Somebody get Wayne on the phone!

Off-topic, but now would seem a good time to bite the bullet on reducing company tax rates as you discussed in the linked article on imputation.

I’m simply drawing parallels between your previously declared preferences within the mortgage lending game, and what appears to be an obvious predilection for government-backed mortgage industry competition. Personally, I believe your direction to be flawed, and am simply saying so.

I’ve written elsewhere what a lousy policy dividend imputation is. Hard to think of how else you could give away $20 billion in revenue to shareholders without lowering the cost of capital. Quite an achievement really.

Fully foreign certainly would be a nice counter balance to Australian fortunes, and more approximate to what a truly globally balanced portfolio would look like. I suspect the ideal though would be somewhat slightly more weighted to the local economy than a completely country neutral portfolio, but a lot more than even 20% foreign.

20% foreign/80% local is still very much weighted to the local market. And if that local market does not come through for an extended period, Australia’s exposure to itself, if you like, will end up costing the taxpayer in pensions.

May be the risk bias that the dividend imputation credit arrangements create for the government long term makes them worth revisiting?

Personally I like the Norwegian approach which involves only foreign investment. I don’t know if I’d make it wholly foreign. I expect not, but one of the successes of super is that it’s generated a surprisingly large amount of foreign investment as managers have diversified into foreign equities – an exposure of 20 odd percent is not uncommon. A lot better than zero. Unfortunately dividend imputation provides tax favours for domestic investment which get in the way of good risk management. Supporters argue that it’s appropriate to give nationals favours because with local shares the tax the companies pay is paid locally, and so should be advantaged in our arrangements ahead of tax paid by companies offshore – which is paid to foreign governments. So one has to think that through – which I can’t say I’ve properly done.

Just on Tania’s theoretical super question, I have been thinking that the current super set up may be leveraging the country too much to the fortunes or otherwise of the stock market. The nation is already has a natural leverage to the fortunes of the market through ownership of shares, the effect on employment of the share prices of companies etc. This is now combined with margin loan share accounts and CFDs etc to create additional leverage to share market outcomes for willing punters. Which is all fine natural and voluntary exposure, but what concerns me is that the most popular super options are heavily weighted to domestic shares.

This super exposure is fine too while, as one of my favorite bloggers Larry Levin says, “Shares go up for ever and ever, Amen.” I think it is unlikely but it is theoretically possible that we could now face 10 years where shares go nowhere, or in a worst theoretical case, like Japan is now experiencing, fall for 20 years.
Again, I do not think this is the likely outcome for the Australian share market, but just supposing that it were, where would that leave the Tania’s of the world when it comes to retirement? The risk transfer outcome of this tendency for local share exposure could be very bad in terms of reducing reliance on public funded retirement.

While I fully support the freedom of choice for superannuation investment options, perhaps the government mandated default should be something more conservative with a portion in something like one of the govt accounts you are suggesting, some in foreign currency etc.

What are your thoughts on reconciling this need for freedom of choice with the current outcome which as I say I think leaves the country overly leveraged to share price movements?

I think I’ve responded to you on this before.

I support Aussie Mac on the merits. I could be wrong, but I think it’s good policy.

I don’t know how Aussie Mac would do much good for Peach Home Loans. But it’s possible.

However if my goal were to advantage myself, wouldn’t it make more sense to promote more low key reform than this?

If you want to bad mouth my bona fides please do it behind my back on some other site where it doesn’t irritate me.

Good question. it would be nice to say ‘the market rate’ but that doesn’t wash because the market rate at the short end is dominated by the RBA’s cash rate policy. So it should be some rate close to the cash rate less some margin for costs – and as you put it risks.

Do you see the ATO lending money to the private sector or just to government?

The proposal would be simpler in most other countries where governments have a large stock of debt – there it would offer them a lower cost means of borrowing and generate obvious gains from trade and improvements in technical efficiency. In Australia and other countries with less net debt than the amount of money that would turn up in ATO accounts the government should invest the money in some appropriate way. One advantage of the proposal is that it would force the government to manage its balance sheet more by design than default – as it does now. In any event, it would invest the money in a range of instruments from a portfolio of local and international equities through to lending back to banks who would on-lend it. This latter task might begin as the predominant investment initially to manage transitions costs for banks, but should be reassessed over time.

The electronic payments system involves software failure risk and hacking risk, which need to be priced into fees or whatever and there is an estalishment, maintenance and administrative cost. Do you think that there should be charges for the use of those functions, or should the deposits be nil interest to compensate?

You could start at nil interest rate, but the principles I’ve enunciated in the article answer your questions. The system should not be subsidised and if these are real risks they should be priced either by way of fees or interest margins.

Is there a risk that your default super fund would become too big? Surely such a fund would attract so much of the super revenue just from laziness and then become massively dominant and inefficient as a result.

This doesn’t seem to have been the fate of the Norwegian Petroleum Fund – now renamed – which, when I last looked, managed US$600 billion at a management expense ratio of 0.1 percent with good returns. Remember ‘the fund’ might look monolithic, but it would simply consist of a management structure tasked with getting the best possible risk adjusted return. If size was an issue (and it is to some extent in terms of moving the market on buying and selling) the answer is for the ‘master manager’ to split managers and have them compete – which is commonplace. The other antidote to moving the market is investment offshore – which is where the Petroleum Fund invests exclusively. This has a range of attractive risk diversification characteristics (the textbooks suggest we all invest mostly in foreign securities as we’re heavily exposed to the local economy through our houses and our jobs!). There are some potential macro-economic benefits as well.

By the way, didnt Albanese float the idea of getting into the superfunds for infrastructure investment just a couple of weeks ago. Youre suggesting a pretty big temptation.

The idea gets floated all the time. If the funds are managed at arms length and this is entrenched in the legislation, I can’t see the problem.

Is there a risk that your default super fund would become too big? Surely such a fund would attract so much of the super revenue just from laziness and then become massively dominant and inefficient as a result.

By the way, didn’t Albanese float the idea of getting into the superfunds for infrastructure investment just a couple of weeks ago. You’re suggesting a pretty big temptation.

On Super, you can take it as either of two suggestions. The first that people have access to a government super fund like the one provided to public servants (I don’t care if it’s the same fund or a shadow fund set up alongside it). The second is not just that they have access, but that there’s a presumption that their super money goes into that default fund, unless and until they make a simple election to send it elsewhere. The fund would not be managed at arms length with the sole aim of maximising after fee risk adjusted returns. The public fund should operate in a way that’s competitively neutral with other privately run funds.

That’s neither here here nor there, I’m seeking clarification on the second point. I’m not sure what you mean by the default fund – the future fund? Your recommendation here is unclear – can you elaborate please?