Archive for the ‘Economics’ Category

Queensland’s boring budget

June 3, 2014 Comments off

NOTE: This article was writing at the request of The Conversation, where it was first published.

With the release of their plan to sell and lease some assets after the next election, the state government has shifted attention away from their budget. Though in truth, it would have been quite easy to distract people from this budget, because there is nothing new.

This is a boring budget.

We already knew that the ever-elusive budget surplus had disappeared. Two years ago I commented in The Conversation that: “The forecast for a fiscal surplus in 2014/15 is nice, but it is hard to take long-term budget predictions too seriously” and also that “it is easy to predict future austerity and surpluses, but it is harder to actually make it happen”. Time has justified that skepticism. The government’s original estimate for 2014/15 was a $0.7 billion surplus, but they are now expecting a $2.3 billion deficit.

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March 28, 2014 Comments off

Sydney has The Centre for Independent Studies… Melbourne has the Institute for Public Affairs… Perth has Mannkal and Adelaide has the Bert Kelly Research Centre… but for over 2 million people in and around Brisbane, we sadly don’t have any large group or serious money to host classical liberal and free-market thinkers. What we do have are the ALS Friedman Dinners.




Since 2011 we have hosted some of the best & brightest of Australia and a few visiting guests — including Dr Tom Palmer (USA), Prof Jim Allan, the Hon Dr Gary Johns, Prof Judith Sloan, Dr Jonathan Crowe, the Hon Senator George Brandis, Prof Deirdre McCloskey (USA, co-host Economic Society), Dr Alex Robson, the Hon Peter Reith, Prof Jason Potts, Dr David Martin-Jones, Prof Jeff Bennett, the Hon Bill O’Chee, and many more. Next on the list is Brendan O’Neill… who is touring from the UK (thanks to the CIS) and the Friedman Dinners will host his only event in Brisbane on the 10th of April. Should be good.

If you want to hear about future events coming to Brisbane, make sure you are on our mailing list.


Game theory & the (not quite) Mexican standoff

March 24, 2014 Comments off

Somebody on the internet asked about the game theory of a mexican standoff (he meant two people pointing guns at each other) and why both players don’t just shoot immediately. I got a bit carried away with my response, which turned into this 4000 word mini-thesis. 


If shooting first was guaranteed to kill the other person, and that is something that you want to do, then you would be right. But most gunshot victims don’t die… so let’s re-think the game with a hypothetical payoff matrix. Assume two players {Robert; Dermot} with two strategies {shoot; smile}.

We’ll make the simplifying assumption (for now) that both have the same preferences and skills. If both smile then they walk away from the conflict, go home and party. Their payoff is (5, 5). If they both shoot, then both get hurt (sad -8) but they both get to hurt the other person (happy +10)… so the net payoff is (2, 2). If one person shoots, then the shooter smites his enemy and gets a benefit of 10… well done that man. The poor schmuck who was shot gets hurt (sad -8) which is the worst of all worlds for him, and it leaves him a broken man. Hollow. Dejected. Just an empty hole where his soul once existed.

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2013 budget reply speech

June 5, 2013 1 comment

I don’t normally get the opportunity to give a budget reply speech, but this year the ALSF invited the Australian Taxpayers Alliance to address their annual budget seminar, so I was given the chance to rant to some eager young politicians of the future. This is what I prepared for the talk…


The choice

In the coming decades, policy makers will need to make a choice between embracing the green-left policy of higher taxes, allow our country to slowly go bankrupt, or undertake difficult reforms to health and pensions that are politically unpopular. Those are the only choices. Few people on the centre-right will admit it now, but the truth is that most politicians (including the “good” ones) are probably going to choose a mix of higher taxes and eventual bankruptcy.

For political wannabes, this is a killer question. It goes straight to the issue of why you want to be involved in politics.

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A thought experiment about welfare

June 3, 2013 Comments off

Imagine a free-market economy with no government welfare. Some people earn high incomes and others earn low incomes. Now consider that some kind hearted bureaucrats come along and want to introduce a government policy to help the low-income earners. How should they do it? Let’s consider two options.

Option A is where the government introduces a very specific payroll tax that only applies to businesses that employ low-income earners. The lower the employee income, then the higher the payroll tax. Businesses that only employ high-income earners do not have to pay anything. Obviously, this tax will hurt businesses that concentrate on low-skill activities (cleaners, retail sales) but it will not hurt businesses that concentrate on high-skill activities (law firms, accountants). Because of the tax on low-skilled businesses, some of those businesses close down, others decide to employ fewer people, and others decide to shift towards high-skill activities… so some low-skilled workers lose their jobs.

The money raised from this tax is then paid as a subsidy to low-income earners, including to people who have lots of assets and people who are from rich families. While the tax caused some low-skilled people to lose their job, those people do not receive any of the subsidy. The subsidy only goes to people who have kept a low-income job.

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Treasury’s non-modelling of the stimulus

February 1, 2013 Comments off

Late last year I published an article with Agenda (the public policy journal of ANU) that critiqued the Treasury “modelling” (sic) of the Rudd government stimulus that followed the global financial crisis. It is an article that I started writing a long time ago, but sat in the “to do” pile for too long.

My main point was that the Treasury approach was hopelessly inadequate, a point that is abundantly clear to any economist who glances at their attempt, and has been readily admitted by some Treasury friends. As I wrote in the article:

“The biggest problem with the Treasury model is that because it misunderstands the issue of international crowding out, it drastically underestimates the impact on net exports. In addition, it entirely ignores the issues of domestic crowding out, monetary policy responses, and the costs of repaying the debt. While its estimate for the private savings response to the stimulus is at the low end of the range, this is the least of the problems.

“The ignorance of open-economy macroeconomics suggests that Treasury has neglected much of the advances made in macroeconomics over recent decades, and its strange assumptions on domestic crowding out and private savings response show that it has forgotten much of its own research. As Harvard economics professor Robert Barro said in 2009 when the US was debating its own stimulus policies, ‘The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936’ (Barro 2009).”

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“Once in a generation budget”

September 11, 2012 Comments off

Before the budget came down, Campbell Newman described it as a “once in a generation budget”. That is certainly what Queensland needed. Our long-term budget position is actually worse than the audit report or old budget papers claim, since they don’t factor in the growing fiscal pressures over the coming decades caused by an aging population. Put simply, current policies are unsustainable, and some tough decisions are needed.

The first thing to note is that the government decided to give up on fixing the 2012/13 budget.

They have allowed the operating deficit to increase from an estimated $4.9 billion (Audit) to $6.3 billion, and the fiscal deficit to increase from an estimated $9.5 billion (Audit) to $10.8 billion. This is perhaps understandable since the federal government has been playing games with their grants (shifting money around to try and manufacture a federal government surplus) and the lag time involved in reforms. So the real place to watch is the estimate for the 2013/14 budget balance.

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The cost of bracket creep

July 15, 2012 Comments off

Each year the government increases income tax rates, and most people don’t notice. They do this through “bracket creep” where workers are moved into higher tax brackets due to inflation. For example, if your income jumps from $37k to $38k to compensate you for higher prices, then you will be pushed up a tax bracket so that you are now paying a 35.5% marginal rate (instead of 20.5%) leaving you with less disposable real income.

This implicit tax increase could be easily removed by indexing the tax brackets to inflation.

To work out a rough estimate of the size of bracket creep, we can make the simplifying assumption that income tax should grow at the same rate as nominal GDP growth. Looking at the coming three years, nominal GDP is expected to increase by 16.9%, while income tax is expected to grow by 25% over the same three years. The difference can be attributed to bracket creep, and amounts to a total secret tax increase of $13 billion over three years.

If the government does not offer at least $13 billion worth of income tax “cuts” over the next three years, then they will actually be increasing income taxes.

Historically, the government has been happy to allow bracket creep to continue as it gives them extra tax revenue each year which they can then give away to special interest groups or loud lobby groups in the hope of buying an election victory. Because the tax increase is not well publicized and not well understood, the government is able to increase the tax burden with a relatively low political cost. But while it might make for good politics, the continuous increase in income taxes has been squeezing family budgets, reducing work incentives, and slowing down our economy.

In the long run we need to have income tax indexation. In the meantime, we need to demand at least a $13 billion income tax cut.

Note: If the government introduced an inflation indexation on income tax rates, that would ensure that nobody was pushed into a higher marginal tax bracket due to inflation. However, there would still be a gradual increase in average tax rates as real economic growth pushed more people into higher tax brackets. To ensure that there is no increase in average income tax rates it would be necessary to index tax brackets to nominal wage growth. But that is a topic for another day. 

Australia’s income tax rates

June 25, 2012 5 comments

Each year the government releases a budget that outlines our income tax system (among other things), and each year they hide the truth. Instead of simply reporting the marginal tax rates, the government reports three different sets of numbers (basic rates, medicare levy, LITO) and then leaves the reader none-the-wiser about how they interact to produce the actual income tax rates. The first time I publicly complained about this silliness was back in 2009.

In 2011 the government announced a series of changes to the income tax system as compensation for the impending carbon tax. At the time, I ran the numbers to show how they would change the actual tax rates.

Now that the 2012/13 Budget is out, it’s time to run the numbers again to strip away the magic and report the honest marginal tax rates faced by Australian workers. These numbers are quite similar to the numbers I reported last year, except for an increase in the threshold for the Medicare Levy. Last year I had pointed out that the Medicare Levy was going to kick in at a lower income than ordinary income tax starting in 2012-13… and it’s good to see that somebody in Treasury has noticed this problem and fixed it.

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My 2012-13 Queensland budget

June 19, 2012 Comments off

The recent Queensland budget audit showed an expected 2012-13 operating deficit of $4.9 billion (up from $4.2 billion), and proposed a range of tax increases and soft spending restraint over several years, with serious structural reform only briefly hinted at in a few sentences on page 203. We can do better.

This document shows how we can immediately return to surplus, fundamentally reform hospitals & schools, cut taxes in half, and slash regulation to get the economy booming.

The below reforms are a clear break from “business as usual” and would require brave political leadership. The spending cuts will be unpopular, especially from those people who previously received the “free” money.

However, while these reforms introduce some short-term pain, the long-term benefits are clear and significant. A more competitive hospital and school system will lead to better quality health and education. Dramatically lower taxes and fewer regulations will spur new investments and productivity growth – leading to more jobs and higher wages. And importantly, these reforms ensure the budget position is sustainable so that we do not leave a legacy of debt and deficits for future generations.

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