Blessed are the moneymakers

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Sad piggy bank

The 2014 Federal Budget has attracted considerable attention for its deleterious effect on the welfare safety net, education and health funding. The impact on the disadvantaged is likely to be considerable, especially young unemployed people, some pensioners and the disabled.

But there is a bigger message in what the Coalition is setting out to do. Investors wielding significant capital are deemed to be useful, while those who can save little, and so have little to invest, are deemed to be a burden. It is not so much class war as a war between capital and the rest of society.

The bias towards investors and against the less well off can be seen in three areas. One is the inattention to negative gearing, which has a doubly adverse effect. It contributes significantly to Australia's Budget deficit — current annual losses on rental properties are running at about $8 billion. And it is a major cause of Australia's inflated house prices, a price spiral that has caused Australia's overall debt profile to deteriorate.

Australian government debt is just over $300 billion, which is unusually low by OECD standards. According to the Australian Office of Financial Management, Australian government debt as a percentage of GDP actually declined from 27 per cent in 2013 to 21 per cent this year.

Australian household debt, by comparison, is out of control: a massive $1.8 trillion, much of it mortgage debt. According to the Australian Bureau of Statistics, the nation's debt burden is among the highest in the developed world. Household debt is 1.8 times household disposable income. In the US it is 1.1 times disposable income.

It means that despite Australian public debt being unusually low, Australia's overall debt position is as poor as most other developed economies.

A large part of that soaring private debt is due to investors using negative gearing to buy houses (over 90 per cent of their purchases are in existing dwellings, disproving claims that it adds to housing stock). At the moment almost half of total finance commitments for housing are undertaken by investors looking to exploit the negative gearing tax loophole. But that is fine, apparently. Well-off investors good; the disadvantaged bad.

The second free pass for investors is superannuation. Superannuants are investors. By having them pool their savings and giving them tax breaks, the idea is that they will take the pressure off the pension system.

But a study by Towers Watson has 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. There will be a heavy reliance on the pension, which to a significant extent defeats the purpose of the tax concessions.

Yet the Government has not looked at super, which is estimated to equate with $28 billion in tax concessions this financial year, because that would mean penalising investors. True, there are many administrative problems with taxing income from super in the pension phase, but this, too is an example of the privileged status of the investor class. In effect, payments from super in the pension phase are treated as return on investment, not income. Well-off investors good; the disadvantaged bad.

The failure to include negative gearing or super in the Government's 'shared pain' can perhaps be understood as political expediency — although the attack on health, education and welfare shows an appetite for political risk that some have described as suicidal.

But the sheer nastiness of the Coalition's priorities is most clear in the attitude to lower income people who can, on a small scale, become investors through their super.

The Budget announced the withdrawal of the Low Income Super Contribution scheme (LISC), which is a refund of the 15 per cent contributions tax deducted from the super account of people who earn less than $37,000 a year when their employer makes concessional (before-tax) superannuation contributions.

The LISC ensured that people on lower incomes, who pay very little income tax, are not disadvantaged by their compulsory super contributions, on which they pay higher tax. Withdrawing the LISC means that when low income workers become investors, by putting money into their super, they get hit with more tax. Well-off investors good; less well-off investors bad.

Although the amounts saved in super by low income earners are not likely to fund a happy retirement, it nevertheless reveals the underlying priorities of the Government. Capital, and the well-off investors who wield it, come first. Everything else, such as a welfare system, health, education and wages, is simply a cost burden that has to be kept strictly under control.


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

Sad piggy bank image from Shutterstock

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

 

 

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An excellent, incisive and extremely pertinent article, David. Negative gearing really needs to be abolished once and for all. Taxing superannuation is also sensible especially if the payments are above a certain amount. Hopefully an Australian government will bite the bullet on both issues. We seem to be becoming a more greedy and more polarised society: probably, as Satyajit Das says, because we focus on economics and not society. He says we need to have a discussion on what sort of society we want. I think you and he are right.
Edward Fido | 16 May 2014


Thank you for this enlightening article. The matter of household debt is ominous, and foreshadows a time when people are forced to reverse mortgage their houses, banks foreclose and individual home ownership declines with banks owning most of the housing stock. In the small area where I live I have seen a number of people (families, widows) evicted from rented properties after those properties are sold, minimally refurbished and re-let for greatly increased rents. The dilemma of these newly homeless folk is heart-wrenching to witness. People live in tents in the backyards of relatives, in cars, or families split up and spread themselves around various friends and relatives. Who cares? Seems big government and big business do not.
Janet | 16 May 2014


Gives an interesting slant on Jesus's words "for to those who have more will be given and for those who have not even what they have will be taken away"
Vince | 16 May 2014


These points about household debt, negative gearing and superannuation concessions must be made many times as they are the red flags we should have our eyes on. I wonder about the young people coming into higher education and employment over the next ten years; they may have huge personal debt from university or TAFE fees (equivalent to a mortgage) and then they will have to take on hundreds of thousands of dollars of further personal debt to buy a house. What little freedom people have to make the real decisions that life may offer them: like to stay at home for three years to be with young children in their formative years; take a chance at education mid life; or anything where one needs a certain level of financial freedom from debt. You don't have to be rich, just have some freedom from debt! This will particularly affect women in their child-bearing years and society for decades. Make the connection between latest scientific research on attachment and stable parenting. Perhaps the younger generation, when their time comes to rule, will round on this way of thinking and the greed and selfishness behind it. Hooray for Satyajit Das on Q&A.
V Lonsdale | 16 May 2014


it is easy to criticize Government. when are you going to come up with a positive solution to our National Debt
bernie treston | 16 May 2014


'a positive solution to our National Debt' Bernie? But what's the problem? Didn't you read the bit about 'Australian government debt is just over $300 billion... unusually low by OECD standards... declined from 27 per cent [of GDP] in 2013 to 21 per cent this year'.
Ginger Meggs | 16 May 2014


The author HAS proposed solutions to the national debt - scrapping negative gearing etc. Here are some more: inheritance taxes, property taxes, financial transaction taxes ....
Russell | 16 May 2014


Bernie, did you read the article? It and the comments that followed, answer your question. Abolish negative gearing, properly tax superannuation contributions, and a big hole is made in the deficit. Add a measure that is not mentioned, but should be, is to tax trusts as what they are, money making structures to increase wealth and avoid taxation. That would just about cover it I think. But that would be an attack on the rich, which Abbott and Hockey are so anxious to avoid.
Alan Hogan | 16 May 2014


Great to see the good Christians like Bernie standing up for others. Hasnt the Catholic population gone beyond the "domino effect" used so effectively in the 1950-1960? Dare one say grow up and think of others less fortunate regardless of who created the mess? Act like Christ not like bigots.
johnny | 16 May 2014


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