Labor targets Investment Returns.

Before losing the last federal election the Labor party held office for two terms during which the budgeted reserves they inherited were consumed, and replaced with alarming debt after staving off the global financial crisis, and  implementing many admirable reforms.

There has never been a shortage of deserving projects requesting government financial backing. Labor governments tend to be generous to a fault but invariably they have stumbled trying to find sufficient revenue to fund their spending, usually without requiring the users to pay.

Gough Whitlam in 1975 disastrously tried to by-pass Treasury protocol to arrange cheap Middle Eastern Loans through Pakistani broker Mr Tirath Khemlani. He lost office as a result.

The exception to the rule was Paul Keating. He was a pragmatic Treasurer; no “bleeding heart”, as he has put it.

http://www.theguardian.com/world/2013/dec/31/cabinet-papers-show-paul-keating-had-a-budget-emergency-of-his-own

But Treasurers also have the unenviable task of not only funding essential and deserving services, but of also imposing constraint on domestic consumption. The economic situation in 1986 was precarious. Inflation at 9% was out of control, with unions demanding higher wages to compensate. To curb demand, interest rates were allowed to rise and peaked at 17%.  Imports far exceeded exports, causing the Australian dollar to be devalued first to US 71c, but eventually bottoming at US 57.1c.

The balance of trade deficit increased a massive 41% in April 1986, nearly 6% of GDP. Something had to be done. In characteristic no nonsense style, Keating drew the attention of the world that Australia was in danger of becoming a banana republic if spending was not curbed.

Both PM Bob Hawk and Opposition Leader John Howard were dismayed by his outburst, but his frank comments galvanised the Cabinet into decisive action. Income tax cuts were deferred, pension adjustments delayed, family allowances were means tested, foreign aid reduced, and  the ban on uranium exports to France lifted. The bank accounts debit tax was raised, luxury vehicle sales tax was lifted from 20% to 30%, the Medicare levy raised 0.25%, and the wine sales tax was increased from 10-15%.

These drastic measures reduced the projected deficit for 1986 from $3.5 billion to $2.4 billion. Remarkably with further savings over the next year, Keating was able to achieve a budget surplus of $1billion. At the same time he lifted the ban on negative gearing.

 

In his term Kevin Rudd and subsequently Julia Gillard legislated a super-tax on mining industry profits that would have been a bonanza for the government had not the mining boom come to an abrupt halt.

Debt escalated during Julia Gillard’s term of office. There was no clear strategy to reduce debt until a plan based on plundering superannuation savings was formulated and taken to the last election. Predictably Labor lost office.

 

I welcome the fact that Labor is starting its campaign in this election year (2016) with a public debate as to how it proposes to fund its election promises. The reality of politics is that to pay Paul, they have to rob Peter. It is always a question of priorities.

The voters must assess the downside potential and risks of a plan which will raise $32.1 billion from the rental property industry in a double whammy that both withdraws negative gearing and reduces by half the capital gain concession when the asset is sold. The elimination of negative gearing also threatens the viability of small business start-up enterprises.

It cannot be taken for granted that property markets never go back-wards. Investors take that risk. Prices do fall in recessions.  They will too if the concessions for new rental housing are retained, and increase the supply/demand balance. Property investors will then be forced to take their losses and sell, further depressing house prices.

Lower property prices may advantage new-home buyers but will disadvantage retirees who wish to sell to move to care providing facilities..

Landlords are all too conscious of the hazards involved in providing rental accommodation, especially to the poorer sections of the community. High purchase and establishment costs, rent default, property neglect and damage, wear and tear, prolonged vacancies, escalating costs of repair and refurbishments, complaints settlements etc. If governments expect the assistance of private enterprise because they cannot provide this service themselves, they must retain incentives.

Property investors are usually and unfairly blamed for property price increases. It is really owner-occupiers who do not have to pay any capital gains tax at all, that are willing to pay high prices for homes in choice locations, in the expectation of receiving still higher prices when they come to sell, that are responsible.

Please let us be fair, and not kill off investment.

 

 

About Kenneth Robson

I studied at Adelaide Boys' High School, and the University of Adelaide, Medical School. graduating in 1961. My field of specialisation was Plastic and Reconstructive Surgery. Prior to establishing my practice in Adelaide, I spent 5 years working in India, and Papua-New Guinea, in the field of reconstructive surgery for leprosy. In retirement I joined the Australian Technical Analyst Association and passed the two examinations for a Diploma inTechnical Analysis, and the designation Certified Financial Technician (CFTe) by the International Federation of Technical Analysts.
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