Monday, 29 May 2017

Health CPI

So Labour and National are scrapping over whether National's increased or decreased the health budget. There's no question that health budgets are well up since National took office, whether in per capita terms, real terms, nominal terms, or real per capita terms. Population's up about 10% since 2008; health budgets in CPI-adjusted terms are up about 29% since 2008. So real per capital spending has to be up.

But the more interesting question's on how to adjust health costs for CPI.

StatsNZ has a sub-index on health costs. And that's shown substantial cost inflation - well above CPI in some categories. But should health spending be adjusted for that sub-index? Let's look at what's in it.

Position in the CPI structure

The health group of the New Zealand Household Expenditure Classification represented 5.09 percent of the CPI at the June 2008 quarter.
Table 1
Expenditure weight for healthJune 2008 quarter
Group, subgroup, or classLevelWeight (percent)Examples of items within class
HealthGroup5.09
Medical products, appliances, and equipmentSubgroup0.98
Pharmaceutical productsClass0.61Prescription medicines, oral contraceptives, and over-the-counter products such as painkillers, cough and cold preparations, sunscreen, and vitamins
Other medical productsClass0.03Bandages and contraceptive supplies (other than oral contraceptives)
Therapeutic appliances and equipmentClass0.34Corrective glasses and contact lenses
Out-patient servicesSubgroup3.32
Medical servicesClass1.97General practitioner, specialist, and optometrist consultation services
Dental servicesClass0.94Dental examination, filling, and denture services
Paramedical servicesClass0.41Medical laboratory (eg scanning) services
Hospital servicesSubgroup0.78
Hospital servicesClass0.78Private hospital services
Let's assume that this is all still the same in terms of weightings and definitions as it was in 2008.

If you flip over to the figures, Infoshare has 2006Q2 as base set at 1000 for the level 2 subgroups. Medical products, appliances and equipment had dropped to 890 by 2008Q3 (National comes in) and is now at 1030. Basically, no inflation there. This group covers pharmaceuticals, medical products, supplies and equipment.

Out-patient services were at 1035 in 2008 and are now 1356. This covers things like GP fees, specialist fees, optometrist fees, dentist fees, and medical lab fees. It's mostly GP, specialist and optometrist fees. Suppose that the government wanted to concentrate health spending on lower income cohorts and so reduced the capitation fee paid to GPs while increasing the range and subsidy on the Community Services Card - with the whole thing being revenue neutral if clinics upped the GP consultation fee. That would increase measured out-patient service cost inflation but it would be silly to increase health budgets on the back of that inflation.

Similarly, if specialists decided to charge private clients more, that affects measured inflation but only affects government health provision costs if they also change how they bill DHBs.

Hospital services rose to 1187 by 2008 and to 1527 by 2017. This reflects costs at private hospitals. If richer people demanded nicer services at private hospitals that would show up as cost inflation but wouldn't affect costs at public hospitals - but could reflect that public hospitals are declining in quality of amenities relative to private ones.

Bottom line: the health component of the CPI has increased far more quickly than other parts of the CPI, driven by increases in private hospital costs and out-patient services. It's very likely that the cost of providing health services in the public system has outpaced CPI inflation, but I'd be reluctant to just use the health services subcomponent of CPI for a weighting there.

A few notes on the budget

Your take on last week's budget should depend on whether you have your economist glasses on, your politics glasses on, or your "economic policy is constrained by institutions and elections" glasses on.

The economics of it are pretty average.

The increase in the accommodation supplement is likely to flow through primarily to landlords. Radio NZ has reported on work at MSD showing relatively little effect of a prior increase in the accommodation supplement on rents, but the basic tax/subsidy incidence on this stuff depends on market conditions. If supply is more elastic than demand, meaning that a given increase in rent does more to stimulate new construction of rental properties than it does to decrease demand for rental accommodation, then the accommodation supplement is good for low-income tenants receiving it. If you run your study when regulatory barriers to building aren't as binding, you'll find that increases in charged rents are pretty minor. But if you extrapolate from that period to now, you just might be making a mistake.

I also worry that there's not been quite enough attention paid to the long term fiscal outlook, where the costs of an aging population drive us into substantial net debt from 2030; to effective marginal tax rates, which barely changed; or, to the small-scale fiscal discipline that would avoid cash giveaways to the film industry in favour of measures addressing either of the two prior points.

The changes to the tax thresholds only partially adjust for inflation since they were last changed in 2010. The increase in the threshold for the 17.5% rate overadjusts for inflation, but the 30% rate's threshold was underadjusted, and the 33% rate's threshold wasn't touched.

My piece at the Spinoff, last week, covered what would have been needed for inflation adjustment to those thresholds:
Suppose that the government adjusted the tax thresholds to account for wage inflation since 2010. The top income tax rate would then kick in around the $83,000 level, the 30% rate would come in at around $57,0000, the 17.5% rate would apply from about $17,000 and the bottom rate would apply below that. Treasury’s tax calculator says this would cut just under $1.9 billion from government revenues. For the same drop in government revenues, every tax rate could be cut by a percentage point and the 17.5% rate could drop by two points. Everyone would get to keep a greater fraction of the next dollar earned.
If we rank options, here's my preference ordering:

  • Adjust for inflation automatically by knocking income tax rates down by half a percentage point whenever accumulated wage inflation warrants it. Treasury's calculator provides the full-year costs of a one percentage point change in each of the tax rates. Whenever inflation gives the government an extra $740m in revenue through fiscal drag, cut each of the rates by a half point - at least on the current costings. 
    • Adjusting things this way means everyone sees a change in their marginal tax rate, with consequent dynamic benefits for growth. Adjusting the thresholds provides a big marginal tax change for a small group, and large inframarginal changes for everyone else.
  • Adjust for inflation automatically through annual changes to the tax brackets.
  • Let politicians pretend inflation adjustments are tax cuts in an election year. We're probably stuck with this one because politicians really really like being able to announce tax cuts in election years.
And that gets us to the pure politics lens, which has the budget as a triumph. That lens is boring and has been done to death already. 

If we run it instead through a "what's the best we could have expected given that it's an election year and given the political constraints" lens, it's not too bad. Just consider how much better things are here than in Australia - the subject of my Australian Financial Review piece on the budget.




Saturday, 27 May 2017

A better case for tipping

If New Zealand were to move towards a tipping norm, here's an entrepreneurial idea.

Set up a restaurant. The wait staff are all volunteers. They still have to pass through normal recruitment practices, but they're volunteers. List on the menu prices that there is no charge at all included in the prices for service: none. The wait staff receive no pay except that which is provided by diners as a gift, and list some suggested gratuity levels that would provide, if every diner paid those amounts, various wage levels from $15/hr to $30/hr.

Currently menu prices include not only the cost of wait staff but also the GST that applies on the service provided by the wait staff. My restaurant only charges GST on the non-waitstaff costs.

And restaurants normally have to compete for staff based on salary, but the gifts provided to my staff would all be before-tax. And since nobody's tracking how much the wait staff receive in donations, they'd be on their own recognisance when it came to things like income tax and ACC levies. Really, the tips are a gift, right? There's no gift duty in New Zealand (though I'm pretty sure IRD doesn't consider tips to be gifts).

I might change my mind about this whole tipping thing.

Friday, 26 May 2017

Ending appeasement

Blackland's produced the best summary of the demise of the Wellington 7s that I've yet seen. Bottom line: the only outcome that would appease the critics was the death of the Sevens, so attempting appeasement was not a great strategy.

From their summary:
The organisers acquiesced to, and collaborated with, the “moral panic” (an imbalanced, hyper-sensitive reaction to non-extraordinary normal events) among the City establishment, including the Council and Police.

It was driven by non-attendees who disliked the behaviour, and campaigning media, but gathered strength when it was allied with anti-alcohol and social disorder sentiments. This gave moral imperative and opportunity which meant establishment and elite figures felt obliged to agree that “something must be done” to change the behaviour.

The changes made by the Sevens organisers and the City establishment directly affected the “party” atmosphere. This experience also relied on large crowds – the joint and mutually reinforcing experience. When attendance began to decline in response to the changes, it quickly gathered pace. Each fall affected the experience, which deterred future attendance.

The lesson is that acquiescence to value signalling of noisy people on contentious subjects can disadvantage those most important to your organisation or event; customers, staff or shareholders.

It is instructive that the Police finally praised crowd behaviour and declared themselves satisfied over the 2017 event, when effectively no one turned up and was a fiscal disaster.

The Police and the City establishment had killed a “golden goose” event enjoyed by tens of thousands of everyday New Zealanders, and the Sevens organisers collaborated.  
They conclude:
Conceding that there was a behaviour and alcohol problem tacitly accepted the need for curbs on these factors. That meant conspiring with the moral panic to suppress factors key to the event’s success. When they did, the event lost popularity.

Because the event was an alcohol-imbibing outrageous party, these factors would be a feature. If you remove these features, you remove the Party. You remove the party, you remove the event.

A common response recommended by public relations “experts” is to concede some ground – accept criticism and modify.

This was the first route tried by the organisers. It didn’t work. It accepted that alcohol consumption and behaviour was out of the ordinary and therefore a problem.

This emboldened and legitimised critics. Without the organisers’ backing, no one was standing up for the event’s punters.

Without any defence of the relatively innocuous and common standard of drinking and behaviour, the complaints were not challenged and moderated.

The next route was total collaboration with critics. The organisers introduced rules and components to the event pandered to the idea that it was possible to create a new product and attract new customers.

The critics had no skin in the event. The success or failure of the event would not be their responsibility, and would have no direct impact on them. Their objectives were different. They were motivated by factors such as changing alcohol consumption or attitudes, undermining rugby, signalling virtue to peers, or gaining political advantage or media airtime.
Read the whole thing, as well as their excellent recommendations that follow on from the conclusion.

HT: Stephen Franks.

Previously:

Product labelling

All we wanted was truth in labelling, backed by tough enforceable regulatory standards, right? Sounds good?

Here's where that path goes:
The fight over the US government’s definitions for certain foods has flared up again. It’s no longer just a fight for milk farmers, who’ve grown increasingly angry about plant-based food companies (think soy, almond, and cashews) calling their liquid products “milk.”

For the first time, vegetables are being roped into the debate—all because of the arrival and popularization of “cauliflower rice.”

“Only rice is rice, and calling ‘riced vegetables’ ‘rice,’ is misleading and confusing to consumers,” Betsy Ward, president of industry lobby USA Rice, said in a statement earlier this month. “We may be asking the Food and Drug Administration and other regulatory agencies to look at this.” Ward added that Scott Gottlieb, the new Trump-appointed FDA commissioner, could use his power to enforce the agency’s existing definitions for food, the so-called “standards of identity.”
The better system: a consumer guarantees act that guards against fraud, and a court system prepared to tell a plaintiff that he's an idiot for suing a riced vegetable producer for having a product that doesn't contain right (and award costs against him).

Thursday, 25 May 2017

New EMTRs!

We have the new Effective Marginal Tax Schedules. Really these things should be published along with the budget documents.

The excellent Patrick Nolan will be presenting some work at the NZEA conference explaining New Zealand's EMTRs. They're kinda high in some income ranges.

I asked Patrick whether he might update one of the main scenarios (they all vary depending on number and ages of kids) to account for the newly announced income tax thresholds and WFF abatement rates. And he kindly provided! Thanks Patrick!

This scenario tracks the EMTR by weekly hours of work for a single-income family with an earner on $20/hour and with one child under the age of 16. I'll quote from the scenario description - note that the description is from the pre-budget version so make your own adjustments.

Again, the $14,000 threshold increases to $22,000; the $48,000 threshold increases to $52,000, the family tax credit increases by $9 per week and abates at a higher rate starting from a lower level of income. The accommodation supplement is not here included.

UPDATE: Updated 16.30 with a correction to the image from Patrick.


And here's Patrick (again: this is pre-changes):
Income taxes and ACC levies are levied from the first dollar of income. The starting tax rate is 10.5% and ACC levy is 1.4%, thus giving an initial EMTR of 11.9%.
 
Once gross earnings increase to $80 per week the main benefit starts abating. The net benefit abates at a rate of 70% against increases in gross non-benefit incomes. Income-tested benefits are not exempt income under section CW33 1(a) of the Income Tax Act 2007. Thus, as both the level of the benefit and total gross taxable income are above the threshold for the 17.5% tax rate ($14,000 per annum), the gross benefit abatement is 84.8% (given by 0.7 / (1 - 0.175)). The increase in gross income from a dollar earnings is thus 15.2 cents (given by 1 - 0.848), giving an increase in net incomes of 10.1 cents (given by 0.152 * (1 - 0.175) - 0.014), meaning an EMTR of 88.9% (given by 1 - 0.101).
 
The EMTR remains at this level until the gross benefit falls below $14,000, at which point the tax rate used to gross up the main benefit falls to 10.5%. Consequently the gross benefit abatement is 78.2% (given by 0.7 / (1 - 0.105)). The increase in gross income from a dollar earnings is thus 21.8 cents (given by 1 - 0.782), giving an increase in net incomes of 16.6 cents (given by 0.218 * (1 - 0.175) - 0.014), meaning an EMTR of 83.4% (given by 1 - 0.166).
 The EMTR and remains at this level until the person works 20 hours a week and thus qualifies for in-work assistance. The Minimum Family Tax Credit provides a guaranteed net family income, and so net income above the level of the guaranteed net income ($23,764) abates at 100% until the credit is fully exhausted. With the ACC levy this leads to an EMTR of 101.4%.
 Once the family has a net income before Working for Families of $23,764 the Minimum Family Tax Credit is fully abated, and the EMTR falls to 18.9%, reflecting the 17.5% income tax rate and 1.4% ACC levy.
 
Once gross income reaches $36,350 the rest of the Working for Families programmes start abating at a rate of 22.5%. The order of abatement is the Family Tax Credit and then the Working Tax Credit. (Note the Independent Earner Tax Credit and Parental Tax Credit are not included in this model.) This gives an EMTR of 41.4% (made up of 22.5% Working for Families Abatement, 17.5% income tax, and 1.4% ACC levy).
 
At $70,000 gross income the income tax rate increases to 33%, so the EMTR increases to 56.9%, and once the Working for Families entitlement is fully abated the EMTR falls to 34.4%, which is a combination of the top personal tax rate and the ACC levy. The EMTR remains at this rate until $122,063, at which point the ACC levy is no longer charged, and the EMTR is 33%.

Thanks again!

Previously: Bringing sexy back - EMTR style

Tax cuts require fiscal discipline

It's budget day here in New Zealand. Much has been pre-announced; Chris Keall has the summary list over at NBR. But as Rob Hosking points out, there's a pretty big remaining surplus that could yet give us some surprises. 

I'd expect most of those surprises to be saved for later election promises, but it would be nicer if they were laid out in the budget.

When it comes to tax cuts, though, we need to be careful. The surpluses look fine for the next few years, but current tax cuts would need to be reversed in a decade's time if we've neither sorted out the costs of an aging population (NZ Super, health), nor increased productivity and economic growth. And temporary tax cuts do less good than permanent ones.

I cover it off over at the Spinoff.
The case for more substantial tax cuts is sound, but harder. It requires the government to be willing to cut programmes that deliver little benefit. And while the government has taken a sharper eye on the effectiveness of new spending programmes under the social investment approach, too much spending simply carries over, year after year, with little attention paid to whether that spending achieves its objectives.

Interest-free student loans cost the government $600 million dollars per year and mostly benefits students who are either from wealthy families or who are likely to go on to be higher earners themselves. That’s more than what it would cost to cut the 17.5% income tax rate down to 16.5%.

Deciding not to throw $300 million at the film industry over the next four years would allow the government to cut the 30% rate down to 29.5%.

Every billion dollar programme throws away the chance to cut the 17.5% income tax rate to 15.5%.

But, even worse, while the medium-term forecasts are very rosy, with plenty of room for tax cuts, the longer-term projections have health care and superannuation costs requiring substantial tax increases or substantial spending cuts – unless somebody finds the magic formula to reverse the long-term slump in productivity.