Prosper Australia

photo credit: the|G|™

Written Oct 16th
Raising interest rates will do little to address underlying economic issues, says visiting US economist Professor Michael Hudson. “The market factoring in 7 interest rates rises spells danger for the Australian economic miracle” warns Professor Hudson.

“Governments must use tax policy rather than monetary policy to address asset bubbles. Burdening the whole economy with land price overheads penalises manufacturing by pricing the products of Australian labor out of global markets.”

“Higher interest rates will provide a windfall for arbitrageurs to borrow at about 1% abroad and lend to Australia at 3.25%. This inflow into the A$ will bid up the exchange rate. This will make Australian exports more expensive, slowing new manufacturing investment and employment while eating into export revenues across the board.”

Prof. Hudson says that “this is the same phenomenon that is happening in Canada. It represents a sacrifice of the real economy of production and consumption to the financial sector.”

“Raising interest rates will hurt government finances in three ways,” Prof. Hudson explains. “First, the government will have to pay more money to bondholders. Second, mortgagees also will see their interest payments rise. This will reduce the income they have to spend on goods and services. Markets will shrink, and so will tax revenues. Finally, the rising exchange rate will reduce business profits, reducing corporate revenue.”

“If the government really wants to slow the property bubble, the appropriate tool is fiscal policy. All they need to do is apply a windfall gains tax. This is like the excess profits tax that countries passed in times past.”

“The beneficiaries of higher interest rates are the banks, not labor and industry. Giving tax preferences to the FIRE sector (finance, insurance and real estate) rather than to industry and consumers limits the ability of economic growth to benefit most Australians. By cutting the capital gains tax below taxes on wages and business profits, the government is encouraging speculation, benefiting wealth and raising the price of property against labor. This means that consumers need to go deeper and deeper into debt to afford rising land and housing prices.”

“Rising interest rates accentuate the housing affordability crisis by rewarding speculators with negative gearing write offs whilst penalising first home owners.”

“Limiting asset bubble policy to raising interest rates makes billions of dollars for bankers in the carry trade, whilst penalising the manufacturing and export sector. Governor Stevens aggressive commentary on the likely prospect of rising interest rates shows his policy conundrum. He has indicated that speculators can make a gain on the rising A$ against foreign currencies ­and falling government bond prices. This seems a circuitous way to counter the price rise inhousing. He should look at keeping a lid on land prices via the use of a Land Tax. This tool should be incorporated into the RBA’s powers. Then it can be properly implemented without the limitations of political lobbying.”

In addition, Prof. Hudson observed, “The Treasurer’s announcement earlier this week that the government will expand its guaranteeing of mortgages shows that it has learnt little from America’s experience. Giving a public guarantee runs the danger that banks will simply give their loan officers bonuses on the number of mortgages they can write, without much care as to whether the borrowers can pay their debts or not, because the government will bail out bad loans.”

“This gives bankers the confidence to make as many loans as they want because the tax payer can always bail them out. The bonuses to bankers will continue as they load the economy down with debt. That is what Alan Greenspan called wealth creation.”

“The everyday person has been conned into believing that borrowing more and more money is the best way to get wealthy. This is the first time in history that going deeper and deeper into debt is seen as wealth creation” stated Professor Michael Hudson, touring the country warning on the epidemic of re-inflating asset bubbles.

photo credit: kodama (home)

Suburbs hit with land tax increase

TAXPAYERS owed more than $227 million in land tax by the end of February – a 20 per cent increase since last year, Office of State Revenue figures reveal – with a Herald investigation finding that much of the pain is being felt in the Labor Party’s backyard.

The debt rise comes after the State Government lifted land taxes by 25 per cent on properties valued above $2.25 million at the onset of the recession in November last year.

This is another sign that the NSW housing market is about to unravel. Speculators in Labor safe seats, no doubt many of them investing in formerly ‘affordable’ suburbs, have made the most of the Land Tax threshold, which starts at $368,000. This means for a $500,000 land and house property investment in Sydney, the speculative investor would owe $2112. Not much. This property advertised in Parramatta for $479,000 would owe $1904.

Soon the financial pressures will add up and these vacant and under-utilised sites will be sold. The added supply will push prices down and thus assist affordability, breathing hope into the lives of the youth.

But small business must be hurting. The Rees Government gave a signal to the market that they prefer small business over speculators by reducing Payroll Tax from Jan 1 by 0.25% to 5.75%.

To avoid this sort of scare campaign by the Property Council, the Rees Government should flatten the Land Tax and lift it so that Payroll and the regressive GST can be removed. Prime locations such as Pipers Point have a higher locational value, rendering obsolete the need for differential tax rates. This will mute government criticism for using Land Tax as a wealth tax. It should be aimed fairly at all occupiers of land as a ‘beneficiary pays’ charge. Hands up for those who want to abolish income tax? This attitude would help us move away from the casino economics mentality that dominates policy makers.

Where is the hard yakka in shuffling paper?

# 2 12 December 2008

Ineffective demand: a picture of a tax-induced economic depression

In the 2nd of this most important series of commentaries warning of the looming depression, Bryan Kavanagh interprets one of his most important graphs. Mr Kavanagh lists the reasons why the GFC has occurred via an overview of recent tax trends. Essential reading.

What’s wrong with this picture?  

There’s nothing wrong with it – except for what it portrays. It depicts Australia’s gross domestic product descending into an economic depression because a badly-designed tax system has finally choked off effective demand - almost completely. This unique portrayal separates earned incomes from unearned incomes and closely approximates what has taken place in other economies.

Why is it ‘unique’? Because it at last assesses the extent of rent within the economy. In economic terms, rent is the annual value of a nation’s land. It’s literally a natural source for revenue, because no individuals have created it. It’s the value that the public and community infrastructure gives to the land as we work away at our jobs each year. Although it is a surplus value (because it’s community-generated, not a production cost), we capture only 12% of it to the public purse (less than $40 billion of $325 billion) in Australia. The graph shows that rent is now sufficient to replace taxation at all levels of government. i.e. If we were to collect it all, there would be no need to tax (or fine) labour and capital for working!  

Although it would do away with the taxation of labour and capital were we to capture our land rent rent for necessary government, we’ve permitted landowners to retain 88% of it, even though they’ve done nothing to earn it. And, of course, those who get the greater part of our rent are those who own not only the most land, but also the most valuable land. People who rent their homes receive no rent from society at all, although their presence did help to create it (not as individuals, but as a group). So, it is unfair in the extreme that rent – being generated by everyone – is collected only by the wealthier segments of society.
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Today’s Sydney Morning Herald article on Empty Dwellings in a City Desperate for Places to Live has exposed the raft of vacancies prevalent when land banking trumps housing affordability.

It quotes how 122,211 sites were vacant in the 2006 census, reminding us of the findings from the I Want to Live Here report. Negative gearing is blamed. An inaccurate solution is offered in charging a differential rate on vacant property. This increases administrative costs. Far more effective would be to raise the overall Council Rates and use this finance to offset inefficient indirect taxes like GST and payroll taxes.
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The day after the 2008 Federal Budget, Gavin Putland (our Research Officer) sent three letters to newspapers.

This one was sent to THE AGE, which exercised its editorial discretion not to publish:

Cop-out On Inflation And Rents

If a Budget is to be anti-inflationary, it must stimulate supply more than demand. Most importantly, it must stimulate supply of accommodation, not only because residential rents feed into the CPI, but also because goods or services cannot be supplied unless (a) enterprises can afford commercial accommodation, and (b) employees can afford housing within commuting distance of the enterprises, on wages that the enterprises can afford to pay.

To boost the supply of accommodation, the Budget could have made the First Home Owners’ Grant available only for new construction, or confined negative gearing to new construction, or made the discounting of property investors’ capital gains contingent on new construction, or at least on offering the properties for rent. None of these things happened.

Meanwhile the Government proposes to increase the intake of immigrants, ostensibly in order to boost the supply of labour. Never mind that immigrants also demand goods and services and, most importantly, housing!

These observations show that the top priority of this “Labor” budget was not to contain inflation — let alone rents — but to maintain a desperate shortage of housing in order to drive up rents and prices for the benefit of incumbent property owners.

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By Bryan Kavanagh

Treasury’s mission is “to improve the wellbeing of the Australian people by providing sound and timely advice to the Government, based on objective and thorough analysis of options, and by assisting Treasury Ministers in the administration of their responsibilities and the implementation of Government decisions.”

It aims to assist:

1. A sound macroeconomic environment
Although it covers monetary, fiscal and monetary issues, Treasury has little or no understanding of the theory of valuation insofar as it relates to the national real estate market, a proven driver of the economy. This is demonstrated by the manner in which it allowed the residential real estate bubble to continue develop ever since 1999. Of course, it is possible that it did offer advice to the government in this regard but was ignored. If this was so, we need to know so that blame may be sheeted to the Howard government.
Mark: 2/10
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March 08 figures reveal that loans for first home owners dropped to just 16.4% of owner-occupied approvals. Yes 16.4%! The Great Australian Dream is being dominated by baby boomers and/ or speculators. Those that most need a roof over their heads are the last in the queue. Why is this so?

Loans for new dwellings dropped a massive 11.5%. The building industry must be extremely worried with this trend. Job losses come next. Interest rates are hurting.

Negative gearing on all second investment homes must be addressed in the first Swan budget. If this policy was designed to improve the supply of housing, at the very least it could be limited to only new housing. Best of all would be to abolish it and the First Home Owners Grant.

If a Site Rental on all land was implemented, we wouldn’t have the ridiculous situation we have today where small business owners and first home owners, traditionally the Messengers for future opportunity, are penalised, whilst speculators in the fruits of the earth are subsidised by the productive sector’s tax funded infrastructure.

by Anne Schmid

JUNE 2006

This submission is made with particular reference to the proposed introduction of the waste collection charge.

I ask the question – Are user charges better than rates? What is the next charge going to be? Traditionally councils have relied on rates for their revenue and a push to obtain local revenue from sources other than local land values leaves councils vulnerable to vested interests, pressure groups and anti social forces.

I believe that unless we have local revenues collected from site values all words about community building and equity is merely rhetoric.

Councilors, ratepayers and council advisors must recognize that council services generally, whether a transport system, water reticulation, sewerage, or rubbish collection, enhance land values. Ethically it is on the land values so created that the annual rates should be calculated as in site value rating. CV rating corrupts this to a large extent as properties are rated on improvements as well as site value. User charges disconnects completely any recognition of the relationship between services and land value.
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by Leo Foley
The primary source for this paper is “Canberra in Crisis” by Frank Brennan, 1971

The Road to Leasehold – the origins of the Canberra leasehold system..

Canberra is the offspring of politics and a social ideal.

• The politics were those of Federation and nation making.
• The ideal was one of social and economic freedom.

In the early years of Federation, there was a widespread belief in the need for government ownership of all the land within the proposed federal territory. It was considered that the taking of the unearned increment for the people would make the capital city a paying proposition within a few years. In 1901, the Prime Minister, Edmund Barton spoke of the territory to be chosen for the seat of government: “we shall be able to get the land on fair terms, lease it on fair terms and still make a profit for the Commonwealth”.

These were the years when the words ‘unearned increment’ were basic to any discussion of leasehold tenure in the proposed Federal Territory. As King O’Malley (Labour, Tas) saw it, ‘Every dollar spent by the people of Australia in the erection of that capital will create an unearned increment in the property for miles around. The question is, are the people of Australia prepared to spend thousands, yea millions, and then lose the benefit of their expenditure? I say the unearned increment created by the expenditure of the people’s money belongs to the people…”
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