SAUL ESLAKE

Economist

SAUL ESLAKE

‘Welcome to my website …
I’m an independent economist, speaker, company director
and Vice-Chancellor’s Fellow at the University of Tasmania’

Interview with Peter van Onselen and Paul Kelly on Sky News’ Australian Agenda program


News | 8th May 2016

Peter Van Onselen | Sky News’ Australian Agenda | 8th May 2016

PETER VAN ONSELEN: Welcome back, you’re watching Australian Agenda. We’ve just been talking to the Shadow Treasurer, Chris Bowen, and we’re going to talk now live to Saul Eslake, former chief economist at both ANZ and Merrill Lynch. He joins us live from Hobart. Appreciate your company.

SAUL ESLAKE: It’s a pleasure being here, thanks, Peter.

PETER VAN ONSELEN: We’ve had the opportunity, I assume – or I hope you’ve had the opportunity to listen into our interview with Chris Bowen. What there stands out to you, both as things to perhaps be complimentary about and also what might you be concerned about as an economist looking at the Labor policies counting down to the election?

SAUL ESLAKE: Well, I think the first thing is to pay credit to Chris Bowen for being willing, as he said, to take some political risks with policies that do expose the Opposition to criticism and, indeed in some cases, to a scare campaign. But more importantly, I think, what Chris Bowen’s responses to your questions highlight is that the people do face a fairly clear choice at the forthcoming election as regards the size of government spending and taxation and what they think the role of government ought to be. Chris Bowen is clearly saying that if the Australian people choose a Labor Government on July 2, the top personal rate of income tax will be higher for longer, company tax rates will be higher, people on various incomes will not get the tax breaks they currently get for investing in the property market with borrowed money, among other things, and that the additional revenue Labor intends to raise will allow higher spending on schools and hospitals, among other things. Whereas the Coalition is saying that the top income tax rate will be lower, company tax rates will be lower, especially for small businesses in the near-term, and that people will continue to be able to enjoy tax breaks for borrowing in order to buy investment properties, but that spending particularly on schools and hospitals and in other areas will be lower.

Now, there’s no economic basis for choosing between those two particular sets of policies. Economics doesn’t have much to say about whether a large government sector funded by relatively high taxes is better or worse than a smaller public sector funded by lower levels of taxes. You can compare and contrast, for example, Sweden, which is high-taxing, high-spending economy, with, say, Switzerland, which is a low-taxing, low spending government, in essentially similar cultural circumstances and it’s hard to say that Sweden’s economy has done better or worse than Switzerland’s. There’s obviously a clear political choice.

Both sides of politics appear to be committed to maintaining Australia’s AAA rating and returning the budget to surplus over time. Chris Bowen seemed to be leaving open the possibility that they would choose a set of policies that get Australia back to surplus more quickly, or build bigger surpluses, but we won’t really know that until the last week of the election campaign.
But as I say, what I think clearly comes out of Chris Bowen’s interview and his responses to your questions is that they are offering the Australian people an opportunity to choose slightly higher government spending on particular programs that many parts of the electorate value in exchange for higher taxes, and the government is saying lower taxes funded by less spending. That’s a clear political choice and obviously it will be interesting to see how the Australian people respond to it.

PAUL KELLY: What’s your view of the centrepiece of the budget – and, presumably, of Malcolm Turnbull’s election campaign – the argument that we need to cut taxes for small and then large business in order to generate more jobs and better growth? What’s your economic assessment of that central proposition?

SAUL ESLAKE: Let me take it in two parts, if I may, Paul. There’s a fair bit of economic evidence. It’s not uncontested evidence, but there’s a fair bit of economic evidence that says lower company tax rates will lead to higher rates of GDP growth over long periods of time and to higher levels of employment and higher wages, because lower company tax rates will stimulate increased levels of investment and faster productivity growth.

Now in every case, we’re not talking about big orders of magnitude. Treasury’s modelling suggests that what the government proposes to do will eventually result in GDP being 1% higher than you would expect if the government’s plans were not implemented. So in terms of rates of growth over a period of time, we’re talking about fractions of a decimal point. But nonetheless, that’s what the majority of the economic evidence does suggest.

What I would say, however, is that there’s absolutely no evidence at all to suggest that preferencing small businesses over big businesses does anything to bring forward or accelerate that result. If you look at the available evidence we have, which unfortunately is only to 2013/14. The 2014 figures don’t come out until the end of next month, hopefully just before the election. But what they show is that although small business does provide about 43% of the jobs, and that’s why the Coalition sometimes describes them as the engine room of the economy, over the last five years, small business has only contributed 18% of the growth in employment over that period of time. Whereas businesses with more than 200 employees, which the ABS describe as big businesses, have contributed more than half the growth in employment despite accounting for about 30% of the level of employment. A different set of ABS figures shows that big businesses are much more likely to engage in various forms of innovation than small businesses, especially those who employ four people or fewer.

So, based on the evidence, if you wanted to structure a series of cuts in the corporate rate in order to maximise the dividend in terms of employment or innovation, then what you’d be doing is favouring big businesses rather than small ones. Now, I acknowledge that’s politically very difficult, partly because opinion poll evidence overwhelmingly shows that people think big businesses should pay more tax rather than less, and secondly because the main beneficiaries of a cut in the company tax rate for big companies would be foreign investors rather than domestic investors. So, again, that would be politically difficult. But nonetheless, if your goal is to boost jobs and growth, as the government says it is, then you really wouldn’t be preferencing small businesses.

My interpretation is that the way in which the government has chosen to reduce company tax is more about genuflecting before an altar that’s always been ideologically important to the Coalition, rather than actually maximising the jobs and growth dividend for it.

Another way that the government could perhaps have chosen to cut company tax would be to cut company tax for new businesses, irrespective of their size. Now, you’d need some careful guidelines to make sure that existing businesses didn’t de-register themselves and register as new companies in order to qualify for tax preferences, but again, there’s an emerging body of evidence from the OECD and elsewhere that says what you really ought to be encouraging in terms of boosting innovation and employment growth is encouraging the formation of new companies rather than simply preferencing one set of business over another on the basis of their size.

PAUL KELLY: Both Bill Shorten and Chris Bowen have been very critical of the government’s initiatives in relation to superannuation. They argue that the $500,000 lifetime cap is a clear case of retrospectivity and they’ve signalled that they’re not likely to support that. They’ve also got concerns about the $1.6 million cap overall in terms of a tax-free stream at the exit stage. What’s your view of these measures and Labor’s criticism?

SAUL ESLAKE: Well, philosophically, I’m sympathetic to what the Treasurer was seeking to do with regard to superannuation in his budget.

That is, in simple terms, to make the tax treatment of superannuation contributions earnings by high income households less generous in order to facilitate more generous treatment of superannuation contributions by two other groups of people – low income workers, for whom at the moment the tax rate on superannuation contributions earnings is actually higher than the tax rate that they pay on their earnings, and that was something that the previous government had sought to address with the low income superannuation contribution, or co-contribution, the government made on behalf of low income workers that was meant to be funded by the mining tax. The Coalition had foreshadowed the abolition of that with the abolition of the mining tax, but it survived another year or two because of the deal that they did with Clive Palmer to get that legislation through the Senate.

The other thing the government is trying to do is to make it easier for people with fragmented career histories, particularly women who take time out of employment to care for children or elderly relatives and thus can’t make the same continuous stream of superannuation contributions that men do, and together with women typically having lower incomes while they do work than men is the main reason why women tend to arrive at retirement age with much smaller superannuation balances than men.

So, what the government is trying to do is undoubtedly something that I think is good and I’m philosophically in tune with, but when you do get to the detail there are some problems, which Chris Bowen was pointing out in his interview with you. I’m not a lawyer, and the subject is complex, but it does seem to me that there is a retrospective element about the cap on lifetime contributions to superannuation. It’s not going to affect a large number of people. There aren’t many Australians who have the capacity to contribute $500,000 or more to superannuation over their lifetime and, likewise, there aren’t a lot of Australians who have $1.6 million or more in their superannuation funds. So if there are difficulties associated with that, they’re only going to affect a relatively small number of people.

However, I think there could have been an easier way of achieving the same outcome and that would have been to reverse the decision that Peter Costello made in 2006 to completely exempt superannuation payments to people over the age of 60 from any kind of income tax at all. Now, I have long put that on my list of the worst tax policy decisions of the last 15 years – and it’s a fairly crowded field of competitors for that title, I acknowledge – but it would have been possible, and I think Labor proposes to impose a tax of 15% – not a high rate, but a tax of 15% – on payments out of superannuation funds in excess of $75,000 a year, which, as we keep being reminded, is pretty close to average weekly earnings for people who are in employment. I think that would be a better way of achieving the objective, which I don’t doubt that the government wants to achieve, of making the superannuation system fairer, but I think that would be a better way of achieving that goal than the rather more complex approach which the government proposed in Tuesday’s budget.

PETER VAN ONSELEN: We’re talking to Saul Eslake, live from Hobart. We’re going to take a quick break here on Australian Agenda. When we come back we’ll talk to him about an issue that he has long argued for – negative gearing changes. Labor has proposed a model to do just that. The government claims that it will rip the heart out of the housing sector. We’ll get Saul Eslake’s response when we come back.

– BREAK –

PETER VAN ONSELEN: Welcome back, you’re watching Australian Agenda. We’ve been speaking to Saul Eslake live out of Hobart. Saul, I want to ask you about I guess the one that I’m most curious to get your reaction on. I know you’ve long argued for the economics of changing negative gearing in this country. Labor has put up a scheme that I know isn’t your ideal scheme, but I think I quoted earlier to Chris Bowen you saying that there’s no point making perfect the enemy of the good. A two-pronged question for you. Firstly, what do you think of the government’s attacks in the context of the scheme that Labor has proposed, and secondly, what are the elements to Labor’s scheme that are perhaps economically good but they don’t want to talk about – things that are perhaps politically difficult but you see as good economics nonetheless?

SAUL ESLAKE: Well, again, let me try and take that in two parts, Peter. The government’s response to Labor’s proposal I would characterise as both shameless and shameful. Shameless because it is just repeating the scare campaigns that the property industry have run ever since Paul Keating and Bob Hawke temporarily abolished negative gearing in the mid-1980s and almost everything they say is completely without factual foundation. The allegations as to what allegedly happened to rents during that period, now almost 30 years ago, have always been scandalously false in my view. To say that rents went up across the country and landlords went on strike – there’s no factual foundation for that at all. Indeed, even the BIS Shrapnel modelling that the property industry likes to cite in its favour concedes that in the final page of that report that came out.

Likewise, the claims that negative gearing is something that’s only done by people on taxable incomes of less than $80,000 – although they usually drop the word ‘taxable’ from that comment when they’re making it, as if somehow that made it right – but that is also trying to say that it’s just simply people of modest means. They always say, “Trying to get ahead”, without saying of whom they’re trying to get ahead, even though the answer is usually, in practice, their own children – and we’ll come to that when we talk about some of the effects of Labor’s policy here.
Whereas what the taxation statistics clearly show is that someone in the top income tax bracket – that is, with a taxable income in excess of $180,000 – is almost three times as likely to engage in – or to have a negatively geared property investment or, indeed, more than one negatively geared property investment, than someone with a taxable income of less than $80,000. The same figures actually show that there are several thousand people with no taxable income at all who have a negatively geared property and who claim an average of about $15,000 per annum in interest on it, which goes to show that the taxable incomes that people have often have very little bearing on their capacity to service a loan. So the kind of things the government is saying about who does negative gearing are very, I think, inaccurate.

The third reason that I think the campaign is shameless is the false assertions they make about the impact that changing the tax treatment of negative gearing would have on the housing market in Australia. Let’s remember that over 90% of geared investors buy an established property. So to say that negative gearing does anything material at all to increase the supply of housing is, I think, quite false. What negative gearing has done over a long period of time has been to push the price of properties upwards to the detriment of those who want to get into housing as homeowners. That’s, I think, why, as there’s a greater recognition of the difficulties that young adults are having in becoming homeowners, that Labor has found that their proposal hasn’t been as politically damaging to them as perhaps people would have suggested, say, five or six years ago, which was why Wayne Swan as Treasurer was so eager to rule out any changes to negative gearing, even though the Henry Review actually hadn’t recommended it near-term.

What I think Labor’s policy will do, first of all, is not to put downward pressure on the price of housing because, for that to happen, you would need to see those with negatively geared properties sell their properties, and by grandfathering negative existing investors they will, if anything, be motivated to hang on to their properties for longer, rather than to sell them, as Chris Bowen acknowledged.

I don’t like grandfathering very much because it, in effect, preferences people on the basis of birth order and I think that’s philosophically indefensible, but when I say you shouldn’t let the perfect be the enemy of the good, what I’m acknowledging is that politically that’s a compromise that Labor had to make in order to forestall the opposition from something like 1.5 million existing negatively geared investors that taking away their privileges would entail. So they’re not doing that. Those investors will be less likely to sell their properties than they would before, so it’s most unlikely that property prices would fall.

On the other hand, Labor’s policy will mean that fewer additional people will seek to buy properties as investors, negatively geared or otherwise, and what that will do, in my view, is reduce the upward pressure on property prices that negatively geared investors are currently exerting and that’s a good thing – the whole point of the policy is to reduce the, I think, unfair competition that would-be first homebuyers face from investors who typically have bigger deposits and who get their interest costs subsidised by other taxpayers through negative gearing.
And if I can, Peter, make one other important point about this that ought to appeal to those who are concerned about small business.

Over the last 25 years, or at least between the 1991 census and the 2011 census, the home ownership rate among people aged between 25 and 55 has dropped by an average of 9 percentage points, and all the survey evidence we have since 2011 suggests that that trend has continued. That doesn’t show up in the overall home ownership figures because it’s offset in terms of the aggregate home ownership rate by an increase in the proportion of the population that’s aged 55 and over, among whom home ownership rates are a lot higher. But if you think about it, during the ‘90s and the 2000s, mortgage rates have been roughly half what they were over the previous 15 years and governments have thrown billions of dollars by way of first homeowner grants and stamp duty concessions at people trying to enter the housing market for the first time, yet the home ownership rate among the target groups for those kind of measures has fallen by 9 percentage points.
Now, I think that has a lot of serious consequences.

It means that the assumption underpinning Australia’s retirement system, its retirement income system, that most retirees will have zero housing costs will increasingly be invalid. But also, since the main financial base that people who start small businesses use in order to get finance for those small businesses is the equity in their own home, if we have a diminishing proportion of people aged between 25 and 55 who own their own home, the rate of small business formation is bound to decline over time, and for a party which claims that small business is something that they want to encourage – indeed, who seem to believe that there’s something inherently more noble about running a small business than working for a big one – to be presiding over such an extraordinary decline in home ownership amongst the people among whom it used to be the most important thing is really quite extraordinary.
And, as I said immediately after the budget, what the government is effectively saying to people who have taxable incomes of less than $80,000 per annum is, if you want to pay less tax, get yourself a negatively geared property.

They’re also indirectly saying to people with taxable incomes in excess of $250,000, or who have made more than $500,000 of super contributions, or who have more than $1.6 million in their superannuation account already, if you want to pay less tax then get yourself another negatively geared property.

And you just have to wonder, how is this consistent with the vision of a stronger, more diverse, nimble and agile economy that the government says it wants us to have to encourage Australian households, who already have more debt relative to GDP than almost any other country in the world, to buy even more of what’s already some of the world’s most expensive residential real estate and, moreover, to do that at what may be close to the bottom of the interest rate cycle and near the peak of the property price cycle? How is that in the interests of the kind of Australian economy that we want to have in the future?

PETER VAN ONSELEN: Well, given the campaign that the government is looking to mount against negative gearing, I doubt very much, Saul Eslake, that they’ll make you their spokesperson! We strongly appreciate your insights on this episode of Australian Agenda. As always, good to talk to you, thank you.

SAUL ESLAKE: Thank you very much for having me, Peter.

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