This section provides a selection of media items from August 2013.
The Economist, 24 August 2013
TAX planners at private-equity firms are having an unusually busy summer. A fiscal ruling in Sweden and a court case in America are threatening to upend the arrangements that buy-out firms use to minimise their tax bills.
Both cases relate to a tax loophole used by private-equity firms in America and much of Europe. Under “carried interest” rules, buy-out executives pay (relatively low) capital-gains taxes on profits made from buying and selling companies, in the same way investors or entrepreneurs do. This is odd, given that the money wagered on private-equity deals comes overwhelmingly from outside investors, not the executives themselves. It would make more sense for these profits to be taxed like salaries, or bankers’ bonuses, at the (higher) income-tax rate.
That is exactly what Sweden’s tax administration has decided. In a ruling on August 20th it demanded SKr647m ($99m) of back taxes from EQT, a local private-equity fund, and its executives. The amount covers the difference between the 25% capital-gains rate and the 57% income tax for 2007-09, plus interest and penalties. EQT is not alone: dozens of other executives at other firms have been handed multi-million-kronor bills as a result of the tax authorities’ change of heart. The potentially impoverished bosses say they are confident courts will find in their favour on appeal.
The American case, decided on July 24th, chips away at carried interest from another angle. An appeals court in Boston ruled that Sun Capital, a private-equity fund that specialises in turning around distressed companies, is liable for some pension obligations of a firm it bought in 2006, and which subsequently went bust.
The case is limited to pensions (and is being contested by Sun Capital) but the precedent could have a wider tax impact, says Jon Zorn of Ropes & Gray, a law firm. The core of the ruling blows away a legal fiction that private-equity funds are passive investors who do not actively control the companies they buy. That premise is also used to justify putting profits into the lower tax bracket.
Executives in Sweden and America complain about the uncertainty created by the cases. They have a point. It would be better to make clear that private-equity profits should be taxed as income, and carried interest done away with. top
Michael West, The Sydney Morning Herald, 12 August 2013
Super tax concessions cost the taxpayer about $32 billion a year, according to Treasury.
Australia boasts what is perhaps the most generous middle-class welfare system in the world, a system where taxpayers shower benefits on executives that are not available to the average worker.
Research conducted for Fairfax Media by actuary Geoff Dunsford has identified at least four ways in which middle-class retirees obtain a benefit from taxpayers; a benefit which is proportionately more generous than the benefit enjoyed by – and he uses this example – a clerk.
Super tax concessions cost the taxpayer about $32 billion a year, according to Treasury. The bulk of this, says Dunsford, goes to middle- and upper-income earners.
Many of these have structured their self-managed super in such a way as to pay very little tax and some actually win a large cheque from the government each year by way of rebate on their excess dividend franking credits.
One such superannuant, who will remain anonymous for obvious reasons, routinely gets a cheque in the order of $400,000 from the government each year as share dividends constitute his only income and there is no other income to offset it against. And so it is, those with $10 million self-managed super funds are underwritten by those without $10 million self-managed super funds. The average taxpayer, in other words, picks up the tab.
This also explains why special dividends are so fashionable. There is a small and sophisticated army of high-net-worthers plundering the system for franking credits, albeit quite legally.
It is via such loopholes, built up over a generation, and created by both major parties, that a large tax leakage accrues to government coffers.
Yet it is the superannuation industry, ironically spawned by government in the first place, which is now pulling its masters’ strings.
Frankenstein’s monster has been unleashed. So powerful is this lobby that meaningful reform is unlikely for some time, even as funding requirements for the retiring baby boomers swell to stupefying levels.
What the research from Geoff Dunsford highlights, however, is not the immensity of this middle-class welfare but the inequity of it. Simply, it favours the wealthy not merely in size but in proportionality.
Dunsford illustrates four ways in which middle-class retirees gain taxpayer benefits that are relatively more generous than those for average workers.
He uses the examples of a clerk and an executive in the final year of their employment and the first year of their retirement, assuming an age of 65.
Via concessional super contributions, concessions on super fund fixed interest earnings, pension credits on investment earnings and the income tax scale on pension earnings, the executive does proportionately better than the clerk.
Fifty years ago, says Dunsford, normal income tax was paid on super fund pension payments.
This was the quid pro quo for having all contributions and investment earnings tax-free. ”Since such pensions represented much lower income that that enjoyed while working, this still provided a significant benefit as they were taxed at lower marginal rates.”
Since then, the rules have been changed many times ”enabling the tax on fund withdrawals to be reduced in ever more complex ways”, he says.
The piece de resistance was Peter Costello’s move in 2007 to scrap the tax on super withdrawals taken after the age of 60.
It all makes for a super generous system, so generous though that Dunsford, and those few with the principle to speak against the compelling interest of their own hip pockets, reckon it won’t last for too long.
Ian McAuley, New Matilda, 8 August 2013
Towards the end Cormann said “Repeating a lie continuously doesn’t make it true”.
He’s right, but he could have completed the picture by saying “[but] if you tell a lie big enough and keep repeating it, people will eventually come to believe it” – a statement credited to propaganda minister Joseph Goebbels in Hitler’s Germany.
Two big lies, repeated ad nauseam over the last six years, are about taxation and spending: Labor governments tax more and they spend more – far more – than Coalition governments.
These lies have become so entrenched that even independent journalists don’t bother to question them. They must be true. Let’s look at the evidence.
First, to consider Commonwealth revenue (94 per cent of which is taxation), using the conventional measure as revenue as a percentage of GDP. A simple graph blows away the lie.
If any government were to be described as “big taxing”, it would be the Howard government, but it is more reasonable to say that it enjoyed the benefits of high revenue from company tax, capital gains tax and GST as it rode the fortunes of a mining boom and strongly growing consumption (which turned out to be unsustainable because people were borrowing against nominal rises in house prices). The main development has been a dramatic drop in revenue on the Labor Government’s watch, in the wake of the GFC and after the peak of the commodity boom.
Then to look at expenditure. There is a little more support for the claim that Labor has spent more than the Coalition, but not enough to base the wild generalisations put about by the Opposition.
What we notice from this (and from longer time series of public expenditure) are peaks at the time of downturns in the business cycle. The Howard government gave a timely and sharp boost to public expenditure in response to the “tech wreck” at the turn of the century, and the first Rudd government did likewise in response to the GFC. The Rudd stimulus was stronger than the Howard government’s stimulus, but so too was the severity of the incipient downturn. Commonwealth expenses, at 25.1 per cent of GDP last year, are now back to where they were in 2002-03 and 2003-04, and are budgeted to fall further.
Its main fiscal shortcoming was to procrastinate on Treasury’s taxation review – the “Henry Review” – which carried a large set of recommendations designed to make our taxation system simpler, more sustainable, more equitable and more efficient from an economic perspective. It sat on that report until a few months before the 2010 election – politically a terrible time to consider tax reform – and it rejected or watered-down most of its recommendations. At the time, writing for New Matilda, I called the Rudd Government’s response an act of “political cowardice”, and was certainly not alone in that view. Had they taken Henry’s advice the post GFC fall in revenue would have been far less severe. Yesterday the constitutionality of one of Henry’s most watered-down recommendations, the mining tax, was affirmed in the High Court.
Back in office Rudd is again pussyfooting around on tax reform, with the pretence that a few incremental changes are all that our tax system needs. Welcome as they are, they do not necessarily strengthen our long-term tax base. For example we would hope that in time there is no revenue from cigarette tax as smoking rates dwindle towards zero.
In justice to Rudd, and in confirmation of Goebbels’ foresight, he knows that the Coalition and the Murdoch media have conditioned the electorate to believe that we pay too much tax and that we live in one of the world’s most heavily taxed countries. (The truth is that we are one of the most undertaxed developed countries, even accounting for the fact that most of those countries are not raising enough tax to cover their public revenue.) He knows too that the Coalition, in its suite of “magic pudding” promises, is telling us all that it would cut taxes.
It has been up to Ken Henry, now departed from Treasury, to make the strong point that both Labor and the Coalition are ducking the issue of tax reform. If we are to enjoy a high standard of public goods and services we need to raise our public revenue. Henry’s is a refreshing contribution, rising above the voices of greed and sectoral interest that have so far characterised this campaign, and it’s a credit to the Fairfax media for giving it such good coverage.
If we had an Opposition worthy of its claim that it is competent to sit on the Treasury benches, it would stop lying and obfuscating about fiscal policy, and criticise the Government for its real fiscal shortcomings – its obsession with the cosmetics of a “balanced budget”, missed opportunities to use its strong credit rating and low cost of finance to invest in infrastructure, and its failure to engage with the community about the need to strengthen permanently our public revenue.
Peter Martin, The Sydney Morning Herald, 8 August 2013
Tony Abbott says the company tax rate is a boon for workers. Peter Martin and PolitiFact dissect the opposition leader’s statements.
To hear Tony Abbott speak, you would think a cut in the company tax rate was a gift for the workers. He is promising to cut the company tax rate from 30 per cent to 28.5 per cent per cent in mid 2015.
“Go back and look at the papers that the government released as part of the Henry tax review,” he said. “And you will see that Treasury believes if you reduce company tax, you increase pay, you increase GDP and you increase employment”
Let’s stop for a moment and consider that statement, the one about what “Treasury believes”. Mr Abbott’s Treasury spokesman Joe Hockey says “Every number the Treasury publishes is dead set wrong”.
So maybe Mr Abbott’s had a conversion. Or maybe he has misread the Treasury.
That’s what we’re here to find out.
Put technically, what Mr Abbott says Treasury believes is that the “incidence” of company tax falls on the workers. If the rate of company tax is boosted, it is the workers that will cop it by losing their jobs or having to accept lower pay. If the rate is cut, it’s the workers who benefit through more jobs and better pay.
It is certainly the view of the former head of Treasury Ken Henry.
In an impassioned intervention at the Business Tax Summit he let fly at union and community representatives who he said still didn’t get it: “In the case of a relatively small, open economy like ours, there is simply no debate in the academic community. There is a strong consensus among tax academics that the incidence of the tax falls predominantly on labour.
“Indeed, in an academic conference that proposition would be considered so obvious that it would excite no interest at all.”
It’s a hard proposition to get your head around. The argument is that businesses have a choice about where they invest. The lower Australia’s company tax rate, the more likely it is that they will invest here. They will employ workers and spend money putting up buildings and buying equipment, each dollar of which will make the workers they do employ more valuable and more worth paying higher wages to keep.
But does it stack up?
The studies cited in the Henry tax report do find such an effect, but it is far from complete. In the short term a move in the company tax rate appears to move wages little. In the longer term a 10 per cent increase in the company tax rate is thought to reduce wages by 7 per cent.
Kevin Rudd and Wayne Swan were convinced. On releasing the Henry report on May 2, 2010 they promised to go further than the Coalition is promising to go now and cut the company tax rate to 28 per cent.
Swan said it would “create new jobs and grow the economy right around the country”. It might not be “politically popular”, but it was “the right thing to do”.
The Coalition blocked it in the Senate because it was to be funded by the mining tax.
Some of the benefit from the tax cut the Coalition is proposing this time would flow to the companies themselves, some to their workers. No one is too sure about how much.
Nor is anyone too sure about whether the benefits are worth the cost, by the Coalition’s own reckoning $2.5 billion per year which will have to come from somewhere, quite possibly from other taxpayers.
Tony Abbott is on safe ground when he says “Treasury believes if you reduce company tax, you increase pay, you increase GDP and you increase employment.” It is the size of those benefits and whether they are worth the cost that is in dispute.
Michaela Whitbourn, The Australian Financial Review, 8 August 2013
Treasurer Mike Baird said the government had done “significant due diligence” on the deal, including determining market interest in buying the right to part of the $350 million the state makes each year from a tax on NSW Lotteries scratchies and tickets.
“All of that was positive,” Mr Baird told The Australian Financial Review. “It hasn’t really been done by governments here in the country but it works.”
It was too early to put a figure on the potential proceeds but it was “nothing like” the $15 billion touted by some commentators, he said.
The O’Farrell government announced in its third budget in June it was selling a 99-year lease of Port of Newcastle to raise about $700 million.
The lotteries income stream was attractive to the local and offshore superannuation funds that were likely to take an interest in the port, Mr Baird said.
The port sale is expected to be completed before next year’s budget.
It follows the long-term lease of Port Botany, in Sydney’s east, and Port Kembla to Industry Funds Management in April for an historic $5.07 billion.
‘Natural hedge’: Baird
Mr Baird said he “didn’t want to muddy the waters” and reduce competition by selling the lotteries revenue at the same time as the port.
“It really is something we’ll consider after the budget next year,” he said.
He said the lotteries transaction would principally be used to reduce government debt. It would also allow the state to reduce its exposure to risk in the lotteries market, which is facing a threat from online gambling.
The NSW Lotteries Corporation was privatised by the former Keneally Labor government in 2010 but the state still receives taxes from the business.
“Obviously the lotteries business is pretty complex and is changing,” Mr Baird said. “From a revenue stream point of view the state has a risk in that market. Really, it’s a natural hedge.”
The portion of the lotteries revenue that might be sold off was still an open question. The government “certainly wouldn’t” sell the right to all of it, Mr Baird said.
The government plans to sell its remaining power stations before next year’s budget. State-owned Macquarie Generation’s Hunter Valley power plants are already on the block. They will be followed by Delta Electricity’s Vales Point coal-fired plant and Colongra gas-fired peaker on the NSW central coast.
Mr Baird said Macquarie Generation appealed to different types of investors than were interested in the rent or tax streams from the ports or NSW Lotteries. There was an “ongoing market risk that comes with the generators”, he said.
Bernard Keane and Glenn Dyer, Crikey, 7 August 2013
Is cutting the corporate tax rate a good idea? The Business Council thinks so — it wants to increase the GST on the rest of us to cut the company tax rate to 25%. The Australian Chamber of Commerce and Industry thinks it’s a good idea, albeit for the nebulous reason that it will “boost confidence”. The Coalition thought so in 2010, when it proposed a 1.5% company tax cut in that election campaign. But then the Coalition went off the idea and when Labor tried to cut the company tax rate by 1%, they joined with the Greens to block it.
The Coalition and the Greens, a unity ticket on blocking company tax cuts. Whodathunkit?
And Labor used to think so — Kevin Rudd’s original mining tax funded a 2% tax cut, curbed to 1% in the Gillard version, but after the Coalition and the Greens blocked it, Labor decided it had better things to do than wait for the business community to lobby the party of business to get behind a business tax cut.
Labor’s policy of course was based on the Henry Tax Review, which backed a corporate rate cut. The fact that Australia had a high corporate tax rate compared internationally meant, that review concluded, that we should reduce “the company income tax rate to 25% over the short to medium term, as fiscal and economic circumstances permit” — albeit coupled with a change in non-renewable resource rent taxation.
That important caveat was missing from this morning’s announcement by the Coalition of a 1.5% corporate tax cut, intended to offset its 1.5% tax rise on medium and large business to fund Tony Abbott’s paid parental leave scheme — the one the rest of his party and the Nationals hate.
The Coalition has declined to explain how the tax cut, likely to cost $5 billion over four years (the costing compared to the predicted cost of Labor’s tax cut is significantly lower, reflecting lower corporate tax revenue growth expectations) will be funded. “We are confident that the company tax cut will deliver some partially offsetting benefits to the budget bottom line over the medium term,” Abbott announced this morning. This, of course, is supply side nonsense, articulated by economist Arthur Laffer, that cutting taxes produces higher tax revenue, which has been repeatedly mocked by economists and shown to be wrong in practice.
George H. W. Bush called this sort of thing voodoo economics and he was proven to be right by the tax history of his, his son’s and the Reagan presidency.
Interestingly, though, the Business Tax Working Group last year wasn’t so enamoured of a corporate tax cut, having found some businesses, namely mining companies, didn’t like the idea of cutting tax concessions in order to fund cutting the headline rate:
“… the economic benefits from a reduction in the company tax rate from the current rate are likely to be smaller than when the rate was much higher in the 1980s and 1990s, notwithstanding that capital may have become more mobile since then. The Working Group considers that a cut of two to three percentage points would be required to drive a significant investment response …”
So, the Coalition line that a tax cut will drive greater investment and more jobs might be a little, shall we say, overstated.
Indeed, the Canadian experience — they’ve been cutting corporate taxes regularly since 1988 — suggests there is no evidence that cutting corporate taxes increases investment — if anything, lower corporate taxes there have accompanied a decline in business investment
Cutting taxes for companies has a different impact than cutting tax for individuals (the stimulus value of which is also problematic — many people save their tax cuts, rather than spend them). Companies can spend the money paying shareholders a higher dividend, or pay company executives higher remuneration or directors higher board fees. Super funds and other big investors will press companies to pay as much of the lower tax bill back to them by way of higher dividends. That will flow into higher fees for the super fund managers and their advisers, with anything left over going into the funds themselves for policyholders.
It’s higher aggregate demand boosts company sales and revenues (and, ideally, profits), not lower company tax — particularly if, as the BCA wants, you raise the GST to fund it. Australian companies have been saving as much of their surplus cash, echoing what consumers and mortgage holders are doing at the moment. In fact, Australian companies have an estimated $100 billion in cash tucked away in their bank accounts (much of it in the major banks on term deposits earning not very much).
That cash pile has been rising for the past three years — ever since super funds and other investors bailed out these big companies in and just after the GFC with more than $120 billion of new capital and loans. Companies have been slow to spend this money on new investment because of weak demand in the economy, not high taxes.
That makes it problematic to see how a 1.5% tax cut, in two years time, will help the economy grow and create more jobs — not for the next two years when the economy will be at its most vulnerable during the move from the resources investment boom to growth driven by higher domestic demand.
A far smarter idea for Joe Hockey and Tony Abbott would have been to look at the entire area of corporate tax, which includes dividend imputation, the tax deductibility of interest payments and depreciation. All should be put up for discussion — if you lower corporate tax, then dividend imputation is less needed as is tax deductibility for interest payments. Imputation costs the budget an estimated $18-20 billion a year by some estimates. The tax bill for interest payments is also substantial while depreciation is wreaking havoc on the budget at the moment and will do so for years because of the impact of the enormous mining investment boom.
David Winograd, The Huffington Post (US), 8 August 2013
When tax credits and deductions are included, two of the most common types of small businesses pay a percentage on their income to the government more than double that of large corporations, the study commissioned by the National Federation of Independent Businesses and the S Corporation Association found. That’s because those types of businesses — known as S corporations and partnerships — pay taxes at the individual rate, rather than as a corporate entity, making them ineligible for certain tax benefits, according to The Hill.
The result is an average corporate tax rate of just 12.6 percent, according to Government Accountability Office. That’s compared to the 31.6 percent and 29.4 percent that S corporations and partnerships pay respectively, according to the study.
The findings come as many of America’s biggest businesses face criticism for avoiding their fair share in taxes. Many corporations, including Apple, Google and Amazon, wind up paying less than the top Federal tax rate of 35 percent, in part because they report international revenues in countries with lower tax rates, known as tax havens. Some companies, such as General Electric have been known to pay negative tax rates, meaning they actually gain money from paying taxes due to federal tax subsidies and other tax benefits.
Meanwhile, recent calls by President Obama to reform the corporate tax code have been criticized by small business owners who say such efforts would only further reduce the burden paid by corporations while doing nothing for businesses who are taxed at the individual rate.
Alison Martin, New Matilda, 7 August 2013
Last week’s damning Auditor General’s report into the state of NSW social housing revealed that the current system meets less than half of the state’s need and that the shortfall is increasing. There are currently 120,000 people waiting for social housing in NSW.
Even the Department of Housing’s website is bureaucratically straightforward about waiting times, displaying a cheery colour-coded table which unapologetically indicates the many areas where applicants can expect to wait over a decade.
The sheer scale of government failure is breathtaking.
Aside from the massive and growing shortfall of available properties, one of the key findings of the report was that properties are ageing and increasingly not fit for purpose. They have too many bedrooms, while the growing demand is for smaller, accessible dwellings.
The O’Farrell Government was quick to point out that the report was a reminder of “the mess left after 16 years of Labor” and that it highlighted “the need to build a social housing system which breaks disadvantage for vulnerable people, rather than just managing it”.
But instead of committing to investing in new, more appropriate properties and a long-term plan to break the cycle of entrenched social disadvantage, the O’Farrell Government’s response has been to tax tenants who happen to have spare rooms. This is a handy way of punishing vulnerable people for the failure of government to plan and build appropriate housing stock, while simultaneously neglecting to address a very real problem of supply and demand. (Apparently market ideology doesn’t apply when it comes to providing public support for people who need help.)
When the same policy was rolled out in the UK it was broadly criticised. Partial concessions were made after public backlash. Those responsible for the difficult task of rehousing tenants in non-existent smaller dwellings highlighted the erroneous logic of punishing people for the shortage of appropriately sized homes.
I work in the electorate office of Greens Jamie Parker MP. It’s located in the heart of Glebe’s historic public housing estate, a cluster of properties purchased by the Whitlam government to provide housing for those in need.
Much of our constituent work involves advocating for people in social housing. Every day our office sees the impacts of chronic underfunding and disadvantage — the human faces of the system’s neglect.
A steadily swelling maintenance backlog blew out to over $300 million under the former Labor government and the O’Farrell Government has done little to address it.
In real terms, this often means squalid living conditions for the people who are served by social housing: predominantly the elderly, the disadvantaged, and those with significant disabilities and mental health issues.
Many are living in homes that are falling into disrepair, with common problems including broken guttering leading to roof problems and encroaching mould. During rainy weeks, we often hear from people whose homes have flooded.
In one dramatic case, a woman’s verandah collapsed after a termite infestation that had also infiltrated her home. After repeatedly reporting it to the housing maintenance service and the private contractor tasked with addressing it, she resorted to collecting the termites in take-away containers as they fell from her laundry roof. When we visited, she was worried for the health of her infant granddaughter, living with her in a room upstairs.
These people feel ignored and frustrated by a system which is so overwhelmed and bureaucratic that it is still taking names on a decade-long waiting list.
After increasing steadily in the 50 years to 1995, the number of social housing dwellings began to level out under Labor. Social housing has declined as a proportion of overall New South Wales housing and is now supporting fewer people than a decade ago.
Increased investment would allow for the broadening of criteria for tenancy, thereby lessening the stigma of social housing over time and reducing the concentration of social disadvantage.
Instead the O’Farrell Government plans to sell social housing properties at more than twice the rate it will be building them in the next four years.
The lack of social housing stock has led to the narrowing of criteria for placement, with the result that often it is only the most vulnerable and disadvantaged who make it into social housing. This is a recipe for entrenched poverty.
It should come as no surprise that a conservative government is implementing a privatisation agenda which reduces social welfare and increases private sector involvement in public service delivery (through public-private partnerships for example).
Labor, however, paved the way for this agenda over decades, by allowing properties to fall into disrepair. This fostered a culture of neglect and non-delivery, slowly lowering public expectations of government’s social welfare responsibilities.
In NSW we are experiencing what may yet be played out at a federal level if the Coalition forms government.
When a Labor government neglects social welfare and public services, it not only fails the most vulnerable people in our community, it also softens the ground for a Coalition government to do far worse, including fundamentally changing government responses to social disadvantage. This principle is also true for the public provision of services such as education, health and transport, as well as the protection of the environment.
This state of social housing in NSW is emblematic of the dangers of systemic neglect of social justice principles, particularly by a party which has woven them into its own rhetoric.
For the thousands of housing applicants who were sold the story of the PM’s rise to greatness off the back of a strong social welfare system, it will be a long wait.
Ian McAuley, New Matilda, 5 August 2013
The Treasurer’s Economic Statement has drawn a great deal of comment, little of which is enlightening.
The Opposition, true to form, has chosen emotion over substance. “Labor has lost control of the Budget” and “the Budget is in freefall”, Shadow Treasurer Joe Hockey announced on the ABC on Friday. Journalists who are too lazy to read the statement are talking about a $33 billion “black hole” that has opened up since the Commonwealth Budget was brought down in May.
OK – Treasury got it wrong, just as businesspeople and stockbrokers get it wrong. Who, for example, could have predicted that the Australian dollar would go from parity with the US dollar on 14 May (the day the Budget was brought down) to 89 cents last Friday? Who could have predicted that China would suddenly move to a more conservative financial policy?
Treasury’s revisions have seen its estimates for receipts in this financial year fall by $8 billion, and its estimates for outlays rise by $4 billion. Receipts are down because GDP is forecast to grow less slowly. The Budget estimate was for 2.75 per cent real growth this year; last week’s economic statement brings that down to 2.50 per cent. The Budget is hit particularly hard by a fall in nominal GDP, from 3.25 per cent to 2.50 per cent. In other words, some of that revenue fall is simply a result of lower prices rather than any contraction in real activity.
And to put those figures into perspective, they are within a $350 billion Budget. Receipts have been revised by 2.2 per cent and outlays by 1.1 per cent – hardly a “freefall”. As a result the cash deficit for this year is now estimated to be 1.9 per cent of GDP, rather than 1.1 per cent of GDP as estimated in the Budget. If our Government has “lost control”, what does Hockey have to say about the USA, where the deficit is 4.5 per cent of GDP, the UK where it is 7.6 per cent of GDP, or Japan where it is 8.3 per cent of GDP? We are still doing well in tough times.
If Hockey really wanted to challenge the Government’s economic policies he could do far better than to nitpick about minor errors in its fiscal estimates. He would be addressing two of the Government’s basic economic policy shortcomings, which have been evident for some years and which are revealed once again in Friday’s statement. These are the obsession to balance the budget and the inadequacy of our taxation base. Hockey is like an accountant who, in his attention to the neatness of bookkeeping, fails to understand how the figures convey basic information about a company’s performance.
To start with the balanced budget obsession, what stands out in Friday’s statement is that the investment phase of the resources boom is over. It had been expected to contract, but not so suddenly. The table below, taken from that statement, shows the severity of this contraction.
Bowen is right when he says that Australia is undergoing an “economic transition”. It’s a transition brought on by an external economic shock. We knew the party would end, but we didn’t expect the ending would be so abrupt.
The textbook response to such a shock, particularly when it comes from a downturn in business investment, is for the government to counter it with stimulatory measures. We can pretty well bank on a further cut in interest rates, but monetary policy is slow to take effect, and as US experience shows, over-stimulation of the housing sector has severe consequences. The other side of a stimulus has to come from public spending, preferably public investment.
As the mining sector calls less on our construction and heavy engineering resources, those resources could be turned to providing much-needed public infrastructure, particularly in areas such as surface transport. The workers and machines now involved in earthmoving and tunnelling could be turned to building urban metro systems, interstate highways and railroads, and accelerating the National Broadband Network.
These projects are unlikely to be funded by the private sector, not because they are uneconomic, but because of problems of linking payments to benefits and because of spillover benefits. (“non-excludability”, “non-rivalry” and “network externalities” in the language of economists).
This is hardly a radical idea. It is standard counter-cyclical economics, and the same point is made in the “Action Plan for Enduring Prosperity” published last month by the Business Council of Australia.
If the Commonwealth were to make such investments, its plan for a balanced budget by 2016-17 (for which a razor-thin $4 billion cash surplus is forecast) would have to be abandoned.
Does it matter, if, as in any well-managed business, we borrow to fund productive assets? Provided such projects have positive benefit-cost ratios, such investments would actually strengthen our national balance sheet.
Unfortunately, thanks to an accounting convention, most such expenditure would appear as “expenses” on the Commonwealth accounts, and as assets on the state accounts, because those assets would be under state ownership and control. (The NBN is an exception, because for now it is a Commonwealth-owned asset.) The effect would be a reported increase in the Commonwealth’s net debt, exactly offset by a decrease in state net debt – in other words no change in the nation’s net public debt.
Our present and past Treasurers shoulder much of the blame for letting a “balanced budget” become the main indicator of economic competence. But even more of the blame can be sheeted to the Coalition, which, with the support of the Murdoch media and the passive compliance of other media such as the ABC, has dumbed-down the debate on economic policy, and has wasted no opportunity to build on consumers’ and investors’ fears and to create business uncertainty.
A “strike of capital” would serve the Coalition well. The Coalition’s recent announcement that it distrusts Treasury costings needs to be seen in this light – as an attempt to undermine international confidence in our public financial institutions, for nothing would suit them better than a downgrading of our Government’s AAA credit rating between now and the election on 7 September.
The other point an aspiring treasurer could make from the Opposition benches is that our taxation base is too weak to support our legitimate demand for public goods and services – education, health care, defence, infrastructure, social security – to name the main outlays. Some of these services can be provided only by government, while others can be provided by the private sector, but only at a much higher cost, with higher administrative overheads, and with large leakages to the financial sector. Toll roads, private health insurance and privatised electricity and water utilities are expensive, inefficient and inequitable alternatives to public provision.
In a process that started with the Howard Government and continued with the present Government our public revenue base has been weakened through tax cuts and other concessions broadly classed as “middle class welfare”. To its credit, the Gillard Government wound back some of this waste, but it never engaged with the community on the need to increase our taxes, which are almost the lowest in the developed world. The Rudd Government has fared little better. (Even its modest clawback of a rort on company cars has evoked squeals of protest, the most recent being the absurd suggestion by the Motor Trades Association that it will result in our buying fewer cars.)
Rudd’s tax initiatives on tobacco, company cars and bank deposits are all, in themselves, responsible by any reasonable economic criteria, but they do not address the fundamental problem of strengthening our public revenue, particularly our personal and company taxes.
Is it possible in our democracy to have a serious discussion on tax? In this election campaign will Abbott and Hockey do better than the patronising drivel they have served us so far? Will Rudd and Bowen address the question of our long term tax base? And will the mainstream media challenge our politicians when they lie, obfuscate or avoid hard issues?
‘Big lie’ behind the bedroom tax: Families trapped with nowhere to move face penalty for having spare room
96% of benefit claimants who will be penalised cannot be rehoused
Emily Dugan, The Independent (UK), 5 August 2013
The figures published today in The Independent expose the false argument behind ministerial attempts to spin the move as ending the “spare-room subsidy”, and confirm campaigners’ claims that it merely penalises poor people.
The policy means that tenants have their housing benefit reduced by 14 per cent if they have one spare bedroom, and 25 per cent if they have two or more spare bedrooms.
Yet more than 19 out of 20 families hit by the bedroom tax are trapped in their larger homes because there is nowhere smaller within the local social housing stock to take them. This is shown by figures provided by councils in response to Freedom of Information requests by the Labour Party.
For the 38 councils that provided full data, 99,079 families are expected to be affected by the bedroom tax, but only 3,803 one and two-bedroom social housing properties are available – just 3.8 per cent of the homes required to rehouse the families who are hit.
Another 26 councils who responded said they expected a total of 45,669 families to be affected, but were unable to say how many smaller properties were available in their area.
Liam Byrne, the shadow Work and Pensions Secretary, said: “The big lie behind this Government’s spiteful bedroom tax is now plain for all to see. Ministers like to claim it’s not a tax, but the truth is more than 96 per cent of those hit have nowhere to move to.
“This hated tax is trapping thousands of families, forcing vulnerable people to food banks and loan sharks, and there is now a serious danger it could end up costing Britain more than it saves as tenants are forced to go homeless or move into the expensive private rented sector. David Cameron’s bedroom tax is the worst possible combination of cruelty and incompetence. He should drop it now.”
The situation is affecting local authorities around the country. In Birmingham, 13,557 households are affected by the bedroom tax, but just 368 one and two-bedroom properties are currently unoccupied. In Cornwall, meanwhile, there are just 65 one and two-bedroom homes and more than 3,300 people eligible to be charged for under-occupancy.
Steve Turner, executive director for policy at Unite, said: “These figures show beyond any doubt that Iain Duncan Smith has been misleading the public. He tried to spin the bedroom tax as a way of managing housing stock, but in fact it is a cruel and callous attack on some of the most vulnerable people in our communities.”
“The evidence now overwhelmingly shows that the Government has made a grave mistake with this policy. They must abandon it now before more lives are destroyed.”
In Sefton, Merseyside, more than 3,600 people were competing for 18 available one and two-bedroom properties at the time of the FOI. Kevin Appleton, income manager at One Vision Housing, which manages Sefton Council’s waiting list, said that the situation was now even more stark.
“As of today we’ve got 8,360 people on the waiting list. Of these, 4,859 want one-bedroom homes and on this week’s adverts we had just six available. It’s making life very hard for people whose lives were hard anyway. The demand for three-bed properties has fallen through the floor,” he said.
Louise Harding, head of tenant services at the Coast and Country Housing association in Redcar, said in one of their worst-hit areas there were 53 three-bedroom properties empty and queues of people desperate to downsize. “It’s appalling,” she said. “We’ve got 1,100 people wanting to downsize to a one-bedroom property and on average we only have around 30 available every year. At this rate it will take 37 years for all those people to get one-bedroom homes. The iniquity of it is shocking; this about money-making.”
More than half of those affected by the policy have a disability – and campaigners say they will appeal against last week’s High Court decision that it did not discriminate against disabled people, who often need an extra room in which to sleep alone.
The Government announced last Tuesday that it would increase the emergency funds available for those affected by increased housing costs by £35m. But the handouts, known as discretionary housing payments, are a fraction of the millions needed to cover people’s shortfall in rent.
The chief executive of Citizens Advice, Gillian Guy, said: “Discretionary housing payments are worth only a small fraction of the total cut in housing benefit and are often only temporary, meaning problems can go unresolved.”
She added: “This is an upside-down approach to policy-making which doesn’t get to the root cause of why housing benefit costs have increased. We have a chronic shortage of affordable housing in the UK with over 1.8 million households on waiting lists. As long as this dire lack of housing options exists then the Government can’t reasonably tell people they have a choice about downsizing to a smaller home.”
Chris Goulden, head of poverty at the Joseph Rowntree Foundation, said: “It is very difficult to see how this policy can work without causing severe hardship, particularly as many of those affected are disabled people. The housing benefit bill could also rise if more people move into the private rented sector because of a shortage of one or two-bedroom properties in social housing.”
A spokesman for the Department for Work and Pensions said: “This ignores the fact that people may move to housing in the private sector and not all tenants will have to downsize because they could make up any shortfall through getting a job or increasing their working hours. These reforms will save the taxpayer £1bn over the next two years and help to ensure a better use of our housing stock when in England alone there are nearly two million households on the social housing waiting list, and over a quarter of a million tenants are living in overcrowded homes.”
While the DWP argues that social housing tenants who want to downsize could instead spend their housing benefit on private accommodation, there is already a major shortage of small, cheap private accommodation.
It would also defeat the cost-cutting aim of the whole policy, since the housing benefit payable for a private one-bedroom place is often more than for a two-bedroom council house. Saving enough for the deposit needed for private housing is a further issue – and a near-impossibility for those already struggling with rent arrears because of the bedroom tax.
Spotlight: Trapped by the tax
Since the introduction of the bedroom tax, thousands of families in the Cotswolds have been trapped in larger properties that they are penalised for by the new charge.
In Wiltshire, there were no unoccupied one- and two-bedroom properties at all, for 2,953 affected households, though 48 were advertised as being available shortly. The situation is similar in Gloucestershire, which had just three suitable properties for 540 people.
Jo Sutton at Wiltshire Citizens Advice Bureau said: “We’re seeing a number of clients who have been hit by this and the impact is huge for some people.”
A Wiltshire Council spokesman said: “We are doing everything we can to support families through these significant changes.”
Case Study: ‘I’m £200 in arrears and it’s only been two weeks’
Hannah Smith, 28, lives in a three-bedroom house in Hyde, Cheshire, with children Gracey, 7, and Jake, 6.
I’ve always said that this house could be for a bigger family. I’ve been asking on and off for the last six years for a two-bedroom place, but the housing association said it couldn’t happen, so I’ve been stuck here.
We had a letter the month before the bedroom tax came in, saying that due to the ages of the children, I’m under-occupying my home by one bedroom and by April we’d have to start paying extra for the rent and also council tax.
Now I’m out of pocket £48 a month. It’s stupid because they wouldn’t move me. I’m already more than £200 in arrears and it’s only been a few weeks. They won’t let me apply for a new two-bedroom place because I’m in arrears. But I can’t clear my arrears because of the bedroom tax. It’s crazy.
On the estate where I live, two-bedroom properties are very rare. Everybody is going to be queuing up for them now.
You have to juggle paying your rent and getting the food in for your children. I haven’t had to use food banks yet, but I may have to.
I’ve worked in a shop and as a care assistant, but not since I was left on my own with the children.
This tax doesn’t work. David Cameron is taking money from people who are just trying to stay afloat.”
Run-down seaside towns a ‘dumping ground’ for the vulnerable
Declining seaside towns around Britain are suffering “severe social breakdown” as they becoming “dumping grounds” for people on low incomes or welfare benefits, pushed out from inner-city areas, a report has found.
Hotels that once accommodated holiday makers are increasingly being converted into cheap flats for vulnerable tenants. The properties are also being used by councils in wealthier areas as low-cost options for housing children in care, said the Centre for Social Justice (CSJ) think-tank.
Their findings show that Britain is spending almost £2bn a year on welfare payments to people of working age in seaside towns. The report, entitled “Turning the Tide”, calls for action to revive the fortunes of seaside towns.
Fleur Anderson, Joanna Heath and John Kerin, The Australian Financial Review, 3 August 2013
The new revenue-raising measures are expected to raise $827 million over the next four years and an estimated $45 million in missing superannuation for workers.
The move complements other new – but not detailed – policies to recoup revenues worth more than $50 million by preventing fraud by welfare recipients and those on veterans’ pensions.
The relatively small sums of money involved in many of the Rudd government’s cost-cutting measures indicates how difficult the task has been.
Most of the cost-cutting pain will be spared this financial year – the same year as the federal election – but will become deeper from 2015-16 and 2016-17 in line with the Rudd government’s plan to return the budget to surplus. Treasurer Chris Bowen said the major of saving measures fell in those later years because it was when “the economy is expected to return to more balanced growth”.
In the aftermath of the global financial crisis, then treasurer Wayne Swan promised to contain spending growth to 2 per cent of gross domestic product “over the cycle”.
Tighter rein on spending
While spending – or payments, as they are referred to in the economic statement – contracted 3.2 per cent in 2012-13, payments have been permitted to drift up to 5.7 per cent this financial year. The government is forecasting a much tighter rein on spending with subsequent years of spending growth to fall as low as 0.8 per cent.
While there has been more than $17 billion saved by policy decisions since the May budget, other savings such as the $1.1 billion reduction in defence spending and $2 billion in reduced pharmaceutical benefits scheme payments are attributed to “parameter” variations – or changes in the economy – since the budget.
In the health sector, the government will save $830 million over three years by speeding up price cuts to off-patent medicines, in a measure that has pleased patient advocate groups but will likely anger the pharmacy industry.
The government will shorten the cycle in which it makes progressive price cuts to drugs under a process known as “price disclosure” to 12 months from the present 18 months.
In the defence sector, the government came under fire for failing to fund its ambitious 2009 white paper which included new submarines, warships and land strike missiles and promised to spend some $275 billion over 20 years. But the global financial crisis and the need to meet the government’s budget surplus meant almost $25 billion in spending has been deferred or cut between 2009-10 and 2012-13, drawing fire from Australia’s ally the United States, the opposition and the defence industry who argued that spending cuts were too harsh.
Phillip Inman, The Guardian AU, 3 August 2013
During the boom years, Australians were familiar with financial levies designed to calm rampant growth and the potential for inflation. The move to personal pensions in the 1990s was a classic manoeuvre to take cash out of a soaring economy and build up a buffer of savings.
Kevin Rudd’s bank levy feels very different. Not only is it being imposed at a time of austerity, when the government is scrambling to close a A$30bn (£17.5bn) hole in its annual accounts, it feels like a tax on savings just at the moment when ordinary workers are feeling uneasy about their prospects.
The threat by banks to pass on the 0.5% levy on deposits up to A$250,000 (£146,000) from January 2016 appears self-defeating. If the object of the exercise is for banks to insure themselves against a possible crash, thus avoiding the need for taxpayers to provide the funds, it is nonsensical for bank customers to pay when taxpayers and people with small bank deposits are almost the same thing.
But all across the world, bank customers, taxpayers or both are paying to build huge financial buffers to cope with that unexpected moment a large bank says it is bust.
In Europe there is a plan to have a buffer in place by 2018. A bank levy in the UK is supposed to be contribute towards the fund.
In June my colleague Jill Treanor explained:
Under the regime being created, a clear pecking order for collapsing banks is set out: shareholders are first; certain types of bondholders; and then customers who have deposits over the guaranteed level of €100,000 (£85,000). These three types of creditors would need to take minimum losses of 8% of a troubled bank’s total liabilities.
In 2011/12 the levy, which is subject to a review in the autumn, raised £1.8bn for the exchequer and is forecast to bring in £8bn by 2015.
In a clever move, the UK government, keen not to let lots of dead money sit around in the exchequer doing not very much, just waiting for a bank crash, secured a deal that means it does not have to set up a national fund and instead can make a financing arrangement through the bank levy. In other words, it can use the money to invest and offset against the UK’s ballooning debts.
So while it may seem strange for the Rudd government to heap further misery now on bank customers with a bank levy, it is considered the right thing for all developed world countries to put in place.
Paul Syvret, The Courier-Mail, 3 August 2013
While the headline numbers may look alarmingly big, the way the levy is structured means most depositors will not notice the charge, even if the banks opt to pass on the cost in full.
The 0.05 per cent levy being proposed would equate to a hit of 5c for every $100 on deposit.
Even a bank account with $100,000 in it would be up for a fee of $50 over the course of a year, far less than most banks can charge in terms of normal account keeping fees.
Arguably, too, the deposit levy is long overdue and brings Australia in line with the rest of the world.
The US introduced its scheme during the Great Depression in 1933, following a string of catastrophic bank collapses. Similar schemes are in place in most OECD countries. The International Monetary Fund, the OECD, Reserve Bank Governor Glenn Stevens and the Australian Prudential Regulation Authority have recommended the Government introduce a similar system here.
In short, what the levy achieves is to provide cash backing for the Financial Claims Scheme.
This is a government guarantee that, in the event of a bank failure, depositors’ life savings are secure up to a ceiling of $250,000.
The scheme was introduced at the height of the Global Financial Crisis, at which point deposits of up to $1 million were guaranteed, in part to avoid the possibility of panicked depositors mounting a run on banks rumoured to be weak.
The catch was that, had any banks actually hit the wall, it would ultimately have been the Australian taxpayer left picking up the tab for the deposit guarantees.
The bank levy, which will see money raised quarantined in a special fund, one that will show up on the Government balance sheet for budget purposes, is designed to insure against this.
The politics are the messy bit. Given the levy is being announced in the context of a $30 billion revenue crater, it is more likely to be viewed as a cash grab than as prudent policy planning for a financial system shock sometime down the track.
While our big banks may argue the levy is unnecessary in that they have never been better capitalised; never stronger, such protestations have been made throughout every business cycle, before every crash and exogenous shock, in history.
Becky Freeman, The Conversation, 2 August 2013
The body of evidence that price increases reduce smoking quickly and effectively is bulletproof. In short, tax increases induce smokers to quit, reduce the initiation and uptake of tobacco use among young people, and lower the consumption of tobacco products among continuing users.
For every 10% increase in price, consumption of tobacco reduces by about 4%. Half of this decrease is due to adults quitting smoking and young people not taking up smoking. The other half is due to people who continue to smoke, smoking fewer cigarettes.
The planned series of four 12.5% tax increases should lead to about 210,000 fewer Australian adults and 40,000 fewer teenagers smoking. That means around 2.5 billion fewer cigarettes will be smoked each year.
By the end of 2014, a typical pack of 25 cigarettes will likely cost upwards of A$20.
Myths and facts
As with any tobacco control reform, the tobacco industry and its allies will immediately respond with a series of predictable myths to instill doubt about the policy intent and effectiveness.
Myth: Australian tobacco taxes are already too high
Just last week, the World Health Organization (WHO) released a report recognising Australia as a world leader in tobacco control, rated among the top 20 nations for its work in mass media education, smoke-free policies, health warnings and support for smokers.
But Australia is lagging behind international best practice on tax policy, with total tobacco taxes making up less than 60% of the final price. The WHO benchmark is set at tax comprising a minimum of 70% of the total price. The announced tax increases mean that Australia will be catching up to New Zealand.
Myth: This is just a government grab for revenue
Over the past 13 years, there have been just two real increases in tobacco excise duty. In comparison, during the 1990s, there were ten large real increases in price; these tax increases were the most important factor driving reductions in smoking over the 1990s. Governments failing to raise tobacco taxes means that smoking rates fall at a much slower rate.
Myth: Tobacco tax increases hurt the poor
Tobacco tax increases are one of the few policy measures that reduce smoking more in low- than high-income groups. Smokers who are unable to quit following an increase in taxes can also avoid paying the extra cost by smoking fewer cigarettes per day.
In Australia, there are now far more ex-smokers than current smokers, proving that quitting is an achievable and common accomplishment. The vast majority of smokers want to quit, and tobacco taxes are an additional incentive that help smokers quit their addiction for good.
Besides spreading these myths, tobacco industry apologists are already crying “nanny state” at the announced tax increases; suggesting that voters are somehow tired of governments taking effective action to improve the nation’s health.
In reality, the public is highly supportive of tobacco tax increases, particularly if they know the measures are coupled with increased health education and quit-smoking support.
What works in tobacco control?
Tobacco taxes combined with high profile, hard-hitting mass media education campaigns, like the one below, have been shown to be critical in reducing smoking rates.
Everybody knows smoking kills
Additionally, tobacco advertising bans, smoke-free public spaces, graphic health warnings on packages, and quit-smoking support programs are all part of a comprehensive package of initiatives that countries should adopt to reduce the harms caused by tobacco use.
There are also strategies that we know have no impact on smoking rates, or worse – actually increase smoking-related harms. Allowing the tobacco industry to run youth smoking prevention education campaigns has been found to leave young people with a lower perception of harm from smoking, stronger approval of smoking and intentions to smoke in the future and a greater likelihood of having smoked in the past 30 days.
Equally, tobacco industry developed voluntary self-regulatory codes have proven to serve only to delay the adoption of effective government legislation.
What’s next for tobacco control?
Australia is clearly a world leader in tobacco control. Being the first country in the world to implement plain packaging is testament to the government’s commitment to ending the 15,000 deaths per year due to tobacco use. But in order to continue to pave the way in global tobacco control, Australia will need to continue to be innovative.
Allowing the tobacco industry to run youth smoking prevention education campaigns leaves young people with a lowered perception of tobacco-related harm. Image from Shutterstock.com
Changing the tobacco retail environment is a largely untapped source for further reforms. Cigarettes are sold on virtually every street corner in Australia with limited restrictions on where and when it can be sold, who can sell it, how much they can sell, and who they can sell it to. While some Australian states require retailers to have a license, they are easy and inexpensive to acquire and never revoked.
Emerging evidence suggests that reducing the density of tobacco retail outlets may be an important tobacco control policy.
And while it can be easily dismissed as “radical”, perhaps in the not-so-distant future, smokers themselves will need to obtain a license in order to purchase tobacco.
Tristan Ewins, Online Opinion, 2 August 2013
And on the same day on page 2 of the Herald-Sun was the proclamation that “households face thousands of dollars in higher bills for fresh food, health and education payments” if the GST is increased and/or expanded in scope – as demanded by the Business Council of Australia. (BCA)
So what’s the connection between these?
As the China boom recedes somewhat – and with the prospect of an ageing population – the government is facing a reduction in tax revenues, including revenue from Company Tax and the GST – at the same time as an ageing population will increase health expenditures in the context of a narrowing tax base. Then there’s the fiscal impact of winding back the Carbon Tax. And on top of that you can add the fact that the country is suffering a massive infrastructure deficit – with business recognising that crisis – and its impact upon productivity – by demanding that workers, citizens and consumers pay the price.
According to Grattan Institute chief executive John Daley extending the GST to education, health and food “would potentially add $3000 a year to average household costs.” And the BCA is also looking to attack organised labour in order to firm up their profit margins.
Malcolm Maiden at ‘The Age’ puts it this way: that “The BCA wants stronger fiscal discipline and a more flexible industrial relations environment…” Translated that means: curtail industrial liberties, remove safeguards for wages and conditions; cut the social wage and welfare… Maiden also observes that other moves are also apparently ‘on the table’; perhaps including massive cuts to Company Tax and a “ceiling on tax revenue as a proportion of GDP.” (The Age, July 31st)
To put it bluntly: Labor needs to decide WHAT and WHO it stands for. Does it stand for the traditions of social democracy? Does it stand for the vulnerable, and for the low and middle income earners of the working class? Does it stand for social security and social solidarity? Or does it stand for small government, corporate welfare, regressive taxation, ‘survival of the fittest’, ‘the top end of town’, and a preference for abstract economic goals, and increased private dividends and profits –instead of concrete social goals and needs?.
Richard Denniss of the Australia Institute has pointed out that changes to Australia’s income tax regime from before the GFC hit (ie: since 2006) were costing $40 billion for the year 2013 alone.
And crucially he has made the additional observation that those superannuation concessions the Federal Government seems so eager to quarantine will cost about $50 billion a year by 2016. And according to Denniss that’s with a dominant percentage of superannuation tax concessions of various kinds (ie: tax breaks) going to the top 5% income demographic! This at the same time as the Federal Labor Government continues austerity against pensioners, and considers further cuts to welfare and services!
Of course the BCA will look after its own interests, and the profit margins and dividends of its members. It will try and push the case for effective corporate welfare: for cuts in the tax business pays at the same time as taxes and user charges go up for workers, tax payers and consumers to provide the infrastructure and services its members benefit from. This – and also assaults on workers’ wages and conditions – is about shoring up profit-margins and dividends by increasing the intensity and the rate of exploitation.
There are points of ‘cross-over’ when it comes to the interests of citizens, workers and business. Keeping business generally viable means preserving jobs. But the public interest and business interests should not always be seen as synonymous. We should seek BOTH to divide the pie fairly AND to grow it through technological improvements to productivity, and support for high-wage industry. (ie: NOT by intensifying exploitation through attacks on wages and conditions)
And we need to retain focus on the social goals that underscore our economy. That is: not promoting profit as an abstract end in itself – but promoting economic activity which adds to the quality of life of citizens and workers. This necessarily entails social investment in properly not-for-profit sectors: health care, aged care, public housing, education for human development – and not just for the labour market. It might also mean reductions in the working week, and in peoples’ working lives – for concrete human needs that go beyond abstracted goals of growth.
All sides of politics recognise the infrastructure deficit and the need “to do something about it”. It is hurting our productivity – and in so doing hurting both workers and business. But we have a CHOICE in the WAY in which we respond to that crisis.
The Labor government can choose a path of austerity – attacking pensioners, the social wage, the welfare state, and industrial rights and liberties. Or it can choose to embrace social democracy more than merely rhetorically – returning to questions of distributive justice and ‘the social good’. And Labor can choose to act on those principles of distributive justice by committing to a gradual expansion of the social wage and welfare state as a proportion of GDP – instead of embracing socially damaging ‘ceilings’ on tax and social expenditure. Such ‘ceilings’ would only flow into greater social disadvantage and injustice – and most likely into infrastructure privatisation whose inefficiencies hurt both business and consumers.
Notions of the social wage, public infrastructure and welfare ‘crowding out’ the private sector also need to be challenged. A benefit of relative economic abundance is that consumers can potentially have significant room for discretion in their spending priorities at the same time as a decent proportion of peoples’ incomes is diverted into the ‘social infrastructure’ of services, physical infrastructure (eg; transport, communications, schools, libraries) and welfare – without which society itself would collapse, or lapse into barbarism. It also means that people can potentially enjoy earlier retirement ages and shorter working weeks – as technological improvements to productivity make this possible over time without hurting absolute material living standards. Though taxes would need to rise in order to maintain that “social infrastructure”. (a fair ‘trade off’) The Nordic countries, and other European countries such as Denmark and the Netherlands – give us some idea what might be possible.
But in order to pursue such a social democratic vision Labor cannot and should not ‘hem itself in’ with ill-thought-out five year commitments on superannuation concessions which do not even have the authority of a National Conference position behind them!
Also, another hung parliament cannot be completely ruled out, and the Greens will likely want reform on tax and tax concessions in that event. ‘Locking itself in’ to such a position simply leaves Labor open to further accusations of promise-breaking should reforms and that area become necessary; or are seen as preferable after a meaningful, inclusive and genuine internal debate.
If removing superannuation concessions, reforming dividend imputation, and restructuring the broader tax mix can bring in tens of billions there is simply no need for the kind of austerity Labor is contemplating in order to return to surplus. What’s more – Labor can implement such a program WITHOUT harming the low and middle income demographics which it depends upon for its electoral base. It can aim at a fairer contribution from the wealthy and the upper middle class. And through reform of tax, welfare and the social wage – Labor can pursue a distinctively social-democratic vision of ‘the good society’ which is much deeper than simply ‘more and more’ private consumption and production – regardless of the social cost.
But by contrast – allowing social and economic infrastructure to ‘wither on the vine’ will hurt everyone – workers and business included. And turning to privatisation of infrastructure also passes the price of inferior cost-structures on to consumers – including both citizens and businesses.
Standing for the same agenda of austerity and distributive injustice as the Liberals – but ‘not quite as much’ isn’t enough to cut it for Labor; to inspire and mobilise the people Labor needs behind them to win this election. Labor needs to forget the ‘small government’ template: and instead stand unambiguously for social welfare and social justice; and a distinctively social-democratic vision of ‘The Good Society’.
Richard Denniss, Arusha Cooray, John Quiggin, John Wanna, Phil Lewis and Zareh Ghazarian, The Conversation, 2 August 2013
Delivering the Rudd government’s long awaited economic statement, Treasurer Chris Bowen said the government wanted to avoid “harsh and swinging cuts that would make our economy smaller and lead to higher unemployment”.
The government warned that the 2013-14 budget deficit is expected to be A$30.1 billion, falling to $24 billion in 2014/15. However, $17 billion in savings, when combined with additional revenue raising measures, would return the federal budget to a $4 billion surplus by 2016/17.
Savings and revenue raising measures announced – some of which had already been reported – include changes to fringe benefit tax arrangements for cars, a levy on banks and increased taxes on cigarettes.
The statement also outlined the costs associated with some programs announced since Kevin Rudd replaced Julia Gillard as prime minister.
The controversial plan to send asylum seekers arriving by boat to Papua New Guinea is slated to cost $1.1 billion over the forward estimates.
The Conversation spoke to economic and political experts about the impact of the pre-election economic statement.
John Wanna, Sir John Bunting Chair of Public Administration at Australian National University
Not sure what all the fuss was about or whether it was worth all the hoopla. The Economic Statement released by treasurer Chris Bowen and finance minister Penny Wong is not so much an economic statement as more a list of policy reminders and bribes, with any bad news (cuts, tightening, lapsed funding of programs) shoved out to the years 2015-17 – that is beyond the end of even the next parliament.
The new taxes or increased charges are largely ad hoc, random and nuisance in character producing very little for whatever political pain is inflicted by the electorate (smoking, company cars, bank deposits tax, unpaid tax swoop, mopping up small superannuation balances, and raising the hoary old efficiency dividend yet again to 2¼ for three out-years. Is this really the best that the government can do?
The document states that fiscal consolidation has slackened pace (p. 2) but does not explain why it has slackened – less than expected revenues are one factor but so too is excessive spending when the government does not yet have the money to spend. The statement admits that we have had seven large deficits straight – since 2008 through to 2015 – that’s a total of $245 billion in cumulative deficits over that period despite the government insisting we would be back in surplus as of last June (an annual average deficit since 2008 of $35 billion).
All major savings measures (cuts, offsets, etc) are shown in the fiscal years 2015-16 and 2016-17 – can we really believe that the government will stand by these austerity measures so far out? Hardly.
The statement reminds us of the need for some important changes as we transition from a mining boom economy to a broader based economy. These include improved productivity, improved competitiveness, innovation, research and development, regulatory imposts, along with hints at greater flexibility in labour markets and industrial relations. But was such a hyped-up statement needed to remind us of these fundamentals which been the subject of debate since the 1980s?
If the government’s Economic Statement was meant to give the Pre-Election Economic and Fiscal Outlook a more rose-tinted slant, then it has probably failed. Maybe the exercise was one of getting the bad news out before the campaign begins so that the PEFO document produced by Treasury/Finance officials falls flat on its face and no-one pays any attention to it once the campaign is underway. It reminds me of an episode of The Hollowmen.
John Quiggin, Professor, School of Economics at University of Queensland
The government has taken a number of measures necessary to restore revenue to its long-term share of national income, around 25%. Both the increase in tobacco excise and the requirement for banks to pay for the government guarantee they enjoy are sound policy measures.
The changes to FBT arrangements point the way to further repairs of the revenue base. The existence of an entire industry devoted to salary packaging is clear evidence that fringe benefits are a major area of tax avoidance. The ultimate solution should be to make all convert all fringe benefits to taxable income, with the work-related component being claimed as an expense.
Phil Lewis, Professor of Economics at University of Canberra
The major thing people will focus on is: why have these estimates come out now? It’s only two months after the budget and we have such a correction in these revenue figures that it’s almost unbelievable. I think that’s the first question to ask: if the budget estimates are so unreliable, how can we put any faith in these?
I think there is a fundamental structural problem, which is highlighted in the piece I wrote on the budget for The Conversation. I would like to point out the fact that given the erosion of the revenue base under Howard and Rudd, it is very difficult for us to finance continual government spending. So there either has to be a drastic reduction in spending, or they have to solve tax-based problems: which may mean increasing GST or increasing the coverage of the GST.
What we see here is a series of band-aid measures. I think the most obvious is the tax on tobacco. I think it’s right there will be some cut in smoking but to base it as a health initiative is somewhat disingenuous and is clearly just a grab for revenue due to an incompetency in raising revenue in the past.
Richard Denniss, Adjunct Professor, Crawford School at Australian National University
The economy is clearly growing a bit slower than anticipated, and in turn revenue is coming in a lot slower than expected. The obvious consequence of that is budget deficit is bigger than was forecast. The challenge for the government now is to manage good economics and good politics because good economics would suggest that we let the budget sink into a big deficit, we don’t now panic and cut government spending. Because if we reduce government spending at a time when the private sector is reducing spending then we’re just going to make things worse not better.
However with an election as close as it is, the government is clearly under pressure to look fiscally responsible even though what passes as fiscal responsibility is quite economically irresponsible.
Yesterday, the government announced it wouldn’t touch superannuation tax concessions for five years. Yesterday’s announcement shows how quickly things can change. The Gillard government got itself in all sorts of trouble by promising to get the budget into surplus by a particular time. Today’s announcement makes it clear how dangerous it is for a government to make promises about what it will or wont do over a five year period, or over a particular period of time in which the will or wont be able to achieve a particular budget outcome. The economics is quite clear on this, the economy has a much bigger effect on the budget than the budget has on the economy.
Zareh Ghazarian, Lecturer, School of Political and Social Inquiry at Monash University
The economic update presented by the government today brings a few surprises to the electorate. A critical issue is the timing of the update. With intense speculation about when the prime minister will call an election, coupled with the sense that the race between the major parties is now neck and neck, the update arrives at a critical period in the political cycle.
The update needs to achieve a couple of goals. First, it needs to outline the Australian government’s budgetary framework. It gives a sense of the state of the economy and the economic parameters in which any future government will be able to operate.
The second goal is for the update to provide a spring-board for the government to launch into the formal election campaign. It is an opportunity for the government to articulate its economic plans and demonstrate how the Labor tradition will influence its future decisions. It will be championed by the government as an alternative to the Coalition’s approach which it has warned would replicate European austerity measures.
In a political sense, there are some areas of concern for the government in the update.
The bigger budget deficit of $30 billion will be seized by the opposition and used as “proof” that Labor can not manage the economy. The new charges on bank deposits, tobacco excise and fringe benefits tax will also be vigorously attacked by industry groups.
The update now clears the path for the PM to name an election date, and provides a clearer idea of what Labor would do if it was to win the contest.
Arusha Cooray, Senior Lecturer, Economics at University of Wollongong
Australia has weathered the financial crisis relatively well despite a A$30 million budget deficit as announced by Chris Bowen. Although unemployment is expected to rise before it falls, it is still low compared to that of other OECD nations. Additionally, inflation is low.
Chris Bowen’s statement of plans to bring the budget to a surplus by 2017 is welcome news. However, taxes would have to be increased and expenditures cut in order to do so. Bowen has declared that the government would impose a levy on banks not depositors, but banks will pass this onto depositors which will discourage savings. Savings in turn finance investment, so therefore a fall in savings could reduce investment. Plans to cap deductions for education is good. However, there would have to be cuts in other sectors to offset this.
If cuts are made to welfare and infrastructure, this could slow down growth. In order to achieve the objective of returning the budget to surplus, Australia could attempt to take greater advantage of the opportunities provided by its trading partners, the emerging economies.
Sabra Lane, The World Today – ABC News Radio, 1 August 2013
ELEANOR HALL: The Federal Treasurer Chris Bowen says the Government’s decision to increase taxes on tobacco will be politically unpopular with some groups.
But it will deliver more than $5 billion to the federal coffers over the next four years. The price of a packet of 20 cigarettes will go up by $5 by 2016.
But Mr Bowen says the decision will help the budget bottom line and he’s also flagging that some of the money that’s raised will be funnelled into health-related programs.
The Treasurer spoke to our chief political correspondent Sabra Lane.
SABRA LANE: Chris Bowen, will the Governments increase in tobacco excise hit low income people the most in the community?
CHRIS BOWEN: Well, it is the case that many low income people smoke and smoking leads to cancer so that means low income people are more reflected in high cancer rates in Australia. So this is a decision which we’ve taken with a view to all the impacts – the impact on the budget, the impact on health.
I represent an area with low incomes and I also represent an area with very high cancer rates and this is an issue that needs to be tackled, and when you look at the impact of the last increase in tobacco tax, which led to a reduction of 11 per cent in tobacco consumption, these sorts of measures work and they work to reduce smoking and they work therefore to reduce cancer.
SABRA LANE: But evidence shows that high income earners tend to quit but low income workers or disadvantaged tend to forego other essentials to continue feeding their habits because it is an addiction.
CHRIS BOWEN: Well, and also Sabra, the evidence is that increases in tobacco tax encourage people to stop smoking across the board. The Cancer Council says this sort of increase will lead to about 210,000 people, Australians, stopping smoking. That’s a good thing.
I think what’s even more important is stopping young people taking it up in the first place. It’s better to stop somebody taking it up, easier to stop them taking it up than it is to get them to kick the habit and again the estimates are that there could be around a 40 per cent reduction in the number of young people who smoke and that’s a very important thing for the healthy future of our country.
SABRA LANE: Will the Government be providing other assistance to help smokers quit, or indeed if this is about tackling a health issue, why isn’t all of the increase in excise going to health to deal with the smoking related illnesses?
CHRIS BOWEN: We’ll have further announcements to make about health and health funding, but what’s very clear is that health – providing hospitals in Australia is a very expensive enterprise and partly because of high cancer rates and high smoking rates and there is a link there.
So we’ll be having more to say about our approach to health funding of course, but this is a measure in and of itself which will discourage people from smoking and therefore will result in better health outcomes.
SABRA LANE: If the Prime Minister is fair dinkum about his declaration to do more to stop big tobacco from killing people, why does he accept travel and accommodation by a company involved in big tobacco?
CHRIS BOWEN: I’m not sure what you’re referring to there but we’ve got a very clear policy of not accepting tobacco donations. As a political party, we don’t do that and I think that should be a policy across the board.
SABRA LANE: The last time the Government increased tobacco excise in 2010, it coincided with a drop in popularity for Kevin Rudd. Is the Government worried about a similar backlash now on the eve of an election?
CHRIS BOWEN: Well, it will be unpopular in some circles. There is no question about that Sabra. We do this with our eyes wide open as to the political risk and the political impact, and yes, there will be smokers who are very disappointed and angry about this and of course I’ve already received some of that feedback as you would expect. But this isn’t about politics.
We’ve got to make a decision based on the evidence before us and when you have a measure in front of you which can not only increase government revenue but actually lead to around 210,000 people stopping smoking, you’d be irresponsible not to do it despite any political downside.
SABRA LANE: This measure will raise a forecast of $5.3 billion over four years. That’s apparently not enough to deal with the revenue shortfalls now confronting the Government, reportedly up to $30 billion. Is the Government considering dropping the School Kids Bonus to also help fill that shortfall?
CHRIS BOWEN: Well, what I’ve said Sabra is that we will return the budget to surplus by 2016/17. That does require some difficult decisions, it requires some of the revenue shortfall to be made up through other decisions.
But we’re not going to cut right back to the bone, we’re not going to cut basic services, we’re not going to cut schools and hospitals. What we will do is take measured, considered steps to return the budget to surplus over time by 2016/17
When we release the economic statement Minister Wong and I will be outlining other measures that are necessary.
SABRA LANE: Are the banks next in your sights as shadow treasurer Joe Hockey believes?
CHRIS BOWEN: Oh well, Joe here is being mischievous. He should know, he does know or if he doesn’t know he should know that the IMF has expressed the view for some time that there is a gap in Australia’s public policy when it comes to provisioning for any potential bank or deposit taking institution failure.
Our financial regulators have expressed the same strong views and so I’ve been consulting with banks. The reason why Joe is able to make that comment is because I’ve been consulting with banks and credit unions and others about how we tackle that issue, how we make sure that there’s money set aside in the unfortunate and very unlikely event that a deposit taking institution in Australia comes into difficulty.
Some people criticise the Government for not consulting. Well, this is a Government that does consult and I have been consulting with banks and financial institutions about that and of course, when I’m in a position to, I’ll have more to say about it.
SABRA LANE: That sounds like it might be on the cards?
CHRIS BOWEN: Well, I’ve given you my answer Sabra. This is a responsible thing for the Government to do and you would criticise me, could I say rightly, if I said ‘I don’t care what the IMF thinks, I don’t care what the financial regulators of Australia think, I’m going to ignore their recommendations and I’m not going to talk to banks about how we fix it.’
ELEANOR HALL: And that’s the Treasurer Chris Bowen, speaking to our chief political correspondent, Sabra Lane.
Mark Kenny and Peter Martin, The Guardian AU, 1 August 2013
The measure is among several unpopular decisions to be unveiled in the economic statement designed to pay for new election spending while maintaining Labor’s promise to get back to surplus in 2016-17.
Four 12.5 per cent hikes in the tobacco excise will occur on December 1 this year, and on September 1 for the next three years. Treasury estimates it will raise $5.3 billion over the four-year period.
Smoking accounts for more than 750,000 hospital bed days a year nationally.
It is expected the price of a packet of 20 cigarettes would rise by a further 98¢ after the first increase, and $5.25 by September 1, 2016.
Treasurer Chris Bowen said the increase would fund cancer-related health services while discouraging smoking and helping the budget.
”I think the Australian people would agree that we need to consider all sorts of measures to reduce the impact of cancer caused by smoking,” he said.
On the spending side, additional assistance for the automotive sector, and cost of living help for households through a national energy efficiency scheme to cut electricity bills have been mooted.
The tobacco increase is likely to secure the support of the Greens who had already sought costings from the Parliamentary Budget Office for a proposed 25 per cent excise hike.
With the election announcement just days away, Labor is battling massive revenue write-downs of up to $8 billion a year which could lead to a combined shortfall exceeding $20 billion over the next four years.
Most of that derives from lower company, personal income, and capital gains taxes.
Among other thorny choices are cuts to middle-class welfare.
Abolishing the Schoolkids Bonus would save $400 million a year. Created in 2012 to replace the underused education tax rebate, the bonus is worth $820 for every high school child and $410 for primary school children in families that receive Family Tax Benefit A.
In a separate policy announcement on Thursday, the Greens will propose a temporary ban on expansions by Coles and Woolworths while the Australian Competition and Consumer Commission carries out an inquiry into the grocery market.
Neither chain would be permitted to buy any more agricultural land.
The government appeared to rule out a relatively easy option for saving $2.5 billion on Wednesday, saying it would legislate to impose a five-year freeze on changes to superannuation in order to give Australians ”confidence to make investment decisions”.
Friday’s economic statement will be followed on Tuesday by a Reserve Bank Board meeting considered certain to cut the official cash rate to its lowest point since the 1950s.
All 22 of the market economists surveyed on Wednesday expect the cut, the first time there has been unanimous agreement about a move in such a survey since records have been kept.
If fully passed on, the cut would take the standard bank variable mortgage rate to 5.5 per cent and push the standard discounted home loan rate below 5 per cent.
Phillip Coorey and John Kehoe, The Australian Financial Review, 1 August 2013
Senior banking figures indicated on Thursday night they would oppose the move and depict it as a tax on bank depositors.
The government plans to impose a 0.05 per cent insurance levy on every deposit of up to $250,000 to protect depositors against collapses.
The banks said they will pass on the impost, which equates to 5¢ for each $100, to customers through reduced interest payments on deposits.
ABA chief executive Steven Münchenberg, who met Treasurer Chris Bowen on Thursday, said the up-front fee was “totally unnecessary”.
“It’s raising a pool of money that is highly unlikely to be ever needed and it’s going to affect the deposit market at a time when regulators and ratings agencies are putting pressure on banks to increase their deposit funding,” he said.
Big banks’ shares fell an average of 1.5 per cent after the news was reported on The Australian Financial Review website, afr.com, though analysts said the effect on bank profits would be ¬minimal.
The levy, recommended by the Reserve Bank of Australia, the International Monetary Fund and the Australian Prudential Regulation Authority, will be part of the government’s economic statement, which is scheduled for release on Friday, as it seeks to shore up the budget bottom line.
The levy would apply from January 1, 2016, and raise $733 million over the current four-year budget period. Given 2016-17 is the last year of that period, the levy will raise this money in 18 months.
Revenue to be collected by APRA
The revenue will be collected by APRA and put into a Financial Stability Fund but will still count towards the budget bottom line even though it can only be used to bail out a failed bank.
The economic statement is designed to take into account a plunge in forecast tax revenues since the May budget and will contain tax increases and savings to bring the budget to surplus in 2016-17.
The Financial Review understands the revenue write-downs since the May budget, estimated last week at between $20 billion and $30 billion, will come in at just over $30 billion.
The statement will forecast a surplus for 2016-17 but will fall short of a budget balance in 2015-16, as the May budget strove to do. Growth rates will be ¬marginally adjusted downwards and unemployment rates tweaked upwards, reflecting the slowing ¬economy.
The bank levy, which would apply to banks, credit unions and mutual banks, will join a $5.3 billion increase in tobacco taxes in the economic statement. The government is also close to announcing a measure to soften anger caused by the $1.8 billion crackdown on fringe benefits tax exemptions for ¬salary-sacrificed cars.
The growing combination of contentious issues is increasing nerves in Labor as to whether new taxes and spending cuts are the right way to launch an election campaign.
When news of the levy leaked on Thursday, Opposition Leader Tony Abbott swooped, saying the government could not control spending so it kept resorting to taxes.
“Whether it is a bank deposit tax, whether it is an increase in cigarette tax, it’s all a hit on you, the people, and if they do this to you before the election, just think how much worse it is going to be after the election,” he said.
The government said Mr Bowen consulted the banks over recent weeks and that it remained open to further consultation. But the banks said they received a one-page letter from Mr Bowen last week via the ABA presenting the measure as a fait accompli.
During the global financial crisis, the government guaranteed bank deposits of up to $1 million. That was scaled back and today, all deposits of up to $250,000 are guaranteed free of charge.
Conditions agreed to
In October 2012, the Financial Review revealed that the Council of Financial Regulators, comprising APRA, the RBA and the Australian Securities and Investments Commission, and Treasury, recommended the government consult on the merits of introducing a fee on banks in return for ongoing ¬taxpayer-funded guarantee of deposits.
In March this year, Reserve Bank governor Glenn Stevens wrote to then-treasurer Wayne Swan saying the Council of Financial Regulators has come “to the view that the ex-ante funding model for the Financial Claims Scheme should be introduced in Australia”. He said the funding would “at least partly compensate the government for the risks it bears from these guarantees and it would build up a fiscal buffer to assist in meeting any potential future costs of (bank) resolution”.
Mr Stevens recommends the revenue raised by the levy be hypothecated into a specific fund to be used only for protecting deposits.
The government has agreed to these conditions. It said a government agency such as the Future Fund Management Agency or the Australian Office of Financial Management would administer the fund. Former Department of Finance deputy secretary Stephen ¬Bartos said it was appropriate for the government to classify the income as revenue, even if stored in a fund. “It would help the budget bottom line.”
Business Council of Australia chief executive Jennifer Westacott questioned the level of consultation. “Two days after the RBA governor highlighted the importance of generating a bit more business confidence, the ¬government has sprung another surprise,” she said.
Mr Münchenberg said: “A bank would have to burn through all its capital and on average 40 per cent of its assets before you would need to use the scheme. There has not been a call like that since the 1890s.”
Juliette Garside and Ian Griffiths, The Guardian, 1 August 2013
Parliament is to open a new front in the corporation tax war by asking auditors to lift the lid on the tax breaks exploited by multinationals in sectors ranging from the internet to infrastructure.
Margaret Hodge, whose public accounts committee of MPs has already tackled Google, Amazon and Starbucks, said the public was being “conned” by the government about the amount that mobile phone networks in particular contribute to the public purse. She is asking government accountants to investigate whether the vast array of reliefs offered by the taxman are being misused.
Her comments were in response to a Guardian investigation published on Wednesday, which reveals that three of the UK’s four networks are paying little or no corporation tax while sharing billions in dividends, management fees and royalties with their multinational owners.
By making full use of the many legal tax discounts available for items ranging from investment in infrastructure to interest payments on loans, mobile companies are able to pay rich rewards to executives and shareholders while making little or no corporation tax contribution to the public purse.
Accounts show that Everything Everywhere (EE), Britain’s largest mobile phone network, has handed over £3bn in cash and fees to its French and German parent companies, but paid no corporation tax in the UK, since it was created through a merger three years ago.
EE says its accounts are transparent and it takes a responsible approach. Mobile companies argue that they contribute in other ways, by investing in British infrastructure and spending billions in government auctions of spectrum – the airwaves needed to carry mobile signals.
However, a trawl through Vodafone’s books shows it is using tax breaks to reclaim half of the £6.2bn it spent at the 3G mobile internet spectrum auction in 2000. This suggests the government is actually giving back to private companies a large portion of the headline-grabbing £22.5bn raised from what was the biggest ever sale of a UK public asset.
Such are the complexities of the tax system that the extent to which networks have been able to claim back money from the Treasury is only now coming to light. Since Orange and T-Mobile merged to form EE, Britain’s four network operators have generated £58bn in revenues, with underlying profits of £12bn. While the average corporation tax rate of 25% would in principle force a company to share a quarter of its profits with the Treasury, networks have paid far less than that.
Taken as a whole, the contribution of all four networks to the exchequer is under £1bn in the past three years, with most of that sum coming from just one company, O2. In the period, O2 has paid £669m in tax, but this is still a fraction of the £2.45bn passed to its Spanish parent company Telefónica in dividends. Three, owned by the Hong Kong conglomerate Hutchison Whampoa, is loss-making and has paid no tax. Vodafone has ceded just £156m in UK corporation tax, but paid £6.7bn to other countries during the past three years.
“Never has there been a better case for more transparency from publicly quoted companies,” said Hodge. “We are looking at this issue of tax relief and I would like this case included in our investigation. We appear to have been conned [by the government] about the amount of money we’ve really secured for the sale of spectrum.
“We wanted investment in communications technology, from which these companies make a very good return, and we ended up subsidising them.
“If subsidy is justified it has to be transparent. What is unacceptable is devious ways in which government pretends that it is being commercial, and in reality is giving away taxpayers’ money.”
Hodge said she would raise the issue of mobile networks with the National Audit Office, which monitors how public money is spent. The NAO is currently deciding the scope of an investigation into tax relief. MPs are keen to see scrutiny of film tax breaks, loopholes exploited by wealthy individuals, and the tax affairs of companies in the water, gas and electricity sectors.
Last year, an Observer investigation found Thames Water and Anglian Water had paid no corporation tax in the year to March 2012 while spending millions on dividends to shareholders.
Mobile networks are among the UK’s most cash-rich businesses. With the arrival of fast 4G internet, and with more people owning smartphones and tablets, the amount consumers spend with networks is set to rise steeply. Vodafone is one of the top two dividend payers in the FTSE 100, and its chief executive earned £11m last year. But these riches do not translate into corporation tax. This is because British law allows relief equal to around a quarter of the money spent on items including buying spectrum, installing equipment such as masts, and paying any interest on company debt. Although a company may have cash in the bank, it can report a taxable loss on paper.
The Conservative MP Charlie Elphicke, a urged the telecoms regulator Ofcom to review the spectrum licences of companies not paying their fair share. “They take our money but won’t contribute,” said Elphicke. He said: “The something-for-nothing culture seems alive and well in the mobile phone industry. Ofcom needs to consider whether companies behaving in this way are fit and proper to hold a licence in the UK.”
A spokesman said: “Ofcom’s role is to ensure that spectrum is used efficiently to benefit consumers. We do not have any oversight of tax issues.”
Paul Farrelly, the culture select committee member and Labour MP, said: “It is time for HMRC to get tough across the board and question arrangements which allow so much to be sent by multinationals offshore, while they are paying little or no tax on their UK operations. These are huge businesses and it’s time they paid their fair share into the public purse.”
Mobile networks maintain that they act within the law, and that they are rightly benefiting from tax breaks that were designed to encourage investment in critical national infrastructure – the communication networks Britain needs to join the global digital economy.
EE said: “EE has transparent financial accounts and a responsible approach to tax, and strongly contests any suggestion of improper tax conduct. Over the last 13 years, EE has invested more than £16bn building a 21st-century digital infrastructure for Britain. This includes £9bn contributed directly to the UK Treasury for the use of mobile airwaves, an amount 10 times more than any corporate tax that EE would have otherwise paid to date had it not deducted the cost of the airwaves like any other business asset.”
Vodafone said it had made just over £10bn in cash since 2000, and paid £7.5bn of that to the exchequer in the 3G sale and this year’s 4G spectrum auction. A spokesman said: “Our infrastructure investment in building networks across the UK helps stimulate economic growth and benefits consumers and businesses alike.”
O2 said: “We make a profit in the UK and pay corporation tax on that profit, making a significant contribution to Britain’s economy.”
Three UK said: “In common with all UK-based businesses we are able to offset historic losses against future profits.”