Covid-19: we're in this together; is trickle down the answer

[pim]

I've posted repeatedly in the past that trickle down economics is all that the Liberals have in their ideological box of tricks. For a while it looked as though I might be proved wrong when Scott Morrison was credited with burying the ideological trench warfare hatchet in the face of the Covid-19 pandemic, setting up the National Cabinet involving all the state Premiers, including Labor Premiers, and ripping open the national purse strings for a cash splash that makes Kevin Rudd's effort in the GFC look like a model of fiscal restraint. It stuck in my craw and it had to be dragged out of me but, reluctantly, truculently and churlishly, I muttered almost inaudibly that the Morrison Government deserved credit for their handling of the crisis:

Public opinion: The Morrison Government deserves a lot of credit for its handling of the pandemic. Don't you agree"

Pim: mumble mumble mumble

Public opinion: What's that? I can't hear you. Speak up!

Pim: mumble mumble mumble

Public opinion: Eh? Speak up man!

Pim: Oh all right, they've done a good job

But as time goes by and the fiscal cliff looms when the JobKeeper payments dry up and JobSeeker reverts to the paltry $40 a day starvation pittance of Newstart are they reverting to type? Trickle down economics which is tax cuts for the few and fuck the rest of yez!

Cutting taxes for the wealthy is the worst possible response to this economic crisis

July 14, 2020 by John Quiggin, Professor, School of Economics, The University of Queensland theconversation.com/cutting-taxes-for-the-wealthy-is-the-worst-possible-response-to-this-economic-crisis-142637

Australia’s response to the health and economic impacts of the COVID-19 pandemic is rightly considered one of the world’s best. At their best, our federal and state politicians have put aside the sterile games dominating politics for decades.

It seemed possible these efforts might last, as politicians sought to find common ground and make real progress on issues such as climate change, industrial relations and inequality as part of the coronavirus recovery.

But as soon as the virus seemed to be receding, politics returned to the old “normal”. Policies are again being put forward on the basis of ideological reflexes rather than an analysis of the required response to our new situation.

There is no more striking example than the federal government’s reported plan to bring forward income tax cuts legislated for 2024-25. The idea apparently has backbench support.

Those cuts will benefit high-income earners the most. They include replacing the 32.5% marginal tax rate on incomes between A$45,000 and A$120,000, and the 37% rate on incomes between AA$180,000, with a single 30% rate up to A$200,000.

This is being proposed while the government begins to wind back income-support measures, such as free child care, with much more serious “cliffs” fast approaching.

This economic crisis is different

One of the most striking features of Australia’s initial response to COVID-19 was the speed at which the Morrison government abandoned a decade of rhetoric denouncing the Rudd Labor government’s response to the Global Financial Crisis.

In mid-March the government was floating the idea of a tightly limited response with a budget of A$5 billion. By the end of the month this had been abandoned in favour of the JobSeeker and JobKeeper schemes, estimated to cost A$14 billion and A$70 billion respectively. Other schemes brought the total to A$133 billion.

Despite the close resemblance to the Rudd stimulus packages, there was one crucial difference.

The GFC caused a collapse in the availability of credit, potentially choking off consumer demand and private investment. This was the classic case needing demand stimulus.

By contrast, the COVID-19 pandemic caused a shock to the production side of the economy, which flowed through to incomes. Millions of workers in industries such as tourism, hospitality and the arts were no longer able to work because of the virus.

The crucial problem was to support the incomes of those thrown out of work, and keep the businesses employing them afloat until some kind of normality returned. There were problems with the details of eligibility and implementation of the JobSeeker and JobKeeper programs, but the response was essentially right.

Have cash, will buy luxury car

The primary rationale for early tax cuts is that they will stimulate demand. But the economy’s real problem is not inadequate demand – particularly not on the part of high-income earners.

On the contrary, the problem for high-income earners is having a steady income even as many of the things they usually spend on (high-end restaurant meals, interstate and overseas holidays) have become unobtainable.

Among the results has been a splurge on luxury cars. Compared to June 2019, sales of Mazdas, Hyundais, Mitsubishis, Kias, Nissans and Hondas last month were all down. But Mercedes-Benz, BMW, Audi, Lexus and MG were all up.

As Jason Murphy notes, this rush to buy fancy cars isn’t definitive proof the wealthy are looking to ways to spend all the money they’re saving. “But it is suggestive. Eventually the money has to go somewhere.”

The worst possible course of action

The continuing problem with the pandemic is the loss of income faced by millions of workers. By definition, anyone in a position to benefit from a high-end tax cut doesn’t have this problem. Equity would suggest that, far from receiving more income, they should be sharing more of the burden, if not now then in the recovery period.

When the federal government legislated its tax-cut schedule in advance, critics including Reserve Bank governor Philip Lowe and Access Economics partner Chris Richardson pointed out the danger of promising future tax cuts based on projected growth. The same policy had failed ignominiously in the 1990s when the Keating government legislated tax cuts to be introduced after the 1993 election. After declaring the cuts “L-A-W”, Paul Keating was forced to withdraw half of the tax cuts when the budget deteriorated.

These criticisms have now been vindicated.

The decade of strong economic growth, starting this year, that was supposed to make big tax cuts affordable has disappeared. We will be lucky if per capita GDP is back to its 2019 levels by 2024-25, when the tax cuts are slated to kick in regardless of circumstances.

Once that happens, we will need all the tax revenue we can get to bring the budget back into balance and deal with the continuing expenditure needs the pandemic has created.

The government now seems to be headed for the worst possible course of action – cutting support for those hit hardest by the pandemic while pouring money into the bank accounts of the well-off.

Read more: Forget JobSeeker. In our post-COVID economy, Australia needs a 'liveable income guarantee' instead

The inevitable result of such a policy will be a surge of personal and business bankruptcies, mortgage defaults and evictions. That will bring about the kind of demand-deficiency recession the tax cuts are supposed to prevent, superimposed on the continuing constraints created by the pandemic.

So far we have all been in this together. For high-income earners that means forgoing tax cuts promised in happier times and contributing more to the relief of those who need it most.

The government of Scotty from Marketing is certainly the government we've got, but is it the government we need?

[KTJ]

Hahaha ... righties showing their TRUE COLOURS, eh?

Who'd have thought it.

Meanwhile, across the eastern side of The Ditch, the predominant rightie party is in total disarray & meltldown as their new leader, who rolled the previous leader a few weeks ago, decided he cannot handle the heat in the kitchen and has pulled the plug on himself only a few weeks short of a general election. The Nats have got the knives out for each other as political polls show a bloodbath is potentially coming which will be to Jacinda's favour, resulting in a huge number of Nats list MPs facing unemployment in the election. Oh dear, too bad, how sad. The schadenfreude on our side of The Ditch is absolutely, deliciously rapturous, unless of course one is a rightie. But fuck them, 'cause they're only oxygen thieves, eh? The more it is good riddance to in a few weeks, the better. The only good rightie MP is one who has just been booted out of parliament.

[Deleted]

Righties are a meltdown...

[pim]

The worst possible decision was the superannuation drawdown. They made it part of an “omnibus” bill that they presented to parliament last March containing a raft of economic measures to put the economy on life support. Labor did move amendments to exclude the early superannuation drawdown but didn’t have the numbers. For its part the government of Scotty from Marketing saw its chance to smash the Hawke/Keating superannuation legacy and they took it. Labor had to vote for the omnibus Bill containing the superannuation drawdown or risk having the whole raft of measures like JobKeeper withdrawn. That’s the hardball that the Morrison government is prepared to play. The superannuation drawdown is the worst act of public policy vandalism that I’ve seen in my lifetime.

Super funds transformed by Liberal ideology

Mike Seccombe, The Saturday Paper, Saturday 8 August 2020 www.thesaturdaypaper.com.au/news/economy/2020/08/08/super-funds-transformed-liberal-ideology/159680880010233

The Morrison government’s superannuation changes risk turning the scheme into ‘privately funded unemployment insurance’.

If you want to understand the realpolitik of the Morrison government’s response to the economic crisis brought on by Covid-19, a good place to start is with the relief package that passed parliament on March 24. The Coronavirus Economic Response Package Omnibus Act 2020 contained all manner of disparate measures, including asset writeoffs for business, stimulus payments to households, free childcare, an increase in unemployment payments and changes to superannuation. One of those changes, notes James Pawluk, executive director for superannuation policy at the McKell Institute, halved the rate at which retirees were mandated to draw down their superannuation each year. He quotes the prime minister’s explanation of the measure, that it was meant to ensure “if you’re a self-funded retiree that you aren’t forced to pull money out in the middle of a bad market”.

This was neither unprecedented nor unreasonable, says Pawluk. The Rudd government did the same during the global financial crisis, to help protect the finances of older Australians. The extraordinary thing this time was that the same bill provided for working Australians to do exactly what Morrison was protecting retirees from – that is, drawing down money from their superannuation at the worst possible time. The early access scheme, announced by the government without any consultation with the sector, allows people to take up to $20,000 out of their accrued super savings. So far, according to peak body Industry Super Australia (ISA), some 560,000 people have completely cleaned out their super accounts – 460,000 of them under the age of 35. About $32 billion has been withdrawn and Treasury estimates that could rise to $42 billion. The super industry fears it could be even more.

Not only are those people losing now by pulling out their money in the middle of a bad market, they also lose much more in the long term, because they forgo the compounding effect of keeping the money in the system for decades. The ultimate cost to those retirement nest eggs could be a couple of hundred billion dollars, along with a concomitant cost to future taxpayers required to fund more in pensions. But the consequences are even bigger than that. The unprecedented early withdrawal scheme fundamentally changes the purpose of superannuation, says Pawluk, from being a vehicle of saving for retirement to being effectively a form of national insurance against hard times.

The government has portrayed the scheme as allowing people access to “their” money to help them through a time of financial hardship. But that is a limited truth. The greater truth, as former prime minister Paul Keating noted this week, is the other way around: early access to super savings is less about the government helping people through a time of hardship than about those people helping the government through a time of hardship, by shifting much of the cost of economic stimulus to a subset of the population.

“Of the income support in Australia to date, in this Covid emergency, $32 billion has been found and paid for by the most vulnerable, lowest-paid people in the country – that’s the people who’ve taken the $20,000 out – and $30 billion has been provided by the Commonwealth under JobSeeker and JobKeeper,” Keating said at an event organised by ISA. “The main burden of income support is people ratting their own savings to the tune of where now 600,000 young people, broadly young people, under 35, have no superannuation accounts at all now. They lose all the compounding – the $20,000 would have multiplied itself by five-and-a-half or six times over their lifetime – so it’s been a very poor choice for them.”

As for the differential treatment of retirees and working-age people, Pawluk interprets it this way: the government was “effectively saying to older Australians, ‘You don’t have to help stimulate the economy out of this recession’, and saying to younger Australians, ‘You do’ ”. He invokes realpolitik to explain it: “They were looking after their base.”

The reality is that older Australians and those with substantial assets are key to the survival of conservative governments. Those who have now emptied their super accounts, disproportionately held in union-affiliated funds, are not.

Whatever the motivation, the fact is that in the Covid-19 economic crisis the people hardest hit have been young, those in low-paid and insecure work, and particularly women. And, as Keating noted, those are substantially the same people who have drawn down their superannuation. And they are not the only casualties. The early access scheme has inflicted damage on the entire superannuation system – particularly on the $700 billion industry funds – and all those in them. According to ISA, the non-profit super sector calculates the cost to its funds at about 35 basis points in earnings over the first three months of the early access scheme, which equates to an average loss per member of $251 – even for those who withdrew no money. The reason for this, explains Matt Linden, deputy chief executive of ISA, is that in order to meet the demand for the early release of super, “the funds have had to shift their asset allocation from growth assets into cash, which basically earns members nothing, almost nothing”. And that, if it were to continue, says Garry Weaven, would defeat the whole purpose of superannuation as an investment vehicle.

Weaven was assistant secretary of the ACTU in the 1980s, and deeply involved in setting up the compulsory superannuation system. He subsequently chaired a number of industry funds and served on the boards of ISA and, until last year, IFM Investors, which manages investments for 60 funds in Australia, as well as clients in 17 countries, and has close to $120 billion under management. He sees a potential “tragedy for long-term retirement welfare” in what the Morrison government is doing. “The danger is that this becomes a more or less permanent form of privately funded unemployment insurance,” he says. If it became the case “that every time there was an uptick in unemployment, there was another raid, there would be an enormous impact, because funds would have to go completely to cash and near cash options for their investment strategy”, says Weaven. “The concomitant to that would be, ‘What do you want super for?’ Because it doesn’t provide a decent return.”

So far, Linden stresses, the impact has been manageable. But there are concerning signs. The early access option originally was scheduled to finish at the end of next month, but a couple of weeks ago the government announced it would be extended for another three months, to the end of the year. This brought a flurry of strong statements from the sector, entreating the government to go no further. “No one doubts there is real financial hardship out there and superannuation has an important role to play – but the system was never designed to be a broad-based social insurance model,” says Linden. “The level of contributions to sustainably support that would be at least twice the current levels.” worries that “the more desperate the employment situation gets the more there will be pressure” to continue the early access scheme. “The only thing that saves that from becoming an inevitable outcome is the impact it would have on capital markets, if you crippled the superannuation system,” he says. “Because the system’s got to about $3 trillion – maybe a bit less now – and is enormously important in keeping the markets alive on both the debt and equity sides.” Which is to say, the super sector, in which the industry funds are now the largest player, is too big to fail – as much as some on the conservative side of politics might like that to happen.

“They’ve always hated industry super,” says Tim Lyons, deputy chair of Hostplus, whose membership is heavily concentrated in the hard-hit hospitality and tourism sectors. “You’ve got to remember that the Libs opposed, effectively, everything we associate with ’80s reform. This was not bipartisan. This was smashed through by the moral authority of Hawke and the power of Keating.”

In large part, he says, conservative hostility is driven by the fact that industry funds represent the long-term interests of their members, rather than the short-term interests of shareholders and executives of the companies in which they invest. They give workers’ representatives a degree of control over the way capital flows.

Lyons has no doubt the government was substantially motivated by malice in its decision to allow early access to superannuation. “This wasn’t a serious attempt to support people in need. It was a calculated attempt to shovel money out of industry funds on the basis of the demographics of those funds that hold money from younger, blue-collar, service workers, as opposed to older, higher-balance members,” he says.

Lyons points to past attempts by the current government to “take some paint off” industry super, notably the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The government resisted the inquiry into egregious practices by the banks, he says, until the pressure became too great. “Then they added the super system, thinking, ‘Well, our mates will cop some crap, but the super system will cop some crap, too.’ And it did. But it was almost entirely the retail funds.” The consequence was a “huge” inflow of funds into industry funds. “It was an enormous own goal,” says Lyons.

Others are prepared to give the Morrison government some benefit of the doubt. Weaven is one. At the time the scheme was announced, he says, the government, or the bureaucrats who serve government, had yet to come up with the JobKeeper wage subsidy. There was panic in the air as jobs disappeared overnight, “with people suddenly being thrown into chaos, with nothing. So you can understand it, but it’s a bad policy, and it should not be repeated,” he says.

Linden, whose job involves liaising with government, is another who is prepared to cut Morrison a little slack for making bad policy on the run. “Literally, there were queues hundreds of metres long outside Centrelink offices,” he says. But the government, in its panic, failed to seek counsel from those who best understood the system. Instead, they announced first, and then consulted. “Had we been consulted prior to its announcement, we would have pointed out some concerns with the proposed design of the scheme,” Linden says. “The idea of financial hardship early release is not a new thing at all. There are already established rules in the system enabling those in financial hardship to access superannuation. But it became pretty clear to us the policy intention was for people not to have their eligibility checked – even randomly as a compliance risk measure. That decision to have a very low bar may have sped up the payment of money to a degree, but there was a lot of concern about how many people would access it given the self-assessment model, and what sort of pressures that would put on the funds and markets in general in terms of releasing the money.”

Subsequent evidence suggests the government, in its haste, gave early access to a large number of people who did not actually need the money. Data released by analytics consultancy AlphaBeta and credit bureau Illion showed much, if not most, of the money released under the early access scheme did not actually go to relieving hardship. They analysed the bank transactions of thousands of Australians who withdrew from their super accounts, and found 40 per cent of them actually saw no drop in their income during the Covid-19 crisis. Many used the money to increase their spending on non-essential consumption.

“On average,” the survey found, “people withdrew around $8000 and spent an extra $2855 in two weeks, compared with the same group’s average spending in a normal fortnight. Sixty-four per cent of the additional spending was on discretionary items such as clothing, furniture, restaurants and alcohol.” Almost three times as much went on gambling as on rent. At best, those findings indicate poorly designed policy. At worst, they support the arguments of people such as Keating and Lyons, who say the real intent was to shift the cost of economic stimulus off government, or to weaken the super system, or both. That is not to deny that many people who cleaned out their super did so out of real need. And disproportionately, they were women, largely because they had lower balances to begin with. But clearly, there were many others who took it, heedless of the long-term cost to their future, those who thought, as Lyons puts it: “Shit, here’s 15 grand. Motorbike!”

Lyons says there is a third group, comprising people with high super balances, who realised they might game the system if they “take the money out, effectively wash it clean of tax, and then put it back in”. Those people could have reaped up to $3000 on a $10,000 withdrawal, and may yet find themselves in trouble with the Tax Office, which told The Saturday Paper via email that it had “commenced making enquiries with individuals where we have serious concerns that their application was not made genuinely”.

As already mentioned, the early access policy has been particularly damaging to industry funds, because of the demographic profile of their members. It has also had a heavy impact on some retail funds, although they have been less critical. Linden suggests a reason for this is that many of those funds are owned by banks and “the banks will not be upset with the additional liquidity from tens of billions of dollars that have gone out of superannuation funds into the banking system”. At the time the legislation was introduced, Labor was muted in its criticism. As Pawluk says, this was a moment “to be seen to be pulling for Team Australia”. Because the early withdrawal was presented as part of an omnibus package, along with other measures, at a time of crisis, there was little scope to oppose it. Labor tried to insert amendments to improve transparency and compliance, but the government rejected them and Labor did not push. It was a take-it-or-leave-it situation. The big test now is whether the government extends this measure again, knowing its flaws. That will give an indication of whether it was a botched policy – or a real attempt to reconstitute a sector it has always been opposed to ideologically.

[Deleted]

The Morrison government’s superannuation changes risk turning the scheme into ‘privately funded unemployment insurance’.

And here lies the rub with free trade with the USA...its adopting their economic ideology of whats good for business, not what's good for people, and private unemployment isurance equates to Americans companies taking over...and private unemployment insurance in the US is stuffed with rorts and depriving people of their due money they have actually paid for. 

Australia doesn't need it or want poverty increasing policies.