Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

No go-slow for ScoMo

Michael Potter

25 September 2015 | Ideas@TheCentre

512014e5-005a-4854-9570-7afa19b9a992Scott Morrison (aka ScoMo) will find on the Treasurer’s desk an in-tray reaching higher than Mt Everest. He could spend months getting across the details of his new remit, reviewing everything all over again.

That would be unfortunate.

Instead what we need from Morrison is action. Australia can’t afford yet more delay in reinvigorating our currently sluggish economic growth.

Firstly, Australia’s uncompetitive taxes need to be addressed. Bracket creep is causing personal taxes to increase each and every year – an extra tax of $25 billion over the next four years, according to the Treasury. The impact is particularly large on average income earners, reducing their take home pay by up to 3 per cent by 2019. This is hitting work incentives, productivity and growth. Higher taxes are hardly a good idea when the economy is growing strongly, let alone when growth is slow. The previous Treasurer, Joe Hockey, argued convincingly that bracket creep is a substantial problem, but then indicated that action to address the issue was some way off. Hopefully the new Treasurer can take act more quickly.

Morrison also needs to push ahead with the broader tax reform process, with a focus on reducing the tax burden (a position he is sympathetic to) rather than increasing it (as argued by Dr Ken Henry, a former Secretary to the Treasury). The CIS has made detailed representations on the tax reform needs.

Other reforms are gathering dust in the Treasurer’s in-tray, particularly the Financial System Inquiry (Murray Inquiry) and the Harper review of competition policy. Responses to these inquiries are overdue: while Morrison shouldn’t engage in a ‘go slow’, it would be better that he indefinitely defers questionable ideas (such as effects test for the misuse of market power) rather than implement them without thought. He should instead be acting quickly to implement the recommendations from these reviews that free up businesses to compete, driving innovation, productivity and economic growth.

Health Reform Innovation

Jeremy Sammut

25 September 2015 | Ideas@TheCentre

703ca6e5-49e6-44a3-92b0-5da1b76b0986Recent events in Canberra have put the spotlight on the need for policymakers to improve how they communicate the message of economic reform.

In the wake of the failure of the federal government’s Medicare co-payment plan, might I suggest that the health reform debate needs to be framed not around spending cuts, or higher taxes, or addressing budget deficits and debts.

Instead, the debate needs to be refashioned around the prospect of offering ordinary voters and taxpayers something better than the Medicare status quo.

This is why we need to talk about health reform in terms of innovation, especially when in modern political parlance, the term reform has become a dirty word synonymous with the creation of ‘losers’.

The CIS has already contributed to trying to recast the health debate and communicating the message and substance of reform.

CIS Senior Fellow David Gadiel and I have devised a Health Savings Account proposal that would allow individuals to opt out of Medicare, cash out their annual health entitlements, and deposit their own health dollars, their own taxes, in a health savings account.

Based on the much more cost-effective Singaporean health system, the political logic behind our opt-out plan is that as well as contributing to long-term health system and budget sustainability, individuals would gain financially by opting for a more efficient way to finance their own health care.

I also believe our plan embodies the kind of principles that need to be front of mind when think about health policy innovations and whether they would address the core structural issues facing the health system.

Our plan would:

  • Establish non-government sources of health funding
  • Increase personal responsibility for health expenditure
  • Transform health insurance from a payment mechanism to a risk management mechanism
  • Shift delivery of health care to financially responsible private sector operators
  • Change incentives for health care providers to focus on outputs and outcomes

The real challenge in reform innovation is to find ways of doing things better in health and communicate the benefits to the Australian public.

Dovish confessions of a hawkish mind

Patrick Carvalho

25 September 2015 | Ideas@TheCentre

9d69df0c-035c-4ea4-b27c-759ac3882e8fWhen it comes to monetary policy the world is divided into doves and hawks. The former tends to underplay the impact of inflation, focusing on economic growth and lower interest rates; the latter displays more aggressive behaviour against rises in inflation, with more inclination towards higher interest rates and no sympathy for artificially sustained short-term economic activity.

I have always sided with the hawks. Monetary policy should focus on the trajectory of inflation; economic growth should be left to the proper conduct of economic institutions, i.e. the formal and informal set of incentives to produce and work (for example, an efficient tax system, a reliable rule of law, competitive markets).

But these are not ordinary times.

During the last seven-years-and-counting muted global economic growth, we have seen unprecedented levels of monetary base expansion (aka quantitative easing) and the rise of negative interest rates amid threats of deflation hand-in-hand with massive asset inflation.

In this bizarre environment, the recent decision of the US Federal Reserve (the Central Bank of the central banks) to maintain its benchmark cash rate close to zero shows how blurred the boundary between doves and hawks has become.

I confess that using a hawkish perspective on inflation leads me to a dovish decision to support the maintenance of the US cash rate at current levels.

At 0.2%, the US annual inflation rate is well below the 2% target rate; on top, a strong dollar and falling commodity prices (in particular oil) are good omens against future inflation. Further, many US economic indicators – e.g. manufacturing production, construction spending, durable goods orders, car sales, housing prices, mortgage delinquency rates – have all yet to fully recover from pre-GFC levels. And while unemployment rates and full-time employment point to strong recovery, wages growth is weak and labour force participation rates are still at the lowest record levels since late 1970s.

Likewise, the Fed decision is also consistent with a faltering, deflationary global demand: a faster-than-expected soft landing in China, the EU project in identity crisis, Japan still battling its 1990s depression, emerging markets in retreat.

In short, let’s hail the zero-lower bound. Alas, these are not ordinary times.