tag:theconversation.com,2011:/id/topics/esa-monash-forum-38454/articlesESA Monash Forum – The Conversation2017-08-24T19:16:08Ztag:theconversation.com,2011:article/820662017-08-24T19:16:08Z2017-08-24T19:16:08ZFinkel’s Clean Energy Target plan ‘better than nothing’: economists poll<p>Few topics have attracted as much political attention in Australia over the past decade as emissions reduction policy.</p>
<p>Amid mounting concern over electricity price increases across Australia and coinciding with <a href="https://theconversation.com/what-caused-south-australias-state-wide-blackout-66268">blackouts in South Australia</a> and near-misses in New South Wales, the Australian government asked Chief Scientist Alan Finkel to provide a <a href="https://theconversation.com/the-finkel-review-finally-a-sensible-and-solid-footing-for-the-electricity-sector-79118">blueprint for reform of the electricity industry</a>, in a context in which emissions reduction policy was an underlying drumbeat.</p>
<p>In a new poll of the <a href="https://business.monash.edu/economics-forum">ESA Monash Forum</a> of leading economists, a majority said that <a href="http://www.environment.gov.au/energy/publications/electricity-market-final-report">Finkel’s suggested Clean Energy Target</a> was not necessarily a better option than previously suggested policies such as an emissions trading scheme. But many added that doing nothing would be worse still.</p>
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Read more:
<a href="https://theconversation.com/the-finkel-review-finally-a-sensible-and-solid-footing-for-the-electricity-sector-79118">The Finkel Review: finally, a sensible and solid footing for the electricity sector</a>
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<p>The Finkel Review’s <a href="http://coagenergycouncil.gov.au/publications/independent-review-terms-reference">terms of reference</a> explicitly precluded it from advising on economy-wide emissions reduction policy, and implicitly required it also to reject emission reduction policies such as an <a href="https://theconversation.com/au/topics/carbon-tax-320">emissions tax</a> or <a href="https://theconversation.com/au/topics/emissions-trading-scheme-6432">cap and trade scheme</a>.</p>
<p>One of the Finkel Review’s major recommendations was a <a href="http://www.environment.gov.au/energy/publications/electricity-market-final-report">Clean Energy Target (CET)</a>. This is effectively an extension of the existing <a href="https://theconversation.com/au/topics/renewable-energy-target-8912">Renewable Energy Target</a> to cover power generation which has a greenhouse gas emissions intensity below a defined hurdle. Such generation can sell certificates which electricity retailers (and directly connected large customers) will be required to buy.</p>
<p>The <a href="https://business.monash.edu/economics-forum">ESA Monash Forum</a> panel was asked to consider whether this approach was “preferable” to an emission tax or cap and trade scheme. As usual, responses could range from strong disagreement to strong agreement with an option to neither agree nor disagree. Twenty-five members of the 53-member panel voted, and most added commentary to their response – you can see a summary of their verdicts below, and their detailed comments at the end of this article.</p>
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<p>A <a href="https://business.monash.edu/economics-forum/polls/the-finkel-review">headline result from the survey</a> is that a large majority of the panel does not think the CET is preferable to a tax or cap and trade scheme. None strongly agreed that the CET was preferable, whereas 16 either disagreed or strongly disagreed, and four agreed.</p>
<p>Of the four who agreed, three provided commentary to their response. Stephen King preferred the CET on the grounds of its ease of implementation but otherwise would have preferred a tax or cap and trade scheme. Michael Knox agreed on the basis that the CET was preferable to the existing Renewable Energy Target. Harry Bloch unconditionally endorsed the CET. </p>
<p>Of the five who neither agreed nor disagreed, three commented and two of them (Paul Frijters and John Quiggin) said there was not much to distinguish a CET from a tax or cap and trade scheme. Warwick McKibbin, who disagreed with the proposition, nonetheless also suggested that the CET, tax and cap and trade scheme were comparably effective if applied only to the electricity sector.</p>
<p>However, closer examination of the comments suggests much greater sympathy with Finkel’s CET recommendation than the bare numbers indicate. Even for those who strongly disagreed that the CET was preferable, none suggested that proceeding with a CET would be worse than doing nothing. But eight (Stephen King, Harry Bloch, Alison Booth, Saul Eslake, Julie Toth, Flavio Menezes, Margaret Nowak and John Quiggin) commented that proceeding with the CET would be better than doing nothing. Interestingly none of these eight explained why they thought doing something was better than doing nothing. Does it reflect a desire for greater investment certainty or a conviction that reducing emissions from electricity production in Australia is important?</p>
<p>Seven respondents (Stephen King, Alison Booth, Saul Eslake, Julie Toth, Gigi Foster, Lin Crase and John Quiggin) alluded to the political constraints affecting the choice, of which several drew attention to Finkel’s own observations. None of these seven suggested that the political constraint invalidated proceeding with the CET.</p>
<p>Of the 19 economists who provided comments on their response, 16 thought a tax or cap and trade scheme better than a CET. Numbers were equally drawn (three each) as to whether a tax or cap and trade was better than the other, with the remaining 10 invariant between a tax or cap and trade.</p>
<p>My overall impression is that in judging Dr Finkel’s CET recommendation, most of the panel might agree with the proposition that the “the perfect is the enemy of the roughly acceptable”. I surmise that in a decade past, many members of the panel would have held out for greater perfection, but now they think prevarication is more cost than benefit, and it is better to move on and make the best of the cards that have been dealt.</p>
<p>In emissions reduction policy the mainstream advice from Australia’s economists has not been persuasive. But this is hardly unique to Australia, as the pervasiveness of regulatory approaches in other countries shows. Perhaps an unavoidably compromised policy that is nonetheless well executed may be better than a brilliant policy that is poorly executed. Even if they could not have been more persuasive in design, Australia’s economists should still have much that is useful to contribute in execution. Hopefully more can be drawn into it.</p>
<p><em>Read the panel’s full responses below:</em></p>
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<p><em>This is an edited version of the <a href="https://business.monash.edu/economics-forum/polls/the-finkel-review/overview-of-poll-results-by-dr-bruce-mountain">summary of the report’s findings</a> originally published by the <a href="https://business.monash.edu/economics-forum">ESA Monash Forum</a>.</em></p><img src="https://counter.theconversation.com/content/82066/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Mountain does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A panel of leading economists has given its majority verdict on Alan Finkel’s proposed Clean Energy Target: it may not be the best possible emissions policy, but we should get on with it anyway.Bruce Mountain, Director, Victoria Energy Policy Centre, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/772372017-05-05T04:51:55Z2017-05-05T04:51:55ZLeave budget forecasting to Treasury: economists<p>A majority of economists in this month’s <a href="https://business.monash.edu/economics-forum/polls">ESA Monash poll</a> said the economic forecasts used in the federal budget should still be prepared by Treasury, despite difficulty in recent years.</p>
<p>The poll asked whether the the economic forecasts – in particular, the forecast of nominal GDP growth – should be outsourced to an independent body, such as the <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office">Parliamentary Budget Office</a>.</p>
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<p>In 2010, the UK Government gave the task of preparing economic forecasts to a newly-created <a href="http://budgetresponsibility.org.uk/">Office for Budget Responsibility</a>. The <a href="http://www.chrisbowen.net/media-centre/media-releases.do?newsId=6885">Australian Labor Party proposed doing the same</a> ahead of the last federal election. </p>
<p><a href="http://www.imf.org/external/np/fad/council/">According to the IMF</a>, 39 countries now have what it calls “fiscal councils”. These are:</p>
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<p>independent public institutions aimed at strengthening commitments to sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation or provision of macroeconomic and budgetary forecasts.</p>
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<p>Since the early 2000s, Treasury <a href="https://theconversation.com/why-biased-budget-forecasts-make-poor-politics-76945">has had difficulty</a> making accurate forecasts of some of the key economic parameters underpinning the annual federal budget. In particular, Treasury’s forecasts of growth in nominal GDP – a key driver of revenue projections – have frequently been wide of the mark. </p>
<p>This largely reflects the difficulties Treasury has had in forecasting movements in Australia’s terms of trade, and hence in forecasting changes in the GDP deflator - a measure of the level of prices of all new, domestically produced, final goods and services in an economy. This is as opposed to errors in forecasts of real GDP growth.</p>
<p>Typically, Treasury has been insufficiently optimistic when the terms of trade have been rising (as they were between 2003-04 and 2008-09, and again in 2010-11), and too optimistic when the terms of trade have been falling (as they were between 2012-13 and 2015-16).</p>
<p>As a result, forward estimates of the budget’s “bottom line” – the “underlying cash balance” – have routinely been off.</p>
<p>Arguably, that was a nice problem to have when budget surpluses turned out to be larger than forecast. But it has been a source of much embarrassment in recent years. Both for Treasury and for politicians <a href="http://www.abc.net.au/news/2012-12-20/swan-dumps-surplus-pledge/4438508">who promised an imminent return to surplus</a>.</p>
<p>Treasury’s experience has been by no means unique. Indeed, an independent review of Treasury’s forecasting performance <a href="https://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2013/forecasting_review/downloads/PDF/forecasting-review.ashx">concluded</a> that Treasury’s performance was “comparable with that of other domestic forecasters” and “comparable with, or better than, [that] of official agencies overseas”.</p>
<p>There have also been suggestions that the economic forecasts used in budgets have been the subject of political interference, although these have been vigorously refuted by Treasury heads.</p>
<h2>The results</h2>
<p>35 of our panellists responded to this month’s poll. Of these, 13 (37%) agreed with the proposition that the economic forecasts underpinning the budget should be outsourced, 20 (57%) disagreed, and two were uncertain. </p>
<p>Six of those who agreed with the proposition did so strongly. Only four of those who disagreed felt strongly about their opinion. </p>
<p>After weighting our panellists’ votes according to the confidence which they attached to their opinions, a majority were against the idea.</p>
<p>Respondents who agreed with the idea of outsourcing the budget’s economic forecasts typically did so not because they thought that an outside organisation would necessarily produce “more accurate” forecasts. Rather, in their view, an outside organisation was less likely to be vulnerable to (or perceived as being vulnerable to) political interference.</p>
<p>Most of those who disagreed with the proposition recognised that there was room for improvement in Treasury’s forecasting performance. But they were typically of the view that there was no reason to believe that an independent agency would do any better than Treasury had. </p>
<p>A couple of respondents argued that it was consistent with democratic principles for the elected government to take the responsibility for all of the projections and forecasts in the budget, including those of economic parameters.</p>
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<p><em>The <a href="https://business.monash.edu/economics-forum">ESA Monash Forum</a> is a joint initiative between Monash Business School and the Economic Society of Australia. Saul Eslake was a guest writer for the Forum.</em></p><img src="https://counter.theconversation.com/content/77237/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Polled economists say another independent body wouldn’t necessairly do a better job of economic forecasting for the budget than Treasury.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/767902017-04-28T02:59:06Z2017-04-28T02:59:06ZEconomists split over Turnbull’s plan to reserve gas for Australian customers<p>The federal government has pledged to <a href="http://www.abc.net.au/news/2017-04-27/government-to-restrict-gas-exports-to-shore-up-domestic-supply/8474432">bring in legislation</a> that would allow it to restrict gas exports and force Australian producers to reserve supplies for domestic consumers, amid continuing fears of an east coast <a href="https://theconversation.com/turnbull-warns-of-consequences-if-gas-industry-doesnt-keep-its-promises-74637">supply crisis</a>.</p>
<p>The move comes after the <a href="http://www.afr.com/business/energy/gas/gas-summit-fails-to-find-energy-crisis-fix-20170419-gvnv3g">apparent failure</a> of crisis talks earlier this month, aimed at easing the forecast price squeeze.</p>
<p>But experts are split on whether domestic gas reservations are a wise move. In a <a href="http://www.afr.com/business/energy/gas/gas-summit-fails-to-find-energy-crisis-fix-20170419-gvnv3g">survey of 32 economists</a> by Monash Business School and the Economic Society of Australia, 38% agreed with the following statement, whereas 47% disagreed. </p>
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<p>In response to energy shortages around Australia, government policies requiring gas producers to reserve some production for domestic consumption are a good way to ensure that Australian consumers have access to sufficient gas supplies while still allowing for gas exports.</p>
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<p>Weighting the scores by confidence pushed the balance even further towards a negative verdict, as shown below.</p>
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<p>David Prentice, principal economic adviser at Infrastructure Victoria, who <a href="https://business.monash.edu/economics-forum/polls/energy-shortages-reserving-australian-gas/overview-of-poll-results-by-david-prentice">summarised the results</a>, said the forthcoming gas supply problems had “raised a lot of concern” as Australia heads into winter. </p>
<p>Lucrative export contracts have sent huge amounts of Australian gas overseas, meaning it is now <a href="https://theconversation.com/gas-crisis-or-glut-why-japan-pays-less-for-australian-lng-than-australians-do-74438">cheaper to buy Australian gas in Japan than in Australia</a>.</p>
<p>Western Australia <a href="http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12166/full">already has a domestic gas reservation policy</a> aimed at holding local prices in check amid a boom in liquefied natural gas (LNG) exports. But Prentice said many of the economists arguing against a similar policy for the eastern states feared that it would distort the market, pushing gas prices artificially low.</p>
<p>“A common theme in many of the arguments of those that disagree with the policy is that the appropriate response to rising gas prices overseas is to let the domestic price rise and firms and households work out the best way to adjust to higher prices – that is, let the ‘invisible hand’ work,” he said.</p>
<p>In contrast, several of those who favoured the policy argued that higher prices could pose a risk for many consumers, such as businesses that may struggle to compete internationally if their gas bills are too high.</p>
<p>Read the panel’s full responses below.</p>
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<p><em>The <a href="https://business.monash.edu/economics-forum/polls/energy-shortages-reserving-australian-gas">ESA Monash Forum</a> is a joint initiative between Monash Business School and the Economic Society of Australia.</em></p><img src="https://counter.theconversation.com/content/76790/count.gif" alt="The Conversation" width="1" height="1" />
A survey of leading economists gave a mixed, and overall negative, view on Malcolm Turnbull’s plan to force gas producers to divert exports back into the Australian domestic market.Michael Hopkin, Deputy Chief of Staff, The ConversationEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/750602017-03-23T19:15:39Z2017-03-23T19:15:39ZCapital gains tax concession is too generous: economists poll<p>As the federal budget approaches, the government is grappling with ways to enhance housing affordability, including reforming the current 50% capital gains tax (CGT) deduction on property investment.</p>
<p>The Economics Society of Australia (ESA) Monash Forum polled economists on this proposition:</p>
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<p>Capital gains tax deductions for housing investment should be removed because they overstimulate the housing market, contributing to rising house prices.</p>
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<p>This is a deliberately more extreme measure <a href="http://www.afr.com/news/policy/plan-to-cut-capital-gains-tax-discount-for-property-investors-20170215-gudwdc">than the proposal reportedly being considered</a> by the federal government, which is to cut the current discount to 25%. But we wanted to assess more generally the effect of capital gains taxes on the housing market.</p>
<p>The poll found 44.4% of economists agreed with a statement that the tax deduction should be removed entirely (22.2% agreeing and 22.2% strongly agreeing). But 40.7% disagreed with the statement (22.2% disagreeing and 18.5% strongly disagreeing); while 14.8% of respondents were uncertain.</p>
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<p>While some economists support the current role of the CGT discount to avoid taxing the capital gains that arise as a result of inflation increasing house prices, as opposed to the valuation in the land or property due to development (Saul Eslake, Rodney Maddock, Nigel Stapledon and Doug McTaggart), others believe the tax should also apply to the gains as a result of inflation (Kevin Davis and Margaret Nowak).</p>
<p>Many argued the principle of the CGT discount is not a bad policy, however the level of the discount is generous and is open for abuse.</p>
<p>They also pointed out that changes in one type of tax will distort the economy, especially if it is only targeted to one type of asset, in this case property. Instead some economists suggested the approach should be a holistic reform to fix tax inefficiencies, and tax treatment should be equal between all forms of investment and saving.</p>
<p>Most of the economists agreed housing affordability policies should be focused mainly on housing supply and housing market constraints (as well as transport and infrastructure) to solve the crisis. Other policies such as shared-ownership schemes and government-backed bonds are also being considered.</p>
<h2>Capital gains tax</h2>
<p>The capital gains tax (CGT) is calculated at the effective marginal tax rate of the investor, on the capital gains made at the time of sale of the asset. Investors who hold an asset for longer than 12 months receive a 50% discount on the CGT liability, at the time of sale. For superannuation funds, the discount rate is 33.3%.</p>
<p>Owner-occupiers are fully exempt from capital gains tax on the sale of their primary residence.</p>
<p>Some of the options reportedly being considered by the federal government include decreasing the CGT concession to 25%, decreasing it to 40% discount (as recommended in the Henry Tax Review) only for property investments, or some other reduction in the CGT discount for property investments.</p>
<p>Another option is completely removing the concession if the property is sold in the initial investment years; and phasing the discount in after the investment has been held for some specified number of years.</p>
<h2>The economists’ arguments for and against</h2>
<p>Economists who supported removing capital gains tax deductions for housing investment said the discount provides incentives to over-invest in property rather than other assets that provide income. So by eliminating or reducing the CGT discount, the cost of capital will increase and buyers will reduce their demand for property, resulting in lower, more affordable house prices.</p>
<p>Those who agreed with the statement argue any change in the CGT discount to address property speculation should also be accompanied by reforming negative gearing. They argue that eliminating the CGT discount for property only would push residential investors towards cheaper properties or towards investing in other assets that maintain the CGT discount. </p>
<p>Most <a href="http://journals.sagepub.com/doi/abs/10.1080/0042098993592">studies find</a> no evidence of capital gains advantages being a main incentive for investors holding residential property. However it appears to be a small factor in the intention of investing in residential property.</p>
<p>Those against the statement argue the timing may not be right as the housing cycle is currently at its peak, and the double digit house price appreciation rates are only seen in the inner-ring suburbs of metropolitan cities and only for houses and not apartments.</p>
<p>Economists would expect to see only a short-term drop in house prices if the CGT deductions are eliminated, as investors switch away from property and into other assets. So the remaining residential investors in the market would purchase cheaper properties, potentially still crowding out first-home buyers.</p>
<p>They would also hold the property for a longer period. In the medium to long-term, the reduction in residential investment would impact on the new and existing supply of housing, resulting in housing shortage and rising house prices.</p>
<p><em>You can read the economists’ individual answers by clicking below.</em></p>
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<p><em>The ESA Monash Forum is a joint initiative between Monash Business School and the Economic Society of Australia. Maria Yanotti was a guest writer for the Forum.</em></p><img src="https://counter.theconversation.com/content/75060/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>María Yanotti does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Economics Society of Australia (ESA) Monash Forum polled economists on whether capital gains tax deductions for housing investment should be removed.María Yanotti, Lecturer of Economics and Finance Tasmanian School of Business & Economics, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.