How Australian households became the most indebted in the world

Extract from The Guardian 

The rapid rise of capital city house prices in the past two years has propelled Australia past Denmark with a ratio of 123.08% debt to GDP, analysis shows

 

 House prices have risen 141% in Australia since 1996.

Photograph: David Gray/REUTERS

Contact author
@PhilipSoos
Friday 15 January 2016 12.41 AEDT


The results are in: Australian households have more debt compared to the size of the country’s economy than any other in the world.
Research by the Federal Reserve has shown the consolidated household debt to GDP ratio increased the most for Australia between 1960 and 2010 out of a select group of OECD nations. Australia’s household sector has accumulated massive unconsolidated debt compared with other countries. As of the third quarter of 2015, it now has the world’s most indebted household sector relative to GDP, according to LF Economics’ analysis of national statistics.
Denmark long held this unholy accomplishment, but has been slowly deleveraging over the last several years as its housing bubble peaked and burst during the GFC. The latest debt-financed boom in Sydney and Melbourne has resulted in Australia now overtaking Denmark, a comparison of official figures from Australia and Denmark has shown.

Photograph: LF Economics
Australia has around $2 trillion in unconsolidated household debt relative to $1.6 trillion in GDP. Australia’s ratio is 123.08%, while Denmark’s fell slightly to 122.99% in the third quarter of 2015, a marginal difference of 9 basis points. Although Denmark holds the record in terms of peak debt of 140.14% in the last quarter of 2009, as Australia continues to leverage and Denmark deleverages the current gap between the two will widen. Apart from Switzerland (which alongside Denmark has a negative interest rate), no other country is close in terms of having such extreme household sector debts. The UK ratio is 85.9% while in the US it is 79.1%.
Due to Switzerland’s opaque financial accounts, it is impossible to calculate a figure for this quarter. Its ratio for the second quarter of 2015 is 121.3%, and household debt is rising very slowly, so it would take an extraordinary increase over the quarter to potentially beat Australia.
The final confirmation of the trend is expected when the Bank of International Settlements publishes its analysis of private credit statistics from the third quarter.
Australian property investors and homeowners are burdened with massive mortgages, especially new and marginal entrants. Unlike winning a gold medal at the Olympics, having the world’s most indebted household sector is not an achievement the nation should be proud of. This is where Australia’s real debt and deficit problem lies, not in the public sector.
Over the last two decades, Australia has been beset by rampant housing price inflation.

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Since 1996, prices have outpaced fundamentals such as inflation, incomes, construction costs, rents and GDP, making it difficult for potential first home buyers to enter the market while lower income households and marginal groups struggle to afford decent shelter.
Between 1996 and 2015, housing prices (adjusted for inflation and quality) have boomed by 141%, without a large and obvious downturn. This surge has led to a heated debate over whether this constitutes an asset bubble. Unfortunately, the Australian housing market shares similarities with countries afflicted by such bubbles: the United States, Spain, Denmark, the Netherlands and Ireland.
Government, the FIRE sector (finance, insurance and real estate) and the mainstream economics profession deny the existence of a real estate bubble, but Australia’s economic history demonstrates they occur repeatedly, with all signs pointing to one today.
Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record.

Photograph: LF Economics
Government is caught between a rock and a hard place, as implementing needed reforms will likely burst the bubble, causing severe financial and economic problems as residential land prices decline. The FIRE sector, including the public caught in the fallout, will surely blame government for the bust and deflect attention away from the gargantuan amount of debt pumped out by lenders.
One of the faults of real estate analysis is the failure to distinctly define an asset bubble, so debate on the matter is kept necessarily vague. Only a couple of housing market metrics is needed to identify a bubble, and are now considered commonplace: nominal price to inflation, price to income and price to rent. On all three, Australia is both historically and internationally at or near the top.
Since the advent of the GFC, it has become commonly accepted that the global real estate booms originated from rapidly expanding bank credit or private mortgage debt. It is not merely the growth of mortgage debt (the first derivative) but the acceleration (the second derivative), also known as the change in the rate of growth. Nevertheless, the simple growth of mortgage debt provides a strong indicator for housing price growth.
The future for investors and new homeowners is not good. Subdued capital price growth in the secondary capital cities, rental price growth at record lows, significant dwelling construction and a falling population growth rate leading to further oversupply all spell danger. The problems are compounded by the Reserve bank having little room for interest rate cuts, by weak macroprudential controls, minimal savings, low household income growth and anaemic GDP growth.
Captured by neoliberal ideology and the FIRE sector, government has no interest in stopping this immensely profitable yet dangerous gravy train, having enriched the already wealthy beyond avarice through privatisation of unearned economic rents rather than productive activity.
Philip Soos is the co-author of Bubble Economics: Australian Land Speculation 1830-2013 and co-founder of LF Economics. @PhilipSoos

Labor says Coalition has lied and included additional cuts in 'omnibus' savings bill

Extract from The Guardian
Tony Burke says Malcolm Turnbull’s budget repair bill has included measures not part of opposition’s costings

Labor’s Tony Burke says the Coalition has included measures not part of the opposition’s costings in its $6.1bn ‘omnibus’ savings bill. Photograph: Lukas Coch/AAP

Katharine Murphy Political editor
@murpharoo
Tuesday 30 August 2016 09.53 AEST

Labor says the Turnbull government has lied about its $6.1bn “omnibus” savings bill, tacking on measures that were not part of the opposition’s costings in the lead-up to the election.
The manager of opposition business, Tony Burke, told the ABC on Tuesday morning Labor had not gained access to the proposed legislation until late on Monday and it was already clear the proposal was more wide ranging than the government had flagged.
“First of all the claim the government made that there were 21 measures in it is wrong,” Burke said on Tuesday. “We said we wanted to wait until we saw the bill because we didn’t trust that it would be as they described. It’s turned out we were exactly right.
“I’m told there are 24 measures, not 21. They are not all measures that Labor had included in its costings.
“So the government has been entirely deceptive with this and if their first action is to lie to the Australian people about what was meant to be their centrepiece bill that really tells you what the Turnbull government is going to be about.
“Playing a game of lying about what’s in the legislation isn’t going to get them anywhere.”
The government has built up the importance of the savings bill in the lead-up to Tuesday’s opening of the new parliament and the prime minister declared in the first Coalition party room on Monday that budget repair was “a fundamental moral challenge”.
But the government’s failure to produce the text of the bill early on Monday meant the Labor caucus was not in a position to assess the measures – which means if the government is relying on Labor’s support, which it says it is, proper debate on the bill will not be able to get under way this week.
Strong internal debate is continuing in Labor over whether the opposition should support some of the measures in the omnibus legislation, including a proposed cut to pensions and Newstart, courtesy of the abolition of an energy supplement – a saving worth $1.4bn over four years.
A meeting of the left caucus in Canberra on Monday was dominated by concerns from MPs about axing the energy supplement, which affects people living below the poverty line, and two additional measures – a $1.3bn saving Labor has booked from abolishing the Australian Renewable Energy Agency (Arena) and a potential cut to children’s dental programs. Burke, the environment spokesman, said Labor’s policy before the election was not simply a cut to Arena but also a commitment of an additional $300m in investment in renewables. “It was moving money form being used in one way to being used in another,” he said.
Burke said in the omnibus proposal the Coalition was asking Labor to support the cut without any commitment to the reinvestment. He said the two elements of Labor’s policy went together.
The omnibus proposal also includes a cut to welfare benefits for people held in psychiatric confinement that Labor rejected during the last term in parliament and did not nominate as a saving during the campaign.
It is not clear when the package will move to substantive debate but the backbench briefing note about the omnibus bill makes clear the abolition of the energy supplement needs to happen during the spring session of parliament, because the schedules take effect in March and July 2017.

Private tax is the great unspoken of neoliberal philosophy. And the rich are the winners

Extract from The Guardian

If you take into account private taxes, it’s possible the wealthy pay no net tax while the middle class and poor face significant net tax burdens

‘Tony Abbott denounced the Labor government’s carbon tax as a “great big tax on everything”. This is false. Carbon emissions result in pollution and climate change; enormous negative externalities imposed upon individuals and the environment.’ Photograph: David Crosling/AAP

Contact author
@PhilipSoos
Tuesday 30 August 2016 06.30 AEST

When we hear talk about taxation, it is naturally assumed to refer to those taxes which are levied by the government. After all, no individual or business can charge anyone else a tax, right?
From the 1980s onwards in the neoliberal era, there has been an effort by policymakers globally, including Australia, to reduce both the total public tax take and marginal tax rates. The standard arguments revolve around promoting economic growth and investment, and reducing disincentives to work.
The debate in Australia is curious given what is not discussed: private taxes. These are sanctioned by government policy (implicitly or explicitly) and levied by market participants upon others. Private taxes come in three forms: intellectual property rights (IPRs), rising asset prices and negative externalities. Unlike public taxes, they are not labelled as taxes, even though they have the same economic welfare effects.
The monopolistic pricing of IPRs acts as a very narrowly-based consumption tax with higher deadweight losses than general consumption taxes (a bad GST/VAT). One of the ironies of the modern economy is that while neoliberal policy has reduced tariffs to minimal levels, it has strengthened IPRs which often results in “tax like” mark-ups into the thousands of per cent above marginal cost.
Today, IPRs saturate every corner of modern economies, reaping monopolistic profits. A major element of so-called free trade agreements, for instance the TPP, will act to enforce these highly protectionist measures worldwide.
Rising asset prices, especially those that inflate well above economic fundamentals, impose a form of private tax on new buyers. In Australia, the obvious example is that of housing prices, which have ballooned over the last two decades. First home buyers must fork out an increasing amount of household income to service mortgages and expenses or miss out, which has the same effect as if homes had simply been taxed.
If appropriate housing-related policies pertaining to debt, tax and planning had been implemented, the housing price inflation may have been avoided, hence keeping purchase costs down. Germany is a rare example of this in the OECD.

Negative externalities result from economic activity which imposes costs onto third parties which they cannot avoid; again like a tax. These effects are widespread and becoming more obvious, especially given climate change, poisoning of the oceans, resource depletion, pollution, and widespread financial sector meltdowns.
One study placed uncorrected negative externalities at 34% of US GDP in 1994. A more recent estimate is a whopping $US7.3tn or 13% of global GDP in 2009. A 1998 report demonstrated the total social cost of a gallon of gas was between $US5.60 and $US15.14, rather than the then market price of $US1. Many industries would not be viable if not for externalising costs; industry profits are often maintained by this perverse dynamic.
Former prime minister, Tony Abbott, had denounced the Labor government’s carbon tax as a “great big tax on everything”. This is false. Carbon emissions result in pollution and climate change; enormous negative externalities imposed upon individuals and the environment. The effect of the carbon tax was to convert a portion of the already existing inefficient private tax into an efficient public tax; hence it was not a new tax.
While progressive parties such as the Greens are typically associated with advocating high public taxes, they could be potentially imposing the lowest total tax take given their economic policies, some of which reduce private taxes. For instance, they seek to mitigate negative externalities by taking action on pollution and climate change, lower land prices via modifying housing tax expenditures and limit the concentration of IPRs.
In contrast, the neoliberal Liberal National party is openly hostile to policies which reduce private taxation. They oppose measures to deal with climate change, to lower dwelling prices or to mitigate the growing monopolisation inherent in IPRs.
Although the wealthiest households and businesses pay the majority of public taxes, they are also the largest recipients of private taxes. While national accounts often provide estimates of public taxes down to the dollar, this is unfortunately not the case with private taxes. This grey area is a gift to its beneficiaries. Given the sum of public and private taxes, it is possible the wealthy pay no net tax while the middle class and poor face significant net tax burdens as a result of the widespread imposition of private taxes.
When neoliberal proponents promote support for lower taxes, they only ever refer to public, not private, taxes. Neoliberals have misled the public into supporting the reduction of public taxes while massively increasing private taxation in its three forms by stealth, without nominating it as taxation.
In Australia, the greatest economic threats to our welfare come from climate change and the housing bubble; direct consequences of allowing runaway private taxation. Nationwide, aggregate private taxation could well measure into the several hundreds of billions of dollars given the suggestions from the aforementioned reports on external costs, revenue from IPR-dependent industries and inflating land prices.
Solutions are readily available to us; the trick is to convert inefficient private taxes into efficient public taxes. Doing so would allow for the removal of many inefficient public taxes which penalise competitive, productive labour and enterprise. The Ken Henry Tax Review estimated Australia has 419 tax and tax-like fees!
Inflating asset prices can be reduced via hefty capital gains, land value and Tobin taxes while extensive “Pigovian taxes” mitigate negative externalities. For IPRs, there has been much discussion in recent years into alternative mechanisms for funding R&D and creative arts without resorting to monopolistic pricing.
The neoliberal tax agenda should be exposed for what it really advocates: big, regressive and inefficient private taxes that benefit the wealthy to the detriment of the public. Whenever calls are issued for reducing taxes, typically from the corporate sector and ideologically-aligned think tanks, we should agree – but with a twist – reducing and removing inefficient and regressive private taxes should be at the top of the agenda.