Jerry Parwada

The debate about a national exam for financial planners misses the point that there is already a benchmark for professional standards for the profession.

Universities across Australia offer undergraduate qualifications in financial planning.  Some, such as UNSW, offer a master of financial planning. In fact, the Business School at UNSW was the first among the Group of 8 universities to offer the course when it began three years ago.

While the focus of the present political debate is around the need for an exam at all, I suggest the Australian Securities and Investments Commission (ASIC) take advice from universities and other neutral bodies that do not have a vested interest.

Evidently, ASIC is not the body to ensure that a national exam reflects state-of-the-art financial issues and industry practice. Nor can it keep up to date (or deliver) the examination content and training required to meet minimum professional standards.

To this end, it should do two things – establish an education council (spearheaded by universities and with significant industry participation) and hold a summit to seek input from across industry and education providers into the training systems required.

The federal government (and ASIC) should avoid pandering to the market. The present debate is polarised by vested interests and taking place in a poisoned atmosphere where the industry is controlled by the big planning groups and players lacking higher qualifications are resisting professionalisation.

Financial planners with a university master’s degree that focuses on longer-term planning will ensure a higher level of professionalism.

As individuals, financial planners need to decide if they will make a long-term investment in higher qualifications or pander to the short-termism that is the practice across much of the existing industry.

That future is coming. It might not be today or tomorrow, but it is definitely coming. Investors are becoming more savvy, markets more attuned to international best practice and there are massive amounts of assets under management, mainly because of compulsory superannuation.

This makes the outcome of this debate a significant economic issue for Australia – it is no longer about just convincing mum and dad investors to seek financial advice for their retirement. It is about an investment management industry that is about the fourth-largest in the world (behind the US, UK and Japan) – a behemoth that needs professional advisers that add value and not just feed from the lucrative fee trough.

In the long term, a parallel system could operate, with graduate and postgraduate qualifications sitting alongside a requirement for national entry exam. This would be similar to what already occurs elsewhere in the financial services industry where upwardly mobile professionals complete a CFA exam but often also undertake a master of finance.

In Australia, we also need a comprehensive register of financial planners so that we complement advances in adviser training to improve standards in the industry. This literally means nobody without ASIC recognition via the register hangs a shingle and starts advising clients.

Potential investors should be able to check the bona fides of their financial planner – not via ASIC’s simple RG146 list which was considered sufficient in the past. Ideally, financial planners would be required to disclose not only qualifications and history but also their institutional affiliations and any past professional and criminal misdemeanours. Without this, I would question the efficacy of having a national exam at all.

Universities deliver fundamental education and many have steadfastly resisted coming up with training courses that feed into the current sales-based financial planning culture that infects much of the industry.

Under the spectre of deregulation of higher education fees and the present market spotlight on financial planner education standards, many universities offering financial planning qualifications have or will be approached by organisations wanting to make a quick buck.

Some are not even course providers themselves but want to act as brokers, trying to convince universities to downgrade standards or offer excessive exemptions and credit for years of experience alone or lower-level previous qualifications.

The present system of training financial planners is tainted and higher education providers should resist being used to rubber-stamp these failed systems (retrospectively) to give them credence. There is no point to be used merely as a branding mechanism where credibility is obtained by an affiliation with a respected university.

Jerry Parwada is an associate professor of finance and head of the school of banking and finance at UNSW Business School.

Dale Boccabella and Kathrin Bain

Under Australian law, changes to the GST are said to be not permitted unless the states agree to the changes. In reality, the GST lock-in mechanism is legally meaningless and unenforceable, though it may still hold political weight.

Section 11 of the A New Tax System (Managing the GST Rate and Base) Act 1999 provides that:

“the rate of the GST, and the GST base, are not to be changed unless each State agrees to the change”.

Similarly, section 1-3 of the GST Act states that:

“the Parliament acknowledges that the Commonwealth will maintain the rate and base of the GST in accordance with the Agreement on Principles for the Reform of Commonwealth-State Financial Relations endorsed at the Special Premiers’ Conference in Canberra on 13 November 1998”.

These legislative provisions and the Intergovernmental Agreement are referred to as the GST lock-in mechanism.

The legislative GST lock-in mechanism is contained in Commonwealth pieces of legislation. Despite the fact that the GST revenue collected is distributed to the states, these pieces of legislation are not Acts of state parliaments. Accordingly, it is the legislative power of the Commonwealth that is relevant when determining whether the GST rate and base can be modified contrary to the lock-in mechanism – that is, without state agreement.

The Commonwealth Constitution grants the Commonwealth Parliament the right to make laws in respect to taxation. Section 1 of the Constitution states:

“the legislative power of the Commonwealth shall be vested in a Federal Parliament, which shall consist of the Queen, a Senate, and a House of Representatives”.

There is no mention of any other body (for example, state governments) having any power in relation to Commonwealth law-making.

The current GST lock-in mechanism is in conflict with section 1 of the Constitution, (which vests the legislative power of the Commonwealth solely in the Commonwealth Parliament) because it purports to grant a veto power to the states in regard to the GST, and is therefore constitutionally invalid.

In order for a GST lock-in mechanism to be valid, section 1 of the Constitution would need to be amended to include a grant to the states of a veto power over Commonwealth GST legislation. Such constitutional change could only be achieved by way of referendum.

In spite of the above, the Commonwealth government has a signed agreement (the Intergovernmental Agreement) with the states that contains the lock-in mechanism. Since the legislative provisions are invalid, does such an agreement provide an alternate avenue for enforcement of the lock-in mechanism? It depends whether the government has the authority to enter into such an agreement.

The key factor in addressing this is whether the executive under the Constitution (that is. the government) has the authority to enter into such an agreement.

Section 61 of the Constitution gives the government the power (and effective responsibility) to implement and maintain the Constitution and the laws of the Commonwealth. The GST lock-in part of the Intergovernmental Agreement is attempting to circumvent a central pillar of the Constitution – that is, the sovereignty of the legislative branch of the Commonwealth government – by granting a veto power over certain areas of its legislative competence to the states.

If the High Court enforced the GST lock-in mechanism, it would be sanctioning a change to the Constitution without requiring use of the referendum process (that is, contravening the Constitution rather than maintaining it). The High Court will not do that.

Overall, neither the legislation nor the Intergovernmental Agreement would legally prevent the Commonwealth government from changing the GST rate or base. However, this does not mean that the Commonwealth government won’t seek the approval of the states before making any such changes.

Laureate professor Cheryl Saunders has stated: “Agreements that have no legal effect either as contracts or through legislation, nevertheless may be significant as a form of ‘soft law’, effectively guiding executive action, often complementing the operation of legislation and sometimes affecting the interests of third parties.”

Indeed, consulting the states has been the practice in regard to the numerous amendments to the GST since its introduction. From a political point of view, the Commonwealth government of the day would need to consider the inevitable community backlash it would receive if changes were made to the GST despite state opposition.

Therefore, while the GST lock-in mechanism is unenforceable, the Commonwealth government (regardless of political party) may still feel obliged to comply with it. It must also be remembered that the Senate is a central part of the Commonwealth Parliament, and therefore must approve any legislation passed by the House of Representatives before it becomes law.

Dale Boccabella is an associate professor and Kathrin Bain is a lecturer in the school of taxation and business law at UNSW Business School. Solicitor Bruce Gordon also contributed to this article. A version of this post has appeared on The Conversation.

Richard Holden

The Australian dollar (AUD) is a curious currency. It is the fifth most traded in the world and it gyrates pretty wildly – having traded below US48c cents and above US110c in the decade or so from mid 2001 to 2011.

And to listen to the financial press – or the governor of the Reserve Bank of Australia (RBA) – it would seem to determine our economic fortunes more than almost anything else. No wonder we are obsessed with it.

What then, does 2015 hold for the AUD, and by implication the nation? That’s the sort of question I generally try to avoid answering – in the spirit of Nobel prize-winning physicist Niels Bohr and baseball legend Yogi Berra, who are both credited with the some version of the aphorism: “It’s tough to make predictions, especially about the future.”

But our currency has become so central to debates about everything from unemployment to interest rates to deficits that I can’t avoid throwing caution to the wind and, in homage to US president Harry Truman, doing my best impersonation of a “one-handed economist”.

Truman reportedly once said: “Give me a one-handed economist! All my economists say, ‘On the one hand … on the other’.”

Here’s a good question for you. What determines the level of the Aussie dollar: (a) our terms of trade; (b) the difference between interest rates in Australia and abroad; (c) global investor sentiment; (d) whatever five hedge fund managers in Greenwich, Connecticut, say it’s worth; or (e) all of the above?

I’m going with (e) all of the above. That fact makes it pretty hard to pinpoint an exact level of the AUD at any point. But it is fair to say most of those factors point to an exchange rate on the weaker side of what we’ve been used to during the past few years. The prices of what we export versus what we import (the terms of trade) have been weakening, putting downward pressure on the AUD.

The US Federal Reserve has been scaling back its bond-buying program (“quantitative easing”) and the US economy grew very strongly in the last quarter, increasing the chances of an interest rate rise in 2015 or 2016. And RBA governor Glenn Stevens may not be predisposed to a cut in Australian rates (in no small part because of the weakening AUD) but the fragile economy, rising unemployment, and low inflation hardly point to a rate hike.

So, from a present level of about US82c, the AUD is probably not going to spend much time above US85c and could spend a fair bit below US80c – maybe below US75c.

When the AUD falls, our exports become cheaper for the foreigners who buy them. Their US dollar, pound, yen or euro buys more Australian dollars and hence more of our “stuff”. This increases their demand for our exports. This is good news for exporters such as the mining, education and tourism sectors.

Much less emphasised are the costs of a weaker AUD. In a piece in this publication late last year, I suggested that our economy has changed a fair bit from the circa-1990 version that benefited from a lower dollar.

We buy more from overseas than we did – both consumers via the internet and increasing trade, and producers in terms of equipment and other business inputs. And a lot of the stuff we do buy has no close domestic substitutes.

In information technology and electronics, particularly, we buy a lot of important things from overseas that we can’t just “not buy” and we certainly can’t get locally. When the Aussie dollar falls these purchases cost more, and they have spillover effects on our productivity.

A weaker AUD makes consumers poorer and business less productive. And that matters a lot more than it used to – and, dare I say it, a lot more than whatever dynamic stochastic general equilibrium model the RBA is presently using seems to tell them.

It looks like the AUD will be relatively weak in 2015, at least compared with recent history. A number of people think that’s a good thing. I don’t. The puts and takes I mentioned above are basically a wash. The kicker is how it affects policy.

I think the RBA materially overestimates the benefits of a lower AUD – so much so that it seems as if the lower dollar has scuppered the chance of a 50 basis points rate cut this year. That was the reaction of futures markets to Stevens’s comments about the AUD and interest rates late last year.

With low inflation, a weakening mining sector, uncomfortably high unemployment and political uncertainty, a couple of 25 basis point cuts would be a great thing for the economy.

Too bad that the bank puts so much weight on the currency – and too bad that it looks likely to be weak in 2015.

Richard Holden is a professor of economics at UNSW Business School. A version of this post appeared on The Conversation.

Richard Holden

Like it or not, a fair chunk of Australian political chatter this year is going to be about how to manage the economy – and about budget deficits in particular. Politicians need to find a narrative that resonates with the public when talking about any issue, and with economics it’s both particularly tricky and important. Just ask Treasurer Joe Hockey.

Though tempting, traditional analogies about the national economy are misleading at best, and downright wrong at worst.

The most popular narrative about economic management is to compare government finances to household finances. “Families all over Australia balance their budgets and live within their means — and so must the government.” It sounds sensible and it resonates with many people. But it’s completely misguided.

The big difference between government and household finances is that households have a finite life (because their members do). At the end of that life something will be left behind: ideally some net assets, like a property without a mortgage attached. The desire that many of us have to leave a bequest to, say, our children is a powerful force. It leads us to try to accumulate wealth.

Typically, we take on debt early in our lives: often a mortgage to buy a house or loans to pay for tertiary education. Taking on debt to purchase housing is rationally shifting consumption forward in our lives, and investing in education increases our earning capacity. But the bequest motive compels us to pay down that debt through prudent spending.

All good, but nothing like what the government faces. The government never dies (even when one political party leaves office) and it doesn’t have anything to leave behind. And that’s the fundamental difference between it and a household.

What about business, then? Surely that’s like government. After all, isn’t the government just one big “corporation”?

Actually, no. Businesses, in principle, can live forever – even if they’re taken over or merge. So that’s not the key difference between business and government.

And notice that most businesses have a positive level of debt permanently. That’s precisely because good businesses have attractive investments to make, can borrow at lower rates than the expected returns on those investments, and expect to be around for a long time.

So even if government was just like business it wouldn’t justify this “pay back the debt and stop paying interest” nonsense the present Coalition government keeps peddling. Subtext (with apologies to Simon & Garfunkel): “Where have you gone Pete Costello, a nation turns its lonely eyes to you?”

The big difference between business and government is that business gets told what its preferences are. Consumers decide what they like and how much they will pay for it.

Of course, businesses can innovate, develop completely new products, and educate consumers. But ultimately businesses take inputs at market prices and convert them, as efficiently as possible, into outputs that someone wants to buy, also at a market price. This creates jobs and wealth.

That’s not to say any of it is easy. It’s just very different from what government does. Government doesn’t make stuff and it doesn’t create jobs or wealth.

What then, if anything, should government do? The answer lies in the fact that markets are great, except when they’re not. And it’s in the “not” part where government has a vital role that no one else can play.

Government can make sure markets work better by ensuring that true price signals are sent and information is freely available. If there is a social harm that isn’t factored into market prices and behaviour, then the government should tax it. For example, cigarettes are taxed because smokers cause pollution and impose costs on the healthcare system. Cigarette taxes cause the price of cigarettes to reflect part of this “social cost”.

So, too, with social goods. Philanthropy is subsidised through tax deductions because people don’t typically factor in the social benefit of such gifts.

Similarly, when markets are plagued by sellers with private information – like sellers of used cars who know whether their car is a “lemon” – they tend to unravel. I, as a buyer, rationally assume the worst about the seller’s car which means good sellers drop out of the market, leaving only lemons behind.

The same adverse selection phenomenon happens in unfettered markets for all sorts of goods and services: from health insurance to stockmarkets. In these situations, government can play a vital role in stopping markets from breaking down through sensible disclosure requirements and incentives for good sellers not to drop out of the market.

Running government finances isn’t like running a household, nor a business. Not even a little bit. It’s much more like being a car mechanic. The “vehicle” that does all the work is markets. But, just like a car, to run smoothly markets need to send and receive the right signals and information. And getting that right is a job only government can do.

So, Mr Hockey, in 2015 I hope you metaphorically don overalls, rather than suits or aprons.

Richard Holden is a professor of economics at UNSW Business School. A version of this post appeared in The Australian.

Gordon Mackenzie

David Murray’s Financial System Inquiry (FSI) may call for the removal of superannuation tax breaks but the government’s tax discussion paper, due to be released next week, is unlikely to advocate similar changes.

The FSI report recommends articulating the overarching purpose of the superannuation system so that future tax changes can be measured against the objective.

It says the purpose of superannuation is to “provide income in retirement to substitute or supplement the age pension”. This then prescribes, in theory at least, the tax breaks individuals can get from the system.

In this case, the maximum tax break an individual should get from superannuation would be roughly equal to the net present value of the age pension paid from age 65 to the median life expectancy.

The age pension is designed to keep people out of poverty after they leave the workforce. Yet how does the inquiry’s definition of superannuation fit with financial planning theory which says that people need to aim for 70% of pre-retirement income to maintain their lifestyle?

It makes redundant any discussion about whether the current compulsory contribution limit of 9.25% provides an adequate retirement income. It also implies that superannuation should attract few tax breaks.

However, this raises the question of whether the tax system should be used to encourage saving, either through superannuation or outside it. There are four reasons why the tax system should not be used for this purpose.

First, the tax revenue forgone through the concession is borne by all taxpayers, while only those using the concession benefit from it.

Second and third, tax benefits only go to the wealthy who have disposable income to save and who have access to information to maximise the benefits of saving, such as accountants and lawyers.

Finally, tax concessions don’t increase savings, they just move preferences to where people save. But the reality is that they are used.

The report observes that superannuation tax breaks distort behaviour and favour the wealthy. However, a number of its observations will be difficult for the government to implement.

The inquiry report endorses Ken Henry’s tax review recommendation to reduce the tax benefits of popular negative gearing investing as well as the over-taxation of income from deposits. It also advocates that income from large superannuation balances should attract more tax, however this has a whiff of retrospective tax about it.

Another suggestion that post-tax contributions should be further limited is also unlikely to be adopted by the government. Few people use these concessions and they benefit empty nesters who are selling down to enjoy a hipster inner-city lifestyle rather than those trying to minimise their tax obligations.

The report says the system that taxes super earnings at 15% in the accumulation phase, but not in the retirement phase, leads to asset allocation distortions, tax arbitrage and prevents funds offering “whole-of-life” financial products. However, it is doubtful whether any of these problems are tangible and important enough to warrant changing the system.

Finally, the report suggests removing the company share dividend imputation system and reviewing the capital gains tax discount. Interestingly, the report argues these incentives distort asset allocation yet both these measures were introduced with the intention of removing tax distortions.

Imputation credits were introduced to lower the cost of capital towards equity rather than debt funding. The capital gains tax discount was introduced to prevent the over-taxation that potentially arises from capital gains all being taxed in one year leading to higher marginal tax rates.

However, the report’s focus on changing interest withholding tax on foreign lending institutions should be addressed. This tax distorts the funding decisions of financial institutions and places Australia at an international competitive disadvantage. If it has to be paid then almost invariably it will be paid by the Australian borrower, not the foreign lender, so it just raises the cost of capital with little revenue to be gained

Should these tax observations be included in the tax issues paper? They seem to warrant considered discussion but with two overarching caveats.

First, superannuation is a very long-term savings vehicle and changes reduces confidence in the system.

Second, savings in the system are there based on the good faith continuance of existing tax laws. In the past 35 years, there have been only minor changes that adversely affected existing superannuation account balances.

However, the chances of the government implementing these tax changes is slight.

Though Treasurer Joe Hockey backed the report’s recommendations to lower fees for super funds, it is unlikely that many of the report’s observations in terms of tax will go ahead.

Adverse changes to the superannuation system are off the table for the first term of this government, apparently. If superannuation tax breaks are measured against the age pension, a significant proportion of the population will be adversely affected.

Changes to capital gains tax are also unlikely to go ahead as most countries differentiate between regular income and capital gains. What remains is imputation credits for company dividends. Adverse changes here would be politically unwise as they are very popular among mum and dad investors and super funds.

Gordon Mackenzie is a senior lecturer at UNSW Business School. A version of this post appeared on The Conversation.

Richard Holden

David Murray’s Financial System Inquiry makes a long list of thoughtful recommendations. But as an economist reading through the report, I tried to find a unifying theme. Why do they recommend this and not that?

I finally concluded that there isn’t a unifying theme. There’s a lot of careful issue-by-issue cost-benefit analysis. But not having a coherent framework for thinking about all the interconnected issues leads to some missed opportunities, and some flat-out unforced errors. That’s a shame. And nowhere is that more evident than in the inquiry’s tax recommendations.

If you’ve made it to, and through, Appendix 2 of the report you will know that the inquiry raises the possibility of a number of tax changes. Dividend imputation, concessional capital gains tax rates, negative gearing, and even charging GST on financial services are all raised as candidates for change.

In many ways the inquiry seems to be channelling what one far too frequently reads in the press: “the housing market is out of control so stop negative gearing”.

I don’t know whether there is a housing bubble in (insert your favourite capital city) and I wouldn’t know how to tell even if there was one. Have people got caught up in modern-day tulip mania or have they just realised that Sydney is a great city? No sensible economist is willing to take a strong stance on this.

But let’s suppose, for the sake of argument, that there is a housing bubble. What should we do about it? The very last thing we should do is fiddle around with tax policy that fundamentally tries to put all asset classes on a level playing field.

Good tax policy is emphatically not about encouraging a little bit more of this or a little bit less of that. Good tax policy is about making distortions as small as possible, sending the right price signal, and getting out of the way of the market.

The inquiry’s stance on dividend imputation is particularly telling in this regard. The report states: “The case for retaining dividend imputation is less clear than in the past . . . the benefits of dividend imputation, particularly in lowering the cost of capital, may have declined as Australia’s economy has become more open and connected to global capital markets. If global capital markets set the (risk-adjusted) cost of funding, then dividend imputation acts as a subsidy to domestic equity holders. That would create a bias for domestic investors, including superannuation funds, to invest in domestic equities.”

For Murray, it seems, this is all a complex set of trade-offs that need to be monitored and tweaked. Don’t we just need a sound review of these arrangements every 10 to 20 years, rejig how hard our foot is on the accelerator versus the brake, and all will be OK?

Actually, no.

Double taxation of corporate profits made no sense – and it encouraged firms to take on more debt than they otherwise would. The Hawke-Keating government realised this and introduced dividend imputation in 1987. Good economics and good policy. Case closed.

Yet Murray is now concerned about how much super funds invest in domestic versus foreign equities. That may (or may not) be a legitimate concern, but dividend imputation is the last tool that should be used to address it. Dividend imputation eliminated a non-level playing field and the distortions that came with it. Leave it alone.

The same logic applies to a range of other taxes that Murray puts on the table. Negative gearing just treats housing like any other investment. Concessional superannuation tax rates combat the problem that people don’t otherwise save enough for their retirement and then turn to the government for help. When national savings are too low it raises interest rates for everyone. Concessional tax rates for saving are completely sensible against this backdrop. As economists say “it internalises the externality”.

The inquiry contains a lot of thoughtful and well-informed suggestions. But it falls into a classic trap. It wants to tinker and fine tune. It is authored by someone who was a very fine manager of a very large and important business. And, alas, it shows. Murray, and his report, wants to manage. But good “system design” is not like good management – and it’s not like being a central banker.

Poor old Glenn Stevens has one instrument – the cash rate – to manage a host of issues: inflation, unemployment, the exchange rate, and housing prices. Murray and, more importantly, Treasurer Joe Hockey do not face such constraints. They have a whole host of tools at their disposal and can use the right one to target each problem.

What should happen, in taxation arrangements and elsewhere in the financial system, is that the market should be given non-distorting price signals. Nothing less, and nothing more. And when thinking about tax arrangements in this coming year the debate should be about how we tax, not who we tax.

Richard Holden is a professor of economics at UNSW Business School. A version of this post appeared in The Australian Financial Review.

James Morley

A recent internet meme making the rounds on Facebook compares minimum wages and the prices of Big Macs in the US and Australia. The minimum wage is more than double in Australia (A$16.87 an hour versus US$7.25 an hour in the US), while the price of a Big Mac is about the same in both countries.

Despite the much higher minimum wage in Australia, unemployment rates in both countries are around 6% and the Australian unemployment rate remained at this lower level in recent years, while the US suffered from double-digit unemployment at the height of the Great Recession (the global financial crisis and its aftermath).

If the minimum wage appears to have little impact on the unemployment rate or prices (though other restaurant prices are noticeably higher in Australia, as any tourist will tell you in about 10 minutes upon their arrival in Oz), why are economists generally opposed to mandating a “living wage” to reduce income inequality?

Non-economists might assume the answer is simple: economists are pro-business. But we’re not. We’re pro-market, not pro-business.

The possibly surprising reason economists tend to oppose a “living wage” is virtue. In particular, if the goal is to reduce inequality, mandating someone else to pay a higher wage is not a particularly virtuous way to do this.

This is because it prevents an employer and potential employees from engaging in mutually beneficial exchange. At least this is how I saw it as a teenager in Canada struggling to find a summer job during a recession. My frustration with the minimum wage policy was one of the reasons I became an economist later in life.

In typical teenage fashion, I indulged in reductio ad absurdum arguments at the time, wondering why proponents of a “living wage” kept such earthly ambitions. If they truly thought such a policy would have few unintended consequences, why didn’t they propose mandating a “heavenly wage” that would allow all of us to drive Porsches through the pearly gates?

My cynicism was mostly incited by the fact that minimum wage and living wage laws cost politicians nothing (except possibly votes from small business owners). I detected a distinct lack of virtue in a costless mandate from government about what wage a high school student could work for.

If progressive politicians really wanted to be more virtuous in helping the poor and reducing income inequality, they should do something that would no doubt be very hard for them. They should listen to Milton Friedman.

Friedman, of course, opposed minimum wages because they hindered the proper functioning of markets. Instead, he argued for a guaranteed minimum income, whereby everyone (man, woman, and child) would receive a lump-sum income payment to cover basic needs (in practice, he argued for implementation of the program in the form of a negative income tax).

Because it does not restrict mutually beneficial exchange or create disincentives to work, a guaranteed minimum income is less distortionary than a minimum wage or a welfare program.

Like a welfare program, a guaranteed minimum income is costly, which is its source of virtue, but a hindrance to implementation. Friedman opposed means testing to limit who qualifies for the income payment, though a means test is probably the only way to make such a program financially viable.

However, a graduated means test could reduce the disincentives to work compared to a sudden threshold and make the program more affordable. And, in general, any increase in focus on income rather than employment status would be an improvement over most existing welfare programs in term of incentives to work.

I’ve mellowed since my teenage years in terms of my views about minimum wages (though not about “living wages”). Having also lived in the US and Australia, I can now see the problems with a very low minimum wage and some benefits of a higher minimum wage.

For example, in the US, service workers often receive tips in addition to their minimum wage (tipping is much less common in Australia). But they would clearly be better off receiving their compensation and benefits all in one payment, as they do in Australia.

And minimum wages may simply be much more politically feasible than a guaranteed minimum income, with or without means testing. As a wise friend once told me, we should never let the best be the enemy of the good.

At the same time, I recognize the typical hypocrisy of middle age in my mellowing views. Compared with when I was younger, I can now sometimes afford the higher restaurant prices in Australia. And youth unemployment in Australia is quite high and has been increasing relative to the rest of the population in recent years. It is hard to believe this is completely unrelated to a minimum wage that is close to A$20 an hour in many service industries.

Ultimately, though, I think economists of all political stripes (even Friedrich von Hayek professed to be in favour of a guaranteed minimum income) have it right that the focus in addressing income inequality should be more on progressive taxes and less on a “living wage”.

James Morley is a professor of economics and an associate dean at UNSW Business School. A version of this post appeared on The Conversation.

Renée Adams

There is a popular notion that women are not risk takers and their mere presence on a bank board will reduce risky strategies and behaviour.

During the past few years there has been an increasing trend of female directors on company boards. A leading factor has been the introduction of gender diversity policies. Already women hold 23% of directorships in the UK’s top companies, just shy of the government’s target of 25% by 2015.

According to the Australian Institute of Company Directors, at the end of August this year, 18.3% of top 200 ASX company board directors were women.

Among the Big Four banks, the ratio ranges from two women on a board of 12 for NAB, to four women on a board of nine for Westpac. On the Reserve Bank of Australia board, three of the nine directors are women.

Does this mean our banks, by virtue of this trend, are falling into an increasingly safe pair of hands?

The safety factor concept has been used in the past to support the argument for gender quotas for boards. Some of the world’s leading economic spokeswomen (and men) have very publicly argued women are “typically” more risk-averse and therefore their presence on boards helps contain risky behaviour.

This premise led to what became known as the “Lehman Sisters” hypothesis, which arose in the years following the global financial crisis. The theory was if Lehman Brothers had been Lehman Sisters (or brothers and sisters), there would have been no collapse

Sadly for those who believe banks revel in the occasional risky business, adding more women to the board is unlikely to have an impact.

In a research paper I co-authored with the University of Queensland’s Vanitha Ragunathan, we showed that more women on boards will not lead to less risk in banks.

Women who choose to follow a career path leading to a directorship are not the “typical” woman in risk-aversion studies. Instead, female directors are likely to be less risk-averse than the “typical” woman because of selection. That is, they would not have chosen this career path if they were so risk-averse.

Selection is likely to be even more important for financial firms because finance is a business dealing with risk. Women in finance may well have the same average levels of risk aversion as men in finance.

Our research showed that female MBA students who choose to enter finance after graduating are much less risk-averse than female MBA students not entering finance. In fact, female MBA students in finance are less risk-averse than male MBA students in finance.

The research shows the dangers of stereotyping women. Applying gender differences that may occur within the population to the management level does not work.

However, though having a greater proportion of women on bank boards may not reduce risk, it does provide other benefits.

Our study reviewed around 300 large publicly traded US banks and bank holding companies across a four-year period spanning the 2007-2008 financial crisis. We found that US banks with more women on their boards were not less risky during this period. However, they did perform better during the financial crisis.

Male directors on boards with more women have fewer attendance problems. Female directors also tend to perform different committee duties than male directors.

Women are more likely to sit on board committees, especially those with key monitoring duties such as auditing or corporate governance. However, they are not more likely to sit on banks’ risk committees. Banks themselves seem to not view their female directors as being more or less prone to avoiding risks than their male directors.

We still do not have a complete understanding of how and why gender diversity matters for corporate outcomes. We also do not know when diversity matters. However, the concept of using women on bank boards as a quick fix for bad corporate behaviour is simplistic and devalues the other benefits that diversity brings.

Renée Adams is a professor and Commonwealth Bank Chair in Finance at UNSW Business School. A version of this post appeared on The Conversation.

Richard Holden

In the wake of a falling iron ore price that has cut his personal fortune by more than A$2 billion, Andrew Forrest has remained unperturbed, saying: “I didn’t count on the way up, and I’m not counting now.” If only Treasurer Joe Hockey could say the same thing.

Unfortunately for Hockey, the Coalition and the Australian public, previous governments did count on the way up and that will force all of us to count on the way down. As iron ore prices, the terms of trade and hence tax collections rose, government spending under the Rudd-Gillard-Swan regime ballooned.

If that all sounds pretty predictable, there’s one important detail that might surprise you. According to the report released Wednesday by the non-partisan Parliamentary Budget Office (PBO), the biggest swing factor in the budgetary outlook is not the terms of trade, but labour productivity. And it is arguably the factor that’s hardest to predict.

First: the budget bottom line. The PBO predicts the budget back in the black in 2018-19 and generating a surplus of 1.4% of GDP in 2024-25. Along with that, net debt – the amount the government owes minus what is owed to it – is projected to fall from 13.9% of GDP in 2014-15 to 0.7% of GDP in 2024-25.

Taken at face value this is rather reassuring. No big dramas, no big blowouts. Sure we run deficits for a few more years but net debt stays very low by historical standards and is essentially zero a decade from now.

But it is in the wonk paradise that lurks beneath those bottom-line numbers where the real story lies.

The PBO report points to three main factors that affect projected deficits or surpluses: labour participation (how many people over the age of 15 work), labour productivity (how much output labour creates per hour) and the terms of trade (the prices we get for our exports relative to the prices we pay for our imports).

The PBO base case assumes labour productivity grows at its historical average rate of 1.5% per annum. But it was slower than this in the 1980s and the 2000s – with the exception being the 1990s, which witnessed a massive information technology revolution.

A half-percentage-point bump in labour productivity growth above the historical average would add 1.1% to the 2024-25 surplus, but the mirror opposite is basically true if it is slower. This is a big range of possible outcomes and – as the report itself says – the risk appears to be more on the downside than the upside.

On the other hand, a 10% movement in the terms of trade has a 0.5% impact on the budget bottom line in 2024-25. This is not small, but it is basically a A$10 billion annual reduction in receipts by 2024-25 – A$7.9 billion due to lower company tax receipts from mining companies.

What the report doesn’t emphasise is that a big part of what keeps revenues growing in those projections is bracket creep – the unsavoury and uneconomic fact that the thresholds for increased personal income tax rates are stuck in nominal terms. (Independent Economics, which provides the macroeconomic model the PBO uses, discusses this on its website.) So as time passes and incomes grow, so do the number of people who pay very high marginal tax rates.

There’s a political problem with this. It isn’t sustainable to have a huge chunk of the population paying the highest marginal tax rate, so something will have to give politically. Moreover, personal income taxes are among the most distorting and inefficient taxes – they negatively change how much people work by quite a lot relative to how much revenue they raise.

In that sense, the PBO report, which understandably assumes no policy adjustments, paints too rosy a picture of revenue growth. And that gets us to the heart of the budgetary issue.

Celebrated economist John Maynard Keynes famously said: “In the long run we are all dead.” Well yes, that’s true. But it doesn’t mean we shouldn’t worry about the long run.

As a very fine mathematician, Keynes might equally have observed that 1.01100 = 2.7. Put differently, a 1% gap between taxes and outlays, every year for a century, leads to outlays being 2.7 times as large as taxes

Temporary shocks to government revenues, or outlays, don’t compound. Structural increases in spending do. That’s why I (and most other numerate commentators) have repeatedly said we don’t have a “budget crisis” and we certainly don’t have a debt crisis.

What we do have is a host of spending commitments that are likely to grow faster than tax revenues. And when you compound those for long enough then, as they say in show business: “Boom goes the dynamite!”

For all the flack he’s copped, Hockey clearly gets this. That’s why he has emphasised aged pension reform and indexation of petrol excise. OK, his execution could have been better, but partial credit where partial credit is due.

And it’s worth noting that this lies in stark contrast to the Prime Minister who repeatedly goes on about the (tiny) amount the government pays in interest on the (very small) debt it has. One of the PM’s advisers with business experience needs to tell him that debt is not immoral. And that when you can get a bigger return on investment than the cost in interest – such as on important infrastructure spending – debt is a good thing.

Household finances may well be about credit card debt and mortgage payments, but government finances are just not.

The PBO report reminds us of this difference in viewpoints. It reminds us that structural problems require structural solutions, and that Australia has time to implement them. But if we don’t have the political will or efficacy to do so, then one day we really will have a budget crisis.

Richard Holden is a professor of economics at UNSW Business School. A version of this post appeared on The Conversation.

Wolfgang Kasper

In November 2011, Spanish voters returned a conservative government by a decisive majority, voting out the most left-wing socialists in their history who had gone overboard with an impatient Keynesian stimulus, job-killing energy policies, re-regulation of labour markets and elitist, new-age social reforms.

The newly elected conservative government, led by a Mariano Rajoy, threw the economic rudder around to practise fiscal sobriety, sack thousands of government employees and hangers-on, and cast itself in the role of a support organisation of competitive ­enterprise.

To the vehement annoyance of trade union central, several factory unions in the car industry cut deals with foreign investors, committing to five strike-free years in exchange for job security and guaranteed real wages. New car models have been assembled and conquered export markets, and the economy has turned from deep recession to hesitant economic growth.

From 2008 to 2012, despite frenetic stimulus spending, real per-capita incomes in Spain had plummeted by more than 18%. But in 2013, the holistic all-out reform effort of the new conservative government managed a rise in real per-capita incomes of 3%, and this year will bring another 2%.

The government’s leadership was inspired in its confident, almost heroic undertaking by the successful example of a previous conservative government – the Aznar administration of 1996-2004 – which overcame the deficits and mass unemployment left behind by the preceding Gonzalez socialists.

The exorbitant risk premiums on Spanish interest rates have fallen well below Italian levels as market confidence has returned, but unemployment has stayed extremely high, about 25%, partly because of public-sector sackings, though private job creation has taken off.

As Spain’s unemployment benefits are time limited, many have to make do without government handouts. Those I know manage – poorly – with family support, in casual informal work. Many young professionals are learning German and Chinese. Many have turned their backs on the traditional major parties and barrack for populist extremists.

The government has curbed subsidies to solar farms and quixotic windmills, some of which have been abandoned by their disappointed rent-seeking owners. The life of nuclear power plants has been pragmatically extended. Some of the many infrastructure projects of the Zapatero era (2004–2011) are mothballed; others are being pragmatically completed despite still complicating the budget.

New controls on regional government spending have created some political acrimony but reinforce the consistent message: “We need discipline and an enterprise-friendly order.”

The task of turning the economy around has been made much harder, of course, because eurozone membership has knocked out monetary policy. The entire burden of restoring economic vigour rests on domestic fiscal and labour-market policies.

Collectivist observers belittle the Rajoy team’s incipient success: new flexible service jobs are called inferior … “the recovery will not last”. Like the Thatcher reforms, Spain’s liberal policy is poorly understood by the commentariat; the spontaneous forces of freer markets are underestimated.

Although much is left to be done, one can already conclude that the Spanish turnaround will be called a miracle by ignor­amuses, who failed to understand why postwar Germany or East Asia boomed. Miracles are, after all, something that one need not explain, and from which one cannot learn.

Wolfgang Kasper is an emeritus professor of economics at the Australian Defence Force Academy campus of UNSW Australia in Canberra. A version of this post appeared in The Australian.