US Tax Plan Will Be Revenue Negative, Result in Higher Deficits

United States: Outlook for Public Finances Worsens says Fitch Ratings who expects a version of the tax cuts presented in the Tax Cuts and Jobs Act to pass the US Congress.

Such reform would deliver a modest and temporary spur to growth, already reflected in growth forecasts of 2.5% for 2018. However, it will lead to wider fiscal deficits and add significantly to US government debt. As such, Fitch has revised up its medium-term debt forecast.

US federal debt was 77% of GDP for this fiscal year. Fitch believes the tax package will be revenue negative, even under generous assumptions about its growth impact. Under a realistic scenario of tax cuts and macro conditions, the federal deficit will reach 4% of GDP by next year, and the US debt/GDP ratio would rise to 120% of GDP by 2027.

The Republican tax plan delivers a tax cut on corporations, seeking to lower the corporate tax rate to 20% from 35%, and removing many exemptions, while eliminating some tax breaks affecting corporate and personal filers. It would leave the overall personal tax burden somewhat lower, although the effects would differ depending on circumstances.

Tax cuts may lead to a short-lived boost to output, but Fitch believes that they will not pay for themselves or lead to a permanently higher growth rate. The cost of capital is already low and corporate profits are elevated. In addition, the effective tax rate paid by large corporations is well below the existing statutory rate. From a macroeconomic perspective, adding to demand at this point in the economic cycle could add to inflationary pressures and lead to additional monetary policy tightening.

Fitch expects US economic growth to peak at 2.5% in 2018 before falling back to 2.2% in 2019. The US will enter the next downturn with a general government “structural deficit” (subtracting the impact of the economic cycle) larger than any other ‘AAA’ sovereign, leaving the US more exposed to a downturn than other similarly rated sovereigns.

The US is the most indebted ‘AAA’ country and it is running the loosest fiscal stance. Long-term debt dynamics are also more negative than those of peers, with health and social security spending commitments set to rise over the next decade. In Fitch’s view, these weaknesses are outweighed by financing flexibility and the US dollar’s reserve currency status, underpinning its ‘AAA’/Stable rating. The main short-term risk to the rating would be a failure to raise the debt ceiling by 1Q18, when the Treasury’s scope for extraordinary measures is expected to be exhausted. The debt ceiling is currently suspended until early December.

US Corporate Tax Reform: Implications for the Rest of the World

The Treasure has released a paper “US Corporate Tax Reform: Implications for the rest of the world” which examines the likely impacts of the US reforms on the US and on the rest of the world, placing the US changes in the context of the global trend toward lower corporate taxes.

The paper says that the economic impact of the Republicans’ tax plan will depend on how time and compromise shape the package that is ultimately legislated. Key in this regard is the size of the cut, how it is funded and whether investors believe it is a permanent reduction.

On 27 September 2017, the United States (US) Administration and Republican Congressional leadership released a framework for US tax reform, including a reduction in the federal corporate tax rate from 35 to 20 per cent.

The key elements of tax framework with respect to corporate tax are:

  • a reduction in the federal corporate income tax rate from 35 to 20 per cent;
  • immediate expensing of depreciable assets (except structures) for at least 5 years;
  • limitations on interest deductions;
  • the removal of the domestic production deduction;
  • an exemption for dividends paid by foreign subsidies to US companies (where the US company owns 10 per cent or more of the foreign company); and
  • a one-time tax on overseas profits.

These proposals were reflected in the draft of the Tax Cuts and Jobs Act released by the House Ways and Means Committee on 2 November 2017.

This paper examines the likely impact of this reform on the US and rest of the world, placing the US changes in the context of the global trend toward lower corporate taxes.

In theory, a corporate tax rate cut stimulates investment by making more investment opportunities sufficiently profitable to attract financing. The extent to which this is the case in practice will depend on how the tax cut is funded and whether investors consider the tax cut to be permanent. If the corporate tax rate cut results in an overall reduction in tax on US investments and investors believe that the tax cut is permanent, we are likely to see an increase in the level of US investment. If investors believe that the tax cut is temporary, the effect on US investment may be minimal. Ultimately, the economic impact of the plan on the US will depend on how time and compromise shape the final package.

If a US corporate tax cut does result in an investment boom, goods, labour and funds will be required. In a scenario in which the investment boom is largely funded domestically from US savings, negative impacts on the rest of the world are likely to be short-lived and modest.

Realistically, however, a US investment boom is likely to be only partially funded domestically and would draw funds and goods from the rest of the world. In this scenario, the rest of the world would experience a decline in capital stock resulting from the flow of capital into the US. The magnitude of the resulting welfare loss in those countries will depend on the size of the US corporate tax cut; how it is funded; the elasticity of the US labour supply response and the US saving response. For Australia, the size of the negative impact will also depend on how other countries respond.

While the size of the US economy means changes to the US tax system have particular significance, it is important to consider these reforms as part of an ongoing trend. As capital markets have become increasingly global and business location increasingly mobile, governments have sought to drive economic growth in their jurisdictions by lowering corporate tax rates. The US reforms have the potential to accelerate tax competition between jurisdictions, making Australia’s current corporate tax rate increasingly uncompetitive internationally.

While the Administration and Republican Congressional leadership have indicated that they will ‘set aside’ the idea contained in the House Republicans’ 2016 plan to move to a destination-based cash flow tax (DBCFT), this paper also provides a discussion of the theoretical underpinnings of the proposal.

Do tax cuts stimulate the economy more than spending?

From The Conversation.

During the presidential campaign, Donald Trump promised to boost the economy both by cutting taxes and investing more money in infrastructure.

Usually, however, politicians and policymakers have favored one type of stimulus over the other. Conservatives like tax cuts, while liberals favor more spending.

In the Trump administration, tax cuts appear to have won the argument for now. Republicans unveiled the blueprint of a major tax overhaul, which White House officials predict will boost economic growth to more than 3 percent a year. In the meantime, infrastructure investment remains on the back-burner.

Did they make the right choice pushing for tax cuts before infrastructure spending? Are tax cuts more likely than new spending to prod companies to produce more, encourage more consumer spending and grow the economy at a faster rate?

Or put another way, which provides the biggest bang for the buck?

Spending versus tax cuts

British economist John Maynard Keynes was the first to suggest in the 1930s that an economy’s ills could be traced to the misalignment of what he called aggregate demand, which is made up of consumption, investment, government spending and net exports. So if there’s trouble in the economy, a government could try to move the needle by spending more (or less) money or by adjusting tax rates to spur consumers or businesses to buy more (or less) stuff.

For decades, from the 1940s through the 1970s, the U.S. mainly relied on manipulating government expenditures rather than tax cuts to goose the economy. Many politicians and academics interpreted Keynes to favor government spending as the best way to right the economic ship, but he also suggested tax policy could do the job of boosting demand.

In the past few decades, however, beginning with President Ronald Reagan and the advent of supply-side economics in the 1980s, governments have increasingly toyed with tax cuts to change aggregate demand in part because they are more likely to have an immediate effect on consumer and business expectations and incentives.

Lord John Maynard Keynes, center, represented the U.K. at the Bretton Woods Conference in 1944, which established the International Monetary Fund and post-war monetary system. AP Photo

An investigation

The question of whether tax cuts or spending has a greater economic impact – as well as the inverse – remains a major subject of discussion among economists and policymakers. With the help of my graduate students in a finance class I taught for three decades, I have tried to help shine some light on the answer.

The following analysis grew out of a series of research projects assigned to them in the past several years. Putting them together produced some insight on the questions I raised at the outset.

To compare the effects on the economy of increases in regular government spending with those of tax cuts, we compiled data on gross domestic product, government expenditures and average tax rates for households divided into five different income groups, or quintiles, from 1968 to 2010. We did that because a tax cut for someone who’s rich will be different than one for someone who spends most of what she earns. While the former might invest the extra cash, the latter is more likely to spend it, immediately stimulating the economy.

We focused on the middle three income groups because incomes among the top 20 percent are too disparate and the tax rate for the bottom is close to zero, making them very hard to measure.

We then tried to determine how much each variable – spending and tax rates of each quintile – correlated to a change in GDP. Our findings showed that US$1 in tax cuts for individuals making $20,001 to $61,500 a year in 2010 dollars (the second and third quintiles) was correlated with an increase in GDP more than double that of a rise in spending by the same amount. A tax cut for those in the fourth quintile earning $61,501 to $100,029 didn’t have as great effect but still correlated with a boost in GDP 1.4 times that of new spending.

These results are consistent with those conducted by economists David and Christine Romer in their study on the economic impact of changes in taxation, which also found that tax cuts correlated with more growth than spending increases.

What it means

So do these results answer our original question and show that tax cuts are always better?

Not exactly, although these results should appeal most to those who champion tax cuts for the middle class. For too long, ideology has dominated this debate and obscured the real answer if the goal is stronger economic growth: an appropriate mix of the two, well-tailored tax cuts for middle-income earners and effective government spending.

In addition, our analysis represents a relatively simplified take on a complicated topic. The last word on how tax cuts affect economic growth has yet to be written.

The real advantage of tax cuts is that they’re quick – taxpayers immediately have more money in their paychecks and companies often begin investing before the cuts have taken effect – while the impact of infrastructure or other spending takes much longer, even years, to work its way through the economy. But they both have their place in good economic policy.

Very often those advocating significant tax cuts claim that the cuts will pay for themselves in terms of ultimate tax revenues. That, of course, is an empirical issue but it misses the point. No one ever claims that expenditure increases pay for themselves (in terms of future tax revenues). The relevant point is how much does each encourage economic growth.

Author: Dale O. Cloninger, Professor Emeritus, Economics & Finance, University of Houston-Clear Lake

Peer Pressure: Tax Competition and Developing Economies

From the IMFBlog.

Economists tend to agree on the importance of competition for a sound market economy. So, what’s the problem when it comes to governments competing to attract investors through the tax treatment they provide? The trouble is that by competing with one another and eroding each other’s revenues, countries end up having to rely on other—typically more distortive—sources of financing or reduce much-needed public spending, or both.

All this has serious implications for developing countries because they are especially reliant on the corporate income tax for revenues. The risk that tax competition will pressure them into tax policies that endanger this key revenue source is therefore particularly worrisome.

Keep up  with the others

Many have argued that tax competition between governments can trim wasteful spending and lead to better governance; the ‘starve the beast’ argument. But the mobility of tax bases across national borders makes this benefit less clear, whether the base relates to labor income, commodity transactions, or most commonly, capital income.

More technically, countries tend, with good reason, to tax things that are not highly responsive to taxation. But international mobility means that activities are much more responsive to taxation from a national perspective than from a collective perspective. This is especially true of the activities and incomes of multinationals. Multinationals can manipulate transfer prices and use other avoidance devices to shift their profits from high tax countries to low, and they can choose in which country to invest. But they can’t shift their profits, or their real investments, to another planet. When countries compete for corporate tax base and/or real investments they do so at the expense of others—who are doing the same. By failing to exploit the lesser responsiveness of tax base and investment at the collective level than at the national level, countries thus risk mutual harm by eroding a source of revenue that may well have been more efficient than the alternatives available to them.

Headline corporate income tax rates have plummeted since 1980, by an average of almost 20 percent. This doubtless reflects a variety of effects at work—changing views on the growth impact of corporate taxation, for instance—but it is a telling sign of international tax competition at work, which closer empirical work tends to confirm.


And even though revenues have remained steady so far in developing countries and increased in advanced economies—perhaps because, for unrelated reasons, the share of capital in national income has increased—there is nothing to guarantee that this will continue. And some developments could make tax competition more intense: if the OECD-G20 ‘BEPS’ project reduces tax avoidance, for instance, competition through other means could increase.

Fiercely competitive; fiercely contentious

To better understand these issues and how they might be addressed, the IMF and World Bank recently gathered together a hundred or so tax experts and officials. Embert St. Juste, of the Ministry of Finance in St. Lucia, for instance, noted that the members of the Organisation of Eastern Caribbean States have been competing with increasing fervour over foreign direct investment and tourism. And the Finance Minister of the Republic of Serbia, Dušan Vujović, said that with greater globalization, all countries have been dragged, willingly or not, into the fray.

Kimberly Clausing, an economics professor at Reed College, presented new work suggesting that paper profits may be much more sensitive to tax rates than previously thought. She cited a recent paper that finds that for every percentage point drop in the average tax rate in a low-tax jurisdiction, profits reported there by foreign corporations of U.S. multinationals increase by between 3.5 and 7 percentage points. This remains contentious. Paul Ryan from the Irish Department of Finance suggested that the impact, particularly from more advanced economies to less, has been exaggerated. But tax competition is generally seen as a real threat to revenue, most notably for developing countries.

There is an answer: use international coordination to stop, or at least limit, the race. That, however, is much more easily said than done.


Partial solutions can help but are inherently limited. As Michael Devereux of the University of Oxford stressed, if only some countries coordinate, they can make themselves more vulnerable to competition from those outside the group. And even if all coordinate, they can remain vulnerable if they do not do so over all relevant aspects of the tax system. Nonetheless, partial approaches can help.

Some recent proposals would fundamentally change corporate tax systems. Gaetan Nicodeme from the European Commission explained its proposal for a Common Consolidated Corporate Tax Base. Under the first stage of this, businesses operating in more than one European Union country would consolidate their taxable profits across borders, so the profits in one country could be offset against losses in another. In a second stage, their profits within the EU would be allocated for tax purposes across member states by a formula reflecting the proportions of their assets, employment or other indicators of their activities in each. This, however would not eliminate tax competition, since governments would still have an incentive to use low tax rates to attract investment, workers or whatever else appears in the allocation formula.

An alternative system that has attracted considerable attention recently in the United States is the destination-based cash-flow tax under which taxes are levied based on where goods end up (destination), rather than where they were produced. If adopted universally, and well designed, this would ease pressures of tax competition. But if adopted unilaterally by one or a few countries, it would amplify profit shifting problems for others. This is because, intuitively, profits from sales elsewhere could then be taken tax-free in those countries, which would likely lead those without a destination-based cash-flow tax to compete more aggressively, or adopt one themselves.

Issues of international tax competition are not going away anytime soon, and that there is a lot at stake for developing countries. In the face of possible tectonic shifts in tax systems, such as a move to a destination-based corporate taxation, it has become even more important to understand the cross-border impact of national tax policies and how governments react to them. This remains an issue of debate and study, and both the IMF and the World Bank plan to continue this analysis, including at this week’s high-level event co-organized with the Ministry of Finance of Indonesia. As part of the Voyage to Indonesia leading up to the World Bank-IMF Annual Meetings in 2018, the discussions will focus on the challenges that tax competition poses for the members of the Association of Southeast Asian Nations.

Banks Cop It In The Budget

The budget has hit the banks hard, with a $6bn charge on bank liabilities aimed at the five biggest banks, as well as a focus on competition and executive accountability.

$6bn over four years would equate to an annual amount of around 5% of current year earnings for the big five. We estimate that the net interest margin would need to be lifted by 6 basis points to cover the costs. If this was applied to just the residential mortgage book rates would have to be lifted by around 15 basis points to achieve neutrality.

The key question will how these extra costs are recovered from the banking system. On past performance, they will simply reprice products to their consumer and small business customers.

New levy on the major banks

Consistent with its response to the Financial System Inquiry, the Government and the Australian Prudential Regulation Authority (APRA) remain committed to a range of reforms, including: setting bank capital levels such that they are ‘unquestionably strong’; strengthening APRA’s crisis management powers; and ensuring our banks have appropriate loss-absorbing capacity.

Complementing these reforms, the Government will introduce a levy on major banks with liabilities greater than $100 billion, raising $6.2 billion over four years. The levy will be used to support budget repair.

Ordinary bank deposits and other deposits protected by the Financial Claims Scheme – including those held by everyday Australians – will be excluded from the levy base. It will not be levied on mortgages.

The levy represents a fair additional contribution from our major banks. The levy will also provide a more level playing field for smaller, often regional, banks and non-bank competitors. Superannuation funds and insurance companies will not be subject to this levy.

The Government has also introduced legislation to recover the costs of financial conduct regulation by the Australian Securities and Investments Commission. It will also recover the costs of implementing a new framework for external dispute resolution. A one-stop shop for resolving financial disputes — the Australian Financial Complaints Authority — and a body for raising professional standards of financial advisers will be fully funded by industry.

Major bank liabilities are greater than the size of our economy

Major bank liabilities are greater than the size of our economy

A more accountable and competitive banking system

The Government will introduce a new dispute resolution framework that will empower bank, financial services and superannuation customers. The Government will also implement a package to increase accountability in the financial sector and make it more competitive. This will mean more choice, better services and greater protections for all Australians.

Improving accountability and competition

The financial services sector affects all Australians and is a backbone of the economy. For it to work effectively, Australians need to be confident that financial services providers will serve their interests. Too often banks and the sector have not met those expectations.

Building on the major financial sector reforms implemented last year, the Government is taking significant new action to ensure the sector meets the expectations of the Australian community.

The Government will create a new dispute resolution framework. There will be a new one-stop shop — the Australian Financial Complaints Authority (AFCA) — for external dispute resolution and greater transparency of internal dispute resolution by financial firms.

The Government will legislate a new Banking Executive Accountability Regime that will make senior bank executives more accountable and subject to additional oversight by the Australian Prudential Regulation Authority (APRA).

The Government will also introduce a number of reforms to boost competition and choice for Australian consumers in the financial system.

Improving dispute resolution

The Government will introduce major reforms to provide customers with access to fair dispute resolution in Australia by introducing a new one-stop shop.

One-stop shop

A new one-stop shop will deal with all financial disputes, including superannuation, and provide access to free, fast and binding dispute resolution.

The new body AFCA will be able to hear disputes of a higher value so that more consumers and small businesses will have their disputes heard, and if they have wrongfully suffered a loss, access fair compensation.

Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms.

AFCA will be governed by an independent board, with an independent chair and equal numbers of directors with industry and consumer backgrounds, and be wholly funded by industry.

AFCA will commence operations from 1 July 2018. The existing dispute resolution bodies will continue to operate after 1 July 2018 to work through their existing complaints.

Enhanced ASIC oversight

ASIC will be provided with stronger powers to oversee the new one-stop shop. ASIC will have a general directions power to ensure AFCA complies with legislative and regulatory requirements.

Internal dispute resolution

To increase accountability, the Government will also legislate to require financial firms to report to the Australian Securities and Investments Commission (ASIC) on internal dispute resolution outcomes.

Cameo: An improved dispute resolution framework

Sarah was a small business owner with a complaint with her bank over the interest charges on her $3 million loan. As the loan exceeded $2 million, Sarah was unable to access external dispute resolution and although Sarah was eventually successful in having her complaint resolved, she was forced to go through a lengthy and expensive court process.

Under the Government’s new framework, small business disputes related to loans of up to $5 million will be heard by the one-stop shop, which will be able to award compensation of up to $1 million. This will ensure more small businesses have access to free, fast and binding dispute resolution.

Banking Executive Accountability Regime

Registration of senior executives

Senior executives and directors of authorised deposit-taking institutions (ADIs), including all banks, will be required to be registered with APRA. The ADI will have to advise APRA prior to making a senior appointment.

This will mean APRA will have visibility of all ADI senior appointments prior to them being made.

Where senior executives have been found not to have met expectations they will no longer be able to be registered or employed in senior roles.

ADIs will be required to provide APRA with accountability maps of senior executives’ roles and responsibilities to enable greater scrutiny at the time of each person’s appointment and oversight of problems that emerge under their management.

Enhanced powers to remove and disqualify

APRA will be given stronger powers to remove and to disqualify senior executives and directors. These powers will apply to all institutions regulated by APRA.

Persons removed or disqualified under these powers would have to appeal to the Administrative Appeals Tribunal to have a decision reviewed.

Increased expectations and penalties

The new regime will establish expectations on how ADIs and their executives and directors conduct their business consistent with good prudential outcomes.

These expectations would cover matters such as conducting business with integrity, due skill, care and diligence and acting in a prudent manner.

A new civil penalty will be created with a maximum penalty of $200 million for larger ADIs, and a maximum penalty of $50 million for smaller ADIs, that fail to meet these new expectations, increasing incentives for ADIs to put in place processes to ensure they conduct their operations appropriately.

APRA will also be able to impose penalties on ADIs that do not appropriately monitor the suitability of their executives to hold senior positions.


The Government will mandate that a minimum of 40 per cent of an ADI executive’s variable remuneration – and 60 per cent for certain executives such as the CEO – be deferred for a minimum period of four years.

This will increase the financial consequences – by preventing bonuses being paid – for decisions which may take a long time to materialise. Executives will place greater focus on long-term outcomes than when there are shorter deferral periods.

APRA will also be given stronger powers to require ADIs to review and adjust their remuneration policies when APRA believes such policies are not appropriate.


The Government will provide $4.2 million over four years to APRA to implement these new measures.

The Government will also provide APRA with $1 million per annum for a fund to ensure it has the necessary resources to enforce breaches of the new civil penalty provisions.

Competition in the financial sector

Open data

The Government will increase consumer choice and improve competition in banking by giving customers access to and control over their banking data by introducing an open banking regime in Australia.

Increased access to data will improve the information available to consumers and better enable innovative business models to create new products tailored to individuals.

The Government will commission an independent review to recommend the best approach to implement the open banking regime to report by the end of 2017.

Competition inquiries

Productivity review

The Government has tasked the Productivity Commission to commence a review on 1 July 2017 of the state of competition in the financial system.

The Commission is to review competition with a view to improving consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and supporting ongoing financial system innovation, while balancing financial stability objectives. The Productivity Commission will have 12 months to report to Government.

This also delivers on a Government commitment in response to the Financial System inquiry for such a review.

Regular ACCC inquiries

Building on the Commission’s broad review of competition in the financial system, the Government will provide $13.2 million over four years to the Australian Competition and Consumer Commission (ACCC) to establish a dedicated unit to undertake regular inquiries into specific financial system competition issues.

It will facilitate greater and more consistent scrutiny of competition matters in the economy’s largest sector, which has been lacking to date.

This implements a recommendation of the House of Representatives Standing Committee on Economics report Review of the Four Major Banks.


Taxation Revenue From Property Continues to Climb

Nice piece from CoreLogic on the growth in property related taxes. As we pointed out before, the states are major winners when property markets rise (and would be hit badly in a slowing market).

The latest data shows that state and local governments collected 51.9% of their total taxation revenue from property, a record high proportion

The Australian Bureau of Statistics (ABS) has recently released the latest taxation statistics data for the 2015-16 financial year.  From a property perspective, taxes are largely collected from state and local governments and over the year $49.567 billion in property taxes were collected nationally.  The value of property taxes collected was 9.6% higher over the year and accounted for a historic high 51.9% of total state and local government revenue.

Total value of property taxation revenue to
state and local governments


Stamp duty on conveyances accounted for the largest overall proportion of property tax revenue. Over the 2015-16 financial year, state and local governments raised $20.607 billion in revenue from stamp duty, accounting for 41.6% of total property tax revenue.  The second chart highlights the value of revenue from stamp duty on conveyances and the proportion of total property tax revenue coming from stamp duty.  As a proportion of total property tax revenue, stamp duty has previously been higher however, over the past few years there has been a substantial increase in the value of revenue collected from stamp duty.

Value of stamp duty on conveyances tax
revenue and % of total property tax revenue


The third chart highlights the revenue collected from stamp duty across each of the major states.  It is pretty easy to see what booming housing markets do for state government coffers with the NSW and Vic governments seeing stamp duty revenues surge.  Of course, when the housing market isn’t booming it has a substantial impact on stamp duty revenue, see NSW and Vic in 2008-09 and WA more recently.  The uncertainty surrounding stamp duty and its dependence on stock turnover makes it an inefficient and volatile source of taxation revenue.  Because stamp duty is only collected from properties which transact, the state governments are relying on values and transactions rising across the 5% to 7% of properties which turnover in any given year to drive their major source of property tax revenue.

Value of stamp duty on conveyances tax
revenue across the major states


The final chart highlights the three largest sources of property tax revenue; land tax, municipal rates and stamp duties on conveyances.  Between them, these three sources of tax revenue accounted for 90.3% of all property related tax revenue to state and local governments in 2015-16 and 46.9% of total taxation revenue.  We already know that $20.607 billion in tax revenue came from stamp duty on conveyances, a further $7.237 billion came from land taxes and $16.924 billion came from municipal rates.

Major sources of property taxation revenue
over time


Land taxes and municipal rates are much more guaranteed income streams than the more volatile stamp duty on conveyances.  For this reason, it would make sense to move from stamp duty to a much more efficient, easier to collect and holistic land tax.  The reality is that any such move is unlikely to be supported by the NSW and Vic governments currently given how much revenue these states continue to rake in due to the ongoing housing booms in Sydney and Melbourne.

Government out of touch on housing policies ahead of budget: poll

From The Conversation.

Australians are concerned about housing affordability, so much so that 45.4% say they would be willing to see the value of their home stop growing to improve the situation, only 31.8% of those polled wouldn’t. An ANU poll shows 51.7% of Australians are also in favour of removing tax concessions like negative gearing.

The poll surveyed 2,513 people (representative of the population) and found 63.6% were willing to see an increase in supply of public housing. Only 32.3% are opposed to relaxing planning restrictions.

With these numbers in mind, it is perhaps surprising that state and federal governments have done so little of any substance in housing policy for decades, if anything they’ve contributed to the problem rather than improved the situation.

Potential policy changes that many believe will improve housing affordability, including removing or reducing tax incentives such as the capital gains tax discount or removing supply impediments, have all been considered too politically difficult by the current government.

The government has justified this by playing to the fear that the value of people’s home may decline or that more liberal planning arrangements may mean that new buildings may spoil the look and feel of local neighbourhoods.

The latest ANUpoll shows Australians are very concerned that future generations may be locked out of home ownership. Three quarters believe home ownership is part of the Australian way of life.

In terms of their own investments we found that nearly 68% of homeowners cite emotional security, stability and belonging as a reason for becoming a homeowner. In terms of security factors, 51% cite financial security, 42% refer to “renting is dead money” and 41% cite security of tenure and being able to “bang nails in the wall”.

Of those families who have an investment property (17% in this poll) the primary motivation for the investment was a “secure place to store money” (27.4%) closely followed by rental income (24.3%). Only 11.9% cited negative gearing as the primary motivator and 13.7% were motivated primarily by the capital gains discount.

Housing remains easily the most popular investment vehicle, with 30% saying their preferred investment for spare cash would be an investment property, followed by 18.5% preferring to upgrade their own home. Only 12.6% preferred shares as an investment.

In spite of recent talk of a housing bubble the general population is not particularly concerned with immediate price drops, with 85% expecting house prices to rise over the coming five years. Only 5.4% expect prices to fall and just 1.7% expect prices to decrease a lot.

If interest rates were to increase by 2 percentage points, 6.4% of mortgage holders expected to be in “a lot” of financial difficulty and 16.7% in “quite a bit”. Only 27.9% would be in no difficulty. While financial difficulty does not mean default, in mortgage markets it may not take a large share of loans to default to cause financial problems for an economy.

As pointed out earlier negative gearing was the least cited reason for property investment which suggests removing the incentive would at least not make a dramatic difference to the level of housing investment in Australia.

The ANUpoll shows that the public are concerned about housing affordability and where policy is directed at improving affordability they are likely to be supportive. The policy options, be they demand side – reducing tax incentives, or supply side – building more dwellings and/or relaxing planning restrictions, are available, but greater political nerve may be required to undertake such options.

Author: Ben Phillips, Associate professor, Centre for Social Research and Methods (CSRM), Australian National University

Budget 2017: Prepare to be disappointed on housing

From The New Daily.

Despite all its huff and puff on housing, a senior economist has warned voters the government will disappoint on the one reform almost everyone wants.

Professor Richard Holden said it would be a “real shame but no surprise” if Tuesday’s federal budget failed to curb tax perks for property investors.

“There is now consensus that there should be a move away from negative gearing and to prune back the capital gains discount. I think everyone agrees except the government and maybe the Property Council,” he told The New Daily.

“It’s very hard to find anybody else. You’ve got Jeff Kennett, John Hewson, Malcolm Turnbull before he became Prime Minister. Everyone seems to agree it’s a bizarre system that’s driving up prices.”

What’s in the housing package? Click to find out

After haemorrhaging support to Labor by doing nothing to help first home buyers in his pre-election 2016 budget, Treasurer Scott Morrison spent the end of last year swearing he’d focus on housing affordability this time around.

He’s been forced to walk back some of that rhetoric, as policy options evaporated under pressure from Labor, interest groups and the Abbott faction.

What hasn’t changed is Mr Morrison’s pledge not to touch negative gearing. But he’s been less emphatic on the capital gains tax discount, which allows landlords to pay tax at their marginal rate on only 50 per cent of the capital gains they realise when they sell a property.

A wide array of experts, including Richard Holden, agree these tax perks favour wealthy investors, and contribute to the difficulty of young Australians entering the property market, at least in Sydney and Melbourne.

A new survey by CoreLogic, a property data firm, found that 87 per cent of non-home owners are concerned about affordability; 30 per cent are looking to inheritance or parents to help them buy; and 62 per cent living with parents say they can’t afford to move out. It surveyed 2010 people aged 18 to 64.

By CoreLogic’s estimate, houses cost 7.2 times the yearly income of an Australian household, up from 4.2 times income 15 years ago. And a 20 per cent deposit costs 1.5 years of household income, up from 0.8 years.

Professor Holden was more enthusiastic about incentives for older Australians to downsize to smaller homes, especially if that involves a stamp duty discount.

“Stamp duty is like the worst tax in the history of the world and everyone with a minute’s economic education thinks it should be replaced with a land tax, so anything that pushes in that direction is a good idea.”

However, if the incentive allowed wealthy individuals to exceed the superannuation balance cap, that “would be a concern, depending on how it’s structured”.

Professor Holden also praised the government’s push to invest more in affordable rental housing: “The idea that housing affordability bites at the very lowest end is a really big deal.”

But he rubbished the government’s proposal to offer subsidised savings account to help first home buyers save a mortgage deposit.

“We saw the government float the idea of accessing super. Now, myself and Saul Eslake and others all came out vociferously and angrily against that. I don’t know if it was causal, but they backed down,” Professor Holden said.

“But now they’re talking about tax-preferred savings accounts for first home buyers, and for the life of me I can’t understand why they can’t seem to get through their heads that anything of that nature is just boosting demand.”

Daniel Cohen, co-founder of lobby group First Home Buyers Australia, said he disagreed with the view that subsidised savings accounts would only push up prices.

“As a standalone policy, they are correct, which is why we want to see policies that are also decreasing demand from investors, and we want to see affordable supply also increase,” Mr Cohen told The New Daily.

“What economists are not considering, I feel, is that first home buyers still have a deposit hurdle, and with the current costs of living, average wages and stamp duty, that is a really big hurdle.”

He said the accounts would act as “financial literacy” to encourage young Australians who might not have considered it to save for a home.

For Mr Cohen, the biggest budget disappointment would be no reform on negative gearing and capital gains.

How the politics of the budget might play out for a government in trouble

From The Conversation.

Given months of polls that show Labor ahead and damaging internal disunity, the politics of this budget are extremely tricky for the government to manage.

It is not just that Tony Abbott’s sniping is causing political headaches for Prime Minister Malcolm Turnbull. Some of the government’s budget problems go back to the 2013 election.

In that campaign, Abbott suggested the budget deficit problems would be easily fixed by simply getting rid of Labor, and the government could somehow do so painlessly without cutting health, education or pensions.

However, as then-treasurer Wayne Swan had noted, Australian budget deficit problems were very complex and included substantial falls in government revenue due to the global financial crisis and the end of the mining boom. They weren’t just due to government spending.

Opponents criticised the size of the Rudd government’s expenditure, including its economic stimulus package designed to counter the GFC. Nonetheless, Kevin Rudd argued that Australian government debt was in fact relatively small compared with many other Western countries in a post-GFC world.

Once he won office, Abbott had to face the difficult realities involved in reducing the deficit. The substantial 2014 budget cuts, including to areas Abbott said would be protected, infuriated many voters and contributed to his poor polls and political demise.

The Abbott government’s woes went beyond the failure to fix a difficult budget situation. Other than attacking Labor, it wasn’t clear what its positive vision for the Australian economy was in terms of how to transition after the mining boom, and how to develop new jobs and new industries at a time of rapid economic and technological change.

Replacing Abbott with Turnbull was meant to provide us with such a positive economic vision. However, Turnbull’s mantra of living in innovative and “exciting times” failed to convince many voters. As one anonymous Liberal MP noted, it actually made some voters highly nervous about what was going to happen to their jobs.

Hence Turnbull turned to promising “jobs and growth” during the 2016 election campaign.

However, the Coalition’s narrow win suggested many voters still weren’t convinced the government knew how to ensure job security and a good standard of living in challenging times. In particular, many voters remained unconvinced that substantial business tax cuts would drive the economic growth and improved government revenues that were promised.

Given current levels of underemployment, unusually low wages growth and with inequality increasing, they had reason to be concerned. There is also international research suggesting that corporate tax cuts don’t have the beneficial results claimed.

Fast forward to the 2017 budget, and the Liberals are desperately trying to develop a more convincing economic narrative around good economic management, nation-building, and fairness.

Despite their attempts to blame past Labor policy and more recent Labor intransigence at passing budget cuts in the Senate, Liberal ministers are still having trouble explaining how government debt has increased from A$270 billion under Labor to some $480 billion under the Coalition.

Fortunately for them, Treasurer Scott Morrison now argues there is “good debt” and “bad debt”. Good debt covers areas such as infrastructure that assists economic growth. Bad debt apparently covers areas such as welfare.

Morrison is partly belatedly accepting advice on infrastructure-funding debt from bodies such as the International Monetary Fund, while trying to argue that the government’s new debt policies will be very different from past Labor economic stimulus ones.

Needless to say, these areas of “good” and “bad” debt aren’t quite as simple to define as Morrison suggests. Furthermore, so called nation-building infrastructure spending is sometimes more electoral pork barrelling than economic necessity. Doubts have already been raised over the economic, rather than political, benefits of a second Sydney airport and inter-capital city rail links.

The NBN: ‘good debt’ or ‘bad debt’? AAP/Mick Tsikas

Meanwhile, Turnbull struggled to explain whether Labor’s National Broadband Network was good or bad debt in terms of building necessary infrastructure.

Australian businesses that are struggling with Turnbull’s cheaper version, with its continuing use of 19th century derived copper wire technology or 1990s pay-TV-derived hybrid fibre coaxial cable technology may be wondering whether the Coalition should have discovered “good” infrastructure debt earlier and supported Labor’s more expensive fibre-optic to-the-premises model.

After all, under Rudd, the NBN was meant to be the nation-building 21st century equivalent of 19th-century government infrastructural expenditure on building railways.

Consequently, the government faces questions about whether its economic policy positions have been consistent, particularly given past Coalition rhetoric about debts and deficits.

Furthermore, while Morrison apparently characterises it as bad debt, providing temporary welfare benefits for those who lose their jobs because of economic downturns or restructuring helps keep up consumption levels. This in turn means it potentially has flow-on benefits for the private sector, as well as the individuals concerned.

It is a central lesson of the Keynesian economics that Robert Menzies’ Liberal Party embraced at its foundation, but was rejected under John Howard in the 1980s.

Does all of this mean that Turnbull is now acknowledging a lesson of the 2016 election: that neoliberalism is harder to sell than it used to be? Are his backdowns on “small-l” liberal values now being combined with back-downs on some of his long-held free-market values?

That seems to be going too far at present, especially given the government’s continued belief in the “trickle-down” benefits of corporate tax cuts and attacks on welfare expenditure.

However, there is some nuancing taking place as Turnbull tries to throw off the image of “Mr Harbourside Mansion” who loves hobnobbing with bright young technology entrepreneurs, and instead stress he is in touch with the concerns of ordinary voters.

Consequently, and much to Labor’s outrage, the government has now repositioned itself as an advocate of equal opportunity and fairness that supports a Gonski-lite needs-based education funding model.

While the government’s cuts to higher education will still have a negative impact on universities, and particularly students, the measures are less harsh than those in the 2014 budget.

It seems likely there will be some attempt in the budget to assist first home buyers. Various options have been canvassed.

Turnbull has already tried to position himself as taking action on household energy costs by criticising renewable energy costs and ensuring gas reserves. Meanwhile, there are suggestions the government will improve Medicare benefits in an attempt to counter Labor’s controversial “Mediscare” campaign at the last election.

All budgets are about politics, not just economics. But this budget will be even more so. Not all the measures are working out politically. Abbott is already threatening dissension over the impact of the education measures on Catholic schools.

This is a government in trouble. On one side it faces internal disunity and pressure from Labor’s emphasis on reducing inequality and fostering “inclusive growth”. On the other it has One Nation’s mobilisation of race and protectionism to appeal to the economically marginalised.

Then there is Cory Bernardi, the Greens, Nick Xenophon and a host of independents and other groups to consider.

After all, the budget is only the beginning. The next test is getting key measures through the Senate, perhaps even wedging Labor by deals with the Greens, so that the Coalition is in a stronger position to face the next election.

Author: Carol Johnson, Professor of Politics, University of Adelaide

The federal budget can’t fix ‘dangerously dumb’ housing prices

From Business Insider.

Any measures in the federal budget aimed at housing affordability will have little impact on getting more people owning their own homes, according to latest budget monitor report from Deloitte Access Economics.

The concept of home and all that it means will come into focus at the federal budget next week with treasurer Scott Morrison indicating he will take action to increase home ownership.

The key questions are why housing has become so expensive and what can be done to get young people back into the market, especially in Sydney and Melbourne where prices have skyrocketed.

Nationally, house prices have risen 12.9% over the last year, with hot spot Sydney jumping almost 20%, according to the latest numbers.

Deloitte Access Economics blames record low interest rates.

“Affordability is through the floor because interest rates are through the floor,” according to the budget monitor report, led by respected budget forecaster Chris Richardson.

Deloitte Access Economics says politicians are increasingly pretending “they” can do something about it.

“Housing affordability is stunningly important … today’s housing prices are dangerously dumb, especially so in Sydney,” says Deloitte Access Economics.

Among the measures the federal government could announce in the 2017 budget are cutting the capital gains tax discount and supporting capital raising for social housing.

“But the likely impact of any of these on affordability would require a microscope to observe,” says Deloitte.

“Yes, there’s good policy there and much that we’d support,” says Deloitte.

“But affordability is rotten because interest rates have never been lower.”

Deloitte says each percentage point increase in interest rates would strip some 7% off average housing prices.

Here’s how mortgage rates have fallen over the last three decades:

Source: Deloitte Access Economics

“If politicians, state and federal, are leaving punters with the impression that they can solve housing affordability, then they’re leading us down the garden path,” says the budget monitor report.

“And that’s unfortunate, because the electorate is already incredibly disappointed in the ability of politicians to deliver anything.”

Shane Oliver, head of investment strategy and chief economist at AMP Capital, notes that the government is now playing down what it can deliver on housing affordability.

“Maybe a few fiddles to encourage downsizing but since the big issue is supply and that is a state issue there is not really much it can do,” he says.