Rethinking our priorities

Some believe that those who purchase Lotto entries, play pokies or Keno or participate in other forms of gambling are effectively paying an idiot tax. On a purely rational level, they may be right as there is a significant chance that the few dollars you give to the Lotto machine operator or similar is wasted money — albeit a small proportion goes to the government in some form of wagering tax.

There are of course, many that disagree and happily put their money down to have a chance of winning considerably more than they started with. It doesn’t matter if it is pure luck or there is some skill involved in the wagering process; each time the money is gambled there is a small hope that the gamblers world will get much better financially very soon. Gambling companies have to publicise the chances of ‘winning big’ these days, and it’s on their website (albeit right down the bottom of a menu). 

Despite the miniscule chances of winning a life changing amount, we all at some point have wondered what it would be like to be able to afford anything we wanted to do. Well, Steve Colquhoun probably couldn’t afford it but he hasn’t had to wonder either. You see Colquhoun up until recently was a writer for Executive Style on the Fairfax Media websites and the list of what he has done to file his stories is awesome. Despite seemingly having it all (with the added bonus of not having to pay for it), he’s giving it up to spend valuable time with his ‘long suffering’ family. Maybe you can’t have it all.

Sadly, most of us will never win a substantial amount of money gambling or have a job reviewing ‘experiences’ for Executive Style. That’s why financial institutions were invented — to lend money.

Provided you meet some criteria, there are any number of financial institutions that will lend you money for all sorts of things. Running a bit short until next payday — there are organisations that will lend to ‘tide you over’. Is your TV too small? — there is a lender for that as well. It’s the same if you want to buy furniture, cars, holidays, houses or pretty well anything else that takes your fancy; ‘come in and talk to our friendly and helpful staff and you can walk out with the item of your dreams’. Lenders are there to sell money. Interest on the money they sell is the cost to the purchaser of buying the money now rather than waiting until the consumer can walk in and ‘write the cheque’ (which these days is usually ‘do a bank transfer’ — which is a completely separate can of worms to talk about another day). The lenders take a risk in lending for periods of up to 30 years (for a house) based on the financial affordability that you can demonstrate today and they price the risk in, making the loan according to the facts they have at their disposal. Financial institutions like to get their money back. If the loan is secured (you pledge that they can get something of equal or higher value if you choose not to pay the lender’s money back), the lender will price the money accordingly.

So, for example if you are looking for a few hundred to tide you over until payday, the facts a lender would consider include why you only need money for such a short term and the chances of you not being able to be found when it’s time to repay the debt; and charge you a high cost (interest rate) for the use of their money. Traditionally, people borrow money for a home, assets that appreciate in value or a tool of trade (a machine of some sort that generates more income than it consumes). Without trying to be flippant, it is the bread and butter business of the financial industry. Assuming you have the income and can demonstrate you fit the criteria for security and repayment capability, there are hundreds of lenders around Australia that will lend you the money now to fund your purchase if you promise to repay the debt over a specified period. Generally, houses increase in value, which means that while you are paying a fee to use someone’s money, the increase in value of the house will over time probably exceed the interest you pay. Tools of trade generate more income than they cost — a plumber would find it difficult to get to their next job with all their tools if they relied on public transport and a machine that can double the output of a product will generate cash for the business that buys it. You could say everyone’s a winner.

Some loans don’t make as much sense. If you borrow money to purchase a personal use car or consumer goods, you are paying a higher interest rate and generally the item you are purchasing doesn’t appreciate in value as a house does. A ten-year-old car is worth far less than a new one, while a house that you have lived in for ten years will probably be worth more than what you paid a decade ago. The car or other consumer item you are purchasing is also transportable, you can drive a car across the country; you can hide an expensive watch in your pocket and so on. Accordingly, the lender will charge you a higher fee for the privilege of using their money.

Borrowing to purchase a home, an asset that should appreciate in value or a tool used to produce income is an accepted part of Australian lifestyle, so much so that when the Commonwealth Bank recently announced a $9.45 billion profit claiming the bank's flagship retail business underpinned the profit growth, the media reports suggested:
Investors were underwhelmed by the result from a bank that trades at a premium to peers, with CBA shares falling 1.3 per cent to $77.40.
In fact, one of the points of difference between the two major political parties at the last federal election was the future treatment of ‘income losses’ produced by taxpayers negatively gearing investment borrowings. Neither party was suggesting that borrowing money to fund the purchase of income producing assets was a bad idea: the ALP claimed they were attempting to reduce the heat in the property market in some of Australia’s large cities (and gain revenue) while the Coalition wanted to keep the status quo.

Yet at the same time as the Coalition is suggesting to you and I that if we can demonstrate to a financial institution that we can afford the repayments we should be able to purchase all the houses we like (and the subsequent increase in prices pushing first home buyers out to areas where services such as shopping, transport and so on are either not provided or far more expensive), we have former Treasurer Peter Costello on ABC’s Four Corners claiming:
PETER COSTELLO: Superannuation changes aren't going to balance the budget; that's obvious. The only way you'll balance this budget is if you get spending below 25 percent of GDP, right? We're at about 25.8 percent now. Um you cannot balance a budget on that. Until such time as you get your expenditures below 25, and preferably well below 25, you won't balance a budget. Super won't do it.
Yes, this is the same Peter Costello who introduced a number of expenditure measures (tax relief to companies and subsidies to average and higher income earners) while Treasurer during the period that Australia was in the fortunate position of higher than traditional revenue due to the mining boom. His ‘profligacy’ has been a problem for all the governments that followed him. As The Saturday Paper observed in December 2014:
Profligate is not our word. It was the word used by the International Monetary Fund in a major report it released early last year, that examined 200 years of government financial records across 55 major economies, identifying periods of government prudence and profligacy in spending.

Overall, Australia was judged very favourably. For most of the country’s history, governments of both persuasions had been prudent economic managers. The IMF identified only four periods of profligacy. The two biggest were during the Howard–Costello years. They were in 2003 and then between 2005 and 2007, and they accompanied the mining boom.

On its face, the IMF assessment might seem harsh. After all, before they were voted out in 2007, Howard and Costello had delivered six budget surpluses in a row.

But they also seriously undermined the structural integrity of the budget by making big spending commitments and giving huge tax cuts, on the basis of a flood of revenue that would inevitably dry up.

“You can sum it up in four words,” says Chris Richardson of Deloitte Access Economics. “Temporary boom, permanent promises.”
Whether Costello or Treasury were responsible for the permanent spending caused by a temporary boom is not the issue. The issue is the consistent bashing over the head we receive with the claim that the budget must balance and government debt is bad. At the same time, the government of the day and Treasury are encouraging the Australian population to assume debt in the form of home loans, through processes such as the ‘First Home Owners Grants’, the ability to claim losses from investment properties as a deduction on tax returns, as well as the capital gain being halved prior to the tax calculation if the appreciating asset is held for a period in excess of one year, they are telling us that all government debt is bad. On a logical basis, it just doesn’t make sense.

While most Australians would prefer not to incur debt on recurrent expenditure, such as fuel for their vehicle or the weekly trip to the supermarket of their choice, it is probably fair to assume that governments would prefer not to pay for wages and subsidies from debt funding as the costs are recurrent in both cases. But, just as it makes sense for Australians to incur debt to purchase appreciating assets or tools of trade it is probably just as valid for the governments around Australia to incur debt for infrastructure that will either appreciate in value or produce income in excess of the costs of the debts (especially when interest costs are so low at the moment). After all, if there is benefit in a concept that benefit should accrue regardless of the corporate status (individual, company or government) of the ‘person’ that will benefit. When someone spends money, the whole economy benefits, through people receiving wages and then creating demand in the economy. Governments are the financial industry’s ultimate safe borrower — there is almost no chance that the government will renege on the agreement and they almost invariably repay their debts to the cent at the required time. Ross Gittens recently wrote in Fairfax media:
Treasury wants little old ladies to feel as guilty about borrowing to improve the Pacific Highway as they do about borrowing for "routine government expenses".

So, let's worry about getting the recurrent budget back to surplus (as most state governments did long ago), but not about borrowing for infrastructure. Agreed?

Except that when you read the budget papers carefully enough to find the info Treasury has hidden on page 6-17, you discover that the expected underlying cash deficit for this financial year of $37 billion includes capital spending of $36 billion.

Get it? We're already back to a balanced recurrent budget. So why so much hand-wringing? And why aren't we getting on with planning the infrastructure pipeline we could expedite "in the event that we were to need a big demand stimulus"?
So much for the debt and deficit disaster that Australia will inevitably face. It seems most of the debt that Australia is going to incur this year is for capital expenditure such as upgrading the Pacific Highway. Whatever happened to the country that completed the Snowy Mountains Scheme, the water pipeline from Perth to Kalgoorlie and the building of thousands of kilometres of railway lines, then roads, all paid for at least in part with borrowings?

Australia as a nation can’t wait until we get ‘lucky 7’ on the roulette wheel, the winner in the third at Moonie Valley or win the lotto to justify spending on improvements to our infrastructure that will improve our way of life well into the future.

And to prove you can’t have it all, it seems that winning the lotto is not all it is cracked up to be.

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29/08/2016Enjoyed this piece. Costello certainly has a lot to answer for. As a couple who both enjoyed Employer Superannuation and were able to contribute ourselves, at the time when Costello brought down the budget which made both our pensions and the earnings of our superannuation tax free we could not believe he could be so short sighted. At the same time he reduced the higher tax brackets. It would have been more prudent to put some away for a "rainy day" which blind Freddy could have predicted would happen in the then future. The Libs congratulated themselves on the surplus they left but it should have been so much bigger. They also condemned Labor for wasting it during the GFC but the swift action taken by Labor stood us in good stead. Totally agree that the Govt should be lending for Infrastructure while rates are so low. If nothing else it would be a boost to the economy and bring about the Jobs and Growth that they like to trumpet.


30/08/2016Thanks for the comment DoodlePoodle. This article on borrowing while the interest rates are low (sounds like making money while the sun shines) was in Fairfax websites this morning -> . The 'debt' thing is a Abbott Liberal thing used to 'prove' the LNP are better economic managers. Reality is they're not - they both take advice from Treasury. While the plebiscite and changes to 18C are the current 'hot topics', borrowing for infrastructure is in my opinion a slow burn that will come back and haunt the people who used it for political advantage - just like marriage equity is at the moment.


30/08/2016Well, here we go again. Sorry to be just repeating myself. 1. Yes, borrowing for spending on investment is perfectly OK. Every corporation does it so why shouldn't the govt.? 2. 40 % of GDP as govt. debt is not a worry, given that the govt. can never default on its debt. All the debt is in AUD and that is issued by the federal govt. through the RBA, Japanese govt. is currently well over 200% of GDP but has not sunk into the sea. 3. The private sector is highly indebted, to the tune of 150% of GDP or thereabouts, and is reluctant to take on more debt as there is a danger of default (remember the GFC?). 4. Out of the private sector, the household sector is more highly indebted, and it is all in (possibly negatively geared) property, which makes it really dangerous. 5. Finally, what no one mentions, because even this simple arithmetic is too hard for the average punter: the private sector cannot pay down its debts unless the govt. sector runs deficits (because we never have an export surplus). This is just a consequence of the three sectors financial accounting identity. So, in spite of all the fuss and bother, the real problem is the private sector debt, and the need for fiscal stimulus for the Australian economy, but no one is talking about that. Glenn Stevens did obliquely mention those things, but make of that what you will.


30/08/2016Doodle-Poodle:"The Libs congratulated themselves on the surplus they left but it should have been so much bigger. " Please think about this: why would you need to save a fiat currency that you issue? Peter Costello continues to to profit from this scam, by being on the board of this future fund and earning top dollar for doing bugger-all. The Future Fund scandal:
How many Rabbits do I have if I have 3 Oranges?