Helen Hodgson

In an ideal (and economically efficient) world, tax policy would not influence the investment or consumption choices taxpayers make. In reality, this neutrality is rarely achieved.

External factors influence choices, which then fail to conform to rational economic models; or the tax system may be deliberately used to intervene in the market to counteract inefficiencies.

In Australia owner occupiers compete with investors for housing property; and there is also competition within these groups. A small increase in the number of superannuation funds and foreign investors purchasing property can have a significant impact on demand; while first home owners are finding it increasingly difficult to enter the market. Each of these groups is impacted differently by the tax system.

Owner occupiers are the major beneficiaries of tax concessions on housing.

The latest tax expenditure statement costed the Capital Gains Tax (CGT) exemptions on owner-occupied housing at A$30 billion, on a par with concessional taxation of superannuation at A$30.25 billion.

The Henry Review acknowledged that these tax expenditures can be justified as both contribute to people’s living standards in retirement.

However the CGT main residence exemption distorts the market as owner occupiers invest more in their residence, diverting capital from other more productive investments in the expectation of tax free capital gains.

Investors also benefit from the CGT discount, but negative gearing has a more immediate benefit. Negative gearing is the product of two of the basic design principles of our tax system.

Firstly, expenses are deducted from income in calculating the income or loss from an activity, and secondly we apply a global system under which income from all sources is aggregated to determine a taxpayer’s income for a year. Therefore, in the absence of any specific restrictions, losses from one activity can be applied to reduce the tax payable on income from other sources.

The tax statistics for the 2010-11 year show that 2.5 million rental property schedules were lodged by individuals, showing nearly A$30 billion of rental income received during the year.

The deductions claimed against this income amounted to A$37.8 billion, of which A$22 billion was interest on loans. A further A$1.8 billion was claimed as capital works deductions, which allows a write down for the capital cost of a building used to earn rental income.

There is no particular bias in the tax system to make negative gearing more beneficial for real estate than other investments: the drivers for that decision come from outside the tax system.

For example, lenders may be prepared to lend a higher proportion of the purchase price on real estate when compared to other forms of investment, thus the purchase can be more highly leveraged and the eventual capital gain will represent a higher return on funds invested. However this does presume the investor has the cash flow, often from other sources, to service the loan.

Negative gearing would be less attractive if the capital gain on the sale of an investment was taxed in full.

Negative gearing is a negative cash flow, but it produces an annual tax benefit that would be clawed back if the capital was taxed when the property is sold. But CGT is generally only paid on half of the capital gain as a discount is applied when calculating how much is included in taxable income. Therefore there is an asymmetry as the full amount of any mortgage interest is allowed as a deduction when incurred, but only half of the capital gain is included as income.

The Henry Review recommended (Recommendation 14) that a 40% discount should be applied across all forms of non-business investment income, including capital gains, with a corresponding reduction in the amount of interest that could be claimed each year. This would reduce both the bias to investments that produce capital gains over income, and the incentive to leverage off negative gearing deductions.

The group of prospective purchasers that is most affected by housing prices is notably absent from the discussion of tax incentives.

First home owners don’t have access to tax deductibility to subsidise interest payments, and without a windfall on the sale of another property they may have difficulty accumulating a deposit.

The effect of first home owner subsidies, however, is mixed: although it boosts the deposit the subsidy can itself be inflationary as vendor price expectations rise to take account of the subsidy.

The remaining group, renters, also face increased rents as the owners of rental properties seek a return on the capital they have invested in the property.

It has been argued that any changes to negative gearing would result in increased rents, based on rental increases between 1986 and 1988 when the Hawke Government quarantined negative gearing deductions. But this is largely discredited as the evidence shows there were other issues that increased demand in the Perth and Sydney markets over this time.

These current policies all affect demand, resulting in increased housing prices as investors and cashed up owner occupiers bid up the cost of housing.

What is needed is a set of policies that would stimulate the supply of housing, for example the National Rental Affordability Scheme which provides tax incentives on new housing development.

Ultimately tax reform in relation to housing will require the government to make some hard decisions.

The two issues that need to be reformed are the main residence CGT exemption and removing the ability to offset investment losses against other income. Such reform will not be successful without public support, and neither the Labor nor the new Coalition governments have been prepared to act on these proposals.

Helen Hodgson is a Senior Lecturer, School of Tax and Business Law at the Australian School of Business.  A version of this blog post appeared on The Conversation.

Geoffrey Garrett

Japan’s Prime Minister Shinzo Abe alarmed Tony Abbott and other world leaders at Davos last week by saying East Asia today reminds him of Europe in 1914. The new government has already been caught in the great power crossfire, with China’s bristling at its apparent pro-Japan, not to mention pro-America tilt.

Abbott’s overall stance is right. But to understand why requires thinking through Abe’s pre-1914 metaphor.

Like China and Japan today, Britain and Germany then were bound by large and mutually beneficial economic links. But win-win economic relations were not enough to stop the continent’s major powers descending into cataclysmic war.

With rising Sino-Japanese tensions in the East China Sea amid still raw historical animosities, is Asia on the edge of a major power confrontation that would inevitably suck other countries into a global war?

Military strategists in Australia and elsewhere are taking the risks very seriously, as they must.

Nonetheless, this nightmare scenario reminds highly unlikely for one: the transformation of America’s global role over the past century.

Put simply, the United States has the power and the interest dramatically to reduce the risk of war breaking out between China and Japan, and to isolate and minimize the consequences of any armed conflict should it ever occur.

China will continue to worry out loud that Australia is too close to the US. But make no mistake that the US remains the ultimate guarantor of peace and stability in East Asia.

Compare the worlds of 1914 and 2014.

Like prewar Britain-Germany, the fact that China and Japan are joined at the economic hip has not quelled high and rising tensions between the world’s second and third biggest economies.

But the global picture is completely different, and most of this has to do with the power and position of the United States.

In 1914, the US was an emerging economy three decades from global dominance. At least as important, America was a largely isolationist power that viewed internecine European wars as far beyond its concern.

More than a century after the revolutionary war, the bonds between Britain and the US had grown very strong. But no one was under any illusion that the US would immediately fight on Britain’s’ side. It clearly would not.

No surprise then that America sat idly on the sidelines of World War I until 1917 amid worries about a German invasion of the US from Mexico and the German sinking of an American ship in the Atlantic.

Also note that economic connections between America and Germany were minimal. The two were rival agricultural powers that had begun developing what would soon be awesome manufacturing might. But they were doing so in splendid isolation. America’s economy did not depend on Germany nor vice versa.

The US was simply disinterested in Europe. The contrast with America and East Asia today could not be greater.

It is an article of faith in the world’s largest economy that the US is the world’s “indispensible” power—there is no major issue in the world in which the US is not interested and for which the US is not needed to resolve.

The hurdle to US boots on the ground in the Middle East today is much higher than it was a decade ago. But Barack Obama’s “rebalance” towards Asia is very real.

Japan is one of America’s key allies, with a large, enduring and highly strategic US military footprint on Japanese soil. The US-Japan alliance would inevitably mean that the US would fight to defend Japan should it be attacked.

Doesn’t this make a doomsday World War III more likely? No, for two reasons

First, the US is not sitting idly by as Sino-Japanese tensions rise. America’s dominant and overpowering interest is in ensuring that armed conflict does not break out, and it is throwing all its diplomatic might behind this effort.

This does not mean that shots—likely accidental or unintended—will never ben fired across the East China Sea. But if they armed conflict occurs, the US will do everything in its power to ensure that the conflict is quickly defused and does not spread.

Second, the real game changer is the US-China economic relationship. Everyone knows about the strategic competition between the world’s top power and the only country that could take its perch.

But the Sino-American economic relationship is the deepest, most complex and biggest bilateral economic relationship in human history. This means China must consider much more than its antipathy for Japan while the US must think about much more than its Japan alliance.

America is China’s number one market, helping to lift hundreds of millions of Chinese out of rural poverty. Chinese government purchases of American Treasury bills keep US interest rates low and the post-GFC recovery strengthening.

For American multinational firms as diverse as Apple, General Motors and Wal-mart, China is not only their biggest supplier but also their biggest and fastest growing market. China in turn welcomes their presence because this gives aspiring Chinese global companies the invaluable chance to learn from and mimic the best.

China-Japan war is simply unthinkable for America, and it has the power in Beijing and Tokyo to make it highly implausible if not impossible.

Abe was narrowly right to draw parallels between China-Japan today and Britain-Germany in 1914. European economic ties did not stop World War I. But Japan’s Prime Minister missed the bigger and more important story at Davos.

A century ago the US was an emerging power happy to sit on the sidelines of European conflict. Today, it is completely enmeshed in East Asia. That remains the best possible news for Australia.

Geoffrey Garrett is dean of the Australian School of Business at UNSW Australia.

Follow Geoffrey Garrett on Twitter: @garrett_geoff .

This Opinion Piece previously appeared in the Singapore Straits Times.

Dale Boccabella

The push from the states to reduce the GST threshold on imported goods is being driven by a desire for a bigger pool of GST revenue and they will get their way, despite the inevitable backlash from consumers.

Australia’s $1,000 GST low value exemption on imported goods is significantly higher than comparable countries such as the UK ($25), Canada ($20), Singapore ($330) or New Zealand ($320). More importantly, the $1,000 threshold is too great a departure from the zero-threshold that applies to consumer purchases from Australian bricks and mortar retailers.

What may further anger consumers is the approach governments take to border security charges and tax collection costs under a lower threshold, given that parcels flowing through the international mail stream into Australia are subject to manual, labour-intensive processes.

Under current law, there are no Customs and Border Protection import charges levied on imported items valued at or below the $1,000 threshold. However, somewhere between $40 and $48 is charged to goods above $1,000. Also, the Department of Agriculture, Fisheries and Forestry levies a $15 charge on items above $1,000 to support its biosecurity obligations.

Julian Lorkin interviews Dale Boccabella from UNSW about the push to reduce the GST threshold on imported goods.

As the 2012 report from the Low Value Parcel Processing Taskforce noted, the present approach to border charges involves cross-subsidies, infringes neutrality and undermines the government’s cost recovery principles. Accordingly, if the government decides to lower the GST threshold (to, say, $300), it will be faced with the decision as to the level of charges (if any) that will apply to the import.

In addition, GST collection costs for the newly taxed items are very likely to be passed on to consumers. The most likely outcome is that the express carriers and Australia Post will be required to collect and remit GST to Customs, and from there, be allowed to recoup these costs from the consumer.

Part of the reason for placing this burden on the express carriers and Australia Post is that goods can be released to consumers from Customs-controlled premises before the GST is collected, thereby allowing for quicker delivery. This would also avoid the need to store “tax unpaid goods” at mail gateways and licensed premises, which already have significant capacity problems.

All up then, a consumer who purchases a $500 item from an overseas supplier could end up paying a lot more – say, $650-$750 – to actually obtain the item. The cost will be even higher if GST is levied on transport and insurance costs, which is currently the case for goods above $1,000.

The question of whether the lower threshold would also apply to customs duty will also need to be addressed, but this would not be a significant cost as most items only have 5% duty on them.

The other political issue involves the timing of a change to a lower threshold. On the one hand, the bricks and mortar retailers and the states would prefer a lower (permanent) threshold implemented as soon as practically possible. But border security agencies such as Customs, as well as the express carriers and Australia Post, would like anywhere between 18 months to three years to implement it properly.

Timing will depend on the time required to upgrade computer systems, and increasing staff numbers to deal with the higher volume requiring manual data capture in the international mail stream, as well as required staffing changes to deal with increased volumes of items requiring GST assessment and collection.

The movement of cargo was severely disrupted and border security compromised during a two-month period when the import component of the Integrated Cargo System was introduced by Customs in 2005. This happened due to the lack of pre-testing of new systems and software, a lack of industry readiness and training, and lack of staged implementation of the change. The government will want to avoid repeating such a failure.

The Taskforce noted three things. First, it would not be practical to just lower the threshold without any system changes and considerable preparation. Second, depending on issues such as who will collect the GST from the Australian consumer – there are a number of options, or a combination of options – and the extent of system changes required, initial reforms could be implemented within two years.

Third, once a decision is made to lower the threshold, reductions in the threshold to its long-term level should take place in stages. This allows all relevant parties to review how the first stage was implemented, and it allows for adjustments to systems in readiness for the extra volume numbers associated with the further reduced threshold.

All this suggests that a lower threshold cannot be introduced very early in the first term of the Abbott Government, even though the prevailing political wisdom is that distasteful reforms need to be introduced very early in the term of a new government.

Further, the desirable staged reduction in the threshold to its ultimate long-term level may push implementation of this reform agenda into a new federal parliamentary term, which raises the prospect that part of the reform would have to run the gauntlet of an election.

Jean Baptiste Colbert once said: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.” The low value import threshold issue is likely to be the Abbott Government’s first real test on “public” tax reform. It is hoped that substantial consumer hissing will not divert it from sound decision-making.

Dale Boccabella is an associate professor of taxation law at the Australian School of Business. Boccabella, and colleague, Kathrin Bain, will present a paper on the GST low value import threshold issue at the January conference of the Australasian Tax Teachers Association in Brisbane, 20-22 January 2014. A version of this post appeared on The Conversation.

Professor James Morley

During the global financial crisis and its aftermath, inflation remained stable in most advanced economies, including Australia. This stability should have come as somewhat of a surprise. And understanding what is behind this surprise can inform us about what to expect for inflation in the coming year.

Australia has an inflation target of 2-3% and the Reserve Bank of Australia (RBA) has been very successful in achieving this target over the past 20 years. So why, then, do I think the recent stable inflation in this range has been a surprise? The simple answer is that, even given an inflation target, it would be hard for Australia to resist large external inflationary or deflationary pressures for very long. And there are many reasons to have expected such pressures from the global economy over the past few years.

The quantitative easing of many central banks following the financial crisis, especially the dramatic measures by the US Federal Reserve, led many economists to predict a return of the high levels of global inflation from the 1970s. Yet, this high inflation has failed to materialise.

One reason often given by other economists for the failed predictions of high inflation is ongoing weakness in the European and US economies, with unemployment rates still well above their pre-crisis levels. Yet high unemployment leads to another puzzle, which is why global inflation hasn’t declined from the 2-3% range or even become negative as most economic models that link the unemployment rate and inflation would have predicted.

The best answer economists can give for the stability of inflation despite the topsy-turvy times for the global economy is that inflation-targeting policies in many economies have anchored the public’s expectations of inflation in the 2-3% range. These expectations become self-fulfilling as wages and prices are set based on them.

As a concrete example of the public’s stable inflation expectations, one can look at the implied “break-even” inflation expectation for Australia based on the difference between the interest rates on nominal and real government bonds. This measure of expected inflation has hovered around 2% for a number of years and remains at this level as we start the new year.

So what do I expect for inflation in Australia in 2014? Like the bond market, I think inflation will remain at the low end of the 2-3% range. Headline measures may go temporarily higher as we see the one-time effects of the recent fall in the Australian dollar on petrol prices and other import goods. But underlying inflation should remain subdued, especially given a weak labour market.

The RBA has signalled that it would be comfortable with an even lower Australian dollar and improvements in the US economic outlook will likely deliver just that. Any such depreciation of the dollar will mechanically increase some prices, especially the cost of overseas travel.

But according to many empirical studies, the “pass-through” of exchange rate movements to most retail prices in countries like Australia and Canada has greatly diminished in the inflation-targeting era. So even a further 10-15% depreciation of the dollar should not have much effect on ongoing inflation.

It might seem like a boring New Year’s prediction … but inflation will remain the “dog that didn’t bark” in 2014.

James Morley is a professor of economics at the Australian School of Business. This post previously appeared on The Conversation.

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.