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Category: A sustainable economy

  • Euro in danger: Germans trigger panic over future of single currency

     

    European finance ministers, who have just hammered out a massive rescue plan for Greece, will hear controversial calls from Germany at a meeting tomorrow for changes to the Lisbon treaty to give Brussels powers to co-ordinate national budgets.

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    Ms Merkel believes that the EU should have stronger powers to organise the “orderly insolvency” of countries such as Greece that set giveaway budgets with no means of paying for them. After announcing a ban on speculative share trading in Germany’s top financial institutions and the bonds of eurozone countries until next March, she warned: “This challenge is existential and we have to rise to it. The euro is in danger. If we don’t deal with this danger, then the consequences for us in Europe are incalculable . . . If the euro fails, then Europe fails.”

    Her apocalyptic warning came as David Cameron prepared for his first visit as Prime Minister to Paris and Berlin, where he is likely to come under pressure to commit more British funds to EU bailout programmes.

    His desire to build relations with Ms Merkel will be tempered by his reluctance to see any more powers transferred to Brussels. However, with 54 per cent of Britain’s exports going to Europe, the economy is not immune to the effects of the euro’s problems.

    Ms Merkel may have intended her words to be a rallying cry to stop the crisis of confidence spreading from Greece to Portugal, Spain and Italy. But the markets were shaken because Germany is seen as the bedrock of the euro, which was introduced just ten years ago and now covers 16 countries.

    Fears are growing at the highest level in the European Commission over the size of Italy’s national debt and its ability to cope if markets turn on it. Further turmoil is possible today as Asian investors prepare to dump huge amounts of euros on the market.

    Wolfgang Schäuble, the German Finance Minister, called for an urgent rewriting of the eurozone rulebook. He told the Financial Times: “I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.”

    Mr Cameron will meet President Sarkozy of France tonight and Ms Merkel tomorrow. He will resist her demand to reopen the Lisbon treaty to beef up European Commission powers to scrutinise national budgets.

    Herman Van Rompuy, the European Council President, called the finance ministers’ meeting in response to Ms Merkel’s demands for a treaty change. Michel Barnier, the EU Commissioner for Internal Markets and Financial Regulation, said: “It’s important that member states act together.”

  • Leaderless UK stokes crash fear

     

    After sharp dips following the election, sterling stabilised on Friday in the expectation that a political deal would be struck over the weekend, with the Conservatives forming a government with the backing of the Liberal Democrats. Yesterday, however, Tory sources said no deal was likely before tomorrow, though progress was being made.

    Traders said markets were already spooked by the chaos in America on Thursday, when prices plunged crazily before recovering most of their losses.

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    The Securities and Exchange Commission and other market regulators have launched investigations, with initial explanations of a “fat finger” trade (a mistaken one) now discounted.

    “With the markets being highly nervous … and in the mood to penalise any country that is perceived to be falling short on its deficit-reduction needs, it is of paramount importance that a credible commitment on how to tackle the dire UK public finances is in place sooner rather than later,” said Howard Archer, an economist at IHS Global Insight.

    Michael Saunders, an economist at Citigroup, said: “The UK faces a difficult mix of political weakness and unsustainable fiscal trends. The electoral system — no fixed election date and first past the post — means minority governments tend to be inherently unstable. With the biggest budget deficit in the G7, Britain urgently needs to establish a credible path back to fiscal sustainability.”

    Other City sources warned that bank liquidity — the willingness of banks to lend to each other — had dried up suddenly last week. “That is what caused the last crisis and is still the big worry,” said one senior banker.

    The Bank of England postponed its regular monthly monetary policy committee meeting on Thursday to avoid a clash with the election. The meeting tomorrow is set to leave Bank rate on hold at 0.5% and not add to the £200 billion of quantitative easing.

    Economists have warned that if political uncertainty sends the pound sharply lower, the Bank may be forced to put up rates sooner than is good for the economy.

    Mervyn King, the governor, will present the Bank’s new inflation report on Wednesday. It is expected to point to higher inflation.

    Today’s EU moves follow an aggressive market sell-off last week on worries about the Greek crisis spreading to Portugal, Spain and Italy. Alistair Darling will travel to Brussels today to attend the meeting.

    The mechanism will include an arrangement to allow the European Commission to issue bonds with the implicit backing of the European Central Bank. Any default losses will be shared by all member states, including Britain. A European Monetary Fund will also be proposed, but is likely to be rejected by some member states, including Britain.

    Some analysts fear events in the eurozone will tip the markets into a deep, enduring crisis. Others are more optimistic.

    Brian Belski, chief strategist at Oppenheimer in New York, said fear was likely to continue causing havoc in the near term. “Everyone was bullish and now the world is coming to an end,” he said. Mistrust of the market was muddying investors’ vision, Belski said. “It’s a problem of optics. What is Greece? It’s 3% of the GDP of the eurozone.”

  • Rudd raiding our super to pay bills

     

    The Eureka flag, which elements of the Left (and extreme Right) have co-opted over the years, actually flew over the miners’ camp at Ballarat in 1854, not the government barracks. It was raised in protest at petty government fees, not in support of the colonial bureaucracy.

    Bureaucracy is even more on the nose today when uber pencil-pusher Kevin Rudd is calling the shots from Canberra and, significantly, there are growing signs within federal Labor that MPs are just as unhappy at the unintended consequences of Rudd’s delusional flights of policy – from Fuelwatch and GroceryWatch to the lethal pink batts insulation program and the rorted education building scheme – as they watch Labor’s popularity dwindle.

    In Western Australia, the atmosphere is toxic. The mining tax is seen as direct attack on the State for its prescient Premier’s refusal to kowtow to Rudd and his phony health reform.

    The State has been receiving less than its fair share of GST revenue and now there is fury at the stance taken by Labor MPs and candidates.

    Mining is at the core of the WA economy. Every sector of the State is affected by the industry, not just the tens of thousands directly employed moving minerals. In every industry, there are now new apprentices hoping to gain employment in the service industries, created to meet the demands of the businesses that are expanding because of the mineral wealth.

    The new tax hits at not only those with super funds, but also the very working families that Rudd claims to represent.

    The WA Liberal Party’s state council, with delegates from mining areas like Kalgoorlie, the Pilbara and the Kimberley, has called on State Labor to stand up to Kevin Rudd.

    Working families have been able to join the dots and make the connection between the projected revenues from this insane new tax and the huge interest bill on Rudd’s borrowings.

    They do not want the mining sector – and their sons and daughters – to pay for Rudd’s reckless spending.

    They are not buying his argument that this tax grab is necessary to pay for their superannuation, as they are well aware that their super contributions come from their employers – not from the federal Government.

    Western Australians have a deep suspicion of Canberra: indeed, of all that comes from what they call the Eastern States.

    The Liberals hold 11 of the 15 federal seats in WA. They believe they now have a better than even chance of picking up a few more.

    At the top of their list is Hasluck, held by Labor’s Sharryn Jackson, who won it in 2002, lost it in 2004, and regained it in 2007.

    The seat, which Labor holds by a 1 per cent margin, has 6000 to 7000 Aboriginal voters and the Liberal candidate is Ken Wyatt, the impressive head of WA’s Office of Aboriginal Health, who stands to become the first indigenous member of the House of Representatives. It is not lost upon those voters that the mining sector is by far the nation’s biggest employer of indigenous Australians.

    Even former Labor Party national secretary Gary Gray, who also worked for mining giant Woodside, may not be safe in Brand, which he won with a 5 per cent majority.

    In Queensland, the seats could really fall, with Herbert and Dickson under 1 per cent and Longman, Flynn and Dawson under 3 per cent.

    The mining companies sense that the state of the global economy works in their favour.

    Rudd’s claim to have protected Australia from the great fiscal stuff-up rings hollow. The figures demonstrate that his stimulus spending was not the saviour of the Australian economy he has claimed; that, if anything, it just blew out the Howard Government’s surplus and plunged the nation into unprecedented levels of debt.

    Tuesday’s Budget will confirm this, no matter how much spin Swan applies.

    The so-called super profits tax has not been well thought through, in line with all of the Rudd Government’s initiatives. Not all mining operations are the same, no matter what the Treasury boffins would like to believe when they run their modelling.

    Their financial structures vary wildly. Some of the majors, to cite just one example, claim their railway operations as part of their structure, while others use independent freighting companies. Applying a blanket tax to both is clearly unjust.

    Some concessions will have to be made by the Federal Government in coming weeks, particularly as the governments in both WA and Queensland intend squeezing more in royalties from the miners in their states.

    Apart from Howes and former Labor apparatchiks Bernie Fraser and David Buckingham, the government has been unable to roll out supporters of its tax grab and its arguments have been threadbare.

    As armies of political consultants moved in to stem the damage from this rash decision, one new joke surfaced.

    It was based on Rudd’s end-of-week announcement that he was committed to serving a full second term, should his government be re-elected at the next poll.

    The good news was that, so far, he hasn’t kept his word on anything.

  • Europe on the brink: the web of debt that threatens the world

     

    The falls, which continued in early European trade, came as fund managers warned that if Europe’s sovereign debt woes were not dealt with they could soon infiltrate the arteries of the global financial system. Investors’ fears centre on $3.9 trillion worth of debt owed by Portugal, Ireland, Italy, Greece and Spain to other European nations.

    Markets are unconvinced the US$145 billion rescue package for Greece is enough to prevent the country defaulting, and on Thursday night Moody’s warned the banking systems of Britain, Ireland, Italy, Portugal and Spain faced ”very real, common threats” through the massive build-up in sovereign debt.

    The head of credit trading at UBS, Luke Fay, said expectations were building that the European Central Bank would be forced to intervene to address plunging investor confidence.

    To prevent a repeat of the credit market meltdown of late 2008 some investors expect the ECB to start buying euro zone bonds – as the US did in its program of ”quantitative easing”.

    ”We’re getting to the stage where this is becoming a systemic problem and the market is now expecting the ECB to act,” Mr Fay said.

    Under the worst case scenario, the flow of capital between banks could dry up, bringing interbank lending to a halt. This could spark a plunge in confidence, significantly increasing global borrowing costs and ultimately damage global economic growth and recovery.

    ”If you can’t effectively price and transfer credit through the system, it affects everybody,” Mr Fay said.

    Despite this, on Thursday night the ECB said it had not considered buying euro zone bonds.

    The chief currency strategist at Westpac, Robert Rennie, said the ECB’s ”tough love” approach was stoking fears of a credit freeze, and investors were flocking to safe havens such as US Treasury bonds. The Australian dollar, seen as a risk asset, has plunged 3¢ in the week to less than US89¢ .

    ”What we’re really dreading here is a sovereign default in Europe,” Mr Rennie said. ”Given that we have a series of European bond redemptions over the next couple of weeks, the chances of a default are definitely rising.”

    Besides Australian banks’ $56.4 billion in exposure to Europe at the end of December, most analysts say the economy has few other direct links. But the market plunge could have serious effects on confidence.

    Prasad Patkar, of Platypus Asset Management, said: ”If there’s any prospect that we could have a GFC Mark II, then people don’t want to be caught holding stocks of risky assets.”

  • You can trust politicians…to do exaclty what’s best for them

     

    So let’s ignore our appalling politicians and pay the Henry report the courtesy of considering what it has to say. Its key point is we need changing taxes for changing times. We’re in the early part of a new century, our lives are changing, the position Australia finds itself in is changing, so how does our system of taxes need to change in response the major challenges we’re likely to face over, say, the next 40 years?

    Ken Henry and his fellow panel members identify three big trends we need to adjust to. The first is demographic change. The population is ageing and the higher proportion of older people will involve increased demand for spending on age pensions, aged care and healthcare, putting a lot of pressure on federal and state budgets.

    You’ve heard that before from the pollies, but you haven’t heard this: ”We do not expect total tax burdens will rise in the next few years, but some increases in later times may be unavoidable.” So taxes will be going up, not down as politicians like to fantasise. We need a ”robust” group of taxes, the collections from which keep up with ever-increasing government spending, and the rates of which can be increased from time to time without causing distortions.

    We need to ensure older people – facing choices about when to retire and whether to work part-time in semi-retirement – aren’t discouraged from working by rates of income tax that are too high. We also need to keep getting the bugs out of the taxation of superannuation so people are encouraged to save for their retirement income needs on top of the age pension.

    The second major trend is globalisation. Australia has always needed to attract foreign capital because our opportunities for economic development far exceed our ability to save the capital needed to exploit them.

    Globalisation is increasing the alacrity with which international investors (including pension funds) are willing to move money around the world in search of the highest returns. But development of the poor countries, particularly in Asia, means we’re facing more competition in attracting the foreign investment we need.

    When you boil it down, governments tax only four main things: land (including natural resources), capital, labour and consumption spending. The Henry panel believes the greater international mobility of capital – and the competition between small economies to attract that capital – means we can’t get away with taxing it as heavily as we once did. This explains its recommendation to reduce company tax from 30 per cent to 25 per cent. It also believes globalisation is making highly skilled labour more internationally mobile and thus harder to tax at high rates.

    But if mobile resources need to be taxed less, then immobile resources will have to be taxed more. Nothing’s more immobile than land and natural resources. Hence the proposal for an annual land tax, at a low rate of, say, 1 per cent, on all land (but with the abolition of conveyancing duty).

    And hence the proposal for a resource rent tax on natural resources. The coal and iron ore belong to all Australians, not the mining companies, and the use of this tax to effectively replace state royalties is just a way of ensuring the miners pay us a price for our resources that more accurately reflects their hugely increased value (as a result of globalisation and the economic development of China and India).

    The third major trend is environmental degradation. Environmental pressures are emerging ”in areas such as land degradation, species decline, water use and climate change”, the panel says. Higher population and continued economic growth ”will put pressure on our increasingly fragile ecosystems”.

    Our economic prospects are strongly linked to environmental sustainability. ”The environment provides natural resources essential to Australia’s productive capacity, and ecosystems that absorb and assimilate the waste generated by people and industry. Sound land and water management practices are essential to maintaining agricultural production; biodiversity enables technological progress, particularly in medical and pharmaceutical applications; and low atmospheric pollution is essential to climate stability.”

    People and businesses make decisions every day that affect environmental quality, but in many cases they aren’t fully aware of their impact, or don’t value those impacts as highly as others do, particularly future generations. ”Accordingly, there is a role for government to influence decision making with a view to achieving better environmental outcomes.”

    The tax system can play a greater role in promoting sustainable policy outcomes by influencing the incentives that lead to environmental degradation. ”An equally important consideration is to ensure that settings within the tax and transfer system do not unintentionally produce adverse environmental incentives or conflict with the broader environmental goals of . . . other policy measures.”

    Bet you haven’t heard that kind of talk about tax reform before. And what’s the one big reform we need to get us moving on the right path? A carbon pollution reduction scheme.

    Oh.

    Ross Gittins is the Herald’s economics editor.

     

  • How to take a grand vision and smother it

    How to take a grand vision and smother it

    • Michael Stutchbury, Economics editor
    • From: The Australian
    • May 04, 2010 12:OOam

    WE are now witnessing the end of a broad-based economic reform agenda and its replacement by narrower and more intense political fights.

    Kevin Rudd has set a national goal of lifting productivity growth. And the tax review, commissioned from Ken Henry out of the heady blush of Rudd’s 2020 ideas summit, provides a rational blueprint for doing this through wholesale tax reform.

    Instead of embracing this, Rudd has now narrowed the tax reform agenda into a fight with the big miners, and BHP Billiton and Rio Tinto in particular.

    That turns tax reform toward a zero-sum distributional stoush with the industry that, along with banking, helped save Australia from the global recession. Singled out, the mining industry has no alternative to fighting back, possibly by putting projects on hold.

    The result is the opposite to the broad-based reform dynamic of the 1980s and 90s. That created losses for some groups. But these were more than compensated by overall wider efficiency gains. This reinforced the reform dynamic, encouraged investment and enterprise, and increased the size of the economic cake.

    By itself, Rudd and Wayne Swan’s resource rent tax is potentially a worthy reform that could even boost mining activity by replacing state mining royalties, estimated to be the most inefficient taxes. Henry nominates Australia’s natural resources as one of the system’s four “robust and efficient tax bases” along with personal income, business income and private consumption.

    Henry’s review estimates that the efficiency gains from improving the tax treatment of these tax bases could boost economic output by 3 per cent, or $40 billion, by reducing the tax disincentives to work, save and invest. Real wages could be lifted by 5 per cent.

    The Henry agenda confronts globalisation (by cutting taxes on footloose capital), the budget costs of an ageing population (by reducing disincentives to work) and the digital age (through congestion charges on our roads).

    And it confronts what Henry calls an “unsustainable tax structure” with “too many taxes and too many complicated ways of delivering multiple policy objectives”. Ninety per cent of national tax revenue is raised by 10 of 125 different taxes. The system has “overreached” in its complexity.

    The ideas are big. For instance, Australia’s highly means-tested tax-transfer system targets welfare payments. But it also encourages welfare dependency as the combination of benefit withdrawal and income tax produces high “effective marginal tax rates”.

    Henry would partly deal with the problem by exempting individuals from paying taxes until they earn $25,000 as part of a much flatter tax rate system based on a 35 per cent marginal tax rate for 97 per cent of taxpayers.

    The Henry review says such recommendations provide a unique opportunity for reform. It has not offered a one-off big bang tax reform package. But it also is “by no means advocating a slow boat to reform”. Its proposals are broadly revenue neutral.

    Yet, rather than using the Henry review to break through political impediments to reform, Rudd and Swan are smothering its politically uncomfortable results. The review headed by its own Treasury secretary is an “independent” exercise that has merely “informed” the government’s agenda. Henry cut a mute figure at Sunday’s press conference, barred from publicly contributing to Swan and Rudd’s “mature” tax reform debate.

    The 40 per cent Resource Super Profits Tax, which funds a small cut to the company tax rate, increased superannuation subsidies and some modest infrastructure spending is supposedly the “first wave” of Labor’s tax reform agenda. But Rudd and Swan provided no in-principle support to the thrust of the Henry report and its call for “a robust approach to an ongoing reform agenda”. Swan says Henry’s proposed two-rate personal income scale — 35 per cent above $25,000 and 45 per cent above $180,000 “is not on our agenda for the next term”.

    Rudd and Swan politically package their super profit mining tax as “stronger, fairer, simpler”. Henry calls for a “fairer, more efficient and simpler” tax system. The government avoids the rhetoric of efficiency, except when batting off mining company attacks on its resource rent tax. Yet efficiency is the key for Henry.

    The distinction becomes clear from the list of Henry recommendations that Rudd and Swan won’t adopt “at any stage”. Take the luxury car tax Swan hiked to 33 per cent in his 2008 budget before being forced into messy special treatment for farmers, tourism operators and for fuel-efficient cars.

    Amid the wreckage, Swan referred the tax to the Henry review, which finds that: “a tax on luxury cars is not a desirable means of raising revenue. It discriminates against a particular group of people because of their tastes. It is not an effective way of redistributing income from rich to poor. Its design is complex and becoming more complex over time.” Moreover, its special treatment of fuel-efficient luxury cars “is a costly and ineffective way of limiting greenhouse emissions”. Yet Labor dismisses Henry’s call to abolish a tax that is not efficient, or fair or simple.

    It gets worse with Rudd and Swan’s immature vow to “never increase the rate or broaden the base of the GST”.

    The Henry review finds that consumption is one of Australia’s “most efficient and sustainable tax bases”, that John Howard’s GST made the tax system more efficient and that taxing consumption more and income less would make it even more efficient. Yet the $5bn exemption for food makes the GST more complicated without improving its fairness. One-third of the GST food exemption goes to the top 20 per cent of income earners.

    But the Henry review also suggests that the GST is operationally complex because of its reliance on mountains of debit and credit invoices more suited to the business practices of the 1960s.

    It suggests that a more efficient business cash-flow consumption tax could replace state payroll tax. This would tax the difference between business cash purchases (excluding wages) and cash sales (excluding exports). Small businesses could use a single bank account to allow their cash-flow tax liability to be calculated automatically, without the need for invoices. It could be a simpler, more comprehensive and single-rate replacement for the GST.

    This potentially could break the political logjam to more efficient taxing of the economy’s consumption base. But it took a quarter of a century to implement the key tax reforms, including the GST, recommended by the 1975 Asprey report. This slow boat tax reform took far too long to arrive. Rudd and Swan’s politically narrow approach to tax reform won’t help the Henry boat dock any earlier.

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