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04 March 2014

The rorts are all we have

I must say, I have to chuckle as I read the growing rhetorical movement in support of cutting back Budget excesses. John Freebairn and his highly admirable advice on how to fix the budget is an example:

You can access your superannuation at age 60. You can access the age pension at age 65. The age pension age was brought in in 1908 when the average life expectancy was just 65; It turns out that the age pension is used by about half of mature-age Australians for their sole source of income. Another 20 per cent to 30 per cent have a part pension. And that support is actually more generous than we provide to, say, people who are unemployed on Newstart.
The distortion is exacerbated by so-called negative gearing, which is, in effect, a subsidy from lower-income taxpayers to those who can afford to borrow to speculate on property and financial securities. Australia is one of only a very few nations that allow such speculators to reduce their tax bills by deducting their borrowing costs from their income.
Freebairn says the taxation treatment of superannuation also needs overhauling. People on middle and upper incomes get a huge break by being able to put extra money into superannuation at a tax rate of 15 per cent rather than at their marginal income tax rate. They then get it out tax-free at 60. All remuneration, whether it is wages, superannuation or fringe benefits, should be taxed at your personal rate.

All urgent reform candidates in the name of both efficiency and fairness and most definitely important components of the collective gouge Australians think of as the economy.

Another example in the growing rhetoric is the Government itself and its hard-line on ending 'entitlement', refusing assistance to businesses as varied as cars, fruit and aeroplanes.

It is all true. The handouts are destructive to our long term wealth. But, that is long term, and one has to ask where has this thinking been during the boom times? By extension, we should also ask if it is wise to undertake such a vociferous campaign to eliminate the rorts during the tough times? The answer will shape the economic cycle that we are in.

What needs to be understood is the nature of the brewing economic challenge and the crucial role that the Budget will play in it. It's all well and good to end the rorts but what if that is all you have?

Consider, Australian government revenues have just been through an extraordinary boom. They've been growing far in excess of real economic growth, around 8% for over a decade, leveraged to nominal prices that have been juiced by first the greatest housing boom and then the greatest terms of trade boom in our history. The proportion of GDP collected in tax revenues has risen sharply as well, from 19.9% in 1966 to a peak of 30.4% in 2000, where it stayed until 2007, when it began falling.

The underpinnings of this same boom have weighed upon and hollowed out broad swathes of the economy but we haven't had to notice because they've been substituted by the government tax boom and its recycling of new income to households via the rorts, as well as the rent-seeking businesses that feed off them.

If left alone, this dynamic will get worse in the years ahead. The Government is set to be the only major beneficiary as the terms of trade boom reaches its much vaunted third phase when all of those mining projects turn from construction to production. The jobs created by the boom will evaporate and 80-90% of the profits will go offshore to the company's owners. Only the tax revenue will remain.

That means that income growth for the average Aussie will be very difficult to come by, especially if, as seems to be the case, the Government get's tight-fisted with its windfall. All things equal that means either unemployment will rise and growth fall unless one other outcome can be engineered: private sector debt must grow to fill the gap.

Nobody wants to see unemployment rise so the real question is how do you get debt to keep rising? And for that you need the rorts. You need negative gearing. You need exemptions of the family home from means testing. You need ludicrous superannuation concessions. You need lower tax brackets for all concerned. You need generous middle class handouts.

Without these giveaways, consumption will stall as asset price stagnate and business investment falls. That, in turn, means more job losses and greater stagnation. The rorts are the epi-centre of Australia's marvelously pro-cyclical economy.

The end of entitlement is absolutely necessary if the Australian economy is to address its structural funk and restore its competitiveness so that it can once more grow via being the best at some things. But ending the rorts will be much more economically painful than most realise. Do it if you dare!

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