14-point plan to address Australian inequity (revisited)

To recap, my last post was about my tribe of children being disillusioned. They all were very down on the future: the overblown housing market; job and earning prospects are crap to non-existent; foreigners are buying the country unabated; over-paid and corrupt bankers; and the appalling choices of leaders in politics everywhere. Whilst they haven’t paid much attention to my ramblings in the past, my last post to MB did get a reaction. Besides at least two now becoming members of political parties, the children wanted more explanation of my 14-point plan to address wealth inequity.

The plan is 14-points that I believe my children’s generations should implement after they seize power. It certainly is not a plan that I’d hold out any hope that the current group of pollies would implement no matter who is in power. I also point out that the plan is a package not a pick what you like. In the short term, everyone’s a loser from the 14-point plan. But longer-term, we are all winners – even the dumb arse elites and rent-seekers who have no idea what is good for them.

My original plan’s 14 points are in italics.

  1. Asset values must be crunched and debt written off. This must be a political act. Nothing can be expected of bureaucrats or central banks. The independence and non-accountability of the RBA must end. The people or parliament must decide monetary policy. Over-inflated asset prices caused by policy mismanagement that distort and strangle the economy should be hit with a shock, not some attempt at a managed deflation. The shock if deliberately undertaken educates people about the importance of policy and risk. It also has the liberating effect of cleaning the slate for a reboot. Now I understand how some bright spark(s) thought that having independent central banks stopped monetary policy being dictated by politics and not rationale economic theory. Two problems here: our RBA is clearly not independent with the board stacked with vested interests and little accountability, whilst economics continues to prove itself a failed discipline. Better that the people take back control of monetary policy, at least we get to vote the policy makers in or out based on their record and accountability.
  2. Drop interest rates hard into real and nominal negative territory and make it clear that the next moves are up and up. This is not about increasing credit creation, it’s about actually destroying both money and debt in non-productive assets, a redistribution. It’s also about encouraging productive investment and not asset investment. Whilst on the face of it this may seem in conflict with point 1, it’s not. Dropping rates into negative whilst dropping house prices is giving borrowers assistance in repairing their balance sheets as losses mount on their beloved asset. However, it must be known that this will not last and rates will ultimately rise and rise so be frugal with any debt creation. For those with bank deposits funding those mega mortgages, they will and need to suffer capital losses. Money created by asset bubbles needs to be destroyed as much as debt reduction for borrowers, and losses for banks. For those bank depositors who want to protest against negative rates, then investment in productive businesses with perhaps an emphasis on valuing effort and labour would finally seem a good option rather than investing in asset values.
  3. The RBA can replace the ensuing capital flight from the banks due to the collapse of interest rates with our own form of mortgage QE to fund the banks. At this stage the AAA rating is history but banks are liquid. Dropping interest rates and house prices at the same time will certainly result in debt capital flight from both government bonds and bank issued securities, which in turn will drop the $A. Sale of these securities by offshore sellers to domestic buyers will result in hundreds of billions of dollars being extracted from the economy. Well, the banks could not cope without the RBA which would take residential mortgage backed securities as collateral to fund the banks at domestic interest rates. The RBA in effect prints to fill the funding gap and keep the system afloat. Australia wont be junk status but no more AAA for quite some time and because of the abuse by both government supported private banks and the Government using the AAA to over borrow, good riddance. The net effect of dropping the $A is positive for tradeable sector.
  4. No bank rescues must be made clear, with equity and bond holders taking losses from mortgage defaults as house prices fall. This will flow through to losses in almost everyone’s super funds as just about everyone will have bank share and bond exposures, but it’s the way its gotta be. Implied government guarantees for financial institutions or too big to fail ensures that bankers exploit the unpaid taxpayer support making the system fragile. System resilience is built on accountability which means no bailouts for share holders and bond holders. Unfortunately in Australia the financial system has been built to such a size (approx. 25% of ASX) that almost everyone through super has an exposure to the banks, but that’s where losses must occur to match the losses on mortgages. Fortunately the biggest losses will likely be with those that have taken the most advantage of the tax rort which is superannuation.
  5. Banks must increase capital against residential mortgages and overall so they are unquestionably strong on a non-risk adjusted basis. If they can’t they are nationalised with management held responsible. Any bank with only the smallest government support must have management salaries capped at say 8 X average wages. Those banks which determine their own capital requirements using internal risk based methodology are under capitalised and misrepresent comparisons with international counter parts. To be in the top quartile of global banks, Australia’s major banks need to raise another 2-3% Tier 1 equity capital and any implied government support clearly removed. The increase in Tier 1 capital will likely increase relative mortgage rates but also make it much more difficult for banks to expand credit due to the increased capital on a per mortgage basis. Banks need to be much more risk averse on their unsupported balance sheets. This also has the effect of stopping bankers from paying themselves massive salaries whilst relying on taxpayers. Aren’t we, as a society, totally sick of this rort?
  6. Serviceability of mortgage loans provided by banks must be based on a normalised rate of at least 8% and mortgage terms set at a maximum of 20 years. Failure to comply is a criminal offence. This won’t improve affordability in the short term, but it will once the system is recalibrated. Serviceability determines the amount borrowers are loaned on their mortgage so increasing serviceability requirements decreases lending. Serviceability requirements should be the same for owner-occupiers and investors – i.e. rental income is not included and no interest only. This, in turn, will severely dampen house prices even as interest rates are lowered. Ensuring that serviceability is calculated on normalised interest rates and short-terms will, in turn, have the effect of ensuring no rampant house price growth in the future. Breaches of this basic system requirement must be severely punished or we can guarantee that bankers will find a way to game it.
  7. Net immigration is reduced to a manageable 0.4% of population pa. Australia needs manageable predictable levels of immigration. Whilst it would seem obvious that high and unpredictable levels of immigration have significant detrimental effects on the existing population due to the cost of infrastructure including housing. What’s less discussed or understood is the effect on the cost of labour. Sure immigrants take jobs but they also create jobs (its not equal of course) but more than anything they create a pool of eager job seekers at the margin which effectively bids down the cost of labour or wages to the detriment of existing workers. It’s the inverse of housing (See point 11 below).
  8. Any tax concessions that favour housing investors over owner-occupiers – i.e. negative gearing and CGT discount – are to be removed. No grandfathering, just one big bang, gone. These selective tax benefits have turned into an abomination. There is absolutely zero evidence that for the last 20 odd years giving negative gearing, capital write-offs and CGT advantages to owners of investment properties increases the available housing or makes rental housing more affordable. It’s pork barrelling for a section of the population which must be removed. A swift kill is called for. As interest rates and taxes can rise, so can tax benefits be removed. That’s the risk a property investor takes. Banks are not supposed to consider tax benefits when assessing serviceability, so removing those benefits shouldn’t increase the risk of the mortgage book. Let’s see if that’s correct.
  9. Tax benefits for the wealthy through superannuation concessions to be removed immediately leaving only a small flat capped tax benefit for all. Currently superannuation is nothing more than a tax dodge for the rich. Superannuation does not of itself create wealth, it redistributes it. The theory of superannuation as a pool of savings to pay for people’s retirement appears sound on the surface but structurally its just another neo-liberal policy failure. Superannuation is not extra money – it just takes savings or money which would be in circulation and puts it in the hands of money managers that extract large rents and misdirect investment mostly away from the benefit of a large part of the populace. To argue that its necessary to damage the budget by giving large tax benefits for super when the budget is in a structural deficit and borrowing to keep afloat seems ludicrous. Whilst people should be encouraged to save for retirement, equally for Australia to have had a policy of putting aside future pension liabilities at least partially from current tax collections over the last 25 years, would have meant that younger generations would now be much better off.
  10. A Death and Gift tax of 20% to be introduced. Due to wealth inequity, much of accumulated wealth is unearned and needs to be clawed back to balance the ledger. Wealth inequity makes these taxes fair and must haves. Australia has $1 Trillion of foreign debt on the government’s and private bank balance sheets and the bank’s have $1.6 Trillion of mortgage assets. Money created through offshore borrowing and mortgages has been pumped into the economy and created large pockets of wealth mostly in housing but not exclusively. Certainly much of that debt cannot be repaid by Australia selling production. To save future generations from being taxed into the poor house, some relief can at least be had from Death and Gift taxes on those that benefited by borrowing and leaving that debt for future generations to deal with.
  11. Abolish stamp duty and replace with an annual land tax, higher for vacant property and land. Special tax for land bankers. Australia does not have a housing shortage. We don’t have tent towns and have large amounts of vacant houses. What we have is a system which allows land banking and the uncompetitive slow release of land which allows prices to be bid up at the margin whilst still meeting demand even from inflated migration levels. Whilst the cost to the buyer of transferring land must be reduced, the cost of land banking and basically allowing rent seekers to manipulate the market must be significantly increased.
  12. Enforce Australia’s foreign buyers of housing laws and international money laundering laws. Are we that shallow and greedy that we want to allow illegal activity and criminal money to distort our housing markets to the benefit of a few and the cost of many?
  13. The RBA and APRA merge with a broader mandate which includes overseeing a balance between corporate, SME and household lending, which encourages the growth of productive businesses. Management of the financial system includes no taxpayer support for any individual bank failure, but protection of the financial system as a whole as a priority along with inflation and employment. Creating APRA and breaking it away from the RBA was a big mistake. Australia followed the UK doing this in the late 1990s. The UK have now realised their mistake and remerged their PRA with the Bank of England. APRA are more accountable to the major banks than the taxpayer. APRA, even as they deny it, is incentivised to encourage too big to fail government support for banks so that they can point to system stability even though its based on the taxpayer. This suits the banks of course as they pay themselves huge bonuses enabled by taxpayer support denied by APRA. This must change and banks must be accountable and left to fail or if bailed out management is punished for offences. The RBA/APRA must be mandated for system protection without taxpayer support. Under this mandate sustainable capital levels for all banks will be a major focus.
  14. If the budget is still not balanced, which it won’t be, the real pain needs to start. Although commodities may assist with budget repair for a while yet, Government debt levels must at least stabilise. We must find added value stuff to sell to the world. Stuff that values labour. The government must directly support these initiatives and provide the infrastructure where the creation of stuff that values labour flourishes. Australia cannot continue to sell or mortgage our property to the rest of the world to fund our life styles. The immorality of such a strategy to future generations is not smart, it’s criminally irresponsible. We can relieve the burden by doing all the things listed above which will decrease current perceived wealth but perhaps increase our self-worth. The future needs more. We need to produce and sell valuable stuff to the rest of the world, not just property or resources. The really hard bit is finding or inventing that stuff and we sure won’t do that without major policy reform and a change of attitude about what we as the current occupiers and beneficiaries of this country are responsible for.

Comments

  1. GunnamattaMEMBER

    Great addition to what was already a great post.

    The essential dynamic is that asset prices must be crushed, and tax avoiders reamed, while those who have bought assets for social purposes (family shelter) and those using what has become a tax avoidance mechanism for a socially honourable purposes (superannuation for pension/ moderate retirement funding purposes) protected – at a social level.

    From there the entire focus of the economy needs to be on generating income through endeavour and intelligence rather than cashing in on natural wealth or living off the leveraged proceeds of selling off resources wealth. I would go as far as ensuring that:-

    – The creation of a national sovereign wealth fund – into which every last dollar of every last commodity export by anyone in Australia or selling Australian product contributes

    – That there is a domestic reserve for every last commodity for use by Australians and Australian owned companies

    – That all Australian manufacturers or service providers adding economic value can pay reduced tax.

    – That all Australian business simply expending with the population Ponzi or actively abetting the population Ponzi pay more taxation (with proceeds being used to support education and housing for young Australian families and services.

    – That companies genuinely investing in Australians (through genuine education and training) have their investment recognised and get placed ahead of other companies in the award of government contracts.

    Personally I would go even further to have every last taxation concession claimant, and every last recipient of budget funds form the last 30 years be identifiable on a national database open to everyone, with those who are identified to have reduced their personal income by a sum of greater than 50K over 10 years be denied any ability to claim further taxation concessions, be denied any government contracts, be audited for appropriate payment of any employee entitlements, be denied [with family members] any form of social welfare payment, and be denied any government funded portion of any social service they use (ie their kids schools don’t get the government payment per capita, and they pay for medical costs)

    At a corporate level every last company (particularly those in commodity exports) which has made more than one million dollars in Australia but has not paid tax should have its resources rights taken from it, should have its amortization rights cancelled, should be denied any form of government contract (and any investors in these companies should be treated likewise) and subjected to an ‘exploitation’ taxation setting reflecting their contribution to a nation on which they have acted as a parasite.

    Then of course you would need to have the Royal Commission into Australian Banks, a national audit of every last real estate transaction for the last thirty years, and a national ‘Millionaires claiming pensions’ database.

    But the most necessary step would be to audit the funding and spending of every last politician who has served in any level of government over the last thirty years, with their parliamentary or council pensions reduced to the standard pension in any circumstance where they have been identified as receiving funds for being party to decisions which benefit the people who have paid them money, to remove parliamentary pension entitlements altogether for any identified as having received funding from offshore or to have defrauded Australian taxpayers with allowance claims while they were in office, with the additional establishment of a national parliamentary entitlements register updated in real time for every last politician at any level of government.

    Finally I would call for an audit of every last public sector outsourcing decision over the last 25 years (and including examining redundancy costs, second and third generation price increases by successful tenderers for former government functions and public sector employees subsequently employed by successful tenderers for former government functions, as well as service delivery – for IT, HR, pay processing, Training and Travel functions) with a view to establishing the costs and benefits for Australian taxpayers, as well as identifying successful tenderers for former government functions who actually pay no tax in Australia (yes there are some) and retrieving the pension entitlements (or part therein) of senior public servants – at state and federal level – who have outsourced functions when no reliable business case has ever been known to exist to do so .

    …and we should also have a National Economic Apartheid Truth and Reconciliation Commission, in which every politician who has served since 2000 is sat before a panel and asked questions while wired and the people at home get to press a button generating an electronic impulse according to how they feel about the answers – and with John W Howard, Peter Costello, Tony Abbott, Kevin Rudd, Martin Fergusson, Simon Crean, Mark Latham, Wayne Swan, Malcolm Turnbull, Joe Hockey and Scott Morrison provided an additional round of being lowered into a pit of starving rats after being smeared in peanut butter depending on the credibility of the questions they are answered (which are chosen by a random computer algorithm from submissions by Australians – limit one per person – re questions they would like addressed)

    All real estate agents should be required to be Masters degree qualified (with a 7 year Masters degree) from a University on North Korea, and to have a luminous pink ‘RE’ tattooed to their forehead, while having a special electronic nipple clamp which goes off every time they tell a fib. Every Australian who has ever taken an interest only loan to speculate in real estate should be sat in a pool filled with leaches for two hours per day for as many days as they have had a mortgage on which they haven’t repaid any principal.

    • How about people, too include, what some legal opinions classify as natural people [cough….citizens united] have to take ethics and its methodological application.

      With none of this Rhodes Scholar Mexican American go to night school so he took Spanish and got C- business….

      https://www.youtube.com/watch?v=MHegSV-Ad3U

    • Entirely correct, however we need to find and then fix the ‘root cause’ of the problem, and that in my mind is the democratic failure in part at least caused by the 2 party preferred system of voting.

      All of the points raised will be subject to the return of sovereignty, the by , for and of the people type nuts and bolts that have been taken from us and permitted this situation we find ourselves in.

      This crisis is of the existential variety so we had better repair the foundation and build your suggested reforms on top !

    • Stewie GriffinMEMBER

      Here I’ve been thinking that I’ve been a crazy outlier suggesting such things.

      One idea that I would add, is that of paying a basic income, especially during the transition phases as the fake money is destroyed as real interest rates are ratcheted up. A UBI of sufficient quantity to assist in the servicing of ONE mega mortgage, means that young people who’ve been forced to purchase a house merely to get on with their life, won’t be completely ruined.

      Combined with say a Land Tax a UBI could result in a neutral outcome for people with just one mortgage – they’d be able to continue to reside in their home with their family and get on with life. For the property investor with multiple properties however, a UBI would offer them no assistance as interest rates climbed to 8% – it might be sufficient to assist in servicing one mortgage but not 5 or 6. Plus it would also help the elderly without substantial independent assets to still live a life of quite dignity.

      The problem of UBI’s and their potential to erode the work motivation and the difficulty of removing them in the future once they’re handed out, eventually solves itself through the Income inflative forces that DeepT’s plan wants to unleash. As asset prices crater and income or wage inflation increases, by holding the UBI constant, eventually (if that is the wish) it is inflated away, removing it as a support within the economy as the market starts to recover and the economy starts to stablise from the Baby Boomers debt bubble.

    • I’m not sure why Paul Keating – the architect of this mess – avoids the peanut butter treatment.

  2. pyjamasbeforechristMEMBER

    Mine is just a 2 point plan.
    1. Stop taxing income (0% income tax, 0% company tax)
    2. Start taxing assets (on a tiered basis)

    Equality solved (over time)

    • Tassie TomMEMBER

      Why tax assets on a tiered basis? Why not flat?

      After all, the wealthiest 10% already own almost 50% of the nation’s assets (ABS data is a bit old – it’s probably above 50% by now), and the wealthiest 20% (including the 10% just mentioned) already own about 2/3 of the nation’s assets.

      A flat rate is already highly progressive – more progressive and better targeted than our current income tax. The “bottom” 80% would still only be paying about 1/3 of the total tax take.

      • pyjamasbeforechristMEMBER

        To reflect that a certain level of asset accumulation is essential rather than discretionary or investments.

        The very wealthy also have an advantage to find and own great returning investment assets than say the middle class.

        Plus you want avoid the large administration cost involed of large numbers of small asset owners having to complete a tax return via some level of tax free threshold.

  3. Tassie TomMEMBER

    I don’t agree with everything you’ve said, but on the whole as a package it isn’t bad.

    One huge omission though – education.

    The title of the article is “how to reduce inequality”, and there are two main arms to this. One arm is to reduce asset values relative to the value of labor – so that people who are born without capital in the family might have half a chance of earning, saving, and acquiring their own capital (starting with a house) one day.

    The other arm is that people born without capital in the family must have the opportunity to get a “good job that pays good money” in the first place. This requires quality, affordable, and universal education – something that we don’t have at present.

    • Agree. Full uni privatisation is a failure. It just results in a debt arms race, which results in an education cost bubble, similar to the property price bubble, but it doesn’t result in better educational outcomes. Better model is for government to be mostly responsible for education, with use of private sub-contractors where suitable.

  4. Do you have any ideas about the type of organisation that will (is) required to get this country back on its feet?

    That might be able to be begun before the 1 – 14 points. Maybe !

  5. ErmingtonPlumbingMEMBER

    “The theory of superannuation as a pool of savings to pay for people’s retirement appears sound on the surface but structurally its just another neo-liberal policy failure. Superannuation is not extra money – it just takes savings or money which would be in circulation and puts it in the hands of money managers that extract large rents and misdirect investment mostly away from the benefit of a large part of the populace.”

    Yes.

    How much is in this scam? 400 trillion isn’t it?

    As for being over reliance on Natural Resources, …I ask how much does “Australia” actually receive, from what is Sold, as a percentage.
    Am I wrong in guessing that its one of the lowest rates of return in the World for our country?

    • Ah yes super.. that great policy of the working class. Born from popular pressure in the rank and file, expressed through their union leaders up the line over many years; with noble objectives to provide for a better life for the working man and woman in retirement. A real popular victory against the plutocracy. Democracy in action. A visionary, courageous decision made a by a true hero Paul J Keating.
      That’s how a journalist would put it.
      Well no actually, the policy was made from the top, absent popular pressure/rank and file consultation, by Keating and Kelty over lunch, purely as a way to deny the working man pay increases in cash and prevent a wages outbreak and make the business and financial lobby, whom they served, happy.
      Yep journalist history v reality.
      And what would a genuine Social Democratic Party have done instead? Obvious. Tax the rich and lift the old age pension.
      Yet Keating avoids Gunna’s peanut butter treatment?

      • Yeah…. think of all that churn created for the financial sector to feast on…. w/ fees and commissions….

        disheveled…. what some lost 40 to 60 percent in the aftermath of the GFC…. just poof….

  6. As a sort of follow-on to your point 14.

    My youngest son is in year 11 and studying Physics as part of his HSC curriculum. Last night I was surprised when I asked about the class sizes and discovered that only about 5% of year 11 students at his school are doing Physics. If these so called STEM careers are so important to Australia’s economic future than why are 95% of these HSC students not studying Physics?
    While that’s an interesting question to ponder, a more interesting question is: What sort of political, social, business and economic environment will develop if 95% of voters have no interest in STEM enterprises and no skills even if they’re interested?
    Will tomorrows Aussies vote to continue supporting organizations like CSIRO? or will they say forget that and instead focus economic and political resources on social problems or whatever else it is that occupies their minds? What businesses will develop when 95% of our workforce are clueless about the physical forces that shape our world?
    Should I be surprised when this new “educated” majority votes for Higher house prices instead of STEM education?
    Should I be surprised when the Political environment panders to the pleasures of a new 95% majority, what political party would forgo a base as large as this?

    • @justa, I feel your pain. My daughter is doing full on STEM in yr12 & she is already wondering where in Aus she’d ever get a STEM job. I don’t think she will. It will be in USA if anywhere. I did full on STEM at school (100 years ago…), & STEM at uni. No jobs other than as a school teacher on contract. I’m an accountant now. Go figure. Good on you Aus.

      • Just to be clear, My son is attending a large high school with over 1000 year 11 students. My initial question was why so many of his classes are scheduled before and after normal school hours, makes school bus travel impossible. Naively I thought he was doing a fairly normal course load (Physics, Chemistry, Extension Math, Advanced English) so I imagined that these courses would be scheduled around the normal school day. As it turns out less than 60 students are doing a similar HSC course load, basically everyone in his Physics class and no one else in the school.
        To be fair Chemistry has a little over 100 students and Extension Math has around 80 to 100 students.
        I need to face the fact that my son has chosen some very non main stream High school courses and that with that choice comes scheduling difficulties and the need to drive him to school early 3 days per week (when I can’t drive he leaves home before 7am to catch multiple buses)
        This pushing of STEM education to the fringes isn’t just beginning it’s been completely mainstreamed, next step will probably be outsourcing these education choice to some private service provider and requesting the parents pay extra to support their kids “fringe” education choices.
        as you say Go Straya!

      • A woman and STEM… Well don’t worry about her. Doors will open for her. The magic combo.

    • Bad form replying to oneself but:
      My point with this story was not woe me (or in this case my son)
      The point was that within ANY human system we will always seek to efficiently accommodate the majority and then squeeze in the fringe dwellers where we can fit them.
      In my day most people doing their HSC did similar subjects to those that my son is taking. Today however this course selection is definitely fringe (5% to 10% of school graduate…from my sample size of one). I’m not complaining I’m just accepting that this is the reality of scheduling for anything in that the system will always seek to address the 90% problem first.

      With respect to Aussie housing it’s much the same thing we create insane macroeconomic settings (policies) that are designed to please 90% of the population (or maybe it’s just 70% now). In the process of pleasing the majority we indirectly F-over the fringe portion of the population that could potentially fix the systemic problems we’re introducing.
      Unfortunately it’s unavoidable it’s just human nature.

  7. I’d also add to that list the following:
    • amendment of the constitution to allow citizen initiated referenda (like in Switzerland)
    • relaxation of planning law or outright elimination of zoning law.

  8. I’ve a few more:

    15. Sharia Law – end it
    16. The gays doing marriage – stop em
    17. Entrenching the legal right of people to shit all over minorities – do it.

    Make straya grate again.

  9. Point 4 – No bank rescues
    If deposit holders lose their money in a bail in, no-one will have a deposit for a mortgage. This will also lead to a flight into a cash economy and further, into a flight into offshore funds perceived as safer. I assume we’re all supposed to draw whatever pittance of savings we have out of the bank before legislation to crush the FIRE industry is passed? We’ll all be equal in that we’ll all be penniless.

    • Gra ManMEMBER

      Rob. Retail depositors have a type of government guarantee up to $250,000 and are also senior to other bond holders. So retail are most unlikely to loses any money even in a worst case scenario

  10. What does point 1 mean – debt written off?
    Does that mean those that have speculated or over leveraged get off?