Archives for June 2016

Growth Rate Indicators

June 24, 2016 by James J. Morrison W.G. Dupree Leave a Comment

With many economic indicators over the past few years showing a downturn as Alan Austin has pointed out, it interesting that growth in the economy is a mantra for the conservatives. The LNP government’s assertions inherent in their three word slogan of “Jobs and Growth” presumes we are experiencing these in certain quarters. Let us begin examining a few.

Australia’s net population growth is still positive. Moving steadily from 19M in 2000 to 24M in 2016. The net populations growth by itself is the product of accumulated ebbs and flows. For example, in 2012-13 a total of 91,761 people indicated that they left Australia permanently. Many of them professionals but only half of them were actually born overseas. A concern for the department of immigration which sees it as “a loss of skills and experience as well as a loss of social investment in fields such as education, training, health services and settlement costs of immigrants”.

Diminishing population growth rates in Australia

The growth rate per year although, has been decreasing over time. From it’s highest point in 2008 of 1.22% it had fallen steadily to 1.09% in 2014 according to Miguel Barrientos founder of IndexMundi. From this site other statistics from multiple sources have been garnered. Australian birth rates have been steadily dropping from 13.08 in 2000 to 12.19 per 1,000 persons in the population (per 1K/Pop) in 2014. Death rates since 2000, have been increasing as would be expected our ageing population dominating and rose to 7.07 per 1K/Pop in 2014. So why, with thousands leaving, a growing death rate and slowing birth rate do we have a steady total Australian population growth? The answer to that and the anomaly of change you may have noted between 2007 and 2008 on all the graphs, is migration. The influx in migrants, whether they be asylum seekers, visa holders or all manner of foreigners, maintain our growth. Much to the ire of many red-neck Australian “tea party” proponents who would rather we send even more “back where they came from” than the 91K we lose in a year. While the Department of Immigration is optimistic that net migration rates will increase in the future – and has published optimistic forward estimates figures – the actual historical statistics shown no such trend. Net migration rate which was at 5.74 immigrants per 1K/Pop in 2014, has been steadily decreasing since 2008 when it was 6.34. Despite the annual departures without the larger influx, the total Australian population growth might be in serious decline. Given the financial, social and intellectual contribution the likes of migrants, including asylum seekers, have proven to supply Australia, it remains economically irrational to be restricting their entrance. They don’t take jobs as that irrational argument by some protests, they create them. The example of Karen refugees making $40m worth of contributions to the economy in Nhill, Victoria, is a classic case. Spending 1.2 Billion a year to keep them in detention, when they could be boosting our economy by millions is both wasteful and sheer economic vandalism. Taken for reasons that have more to do with politics of fear mongering that is pandering to the emotional insecurity of a racist Australian population. It certainly has nothing to do with good economic management of a resource that is, desperate to be here and that we are blocking. So if we are socially & politically inhibited in using the resources of people to aid our economy, are we working well with the population we have in seeking to grow our net wealth?

Our economic results are reported as positive news. Recent quarters have shown Australia’s economic growth has beaten expectations. This is particularly good news especially after our total GDP dipped in US dollar terms from 2013 to 2014. Unfortunately the growth rate in GDP despite numerous fluctuations, has been showing a falling trend generally since 1999. GDP per capita although, has shown a stead increase over the same time. It looks prosperous, provided you fail to account for wealth inequality.

One of the noticeable absences from Joe Hockey’s Intergenerational Report (IGR) last year, was no indicator of the Gini coefficient (a normally standard reporting indicator in previous IGR’s for socio-economic impact of policies). The Australian National University has noted that wage inequality has increased steadily from early 1980s onwards [1] and ACOSS has noted an increase in numbers of citizens living below the poverty line.

Poverty numbers in Australia thrust upward to 2.55 million in 2014 (over .6 million of that being children). This continues the long-term trend of growing inequality in Australia. This factors certainly skew the per capita growth in GDP towards the already wealthy demographic.

So many conservatives hope the coalitions focus on Jobs and Growth is a progressive step in the right direction to shift the burden of growing poverty and provide jobs that can lift our limited growth population out of poverty. So are jobs the solution and have jobs increased? Scott Morrison is loudly boasting, “yes they have!” And if you want to retain that shallow positivist joy, this is where you should stop in your examination.

Participation in the labour force has continued to increase to just over 12.78 million in May 2016. It was just over 12.46 million when the coalition government came into power. Unemployment has of course increased while available jobs in the market have decreased. Jobs growth (according to the Coalition) of 300,000 since they came into power, is not actually keeping up with labour force growth, let alone expanding to overcome the decreasing population growth rate aforementioned. When you consider that we have just turned over 11 months of consistent part-time job increases measured against the fifth straight months of full-time job decreases, then it is not hard to know where the real “Jobs and Growth” are occurring.

When Scott Morrison got excited about apparent jobs growth in recent ABS statistics, he did not delve too deeply into their makeup. But isn’t any job even if it is a part-time one, at least “a job”? Probably not when it cuts you off from Newstart support but just like “Newstart”, still leaves you in poverty. The recent years have seen the rise of an unemployment problem called “the working poor”. A phenomenon where working families who are subsidised by wages, live below the poverty line. Another unique employment issue (even recognised by the Telegraph who have a reputation for a lack of sympathy for the unemployed) is the homeless but fully employed demographic. The National Coalition for the homeless claimed 44% of homeless people have jobs and that was a claim from back in 2009. Given that the ABS does not rate you as unemployed if you have worked for as much as one hour in a month, none of these homeless demographics register as “unemployed” but they do qualify as part of the “jobs growth solution” boasted about by the Liberals.

But at least if you have one of Joe Hockey’s “good” jobs (or your family needs a couple of them) and can afford a home, you have to be making some leeway? Chances are, if you are not a baby boomer who has finally paid off your home and retired, you are burdened by an enormous amounts of private debt. Millions of Australians are lumbered with housing debt. Private Debt zipped past our GDP to loom above it by over 123%. The over $2 Trillion in private debt is being chased by it’s little brother, “Foreign Debt” who has only grown to over $1 Trillion but has ambitions. Australia is already living beyond its means with faint ambitions by the average wage earner to grow their wealth.

It is therefore a shame that Morrison’s “growth” part of the equation doesn’t include Australia’s hourly rates of pay. These have been steadily diminishing over the term of this government. Even the Reserve Bank has expressed their concerns over the how wage growth has declined markedly in Australia over the last few years. What has been growing at a rate that is outstripping our economic growth – that Morrison can boast about – is housing. As the global property guide proclaimed. “House prices rose by 11.4% in Australia´s eight major cities during the year to end-Q3 2015 (9.72% inflation-adjusted), up from an annual rise of 9.23% in a year earlier and the highest y-o-y increase since Q2 2010, based on figures from the Australian Bureau of Statistics.”

So in summary, Debt and housing costs are growing but wages to afford the debt and housing is not. If I were to provide advise, it would be if you have a full-time job, don’t leave it. They are vanishing and there is only growth in part-time jobs. If all you can find is a part-time job, the chances of you descending into poverty are statistically significant. Don’t live in major cities. Given there are at least 8 times the number unemployed as there are jobs in the market, your chances of getting a job,- even a part-time one – are slim to none. Australia won’t allow highly motivated foreigners – like asylum seekers – into the country to boost our economy, as they have historically proven to do over decades. In fact we would rather spend billions abusing them in offshore gulags, then give them that opportunity. This is the price of being insular and parochial. Conservatives with a reputation for a love of money would rather spend billions on locking people up when you could be exploiting them to create millions. Am I the only one that is puzzled by this? So with a slowly diminishing rate of growth for population, GDP, hourly wages, full-time employment, and innumerable other economic indicators and a rapid rise in debts, housing prices, part-time employment, poverty and inequality, has it occurred to anyone that something is wrong here?

The record of the current government is laid out in its last three years of office. On July 2^nd you have a chance to ensure this continues. That choice is your’s Australia!

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[1] “Is Inequality Increasing?”, Powerpoint Presentation for Parliamentary Library Vital Issues Seminar, 10 October 2012 by Peter Whiteford, Crawford School of Public Policy

July afterthought.

With a heavy heart, I have only one comment to add to this article in the July that followed that election.

Australia, you have failed again! <sigh>

Negative Gearing

June 18, 2016 by James J. Morrison W.G. Dupree 1 Comment

Private debt in Australia has escalated beyond the $2 Trillion mark shooting past Australia’s GDP of $1.6 Trillion by 123%. Housing affordability is reaching crisis levels driven beyond the budgets of many Australians, by negative gearing and capital gains concessions.

In fact, we have just bypassed Denmark (the previous first placeholder) to hold the prize for the single largest ratio of household debt to GDP. Our government net deficit/debt is minuscule by comparison at only 17% of GDP. It was only 11% when Labor left Office. At the time, Australia had the third smallest net government debt relative to GDP in the OECD. Unfortunately, the sheer hysteria over government debt expressed by Joe Hockey led many voters to believe this was significant. Ignoring that Australia used to be one of the world’s best-performing economies in 2013. One of the predominant components of any magic act is the art of distraction. Hockey, and later Morrison, frequently shrieked at the “mouse” of Government debt to catch your eye, while allowing the “elephant” of private debt to sneak across the stage. Despite doubling our deficit since then, we are still in an internationally enviable position as far as Government net debt is concerned.

A little perspective on the debts of our nation?

The issue of negative gearing has been confusing for both the Coalition and the public. Kelly O’Dwyer was contradicting Malcolm Turnbull on whether or not the revocation of negative gearing would result in house prices falling or rising, did nothing to assure the public.

ABC’s Lateline hosted a debate between IPA Stalwart, Sinclair Davidson and economist Saul Eslake on the 10^th of May 2016. Saul suggested Negative Gearing (which he has opposed for 30 years) was costly and ineffective for its originally intended goal. Saul referenced the Reserve Bank’s analysis and the Grattan Institute’s research, as supporting his case. Davidson referenced his own personal “number crunching” but mainly appeared to channel his inner apprehensions over losing negative gearing. Curiously he claimed the “poor folks” who earned only $100K a year were not “rich”. (Despite that only 10% of Australian taxpayers can earn more than that.) With that redefinition of “relative poverty” in place, he argued negative gearing was not “a lurk or a rort for the rich”. He provided neither his “modelling” nor independent evidence that the absence of negative gearing would cause housing prices would decline. He was, although, perfectly prepared to disparage the modelling conducted by the Grattan Institute. In fact, pages 30 to 32 of the report go to some length to explain why it is unlikely to do as Davidson feared. These pages explain that a 2% reduction in the normal 7.3% average growth experienced since 1999 is the most its absence would affect the rate of growth.

Negative gearing is designed to compensate for the losses encountered by a borrower for an investment property where the rent and costs of managing the investment exceed the cost of borrowing. In Australia and New Zealand deductions for negatively geared losses on a property can be made against income from any other source. In other countries, this is quarantined. For example, in Canada, losses cannot be offset against wages or salaries. Similar restrictions exist in the UK and Netherlands. Australia has by far the most generous conditions now. Before 1985 it had been quarantined so losses could not be transferred to an individual’s income from labour.

Between July 1985 and 1987, the Hawke government abolished it and rent prices fell everywhere except in Perth and to a lesser extent in Sydney. This price fall was not due to Negative Gearing’s absence, but the meagre “available” vacancy rates and competition from inflated rent prices. (Grattan Report: Page 34-34) After that though, a less quarantined negative gearing was reinstated.

Housing & Rent prices rose but not at the rate they have since 1999. What mitigated the potential effects on the economy of unchecked negative gearing, was the 1985 introduction of a CPI indexed Capital Gains Tax. In 1999, the Howard government removed indexing and introduced a 50% discount for capital gains for individuals. From that point on, housing prices (and rent) skyrocketed an average of 7.3% annually. (Grattan Report: Page 31) The 2010 Henry Tax Review recommended reining it in, and at the very least, capping the deductions. The Labor and subsequent Liberal governments chose to ignore this. In 2013-2014 these features of Negative Gearing & Capital Gains cost the Tax department $11.7B a year in deductions claimed. (Grattan Report: Page 34-34)

Negative Gearing was originally touted as a means to increases the supply of rental property and decreases the rent charged by Landlords. Lobby groups with enormously financially vested interests such as the Taxation Institute of Australia and Real Estate bodies continue to do so. Like bad journalism, they have a dislike for when the facts get in the way of a good story. In fact, precisely the opposite of their claims has occurred.

While housing construction has grown, occupancy or use has not. Sydney, by way of a singular example, is a City of between 90,000 unoccupied homes. There are 83,000 in Melbourne. Notably, we have 45,000 homeless, Australia wide.

So the myth of housing scarcity that requires Negative Gearing to support it is not born out of anything other than a fabrication. That isn’t to say that the “scarcity” isn’t artificially maintained by refusing access to these unoccupied properties. These properties are primarily bought by Chinese investors needing to launder illicit funds.

The argument put forward by the Government though is that the majority of negatively gearing taxpayers earn under $80,000 and revoking it would adversely impact these “mum & dad” investors from “getting ahead”.

As Tax earnings go, it’s an interesting choice from which to start. Especially when you consider that the median wage in this country is more accurately $52,000. Only 40% of negatively gearing taxpayers lie below this median income. So why do the Liberals and the IPA spokesman, Sinclair Davidson, begin focusing on $80K? It’s not the average medium wage, so what does it represent? Is it because it is the lowest rounded number figure in which the majority of negative gearing taxpayers exists below? That being 67%. (Cart before horse thinking?) It’s the point at which the Liberals can confidently say the “majority exist”. Taxpayers that earn greater than that $80k demarcation represent only 20% of all taxpayers.

There are three problems with this analysis spoken of in these terms.

The large percentages are a deception because we are talking about a minimal subset of all taxpayers.
We are using taxable income as the measure after they are adjusted for negative gearing.
The undeclared interest these politicians have in maintaining the status quo.

Notice the use of the term “negatively gearing taxpayers” because the reality on the larger scale is, that “negatively gearing taxpayers” represent just under 10% of ALL taxpayers. So regarding total taxpayers it is 6.7% of all taxpayers that negatively gear and earn less than $80,000. Conversely only 4% of all taxpayers therefore negatively gear and earn less than the median wage of $52K. More than 90% of taxpayers don’t negatively gear and just want an affordable home in which to live.

The level of “earning” is based on declared income to the Tax department after negative gearing losses have been deducted. As many corporate figures and recent tax avoidance scandals do suggest, there must be a lot of individuals pulling in very, very large incomes but whose “declared” income is so modest that they pay negligible tax. The whole purpose of negative gearing is to lower your “taxable income”. (Grattan report: Pages 27&28) So using a measure of “Taxable income” as a valuation is a smart statistical deception. “The typical tax savings for negatively geared individuals is $1,800 per year”, although it may be as much as $11,800. An individual could conceivably be earning the pre-gearing taxable income of $90K a year and still fall into the category of being “below $80K of taxable income”. If you take out rental losses from negative gearing from taxable income then only 56% of people who negatively gear are in reality earning less than a disposable income of $80K (or 5.6% of all taxpayers). A similar adjustment for the median average taxable income is 33% (or 3.3% of all taxpayers). Negative gearing mainly benefits those on higher incomes as the top 10% of taxpayers receive almost 50% of the benefits from it. (Grattan report: Pages 27-29) The suggestion that it doesn’t, borders on hallucinatory ideology or deceit. This is the realms of magicians and conjurers.

Even before becoming Prime Minister as a high-profile Communications Minister, Malcolm Turnbull owned an impressive portfolio of seven properties, and many of his ministers have similar conflicts of interest. Interestingly it is Turnbull’s electorate who are the biggest negative gearers in the country. It is no wonder the Government resists any action to repair the economic damage done by this facility.

Warnings about housing bubbles bursting have appeared for a while. As Jessica Irvine wrote in the SMH, Sydney houses now cost “12 times the annual income”, up from four times from Gough Whitlam’s time. Jessica went on to describe it as a “classic Ponzi scheme” which is even how Liberal Backbenchers like John Alexander have described it. Walled Aly discussed these faults on “The Project” on the Coalitions negative gearing claims, which may engage from the perspective of the graphics, the numbers quoted and the nonpolitical research provided.

If economic rationalism, the deterioration of wages, rising living costs and housing & rent price explosions hadn’t caused as much damage as it has to our economy, negative gearing could have been easily dismissed. It has become a much more complex and entrenched mechanism. Labor’s grandfathering negative gearing strategy is one safer way to ease out of the problem. Affordable housing will continue to evade the grasp of average Australian in pursuit of the “great Australian dream” of home ownership while the current system is maintained. The only hope many Australian’s have for affording to buy a home in the future is if negative gearing and the capital gains concessions are dismantled. (Grattan report: Pages 46-47)

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