Comments on Jennifer Hewett “Adviser backs up his design principle”, 19/05/2010, http://www.theaustralian.com.au/business/opinion/adviser-backs-up-his-design-principle/story-e6frg9px-1225868408907
First, what else could Ken Henry say? Did he have any choice but to back the government line that is partly the making or Treasury?
That is the big problem with such this particular tax design, why should the government do it this particular way?
The answer is it needs quick revenue/money to balance its short term budget.
So, taxpayers' interests are sold in favour of short term partisan politics.
That is the source of the problem.
Unfortunately, normally perceived independent Treasury assisted in such a poor design. That is a lesson for public policy making.
There is a strong need for more institutions much more independent from the government of the day to be apolitical in policy advice and evaluation and be more transparent and open.
Because of that, namely pursuing short term political interest, Australia's sovereign risks have increased to unprecedented levels.
PS: in an email to a colleague re a news report of Henry's speech, I made the following observations yesterday afternoon:
Henry uses Treasury modelling. That modelling uses assumptions. Those assumptions would have to be strange, either in long term prices or the share of marginal versus non-marginal mines, to produce the results he is relying on.
In econometrics, there is the term of spurious estimation.
It seems in Treasury modelling, there should be a similar term existing and applying, that is, spurious modelling.
See below for Henry's arguments.
My colleagure had teh following reply:
Thanks. I'm inclined to mostly agree with Henry without having seen his assumptions. I think there will be an impact on new investment to make it less attractive in the case of some larger projects, but for existing projects, the view that China and India's demand are likely to persist for some time yet is probably true. Mining companies will have a choice of using their existing investments and production at marginal cost to fill orders or look to new, riskier Greenfield ventures with long lead times. If I were a miner, I'd wear the profit reduction and make incremental investments in existing projects so I could keep filling orders now.
In the end, only time will tell though. I suspect the govt will be as conciliatory as possible when negotiating the details of the new tax given the looming election and public opinion on this.
I further responded with the following this morning:
I don't like to give blank cheques to politicians especially when they have shown to be lousy.
But seriously, a few basic principles of economics should be useful. One is the direction of a change. The second is price is determined by demand and supply, with short term supply constraints, but long term cost as key determinant. A third one is global demand and supply and capital mobility internationally, so Australia is only part of the story.
Further, I notice an interesting thing: In China, people are more critical of the government though not say it openly and can't do much about it; in Australia people are more kind to government and have a low expectation of them and their quality, though they can vote them out but are reluctant to do so. Of course, when all politicians from both sides are dumb, then there is not much choice. Abbott is no better and probably worse. That limit choices.