Maybe more school spending IS the answer

Following the recent news that Australia has fallen 5 places in the international rankings for science and education performance at an eighth grade level, to 12th of 14 countries measured, the coalition government has taken to saying that the result shows that more money in education does not provide stronger results, and that the governments decision not to fund the last 2 years of the Gonski scheme is the right one. As evidence for its claim the government cites a 49% increase in nominal per-student education spending between 2003 and 2015, a period which saw Australia fall down the international education rankings. The conclusion that we bright citizens are apparently meant to draw is that the increased spending has been entirely wasted and that the coalition governments clever cuts to education spending will get the whole ship in order.

The trouble is that we live in a world where inflation exists, and the thing about inflation is that it means that you can spend more money and still be buying less. If you doubled your weekly coffee budget but the the price of a cup of coffee tripled (or ‘inflated by a stupid amount’, to use some industry lingo) then you could rightly claim to be spending a record amount on coffee, but that wouldn’t change the fact that you were still only getting 2/3 as many cups. The dollar figure would just make that truth a lot harder to see. As such, the governments claims on growth in nominal per-student education spending don’t tell the whole story. Instead, it’s more appropriate to look at real per-student education spending and, wouldn’t you know it, I just happened to have a graph comparing average real and nominal government per-student primary and secondary spending from 2006 to 2015 lying around.

education-spend

As the graph shows, nominal per-student government expenditure really has increased by an average of 4.0% between 2006 and 2015. The problem is, this hasn’t been enough to keep up with inflation in the education sector, which has averaged 5.2% over the last decade. As a result, real per-student government spending on primary and secondary education has actually fallen by an average of 1.6% per annum over the period.

When the drop in Australian students rankings for science and math is placed into a context where real per-student government spending on primary and secondary education was $1,000 lower in 2015 than in 2006 it suddenly starts to make a lot more sense. It also makes the governments decision not to fund the final 2 years of Gonski look even more cynical.

While there is no doubt that there is more to quality education than just money, the resources available to each student has a very real impact on the ease with kids can realise their academic potential. This isn’t controversial. There is a reason parents spend upwards of $40,000/year to send their kids to private schools. So while the government might say that its decision not to fund the last two years of Gonski will have no effect on education results, it is pretty clear that is going to make turning around the ongoing slide in global rankings a damn sight harder.

What makes the cuts even more infuriating is the news that a third of corporates in Australia paid no tax, including many major multinationals. Instead of taking this as a sign that it can find the necessary funding to offset the plans for education cuts by raising revenue from tax dodging corporates, the government has continued to advocate for a cut in the corporate tax rate that will primarily benefit foreign shareholders thanks to Australia’s dividend imputation system.

Depressingly, the government is making it clear that it feels corporate profits are a greater priority than investing in the education of Australian children. I can’t help but feel that makes it a pretty safe bet that we have yet to see the bottom for Australian achievement in international education rankings.

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Jobs and growth hits a speed bump

GDP growth figures for the September quarter were released today and, to the surprise of what seems to be basically everyone, they were bad. Really bad. Headline seasonally adjusted growth for the quarter was -0.5%, which is substantially under the still bad -0.1% that seems to have been the consensus estimate prior to the announcement. Things were even worse on a per-capita basis, with Australia’s continued population growth meaning that seasonally adjusted per-capita GDP fell by an abysmal -0.8% over the September quarter.

Real net national disposable income provided some silver lining, growing by 0.8%, though population growth again lowered this headline figure to a more modest 0.5% on a per-capita basis. To my mind real per-capita net national disposable income has a greater impact on Australian’s quality of life than headline GDP figures (it’s often noted that you can’t pay your rent with GDP), so suffice to say that it wasn’t all doom and gloom. Despite this, however, the September quarter was only the 4th time since 1991 that Australia has recorded negative GDP growth, and so this still represents a very poor quarter for the Australian economy.

The big driver of this troubling result was a substantial decline in investment, with private sector investment falling by -0.8% and public sector investment falling by a staggering -10.4% (albeit from a much lower base than the level of private investment). Public sector consumption of goods and services acted as a further drag on GDP, falling by -0.2%, though it was partially offset by encouraging 0.4% growth in household consumption.

There were a couple of things that struck me as I read the quarterly results. The first is that Australia’s economy seems vulnerable to any slowdown in private sector investment in housing. Australia is already in the midst of a protracted slowdown in private sector non-dwelling construction, which has fallen every single quarter since September 2014 as the nations major mining and LNG projects have been completed. However, this has been partially offset by positive growth in dwelling investment for all quarters bar one across the same period. It is not clear that dwelling investment will continue to provide this support going forward. The number of total dwelling approvals have fallen for 5 consecutive months to Oct-16, and with frequent reports of a potential glut in the Melbourne and Brisbane apartment markets it seems very possible that dwelling approvals will continue to fall over the near term. If the fall in dwelling approvals starts to result in declining dwelling investment and the falls in non-dwelling private investment continue, then it seems likely that Australia will be in for a period of sustained weakness in GDP growth, unless some other growth driver that has yet to be discovered reveals itself. I suspect that this need for some magic new growth driver is partially behind the frankly terrible proposal to turn South Australia into the worlds dumping ground for spent nuclear waste.

I recognise that the governments proposed corporate tax cut is being heralded by Malcolm Turnbull and Scott Morrison as the answer to falling private sector investment, but this seems extremely unlikely. Australia’s mining and LNG construction boom was a once in a lifetime event that is unlikely to be replicated by a 5% cut to the corporate tax rate that, thanks to Australia’s dividend imputation system, will entirely benefit foreign shareholders. Further, given that the estimated $50bn cost of the tax cut would need to be recouped through either higher taxes on households or through lower government spending, it is entirely possible that the net effect of the tax cut on the economy would be neutral or even negative. I would suggest a better option would be for the government to use the money to increase its investments in the construction of new schools and hospitals, as Australia’s rapid population growth continues to strain the existing educational and healthcare infrastructure of the country.

The second thing that struck me is that the governments fixation on Australia’s supposed spending problem is nonsensical in a time of economic weakness. With private sector investment falling and household consumption providing a boost to gdp this quarter but facing constraints on its capacity to sustainably grow due to high levels of household debt, it falls to the public sector to act as the consumer of last resort to support the economy. Increasing spending on the aforementioned education and health sectors or supporting household consumption through boosting welfare payments for the unemployed and disadvantaged Australians would bolster the economy while providing significant social benefits. By contrast, the federal governments current set of policies to reduce government spending through deregulating universities, reducing the rate of growth in education funding, cutting unemployment benefits, and moving towards a more user-pays model in the healthcare system will only shift costs to an already stressed household sector, and as such seems unlikely to provide any upside for the economy or Australian households.

Separately from what the September quarter numbers say about the Australian economy, this result is politically awful for the coalition government. Malcolm Turnbull’s justification for challenging for the leadership of the liberal party was that under Tony Abbot the LNP had consistently trailed Labor a two party preferred basis in the Newspoll survey, and that he had failed to provide the Australia with sufficient economic leadership. Turnbull now finds himself failing on the very same criteria, having trailed Labor in six straight Newspolls and having overseen the first quarter of negative GDP growth since tropical cyclone Yasi hit Queensland in 2011. If the unlikely does happen and Australia records negative GDP growth in the December quarter, resulting in the first technical recession in 25 years, then Turnbull’s chances of retaining the prime ministership, as well as the LNP’s prospects of winning the next federal election, would seem vanishingly small.

For what it’s worth, I don’t think that we will see another quarter of negative GDP growth in the December quarter – it seems unlikely that public sector consumption and investment would both drag on GDP for two consecutive quarters, and I expect the government would have been informed that September quarter GDP growth was weak prior to today and will have been spending like drunken sailers to lift the December quarter growth figure. However, 2016 has been a historically awful year, so I would be entirely unsurprised if it decided to shock us all and give us the first Australian recession in 25 years as its parting gift to the country.

The divide between politicians and the rest of Australia

The last two days have seen some impressively coordinated and disciplined protests at federal parliament by the Whistle-Blowers, Activists  and Citizens Alliance. The group was agitating for an end to what is, in essence,  Australia’s state sanctioned abuse of asylum seekers at the detention centres on Nauru and Manus Island. The group yesterday interrupted question time in parliament in a protest that involved members of the group gluing their hands to the railings in the public gallery of the lower house. This was followed up today when the group unfurled a banner over parliament house and dyed parliaments fountain red.

These were clever, attention grabbing protests that yet again shone a light on the national disgrace that is Australia’s treatment of asylum seekers, and rightly confronted both major parties for their role in inflicting so much human misery on an innocent few. The protests also represented an interesting shift in tactics for groups sympathetic to asylum seekers in an environment that has seen seldom seen arguments for humane treatment of refugees and asylum seekers represented in the lower house of parliament in recent years.

But as interesting as the protests were, it was the reaction of Australia’s politicians to these uninvited interruptions to their parliamentary schedule that was most revealing. Prime Minister Malcolm Turnbull criticised the protesters for “[interfering]  with democracy and [wanting] to shut parliament down”, and expressed disbelief that none of the protesters had been charged by police. Opposition leader Bill Shorten echoed these sentiments, saying “we will never never give into those who wish to shut down this parliament”, and that the protests were “the exact opposite of democracy”.

This is a little rich. These were peaceful protests that were undertaken in a non-threatening way during question time, which is perhaps the least edifying part of Australia’s parliamentary process. Question time seldom involves the respectful exchange of genuine questions and answers on issues of substance,  but instead features the nations elected representatives screaming abuse at each other in a manner that would be more at home on a school playground than than in a national parliament. This is hardly the hub around which the wheel of Australian democracy turns, and it’s equally plain that a 30 minute interruption to question time does not amount to an attempt to shut down parliament.

But beyond this it’s the lack of self awareness of the politicians that stand out. Major issues affecting Australians on a daily basis include a genuine housing affordability crisis, declining levels of permanent employment and increased underemployment, stagnating wage growth, high youth unemployment, including for university graduates, increasing stresses on the education and health care system, sky-rocketing congestion and crush loading on public transport resulting from relentless population growth, and the continuing loss of the manufacturing base that had historically underpinned employment for a sizeable portion of the middle class, among many, many others.

I could continue but I know my 3 readers have other things to do with their day, so suffice to say that the nation has a multitude of pressing problems facing it. Since the election in July parliament has made absolutely no genuine attempt to address any of these issues in any substantive way. Instead, we have watched the government bicker about whether people should have the right to offend and insult on the basis of race,  and watched again as it pretended to address the injustice of Australia’s continuing denial of gay couples right to wed the person they love by pushing an unnecessary plebiscite that the gay community rejected as harmful and divisive. Indeed, just this month we discovered that the government is pursuing legal action against a Sydney grandpa for having the audacity to run a little trafficked website pushing against changes to medicare, a situation so absurd as to be farcical.

Faced with a parliament so obviously uninterested in addressing any of the major issues facing the nation its a small wonder that the Whistle-Blowers, Activists  and Citizens Alliance felt the need to resort to a protest in parliament to make their voices heard on an issue that is, in a very real sense, life and death for the people affected. This right to peaceful protest is an essential element of any functioning democracy, and at this point there seems to be no other way to get politicians to actually listen to community concerns. However, this seems to have been lost on our parliamentarians, as was neatly encapsulated by LNP senator James McGrath in an interview on sky news this morning:

What a bunch of grubs. Parliament is the house for all Australians … and we have these Kmart Castros out the front its all about them and their views and nobody else … If they want their views to be heard run for parliament … they should wake up to themselves and get a job.

Never has a quote so neatly captured Australia’s politicians dismissal of the views of the population that they are supposed to represent.

Australia’s political class is widely held in contempt by those they are elected to serve, and it is difficult to think of a profession for which the public has a lower opinion. Given our ‘leaders’ seeming inability to take any action to address the major issues facing the nation it would be unsurprising if we saw more protests like this in the future.

Unless the politicians from Australia’s major parties stop trying to score petty ideological points and instead start listening and responding to the concerns of their constituents we will only see further loss of faith in our system of government, and increasing support for extreme ‘outsider’ parties such as One Nation. Of course, given that the government is reported to be considering the installation of glass in the public gallery to prevent any unwanted future intrusions of the Australian public on parliament it seems that our elected representatives have taken a different lesson from this incident.

If the 45th parliament continues on its current path it seems likely that the distance between Australians and their elected officials will only grow, further eroding public faith in our democratic institutions and those elected to serve in them.

Won’t somebody think of the (foreign) property developers?

Australians yesterday woke to the exciting news that Chinese property developers will finally be establishing a peak lobbying body in Australia. From the Australian (via Macrobusiness):

Major Chinese developers with billions of dollars worth of local construction projects under way are planning to launch their own peak group, which will seek to argue the case for foreign investment and to have greater input into local approval processes.

The organisation, likely to be known as the Chinese Developers’ Alliance, will have anchor member companies including Dalian Wanda, Macrolink and Hailiang, with the three alone emerging as key players in the nation’s property development market.

The Chinese lobby group will also seek to have discussions with governments when they implement policies that may affect the companies. State governments in NSW, Victoria and Queensland hiked taxes on foreign home buyers earlier this year in a bid to cool the overheated market.

This is a long overdue move, with mainland China’s corporate and political interests historically having had no voice in Australia’s public sphere. I mean, assuming you don’t count the influence achieved by (deep breath) the $5.5m of donations made by Chinese linked donors to the LNP and ALP between 2013 and 2015, the hiring of former Australian government ministers to lobby for Chinese corporations, the ongoing advocacy efforts of existing Chinese industry groups such as the Australia China Business Council, the Chinese communist party’s reported control of much of Australia’s Chinese language press, and the financing of pro-China think tanks, such as Bob Carr’s “Institute for Getting Paid” at UTS.

But let’s be honest, all China’s political and corporate interests have to show for these efforts is (jesus, another deep breath) direct access to politicians (which seems likely to be increasingly taken advantage of), ownership of the strategically important Port of Darwin, exclusions from limitations on the number of and certain labour market testing requirements for 457 visas under the recent China/Australia Free Trade Agreement, the right for Chinese children as young as 6 (6!) to  immigrate to Australia on a student visa with a carer in tow, and the ability to persuade Labor senator Sam Dastyari to support their position on regional geopolitical issues.

Now, on first glance this list looks like a compelling argument for limiting foreign influences in Australian politics, but you need to remember that Sam Dastyari is just an opposition backbencher now, so that one doesn’t really count. Further, if we ignore all the other items on the list then it becomes pretty obvious that lobbying and political donations from Chinese interests haven’t achieved much. This ineffectiveness is surely why the Turnbull government has taken the far-sighted position of refusing to even think about banning foreign donations to Australian political parties¹.

Anyway, it seems like Chinese property developers feel their voice hasn’t really been heard in the Australian political sphere (I guess they have been drowned out by the noise of all the other foreign interest groups) so they’re going to have themselves a good old fashioned industry lobbying body. Unsurprisingly, this new lobbying body comes as the stake of Chinese investors in the Australian property market continues to grow. From the ABC in April:

The value of foreign investment approvals for Australian residential real estate surged 75 per cent last financial year to a record $61 billion and could account for around a quarter of new developments.

There was one clear source for most of last year’s overseas investment in Australian real estate, which was China.

The vast bulk of individual purchases of real estate were by Chinese nationals, who accounted for about two-thirds of the total number of FIRB applications across all categories.

Mainland Chinese investors also accounted for around 36 per cent of the value of investment in real estate (commercial and residential combined), more than triple the value of the next biggest investor in that sector, the United States.

It’s not all sunshine and lollipops, though. From the ABC this week:

Thousands of Chinese property investors who bought apartments in Australia are still scrambling to save their investments, six months on from a bank clampdown on foreign lending.

Earlier this year, the big four banks cut off lending to offshore investors in a bid to reduce the amount of risk they took on.

They were spooked by some applications with fraudulent proof of income, and wanted to rein in lending to avoid being too reliant on Chinese borrowers.

Property developers in Australia have, in recent months, reported Chinese buyers rescinding their contracts as the squeeze takes hold.

Call me a cynic, but I have a sneaking suspicion that this new Chinese property industry group might do a bit of lobbying on behalf of those poor Chinese owners of Australian property who now stand to lose their shirts (or at least deposits) if they can’t make the settlement payments on their shiny new shitbox apartment. They needn’t worry, though, because the government is ahead of the curve, with treasurer/property-spruiker-in-chief Scott Morrison  last weekend announcing changes to the guidelines for foreign purchases of new property:

The Turnbull Government will implement changes under the foreign investment framework to allow foreign buyers to purchase an off-the-plan dwelling when another foreign buyer has failed to reach settlement.

This change addresses industry concerns, and means property developers won’t be left in the lurch when a foreign buyer pulls out on an off-the-plan purchase.

This action will ensure that markets will not be impacted negatively by an increased amount of off-the-plan sales, particularly from foreign purchasers, not being completed.

The Turnbull government says these changes will prevent price drops in the apartment market that might otherwise result from an increase in settlement failures. It also says that this will increase the supply of affordable apartments, which makes sense given that making things more expensive is widely acknowledged to make them more affordable. I’m pretty sure this was the logic behind the coalitions famed anti-carbon tax campaign, which compellingly argued that excessively affordable $100 roasts would result in a national obesity crisis.

Anyway, Morrison’s announcement reads a lot more like a response to lobbying from rent seeking Australian property developers than a response to lobbying from foreign interests, but the great thing about this government is that there is no reason it can’t be both. Regardless, the governments willingness to make these kind of moves in response to lobbying pressure suggests the Chinese Developers Alliance will have a long, successful future ahead of it.

¹I was originally going to say that both major parties are unwilling to take action on foreign donations, but Labor introduced a private members bill for reforms to the political donation system this week that include a ban on foreign donations to political parties. It seems unlikely to get up given the government’s antipathy to any meaningful donation reform, but credit where it is due.