Julie Cogin

Smart phones are designed to make you feel indispensable. Forever on tap, on line, alert to the beep or vibration of an incoming message, you are chained to the workplace.

Imagine a CEO who is always available, a senior manager who can decide every major operational decision, whether in the office or on holiday.

What is this connectivity doing to workplace culture?

Managing talent and succession planning will fail if executives don’t delegate responsibility.

At an executive education session on talent management I presented recently, each of the 80 or so executives had their smartphone sitting in a prominent position on the desk in front of them.

The room was full of highly committed senior executives looking for the secret to attract, engage and retain the best talent in order to propel their businesses forward or outdo the competition. The behaviour of folks in the room was consistent with every other executive audience I have encountered in recent years. There was good exchange of views and listening to examples of workplace practices or troublesome issues.

Yet everyone leapt out of their chair for all breaks or group work activity to call the office or at the very least check their smartphone for email, text or incoming calls, certain something must have gone pear-shaped in their short absence. Every single person in that room had a smartphone accessible to enable regular (in some cases meant several times each minute) checks for action.

The irony of the situation was that this behavior is a major impediment to talent management – the very topic of the day. Let me outline three reasons why.

First, if you can always be contacted to deal with emergencies, urgent situations or the usual bushfires that come up you’re not encouraging others to make decisions in your absence or assume greater responsibility. By not providing employees with the autonomy to make decisions about how they can best deal with difficult situations you reduce their motivation and ability to take risks, try new things and be creative.

Remember the days when senior executives took leave and someone talented was coached and prepared to “act up” in that role? What a win-win situation for the person on leave who could really experience the benefits of a vacation or professional development opportunity – as well as the individual with the chance to develop new skills, be exposed to matters they may not be in their regular job and gain experience or recognition to prepare for their own advancement. It seems this approach is now lost.

Second, the addictive smartphone behavior I observed during this session (and on many other occasions) where executives immediately answer emails and phone calls any time of the day (and night), encourages that behavior in others. The cascading effects are likely to block the development opportunities of those below and impede succession planning right down the line. Also important is the signal sent across the organisation on managing work and non-work responsibilities, let alone the message this communicates on well-being.

Third, during the session those most addicted to their device argued that they wanted to be “available” to their teams (and boss) or it was an extremely busy time of year, while some confessed to a high sense of wanted to be needed or in high demand. And while I don’t believe anyone is indispensable to an organisation, creating a situation where you are in a high-demand position, invaluable or needed for all key decisions prevents your own progress to more interesting roles. 

A key component of any talent management program is the “make” versus “buy” decision. Irrespective of whether you “make” your talent internally by developing people for roles or “buy” your capabilities in from the labour market, both require a concentration on improving the return on investment efforts (from recruitment or development activities).

This means protecting that investment by creating a work environment where people can thrive and want to remain as well as generating sufficient internal opportunities to enhance skillsets. And there is no better way to improve a skillset than by temporarily promoting talent, where you can also test them by seeing how someone performs before giving them a ‘leg up’ the corporate ladder.

Also – from a purely accountant’s perspective – if you look at the costs of recruiting staff, and the risks inherent in taking on a virtual unknown, it is clear that internal promotion has obvious advantages: firms can save a lot of money by promoting those with obvious abilities, and the only way to do that is if the hierarchy permits a temporary promotion to see how they perform.

Having their boss switch off – both physically and mentally – for a couple of weeks is a great way to do this. The boss won’t be away long enough for any real damage to be done if those standing in prove mediocre, but it’s long enough to give a good test run, and see if promoting talent is a cheaper alternative than ‘buying’ someone new in.

I am a big supporter of smartphones, laptops and other mobile technologies as they can enhance productivity, provide greater freedom and flexibility, however they also may be your organisation’s major impediment to talent management.

However switching off that phone and having genuine time out of the office is the best way of securing talent for the next generation – and saving the company money.

James Morley

As a former North American, I decided I would pay a bit more attention to Prime Minister Tony Abbott’s trip to Canada and the United States than to some of his other adventures abroad. So how did his trip go?

The short answer, at least in terms of the economic agenda, is not all that well.

On the trip, Tony Abbott wanted to focus on the vague theme of “Australia is open for business” (it will have come as a great surprise to most North Americans that it had been previously closed).

But climate change and policy responses to it quickly became the focus of attention for the trip. On this, Tony Abbott has willingly set himself up to be a world-wide posterchild of climate-change denial, along with Stephen Harper, PM of Canada. 

To be fair, Tony Abbott emphasized that he thinks climate change is real and important (just not that important!). But the big policy differences from other leaders in wanting to avoid any demand-side price mechanism and coordination of policies made him look like “yesterday’s man” compared to Barack Obama (Californian Democrat Henry Waxman used the doubly-dismissive phrase “a behind-the-scenes lagger”).

The “Canadia” gaff was a small, if amusing highlight of the trip. But the initial snubbing of key economic leaders, such as Christine Lagarde from the IMF, was flat-footed and more serious. Clearly someone in the PM’s staff figured this out because he did meet socially with Ms. Lagarde in the end.

However, I was surprised that Tony Abbott was initially scheduled to meet Janet Yellen, the Chair of the US Federal Reserve, and not Christine Lagarde. It’s as if someone was confused about the difference between monetary and fiscal policy. It makes more sense to me for someone like Glenn Stevens, Governor of the RBA, to meet with Janet Yellen and for Tony Abbott to meet with Christine Lagarde and the US Treasury Secretary Jacob Lew. 

Of course, the fact that the IMF has in the recent past published statements implying that Australia has no impending budget crisis may have made a formal meeting with Christine Lagarde a little bit awkward. The IMF has also just released a report suggesting that the Australian housing market is one of the most overvalued in the world. Meanwhile, the recent budget cuts mean that the RBA has to hold off on raising rates (by contrast, the RBNZ has been able to raise rates) even though doing so risks inflating a housing bubble.

I doubt Tony Abbott’s lecture to the US on corporate tax manipulation will have much impact. Like addressing climate change, this is something that would require a lot of international coordination. But with the exception of the love-in with Stephen Harper in Canada, I don’t see Tony Abbott in much of an international-coalition-building mode right now. Whether he likes it or not, climate change will get more attention at the G20 meetings than Google’s small Australian tax bill.

A noteworthy economic story from the trip was the fact that US pension funds expressed interest in Australian infrastructure. Canadian pension funds have already invested. This all makes sense given diversification benefits and high returns in Australia right now compared to the US and Canada. But I’m not sure that any future increases in investment will have been because of Tony Abbott’s financial planning advice rather than just what the pension funds would have done in any event.

Indeed, some US fund managers explicitly stated that they would have been just as happy buying Australian government debt (or probably happier because government bonds are highly liquid assets). There just isn’t much Australian government debt to buy nowadays, so they have to directly buy Australian infrastructure instead. But new infrastructure could be financed using debt and this might actually be less costly given the preferences of US fund managers. Of course, borrowing to build infrastructure rather than selling it wouldn’t fit in with the PM’s apparent view that the government avoid owning public goods.

I had particularly hoped that Tony Abbott would get to meet members of the Tea Party as part of his trip. Alas, Eric Cantor, the House Majority Leader and renowned Tea partyer (partier?), cancelled his meeting with Prime Minister at the last minute after he was unceremoniously dumped by his own party. Of course, I doubt the Prime Minister would have enjoyed the meeting under the circumstances. Instead, he had more time to contemplate the loyalty of his own party before his long flight home.

James Morley was born in Canadia and is Associate Dean (Research) of the Australian School of Business.

Tim Harcourt

We are days away from the long awaited FIFA World Cup in Brazil – the most watched sporting event in the world. Like the Olympics it happens every four years since it began in 1930 and this time the event has been controversial because of protests against the hosting of the World Cup (and Rio Olympics in 2016) by local Brazilians and most recently by suggestions of corruption in FIFA’s decision to hand the 2022 World Cup to Qatar.

As usual, most economists are soccer fans (soccer is known as football in most countries but soccer in North America, Australia, New Zealand and South Africa) and have been analysing the economic impact of the Cup, especially as they have to justify watching the games on TV over the next four weeks or so at the same time as they are analysing shares and commodity prices. But they needn’t be too sheepish about it.

Sport is a big deal in economic terms and the business of the World Cup has become one of the most scrutinised set of international transactions you’ll ever see (or not see). 

Soccer, ‘the beautiful game’, transcends cultures and national borders, has been the subject of economic diplomacy and the odd dispute, and touches millions of people on this planet, for better or for worse.

But what exactly is its economic impact?

First, it is clearly a big deal for Brazil to host the World Cup again, for the first time since 1950, to much fanfare and riots, but is there a world cup effect? Is it good for the host country economy?

There’s no doubt that Brazil went for the hosting rights because of the prestige it would bring and would help their claim to be the world’s next economic superpower. After all they are the world’s 5th largest economy by population and the seventh (on a purchasing power parity basis) or sixth (on a US dollar basis) largest country in the world, accounting for between 3 and 3  ½  per cent of world output.  As a member of the BRICSA grouping (Brazil, Russia, India, China and South Africa), Brazil is playing an important role in international affairs as we have seen in the World Trade Organisation (WTO) and G20 multilateral fora. 

Brazil has undertaken a charm offensive in the developing world under the ‘South-South banner’. Under President Luiz Inacio ‘Lula’ da Silva, Brazil opened up 53 new embassies in Africa and has expanded its sphere of influence across the globe. 

According to Goldman Sachs, 250 million people play soccer football regularly in more than 200 countries and since the first FIFA World Cup was hosted in Uruguay in 1930, over 70 countries have participated in various qualifying rounds. But as the protestors point out, if resources are allocated away from health and education to build stadia, or if something went wrong, it could damage Brazil’s prestige just 2 years ahead of the Rio Olympics in 2016. 

Second, if there is an economic gain from hosting the world cup, how about winning it? Remember, in 1950, 200,000 people jam-packed the newly built Maracana stadium in Rio de Janeiro, and Brazil just needed to draw to win the Cup. But they lost, to their neighbour Uruguay on a day that shocked the nation, and ruined the life of the poor Brazilian goal keeper who happened to be custodian of the national team on that day.

According to Goldman Sachs, a World Cup win does give a country a boost on the stock market. All the winners since 1974, have outperformed in the post final month with the exception of Brazil in 2002, that had been going through a financial crisis as was near neighbour Argentina. The victor outperforms the global market by 3.5 per cent in the first month, then it tails off, and for the host nation outperformance is 2.7 per cent but it tails off too, and can even underperform in three months.

Apart from the stock market, the economic impacts can be positive if the host nation uses the major event to bring forward much needed infrastructure (as in the Sydney Olympics in 2000), provides a legacy to a local area (East London in 2012 via Westfield Stratford) or to showcase its global engagement to the world (Seoul as Olympic host in 1988 signalling its move to an advanced North East Asian global ‘hub’ of trade and commerce). In addition, there are networking effects of hosting the games or the Cup e.g. Austrade’s famous ‘Business Club Australia’ model at the Sydney Olympics that paved the way to Beijing business for the likes of architect John Bilman, of PTW architects who built the watercube at Beijing in 2008.

Third, what will the World Cup do for Brazilian-Australian relations?

Brazil has had better economic progress than the ‘lost decades’ of the 1970s and 1980s, and has plenty of economic suitors, so Australia will need to do more than just woo the Girl from Ipanema if it wants to succeed in Brazil. Areas of potential collaboration include resources and agriculture, transport, better cities (urban renewal), renewable energy, education, arts and popular culture and of course sport!

Will the World Cup help with many Australians going to Brazil for the first time to support the Socceroos? One interesting fact from  the Goldman Sachs report was that amongst foreign buyers of World Cup tickets, Australians bought 41,000 or 41k tickets making it  second only to the USA (154 k), and ahead of football mad England (38 k) and nearby Colombia (33 k). Whether it is the strength of the Aussie dollar, the enthusiasm of Brazilian-based Australians or the perfect reason for a once in a lifetime extended holiday to Brazil, is unclear.

Fourth, how with the World Cup impact on Australia’s trade and investment ties with the rest of Latin America? As I wrote in the recently released Latin lessons – Australia and Latin America face the Asia Pacific Century, the Andean countries of Chile, Peru and Colombia have been happy hunting grounds for Australian exporters and investors, particularly in resources, energy and education. The World Cup may draw in a bit of extra business, especially as Qantas flies to South America through Santiago, but I expect that business will go on whatever happens in Brazil this month.

And finally what will the World Cup mean for the business of sport in Australia? As I have been finding in researching my forthcoming book, Footynomics, on the battle of the football codes in Australia, there has been a time when the AFL, NRL and Australian Rugby Union officials were sort of hoping for the Socceroos not to qualify for the World Cup, because it would awaken ‘the sleeping giant’ and they’d lose their talent – on and off the field – to Australia’s fledgling soccer code. 

I think we would expect the rival football codes to want the Socceroos to do well at least out of national pride and professional respect. The big question is whether the latest scandal rocking FIFA in handing the 2022 World Cup to Qatar, with accusations of bribes and breaches of occupational health and safety and actual workplace deaths and might shake things up and bring Australia back into the picture as an alternative host. Then we would see a battle of the football codes but following a successful Australia 2022 not Brazil 2014.

Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business.

The two changes to superannuation announced in the Federal Budget, one of which is welcome news, were:

• the way excess non concessional contributions are dealt with, and
• the progressive increase of the Superannuation Guarantee will be delayed another year.

A third announcement, the 2% debt levy, is already encouraging the financial planning community to look at ways to avoid it (sigh).

In addition to these Budget changes, the Australian Taxation Office (ATO) recently put the market on notice that it will come down hard on taxpayers using leverage in a superannuation fund to circumvent the contribution limits.

Non-concessional contribution caps

The contributions caps in superannuation limit the amount of tax concessions anyone, no matter how wealthy, can receive from using a low-taxed superannuation fund. One of those limits applies to contributions which, in effect, have not been tax-deductible, and is considered a penalty. It has also been highly problematic for many.

When introduced in 2007, any contributions in excess of the limit were taxed to the member at 46.5%. While that extra tax on excess contributions was said to recapture any tax concessions that had been derived from having the excess in the fund, it was more in the nature of a penalty tax.

Indeed, through one of the other rules relating to this contributions limit, it was not unusual for people to make contributions, say, two years ago and without fully appreciating what they had done earlier, make a contribution now that resulted in an excess non-concessional contribution and a 46.5% tax bill on that excess. It is with some relief, and probably six years too late, that these rules are now changing for the better.

From 1 July 2014 it is proposed that a person who contributes non-concessional contributions in excess of the cap will be required to take it out of the fund. No more 46.5% taxes.

Super Guarantee increase delayed

The increase in the Super Guarantee payment from 9% to 12% will be delayed a year. The super guarantee will not reach 12% now until 2022. However, the increase from the current 9.25% to 9.5% in 2014/2015 will go ahead, and it will remain at this level for four years until the end of the 2017/2018 financial year.

Dealing with the 2% debt levy

I never cease to be amazed by the ingenuity of the financial planning profession (of which I am part, I feel obliged to add). Within a few days of the Government announcing taxpayers over $180,000 pa will be charged an additional 2% income tax as a levy to cover Australia’s debt position, plans surfaced on how to manage around it.

The 2% increase will mean that the highest marginal tax rate for those affected, excluding the Medicare levy, will now be 47%, rather than 45%. However, the FBT rate is staying at 45% until at least the 2014/2015 financial year. The proposed scheme to avoid the levy is to salary sacrifice into taxable fringe benefits, which will be taxed at 45% rather than 47% had it been paid in cash, until 31 March 2015 (the commencement of the new FBT year).

Leveraging around the contribution limits

There has been one other significant tax issue related to superannuation that does not come out of the budget. The ATO has put the market on notice that it is not happy with people using leverage in a superannuation fund to overcome the contribution limits.

In one extreme example, three wealthy brothers all over age 60 who each set up an SMSF then loaned $10 million to it interest-free. The three SMSFs would then co-invest in a $30 million commercial property.

There is no deeming of the interest free loan as being a contribution so there were no contribution limit problems and as each brother was over age 60, their SMSFs were in pension mode and no tax was being paid on any rent or gain on sale from the commercial property.

The only risk being run was if they died without a Death Benefit Dependent, when tax would be payable on any benefit payment.

In any case, the ATO is now signalling that this kind of structuring is problematic. Briefly, the ATO is suggesting that the rental income and indeed, any gain made by the SMSF on sale, will be taxed to the fund at 46.5%. Some tax professionals are not sure the ATOs technical analysis of these types of transactions is correct. However, they take the view that the more likely result would be the application of the general anti-avoidance rule, which would seem to directly catch this practice.

Importantly, the views expressed by the ATO are a message to the market that it does have serious concerns with using leverage to get around the contribution limits.

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of Business, UNSW. A version of this post originally appeared in Cuffelinks.com.au. This information is general in nature and readers should seek their own professional advice before making any financial decisions.

Geoffrey Garrett

This week’s Australian Budget was clearly highly political. The question is what its economic impact will be.

My overall assessment is that the Abbott government has burnt too much political capital for too little economic gain.

Tony Abbott is likely to be hoisted on his own petard. He won office by attacking Labor for creating a budget emergency and by focusing on former prime minister Julia Gillard’s broken promises.

But there is no budget emergency and Abbott’s record of broken promises seems broader and more systematic than Gillard’s slippage from a floating to a fixed carbon price.

The combination of broken promises that hurt the Howard battlers will haunt the government. This means very heavy political sledding for Abbott, particularly tough given how poorly his government did in its first six months and his and his party’s attendant slide in the opinion polls.

But irrespective of the fate of the government, the biggest casualty is that no one will have any appetite to take on the fundamental structural issues everyone on both sides of politics knows must be on the agenda.

Increase and broaden the GST. Empower or emasculate the states in health and education. Tighten pensions and tax superannuation. Not to mention the across-the-board deregulation needed to promote innovation, competition and, ultimately, productivity.

This is really what Treasurer Joe Hockey’s consistent narrative on ending the age of entitlement is all about. The Budget was supposed to be the first step, with relatively small (1%) GDP improvement over the four years of the forward estimates, a signal of more to come in the out years, and a provocation to start a mature political discussion of the really big issues.

Instead, the political debate will focus on relatively minor changes in policy inflamed by charges of broken promises.

Doing nothing, we were told, was not an option for Australia. Well, the Budget did something. The problem is that it did too much for electoral comfort but too little for structural economic change.

Take the decision to reverse the Gillard/Rudd commitments on increased funding to the states for healthcare and education.

Hockey has been in your face to the states in the past 24 hours, telling them health and education are their problem and they should raise their own revenues to fund them.

What Hockey seems to be doing is provoking the states, mostly with fellow travelling Centre-Right governments, to build the case for increasing the GST — collected in the states for spending in the states.

But the premiers know this is politically radioactive on multiple dimensions. The much safer path for them is to blame Abbott for insufficient funding from the Commonwealth.

The end result will be lots of political pain all around. Poor delivery of key services at the state level. No fundamental tax reform.

There seem to be only two ways the Budget won’t have this bad outcome.

The better alternative, for everybody, is that the Australian economy bounces back very strongly in the next 18 months. Unfortunately, this seems unlikely given that the US Federal Reserve’s commitment to tapering will push up interest rates around the world, with China’s Xi Jingping doing all he can to resist the temptation of another 2009-like stimulus as 7%, not 12%, becomes the new normal for Chinese growth.

The worse alternative, much worse, is a real economic crisis, like that driven by the last real root and branch reform of the Australian economy — the very tough budgets and radical regulation of Paul Keating’s “banana republic” reformism of the mid 1980s.

Australia is fortunately in a much stronger position today than it was then. The ironic downside to this is that the country just doesn’t see a major problem with how the economy is tracking.

The term “too good a crisis to waste” was gallows humour in many Western countries in the dark days of 2009. But some did use the crisis fundamentally to restructure their economies. There was no crisis in Australia, just an acceleration in the spending that began in the latter Howard years.

Fast forward to today. Hockey and Abbott did more in the Budget than Australia was comfortable with but less than we need. They may end up being political casualties, but in the long run the country will be the real loser.

Professor Geoffrey Garrett is the dean of the Australian School of Business at the University of NSW. This opinion piece has appeared on The Conversation.

Richard Holden

You can’t fault a treasurer for trying to put the best possible spin on Budget numbers — and that’s certainly what Joe Hockey has done.

The most important numbers, of course, are the deficit projections  – A$49.9 billion this year, falling to A$2.8 billion in 2017-18, the final year of the forward estimate period. Quite a hockey-stick.

Looking at the forecast numbers in a chart reveals a nice, smooth, downward, exponential pattern. And that is no accident.

But as always, the future amount of revenue and expenditure that the Budget deficit stems from are uncertain. Revenues largely come from tax receipts and they depend critically on how fast the economy grows. Expenditures are a little more certain, but again depend on factors such as the unemployment and inflation rates.

The Budget estimates assume GDP growth of 2.5% next year, increasing to 3% and then 3.5% over the forward estimates period. And that’s where the rabbit goes into the hat in Hockey’s deficit forecasts.

It would be hard to argue that growth will be much higher than 2.5% next year.

First of all, estimates for the near future are almost always better than those for the medium and long term. Second, there is a pretty strong consensus among economic forecasters that growth won’t be higher than 2.5%. What about the 3.5% GDP growth assumption for 2016-17 and 2017-18?

Well, it could happen. It would be nice if it happened. It would also place Australia among the fastest growing advanced economies in the world. In short, it’s no sure thing.

On the flipside, cost growth is assumed to be relatively contained. Inflation is assumed to be 2.5%, which is not a crazy assumption, but actual inflation could certainly be higher. Since a range of benefits expenditure is linked to the Consumer Price Index, this is an important driver of government expenditures.

The bottom line is that the nice, smooth, exponential decline in forecast deficits comes from just that — forecasts. And while those forecasts do involve a great many detailed categories, they are far less “bottom up” than, say, a household budget.

Assumptions are made on macroeconomic aggregates like GDP growth and inflation, not how much a family’s health insurance or mortgage payments will cost. And while that’s inevitable, it does mean that there is a lot of uncertainty about those future numbers. They could be better, but they could be significantly worse.

Then there’s the claim about debt levels: both what was inherited from the previous government and where it will go in the coming years. Where it will go depends on the actual deficits over the forecast period, so it depends on the factors just mentioned.

As to the line that the current government “inherited $667 billion in debt” — well that’s false. And it’s false for multiple reasons.

The number is a projection for government debt at the end of the decade, it includes a range of actions by the current government (such as paid parental leave, removing the carbon and mining taxes, direct action on climate change, and others), it is not relative to GDP, and most importantly it is a projection about gross debt, not net debt.

Net debt compared to GDP is what matters. Net debt is basically what we owe minus what others owe us. Gross debt is not relevant for our credit rating or ability to service debt.

Indeed, when the government talks to ratings agencies and investors it talks about net debt. International agencies such as the International Monetary Fund and the OECD always focus on net debt — they barely mention gross debt.

Moreover, net debt to GDP is what matters. Telling me that your mortgage is $250,000 is not very informative. If you have annual income of a million a year that’s not very much debt. If you make $70,000 a year it’s a lot.

Our net debt to GDP is about 12%. It’s the third lowest in the OECD, where the average is about 50%. It’s lower than Germany, the UK and the US — and lower by a very wide margin.

It’s tempting to call Hockey’s claim that Australia has a debt crisis “fuzzy arithmetic”. It may be fuzzy, but it’s certainly not arithmetic. It’s just wrong.

So, what does this all mean for the Budget next year? Actually, probably not that much. Many of the cost-saving measures come into place (such as the age pension eligibility age) after the likely life of this parliament, let alone next year. The one thing next year will reveal is how the forecasts are looking. We’ll have a better fix on the magic 3.5% GDP growth number.

We should all hope it pans out. Hockey certainly should. He’s wagered his political credibility on it.

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

Geoffrey Garrett

This week’s Australian Budget is only the first act in the big economic drama that will take many years to play out. What kind of country does Australia want to be and what is the role of government in getting there?

Most Australians seem, largely without knowing it, to want to follow the script Germany is writing, growing its way out of post-GFC debt through high value-added exports to China while holding the line on pre-crisis taxing and spending policies.

Though the debt mountain is higher and the fiscal tinkering has been greater, this is also America’s strategy. The US is hoping that breakthrough innovations as different as WhatsApp and shale gas will drive faster growth and smaller deficits.

Prime Minister Tony Abbott apparently thinks Australia should instead emulate Ireland, committing to sustained radical surgery on the budget as a way to wipe the slate clean for an economy that is open for business.

Australia is unlikely ever to play out the Greek tragedy of being forced into painful austerity by a massive vote of no confidence from global financial markets.

Do nothing and Australia might instead risk becoming Japan, slowly sinking into the Pacific; or France and Japan, increasingly meccas for cultural tourism and little else. In these countries, very high standards of living will inevitably erode because of an unwillingness to make the big fiscal changes necessary to jump-start growth. But the decline will be gradual and comfortable, not falling off a cliff.

So what should Australia do? Gallic do-nothing is not an option. Irish austerity runs big risks. The right path for Australia is Germanic. But this means getting serious about creating a platform for sustained growth.

To understand Australia’s predicament, it is necessary to step back from the intense politicking of the past few weeks. The clear reality is that Australia is facing the same challenges as the rest of the West, for essentially the same reasons.

Everyone spent heavily, ensuring the GFC did not metastasise into a second Great Depression. The timing of this stimulus-induced fiscal overhang couldn’t have been worse because baby boomers have started to retire, driving up the cost of healthcare and retirement incomes while shrinking the tax base.

At this point, national trajectories diverge. According to the IMF, on top of more than 20 years of stagnation, Japan is condemned to annual growth rates under 1.5% into the indefinite future. But raising taxes and cutting spending has proved too hard for Japan, resulting in net public debt of more than 140% of GDP by the end of the decade, on IMF projections. Things are not much better in France and Italy, with high and rising public debt and anaemic growth as far as the eye can see.

Australia is much better placed. On current (pre-budget) policy settings, our net public debt by 2019 is expected to be 20% of GDP, with growth above 2.5% a year until then. True, our debt has risen dramatically since the GFC. But we are not Ireland.

The GFC killed the long Irish boom driven by Wall Street-like finance. Economic growth in Ireland plummeted from +5.5% in 2006 to -6.4% in 2009, compared with 2.7% to 1.5% in Australia.

Irish government spending mushroomed from 34% of GDP in 2006 to 65% through massive bank bailouts and aggressive stimulus. This ravaged the Irish public balance sheet. In 2006, Ireland rivalled Australia for the advanced economies with the lowest public debt. By 2010, Irish public debt had risen to 70% of GDP. It is expected to peak at more than 100% of GDP next year, six times Australia’s.

No wonder the Irish government is in its eighth straight year of austerity budgets.

Contrast this Irish carnage with the stability of the German economy. Its public debt rose from 53% to 58% of GDP during the crisis and is projected to decline to 40% by the end of the decade.

Many in Australia deride the US as an economy in decline with a broken political system. True, American debt has close to doubled since 2006, reaching about 80% today. But the cataclysm facing the US was extraordinary, and America’s fiscal position is now improving quickly.

The key to the rosy prospects of Germany – and America – is growth. In Germany’s case, led by exporting high value-added manufactures to China. In America’s, catalysed by energy independence and app-created billionaires.

This is where Australia should go, too, but we need to get much more serious about growth and worry less about the numbers on the budget page.

We talk a good game about life beyond the mining boom and the productivity and creativity of our service sector. But much of our innovation is in raw materials (driving trucks in the Pilbara from Perth desktops). And our cost base (big distances and lots of regulation, not just high wages) hurts competitiveness.

The government must tackle our demographic demons before they become too scary.

Raise the pension age, tax superannuation more, broaden and increase the GST, cut waste in the public service, add more user-pay provisions to health and education. But over time, not budgetary shock therapy.

Focus on growth-enhancing policies. Don’t prop up jobs in declining sectors or try to pick winners in advanced manufacturing. Build a platform for sustainable long-term growth through better infrastructure, more competition and less regulation.

Professor Geoffrey Garrett is dean of the Australian School of Business. He joins The Wharton School of the University of Pennsylvania on July 1. A shorter version of this post has appeared in The Australian Financial Review.

Tim Harcourt

It’s been a super month for government economic statements in Australia with the long awaited Commission of Audit report being released just ahead of the usual federal Budget unveiling.

The content of the commission’s report was as interesting as its timing, though apart from a bit of unexpected policy freelancing on the minimum wage, it mainly stuck to its brief of addressing expenditure cuts and didn’t touch the revenue side of the Budget.

But what was the reason for the Commission of Audit and federal Budget to be timed together? What was the strategy behind it?

Ironically, the commission’s approach reminded me of the old Builders Labourers Federation (BLF) trade union tactics by putting out a radical wish list of expenditure cuts – like a BLF ambit log of claims – so the federal Government could be seen to bring down a moderate Budget by comparison.

It’s almost a bad cop-good cop routine or, if you like, a rope-a-dope strategy – named after Muhammad Ali’s famous upset win over George Foreman for the heavyweight boxing title in Zaire in 1974.

The strategy goes like this: put out a radical Commission of Audit report to get the opponents and the media throwing punches and by the time you bring down the Budget, the sting has come out of them and the Budget looks meek and mild by comparison.

This is how Ali beat Foreman: getting his opponent to swing all his punches and wear him down. Regardless of the individual merits of the Commission of Audit’s recommendations, it created a flurry of activity and had people talking of overall public sector waste, whether it was true or not on an individual agency basis.

The other part of the strategy has been to float the idea of the “debt levy” to beat the “debt crisis”. Again, the federal government wanted to create an atmosphere of a budget emergency or crisis. And used it to justify a 1% debt levy on taxpayers (deemed to be high-income earners) to help get through the temporary emergency.

But the debt levy makes no economic sense and for several reasons.

First, there is no debt crisis. Australia is not Europe (see my blog, My Big Fat Greek Debt, Explained), we are not America or Argentina (see my blog, Don’t Buy from me … Argentina). The net debt to GDP ratio in Australia is only 11% compared to the OECD average of 50%.

Second, it makes sense for governments to carry some debt. Governments provide the community public goods – defence, border protection, hospitals, education, roads, etc, that can’t be provided by individual firms and households alone. That’s government’s job, and whatever politicians might tell you, the federal Budget is not like your family budget.

There are social returns on public investment that the federal government provides and has done right back to the time of governor Lachlan Macquarie (1810-21) and even before that. Provided the government can service the debt, and get return on its investments in infrastructure with a growth strategy and sustainable and growing export income, it’s a rational and sensible thing to do.

Third, you can’t call a debt levy temporary. It’s not. As my Australian School of Business colleague Richard Holden has pointed out, you can have levies for temporary acts of nature such as a flood or bushfire, but not an open-ended one, especially like the one proposed which simply doesn’t raise enough revenue.

Of course, aside from the shortcomings of the debt levy and the Commission of Audit, there are ways in which governments can structurally change the Budget – such as, taking away high-income super concessions (former treasurer Peter Costello’s Willy Wonka golden ticket to high-income baby boomers); eliminating middle-class welfare (private school subsidies, private healthcare rebate); eliminating some government agency duplication (there are some sensible parts of the Commission of Audit); and reform federal-state relations for the 21st century.

But is there an economic crisis? No, there’s not. Australia’s economic fundamentals are still in good shape. If you look at the most important indicator, the labour market, we are still receiving better than expected news on employment.

The government’s own figures show that the total number of jobs in Australia rose by 14,200 in April to a seasonally adjusted 11.5 million. Inflation is low, wage growth is moderate and even interest rates look like being on hold for a while, and there is now almost a concern they may have to trickle up a little later in the year to clamp down on growth.

Is there a budget crisis? No, there’s not, and there’s certainly no debt crisis despite the atmosphere created by the Commission of Audit and talk of a debt levy.

Tim Harcourt is the J.W. Nevile Fellow in economics at the Australian School of Business and author-host of The Airport Economist.

Dale Boccabella

The tax treatment of family trusts (meaning discretionary trusts) regularly attracts the “tax rort” or the “tax minimisation” criticism. Rarely though are the reasons for the criticism articulated; the criticism(s) remain at the general level. This article provides a foundation for the criticisms.

The key reason for their tax unfairness lies in their flexibility and the fact that tax law permits the flexibility to go unchecked. They allow a given level of taxable income to be split across family members, and thereby accessing multiple tax-free thresholds and multiple low rate bands (income splitting). There is generally no limit on the family members that can be beneficiaries to “receive” income. In addition, if there are insufficient beneficiaries to absorb the income into tax brackets below 30%, then the income can be allocated to a company beneficiary where the company tax rate applies. This caps the tax on this income at 30% (so called bucket companies).

The discretionary trust can also vary the income allocations in subsequent years to take account of changed circumstances of beneficiaries (e.g. reduce an adult child’s allocation this year because they have just landed a high-paying job).

Some argue that the partnership and the company vehicle can also achieve income splitting amongst family members. This is correct, to an extent. But, these vehicles do not have the flexibility that is available through the discretionary trust. Where these vehicles attempt to replicate the flexibility of the discretionary trust, there are often rules that impose a tax charge on such attempts, and there are numerous tax integrity rules that may apply. The key point here is that the discretionary trust is not faced with such tax charges and is not faced with such integrity rules.

Some argue that the current position results in the tax liability “following the money”, and that this is an appropriate income tax outcome.

First, the beneficiary being taxed is very often just the legal owner of the money, and he/she has no real right to enjoy that money. That is, the legal criterion of entitlement to attract tax liability is satisfied, but it is made clear by the controller of the trust and its assets that beneficiaries are not to enjoy the money. Evidence of this strategy comes from the fact that the amount of money “loaned back” by “beneficiaries” to their discretionary trust has reached staggering sums. Thus, calling the current position one of tax liability following the money is hardly accurate.

Secondly, and accepting the legal entitlement approach as appropriate for now, the tax law in this area is actually taxing the recipient of a gift. This is what the beneficiary allocated income in a discretionary trust is getting (i.e. money for nothing). Overwhelmingly, elsewhere in the Tax Act, recipients of gifts are not taxed. Yet, for some reason we do this in the case of a discretionary trust. The Tax Act does tax providers of gifts, but not recipients. A strong case can be made that the controller of the assets in the discretionary trust and/or the person who is the source of those assets and the income thereon is making a gift to beneficiaries.

Thirdly, the tax law is failing to tax the income to the people who contributed the wealth that produced the income. Alternatively, for a testamentary trust (a discretionary trust created under the will of a deceased), the tax law fails to tax the person who controls the wealth that produced the income. In short, in numerous parts of the Tax Act, attempts at alienating or diverting income away from oneself, without the transfer of the underlying wealth that creates the income, are not tax effective. Yet, we permit this in the case of the discretionary trust.

In addition to the above, there are many other rules in the Tax Act that are inconsistent with the tax treatment accorded to the discretionary trust.

Looking outside the Tax Act, and especially in legal regimes that are required to deal with the “ownership” of assets and income in a discretionary trust, we see approaches that are quite at odds with the Tax Act. In the Tax Act, the assets of the discretionary trust are treated as being in “suspended ownership”, and the income belongs to the beneficiary to whom it is allocated.

First, under the assets test for the aged pension, assets held in a discretionary trust can be counted as assets of a person under the assets test if: (a) the assets in the trust are “controlled” by the person or (b) the person gifted the assets to the trust. The key point is that a person who has control over assets of a discretionary trust and/or who contributed those assets is effectively being treated as owning the assets and the income thereon for social security purposes.

Secondly, in the marriage breakdown area of family law, the assets of a discretionary trust could be held to be “property of the parties to the marriage”. This will be the case where a person has the capacity to control the income or capital allocations of a discretionary trust so that allocations could be made to the person. This can be the case even where the person is not the trustee of the discretionary trust, provided that he or she is the appointor (or nominator) of the trust and thereby has the power to change the trustee. Even where a party is not a beneficiary but has the capacity to become a beneficiary, and from there obtain an allocation of assets or income, it will be sufficient to make the discretionary trust’s assets property of the parties to the marriage.

These two regimes do not tolerate the “legal niceties” of the discretionary trust and/or the affront to equity that would otherwise arise if left unchecked. However, the most important of these is the social security treatment of discretionary trusts. The social security system is closely related to, or even the other side of, the income tax (i.e. negative income tax). The two systems both deal with economic capacity. Why a different approach should be taken in each system is not clear.

The above is a brief outline of the favourable tax treatment given to the discretionary trust. But even from this, those criticising the tax treatment of discretionary trusts (family trusts) have a very strong foundation for their criticism. The guiding principle should be that similarly placed activities or transactions should be taxed in a similar manner. It is very hard to see how this is occurring in the case of the discretionary trust.

At the very least, the issue requires a close and independent examination. To the author’s surprise, the Henry Review did not do this. The government’s tax white paper on the tax system should not repeat that failure.

Dale Boccabella is an associate professor of taxation law in the School of Taxation & Business Law in the Australian School of Business, The University of New South Wales, Sydney, Australia

James Morley

In the mid 1990s, The Wall Street Journal ran an editorial with the headline “Bankrupt Canada”. Ratings agencies had recently downgraded Canadian government debt and the WSJ editorial pondered whether Canada would need to be rescued by the International Monetary Fund.

Soon afterwards, the Liberal government of the day put Canada’s fiscal house in order with deep spending cuts and more mild tax increases. Less than a decade later, Canada’s triple-A rating was restored and today it remains a top fiscal performer with a public debt-to-GDP ratio under 40%, compared to its peak at 68% in 1996.

Jumping across the Pacific and fast-forwarding in time, it would seem that Australia now faces a similar existential debt crisis to Canada’s in the 1990s, at least according to the Liberal government of the day here.

But Australians could be forgiven for wondering “what crisis?” in light of a triple-A rating on government debt and a public debt-to-GDP ratio under 20%.

Indeed, the IMF’s recent country report for Australia explicitly states, “Australia’s modest public debt gives the authorities scope to delay their planned return to surpluses”. Unlike with the Canadian fiscal crisis in the mid 1990s, no mention has been made of Australia needing to be rescued by the IMF.

So what’s going on with all of this talk of a budget crisis? It appears that Prime Minister Tony Abbott and his Treasurer Joe Hockey are suffering from what Nobel prize winner Paul Krugman calls “VSP syndrome”. This label diagnoses a tendency for “very serious people” in policy circles to burnish their economic credentials by proposing tough policies, even when these policies do more harm than good.

Abbott and Hockey clearly want to demonstrate their economic courage by making big cuts to spending in order to save Australia from a debt crisis. The lack of an actual crisis is only a mild inconvenience in this narrative.

Now, other very serious people are going to read this and assume I’m foolishly ignoring the looming demographic crisis faced by all major industrialised economies, with dependency ratios set to balloon in coming decades and our ability to fund social services at currently promised levels becoming increasingly difficult. But I’m not ignoring these long-term problems. At some point, entitlements will have to be cut back.

However, broad cuts to spending now and a temporary crisis levy are not long-term solutions to a demographic crisis. They are simply a way for a government to achieve a temporary surplus at all costs. The temporary nature of the so-called “crisis levy” is as clear an indication as possible that the government’s proposed policies are not really about long-term solutions.

The unemployment rate in Australia has been slowly rising during the past couple of years. Given stable inflation, this has led the Reserve Bank of Australia to cut interest rates and keep them low. But the RBA is no doubt worried about the influence of low interest rates on house prices. In an ideal world, they would like to raise rates back to a more neutral level.

But we are not in an ideal world. Indeed, a manufactured fiscal crisis that produces big spending cuts and a temporary crisis levy (which, for fun, I will resist calling a “tax”) will put pressure on the RBA to keep interest rates lower for longer as they try to help the Australian economy adjust to the post-mining-boom era.

But this loose monetary policy risks increasing imbalances in the housing market, which could lead to a real bona fide financial crisis in the future when house prices stop increasing and household debt becomes more expensive to service.

The real cost of borrowing is unusually low right now. This won’t last forever. And when it ends, it will lead to a difficult period of adjustment for Australians holding a lot of debt tied to short-term interest rates. But the current low real interest rates provide an opportunity for governments to borrow at long maturities to finance public infrastructure.

So if Abbott and Hockey really want to burnish their economic credentials, they should stop wishing there was a Greek-style fiscal crisis to address and instead act on an unusually good opportunity for long-term investment in infrastructure at low real interest rates.

The stimulative effects of this temporary increase in spending would also allow the RBA to return short-term interest rates to a more neutral level and diminish the risk of a future financial crisis based on a housing bubble.

Alas, however, I fear “crisis envy” will carry the day when Hockey delivers the Budget and we will have yet another example of VSP syndrome to point to. It will be an opportunity lost for both fiscal and monetary policy in Australia.

James Morley is associate dean (research) and a professor of economics at the Australian School of Business. A version of this post appeared on The Conversation.