All posts by Andrew McDonald

Beware ‘easy money’ schemes to fund new transport projects

State governments should be wary of following the Turnbull Government’s advice to introduce “value capture” schemes to fund major new transport projects, according to a new Grattan Institute report.

As Australians in capital cities struggle to cope with clogged roads and crowded trains, the Turnbull Government wants to stop being just “an ATM for the states” and is urging them to use value capture taxes to fund infrastructure.

Value capture is the name given to a policy whereby governments “capture” some of the windfall gains for landowners that result from building a new piece of infrastructure, and use the money to help fund the project.

At first glance, value capture seems marvellously fair, because it only applies to those who benefit from the particular new project. So the people of western Sydney do not help fund a new railway station on the North Shore.

But in practice, value capture schemes are less obviously fair.

Drawing a boundary around a new project to distinguish between those who must pay the new tax and those too far away to benefit is bound to involve rough justice. People on one side of the boundary will not be happy to get a tax bill when their next-door neighbour doesn’t.

The apparent fairness of value capture may be an illusion, because it is hard to apply to infrastructure such as roads and hospitals where the benefits tend to be spread more broadly. There is nothing fair in the beneficiaries of rail projects paying extra tax while the beneficiaries of road and other projects do not.

Value capture schemes are also less efficient than broad based taxes because they require more precision in valuation and create opportunities for corruption.

While many financiers are keen on “tax increment financing”, the arguments for them are specious. Ultimately such innovative financing mechanisms, cost governments more than borrowing for themselves, don’t necessarily improve risk management, and still involve taxing landowners.

As a result, an additional broad-based, low-rate property tax on all land may be a better option for governments seeking to fund major new projects.

If governments nevertheless want to try to capture value from specific projects, then the tax should be part of a consistent legislative regime designed to minimise corruption, and levied on all properties within a designated zone at a fixed rate of the increase in the unimproved land value between the date of official commitment and 2 years after completion.

Whatever the taxation arrangements, governments can realise additional value from infrastructure projects by joint development around them. They can sell government land that is no longer needed after construction, or sell new development rights from rezoning land in the neighbourhood. But the value of such schemes will depend on how much the government already owns, and the demand for new intensive development.

“It may be attractive in theory, but there is nothing easy about capturing value,” says Grattan Institute Transport Program Director Marion Terrill.

Read the report

For further enquiries:
Marion Terrill, Transport Program Director
T. 03 8344 3637 E. media@grattan.edu.au

Australia has a historic opportunity to fund all schools properly, at no extra cost

A new deal among governments and school systems can end Australia’s toxic school funding debate and transform teaching and learning in schools, without costing the Commonwealth more money, according to a new Grattan Institute report.

Circuit breaker: a new compact on school funding argues that historically low inflation rates give the Government an unprecedented opportunity to reduce excessive school indexation payments that are locked into legislation, saving the nation billions of dollars.

The report calls on all governments to use part of the savings to create the needs-based funding system all main parties say they want, as well as new roles for expert teachers to lift student performance.

As education ministers prepare to meet next month to discuss a new funding model, Grattan Institute School Education Program Director Peter Goss says the compact offers the circuit breaker Australia’s 50-year old argument over school funding desperately needs.

“It shows how we can reallocate funds to get all schools to their needs-based funding target by 2023, without spending any more money over the next four years than the Turnbull Government proposed in its 2016 Budget.”

Under its proposals, under-funded schools are much better off compared to the model legislated by the Gillard government in 2013 and the 2016 Budget. Chronically disadvantaged schools gain the most.

About half of schools close to or at their targets would have slower funding growth than under the legislation. But they maintain their purchasing power and most of them will be better funded than today.

A very small number of over-funded schools (only 3 per cent) would get less money.

“These changes are essential to create a school system that gives every Australian child a fair chance in life,” Mr Goss said.

“But money alone cannot create that system. It must be spent well. All the evidence shows that if you want to lift student outcomes, you have to invest in the most effective teaching.”

The compact recommends a structural change to create two new roles: Master Teachers and Instructional Leaders who will work in schools and across clusters of schools to improve teaching effectiveness in maths, science, English and other fields.

“It is time to end the exhausted funding debate and to start the debate that counts in this century – how to improve teaching for all students in all schools,” Mr Goss said.

Read the report

For further enquiries: Pete Goss, Program Director, School Education
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

Government has a billion reasons to wind back unfair age-based tax breaks

The Commonwealth Government could save about $1 billion a year by winding back three tax breaks for older Australians that have no sensible policy rationale, according to a new Grattan Institute report.

Seniors pay less tax and get a higher rebate on private health insurance than do younger workers on the same income as a result of the Seniors and Pensioners Tax Offset (SAPTO), a higher Medicare levy income threshold, and higher Private Health Insurance rebates that are available only to older Australians.

Age of entitlement: age-based tax breaks shows that fewer people paying income tax – the rise of the “taxed-nots” – is in part due to age-based tax breaks. Despite their rising incomes and workforce participation rates, the proportion of over 65s paying tax has halved in the past 20 years.

At the same time, the Commonwealth is running annual budget deficits of about $40 billion and must make tough saving and spending decisions if it is not to hand an unsustainable bill to future generations.

The report recommends winding back SAPTO and the Medicare levy to save about $700 million a year. Reducing the private health insurance rebate so that seniors get the same rebate as younger Australians would save about $250 million.

Only pensioners should qualify for SAPTO, and those with enough private income that they do not qualify for a full Age Pension should pay some income tax.

The proposed changes would have little effect on the 40 per cent of seniors who receive a full Age Pension. They would most affect seniors who are wealthy enough to receive no pension or just a part pension.

Grattan CEO John Daley said that, “Some people think that the tax breaks are a fair reward for paying tax while under 65.”

“But in fact, large tax breaks for seniors are a relatively new invention not provided to previous generations. And the current generation of seniors receive much more than their predecessors from government spending, particularly on their health.”

“Age-based tax breaks are badly designed to achieve valid policy purposes, such as increasing workforce participation or preserving adequate retirement incomes for poorer Australians,” says Grattan CEO John Daley.

“These tax breaks might have been affordable when they were introduced over the past 20 years, but the country can no longer afford the bill.”

Read the report

For further enquiries: John Daley, CEO
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

 

How politicians’ reckless promises are distorting transport infrastructure spending

Australian governments spent $28 billion more on transport infrastructure over the past 15 years than they told taxpayers they would spend, a new Grattan Institute report has found.

Cost overruns in transport infrastructure analyses all 836 projects valued at $20 million or more and planned or built since 2001. It finds that cost blow outs account for nearly a quarter of the total budgets of these projects.

Western Australia’s Forrest Highway between Perth and Bunbury cost over five times, and New South Wales’ Hunter Expressway cost nearly four times, the amounts politicians initially promised they would cost.

Premature announcements – when a politician promises to build a road, bridge or rail line without a funding commitment, often in the run up to an election – are the biggest culprits.

While only 32 per cent of projects were announced early, these projects accounted for 74 per cent of the value of cost overruns over the past 15 years.

Cost overruns are rarely analysed from the first funding promise, yet once politicians announce a project, they and the public treat the announcement as a commitment, and two thirds of these projects end up being built.

All main political parties have committed to sound planning of infrastructure, and to making decisions with broad social benefit, yet in practice they continue to promise projects that Infrastructure Australia has not evaluated or has already found to be not worth building.

Governments should not commit money to transport infrastructure before tabling proper evaluation and the underlying business case in Parliament, the report argues.

And once a project is completed, governments should report to the public on how it performed against the cost-benefit estimates behind the original decision.

Governments can also improve project assessment methodologies, collect and publish data that would enable cost estimators to learn from past experience, and not spend contingency funds on add-ons that are poor value for money.

“At a time of declining private investment and historically low interest rates, when many politicians and commentators are calling for more transport infrastructure spending, cost overruns are a vital public policy issue,” says Grattan Institute Transport Program Director Marion Terrill.

“Transport infrastructure has great potential to ease traffic congestion and lift productivity, but unless we can curb politicians’ premature promises, it will remain the bluntest of economic instruments.”

Read the report

For further enquiries:
Marion Terrill, Transport Program Director
T. 03 8344 3637 E. media@grattan.edu.au

Why Australia must heed the warning from one state’s electricity shock

Soaring South Australian wholesale electricity prices in July have exposed the urgent need for Australia to develop climate change and energy policies that combine to maintain reliable, affordable and sustainable power, according to a new Grattan Institute report.

Keeping the lights on: lessons from South Australia’s power shock documents how the state’s wholesale electricity price averaged $230 per megawatt hour over the month – three and a half times the price in eastern states.

The price even skyrocketed to nearly $9000 per megawatt hour on July 7, when a lack of wind, coupled with the closure of two coal plants and the temporary closure of a back-up electricity connection meant that gas was generating nearly all the state’s power needs.

The intermittent nature of wind – which now generates about 40 per cent of South Australia’s electricity – creates challenges for the price and reliability of power generation in the state.

Yet while the high July prices triggered a furious blame game, the report argues that criticisms of wind farms, gas generators or the electricity market are alarmist and unfair.

“The market worked, the lights stayed on and prices have since fallen to levels more comparable with the eastern states,” says Grattan Energy Program Director Tony Wood.

Nevertheless, the incident exposed two big potential problems for Australia’s power future.

First, the nation has no credible policy to reduce emissions in the power sector and enable Australia to meet its global climate change commitments.

Second, the current design of the wholesale electricity market may not provide the secure and reliable power that Australians take for granted.

The report urges Commonwealth and state governments to take three actions:

  • Use the 2017 Commonwealth review of climate change policy to develop a credible plan that all states support and that works with the electricity market.
  • Review the market to ensure that power flows reliably and affordably.
  • Explain that a transition to a low-emissions future will happen and that it will cost money.

“These events in one state were a canary in the coalmine, warning of the risks in our power future. It is time to listen,” says Tony Wood.

Read the report

For further enquiries: Tony Wood, Energy Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

Why the main parties must work together to tackle super tax breaks

MEDIA RELEASE

Winding back superannuation tax breaks is an acid test of our political system, and should be one of the first items of business in the current Parliament, according to a new Grattan Institute paper.

A better super system: assessing the 2016 tax reforms finds that the Federal Government’s plan to restrict superannuation tax breaks would create a fairer superannuation system more aligned to its purpose of providing income to supplement the Age Pension.

The plan would not only trim overly generous super tax breaks enjoyed by the top 20 per cent of income earners – people wealthy enough to be comfortable in retirement and unlikely to qualify for the Age Pension – it would save about $800 million a year.

The Government’s proposals would affect about 4 per cent of superannuants, almost all with enough income and assets to prevent them from ever qualifying for a part Age Pension.

Claims that the proposed changes would be retrospective are incorrect, says Grattan CEO John Daley. “Many reforms affect investments made in the past, and no-one suggests they are retrospective. The changes will simply affect taxes paid on future super earnings, and entitlements to make future contributions to super.”

Alternative proposals by the Australian Labor Party, which broadly supports the Coalition’s reforms, would save more than $2 billion a year. The paper shows that many of these alternatives would further align superannuation with its purpose.

The paper shows that there is broad agreement between the Government’s proposals and the ALP’s policy. If the Government concedes on some of the details to get a deal with the ALP in the Senate, it will probably improve the budget position.

“The Government’s considered position is built on principle, supported by the electorate, and our main parties largely agree on both ends and means. In these circumstances, a failure to get reform would signal there is little hope for either budget repair or wider economic reform,” says Mr Daley.

Mr Daley says the superannuation proposals are an important step in the right direction, but only a step. “Even with these reforms, super tax breaks will still overwhelmingly flow to high-income earners. And the long-term cost will remain unsustainable. Further changes will be needed in future.”

Read the working paper

For further enquiries: John Daley, CEO
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

The number of science graduates are growing but the jobs are not

Many recent science and information technology graduates are failing to find full-time work at a time when science, technology, engineering and mathematics (STEM) education is a priority for government and industry, according to a new Grattan Institute report.

Mapping Australian higher education 2016 shows that in 2015, only half of bachelor degree science graduates seeking full-time work had found it four months after completing their degrees, 17 percentage points below the average for all graduates.

Among recent science graduates who found full-time jobs, only half say their qualification is required or important for their job – about 20 percentage points below the average.

Although job outcomes improve over time, science bachelor degree graduates are less likely than other STEM graduates to work in high-skill managerial or professional jobs.

Mapping Australian higher education 2016, Grattan Institute’s regular overview of key trends in higher education, focuses on STEM graduate employment.

Grattan Institute Higher Education Program Director Andrew Norton says that despite poor employment outcomes, demand for science courses continues to grow.

‘Prospective students thinking about studying science need to know that a bachelor science degree is high risk for finding a job. Often students need to do another degree to improve their employment prospects,’ Mr Norton says.

While there are many more potential jobs in IT than science, a third of recent IT graduates cannot find full-time work.

IT students are less satisfied with their skills development, and are more likely to leave their courses without finishing, than are other students. IT industry and professional bodies suggest that university IT courses need improving.

Engineering graduates have better employment prospects than science or IT graduates.  Three-quarters of new engineering graduates have full-time work, and have the highest rate of professional or managerial employment of all STEM graduates.

In other trends examined in Mapping Australian higher education 2016, domestic enrolments exceeded one million for the first time in 2014, with the fastest growth in health.

International student numbers are growing again, after a fall between 2010 and 2012. Student satisfaction with teaching is also increasing.

Australia performs well in global research rankings, but in recent years levels of university research expenditure and outputs have stopped growing.

Read the report

For further enquiries:
Andrew Norton, Higher Education Program Director
T. 03 8344 3637 E. media@grattan.edu.au

How a targeted approach could reduce our hotspots of health inequality

Hospitalisation rates for diabetes, tooth decay and other conditions that should be treatable or manageable out of hospital reveal how Australia’s health system is consistently failing some communities, a new Grattan Institute report has found.

Perils of place: identifying hotspots of health inequality shows that places such as Frankston and Broadmeadows in Victoria and Mount Isa and Palm Island in Queensland have had potentially preventable hospitalisation rates at least fifty percent above the state average in every year for a decade.

Grattan Institute Health Program Director Stephen Duckett says the problem can be addressed, but only if governments come up with targeted solutions for individual places.

“Australia is not a uniform country and a one-size-fits-all approach will not work. Local, tailored policy responses are required,” Dr Duckett says.

Perils of place finds that reducing potentially preventable hospitalisations in hot spots in Victoria and Queensland — the two states the report studied – would save a total of at least $15 million a year. Indirect savings should be significantly larger.

The report introduces a method of identifying small areas where health inequalities are entrenched and, without intervention, are likely to endure.

To build up the limited evidence of what works in reducing place-based health problems, the report recommends that government combine with Primary Health Networks and local communities to run three- to five-year trials of tailored programs in selected places.

Rigorous evaluation is critical, so that the lessons from successful trials can be applied across the country.

“Because persistent hotspots are rare, targeting them alone will not substantially reduce the growing burden of potentially preventable hospitalisations, but it’s an important first step,” says Dr Duckett.

“Government and Primary Health Networks must ensure that all communities get a fair go. The government will save money and, more importantly, some of the most disadvantaged Australians will get the chance to lead healthier, more productive lives.”

Download an audio recording of Stephen Duckett discussing the report

Read the report

For further enquiries: Stephen Duckett, Health Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

What this federal election should be about: brave policy in the public interest

Australia faces many domestic policy challenges as it enters the last weeks of an election campaign. Yet a government that is prepared to forcefully articulate the public interest could stare down interest groups and win public support for a brave and powerful reform agenda, according to Grattan Institute CEO John Daley.

Launching Orange Book 2016: priorities for the next Commonwealth Government, Mr Daley says that Australia’s political system is not dealing well with the country’s problems.

‘Our politicians are creating expectations that far exceed what government can ever do, while often failing to act on the things they can control,’ Mr Daley says.

‘The result is an often barren debate and a dull campaign, yet surveys show the public accepts the need for reform, and is ready to slay sacred cows such as negative gearing.’

The failure of reform nerve over the past fifteen years should not obscure the fact that reform could make a big difference.

Surveying seven years of Grattan Institute reports in health, school and higher education, energy, cities, transport, tax and other policy areas, Orange Book 2016 identifies numerous reforms to increase economic growth. They include:

  • Tax reforms to increase efficiency;
  • Transport spending based on clear need, not marginal seat pork-barrelling;
  • Road charging to reduce congestion and connect user demand with public spending;
  • Strengthening existing policies to create a stable long-term climate change policy;
  • Energy market reforms to align pricing with costs; and
  • Redirecting school education funding to lift student progress through more focus on targeted teaching and improving teacher feedback, among other reforms.

The Commonwealth also needs to improve the quality and reduce the cost of public services. Pricing reforms to pathology and pharmacy, and reducing the number of inappropriate procedures, would save money. Funding should be redirected to promote more integrated care, and support more people to live at home near the end of life.

Budget repair is a major priority. Commonwealth budgets have not come close to balancing for eight years, and younger generations will be taxed significantly more to pay for today’s spending. Both spending reductions and targeted tax increases are needed.

‘Australia has a proud history of enlightened public policy. It can continue to be the lucky country. But we must make our own luck,’ Mr Daley says.

Read the report

For further enquiries: John Daley, CEO
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

Time to fix Australia’s unaffordable capital gains tax and negative gearing policies

Long overdue changes to negative gearing and capital gains tax would save the Commonwealth Government about $5.3 billion a year, according to a new Grattan Institute report.

Hot property: negative gearing and capital gains tax reform shows that the interaction of a fifty per cent capital gains tax discount with negative gearing distorts investment decisions, makes housing markets more volatile and reduces home ownership.

The two measures in combination allow investors to reduce and defer personal income tax, at an annual cost of $11.7 billion to the public purse. Other taxes, which often drag more on the economy than a capital gains tax does, must be higher as a result.

And like most tax concessions, these tax breaks largely benefit the wealthy.

The report recommends that the capital gains tax discount should be reduced from 50 to 25 per cent, and that negatively geared investors should no longer be allowed to deduct losses on their investments from labour income.

A smaller discount would save about $3.7 billion a year, while the change to negative gearing would raise $2 billion a year in the short term, falling to $1.6 billionas losses start to be written off against positive investment income.

The reforms would provide relief to the Budget in tough times and slightly improve housing affordability with little impact on how much people save, says Grattan CEO and report co-author John Daley.

‘We estimate property prices would be up to two per cent lower under these reforms than they would be otherwise,’ Mr Daley says.

‘Contrary to urban myth, rents won’t change much, nor will housing markets collapse. The effects on property prices would be small compared to factors such as interest rates and the supply of land.’

The report recommends phasing in the reforms, to make them easier to sell and to prevent a rush of investors selling property before the changes come into force.

While other proposals, such as restricting negative gearing to new properties or limiting the dollar value of deductions, would improve the current regime, they nevertheless leave too many problems in place and introduce unnecessary distortions.

‘These two sensible reforms won’t hurt private savings much but will save the government a lot of money,’ Mr Daley says.

Read the report

For further enquiries: John Daley, CEO
T. +61 (0)3 8344 3637 E. media@grattan.edu.au