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‘Catch up’ super contributions: a tax break for rich (old men)

From The Conversation.

It’s no secret that our superannuation system is unfair. Over half the value of the tax breaks goes to the top 20% of income earners, people who already have enough resources to fund their own retirement.

As shown in our new report for Grattan Institute, Super tax targeting, the system provides overly generous opportunities to contribute to super. These opportunities are usually defended on the grounds that people with broken work histories, especially women returning to work, can “catch up” before retirement. Super lobby groups make a lot of noise about middle-income people scrambling to build a decent nest egg for retirement, and our super system bends over backwards to help them.

But it’s hard to find many middle-income earners in real life who make large voluntary contributions to super. Instead the system mainly creates large tax-planning opportunities for many more people who already have enough resources to fund their own retirement. The plight of catch-up contributors is the tail that wags the super dog.

Author provided

Superannuation tax breaks allow people to pay less tax on their super savings than is paid on other forms of income. Annual caps on super contributions act as a brake on the system’s generosity, and its cost. If set at the right levels, these caps prevent high-income earners from abusing generous super tax breaks to lower their tax bills.

Yet Australia permits larger voluntary contributions to superannuation than many other countries. The flat 15% tax rate is applied to contributions made from pre-tax income – delivering enormous tax breaks to high-income earners on high marginal rates of income tax. Even where superannuation contributions are made from post-tax income, savers then benefit from generous tax breaks on super fund earnings, only taxed at 15%, or zero in retirement.

Catch-up contributors are a myth

All the evidence shows that very few middle-income earners, and even fewer women, make large catch-up contributions to their super funds. Only 12% of taxpayers, or about 1.6 million people, make large pre-tax contributions of more than $10,000 a year, and that includes compulsory super paid by their employer. Just 164,000 women earning less than $77,000 make such large pre-tax contributions. However 935,000 men earning more than $77,000 do so. These high-income savers get a tax break on the way in, and then pay little or no tax on their super earnings.

Author provided

Why do so few middle-income earners make large catch-up contributions? Put simply, they can’t afford to. In 2012-13, the median taxable income in Australia was $41,561. Gross incomes (before any deductions) are not much higher. More saving boosts incomes in retirement, but it reduces living standards today. This fundamental trade-off is rarely discussed in the superannuation debate.

Benefits flow to high-income earners

Not surprisingly it is mainly high-income earners who have the disposable income to put more than $10,000 a year into their super. They get large tax breaks, even though they are likely to retire with enough assets to be ineligible for an Age Pension.

The cap on post-tax contributions is even more generous. It allows people to contribute up to $180,000 per year. People under age 65 can also bring forward an extra two years’ contributions, so they can put in up to $540,000 during a single year, and that’s on top of up to $35,000 in contributions from pre-tax income.

These post-tax contributions total $33 billion a year – about three times the size of voluntary pre-tax contributions. Many post-tax super contributions appear to represent tax-planning rather than any genuine increase in retirement savings. Of all post-tax contributions, around half are made by just 200,000 people who already have at least $500,000 in their superannuation. Only 1.2% of taxpayers have total super account balances of more than $1 million, yet this tiny cohort accounts for 26% of all post-tax contributions. By contrast, the 70% of taxpayers with super balances of less than $100,000 make just 9 per cent of total post-tax contributions.

Author provided

Lifetime caps would likely make things worse, unless set at very low levels. To maximise their superannuation tax breaks, taxpayers who have not used up their lifetime pre-tax cap could sacrifice the entirety of their earnings into super. Such tax planning is likely given how super tax breaks are used already.

Counting the cost

Whatever the benefits of superannuation tax breaks, they must be balanced against the costs. Superannuation tax breaks cost a lot – over $25 billion in foregone revenue, or well over 10% of income tax collections – and the cost is growing fast. Lower-income earners and younger people have to pay more in other taxes – both now and in the future – to pay for the tax-free status of so many retirees.

The way forward

Caps on super contributions need to strike a better balance between allowing those with broken work histories to contribute towards a reasonable superannuation balance, and restricting the opportunities for tax minimisation by those unlikely to qualify for an Age Pension. That means being realistic about the level of catch-up contributions that are likely from those who are genuinely making up for broken work histories.

Grattan Institute’s new report, Super tax targeting, recommends three reforms to better align tax breaks with the goals of superannuation.

One, annual contributions from pre-tax income should be limited to $11,000 a year. This change would improve budget balances by $3.9 billion a year. There would be little increase in future Age Pension payments since the reductions in tax breaks would mainly affect those unlikely to receive an Age Pension anyway.

Two, lifetime contributions from post-tax income should be limited to $250,000. It won’t save the budget much in the short term, but in the longer term it will plug a large hole in the income tax system.

Three, earnings in retirement – currently untaxed – should be taxed at 15%, the same as superannuation earnings before retirement. A 15% tax on all super earnings would improve budget balances by $2.7 billion a year today, and much more in future.

Previous repeated changes to superannuation have been too timid. Decisive reforms must target super tax breaks at those who need them most, and limit the benefits for those who don’t need them. Until then the system will keep chasing its own tail.

Authors: John Daley, Chief Executive Officer , Grattan Institute; Brendan Coate, Senior Associate, Grattan Institute.


No Sovereign Credit Impact From Australia PM Change – Fitch

The change in Australia’s premiership following a Liberal party leadership vote held on Monday will not have an immediate credit impact for the sovereign, says Fitch Ratings. Frequent changes in leadership, with four prime ministers governing the country over the past five years, have made little difference in core economic policies so far. There is no sign that this latest transition will lead to deterioration in policymaking effectiveness.

Notably, there is cross-party consensus at the federal level in favour of fiscal consolidation – there is much less appetite in Australia relative to some other high-grade peers for abandoning efforts to reduce deficits. Recent leadership changes, including the vote against incumbent Tony Abbott on Monday, have been driven more by personality and social or constitutional issues as opposed to differences over economic policy.

Political volatility will, in general, only have a credit impact if it were to result in tangible economic policy changes, loss of foreign investor confidence, reduction in policymaking capacity and/or if it impaired the authorities’ ability to respond to a crisis. But in Australia’s case, there has been little to no signs that the recent frequent changes in power have had any such effects.

Beyond the leadership issues, Australia shares some of the long-term challenges of other high-grade sovereigns, including an ageing population and the need to foster productivity growth. The Australian economy is also facing immediate challenges linked to its reliance on commodity exports, particularly to China. High personal indebtedness – over 150% of disposable income – also means households are more vulnerable to higher interest rates and any substantive worsening in the job market. Incoming Prime Minister Malcolm Turnbull has placed some weight on the need to address long-term economic challenges in his public statements, although it remains to be seen whether this will lead to concrete policy changes.

Any further deterioration in Australia’s macroeconomic position may require more politically difficult policy decisions to keep fiscal consolidation on track. As such, continued political volatility, while not a significant issue thus far, could yet impair authorities’ ability to implement policies should economic conditions deteriorate further.

Turnbull, the minister for communications, defeated Abbott as leader of the Liberal party in a 54 to 44 vote by Liberal MPs on 14 September. Turnbull was sworn in as Australia’s 29th prime minister on 15 September.

Data indicates the recession is effectively here; it’s what policy makers do next that counts

From The Conversation.

The latest economic figures released by the Australian Bureau of Statistics (ABS) have fuelled the debate on the future of the Australian economy and prompted many to ask: “Will Australia go into a recession?”

This question is legitimate, but off the mark. In fact, the data tells us that we should not be worried about going into recession.

What we should worry about instead is how to get out of the recession. Because, like it or not, the recession is already here and the sooner we acknowledge the problem, the sooner we can start the recovery.

So, what does the data say?

According to ABS, trend Gross Domestic Product (GDP) growth in Australia in the second quarter of 2015 was 0.5%. This was only marginally below the rate observed in the first quarter of the year (0.6%). The implied annual growth rate of GDP is therefore around 2%.

While considerably below the long-term average of 3.25% a year, trend growth is still positive, which means that Australia is not technically in a recession.

Economists technically define a recession as a period of at least two consecutive quarters of negative GDP growth. This occurs rarely in an advanced economy like Australia.

The last time Australia was technically in recession was 24 years ago, when trend growth turned negative in the third quarter of 1990 and did not go back to positive until quarter four of 1991.

Before then, trend growth was negative for five quarters between 1982 and 1983, for two quarters in the middle of 1974, and for four quarters between 1960 and 1961.

However, while not being technically in a recession, Australia today shows most of the symptoms of recession.

Reload: what does the data say?

First of all, trend GDP is by construction smoothed. However, recessions (and expansions) are cyclical phenomena that are better represented by seasonally adjusted GDP.

In the second quarter of 2015, seasonally adjusted GDP in Australia grew by a mere 0.2%, sharply down from the first quarter when it grew by 0.9%. That is, seasonally adjusted data suggests that the country is much closer to the beginning of a technical recession.

Second, seasonally adjusted Gross Domestic Income (GDI) showed negative growth of -0.4%. This is particularly worrying because GDI is statistically more reliable than GDP as a predictor of the cyclical fluctuations of the economy.

Third, and probably even more importantly, indicators of an individual’s welfare are taking a turn for the worse. The second quarter of the year saw a negative growth in GDP per capita (-0.2%) and net national disposable income per capita (-1.2%).

These negative income dynamics add to persistently weak labour market performance.

The ABS labour force survey shows that in July 2015, seasonally adjusted unemployment reached 795,500 units. This is the highest level since November 1994 and approximately 125,000 units higher than at the peak of the global financial crisis (June 2009). The corresponding unemployment rate was 6.3%.

In the same month of July 2015, youth unemployment increased to 13.8%. This was the first monthly increase since the beginning of the year.

Perhaps this is not technically a recession, but certainly it looks, smells, and feels a lot like one.

Intervention needed

The government, however, seems to be in denial.

Finance Minister Mathias Cormann is reportedly “very optimistic about the outlook moving forward”. Treasurer Joe Hockey recently said that “the Australian economy is showing a deep resilience that people in Canada and elsewhere would die for.”

Unfortunately, the fact that Canada is in a technical recession and other resource intensive countries are suffering from falls in commodity prices does not make the situation of Australia any better.

Conversely, the business sector seems to have understood the reality of the situation. This is evident, for instance, in the declining levels of business confidence and conditions reported by the NAB Monthly Business Survey of July 2015.

The good thing about recessions is that, generally, they end. The bad thing, instead, is that their effects are felt proportionally more by households at the bottom end of income distribution.

Another bad thing is that the consequences of a recession (in terms of unemployment, reduced welfare for instance) tend to outlive the recession itself.

For all these reasons, some form of intervention would be desirable; but how?

In Australia’s case, the empirical evidence clearly indicates that fiscal stimulus works: for each dollar spent by the government, GDP increases by more than one dollar.

In fact, already now, what has prevented the country from recording negative GDP growth is good old Keynesian spending.

Government final consumption grew by 2.2% in the second quarter of the year and 4% since the beginning of the year. Public gross fixed capital formation increased by 4% in the second quarter.

Without this extra public spending Australia would have probably experienced its first quarter of negative growth.

Certainly, Australia also has structural problems that condition its longer-term performance and that a fiscal stimulus will not solve.

But the stimulus will improve the short-term outlook, restore confidence, and create favourable socioeconomic conditions to undertake structural reforms.

To get there, however, an initial step is required: the government must get past its denial of the problem. Let’s hope that this happens sooner rather than later.

Author: Fabrizio Carmignani, Professor, Griffith Business School at Griffith University

Middle Income Households Income Is Getting Squeezed

Data from the ABS looking at income and wealth, shows that the average income of high income households rose by 7 per cent between 2011-12 and 2013-14, to $2,037 per week, whist low income households have experienced an increase of around 3 per cent in average weekly household income compared with middle income households which have changed little since 2011-12.

The average income of all Australian households has risen to $998 per week in 2013–14, while average wealth remained relatively stable at $809,900. Similarly, change in average wealth was uneven across different types of households. For example, the average wealth of renting households was approximately $183,000 in 2013-14. Rising house prices contributed to an increase in the average wealth for home owners with a mortgage ($857,900) and without a mortgage (almost $1.4 million).

Most Australian households continue to have debts in 2013-14, with over 70 per cent of households servicing some form of debt, such as mortgages, car loans, student loans or credit cards. For example, the average credit card debt for all households was $2,700.

One quarter of households with debt had a total debt of three or more times their annualised disposable income. Mortgage debt was much higher

These households are considered to be at higher risk of experiencing economic hardship if they were to experience a financial shock, such as a sudden reduction in their income or if interest rates were to rise, increasing their mortgage or loan repayments.

The survey findings also allow comparisons of income and wealth across different types of households.

In 2013–14, couple families with dependent children had an average household income of $1,011 per week, which was similar to the average for all households at $998 per week.

By comparison, after adjusting for household characteristics, one parent families with dependent children had an average household income of $687 per week.

Australia’s economy is slowing: what you need to know

From The Conversation.

Australia’s economy grew by just 0.2% in the June quarter, below expectations of 0.4%, largely as a result of reduced mining and construction activity and a decline in exports of 3% during the quarter.

Nominal Gross Domestic Product grew by 1.8% during the year, which the Australian Bureau of Statistics said was “the weakest growth in nominal GDP since 1961-62”. Despite this, Australia has now recorded 24 straight years of growth.

The news has some analysts and economists spooked, and politicians blaming each other for the slowdown.

Treasurer Joe Hockey said:

At a time when other commodity based economies like Canada and Brazil are in recession, the Australian economy is continuing to grow at a rate that meets and sometimes beats our most recent budget forecasts.

He also said it was “factually wrong” to say it was the weakest growth since 1961.

The fact is that the economic growth we had in the last quarter was in line with expectations. Of course it bounces around from quarter to quarter, but it was in line with our overarching expectation to have two and a half per cent growth in the last financial year.

Shadow Treasurer Chris Bowen said:

Growth has flat-lined since the Abbott government’s first damaging budget last year and cost of living pressures are continuing to increase. This is the biggest quarterly decline in living standards since the global financial crisis.

This is a very weak set of figures and for the government to cast around for international comparisons to try and make it sound better is a pretty pathetic excuse.

The Treasurer says Australia is still doing better than Canada, Brazil, the US and New Zealand. How should people view these numbers in a global context? To what extent is the slowing rate of growth due to global economic headwinds, and to what extent is it due to domestic factors?

Griffith Business School Professor Fabrizio Carmignani answers:

In the past, the Australian economy has proved to be quite resilient to global economic shocks. Today we are facing what could be potentially a perfect storm.

For one thing, international commodities prices are very volatile and have resulted in a sharp contraction of Australian’s terms of trade. For another, China is going through a complicated economic phase and it is not, at this moment, the same solid anchor for the Australian economy as it might have been previously. So, it is not surprising to see that on a seasonally adjusted basis, quarterly growth in Australia has been oscillating between 0.2% and 0.3% for the last five quarters.

We owe it to some good old Keynesian stimulus on the demand side (read: government consumption and to a lesser extent public gross fixed capital formation) if we are not entering a technical recession.

The comparison with Canada, on surface, is favourable to Australia. Canada has officially entered a recession after recording two consecutive quarters of negative GDP growth in the first half of 2015. This is essentially due to low oil prices. However, according to media reports, Canada is still committed to achieving a target of annual growth of 2.5% this year, which is exactly what the Treasurer has stated for Australia. So, it seems to me that the difference between Australia and Canada here is thinner that what might appear at first sight. A fraction of a percentage point below or above the zero growth line is not really indicative of substantially different structural positions.

Both Australia and Canada are facing similar challenges in terms of diversification. The current “crisis” to me shows that these challenges are still far from being fully addressed in both countries.

Australia has had 24 years of consistent growth. How much of this can we attribute to the mining boom? And given the cyclical nature of the economy, can we expect a downturn?

Griffith University Professor Tony Makin answers:

Australia has performed relatively well compared to other OECD economies over recent decades, though did actually experience a recession during the GFC according to income and production measures of GDP.

Taking population growth into account, Australia’s economic performance since the global financial crisis has been worse than the raw GDP numbers show. On a per capita basis, national income has grown on average below one per cent per annum, less than half the almost two and a half per cent per head per annum average rate in the decade before the GFC.

The extraordinary boost to the terms of trade from the world commodity price hike, especially between 2005 and 2011, substantially raised Australia’s international purchasing power. However, GDP growth during the mining boom was actually less than during the economic reform era from the mid-1980s through to the end of the 1990s when commodity prices were fairly flat.

The main culprit for Australia’s sub-normal economic growth in recent years has not been falling commodity prices, which have undoubtedly played a role, but Australia’s underlying competitiveness problem, combined with a productivity slowdown that began from the turn of the century.

While the recent depreciation of the dollar will go some way to restoring Australia’s competitiveness and help stave off recession, genuine productivity-enhancing reform focusing on the economy’s supply side remains as important as ever for returning GDP and income per head growth to long-term average rates.

One journalist at Wednesday’s press conference said the new data showed “the weakest growth since 1961”, but the Treasurer said that was factually wrong. Who is right?

UNSW Australia Professor Richard Holden answers:

The statement that it is the slowest growth since 1961 seems, to me, to be false. We have had recessions in the 1990s and 1980s, which is two successive quarters of negative growth. And yesterday we had positive growth, so it was a slowdown but not the worst we have seen since 1961. I think the journalist’s statement doesn’t seem correct to me, on the face of it. I think the Treasurer is right.

It is possible the journalist was referring to the Australian Bureau of Statistics comment yesterday that:

GDP growth for 2014-15 was 2.4%. Nominal GDP growth was 1.8% for the 2014-15 financial year. This is the weakest growth in nominal GDP since 1961-62.

Nominal growth and growth are not quite the same thing. Nominal growth means GDP growth that is not adjusted for inflation.

But yes, yesterday’s numbers are still below projected growth. It is below market expectations. I think the Treasurer saying we have projected 2.5% annual growth this year and this is basically on target is a bit disingenuous. This is slow growth, it’s actually very troubling.

I understand the Treasurer can’t talk down the economy so his comments are understandable and he is in a difficult position. But the low rate of growth is genuine cause for concern.

I have written before about the concept of secular stagnation, which is the idea that growth of advanced economies looks like it has slowed down dramatically. The figures yesterday are further evidence of that theory.

Victoria University Senior Research Fellow Janine Dixon answers:

While it is factually correct that real GDP – the volume of production in the economy – has grown, the low growth in nominal GDP points to an underlying weakness in the economy. This is our exposure to the very large fall in commodity prices. When we translate real GDP into real income, we take into account that fact that the prices of the things we produce for export have fallen relative to the prices of the things we consume, some of which are imported. This has been a very important determinant of real incomes in the last few years.

Real net national disposable income is a better measure of our living standards than GDP. As well as adjusting for prices, we take into account the fact that some of the income generated domestically actually accrues to the rest of the world if the factors of production are foreign owned. We also deduct the value of capital that is “used up” or depreciated during the year.

Real net national disposable income per person has now fallen for 14 quarters in a row. This represents the most sustained fall in standards of living in the last 50 years.

What’s especially interesting about this period is that falling incomes have not been associated with falling output or particularly high unemployment. In the 1990-91 recession (the one we had to have) or the early 1980’s, incomes fell, but the solution to the problem was fairly clear. More than 10% of the workforce was unemployed. Fixing unemployment would boost production, incomes and living standards.

This time around, incomes are falling because commodity prices are falling. Commodity prices, set on world markets, are largely out of our hands. The labour market is much more flexible these days, and unemployment is 6%, not 10%. We are left with just one way to turn things around. In the words of Nobel laureate Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything”.

Is GDP really in line with expectations, both of the government and the market?

Griffith University Professor Ross Guest answers:

These GDP expectations are continuously being revised down as new information comes to hand.

The projected growth is lower than nearly everybody expected and everybody is having to revise downward their expectation.

What will the slowing annual growth mean for the federal budget, which had forecast growth for 2015-16 of 2.75%?

Ross Guest answers:

If growth were to remain at its current level of 2%, the budget deficit would be A$15 billion larger, in ball park terms, than the government projected. To put that in perspective, the total amount we spend on unemployment benefits is A$10 billion.

Australia living standards and the Australian government budget are being hit by a perfect storm of lower commodity prices and lower productivity growth.

Victoria University Senior Research Fellow Janine Dixon answers:

The GDP growth forecast for 2015-16 is fairly subdued at 2.75% and the budget not overly ambitious – a deficit of 2% of GDP. The trouble lies in 2016/17 and beyond, when annual GDP growth is forecast to be above 3%.

Over the next five years a couple of downside risks exist that will make it unlikely that GDP will grow this strongly, and consequently the budget’s return to surplus will be more difficult to achieve.

If the terms of trade fall further than allowed for in the budget forecasts, and if productivity growth remains weak, as it has been in recent years, real national income could be 3% lower than forecast by 2020. Roughly, this means the tax base for the government will be 3% smaller than expected. Rather than having a balanced budget by 2020, we would still be running a deficit, of around 0.75% of GDP or $12 billion in today’s terms.

The Long-Term Evolution of House Prices: An International Perspective

Excellent speech from Lawrence Schembri, Deputy Governor, Canadian Association for Business Economics on house price trends. The speech, which is worth reading, contains a number of insightful charts. Australian data is included. He looks at both supply and demand issues, and touches on macroprudential.  You can watch the entire speech.

I have highlighted some of the main points:

First, Chart 1 shows indexes of real house prices since 1975 for two sets of advanced economies. Chart 1a shows Canada and a set of comparable small, open economies (Australia, New Zealand, Norway and Sweden) with similar macro policy frameworks and similar experiences during and after the global financial crisis. In particular, they did not have sizable post-crisis corrections in house prices. For comparison purposes, Chart 1b shows a second set of advanced economies that did experience significant and persistent post-crisis declines in house prices.

Real-House-PricesSince 1995, house prices in Canada and the set of comparable countries have increased faster than nominal personal disposable income (Chart 2a). During this period, all of these countries experienced solid income growth, with the strongest growth in Norway and Sweden (Chart 2b).

Price-to-IncomeDuring the global financial crisis, these countries also experienced house price corrections. This caused the ratios of house prices to income to decline temporarily, after which they continued climbing.

One of the factors that has affected population growth rates is migration. Net migration was highest in Australia and Canada over the entire sample. In addition, net migration increased importantly in all five countries in the second half of the sample period (Chart 3b)

population-GrowthIn Australia, Canada and New Zealand, the rate of population growth of the approximate house-owning cohort of those aged 25 to 75 declined in the second part of the sample period. This likely reflects the aging of their populations as the postwar baby boom generation moved from youth into middle age (Chart 4). Nonetheless, the growth rate of this cohort still remains well above 1 per cent for these three countries.

CohortsChart 9 provides some suggestive evidence on the impact of land-use regulations on median price-to-income ratios. Many of the cities with higher ratios also have obvious geographical constraints—Hong Kong and Vancouver are good examples—so the two sources of supply restrictions likely interact to put upward pressure on prices.SupplyWhen we look at the post-crisis experiences of the countries in our comparison group, they have similar levels of household leverage, measured by household debt as a ratio of GDP (Chart 12). Household leverage has risen along with house prices, as households have taken advantage of low post-crisis interest rates. The one exception is New Zealand, where a modest degree of household deleveraging seems to have occurred. For Canada, the ratio of household debt to GDP has risen since 1975, although the growth of this ratio has notably declined since 2010. For Sweden and Norway, the ratio also grew at a modest pace in the post-crisis period. Note Australia has the highest ratios.

LeverageCharts 13a and b draw on recent work by the IMF, which shows that macroprudential policies in the form of maximum loan-to-value (LTV) or debt-to-income (DTI) ratios have tightened across a broad range of countries over the past 10 years. The IMF’s research, as well as that of other economists, has found evidence suggesting that the tightening has helped to: reduce the procyclicality of household credit and bank leverage; moderate credit growth;
improve the creditworthiness of borrowers; and lower the rate of house price growth.

The most effective macroprudential policies to date appear to have been the imposition of maximum LTV and DTI constraints. Increased capital weights on bank holdings of mortgages have also had an impact. While long-term evidence on these instruments is not yet available, permanent measures that address structural regulatory weaknesses and that are relatively straightforward to implement and supervise will likely be the most effective over time.

MacroprudentialInteresting to note that in Canada, they have had four successive rounds of macroprudential tightening, primarily in terms of the rules for insured mortgages. The maximum amortization period for insured loans has been shortened from 40 years to 25. LTV ratios have been lowered to 95 per cent for new mortgages, and 80 per cent for refinancing and investor properties. These latter two changes effectively eliminate new insurance for refinancing and investor properties. Qualification criteria such as limits on the total debt-service ratio and the gross debt-service ratio, as well as requirements for qualifying interest rates, have also been tightened.


Let me conclude with a few key points from the mountain of facts, graphs and analysis that I have reviewed with you today. As I mentioned at the outset, the purpose of my presentation is to help provide more context for an informed discussion about housing and house prices given their importance to the Canadian economy and the financial system.

First, real house prices have been rising relative to income in Canada and other comparable countries for about 20 years. There are many possible explanations, mostly from the demand side, but also from the supply side.

Second, in terms of demand, demographic forces, notably migration and urbanization, have played a role in the evolution of house prices, as have improving credit conditions through lower global real long-term interest rates and financial liberalization and innovation. There are, of course, other demand factors that warrant more data and analysis, including the impacts of foreign investment and possible preference shifts.

Third, in terms of supply, the constraints imposed by geography and regulation have decreased housing supply elasticity, especially in urban areas. This reduced supply elasticity has interacted with demand shifts toward more urbanization to push up house prices in major cities.

Fourth, the credible and effective macro and financial policy frameworks in place in Canada and the other countries considered here have contributed to a high degree of macroeconomic and financial stability. Consequently, in the face of a protracted global recovery, their countercyclical policies successfully underpinned domestic demand in the post-crisis period. The resulting strength in the housing market has increased household imbalances, but the risks stemming from these vulnerabilities have been well managed by complementary macroprudential policies.

The experience in these countries therefore suggests that macroprudential policies that address structural weaknesses in the regulatory framework are best suited for mitigating such financial vulnerabilities. They reduce tail risks to financial stability and enhance the overall resilience of the financial system.

Is Housing Credit That High?

In the RBA’s latest Statement on Monetary Policy, they explore the impact of off-set accounts on the total household debt outstanding.

The increase in housing credit growth over recent years has been accompanied by rapid growth in loan products that provide borrowers with access to offset accounts. Offset accounts are a type of deposit account that are directly linked to a loan, such as a mortgage. Funds deposited into offset accounts effectively reduce the borrower’s net debt position and the interest payable on the loan. Offset account balances currently amount to around $90 billion, equivalent to over 6 per cent of housing loans outstanding. Since offset account balances have been growing by around 30 per cent annually over recent years, annual growth in net housing debt, which takes into account offset accounts, is about 6 per cent. This compares with annual growth in housing credit of around 7 per cent.

The RBA compiles monthly statistics that measure the stock of outstanding credit. Changes in the stock of credit reflect various flows during the month. In the case of housing credit, for example, borrowers are required to make scheduled repayments and often also have the option of making additional repayments, which are referred to here as mortgage prepayments. Mortgage prepayments include those for loans with redraw facilities, which give the borrower the option of withdrawing accumulated
prepaid funds in the future. All mortgage payments, whether scheduled or prepaid, reduce the stock of outstanding credit, thereby reducing the rate of growth of credit. When households choose to pay back their mortgage faster than scheduled by making prepayments, this lowers credit growth.

Offset accounts are an alternative form of mortgage prepayment that are not treated as such when measuring housing credit. An offset account typically acts like an at-call deposit account, with funds in the account netted against the borrower’s outstanding mortgage balance for the purposes of calculating interest on the loan. Because it acts like an at-call deposit account, any accumulated funds are easily available for withdrawal or for purchasing goods and services.  As mentioned above, balances in offset accounts have been increasing rapidly, with growth over recent years around 30 per cent. This growth has the potential to continue as older loans that are less likely to have offset accounts are replaced with new loans, where it is more common to have an offset account. Available redraw balances, at around $120 billion, are larger than offset account balances, but have grown at a pace closer to 10 per cent over recent years.

For a household with a mortgage, mortgage prepayments made using a redraw facility or a deposit into an offset account have a similar economic effect. In both cases, a household’s net housing debt and interest payable are reduced. Thus, while the effect on household balance sheets differs – loans and deposits are higher than they otherwise would be if offset accounts are used – net housing debt is the same. Since offset account balances have been growing much more rapidly than housing credit, net housing debt is growing more slowly than housing credit; over the six months to June, annualised net housing debt growth was around 6 per cent, compared to 7 per cent for housing credit growth (Graph E2). RABE2Aug2015The effect is slightly larger for credit extended to investors than to owner-occupiers, reflecting the fact that investor offset account balances have grown more quickly than balances for owner-occupiers. Offset account balances have also been making a significant contribution to household deposit growth; excluding offset account balances reduces growth in household deposits by around 1 percentage point to 71/2 per cent.

The treatment of offset account balances also has implications for measuring the household debt-to-income ratio. Housing credit is the major component of household debt. Without adjusting the stock of outstanding housing credit for offset account balances, housing debt as a share of household disposable income has been increasing since mid 2012 to be at a historical high of 144 per cent (Graph E3). Adjusting for offset account balances suggests that this ratio has been rising at a slower pace, and has only just surpassed its most recent peak in late 2010.




Is 50% of all income tax in Australia paid by 10% of the working population?

From The Conversation Fact Check:

According to the 2015-16 Federal Budget, Australians paid around A$176 billion in personal income taxation in the 2014-15 financial year (Table 5 of Budget Paper 1). The Treasurer, Joe Hockey, claims that around 50% of this taxation is paid by the top 10% of the working age population as ranked by their income.

NATSEM’s STINMOD model of the Australian tax and transfer system can be used to evaluate the accuracy of such a claim.

STINMOD, which stands for Static Incomes Model, is NATSEM’s model of taxation and government benefits. It simulates the taxation and government benefits system and allows us to evaluate current and alternative policies and how they would affect different family types on various income levels.

STINMOD is based on ABS survey data (Survey of Income and Housing) which provides a statistically reliable and representative snapshot of household and personal incomes and demographics.

Since the survey is a few years old, NATSEM adjusts the population in accordance with population and economic changes since the survey.

STINMOD is not publicly available, but as a NATSEM researcher, I was able to use the model to check Hockey’s claim against the evidence. STINMOD is benchmarked to taxable incomes data from the latest Australian Tax Office taxation statistics on the distribution of tax payments by income.

When I restricted the STINMOD base population to the working age population only (aged 18 to 65) and rank these people by their taxable income, I found that the top 10% (those with taxable incomes beyond $102,000 per annum) do pay around 52% of all personal income taxation.


Different measures, similar result

Since high income earners usually have greater scope for minimising tax through deductions, such as negative gearing, we can use an alternative income measure called “total income from all sources” to rank personal incomes. On this ranking, the share of personal income taxation paid by the top 10% drops to 50.5%.

Australia’s personal income taxation system is strongly progressive, with higher income earners paying both a higher marginal tax rate and average tax rate compared to lower income earners. According to STINMOD, the 90th percentile of working age taxable income is $102,000 per year, while the median taxable income is $39,000 per year. The average tax rate of the 90th percentile is 26.7% while that of the median tax payer is less than half that at 12.3%.

This analysis does include a large number of people who are of a working age but not in the labour force – around 21% of this population (2.9 million persons). These people are not in the labour market for a range of reasons such as disabilities, students, young parents or through personal choice or a range of other reasons. Removing these people from the analysis reduces the tax share to 46% paid by the top 10%.


In 2014-15, personal income taxation made up around 47% of all tax received by the federal government. Other taxes are paid to state and local government. While personal income taxation is highly progressive, the incidence of these other taxes tend to be less progressive, or indeed mildly regressive. One example is the GST, which makes up around 14.4% of federal taxation receipts.


The Treasurer’s statement that the top 10% of incomes from working age persons pay 50% of personal income tax is correct. This reflects the progressive nature of Australia’s personal income tax system, which is applied to a society that features significant income inequality.

The progressive nature of income taxation in Australia plays a very significant role in altering the distribution of disposable income (after-tax) and provides Australia with a more equal distribution of disposable income.


The FactCheck seems reasonable and correct. It benchmarks the ABS household income and expenditure survey against the official ATO Taxation Statistics, and then confines to working age (18 to 65), to test the Treasurer’s claim.

There were about 12.8 million individuals filing tax returns in 2012-13. The ATO Statistics in its “100 persons” picture of Australian taxpayers, explains that the top three taxable incomes paid 27% of all net tax and the top nine taxable incomes paid 47% in total – pretty close to the working age estimate.

I agree with the author that the FactCheck demonstrates Australia’s progressive income tax system, which has long been considered fair.

Australia has a high tax-free threshold of $18,200 so many working age low earners pay very little income tax. In contrast, New Zealand taxes from the first dollar of income.

And many working age people pay no tax simply because they are unable to find a job – as Australia has an adjusted 6% unemployment rate.

Household Net Worth now over $8 Trillion, but Savings down

The ABS released the latest national accounts, to March 2015. The Household Finance and Wealth data confirms again what we know, overall household net worth is up (thanks to asset appreciation) but savings are down.

At the end of March quarter 2015, household net worth was $8,090.9b, made up predominantly of $5,451.8b of land and dwelling assets and $4,131.0b of financial assets, less $2,121.6b of household liabilities. During the quarter, household net worth increased by $231.5b, driven mainly by holding gains of $207.0b. Financial assets ($129.0b) and land and dwellings ($79.8b) were the drivers of holding gains this quarter, with financial assets seeing the largest quarterly holding gains on record. The large increase in holding gains from financial assets was driven by net equity in reserves ($90.6b) and equities ($36.2b).

The increase of $17.6b in transactions in net worth was driven by $9.7b increase in net capital formation of land and dwellings; and net financial transactions of $7.3b, of which transactions in financial assets were $30.8b and liabilities were $23.5b. The March quarter 2015 transactions in financial assets were driven by $13.8b of transactions in net equity in reserves of pension funds and $11.2b of transactions in deposits. Transactions in liabilities in March quarter 2015 were driven by transactions of $24.3b in long term loan borrowing.

ABS-HousholdsBoth household assets and liabilities continued to grow over March quarter 2015, resulting in 2.9% growth in household net worth. Net worth has continued to grow over the last eight quarters, passing the $8 trillion mark in March quarter 2015.

ABS Household 1
Household financial assets grew faster than both residential land and dwelling assets and liabilities, growing by 4.0% ($159.8b), 1.9% ($96.1b) and 1.4% ($30.2b) respectively. Insurance technical reserves – superannuation, and shares and other equities were the key drivers of growth in financial assets this quarter. Insurance technical reserves – superannuation grew by 4.8% ($104.9b), recording its highest quarterly percentage growth since the June quarter 2012 growth of 8.4% ($131.4b). Shares and other equity grew 5.7% ($37.1b), recording its highest quarterly percentage growth since the March quarter 2013 growth of 6.1% ($32.4b).

The financial ratios graphs presented here are derived from the household balance sheet, financial account and income account. The interest payable to income ratio represents the proportion of household gross disposable income that is required to meet interest payments. Interest payable in the graph is the “adjusted interest payable”. It includes the financial intermediation services indirectly measured (FISIM) on the dwelling loan plus the dwelling interest payable from the household income account. It therefore represents the total nominal amounts paid as interest by the household sector. The interest payable to income ratio is relatively volatile in the short term, however some long term trends may be observed. After a period of volatility during the Global Financial Crisis, the ratio stabilised from March 2010 onwards, settling into a gradual downward trend. The ratio at March quarter 2015 was 11.1%, an increase of 0.6p.p from the December quarter ratio of 10.5%.

ABS Household 2The mortgage debt to residential land and dwellings ratio shows the extent that household residential real estate assets are geared. The ratio has declined since peaking at 30.6% in September quarter 2012, but has remained unchanged since December 2014 at 29.2%, indicating that household mortgage debt grew at the same rate as residential real estate owned by the household sector for the past two quarters.

The debt to assets ratio gives an indication of the extent that the overall household balance sheet is geared. That is the degree to which assets are dependent on debt. At 31 March 2015, household debt was equal to 20.8% of assets, dropping below 21% for the first time since December quarter 2010.

The debt to liquid assets ratio reflects the ability of the household sector to extinguish debts in a short period of time using their readily available, or liquid, assets. The following are classified as liquid assets: currency and deposits, short and long term debt securities, and equities. The ratio of household debt to liquid assets fell from 134.1% at 31 December 2014 to 131.8% per cent at 31 March 2015, the third consecutive quarter of decline and the lowest ratio since September quarter 2008.

ABS Household 3Household net saving was $16.4b for the quarter, decreasing from $22.8b in the December quarter. Despite the decrease in net saving, household net worth increased by $231.5b to $8,090.9b in March quarter 2015. With the inclusion of real net wealth effects, net saving increased to $215.9b for the quarter. The largest driver of the increase in other changes in real net wealth was real holding gains, which made up $192.2b of the $199.6b increase. Real holding gains for financial assets was $121.4b, which overtook land and dwellings as the biggest driver of real holding gains this quarter, and is the highest recorded holding gain for financial assets in the series.

ABS Household 4

Australians are saving more, but are more comfortable with debt

From The Conversation. Australians know that adequate savings can help provide for a rainy day, help a family put down a deposit on a home, or ensure a comfortable retirement.

Debt also offers a way for households to make purchases that would otherwise be impossible and to achieve a higher current standard of living. Debt invested into an asset that will also grow in real value and is able to be serviced without placing too much financial pressure on a household, is generally considered to be good debt.

The key is balance. Since the 2008 financial crisis, Australians have actually decreased their propensity to take on debt and have increased their savings. But debt rates still remain uncomfortably high and there is evidence that this savings discipline is beginning to fade. Have we grown too comfortable with debt?

Household debt is three times what it was 20 years ago. Image sourced from

Saving more, but more indebted

Bankwest Curtin Economics Centre’s second ‘Focus on the States’ report, Beyond our Means? Household Savings a Debt in Australia finds Australians have more debt and are more comfortable with it.

While household savings portfolios have seen an increase of 54% in real terms since 2005, household debt has risen by 51% in the same period. Many households are able to access and service this debt, with higher debts associated with higher incomes. On average, Australia’s estimated 9.1 million households have savings in the form of financial assets of $340,900 and debts of $148,700.

However, there is a gulf between those at the top of the distribution and those at the bottom. The inequality in the distributions of household savings and debt are considerably worse than the much talked about inequality in incomes.

The average household disposable income of the top 20% of savers is less than four times those in the lowest savings quintile. However, their savings at an average of almost $1.3 million is 200 times the bottom 20%. This top quintile may receive one-third of all income, but they own three quarters of the total value of savings in the form of financial assets.

Average household savings by savings quintile, Australia 2015 (mean $‘000)

The trifecta of debts, low (or no) savings and low incomes presents many low economic resource families with an unenviable challenge to maintain an acceptable quality of life for themselves and their families on a day-to-day basis.

Since the global financial crisis, the household savings rate have risen, with households exhibiting discipline in their expenditure at a time when the economic outlook was uncertain. In an economic downturn income can decline quickly while reining in spending can be more difficult, for both households and governments. Debts can quickly get out of hand and become unmanageable in this situation.

Becoming used to debt

While Australian households have decreased their propensity to take on debt and have increased their savings in the post-GFC period, household debt still remains three times higher now than what it was 20 years ago. Australians are now more comfortable with debt and currently hold debt equal to 1.5 years of income, whereas in the past they had only debt equivalent to six months of annual income.

The share of debt associated with investment property loans has tripled from one-tenth to three-tenths between 1990 and 2015.

Unlike previous generations accustomed to more rigid financial products, current households can access a greater number of financial products, which have arguably become more complex and more flexible.

This flexibility delivers benefits, but with complexity comes risk and it is important to promote good financial decisions and encourage a longer term outlook. Mortgage equity withdrawal has become a popular tool to derive a higher current standard of living by using the family home as collateral.

More households now use these schemes to smooth consumption or relieve short-term financial pressures. But this may have contributed to the average mortgage debt as a proportion of property values almost tripling over the last 25 years, rising from 10% to 28% since 1990.

Ratio of housing debt to housing assets, June 1990 to December 2014

Another issue is the use of superannuation savings to pay down mortgage balances, leading retirees to rely more on the pension.

So are we living beyond our means? With household debt to income ratios three times higher now than a quarter of a century ago, household debt up by over 50% in real terms over the last decade and the debt of those approaching retirement (55-64 year olds) up 64% in real terms, it would seem on the face of it to be true.

However, the reality is more nuanced. Household savings are growing faster than income and 8.5 cents in every dollar is being saved, and there is now $2 trillion tucked away in superannuation, while riskier investments are making way for more a more conservative approach. This is far better than we were 10 years ago, but with a note of caution that savings are again on the decline.

Authors: – Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy at Curtin University and Rebecca Cassells, Adjunct Associate Professor, Bankwest Curtin Economics Centre at Curtin University