Time to remember the Henry review

Australia's tax system is a mess. Quite shambolic in fact, with lots of concessions to special interest groups that only make sense in the pursuit of votes. Undoing this mess is politically difficult, because it will lose votes.

The Henry Review of 2010 tried to make sense of the system and suggest sensible reforms. Henry's ideas were welcomed, but little has been done to implement them, except for the changes that accompanied the Carbon Tax (such as the significant rise in the tax free allowance).

Now Mr Henry has suggested that the government might like to look at his proposals again as they try to tackle what they have termed a 'budget emergency'. 

Among other things Henry suggested that GST should be widened and raised. Not a popular move at all. However his point was that taxes should be simple and fair, and a sales tax is both transparent and simple, although not always fair as it is usually regressive.

It would be a good opportunity to remember what the Henry Review suggested and use it as a yardstick to judge any current proposals. the Executive Summary is linked below.

Here is something to think about. What sort of tax system allows the authorities to knowingly take more tax from a person than they owe and then makes them claim their own money back up to a year later? And what sort of tax system allows a landlord to claim tax relief on a loss, even when they bought a property knowing they would make a loss on the rental? The answer is Australia's tax system.

The Executive summary of the Henry Review is here

The Guardian current news item on Henry is here

Evidence of climate change continues

The idiot Abbot continues to claim that climate change isn't a serious issue and is still trying to replace the carbon tax with a less effective 'direct action' policy.

It is quite clear that the current level of carbon tax is inadequate to reduce carbon emissions to a level that will mitigate the worst effects of global warming. The best solution, a tradeable pollution permit scheme, is not currently on the table in Australia.

The latest report by the Climate Council shows that 156 temperature records were broken during the summer. And these were not on the lower boundary.

The Sydney Morning Herald reports the Climate Council report here

The impact of ceasing car manufacturing

The Productivity Commission has estimated that 39,000 jobs will be lost due to the closing of the car industry. The overall effect on South Australia will be a 2.7% fall in economic activity and a 2.2% fall in Victoria.

The figures seem to be a simple addition of car manufacturing employees and the jobs of those in the component/supply industry. However it is more complicated than that.

The type of unemployment that is being caused is structural unemployment. It has been caused by a change in the structure (pattern) of the economy. The big problem with this type of unemployment is that many people in the same area and with the same skills are made redundant at the same time, leading to unemployment 'black spots'.

Reducing this type of unemployment is difficult. Simply raising demand through budgetary or monetary policy is spread out across the economy and the new jobs created will probably not need the skills the newly unemployed car industry workers have. The policy that is needed is microeconomic, or supply-side, policy. 

Sensible policy to help the affected areas will provide retraining for workers so they have skills needed in growing industries and will encourage those industries to locate in the areas most affected. Sadly these policies take five or more years to be effective and there is no guarantee they will actually work.

A further point to make is that the car industry closures will have a multiplier effect. Those made redundant will suffer a fall in earnings. This will lead to a fall in consumer spending and so a fall in aggregate demand. This will reduce overall national output further. Of course this multiplier effect will be most notable in the areas that the car industry operates in as local services suffer a fall in business.

The Guardian reports the Productivity Commission findings here

The Carbon Tax is working

Australia's small carbon tax has apparently having an effect. One group believe that Australia's carbon emissions fell by 7% last year, mainly due to the carbon tax.

Of course that is the point of the tax. It raises the price of goods and so fewer are bought. The idiot Abbot, for reasons that are hard to rationalise, wishes to remove the incentive to reduce carbon emissions and replace it with a series of grants he calls 'direct action'.

The bad news for Abbot is that no independent observer thinks his alternative will work. They don't believe that there is enough in the budget to reduce emissions sufficiently.

There is another problem looming for Abbot. The US wants the subject of climate change measures on the G20 agenda for the Brisbane meeting in November. This is probably going to be embarrassing for Australia, although it is unlikely that Abbot is bright enough to feel the shame.

The Guardian reports the story here

More good news!

Following on the growth figures it appears Australia is doing even better than thought.

Retail sales are growing strongly. This is more than good news for retailers and those who make the goods and services they sell. It suggests that Consumer Sentiment (consumer confidence) is very strong and this is good news for the national economy.

Households don't raise their spending when they are uncertain. When they are confident they spend and are prepared to borrow. This can lead to higher total (aggregate) consumption an important part of Aggregate Demand. Rising Aggregate Demand leads to higher growth and national income.

There is also news of a bigger than expected trade surplus - the amount that exports exceed imports. That means Australian firms are doing well in selling to overseas customers. Selling more means more jobs in Australia and that will help moderate the expected rise in unemployment.

Of course net exports (exports - imports) is also a part of Aggregate Demand. A larger trade surplus leads to a faster rise in AD and so faster growth.

Overall then the signs are that the slow down in growth caused by the winding down of the mining boom may be coming to an end. However the 'headwinds' causing the economy to slow remain strong, but the 'tailwinds' that speed the economy along seem to be getting a little stronger.

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Australian Retail Sales - year on year change 2010 to present

Australia's Balance of Trade (Exports less Imports) 2011 to present

The BBC report the figures here

Good economic news?

Yesterday the reserve bank of Australia left interest rates at 2.5%, a record low for Australia. there was also news that Australia grew by 0.8% last quarter (3 months), faster than was expected.

The RBA feel that export growth will continue, but wish to remain accommodating as the rest of the economy grew only slowly. Interesting despite low interest rates borrowing is not growing strongly and this may indicate weak confidence among firms and consumers.

There is little doubt that unemployment will continue to rise, probably for the rest of the year, but the lower dollar is helping exports (as a lower exchange rate causes export prices to fall). The RBA would, however, still like to see the dollar even weaker (perhaps as low as 80c to the USdollar.

Below are articles on the rate decision and the growth figures.

The Australian reports the interest rate decision here

The ABC reports the growth figures here

What is wrong with foreign ownership?

The Government have said they want to remove the cap on foreign share ownership of Qantas. This has led to a massive outcry against the move. But what is the economic argument for this opposition?

I have to say I can't think of a single valid reason to oppose allowing foreigners to purchase a controlling interest in Qantas. All of the reasons put forward seem to be simple national pride and a misguided idea that there will be more Australian jobs in an airline owned by Australian superannuation funds.

Tim Congdon, a British free market economist who is fiercely nationalistic (he stood for the UK Independence Party in 2010) stated, "I don't mind who owns the British car industry, or all of British industry, as long as everyone has a job." He said this in around 1999, in 2013 the UK car industry, which is almost exclusively foreign owned, again produced more cars in the year than EVER BEFORE (they did the same in 2011 and 2012).

So we need to be sensible when looking at Qantas and avoid the knee jerk reactions of politicians and unions pursuing their vested interests.

Qantas operates in a highly competitive industry (although it is protected by the government which prohibits more flights by foreign airlines). It is known as a highly contestable market. Firms can enter and leave easily when they already have aircraft. Suppose the traffic between Melbourne and Sydney drops off by 10%. Then airlines switch aircraft around. Smaller ones fly Melbourne-Sydney, or the airline switches flights to other destinations. If things change then they reorganise again.

However what a modern airline needs is a fleet of modern aircraft that is flexible. Modern aircraft are efficient and require far less maintenance than previous models, so they can allow airlines to cut prices. Large fleets mean that aircraft can be substituted for one another as route demand changes.

Foreign capital would allow Qantas to modernise and expand their fleet. That is the best way to keep jobs in Qantas.

But let's suppose Qantas can't compete in the market. Then they deserve to go under. Will people stop flying then? Of course not. Other airlines will emerge and they will employ people locally. In 2012 Emirates employed 5000 Australians, Qantas employed 37,500.

Does it matter if foreign airlines employ the Australians? Not at all as long as Australians get airline seats at competitive prices. Passengers are the people we should be worried about, and for that we need an 'Open Skies' policy where no one airline is favored by a government more concerned with Herlad Sun headlines and their poll ratings than the long term welfare of the country.

The Guardian reports the whinging Aussies here