The failure of both sides of politics to understand the role of effective public finance is undermining Australia’s future.

Stamp duties in Victoria are plummeting, undermining the Baillieu government’s determination to deliver a budget surplus or build infrastructure. Instead of looking at why stamp duties are dropping and what can be done about smoothing out the land bubble (providing a more reliable government income stream), privatisation of public resources is preferred.

Prosper’s long standing position has been to replace stamp duties with a Land Tax as AHURI recently modeled (PDF). Such a policy focus could also provide the basis for funding infrastructure.

This is seen as electorally unpopular and rarely discussed by MP’s. However, Kenneth Davidson points to the danger of the funding alternative – privatisation in today’s Age:

John Olsen in South Australia in 2001 and Kristina Keneally in New South Wales in 2011 lost their premierships largely because of their policies on privatisation of electricity. Bob Carr won the 1999 NSW election because the unions combined with the state Labor conference to successfully oppose Carr’s commitment to electricity privatisation in 1998. This is why Barry O’Farrell as NSW opposition leader never advocated privatisation.

Bryan Kavanagh also points to how property bubble crashes lead to the downfall of governments in his landmark Unlocking the Riches of Oz report (PDF). The Barometer of the Economy image below hints at property’s political influence.

Behind every property crash is the pursuit of economic rent. What is it and why is economic rent exempted from public finance policy discussion?

Economic rent is the ability to charge over and above the cost of production. Land cost nothing to produce – it was a gift to us all. The eternal issue is the rising value of land, the economic rent, and how this magic money is allowed to be privatised – as if it has no side effects.

The provision of infrastructure is the clearest example of windfall gains. Last week Infrastructure Australia held a conference in Melbourne where they decreed that the public provision of roads and railways would be no more. Treasury deputy secretary Jim Murphy applauded the use of user charges. This 1 min clip on the effect of a railway line on land values provides an alternative view:

Free Riders on Public Transport from Real Estate 4 Ransom on Vimeo.

The role of beneficiaries to such development was ignored at the Infrastructure Australia gathering, where it must be noted that 15 out of 19 board members have vested interests in the construction, banking and consulting world. This was despite recent encouraging statements in the NSW debate over infrastructure where former Lord Mayor Lucy Turnbull stated in the AFR’s We spend, you win; you pay:

“You could argue that property owners are getting a windfall gain from the provision of infrastructure without making some kind of contribution from the property value rise that they enjoy,” Mrs Turnbull said. “In an ideal world, they would pay a fair and reasonable component of the infrastructure which they directly enjoy. You couldn’t argue that’s not a fair proposition.”

Additionally, from the AFR:

Bob Nanva, the national secretary of the Rail, Tram & Bus Union, said it was “vitally important that the government ensures the public captures the increased land value that in this corridor (Sydney’s north-west), not just the property developers”.

Jessica Irvine promotes the use of bonds to finance infrastructure development. But how do we pay them back? Out of general tax revenue or over 20 years by a system of capturing the naturally increasing value of land? At present developer charges are forcing one generation of home buyer’s to finance a lifetime of infrastructure. The additional interest charges this adds to a mortgage must surely be having an effect on retail spending.

This system was outlined in a paper I prepared for a former board member of Infrastructure Australia. The evidence supporting this form of public finance is staggering. We just need the people to awaken to the simplicity of effective public finance over privatisation.

For this reason we have produced the 40 minute documentary Real Estate 4 Ransom. Please watch and share.

The lure of economic rent presents itself on nearly every page of the newspaper. Page 3 of today’s Age is on the re-zoning of land along the Great Ocean Road. Governments should not be giving away such windfall gains when they could be harnessing to finance infrastructure that benefits us all, not just the developer industry.

The political preference to tax small business rather than capture the economic rent for all spells the entrenched concentration of business activity into the future. The outcry by Brisbane business leaders that the LP whitewash of Labor in the QLD election was due to the mining and carbon taxes smacks of self interest. The people quoted as business representatives were from the mining, property and agricultural industries.

When is the Business Council of Australia going to stand up for productive business rather than letting the rent seekers in mining, banking and development dominate the business agenda?