Richard Holden

Qantas should remain our national carrier – but not a nationalised one. The Australian government can throw the struggling airline a lifeline, but it must not stifle competition by giving Qantas an unfair advantage over rivals such as Virgin. Instead, I suggest the government invest in Qantas and take on debt that, because of the Qantas Sale Act, the airline can’t borrow from elsewhere.

Qantas is not just a private sector business facing stiff competition and cost pressures. Yes, it’s iconic, but it’s much more than that. Qantas opens up Australia to the world and the world to Australia. In short, Qantas is not some beleaguered car manufacturer that happens to employ quite a lot of people. It’s a crucial part of our national infrastructure. In the language of economics it provides “positive externalities”: to the tourism industry, specifically, and Australian individuals and businesses more generally.

Can other airlines such as Virgin play this role? Actually, no. Virgin Australia has just five intercontinental planes, compared with around 50 at Qantas; it’s domestic network is one-third the size of the Qantas network. And as impressive as it is, Virgin’s brand will never resonate as “Australian” in the same way overseas. For tourism, this is especially important. And when it comes to connecting a large, far-flung continent with itself and the world, size matters.

In the wake of Qantas’s projected half-year loss of $300 million and recent debt downgrade there has been much discussion about what, if anything, the federal government should do to assist. Everything from re-nationalisation to leaving Qantas to its own fate has been canvassed.

Although competition has been difficult for Qantas, it has also helped the national carrier. Competition has forced Qantas to be more innovative and efficient. A good plan to help Qantas should not shield it from the market. Re-nationalisation would do just that. Even a partial government stake would be problematic, forcing the Commonwealth to wear two hats: one as owner and one as government.

The government must apply some market rigour to its decision. If you rescue Qantas from competition, why didn’t we rescue Ansett a decade ago? Simply because nationalised airlines don’t work: they grow inefficient pretty quickly, and that was why Qantas was privatised in the first place. Under public ownership it was flying to places that the government thought it should fly to – such as Rome, Paris and Zurich. However these routes made no sense commercially. At least Qantas as a public company is a nimble operator that can take decisions based purely on a commercial imperative.

What then, can the government do?

In my view, the government should buy subordinated but low-yielding long-term debt in Qantas. Because of the Commonwealth’s low borrowing costs, this could be revenue neutral to the taxpayer while lowering Qantas’s cost of capital significantly and freeing up its balance sheet. It would also remove the pressure of possible debt downgrades such as that from Standard and Poor’s recently.

This is a real problem – S&P’s revision of Qantas’s rating from BBB- to BB+ (outlook negative), which is below the lowest investment grade. Such a withering downgrade  makes it much more expensive to raise debt on the markets as it effectively recommends stock in the airline should not be actively considered. The airline could face a $100 million rise in its annual interest bill, higher leasing and hedging fees and the loss of some investors unable to invest in companies rated “junk”. Equally, the transfer of revenue from credit card companies will be delayed.

However, if the government steps in and is willing to buy long-term debt in Qantas, such debt could have a term of 25 years, thus giving Qantas more certainty and ability to weather short-term fluctuations from fuel price shocks, downturns in the economy, and the like.

Should Virgin get the same deal, as CEO John Borghetti has said? No. In part because of its smaller network, Virgin has a naturally lower cost base and is not encumbered by the ownership restrictions contained in the Qantas Sale Act, so it already has access to cheaper capital. Virgin’s recently announced $350 million capital raising, underwritten by Air New Zealand, Singapore Airlines and Etihad, is clear evidence of that.

Borghetti has also said he’d be happy to see the Qantas Sale Act abolished allowing Qantas and Virgin to compete on a “level playing field”. But let’s be realistic: the Qantas Sale Act is not going to be abolished any time soon. That is a political certainty, and it’s a constraint on how Qantas can be helped.

Qantas is as much a part of our national infrastructure as it is our national DNA. It’s not just another private company. It’s different, it’s special, and it needs help. But let’s not be sentimental about it.

I strongly urge the government to take action in a smart way that preserves airline competition. Don’t nationalise Qantas, but buying long-term bonds in the airline would guarantee it capital it can’t get elsewhere.

Richard Holden is a Professor of Economics at the Australian School of Business. A version of this post appeared in The Australian.

Dale Boccabella

The government may cost consumers an extra 10% for their Christmas presents next year if they shop for them on the net overseas – but the overall benefit to Australia brick and mortar retailers is questionable.

Every day we open the papers to see the brick and mortar retailers are once again urging the government to lower the $1,000 threshold upon which GST can be charged to goods bought online from offshore retailers. The federal government has promised an announcement on this early in the new-year.

However I feel there are two big questions. Why would the Federal Treasurer support a lowering of the import threshold when just last year the Parcel Processing Task Force numbers indicated that it would be very costly to administer a lower threshold on imports, and indeed collecting, on some suggested thresholds, could cost so much it would largely outweigh the tax collected.

And, secondly why would the Federal Treasurer support a lower threshold unless he can somehow be assured that the State Governments will bear the political kickback that will necessarily flow from this? Last week, as they have been doing for some time, retailers pushed hard for GST to be levied on online purchases made overseas. However, this probably alienated their potential customers. Polling from Essential Research shows Australians are opposed to any lowering of the GST threshold for goods purchased online from overseas providers. Voters aged 35-54 are particularly hostile, with 57% opposing such a move.

While the government could argue that raising the threshold is an equity measure, even the consumer bible Choice has discredited some of the big retailers’ campaign, citing a measly 12% of Australian online shoppers buying from offshore retailers to save on duties and taxes. Instead most want and enjoy the increased choice of products, and want to buy products that simply aren’t available in Australia.

It is clear however that Australian retailers would love to see a tax on large overseas internet sales through a lowering of the $1,000 tax-free threshold. However, given the difficulties of collection, it is not clear that it will help raise much revenue; indeed the idea that it would ‘help fund roads and hospitals’ really seems to be a red herring: collecting the tax would cost so much that it would be completely out of proportion to tax collection costs of other taxes.

Consumers like being able to shop around for cheaper prices. However the new move as part of a promised GST review has raised retailer’s hopes again of imposing GST on what are called ‘low-value imports’.

In terms of a taxing point or collection point, this is also difficult. Australia could make every online retailer in the world register for Australian GST if they export Down Under. While technically feasible in today’s world of tax cooperation, this is unlikely and would simply be too complicated. Only requiring the big online suppliers to register and collect GST would create a bias and it would be unfair.

Much more likely, the obligation to collect and pay the tax would be collected in Australia, similar to what currently happens with items above the $1,000 threshold. This system is slow and labour intensive, especially for parcels coming into Australia through the international mail stream (as opposed to the express carriers). Quite frankly, consumers importing low value items will be annoyed with the extra delays and the extra costs that will inevitably be passed on to them.

It is far from clear what the Treasurer’s response will be early in the new year, but one likely response is that the government needs to do even more work on the issue.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.

Dale Boccabella, and colleague, Kathrin Bain, are presenting a paper on the low value threshold issue at the January 2014 conference of the Australasian Tax Teachers Association in Brisbane. The paper will explore the current state of play including developments in administering a lower threshold and the political ramifications of the various options.

Professor Fred Hilmer

Earlier this year I was invited, along with Rod Sims, head of the Australian Competition and Consumer Commission, to address the new Mexican government on competition policy. This was not unusual – it followed similar requests from other countries hoping to lift productivity through competition reform, including the Canadian, Indian, Japanese and New Zealand governments, as well as the Organisation for Economic Co-operation and Development (OECD).

In one way this is ironic, given Australia’s own productivity growth has stalled since 2003. What the continued international interest tells us is that the competition framework that emerged from our review into national competition policy (NCP) in the 1990s has stood the test of time. It is in the area of implementation that we have dropped the ball.

Prime Minister Tony Abbott’s announcement last week of a new review of competition laws and policy is welcome and, if anything, overdue. Australia’s economy and the international economic climate have changed. Moreover, in recent years we have been failing to apply some of the basic tenets of the NCP reforms, and the cost of that failure is all too evident.

It is worth remembering that Australia’s economy prior to the NCP was one of the world’s most heavily regulated. Many key infrastructure industries including power, gas, transport and telecommunications were restructured, and well over 1000 anti-competitive regulations were reformed.

The Productivity Commission concluded those reforms lifted Australia’s gross domestic product (GDP) by at least 2.5% over levels that would otherwise have prevailed. Our GDP growth – after years of sluggish performance – was one of the highest in the OECD between 1993 and 2005, underpinned by strong productivity growth.

Now, the need to lift productivity is back on the agenda: our rate of annual improvement in multi-factor productivity has dropped to below 0.5%.

Our most serious failure has been in the area of regulation review. A very significant factor behind the boost to GDP was the dismantling of anti-competitive regulations. As long as the National Competition Council drove the process, using the carrots and sticks of annual competition payments to the US, it was taken seriously by all governments.

About 1800 pieces of legislation were reviewed: reforms included dismantling legislated cartels in agricultural marketing and deregulating domestic aviation, utilities, retail trading and liquor licensing.

In 2007, with the National Competition Council out of the picture, the Council of Australian Governments broadened the scope of regulation review, shifting the emphasis to principles of so-called best practice. But it is attempting, in one process, to cover three areas – anti-competitive regulation, ineffective regulation and red tape generally – when very different skills are needed for each.

A competition review focuses on the impact of regulation, barriers to entry, pricing and incentives, and requires a sound understanding of how businesses operate and compete, micro-economic literacy and legal training. To assess regulation effectiveness requires a background in policy analysis. To deal with red tape, expertise in process mapping and work-flow analysis is critical.

This confusion about what is required has, in my view, led to worst practice. It’s not just our processes that are the problem – too often we’re not observing process at all. All new regulations are intended to pass an impact assessment review against the best-practice principles.

Yet individual or cabinet ministers can decide to bypass this, in which case a post-implementation review (PIR) is required to ensure the negative effect of regulations made in haste can be remedied.

It had originally been anticipated that there would be few exceptions. However, as the Productivity Commission noted in 2011, the number of exceptions had risen to 60 in the four years since the regime was introduced, with one-half occurring in just the last 12 months.

Examples of bypassed reviews include the industrial relations changes of 2010, the minerals resource rent tax and, closer to my current role, the legislation establishing the Tertiary Education Quality and Standards Agency (TEQSA).

The fact that the fail-safe mechanism, the PIR, is needed in key areas indicates that the requirement for ex ante regulation review via regulation impact statements is being avoided and ignored.

There is no point in having a competition framework if the regulatory process allows barriers to competition without proper review and scrutiny.

Not all our reforms worked, and there are lessons to be learned. We did not put enough emphasis on public versus private ownership, believing that if the industry structure was right, public ownership could co-exist with competition.

For example, in NSW where all three electricity generators were owned by government, we expected they would compete in a similar way to private enterprise. This clearly was not the case. Competitive markets require at least a significant number of privately owned firms – public interest should be promoted through regulation rather than government ownership.

The second lesson is the need to define more clearly the boundary between private property rights and public interest.

The regime that governs access to essential facilities such as the rail tracks and airports is being reviewed by the Productivity Commission but the issue remains problematic.

Obviously, 20 years on, there are new challenges and opportunities. Important areas that should now become the focus of competition policy include health and education, where there is limited use of competition but the design of markets is flawed. For example, in healthcare, competition too often becomes a zero-sum game of cost shifting rather than competition for the most effective treatment. In higher education, volume (enrolments) is deregulated but price (student fees) is tightly controlled.

In both of these areas, there is increasing interest in the role of competition policy in spurring innovation as well as driving down costs.

Another focus of the review should be high-growth, high-tech industries, which raises the vexed question of the national broadband network. I seriously doubt that having the cutting edge of online innovation subject to anti-competitive regulation will lead to the best outcomes.

It may not be easy to unscramble the regime that’s been created but we need to try. Only a robust competitive environment will deliver the opportunities made possible by these technologies.

It is difficult to estimate just how much this latest review might yield in terms of GDP growth and productivity. In the 1990s we were coming off a very low base, so the gains were considerable. Our current productivity performance is so bad that we should be able to hope for comparable economic gain. Certainly we should approach the review with high aspirations.

But political will for reform must be strong, as it was in the 1990s. The dire warnings of those sectors that had been shielded from competition via regulation fortunately did not win the day then, and should not be allowed to dictate national policy now.

Professor Fred Hilmer is Vice-Chancellor of the University of NSW. He chaired the independent committee of inquiry into national competition policy in the mid-1990s. This article has appeared in The Australian Financial Review.

Professor John Piggott

The past month has seen a small whirlwind of publications and data releases on demographic change. There was the Productivity Commission’s well-researched paper, An Ageing Australia; new data and projections from the Australian Bureau of Statistics indicating longer lifespans (again); a paper from the National Seniors Productive Ageing Centre on the financial benefits of delaying retirement; and a paper from the Grattan Institute calling for further pension age increases.

They support the idea that we are living longer – one of humanity’s triumphs. But it brings with it the need to adjust institutions and policy to accommodate a changing demographic structure.

Demography gets much less attention from economists than it ought. Population ageing dynamics generate changed government outlays and economic growth patterns. Take the idea of a demographic dividend – a period when low fertility and still evolving late-life longevity mean that the working age population makes up an unusually large proportion of the total. A buoyant labour market and limited calls on government outlays to support education and retirement transfers mean governments sometimes reduce taxes and neglect pension access age.

Then there’s a flip point, and within a few decades the picture is entirely reversed. Social support structures require more government expenditures and the labour tax base shrinks relative to GDP. Japan’s demographic dividend flipped in the mid-90s and that country has been economically challenged ever since. We’re now experiencing Australia’s flip point – the population share of those aged 15 to 64 peaked in 2009.

At the same time, life expectancy at mature ages is increasing. Whereas most of the life expectancy increase in the three decades following World War II was generated by declines in mortality at young ages, during the past 30 years the increase in life expectancy has come from reduced mortality at later ages, generated by medical and pharmaceutical breakthroughs, and also behavioural changes such as reduced smoking.

Official estimates indicate Australian male life expectancy at 65 increased by more than 2.5 years just between 1998 and 2009 – from 16 to nearly 19 years. Healthy life expectancy seems to be going up, too. Other calculation methods can lead to significantly higher estimates.

This trend to a longer life and an older population will continue. What can policymakers do?

Well, plan. This will be an inexorable change for Australia, as elsewhere, but it will take a while. We can start to change policy now.

People are already working longer than they were (though not as long as they did 40 years ago). One of the most important levers to encourage older people to remain in the workforce is to increase pension access age. The superannuation access age need not be the same, but it shouldn’t be far off.

At the moment, there is a five-year gap between tax-free superannuation payout and age pension age. It would be good not to increase that gap. The increase in age pension age to 67 by 2023 is what The Netherlands has done. It also added an automatic link between access age and life expectancy to take effect in the future. This helps to distance politics from the access age adjustment.

More imaginative retirement products, and the market and regulatory structures to support them, would help – a topic for the Murray inquiry into financial services. Policies aimed at delivering more aged care in the home and community will also be important, not just because that’s what people want, but also because it is less expensive.

And then there’s the revenue requirement. Tax as a proportion of GDP will have to increase to maintain the age pension and health services at their current levels. But baby boomers’ greater demands and expectations will mean services are likely to cost more, even on a per-user basis. The aged-care policy framework is a good example, as was recognised in the Productivity Commission’s latest costing.

Tax policy needs to take this into account. For my money, some increase in consumption taxes seems inevitable. It is less distortionary than most other taxes, it reaches the retired as well as workers and is therefore robust to changing ratios of retirees to workers, and the poorest in the community are largely protected because they tend to rely on government transfers which are indexed.

Whatever mix is chosen, planning can start now. The government’s proposed white paper on taxation would be a good place to start. Australia is ageing but still relatively young, with some sustainable age-related structures already in place. We need to keep that up.

John Piggott is a Scientia Professor of Economics and director of the ARC Centre of Excellence in Population Ageing Research at the Australian School of Business.

Helen Hodgson

The latest consultation paper released by Treasury on the governance of superannuation funds doesn’t include any surprises. There are no policy recommendations of the type the Grattan Institute called for in its recent report; instead, it focuses on compliance and transparency issues and builds on work done in previous reviews.

However, it does need to be examined through the lens of the Coalition Government’s commitment to reduce regulatory red tape, as articulated by Assistant Treasurer Arthur Sinodinos in his first major speech in the role.

A number of reviews during the term of the previous Labor government identified shortcomings in relation to the regulation of the superannuation system. Notably, the Cooper Review led to the MySuper reforms, which were intended to demystify and promote better engagement with the superannuation system for members by offering a standardised product without bells and whistles.

This was followed by a Productivity Commission report on the role of default superannuation funds, and the Fair Work Commission was given the task of reviewing the default superannuation funds nominated in modern awards taking account of the new MySuper products.

Treasury’s consultation paper seeks input on three aspects of the regulation of superannuation funds. (Its closing date is February 12, 2014.) First, it addresses the governance of a fund and the composition of its trustees, questioning the need to have an equal number of employer and employee representatives, instead promoting the idea of independent trustees.

It would be easy to regard this as a “union busting” measure, overriding a requirement that has been incorporated in the Superannuation Industry (Supervision) Act 1993 since the legislation was enacted. However, the landscape of the superannuation industry has changed significantly during the past 20 years.

The basic rule of 50/50 representation applies to employer-sponsored funds, which have decreased in number from 1,405 in June 2004 to 122 in June 2012, and now only control 4% of assets in the superannuation sector.

Other funds, including most industry funds, are required to have an arrangement in place that is approved by the members of the fund and APRA (Regulation 4.08A Superannuation Industry (Supervision) Regulations 1994); a requirement often met through establishing a policy committee with employer and member representation, frequently through a relevant union.

The number of industry funds has also declined during the past eight years, though the number of member accounts has increased. The composition of the board of trustees or policy committee should enhance transparency: whether this is best achieved through the involvement of employee representatives or through independent trustees is a moot point.

Many in the university sector will have been affected by changes made to Unisuper which have had an adverse impact on entitlements, though the relevant clause was approved by both the consultative committee, which has 50% employee representation, and the board, which has employee and independent representation.

The second issue raised by Treasury relates to transparency and the way in which funds report their performance. MySuper will adopt a form of simplified “dashboard reporting”, though the consultation paper suggests that this may be deferred beyond the proposed start date of July 1, 2014, and the paper asks whether a similar form of simplified reporting should be more widely adopted.

There are a number of threshold questions that need to be considered as part of this proposal, including determining which benchmarks are the most useful to superannuation fund members and how those benchmarks should be defined.

The third issue addressed in the paper seeks to explore the implementation of the Productivity Commission’s recommendations regarding default superannuation funds in modern awards. Although the Fair Work Commission has commenced a review of default funds, with the intention of developing a list of default superannuation funds, the consultation paper notes that this goes further than the Productivity Commission recommendations.

It seeks guidance on how default funds should be nominated: whether any MySuper product should be acceptable or whether a high quality list should be developed, and who should be responsible for that process. This aspect is again attributed to a desire to cut red tape, though it could also be attributed to an ideological view of the award process.

Overall, the issues raised in the consultation paper are matters that need to be reviewed in the context of the present superannuation environment. The balance of regulation and compliance costs is difficult to get right: unnecessary regulation can increase costs to employers and to members as funds comply with the requirements.

However, in a mandatory superannuation system there must be sufficient regulation to protect members’ entitlements, and members must be empowered to understand how their retirement funds are being managed. Reductions in red tape should not be allowed to override the need to look after the members of these funds.

Helen Hodgson is a senior lecturer in the School of Tax and Business Law at the Australian School of Business. A version of this post appeared on The Conversation.