Dale Boccabella

In the lead-up to Australia’s crucial federal budget in May, it could be argued that requiring the National Commission of Audit to identify revenue trends that could pose a risk to the budget’s structural integrity could encompass tax expenditures.

While the commission’s terms of reference expressly mention levels of direct government expenditure, such as grants and transfer payments, there is no express reference to tax expenditures and secretariat Peter Crone has confirmed that it will not deal with them.

Tax expenditures are “expenditure programs” of the Commonwealth that are delivered through the tax system, rather than the direct expenditure side of the budget. They mainly take the form of deductions, rebates, exemptions and concessional valuation rules.

The essence of tax expenditures is that they involve under-taxation compared to the nation’s benchmark income tax system. What the benchmark should be within our income tax is debatable, so not everyone will agree with Treasury’s view on that. Treasury mainly works with the idea that most gains and profits should be fully taxed under a benchmark system, and that is why tax-free gains made on the sale of family homes is listed as a very large tax expenditure.

On the other hand, the generous tax treatment of discretionary trusts (family trusts) is not included in the tax expenditure statement – but there are good reasons why it should be. The negative gearing loss on rental properties and share investments is not included either. For 2012-13, the Commonwealth has around 280 tax expenditures under the income tax, worth around A$100 billion. This is around 6% of GDP. Direct expenditure of the Commonwealth for the same period was around A$360 billion, which is about 24% of GDP.

The point is that tax expenditures are significant in size. While characterising tax expenditures is problematic, they deliver concrete economic advantages and, in numerous cases, significant advantages to their recipients in the form of deliberate non-collection of taxation.

Given this, why aren’t tax expenditures expressly within the terms of reference of the commission? After all, keeping tax expenditures out of the its deliberations necessarily means it is not looking at all government expenditure items.

Does this matter? Yes, because any deliberations and ensuing recommendations may not be based on full information. If the commission will not examine the full scale of government assistance being received by a sector or a category of taxpayer, how can a credible recommendation be made about the level of direct assistance that should be scaled back?

Attaining the goals of fairness, equity and efficiency through our public finance system dictates that all the main value exchanges between a sector or taxpayer grouping and government should be taken into account when determining whether the current level of “expenditure” is appropriate.

A good example is housing, where there are both substantial direct payments provided to taxpayers (such as housing grants and rental assistance) and considerable tax expenditures (such as negative gearing). How can the commission make fair and efficient recommendations about the proper level of rent assistance and pensions in the direct expenditure system when it does not consider the level of assistance provided to homeowners and others through tax expenditures? There are many more examples in both the private and business sphere.

The commission’s response is that tax expenditures will be taken into account in the tax review, promised by Treasurer Joe Hockey. The problem with this is that direct expenditures are hardly ever comprehensively examined in tax reviews, which means the same partial or disjointed examination problem is present again. Further, the tax review and associated measures are some way off, whereas the 2014 budget is just months away.

It is hard to predict what the political landscape will be in three to four years time. Indeed, given the risk of an inevitable voter disenchantment following any savage budget cuts, it is very unlikely that the government will have the same reserves of political capital to move on tax expenditures with a similar degree of vigour that will be brought to bear on direct expenditures.

In any event, the directive in the commission’s terms of reference to aim for savings that will deliver a surplus of 1% by 2023-24 is a strong indication the government intends for savings to mainly come from reducing direct expenditures, and not reducing tax expenditures.

Yet the problems of not dealing with tax expenditures are compounded because the political dynamics are quite different between examinations of direct expenditure programs and tax measures.

What can happen is that the proposed removal of a tax expenditure can easily be seen and presented as a tax increase. The failed attempt to remove the tax expenditure on the car fringe benefits tax in the lead-up to the 2013 election is a recent case in point.

The “age of entitlement is over” doctrine outlined by Hockey implies that before entitlements are reduced (or less likely, increased), a fairly accurate account of the level and spread of entitlements will be established.

It is hard to see how such accuracy can be attained if tax expenditures are not subjected to the same standard of scrutiny and the same political accountability mechanisms that are applied to direct expenditures.

Dale Boccabella is an associate professor in the School of Business Law and Taxation at the Australian School of Business. A version of this post appeared on The Conversation.

Vic Edwards

Chinese Premier Li Keqiang may have slid comfortably into the spotlight in his rousing speech to Beijing’s Great Hall of the people on Wednesday, but there is another spotlight that needs to shine for China to maintain sustainable growth – and that is on the country’s inadequate economic infrastructure.

China has high saving rates, an ageing population and lack of welfare safety nets – and will have to build a sophisticated wealth management sector to support healthcare, aged care and education.

Unfortunately the expectations of some of its political and financial leaders seem to be that educational institutions around the world should have detailed knowledge of its economic systems and provide a quick fix.

Sending hundreds of thousands of students overseas to study may help them to gain an insight into how the rest of the developed nations work – but overseas universities cannot   undertake all facets of research and teaching to remediate weaknesses in the future development of the Chinese economic, financial and socio-political system.

Among G20 nations, the US and China wield the greatest economic power. In China’s case, it combines massive purchasing power and the sort of can-do attitude (perhaps minus the personal freedoms) that characterised the building of the US economy during the 20^th century.

But China’s desire to succeed is racing ahead of the economic infrastructure essential to realise its ambitions – and of the education and training needed to guarantee the effectiveness of the systems it puts in place to solve ageing, welfare, taxation, environmental and other issues.

International Accounting Standards Board member Dr Wei-Guo Zhang said recently that Australian universities were not capitalising on China’s desire to learn from our experience. Not enough research was being done to adapt Australian laws and institutions to China, while graduates’ were returning with western qualifications not useful or relevant, he said.

 However, China needs to drive more research and education itself.

Most of the students that come to the first tier Australian universities enrol in business or engineering. Very few enrol in law or economics where they teach tax, public finance or social welfare issues. So Chinese students are not seeking knowledge in some of the crucial areas in which China needs to develop knowledge and skills.

China also needs to fund research in areas of need. It has largely thrown the onus of funding for research back upon foreign universities. Foreign universities are cash strapped enough after the global financial crisis. They are increasingly less likely to come up with funds for solving Chinese economic, financial and social problems, particularly so as China was only a minor casualty of the global financial crisis and has not missed a growth target since 1989.

Linked to this is the fact that, until very recently, research on China issues were not considered relevant to top rate academic journals (mainly American or European).

Chinese databases are generally unreliable. Reasonably accurate data rarely extends back more than 10 or 15 years.  In finance, accounting and economics, there is one central data collection covering the Shanghai, Shenzhen and Hong Kong Stock Exchange databases over 20 years. This database, built up by a single, very dedicated Professor from Tsinghua University, is used by accounting and finance staff from the University of New South Wales.

The official Chinese data from government departments is unreliable, flawed and manipulated – so there are very real concerns about results from research conducted outside China using this data.

And in all likelihood the real worth of many of these foreign-trained students may be going unrecognised. Some returning students have analytical skills their bosses don’t have, but the bosses will sign their names to it as if they did it – so these younger people don’t get the recognition.

The Australian School of Business is doing a considerable amount of research into the issues facing modern China – in ageing and welfare, environmental issues (e.g. emissions trading schemes), finance and revenue, post GFC Issues and Australia-China relations, as well as broader economic, financial and socio-political global-Chinese issues.  UNSW has also given significant assistance to China in medical research, fuel cell and energy research as well as developing biochemical means for mopping up pollution spills etc.

Academics sometimes have to update textbooks (as I have done recently with an American textbook on Bank Management) so that it is “Asianized” to account for the impacts and outcomes of the global financial crisis upon China, but also other ASEAN economies. This involved dealing with the differences in government regulation, competition, as well as the ring-fencing of Asian economies from external bubbles and weak but significant financial institutions of western nations. There is no equivalent text coming from China.

Chinese Premier Li Kerbang has acknowledged the “deep-seated and structural problems” facing their economy, saying there was a need to build an “upgraded version of the Chinese economy, focusing on improving the quality and efficiency of development.”

“While growing the economy, our top concerns are raising personal income in tandem with economic growth, strengthening the social safety net and continually improving people’s livelihoods,” he said.

At his Great Hall speech on Wednesday he foreshadowed “painful structural adjustments” needed for the economy to meet the 7.5 per cent growth target.

If the country does not tackle the structures needed to channel private wealth into adequate health care, aged care and education, many in the nation will also have to wear some long term pain.

 Vic Edwards is a Visiting Fellow at the Australian School of Business

Renee Adams

In a clever marketing move, Facebook’s finance chief Sheryl Sandberg and stock photography supplier Getty Images recently released a series of photos which represented women in “more empowering ways”.

What Sandberg, the author of “Lean In: Women, Work and the Will to Lead”, is trying to counter is the narrow range of images used to portray women, work and family – the businesswoman with briefcase, the mother with children and the one juggling both.

Society’s focus on women and work appears fixated on these kinds of stereotypes – and government policy settings are squarely aimed at them. Think paid maternity leave, tax rebates for child care, gender balance reporting requirements for corporations with 100 or more employees.

The corporate sector is required to report annually to the federal sex discrimination commissioner on diversity and gender balance (although there are moves to roll this back), but the reports are inconsistent, include data on issues that may be irrelevant for senior women (such as breastfeeding in the workplace) and often incomplete. They don’t seem to produce the desired outcome of rectifying the imbalance, especially at senior levels.

One neglected corner of the working women debate is that of female academics – the women who teach the new generation of leaders, produce valuable research and take part in what is commonly referred to as “thought leadership”.

Women have played a big role in academia (in expert opinion and research), in the arts and the not-for-profit sector, where significant contributions are too rarely recognised and rewarded.

Female academics have reached some dizzying heights. Elizabeth Blackburn won the 2009 Nobel Prize in Physiology or Medicine; Condeleeza Rice was a political scientist at Stanford before and after her time as US Secretary of State.

In finance and economics, my field, only a handful of women are at very senior levels. Janet Yellen is head of the US Federal Reserve. Christine Lagarde (in fact, a former lawyer, not an academic) is managing director of the IMF.

Yet their input is essential. Not simply to contribute a “female” perspective on economic issues, but because women represent over half the world’s population and should be heard in every debate that impacts on their livelihood.

Women are plentiful at the lower levels of academia but they get stuck there and rarely advance to professor. It is a lonely field and a lot of women feel very isolated. In many jobs, there is paid leave to support women who take time off to care for sick children. In academia, when your time is effectively your own, the flexibility is often envied. But time off eats into research, reduces publication rates and limits promotion possibilities.

An academic job for a woman is different to an academic job for a man. Community-wide expectations that women will be represented on all boards or working parties have created a situation where women at very senior levels spend large parts of their time in meetings and other activities that take them away from their research and, by extension, their prospects of promotion.

And no matter how many programs there are to support women’s advancement, women still shoulder the largest part of the childcare and home responsibilities.

Women can also hinder themselves by their own attitudes. Senior women should not be waiting around for the right male mentor to come along, but they do need support to network and create their own opportunities.

If we want to have women at the most senior levels, taking part in decisions that impact on the nation’s and the world’s economy – or carrying out research that influences those decisions – they need funding for networking and mentoring programs. And they need support at the broadest possible level, not just within their own institutions.

Federal and state governments should take some responsibility for supporting women who want to help themselves to become senior opinion leaders and researchers. By funding formal mentoring programs, networks and fellowships, governments would be acknowledging the fact that universities are incubators of ideas that have far-reaching implications.

Women spend too much time chasing the money for these programs instead of doing the productive work of research, teaching and supervising PhD students.

The private sector is reluctant to contribute without a clear benefit – they need a return on investment. The not-for-profits can’t afford it. Universities are living in straitened times.

Formal mentoring programs for female academics in finance and economics currently exist in the US, UK, China and Canada, but receive little support in Australia.

At the Australian School of Business at UNSW, there are programs to support women but the benefits of senior academic women spread far wider than the campus.

Low numbers of women in the field have flow-on effects in business. Harvard Business School Dean Nitin Nohria recently apologised for his school’s treatment of female students and professors, promising to double the number of case studies in which women are portrayed as central leaders in business problems.

Sometimes perception is part of the problem. Women need to put themselves in the centre of the picture, or the business problem.

To do that they need to connect with other women, share success stories, get access to conferences, fellowships and other opportunities.

Renee Adams is the Commonwealth Bank Chair in Finance at the Australian School of Business. A version of this onion piece appeared in The Conversation.

Richard Holden

Tony Abbott has thrown a curve ball at Qantas in refusing to offer up the debt guarantee it wanted, but seeking to abolish Part 3 of the Qantas Sale Act in its entirety. This opens the door to foreign ownership above the current 49% cap and more concentrated ownership by one overseas airline, among other things.

Should the proposed legislation pass, will Qantas inevitably split its international and domestic operations, along the lines of Virgin?

The Air Navigation Act requires that for an international airline to be designated “Australian” it must have majority Australian ownership — limiting foreign ownership to 49%. This provision does not apply to domestic carriers, thus allowing majority foreign ownership of a potential “Qantas domestic”. As an example, Virgin’s domestic operations are 66.9% foreign owned (by Air New Zealand, Etihad Airways and Singapore Airlines).

Fine, so it would be possible. But would it happen? Well, as the great American baseball player Yogi Berra said, “It’s difficult to make predictions, especially about the future”. But here goes.

Qantas CEO Alan Joyce has repeatedly claimed Virgin is being supported by cash infusions from its foreign investors. Those investors: Air New Zealand, Ethiad and Singapore Airlines, clearly see some advantage in holding a majority stake in Virgin, presumably as providing solid linkages with their own networks. And as is often the case in complex industries, such linkages can be more easily and fully achieved by ownership rather than a mere alliance. So does it not stand to reason that British Airways, Emirates A380 Seatmap or other international airlines want to do similarly with Qantas?

Perhaps, but it’s far from clear. In response to Tony Abbott’s announcement last night, Qantas characterised that foreign support as being designed “to fund a loss-making strategy against Qantas”. That loss-making strategy is designed to provide a strong foothold in Australia, which makes the linkages to the foreign owners more valuable. But Qantas already has more than a foothold: it has two thirds of the domestic market.

Why invest in a loss-making strategy to either retain that share or even try and increase it, especially when there is already a triumvirate that seem committed to preventing that from happening?

In short, it’s not obvious that there will be a queue of international airlines eager to throw money at a price war in domestic Australian air travel. If there is not then it makes little sense to split Qantas’s foreign and domestic operations, particularly as there are some ongoing costs to doing so.

If the proposed legislation fails to pass the Senate, which seems likely given the stated opposition of Labor and the Greens (and despite possible support from incoming crossbench senators David Leyonhjelm and Bob Day), what options remain?

For Qantas there seems little to do than push forward with the aggressive restructuring program it recently announced and to revisit its stated goal of maintaining 65% domestic market share, regardless of the short term profit consequences.

It may be that ceding market share to Virgin could lead to an equilibrium with less aggressive capacity expansion by both players, and consequently higher ticket prices. Market share does not equal profit, as Qantas’s recent results are testament to.

Prime Minister Abbott doesn’t want to “let Qantas bleed”.

Perhaps an equally interesting question is what options remain for the Coalition if the legislation fails to pass.

If, when the new Senate sits in July, the legislation still fails to pass then the Coalition will be in a tricky position. Abbott has already made it very clear that the current playing field is not level. The government would then either have to do what Abbott yesterday implored Labor not to and let “Qantas bleed”, or reverse its position on the debt guarantee, or a related option.

• Option A: Holden/SPC Ardmona tough love.
• Option B: the Gonski flip-flop redux. Neither of those prospects seem politically enticing.

What’s next for Qantas? A great deal of uncertainty about its ownership, operational structure and the possibility of support from this or future governments. The only thing that seems certain is that 5,000 loyal Qantas staff will lose their jobs.

Richard Holden is a professor of economics at the University of New South Wales, Australian School of Business.  A version of this opinion piece appeared on the Conversation.