Other economics


A pause in interest rate rises

Three quotes from Tuesday’s media release when the Reserve Bank decided not to raise the cash rate target hint at what the Board is thinking. It’s a pause, not an end to interest rate rises:

The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt. The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook.

A range of information, including the monthly CPI indicator, suggests that inflation has peaked in Australia.

The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target. The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.

The RBA also acknowledges that problems experienced by banks in Switzerland and the USA will, de facto, have the same dampening effect as a rise in rates.

The pause is like a lull in an artillery barrage, as the enemy lets its guns cool down, re-stocks with shells, and ranges its guns more accurately.

One issue not covered in the RBA announcement, but covered in a paper in the March edition of the RBA Bulletin, is the impact throughout this year and next year when loans previously negotiated at low fixed rates have to be re-financed: Fixed-rate Housing Loans: Monetary Policy Transmission and Financial Stability Risks.

These loans, usually for three years, were generally taken out during the Covid period. The paper analyses the distribution of the shock to borrowers. While many of these loans are high risk, many borrowers have accumulated reasonable buffers in realistic anticipation of having to refinance at a higher rate.

Peter Martin, writing in The Conversation, summarizes the paper, and he provides an outlook for interest rates generally: Sure, the RBA froze interest rates this time, but there’s plenty of pain to come.


Productivity is almost everything

Productivity isn’t everything, but in the long run, it’s almost everything. Paul Krugman

In last week’s roundup there were links to journalists’ quotes on Ken Henry’s speech to the Tax Institute on the need for tax reform.

Media coverage of that event was mainly about Henry’s consistent message that tax reform had to be a complete package. It is sub-optimal for a government to attempt to reform taxes one-by-one, because every proposed change in tax evokes resistance from those who are concerned with its specific inequities and distortions. But with a comprehensive reform involving all taxes, state and federal, there can be net benefits all around – “Pareto” improvements in economists’ terms, or “win-win” outcomes in everyday parlance.

Public finance texts present tax design as a devilishly complicated task, but Henry gels the essence into one sentence, requiring:

… that it be capable of generating sufficient revenue to underwrite fiscal sustainability, without unacceptable consequences for economic efficiency, fairness (including intergenerational equity), risk, and system complexity.

He goes on to state that “Australia’s tax system fails every one of these tests”, before going into detail and argument.

While the media focus has been on his tax reform proposals, his address wove together two related themes: the need to collect more revenue (because our public spending has been rising faster than taxation) and the need to lift our productivity.

He has given permission to link his speech and accompanying slides on my site. If you are reasonably familiar with economic concepts you would find his slides carry his main message, while there is more detail and explanation in his speech.

To reduce his message to its bare essentials, we need tax reform because our productivity, and therefore our capacity to sustain a high material standard of living, has been falling.

If we are to deal with the opportunities and challenges we are facing – climate change, the digital revolution, the economic rise of Asia, our ageing population, and the loss of biodiversity and the destruction of ecosystems, we need structural reform. Tax reform, if done properly, is a crucial element in driving structural reform.

On tax reform his views seem to be little changed from those he presented in his 2010 Australia’s future tax system report, except that now, as a free agent, he doesn’t have to deal with a government foreclosing options by ruling out certain taxes, such as the GST and aspects of superannuation concessions as was the case in 2010.

But in view of the continued deterioration of Australia’s economic performance over that period, including our poor productivity, our continued dependence on commodity exports, and our low level of non-mining investment, his message has more urgency than it did thirteen years ago. Back then he was talking about opportunity costs, now he is talking more about avoiding losses.


Superannuation reform

Tax breaks for superannuation cost the public purse $45 billion a year. The Grattan Institute has put forward a suite of superannuation reforms designed to save between $11.5 billion and $13.5 billion a year: Super savings: practical policies for fairer superannuation and a stronger budget by Brendan Coates and Joey Moloney.

Most of these savings would result from taxing earnings from accumulated superannuation funds in the retirement phase. At present the earnings from funds with balances less than $1.9 million are tax-free. The authors propose that these earnings should be taxed at 15 percent, and that earnings from balances above $2 million should be taxed at 30 percent. This is a lower threshold for the 30 percent tax rate than the $3 million applying in the government’s recent reforms.

Even though these measures would wind back the tax breaks applying to high-wealth retirees, the effective tax rates on superannuation fund earnings would still be lower than tax rates applying to earnings from investments not held in superannuation accounts, and lower than taxes paid by people whose income comes from wages. So-called “self-funded” retirees would still be left in a privileged situation.

They also propose to make the tax breaks on superannuation contributions more progressive by applying a higher contributions tax for those with high incomes, and more generous incentives for people on low incomes to contribute to superannuation.

The principle behind the Grattan proposals is to ensure that superannuation serves its original purpose, as a means to support people’s income in retirement. It should not be a taxpayer-funded inheritance scheme, but that is what it is becoming.

Brendan Coates provides a short outline (8 minutes) of the proposals on ABC Breakfast: Calls for major super reforms to strengthen public purse.


More grizzles

The latest group to complain about the government’s decision to apply a 30 percent tax to earnings from funds with more than $3 million in assets are farmers who have put their farms into their self-managed funds. Presumably the public servants who advised the government hadn’t considered that anyone would be so rash as to put their own business into their superannuation fund – a practice strongly discouraged under the rules for establishing a superannuation trust deed.

The problem facing these unwise investors is that increases in farm land values show up as “income” in superannuation accounts, even though that capital gain is highly illiquid.

The Coalition, true to form, has come out in defence of the wealthy and unwise, but a simpler solution would be to exempt changing book values of land from being counted as income, until that gain is realized when the property is sold.


Who took the fun out of work?

Australian workers are feeling exhausted, fatigued, overexerted and burnt out.

That’s one revelation, and the one to have received most attention, of a major University of Melbourne research report State of the Future of Work. To quote from its six key findings:

  1. Prime aged workforce [18 – 54] workers report worse workplace health two years into the pandemic.
  2. Caregivers continue to experience disadvantage at work that increases their risk of attrition.
  3. Chronic illness is an increasing problem in the workplace.
  4. Discrimination is more prevalent and nuanced than previously thought.
  5. Flexible workers do miss their colleagues but they are happy, productive, and expect career advancement.
  6. Australian workers are unsure how AI will impact their skills and jobs.

It all makes dealing in hard drugs, speculating in land, or becoming a mortgage broker, look much more attractive than working for a living.

The authors suggest that people’s experiences in the pandemic have shaped their relationship with work. Many people were pushed around and overworked as the pandemic imposed new demands on workers in many industries. The pandemic itself, and workplace adaptations to the pandemic, all contributed to a period of elevated anxiety.

At the same time many workers had the opportunity to experience the flexibility of working from home, where they could be more productive and enjoy a more rewarding work-life balance. Now they resent the demand of being called back to the workplace, and the re-emergence of a culture of “presenteeism”.

Brendan Churchill, one of the 13 researchers, discusses the findings in a 7-minute interview on ABC Breakfast: Post pandemic workers are “exhausted and burnt out”. He is also one of three contributors to a summary in The Conversation: The “great resignation” didn’t happen in Australia, but the “great burnout” did. The authors conclude that article with a general call for change in our workplace behaviour and culture:

We must understand pre-pandemic ways of working didn’t work for many. It especially didn’t work for mothers. It didn’t work for caregivers. It didn’t work for people living with chronic illness. It didn’t work for groups vulnerable to discrimination at work. It didn’t work for people forced to commute long distances. So, going “back to normal” means continued disadvantage for these groups.

Apart from the direct influence of Covid, the authors do not go into the causes of this downturn in our enthusiasm for work: that would require another major study.

Maybe workers in public sector dominated industries – health care, teaching and policing – are feeling the accumulated effects of budget cuts. Maybe workers in hospitality, transport and retail industries are under excess pressure from performance management systems and cutthroat market competition. And maybe the bully boss, more concerned with his or her ability to control other people than with productivity, is still prevalent in workplaces.

On a related matter Giuseppe Carabetta of the University of Technology, Sydney, writes in The Conversation about a court case involving the notion of what constitutes reasonable hours: What are ”reasonable” hours? The Ryan-Rugg legal stoush may help the rest of us know. The specific case involves a worker in Parliament House, a particularly high-pressure work environment. His article lists ten factors, specified under the Fair Work Act, that determine whether a request for a worker to work longer than 38 hours a week is “reasonable”. These are under re-examination in the court case.