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Labor to slash and burn?

By Ralph 13 August 2007 36

For those salivating at the prospect of Labor putting Australia back on the road to socialist salvation, that may come at a price to local jobs.

Last week’s Canberra Times quoted a speech from Lindsay Tanner at the National Press Club, noting Labor’s plan to reduce the size of the public sector.

Smaller governments generally deliver better economic outcomes – with lower taxation leaving more money for the private sector to save and invest. If anything, this might be the only sensible policy that we hear from Labor.

The Canberra Times article also notes that Labor has the NCA in its sights – make that sensible policy No.2.

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Labor to slash and burn?
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thetruth 5:13 pm 16 Aug 07

My point was what things do they actually TAKE responsibility for – I understsand the constitution (which make my jibe all the more relevant)

Thumper 8:09 am 16 Aug 07

“The Cth has all the revenue raising abilities (principally income tax, excises etc)while the States/Ttys have all the expenditure responsibilities (healthcare, education, public infrastructure like roads and public transport).”

Correct, to a degree.

The States and Territories rake in billions in tax dollars and frankly in a lot of areas of responsibility, they fail.

jemmy 7:36 am 16 Aug 07

Non-italicised version:

Can anyone actually tell me what state governments are actually responsible for

I think it’s defined in reverse: the constitution defines what the Cwealth is responsible for, and what the States specifically cannot do, and the
States have everything else. This is how Howard is able to encroach into the States’ areas, as their areas aren’t clearly defined but his are. He merely has to claim that a role that a state previously performed now comes under one of the Cwealth’s defined areas. Of course he has to be able to justify it, but it would be much harder if the constitution specifically defined the responsibilities of a State. On the other hand, it would be a bunfight all the way to the High Court for new and previously unthought-of responsibilities, so maybe this way is better.

jemmy 7:35 am 16 Aug 07

Can anyone actually tell me what state governments are actually responsible for

I think it’s defined in reverse: the constitution defines what the Cwealth is responsible for, and what the States specifically cannot do, and the
States have everything else. This is how Howard is able to encroach into the States’ areas, as their areas aren’t clearly defined but his are. He merely has to claim that a role that a state previously performed now comes under one of the Cwealth’s defined areas. Of course he has to be able to justify it, but it would be much harder if the constitution specifically defined the responsibilities of a State. On the other hand, it would be a bunfight all the way to the High Court for new and previously unthought-of responsibilities, so maybe this way is better.

thetruth 6:51 pm 15 Aug 07

Check the land release issue again Boomcat I think you will find that the level of release has been very low of a decade or so as State Governments became developers and real estate agents and some level of scarcity maximised profits.

John Quiggin has an interesting take:
I expanded my post on housing affordability into a piece for the Fin, published yesterday. The suggestion of replacing stamp duty with land tax produced a letter from someone whose argument (if I got it right) was that homeowners would be better off if stamp taxes were abolished and not replaced with anything. True, and while we’re at it, free expresso and ponies all around would be nice.

With an election only months away, it’s not surprising that house prices are a hot political topic. It’s also not surprising to hear plenty of hypocrisy, on the topic.

The crucial problem is that, while it’s politically obligatory to favour affordable housing, the majority of the voting population already own (or are paying off) their houses, and stand to gain if prices rise. As John Howard reportedly said in 2004 ‘”I haven’t met anybody yet who’s stopped me in the street and shaken their fist and said: ‘Howard, I’m angry with you, my house has got more valuable’

In 2004, house prices had been rising strongly for years, and interest rates were at historically low levels. If it had been possible to slow down the increase in prices of the preceding few years, no one, except perhaps some overgeared investors, would have actually been worse off. Existing home owners would have foregone some unrealised capital gains, but would still be well ahead, and new buyers would have benefitted from lower prices.

The conflict is more acute this time around. In some areas, particularly in parts of Sydney prices have declined in real terms at the same time as interest rates of risen. The result, for those who entered the market at high prices is not pretty. Interest payments are consuming as much as 30 per cent of household income, yet the payoff of large capital gains, seemingly guaranteed by all historical experience, looks to be a long way off.

Moreover, given the spread of aggressive lending practices in this period, many buyers started with low levels of equity, often below 20 per cent of the purchase price, and have made only marginal progress in paying off the debt. It would take only a modest further decline in prices to push many into negative equity.

Yet prices are still unaffordably high for many would-be homebuyers. At this point, the best policy advice would seem to be that of the Irish farmer, when asked for directions who said “Well first off, I wouldn’t start from here’.

Suppose though, that governments really wanted to make housing more affordable. What policy measures could they take.

The speculative boom in prices was ignited by the government’s decision, back in 1999, to halve the rate of capital gains tax. On grounds of tax neutrality alone, it would be desirable to reverse this change. However, assets bought under the current rules would have to be grandfathered, and expectations of capital gains are now fairly moderate, so it is unlikely that this would have much immediate effect.

The Treasurer has argued that the big problem is the failure of state governments to release more land on urban fringes. But shortages of new land are not the main problem.

Urban housing prices follow a gradient, reflecting the value of time and convenience. Houses and land close to the city are more valuable than similar houses further out. Go far enough out, and the price is determined by the cost of converting land from farming or other uses into house blocks.

If house prices were being driven by a shortage of new land on the outskirts, the price gradient should be getting flatter. In fact, as the Productivity Commission has shown, the gradient became steeper between 1994 and 2002, and it has become even steeper since then. The outer suburbs, were the last to boom, and the first to slump, most notably in Sydney.

A much more plausible candidate for reform is the way residential land and housing services taxed. On standard tax principles, the flow of services from land should be taxed on an annual basis, just like other income. Indeed, land taxes are generally considered the most efficient available to government. On the other hand, transactions taxes like stamp duties are highly inefficient.

If stamp duties were abolished, along with the current exemption from land tax enjoyed by owner-occupies, the price of houses would not change much, since the present value of their services would remain the same. But the cash costs faced by new home buyers would decline drastically. On the other hand, existing home owners would face a new annual charge.

The experience of the NSW government, which tried to cap the land tax exemption at $1 million shows that such a shift in the tax burden would be politically suicidal. We may like our leaders to talk about making housing more affordable for young families, but, as a community, we have been unwilling to do anything serious about it.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

There are a number of implications her – none of the solutions are in the Federal Governments sphere and improved transport links (also state)would flatted the gradient.

Interest rates are not the main issue here (unless you advocate increasing them to decrease prices which would also work).

Can anyone actually tell me what state governments are actually responsible for and for what do they take responsibility for?

boomacat 3:00 pm 15 Aug 07

Ever since the Commonwealth took over responsibility for income tax during the 2nd world war, there has existed a terrible vertical fiscal imbalance between Cth and State/Tty govts.

The Cth has all the revenue raising abilities (principally income tax, excises etc)while the States/Ttys have all the expenditure responsibilities (healthcare, education, public infrastructure like roads and public transport).

Despite Peter Costello’s bleating to the contrary, this situation has not be rectified by the GST. I note that not all the GST raised in ACT/NSW actually goes back to ACT/NSW – much of it is sent to other States and Territories.

This leads State and Territory Govts to levy inefficient taxes like stamp duty.

I also reject the argument that the high cost of housing arises from the State/Tty govts not releasing land. A recent study in NSW found that increased house prices are heavily influenced by people wanting to live in limited areas, principally inner city and coastal areas. They don’t want to go live out in the boon docks. High demand and scarce supply = increased price, simple economics.

In any case, I’m sure as a mortgage paying homeowner you’d be really impressed if the Tty govt dumped a heap of land onto the market at artificially low prices thereby reducing the market value of your property.

And don’t go accusing me of being a Labor party stooge just because I disagree with your ideas. If that’s all your feeble mind is capable of, go back to school and improve your education and critical thinking skills.

I wonder what at all this has to do with the merits of reducing the public service, which is actually supposed to be the topic of the conversation.

sandwich 1:48 pm 15 Aug 07

boomacat – I don’t have a ‘higher’mortgage, simply had extremely high stamp duty when I bought (I bought within my means).

With regards to higher housing prices in the ACT, I have worked in planning and construction industry in the ACT and higher prices are due to a lack of land release over the last few years by the Stanhope Government, and also the flux of money poured into the LDA – an agency that was never needed in the first place!

Honestly Boomacat, go and get a job with the Labor Party, if you don’t have one already – and wake up to the world we live in!

“Maybe if Sen Gaz and his Coalition mates were more interested in the needs of the nation than vote buying, State/Territory govts wouldn’t be forced to levy inefficient taxes like stamp duty to fund the provision of essential services.”

The states already get all the GST revenue, as well as heaps of other revenue from state taxes (such as speed cameras and stamp duty). Frankly I think the states need to lift their game a bit, and become a bit more efficient.

boomacat 12:21 pm 15 Aug 07

Ralph – I thought I might get away with slipping that one in there as uncontested fact.

Damnintellectuals, I think it is axiomatic that small govt and small investment in infrastructure are exclusive.

There is only so much money in the pot. The more money spent on public servants, the less available to spend on infrastructure and public service. This is simple logic.

Sandwich – your higher mortgage is really a consequence of increased housing prices which are themselves a consequence of increased prosperity and Australia’s obsession with bricks and mortar. Higher rates, stamp duty, rego etc are a consequence of the vertical fiscal imbalance present in Australia’s constitutional arrangements, not something Stanhope is responsible for.

Maybe if Sen Gaz and his Coalition mates were more interested in the needs of the nation than vote buying, State/Territory govts wouldn’t be forced to levy inefficient taxes like stamp duty to fund the provision of essential services.

sandwich 9:21 am 15 Aug 07

I have a mortgage to pay (and the increased stamp duty!), higher rates, water and electricity, higher car rego etc etc, all because of a STANHOPE LABOR GOVERNMENT. I have no problem saying that I work in the public service – ON THE FRONT LINE – and I will be voting for Senator Gaz because he at least understands that I need a job to pay for all the taxes and costs that Stanhope and Labor give me!!!!

damnintellectuals 8:43 am 15 Aug 07

“I think the problems you refer to might be better categorised as symptoms of a lack of investment in infrastructure, rather than small government.”

I beg to differ, as it seems you are suggesting that small government and investment are exclusive from one another. I fail to see how the Labor plan of cutting jobs is not an act an economic act to save money. Smaller government means less money invested. The American battle cry of less government is an extension of less taxes. So, on one hand you have Bubba demanding less taxes but on the other hand Bubba wants his super-highways smooth. It takes more than a guy with a bitumen machine to lay a road.

Ralph 7:52 am 15 Aug 07

owing to the economic reforms of the Hawke/Keating governments

HAHAHAHAHAHAHA

thetruth 8:11 pm 14 Aug 07

If anyone remembers what it was like to sell a house in 1996/97. Just multiply the issue ten fold as people have borrowed to the hilt to pay the “Stanhope development corp land bank tax”. A lot is happening in Canberra on the promise of more people even a hiccup will not be pleasant. As previously said all change of governments result in big cuts Big Kev has form on this issue too.

boomacat 7:13 pm 14 Aug 07

Yeah and it’s worth $4M to that timber mill that Howard decided to bail out in Eden Monaro – yeah because there’s a real shortage of labourers jobs in Canberra…not. Of course it had nothing to do with the fact that Eden Monaro is one of Australia’s most marginal seats. What a waste of taxpayer’s money. Remember that next time it’s impossible to find a doctor who bulk bills.

sepi 6:47 pm 14 Aug 07

Boomacat – it works for timber workers in Tassie – kept in work to the detriment of the national interest.

boomacat 6:37 pm 14 Aug 07

Err Ant Pant, has it ever occurred to you that there exists record low unemployment across the entire country, owing to the economic reforms of the Hawke/Keating governments and the resources boom, so there are thousands of jobs going begging across the country?

Never mind all those people in the private sector that have to go find their own employment on merit, you can sit and receive a salary for the sake of it at the expense of the taxpayer, just to make things easy for you.

Is this the USSR? It is this sense of entitlement that makes people perceive public servants to be lazy slackers?

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