– Professor James Morley

Maintaining the policy interest rate at 4.75% appears to be more appropriate than raising or lowering the rates. However, there is currently an unusual amount of uncertainty about the most appropriate level for interest rates.

The Reserve Bank of Australia is due to hold its monthly board meeting today, amid conflicting economic indicators. Business and consumer confidence have dropped while inflation accelerated last quarter to the fastest annual pace in three years.

Because there are lags between the implementation of a monetary policy and its effects on real economic activity and inflation, policy should be forward looking and consider all possible scenarios for future economic conditions. The forecasts for these conditions are currently very mixed.

Last week the ABS showed that consumer prices gained 3.2 percent in the year, however a gauge of Australian manufacturing released today dropped to a two-year low in July.

I put the highest weight on maintaining the current rate, but also place more weight on an increase than a decrease in rates.

The near-term outlook for inflation is mixed. Headline inflation is running above the target range, but should be expected to fall back into range within the next year as the large increases in food prices due to the Queensland floods ease. Also, the large increase in world oil prices has eased somewhat in recent months. At the same time, the low unemployment rate suggests limited slack in labour markets and only a small downside risk for underlying inflation.

The near-term outlook for real economic activity is dominated by the strong growth of exports to fast-growing Asian economies and the concomitant investment boom in the mining sector. The high Australian dollar somewhat mitigates the overall upside risk of an export-led boom. Also, consumer sentiment and retail sales have shown some recent weakness, which can be expected to persist over the near term. There is also a small, but non-negligible risk that debt crises in the United States and Europe will have contagious effects for the entire world economy, including for Australia. A recent rise in unit labour costs of wages relative to productivity suggests some upside risks for the impact of real-economic activity on inflation.

James Morley is a Professor of Economics at the Australian School of Business, UNSW.
He is also a member of the newly-established Shadow RBA Board. Made up of senior Australian economists, the shadow RBA board pilot project runs from August until October with each round occurring on the Thursday before the decision by Reserve Bank of Australia board. Each Shadow Board member reports percentage weights on what he or she believes to be the most appropriate interest rate.

Professor Paul Patterson

A recent American Express survey revealed that customer rage is on the rise. Prior to a customer reaching boiling point, however, an organisation has several chances to placate them and win back their loyalty.

It is a myth that customers suddenly explode into anger. In the vast majority of over 1000 interviews we found a gradual build up of negative emotions as a customer is failed again and again by an organisation, and at each failure the negative emotions become stronger. Prior to customer rage the offending organisation has been given several chances by the customer to redeem itself and every time it has failed to do so.

Excellent service quality only comes at a cost. Customer service and a firm’s productivity or efficiency are like two sides of the same coin, and one that is often traded against the other. Many firms are simply short sighted and fail to invest in excellent customer service, by for example hiring the best people, continuously invest in training, and building a service culture. Telecommunications companies are a case in point – you only have to look at the ever increasing number of complaints to the ombudsman; they have the rhetoric about excellent service but do not invest seriously in it.

An American Express review published today, of consumers in 10 countries, found 33% of Australian consumers think that companies are paying less attention to customer service in the current economy compared to other countries.

Customers have specific psychological needs such as self-esteem, a sense of belonging, a need for control, to be treated fairly and security. During rage incidents it’s important for customer-facing staff to be empowered to solve a problem quickly rather than having to refer it upwards to a more senior colleague. When solved at the first recovery opportunity, damage to the firm’s reputation, loyalty and repeat patronage is minimised. But if the problem is allowed to go unchecked, disaster can follow.

The American Express survey showed that Australian consumers displeasure ranked second only to that of Italians. Almost half the Australians surveyed (46%) said companies did not make any extra effort to retain their business.

A sense of fairness should be restored and often this should involve a sincere apology. Incredibly, out of over 1000 case studies from this research study an apology was only offered by the organisation in 13% of cases. Speedy, respectful, professional and courteous treatment of customers actually boosts self-esteem, and while you’re making your customer feel good, they’ll be friends for life.

Professor Paul Patterson, Head of the School of Marketing at the Australian School of Business.

Associate Professor Anthony Asher

Higher “superannuation guarantee” contributions are an assault on the poor and the young.  They only seem a good idea to those who can afford to save, or who do not understand the pressures on the young, or perhaps will benefit from the additional fees flowing into the financial services industry.

Australians in the lowest income brackets already have more money after they retire than before. If super contributions go up, they will receive even less in their pay-packets now.

Increases to super contributions hit hardest at working mothers, who are spending a large chuck of their energy and finances on their children. They already work harder than any other group in society:  research suggests that an average of 80 hours a week including domestic work is the norm. Those most exposed are single mothers and mothers repaying mortgages, who are probably worse off.

The higher contributions do not just hit the poor. One reason for misunderstanding is that many older – middle class – people bought their houses when average prices were 3 times average wages, and it cost a month’s wage to send a child to a good private school. These people seem to have difficulty seeing that needs have changed significantly when house prices are 6 times average wage and it costs six months’ wages to pay private school fees for 3 children.  Taken together, these additional costs can take 15% of a lifetime’s earnings and so should also lower retirement income.

If government and the superannuation industry were serious about improving people’s retirement income, they would focus more energy on facilitating proper lifetime pensions. Properly designed, these can increase spending power in retirement by almost 20%. This would also stop the situation where men spend their superannuation proceeds and leave their widows to live off the pension.

Anthony Asher is an Associate Professor of Actuarial Studies at the Australian School of Business, University of New South Wales.

Gordon Mackenzie

When planning for one’s own death, it isn’t wise to depend on handing over superannuation funds to beneficiaries.

Spouses and children face the prospect of significant tax bills upon the death of a parent or partner following a ruling by the Australian Taxation Office.

The ATO ruling clarifies the manner in which pension assets will be treated following a death, and mean that private pensions are no longer tax-free upon the death of a pensioner and that any beneficiaries will have to pay capital gains and income tax on the assets.

What we are seeing with this ruling is the view that super funds should not be used for estate planning purposes.

If a death benefit is paid to someone other than a spouse or dependent child, the taxes in the fund and when the benefit is paid reverse the tax concessions that the deceased got for using a super fund in the first place.

What that means is that benefits paid to non-dependant adult children, say, will be taxed at an effective tax rate of 31.5%, (or 16.5% on capital gains). That rate is, broadly, the tax rate that most Australians would have paid had they not used a super fund on that account balance. So, in that way the tax concessions for using a super fund are recaptured.

Gordon Mackenzie is a Senior Lecturer and Program Convenor at the Australian School of Taxation and Business Law at the Australian School of Business. Gordon Mackenzie has given submissions to Henry Tax Review Panel on Resolving the Tax Inefficiency of Losses, and the Cooper Review on Tax Governance of Superannuation Funds, into the structure and operation of Australia’s superannuation system.

Professor Fariborz Moshirian

There is a lot of concern about the deadlock in Washington’s debt negotiations – and it is really uncertain whether the US can hold on to its triple-A credit rating.

Until this week there was confidence that a US debt-ceiling compromise could be reached in time to stave off a US credit downgrade or other damaging outcomes, however talks to resolve this have now dragged on, amid political posturing on the US budget debate, and it is possible the world’s largest economy would default and lose its prized triple-A rating.

The International Monetary Fund has called on US politicians to urgently raise America’s debt ceiling, as both parties dig in and the August 2^nd deadline for a possible default on the nation’s debt looms. With only a week left to reach agreement on a plan to raise the debt ceiling, the parties appear as far apart as ever, with each offering competing budget proposals in Congress to cut spending.

However, the US has no choice but to compromise. A default would be catastrophic for the world’s financial markets. The US dollar was once the world’s safe haven currency. Now that is looking ever more uncertain.

Looking at the other worldwide debt crisis in Europe, there is a leadership crisis within the euro zone. Germany and France now are showing more determination to address the underlying causes of financial crisis and they realise that their economic prosperity lies in prosperities of other euro zone member countries. The leadership and political process has been very difficult simply because the eurozone, unlike the United States or Australia, doesn’t have a federal government.

There is though, some reassurance for those in Australia. While we should be concerned about the position in the US and Europe, our investment banks are in a better position, but the future here is still dependent on the US economy. We need the US to come to a resolution in the debt negotiations.

Fariborz Moshirian is a professor of finance at the Australian School of Business, University of New South Wales.

Associate Professor Dale Boccabella

The Federal Government has looked at slashing the tax free threshold for duty free goods, following complaints from retail giants that shoppers now want to buy online overseas. Retailers say they want a tax barrier to drive customers back into their stores, and a report by PwC today says that although Australia lags behind in online shopping, it is catching up fast, with an increase of 13% in sales expected this year.

However this could cost Australia more. The cost of collecting the tax may outweigh what tax revenue could be raised. As the Board of Taxation indicated around a year ago, there are many practical difficulties in collecting GST on goods bought over the web where the online shop is overseas.

The Government has now confirmed that it has examined reducing the threshold to $500, however online retailers such as eBay say that only a very small minority of transactions would be impacted by this, and little additional revenue would go to the government, which puts the cost of implementing the change at $38 million.

There are two alternatives to collecting the tax, both of which would be costly and time consuming, and neither of which would actually raise any significant revenue.

We could get the Australian consumer to collect the GST on the sale made to them and send a remit to the Tax Office. The bottom line here though is that Australian Governments are very reluctant to impose tax collection or reporting obligations on consumers as opposed to businesses. Quite simply, consumers wouldn’t want the hassle, and wouldn’t be thankful for having this burden imposed on them.

The alternative is to ensure that all companies that can trade online with Australian consumers are registered for GST. However, the government is under considerable pressure to keep overseas companies with only a few Australian customers out of our GST system because of the high compliance costs that go with GST registration, which would mean that the compliance costs can outweigh the revenue collected.

Indeed, one could query why the low value threshold was increased so significantly to $1,000 (from $250) in 2005, and why there wasn’t much opposition from retailers at the time. The brick and mortar retailers may have a point that this is placing them at a competitive disadvantage. However Australia’s GST is ‘only’ 10%. Admittedly anecdotal, I have seen price differentials between on-line goods and brick and mortar goods that cannot be explained by the presence or absence of GST, and is more likely to be from the high cost structures of brick and mortar businesses, and possibly from excessive mark-ups.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business, University of New South Wales.

Michael Peters

Internet Service Providers have started revealing retail prices for internet and phone services delivered via the National Broadband Network – however the business case has not been made.

It will be virtually the only pipe linking more business and households than any other technology there should be a nominal access point price: a price level that anyone can afford, offering a basic service.

On Internode, customers will have to buy a bundled package that includes both home phone and internet access and the cheapest plan at the slowest speed will be $60 for 12 megabits per second connections and 30GB of downloads. To get the full 100 Mbps speeds promised by the government with a 200GB quota the price rises to $120 a month, and boosting this to 1 terabyte costs $190.

At this cost the current price model has more to do with supply side needs rather than the need to ensure everyone has the right and the ability to the network.

The government-funded group, the Australian Communications Consumer Action Network, has backed the pricing plans for the broadband network despite expressing surprise over their high cost. Another ISP, Exetel, has announced its price plan today, and it is the cheapest to date, however even the basic plan costs $34.50 per month and delivers a speed of up to 12Mbps and a quota of 20GB of data.

What we need is ongoing surveillance of the NBN, now that the Broadband Network will start to use Telstra’s copper wire and ducting capabilities, and migrate new customers onto the high speed optical network.

NBN Co looks like becoming what Telstra was less than a decade ago. A large monopoly owned by the state. Telstra was the ‘bad boy on the block’ and the NBN looks set to take the same route.

The failure of competition law to ensure access to the network allowing others to compete is to be deplored. It has yet to be seen if the NBN will encourage content creators and providers to flourish.

Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business.

Associate Professor Dale Boccabella

The income tax changes related to the Carbon Tax partly implement recommendations from the Henry Review. That is to be welcomed, however there are some alterations to the tax scheme that have received little publicity.

The government’s carbon tax reform is designed to deliver tax cuts to those below $80,000 of taxable income. This is achieved through raising the tax free threshold, and also increasing marginal tax rates above the new threshold (15% to 19% and 30% to 32.5%) along with the lowering of the low income tax offset.

The increase in the tax free threshold, on its own, would go some way towards implementing the Henry Review indicative recommendation of raising the threshold to $25,000 and then having a flat 35% rate all the way up to $180,000 of taxable income.

However, the increase to the marginal rates that accompanied the threshold increase ensures the Henry Review ‘indicative’ recommendation is not fully implemented.

This is the first time in decades that marginal tax rates have been increased. The 15% rate goes up to 19%, while the 30% rate goes up to 32.5%. The low income tax offset will be reduced, and the tax-free threshold will rise to $18,200 from 1 July 2012 and $19,400 from July 2015.

Indeed, the combination of a higher threshold along with increases in two marginal rate bands ensures that those with taxable income above $80,000 are in the same position as they were in before the carbon tax changes. Accordingly any assertion that tax rates have gone up (which implies some pay more) is calculated to mislead.

The federal government estimates that around an extra one million people will not have to lodge a tax return, both due to the raising of the tax-free threshold, and because the deductions claimed for work-related expenses are proposed to rise from $300 to $500 in 2012 and $1,000 from July 2013.

However the one million figure is inaccurate, and an over-estimation. While this change is welcome, and it makes life easier for those with very simple tax affairs, a lot of people have a small number of shares because of the round of de-mutualisation and de-nationalisations over the decades. Even if they have only a tiny amount of shares, they still have to lodge a tax return.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business, University of New South Wales.

Dr Jonathan Reeves

An array of forecasts for Australian house prices ranging from modest rises to dramatic falls currently exist. These large forecast differences are primarily explained by the dataset used by the forecaster.

Most Australian forecasters rely on Australian house price index returns, rather than overseas house price index returns. Whereas, overseas forecasters of Australian house prices, often combine both Australian and overseas house price index returns in their analysis.

The major limitation with the Australian house price indexes is that most commence around the early 1980’s. Providing a relatively short sample of approximately thirty years of quarterly data. Whereas, in the US and Europe house price index data exist for over one hundred years.

Australian inflation adjusted house price indexes display substantial average growth rates over the last thirty years, whereas the US and European inflation adjusted average housing growth rates over the last century are relatively modest.

When Australian house price returns are modeled over the last thirty years, typically correlations are measured between house price returns and factors such as population growth and interest rates. These models have some usefulness in forecasting three to twelve months ahead, though generally are not suitable for longer range forecasting.

Housing for most investors is a long term investment. Thus forecast horizons of three, five and ten years are more relevant than the three to twelve month horizon. For these longer range forecasts, there is simply insufficient historical Australian data available for reliable models to be constructed.

Instead, Australian forecasters should more often use overseas data on the long run behaviour of house prices. In the practice of forecasting, it is often found that the relatively simple models are the most reliable.

In house price modeling with US and European data over the last century, the simple model of long run average house prices being a multiple of four times the average gross household salary, has proved to be a reliable guide. This multiple of four is the average over many decades, with periods where the multiple is above and below.

For example, before the global financial crisis, the multiple in the US was over six and now it is currently three. The economic rational behind long run house prices not staying above a multiple of four for long periods, is that households simply can not afford this through all phases of the business cycle.

Currently in Australia the multiple is over six and thus likely to fall. Otherwise, by current comparisons to other developed countries and by comparisons to the historical record of house prices in many countries, Australia would be exceptional.

Some forecasters consider there to be a shortage of land in Australia. However, this is at most a short run factor as governments have the ability to rezone land for higher density housing.

The magnitude of a fall in Australian house prices will most likely be influenced by overseas events. The most immediate threat may come from the European sovereign debt crisis and the impact this could have on raising mortgage interest rates in Australia. Business cycles transmitted by China are also a high concern, along with the performance of the US economy.

In addition, falling house prices in New Zealand, with a weak New Zealand economy, may have substantial impacts on Australian banks operating in New Zealand.

In contrast to other developed countries, Australian house prices rose in 2009 and 2010. Australia’s rise was due to the government stimulas package that included specific housing stimulas. With the stimulas effects fading in 2011, Australian house prices have started to decline. It is likely that this is the beginning of a substantial housing correction.

Dr Jonathan Reeves is a financial economist at the Australian School of Business, University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review on the 19 July 2011.

– Professor Richard Holden

The Prime Minister, Julia Gillard, recently announced that petrol would be exempted from Australia’s forthcoming carbon tax (sorry, “price on carbon”.) She declared, “Families, tradies, small business people do not have to worry about a petrol price increase.”

No doubt much will be said about the politics of it, but let’s talk about the economics of it. They’re not good, either.

There is a basic tradeoff here—an all too familiar one. A carbon tax internalizes externalities. That is, it forces people to make choices that take account, in this instance, of their impact on the environment. Why is this necessary? Because there are some things that aren’t part of the price mechanism, yet drive our economic choices. Pollution stemming from manufacturing is often not factored into the price of consumer goods, the price we pay for car registration typically doesn’t take into account traffic congestion, and so on.

What does a carbon tax do? If properly implemented, it internalizes these kinds of “externalities”—things that are not naturally part of the price mechanism. It makes people face the true prices—and hence consequences—of their individual decisions. Sounds perfect, right?

Not so fast. Some people will not be hurt very much by such a change, but some people will be hurt quite a lot—at least relative to their current incomes and expenditures. If there is suddenly a large tax increase on petrol and I walk to work, then that’s no big deal for me. If I drive a lot for my job (or for recreation), then that is a big deal. The Prime Minister apparently hears the pain of the latter group and has acted. That’s reasonable, in principle. There are distributional consequences of a carbon tax and she wants to mitigate them. Fair enough, no?

Too bad, then, that she has chosen the worst possible instrument with which to try and help. The whole reason for having a carbon tax is to change behavior—make people face the real price of their actions. Ms Gillard has chosen to exempt a large number of people from doing exactly that. It will significantly damage the effectiveness of the policy.

What she could have proposed, instead, was compensation for groups most likely to be affected by the carbon tax. Give them lump-sum compensation like a $1000 annual tax credit. Isn’t this the same thing? No, it’s not. Compensating people helps alleviate the hardship imposed, but still gives them the incentive to make personal choices about (say, petrol) consumption faced with true prices. The downside is that we can’t compensate everyone perfectly with tax credits. And there’s the rub. If you exempt the very users of something that isn’t priced then a tax has zero effect. If you don’t compensate the users to some degree, then they get hurt.

One might worry that compensation like this could be taken back in the future, but so could the proposed exemption. And moreover, Australia has proven very effective at maintaining compensation once in place when it’s the right thing to do.

There is an inherent tradeoff between economic efficiency and distribution. We shouldn’t fail to acknowledge it. And we shouldn’t inflict significant harm on certain groups—like tradespeople and farmers—simply because it is “economically efficient”. But we also shouldn’t enact a compensation scheme that undoes the whole point of pricing socially costly activities in the first place. That’s clearly bad economics, but it’s also bad politics.

Richard Holden is Professor of Economics at the Australian School of Business, University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review 11 July 2011.