Because the highly profitable mining industry campaigned against it AND we're idiots.
Theory: Immigration is a main "export". It's a very nice place to live: democracy, rule of law, media and the geographical reasons etc. Immigration helps supports demand for housing and the bubble.
We're basically a hole in the ground - but a very nice one.
Sadly it only came into effect after the boom and raised very little money before the mining industry ad campaign shut it down.
I don't think the problem is that there's too much investment sloshing around, but rather it's that investment incentives in Australia are horribly distorted by the tax system (and in two cases, IMHO, by the lack of a certain tax [0] / price on a negative externality [1]). So the money gets funnelled into unproductive investment (or socially/globally harmful activity).
I get even more concerned when people float ideas like mandating that x% of super must be invested in infrastructure projects, or allowing super to be withdrawn early to pay for a house deposit (shudder). The tax treatment of super itself is also completely messed up: it's regressive and completely at odds with its own policy aim (i.e. to reduce future age pension outlays). You can thank Kevin Rudd for squibbing an opportunity to address this, because he wanted a nice headline instead.
The government really has to level with the population and let them in on the big secret about super: it's not "extra money" that you get in addition to your wage, it's an additional income tax where the revenues are locked away in managed investment funds (making it harder for politicians to get their grubby little hands on the revenue).
[0] Land-value tax, which corrects an inherent investment distortion (i.e. privatisation of land-rents).
[1] Carbon pricing.
This is just like the first home owners grant, which only made barely-affordable houses that much more expensive and didn't actually make houses more affordable for young people.
(Full disclosure: I left 20 years ago)
But when you look at stuff like this (http://i.imgur.com/g7a9QDL.png), it makes you realise that there's no chance of generating a start-up culture in Australia (except maybe in the financial sector, especially if the business has something to do with property loans).
I've lived in London for 10 years, and my partner is Australian. We've considered moving to Australia recently, so the above is from my research.
Things have been rapidly changing too with the young generation. Smart people are skipping the investment banks for startups because they see the opportunity.
There are only 23 million odd Australians, but there is well north of $2 trillion AUD in our superannuation accounts.
Assuming they applied 0.5% of that towards VC, you'd be looking at $10bn AUD of available capital. At least one order of magnitude more than is currently present.
Also, last I checked, stock-based comp in Australia is tax-disadvantageous. I can't recall if it was FBT or something else.
I remember when I worked at a startup the choice when I got stock options was - pay the tax up front based on the current strike price value - or pay a higher tax when you exercise them and make a profit. If you take the first choice then you'll need to do a lot of paper work to get that money back should the company fail.
If simple well understood businesses (dig up rocks or buy land and build) can return > 10% YoY, why would any intelligent investor poor money into an asset class that has underperformed that in the same period?
Exploration, drilling, construction, exploitation. The early stages cost millions and often lead to failure, with the occasional profitable case and rare super-profitable discoveries. Scaling up costs major capital, after which, prices allowing, a mine can be a cash cow.
I would whole-heartedly agree that the Governments (both left leaning Labor and right leaning Liberals) have misspent the mining boom windfalls. (Actually mining is only about 16-18% of the Australian economy last I read.) Instead of improving communications infrastructure, or developing new businesses in sectors outside of mining, they are building railways and ports for new mines.
I used to live in Sydney (I've since left Australia altogether) and it made me realise that I would rather rent a place somewhere nice to live, than own a place somewhere where I could afford to do so. I do feel like Australia is a nice place to live, and to raise a family, but I don't know if I would do it in the bigger east coast cities or somewhere where the balance is better.
How much of that from exports? Which pumps more money into the economy where it has a lot of follow-up effects. Given that a rise or fall in GDP of a low single-digit percentage point can already mean a big boom or bust the above number is huge.
Out of that percentage, I don't think it would include all of the other mining related industries in that figure, or the effects on rutal mining towns. But just as there are positive flow on effects, once that flow stops then towns and communities die and people have to move elsewhere for work. This was already the case for towns dealing with mine and plant closures from earlier booms, it usually takes decades.
There is also a lot of temporary fly-in-fly-out labour in mining. Where the workers don't settle down in towns near the mines, but back in Perth and other bigger towns and cities. As such Perth has experienced a property bubble of sorts relating to mining, even though its not as popular a place to live as the east coast.
I can't remember exactly but the Banking sector in Australia may be the bigger than mining.
Uhmm.... I just pointed out that the use of the word "only" is not justified... :-)
> I can't remember exactly but the Banking sector in Australia may be the bigger than mining.
What do you mean by "larger"? Employ more people, pay more wages? Just "having" money (and large numbers in their balance sheets) is kind of a given for that sector.
Besides, the point never was finding the "biggest". Somebody can be a tall person even if they are not the "tallest". So large changes to that sector will have large effects to the overall economy, many of them indirect.
There's no law of physics that says wealth must be destroyed every few years.
I note that you didn't mention his Treasurer, Peter Costello. The pair of them basically invented the Australian political norm, now dead, that government debt was bad and ought to be paid down as quickly as possible.
No to mention setting aside what is now one of the larger sovereign funds to cover future Commonwealth pension liabilities.
While middle-class welfare has done irreparable structural damage, painting them in a single shade of black or white isn't fair.
Some of the rot or failure to act started under PM Hawke / Treasurer Keating, PM Keating / Treasurer Dawkins, PM Keating / Treasurer Willis and continued under PM Revolving Door / Treasurer Roundabout.
Overall the Hawke-Keating-Howard-Costello years transformed Australia from an economic backwater into a much wealthier and more successful country.
Could there have been better choices? Of course.
Could there have been worse? Oh yes. Australia can't sustain US-style fiscal policy, no matter how politically attractive.
High immigration levels: Check
Housing Bubble: Check
Commodity boom / Bust: Check
- Manufacturing in general in the developed world is in serious trouble. I'm not sure anything could really reverse that;
- I agree about having a sovereign wealth fund. Norway has this. It's such a lost opportunity by pretty much everyone else that allows the looting of natural resources by a wealthy few.
- As for fiscal responsibility, I think your view of the Howard era is somewhat slanted. The spike in resources prices didn't really begin until the mid 2000s [1], the latter days of the Howard government. I tend to largely ignore the Sydney Morning Herald when it comes to criticism of conservatives. It comes off as anything but impartial.
There were definitely attempts at buying votes in the last Howard term but most of the rest was tax reform, paying down debt [2], using asset sales to fund superannuation obligations (ie the Future Fund).
- There was definitely a problem with how the slices of the GST pie were calculated. Western Australia and to a lesser extend Queensland really got the shaft on this one. As resource prices receded, WA is now down to retaining something like 34 cents of every GST dollar collected.
- There was a somewhat complicated system for CGT inflation indexation. This was "reformed" to being a straight gain that was discounted by 50% if held for over a year. Son in the medium term, the effective rate is lower but I'm not sure this leads to the result you claim.
For one thing, flipping properties isn't really a thing in Australia largely due to stamp duty levied by the states (something the GST was meant to replace I might add, which the states largely reneged on).
At the height of the property boom (mid 2000s) it was probably the case that prices were rising so fast that even paying stamp duty it was possible to make a lot of money by holding property only for 1-3 years but this is exceptional. More to the point, I don't think the CGT changes were the cause.
Property prices in the Australia largely stagnated since the recession we had to have (1991). In Perth, for example, it was possible in 2000 to buy a 1970s 3 bedroom house 8 miles from the CBD for <$100k and this hadn't changed in years.
So partly this changed because the market was (still) oversold.
Another factor: the mining boom. Capital projects soaked up a huge amount of supply. The cost of construction in Australia massively increased as a result. This inflation was (IMHO) largely responsible for the 2000s price boom. 20 years ago it was possible to build a house for $100k in 3 months. Now? It's more like $350k and it takes a year.
- As for recent price booms in places like Sydney and Melbourne, this is part of a global trend where foreign money is driving up prices in urban centers in the developed world. I'm not sure immigration has much to do with anything here.
[1] http://www.indexmundi.com/commodities/?commodity=iron-ore&mo...
[2] http://www.tradingeconomics.com/australia/government-debt-to...
So now that the capital projects are done and we're transitioning to the 'volume production phase', the effect on employment, wages and costs of construction inputs are receding. And it sounds like we're in agreement on the national interest re: finite resource extraction. Thank goodness we had the foresight to tax some of the rents derived from the extraction of our finite natural resources... no wait...
As for hollowing out of manufacturing, it's definitely a debatable point and I think reasonable people can arrive at different views on this one. Honestly, it's a difficult proposition to prove in either direction. I guess I'm saying I don't have very strong views here, other than we didn't exactly take many (or really any) prudent actions here.
As an interesting aside, multi-factor productivity should naturally rise (particularly now that world commodity prices have come back down a bit, so its no longer profitable to extract marginal deposits). I'm sure whoever happens to be in government at the time will figure out a way to claim the credit.
I can't fault you for ignoring SMH when searching for truthful information. Frankly, anything that comes out of Fairfax (even the AFR) these days is highly suspect. Around 80% of Fairfax's revenues come from Domain property advertising, making SMH the most widely read real-estate agent newsletter in the country. But the IMF study is solid, and I can't see any reason why they'd have a bias one way or the other (especially since Australia was just 1 of about 200 countries studied). If you have a critique of that study, I'd be interested to hear it. Otherwise I stand by my assertion about the structural deficit.
GST distribution is a bit of a vexed issue (some of which is too complicated to go into here, but is comprehensively discussed here: http://gstdistributionreview.gov.au ). The EU is an example of a monetary union without a system of horizontal fiscal equalisation. Hasn't worked out that great for some of their members who have had a 'slower' economy than the average EU member, but nonetheless faced a non-stimulatory central bank cash rate (e.g. Greece). On the other hand, it seems to have worked out pretty good for members like Germany.
WA also seems to have a curiously short memory on this issue. Commonwealth to State fiscal transfers have been going on since federation (as opposed to since the introduction of the GST). I'm pretty sure that, even though recently they've been getting a 'raw deal', on a per capita basis over the life of the Australian federation WA has actually been a net recipient state. Certainly over the past 30 years or so this has been the case (see: https://www.cgc.gov.au/index.php?option=com_docman&view=down...), where WA has been a net recipient in ~53% of the years since 1981. I suppose they can pay the other States back, if they really feel that strongly about it...
As for stamp duty, in fairness to the States, removal was part of the original inter-governmental agreement but was removed after the GST tax base got smaller (thanks to the Democrats, who only passed the GST legislation after negotiating with Howard to exclude certain goods and services from the consumption tax base, reducing the efficiency of the tax in the process). Although they might have had good intentions, there are more efficient ways to offset the regressive effects of a broad-based consumption tax (e.g. reduce low income earner income tax, increase 'hardship' transfer payment amounts etc.).
Whether things like the Future Fund were paid for from the 'rivers of gold' (i.e. general tax revenue) or asset sales is really neither here nor there since it's all just 'one big bucket' from government's perspective. There are only a few situations where it might make sense to hypothecate revenue to a particular expenditure (note: the medicare levy is not one of these; the revenue from this additional income tax just goes in to the 'big bucket'). At a basic level, it only makes sense to sell an asset if you can earn a higher rate of return on the proceeds. It gets a bit more complicated when talking in the context of government, as 'rate of return' should factor in things like public/consumer welfare (i.e. it's usually a bad idea for governments to privatise natural monopolies like Telstra, as the subsequent monopolist price gouging effectively functions as an inefficient tax). The fact still remains that they squandered an enormous but temporary increase in government revenues on permanent middle-class welfare outlays and tax reductions.
And I agree with you on the influence of foreign money (hell, let's come right out and say it: Chinese money). Canada appear to have had similar issues. And the Commonwealth has been outright negligent in enforcing its own laws regarding foreign purchase of residential real estate. And FIRB are goddamn useless to the point where one has to wonder if it's incompetence, or incompetence like a fox...
As for the effect of tax policy on house prices, they appear to have shot up right around here: http://i.imgur.com/4VUGfPz.png
I've heard anecdotes from Asian Australians but not really sure how true it is.
but anyways, it made me grateful for being in Canada.
Combine that with the fact that a large finance sector is good for over all GDP but pretty much terrible for median GDP per capita (since all the wealth goes to relatively few well off people) and we have a nasty time bomb.
If you factor in the real levels of inflation against salary rises in the last 15 years they are flat for most and down for some.
I find it absurd that anyone is still arguing this is a problem, we've just watched the largest wealth transfer in history from the have-nots to the haves but somehow it's those poor immigrants who are carrying the can for it.
One of my former bosses (a British expat who had moved to Eastern Europe) told me basically the same thing in late 2008 in regards to the then fully developing financial crisis: "This is one of the biggest rip-offs that I've ever witnessed". I remember thinking back then "if no world war starts in the next 10 or so years then I guess we'll be good". There has been no world war, just yet, but we've now got Trump, Brexit and almost all of Western Europe being 10-15% away from electing lunatic leaders.
It's that no one seems to care, the press isn't covering it (why would they when they are mostly owned by high net worth individuals cough Murdoch cough or funded through them).
It's an absolute scandal and we all just collectively went oh well, "please sir, can I have some more?".
- Since the early 2000s, there has been an unprecedented spike in the price of natural resources like iron ore (http://www.macrobusiness.com.au/wp-content/uploads/2015/11/C...). Australia is a resource rich country and so has enjoyed a significant, but temporary, increase in national income as a result.
- The above has had a number of unfortunate (but avoidable) long-term effects on the Australian economy: high demand for Australian natural resources meant high demand for Australian dollars, so the dollar appreciated. This hollowed out the economy as most non-mining export facing businesses were ruined by this. Australia's car manufacturing industry is dead, for instance. This could have been managed by taxing rents from natural resources and placing that money in a sovereign wealth fund (i.e. a fund that invests in assets denominated in non-Aus currencies). But we didn't do this because we're idiots.
- The government that presided over the majority of this 'mining boom' (i.e. John Howard and co) acted as if those historically unprecedented prices were the 'new normal'. Accordingly, they passed a number of budget measures that placed the Commonwealth budget into permanent structural deficit. The IMF conducted a cross-country study of fiscal spending for the last 200 years in 2013. In Australia's case it found that there have been 3 periods of 'fiscal profligacy': 1 during Whitlam (in the 70s) and 2 during Howard.[0][1] However many Australians continue to buy in to the myth that John Howard was a 'great economic manager'.
- Howard's government also changed how residential real estate is taxed for property investors. Specifically, he made it more concessional for the rich, and created stronger incentives to 'flip' houses after 1 year to maximise the tax benefit.[2]
- So Australians took all this new income, and sweet tax breaks, and poured it all into speculative investment in residential real-estate. [3][4][5] Out housing markets (especially in Sydney, Melbourne and Brisbane) are investment bubbles just waiting for some external shock to pop them. The mining boom is also winding down, so less national income to keep the ponzi going. In terms of private debt, we are now one of the most indebted nations in the world.
- We've also kept the housing / nominal GDP ponzi by having insanely high immigration levels, unprecedented by historical standards. Of course, this had to be sold carefully because Australia is a fairly racist country. So, our previous Prime Minister John Howard made a big show of brutalising refugees, while at the same time quietly opening the immigration floodgates [6][7][8].
- With the mining boom ending and the continuation of high immigration, our major cities are reaching crush capacity. Infrastructure and education spending have not come even close to keeping up. This has kept house prices levitating for the moment, but this can't last forever. It has also reduced quality of life and employee wages and share of production surplus [9][10]
So that's how Australia has managed to avoid a nominal recession for the past 25 years: by running the world's most successful ponzi scheme. But as windfall natural resource income dries up, international lenders stop lending to our banks, and high immigration becomes a mass exodus, our enormous property market bubble will explode leaving us with only a bunch of long dead industries (like manufacturing) and piles of debt. Basically a replay of the 1890s recession in Australia, which was one of the main drivers of federation.
So I guess we'll be invading New Zealand soon.
[0] https://www.imf.org/external/pubs/cat/longres.aspx?sk=40222....
[1] http://www.smh.com.au/federal-politics/political-news/hey-bi...
[2] http://i.imgur.com/4VUGfPz.png
[3] https://www.macrobusiness.com.au/wp-content/uploads/2017/03/...
[4] http://www.macrobusiness.com.au/wp-content/uploads/2016/12/S...
[5] http://www.macrobusiness.com.au/wp-content/uploads/2016/11/S...
[6] http://www.macrobusiness.com.au/wp-content/uploads/2017/02/S...
[7] https://www.macrobusiness.com.au/wp-content/uploads/2017/03/...
[8] http://www.macrobusiness.com.au/wp-content/uploads/2017/02/S...
[9] https://www.macrobusiness.com.au/wp-content/uploads/2017/03/...
[10] https://www.macrobusiness.com.au/wp-content/uploads/2016/11/...