#11 March 2006 - Melbourne Institute News

Melbourne Institute News March 2006 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 11

Consumers won’t let interest rates deter them from spending Australians will keep buying despite being in debt and despite interest rate concerns, a recent study has found.

Australia: A Healthy Population?

Professor Tony Scott explains why being healthy has a large impact on the quality of people’s lives and on economic growth in Australia.

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Opinion by John Freebairn Professor John Freebairn gives his opinion on the ongoing discussion on tax reform in Australia.

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HILDA Report The HILDA team has just released a new report providing a snapshot of Australians’ lives over the past few years.

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Indexes of Economic Activity

The study, conducted by the University of Melbourne’s Melbourne Institute of Applied Economic and Social Research, estimated the causes of changes in consumption expenditure in Australia over the period 1970 to 2005.

In addition to income, the principal determinant of consumption expenditure was found to be the availability of either housing credit or other personal credit. As is found in most other studies, but not by all, the level of interest rates was found not to influence the levels of aggregate household expenditure.

With financial deregulation over the 1980s, the magnitudes of the estimated coefficients on both the income and credit variables were estimated to decline. This indicates that households are better able to smooth their consumption outlays over time with a more deregulated financial market.

‘The sensitivity of consumption to credit suggests that monetary policy could exert powerful effects on consumption by affecting the availability of credit’, said Dr Lei Lei Song.

The full findings of this study, entitled ‘Response of Consumption to Income, Credit and Interest Rate Changes in Australia’, are available online at www.melbourneinstitute.com.

Dr Penny Smith gives us the rundown on the Westpac – Melbourne Institute Indexes of Economic Activity, which has just celebrated its 20th birthday.

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www.melbourneinstitute.com Melbourne Institute of Applied Economic and Social Research - Page 1

Australia: A Healthy Population?

Being healthy has a large impact on the quality of people’s lives and on economic growth in Australia. The determinants of health are, however, complex.

The determinants of health include the way we live our lives including what we eat, what other substances we choose to let into our bodies, how much we exercise, and the environment around us. Another large impact on our health, especially when we are ill, is the health care system and the doctors within it. Doctors make the key decisions, whilst working with other professionals, about how to restore our health, quality of life and in many cases life itself.

Given the $10 billion in taxpayers’ money spent on medical services each year, you would think it would be helpful to Peter Costello and Tony Abbott (and of course to voters) if they knew what we were getting for this money. Productivity is easier to measure in other industries as these industries make profits and their value is determined by the stock market. In health care, profits do not sit easily with maximising the population’s health due to well-documented market failures and because of the importance placed on equity of access to health care services. So how do doctors measure how well they are doing?

Alan Maynard, a health economist from the United Kingdom, observes that across the developed world doctors do not routinely measure success in terms of improvements in their patients’ health. They measure only failure in terms of death rates. It is therefore

by Tony Scott

difficult to tell whether the productivity of doctors is improving or not as health expenditure continues to grow. Only in the context of medical research do doctors attempt to measure the impact of their activities on patients, and even in this context only recently have doctors begun to measure health status and quality of life.

In Australia, as in many countries, there are intermediate measures of doctors’ productivity that are used because they are easy to measure. Data from Medicare, combined with data from the Australian Institute of Health and Welfare, show clearly that the number of medical services provided per doctor and doctors’ working hours were falling between 1997 and 2003 whilst the revenue from the fees charged was increasing. Doctors were working less, fewer services were being provided and fees and costs were rising with unknown changes in quality. Since 2003 a number of Medicare initiatives have continued to increase payments to doctors in order to increase bulkbilling rates and this appears to have worked. However, this has further increased costs and doctors’ incomes with unknown effects on patients’ health.

What impact might these changes have had on population health? The first potential effect, which would not be popular with the AMA, is that doctors reduced their working hours and then increased their fees to maintain their incomes. This will have reduced access as shown by the dramatic fall in bulk-billing rates during that period.

Evidence suggests that patients who are deterred from visiting their doctors are more likely to be those on low incomes and in most need of health care. Population health may therefore have fallen.

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A counter argument is that the quality of health services has increased. There is some weak evidence that the quality of GP services has been increasing since the mid-1990s. More GPs are accredited and meet basic standards, more GPs are now Fellows of the Royal Australian College of GPs, and consultation lengths are longer. However, these are not direct measures of whether patients are more satisfied or are more healthy.

The net effect on population health depends on whether the forgone health gains of patients deterred from using health care due to price rises are higher or lower than the potential increase in quality of care for those who still visit their GP. So how do we ensure that population health is maximised? The ‘Trojan Horse’ solution is to increase the number of doctors. This will cost billions and there is little evidence, since doctors don’t collect it, of whether population health will actually improve. Another option is to ensure, through structural reform of the health system, that the doctors we do have are able to do a better job.

There is much evidence from doctors’ own randomised controlled trials about the ‘best’ way to practice medicine, but little of this evidence is applied or used.

There are important links to be made between the use of evidence-based medicine and the methods used to pay doctors. This is already happening to a small extent through the introduction of the Practice Incentives Payments, which means that GPs rely less on fee-forservice and more on ‘blended’ payment methods which do not contain the extreme incentives for under- or overservicing.

Getting nurses to do some of doctors’ tasks is another potential solution, and less reliance on the fee-for-service system can help here, but there is also a shortage of nurses.

If the government is serious about continuing to encourage economic growth and enhancing the quality of life of Australians, then a little more bravery and brawn are needed to ensure that the health care system, and the doctors who underpin it, play its role.

The full findings of this study, entitled ‘The Productivity of Doctors in Australia: The “Flat of the Curve” and Beyond?’ are available online at www.melbourneinstitute.com.

Monthly Inflation Gauge On 7 February 2006, TD Securities Asia Pacific and the Melbourne Institute held a function in Sydney to mark the removal of the qualifier ‘experimental’ from the TD Securities – Melbourne Institute Monthly Inflation Gauge. The Inflation Gauge is designed as a timely and accurate monthly measure of inflation in Australia.

Over its short history, the Inflation Gauge has accurately estimated inflationary pressures in Australia, with the added advantage that the quarterly estimates are available about seven weeks earlier than the official statistics.

In September 2005, the Inflation Gauge was successfully revised to accord with the 15th series of the CPI. This was without any problems and was a major achievement, confirming that the processes are reliable.

The Inflation Gauge estimates month-to-month price movements for a wide-ranging basket of goods and services with weights that replicate those used by

the Australian Bureau of Statistics in measuring the Consumer Price Index. Each month, the Inflation Gauge collects information on the prices of around 1,000 goods and services, and weights the changes in these prices according to expenditure class to arrive at an estimate of inflation for that month. The Inflation Gauge is released monthly before the board meeting of the Reserve Bank of Australia. The Inflation Gauge was in development for over a year prior to its official launch in July 2003 as an experimental indicator.

Further details about the Inflation Gauge and presentations at the function by Professor John Freebairn, Director of the Melbourne Institute, Mr Stephen Koukoulas, Chief Strategist of TD Securities Asia Pacific, Dr Lei Lei Song and Dr Don Harding can be obtained at www.melbourneinstitute.com/research/macro/tdsec. html.

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Opinion

by John Freebairn

and capital resources, although whether we are facing inflationary pressures is a tricky judgement, suggests a case for running a surplus. Whether that surplus should exceed one per cent of GDP, as the $10 billion figure does, and how to trade-off a larger budget surplus with current or lower interest rates, should be up front in the macroeconomic policy debate.

The ongoing discussion on tax reform in Australia seems to involve at least three different sets of topics with different objectives and different sets of arguments for and against the choice options. These also are topics of increasing political and economic complexity. They are: • Reducing tax rates; • Broadening tax bases by removing special exemptions and deductions; and • Fundamental tax mix changes.

We briefly note some of the key options in each of these debates.

Income Tax Rate Reductions Key ministers in the federal government seem to be preoccupied with the narrow tax reform debate of lowering tax rates to return tax funds for private expenditure by individuals and businesses. Federal revenue gains from the booming economy, and in particular from the cyclical highs of commodity prices which most expect to fall over the coming years, and from the effects of fiscal creep associated with the growth in nominal incomes and failure to index the tax brackets (for inflation and also for the growth in real per capita incomes) have boosted the forecast federal budget surplus for the current and next financial year to over $10 billion each year.

Discussion of the use of the fiscal surpluses involves consideration of macroeconomic policy and of the longer term structure of the economy. With the Australian economy entering one of its longest sustained growth periods and approaching full employment of labour

Taking a longer term structural economy perspective, the increases in government funds can be used to increase public sector expenditures on health, education, defence, sports, public infrastructure and so forth, or the increased funds can be returned as tax cuts to individuals and businesses to fund increased private expenditures on health, education, food, recreation, business investment and so forth. The economic market failure arguments, as well as political and social judgements, on this public–private split of the economic pie vary across the spectrum, both within contemporary Australia and in comparing across countries and over time, in what is an unresolved debate.

More Comprehensive and Broader Tax Bases Funding Lower Tax Rates A number of backbenchers, including Malcolm Turnbull and Craig Emerson, along with many commentators, including myself, have argued for a package of income tax reforms involving removal of many special deductions and exemptions and using the extra tax receipts to fund compensating reductions in income tax rates. The list of special exemptions and deductions to be removed so as to have a more comprehensive income tax base include work-related expenses, capital gains tax concessions, remaining fringe benefits concessions, remote area allowances, special treatment of some lump sum payments, and averaging provisions.

The advantages of a more comprehensive income tax base, and of the lower rates that can be funded, include: an important component of a strategy to simplify a tax system that is complex and costly to administer and comply with; the removal of many of the incentives and rewards for unproductive and inequitable tax avoidance schemes; a more level playing field on related choice options for investment and saving, for different forms of remuneration, and for different business organisation structures leading to a more productive economy; sustaining the integrity of the system and future revenue flows; and making Australia a more attractive location for internationally mobile capital and skilled labour.

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Similar arguments can be made to remove special exemptions and deductions to broaden the tax base and to fund lower tax rates for the GST, and for the payroll taxes and land taxes levied by the states.

are complex and controversial, especially in the realistic context of Australia as a small player in a global economy.

For example, the benefits of reduced distortions to decisions on saving and investment have to be balanced against the costs of increased distortions and efficiency losses with labour decisions.

Tax Mix Changes More radical and more challenging tax reform options worthy of further investigation include changing the mix of income relative to consumption taxes, and more reliance on explicit taxes on externalities of pollution and congestion.

Changing the emphasis from taxation of income to taxation of consumption could be effected by increased emphasis on the GST, increased emphasis on payroll tax, introduction of a direct expenditure tax, or by introduction of a Scandinavian-type schedular tax system.

In effect, the tax burden would be shifted both away from income allocated to savings instead of consumption and away from capital income to labour income. The efficiency and equity effects of such a tax mix change

One policy option to improve the allocation of scarce national resources where external costs are important is to place a tax equal to the marginal external cost on the offending production or consumption activity.

Arguably this is a part rationale for current excise taxes on petroleum, tobacco and alcohol products and gambling taxes. But here there are significant reform options for more appropriate tax bases and tax rates. Potentially large revenue options for productivity enhancing new externality taxes in the future include a comprehensive and broad-based carbon tax, taxes on the external costs of urban congestion, and environmental damage taxes.

Melbourne Institute Economics Forums Upcoming Forums Special Topic: Reforming the Health Care System: Lessons and Future Directions How can the health care system be reformed to increase population health and productivity? Can quasi-markets play a role? Are reforms from other countries relevant to Australia? Professor Tony Scott, a Health Economist from the Melbourne Institute, will review some key economic issues and evidence from overseas concerned with structural and financing reform of the health system, and will outline broad options for Australia.

In Melbourne, Dr Richard Scotton, a Health Economist, will comment on Professor Scott’s presentation and Mr Peter Allen, Under Secretary with the Department of Human Services, will focus in more detail on government policy and future directions for Australia.

Melbourne Institute Economics Forum Carillon Room, Hotel Sofitel, 25 Collins Street, Melbourne Thursday 6 April 2006, 12.00noon – 2.00pm Melbourne Institute Public Economics Forum Federation Ballroom South, Hyatt Hotel, Commonwealth Avenue, Yarralumla Tuesday 11 April 2006, 12.00noon – 1.45pm

In Canberra, Mr Andrew Podger, National President of the Institute of Public Administration Australia and former Secretary of the Department of Health and Ageing, will focus in more detail on future directions for Australia.

In addition, Associate Professor Mark Crosby will present the Melbourne Institute’s economic forecasts.

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HILDA Statistical Report The first annual Statistical Report of the Household, Income and Labour Dynamics in Australia (HILDA) Survey has been released.

Families, Incomes and Jobs: A Statistical Report of the HILDA Survey contains short reports and statistical tables covering the four main areas of HILDA, including households and family life, incomes and wealth, employment and unemployment/joblessness, and life satisfaction and wellbeing.

Authored by Associate Professor Bruce Headey, Ms Diana Warren and Mrs Glenys Harding, the report, which will be annual, provides a new additional set of social statistics for Australia—longitudinal panel statistics describing the ways in which people’s lives are changing.

The Australian social statistics we are all familiar with are cross-sectional. That is, they provide snapshots—still photographs—of, for example, the percentages of Australians who, at one moment in time, are married or single, income rich or income poor, etc.

The report has unearthed a vast array of new statistical information about the way that Australians are living.

Four selected highlights can be seen below.

Who Gets Fired from Work?

Interesting results emerged when respondents were asked about their predictions on being fired from work.

It transpired that respondents’ predictions of their own fate were in the right direction but were much too pessimistic. People who believed they were more at risk were correct. Among those who thought they had more than a 50/50 chance of being fired, just 10.0 per cent were.

Among those who thought the odds were under 50 per cent, 2.7 per cent lost their jobs. The overall Pearson correlation between respondents’ own estimates of the probability of job loss and actual loss was a modest 0.15, and it was almost exactly the same for men and women.

In other words, men and women were about equally good (or bad) at predicting whether they would be fired.

fired. In other words, on the raw figures, men were twice as much at risk of being fired.

Although both genders were overly pessimistic about their job security, women in fact achieved better outcomes relative to their own predictions than men did. Of the women who thought they were 100 per cent certain to be fired, only 6.6 per cent were. This compares with an 11.5 per cent dismissal rate among men who thought they were certain to go.

Gender appears to be one variable which affects whether one is fired or not; and for some reason women are less at risk.

Changes in Marital Status The divorce rate in Australia is increasing, and eventually about 32 per cent of marriages end in divorce. Whilst this statistic might give rise to the impression that many marriages are unhappy for years before they eventually founder, the authors of the report conclude this may be termed a ‘fallacy of social pathology’. The survey indicates that only about 2 per cent of marriages end each year and it is likely that many are happy for years before one or both partners become dissatisfied and initiate separation. Early evidence from the HILDA Survey data supports this theory.

This report shows that in couples where the woman had said that her satisfaction with the relationship was low, only 19.4 per cent of male partners were in agreement, with 40.6 per cent rating their relationship satisfaction between 4 and 7 out of 10, and 40.0 per cent giving answers of 8 or above.

52.8 per cent of men and 40.5 per cent of women who were about to split up reported relationship satisfaction scores in the 8–10 range. Especially for those who were still well satisfied in 2002, the split thereafter must have come as a considerable shock.

Panel data show that most people are well satisfied with their marriages and that this satisfaction lasts, in many cases, until shortly before separation. The probable, although not certain, inference is that most marriages are ‘successful’ for a good many years, even if they eventually terminate.

A striking and puzzling finding is that women who are more optimistic about their job security than men turn out to be right. They are in reality less likely to be fired. In the 12 months following the 2001 interviews, only 2.0 per cent of women compared to 4.4 per cent of men were

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Parenting Stress and Its Effect on Relationships How stressful is parenting and what is the degree of stress parents experience in combining their work and family responsibilities?

The HILDA Survey asked parents to say how strongly they agreed or disagreed with statements related to parent stress. Parents in paid work were also asked how strongly they agreed or disagreed with statements relating to work–family stress.

The majority of parents fell into the category of medium parenting stress, and as might have been expected, single parents reported higher stress than parents who were married or in a de facto relationship.

14.8 per cent of single mothers had high parenting stress compared to 10.1 per cent of mothers with a partner and only 4.7 per cent of fathers with a partner.

Do You Do Your Fair Share of Household Chores?

Traditionally it was the case that in couple families, the men went out to work and women were responsible for most of the domestic chores. Now, a majority of prime age women work, so it seems reasonable that a man whose partner works should contribute to the household chores—but does this actually happen?

Regardless of labour force status, more than half the men surveyed said they do their fair share of domestic chores.

Over half of the women surveyed said they did a bit more or much more than their fair share of chores and 33.3 per cent of full-time working women said they did much more than their fair share.

The results from this survey show that, on average, women spend more hours per week doing household duties than men do, but men spend more time working and commuting than women do. Most men thought they did their fair share of household chores and looking after the children. Women, particularly those with resident children and those who worked full-time, thought they did more than their fair share of domestic chores.

Parents who were employed full-time reported higher levels of work–family stress than those who worked parttime, women had higher levels of work–family stress than men, and, not surprisingly, single parents reported higher levels of work–family stress than parents with partners.

Men reported just slightly higher levels of relationship satisfaction than women. But, if you look specifically at couples with children, the gender difference is larger.

This particular study found that parenting stress does have some impact on women’s relationship satisfaction.

Presumably women are more affected because they still take most of the parenting responsibilities.

Wave 5 HILDA Fieldwork Completed The Wave 5 fieldwork has been completed early in March 2006. The preliminary response rate for people who were interviewed last year is 94.4 per cent (resulting in an attrition rate of 5.6 per cent).

This is a fantastic achievement by ACNielsen and the Melbourne Institute.

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Recent Melbourne Institute Working Papers March 2006, ‘Managing Knowledge Flows through Appropriation and Learning Strategies’, 6/06, Paul H. Jensen and Elizabeth Webster.

February 2006, ‘Market Power, Brand Characteristics and Demand for Retail Grocery Products’, 5/06, Paul H. Jensen and Elizabeth Webster.

February 2006, ‘Trade Marks and Market Value in UK Firms’, 4/06, Christine Greenhalgh and Mark Rogers.

February 2006, ‘Intellectual Property Activity by Service Sector and Manufacturing Firms in the UK, 1996–2000’, 3/06, Christine Greenhalgh and Mark Rogers.

February 2006, ‘The Income Distributive Implications of Recent Private Health Insurance Policies in Australia’, 2/06, Jongsay Yong, Alfons Palangkaraya, Elizabeth Webster and Peter Dawkins.

January 2006, ‘150 Issues of The Australian Economic Review: The Changing Face of a Journal over Time’, 1/06, Daina McDonald.

Happy 20th Birthday to the Westpac – Melbourne Institute Indexes of Economic Activity Published monthly, the Westpac – Melbourne Institute Indexes of Economic Activity examines movements in leading, coincident and lagging indicators of economic activity in Australia, together with comparative data from overseas. Each index combines individual economic indicators into a composite index. This combination is intended to give a more representative picture of economic activity than would any one indicator by itself.

The current form of the indexes has evolved from those initially developed for Australia by Emeritus Associate Professor Ern Boehm and Professor Geoffrey Moore while Associate Professor Boehm worked at the International Economic Indicator Project based at Columbia University in New York. They were launched as a joint venture with Westpac Institutional Bank in July 1985.

To celebrate the 20th anniversary of the indexes, they have been thoroughly overhauled with the purpose of improving their reliability as more is learned about the circumstances in which the indexes are likely to correctly measure and anticipate the Australian business cycle. The statistical methods used for computing the indexes were updated and a study investigating the lead profile of current components of the leading index, and a comprehensive search for new leading indicators, was performed.

Two key findings of this study have been implemented. Of the candidate leading indicators examined, the US industrial production index, which acts as a proxy for the effects of international economic conditions on the Australian business cycle, was found to be a particularly reliable leading indicator of cyclical turns in Australian economic activity. It is now included as a component of the leading index. Meanwhile, private non-residential building approvals, which were found to have become excessively volatile in recent years, have been removed from the leading index.

This article was written by Research Fellow Dr Penny Smith who manages the Westpac – Melbourne Institute Indexes of Economic Activity. To become a subscriber to this report please contact Michelle Best on 03 8344 2100.

Melbourne Institute News Views expressed by the contributors to Melbourne Institute News are not necessarily endorsed or approved by the Melbourne Institute. Neither the Melbourne Institute nor the Editor of Melbourne Institute News accepts any responsibility for the content or accuracy of information contained in this publication. Editor: Laura A’Bell, tel: 8344 2154, fax: 8344 2111, email: labell@unimelb.edu.au. Sub-Editor: Nellie Lentini. Contributors: Professor John Freebairn, Mrs Glenys Harding, Associate Professor Bruce Headey, Professor Tony Scott, Dr Penny Smith, Dr Lei Lei Song, Ms Diana Warren.

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