(meme by Sandi Keane | @jarrapin)

Martin McMahon concludes fact checking Malcolm Turnbull's cack-handed effort to discredit Labor's policy on negative gearing with Part 2.

Read Part 1 here.

Howard and Costello knew the problem

Deloitte Access Economics has started pointing to the dangers of prolific borrowing in the private sector. However, it has being going on for a very long time.

All through the Howard years, despite his rampant rhetoric about the net foreign debt of $180 billion (which he liked to call one-hundred-and-eighty-thousand-million because it sounded bigger) that he was about to inherit from Labor (including the “truck stunt” where he travelled with a large truck with the amount written on the side.), the net foreign debt went up and up, heading towards a trillion dollars and with no infrastructure and no industry to show for it.

In another interview he said:

‘I can promise you that we will follow policies which will, over a period of time, bring down the foreign debt . . . our first priority in Government economically will be to tackle the current account deficit.”

[John Howard, doorstop interview, Debt Truck Launch, 20 September 1995.]

Howard and Costello talked on principle, but acted on self-interest. There was, and still is, much crowing about paying off Labor’s debt. What they don’t crow about is the fact that retirement costs in unfunded superannuation of the Commonwealth defined benefit scheme was estimated at close to $100 billion at the time the Howard Government left office: up some $60 billion during their reign.

Peter Costello had a formula for assessing the burden of foreign debt in 1995. It broke down as $10,000 for every man, woman and child in the country. By the time he left it was well over $30,000 for every man, woman and child in the country.

The only answer the economic snake oil merchants in the Howard government had after creating a false housing boom on borrowed money was to mastermind “deregulating” the labour market; always a code word for lowering wages.

But lower wages were never the answer. Investment is. But there needs to be Government involvement even if it is in the form of long term low interest loans.

Turnbull had this to say in his delusional best:

 "The problem with Labor's debt is that they've taken Australia, in a little over 18 months, from being a country which had no debt at all - no debt at all, and cash in the bank, and now we're heading for the biggest debt in our history.”

That is as big a lie as it is possible to make about Australia’s debt and it went uncorrected, worse still Turnbull parroted the same lie day in and day out without anybody telling him he was lying although he knew he was lying.

The press is complicit. And no it wasn’t spent on “pink bats”.

Terms of Trade and the Current Account Deficit are measures of a country's trade in which the value of goods and services it imports exceeds the value of goods and services it exports. It was $11.9 billion at the end of September 2003, an increase of 112.5 per cent on the September 1995 level Australian Bureau of Statistics, ABS, Time Series Spreadsheets (Balance of Payments and Investment Position, Australia 5302.0, Reserve Bank of Australia (H) Bulletin, Current Account).

So despite the speech-making, a decade after Howard took office Australia's foreign debt had not fallen. It hadn’t stayed the same, increased at the rate of inflation, or even increased at the pace of Australia’s economic growth.

It had blown out to three times the level it was when John Howard took responsibility for the economy.

Export growth had halved from 10.8 per cent under Labor between 1983 and 1996, to 5.3 per cent since John Howard took office.

After ten years, John Howard became too arrogant to even acknowledge the problem, let alone work on the solution. Everybody said the economy was going “gangbusters” because house prices were going up. Well it wasn’t. When a country is losing two thousand million dollars a month and has been doing that for the entire term of office of the Howard government then we are listening to spin not living in reality.

National debt went from a third of GDP in 1996 to more than half when Howard left office in 2007.

Their answer to that one was to close the scheme to new entrants. This information can be found in the same Hansard that Costello crowed about paying off the last of the $96 billion.

In case you'd forgotten who has skin in the negative gearing game! Graph courtesy of Sydney Morning Herald. 

Net liability position with the rest of the world

The IMF's annual assessment of the Australian economy, released in October 2015 had this to say: ‘

'Throughout its history Australia has been a capital importer with an overall net liability position with the rest of the world. This reflects very high private investment relative to a savings rate that is already high by international standards. As a result, the net liability position has ranged from 50 to around 60 percent of GDP since 1994. This could give rise to vulnerabilities were the rest of the world to become much less willing or able to lend to Australia.’

We could afford to run a budget deficit permanently if we had a positive Balance Of Trade. That’s where the money comes from — what we sell to other countries and what we buy off them and the money that’s left over. The beauty of the trade deficit is its simplicity. It measures the difference between import and export revenues. It’s the money that’s left over that makes a country rich. It’s the money that’s not left over that makes a country poor.  In Australia’s case 1.3 trillion dollars poor. If you lived to be 80 years of age you would have to save $34 million each day of your life to have $1trillion.)

Lowering the Australian dollar has the opposite effect to what the media is usually telling us. A lower dollar makes everything we import more expensive: Thus raising the deficit if we continue to purchase as we do. (Although most liabilities are in Australian dollar so a lower dollar lowers the debt against the foreign assets Australia owns.)

The current account deficit

We were told that a current account deficit wasn’t a problem because most of it was going into capital goods to increase the productive capacity of the economy. In plain speak; we were buying tools and machinery to manufacture the thing we should be manufacturing. Well we could believe that for one year maybe two years maybe even five years but not twelve years.

If it had been going into capital goods to increase the productive capacity of the economy we would be the biggest industrial nation on the planet and we wouldn’t be importing, we would be manufacturing and exporting. It is quite obvious that most of it was going into housing and consumer goods that we no longer manufactured.

The IMF just pointed out (October 2015) that Australian infrastructure is under pressure and Australia has an "infrastructure deficit" of about $80 billion. A boost in infrastructure spending funded by borrowing would have short and long-run benefits "with little effect" on the debt-to-GDP ratio.

The next best solution is for a country that's running a current account deficit to wisely invest the foreign capital into building infrastructure, such as roads, education of its workers, and ports to boost international trade.

This, however, would have required huge investment in industry, research and development, human capital and infrastructure, urban and freight rail networks as well as ports, on a scale to dwarf what we saw during the Howard /Costello years, to pull ourselves out of the hole.

None of it happened that way

All the money for increased housing values came from outside of Australia until we were one of the biggest borrowers in the world and with a negative balance of trade.

Instead of investment in business, all the money was going into housing. However, unless a person sells their family home and moves to another country there is no real value in having every property valued at more than twice what they should be. It’s just wasted money tied up in realestate.

Owning an expensive property in Australia is of little or no financial benefit because all homes are equally expensive. (There are of course “mansions” for the super-rich but they are in every country.)  It only means higher rates and expenses and more of worker’s earnings poured into the purchase of the family home. It also starves industry of investment.

If in a particular country all house blocks are worth $1m and in another country they are only worth $10.00 the people in the former country are no richer in real terms unless they sell the property and move to the latter country. Or of course they could live under a bridge in their own country. But more bridges would need to be built in the infrastructure revolution.

When there is more money to be made on passive investments, like investing in housing, what person is going to build a factory and go down the risky road of manufacturing, without some government incentives?

The investment in manufacturing cannot be left to private enterprise. Nobody is going to mortgage their house and start a shipbuilding industry. And unfortunately lowering corporate taxes doesn’t necessarily lead to investment.

Business are borrowing more, but they're investing less

For industry to compete globally, there needs to be government involvement even if it is in the form of long term low interest loans that do not require payments until the company makes profit. We need to build factories that are two kilometres long and half a kilometre wide if we are to be competitive.

Because venture capital is hard to come by businessmen tilt their activities toward short-term projects and the general business mentality comes to view speculation as likely to produce safer gains than investment in projects such as manufacturing that have a long growth period.

Super funds have done little more with our savings than blow up a realestate bubble in the major cities, much of which could evaporate overnight, especially when the OECD stated that Australian house prices are more overvalued than in any other country.

Super funds do also invest in overseas shares on behalf of their clients and that has the effect of reducing our gross overseas debt.

They love to compare government debt with household debt. But the government is not a household. It’s a business.

In a household, the breadwinner(s) stop generating income and have to draw down their accumulated savings during decades of retirement. Companies and countries can exist forever (in theory anyway) and they can (and probably should) carry debt as long as the cost of debt (interest) is lower than the additional income generated from the investments funded by that debt.

So despite all the talk about leaving a debt for our children to pay off, it is far better to leave them infrastructure with debt than to leave them infrastructure free and debt free. Inflation reduces the burden of debt into the future in the same way we all wish we had gone into debt to buy real-estate in the sixties, seventies or eighties.

Think of the Goldfields Pipeline – Perth to Kalgoorlie – at a cost of around £2.5 million. O’Connor, the engineer, was subjected to prolonged criticism by members of the press and also many members of the Western Australian Parliament over the cost of the scheme and he committed suicide as a result, less than a year before it was completed.

Today, many houses in Perth are valued at more than the cost of that great infrastructure that was such a “waste of public money” and it is still providing water to the towns along the way to Kalgoorlie which still produces about 800,000 ounces of gold a year. The pipeline continues to operate today, supplying water to over 100,000 people in over 33,000 households as well as mines, farms and other enterprises.

As a former merchant banker, that's all water under the bridge or at least not in the pipeline for Malcolm. Protecting the banks from an investigation because it might hurt their feelings he is also protecting them by not tackling negative gearing.

All of Malcolm’s eggs are it the technology basket and the “nimble and agile” slogan. But the technology boom has passed over Australia like a white cloud on a fine day considering that Samsung alone will spend $18.6 billion in research and development this year. That’s just one company in a small country that was just rice fields 40 years ago.

Negative gearing is the misallocation of wealth into housing via government subsidisation, that is unfairly geared toward the wealthy.

We do not need further investment in housing; we need investment in business and infrastructure.Now, Malcolm that’s common sense!

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