Six ways to fix Australia's finances without cuts

[clive milne]

The following article is from the Guardian:

It can be viewed in full here:

http://www.theguardian.com/commentis...s-without-cuts


The great political scientist Harold Lasswell saw politics as the business of "who gets what, when, and how”. Governments have the power to make grand schemes happen, and their budgets indicate their priorities. The question for prime minister Tony Abbott and treasurer Hockey this budget is who will get what, when and how?

In the lead up to the budget the public has been told that cuts are necessary. The commission of audit and the government have made some very spurious arguments to justify the cuts, which Greg Jericho described as "ideology over evidence".*

So what might a fairer budget look like? Here's six ways we can find more money without cuts.

1. End the great superannuation concession rort – save $10.5bn

Here's a popular cut: end the huge cash giveaways to the wealthy throughsuperannuation tax concessions. For every $1bn we spend on concessions, we save only $200m on the old age pension. This is a massive net loss for the government and a redistribution of wealth from the state to the already well off, because 30%*of concessionsgo to the top 5%. The top 1% receives more than three times as much as the old age pension – the programme it was intended to replace. Ending the concessions for the top 5% alone would save $10.5bn annually; a more radical restructuring would save a lot more.

2. Actually tax the mining industry – add $50bn

Mining operations in Australia arecomparatively undertaxed. The effective taxation on resources in Australia is*13%, while in Norway it's*78%. In 2010-11, the value of mining exports was*$135.6bn, meaning the total tax was approximately $17.6bn. If the effective tax increased to Norwegian rates, it would accrue $105.8bn.

Perhaps that’s too radical for Australians, who are used to being exploited by majority foreign owned mining companies. How about a 50% tax rate for our Crown-owned minerals? We could pocket a neat $67.8bn. The difference would more than cover the$47bn*deficit.

3. Abolish fossil fuel subsidies – save $11bn

In 2013-14 there were over*$11bn*of subsidies given to the fossil fuel sector. This includes $6bn for fuel tax credits, $1bn for aviation fuel, and lots of smaller subsides, like $0.5bn for mining exploration. This is a wealth transfer to polluting companies which should be cut.*

4. Defund private schools – save $9bn

In*2013-14*the Commonwealth spent $4.5bn on public schools and $9bn on private schools. I've*argued before*that private schools shouldn't receive federal funding, as those students have opted out of the public provision of education provided by the states. Cutting that $9bn spent on private schools – or transferring that money to public schools – would end the wasteful elite private school*"arms race"*where unfathomable amounts have been spent on gyms, pools and the like.

That aside,*private schools are less efficientincreasing their costs per student by 3.4% per annum compared to 2.4% per annum for public schools – with*no improvement to academic results. Any neoliberal would tell you that such spending is wasteful and inefficient, because the input costs are greater for the same academic return - studies found that NAPLAN scores didn't improve for students who attended*private or Catholic schools.

5. More progressive income taxes – add $41bn

The real causes of the deficit are cuts to income tax and the disappearance of a more progressive taxation system. If 2006 taxation rates were still used, there would be an additional*$40bn*of revenue this year - let's restore them. The Greens have also proposed a millionaires’ tax, which would raise*$1bn*by taking an extra 5% from the very richest. Why stop at 50% for millionaires, when in 1985-86 people making what would now be $92,351 were taxed 60%? France recently adopted a*75% tax on millionaires; the Australian Greens are much tamer with their meagre 50% tax.

6. Abolish negative gearing – save $15bn

Australia has a curious loophole in its tax code, which allows an investor to borrow money to buy an asset, even if the income generated by that asset does not initially cover the interest on the loan. Losses from so-called "negatively geared" property is income tax deductible; it is difficult to calculate how much negative gearing costs the budget but it has been estimated to be about*$15bn. This is blatant welfare for those who are already very wealthy and should be ended. It is government policy that does not improve housing affordability, as was its initial aim, but increases wealth inequalities.

The bottom line - $136.5bn improvement

My $136.5bn improvement isn't exhaustive, but it is enough to pay the*$114bn*for a high speed rail network and save jobs at the ABC. I’ve had my fun, now you be the treasurer. What would your budget priorities be? Comment your recommendations to Hockey.

[glend (Glen)]

Interesting. I would add abolish the ability of self-managed Super funds to borrow money - this is driving house prices crazy as well-healed people use their SMSFs to gain massive property leverage in a tax free environment. First home buyers have to buy with after tax dollars.

And if your going to tax the miners with a super profits tax - why not the banks? Banking is obsencely profitable and only the shareholders benefit from this - probably held in SMSFs and used as leverage to drive property purchases. A bank super profit tax could easily pay for the NDIS.

Politicians are fundamentally lazy and painted into policy corners by their opposition and past statements that are used to beat them later on.

[bobson (Bob)]

A simple and sound solutions that politicians wont even look at. They will rather hit Medicare and needy people.
The media circus they create just by mentioning taxing mining industry!

[casstony]

#1. No. Individuals save money whereas the govt can't be trusted to save money for our retirement.

#2. Unsure. We still need the businesses to be profitable.

#3. Yes.

#4. No. Parents contribute a lot to private school costs that they would not spend at a public school. Also there's a lot more to student wellbeing than simple academic results show. eg. Sensitive or 'different' kids that might be outcasts in a public school may do better in a private school.

#5. Yes to higher income taxes, particularly the higher bands.

#6. Yes. House prices would be much lower than they currently are if subsidies like negative gearing and first home buyer grants had not been available.

[clive milne]

Yep... I agree and would go further.
Surely it is self evident that irrespective of one's political inclination the current economic system is not serving us. It is not surprising because one of its base premises is a mathematical absurdity.

[multiweb (Marc)]

The title of this thread sounds like "Lose weight without exercising".
Besides the deficit we have a huge domestic debt. People spend money they don't have on their credit card. This attitude is reflected to every echelon of the government. The money has been spend. Now we have a huge interest bill. So it makes sense to squeeze until we lower that debt and there's only one way to do it. Buckle up. The pain is coming.

[Larryp (Laurie)]

1-superannuation is a hodge-podge at the moment, and the only people getting rich are the fund management companies. I don't know the answer, but perhaps super should be run by a government established fund manager, every working person pays into it, and everybody gets an aged pension-no concessions for extra contributions.

2-A mining tax needs to allow the miners to make a reasonable profit AND sell their product at a competitive price to their competition. It needs to be thought out a whole lot better than it has been so far.

3-Removing the fossil fuel subsidy will need to be thought out carefully, as it would cause an increase in primary production costs. Increasing food prices would be inflationary.

4-Private school parents pay income tax, too. They are entitled to the same dollar spend on their kids as public school kids-after all, they are paying the private fees for their kids, not the taxpayer. If you take away taxpayer funding in private schools, there would be a huge number of kids leaving the private system and flooding the public system, and it couldn't cope. I think this is best left alone!

5-Raising income tax dramatically for the wealthy will only drive them off-shore-then you get nothing! Better to raise the GST and apply it to everything- low income earners and welfare recipients can be compensated for the increased costs.

6-Yes-abolish negative gearing. It forces the taxpayer to subsidise someone else's wealth acquisition.

[tlgerdes (Trevor)]

Love #6 Abolish negative gearing.

Now I have to put up the rent on my investment property to cover the complete costs of the interest payments, strata levies, water rates, council rates, insurance etc, etc.

So who loses out, the low income earner renting my property, do you really think the investor is going to wear the loss?

Then, how does that also apply to a business making a loss versus an individual making a loss, say selling fruit, where a bad crop doesn't pay for the inputs? Or tenant who trashes a property (4-5 times the value of the bond) and the owner has to replace carpet before he rent it again. Can't have one rule some and different rule for others.

[Renato1 (Renato)]

Typical loony left stuff from the Guardian. I wonder if they cut and paste it from The Issue (which the unemployed sell on street corners).

Take the fossil fuel subsidies. The tax on fuels is meant to go towards road building. But the mining companies build their own roads and run there own vehicles on them. The rebate they get is because they've built the roads and not the government.

Or Income tax - from the ATO, the top 25% of income earners (those taxpayers with an income above $75,650) paid 67.4% of all net income tax. And if the Deficit levy comes in, Australia will have the third highest marginal tax rate in the OECD. The Guardian wants them to pay even more?

Mining taxes - The Guardian compares us to the great mining giant of Norway???? Why not do the comparison to our direct competitors - Canada, Brazil etc, - which is where all mining capital would go to. Plainly part of the Green's agenda to shut down mining in Australia.

Private Schools - ignores State government funding. Somehow, according to the Guardian, it will be cheaper if parents stop paying up to $20,000 or more per student for something they could get for free from the government. The thought "Arithmetically challenged" comes to mind.

Negative gearing - ignores the fact that the government has hundreds of billions in capital gains tax that it is collecting or will collect in the future.

Superannuation - claims concessions saves $200million on old age pensions. Old age pension is around $20,000 pa per single pensioner. Assume all pensioners are single. That's 10,000 pensioners getting $20,000 to make up the $200 million. So our whole superannuation industry and government concessions is geared towards keeping a minuscule 10,000 people off the old age pension? This is a simple nonsense - we know that 20% of the population doesn't go on the old age pension in full or part, and that is a lot more than 10,000 people.

Class warfare is alive and well at the Guardian. Must have been devastated when Gillard was deposed.
Cheers,
Renato

[stanlite (Grady)]

I take umbrage (as an economist) with the assertions of several of these proposals not because they are bad proposals (for example i dislike negative gearing because it is a distortion on Australian housing market) but because they fail to mention the knock on effects they would have to others (and the federal Budget).

So if I may be allowed to explain my reasons and in the interest of informed discussion hear are the parts i disagree with.

1. End the great superannuation concession rort – save $10.5bn

I agree that something needs to be done to stop the incredibly wealthy from using Super as a tax haven, But for the VAST VAST majority of people with Super with will just be a double take tax (your taxed when you put money in and now when you take it out) hardly fair. Particularly when we are trying to encourage people to save for retirement so we don't have them drawing a pension. The Aged pension was designed at a time when there where 13 tax paying workers to each pensioner and the average pensioner only lived for about 5 years on the pension before passing away. Now it is like 3.5 Tax payers per pensioner and they live for 15years. There is nothing wrong with this and there should be a pension but unless we either raise the pension age, decrease the pension $$$ or get those who can save enough in super (middle income and above) to get off we are going to have a major issue. Remember the Pension is paid by today's workers for yesterdays ones.

2. Actually tax the mining industry – add $50bn
Again a good idea in principle but remember the mining industry is highly volatile. Today's super profits where for much of the time between the 70's til 90's very merger. This makes mining companies skittish about the future and given that mining has a multiplier effect in Australia of about 1:4 (couldn't find correct information but this is the number that comes to me) so each dollar earned by the mining industry multiplies 4 times in the general economy put another way each guy at the coal face supports the jobs of 4 other people. Taxing such an industry (particularly above other industries) will have a far larger effects on Jobs in the broader economy than many imagine.

3. Abolish fossil fuel subsidies – save $11bn
again this is the multiplier effect in reverse, 11billion in subsidies means x number of jobs in mining, freight (truckies) ect.ect that wouldn't be there otherwise. There would be a cost on the otherside of the budget to unemployment benefits and tax revenue (from reduced business taxation of those affected) that could cancel out much of these savings. I don't have access to the forecasting treasury or this article is using so i don't know what sort of flow on effect would be. If they are less then $11bn a year cut the subsidies and wear the job losses, reduced business.

4. Defund private schools – save $9bn
OK as a teacher (in training) this is just ridiculous on a number of levels ... firstly private schools educate around 35% of school age children cutting all funding to them (they receive none from the States where public schools get 90% of their funding from) would force many to either close or jack up school fees massively. The public school system couldn't absorb the sheer amount of students that would move from private to public (i would say about half of private school kids would move). The States would have to build the equivalent of the Victorian education system overnight to be able take them.

I believe someone mentioned that private schools are less efficient than public schools. Again this is incorrect, while cost per students have risen slower at public schools than private schools over the last few years this is because private schools are roling out massive technological improvements (many now require/provided every student with a tablet of PC) this isn't the case at public schools yet or they are using education department economies of scale in purchasing computers. If you look however at enrollments compared to total funding private schools are far more efficient at delivering the same level of educational outcome.
Public School Enrollments = 65% of school age children and receive 78% of government funding.
Private schools = 35% of school age children and receive 22% of funding.

This is the only point i completely disagree on only thing i agree with is making sure elite private schools don't get porked barreled. However, many private school are not elite and not wealthy.

5. More progressive income taxes – add $41bn
Again things went to far in 2006 on the tax cut front ... but at the time i didn't see people complaining. income tax is also got a negative aspect to it in that normally the richest of the rich can afford to avoid it. Likewise, their is a multiplier effect on jobs, given the wealthiest amongst us can afford the luxury goods that underpin many retail jobs raising their taxes usually impact on the poorest more then the rich. Rather than raising the top rate to 50% we should make it harder to avoid paying tax for the wealth (means testing deductions for example).

6. Abolish negative gearing – save $15bn
This one sound great on paper and i would support it in a flash if not for one reason. It has distorted the housing market for nearly 30 years already and removing it suddenly or at all will be very painful to the following groups.
Retires, low income earners, middle income earners, people who rent, anyone with a mortgage.
Firstly the values of homes in Australia is inflated by about 30% because of negative gearing. You remove it the poor, retired and middle income people will be worst affected. this is because although they don't benefit directly from negative gearing (they only own one house) a lot of their wealth is in their home. Removing negative gearing would deflate house prices in Australia for at least 10 years. Many people would not be able to move because of mortgage commitment to a house now worth less than the mortgage.
Secondly, renters would be affected you might think they would benefit from lower house prices but rents are now tied to mortgage repayments and since a person in a negatively geared property doesn't want to go broke over it they will either have to sell (at a loss) or jack up rents to cover their mortgage repayments (remembering that negative gearing worked on the premise that your income from the property is less than the cost of owning it.) So while negative gearing inflated real estate prices it also kept rents lower than what should have been the case for that market.
Finally anyone wanting a mortgage or with one will suddenly find it very hard to get one. Banks have calculated the risk of lending in Australia on the premise that house prices will continue on a upward journey. If you remove a major contributor to upward pressure of house prices and the market corrects (like it should if you remove negative gearing, remember 30% overpriced) banks will tighten their lending criteria thus not just making it harder to buy a house but to change to a different bank. Likewise this will feed into a downward pressure on house prices as people struggle to get access to funds to buy property.
Abolish Negative gearing at your own risk and preferably with lots of lead in time to prepare the market.

I am all for finding other ways to balance the budget but you have to remember that every action you take will have a reaction somewhere else in the budget or economy. Often times this will affecting the very people you where trying not to affect by avoiding cutting a service and sometime affect them more than the cutting of that service would have.

[tlgerdes (Trevor)]

Originally Posted by multiweb

The title of this thread sounds like "Lose weight without exercising".
Besides the deficit we have a huge domestic debt. People spend money they don't have on their credit card. This attitude is reflected to every echelon of the government. The money has been spend. Now we have a huge interest bill. So it makes sense to squeeze until we lower that debt and there's only one way to do it. Buckle up. The pain is coming.

Yes, like someone I knew, who complained about housing prices and that they couldn't afford to buy because they couldn't afford deposit, yet didn't think twice about blowing $500 in weekend on drinking, dining and having a good time, had to BMW/AUDI/"insert Luxury car brand", had to have the name brand goods for themselves and their 3 yo child.

We had the Party, now we have the hangover.

[Astro_Bot]

Originally Posted by clive milne

Surely it is self evident that irrespective of one's political inclination the current economic system is not serving us.

Neither are the politicians, but I'll get to that in another post.

I agree with Tony's assessment with a couple of minor amendments and comments:

#1. Super was structured to encourage self-funded retirement, hence tax concessions traded against availability of funds (preservation age). Employee contributions (mostly) are voluntary so encouragement/concessions of some sort remain necessary, but a sliding scale or means test as to the degree of concession would be valuable as some people would save/invest anyway (due to high disposable income) and would never qualify for a pension based on assets - to these few, super tax concessions are just a free gift - remove them and they'll simply invest elsewhere.

#4. No, but for a slightly different reason. I like the model of dollars per child per school grade, regardless of whether public or private - it's the child that is funded, but the funds are handed to the institution. If parents wish to pay fees over and above that, then they can - treat wealth inequality with taxes, not distorted school funding, which is far less discriminate. Sure, there's an argument about "base level" funding - e.g. schools need to be maintained regardless of how many students there are. At the moment, public schools are receiving more funding per capita than private schools (which may well be appropriate), and Gonski (I think?) increased funding proportionately to public schools, so I don't see that there's any relative public school funding problem at the moment. Let's just go with Gonski and re-evaluate in a few years.

#7. I'd add another one: Spooks - we have too many. Spook numbers have increased 4-fold since 2001 and the their budget 8-fold over the same period. If we're all going to share the pain, then slash the spook budget. (Then maybe, they'll prioritise their efforts and stop analysing what music you link to on facebook, and that movie you texted your girlfriend about).

[Astro_Bot]

Originally Posted by tlgerdes

Love #6 Abolish negative gearing.

Now I have to put up the rent on my investment property to cover the complete costs of the interest payments, strata levies, water rates, council rates, insurance etc, etc.

So who loses out, the low income earner renting my property, do you really think the investor is going to wear the loss?

I think the general idea is that a proportion of investors, perhaps including yourself, would be forced to divest themselves of investment property/ies. More properties for sale would cause property prices to fall and invite lower income earners into the market as buyers. There may well be other effects, not all of them positive, but this is the one people are thinking of when they suggest ending negative gearing.

Can't have one rule some and different rule for others.

Well, actually, you can - rules vary across market segments throughout the economy. More to the point, though, is that residential property is a bit unique. Whereas you can choose to have or to go without a great many things, everyone needs somewhere to live and housing is enormously expensive. There are already 100,000 homeless people in Australia, and many more that, under current arrangements, will rent for life, so I have little sympathy for those using taxpayer funds to improve their personal wealth portfolio at the expense of low income earners and the homeless. That doesn't mean I don't support your right to own assets and build wealth, but I'd rather you didn't use taxpayer funds in the process.

[PCH (Paul)]

Originally Posted by tlgerdes

Love #6 Abolish negative gearing.

Now I have to put up the rent on my investment property to cover the complete costs of the interest payments, strata levies, water rates, council rates, insurance etc, etc.

So who loses out, the low income earner renting my property, do you really think the investor is going to wear the loss?

Then, how does that also apply to a business making a loss versus an individual making a loss, say selling fruit, where a bad crop doesn't pay for the inputs? Or tenant who trashes a property (4-5 times the value of the bond) and the owner has to replace carpet before he rent it again. Can't have one rule some and different rule for others.

Here here

[PCH (Paul)]

By way of a response to the aforementioned suggestions, I'd like to quote the British ex MP Tony Ben who said....

"Government works best if it can keep people poor, demoralised and afraid. It's far easier to govern people who are uneducated, poor, afraid and demoralised than it is to govern people who are well educated, well off and optimistic about a bright future.

People who are poor, demoralised and uneducated tend to 'do as they are told', think 'hope for the best' and that 'everything will turn out alright in the end'."

I'm not saying these are his own political philosophies, rather he was just commenting on his experience of the way Governments seem to work, at least in the western world.

So there you go. It doesn't matter how good your suggestions are because you're thinking from the point of view of benefiting the end user, meaning us. Whereas the pollies' agender is to feather their own nests whilst keeping us peasants up to our necks in sh1t!

Just my 2c

[tlgerdes (Trevor)]

Originally Posted by Astro_Bot

I think the general idea is that a proportion of investors, perhaps including yourself, would be forced to divest themselves of investment property/ies. More properties for sale would cause property prices to fall.
.

See, there's an incorrect assumption.
Choice 1) liquidate property, at probably a loss due to excess supply.
Choice 2) increase rent to cover costs, retain investment due to drop in supply keeping rental market tight.

I certainly know which one I would be doing.

[clive milne]

Some interesting points of view on both sides of the fence.... I'm also pleased to see some thought go into a thread (even if the conclusions are not ones I share)

As the op of this thread, can I please remind everyone to remain civil, respectful and polite.

Cheers.
c

[stanlite (Grady)]

The most likely outcome would be that both would happen. Rising rents and falling prices.

rising rents because people with investment property are passing along the true cost of the property to the market.

falling prices because many people (who are not particularly wealthy) have made investment choices based solely on the tax exemption would find themselves in an impossible situation haveing to pay the mortgage and raising the rents but loosing tenets ect ect and falling behind.

If the modeling i saw in uni was public knowledge people wouldn't even be mentioning getting rid of negative gearing as a solution (at least not without a long lead time with protections for those already with negative geared homes)

Originally Posted by Astro_Bot http://www.iceinspace.com.au/vbiis/i...s/viewpost.gif
I think the general idea is that a proportion of investors, perhaps including yourself, would be forced to divest themselves of investment property/ies. More properties for sale would cause property prices to fall.

Originally Posted by tlgerdes

See, there's an incorrect assumption.
Choice 1) liquidate property, at probably a loss due to excess supply.
Choice 2) increase rent to cover costs, retain investment due to drop in supply keeping rental market tight.

I certainly know which one I would be doing.

[Larryp (Laurie)]

The prospect of ending negative gearing would not necessarily affect investors already using the scheme.
It could be made unavailable after a specified date-no new negative gearing investments-but allow existing ones to continue. This would be similar to when Keating introduced capital gains tax-if the asset was owned prior to a certain year (1983?), then it was exempt from CGT.
As I said previously, I am opposed to taxpayers funding someone else's wealth creation

[Stardrifter_WA]

Originally Posted by Larryp

As I said previously, I am opposed to taxpayers funding someone else's wealth creation

I wasn't going to weigh in, on this debate, but I just couldn't help myself. Sadly

So, instead of the private market providing housing and getting a subsidy, of sorts, you would rather see the creation of fully subsided public housing (or indeed, just throwing people onto the streets), which will cost considerably more, and, as we already know, governments are not efficient in providing services. It may also result in more ghetto style areas of high density housing.

Removal of negative gearing would not, necessarily, drop house prices, particularly to the point where everyone could afford them. And if that did happen, many people would have a much lower standard of living, and still leave them out of the housing market. I have lived in a poor country, for a short time, so have seen the effects of poverty first hand; I don't recommend it. These people cannot lift themselves out of poverty, without the help of the government, and that particular government lacks the will to improve the peoples standard of living, as they simply want the people cowered.

Therefore, someone has to provide the housing for those that can never afford to buy a house, either private investors or government.

Investors will not invest in housing if they are not going to see a decent ROI. Just as there needs to be an incentive for people to contribute to superannuation.

Government providing mass housing, for those that cannot afford them, has been tried, it is called communism. And, that didn't work either! What is being suggested, it seems, is that governments should stop the manipulation of the market, and reduce us all to the lowest common denominator. Have a closer look to why there is a civil war in Syria.

If Government doesn't aid wealth creation, it isn't going to happen, at least, for the average man.

Removing negative gearing has previously been tried before (by Keating, if I remember correctly) and it was a disaster.

Removing negative gearing and forcing house price down dramatically will not work. Devaluing the wealth created isn't the answer either. You simply don't make an economy strong by making people poorer.

This is only my opinion, as I am not pretending to be an economist, with all the asnwers, as I know jack sh*t!

However, I do know that the answer isn't as simple as every one seems to think.

Cheers Pete

PS: For the record, I am not an investor in property, apart from owning my own home. My home is my super, so any fall in house prices would affect me greatly. You can't build a strong economy by making people poorer, as I said above.