Abbott and Hockey more Prince John than Robin Hood

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Prince John from Disney's Robin HoodIn politics, one should never opt for a balanced and thoughtful description of the truth when wild exaggerations will do. Especially when you want to take from the poor and give to, if not exactly the rich, at least the investor class. Tax concessions to superannuants and those using negative gearing amount to more than the aged pension. Yet there is no mention of that; the silence is deafening.

The Commission of Audit's 86 recommendations to the Federal Government have prompted outbursts of alarm and criticism for those affected: mostly in the health sector and the aged. It is likely most of them will not be adopted, just another episode in the softening-up process the Government is orchestrating. Two messages are being sold: 'We have to do something drastic,' and 'We will all try to share the pain.' Thus Treasurer Joe Hockey can 'refuse to rule out any recommendations' then listen to the huge sighs of relief on Budget night.

At first glance, it seems a justifiable political tactic. The Budget does need some repair, as the wealth benefit from a once-in-a-generation mining boom comes to an end. And it is perhaps unrealistic to expect politicians not to spin, distort and lie. Nevertheless, spin, distortion and lies it is.

The Audit report concentrates mainly on government services and the social safety net. While not exactly engaging in class war (there is a proposed one-off debt payment for high income earners) it nevertheless reveals a lack of concern about the less well-off.

To some extent this is inevitable, because Australia has the most targeted social welfare system in the OECD, directing more of its government spending to the poorest 30 per cent, and less to the richest 30 per cent, than any other nation. So if government spending is to be curtailed, it will inevitably affect the worst off.

Yet a glance at the actual evidence about Australian government spending shows just how much the government is exaggerating for political effect.

The claim that ageing is making pension payments unsustainable is not supported by the evidence. The government spends about $40 billion on the aged pension (total assistance to the aged is about $55 billion). Public spending on pensions is 3.5 per cent, the fourth lowest in the OECD (America's is 6.8 per cent).

And, far from having become out of control, government spending has actually fallen over the last two decades. In 1995, and then again in 2000, it was over 9 per cent of GDP. It is now about 8.5 per cent of GDP. This is because government spending has been comparatively parsimonious. What has changed is tax revenue, which has fallen as the mining boom has eased. It is the fall in tax revenue that has put the Budget under pressure.

Even the Audit report's evidence is not especially damning. On page 19, the 'business as usual' scenario only envisages payments rising from 26 per cent of GDP now to 26.5 per cent by 2023–24. This is hardly an out of control situation (the 'reform scenario' has payments falling to 24 per cent over the same period).

The underlying cash balance (revenue minus expenditures) is currently minus 3 per cent. Under the 'business as usual scenario' it is forecast to improve to minus 1.7 per cent by 2023–24. Again, hardly disastrous. (Under the 'reform scenario' it is forecast to be plus 1 per cent by 2023–24.)

The same goes for net debt, which is far from being out of control. Indeed, Australia's government debt is the envy of the developed world. The Commission of Audit estimates that if things stay the same net debt will rise from 12 per cent to 16 per cent of GDP by 2023–24. (In the 'reform scenario' it falls to 4 per cent of GDP.)

It is not really a reason to push the panic button, even on the Commission of Audit's own forecasts. Australia's low government debt and the fact that it did not go into recession during the global financial crisis have given the nation economic room to move.

So why the dire pronouncements from the Abbott Government? Perhaps the relentless negativity that Tony Abbott displayed in government has to find a new avenue for expression. There is also more than a whiff of class war about the posture.

But most of all it reveals a bias to favouring investors over recipients of government spending. There is no suggestion, in either the Audit or from the Abbott Government, that one group of investors, superannuants, will have to 'share the burden'. They get tax concessions worth about $28 billion.

Nor is there so much as a whisper about negative gearing, which costs the government about $14 billion a year.

Together, these two benefits for investors exceed the aged pension. The superannuation concessions can be defended because they are supposed to allow people to fund their own retirement. But as a Towers Watson report shows it will not really take much pressure off the pension system. Towers Watson found that when superannuation, the age pension and other retirement savings are all taken into account, only 53 per cent of couples and 22 per cent of singles are on track to reach or exceed their target retirement income:

Chart: Who is on track for a comfortable retirement?

Negative gearing is even less defensible. It has greatly distorted the housing market. It has created a bias towards investing in land rather than productive activity. And, bizarrely, it encourages investors to make a loss, in order to benefit from government largesse.

It leaves this question. Why is it wrong for the poor to receive government 'entitlements' but entirely acceptable for investors to get 'entitlements'? That is what is not being said in the debate about the Budget.


David JamesDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.

Topic tags: David James, 2014 Budget, Joe Hockey, Tony Abbott

 

 

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If we were to remove negative gearing it would have the effect of increasing rents for the poor. Investors are happy to receive 2% or less from their investment on the basis of receiving the balance from the tax concession. Remove the tax concession and no right minded person would invest in the property market for less than a 4% return. Whilst acknowledging that there is some element of capital gain, or has been in the past, this has not recently been the case. Obviously rents will increase, affecting not just the poor but the amount paid out by the government in rent assistance. If one factors in the damage done to properties by some tenants, the cost of employing an agent to protect against bad payers, and the need to set aside some money for normal maintenance then investment in property is a poor return compared with other investments. Governments need to think it through before making the radical decision to scrap negative gearing.
Mike | 03 May 2014


Budgets should not just be about savings, returning budgets to surplus anyhow but prioritising, considering impacts, being wise, informed and fair. The foreshadowed budget, the 'poor budget' in a so-called 'egalitarian society' appear, in the main, to be aimed at those who can least afford it, the poor, aged, disabled and people who are vulnerable or disadvantaged. Talk about the pain being evenly spread in this budget is not borne out by what is foreshadowed e.g. a parental scheme at a cost of $7 Billion, $12-24 billion spending on aircraft, and so on. Tax concessions expensive, but not on the table. The Commission of Audit looks through a narrow lense of cutting expenditure not what makes for an informed, holistic, fair, effective, and efficient society. Cutting without understanding the empirical evidence and evaluations of positive impacts of many community based programs (like free financial counsellors) and research institutions that help us understand the ‘why’s’ of what is happening lead to informed policy such cuts are unwise, poor and lazy steps. Real fiscal responsibility would see us discussing tax reform which increases taxes so we can afford services for the community, seek innovation and a better society not just a better economy – we can be both. Dr Liz Curran Senior Lecturer ANU
Dr Liz Curran | 03 May 2014


Your article and the informed comment on it by Dr Liz Curran are useful correctives to the biased perspective of the Commission of Audit and its partisan recommendations. I keep hoping that the sort of commentary you both make is going to help spark that informed national debate we need to have before we seriously embark on long term national economic and social policies which will shape the future of this nation and all its inhabitants for a considerable time. To me the question is whether we want a just and inclusive society without huge extremes of wealth and poverty. Of course we need to exercise economic common sense but neither of you are advocating abandoning that. Thank you both.
Edward Fido | 05 May 2014


The Liberals spent the whole of their time in Opposition running around screaming, "The sky is falling! The sky is falling!" And in government, they're still doing it. No wonder business and consumer confidence is down, as well as revenues - as no-one is game to spend anything. When is this government going to stop playing Chicken Little and playing out fairy-tale scenarios, act responsibly and get on with the real job? Everything with this government is smoke and mirrors!
Paul | 05 May 2014


let them eat negative gearing
a j stewart | 05 May 2014


Surely the main outcome from the commission of audit-shallow as it may well be ,will incite the needed discussions we are having.Times are about to change on many fronts for Australia.Criticism of a government which risks a negative response by reminding us of whats ahead is to be expected.Truth is we have spent too much time over recent years applauding governments ideas which are all about spending money on things we can't afford.Thanks MIKE for responding re negative gearing'. In every State people are crying out for more low cost housing. Governments,over recent years have been withdrawing from their role of suppliers in this sector.Instead of removing negative gearing we should be looking for further ways to entice private sector/perhaps superannuation, investment into this sector
Brian | 05 May 2014


The issue re negtaive gearing is how we see housing - is it to create wealth or provide affordable shelter for everyone. Perhaps negative gearing should be directed at encouraging the supply of low cost and affordable housing. instead of being such a generous scheme for wealth generation. certainly if the age of entitlement is over, watch the tantrums if any government started to reduce the financial attractiveness of negative gearing. surely there are other ways to create wealth besides investing in such a fundamental human right.
Lawrence | 05 May 2014


"Social impact study" - is that a thing? Can we expect any commitment to evaluating, down the track, the combined effects of the various aspects of the coming Budget?
Joan Seymour | 05 May 2014


Now we've had the Business sector release its wishlist, let's have the ACTU release theirs, then the two can sit down together, and where they agree, that would be OK to implement. Can people not remember all the tax cuts handed out to the wealthy from the Keating era on? We only need to reverse them and the budget problem will disappear. Turns out we couldn't afford them.
Russell | 05 May 2014


Negative gearing is bad whichever way you look at it. No country in the World allows this stupid waste of money. It distorts the property market and it is a significant reason why first home owners are being priced out of the market. Housing policy should be concentrated on a place to live not an investment opportunity. Tax saved could be used to provide affordable accommodation to those less well off. House prices would fall but the then lower price would allow more people into the market. The aim must be more owner occupied housing, and area we once led the World. To avoid market and current investor problems eliminating negative gearing could be carried out on a gradual basis. Ron Hill
Ron Hill | 06 May 2014


Oh dear... landlords crying poor! Mike, if owning a property is such a burden and, as you claim, it is such a poor return for your investment, I wonder why you don't put your spare cash elsewhere. There can be no doubt that the narrow perspective inherent in the Commission of Audit's terms of reference ensured that their report could be nothing other than recommendations "by business, for business". Dr Curran is correct - we should be talking about what kind of society is our ideal and then planning our economy to suit, not the other way around. If we are to do away with the "age of entitlement", then that sense of entitlement should not continue to be afforded to business world. They should also have to re-adjust to the so-called harsh new realities.
Micka K | 09 May 2014


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