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OECD hands govt praise — and an awkward to-do list

The latest OECD report on the Australian economy is positive towards many government policies, but makes some politically unpalatable suggestions about future reform. Is the hand of Treasury at work here?

The OECD has given the Australian economy and the government’s stewardship of it a ringing endorsement while urging a series of unpalatable reform to further strengthen it in its latest economic survey, released this morning. It has also urged the government to abandon its commitment to surplus in the event that growth weakens.

The current outlook for the economy is positive, the OECD concludes, “even though there are mainly negative risks stemming from the external environment, to which Australia is however less vulnerable than many other OECD countries”. Our “current monetary and fiscal policy mix is appropriate to sustain recovery, and Australia is in a good position to respond to risks”. However, “in case of a sharper-than-expected cyclical weakening, the central bank should loosen further and the fiscal automatic stabilisers should be allowed to work, even if this postpones the return to budgetary surplus”.

Automatic stabilisers are the shifts in fiscal policy caused by changes in the economy — in this case, lower tax revenue and higher transfer payments brought on by lower growth and higher unemployment, which means the government is pumping more money into the economy than forecast. Weaker-than-forecast growth is currently looming as the biggest threat to the government’s forecast surplus for this financial year, with corporate and mining tax revenues likely to be lower than expected.

OECD economic reports often reflect the input of Treasury, and Treasury’s hard and politically unpalatable line on a number of issues can be discerned through the report’s recommendations.”

The report also gives a tick to the carbon price, which “should encourage investment in clean energy technologies, and help enhance competitiveness in a carbon-constrained world”.

The OECD also makes recommendations for further reform, some of which have a familiar ring to them, and others that will have both sides of politics running scared. They include:

  • Dumping subsidies for irrigation infrastructure, which formed a key part of the recent, bipartisan agreement on the Murray-Darling Basin Plan, and the automotive sector, and removing fossil fuel subsidies for extractive industries
  • Consider establishing a “stabilisation fund” to reduce the pro-cyclicality of fiscal policy;
  • Cutting the corporate tax rate and expanding the MRRT (i.e. something closer to the original, Rudd RSPT than the current compromise)
  • A big program of tax reform, including lifting and widening the GST: “reduce or remove conveyance duties and the progressivity of the state land tax; broaden the state land tax base by eliminating exemptions for owner-occupiers; cut subsidies to first-home buyers; broaden the base of the goods and services tax and consider increasing its relatively low rate”
  • Minor changes” to industrial relations, mainly on greenfields agreements
  • Road user charges, more cost-reflective water pricing and a freer water market, and the use of smart meters for electricity consumption.

The report also suggests that Australia’s “safe haven” currency might necessitate further interest rate cuts than would otherwise be the case; it also notes that a sovereign wealth fund might help with offsetting capital inflows.

In passing, the report also deals with a number of furphies peddled in economic debate. On the myth of the threat posed by falling house prices to bank stability, Australian house prices are undergoing an “adjustment” but it is likely to remain “orderly”:

… households appear well placed to meet their debt obligations, as shown by the low rate of non-performing housing loans, which has remained below 1%. Indeed, nearly 50% of owner-occupiers are repaying their mortgages ahead of schedule … the risk of a house price bust is also limited by the fact that mortgage lenders have been refraining from easing lending standards.”

Indeed, “Australia’s leading banks, unlike those in many other countries, have managed to keep profitability close to pre-crisis levels and have maintained a strong financial position, as in Canada. They continue to be viewed relatively favourably by the international rating agencies.”

On Australia’s underlying budget deficit:

the underlying health of the public finances has however significantly weakened in recent years … [it] reflects not only the impact of the crisis-induced fiscal stimulus, but spending of a large part of the pre-crisis mining-related revenues through permanent tax cuts and expenditure increases. To deal with this adverse trend, several savings measures have been introduced that will steadily build over time, providing ongoing improvements to the budget position. These measures include increasing the pension age, means testing the private health insurance rebate, reforms to family tax benefits, and reducing superannuation concessions for high income earners.”

And on industrial relations, “the Fair Work Act has made the system more employee- friendly — in terms for example of a slightly higher relative minimum wage and unionisation rate — with little effect so far on labour market performance and productivity… major changes do not seem warranted at this stage”.

The OECD says about half of Australia’s productivity problem in recent years has been due to the mining investment boom and associated lags, lags in energy infrastructure investment and drought, but that improving productivity must focus on human capital via training and education, and greater innovation through better links between large firms and universities. The OECD also wants to see greater private sector infrastructure investment and better infrastructure pricing (the road and water pricing recommendations).

Absent from the report is any justification for many of the hysterical campaigns peddled by parts of the media and the opposition — the demand for a return to WorkChoices to fix productivity, the fixation on government debt, the claim that the government is spending too much, or the David Murray thesis that a downturn could wreck our banks via the housing market.

Nonetheless, there’s plenty in the report the government won’t be too comfortable with. OECD economic reports often reflect the input of Treasury, and Treasury’s hard and politically unpalatable line on a number of issues can be discerned through the report’s recommendations.

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  • 1
    Jimmy
    Posted Friday, 14 December 2012 at 1:21 pm | Permalink

    Very good article and the OECD report agina shows 2 things the “ALP can’t manage the economy” crowd continue to ignore - the economy is actually going reasonably well all things considered and Howard wasted his boom years by creating a structural deifct through vote buying middel class welfare.

    I also predict that elsewhere the OECD reoprt will be reported as “OECD predict govt wn’t produce surlpus”

  • 2
    Posted Friday, 14 December 2012 at 3:16 pm | Permalink

    Now to convince Swanny to remove these “fossil fuel subsidies for extractive industries”:

    Adam Collins, spokesman for the Treasurer, Wayne Swan, said none of the programs qualified as subsidies under the G20 definition.” - SMH March 2011

    Oh yeah, then “Swan says no to sovereign wealth fund” in May 2012.

    Then there’s the MRRT…

  • 3
    Simon Mansfield
    Posted Friday, 14 December 2012 at 3:44 pm | Permalink

    Dorthory wrote this report for Dix to read on the plane home tonight.

    Only the Lemming Party would ever enact a broad based property tax in Australia. Gillard didn’t even have the guts to broaden the GST tax base this year let alone take on the issue of GST on imports below $1000.

    Why do we pay people at Treasury to write these reports for their OECD counterparts to rubber stamp. Nominate just one of these suggestions/recommendations that will ever see the light of day.

  • 4
    Posted Friday, 14 December 2012 at 3:51 pm | Permalink

    Mightn’t the high capital inflows inflating the value of the $ be tempered by a Tobin tax, which may also increase revenue?

    While it is true that many such OECD reports (and presumably much Treasury advice) may not seem immediately feasible, they make important contributions over the medium term. In the 1990s it seemed impossible to get State governments to balance their budgets over the economic cycle, but of course that is now orthodox, altho taken to a damaging extreme.

  • 5
    Simon Mansfield
    Posted Friday, 14 December 2012 at 4:04 pm | Permalink

    Reports like these should focus on a few ideas at a time.

    Broadening the GST base is probably the number tax reform needed at present. It would have the complete support of all the state govts and the current opposition - unless Tony wanted to be complete dumbo. Only the Greens would oppose it outright. The last COAG meeting should have signed off on it with Jan 1 2013 as the start date. Now that would be a sign of gutsy economic leadership.

    Instead we have policy wonks in Canberra pretending they are so clever suggesting the state governments of Australia bring in a broad based property tax on homeowners.

  • 6
    Posted Friday, 14 December 2012 at 4:14 pm | Permalink

    Broadening or increasing the GST is opposed vociferously by the Coalition.

    It is also regressive, while a broad based property tax would be progressive, easier to collect and harder to avoid.

  • 7
    Simon Mansfield
    Posted Friday, 14 December 2012 at 4:49 pm | Permalink

    Broadening the GST was Coalition policy. They’d be hard pressed to oppose it. Increasing it to 12-15% is another matter entirely. A broad based property tax on the family home is never going to happen.

  • 8
    Jimmy
    Posted Friday, 14 December 2012 at 4:53 pm | Permalink

    Simon - I think was is the operative word there - Abbott isn’t going to either support any ALP policy, especially something that “hurts working families” and Abbott wouldn’t take a tax increase to the election

  • 9
    Jimmy
    Posted Friday, 14 December 2012 at 4:56 pm | Permalink

    Simon - I think was is the operative word there - Abbott isn’t going to either support any ALP policy, especially something that “hurts working famil ies” (even if it doesn’t) and Abbott wouldn’t take a tax increase to the election

  • 10
    Posted Friday, 14 December 2012 at 5:13 pm | Permalink

    Mr Abbott was keen to quash the possibility of a change to the tax. “The Coalition has no plans to change the GST, none whatsoever,” he said.’

    Hayward, Andrea (2012) ‘Abbott quick to quash Coalition GST hike talk’, Canberra Times, September 17 2012.

  • 11
    Simon Mansfield
    Posted Friday, 14 December 2012 at 5:18 pm | Permalink

    If every state premier was signed on - how could Abbott oppose it. They just rolled over on the Murry-Darling deal - so going back to past Liberal policy on the GST would be done and dusted after one press conference taking a few whacks at Labor for opposing the GST in 1998-2001. Gillard should have taken the hits and fixed the budget hole and it would have all been done by Jan 1. Instead they have to keep cutting and undermining fiscal support of the economy.

  • 12
    Jimmy
    Posted Friday, 14 December 2012 at 5:23 pm | Permalink

    Simon - Look at the approach Abbot has had in the last 3 years - anti carbon tax & anti MRRT - he has repeatedly berated the govt for being big taxing and also had a go at them for not taking the carbon tax to an election (although if you voted for the ALP thinking they weren’t going to put a price on carbon you are a fool).

    Abbott has painted himself into a corner, he can not increase or introduce any tax in a potential first term.

  • 13
    Posted Friday, 14 December 2012 at 5:25 pm | Permalink

    Jimmy is right.

    Furthermore, a rational politically expedient Opposition would oppose broadening or increasing the gst even with the support of the States because their support attracts only 8 votes, while millions oppose increasing or broadening the gst. Recall that Howard lost the popular vote in the gst election.

  • 14
    Simon Mansfield
    Posted Friday, 14 December 2012 at 5:51 pm | Permalink

    But the beauty of getting Labor to do it - would be too good an opportunity to pass up. If Labor is going to go down it might as well get a few things right between now and August. And filling up the state coffers with the money to pay for schools and hospitals is the right thing to do.

  • 15
    Apollo
    Posted Friday, 14 December 2012 at 9:25 pm | Permalink

    Victoria is increasing licence fee to boost budget. The federal government should impose an extra $12 per air ticket on Australians fly-ing out of the country.

  • 16
    CML
    Posted Saturday, 15 December 2012 at 1:03 am | Permalink

    @ Simon Mansfield - How very convenient! You want the Labor government to correct the fiscal deficit in the budget that the Coalition caused by increasing middle-class welfare payments to buy votes. Especially in the early/middle 2000’s.
    Then Labor will take all the sh+t for raising taxes such as the GST, while Abbott swans into government and reaps all the benefits? You don’t happen to vote for the Coalition, do you? Give me a break!

  • 17
    Apollo
    Posted Saturday, 15 December 2012 at 5:51 am | Permalink

    I was going to suggest maybe if they let the asylum seekers out and work enough hours to support themselves and have a special tax rate like the tourist work visa so that would save the budget bottom line, but a quick research on how other countries are dealing with this confused me on how we should go about things.

    The US make their decision within 180 days of application being filed but are mostly not allowed to work. Then removal proceeding start should the application failed.

    Europe is really confusing, UK is not happy and it’s not only Greece that is getting hostile towards asylum seekers, Italian coast guards have been ignoring guidelines and sent many ferries back to Africa. Even Scandinavians countries like Norway and Denmark have been getting tough on asylum seekers, now it makes Sweden most attractive out of all of them and Sweden’s projection for 2013 asylum seeker arriving will be 50,000. But Sweden have a 3 year temporary resident category, Sweden and Norway now give automatic recognition for Syrians due to the escalated conflict.

    I suspect that Labor’s recent drop in the poll is due to them releasing asylum seekers out of detention centre but pay them the dole instead of allowing them to work to pay their way. And I suspect Abbott will close down Nauru and Ma.nus islands to save money and do some deal with Indonesia or other countries to either turn the boats back or send them back to the region by plane.

  • 18
    Apollo
    Posted Saturday, 15 December 2012 at 6:27 am | Permalink

    Correction, Greece and Italy are play-ing ping pong game. Greece is not meant to let asylum seekers leave their water to enter Italy but they do it anyway. Italy is told not to send them back by the EU because asylum seeker hosting condition in Greece is bad but Italy ignore it. I’m not sure if Italy have sent any boat back to Africa.

    Maybe Indonesia will play ping pong with Abbott. But most likely, the asylum seekers will sabbotage their boats, so the feasible option is plane.

  • 19
    Posted Saturday, 15 December 2012 at 8:19 am | Permalink

    I agree with CML.

    If Labor is to ‘do the right thing’ for the good of the country it is not to extend the regressive gst: regressive taxation is advanced by the Coalition, most recently by Costello and Howard.

    There are plenty of ‘courageous’ progressive ways of repairing Howard and Costello’s fiscal vandalism: a broad based property tax, removing the capital gains tax exemption on housing ($35 billion), ending tax breaks on superannuation ($29 billion), removing dividend imputation ($20 billion), removing the tax break for discretionary trusts, removing negative gearing, etc.

  • 20
    Apollo
    Posted Saturday, 15 December 2012 at 12:58 pm | Permalink

    Good list there Gavin Moodie. But I think they should only wind them back and maybe create a couple of progessive brackets to allow social mobility, and that will be politically feasible anyway.

    The reform could help to fund the NDIS and the Gonski education plan. I’m all for investing in education but I’m skeptical of the idea that if your throw money at it you will fix it. They need to develop a concrete plan on how to lift the education standard first. I’d say teach them ethics, philosophy, world cultures and history, money (income management for kids has been introduced in US, this sounds strange but when you see what many Australians on welfare do with their money that prompt the federal government to think about enforcing income management you’ll understand) management early in childhood education will develop more conscious and well rounded citizens.

    ps. My previous comment was a speculation on what Abbott might do, not an endorsement of his policy or bold prediction of next election’s result.

  • 21
    Mii
    Posted Saturday, 15 December 2012 at 1:52 pm | Permalink

    Increase the GST? Dear OECD. Get Bent.

  • 22
    Simon Mansfield
    Posted Sunday, 16 December 2012 at 8:57 am | Permalink

    Gavin - you are a Green voter - why should Labor carry out the entire Green economic platform.

    CML - I got my certificate of 10 years service to the ALP in the mail this past week. So no I don’t vote for the Tories. I wasn’t aware that you had to believe in the little red book anymore.

    Gavin - how do you get rid of both capital gains exemption on housing and negative gearing at the same time. And please lets hear your thoughts on what the progressive tax scale should be.

  • 23
    Gocomsys
    Posted Monday, 17 December 2012 at 11:12 am | Permalink

    Reasonable article. However the total incompetence and insincerity of the LNP and their backers as always neglected to be taken into account by the mediocre MSM. Good to know that some sites and blogs canvass the real underlying issues. Please cut and paste into browser:
    independentaustralia.net/2012/politics/overlooking-australias-watergate/
    Just an example how proper investigative reporting is done.

  • 24
    zac48
    Posted Monday, 17 December 2012 at 12:35 pm | Permalink

    So, what is Gillard and Swan going to do about an economic surplus?..’*The Mother of all promises*’… After so long and so emphatically promising the country they can and will provide a surplus, in an election year mind you, what can they do about this economic corner they’ve backed themselves into. Gillard and Swan both know that a surplus at any cost will do more damage than good to the Australian economy and all things being equal, if it wasn’t for the ‘Great Promise’ they wouldn’t hesitate in bringing in a deficit. But they ‘absolutely must’ bring in a surplus. If they don’t, the ‘Great Promise’ they would be accused of breaking would make the broken carbon tax promise look like a Sunday school picnic. What to do? What to do? The conservative business community are already complaining about the negative effect of achieving a surplus at any cost, even members of their own party are declaring the foolishness of creating a surplus at any cost, but what can Gillard and Swan do. They can’t simply ‘change their minds’ or they would be accused of making one of the biggest backflips in Australia’s political history. They would be accused of breaking one of the great promises in Australia’s political history. They can’t simply change their mind and appear to be acting in their own self-serving, politically expedient interests…..What to do? What to do?….This is what they will do. They will wait. They will wait till the very last moment before the election. They will wait until ‘panic’ sets in in the (coalitions) business community. They will wait till more and more Labor Party supporters are crying out loudly, and most importantly they will wait until it becomes ‘a public interest issue’ before the election….Then and only then can they act….They will have then put themselves in the position where they can declare that because they are a democratic party governing on behalf of ‘all’ the community and because of the overwhelming demands of the a cross-section of the Australian society, including their most avid Labor Party supporters, they find themselves in the position where they simply ‘must’ act according to the publics wishes, although they could **easily and successfully achieve their promised surplus with no negative effects**. And although they believe that it could be in the country’s interest to maintain their determination in achieving a surplus they have decided in the interests of democracy to *acquiesce* to the “wishes of the Australian electorate” and very reluctantly provide a deficit. But only because business demands it, and only because their own party demands it, and only because the Australian people demand it are they are prepared to “forgo the ‘Great’ Promise” made for so long and although their surplus would have been a great success, justifying and proving their economic management credentials, to soften the blow of the international economic crisis to Australians , against Gillards and Swans wishes, and in accordance with the will of the people, they are prepared to forgo the surplus and bring in a deficit…..We truly are the ‘hero’s’ of the Australian people Gillard and Swan will declare, so vote for us at the elections next month…..How easy was that they will say to each other over drinks on election eve.

  • 25
    Paul Barry
    Posted Monday, 17 December 2012 at 12:47 pm | Permalink

    Interesting that every time Abbott or the Coalition does bad in the poll, you’ll notice the trolls quickly come out to attack on this website.

  • 26
    Apollo
    Posted Monday, 17 December 2012 at 2:30 pm | Permalink

    Quiggin: OECD right on education to productivity”

    I wonder if the Houston panel also recommends education for refugees awaiting overseas who have received resettlement offers from Australia?

    Australia also needs to have arrangement with countries in the region to take rejected claimants in Australia who can’t be returned to their homelands. It is cheaper to keep them overseas, and is a good deterrence for those who don’t have well grounded claims, many people destroy their papers so there is less of a chance that Australia can deport them. If they are allowed to stay in the community in Australia it will only encourage more to come, the unecessary cost of logistics and processing is enormous for Australia when they could have tried the UN, and Australia should help the UN to increase processing officers.

    Hmmm, Treasury doesn’t advise on productivity on asylum seekers issue!!!

  • 27
    Posted Friday, 21 December 2012 at 11:47 pm | Permalink

    The GST as we know it does not need to be expanded. It needs to be replaced by something that’s guaranteed not to violate s.55 or s.82 of the Constitution. See “Want a new GST? Sink the old one!

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