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Don’t bag the economy while setting out to ruin it

AUSTRALIAN BUSINESS REVIEW   November 23, 2018   Judith Sloan

Assistant Treasury spokesman Andrew Leigh with leader Bill Shorten and deputy Tanya Plibersek.

I am with Josh Frydenberg on this one. Labor politicians should be ashamed of themselves for publicly talking down the Australian economy and forecasting impending economic disaster.

I am referring here particularly to opposition assistant Treasury spokesman Andrew Leigh and the cringe-worthy piece he wrote recently for The New York Times. And this week we had opposition Treasury spokesman Chris Bowen foreshadowing a possible recession in Australia should the world economy slow.

Arguably his comments are just a way of covering his backside in the event of economic conditions in Australia worsening under Labor’s watch, with the clear message being that it won’t have anything to do with Labor’s suite of world-class (in his opinion) but potentially economically damaging reforms.

Of course, it shouldn’t surprise anyone that the left-leaning New York Times would choose to run Leigh’s self-serving piece. And while that newspaper may think of itself as an exemplar of accurate reporting and fact checking, these characteristics were sadly missing in Leigh’s column.

The basic misleading message of Leigh’s article was that Labor saved Australia from the ravages of the global financial crisis — you know, by running massive deficits and dramatically increasing government debt — but that it has been downhill since the Coalition came to office in 2013.

He is quick to talk down the state of our labour market, in particular. His article was published last month when the Australian rate of unemployment was 5 per cent, but Leigh managed to tell New York Times readers that the rate was closer to 5.5 per cent.

He also fails to mention that our rate of labour force participation is at a historic high and that the employment-to-population ratio (the best indicator of the state of the labour market) is close to the historic high. For females, this ratio is at an all-time high.

Leigh has a predictable moan about low wage growth without mentioning that this is a feature of a large number of developed economies. He claims that labour’s share of national income in Australia has fallen, which it has not.

And he tries to argue that real wages haven’t kept pace with labour productivity growth when, in fact, across the past decade, that is precisely what has happened. (There was a real wage overhang — real wages growing above productivity — during the mining boom that had to be worked off.)

Of course, as a former professor of economics, he knows all that. But as the Labor member for Fenner, he seemingly has forgotten all his economics and prefers to play grubby, misleading politics instead. Evidently the Australian economy is now hopelessly undiversified, is dominated by a few big firms (but not in energy where Labor opposes divestment — go figure) and is profoundly inequitable. That’s the message for New York Times readers.

Mind you, we shouldn’t forget that Leigh has made a total goose of himself in the past several years, in part because he knows absolutely nothing about the real economy or financial markets.

His confusion between nominee shareholders and beneficial owners of companies was so naive and embarrassing it’s hard to understand how he kept his shadow ministerial position. Of course, he did have to fulfil the role for a while without being paid (is this the Labor way?) because the factions had filled up all the remunerated slots.

But it’s not just Leigh who thinks it’s swell to bag the Australian economy. Bowen got in on the act this week, claiming some sort of expertise on the international economy.

“I am not predicting another GFC but I am saying the world will not continue in this globalised synchronised uptick that we are seeing,” he said. “The United States, China, Japan, India, Europe will not all continue to grow. One of them will falter.”

In view of this dim view of the world economic outlook, Bowen somehow thinks he is making the case for running bigger budget surpluses to splurge in the event of another economic downturn.

His thinking seems to be that, given the serious questions being raised about some of his revenue-raising policy proposals, he needs another rationale for substantially increasing tax revenue. Needless to say, cutting back government spending is not on his radar.

A key backdrop to this change of emphasis is Bowen’s very weak performance during the past election campaign, when his fiscal plans ended up in higher cumulative deficits over the forward estimates of $16 billion compared with the government’s plans. While he assured us that the budget position would be better across 10 years, no one takes any notice of figures this far out.

Now with the change of prime minister and some slight policy changes on the part of the government — think energy, immigration — more attention is being directed to the wisdom of some of Labor’s proposed measures, including the change to housing taxation, the reduction in the capital gains discount and the cancellation of cash refunds for excess franking credits for many retirees.

If you go back to the very slight and substandard paper that initially set out Labor’s policy proposal to ban negative gearing apart for new residences, it was never clear what the real objectives were (well, apart from raising more revenue) or what consequences were anticipated.

Nowhere was there any real assessment of the time-honoured principle that the costs associated with purchasing and holding an income-producing asset should be tax deductible. And while it can be assumed that Labor intends that housing should become more affordable — that is, house prices should be lower — because of the policy, Bowen has walked away from any suggestion that house prices will be significantly lower.

It’s actually not easy to work out precisely what the effects will be. And given that Australia has many housing markets in both cities and regions, the effects will not be the same everywhere. The grandfathering aspect of the policy complicates the analysis even further. But there is a possibility that the changes, and indeed the anticipation of the changes, will hit parts of the real estate market for six.

But here’s a strange aspect of Bowen’s proposal: if you are a serious property investor with multiple properties (and possibly other assets), you have nothing to fear from Labor’s axing of negative gearing. This is because a mix of positively and negative geared properties can yield sufficient investment income from which gearing costs can be deducted for tax purposes.

Why Bowen would seek to protect what used to be called the white-shoe brigade is anyone’s guess. He also might tell his boss, Bill Shorten, to stop banging on about the evils of subsidising investors with four, five or six properties because they are actually sheltered by Labor’s policy.

The decision to eliminate cash refunds for excess franking credits also is quietly blowing up in Bowen’s face. There is just no logic to exempting age pensioners while punishing other retirees whose financial position may be similar to these pensioners. And why is it that members of union-backed industry super funds won’t be affected while those in self-managed superannuation will be?

Again, as is the case with negative gearing, the better off have nothing to worry about with this policy change because they have sufficient taxable income to soak up the benefits of the franking credits. Labor wants to hurt those who have saved and just missed out on the Age Pension, while protecting those with much higher incomes. It’s another case of go figure.

The bottom line is that it’s a bad look for Labor politicians to publicly bag the Australian economy. It’s even worse when these utterances are a diversion from their defective policy proposals that punish mum-and-dad investors while protecting the well-off.

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