Last week’s article, Hooked on property, provided some detailed facts and figures from RP Data highlighting how Australia’s state and local governments are addicted to property-related taxes, and discussed how these revenues are expected to fall precipitously as housing sales decline and prices stagnate. The article concluded with the following statement:
Over the past decade, Australia’s state and local governments have rode on the back of skyrocketing property prices. The revenues received have funded all kinds of expenditure – from public servants’ salaries to health care, schools and infrastructure.
The story is similar at the federal level, where tax collections have surged on the back of growing property values and rising debt levels, which have boosted consumer spending, employment and the economy more generally.
Should Australia’s housing market encounter a significant correction, rather than the price stagnation and falling volumes experienced currently, then government finances will likely take a hammering as consumer spending dries-up, unemployment rises, tax collections haemorrhage, and welfare payments rise.
Wednesday’s Australian Financial Review (AFR) provided further insight into the revenue squeeze being experienced by both the state and federal governments from the fall in household consumption expenditure amid slowing credit growth (‘disleveraging’).
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According to the AFR article, States peer into GST budget abyss, the state governments are facing a $6 billion hit to their GST revenues as the Federal Government adjusts its national economic forecasts in the face of weaker consumer spending:
Several states preparing their budgets have now warned that slower than expected economic activity will slash their GST receipts.
NSW Treasurer Mike Baird admitted yesterday that his state’s Treasury department had warned the new Coalition government that plummeting GST income could help produce several operating deficits worth $4 billion. West Australian Treasurer Christian Porter said his state was facing a $550 million black hole…
It emerged this week that the Victorian Treasury expects GST receipts to be $1.5 billion lower over the forward estimates as a result of lower GST income to the Commonwealth…
Asked whether he was concerned about the economic outlook, Mr Baird said: “I don’t think any treasurer is being genuine unless they said that they were worried”.
“It’s very clear that households are starting to hang on to their money, which is having a knock-on impact into the retail sector and affects the state budget”…
It is becoming clear that the state governments will be hit hard from the combined slowing of the housing market, credit growth, and household expenditure, which will significantly lower both GST revenues and stamp duty receipts.
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But it’s not just the state governments that are feeling the pinch. The Federal Treasurer, Wayne Swan, is also forecasting slower revenue growth due to household disleveraging. From Wednesday’s AFR article, Swan talks down ‘rivers of gold’ resources boom:
The Government says tax revenues were revised up by a massive $334 billion over the budget estimates between 2004 and 2007, boosted by a sharply rising terms-of-trade, rapid asset price growth, and solid corporate profitability across the board…
[However] while personal credit rose by almost 60% in the four years preceding the GFC, it has fallen by more than 5% since the crisis.
“Growth in household consumption is expected to be almost a full percentage point lower over the budget forecast horizon than it was during Mark I [the 2004 to 2007 mining boom]”…
All these factors mean Australia will not experience the growth in nominal GDP “at anything like the rates we saw in the first boom”, Mr Swan will say. “And that means revenues won’t grow at the sorts of rates we saw during the previous boom”.
I have explained in detail the link between credit/house price growth, consumption expenditure and economic growth previously (most recently here), so I won’t bore you with another sermon.
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Instead, I will let Business Spectator’s Rob Burgess explain the disleveraging forces at play:
…while in aggregate the economy seems to be rocketing along, out in the mortgage belt voters are having a hard time believing “they’ve never had it so good” (as John Howard put it during the first phase of this boom).
How do we know this?
Well firstly, they’re not shopping like they used to. Retailers are growing increasingly desperate to shift stock and are slashing prices – December quarter CPI figures showed clothing and footwear prices falling by 4.8 per cent.
Secondly, though the miners and unions are battling over wages blowouts… wages growth in other sectors is not following suit…
But perhaps the biggest reason… is found hidden in the RBA’s credit aggregates data, where the end of a house-price linked ‘wealth effect’ is becoming clearer by the day.
While there are conflicting stories in the media about what’s happening to median house prices, price-to-income ratios or auction clearance rates, the RBA’s aggregate data is harder to argue with. And it shows a dramatic and continuing decline in a long-standing component on Australian income – namely, the debt we took on via housing finance to spend on consumption over the past decade.
Readers may remember Steve Keen’s sage warning of a year ago, that the then-emerging trend towards borrowing less and saving more would have a dramatic effect on the apparent wealth of Australians (Why a fifth of our income is vanishing, May 25, 2010).
Well that vanishing is continuing apace as the chart below shows. The short version of Keen’s argument is that when the housing market is rising, it’s relatively easy to extract equity from one’s home and fritter it away as ‘income’. We still have the shiny cars and overseas holiday snaps to prove it.
But when house prices stall – and though they may not be falling, I don’t think anyone is predicting any substantial growth in the years ahead – both consumers and banks start to see such borrowing and spending as reckless.
And so while the housing credit extended to owner-occupiers and investors is still growing, currently at just under 5 per cent in real terms or 7 per cent nominal, it is in dangerously low territory. As the chart shows, it has broken below 5 per cent in real terms for only the third time since 1980.
In the mortgage belt [households] are increasingly aware that their houses are no longer appreciating as they used to, and in cities such as Perth and Brisbane they may well be depreciating. Equity withdrawal and the wealth effect that flowed from it are all but over.
For Australia’s governments, the golden era of credit-fuelled revenue growth that was 2000 to 2007 appears over, replaced by an age of frugality. And the headwinds facing government revenues will only intensify as the baby boomers retire and pare back their spending; or if commodity prices fall.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
