Immigration and Oz: What Gives? (II)

Apologies to the readers for the delay.

"So who wins and who loses from past and current Australian immigration? (...) The actual outcome in distribution terms depends a lot on [the] use of the fiscal dividend, between increased public outlays of various kinds and tax cuts." (Garnaut, Ganguly and Kang. 2003. Pages 159 and 160).

As hinted in the previous post, the Australian Government's favorable perspective on immigration is not necessarily valid for all social groupings.

The 2003 Garnaut, Ganguly and Kang study attempted to analyze this matter, considering different areas. One of the main areas considered is taxation and fiscal policy, which we'll study here.

The chart below shows the Commonwealth cash balance (deficit/surplus) as a percentage of GDP, for the Hawke/Keating and Howard periods.

Source:
2009-10 Commonwealth Budget - The Final Budget Outcome.
Appendix B: Historical Fiscal Data. Table B1.

Excepting three years (1987-88, 89 and 90), the Hawke/Keating period saw a sustained fiscal expansion (i.e. fiscal deficits).

In contrast, the Howard period (excepting its first financial year, 1996-97,) was characterized by fiscal contraction (sustained surpluses).

About now, and following the "spending funded by taxes" logic, the reader should be asking about the origin of the money spent during the Hawke/Keating period and hoarded during the Howard period. (Find the data here, Table B1 of Appendix B).

Show Me the Money

To answer that question, one must consider that during the combined Hawke/Keating-Howard period taxation receipts oscillated over a broader 4.3 percentage point wide range (maximum of 24.1% of GDP for 2004-06, during the Howard period; minimum of 19.8% of GDP for 1992-94, under Hawke/Keating).

Non-taxation receipts, at the other hand, oscillated around a narrower 1.5 percentage point wide range (maximum of 2.9% of GDP in 1986-87, during the Hawke/Keating period, and minimum of 1.4% from 2003-04 to the end of the Howard period).

In other words: during the Hawke/Keating period the Commonwealth spent in excess of revenues, even when they had considerable non-taxation receipts (for instance, privatizations). As a consequence, it's possible that this period also had a considerable degree of "churning" (jargon for returning to tax payers, as transfers, money collected as taxes or as other Commonwealth receipts).

During the Howard period, at the other hand, the Commonwealth hoarded money, largely originated from tax receipts (as non-taxation receipts were greatly reduced by then).

Rich Man, Poor Man.

This sets the context for the following two charts, which describe the evolution of the tax-free threshold (i.e. the minimum income level, beyond which income taxes are paid) and the top threshold level (that income level beyond which taxpayers pay the top rate). In both charts, the red line indicates how much the 1983-84 threshold would be if it had been actualized with CPI variation. In blue is the actual threshold. (Data from ATO: see here)

From 1984 and up to 2005 actual thresholds increased less than their inflated versions: this is known as "tax bracket creeping".

From 2005 on, the top income threshold shot up, while the tax-free threshold remained stuck.

A "beer coaster calculation" (as some friends call this kind of exercise) can be useful to understand what this means:

1. A person who by 1983-84 earned an income of $4,500 would be just below the tax-free threshold for that year ($4,594) and would have paid no income taxes.
2. By 2005-06 the same person, earning now some $10,493 (its 1983-84 income, actualized by inflation) would have exceeded the tax-free threshold that year ($6,000) and would have paid $674 over the excess (an effective tax rate of 6.4%). So, this person has clearly lost over time.
3. A person who by 1983-84 earned an income of $36,000 (just inside the top income bracket for that year: $35,788) would have paid $12,091, for an effective rate of 33.5%.
4. By 2005-06 the same person, earning some $83,949 ($35,788, actualized by inflation) would have fallen below the top tax bracket. In the second highest income tax bracket, she would have paid $29,059, for an effective rate of 34.6%. So, this person has not seen a real change in her taxes.
5. Now, let's consider a person who, by 1983-84 earned well in excess of the top bracket threshold: $105,000. In that year, her tax bill would have amounted to $53,491, for an effective tax rate of 50.9%.
6. By 2005-06 the same person, earning now some $244,851 (its 1983-84 income, actualized by inflation) would have paid $98,630, for an effective rate of 40.3%. So, this person did see a considerable improvement in its taxes.

The examples above are clearly a simplification: the Australian tax system is extremely complex. For instance, it does not include the Medicare levy or HECS (both payable beyond a certain income level); in compensation, it doesn't include National Rental Affordability Scheme, Private Health Insurance Tax Offset, Superannuation Co-Contributions (benefiting mostly higher income earners).

Furthermore, it does not consider the GST (which adds 10% to the price of most goods and services, regardless of income, and which accounts for some 4% of taxation receipts), State taxes and municipal rates (which were greatly reduced after the GST came into effect).

As the opening quote suggests, Garnaut, Ganguly and Kang considered a potential reduction of taxes as one of the main potential benefits of the increased immigration intake.

With its limitations, the calculations above give reasons to suspect that immigration has not been accompanied by a tax bill reduction for all Australians (or for the migrants themselves).

It seems some people are getting a much better deal.

Next post in this series (no promises about the date!!): how about wages?


Update:

This feedback did not take long to come and it's a very good one, too.

The numerical examples were based on the taxation rules applying in 1983-84 and 2005-06.

As the tax-free threshold remained constant on $6,000 since then, currently our hapless low-income earner is paying more than 6.4% (7.2% in the 2008-09 financial year).

The second tax payer improved some, but not much: effective taxes now of 32.2% (versus 34.6% in 2005-06). 

But things do get better for the higher earning taxpayer: from paying 40.3% in 2005-06, it came down to 36.5% (2008-09).

Immigration and Oz: What Gives?

The year is 1988. Declaring himself alarmed by a record immigration intake, then Federal opposition leader, John Howard, released the One Australia policy.

That policy, justified on the need to preserve the ethnic makeup of Australia, called for tougher immigration rules.

As the chart shows, the migratory intake fell dramatically (as did Howard himself in 1989, partly due to opposition within his own Liberal Party of Australia to the One Australia policy).

Population increase: Components. (ABS. 3101.02)

It is debatable the extent this reduced migratory intake was due to the approaching 1991 recession, or to eventual tighter selection criteria voluntarily applied by the Hawke/Keating government, inspired by One Australia. What's indisputable is that the immigration intake rebounded to higher records... during the Howard Government, in spite of its new tough asylum seekers policy.

The contradictions revealed by this episode speak volumes about immigration in Australia, where a populist rhetoric depicts immigration as a risk to some undefined "Australianness", while the Government tries to sell immigration as an unmitigated good and deeper interests, often unmentioned and officially unacknowledged, both oppose and support immigration.

In an attempt to shed some light on these opposed interests, let's consider what facts are clear?

Natural Increase.

An obvious characteristic in the chart above is that natural increase is remarkably constant.

As a consequence, relatively constant increases in absolute numbers result in a decreasing population growth in percentage terms. That is, smaller and smaller proportions of native Australians join the workforce, the internal demand and the taxpaying base.

Consider the children born in Australia in 1982, shortly before Hawke took power. From the first moment, these children have a difficult to assess effect over the Australian economy.

At one hand, they increase demand for private goods and services, which their parents need to provide by themselves or with the help of government transfers.

Increases in aggregate demand are seen as the engine of economic growth, so one could conclude with mainstream economists, that they have a positive effect on the economy.

A more careful consideration, however, reveals that such conclusion is not always granted: it's possible for an increase in demand by the children to be partially offset by their parents' decreased consumption. To what extent one effect prevails over the other is impossible to assess on the data available.

But the 1982 cohort also increases demand for public services (mainly education and health), which require public funding.

And these individuals only start to join the workforce by 1998, into the Howard Government. At this point, they gradually start to earn a living by themselves, freeing their parents' income for their own consumption, increasing their individual consumption, and paying taxes.

For a government as the Australian, that insists on managing its finances by the "spending funded by taxes" logic (logic disputed by the MMT school of economics), this lengthy transition from net recipient of government transfers and user of public services, to taxpayer makes natural increase of the population a relatively unattractive option.

Net Overseas Migration.

From a government's perspective, the option of net overseas migration as population growth driver is easier to assess and much more convenient.

For one, net overseas migration, as shown in the chart, is much more variable and probably easier to control. By itself, that explains that it has recently become a much larger component of population increase.

Are there any other advantages in immigration?

Immigrants do not require public funding to develop their labour skills [#]. If they arrive through the skilled migration stream, they have already completed their professional training. If they arrive through the student stream, and obtain residence while in Australia, they pay for their own training.

In any case, this allows Australia to externalize training costs: either individual migrants or their countries of birth assume these costs and the Australian Government benefits in that measure.

Further, migrant families arriving in Australia need to have at least one breadwinner in working age (i.e. the main applicant in the visa application protocol), and are subject to a two-year waiting period before they can claim social security: they need to provide for themselves from the start, paying taxes in the process.

Notice as well that, as the proportion of older Australians increases, the number of retirees increases and they will all but stop paying taxes. Again, migrants come in handy to fill the void left.

What's more, migrants also contribute to aggregate demand.

The Australian Government Perspective.

From the considerations above it appears that the case is clear: migration is in the interests of the Australian Government, either as a replacement for natural increase or as a boost to it.

In fact, the literature largely follows the logic described above and arrives at similar conclusions, although with some nuances. See for instance the Garnaut, Ganguly and Kang 2003 report (section 2), commissioned by the Department of Immigration, Multicultural and Indigenous Affairs. [*]

But is it legitimate to assume that the interests of the Australian Government coincide with the interests of all Australians? What about the migrants themselves?

Interestingly, the Garnaut, Ganguly and Kang report mentioned above attempted to consider this question explicitly. Reading the report from this perspective, the answer doesn't seem so clear.

This series will continue next week: who benefits from immigration?

NOTES:
[*]  One of the factors the report considers, which I did not include here, is the "scale factor". Essentially, larger populations, regardless of origin, should bring about scale economies. The report does not provide any specific estimates of this effect. Further, the report does not consider the possibility that this effect might suffer from decreasing marginal effects. For those reasons, it seems sensible to omit its consideration here.

Update:
[#] Here a note for readers outside Australia is required. Immigration to Australia, perhaps unlike the US, for instance, is largely legal migration. This provides the Commonwealth Government with considerable powers to shape migration. As suggested in the main text, a large contingent of migrants come through the skilled migrants stream. Those who come through other streams often don't require working skills (for instance, relatives of Australian residents, part of the family reunion stream and dependent upon the residents for their support; prospective business owners, who are required to bring in capital, but no specific labour qualifications).

Dodgy Recovery!

Today Thursday 9th of June the ABS released its latest employment figures (Labour Force, Australia, May 2011 - catalogue number 6202.0).

Last time we reported employment falling by 22,100 fulltime positions (equivalent to a loss of 308 thousand in the US).

At the time, the loss seemed so severe that raised questions about a statistical fluke, as can be seen in my previous comment and here.

Last May seasonally adjusted employment fell again, by 22,000; but it was partially compensated by 29,800 part time new jobs.

Employed Persons

From the chart above (taken directly from the ABS) It would seem that trend employment has reached a peak, barring unforeseen positive events.

Hours worked increased slightly, by 0.4%, although not enough to compensate for April's fall of -0.9%.

Labour underutilization rate (unemployed plus part-timers looking for extra work) increased to 12.2, from February.

At the other hand, not even our esteemed pundits, experts, journos, bloggers and others seem to be calling for an urgent interest rate hike, any more.

Which, come to think of it, sounds really ominous.

You Be The Judge

Last night (Wednesday, 1th of June) the ABC's 7.30 Report contained a segment on the possibility of a NSW Government/state employees unions conflict.

This post will consist on pieces of the transcript (see here). They are shown in italics, and indentation, so they are easily distinguishable from my comments (not in italics, and either not indented or within square brackets):

CHRIS UHLMANN, PRESENTER: The New South Wales Government is the nation's biggest employer and it's about to revolutionize the way it deals with its 400,000 workers. It's set to cut arbitration rights and fix pay increases. The justification is a blowout in the public sector wages bill, and the changes could become law as early as tonight.

But independent research obtained exclusively by 7.30 questions the assumptions driving one of the country's biggest industrial relations experiments.

Here we'll focus on the calculations the O'Farrell government uses to justify its measures.

BARRY O'FARRELL: Well since 1997, the figures show that public sector wages in NSW have increased by 21.6 per cent. That's outstrips private sector wage increases of 11.1, it outstrips Queensland public sector wages at 14 per cent - 14.3 per cent, I think, and Victorian wages of just over 15 per cent.

CONOR DUFFY [reporter]: The new research obtained by 7.30 challenges the assumptions underpinning the Government's reforms. An independent analysis conducted by Sydney University's Workplace Research Centre concludes NSW public sector workers are paid roughly the same amount as their counterparts in other states and in the private sector.

The research mentioned can be found here. Note one refers to interstate comparisons for three categories of state public employees not at entry level (teachers, senior constables, and registered nurse). Note two refers to an statistical analysis of the difference between public and private sectors pays.

JOHN BUCHANNAN, WORKPLACE RELATIONS CENTRE, UNI. OF SYDNEY: These aren't fat cats who are rolling in clover; these are people [teachers, senior constables, and registered nurse] who are basically getting a little bit above average [wage for both private and public sectors at state level, regardless of experience]. So if you take those kinds of cuts in pay, they're gonna be below average and in some cases quite some way below average weekly earnings.

In some cases, NSW employees are above other states employees, in some cases, below.

CONOR DUFFY: The paper also modelled the effect the policy would've had on wages if it had been introduced 10 years ago. It found teachers would be 14,580 a year worse off, senior constables would be $8,961 a year worse off and nurses would be $12,232 a year worse off.

This is how the segment concludes:

BARRY O'FARRELL: I still make the point that on the 1997 to 2010 figures, public service wages in NSW have outstripped private sector wages and public sector wages in Victoria, in Queensland. That's across the board. I'm sure that, as with any other argument, someone can find an exception to prove the rule, but it doesn't make us back off.

Here it appears Premier O'Farrell is moving the signposts: it's not that NSW state employees' current salaries are higher than those in other states, but that they have increased faster.

CONOR DUFFY [reporter]: Such is the strength of the O'Farrell Government and the loathing for the Labor Opposition, it can politically afford a brawl with the unions, but there are warnings it may come at a cost, particularly in the state's classrooms, hospitals and police stations.

O'BRAY SMITH [registered nurse]: I certainly couldn't live in Sydney. I would have to move elsewhere. I don't think there's many nurses that could afford to live in Sydney with that kind of pay cut.

BARRY O'FARRELL: We want to ensure whether you're a nurse, a teacher, a police officer or some other public servant upon whom we all rely, that you get a fair rate of pay. We think this does guarantee a fair rate of pay.

For an ominous parallel with an episode (totally neglected by Australian media) but that could shed some light on this seemingly looming conflict, please see.