Tag Archives: Grattan Institute

You’re paying too much for electricity, but here’s what the states can do about it

The Conversation

Kate Griffiths, Grattan Institute

State-owned power networks have spent up to A$20 billion more than was needed on the electricity grid, and households and businesses in New South Wales, Queensland and Tasmania are paying for it in sky-high power bills.

A new Grattan Institute report, Down to the Wire, shows that electricity customers in these states would be paying A$100-A$400 less each year if the overspend had not happened.

The problem is that state governments, worried about blackouts and growing demand for electricity, encouraged the networks to spend more in the mid-2000s. But the networks overdid it, and now consumers are paying for a grid that is underused, overvalued, or both.


Read more:
Comparing Australia’s electricity charges to other countries shows why competition isn’t working


Why we built too much

The grid includes high-voltage transmission lines that carry electricity over large distances, as well as low-voltage poles and wires that connect to homes and businesses. Networks are built to cope with those times of highest demand for electricity. Yet the growth in the value of network assets has far exceeded growth in customer numbers, total demand, or even peak demand.

Demand for electricity did grow rapidly in the early 2000s, but since then it has slowed substantially as more and more households have installed solar panels, and appliances have become more energy efficient. Networks may have overbuilt because they expected that demand would continue to grow.

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Yet the overbuilding has occurred almost exclusively in the public networks. Why would government ownership lead to such high costs?

There are two main reasons. First, investment in electricity networks boosts state government revenues because public networks pay a fee to the state to neutralise their lower borrowing costs (as well as the dividend they pay to the state as the owner). Second, a government-owned business might come under political pressure to prioritise goals such as reliability or job creation over cost.

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Of course governments worry about reliability – they cop the blame if anything goes wrong. In 2005, the NSW and Queensland governments required their network businesses to build excessive back-up infrastructure to protect against even the most unlikely events. Reliability did improve a bit in some networks, but at significant cost: on average, customers got an extra 45 minutes of electricity a year at a cost of A$270 each.

State governments should take responsibility

Successive state governments in NSW, Queensland and Tasmania are responsible for overinvesting in their networks and, in NSW and Queensland, for setting reliability standards too high.

State governments can’t turn back the clock but they can still fix the mistakes of the past. And they should, because if they don’t, consumers will be paying for decades to come.

Households and businesses that can afford to buy solar panels and batteries will reduce their reliance on the grid. Meanwhile, those left behind – including the most vulnerable Australians – will be stuck with the burden of paying for the grid.


Read more:
Energy prices are high because consumers are paying for useless, profit-boosting infrastructure


In Down to the Wire we recommend that where network businesses are still in government hands, the government should write down the value of the assets. This would mean governments forgoing future revenue in favour of lower electricity bills. For recently privatised businesses in NSW, a write-down could create more issues than it solves, so in those cases the state government should refund consumers the difference through a rebate.

At a time when governments are concerned about energy affordability, NSW, Queensland and Tasmania have a real opportunity to do something about it. They should seize it.

How to prevent this happening again

There will always be pressure to spend more. At the moment, concerns about South Australia’s reliability could very well lead to further investment in network infrastructure.


Read more:
FactCheck: does South Australia have the ‘highest energy prices’ in the nation and ‘the least reliable grid’?


Policymakers must also deal with the risk that, in future, parts of the network may no longer be needed. The grid may need to be reconfigured as new technologies emerge, some communities go off-grid, and new energy sources arise in new locations.

For now, consumers bear this risk: they are locked into paying for assets whether or not they are needed. In future, the risk should be shared between consumers and businesses; this would encourage businesses to avoid overbuilding in the first place and instead consider alternative solutions.

With the focus on reliability right now, governments are at risk of repeating mistakes of the past. The truth is that Australia already has a very reliable grid.

On average across the National Electricity Market, consumers experience less than two-and-a-half hours in unplanned outages per year. Reducing that by a few minutes of supply each year is very expensive. Politicians typically value reliability more than consumers, but ultimately it is consumers who foot the bill.


Read more:
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The ConversationState governments now have an opportunity to reset the clock – to pay off the mistakes of the past and let consumers guide choices about our future grid.

Kate Griffiths, Senior Associate, Grattan Institute

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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Blaming immigrants for unemployment, lower wages and high house prices is too simplistic

The Conversation

Robert Breunig, Crawford School of Public Policy, Australian National University and Mark Fabian, Australian National University

Australia should cut its immigration intake, according to Tony Abbott in a recent speech at the Sydney Institute. Abbott explicitly cites economic theory in his arguments: “It’s a basic law of economics that increasing the supply of labour depresses wages; and that increasing demand for housing boosts price.”

But this economic analysis is too basic. Yes, supply matters. But so does demand.

While migration has increased labour supply, it has done so primarily in sectors where firms were starved of labour, and at a time of broad economic growth.

Immigration has put pressure on infrastructure, but our problems are more a function of governments failing to upgrade and expand infrastructure, even as migrants pay taxes.

And while migrants do live in houses, the federal government’s fondness for stoking demand and the inactivity of state governments in increasing supply are the real issues affecting affordability.

The economy isn’t a fixed pie

Let’s take Abbott’s claims about immigration one by one, starting with wages.

It’s true that if you increase labour supply that, holding other factors that affect wages constant, wages will decline. However, those other factors are rarely constant.

Notably, if the demand for labour is increasing by more than supply (including new migrants), then wages will rise.

This is a big part of the story when it comes to the relationship between wages and migration in Australia. Large migrant numbers have been an almost constant feature of Australia’s economy since the end of the second world war, if not earlier.

But these migrants typically arrived in the midst of economic growth and rising demand for labour. This is particularly true in recent decades, when we have had one of the longest periods of unbroken growth in the history of the developed world.

In our study of the Australian labour market, we found no relationship between immigration rates and poor outcomes for incumbent Australian workers in terms of wages or jobs.

Australia uses a point system for migration that targets skilled migrants in areas of high labour demand. Business is suffering in these areas. Migrants into these sectors don’t take jobs from anybody else because they are meeting previously unmet demand.

These migrants receive a higher wage than they would in their place of origin, and they allow their new employers to reduce costs. This ultimately leads to lower prices for consumers. Just about everybody benefits.


Read more:
A focus on skills will allow Australia to reap fruits of its labour


There’s an idea called the “lump of labour fallacy”, which holds that there is a certain amount of work to be done in an economy, and if you bring in more labour it will increase competition for those jobs.

But migrants also bring capital, investing in houses, appliances, businesses, education and many other things. This increases economic activity and the number of jobs available.

Furthermore, innovation has been shown to be strongly linked to immigration. In the United States, for instance, immigrants apply for patents at twice the rate of non-immigrants. And a large number of studies show that immigrants are over-represented in patents, patent impact and innovative activity in a wide range of countries.

We don’t entirely know why this is. It could be that innovative countries attract migrants, or it could be than migrants help innovation. It’s likely that the effect goes both ways and is a strong argument against curtailing immigration.


Read more:
How migrant workers are critical to the future of Australia’s agricultural industry


Abbott’s comments are more reasonable in the case of housing affordability because here all other things really are held constant. Specifically, studies show that housing demand is overheated in part by federal government policies (negative gearing and capital gains tax exemptions, for instance) and state governments not doing enough to increase supply.

Governments have responded to high housing prices by further stoking demand, suggesting that people dip into their superannuation, for instance.

In the wake of Abbott’s speech there has been speculation that our current immigration numbers could exacerbate the pressures of automation, artificial intelligence and other labour-saving innovations.

But our understanding of these forces is nascent at best. In previous instances of major technological disruption, like the industrial revolution, the long-run effects on employment were negligible. When ATMs debuted, for example, many bank tellers lost their jobs. But the cost of branches also declined, new branches opened and total employment did not decline.


Read more:
New research shows immigration has only a minor effect on wages


In his speech, Abbott said that the government needs policies that are principled, practical and popular. What would be popular is if governments across the country could fix our myriad policy problems. Abbott identified some of the big ones – wages, infrastructure and housing affordability.

What would be practical is to identify the causes of these problems and address these directly. Immigration is certainly not a major cause. It would be principled to undertake evidence-based analysis regarding what the causes are and how to address them.

The ConversationA lot of that has already been done, notably by the Grattan Institute. What remains is for governments to do the politically difficult work of facing the facts.

Robert Breunig, Professor of Economics, Crawford School of Public Policy, Australian National University and Mark Fabian, Postgraduate student, Australian National University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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Stuck in traffic: we need a smarter approach to congestion than building more roads

The Conversation

Marion Terrill, Grattan Institute and Hugh Batrouney, Grattan Institute

The equation doesn’t look pretty. Traffic congestion costs us billions of dollars each year – so we are told – and population growth is not letting up. When road rage meets large economic costs, it’s little wonder our politicians are desperate to do something.

The trouble is, too often that “something” is a great big new freeway. Building more roads isn’t the best answer, because the roads we have are mostly up to the job – if only we could make better use of them by spreading traffic out beyond the morning and evening peaks.

Instead of focusing on freeways, governments should change the way we pay for urban roads and public transport. To work out how best to do this, the Grattan Institute has looked at several million Google Maps estimates of travel times in Australia’s largest cities. This analysis reveals both the extent of the problem in Sydney and Melbourne and its city-specific characteristics.

For many, the problem is minor

The truth is, for a lot of people, road congestion doesn’t matter much. This is because most people work in a suburb close to where they live.

Chart 1 shows congestion delays for Sydney’s 146 most-common commuting trips.

Chart 1: For many Sydney commuters, congestion is very modest

Additional minutes compared to free flow

The horizontal black line in the coloured bar is the median of all journey-to-work routes, weighted by the number of people who used a car to travel to work on those routes in the 2011 Census reference week. Trip times were estimated by assuming all travel between suburbs was between representative addresses for each suburb. Routes with fewer than 400 such commuters are not included. Grattan analysis of Google Maps, and ABS (2011)

The average delay is small: an average commute at the busiest time of day takes around three minutes longer than the same trip in the middle of the night.

While some commutes are delayed for much longer, it is unusual for trips to take more than ten minutes extra in peak periods.

Congestion is a problem in the CBD and inner suburbs

Unsurprisingly, the story is different, and worse, in and around central Sydney and Melbourne. Add in all the trucks and vans, students and tradies, shoppers and people going to appointments, and typical delays for travel on CBD-bound journeys are substantially greater (Chart 2).

Chart 2: On commutes into Sydney’s CBD, the average morning-peak delay is 11 minutes

The horizontal black line in the coloured bar is the median of all journey-to- work routes, weighted by the number of people who used a car to travel to work on those routes in the 2011 Census reference week. Trip times were estimated by assuming all travel between suburbs was between representative addresses for each suburb. Routes with fewer than 400 such commuters are not included. Grattan analysis of Google Maps, and ABS (2011)

The trends are similar in Melbourne. Travel on CBD-bound journeys is much more delayed than to non-CBD locations.

Chart 3 also shows that delays are noticeably larger in the suburbs that immediately surround Melbourne’s CBD.

Chart 3: Travel in suburbs surrounding the Melbourne CBD is highly delayed

Increase in travel time relative to free flow travel time

Average delay is calculated as the ratio of trip duration at each point throughout the day to the minimum trip duration observed for that route over the sample period. Based on travel time of representative route samples collected via Google Maps. Weekends and public holidays excluded. Grattan analysis of Google Maps

Some commutes are frustratingly unpredictable

Most travellers don’t just care about how long a trip usually takes. How long it could take also matters.

Chart 4 shows that Melbourne’s Eastern Freeway/Hoddle Street corridor has not only some of city’s worst delays, but also some of the least-predictable travel times. Motorists from suburbs to the north-east have to juggle these less-reliable travel times more than those travelling similar distances from other directions.

Chart 4: Travel on routes to Melbourne’s CBD that rely on Eastern Freeway and Hoddle Street are noticeably delayed and unreliable

Increase in travel time as a proportion of free-flow travel time, weekday morning peak, commutes into Melbourne CBD

For travel departing between 7am and 9 am. Excludes weekends and public holidays. The boxes cover the 25th to 75th percentiles. The vertical line in each box lies at the median for each city. The ‘whiskers’ on each side of the boxes extend no further than plus or minus 1.5w where ‘w’ is the box width. Observations beyond the lines are plotted as dots. Grattan analysis of Google Maps

New roads are not the whole answer

Congestion tends to be worst in the most built-up parts of Sydney and Melbourne, where it would be most costly to construct new roads. This means that even crippling levels of congestion might not justify the construction of astronomically expensive infrastructure.

In any case, new roads often take years to build and can fill up with new traffic of their own.

New roads are important, however, in new suburbs.

The rule for our policymakers should be: build a road whenever the community will gain more from the new road than it will cost, and whenever the new road is a better option for the community than extracting more from the roads we’ve already got. But do not think of new roads as congestion-busting.

So what should be done?

Changing the way we use our existing infrastructure through pricing needs to be at the top of the agenda. This mean charging motorists for the congestion they cause.

Sydney and Melbourne need to consider introducing a congestion charge. That doesn’t mean more toll roads – it means charging people who drive at peak times on congested roads a small fee.


Further reading: Road user charging belongs on the political agenda as the best answer for congestion management


Because some people wouldn’t think it worth paying the charge at the busiest times of day, those who did pay would get a quicker and more reliable trip. People who can travel outside of the peaks would not have to pay, because there would be no congestion charge when the roads are not congested.

The increased cost to drivers could be offset by cuts to car registration fees. And any extra money raised by the congestion charge could be spent improving train, tram, bus and ferry services.

International examples show that introducing a congestion charge need not amount to political suicide. An initially sceptical public came quickly to accept, value, the reform when it was introduced in London and Stockholm.

The ConversationThe congestion equation for Sydney and Melbourne is only going to get more ugly as both cities continue to grow. We need more sophisticated policymaking to ease drivers’ road rage and frustrations.

Marion Terrill, Transport Program Director, Grattan Institute and Hugh Batrouney, Senior Associate, Grattan Institute

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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Comparing Australia’s electricity charges to other countries shows why competition isn’t working

The Conversation

Bruce Mountain, Victoria University

Australia’s residential electricity prices are amongst the highest in the world so it’s not hard to see why customers have been up in arms about high prices. The Conversation

Comparing the charges for electricity retail services in Australia and in other countries, we find Australia’s charges are much higher. The difference is particularly stark when comparing retailer charges in New South Wales with those in Denmark, Germany, Italy and Britain which have the highest electricity prices in Europe.

Residential electricity prices in Canada and the United States are typically less than half those in Australia and so the situation in Australia is even more damning in that comparison.

The prime minister’s recent request to the ACCC to review the retail end of the electricity market will put this part of the industry under the spotlight. This request follows the Victorian government’s appointment of a panel to review the Victorian retail energy market.

But rising concern about retail markets is not unique to Australia. In Britain, retail energy markets have received prime ministerial attention for many years. In what the British government described as the most significant review of its industry in the 30 years since privatisation, their Competition and Markets Authority concluded that significant changes needed to be made, although some ex-regulators disputed their estimates of the problem.

These reviews indicate changing attitudes in government. The Australian Energy Markets Commission reviews Australia’s retail energy markets every year and has consistently concluded that they are working well. Similarly, the Independent Pricing and Administrative Tribunal advised the New South Wales government last year that their retail energy market is working well. Evidently the Commonwealth and Victorian government are now seeking a second opinion.

How Australia’s electricity retail market is set up

The business of retailing electricity is really finding out what customers want and then offering deals that meet those requirements. More specifically, it’s the business of procuring electricity and network services, acquiring retail customers, selling to those customers and then metering, billing and collecting revenue.

Analysis of regulatory filings shows that around 6.5 million of Australia’s 10 million households and small business customers (those in New South Wales, South Australia, South East Queensland and Victoria) can choose their retailer. These four deregulated markets are dominated by three retailers that also own sufficient generation to supply those customers.

After more than a decade of retail competition, the three big retailers typically still supply at least 80% of all customers in each regional market. While in some of the regional markets, customers can choose amongst 24 retailers, the new entrant retailers have invariably grown their customer base slowly, if at all, despite powerful incentives to the contrary.

Social services organisations, customer advocates and some independent energy economists have long voiced concerns about retail energy markets. Their concerns centre on the amount that the retailers’ charge, that customers are not happy and that electricity is becoming increasingly unaffordable.

The Grattan Institute recently published a blunt critique that went one step further. It suggested that not only are retailers charging a great deal, but that this is explained not by high costs but by excessive profits.

Competition and consumer choice

The official reviews in Australia hitherto have taken the line that if customers don’t engage in the market they can’t complain. But electricity is complex and customers need skill and a great deal of effort to reliably evaluate the market.

Since it’s a repeat purchase, active engagement means ongoing effort. Even customers with the necessary skills seem to often conclude they have better things to do with their time, as evidenced in switching rates. Pervasive advertising and the profitability of the commercial switching websites provides additional evidence of the challenge new entrant retailers face in acquiring customers.

Why would it be so hard and expensive for new entrant retailers to attract customers if they were not loyal? Therein lies an explanation for Australia’s incumbent retailers’ apparently extraordinary profits.

Andy Vesey, the chief executive of Australia’s largest electricity retailer AGL described the retail market as one that penalises customer loyalty. While such candour is admirable, even hardcore market economists question the effectiveness of a market in which retailers profit most from their most loyal customers.

The issue is non-trivial: in its cost of living surveys, customer advocate Choice has found that electricity prices are consistently the top cost of living concern for households. Electricity poverty payments to deal with affordability problems, are understood to now be costing state governments several hundreds of millions of dollars each year.

Next steps

While it has been a long time coming, the ACCC’s review in addition to the Victorian government’s review, is to be welcomed.

A great deal of effort will need to be made to get to the heart of the matter. Retail energy markets are complex and the amount that a retailer charges a customer for its services is not known for certain – it has to be estimated by subtracting the charges for network services, wholesale production, metering and environmental charges from the customer’s actual bill.

Not only do customers’ bills differ greatly but the components of the bill differ greatly for different customers and so obtaining reasonable estimates of retailers’ charges across the industry requires effort and care.

Fairly evaluating retailers’ offers and how much of their offers are explained by the retailers’ charge, is the place to start. Then finding out what customers are actually paying, and what retailers’ costs and profit margins are, is essential in assessing the nature and extent of market failure.

The reviews will need to cover tricky ground in assessing the economies of scale in retailing, and the value to electricity retailers of also owning electricity generation businesses that supply them. The extent to which high customer acquisition costs provide an advantage to the dominant incumbent retailers who don’t incur those costs unless they are seeking to expand their market share must also feature in the analysis.

There is reason to be hopeful about the ACCC and Victorian government reviews. Done well, they can allow sunlight into this part of the industry. As they say in regulatory circles, sunlight is the best disinfectant.

Bruce Mountain, Director, Carbon and Energy Markets., Victoria University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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The latest ideas to use super to buy homes are still bad ideas

The Conversation

John Daley, Grattan Institute and Brendan Coates, Grattan Institute

Treasurer Scott Morrison wants to use the May budget to ease growing community anxiety about housing affordability. Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence. The Conversation

It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.

A seductive idea with a long history

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.

Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.

Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.

Having learned from that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.

Using voluntary super savings for deposits

The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.

Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.

First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.

But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.

In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.

A “shared equity” scheme for super funds

The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.

Details are scarce, but the proposal raises several questions.

First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?

Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.

Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.

If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.

Focus on what matters

If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.

On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little – we estimate they would be about 2% lower than otherwise.

The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing,
while helping improve the budget bottom line.

At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.

The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.

While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.

John Daley, Chief Executive Officer, Grattan Institute and Brendan Coates, Fellow, Grattan Institute

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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