Wednesday, April 28, 2010

Income tax at long-time low

THE income tax paid by Australians has plunged to its lowest level in almost 40 years as a share of GDP, as tax cuts and the global financial crisis ploughed a big hole in government revenue.

The Bureau of Statistics says Australians paid almost $10 billion less tax in 2008-09 as the crisis hit, sending the total tax take to its lowest share of GDP for 15 years.

Total tax revenue of federal, state and local governments fell for the first time since the last recession, slumping from $348.3 billion to $338.9 billion. Most of the fall was in company tax and stamp duties on property sales. But for most taxpayers, the biggest saving was in income tax.

The Howard government's tax cuts, while favouring those at the top end, had already slashed income tax revenue from 12.1 per cent of GDP to 10.8 per cent over the previous three years.
Then in 2008-09, more tax cuts combined with the economic slump to send it plunging to 10.1 per cent of GDP — the lowest level since Gough Whitlam became prime minister in 1972.

Relative to GDP, that fall saved us $25 billion in tax in the past financial year. Of that, $9 billion came in 2008-09 alone, part of it from the 2007 election tax cuts and part from tax revenue falling as people lost jobs or income.

The total tax take of all governments sank from 29.5 per cent of GDP in 2007-08 to 26.9 per cent a year later. While most of that was unintended, it put a cushion of $32.5 billion under the economy's fall.

Overall, the bureau reports that federal, state and local governments ran a combined deficit of $31 billion in cash terms, although just $21 billion on the accrual measure used by Victoria and most governments.

A year earlier, the combined surplus was $20 billion in cash terms and $33 billion on the accrual measure — implying a turnaround of more than $50 billion to cushion the economy in 2008-09.

More than 90 per cent of that cushion was provided by the Commonwealth, which saw its bottom line on the accruals measure reverse from a $25 billion surplus to a $25 billion deficit.
The states collectively remained in surplus, but by just $193 million.

Tuesday, April 27, 2010

Taiwanese solution to soaring house prices: don't have kids

IN TAIPEI the other day, a crane drove up to the front of the Parliament building. It lowered a man sitting in a plastic container shaped like a house, and suspended him in the air in a protest against the high price of real estate. Through a microphone, he urged onlookers to rise up against high housing prices, declaring: ''People without homes, slaves to property, stand up!''

It is not only in Australia that young people have seen their dreams of home ownership evaporate as house prices boil. Throughout east Asia, a crisis is building as cashed-up investors who fled the sharemarket in 2008 moved their money into real estate, sending prices soaring.

This matters because housing is not just an asset like shares or bonds. It is where we live. It's natural for investors to prefer the security of bricks and mortar. But as governments throughout the region are discovering, it is also natural for people to want to own a home - and to turn against governments that allow prices to soar out of their reach. In Taiwan, the costs have become particularly serious, as we shall see. Their would-be home buyers - ''snails without shells'' as they call themselves - have reacted by scrapping the other big expense facing young couples: children.

At home, the Rudd government last week reversed its 2008 liberalisation of foreign investment rules on real estate, and set up a unit to ensure the rules are obeyed. It also set up a joint working party with the states to ask why housing prices have soared out of reach. But that will work only if it tackles the single biggest cause: the tax-driven growth of rental investors, whose borrowing has grown 30-fold in 20 years, squeezing out home owners.

China, in the midst of a full-scale housing bubble, has now done so. After real estate sales revenue jumped 75 per cent in a year, its state council last week hit investors with tighter rules. Banks are now forbidden to lend investors more than 50 per cent of the sale price (in Australia, 100 per cent is common). Investors must now pay a premium of at least 10 per cent above the normal interest rate, while first home buyers receive a discount. New loans are banned to investors who already have one property. And there is talk of a tax on rental property ownership.

China's goal is to deflate the housing bubble before it bursts, derailing the world's economic locomotive. Wish them luck.

But Chinese buyers are looking abroad, and so are their neighbours. In a bookshop in Taipei a few days ago, amid all the books and journals in Chinese, I spotted an Australian magazine on the shelves: Australian Property Investor. Clearly, people in Taipei are buying Australian real estate.

But Taiwan itself is the best example of what can go wrong if governments let housing investors and market anarchy push prices out of ordinary people's reach, leaving young snails without shells.

Taiwan has become rich very fast, largely by inching its way into a central role in global IT and communications manufacturing. This year, the International Monetary Fund estimates, its GDP per head will overtake that of its one-time colonial master, Japan. Its economy is almost as big as Australia's, and growing twice as fast. Yet its new wealth shows only fleetingly amid the grimy, cramped apartments built in earlier, poorer times.

Taiwan is in the grip of a housing crisis worse than ours. It is a rich country, but wages and most prices are roughly half the levels here - because the government, like China's, holds down the exchange rate to keep its manufacturing globally competitive.

Yet while wages remain low, apartment prices in Taipei are close to those in Melbourne, particularly for anything modern.

Why can't they build more apartments? Because ownership of those grimy old apartment blocks is fragmented among dozens of occupants and investors. To demolish, even to upgrade, a developer must buy them all out, which is prohibitively expensive in time and money. There are classy new apartments on the urban fringe, on greenfields sites, but too few to meet the demand from occupiers and investors. So prices have soared.

So the snails save hard to buy a shell, and do without other things. That means, above all, they do without children, or with just one child. By 2008, Taiwan's fertility rate was the lowest in the world. Its women bear on average just 1.05 children over their lifetimes. The cost of housing is not the only reason, but analysts say it is the main one.

But not having children creates even bigger costs ahead. Right now, Taiwan has 6.8 people of working age for every retiree. But preschools are already closing for lack of children, and the population is set to shrink dramatically. By 2032, demographers project, Taiwan will have just 2.5 potential workers for every retiree - and by 2056, just 1.4. If nothing changes, Taiwan - like China, Japan and Korea - will slowly become economically unviable.

So far, that hasn't happened here. But if governments keep subsidising investors to outbid first home buyers and low income earners, it will. Snails want shells. Taiwan - and soon, possibly China - are showing us what else can go wrong when the price of shells soars out of the snails' reach.


Tuesday, April 20, 2010

Hospitals have a good story to tell

WHATEVER the outcome of the battle of the operating theatres between Kevin Rudd and the premiers, three crucial things need to be made clear.

First, they are fighting over a success story. The costs of running hospitals are rising sharply, not because hospitals are failing in their job, but because hospitals and the health system in general have done their job so well. Their job is to save lives. That's exactly what they've done. Australians' death rates at any age short of 85 are shrinking rapidly, to our great benefit.

The Bureau of Statistics estimates that its standardised death rate which adjusts death rates for the changing age of the population shrank by more than half between 1971 and 2008. So, if you are a 40-year-old, for example, your risk of dying this year is less than half the risk faced by a 40-year-old in 1971.

That's a big gain. It shows our health system, spearheaded by the hospitals, has done a great job in giving us longer lives. Of course it's not perfect: it's run by humans, and all of us know of cases in which the system has failed and failure in this system often means tragedy. But we are not talking about a system in crisis. This is a success story where it matters.

And death rates are still falling rapidly. In the decade to 2008, the bureau estimates, the standardised death rate shrank by 17 per cent. The sharpest falls were in death rates among people (especially men) aged between 55 and 79.

Isn't that happening the world over? Yes. But on the best single measure of health life expectancy Australia now ranks equal second or third in the world. The World Health Organisation's World Health Statistics 2009 reports that only in Japan do people live longer than in Australia. More pertinently, only people in Japan and Switzerland have a higher "healthy active life expectancy" than we do.

But there's a catch. Saving lives is expensive. The technology used in patient assessment and in the operating theatre is expensive. People wheeled out of the operating theatre have to be nursed back to recovery, and subject to repeated monitoring. A health system that works requires taxpayers to shell out a lot more money than one that fails.

Let me take an example close to home. When my father, John Colebatch, started work at the Royal Children's Hospital in 1946, leukaemia was seen as untreatable. Children diagnosed with it were given palliative care only, and survived on average for just six weeks. That was cheap, but only because it accepted complete failure as normal.

My father and a few colleagues took on the challenge. In 1948, he carried out the world's first controlled trial of a leukaemia treatment. He endured years of trial and error, with many casualties and painful opposition from professional colleagues, before his RCH team could declare a patient cured. But you know the outcome: today, 75 per cent of children with leukaemia survive it. That costs taxpayers a lot of money, but it's worth every cent.

I'm no expert on health administration. There may be some cost savings in doing things Rudd's way rather than the way we live now, but reading Rudd's case, I suspect they're marginal. Setting targets for reducing time taken in emergency wards, or paying only standard treatment costs for this or that procedure: they sound fine, but in the real world I suspect they will be like squeezing a balloon rather than ending the shortage of resources, they will simply shift the pressure from one area to another.

Second, where there are big health problems ahead, commonsense tells you they are in areas other than the hospitals. Australians were once a lean people. Slowly, we have become one of the most obese societies in the world, threatening the health system with huge future costs. Alcohol abuse, always a problem here, is reaching a new level. Mental health problems have escalated out of sight, with huge economic as well as social costs. It is the main reason why 10 per cent of all men aged 25 to 54 are now not even looking for work, up from 2 per cent in the '60s.

Professor Ian Hickie did a masterly job on this page yesterday analysing these issues, which the Rudd reforms do not touch. I would add another. We are short of nursing home beds because federal governments of both sides have squibbed the tough but inevitable decision to make people pay for their care through nursing home bonds. That's one health reform Rudd can do on his own.

But the Rudd package was never really about health reform. It was about getting the home insulation mess off the front pages, which is why Rudd is demanding that the states hand back 30 per cent of their GST revenue so it can be returned to hospitals as "Commonwealth money". You call that reform, PM?

Third, the one undeniable fact bolstering Rudd's case is that, thanks to past High Court decisions, the states on current trends will not have enough tax revenue in future to fund their hospitals properly. But that is due not only to soaring hospital costs, but also to inadequate revenue sources. Saying you can fix it by moving some hospital funding to Canberra is another case of squeezing the balloon. Hospitals might be OK, but we would get inadequate funding for schools, or transport, or whatever.

The problem we need to fix is to give states adequate revenue sources of their own. This could require a referendum to change the constitution, which means it will need to be tackled on a bipartisan basis. We're not good at that, but we will need to get good at it if we are going to make progress on tackling the real issues.

But I suspect Rudd's decision to take on the states over hospitals was never about tackling the real issues.


Wednesday, April 7, 2010

No room for NIMBY syndrome

MELBOURNE abounds in affordable housing. The Valuer-General reports that in the September quarter last year, there were 116 suburbs in which the median house price was less than $400,000. For the city as a whole, the median unit price was $385,000.

But there was a catch. Of those 116 suburbs, 86 were 20, 30, 40 or more kilometres out of town. Another 20 were 15 to 20 kilometres from town, all in northern and western suburbs. The suburbs with affordable housing closer in were all in the north and west, mostly around Sunshine. It was the same story with units and apartments: expensive close in, cheaper the further out you go. And on the fringe, the median block of land cost just $165,000 - even less in the suburbs where most blocks were sold: Tarneit, Craigieburn, Pakenham and Doreen.

The moral is clear. The housing that has become unaffordable for aspiring home buyers is mostly housing in the inner and middle suburbs: areas within easy reach of the city centre, serviced by trains or trams, the sort of housing most of us grew up in.

In recent days, The Age has explored how Melbourne might develop to house the 7 million inhabitants now forecast for 2050. This debate has a long way to run, but our Project Melbourne series has shed light on the issues the Brumby government must now confront if it wants to lead, rather than drifting with the tide.

But it has also shown that the causes are largely beyond the state government's responsibility. Housing prices have soared because of an imbalance between supply and demand. More people want to buy houses than there are houses to buy. And the comparison of prices shows that imbalance is not so much on the perimeter, but in the inner and middle suburbs.

Interest groups keep telling us the solution is to zone more fringe land for housing. But we already have zoned urban land in spades, owned by developers who are holding on to it so they don't flood the market. Releasing more land will solve nothing.

We have an imbalance because demand for houses has been swollen by three policy changes made by federal governments, while the supply of housing in inner and middle suburbs has barely grown. So we now have shortages of the houses people want - and so prices have risen.

The interest groups know that, but want to shield their interests from change. If that's our attitude, we'll solve nothing. If we try to shift the blame or tinker at the edges rather than fix the problem, house prices will keep rising. Australia will keep changing from a nation of home owners to one of landlords and tenants.

The first policy change was the Hawke government's restoration of negative gearing in the 1987 budget as an approved tax break. Since then, the number of rental investors has more than trebled, from 511,000 to 1.7 million. They now own at least 2.4 million homes and their share of bank finance to buy established homes has soared from 8 per cent to 40 per cent.

The huge growth of rental investment has pushed up prices, and pushed out more than a million aspiring home buyers, who have been forced to remain renters (keeping the rental market tight). Census figures show that just in the decade from 1996 to 2006, the proportion of middle-income Melburnians aged 25 to 44 who owned their own home shrank from 68 per cent to 57 per cent. If the tax break stays, many of them will never own a home.

The second policy change was the Howard government's huge increase in net immigration: nationally, from 79,000 a year in the '90s to roughly 300,000 now - and in Victoria, from 20,000 a year to more than 80,000. This required far more housing and better infrastructure in the cities that housed them. But that didn't come in the time and scale required. If you push more people into the same housing stock, prices rise.

Now it appears that Melbourne prices are being lifted by a third policy change: the Rudd government's decision in December 2008 to stop requiring temporary residents to get approval from the Foreign Investment Review Board to buy a home. At the time, Labor wanted to prop up housing prices against the risk of a US-style collapse. But now, Melbourne prices are being pushed higher still by money from outside.

In Victoria, in the four months to January, bank lending to people buying existing homes was just 1.6 per cent higher than two years ago, and heading down. Yet Melbourne housing prices were 16 per cent higher, and heading up. Assistant Treasurer Nick Sherry was faking it last week when he told us the government was monitoring purchases by temporary residents - it no longer collects any data on them.

The federal government's tax breaks increase demand for housing, not its supply. To lower house prices relative to income, we will need to sharply increase supply. Redirecting those tax breaks to lift supply instead of demand could be a big help. But two other changes are needed.

First, the Rudd government's valuable social housing initiative - building 19,400 more homes for public, co-operative or defence housing - should not be a one-off, but the start of a renewed government role as a provider of affordable rental housing. Housing Minister Tanya Plibersek notes that if public housing's role had simply been maintained at 1996 levels, today there would be 90,000 more units, and less pressure on low-income renters.

But the other change must come from us. We need to kill off the NIMBY syndrome. If we want more affordable housing in our suburbs, we have to make room for it. We need to give up knee-jerk reactions against new housing in our street, and become more proactive, looking at where those new homes can go. We can either build out, or we build up. It makes sense to build up around the main suburban centres, around train stations and on tram lines. I once lived in a city like that, and it works.