parties or themselves?

Why did they think Chau Chak Wing and Huang Xiangmo – two billionaires with apparently close links to the Chinese Communist Party – and associated entities would want to pour millions of dollars into their parties?

Did they believe that, in the absence of democracy in the land of their birth, these businessmen were just anxious to subsidise it abroad? Hardly.

Even worse, after ASIO had explicitly warned the Coalition parties and Labor in 2015 about the business figures and their links to the Chinese regime, how could the Liberals, Nationals and ALP keep accepting more of their money? Seemingly, their voracious desire for funds overcame ethics and common sense.

And why would former trade minister Andrew Robb not see a problem in walking straight from parliament into a highly lucrative position with a Chinese company?

The spotlight is back on Labor senator Sam Dastyari who last year stepped down from the frontbench over a controversy involving a debt paid by Chinese interests. Monday’s program reported that Dastyari’s office and he personally lobbied intensively to try to facilitate Huang’s citizenship application. The application had stalled; it was being scrutinised by ASIO.

While the Liberals will, quite legitimately, renew their attacks on Dastyari, the case of Robb, also highlighted in the program, raises a more complex question.

Robb brought to fruition Australia’s free-trade deal with China. He announced his retirement late in the last parliament, stepping down as minister but seeing out the term as special trade envoy. He was one of the government’s most successful performers.

On September 2 last year Robb’s appointment as a senior economic adviser to the Landbridge Group – the Chinese company that had gained a 99-year lease to the Port of Darwin – was announced on the company’s website.

Landbridge’s acquisition of the Port of Darwin was highly controversial, despite being given the OK by the defence department. The Americans were angry they were not accorded notice, with President Barack Obama chipping Malcolm Turnbull about it.

Monday’s expose revealed that Robb was put on the Landbridge payroll from July 1 last year, the day before the election, and that his remuneration was A$73,000 a month – $880,000 a year – plus expenses.

Robb was touchy last year when his new position was questioned, saying: “I’ve been a senior cabinet minister – I know the responsibilities that I’ve got. I’ve got no intention of breaching those responsibilities.”

He did not give an interview to Monday’s program, but told it in a statement: “I can confirm that I fully understand my responsibilities as a former member of cabinet, and I can also confirm that I have, at all times, acted in accordance with those responsibilities”.

The formal responsibilities for post-separation employment are set out in the Statement of Ministerial Standards, dated November 20, 2015.

This says:

Ministers are required to undertake that, for an 18-month period after ceasing to be a minister, they will not lobby, advocate or have business meetings with members of the government, parliament, public service or defence force on any matters on which they have had official dealings as minister in their last eighteen months in office.

Ministers are also required to undertake that, on leaving office, they will not take personal advantage of information to which they have had access as a minister, where that information is not generally available to the public.

Ministers shall ensure that their personal conduct is consistent with the dignity, reputation and integrity of the parliament.

While Robb is not a lobbyist, and would argue that he has not contravened the letter of this code, it is hard to see how quickly taking such a position does not bring him into conflict with its spirit.

Why would this company be willing to pay a very large amount of money for his services? The obvious answer is because of who he is, his background, his name, his knowledge, and his contacts.

Robb surely would have done better to steer right away from the offer.

Both government and opposition, having for years been caught napping or worse about Chinese penetration, have started scrambling to be seen to be acting.

Turnbull last month asked Attorney-General George Brandis to lead a review of the espionage laws. Brandis says he will take a submission to cabinet “with a view to introducing legislation before the end of the year”.

The government is planning to bring in legislation in the spring parliamentary session to ban foreign donations, a complex exercise when, for example, a figure such a Chau, an Australian citizen, is involved.

In an attempt at one-upmanship, Bill Shorten – again on the back foot over Dastyari – says Labor won’t accept donations from the two businessmen featured in Monday’s program, and challenges Turnbull to do the same.

Shorten already has a private member’s bill before parliament to ban foreign donations, and on Tuesday wrote to Turnbull calling for a parliamentary inquiry “on possible measures to address the risk posed by foreign governments and their agents seeking to improperly interfere in Australia’s domestic political and electoral affairs”.

The ConversationOut of it all will come action on foreign donations and perhaps tighter espionage laws. But it is to the politicians’ deep discredit that they have been so cavalier about the integrity of our political system for so long.

Michelle Grattan, Professorial Fellow, University of Canberra

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