Tony Abbott

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As widely expected the Reserve Bank of Australia (RBA) decided again to leave the cash rate in a holding pattern for the seventh straight meeting although somewhat surprising the rhetoric was considerably different this time around.
Sydney is the elephant in the room with house prices jumping 15.6% in the last year according to RP Data, although I would add that this is a lazy way of explaining and defining the property markets across Sydney given they are all performing differently – some are hot and some are not.
Back to the RBA where in an extraordinary week we heard both Glenn Stevens and treasury secretary Martin Parkinson publicly declaring that Australia needs to be closely looking at and discussing taxes and government spending. Well not before time. We are fast drawing the conclusion that the elected ones in Canberra have absolutely no idea how to run a business – they appear to be the only ones who don’t believe that the rate of GST needs to be increased.
Reading between the lines there was a clear concern about what will be brought down in the May budget with a clear indication together with framed criticism by Glenn Stevens: “Put simply, there are things that we want to do as a society, and have voted for, that are not fully funded by taxes over the medium term, as is starting to become clear in the lead up to the May budget.”
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As strange as it might sound, I’m looking forward to seeing the cash rate increases.
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Personally I think it is fabulous when the likes of Messrs Parkinson and Stevens have the fortitude to publicly speak their minds by firing shots at the government on the eve of the budget. Let’s fill in a few gaps – NDIS and paid parental leave are the main culprits to which they were referring.
A perfect case in hand that should be at the forefront of the Abbott government's mind is that $16.2 billion Building and Education Revolution, the master class of the Rudd and Gillard terms which has now been condemned as an international case study of legislative and bureaucratic failure. Reading between the lines again, it would appear that Messrs Stevens and Parkinson are politely pointing out that the Australian economy can ill afford repeats of policy failures.
When you’ve been selling real estate for nearly 30 years, interest rates scare the living daylights out of you! And, as strange as it might sound, I’m looking forward to seeing the cash rate increases. Many economists are suggesting that this will happen in 2015 although I am of the opinion we will start seeing increases sooner rather than later with small increment increases.
<img src="/images/2014/04/07/simeon-april-7-one.jpg" alt="">
<img src="/images/2014/04/07/simeon-april-7-two.jpg" alt="">
<a href="https://www.smh.com.au/business/the-economy/housing-bubble-fears-property-prices-could-fall-10-to-20-per-cent-20140331-35sg7" target="_blank" title="Housing bubble fears: property prices could fall 10 to 20 per cent">Housing bubble fears: property prices could fall 10 to 20%</a> was an interesting piece by Christopher Joye although it lacks market definition. Yes, certain parts of the Australian real estate market are over inflated, those being the new suburbs crashing through the $1,000,000 mark for the very first time which will, as history has shown, be the hardest and fastest hit. By comparison the traditional markets such as Paddington, Mosman, Pymble and Bondi, for example, are tracking upwards although at nowhere near the pace of the hotspot suburbs.
I can see the cash rate moving from its current rate of 2.50% to 3.50% next year which will in time place a number of households under increasing financial pressure, although we have seen this happen time and time again. Most notably in the early 2000s the cash rate fell from 6.25% in <a href="https://www.rba.gov.au/statistics/cash-rate/cash-rate-1997-2001" target="_blank" title="September 2000 to 4.25 per cent in December 2001">September 2000 to 4.25% in December 2001</a>. We then witnessed dramatic market corrections in south-west Sydney as the cash rate started climbing to <a href="https://www.rba.gov.au/statistics/cash-rate/cash-rate-2008-2014" target="_blank" title="7.25 per cent in March 2008">7.25% in March 2008</a> where it then started being eased to where we find it today at 2.50%.
So what amazes me more is that currently we are seeing record numbers of investors entering the market, which can be best described as panic buying – investors now make up 40% of value of total housing loan approvals in NSW and Victoria. So when and where we do see property market corrections this is when we see the astute investors entering the market – the experienced ones are certainly keeping their powder dry.
What this does clearly identify is that politicians and investors pay very little attention to history where more often than not they become part of history.
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When it comes to interest rates investors should learn a bit from history

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Modern governments believe that during budget framing, it is politically savvy to parade the pain. We saw it with Labor and the Coalition is doing the same.
There are scary scenarios of what would happen without remediation, with warnings about problem areas. Some surprises will be held for the night, but other measures will be strategically “leaked” beforehand.
Tony Abbott, in Perth campaigning for the West Australian Senate election, let it be known he was chairing Wednesday’s meeting of cabinet’s expenditure review committee.
Shadow treasurer Chris Bowen declared it was the first time in Australian history a PM had chaired the ERC, claiming it showed dysfunction at the highest level.
This was nonsense. The government could quickly counter that Bob Hawke, John Howard and Kevin Rudd had also done so.
But it was surprising Abbott gave such a high profile to this “razor gang” meeting.
The ERC is all about nasties and, after all, Labor is making the prospect of deep budget cuts a centrepiece of its WA Senate campaigning. Abbott seemed to be providing ammunition. On the other hand, he could take the view Labor had the bullets anyway so he might as well play the longer game.
Treasury secretary Martin Parkinson publicly chimed into the pre- budget debate with a speech reinforcing the government’s lines about spending growth in the big areas.
But Parkinson also sent a public message to the government for later about what it should do on taxation.
With Hockey shining attention on health and pension costs, Parkinson documented the escalation.
Total Commonwealth spending on health is set to rise from $64.7 billion in nominal terms in 2013-14 to $74.6 billion in 2016-17, and to $116 billion in 2023-24.
The Commonwealth’s three main pension payments - for the aged, those on disability support and carers – will grow at an annual 6% in nominal terms over the forward estimates, adding $13 billion to annual payments by 2016-17, and another $39 billion by 2023-24. “Of this nearly $52 billion in additional payments in 2023-24, compared to 2013-14, over half is a result of indexation with the remainder due to increases in the number of recipients.”
That seems a fair hint that both drivers are being looked at. It should be remembered that successive governments have been trying to curtail the numbers on the disability pension but it has seemed a losing battle. It’s never as easy as it looks in theory.
Parkinson then turned to the tax side. His argument, aimed well beyond this budget and directed squarely at the political masters he will leave in December, is crystal clear. Australia needs a tax system it relies more on indirect tax, less on direct tax. The king of indirect taxes is, of course, the GST.
Parkinson pointed to one rather surprising fact, given the tax debates we’ve been through over many years. “Despite reforms that broaden the tax base (such as the GST), and decisions that have lowered corporate and personal tax rates across the decades, the share of direct and indirect taxes (as well as Australia’s reliance on income taxes) has changed little since the 1950s.”
Australia had relatively high reliance on direct taxes as a proportion of revenue raised compared with other OECD countries, he noted, before observing that: “Research consistently says that reduced reliance on income taxes and increased reliance on other, more efficient sources of revenue, including indirect taxes, can support higher growth and higher living standards by increasing workforce participation and lifting productivity.”
The problem is that “without conscious change, Australia’s tax mix will move in the opposite direction as personal income tax increases through fiscal drag”.
“We will move even further in this direction if, as we anticipate, the relative share of total indirect taxes (including GST) continues its long-term decline. Contributing to this decline is the non-indexation of fuel excise (unlike other excise rates) and a rising proportion of consumption outside the GST net, for example, in increased health expenditure.”
Parkinson warned that “continued increases in the personal income tax burden will hit lower and middle income earners with higher marginal and average tax rates. This will have adverse labour force participation impacts, while sharpening incentives for tax minimisation by higher income earners”.
The globalised economy meant Australia would be under pressure to cut the company tax rate.
“Given the pressure to return fiscal drag and to reduce the burden of corporate income tax, it will be a challenge to maintain the current levels of revenue over the medium term, let alone the increases required to achieve the budget projections.”
In the past, Parkinson said, tax reform had largely been pursued through broadening tax bases as an offset for lowering tax rates.
“However, a key challenge for the upcoming White Paper on Taxation will be to consider the mix of taxes, including whether there is a role for a greater contribution from indirect taxes.”
The opportunity were there to plot a path to a better tax system and the dangers clear if it was not done.
“If we do not start making these changes and simply keep drifting along we will be increasingly vulnerable to the next global crisis and will also lose out on the opportunities presented by the rising Asian middle class. The exceptionalism of this ‘lucky country’ will become just a distant, ironic memory and our children may really end up ‘doing it tough’”.
So there you have it. Parkinson, axed by the government (though extended until year’s end) won’t be around for the battles after the white paper, which has a long time table.
But he has signposted another lot of unpalatable truths. In terms of painful decisions ahead, this budget is only the start of it for the Abbott government, which hates the idea of tax increases, fears the politics of a robust debate about needing a higher, broader GST and has promised to take any major tax changes to the election.<img src="https://counter.theconversation.edu.au/content/25161/count.gif" alt="The Conversation" width="1" height="1" style="line-height: 1.3em;">
Michelle Grattan is professorial fellow at the <a href="https://www.canberra.edu.au/" target="_blank" style="line-height: 1.3em;">University of Canberra</a>.
This article was originally published on <a href="https://theconversation.com" target="_blank">The Conversation</a>.
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Tony Abbott

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