How the LNP conned the Greens on Pension Reform

Richard 'Meg Lees' DiNatale, the first ever straight white male leader of the Australian Greens has been looking very pleased with himself this week. One of his first actions as Leader was to 'wrong-foot' the ALP on pension reform by agreeing to a deal with the LNP. This has led to  glowing endorsements in News Ltd papers, a rarity indeed for the Greens and a sign of their new no-nonsense approach to governing like grown-ups. Di Natale said of the changes:

""I'm staggered that we're here," "I thought this would be a non-controversial debate."

So what exactly are the changes? The Greens/LNP deal does two big things. Firstly it raises the asset limit for pensions, and secondly it changes the rate at which having assets over the limit reduces your pension.

So, basically if you have over a certain amount of assets, the rate at which you recieve the pension goes down, as your asset value goes up. Fair enough, too - excluding the family home for various political and non-political reasons, it's fair enough that we not hand out pensions to people with huge asset bases who can support themselves.

The rates at which the pension reduces are set out here and are reproduced in part:

Family situation	For homeowners full pension assets must be less than	For non-homeowners full pension assets must be less than
Single	$202,000	$348,500
Couple combined	$286,500	$433,000

For every $1000 you have over that limit, your pension is reduced by $1.50 per fornight. There are 26 fortnights a year, so each $1000 over the asset limit reduces your pension by $39 a year. If you are a single person with a home $202,000 in super, the asset test entitles you to the full rate of the pension. If you're a single person with a home and $252,000 the pension is reduced by $1950 a year, to take account of your assets.

The changes increase the asset limit slightly, and also increase the rate at which the pension is reduced, from $1.50 a fortnight per $1000 over the limit to $3 per $1000.

What are the new asset limits?

Single (Homeowner) $250,000
Single (no home owned) $450,000
Couple (Combined) (Homeowners) $375,000
Couple (combined) (No home owned) $575,000

So all the asset limits have gone up. Going back to our theoretical single person, with $252,000, under the old assets test she loses $1950 under the old test and:

 (($252,000 - $250,000) / $1000 ) x $3
= ($2,000 / $1000 ) x $3
= $2 x $3
= $6 a fortnight

under the new assets test, which is $156 a year. So she's about $1800 better off a year; fantastic!

Of course, since the rate of reduction applied to the assets test has gone up, the more money you have the fast you lose the pension. So imagine a single person with $500,000 in assets. Under the old test they would have lost

(($500,000 - $202,000) / $1000) x 1.5

= $447 a fortnight
= $11,622 a year

But under the new regime, you'd lose the pension at a faster rate:

(($500,000 - $250,000) / $1000) x 3

= $750 a fortnight
= $19,500 a year

leaving not very much of the single pension left.

The Australian has a full chart of the impacts here, albeit behind a paywall. But we'll come back to this in a moment...

The Greens are defending this change, saying:

This is an outcome that stakeholders including the Council of the Ageing, Uniting Care and ACOSS have been seeking for a long time
We are a caring society and all older Australians deserve the best possible retirement. With this agreement we have helped ensure a pathway to a decent retirement for everyone.

But why are they on the back foot at all?

Two reasons. First, despite claiming that this is an outcome ACOSS - the Australian Council on Social Services has been seeking for a long time, there's a sting in the tail. ACOSS supported a change in the rate of reduction of pensions from $1.50 per fortnight to $2 for every $1000 over the limit. The deal struck with the LNP is for $3 - a much steeper reduction.

Secondly, many of the claims made about how much better off people are going to be after the changes turn out to be simply not correct.

Some fairly straightforward claims have been made by the government, such as:

For example, all couples who own their home with additional assets of less than $451,500 will get a higher pension. Singles who own their home will be able to have up to $289,500 in extra assets and still be better off.

Sounds great - and doubtless it was very convincing in the Greens party room. Sadly, it's simply wrong.

Why?

There's another test that applies to your pension eligability; the income test. To be eligible for the pension you apply both the asset test and the income test, then you receive the lower of the two rates. So it doesn't matter if the asset test qualifies you for a higher rate if your rate is capped by the income test.

Here's the kicker; the income test includes your Financial Assets - which includes your Superannuation. The government 'deems' an income - at a rate set by the Minister - according to the value of your financial assets. Currently it works as follows:

Single

Fortnightly income	up to $160	over $160
Reduction in payment	none – full payment	50 cents for each dollar over $160

Couple combined, couple separated due to ill health

Fortnightly income	up to $284	over $284
Reduction in payment	none – full payment	50 cents for each dollar over $284 (combined)

 The deeming rate?

From 20 March 2015:

• if you are single and receiving an income support payment, the first $48,000 of your financial investments is deemed to earn income at 1.75% per annum and any amount over that is deemed to earn income at 3.25% per annum

• if you are a member of a couple and at least one of you receives a pension, the first $79,600 of you and your partner's financial investments is deemed to earn income at 1.75% per annum and any amount over that is deemed to earn income at 3.25% per annum, or

• if you are a member of a couple and neither of you is receiving a pension, the first $39,800 for each of your and your partner's share of jointly owned financial investments is deemed to earn income at 1.75% per annum and any amount over that is deemed to earn income at 3.25% per annum

So, even though the asset test allows you to have more Superannuation before it reduces your pension, for a lot of people this won't matter, since the income test will deem that their superannuation gives them an income, and that income will reduce their pension anyway. So many of the people who will 'benefit' from the asset changes won't, since they'll be caught by the income test. Rather than robbing Peter to pay Paul, we're now just robbing Peter...

That chart from The Australian I mentioned earlier? It doesn't seem to take this into account. So most of it's 'winners', well aren't...

What does this look like in practice? I made a handy graph:

This maps pension against assets for Couples who are Homeowners. The Black line is the old pension rate, against assets. As assets go up, pension comes down. The blue line is the new pension rate with the higher assets test. Once you hit your asset threshold ($375,000) the pension drops much faster than the old black line.

Where the blue line is above the black line, those people are 'winners' under the new system. Where the black line is above the blue line, those people are losers. You can see that the 'winners' are those with about $275 - 460k in assets. The losers are anyone with more than $460k in assets.

The area in blue between the blue and black lines are those people the government has been calling 'winners' under the system; everyone from about $275k in assets to 460k in assets.

The red line is the income test. The red line is the impact of the 'income test'. Basically, for a given set of financial assets (like Superannuation) the government 'deems' income at a rate it sets. Your pension can never be higher than that red line: you always take the rate which is the lower of two.

What does this mean? It means that the blue area between the blue and black lines - the 'winners' - is about half the size the government was claiming. That is, if you have $375k in assets, the government was talking as though you'd move from the black line to the blue one. You won't; you'll only move to the red line. Put another way, the government was significantly over-stating the winners.

There's another problem; the deeming rate is set by the minister and is historically low. The deeming thresholds are 1.75% for assets under $76k and 3.25% for assets over. This is the lowest they have ever been. Go back to 2010 and the rates were 3/4.5%. The deeming rates aren't going to stay this low. They will rise. As they do, they'll cannibalize more and more of that remaining blue space, the 'winners'.
There's another problem; the deeming rate is set by the minister and is historically low. The deeming thresholds are 1.75% for assets under $76k and 3.25% for assets over. This is the lowest they have ever been. Go back to 2010 and the rates were 3/4.5%. The deeming rates aren't going to stay this low. They will rise. As they do, they'll cannibalize more and more of that remaining blue space, the 'winners'.
Here's the same situation, with the old 2010-2012 deeming rates:



Remember; the you only get the lowest rate. So where the blue line over the black line in theory represents a 'winner', in practice, if the red line is lower, you get that rate. Bumping up the deeming rate to average levels will almost totally cannibalize any 'winners'.

Maybe this is why we've had a sudden flurry of suggestions that the deal wasn't quite as rosy as  perhaps we'd thought...

I wonder what Meg Lees is doing with herself these days?

Are the Labor Party 'Economic Vandals'?

By now everyone knows that Luke "eating Halal food secretly converts you to Islam" Simpkins has called a spill on Tony Abbott's leadership, with a ballot to be held at the partyroom next Tuesday. You know, the guy who called up WA Transport Minister Dean Nalder to complain about stickers because he can't tell the difference between a shahada and a nightclub ad. One of the key reasons he called this spill, as outlined in his email to partyroom colleagues:

 I just want to make sure that the economic vandals do not get back into power and our children and grandchildren are not left to pay Labor's bill.

So, are the Labor Party 'economic vandals'? Well clearly the answers you get to that question are going to be divided on party lines. LNP voters will give you an emphatic yes, and ALP voters will tell you, no not at all and probably point to Keating and Swan both being named 'World's Best Treasurer'.

Rather than engage in partisan posturing, I thought it might be interesting to examine the data objectively - at least, as objectively as possible in the circumstances. So I turned to that font of all wisdom, the OECD historical GDP statistics.

For those wanting to play along at home, the data is at http://stats.oecd.org/ under the Tabs National Accounts > Annual National Accounts > Main Aggregates > GDP > GDP Volume - Annual Growth Rates in percentage.

Tracing back to the year before Gough Whitlam won office -1972 - I got the data for Australia's GDP growth, and compared it with the OECD average growth figures. I then tried to make sense of that data through the lens of which party was in power. The figures were - to my stats obsessed mind - extremely interesting.

In the 42 years I examined (we only have OECD confirmed data up to 2013), Labor had been in power for 22 of those years, The LNP for 20, give or take a few months.

On average, over the entire period, Australia averaged GDP growth of 3.12% per annum. The OECD average of GDP growth for the same period was 2.69%. So over the whole period, Australia did much better than the OECD average. Yay us!

Looking at only the period during which the LNP were in power, Australia grew at a rate greater than the OECD average in 12 of the 20 years of LNP government, or 60% of the time. By contrast, when the ALP were in power, Australian growth outstripped the OECD average in 15 of the 22 years, or about 68% of the time. So on the raw numbers, an ALP government was more likely to oversee a period of trend growth higher than the OECD average.

How much higher? This is where the numbers get really interesting. During the period the LNP were in government, the average OECD growth rate was 3.01%. Compare that number with the average OECD growth rate overall - 2.69% - and it becomes apparent that during periods of LNP government in this country the OECD group of countries, overall were doing better. This probably points to sunnier economic periods if not globally, then certainly for comparable economies to Australia. Australian growth during the period the LNP were in power was, on average 3.14% This means that, on average the LNP governments beat the OECD trend data by .13% Not a bad effort, on any analysis.

Now let's consider the periods during which the ALP were in power. During those years the OECD average growth was 2.39% - again, that's down on the average over the entire period, which was 2.69%. Australia's average growth rate while the ALP were in power was 3.1% - a whopping .71 points higher - nearly 3/4 of one percent more - than the OECD average.

This - I think - gives us one of the most interesting insights into the 'better economic managers' narrative that has persisted for decades in Australian politics. Since the Whitlam years we see that the growth rate difference between the two parties is pretty negligable: 3.1% under Labor, 3.14% under the LNP. But when you compare them to the OECD averages, you find that while the LNP outperforms the average by a respectable .13%, the ALP outperforms it by a seriously impressive .71%.

The difficulty, of course, is that the same basic growth rate - 3.1 ish% - is being achieved in very different circumstances. So, on average, Labor governments have had to contend with poorer economic conditions in comparable countries, on average, than Liberal governments have. This perhaps explains why the public sentiment is that the LNP are 'better' economic managers; they've had the good fortune to govern during periods of strong growth among the OECD nations. And yet when we compare the difference between the OECD average and Australia's growth it's very clear that Labor governments consistently beat the trend more often, and by a larger margin.

(Of course, the other potential answer is that Australia is going to grow at about 3.1% regardless of who's in power - certainly that seems a fair interpretation of the numbers. But if this is the case, accusations of 'economic vandalism' must still ring hollow.)

4 Alternatives to Cutting Funding to the ABC and SBS

Despite Tony Abbott's pre-election promise that there would be "No cuts to education, no cuts to health, no change to pensions, no change to the GST and no cuts to the ABC or SBS.", the ABC and SBS are staring down the barrel of $43.5 million in cuts over four years. This is a low-ball figure, with ABC Managing Director Mark Scott arguing that the cuts will probably amount to more than $120 million over that period.


Unsurprisingly, this policy about-face (which is a kind way of saying lie) was tremendously unpopular with voters. However, the government has stuck to it's guns, citing a "debt and deficit disaster", which seems to conveniently evaporate the moment Joe Hockey crosses the Tasman.

But let's assume, for the sake of argument, that the PM isn't lying through his teeth. Let's also assume that he's being genuine when he invites input from cross-bench senators, asking "if you don't like what the Government is putting up, give us your alternative in terms of how we save money." 

Sure, a more cynical commentator might suggest that this is a lazy attempt to shift attention away from his own budget train-wreck; but let the record show I am anything but cynical.
The savings I will focus on come from the Tax Expenditure side of the ledger. In simple terms, tax expenditure is tax that the government could collect, but chooses to forego. Think here about the zero-rating of GST on certain kinds of food - that alone amounts to 6.2 billion in foregone revenue. While I have very strong ideas about the desirability of zero-rating food, we'll save them for another blog post. Instead, I want to focus on alternative tax expenditures that we might choose to collect in order to find the $43.5 million in cuts which are being directed to the ABC and SBS.


Option 1: $21 million annually in "Discounted valuation for car parking fringe benefits".


A fringe benefit, in simple terms, is a benefit that flows to an employee, from an employer, which isn't the employee's salary. So, if I work for a public transport authority and get cheap or discounted travel as a perk of the job, that's a fringe benefit. Fringe benefits are subject to tax to stop a situation where an employer could provide a large portion of an employee's benefits in a form other than salary, thereby avoiding tax which would otherwise be payable on those benefits.


Now, you or I mere mortals have to pay for parking near our work. Probably, if you're anything like me, this should cause you to take public transport, or car-pool more often that you actually do. However, employees of organisations far more salubrious than mine can have their car parking provided for them. This constitutes a fringe benefit, which is taxable; the tax is levied on the employer and is calculated by applying the ATO's formula.

Rather than assess the real cost of the benefit, however, there are a number of ways a business can get a deduction on the amount due. Some small businesses are exempt from paying the FBT, others can elect to use a formula for calculation of the tax due which is significantly less than the real value. The result is $21 million in foregone revenue annually. To re-iterate, that is twice the value of the combined cuts to the SBS and the ABC year on year.

Now, sure, this might cause some employers to stop offering car parking Some employees might not like having to pay car parking fees, but in an age of massive urban congestion we have to ask whether the convenience of a small subset of employees being able park at their place of work for free, or a considerably discounted rate, is worth, again, $21 million a year.

Option 2: $5 million annually in "Concessional rate of excise levied on brandy"


Let's be up front; this alone wouldn't cover the cost of budget cuts to the SBS and ABC. It would, however, cover half that amount. And, unlike other tax expenditures, there seems to be no conceivable reason for continuing the concessional tax treatment. Why do brandy drinkers get a free pass? It's time for those Hennessey swilling toffs to be lifters, not leaners.


Option 3: $20 million annually in "Deduction for environmental protection activities and environmental impact studies"


This is another tax expenditure that dwarfs the cuts to ABC/SBS. We forego $20 million annually in allowing full immediate deductions for capital expenditure to " to control pollution or manage waste". This deduction is meant to incentivise business to outlay capital to reduce their environmental impact. 

Now, call me old fashioned, I would have thought that if your business created pollution it was your job to control or manage that waste. That is, it's just an ordinary part of doing business. It strikes me as rather strange that we would pay polluters to clean up after themselves, rather than expecting them to clean up after themselves as part of the cost of doing business. Instead, we're spending $20 million a year in corporate welfare that's only available to those businesses that create significant waste of pollution. Seems rather backwards to me.


Option 4: $74 million in 2014/15 for "Refundable Film Tax Offsets"


As the Tax Expenditure statement puts it, "Film production companies incurring expenditure on certain productions in Australia may be eligible for refundable tax offsets." Up to 15% of various costs incurred shooting, producing or post-producing a film in Australia are deductible. This is not restricted to our indigenous film industry, but also includes "qualifying large scale films" including Hollywood blockbusters.



Of course, there are sensible reasons for wanting to encourage foreign investment in Australia's film industry. Against that, this is money effectively being paid out to highly profitable companies, many of which are overseas entities. And many, many other industries get no such support in the form of similar tax breaks. Further, if you were genuinely concerned to build an indigenous film and television industry, why on earth would you be cutting $43.5 million dollars in funding to the ABC and SBS, in favour of tax breaks to multi-national film companies? Surely the direct investment in local film and television would be the much better use of the limited resources...

So there we have it - I've identified 4 low-hanging tax expenditures which could be axed instead of cuts to the ABC and SBS. And these are only the low-hanging fruit. Just wait till I get started on Shipping Investment Incentives, Offshore Banking Units and the myriad superannuation concessions...

Budgets are about priorities, and time and time again the Abbott government has shown that they believe in prioritising corporate welfare over the things that matter to voters.