News That’s Fit To Punt – 19/Mar/2012

The Capital Gains Revenue And The Property Bubble

I wrote about the problems of vested interests leading to the disasters in Japan, several times. In Australia we’re at this smug point of history where our government debt ratio to GDP is low and the current ALP government is aiming for a surplus by 2013. That being said, there seem to be some serious miscalculations that are going to make it very hard according to this article in the SMH.

Parkinson said that since the global financial crisis, federal tax revenue had fallen by the equivalent of 4 percentage points of gross domestic product [about $60 billion a year] and was ”not expected to recover to its pre-crisis level for many years to come”.

This had made the task of maintaining medium-term budgetary sustainability harder for both the Commonwealth and the states. ”For both levels of government, surpluses are likely to remain razor-thin without deliberate efforts to significantly increase revenue or reduce expenditure,” he warned.

The most obvious (and least consequential) implication of this news is its threat to Julia Gillard’s resolve to return the budget to surplus next financial year without fail.

But Gillard’s problems pale in comparison to Tony Abbott’s, with his oddly ideological and populist commitment to rescind both Labor’s carbon tax and its mining tax without rescinding all the tax cuts and spending increases the taxes will pay for.
There seems little doubt Abbott’s term in office would either be marked by an orgy of broken promises or be consumed by agonising over what spending to cut, with eternal lobbying both before and after the fact. Probably a fair bit of both.

Parkinson is telling us there’s now a disconnect in the established relationship between the rate of growth in the economy and the rate of growth in tax collections. The economy can be growing at a reasonable rate without that meaning tax collections are growing strongly.
It will be a lot harder in future for politicians of either side to keep the budget in surplus. What was a doddle in the noughties will now require unremitting discipline and political courage.

That’s interesting news. Basically, under the Howard government, government coffers were filled by the GST as well as the Capital Gains Tax. So, in feeding and growing the property bubble, the Federal Government under John Howard and then the ALP Rudd government up until the GFC, benefited mightily from the capital gains on the properties that changed hands. Now that the GFC has put a dent in that bubble (and the bubble has not blown – yet…), the government revenue has been hit.

Now that growth in government income has stopped, and has started to slide back, the government is going to have to either cut spending drastically (austerity anybody?)  raise taxes to fill the shortfalls somehow (“God forbid” say the right wing ideologues).

The thing about this particular problem is that as Ross Gittins points out:

Keeping the budget in ”razor-thin surplus” will be hard enough; eliminating net debt will be very much harder – especially since the potential-privatisations cupboard is now almost bare.
It would be the easiest thing in the world for our pollies on both sides to catch a dose of the North Atlantic disease and let deficits and debts roll on.
Should this happen, it will be because they possess neither the bloody-mindedness to live up to their professed smaller government ideal nor the courage to make and defend explicit tax increases. As in the North Atlantic economies, it will be the path of least resistance.

If I sound like a broken record, bear with me but this is exactly where Japan went off the rails in the 1990s and into the 2000s, inclusive of the Koizumi government that was so popular and so lacking in intellectual rigor. They just kept racking up debt to fund white elephants to buy votes in obscure rural electorates, and putting off the big problems into the future. The thing is, applied to Australia and politics being the way it is with the electorate mood being what it is, it’s hard to imagine either of the major parties having a lot of gumption in making the tough calls, so you can easily see the same thing being played out over here.

And there’s the problem. If the government won’t bear down and make the tough calls, that is going to be the very recipe by which our government deficit will grow. If and when the property bubble pops, then the Federal and State governments are both going to be in big trouble because revenue from both capital gains tax and stamp duty will take a giant hit. Inevitably, the governments of either persuasion are going to have to look at raising income tax and company tax.

I just thought it was pertinent that we point out why the Federal government might want the bubble to keep going a bit longer and might be willing to spend its savings to do so. It explains why Kevin Rudd spent the money on the First Home Owner’s Grant instead of trying to reform the markets. The last thing the government wanted was for asset prices to fall. Doubtless, we’ll be in for a hell of a time when it eventually does fall.

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