Party politics aside, the Australian population is getting older with health and age pension spending rising. So regrettably, our nation will become slowly poorer unless we adapt. The prospect of gradually falling living standards in decades ahead needs a national focus on creating wealth, rather than just obsessive cost cutting. Of course we should prune back paying Age Pensions to those with significant assets, as we also should on overly generous tax concessions for the wealthy.
In this Asian century the path to prosperity lies in encouraging winning behaviour focused on revenue, rather than just bringing in the cost cutters. As China illustrated in recent years, the path to national wealth lies in bringing in wealth from outside your borders (it’s much the same as for a household). We relied for decades on mining and agriculture for our export wealth but now we need more broadly based sustainable exports.
Recently The Reserve Bank lowered interest rates to stimulate our economy and replace declining mining work with home building activity – all the while worrying that this also pushes up prices of already overpriced established houses. The Reserve Bank would rather not push rates even lower, lest it prove a less effective policy than in years past but the economy needs stimulating.
Imagine what might happen to Australia’s export productivity if we encouraged it the way we’ve been encouraging housing for the past few decades. Very few countries permit income losses to be carried over and deducted against other income, the way we do with negative gearing. What might happen to our productivity if we say, introduced some kind of imputation credits on export earnings? Improved incentives there might result in Australian research developments actually being taken to commercial reality here instead of being whisked offshore.
Rather than cutting costs and reducing investment in education, research and scientific development in our nation, voters would probably tolerate the need for tax revenue to rise – if they could see a long term benefit. Also, the climate change challenge is real and now quite urgent – it won’t be fixed without some cost. So there needs to be a fair and effective way to boost overall tax revenue.
Traditionally, governments lose elections rather than oppositions winning them. Right now, Australians hanker for political leadership that rises above a populist approach to offer a statesmen-like vision for the future of our country. This needs policies that deal with the difficult problems we confront, rather than offering ‘spin’ while rewarding political donors of either side.
Whichever party this vision comes from, we might expect future Age Pensions to be delayed to 70 or more and also to be reined-in for those with higher asset values, even if that value is in their home. We might also expect tax to be payable on super pension account balances above a ‘reasonable amount’ – in 2013 Labor’s view of reasonableness was individual incomes under $100,000 p.a. (apparently 16,000 people had super pensions above this). There might also be scrutiny of other super tax concessions, though super must remain a most compelling vehicle to save for self-sufficient retirement. But apart from these, dare we hope for policies that stimulate sustainable export earnings?
If such changes occur, any offsetting adjustment out of negative gearing will need to be gradual since most of us and much of our economy is affected by house sales/values. The property lobby is extensive – beyond the property sector directly, it includes banks, tradesmen, media advertising all home owners and more. So, it would take huge political courage to end negative gearing, despite the national interest. Perhaps it might occur gradually as export incentives are phased-in. Regardless, house prices are unlikely to keep rising above the global trend. It’s also hard to see them fall (as in the US) though they might track sideways as in 1990 to 1998. The lowest interest rate we’ve ever seen does delay this prospect for now but rates will eventually rise, causing financial discomfort.
The politics of all this are fraught of course, so an alternative positive vision would need to be sold well. Without it, Singapore’s Lee Kwan Yew may be proved correct in his 1980 ‘White trash of Asia’ admonition. Hawke/Keating rescued us then but another resurrection is now due – will a modern day leadership team step-up? Perhaps the upcoming Federal Budget will begin solving these issues.