Tim Harcourt | The Airport Economist

For most of our respective histories, Australians have typically ignored Brazil. That was partly down to the tyranny of distance, as the two great southern lands were so far away from each other that it was a case of “out of sight, out of mind”. Our colonial ties were very different too. Australia looked to the British Empire and Brazil to the crumbling Portuguese ; our legacy was transportation theirs was slavery;  and while Australia looked to London, Brazil looked to Lisbon. Brazil, with political instability and economic crisis, seemed like a place with too many problems that was best to keep away from (except at carnival time).    More recently, the sheer importance of our bilateral economic relationship with China sometimes seemed to leave little room to consider other emerging markets.

But times are changing and the rise of the new Brazil has seen many international delegations flying down to Rio, (and Sao Paulo, Brasilia, Belo Horizonte, Porto Alegre and the rest of Brazil’s burgeoning metropolises) to seek stronger economic ties with Brazil. Brazil is being overrun by international business diplomatic delegations from the US, Canada, Germany, Japan, China and increasing the emerging powers of Asia, the Middle East and Africa too.

Although we are hardly a first move, Australia has now joined the pack with significant investment in Brazil by Pacific Hydro, Westfield, and major resource, agribusiness and infrastructure players. The Australian Government has also redirected resources to Brazil and Austrade has made a strong push to strengthen ties with Brazil when the spotlight hits the country with the FIFA World Cup in 2014 and the Rio Olympic Games in 2016 with its highly respected Business Club Australia programme.

So why all this attention on Brazil?  As we highlight in a new report, there are several good reasons for Australians to pay more attention to this other great southern land.

It’s economic.  Brazil is already a major global economy. Brazil is the world’s fifth largest country by population and the seventh (on a purchasing power parity ppp 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 (depending on how GDP is measured). As an agricultural, mining and aviation exporter, it’s a food aerospace, resources  and energy superpower with Petrobras, Vale, Embaer, JBS Beef and Ambev some of the world’s most influential multinationals and investors.  Granted, Brazil’s recent economic performance has disappointed.  Growth last year slumped to less than one per cent and policymakers must now manage a complex macro environment.  But key fundamentals, including sheer size and vast ecological wealth, keep Brazil firmly in the ‘too big to ignore’ camp. 

It’s diplomatic. 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.  The diplomatic initiatives have continued under President Dilma Rousseff: A Brazilian will be the next head of the WTO.

It’s because of China. Australia now faces a resources rival in Asia. We saw at the height of the global financial crisis (GFC) that Australia and Brazil were the two largest beneficiaries of the Chinese stimulus package, as Brazil and Australia’s resources and energy stoke China’s rapid urbanisation and industrialisation.

It’s because of shared challenges.  Like Australia, Brazil has had to manage the complexities of the current resource boom, the challenges of Chinese investment into sensitive resource sectors, and the side-effects on its exchange rate from quantitative easing and the so-called currency wars. 

None of this is to deny that there are risks to Brazil’s outlook. Our co-author Patrick Carvalho, who outlines Brazil’s recent macroeconomic achievements, has also warned of: “Weak infrastructure, inefficient bureaucracy and tax system, expensive and unfair pension system and despite some recent improvement, high crime rates.”  As he reminds us, “economic development is a marathon not a sprint” And Brazil is still some distance from the finish line.

However, for all of these challenges, as the world’s 6^th largest economy, Brazil is an important player, and like with the Girl from Ipanema, it’s now Australia’s turn to do the wooing.

A shorter version of this blog post was previously published in The Australian Financial Review.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales (UNSW) & author of The Airport Economist:  www.theairporteconomist.com.

 Tim Harcourt and Mark Thirlwell are the co authors, along with Fernando Cardim and Patrick Carvalho, of Great Southern Lands: Building ties between Australian and Brazil, a report by the Lowy Institute & COALAR.

Justin O’Brien

Australia cannot ignore the Singaporean investigation into attempts to manipulate key financial benchmarks. 

The investigation by the Monetary Authority of Singapore into the attempted manipulation of key financial benchmarks has profound implications. Notwithstanding the fact that no evidence of actual success has been proffered, Singapore has moved quickly and decisively to change the domestic and international regulatory battleground.

The regulatory change is based on very loose principles articulated by the International Organization of Securities Commissions earlier this year. The decision is a considerable victory for IOSCO, which is chaired by Greg Medcraft of the Australian Securities and Investments Commission. Its articulation of global principles, although purposively vague, was designed to demonstrate both the timeliness and efficacy of international coordination. In fleshing out these principles in a radical redesign, Singapore is providing a much needed route map to navigate two pressing hazards.

The first of these is how to handle the investigation and enforcement process. The MAS action has foreclosed individual investigation and the piecemeal erosion of trust associated with periodic disclosure of individual institution misconduct. Instead it opted for a comprehensive settlement. The second and potentially more significant navigational aid is how the settlement forcibly enlists the industry in protecting the integrity of the rate-setting process.

The benchmarks are conceived as a public good that industry has an obligation rather than an interest in protecting. Cleverly, the MAS has forced ‘skin in the game’ by demanding individual banks increase the level of reserves deposited with the central bank.  Under the terms of the settlement, released on Friday, the banks implicated have to deposit additional reserves in Singapore for a period of one year, during which they will not receive any interest.

The exact amount depends on the degree of complicity in the scandal, with the highest imposed on ING, RBS and UBS (S$1-1.2 billion each). What is also clear, however, is that the MAS does not trust the capacity of any of the banks to clean this mess up without external supervision. The banks are required ‘to report their progress to MAS on a quarterly basis, and conduct independent reviews to ensure the robustness of their remedial measures.’ Self-certification, therefore, is deemed in itself inadequate.

The Association of Banks in Singapore is to be stripped of its capacity to self-regulate the benchmarks. Manipulation or attempted manipulation is to be made specific civil and criminal offence. At the same time, the authorities have made it clear that ongoing integrity can only be vouchsafed by a significant change in practice. The MAS has managed to force the industry to institute an effective early-warning system linked to blacklisting those directly implicated (if not charged with wrongdoing). It notes that ‘the industry will put in place measures to facilitate reference checks, so that an institution would be made aware if a potential hire had been implicated in attempts to inappropriately influence benchmarks.’ 

In taking such robust enforcement action, Singapore is guarding itself against the possibility that any future civil or criminal proceedings in the United States will seek to quarantine guilt to subsidiaries operating in Asian markets. Its integrated approach also has the capacity to break the impasse within the IOSCO taskforce set up to evaluate how benchmarks can be refined. The United Kingdom continues to insist Libor and its facsimiles can be reformed; the United States by contrast wants it replaced by observed rates. These too, however, run the risk of being manipulated.

It goes without saying that the primary focus of the MAS investigation will be the main British Banks implicated, including RBS and Barclays. It is, however, also significant that US banks have been censured formally. The involvement of two major Australian banks – ANZ and Macquarie – in the scandal also raises serious questions about the efficacy of oversight here in Australia.

Because ANZ and Macquarie were in the bottom range (S$110-300m) they failed to make initial international media reports. Although Macquarie itself does not itself submit to the Association of Banks in Singapore benchmark rate, it too is found to have ‘deficiencies in governance, risk management, internal control and surveillance systems.’ Along with the other banks censured it must adopt measures to address deficiencies and appoint an independent party to ensure the robustness of remedial measures.

With the MAS action, the manipulation of financial benchmark scandal has gone global. Australia, the lucky country, has for once not been saved by the tyranny of distance. In today’s globalized marketplace, it is too obviously implicated for regulatory agencies here in Australia to ignore.

Professor Justin O’Brien is director of the Centre for Law, Markets and Regulation at UNSW  Law.

His most recent research paper on Libor has just ben published by Edmond J Safra Center for Ethics at Harvard university. It is available for download at http://ssrn.com/abstract=2277172

A shorter version of this article was previously published in The Australian Financial Review.

However, Australia’s approach to monetary policy has not been as standard, when compared to many other countries. Since 2008, many economists and central banks have modified their views on what is an acceptable level of inflation.

Sound arguments can be made to justify an inflation rate of 4 per cent. Whereas, the RBA post 2008 has instead increased interest rates when needed to keep the inflation rate averaging within the 2 to 3 per cent band.

This policy resulted in Australia having very high interest rates, relative to other countries, which pushed the Australian dollar to extreme levels, damaging many sectors of the Australian economy over the last three years.

The RBA currently has the official cash rate at 2.75 per cent, however, there is a strong argument that this could have been done much sooner. It may have resulted in inflation averaging around 4 per cent for a period, though in the current economic environment, this would have been beneficial.

Private sector debt levels and house prices are at excessive levels and moderate inflation over a number of years is one way for adjustment to occur to more sustainable levels of real (inflation adjusted) debt and house prices.

Given the volatility in the mining sector, for a strong Australian economy, we also need other sectors of the economy to be strong. Over recent years, monetary policy has provided insufficient support for these other sectors.

The impact of monetary policy on the unemployment rate can often be delayed. For example, the relatively high interest rates and resulting high exchange rate in recent years, is only now showing up in a rising unemployment rate.

Due to this delayed reaction, current expansionary monetary policy is unlikely to prevent the unemployment rate from rising over 6 per cent. If the goal is to keep the unemployment rate from rising too much, more fiscal stimulus will probably be required.

The recent New Zealand experience provides lessons to be learned. New Zealand’s response to the global economic crisis was unconventional and focused on monetary stimulus with little fiscal stimulus (despite moderate levels of government debt) which resulted in the NZ unemployment rate sharply rising to over 7 per cent.  

However, the rebuild due to the Christchurch earthquakes, provided a major stimulus to the economy (similar to a very large fiscal stimulus) which resulted in a substantial reduction in the unemployment rate. The unemployment rate in Christchurch (NZ’s second largest city) is now below 5 per cent.

Australia still has moderate government debt levels which allows the government the ability to provide further fiscal stimulus.  In addition, to the obvious benefits of keeping people employed, government spending on projects such as infrastructure spending, can provide great long term benefits for the economy.

Dr Jonathan Reeves is a financial economist at the Australian School of Business, UNSW Australia.

Professor Chris Styles

Michael Clarke was recently named the most influential Sportsperson in Australia by The Australian Newspaper. He won the 2012 Alan Border medal (voted for by peers, the media and umpires), and scored more runs in test cricket than anyone else in the game last year.  He even got an apology from the Sydney Morning Herald a few months back for their misjudging of him as a player and a captain.

But in the last few days he and the Australian coach, Mickey Arthur, have been heavily criticised by the public, past players and sections of the media for stepping down four players from the test in Mohali for not doing their homework. The rationale given by them was that this incident was the last straw in a string of breaches of team discipline and came on top of two large, embarrassing losses in India.  They are well paid professionals and the management team felt it was time to draw a line in the sand.

Remember when being a cricket captain just involved  setting a good field and deciding whether to bat first if you won the toss? Welcome to leadership in the 21st century.

Whether we like it or not, sport, and sports teams, look more like businesses than ever before. Probably because that’s what many have become.  Cricket is a good example.  With multi-million dollar bids for television rights, players earning exorbitant match fees and sponsors critically assessing ROI (return on investment), cricket is a sizeable business indeed. The question then becomes about how Clarke should lead the Australian cricket team in such an environment.

Taking a corporate model, Captain Clarke is equivalent to the CEO and Mickey Arthur could be viewed as Chairman of the Board.  They decide who is in and out of the team, the organisational structure, strategy and tactics.  Earlier this week, four members of the organisation didn’t comply with a request from senior management to provide their thoughts on a turnaround strategy, and they were put on ‘special projects’. One declined the offer and has taken indefinite leave.

A consultant brought in to help evaluate performance might look at a lot of things, particularly now that they can access huge amounts of data generated by various performance programs including detailed video analysis.  But the consultants might also ask one very basic question: how did it come to this?  It’s not about who did how much homework, being late for a bus, or wearing the wrong uniform.  It’s likely to be more fundamental.  The problem is really about the culture of the organisation, and any change in performance requires a change in culture.

Leaders talk a lot about culture but culture is often hard to put your finger on.  We see the outcomes of culture – behaviours, performance, staff turnover and retention – but culture itself is harder to define. Management consultants McKinsey & Co (who may have already got the call from Clarke), are attributed with a broad definition of organisation culture which is “how we do things around here”.  If we believe the reports from India, the way things were done by the Australian team appear to be pretty lax.  There would also seem to be a distinct lack of accountability on and off the field.

In simple terms, changing culture requires an organisation to decide where it wants to be and what culture would support getting there, and then collectively deciding change is needed.

Clarke has stated very publicly where he wants the team to be – to return Australia to its position as the #1 test team in the world.  He has also obviously decided that currently, ‘how things are done around here’ isn’t going to support the achievement of that goal.  So he, and the coach, have decided to get tough. Llike those in the corporate world, perhaps Clarke’s big leadership test will be his ability to bring everyone in the team along with him.

Professor Chris Styles is Deputy Dean and Director Australian Graduate School of Management (AGSM).

From the Knowledge@Wharton today blog.

Throughout 2012, many analysts were predicting that RIM’s days were numbered. And in one way, that turned out to be true.

Last week, the Canadian firm announced that it would no longer be known as RIM – or Research in Motion – and instead was rechristening itself BlackBerry, after its iconic smartphone. Along with the change, the company introduced a new line of devices based on its latest operating system – BlackBerry 10. Combined, these actions have been widely regarded as a last-ditch effort on the part of the firm to remain a viable player in a market dominated by Apple’s iPhone and devices that run on Google’s Android operating system, such as Samsung’s Galaxy. (In the last quarter of 2012, BlackBerry’s U.S. market share dropped to 1.1%.)

Although many analysts were impressed by the latest BlackBerry devices — one of which incorporates a sleek, touch-screen interface, a “smart camera” and other features — some were disappointed that the firm’s newest offerings wouldn’t be available in the U.S. until March. Already, BlackBerry had delayed the launch of its new operating system for more than a year, and the additional delay sent a negative signal to BlackBerry investors. Following the launch, the company’s stock fell by 12%.

“This looks like a huge uphill battle for BlackBerry,” says Wharton emeritus management professor Lawrence G. Hrebiniak. “If market share equates with power, BlackBerry is close to powerless.” The company offers far fewer apps than its competitors, he notes, and its enterprise user base is continually eroding as companies move to allow employees to rely on their own devices for office email. In addition, “other smartphones are more powerful than the latest BlackBerry offering.”

BlackBerry “needed a bold, ‘swing for the fences’ move, and all we got is a so-so clone of other recent phones,” says Wharton marketing professor Peter S. Fader. “The image of the company revolves around a no-nonsense phone for busy people who don’t have time or patience to type on a virtual keyboard or to monkey around with apps. Many of the people who have clung to a BlackBerry — despite the social pressure to leave it — have done so because of the real keyboard it had traditionally featured, and the many conveniences that come along with it…. The new BlackBerry should have boldly featured a real keyboard and lots of keyboard-based conveniences that iPhones — and their myriad clones — can’t offer.” He adds that although BlackBerry announced it would offer a new phone that incorporates a traditional keyboard, “most people are totally unaware of it. Instead, all the hype is around marginal features that don’t offer any meaningful or long-lasting differentiation.”

“They had an incredible hold on the very large market segment that loved their keyboard,” notes Wharton marketing professor Jerry Wind. “They made huge mistakes by not keeping the keyboard and building around it the necessary software and quality services” to compete with Apple, Samsung and others.

In addition, the company’s decision to reform its brand around its well-known namesake smartphone seems like a step backward to some observers. “The rebranding strikes me as having a certain irony,” says Wharton management professor Daniel A. Levinthal. ”Now that the BlackBerry as a device is becoming associated in people’s minds with a somewhat dated piece of hardware, [BlackBerry is] defining the company’s identity in terms of this particular artifact.

“Adding to the irony,” Levinthal continues, “is that the alternate business strategy for RIM would have been to embrace their secure data network as the core asset and decouple that from a propriety piece of hardware. The ‘M’ in Research in Motion — connoting ‘mobile’ — is arguably more a contemporary statement than ‘BlackBerry.’ They have doubled-down on the propriety hardware in all ways … and, I think, have lost the last opportunity to reinvent themselves as a software/service company. They have an installed user base and can certainly generate some revenue from that, but the longer-run competitive dynamics look bleak.”

According to Hrebiniak, however, there’s still hope for the company. “Mobile carriers like BlackBerry’s operating system,” he points out. ”There’s no guarantee that this applause will generate sales, but it could help.” And if enterprise customers become more security conscious again, they could gravitate back to BlackBerry, he suggests. “But, in my opinion, the biggest hope for BlackBerry revolves around competition. A third or fourth player increases competition and keeps [company] leaders on their toes. This sparks innovation and lower prices. Apple has shown some weakness of late, which could help BlackBerry.

“Finally, people sometimes root for and help the underdog, and BlackBerry certainly fits this category,” he adds. “Super Bowl Sunday has probably affected my thinking, but I think that BlackBerry can make it, despite the very long odds…. The underdog occasionally pulls off the upset.”

From the Knowledge@Wharton today blog.

It was a story so compelling that even Hollywood couldn’t resist it. The rise and fall of Kozmo.com in many ways epitomized the dot-com boom era. The New York-based company was founded on a seemingly genius idea – same-day delivery of goods of all kinds in some of America’s densest urban centers – which, in the end, proved to be completely impractical. After its founding in 1998, Kozmo generated enormous buzz and expanded from New York to Chicago, San Francisco, Boston and other markets. However, it quickly burned through cash and, by 2001, had completely gone under. The company’s story was captured in the hit documentary, E-Dreams.

Kozmo’s high-profile failure has for years been held up as proof that the concept of same-day delivery isn’t feasible – that the costs inherent to the service are just too high to ever work in practice. But now, more than a decade after Kozmo’s failure, same-day delivery is back, and in a big way.

With the holidays closing in, retail giants such as eBay and Walmart are following the lead of Amazon by offering same-day delivery service in select markets, including New York, San Francisco and Seattle. And though comparisons are already being made between these new initiatives and the failure at Kozmo, Wharton marketing professor David R. Bell predicts that, this time, same-day delivery might be here to stay. The larger question, he notes, is what that success could mean in the long term for the rest of the retail industry.

“Because of the high fixed costs to do this – the building of logistics or warehouses and the rest – once you go down that path, it’s either going to work or it’s going to be a massive failure,” Bell says. “Given what a savvy operation Amazon is, for instance, I think they will be able to get it right.”

At the very least, Bell notes, Amazon, Walmart and eBay stand to benefit from the key lesson learned from Kozmo’s failure – specifically, that when it comes to same-day delivery, volume is essential. “It was a combination of things that hurt Kozmo, but the biggest was that they failed to ever achieve ‘density.’” In other words, Kozmo never made enough deliveries to generate sufficient revenue to cover its massive infrastructure costs – everything from high courier fees to warehouse space. WebVan, the San Francisco-based company that offered a grocery delivery service, suffered the same fate.

But the new same-day delivery services are slightly different. In an effort to avoid Kozmo’s fate, for example, eBay is circumventing the warehousing issue by having its couriers pick up orders directly from partner retailers, while Walmart already has the storage capacity and is shipping directly from its stores. Other smaller retailers have experimented with a somewhat different strategy: Rather than delivering goods to a consumer’s home, they instead send them to a central location – for example, a temporary setup in a parking lot or at a specified retail outlet – where they can be picked up.

“What this approach does is give you that density you need,” Bell says. “That’s because the retailer can just throw everything onto one truck instead of having to make 500 different deliveries.”

In the end, Bell predicts that at least one of these retailers, and possibly many of them, will make same-day delivery work in some form. And while that certainly will be a good thing for consumers, it would undoubtedly pose serious challenges for the rest of the retail industry. “It’s going to raise the bar for everyone. If you start training customers that they can expect to get anything they want that same day, they’ll start to demand it. And that could end up putting the pressure on companies like UPS and FedEx, too.”

This post was previously posted in Knowledge@Wharton Today Blog: Same-day Delivery: This Time, It Might Actually Work

Bradley Kalgovas

New research shows that the head of IT within an organisation – the Chief Information Officer or CIO – needs to become ambidextrous to deal with all the conflicting demands placed on them.

Business needs CIOs who are as comfortable managing people, systems, and budgets as they are with the technology, and CIOs should be capable of juggling all the complex tasks that come their way. To do that they need to use both ‘arms’ of their skills: hence we call it ambidextrous.

My research found that CIOs need to develop a deep understanding of the organisational implications of technology decisions – in particular where it hits the company’s bottom line. Their focus is on project management, delivering IT and business strategy, as well as human resource and change management within their teams. Their role has changed from an ‘IT Manager’ to an executive who is responsible for mitigating the ‘complexity gap’, whereby they are expected to pioneer technology in an area that is rapidly changing.

They need to be business people first, managers second, and of course also deal with the technology and ‘keep the lights on’.

Ambidexterity is a framework that aims to resolve the tension between conflicting roles and skills. This type of management theory has been examined extensively at an organisational level, but has received little attention when it comes to the individual. And yet for a CIO it is vital.

Of course the CIO is very different from an IT manager: the CIO reports to the board, whereas the IT Manager deals with the technology.

A key finding for CIOs is that ambidexterity will result in delivering a quality product. Over the past decade there has been a transition to ensure that the CIO is no longer a data processor: they are very strategic. They are part of the planning process, as opposed to hearing about it second hand and being told to implement it. Part of this is because the profit at many companies comes from their website. They are not just a company that uses IT: IT is core to ensuring they make money.

Bradley Kalgovas is an Honours Bachelor of Commerce Student at the Australian School of Business.

Dale Boccabella

A major anomaly in the capital gains taxation should be the target of a federal government seeking to increase tax revenue. Discount capital gains tax for individuals is very odd.

A wage earner on income above $37,000 will face a tax rate of 34% on income above that amount. When the income reaches $80,000, every extra dollar is taxed at 38.5%. Yet, the most that is payable on a discount capital gain is 23.25%.

Discount capital gains for an individual means that a person only gets taxed on half of the capital gain they make – only $5,000 of a $10,000 gain would be taxed. The effect is that a person on the top marginal rate of tax (earning income over $180,000) would only pay a rate of 23.25% on a capital gain (50% of the top marginal rate of tax of 46.5%). A person on the tax rate one down from the top marginal rate (income above $80,000 but below $180,000) would only pay a rate of 19.25% on a capital gain (50% of the 38.5% marginal rate band).

Why do we have such anomalies or differential treatment in the tax law? After all, isn’t a buck a buck, and therefore they should all be taxed in a similar way? Yes, a buck is a buck in terms of economic well being, and for accounting purposes, but for tax purposes, not every buck is quite the same.

This begs the question why?

Governments and the Henry Tax Review have come to accept that different taxes may have different effects on taxpayer behaviour, and that as far as possible, tax measures that have a damaging effect on investment and economic growth should be avoided.

Anomalies can therefore arise from this desire to avoid the damaging aspects of a tax measure. Badly designed taxes can have the effect of changing the behavior of taxpayers to the detriment of the economy.

But, fairness is at the top of many peoples’ wishlist when it comes to the design of a tax, and fairness is all about contributions to the public revenue. The ‘Warren Buffett’ type anomaly – whereby the billionaire Warren Buffett faced a lower tax rate on his income than the rate faced by his secretary – should be seen in the light of this tension between minimising damaging taxes and fairness.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.

Michael Sherris

The latest figures from the ABS show significant jumps in longevity.

This, on the one hand, should be celebrated. The jump in our lifespan is enormous. Just last year a man turning 50 could expect to live an extra 31.7 years – now it is 32 years and well up on the 29.9 years a decade ago.

However it is causing serious concern for Australia’s superannuation system.

Quite simply, most of us will run out of money before we die. Australians who get their super in a lump sum – or even if you take it out gradually – will almost certainly exhaust it before they are dead.

However financial planners who are setting savings levels for old age just don’t understand the risk.

The longevity tables released by the Bureau of Statistics say a girl born today can expect to live 84.2 years and a boy 79.7 years, but if they survive the first few decades (which are relatively dangerous) the figures are even higher.

Most people’s ideas of what they need to live on in retirement are outdated.

When many people retire their superannuation accounts will let them draw down what they want, but they typically live for maybe 20 years after retirement, and so they soon run out of money. They should buy lifetime annuities – or what is called longevity insurance – and self-insuring their future lifetime risk, but most people do not because the annual income it gives is small, compared to drawing on your super savings.

Also remember that while 20 years is what the tables say retirees have left, longevity is improving all the time – and someone just starting to work now may last much longer than the tables show.  Allowing for future improvements in mortality due to better healthcare etc, a girl born today is quite likely to live to 100, with about half the girls born this year likely to live beyond 100.

There is also enormous variability about the core figure of how long you’ll last – remember this is an average, and some people will live much longer. When their super runs out most people fall back on the old age state pension – but that will represent a sharp drop in income for most people, and also the state may change what or when you can collect. For some people, there may be no safety net at all in the future.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business, and a Chief Investigator at the ARC Centre of Excellence in Population Ageing Research.

Dale Boccabella

The federal government is tipped to be eyeing the online world in a bid to shore up­ collapsing federal tax revenues. This move has more to do with squeezing “little areas” to get more tax, and ensure a surplus – and less to do with redressing unfairness that brick and mortar retailers may perceive.

Australian brick and mortar retailers would love to see a tax on “large” overseas internet sales through a lowering of the $1,000 tax-free threshold. However, given the difficulties of collection, it is not clear that it will help raise much revenue in the short term. While the government could argue that raising the threshold is an equity measure, it would be viewed by many as an exercise in shoring up the federal budget. Indeed, every revenue measure over the next 10-months will be viewed with such suspicion, even if a sound tax policy rationale underlies the measure.

Last week retailers conceded tax exemptions on internet shopping were unlikely to be scrapped, and some now argue it was wrong for them to push so hard for GST to be levied on online purchases. Their push may have alienated their customers, and their advertising campaign made them look largely out of touch. Consumers like being able to shop around for cheaper prices. However the new move as part of the GST review has raised brick and mortar retailers’ hopes again of imposing GST on what are called ‘low-value imports’.

It is going too far to say under all scenarios, it would cost more to collect the tax than it would raise. It will depend on where the new threshold is set. For example, look at the level in other countries where the low value import thresholds (in $A) is in New Zealand: $300; Canada: $20; UK: $30; Singapore $300. The Australian position of $1,000 is way above those. The question is why.

Prior to November 2005, the Australian threshold was only $250. The tax saving and therefore revenue lost to government on a $1,000 purchase is roughly $100. Simply reverting to the old standard of $250 would, at least in theory, bring in a lot of tax revenue.

However, there is little point in having a tax rule for purchases over the internet if there is no practical way of collecting it. In terms of a taxing point or tax collection point, this is very difficult.

Australia could make every online retailer in the world register for Australian GST if they export Down Under. While technically feasible in today’s world of tax cooperation, this is unlikely in the short-term.

More likely would be the imposition to collect the tax on the recipient of the overseas parcel. However the idea of having the purchaser pay tax as a separate transaction would be complicated, create a load of hassle and red tape for ordinary consumers, and is certainly not a model used under the income tax system.

The GST threshold of $1,000 is high by world standards, and lowering it to say $250-$400 is likely to raise more tax. The question is whether there is appetite on the issue among politicians. You would create a load of hassle for every voter that has begun to shop online in a big way, and the government would not be guaranteed a healthy revenue collection.

If the surplus is the goal, there are many better targets for the federal government. For example the treatment of discretionary trusts, uncapped negative gearing, and the continuation of the uncapped exemption on the family home and superannuation payouts. These are crying out for an overhaul that would raise significant revenue.

Regrettably, it appears that these ideas – that have a sound policy reason to them – are in the ‘too hard’ basket at the moment.

Instead, what we are seeing is the government trying hard to “reform” areas where the return to revenue is minor. While this may improve the tax system marginally, politicians should really be looking at the bigger items that are a major source of unfairness and inefficiency in out tax system. This is what the Henry review was all about.

Alas, with the current government majority, politicians of all persuasions seem to be sitting on the fence about tacking areas that are screaming out for reform – which is why GST on internet imports is once again under consideration.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.