I’m going to expound my economic theories.
One of the best things about Australia
I really enjoy reading Ross Gittins in the Sydney Morning Herald. I often don’t agree with him for reasons which I can never really put my finger on. I’ve argued with economists in the past and I’ve found that they have the annoying habit of quoting facts at you. Obviously the trick to beating someone who is quoting facts at you is to come up with better facts but unfortunately most of my opinions are based on contrarian hearsay and populist rumour so I’m quickly undone by even the weakest actual knowledge. Despite all this I’m sure that, on at least one of two occasions, I’ve been right and Ross Gittens has been wrong.
This morning however I was in complete agreement with him when I read this article about th e current predicament facing the Australian government. Politicians can be a real liability in an election year. They have a tendency to promise things wrecklessly, like tax cuts at a time when inflation is a problem. I love small government so in theory I support tax cuts but I love innovative government more and plain old more-money-in-your-pocket tax cuts are certainly not innovative.
So what do I think the government should do? Super.
- They should reduce the 15% tax on super. That 15% after all is a tax on me. Reducing it is a genuine tax cut. It’s a tax cut which will have a very significant long term impact for me.
- Extend the super co-contribution scheme. Super co-contribution has a huge impact on long term savings. I remember David Koch talking about this in the paper a while back. It’s not technically a “tax cut” but I’m sure that a good bit of spin doctery could turn it into one. I’d like to see it extended to low paid people even if they don’t make personal contributions. This is especially important when they’re young. Currently a $1,000 personal contribution when you’re 18 can make you at least $200,000 better off when you retire. It’s good to encourage people to make personal contributions but for very low paid workers I don’t think it should be a precondition of receiving the co-contribution.
Super in Australia towers over the economy and to a certain extent the society as a whole. It’s hugely influential despite having been only in place for 15 years or so. It’s a great example of a how a very simple egalitarian law which requires very little government intervention can have a huge impact on a society. People who started working in the last 15 years are going to find that they are far wealthier on retirement than workers in any other country in the world. You can play around with all the numbers as I’ve done here and what they show you is that someone who works on the minimum wage their whole life will retire with around $2,000,000 $1.2m. That’s without any personal contributions or co-contributions. Reducing the 15% super tax rate by 3% would give that same worker almost $200,000 more.
Australia is so far ahead of the rest of the world in pensions and superannuation. Not only are they already 15 years ahead of most of the rest of the world but most of the rest of the world is in no place to implement such a scheme even now. It’s such an important thing to get right. Most countries are only just grappling with the problem but Australia has already solved it. I heard recently that super savings here in Australia recently topped $1 trillion dollars.
One of the great side effects of superannuation in Australia has been that it breaks down the old social barriers between shareholders and workers. Everyone in Australia is a compulsory shareholder. Share prices are not something that rich people check in their morning papers. They affect everyone, from the dustman to the doctor. In a way it has created the ultimate egalitarian capitalist society where everyone has a stake in the economy.
Superannuation changes politics as well. Although they have traditional left-right politics here in Australia both sides are ultimately representing very wealthy supporters. It narrows the gap between rich and poor.
One of the worst things about Australia
Debt, as I’m beginning to understand, can be a good thing. It forces you to work for one. It also forces you to look for ways to increase your income. For an economy those are good things. Keeping house prices fairly high I suspect (although I am no economist) can have the effect of boosting productivity.
The problem however comes with the availability of the debt. Banks love lending. It’s how they make money. They make up some rules such as earnings multiples and asset tests to try to appear responsible but ultimately they want to lend you as much as they can without financially ruining you. If their rules won’t allow them to lend then they’ll give the money to someone else with weaker rules who will lend to you. Excessive debt makes people unhappy. It’s simple. I’d like to see stricter rules around lending to ensure that debt levels do not become excessive. It’s not enough to leave it to the individuals to decide what debt they can afford because we’ll just end with a race to leverage up as we have now. All the best housing will go to the biggest risk takers instead of the best producers.
I just read this really interesting article from the Age arguing that lending limits should be based on a multiple (20) of estimated rental income. It’s a great idea. Lenders will always find ways to lend more than they should but hopefully if you make enough rules the flood of debt will begin to dry up.
From the little I know about economics the euphoric rush to leverage up during a boom is a major factor in the severity of the ensuing bust. Slow that rush and we might see a more orderly procession in the world economy.
Update: the government must be reading my blog. Just spotted this news.
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