Roundtable will fix nothing unless we can all park our self-interest

I’m not sure if it’s happening by accident or design, but we may be about to convince ourselves that, though our democracy isn’t nearly as stuffed up as America’s, we’re fast making ourselves ungovernable, unable to agree on how to fix our problems.

I fear that Treasurer Jim Chalmers’ economic roundtable in a fortnight’s time won’t reach agreement on any measures of substance. The players – business on one side, the unions on the other, plus assorted experts – confidently assume that the Albanese government will use this indecision to come up with its own set of solutions.

But what if it doesn’t? Everyone complains that this government’s too timid, unwilling to risk losing votes by making the controversial changes we need. Surely, it could use the roundtable’s failure to agree on anything as its justification for doing nothing. “When you guys can agree on what we should do, we’ll do it.”

Initially, the roundtable was to discuss the great worry of our times – productivity. Almost every year since forever, our economic production machine has got a fraction more efficient at turning economic resources into goods and services, thus raising our material standard of living. But for the past decade or so, it seems to have stalled. Why? And what can we do to get it going again?

But Treasury would have been quick to remind Chalmers that the budget is expected to be in deficit for as far as the eye can see. Something needs to be done about this, and the government is certainly in no position to try to fix productivity by cutting taxes.

And, led by former Treasury secretary Dr Ken Henry, the nation’s economists will tell you our biggest economic problem is that our tax system, which is little changed since the introduction of the goods and services tax 25 years ago, is no longer working properly. It needs a major overhaul.

In economics, you can’t get away from tax. Our productivity is determined largely by what happens inside the nation’s factories, mines and offices. Ask any economist what can be done to make our businesses more productive, and they’ll want to do it by changing the “incentives” businesses face. Translation: pull some kind of tax lever.

So it’s no surprise that, when the Productivity Commission was asked to offer some suggestions, its first was to rejig company tax in a way that encouraged greater business spending on more and better machines for the workers.

Almost all our companies would pay less tax, but this loss to government revenue would be covered by making the big tax-dodging foreign multinationals pay more.

Trouble is, when you boil it down, the (big) Business Council of Australia exists to protect the interests of big foreign businesses, which want to make profits in Oz but pay negligible tax. Amazingly, the Business Council has persuaded Canberra’s 23 other business lobby groups to join it in rejecting the company tax changes.

Now the ACTU has proposed curbs on negative gearing, the capital gains discount and the use of family trusts – all of which allow the well-off to minimise the income tax they pay.

The financial press seems to think this means the Labor government will rush off to do the unions’ bidding, even though Albanese has explicitly rejected these reforms, and the well-off would fight them tooth and nail.

Somehow, I doubt it. I think it will confirm Albo in his resolve to do very little.

What depresses me is realising the way our democracy has devolved into a self-interested fist-fight. Every interest group goes all out to extract as many benefits as possible while paying as little tax as possible – and may the deepest pockets win. Which they often do, by way of bribes to the political parties. This triumph of self-interest over co-operation is promoted by a small army of lobbyists and an increasingly partisan media.

The politicians themselves have fostered this notion that we should vote for the party that’s offering us the best deal. “Vote in the national interest? Vote for the party that would try to be fair to everyone and protect the poor? What kind of sucker do you take me for?”

It hasn’t got them far, but for years the Liberals have promoted themselves as the party of lower tax. What’s more, they can do it without any reduction of “essential services”. This has always been no more than wishful thinking – and Labor’s not much better.

The result is people convincing themselves that taxation is the great evil, that asking me to pay more tax is outrageous, and expecting tax cuts at every election is no more than my due.

In truth, what we’re saying is “I want to pay less, so find someone else to pay more”. Those who fondly imagine government spending involves huge waste and could easily be slashed with no harm to anyone are deluded. And they never come up with specifics on what spending could be cut.

When businesses demand lower company tax, they’re arguing that consumers should pay more GST. When well-off individuals (like me) demand lower taxes, what they’re really saying is: “Please stop asking me to subsidise people less fortunate than me. I don’t care how hard they’re doing it.”

And now, would you believe, we have Professor Ross Garnaut popping up last week to warn that Australia’s transition from fossil fuels to renewable energy is happening too slowly, so we’re not on course to get our emissions down to net zero by 2050.

The private sector isn’t building many new solar and wind farms because there isn’t enough money in it, and the solution is to bring back the carbon tax abolished by that man of great foresight Tony Abbott.

Really, another tax? I don’t see Albanese doing that, either. And the notion that governments should have the courage to force on us things most of us oppose is another idea from Fantasyland.

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Big business quick to veto productivity tax reform

Well, you can forget about Treasurer Jim Chalmers’ three-day roundtable discussions leading to any improvement in the economy’s productivity and growth, let alone getting the budget back under control.

Late last week, the Business Council of Australia persuaded all of Canberra’s many other business lobby groups to join it in rejecting out of hand the Productivity Commission’s proposal for reform of the company tax system which, the commission argued, would increase businesses’ incentive to invest more in productivity-enhancing plant and equipment, without any net reduction in company tax collections.

The proposal is for the rate of company tax to be cut for all but our biggest 500 companies, while introducing a 5 per cent tax on the net cash flow of all companies.

The join statement by 24 business lobby groups says that “while some businesses may benefit under the proposal, it risks all Australian consumers and businesses paying more for the things they buy every day – groceries, fuel and other daily essentials”.

Get it? This is the lobbyists’ oldest trick: “We’re not concerned about what the tax change would do to our profits, dear reader, we’re just worried about what it would do you and your pocket. It’s not us we worry about, it’s our customers.”

Suddenly, their professed concern about the lack of productivity improvement and slow growth is out the window, and now it’s the cost of living they’re deeply worried about. They’ve been urging governments to increase the GST for years, but now they don’t want higher prices. Yeah, sure.

Bet you didn’t know there are as many as 24 different business lobby groups in the capital. Their role is to advance the narrowly defined interests of their paying clients back in the rest of Oz by means fair or foul. They’re not paid to help the government reach a deal we can all live with, nor to suggest that their clients worry about anything other than their own immediate interests.

Canberra calls this lobbying. Economists call it rent-seeking. You press the government for special deals at the expense of someone else, while ensuring you contribute as little as possible. This, apparently, is the way democracy is meant to work.

And if the lobbyists can play this game, why can’t the business press join in? As its blatantly partisan commentary makes clear, big business’ only interest in attending the government’s roundtable was to come away with some new concession, ideally a cut in company tax.

At the summit after Labor was elected in 2022, business came away with nothing, we’re told, while the unions got all they wanted. Well, not gonna play along with that again.

It’s no surprise the Business Council is so opposed to the Productivity Commission’s proposal, which would reduce the tax paid by all companies bar the top 500. They’d get no cut in conventional company tax, but would pay the new 5 per cent cash flow tax.

Which lobby group roots for our biggest companies? The Business Council. What is surprising is the ease with which it was able to persuade all the other business lobbies to join it in helping protect the Big 500, even though most of their own members should have benefited from the deal.

Huh? I think the explanation is in the first sentence of the joint statement: the “proposal to tax business cash flow is an experimental change that hasn’t been tried anywhere else in the world”.

True. So, a simple case of resistance to radical change. And who could blame them? Economists – and the Productivity Commission itself – don’t have a good record in promoting radical changes that look good on paper and also work in practice. Think: the whole neoliberal project and, especially, the notion that creating from nowhere a market for the supply of disability services would be easy and efficient. It’s wasted billions.

When we wonder why productivity has stopped improving, the obvious suspect is the huge decline in the growth of business investment in new plant and equipment. Giving workers more and better machines to work with is the main way we’ve increased their ability to produce more per hour.

On paper, the commission’s partial switch from conventional company tax to a tax on companies’ net cash flow – which allows them to write off the full cost of new assets immediately – ought to improve productivity.

But the budget’s projected decade of deficits prohibits the Albanese government from giving tax cuts to companies or anyone else. So, while the commission’s plan would cut the tax paid by almost all companies, this cost to government revenue would be recouped by the extra tax paid by the Big 500.

Guess what? Many if not most of those companies pay far less tax than you’d expect. In particular, many of them are the subsidiaries of foreign multinationals using profit-shifting to pay laughably small amounts of tax in Australia.

The commission readily explains that the tax saving to most companies would be covered by tax-dodging foreign companies. Australia’s rare system of dividend imputation (“franking credits”) means that the Australian shareholders of Australian companies get their share of company tax refunded.

Only the foreign shareholders of Australian companies bear the cost of company tax. So why does the Business Council bang on unceasingly about the need to cut the rate of company tax? Because, when it gets down to cases, the Business Council represents the interests of foreign multinationals operating in Australia. That’s its guilty secret.

Footnote. When I wrote last week about the way “modelling” is used to make estimates of the favourable effects of a proposal sound more scientific and reliable than they are, I didn’t know the first offender would be the Productivity Commission, quoting results produced by Australia’s leading commercial modeller, Chris Murphy.

It says modelling suggests its proposal could increase investment by $7.4 billion, Gross Domestic Product by $14.6 billion and labour productivity by 0.4 per cent.

Sorry, no “computable general equilibrium” model can tell you the likely effect of some policy change on productivity. Someone has to insert their best guess at the effect on productivity, and all the model does is calculate what, given a host of other assumptions, such an improvement would mean for GDP.

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It's hard not to hate investors when the property game is so unfair

BY MILLIE MUROI, Economics Writer

The thing about moving up the food chain from renter to home buyer is that it comes with a monumental mindset shift.

After years of renting, hearing the words “high rent” makes me freeze and sends shivers of dread down my spine. Yet, there I was at an inspection last weekend, listening to a real estate agent happily declaring how high the average rent in the area was.

It took me a moment to recalibrate my alarmed expression, trying to blend in with the investors nodding along in satisfaction. There’s also a certain air of indifference radiating from buyers who aren’t desperately looking for an escape from the rental rat race – which I failed (quite miserably) to imitate.

Don’t get me wrong. Investors can play a positive role in our housing crisis. But only when the rules of the real estate game are set correctly.

Right now, there are plenty of ladders for investors and home owners, and no shortage of snakes setting renters and first-home-buying hopefuls back.

The more inspections I attend, though, the more I understand how we got where we are – and how we’ve ended up so stuck.

When we stand to gain from the rules and outcomes of a system, it becomes easier to play down the problems. That’s because humans hate the discomfort (known as “cognitive dissonance”) of holding conflicting beliefs or acting in a way that clashes with their beliefs.

While I’ve met and heard from generous landlords who could – but choose not to – charge the maximum rent, they’re an exceedingly rare species. It’s much easier for most of us to justify an unfair system we benefit from, than to give up our personal gain or live in a constant state of contradiction.

It’s also easier to think things are totally fine when the people we’re surrounded by aren’t outraged by it. The more time I spend at inspections, the more desensitised I’ve become to the way we see housing: as a wealth-building machine.

Low home ownership is not always a bad thing. But it’s terrible when the only other option – renting – leaves many in financial stress and struggling to save for a deposit: the very thing they need to buy their way out.

In Australia, about one-third of the population rents and one in three of these renters are spending more than 30 per cent of their income on housing, meaning they are considered to be in financial stress.

The problem with keeping people renting for life by necessity is that it keeps many of them trapped in a tough position for the rest of their lives.

Retirees who rent in the private market are much more likely to live in poverty than retirees who own their own house. Two-thirds of retired renters live in poverty, compared with one-quarter of those with a mortgage and one in 10 who own their home outright.

And the rate of home ownership has continued to drop over the decades. More than half of Australians born between 1947 and 1951 owned a home between the ages of 25 and 29, compared with one in three people born between 1992 and 1996.

The big focus on lifting our supply of houses is fantastic: both the government’s ambition to build 1.2 million new homes by the end of the decade and the push to reduce the red tape – from zoning laws to slow approvals processes – standing in the way of private businesses and developers.

But as ANZ chief economist Richard Yetsenga points out, the evidence suggests changing things on the supply side alone won’t be enough.

As of March this year, the government had completed only about 350 homes through its $10 billion Housing Australia Future Fund, with 5465 under construction. Building houses has never been something we can do overnight. But the process has become slower over time.

Yetsenga also points out Australia has 11 million dwellings and a population of 26 million. With these numbers, there should be far fewer people facing homelessness or being priced out of the property market.

“The challenge seems to be more about misallocation than a genuine shortage,” he says. “Some choices, while individually reasonable, might be turning housing into a luxury for others.”

One thing we need to examine is the capital gains tax discount, which halves the rate at which investors are taxed when they sell a property and make a profit as long as they have held the property for at least 12 months.

That’s a generous discount that gives investors more reason to snap up properties. That’s not necessarily a bad thing, except when considering the fact investors are often competing against first home buyers, and we’re facing a supply shortage.

We may not need to abolish the tax discount completely. In fact, it’s probably a good idea to keep it for investors who are building new homes rather than buying up existing ones. And the additional discount for people using their investment properties to provide affordable housing is a good thing.

But reducing the capital gains tax discount for existing properties being rented out at standard (and often seemingly excessive) rates might give first home buyers a better chance at getting their feet in the market.

Because here’s the thing: as long as most of the population are home owners, and the majority of their wealth is tied up in the value of their house, the overwhelming interest will always be to see property prices continue to rise, even if incomes fail to keep up.

In the 1990s, the average home in Australia was worth about 9.5 times the average household income per person. By 2023, they were fetching 16.4 times the average household income per person.

With supply only softly creeping up, it’s simply unrealistic to assume house price growth will slow significantly.

I’ve been fortunate to have lived rent-free, until the age of 21, and to have received a little bit of help from my grandparents to boost my deposit.

But it shouldn’t take luck – having the right parents (and grandparents) – to buy a house.

If we’re going to treat homes as investments, it needs to be just as possible for a kid growing up in a broken household with no family help to escape the rental market and start building their wealth as it is for anyone else.

There’s also a strong case for abolishing stamp duty – a levy collected by state and territory governments on the purchase of homes – and moving to a land tax paid annually on the value of the land a property sits on. Why? Because stamp duty discourages people from moving, including empty-nesters who could downsize, to homes that better fit their needs.

While we should welcome investment into new homes, we don’t need to give more reason for investors (who are not providing affordable housing) to compete with first home buyers.

I’m still on the hunt for a home after one property I inspected with a price guide of $460,000 sold to an investor for $530,000.

I’m in a much better position than many, but it’s clear, as long as I’m competing with investors, to see how the cards remain stacked against first home buyers. Hating the player might not be very productive, but I certainly hate the game.

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