But we’ve done tax reform – haven’t we?

Here’s a tip for 2015. If the Abbott Government can remove the current opinion polls and stories of excess and incompetence from the front pages, it has been signalling that it intends to tackle ‘tax reform’ during the life of the current government. It wouldn’t be the first to attempt to do this: Governments back to the days of Hawke in the 1980’s have legislated large changes in the way the government charges for the services it provides — and the continual evolution of the Australian and international community would indicate that further changes are necessary now and in the future.

There is an implication that the governments that rate highly on ‘economic management’ also seem to be considered ‘good’ governments. The Hawke/Keating Government introduced a number of changes to tax collection practices during the 1980’s, as did the Howard Government in the 1990’s, and were still considered ‘good’ governments. No doubt Abbott would like to share the same perception.

This week’s discussion piece is a very brief overview of some of the issues with payment of taxes (charges and levies); next week we will look at some of the realities of ‘tax reform’ — why it isn’t as easy as some commentators, politicians and academics suggest.

In an ideal world, taxes would fund measures to ensure that everyone has an equal standard of living — ensuring that each member of society pays an equal amount of money to receive an equal amount of benefit. We don’t live in an ideal world.

Naturally, each member of society perceives their needs and wants to be more important than others: if for example I am retired and can’t fund my own living expenses, I expect the government to provide an allowance to make it easier to meet my ongoing commitments and live to a standard that is similar to that I enjoyed when I was employed. In contrast, if I am a parent with a young family committed to pay a mortgage and the expenses of young children, I would look to the government to give me a supplement to my income to assist in the provision of essentials to what are effectively non-productive members of the family (‘my’ children) as well as assistance towards the costs of child care, maternity leave and so on.

Both groups of people have an equal expectation of government support and an equal reason to believe the government should assist them — after all the retired person has contributed to society through their labour and payment of taxes for a considerable period of their lives; while a parent is still contributing labour and taxes while bringing up children who will in turn contribute labour and taxes to support the community into the future. The unfortunate thing is that when a government claims (probably with some justification) that it cannot afford to be as generous as it was in the past, there is a considerable proportion of the population who believe that their needs or wants are more important than other groups within the community: why are others getting some benefit which is reducing the funding that I can claim?

There is a ‘long and proud’ history of robust discussion of taxation matters in Australia. In 1854, the Eureka Rebellion in Ballarat was primarily a revolt against the imposition of a tax (licence fee) on miners, regardless of their success at their chosen profession. While it could be said that they lost the battle, the miners won the war with their leader, Peter Lalor, being elected to the Victorian Parliament along with eight other miners in 1855.

At the Print Media Enquiry in 1991, Kerry Packer is reputed to have said:

I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.

‘In this world nothing can be said to be certain, except death and taxes’ observed Benjamin Franklin in 1817. There are also a number of comments regarding the morals and ethics of the Roman tax collectors in the Bible. It seems that Australians aren’t the only ones that don’t appreciate the need for taxes.

Packer altruistically assisted the funding of installation of defibrillators in most New South Wales ambulances, so he wasn’t averse to donating money to a ‘good cause’. However, he has a point: why should I pay proportionally more than the next person to the government to fund community services?

John Hewson, is the ex-Liberal Party Federal Leader who took a GST to the 1993 election as a part of his “Fightback” package, and lost. Hewson is now a professor of economics at Australian National University and an occasional media commentator. He observes when tax law was introduced into the Federal Parliament in 1915, the act consisted of 24 pages, but in the 1980s the legislation ran to some 1200 pages and today it tops out at some 5500 pages. Clearly as the government has discovered ‘faults’ in the legislation, it has amended the legislation to rectify the errors. That has led to those who can afford the cost finding additional loopholes that have yet to be plugged by the government of the day. After all, as Kerry Packer pointed out (above), tax minimisation is perfectly legal — tax evasion isn’t. The Australian Taxation Office (ATO) annual report for 2013/14 runs to 266 pages, which seems to be rather a lot when all they should really be saying is everyone paid their fair share and the world moved on.

There are a number of factors for the dramatic increase in the size, and one would imagine complexity, of tax law in the past 30 years. Let’s look at two of them: tax compliance and tax minimisation.

During the 1970’s, some lawyers and accountants devised a system where companies were formed, traded, made profits and just before tax was to be paid, the assets of the company were given to another related entity and the former company shell sold to an unsuspecting person without the financial backing to pay outstanding commitments, such as tax on the original company’s income. The ATO was an unsecured creditor (a person or legal entity who is owed money by the business without legal entitlement to any of the assets by way of a mortgage or charge) to the original company, along with unsuspecting service providers and employees, and effectively got nothing as it was a pointless exercise to bankrupt the unsuspecting person. The scheme is known as the ‘bottom of the harbour’ as effectively the companies that were stripped of assets were sent there to drown.

In recent times, the ATO has prosecuted a number of ‘famous’ and ‘influential’ people as a result of Operation Wickenby, including The Masters Apprentices bass guitar player and John Farnham’s manager Glenn Wheatley and star of television comedy and movies (including Crocodile Dundee) Paul Hogan.

Tax minimisation is completely legal, but it reduces the tax revenue available to fund the services we as a community expect the various levels of government in Australia to provide. There are a number of ‘common’ schemes that are used on a daily basis including:

    • Negative gearing –To ‘negative gear’ you borrow money to purchase an asset that will not pay it’s own way (such as an investment property or share portfolio). The difference between income from the asset and the costs of the asset, including interest, can be claimed as a tax deduction. Those that use this scheme often offset the losses against other income (thereby reducing their taxable income) and also hope that a future increase in the price of the asset when it is sold will equal or exceed the losses they have claimed on their tax return.
    • Novated leasing - A three way agreement between an employee, employer and financial company where the employer nominally purchases a car (or similar) for an employee and funds the purchase from the employee’s pre-tax income effectively reducing the employees taxable income and tax liability.
    • Exporting profits - Apple is the subject of the link here as it apparently transferred around $2 billion to an Apple related entity based in Ireland while declaring and paying tax on a profit of under $100 million in Australia during 2013. Apple is not the only global company using this strategy. Other household names also move the bulk of their profits around the globe to avoid paying tax as well. How it works is the Australian customer deals with an Australian seller, but the financial transaction takes place in another jurisdiction where a significant proportion of the purchase price is claimed for the ‘production of the item’ and ‘intellectual property’ used in the product. That amount is sent directly to a related corporate entity in a country that offers the company a better tax treatment than Australia. The only part of the purchase that is ‘transferred’ to the Australian company is the price of the sale infrastructure and transport of the item to the purchaser. It is fair to say that a number of these ‘arrangements’ will cease to exist in the next few years as it has been recognised as a significant issue by governments and is now the subject of negotiations at events such as the G20.
In addition, governments of all colours introduce ‘targeted’ tax benefits or liabilities to manage social behaviours. There is a significant tax impost if someone purchases a packet of cigarettes — the argument being that there is a measurable drop in consumption of cigarettes (an arguable benefit to society in reducing smoking related illness) every time the tax rate rises. Australia also introduced a ‘Luxury Car Tax’ in 1990 in an effort to improve the viability of local vehicle manufacturing. Australian engineers can design a competitive product as shown by Ford and Holden/General Motors retaining the capacity to design a vehicle from the ground up once the current manufacturing capacity is withdrawn. A discussion on how and where Luxury Car Tax applies is here. Then GST is applied to the final cost of some products (including taxes), so we are paying tax on tax in some cases.

John Hewson claims:

… there are 125 taxes paid by Australians annually — 99 levied by the Commonwealth (recognising many agriculture and food levies), 25 by State and Territory governments, and one by local governments. These revenues are heavily concentrated with over 90% derived fro[m] just 10 taxes, reflecting 95% of Commonwealth revenue, over 60% of State revenue, and 100% of local government revenue.

Hewson also observes that over 66% of Australians use the services of agents to submit their annual tax return — surely an indictment of the perceived complexity of the system.

So we have a complicated system of taxes, charges and levies, which has been added to and amended over the past century. Is ‘tax reform’ a good idea in theory? — of course it is, but there is a political cost to doing it, ask John Hewson.

What do you think?

About 2353

The next part of this discussion will be posted next week and looks at the practicalities of introducing a fair, reasonable and easy to understand taxation system.

Abbott continues to tell porkies

I was surprised during last December (and again in the past week after the unsuccessful spill motion) when Abbott and his ministers reverted to the line that the LNP government had inherited a huge budget deficit from Labor.

Early in December they were claiming that Labor had been deceitful by going into the 2013 election claiming that the deficit was only $18 billion whereas when the Liberals gained the treasury benches it was shown to be $46 billion (and I noticed in Abbott’s appearance at the National Press Club at the beginning of February that he had rounded this up to $50 billion). That attack, in itself, was part of Abbott’s resetting of the agenda after his ‘ragged week’ and was obviously intended to turn attention back on Labor and away from the problems his government was facing: there is no doubt that approach will continue.

The first lie is the $18 billion deficit. That was the figure in the last Wayne Swan budget in May 2013 but Swan also made an ‘Economic Statement’ in August (during the election period) as the terms of trade deteriorated and economic activity slowed, reducing government revenue. By the time of the PEFO (Pre-election Financial Outlook) the deficit was actually $30 billion, which had been revealed slightly earlier in Swan’s ‘Economic Statement’. The $12 billion increase came from slowing GDP growth, and the subsequent decrease in revenue, and only $373 million (about 3% of the increase) arose from policy decisions by Labor. So Abbott’s claim that there was a $28 billion increase in the deficit is a fiction created by adopting a set of figures that had already been superseded before he was elected (although semantically it was the figure ‘going into the election’ — so perhaps Abbott is just playing with words again).

Abbott’s claim, however, was also dealt with at the time and found to be false. In June last year, Chris Bowen said that Joe Hockey had doubled the deficit by changes to government spending and changes to government economic assumptions and parameters: the ABC’s Fact Check found that Bowen’s statement — ‘checks out’. Other economic commentators also pointed to the spending and revenue decisions made by the Abbott government as making a major contribution to the increased budget deficit.

Although it has been done before, I will go through the details of the government’s finances. Please bear with me, as I will have to provide quite a few figures in explaining the situation, using the 2013-14 PEFO and MYEFO (Mid-year Economic and Financial Outlook), with some minor reference to the last two budgets. And it should be noted that the PEFO is the only financial document that is put out by Treasury and the Department of Finance. MYEFO and the budget are products of the government of the day after, of course, taking advice from the financial departments, but the final shape of those documents is always a result of government decisions. PEFO simply sets out the current situation based on the ruling assumptions and existing policies.

Firstly, we do need to understand that treasury forecasts are simply that — they are ‘estimates’ and ‘projections’. As such, they are subject to many qualifications and assumptions. Treasury itself states that:

The forward estimates of revenue and expenses … incorporate assumptions and judgments based on the best available information at the time of publication together with a range of economic assumptions and other forecasts and projections.

Major taxes such as company and individuals’ income taxes fluctuate significantly with economic activity. Capital gains tax is particularly volatile and is affected by both the level of gains in asset markets and the timing of when those gains are realised.

In addition revenue forecasting relies heavily on the observed historical relationships between the economy, tax bases and tax revenues. Such relationships may shift over time as the economy changes, presenting a further risk to the estimates.

(In relation to that last statement, the economy is currently undergoing changes as the mining boom ends and, therefore, there is an increased risk to the surety of the estimates.)

The MYEFO gives examples of the potential impact of certain hypothetical changes. If commodity prices fall, impacting the terms of trade and causing GDP to fall by one per cent, then government revenue could be reduced by $5.5 billion. On the other hand, if there is a 0.5 per cent improvement in both labour productivity and workforce participation, government receipts could increase by $3.7 billion.

Those examples are important because Treasury also explains the ‘confidence levels’ of the economic and fiscal forecasts. For example, although MYEFO forecast GDP growth of 2.5%, the 70% confidence level places growth anywhere between 1.75% and 3.25%, and the 90% confidence level between 1.5% and 3.5%, which means the preceding hypothetical examples actually fall within the range of possible forecasts.

With those provisos in mind, we can consider the actual figures and what went into increasing the budget deficit. If we believe Abbott the increase was $28 billion but only $16 billion if we believe PEFO. Or we can also look at the accumulated deficit over the forward estimates (to 2016-17) which increased from $54.6 billion to $122.7 billion, a difference of $68 billion. I will work on the last figure because that provides the full impact of Abbott government decisions.

Firstly, you will probably recall Hockey’s payment of $8.8 billion to the Reserve Bank, something the economic commentators said was not sought by the bank and was unnecessary. That leaves $59.2 billion to account for.

Abbott’s big ‘policy’ of repealing the carbon ‘tax’ was a major contributor to the loss in government revenue, to the tune of $13.7 billion over the forward estimates. That leaves $45.5 billion.

Repeal of the mining tax saw the loss of another $3.3 billion. That leaves $42.2 billion. (Those three big ‘decisions’ by the Abbott government cost the budgets over the forward estimates a total of $25.8 billion.)

There was another set of significant losses to revenue that many of us would not have heard about. Apparently there were 92 taxation and superannuation changes that had been announced by previous governments but not yet implemented. Abbott and Hockey decided to proceed with only 34 of those changes, foregoing another $3.1 billion in revenue. That leaves $39.1 billion.

The ABC Fact Check explains changes to a couple of the assumptions and parameters better than I can:

  • a change to the terms of trade methodology, reducing the economic growth forecasts, causing a $2 billion hit to the bottom line over the forward estimates
  • a change in the projected unemployment rate, leading to higher benefits payments totalling $3.7 billion extra
That leaves $33.4 billion.

But there was also a projected slowing of the economy: GDP growth figures were lowered. While this is something over which neither the Labor nor Abbott governments have much control, the Treasurer does have a say in selecting which figure to use for the forecasts (see the earlier paragraph on confidence levels). In MYEFO, the slowing economy was projected to reduce taxation receipts by $37 billion over the forward estimates.

So Abbott government decisions had actually increased the potential deficit by $71.6 billion over the forward estimates and it had to juggle the figures even to keep the increase to $68 billion. Even allowing that some of the worsening of the deficit would have happened no matter who was in government, Abbott government decisions directly added about $29 billion to the deficit (and up to $34.6 billion if we add the government influence in changing parameters).

Offsetting those losses, Abbott and Hockey had proposed abolishing the benefits introduced by Julia Gillard that were to be funded from the carbon and mining taxes. That would have decreased spending by $9.5 billion or reduced the deficit by that amount: but, of course, he has not been able to abolish all of those measures, so the deficit remains higher. Even if they had passed the parliament, the deficit would still have increased by $62.1 billion of which at least $20 billion would have arisen from decisions by the current government.

Estimates of government revenue for 2013‒14 were continually revised downward from the 2013‒14 budget through to the 2014‒15 budget:

  • $376 billion in the 2013‒14 budget
  • $369.5 billion in the PEFO
  • $364.9 billion in the MYEFO
  • $363.5 billion in the 2014‒15 budget
Despite that continual revision, the actual figure for the 2013‒14 financial year was lower still at $360.3 billion, $15.7 billion below the original budget estimate in May 2013 and even $3.2 billion below Hockey’s budget estimate in May 2014. So there are clear revenue problems for the government that have nothing to do with decisions by the former Labor government.

(As a postscript, Hockey’s more recent MYEFO in December 2014 also showed that revenue was continuing to decline in 2014-15; down $6.3 billion since his own budget estimate and down almost $21 billion on the forecast in Swan’s last budget.)

You would think that if a government takes decisions that decrease revenue it would also take other measures to increase revenue (not focus solely on cutting costs) but Abbott’s government has locked itself into the neo-liberal position of reducing taxes and so has very little room for manoeuvre. During the election campaign, it could be argued that Abbott lied by omission by not detailing how he would make up the foregone revenue ($17 billion) of his promises to abolish the carbon and mining ‘taxes’. People were left to believe that the ‘taxes’ could be abolished and nothing more need be done. I would suggest that Abbott knew that at the time and, given his promise not to raise taxes, already knew that he would undertake significant spending cuts to make up the shortfall — but of course he wouldn’t discuss that in any detail. And then, to justify the cuts, his government artificially increased the deficit and blamed it on Labor.

If Abbott and Hockey had really wanted to increase revenue to improve the budget position they would have kept Labor’s tax on annual superannuation earnings above $100,000 and the reduction in the fringe benefits tax concession on novated car leases: or have considered similar measures on other ‘tax expenditures’. Tax expenditures are foregone taxes when government provides certain benefits without taxing them or allows concessional tax rates: for example, military personnel receive a number of allowances and benefits that aren’t taxable although legally they are ‘income’. (It is only the tax foregone, not the full cost of the benefit that is counted.) Changing tax expenditures allows governments to increase revenue without increasing income tax, although there would obviously be vested interests who would ‘lose’ from such changes — such as the outcry from vehicle retailers and manufacturers when the change to the taxation of novated car leases was first announced.

In the 2013-14 budget the cost (foregone revenue) to government of tax expenditures was about $120 billion and was projected to rise to $146 billion in 2016-17 (which is the equivalent of 8% of GDP or about a third of projected government revenue in 2016-17).

While many concessions would be considered socially beneficial, there are others that appear to be of most benefit to those on higher incomes — superannuation is the one most commented on in that regard. In 2013-14 it was estimated that the concessional tax applying to superannuation cost the government $35 billion in revenue and that was projected to rise to $51 billion in 2016-17, or a total of $170 billion over the forward estimates. Eliminating the concessional tax rate for the earnings of superannuation funds would raise $65 billion over the forward estimates, and eliminating the concession for employer contributions would raise $62 billion, a total of $127 billion. While it would somewhat defeat the purpose of compulsory superannuation (to reduce old age pension payments) to entirely eliminate concessions, there is certainly scope for changes that could easily raise a few billion dollars: for example, even to raise the concessional tax rate from 15% to 17.5% could potentially raise $4.25 billion over the forward estimates: or $8.5 billion if raised to 20% — that is still a ‘concessional’ rate of tax but just not as generous.

Why isn’t Abbott considering such measures? Instead, he is even scrapping the changes that Labor made that would have helped revenue.

He is blaming the deficit on Labor when it is clear that about half of the increase in the deficit comes from a ‘natural’ fall in taxation receipts as the economy slows and transitions away from the mining boom, and the rest from decisions by Abbott and his government after it came to power. Other commentators, more expert than I, have already shown his claim is false and yet he returned to it in December, and again in the past week, obviously taking the view that because it was disproved six to eight months earlier most voters would not remember. That is probably partly true but it is also pure propaganda, no longer just ‘spin’: ‘spin’ is about putting the best possible light on a bad situation, not about blatant lies. Abbott, as he did in opposition, appears to be operating on the principle that if he tells the same lie often enough, people will believe it.

What do you think?

About Ken Wolff

Ken says that although this is old news he will have to keep returning to it because that is what Abbott and Hockey keep doing.

Next week we will continue the financial theme and how to raise revenue with 2353’s discussion of ‘Tax reform’.

If you doubt the scientists, what about the actuaries?

There’s an old adage that if you want to know who will win an election follow the bookmakers’ odds or where the punters are putting their money rather than the polls (particularly when the polls are close). Something similar could be said of climate change. For Mr Abbott and others like him who remain sceptical of the science, they should instead follow the risk assessment of the actuaries as they advise the insurance and reinsurance industry and the investment banks.

The actuaries do not concern themselves directly with the science but with evaluating the risk and the costs that arise from it. As the actuaries put it:

Our role as actuaries is to help optimise decisions. We don’t seek to prove or disprove the estimates made by the experts but we need to understand what they are saying.

Australian actuaries have been at the forefront in taking environmental factors, including climate change, into account, establishing a committee in 1998 to examine environmental and energy issues as they affect their profession. In January 2012 Australian actuaries played a significant role at the ‘Climate Change Summit for Asia’s Insurance Industry’ in Singapore. American actuaries were slower to react (their first climate committee appeared in 2005) but are now developing an Actuaries Climate Change Index and an Actuaries Climate Risk Index, initially for North America, that cover a range of factors, including obvious ones like temperature and precipitation and lesser known factors like soil moisture.

Munich Re, a major reinsurance company, issued details in 2011 [page 11 of link] showing that the number of weather-related catastrophes between 1950 and 2010 was on an upward trend (and weather-related events accounted for about 85 per cent of insurance claims). There was a sequence of bad years between 1986 and 1999, with a peak of 14 catastrophic weather events in 1993. The years 2004, 2005 and 2007 also had an above average number of major weather events. Although it seemed slightly quieter from 2008 to 2010, 2011 became the costliest year on record (but not just from weather events) for the global insurance industry following the earthquake and tsunami in Japan, the Christchurch earthquake and hurricane Irene in the US — total insurance losses for the year of $105 billion out of total economic losses from natural disasters of $380 billion. (To give those figures a context, the Australian government’s total revenue in 2010‒11 was $283 billion.)

A similar upward trend is apparent in plotting natural disasters in Australia.

The cost to the insurers and reinsurers of such events varies, depending where they occur. Some have argued that the increase in insurance pay-outs is attributable mainly to social and demographic changes, such as the growth of coastal cities and rising property values. That can be seen in the Sydney hail storm of 1999 or more recently the hail storm in Brisbane at the end of November: the Sydney event remains one of the most expensive for the insurance industry in Australian history at $1.7 billion, while the current cost of the Brisbane event is slightly over $800 million. (The most expensive event to date was the 2010 Queensland floods at $2.3 billion.) For the actuaries this is not an issue, in the sense that it is a given that must be taken into account, but it does concern them that, in the various climate change scenarios, catastrophic events may occur more often in major urban areas and that cyclones may move further south, bringing them within range of Queensland’s heavily populated and built-up south-east corner.

IAG in Australia is now utilising climate science figures that suggest that a 1°C increase in mean summer temperature will increase the risk of bushfires by 17 to 28 per cent; an increase of 2.2°C will cause a 5 to 10 per cent increase in cyclone wind speeds; that a 25 per cent increase in the volume of rain over short periods will mean that what is currently viewed as a one-in-100 year flood could become a one-in-36 year flood or, at worst, a one-in-17 year event.

The actuaries are also concerned that small changes created by climate change will not cause a proportional increase in damage (and insurance costs) but an exponential increase: for example, a 25 percent increase in a storm’s peak wind gusts from 40‒50 knots to 50‒60 knots does not produce a 25 per cent increase in damage but a 650 per cent increase. (For those who are metrically minded that is an increase from 74‒93km/h to 93‒111km/h.) It means our current housing stock is not well-suited to such an increase in the intensity of storms and that poses major challenges for insurance companies.

Terms like 1-in-100 year and 1-in-200 year will become meaningless as events of that magnitude occur on a more regular basis. In the UK [page 21 of link], it has been estimated that the insurance industry would require additional capital of £1 billion to cover 1-in-200 year flood events if there is a temperature rise of 2°C but £5.5 billion if there is a 6°C rise in temperature (the upper end of IPCC forecasts). To cover costs, it was also estimated that insurance pricing in the UK would need to increase by 16% for a 2°C rise and 47% for a 6°C rise. Those figures illustrate how the actuaries are examining the risk posed by both the high and low range climate change forecasts.

Insurance companies and their actuaries are not concerned merely by the local risks from climate change. The linkages between insurance companies created by reinsurance mechanisms means that they can each be affected by catastrophes anywhere on the globe. For example, the price to insurance companies of reinsurance almost doubled after cyclone Andrew in the US in 1992 (because that one event accounted for about 40 per cent of the then globally available capital for reinsurance) and it was three years before the price began to decline again.

The associated danger is that the cost of insurance becomes too expensive. More and more individuals may not take out insurance to cover their assets. In 2002, $1,500 billion of Australia’s wealth was locked up in homes, commercial buildings, ports and other physical assets. IAG’s Chief Risk Officer has stated:

The insurance industry currently underwrites the risk to the bulk of these assets from weather events but climate change threatens its ability to do so as effectively in the future. Therefore the affect to Australia from climate change is quickly becoming a social, economic and political issue.

The worst case scenario is that insurance companies themselves fail from the increasing insurance ‘losses’ and the rising cost of reinsurance, leaving people and businesses with no market mechanism to protect assets. In economic terms, ‘insurance’ is a means of spreading risk but if premiums become too expensive or insurance companies fail, the government will become the ‘insurer’ of last resort, as the main body able to spread and absorb the risk — but at what cost to taxpayers?

There is already some talk of greater government involvement. Following the 2010 Queensland floods the then Assistant Treasurer Bill Shorten announced the Australian National Disaster Insurance Review. The Review’s final report included recommendations for:

    • the creation of a government agency* to manage national coordination of flood risk management and to operate a system of premium discounts and a flood risk reinsurance facility
    • all home insurance policies to include flood cover
    • a system of premium discounts in order that most purchasers of policies in areas subject to flood risk are eligible for discounts against the full cost of flood insurance
    • a government guarantee for claim payments
(* A similar body had been created by the Howard government after the ‘twin towers’ terrorist attack to provide a government guarantee as regards terrorism insurance.)

The government response to most of the recommendations was, however, that it would ‘consider’ them as part of a broader consideration of disaster insurance changes, following a consultation process in 2012. Apart from action on the definition of what constitutes a ‘flood’, I am not aware of other government steps on this issue. One aspect that appears to have held up government action is that many insurance companies continue to operate on neo-liberal market principles and oppose government involvement:

In July 2011 Lloyd’s made it clear to the Review that government intervention in private insurance markets should be kept to a minimum and warned that the creation of insurance programmes or pools limits the effectiveness of the insurance industry, can be hugely costly for governments and hampers the application of sound actuarial and risk-based principles.

It is almost inevitable that in future years (despite Lloyd’s current approach), there will be more discussion of the government’s role in insurance. If the actuaries’ figures are borne out, the cost of insurance could become prohibitive either for the individual or for the insurance companies, or both. Alternately, governments have to be active now in taking measures to adapt to and mitigate climate change that will help contain future costs.

Actuaries are already speaking of the need for adaptation and mitigation. A simple example is ensuring that buildings in cyclone-prone areas are built to cyclone standards. Here in Australia, the actuaries are using the evidence that recent cyclone damage has been greatest to dwellings that were not built to such standards or, in some cases, where such standards were not enforced during construction. Taking action now may help avoid the high range climate change scenarios and the associated higher costs: not only insurance costs, but the construction costs of more stringent cyclone standards to cope with higher cyclonic wind speeds. The draconian alternative is abandoning some of the towns and cities that are subject to cyclones.

IAG has suggested that insurance companies can drive public awareness programs that identify vulnerable areas, can lobby governments to change or enforce building codes, and, in relation to emissions, can offer lower vehicle insurance premiums for those driving fewer kilometres. Insurance companies are also funding research to more clearly identify the risks they face. IAG is funding research into the development of hail storms over Sydney: warmer waters appear one contributing factor, so the risk is, if oceans warm as predicted, that those events will become more frequent.

Despite the need for adaptation and mitigation, last December we saw Queensland minister Jeff Seeney order the Moreton Bay Regional Council to remove from its regional plan reference to a climate change-derived sea level rise of 0.8 metres by 2100. The Local Government Association of Queensland feared that Seeney may enforce that for all coastal councils in Queensland and was seeking legal advice. The concern is that councils may be legally liable, like tobacco and asbestos companies, if it is shown that they knew of the risk but failed to act.

Seeney claimed he intervened ‘to ensure the residents’ rights to build and develop their properties were maintained and not restricted by their local council’. That relates to issues I discussed last year on TPS regarding the Right’s view of individual freedom and individual self-interest. And it manages to ignore completely the growing concern of the insurance industry and its actuaries.

The actuaries are also discussing the risk related to the market value of companies holding carbon (fossil fuel) assets. The argument goes like this:

    • to limit global temperature rise to 2°C we have a ‘carbon budget’ of 886 gigatonnes of CO2 between 2000 and 2050
    • in the first ten years of the century we have used 321 gigatonnes of that budget, leaving 565 gigatonnes
    • but known global reserves of carbon fuels would produce 2,795 gigatonnes of CO2
    • top listed companies represent around 25 per cent of those reserves
    • so what happens to the companies’ value if only 20 per cent of carbon fuel reserves can be used?
In economic terminology, these would become ‘stranded assets’ — assets that can no longer be used. That has implications for companies and the share markets. Insurance companies are particularly concerned because they rely on investments to help build their funds, so they need to reduce such risk in their investment portfolios. Actuaries who provide advice in those areas are starting to factor such considerations into their advice.

Insurance companies are recognising that a risk from climate change already exists and, whether convinced by the science or not, are asking their actuaries to assess that risk. They are acting on the precautionary principle — expressed this way by a Swedish insurance company:

Climate change has been a hot topic for a long time now. Global warming is probably contributing to many of the changes in our weather. Whatever the reason, the conclusion is that we have to respond to the situation more effectively. [emphasis added]

It’s a shame that we can’t say the same of our government, although it is likely that the government will be the one left to pick up the tab if the insurance companies can no longer meet the cost of weather events arising from climate change. Someone should ask Mr Abbott and Mr Hockey what sort of debt and deficit disaster that will create for future generations.

What do you think?

About Ken Wolff

This week Ken takes a different look at climate change and suggests that Tony Abbott, and other climate science sceptics like him, should instead consider the risk assessment of the actuaries. The government may be taking no notice of climate change but the insurance industry certainly is.

Next week we start a series of articles on financial matters, starting with another piece by Ken, 'Abbott continues to tell porkies', which examines the detail of the so-called budget deficit disaster and asks why Abbott and Hockey did not also consider other tax changes, particularly regarding 'tax expenditures'. It will be followed by 2353 examining the issue of tax reform and why it is so difficult.

We’re all in this together

As human beings we each have a responsibility to care for humanity. Expressing concern for others brings inner strength and deep satisfaction. As social animals, human beings need friendship, but friendship doesn’t come from wealth and power, but from showing compassion and concern for others. [Dalai Lama]

It is common to make a resolution on New Year’s Eve that, if kept, will make us better people in the forthcoming year. It is also a period of reflection, of things we did well, things we could have done better and things that we just should consider — so with your indulgence, and as New Year’s Eve was only a few weeks ago, I would propose that we should all reflect on this quote from the Reverend Tim Costello (Baptist Minister, CEO of World Vision and brother of former Australian Treasurer, Peter), and that we should all aspire to it in 2015.

Ultimately we have got to co-operate for our common destiny.

If you’re reading this site you’ll probably remember that back at the beginning of November, the Memorial Service for past Prime Minister Edward Gough Whitlam was celebrated at the Sydney Town Hall. As you would expect, all the living Prime Ministers attended the service — and the public outside did not greet Prime Ministers Howard, Rudd and Abbott with any enthusiasm. Regardless of our opinions of the three gentlemen in question, it is my contention here that the treatment they received outside the Hall was inappropriate for three past and current leaders of our community. True, once inside, Abbott gave the impression he was there only because he ‘had to be there’, when speaker after speaker was pointing out the legacy left by Whitlam, so he was equally at fault.

Oliver Burkeman, writing in the US version of The Guardian opened a recent opinion piece with the headline ‘We can all get along — and for less than the cost of a Taylor Swift Album’. While Taylor Swift may not be your preferred musical choice (she certainly isn’t mine), the article asks why people ‘hate’ those with a different viewpoint. Burkeman looks at a recent study by the National Academy of Sciences of the United States of America that set out to look at the reasons for intractable disputes:

Political conflict between American Democrats and Republicans and ethnoreligious conflict between Israelis and Palestinians seem intractable, despite the availability of reasonable compromise solutions in both cases. This research demonstrates a fundamental cognitive bias driving such conflict intractability: Adversaries attribute their ingroup’s actions to ingroup love more than outgroup hate and attribute their outgroup’s actions to outgroup hate more than ingroup love. This biased attributional pattern increases beliefs and intentions associated with conflict intractability, including unwillingness to negotiate and unwillingness to vote for compromise solutions. In addition, offering financial incentives for accuracy in evaluating one’s outgroup mitigates this biased attributional pattern and its consequences. Understanding this bias and how to alleviate it can contribute to conflict resolution on a global scale.

In other words, can people be convinced to ‘see the values of their enemies’? Well it turns out that the answer is yes; people can gain an understanding that the motives of their ‘enemies’ are usually the same as their own motives but they come from a different viewpoint. Where the Taylor Swift comparison comes in is that when interviewing Americans about their hatred of the Republicans/Democrats (as applicable), it only took $12 — less than the cost of the aforesaid Taylor Swift album — for the interviewee to be able to describe the motivation behind those from the other side. Yes, the potential to gain $12 may demonstrate a number of human failings rather than an opening of awareness but maybe some of the interviewees actually did begin to question their rationale that the other side is completely wrong.

Burkeman links in his analysis to the writings of Arnold Kling who wrote The Library of Economics and Liberty and suggests:

The following thought occurred to me recently. Suppose we look at writing on issues where people tend to hold strong opinions that fit with their ideology.
Such writing can
(a) attempt to open the minds of people on the opposite side as the author
(b) attempt to open minds of people on the same side as the author
(c) attempt to close minds of people on the same side as the author
So, think about it. Wouldn't you classify most op-eds and blog posts as (c)? Isn't that sort of pathetic? Here are some more thoughts:
1. The default is (c). If you are not consciously trying to do (a) or (b), then you will almost surely do (c).

Burkeman then acknowledges:

Indeed, an awful lot of opinionating, in the media and elsewhere, just takes the hate-based motivations of the other side as given. The real purpose of such writing — and I’ve done plenty of it myself — is rarely to change opponents’ minds. That kind of project would surely benefit from accepting the possibility that those opponents think of themselves as decent, loving people. Instead, it’s to rally the existing supporters of one’s cause, reinforcing their perception of the other side as driven by hate.

This line of reasoning could support the motives and operations of various media ‘personalities’ and politicians both here and overseas.

Abbott became prime minister through unfailing negativity. In opposition:

They focused like a laser beam on any action by the Labor government that could be effectively attacked. It was primarily a negative opposition, with the biggest promises being the undoing of Labor’s legislative and infrastructure agenda. Abbott opposed the NBN, the mining tax, the carbon price, poker machine reform and much more.

However, in government, this process has now come back to bite them badly.

It’s almost universally agreed by economists and policy experts that a carbon price, through a tax or trading scheme, is the most effective and efficient method for reducing emissions. Julia Gillard opened herself to attack over the carbon price because of her promise during the election campaign that there would be no carbon tax under her government. The Coalition leapt on this broken promise and attacked the Gillard government relentlessly.

Gillard didn’t sell the ‘carbon tax’ well. One could argue that NBN, Disabilitycare and a number of other policies were sold equally as badly by the ALP under Rudd and Gillard. The continual infighting made known to the public through leaks didn’t help promote a sense of unity and purpose. Abbott’s relentless attacks on those policies now puts him in a position where he can’t offer the ‘effective and efficient’ method to reduce carbon emissions, neither can he offer the ALP’s technically superior NBN, the more cost effective ‘paid parental leave’ or any form of increased assistance for those with a long term disability. Hate politics has gotten in the way of good policy — and you and I (as well as our descendants) will suffer. Abbott now calls for mature debate surrounding increasing the GST — something that he claimed was ‘off the table’ while in opposition. When Clive Palmer is literally laughing at Abbott and even NewsCorp is reporting the request with some sarcasm, Abbott has a problem. Kaye Lee discusses Abbott’s conundrum on The Australian Independent Media Network by pointing out some of the other revenue-leaking measures Abbott has promised not to touch, despite being unfair to large sectors of the community.

In November, Senator David Leyonhjelm who is an independent, wrote an opinion piece for The Guardian headed:

‘Dear Bill Shorten: you're the opposition leader, not me. It's time to drop your soft bipartisanship.’

Rather than oppose for the sake of opposing, or donning a hi-vis vest and walking into some unsuspecting factory with a media circus in the manner of Abbott while he was in opposition, is Shorten playing a longer game here? If he is less ‘absolute’ now, he will be more able to determine the best practical policy outcomes in the future, assuming the opinion polls are correct. A search of The Guardian or Fairfax Media’s websites will show a list of items where Bill Shorten is actively and publically differentiating his party from Abbott. Some of his speeches have been (in the words of Yes Minister) ‘courageous’ — such as his speech at the Christian Lobby’s convention that he is in favour of blended families and same sex marriage.

Professor Selena Bartlett from QUT has developed a ‘brain vitality index’, which she hopes will become as well known as the BMI used as an indicator of physical health. Bartlett claims

“Often we are not aware of what we are saying to ourselves or the impact this has on our brain health,” she said.

“Your brain is a massive computer. If you get up in the morning thinking ‘I'm sad’, or ‘I'm worthless’, it's like entering a search for 'worthless'.

“Your brain then sets about finding the evidence to support these thoughts and so the whole negative feedback loop becomes part of your brain's hardware.

“Our brains hold onto negative thoughts more than positive thoughts and if we maintain and reiterate endless negative self-narratives it causes stress.”

Bartlett’s research puts a scientific and peer reviewed foundation to the writings of Kling and Burkeman discussed above. She also has a free ‘app’ on the Apple and GooglePlay download ‘stores’ should you wish to ‘measure’ your brain vitality.

At the end of the day, Tim Costello is right: we do have to co-operate to survive. No one person or group of people has all the correct answers. So why is it that there are a number of people prepared to tear down not only the opinions of those who haven’t come to the same conclusion, but tear down the person as well? Burkeman, Kling and Bartlett all demonstrate from different perspectives that negativity is a dangerous weapon. Bartlett also demonstrates that negative opinions are harder to ‘modify’ than positive opinions.

It is frequently said that people go ‘into’ politics because they have a genuine desire to improve the lives and outcomes for their community. Those who meet a politician from ‘the other side’ also frequently express that they seem to be nice people who are genuinely interested. Why then did it become acceptable for political parties and their acolytes to engender hatred of ‘the other side’ for political gain?

At the end of the day, no one gets off the earth alive and we need to be able to understand that others may have differing opinions developed through a similar reasoning pattern as our own. Surely as a society we have the ability to disagree with a person’s ideas or motives — but not hate the person.

What do you think?

About 2353

As the first ‘official’ post for the year (not counting our ‘warm-up’ or the announcement of changes for TPS in 2015 during the week), 2353 has asked whether we can in this new year be more understanding of opposing views, whether people can disagree with an idea without attacking the person holding it. It is an aim that all should strive for in 2015, including our politicians. Then we might have some genuine public discourse on ideas for Australia’s future rather than political name calling. We can only live in hope! Come back next week for: 'If you doubt the scientists, what about the actuaries?' by Ken Wolff