Bankers 3 Democracy 0 with Abbott running the sideline

In a piece in June, ‘The unhappy marriage of democracy and capitalism’, I discussed the then situation in Greece and the way democracy was being ignored by the wielders of economic power, particularly the bankers and the power brokers of the financial system. Since then the bankers have won, the Greek parliament has passed legislation to introduce further austerity measures and the people have rioted in the streets.

Greece was in a cleft stick. A majority of Greeks did not want to leave the Eurozone but nor did they want more austerity. The European Central Bank, the IMF and the European Commission (representing the other European governments that had provided funds to Greece) left them with Hobson’s choice — accept austerity or leave the Eurozone. The Greek government still opposed the outcome in principle but felt it had no choice: it could meet only one of the democratic demands placed upon it by the people, not both. The bankers had won by backing the Greek people and its government into a corner.

The Greek situation, however, is symptomatic of a much wider problem across most democracies in the world today but has brought it clearly into focus: it is now the bankers, the financial system, and the so-called rules of (neo-liberal) economics that dominate government thinking, not the will of the people. In an article in The Guardian in July, George Monbiot referred to it as ‘the financial elite’s war on democracy’:
The IMF is controlled by the rich, and governs the poor on their behalf. It’s now doing to Greece what it has done to one poor nation after another, from Argentina to Zambia. Its structural adjustment programmes have forced scores of elected governments to dismantle public spending, destroying health, education and all the means by which the wretched of the earth might improve their lives.

The same programme is imposed regardless of circumstance: every country the IMF colonises must place the control of inflation ahead of other economic objectives; immediately remove barriers to trade and the flow of capital; liberalise its banking system; reduce government spending on everything bar debt repayments; and privatise assets that can be sold to foreign investors.
It is a gloomy picture but, I think, we can all recognise it. In this new world, it is not governments, but the bankers, who rule. We have only to look at a common approach in many countries, namely the central banks adopting inflation targets, generally around 2%. Predictable inflation is considered necessary for economic planning and allowing consumers to feel confident, but for consumers and producers it is the predictability of inflation, not so much its rate (unless it has become hyper-inflation), that is important.

Financiers are more fearful of inflation because it has a major impact on financial assets. A simple example: I borrow $10,000 at 10% with an estimated 0% inflation, meaning I pay back $11,000; but if inflation rises to 5%, that $11,000 I pay back then has a purchasing power of only $10,475 — the bank has effectively lost $525. When we are talking of major international financial institutions, and the huge amounts they are dealing in, small variations in inflation can affect their bottom line, unless it is kept low and within a small predictable range.

Australian banks learned that lesson during the high inflation of the 1970s. Until then, most home mortgages were on a fixed interest rate (set by the government as I recall) for the life of the loan but banks stood to lose heavily in the 1970s and now are allowed to offer ‘variable’ interest rates so they can adjust to inflation. But that also means the borrower never gets ahead. Previously, as the years went by, the repayments became a lesser portion of the take-home wage, leaving the borrower with more disposable income — to boost consumption and thereby the economy — but now that is less likely to happen, or occur at a much slower rate and only to the extent that wage rises exceed inflation and the bank’s interest rate. So the overall economy doesn’t benefit from the current approach.

So the question is who benefits from all these efforts to keep inflation at 2-3%? Who benefits when a country adopts austerity measures which often cause deflation? Using that same example of the $11,000 loan repayment, if inflation became a deflation of minus 5%, I would effectively be paying the bank $11,550 in purchasing power.

But deflation is bad for the economy and for government coffers, as Greece knows. If growth turns negative, that means not as many goods and services are being purchased, not as many people are required to produce goods and provide services, and less tax flows to the government. It doesn’t, however, stop the financiers making money: they may even make more as people (even governments) may borrow more to overcome the loss of income.

So who do you think benefits the most?

It is not the people, as shown in the Greek situation. Governments have abandoned the people and, therefore, by definition, democracy. They no longer listen to the people but to the financiers and ‘the markets’.

In an article in The Monthly, Richard Denniss argues that we, the people, are being blinded by ‘econospeak’ and being led to believe that governments in making their decisions have to be conscious of the reactions of ‘the markets’. He writes that we should remember that ‘markets’ per se do not have feelings, do not have needs or demands. What we refer to as ‘markets’ is actually people buying and selling and attempting to manipulate trading for their own advantage. Denniss gives an example of ‘econospeak’ with his own translation into everyday English, which emphasises that it is really the feelings, needs and demands of rich and powerful individuals we are talking about:

  1. Markets reacted angrily today to news that the government is considering tightening thin capitalisation provisions that have provided foreign investors with strong incentives to expand their Australian operations.

  2. Rich people overseas reacted angrily today to news that they might have to pay tax on the profits they earnt in Australia. After the government announced that it was considering clamping down on some of the most lucrative forms of multinational profit-shifting, some very wealthy Americans threatened to take their bat and ball and go home if they were forced to pay tax.
We are being fed this propaganda constantly with the media now reporting numerous times each day on ‘the markets’ and stock exchange indexes from around the world. It suggests, as Denniss writes, that the markets ‘are watching and judging us’. We are meant to believe that this constant diet of market reports is important.

It is all crap!

When I was growing up we didn’t hear about the stock market. There was a page somewhere in the newspaper giving the previous day’s prices but we skipped that page. The stock market was called ‘rich man’s gambling’: where I lived, people gambled on the horses, most often with the local, illegal SP bookie. What changed? Why did ‘the markets’ become the be-all and end-all of economic progress? (And we could ask why in a free market economy was the off-course SP bookmaker made illegal and driven out of business?)

Joint stock companies have existed for a long time, in which people raise money, and spread risk, by allowing other people to purchase a share in the company. Stock markets (exchanges) were meant to be an organised way of allowing trade in those shares. It did mean that shares could be traded without affecting the company itself — it was only a change in ownership of a small portion of the company.

When companies are successful, more people want to buy shares in them and the share price rises purely on the old law of supply and demand. Hence England had the ‘South Sea bubble’ early in the 1700s. It involved the South Sea Company taking over a large portion of the English government’s debt following the ‘War of the Spanish Succession’, in return for trading rights in the Spanish colonies of South America and in the West Indies (referred to as the ‘south seas’ at the time). By the treaties at the end of the war, the company, however, was allowed only one ship per year to South America. Despite that, it was able to sell its shares because the government was paying 4% on its debt and the company ran an effective marketing strategy. Share prices rose quickly from £100 to £1000 before the bubble burst. The company had also encouraged share purchases by lending money to people to buy its own shares. Of course, it was those who were leveraged in that way who lost most when the shares crashed: the crash was started by the directors of the company selling their shares because they knew the ten-fold increase in the value of the company existed only in the shares and was based on nothing substantial. As a result, in 1720, the British government banned the issuing of stock certificates. (It was enforced for only a short time although not repealed until 1825.)

Bubbles keep happening, usually followed by a depression or a recession. Apparently the only difference between a market ‘crash’ and a ‘bubble’ bursting or a market ‘correction’ is the size of the devaluation of the market. (One article I read suggested that the fall had to be greater than 20% to be more than a ‘correction’, but that still means that many people will lose a lot of money.) Often, as after the South Sea bubble, these bubbles are followed by a burst of government regulation but ‘markets’ can now avoid such intervention by claiming it is only a ‘correction’.

Has anything changed? We have returned to laissez-faire capitalism under the new guise of ‘market liberalism’ and neo-liberalism. As George Monbiot wrote:
Neoliberalism is inherently incompatible with democracy, as people will always rebel against the austerity and fiscal tyranny it prescribes. Something has to give, and it must be the people. This is the true road to serfdom: disinventing democracy on behalf of the elite.
Monbiot argues that the imposition of budget surpluses as the target of governments (it is, for example, written into Eurozone rules) is the new ‘gold standard’ that limits public spending and what governments can do to stimulate employment. A limit on spending, either by the gold standard, or the new requirement for budget surpluses, effectively leaves the rich and the financiers in control. If a government needs more money it either has to take more ‘gold’ from the wealthy — and they have the ‘gold’ to be able to fight that as we saw when the mining companies successfully fought the mining tax — or borrow money. Borrowing money: doesn’t that mean the financiers are involved? — funny that! And if governments allow inflation to rise, they effectively pay back less money, so the financiers also want low inflation so they don’t lose.

The big financial institutions (and rich individuals) also invest their surplus funds in stocks as a way to make more money — or so as their surplus money is not sitting idle, as they would see it. So who has a vested interest in ensuring that we are all worried when the markets fall, or that we should be worried by the market’s reaction?

We gave the Reserve Bank the power to determine interest rates and the guideline that it should aim to maintain inflation between 2% and 3%. We were told that it removed monetary policy from politics. But why should it be removed from politics? Governments are meant to make political decisions and to the extent that inflation and interest rates affect people, they involve political decisions. By removing that power from political considerations, we effectively abandoned a part of democracy’s capacity to influence the market: that is control, in the broader interest of society, the behaviour of banks and wealthy individuals. That can only be a neo-liberal decision (even if Labor originally set the inflation target) that supports laissez-faire capitalism and its financiers.

And running the sidelines we have our current government. Abbott and Hockey have repeatedly told us that surpluses are sacrosanct and that, when we don’t have one, we have to cut government spending to ensure that eventually we do. They look to the markets to justify their decisions, but who do the markets represent? — it is not the people. They say we need less government regulation in the market but who benefits from that? — they tell us it will benefit workers in the long run but that’s what ‘markets’ always say, while the corporation owners and the bankers reap the benefits now.

I will end with something said by Sir Isaac Newton, after he lost £20,000 in the South Sea bubble:
I can calculate the motions of heavenly bodies, but not the madness of people.
I think ‘the madness of people’ still dominates the markets, despite what the neo-liberals, the economic rationalists and the Liberals tell us. In that regard, it is not a firm basis on which to run an economy.

What do you think?
Ken may have nailed his colours to the mast with this piece but has he also nailed the bankers there? Around the world new grass-roots political parties are emerging and, in some countries, enjoying electoral success, as people become disillusioned with the way the current political system is dominated by financial interests. It is not yet happening in Australia but Labor should remember that it began as a grass-roots party, created to give the workers a political voice. If Labor returns to its roots, it can still be the people’s party in Australia.

For next week, you can ponder what is the link between the (former) planet Pluto and Tony Abbott? Find out in 2353’s ‘Pluto and the conservative mindset’.

The challenge of renewables

Later this year a conference will be held in Paris that will determine the global response to climate change. While the international jockeying has commenced, it seems there is a ‘tipping point’ that, if exceeded, will ensure that the world will never be the same again. Australia’s contribution is being keenly watched.

Australia was one of the first to introduce an Emissions Trading Scheme (misnamed by both sides of politics as ‘the carbon tax’) and certainly the first to almost ditch it. The ALP at its recent conference has committed to generating 50% of Australia’s electricity using renewables by 2030. It seems the current government has yet to make up its mind. Given that the world’s environment is warming and 2014 was the warmest year on record, doing nothing is not an option — and if the worst result is that fossil fuels last longer, is that a bad thing?

The ALP’s commitment to 50% renewables made some people happy but others were claiming the costs could be excessive. Abbott went as far as claiming that the ALP policy would cost $60 billion — pity the claim was based on a calculation ‘on the back of an envelope’.

The reality is that, according to the International Monetary Fund, Australia will subsidise coal, petroleum and gas consumption to the value of $41 billion during 2015.
Australia's current electricity mix can supply power at about $30 to $40 per megawatt-hour, according to estimates provided by the Grattan Institute.

If we were to build new fossil fuel power plants today they would produce power at about $50 to $75 per megawatt-hour based on the same Grattan model. New wind power would cost about $80 to $90 per megawatt-hour, while large-scale solar would be about $180 (Estimates by other groups put the cost of new coal power at higher rates.)
As the article points out, this is just the cost of generation — not the cost of the environmental mitigation required from burning fossil fuel.

Not everyone agrees on the costs. Alan Jones claimed on Q&A during July that:
“Eighty per cent of Australian energy comes from coal, coal-fired power, and it’s about $79 a kilowatt hour,” he said. “Wind power is about $1502 a kilowatt hour.”
He was spectacularly wrong (and to his credit he did apologise for the error), but there seems to be a trend here of plucking numbers out of thin air and constructing an argument to ‘demonstrate’ the economic madness of renewable energy.

While the IMF has new coal-fired power stations at a slight cost advantage (before the ‘on-costs’) over renewable power, Bloomberg has a different view:
By Bloomberg New Energy Finance’s most recent calculations a new wind farm in Australia would cost $74 a megawatt hour.

“A new large-scale photovoltaic project would cost $105,” says the firm’s Australian head, Kobad Bhavnagri. “A new coal-fired power station would cost $119. And a new gas base-load station would cost $92. So both wind and solar are already cheaper than coal.”

What’s more, says Bhavnagri, the cost advantage of non-polluting energy is rapidly increasing. “Wind is already the cheapest, and solar PV [photovoltaic panels] will be cheaper than gas in around two years, in 2017. We project that wind will continue to decline in cost, though at a more modest rate than solar. Solar will become the dominant source in the longer term.”
The Saturday Paper reports that Bloomberg has determined global spending on the construction of renewable generation capacity since 2013 has been higher than coal, gas and oil combined. The trend is likely to escalate. On top of that, electricity demand across Australia is reducing. Stanwell Power in Queensland closed down two generation units at its Tarong Power Station — citing lack of demand in 2012. Renew Economy reported:
The closure of the two units at Tarong follows the closure of the ageing 600MW Munmorah power station in NSW, Stanwell’s 125MW Swanbank B power station in Queensland, and the 240MW Playford B and the 520MW Northern brown coal generators in South Australia. Energy Brix has also reduced output. Northern recently reopened and will operate in the immediate future only in summer, when demand is higher.
Climate Works Australia, a partnership between the Myer Foundation and Monash University, has prepared a report, housed on the United Nations Sustainable Development Solutions Network, that discusses the probability that Australia could effectively be ‘carbon neutral’ by 2050 while maintaining current economic growth. Denmark is targeting to be completely free of fossil fuel by 2050. They are well on the way, having around 40% renewable energy on their electricity grid now. The New York Times reports that there are a number of practical problems in the transition to a completely fossil-free future, from winter nights with little wind through to ‘range anxiety’ for electrically driven vehicles.

The Danes are now subsidising fossil and nuclear power stations to remain on-line to cover eventualities such as still nights, as the cost of fossil or nuclear electricity production exceeds the price the generators can sell electricity for. Believe it or not, some Australian states are having the same issue. In Australia, electricity is traded on a ‘market’ across Queensland, New South Wales, Victoria and South Australia. Queensland and South Australia have excess generating capacity so they can sell surplus electricity into the market, which acts, as economists will tell you, ‘rationally’ (the price paid for surplus electricity is governed by the demand for the product). Electricity generators make decisions on how much electricity they will produce based on the expected return from the market meeting or exceeding the cost of generation. If the generators miscalculate the demand, the price paid for electricity increases rapidly, causing generators to increase production. If there is a surplus of electricity available, the price goes down. Those that can change production quantities quickly make more money than those that can’t. On occasions during the middle of the day in July 2015, the wholesale price for electricity in Queensland was a negative value rather than the ‘normal’ $40 to $50 per megawatt hour. While not the sole cause (the infrastructure allowing Queensland to ‘export’ power to Southern States was not working at full capacity):
The influx of rooftop solar has turned this model on its head. There is 1,100MW of it on more than 350,000 buildings in Queensland alone (3,400MW on 1.2m buildings across the country). It is producing electricity just at the time that coal generators used to make hay (while the sun shines).
If Queensland has excess power during the time that is usually profitable for power generators, and South Australia has the capability of operating entirely from renewable energy, as occurred late in 2014, the world is changing without waiting for the government to change.

Ergon Energy in regional Queensland (which is owned by the Queensland government) is conducting a trial of battery storage for the power generated from solar panels in a domestic environment which, if successful, will allow the use of domestic solar panel generated power at night or if it’s raining heavily. The Queensland government is also planning to install a number of renewable energy powered electric vehicle chargers along the Bruce Highway, which runs from Brisbane to Cairns.

Clearly the world is changing. It is conceivable that in the not too distant future we will be able to power our houses using electricity generated on the roof and stored in batteries under the house. Our cars will be plugged into a charging point each night and when we do want to travel further than the battery capacity, there will be a recharging station en-route (in a similar way to filling the car at the petrol station). Both of these fundamental changes will reduce our need for fossil fuels as well as infrastructure such as power lines. These fundamental changes will also reduce the business plans of a number of companies to historical artefacts. These companies are in a similar position to the tobacco companies were some years ago when the evidence that smoking is hazardous to health was overwhelming but before cigarette packet warnings and education programs were introduced.

The problem for energy companies is that if they don’t adapt, they will gradually fade away. However, there is an economic problem here — who will be the first to try and adapt to a new business model that addresses the rise of renewable energy, potentially giving their competition a ‘free kick’? The first to withdraw from the traditional generate, distribute and retail business model will leave a hole in the market that others will attempt to fill, so unless the strategy is planned and executed correctly, the early adopter could fail completely. While Ergon is conducting a trial of battery storage, they are a government owned business with a legislated supply area and no competition — so they effectively have a monopoly. The business and economic risks of the trial are significantly less in Ergon’s case than they would be in the case of Origin or AGL.

This doesn’t explain the Abbott government’s reluctance to support renewable energy. The Abbott government has reduced the RET (Renewable Energy Target), instructed the CEFC (Clean Energy Finance Corporation) to remove funding from ‘established’ renewable technology — which was profitable to the agency and the government — and launched various hysterical campaigns on wind farms, emissions trading schemes and aspirational targets for the move to renewable energy by the country over the next 15 years.

It is even harder to understand Abbott’s responses when it is considered that Pope Francis (the spiritual leader of all Catholics — including Abbott) has released an encyclical that not only acknowledges climate change caused by humans burning fossil fuels, but demanded immediate action to stop the world becoming ‘an immense pile of filth’:
In the encyclical, titled Laudato Si (Praise Be), On the Care of Our Common Home, Francis advocated a change of lifestyle in rich countries steeped in a "throwaway" consumer culture and an end to an "obstructionist attitudes" that sometimes put profit before the common good.
Not that Abbott is alone in ignoring the Pope’s ‘teaching’. Father James Grant is an adjunct fellow of the IPA (Institute of Public Affairs) and wrote an article in The Australian (which is paywalled) on 10 July entitled ‘It’s unchristian to oppose coal generated power’. However, we can all read the smackdown of the article and the government’s lack of action written by Neil Ormerod and published in Eureka Street. Ironically, Eureka Street is published by the Australian Jesuits, the Catholic order that Abbott tried to join when younger.

The scientific and moral debate on climate change is over. Climate change is real — we are all are causing it. So why do Abbott and other conservatives continue to ‘fight the fight’? Is it, as Pope Francis commented, because profit outweighs the common good? Abbott is probably finding it hard to justify to other countries why they should purchase greater quantities of Australian coal at the same time that our national consumption is reducing dramatically. Or is it that the government is so bereft of capability to devise and implement cutting edge policy that the easy option is (with apologies to 1914 ALP Leader Andrew Fisher) resist to the ‘last man and the last shilling’ with a determination to (in the words of Churchill) ‘never, never, never give up’.

What do you think?
As 2353 points out, the world is changing. Why can’t Abbott accept the reality when even his beloved markets are reading the writing on the wall, are reacting to climate change and the challenge of renewables? We are seeing more investment banks divesting some of their fossil fuel assets as they foresee that they will, in future, become stranded assets. And yet Abbott continues to live in a different reality and will fight the changes to the last man. How can one man be so obstinate and ignorant and yet lead our country?

Next week Ken returns to his theme of the bankers versus democracy in his piece ‘Bankers 3 Democracy 0 with Abbott running the sideline’.

Funding health: part 2

This week I focus on the future of commonwealth government health funding and begin with consideration of the role of the Medicare levy in commonwealth government spending.

While health expenditure may increase so does revenue from the Medicare levy so long as wages and the workforce continue to grow. In constant (2012‒13) prices, the revenue from the Medicare levy grew faster than the growth in government health expenditure for six of the eleven years between 2003‒04 and 2013‒14. The levy revenue increased by 57% in that time (from $6.5b to $10.2b in constant prices) while commonwealth government health expenditure increased by 61.5%. In the early half of those years the levy provided around 17‒18% of commonwealth health spending but since 2009‒10 has been around 15‒16% and is currently about 16%. What the year-by-year figures actually suggest is that the Medicare levy covers a greater proportion of health costs when the economy is doing well and falls when the economy is performing poorly, so changes are not just a result of increased health spending. It is a concern currently that unemployment has increased and wages growth has slowed, both of which will impact Medicare levy revenue in the short term.

The fastest growing area of health spending by the commonwealth government is actually the subsidy for private health insurance. The private health insurance rebate cost the government $5.5 billion in 2012‒13 having risen from $1.4 billion in 1999‒2000 and in the Hockey 2014‒15 budget it was predicted to grow faster (by 5.9%) than Medicare costs (3.5%). What does the government get for that? The AIHW figures for 2012‒13, remembering they were for total health spending, show that private health funds contributed about $11.8 billion but the government spent $5.5 billion to achieve that, leaving a nett benefit of $6.3 billion. But private health funds also pay for dental, optical and other services and actually contributed about $8 billion to the major commonwealth costs of hospital and referred medical services (under Medicare, private health funds make no contribution to unreferred services) — so it could be argued that the real nett benefit to the commonwealth government was $2.5 billion. The Grattan Institute has estimated that the extra cost to public hospitals, if the private health insurance rebate was abolished, would be $2.5 billion, leaving the government $3 billion in front, which is $500 million more than the real nett benefit it currently achieves.

Treasury and the Intergenerational Reports (since 2002) have been continually arguing that the rising health spending in the coming decades is due to the ageing of the population. The 2010 Intergenerational Report (IGR) suggested that 40% of the projected increase came from ageing and population growth: the balance was through technology changes and demand for higher standards in health services. The 2015 IGR, however, suggested that non-demographic factors will actually account for 80% of the increase in health spending — ageing alone contributes only 10%, with the other 10% simply from population growth. If that sort of reduction in impact is repeated in the next IGR, ageing may not contribute at all to increases in health funding!

The other issue to consider in relation to meeting rising health costs is that government revenue generally grows, as a result of growth in GDP and wages, and it is usually just the speed of that growth that varies. Since 2003‒04 the only decline in revenue came in the years 2008 to 2010 when we were affected by the GFC: the final budget outcome was $4.8 billion lower in 2008‒09 than the previous year and another $6.2 billion lower the following year. Long term studies suggest that we can expect such short-term economic downturns about once every 8‒10 years.

As I pointed out in ‘Abbott continues to tell porkies’ government revenue has been revised downward on a number of occasions in the past three years. Despite that, the total revenue has still been slightly higher each year: $360.2 billion in 2012‒13, $374.0 billion in 2013‒14 and estimated to be $384.1 billion in 2014‒15 (the last figure is that included in the 2015‒16 budget papers, not the original budget figure). Earlier forecasts had suggested that revenue could be as high as $407 billion in 2013‒14, so there has certainly been a considerable slowing of the growth of government revenue and programs introduced on the basis of those earlier forecasts are now causing fiscal problems.

It is that ‘normal’ growth that allows governments to implement new programs as well as meet rising costs. Problems arise, as at present, when growth slows and those programs that have been introduced earlier, based on the previous forecasts of growth, still require increased spending — that is when expenditure starts to exceed revenue. But it also suggests that it only takes a few years before that revenue rises again at a faster pace to cover expenditure. It is interesting that the 2007 IGR predicted long term ‘real’ GDP growth of 2.5% (below the historical average of about 3.3%) but the 2015 IGR now places that long term GDP growth at 2.8%. Calculating from the size of the current economy, the cumulative difference of that apparently small 0.3% in the two projections is enormous: a difference of about $500 billion in the size of GDP in 40 years. And, of course, such a large difference also makes a significant difference to the government’s revenue — a difference of about $120 billion in 40 years (at the current revenue share of GDP). So very small differences in parameters make significant actual differences in GDP and government revenue and that is important in considering whether we can meet future health costs — remembering that this is based on ‘real’ growth after inflation.

The biggest danger to future commonwealth government revenue, as claimed in the IGR, is that the ageing population will lead to a relatively smaller workforce. Whereas in 1974‒75 the ratio of workers to aged people (the ‘dependency ratio’) was 7.3:1, it is projected to be 2.7:1 by 2054‒55. On the other hand, that was one reason the GST was introduced so that those who are not in the workforce are still contributing to revenue — except all that revenue goes to the states. But the IGR still predicts a 62% participation rate in the workforce and a much larger population with that average 2.8% real increase in GDP — so where is the problem?

What does that mean for health funding? Since 2002‒03 health funding has actually fallen slightly as a proportion of the commonwealth government’s total spending: from 17.4% in 2002‒03, reaching a peak of 18.2% in 2004‒05 to 2006‒07, a low of 15.1% in 2008‒09, and is now 16.1% — if it was still at 17.4% an extra $5 billion would have been available in 2014‒15. So there is a clear argument that it is not rising health costs that are impacting overall commonwealth government spending. On the basis of the proportional fall in health funding, it could actually be argued that funding that would otherwise have gone to health has been diverted to other programs.

As the data in Part 1 indicated, health costs aren’t out of control but the number of services is climbing and an ageing population may contribute to that rise: the most recent IGR, however, as stated above, considers that only 10% of the increase in costs will be a product of the ageing population. There will be other increases in health costs unrelated to ageing: for example, AIHW has projected rising rates of diabetes as a result of obesity. Dealing with obesity, and hence avoiding future costs associated with diabetes, is a matter that relates mainly to primary care.

The cost of GP services (non-referred) is already fully covered by Medicare and it could be said that it is the referred services that are causing the shortfall in the Medicare levy but individuals already contribute 16% of the cost of referred services — and that is the additional out-of-pocket contribution over and above the contribution through the Medicare levy and general taxes.

If ageing is the problem it is made out to be, the problem it gives rise to is some level of increased services and Abbott’s new ‘price-signal’ by stealth (the freezing of the Medicare rebate) will not significantly change that. Most people don’t go to the doctor simply because they can but because they need to and, in that regard, it is probably true that an ageing population may lead to some increase in the use of health goods and services (but, I repeat, even the government’s own report says only 10%). To the extent that people do put off seeing a doctor, it may lead to late identification of conditions, thus allowing them to develop into chronic conditions and so a greater burden on the health system and health funding. Alternately they will attend emergency rooms at public hospitals where they do not need to pay, only increasing the burden on public hospitals. Either way, it will not be beneficial nor cost efficient.

All in all, the Medicare levy works well for what it is intended — an equitable distribution of costs — and it works well when the economy is working well. The private health insurance rebate could be abolished and the government would be better off — keeping it is ideological, in support of private enterprise (privatised medicine). As pointed out previously on TPS, there is considerable scope for raising revenue by addressing tax expenditures, without directly raising GST, income or company taxes, or even the Medicare levy. There are many ways of meeting future health costs.

Basically health funding appears to be an economic issue, not simply a fiscal issue, and rising costs can be covered in a vigorous economy. The economy will continue to grow, even with an ageing population, just not quite as fast as we have been used to. Governments have a major role in encouraging a strong economy, including promoting new industries, promoting full employment (noting that unemployment costs the government twice, by reduced taxation revenue and increased expenditure on unemployment benefits) and ensuring good health so that people can remain active participants in the workforce for so long as they choose. Meeting health costs really requires the government taking more initiatives to promote economic activity, not tightening the purse strings which stifles economic activity.

In my view, increased health spending arising from an ageing population is not as big an issue as the government makes out, particularly when one remembers that we had a problem at the opposite end of the age spectrum in the 1950s and ‘60s — the need for more schools and teachers for the then young ‘baby boomers’ — and we managed to get through that. I think that older people are being used as scapegoats for inaccurate forecasts, ideologically-driven fiscal policy and to justify subtle attempts to push a greater share of health services to private enterprise.

What do you think?
Ken admits that, as an older person, he may have a vested interest in presenting this piece. Whatever the reasons causing increased health costs, should they be met by increasing taxes or should governments better manage the economy and rely on normal revenue growth to cover costs? Are there other ways? Is this government even capable of making the right decisions? Or is it no more than another Liberal battle in its ongoing war to introduce a privatised health system into Australia?

Next Sunday 2353 returns with his look at ‘The challenge of renewables’.

Funding health: part 1

Earlier in the year, there was much talk by the government about the ‘unsustainable’ growth of health funding. In July, the premier of NSW, Mike Baird, joined the party suggesting that the GST should be raised to 15% to help cover rising health costs. But how bad is the situation?

In 2012‒13, the most recent year for which full details are available from the Australian Institute of Health and Welfare (AIHW), total expenditure on health in Australia was $147.4 billion, about 9.7% of GDP — commonwealth government spending on health was about $61 billion. Overall spending had grown from $68.8 billion in 2002‒03 — or $90 billion in 2002‒03 in constant (2012‒13) prices. The average annual real growth of health spending over the decade was 5%.

Australia’s health expenditure as a proportion of GDP is very near the average for the OECD and most countries also saw their health spending rise over that decade (Iceland, Turkey and Israel were the exceptions).

There are a number of players in Australia that contribute to meeting those health costs, not just the commonwealth and state governments — and even in considering the commonwealth government we need to include the Department of Veterans’ Affairs which contributes over $3 billion a year. Private health funds obviously contribute a small amount, as do insurance companies through injury compensation payments. And, of course, so do each of us as individuals, through out-of-pocket expenses and co-payments (at present, the latter is mostly for pharmaceuticals).

The proportion contributed by each group at the start and end of the period was as follows:

Agency 2002‒03 2012‒13
Commonwealth government 43.6% 41.4%
State and territory governments 24.4% 27.0%
Health insurance funds 7.9% 8.0%
Individuals 16.6% 17.8%
Other (largely insurance companies) 7.3% 5.7%

Those figures show that state governments and individuals have seen their contribution increase since 2002‒03, and that was in 2012‒13 before the Abbott government was elected and proposed measures to further increase state government and individual contributions. Despite abandoning the GP co-payment, the government has acted to achieve the same result by freezing Medicare rebates until 2018.

There are many different areas of health expenditure, including dental (three-quarters of which is paid by health funds and individuals), patient transport services and community health (largely met by the states) and aids and appliances (largely met by individuals). They each add a few billion dollars annually to overall health expenditure. The main areas, however, are:

  1. hospitals, public and private: In 2012‒13, about $56 billion was spent on hospital services, 78% in public hospitals and 22% in private hospitals. The commonwealth government provided $16.2 billion and the states $23.7 billion for public hospitals and individuals contributed $1.3 billion. For private hospitals the health funds provided $5.7 billion but the commonwealth government also paid $3.6 billion and individuals $1.5 billion. Insurance companies also spent $1.8 billion in public hospitals and $760 million in private hospitals.

  2. primary care (unreferred) services and referred medical services: ‘Unreferred medical services’, about 90% of which are visits to GPs, cost the commonwealth government $8.3 billion in 2012‒13 out of total expenditure of $10.2 billion (with insurance companies contributing $1.2 billion). The commonwealth government paid $11.4 billion for ‘referred’ medical services, health funds $1.3 billion and individuals $2.4 billion. (When individuals contribute almost twice as much as health funds for referred services, there is a basis to question the real value of health insurance.)

  3. pharmaceuticals: For subsidised pharmaceuticals there are only two groups who pay: the commonwealth government ($8.4 billion in 2012‒13) and individuals ($1.5 billion). We also spent, as individuals, another $8.7 billion on other medications. Those are the AIHW figures for 2012‒13. The payments made by the PBS are lower because the overall government figure includes immunisation programs and some direct payments to pharmaceutical wholesalers. In 2012‒13 PBS reported 197 million prescriptions of subsidised medicines for which it paid just over $7 billion and $1.5 billion was paid by patients (the same as the AIHW figure). For 2013‒14, there were 209 million prescriptions at a cost to the PBS of $7.3 billion and patients again paid a little over $1.5 billion. It is interesting that the average cost (including the patient contribution) actually fell from $43.49 in 2012‒13 to $42.19 in 2013‒14.
There have been slight changes, between 2002‒03 and 2012‒13, in the proportion of overall health expenditure that these main areas represent:

Area of expenditure 2002‒03 2012‒13
Public hospitals 30.4% 31.6%
Private hospitals 8.5% 8.7%
Unreferred medical services 7.9% 7.3%
Referred medical services 10.6% 10.9%
Pharmaceuticals 9.4% 7.2%

While a greater proportion of health funding is being spent in hospitals and on referred medical services, we are spending a lesser proportion on unreferred medical services and pharmaceuticals. One of the bigger areas of growth is our own expenditure on non-subsidised and non-prescription medications which rose from 5.1% to 6.7% of health spending in those years.

All of the expenditure I have referred to above is ‘recurrent’ costs, that is the price of services and consumables. There is also capital expenditure, mainly the building and refurbishing of hospitals, including the purchase of major equipment, but this tends to be only a few billion each year: $8.6 billion in 2012‒13 of which the commonwealth government provided only $72 million. Almost all of the capital expenditure comes from state governments ($5.1 billion) and private providers ($3.4 billion).

The AIHW report states that for seven out of the ten years up to 2012‒13 health prices actually increased by less than the rate of inflation and that much of the continuing rise in expenditure was a result of an increase in the volume of goods and services. The year 2012‒13 was a bit of a hiccup with the volume of services declining but the price increasing. Based on Medicare data, the volume of services did resume rising in 2013‒14.

The commonwealth government’s main areas of funding are ‘medical services and benefits’ (largely Medicare payments but the private health insurance rebate is also included under that heading), pharmaceutical benefits, payments to support state-run public hospitals, and for ‘other health services’ (which incorporates mental health, hearing services, blood and blood products, and research).

In the decade to 2012‒13 the commonwealth government’s health expenditure usually required around 17% of government revenue. [That figure and many of the following figures up to 2013‒14 (including in Part 2) are my own calculations using ‘final outcome’ figures for each budget.] It fell as low as 14.6% in 2007‒08 and reached a peak of 18.8% in 2011‒12: in 2014‒15 it was forecast to be 17.6% but was projected to fall back to 17.1% by 2016‒17. The increase in recent years was mainly a result of the slow rate of overall revenue growth for government.

In the last Wayne Swan budget the commonwealth government was projected to spend $280 billion on health between 2013‒14 and 2016‒17. The 2014‒15 Hockey budget reduced that to $271 billion, the largest reductions being for pharmaceuticals (‒$4.5 billion) and payments to the states for public hospitals (‒$2 billion). Treasury indicated that most of the reduction in pharmaceuticals was related to more accurate information about the cost of medicines, as the government now requires pharmaceutical manufacturers to provide the actual price at which they sell to wholesalers and pharmacies.

Under the Abbott government there will be further reductions in payments to the states for public hospitals because it will abandon a number of agreements, that were made under the Rudd and Gillard governments. Under the National Health Reform Agreement 2011 the Commonwealth was applying:
… an activity based funding approach to determine an ‘efficient price’ for hospital services. The Commonwealth pledged to meet 45 per cent of the growth in the efficient price initially, rising to 50 per cent after 2017. The states and territories will meet the balance.
When that agreement now ceases in July 2017, Commonwealth funding will revert to the old model linking CPI and population growth.

Abbott and Hockey also abrogated the National Partnership Agreement on Improving Public Hospital Services as from July this year. That agreement was meant to help improve access to elective surgery, emergency care and subacute care. It will save the commonwealth government $201 million over the forward estimates but the states may have to reconsider what they can fund.

A lot is said about the Medicare levy and whether there is a need to increase it. In 2012‒13 it raised $10.2 billion, $10.5 billion in 2013-14 and was forecast to increase to $14.1 billion in 2014‒15 but that includes the additional 0.5% for the NDIS. Although the Medicare levy is simply paid into consolidated revenue, we can estimate that about $10.6 billion should be available for health, as opposed to disability funding.

Medicare statistics show there were 356 million services provided in 2013‒14, an increase of about 12.5 million on 2012‒13 (about 38% of those services were non-referred, mainly GPs). Benefits paid increased from $18.6 billion to $19.1 billion. So the Medicare levy covered about 55% of benefits. It more than covers the cost of non-referred visits, which amounted to $5.9 billion in 2012‒13 and $6.4 billion in 2013‒14. It is the referred services, which include specialists, obstetrics, pathology and diagnostic imaging (amongst others) which cost the most: referred services increased by almost 6.7 million in 2013‒14 (about 54% of the total increase in services), and cost $146 million more but that was after a reduction of $594 million in payments for ‘allied health’, so the real increase was more in the order of $740 million; non-referred services increased by 5.8 million and the payments increased by $411 million. Doubling the Medicare levy would certainly cover all benefit payments: if the levy had been 3% in 2013‒14 it would have raised about $21 billion, almost $2 billion more than Medicare payments. But is that necessary? The original aim of the Medicare levy wasn’t to fully cover costs but to make the cost-sharing equitable. It is also notable that the average cost per service for Medicare fell slightly, from $54.03 in 2012‒13 to $53.69 in 2013‒14 (or a saving of $116 million if the number of services did not increase).

Health costs a lot but the above figures indicate that health prices aren’t rising all that fast, and have actually fallen recently. We could have cheaper health but at what cost to our health! Our health services are highly regulated for obvious reasons: we expect that the people who examine us and operate on us are properly qualified; we expect our medications to be safe and efficacious; we expect our health services to be available to us in a timely manner. That all adds to the final cost of health services.

The issue is who pays? The commonwealth government is trying to reduce its contribution but that doesn’t necessarily reduce overall health expenditure — it just moves costs elsewhere, to state governments and individuals. Under the Abbott government, it is easy to believe that it may actually be a way of achieving greater privatisation of medicine by putting pressure on public hospitals, shifting costs to individuals, and so encouraging greater use of private health funds and private hospitals.

Next week, Part 2 will look at the commonwealth government’s future health funding issues.

What do you think?
The Abbott government is insisting that it cannot continue to meet the rising cost of health services but, as Ken points out, someone still has to pay. The data presented by Ken suggest that there has already been a shift in health costs to state governments and individuals since 2002‒03 and now the Abbott government seems intent on accelerating that transfer.

Come back next week for Part 2 of ‘Funding health’.