Budget '09 Roundup

Every year my best friend (who shall be, from here on, referred to as "C4") and I get together for a special event. One year, as there was no television at my house, he drove a television over to my house, in the car, especially.

No it's not the State Origin, or the World Cup (der, obviously - that's on every 4 years... isn't it?).

It's the budget. That's right, we get together... to watch... the budget.

As the major and most publicly anticipated political event of each year - we both find an embarrassed nerdy pleasure in making the time to watch it.

The main frustration in previous years has been wanting to comment in the middle of the speech - and rewind in order to catch details. This year (along with the beer, wine and cashews) I came to the party armed with note-pad and pen, so I could jot down points of interest without interrupting the flow of the speech. I needn't have bothered, however, as, low and behold, this year C4 brought his DVD recording system to the party so we could pause, discuss and rewind - what a revelation! Someone should tell someone... I don't know... maybe, sports fans, or something, might like this kind of thing too.

Every year I am inspired to write a roundup. So this year...

On top of this, however - C4 was kind enough to point out the discrepancy between the name of my blog and the regularity with which it's updated... perhaps my "ramblings" have not been quite as "incessant" as I would have hoped...

What better time to pick up the pace with my posts again!

So now, for the roundup:


The Roundup


Initial Thoughts

So - once you get past the contemporary need for a "catch phrase" or a sound bite:

"and tonight's budget is brought to you by the expression 'Nation Building for Recovery'"

the first issue with this budget is the fact that it was billed as a "tough budget". In his opening preamble, Wayne Swan says that "economic leadership is about making the tough decisions, no matter what the political consequences might be".

That may be so - but if it is, then this budget does nothing to prove Labor's commitment to economic leadership. Quite the opposite - they have obviously made some less "tough" decisions in order to minimise the political consequences in their most contested constituencies, and other "tough" decisions have been made precisely because there were no political consequences to speak of.

Yes of course - expecting politicians not to be political is like [insert drole comparison of two oxymoronic concepts here]. But still, to claim the actual decisions within this budget as anything approaching "tough" is simply taking the piss. Wayne Swan claimed that "We couldn't raise the pension without hard choices elsewhere" - but apparently... he has.


Pension Payments

• Increase in withdrawal rate
• Increase in qualifying age
• Decrease in super concessions (some temporary)
  

for pensioners; all of these things are savings. But they could hardly be defined as "tough" or "hard choices". All of them are outweighed by increased payments to singles and couples.

Now, don't get me wrong. I support all of these measures. All of them seem fair and right. Or, at least, more fair than the previous system. But none of them should be defined as "tough".


Paid Maternity Leave

All this talk brings me to one of major problems in this budget - the plans for paid maternity leave.

Let's look at some of the big numbers:

• $22 billion - Infrastructure
• $4.7 billion towards a $43 billion PPP Broadband Network
• $5.3 billion - Tertiary Education

Amongst all of this, the government has made one of their "tough" decisions regarding paid maternity leave and postponed it for 18 months.

Now the TOTAL spend over 5 years for the introduction of a Paid Parental Leave system is $731 million - and yet the government sees the need to postpone this until after the next election.

The savings are minimal, and yet the potential cultural benefit so great.

Lets make this clear - we are in a club of 2 (along with the US) as the ONLY OECD countries who have no paid maternity leave. If they were worried about the effect on job security, in a time of economic downturn - they could have found a little extra ($731 million isn't much compared to the rest of the budget) to compensate (small?) businesses for some of the extra costs involved in back-filling staff.

The last thing we want to encourage people to do right now, is to hold off on having more children - and yet that's what this decision does. It's a small price for a great gain - and there's no reason, in my mind, to hold a carrot to the electorate and say "vote for me again - or you might not get paid maternity". In fact I find that insulting.

Does the Rudd government believe in it as a policy or not? Not enough to introduce it - apparently.

You could imagine that this might push some of the Labor faithful towards voting Green... and amazingly enough, this shift is borne out in the latest poles - where Labor have lost 5 or 6 points, and the majority of them have been picked up by the Greens.

"But wait", I hear you cry, "didn't you say the problem was the budget isn't tough enough? Isn't that at least a small saving for tough times?"

And this brings me to to my comment for the budget as a whole.


The Big Problem

The problem with this budget is not the fact that it isn't a tough budget.

The problem for this budget is that it was sold as a tough budget.

In trying to come up with some good "tough" measures that the government could have introduced at this budget - I came up with nothing.

The problem is, anything broad-based enough, tough enough and big enough in total value, to actually be defined as "tough" is, at the same time, dangerously deflationary. And deflation isn't a game we want to risk getting into in this climate.

The truth of the matter is, we missed the opportunity to save as much money as we should have, under the last government. They gave it all back in tax cuts, which were an inflationary measure in boom times. Now we're stuck trying to avoid deflationary cuts in bad times.

It's much like the frustration with the first Swan budget.

There wasn't actually enough difference between the Rudd government's position and the Howard government's. While still in boom times, the Rudd government handed back most of the boom time money in personal tax cuts (only slightly less tax cuts than the Liberals wanted to introduce - but let's take a moment to imagine how much worse the current budget would look if we had introduced the Liberals tax cuts).

So... the problem isn't that this budget isn't tough enough - on the contrary... we need to admit that, what we don't need right now is a tough budget. We need to support spending in key areas - in order to avoid deflationary pressures. And we need to (which this budget does) plan to pull back on that accelerator once things are looking good again.

I actually support much of what this budget puts in motion.

After a period of short-term injections, we now need some medium-term plans to increase productivity and support jobs.

There's money for Health and Education and some areas of Social Security (interestingly not Unemployment or Single Parents).

But - in holding off on introducing the Paid Maternity Leave measures until after the next election, the Rudd government has snubbed its nose at its heart-land voters. The argument, presumably, is "well, who else are they going to vote for?".

The Greens? Well, again, Labor may be hoping that all those votes will come back to them in preferences. And they may well be correct.

But - after years of barracking for Kevin Rudd, in response to this (and his last) budget - my current hope for the next election is that we can find dense enough collections of "Left swinging" voters to make a real splash for the Greens.

For some reason (call me naive), I still believe the Greens will push through policies that represent their core constituencies, and not just the people who might be swayed at election time.

This wasn't an "election budget" - that's coming next time. Rudd will have to do a lot more "voter pleasing" next year. This was his opportunity to introduce some real and valuable "Labor style" policies - and, from my perspective, he missed it. I understand that you need to stay in power - but if you don't take the opportunity to introduce some strong policies when the opportunity is there, what's the point in being in power at all?

Unless of course, he thinks this is an election budget? Just how much does he predict we might be heading for a double dissolution...? Hmmmm...


References:

• Transcript of the 2009-10 Federal Budget, second reading

World Youth Day - New Powers

New powers, effective today, have been introduced to allow police to perform partial strip searches at hundreds of Sydney sites - and to allow police to arrest and fine people for "causing annoyance" to World Youth Day participants.

The SHM report.

Critics say that the new laws have the potential to make a crime of wearing a T-shirt with a message on it, undertaking a Chaser-style stunt, handing out condoms at protests, riding a skateboard or even playing music.

I say - these laws haven't gone far enough!

Yes, they are prejudiced against people who aren't participants of World Youth Day.

But the answer isn't to restrict the laws - or repeal them. The solution is to broaden them.

Let's remove the prejudice from these laws by extending their powers to everyone.

World Youth Day causes me great annoyance. Why not fine everyone of the participants for every WYD t-shirt they wear.

All participants of WYD should be strip searched upon leaving any of the "declared areas". People leaving them should be subject to vehicle and baggage searches that require them to remove jackets, gloves, shoes and headwear if requested. And reasonable force should be allowed to make sure they stay inside their "declared areas" if, for any reason, they do not permit the search.

Kristina Keneally is reported as saying "bag checks are a sensible safety precaution which any young person who is going to a major event in Australia … would expect". So, the participants should be expecting them.

The president of the NSW Council of Civil Liberties, Cameron Murphy, said the broad meaning of "causes annoyance" had the potential to encompass any activity.

Great! So, basically, if extended to pro-WYD behavior as well as anti-WYD... it would cover any religious singing, all speeches and sermons performed as a part of WYD... and most especially, anything carrying the motto "For the time of your eternal life"!

Bring it on. Let's fine every last one of them for all the really annoying things they're going to subject us to.

Don't shun the idea - use it.

Bring on the new laws... just get rid of the prejudice in them, and we can all join in the game.

Supply - not Demand 2

To continue the discussion of "Supply - not Demand" (see original post here)...


The New Norm

As economic expansion becomes its own problem and the difficulties facing an economy with almost full employment become the new norm... more and more issues arise that ask the question:

"how do we increase supply, and not demand"

I was listening to Radio National this morning (details and podcast here). Professor Deborah Brennan was talking about the Rudd Government's new Child Care policies and the ways in which increasing the Child Care benefits will simply increase demand and not help the supply problem.

I agree with her - and I am sad to think that the Rudd Government has come up with policies as cynical and pointless as the "first home-owners grant".

It makes people feel better. It makes them feel as if the government is doing something... but in the end it simply increases demand, drives up prices, creates more "burn" in the tax benefit system and does nothing to actually make anyone's life easier.


Housing and R&D

It did set me to thinking, however, about how one might manage to improve the supply situation without increasing demand.

The answer, in a way, is simpler for houses. We have a whole industry based around the supply of houses - the construction industry, housing developers... there are people to whom we can give direct tax credits, simply for doing their job, in order to increase the supply of houses being built in the economy (more about this idea).

There is no equivalent for Child Care. There is no Child Care Centre construction industry.

But the concept of tax incentives based on particular activity within an industry is not a new one. Think of the generous tax incentives for R&D that have been implemented in some countries.

Yes, admittedly, there is always the problem of "what is R&D"... but that is for the tax department to work out. You know when you're doing it... and if you've got any queries, don't depend on the tax rebate until the department has made a ruling... it's simple really, and it's been done before, many times.


Finding the Answer

What we need is a 150% (or at least something 100%+) tax rebate on all the costs involved in the first year's set-up and running of a "new" child-care centre.

Yes, the tax department will need to define "new". Yes, it will need to clarify what can be included in the list of expenses. But the basic list is easy to come up with - the details can, as always, be worked out in the fullness of time.

The list includes, but is not limited to, the costs of:

• building new premises intended for the purpose of housing a new Child Care centre, which is then used to house said Child Care centre for at least 12 months. (If premises has other purposes, as well, then a pro-rata calculation can be made)
  
• Renting premises intended for the purpose of housing a new Child Care centre, which is then used to house said Child Care centre for at least 12 months.
• All wages for staff involved in supporting and running a new child-care centre.
• All office expenses, new materials etc. involved in supporting and running a new child-care centre.

Facing the Problems

There is then the problem of Child Care centres not being viable after the initial 12 month period. But the problem is a small one.

The point is, there is a lot of unmet demand out there. There are more children than places. If that isn't the case, we don't have a problem. Once a Child Care centre is up and running - it is unlikely to be torn down and replaced with something else, unless someone has made a very stupid business calculation and is now running a Centre where the prospect is truly unsustainable.

If this is the case, then the problem is with the business case, not the incentive scheme - and the Centre deserves to shut down, as per the laws of Supply and Demand that we are trying to utilise.


Questions:

Would it be expensive?
Yes

Would it cost more than the current rebate extensions?
Possibly, depending on tax rebate levels

Would it help supply without increasing demand?
Yes

Can we afford it?
Yes

Would it help "working families" more than the current rebate, in the long run?
Most certianly, YES!

Let's stop just making people feel better, and help the whole economy.


The Reasons

Access to Child Care is an equality issue.

Increasing access helps new parents back into the workforce. It increases levels of participation. It helps single parents. It increases overall output and productivity.

It simply IS a good idea.

This isn't some "anti-market" strategy. It's a market shaping strategy... and a good one... one that works. Only the absolute free-market purists could argue against it... and, well, really... arguing against a purist of any persuasion is a bit pointless.

Questions, comments, further ideas and foreseen problems welcome. Let's work out the details and get this implemented.

Supply - not Demand

Australia's housing afford-ability

OK. So what's obvious is that the current housing afford-ability problem, in Australia, is a basic Supply/Demand problem.

What's also obvious is that any attempts that try to fix the problem by giving people money only supports the demand side of that equation and completely fails to deal with the problem from a supply side - which, in effect, only makes the problem worse.

So giving people a "first home owners grant" only raises the cost of housing, on average, by the amount of the grant - it might make it slightly cheaper for first home owners and slightly more expensive for anyone not buying a first home. But on average, the market simply corrects. There's still a lack of supply, and raising demand simply raises the equilibrium point.

And in the face of the, more recent, rental squeeze in Australia's urban centres, giving people rent assistance only pushes the price of rental properties up even further - for exactly the same reason.

What we need is more houses. More houses means greater supply - greater supply means cheaper sales and rent. Simple, isn't it? Obvious!...

What is not so obvious, however, is how the current tax incentives for investors effects the afford-ability problem.

The current housing tax regime, in Australia, was originally designed to help afford-ability by encouraging people to invest in housing, therefore encouraging investment in building houses, therefore raising supply, therefore reducing prices and rent...

There are a number of "but"s here:

1. Much of the tax relief goes to people investing in pre-owned houses - making the expenditure inefficient. Why are we helping people invest in and make money out of 100 year old houses... we need new houses, not more investors in old ones.
   
2. The tax incentives only work as planned when the market is going up.
1. They encourage extra investment when investment is a good idea anyway, by increasing profits... but they are of little help when the market is going down. At end of the day, if the capital value of houses is going backward, it doesn't matter how much money you refund on the costs of running the house, it's still a bad investment, and needs to be sold.
   
2. By encouraging over investment on the way up, they encourage a greater boom and bust throughout the housing price cycle.

So, if cash payouts don't do any good and tax incentives for investors cause extreme markets... what's the answer?

Well, actually, it's really not that complicated.

If you wanted to reduce the cost of cars, you wouldn't start by making investing in cars cheaper, you'd start by making the manufacturing of cars cheaper.

In the same way, in order to make houses cheaper... forget the tax incentives for investors... give tax benefits to builders.

• Reduce company tax for companies that make building materials - bricks, building timber etc. Tax return incentives for investment in certain areas of business have precedent and are not that new.
  
• Give tax reductions to companies that build houses - developers etc.
• Create subsidies for companies that sell housing products to individual builders and contractors
  
• Give tax credits or bonuses (think "the baby bonus") to individuals who build their own houses.

It's a simple equation:

1. make building a new house cheaper
2. increases the number of competitors and competition in the market
3. makes the final sale price of each house lower
4. drives down prices for currently standing houses (people who can pay less for new houses won't pay as much for similar non-new houses)

Where does the money come from to pay for all these tax incentives?

In past versions of this plan, I outlined ideas like reducing the current 100% tax benefit for investors by 5% a year, and putting the money saved towards tax benefits for builders... but, quite frankly, with the kind of surpluses we've been seeing in the budget recently, we can simply afford these tax breaks... we don't need to "find" the money. We've got it already.

By keeping the current tax incentives for investors, the combined effect will continue to have downward pressure on rents by encouraging investment... however, over time, the idea of reducing tax benefits for investors could/should be looked at in order to encourage people to buy their (now cheaper) houses, and discourage the low owner-occupier / high-investor model we're currently locked in.

On top of that, by my readings, it's not a particularly inflationary tax-cut. It's upshot is to reduce the cost of building new houses, which immediately takes the pressure off wages by reducing mortgage stress and rental stress.

There don't seem a lot of down-sides to the plan in general - the details, of course, will need to be fought over.

The baby bonus

Not Fair: Nelson

"I would have thought that Mr Rudd - who's already tried to pick on seniors and carers - would find another group other than families to pick on and it's very, very important that Mr Rudd understands that every mother loves her baby and this should be an Australia where all babies are equal" - Brendan Nelson

Let's just pull that apart for moment.

"already tried to pick on seniors and carers"
Now by this, presumably, Dr. Nelson is talking about Labor failing to confirm that it would maintain the carers benefit. They failed to confirm that they would continue to pay "exactly the same" benefits, its true - but I think the language of "picking on" is hyperbole.

"find another group other than families to pick on"
Apparently Dr Nelson believes Labor should be picking on someone - but not families.

"every mother loves her baby"
1. Is this true?
2. Even if it is - what about fathers? Does their love not matter? I thought we might have left the sexism behind with the Howard government - but apparently its just a Coalition thing.
3. Even ignoring the sexism of that statement - and assuming it to be true... So what? What on earth does that have to do with support payment policies? If other people's love a were a reason to give government support, that would change a lot of policy, I think.

"this should be an Australia where all babies are equal"
Exactly! It should be! And here's the news flash, Dr Nelson - it's not. Not all babies are born equal - some are born with a lot more in this world than others. And one way to improve that imbalance would be to means test the support given new parents, towards the cost of having babies.

If we means tested stuff like the baby bonus then babies born in Australia would be more equal, and we would be closer to Dr Nelson's dream.


Too Expensive: Turnbull

And, on the idea that working out the baby bonus payments would cost more than it would save in tax dollars... we already do these calculations (quite complicated one's) to work out the value of parent's child care / day care payments... we just need to start working it out a year or two earlier - it's simply an addition to a process that's already in place - not a brand new expense. Give me break.

Bring on the means testing - even if I lose my benefit. It won't cost much more than calculating family benefits does already - and it would actually make Australia much closer to Nelson's stated dream of all babies being equal.

Vote yes to a fairer system. Vote yes to means testing.


Some more sensible words

For a slightly more serious take on the reasons to means test (or get rid of the baby bonus all together) and what to do with the money saved - Andrew Leigh