Ross Gittins joins the Option D Cart . . . can Alan Jones be far behind?

Conviction upheld ... Alan JonesOh – D stands for Default (super). The text of Ross’s most recent column is over the fold.http://www.cli.nsw.edu.au/cli/WritersTalk/graphics/R_03.jpg

Postscript: Alan Jones’ executive producer rang and asked if I’d go on his program. It will be at 7.22 am tomorrow morning I understand – for four minutes!

Post-Postscrip: Not to mention Tim Colebatch.http://about.theage.com.au/userimages/jp_colebatch.jpg

If you really wanted to put the fight against inflation first, you could deliver that bit of the tax cuts, and put the rest in the fridge. The proposal by Nicholas Gruen of Lateral Economics put the money into our super accounts unless we choose an “opt out” option to take it now is quite ingenious, solving the political and economic problems in one hit. Bob Hawke or Paul Keating would have seized on it.

And Michael Short and a few others.

Cut taxes, then … cut spending or increase super

IF WAYNE SWAN is serious about using the budget to reduce the need for further interest rate rises in the fight to control inflation – and I think he is – he faces two major, but surmountable, political obstacles.

The first is the promised three years’ worth of tax cuts and the second is the ever-rising budget surplus.

The craziness of cutting taxes at a time when you want to use the budget – fiscal policy – to reduce consumer spending and thus restrain demand is apparent even to the cartoonists.

Last week the Herald’s Alan Moir had Mr Swan driving a car with L plates while Kevin Rudd sat beside him frantically thumbing through a book of driving instructions. “I think the idea is to push hard on the accelerator and brake simultaneously,” Mr Rudd says.

Not smart. According to Chris Richardson of Access Economics, the planned tax cuts will have a cost to revenue in the coming financial year of about $7.2 billion. In terms of the effect in stimulating demand, that would be roughly equivalent to cutting the official interest rate by 0.5 percentage points.

Just to counter that stimulatory effect, Mr Rudd and the Finance Minister, Lindsay Tanner, would thus have to find spending cuts worth $7 billion in the first year. That’s a big ask, and a waste of good spending cuts, so to speak.

If Labor had any sense it would defer the promised tax cut, explaining that the mid- and post-election evidence of deterioration in the outlook for inflation had rendered the tax cut irresponsible.

There is a right time for big tax cuts. It’s when demand is weak and needs stimulating, not when demand

is strong and the economy’s overheating. So the time for tax cuts will come soon enough. And if the Government’s not careful, it will come sooner rather than later.

That’s the thing Labor must understand. It’s not deciding how much political pain it’s prepared to wear, it’s deciding whether it wants a bit of pain now or the high risk of a lot of pain closer to the next election.

By far the biggest political risk the Government faces is that over-reliance on higher interest rates ends up precipitating a hard landing rather than a soft. That would revive all the electorate’s fears that Labor is hopeless at running economies and could conceivably make it a precedent-setting, one-term government.

I’d have thought that taking a bit of political pain right at the start of your reign – when a lot can justly be blamed on your complacent predecessors –

was a much less unattractive option. Taking upfront pain now is an investment in reduced pain later.

But if Mr Rudd simply can’t summon the bottle to defer the tax cuts, the obvious compromise is to direct them into superannuation. Tax cuts that are saved rather than spent aren’t stimulatory.

And here Labor could greatly reduce the political backlash by taking up a clever proposal by Dr Nicholas Gruen of Lateral Economics that’s based on a well-researched finding of behavioural economics.

When you invite people to opt in to super saving schemes you don’t get many takers. But if you opt them in automatically, while giving them the right to opt out merely by filling out a form, you get many staying in.

In other words, Labor could permit anyone who didn’t want to save their tax cut to take it in cash without running much risk that many would take up the offer.

How could such a scheme be implemented? Is it practical? Now Labor’s in government, that’s a problem for the econocrats not the pollies. The pollies’ job is to tell ’em what they want; the econocrats are paid to find a way to do it.

The second political obstacle to using the budget to reduce pressure on interest rates is that this involves letting the budget surplus get bigger every year. It involves knowingly raising far more in taxes than you need to pay for the government spending you’re doing.

Since few punters enjoy paying tax, many object to this. “It’s OUR money; if you don’t need it, give it back.” Others don’t like the thought of the money “lying idle rather than being put to good use”. To this end, interest groups will always be demanding the surplus be spent on their worthy cause.

So it’s politically difficult to get away with a large and ever-growing surplus. What to do?

First, stop saying you’re “returning the taxpayers’ money” and correct anyone else who’s claiming it. With most of the revenue blow-out coming from company tax collections, and with income tax having been cut in real terms, it’s simply not true.

Next, convince the public the surplus isn’t lying idle and has been put to worthwhile use. Paying off debt is unquestionably worthy in the punter’s mind, but the sale of Telstra left none to pay off.

The trick is to make the disposition of the surplus sound exciting and nation building, about investing in our future, or saving in the good times so you’ve got a cushion when times get bad.

In its own bumbling way, the Howard government eventually closed in on the elements of a good answer. The name of its Future Fund was inspired, as was its decision to put some of the surplus into the sexy-sounding Higher Education Endowment Fund, with the earnings to be used to fund university capital works.

More of such hypothecation could be done, with much more imaginative, far-sighted packaging. It is, as the econocrats would say, just a question of managing the “presentational aspects”. That is, lay it on with a trowel.

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NPOV
NPOV
13 years ago

Nicholas, have you actually discussed this idea with anyone inside the ALP?
How likely do you think it is it will be taken up, if not for the first round of tax cuts, then at least for future ones?

STT
STT
13 years ago

I would be ticking the box to get the cash into my sky-rocket. I pay too much tax, and I want it back.

NPOV
NPOV
13 years ago

I’m curious how it would apply to those in my situation – I recently took up a job where I am paid directly by a US firm. I am 100% responsible for my own taxes and super. (As it happens, I’ve decided to forgo putting any super aside until some bills are paid off). I can only assume that in that case I “must” take the tax cut, and could then voluntarily choose to put aside more super?

wilful
wilful
13 years ago

STT, clearly you really do not understand the proposal. Should I explain it in really really simple terms?

NPOV, there are plenty of people managing their own super and taxes. You tell the tax office how much you’ve earned, they tell you how much you owe them and how much you have to compulsorily contribute to super. In this case they tell you that you’ll owe em X, but if you really really want to fill out this form, you owe em less but have to put less in your super fund of choice.

NPOV
NPOV
13 years ago

Um, I don’t believe I have to “compulsorily” (sic) contribute anything to super. It’s only compulsory for Australian employers to contribute towards employee super as part of their salary.

wilful
wilful
13 years ago

Ah well, there you go, I thought you did. Now I know better. But still, it’s money taxed at 15% versus up to 45%. Also your situation is exceptional and not really relevant to the macroeconomics of the matter. I guess they’d come up with something bloody complicated taht required a couple of accountants for you.

NPOV
NPOV
13 years ago

I agree, it’s not relevant from a macroeconomic point of view.
Most people would get more super automatically, but could opt out to get it as take-home pay.
The few of us in my situation would get the tax cut automatically, and could “opt in” to put in more super.

NPOV
NPOV
13 years ago

So have you taken it up with anybody inside the ALP, or the treasury department, or even the RBA?

David Coles
David Coles
13 years ago

It would be surprising in the current economic situation if there were many serious analysts who would support the promised tax cuts. The problem as you point out Nicholas is a political one.

Talking incessantly about the danger of inflation sets the scene. Now all that is needed is a way of using the money that looks like it is not a complete abrogation of the promise. Super is an ideal solution. Future funds seem to have been tainted a little but it is harder to argue that in the times of plenty we should put away for a rainy day.

STT
STT
13 years ago

Wilful,

I understand the proposal perfectly. It’s based on a finding from behavioural economics that people are much more likely to take the default option than to think through all of the available options and choose the one that suits them best. Policy makers can exploit this by setting the default option to acheive their desired outcome, while still allowing people to opt out and do what they want to.

An example is in organ donation. In some European countries, the assumption is that everybody is an organ donor unless they actively opt out of donation. In those countries around 80 per cent of people are donors. In Australia, where you have to actively opt in to organ donation, the rate is more like 20 per cent.

Richard Thaler (and Shlomo Benarzi? I can’t be bothered looking up the paper) designed a scheme that applied this finding to retirement savings. Under the ‘Save More Tomorrow’ scheme, you agree to contribute more money to super (or a 401(K) as it is inthe US) at a later date. So you might say ‘I’m expecting a $3000 pay rise on 1 July, so from 1 July, I’ll make a voluntary extra contribution of $1500 to muy super’. People never see the money, so they don’t miss it. But people who don’t make the pre-commitment don’t contribute nearly as much to super.

In New Zealand (which has no compulsory super), the KiwiSaver scheme is based onthe finding that people tend to not bother to opt out of savings schemes. All new employees are assumed to be members of a scheme, and 4% (I think it’s 4%) of their salary is paid into that scheme. They can opt out in the first couple of months and keep the money for themselves.

What Nicholas is proposing is a combination of:

1) The argument that the tax cuts promised inthe election campaign will add to inflation.

2) Paul Keating’s argument that tax cuts would be better off in super.

3) Using behavioural economics findings to allow people to take the tax cus, but setting the default option so they are less likely to. Technically, whether people take the tax cuts is up to them.

So yes, wilful, I do understand the scheme. And I would tick the box to opt out and take the cash. I want my tax money back, and I want it now, not in 40 years when I retire. I don’t want to be told by the government how to spend my money.

Patrick
Patrick
13 years ago

Whilst I too would opt out, I still think that it is a very good idea despite my personal preference.

I think Rudd’s talkfest is the stupidest thing he has talked about that I’ve heard. I think it is a ridiculously stupid idea.

But if he has to have it, and if there is any room for non-actress, non-clueless-journo, non-fancy-pants-wanker contributors left, I’d love N Gruen to be there.

derrida derider
derrida derider
13 years ago

NPOV, you’d be surprised who lurks on Club Troppo; I think people in the Treasury and RBA will now be acquainted with the idea. And if he goes on Alan Jones the pollies will also be.

As for my own opinion of it, I reckon we’re already putting too much money into super (though that’s a long argument). And given the history of the L-A-W tax cuts the proposal would be an excellent opportunity for the opposition to muddy the waters, regardless of the abstract merits or demerits of the idea.

NPOV
NPOV
13 years ago

Do you have a “short” version of why we’re putting too much into super?
Is there somewhere better we could put the money?

SJ
SJ
13 years ago

derrida derider said:

NPOV, youd be surprised who lurks on Club Troppo; I think people in the Treasury and RBA will now be acquainted with the idea. And if he goes on Alan Jones the pollies will also be.

Nick had the thing published in the AFR on the same day he published it here. Use Occam’s razor: Is it more likely that these people secretly lurk on Club Troppo, or that they just read it in the press clippings that they get sent every day?

Here’s the opening of the original post:

A political $100 bill sitting on the pavement

Posted by Nicholas Gruen on Tuesday, February 5, 2008

From todays Fin.

Tax cuts better off in super

As you read this, bevies of bureaucrats are busily building an inflation strategy. Virtually all the medicine theyll prescribe will have a nasty taste. We dont like spending cuts and revenue increases.

But one option could pull a billion odd out of consumption without being unpopular…

Emphasis added.

NPOV
NPOV
13 years ago

It was also mentioned here: http://business.theage.com.au/analysts-warn-on-tax-cuts/20080212-1ru3.html, although not the “opt out” part.

NPOV
NPOV
13 years ago

Colebatch is a fan too (can’t post a link, getting blocked as spam, but its ‘Tax cuts will test Reserve resolve’ in the Business Age).

Are there any “right-leaning” economists behind it? Or is any admission that tax cuts aren’t always a good thing strictly anathema to them? ;-)