The International Monetary Fund (IMF) this week warned Australia’s budget position over the past 6 months is deteriorating at the fastest pace of any of the world’s 29 most advanced economies.
“Australia will need massive budget savings of about $90 billion if it is to stabilise its government debt by 2030, International Monetary Fund estimates show,” writes David Uren of The Australian.
Treasurer Joe Hockey this week told a Washington audience, “But I think there is a good understanding in Australia that the current settings we have in place are unsustainable. Australians know that,” (Let’s hope Australian’s do in fact have a good understanding….)
“Achieving long-run fiscal sustainability will require winding back some spending that our population have come to take for granted,” the Treasurer said. “This will require every sector of the community, including households, corporates and the public sector to make a contribution.”
Everything is now in the firing line including increasing the pension age to 70, breaking election promises by slashing ABC funding and yes, closing down many of the lucrative property rorts costing taxpayers billions and billions of dollars.
Latest NRAS (National Rental Affordability Scheme) Frozen pending Budget
First in the firing line is believed to be NRAS, the National Rental Affordability Scheme. The $4.5 billion dollar program was established with the aim to provide affordable rental accommodation to many of Australia’s neediest after negative gearing not only failed, but rather exacerbated the very issue it was suppose to address.
NRAS has been widely rorted by prestige universities and student accommodation providers, using taxpayer subsides to build student accommodation for wealthy foreign students. In the latest round, Sydney University had applied for $10,000 subsidies on each of 1,200 units to be built on campus. The university had claimed it was justified, suggesting the units would free up rentals elsewhere that could instead be occupied by struggling Australians.
Sydney University was not the only University in on the act. Monash, Australian National University (ANU) and the University of Canberra all claimed taxpayer subsidies under NRAS. According to the Australian, it is thought two of Monash’s NRAS blocks are over 70% occupied by foreign students.
The Australian also reports on numerous student accommodation providers with their fingers in the pie – Top end of town rorted NRAS scheme (15th March).
Over the weekend, The Australian reports that according to senior government sources, the current round of NRAS applications have been frozen ahead of significant revamps in next months budget designed to save taxpayers “substantial” savings.
This can only come as good news. Let’s hope any revamp is well designed and thought out. (Can’t say I have high hopes – the track record is not good!)
Negative Gearing
Negative gearing has always been considered a sacred cow, but with the budget deteriorating rapidly by the day, it is though nothing is sacred any-more.
There are now credible sources indicating Treasury and the Parliamentary Budget Office in recent months has been working on plans to grandfather negative gearing in next month’s budget. The plan is to abolish negative gearing for new investors of existing dwellings, while current investors will be allowed to continue to negatively gear. This is designed to prevent a mass exodus of investors at a time when the property bubble is precariously balanced, while taking some of the recent heat out of the market.
While it is unclear if Australia actually has a housing shortage, the plan will also allow investors in new housing stock the ability to negative gear in a bid to create more housing and drive down prices.
Budget Emergency? Nop, not yet
While the budget is rapidly deteriorating, one of the positives for Australia is our relative low level of Government debt as a percentage of GDP. The IMF has it at just a bit over 30 per cent.
Sadly, the same can not be said for households in Australia. Household debt is hovering just shy of 100 per cent of GDP, or over three times that of Government debt. As a percentage of household disposable income, household debt is now 148 per cent, still rising and still continuing to ring alarm bells.
One of the reasons why few saw the GFC coming, was simply because they were fixated with government debt.
Housing bubbles, like the size of the one Australia is experiencing, almost always lead to banking failures when prices come tumbling down. Banking failures require government bailouts. Following the last minute buyout of Bankwest in October 2008, preventing its collapse and potentially triggering the collapse of Suncorp, the government moved to passed legislation to set up the committed liquidity fund to the tune of $380 billion. This means, when the time comes, the government is better prepared and the Australian taxpayer will be ready to bailout the banks – thanks guys.
Overstretched household debt can very quickly turn into government debt. For example in 2008, Ireland had a government debt to GDP of just 25 percent, less than Australia today. In 2013, it was 117.4 percent, following the devastating collapse of its housing bubble.
If the government can’t get our housing bubble under control, then today’s budget emergency will pail in comparison.
» Fiscal Monitor – International Monetary Fund, April 2014.
» IMF says budget fall fastest of all – The Australian Financial Review, 1-th April 2014.
» IMF warns of $90bn debt rescue – The Australian, 10th April 2014.
» Joe Hockey tells G20 finance ministers that upcoming budget will cut spending Australians ‘take for granted’ – The ABC, 10th April 2014.
» Australian house prices: Taking a fresh look at negative gearing – The SBS via AAP, 4th April 2014.
» Budget boost as ‘flawed’ rent scheme put on ice – The Australian, 12th April 2014.
» Sydney Uni taps NRAS for on-campus units – The Australian, 1st April 2014.
» Deakin puts NRAS row to beds – The Australian, 26th March 2014.
Hmm. I will be really surprised if Slop messes with the Negative Gearing rort.
I still cannot get my head around it. Massive budget deficits are forcing the government to adopt more sensible economic policies? It sounds like hopelessness and incompetence abound in Canberra. The proposed budget cuts do not go far enough but I do not believe the majority of Australians should be paying the consequences of which the government is trying to do. I hope those who still vote will open their eyes to this. The rich minority (banks-real-estate/investors)should be the one footing all the consequences. Also, I did not read anything about the government changing Australia’s tax system to the land tax where everyone pays according to the value of their property. Maybe the worsening budget will make the politicians make more changes and sooner rather than later?
They will never ever ever get rid of negative gearing. Ever.
Negative gearing has made every baby boomer a millionaire, every baby boomer a property wiz kid, every baby boomer a tycoon.
More likely they will start churning out the $$ up the print to 9-11% increase in cash, lower the value of the dollar and inflate away the problem while having low rates. Baby boomers and gen X with big ole loans will suddenly, as they have done with the now low rates, found they have even more cash to play with and will start buying even more property patting themselves on the back for what savy investors they have been.
That way people who already own are safe and people who try to save or don’t own (gen Y) get stuck with all the problems and low wages trying to pay for massive living cost increases and save for a home that keeps increasing 10% a year while their wages sit at 2.5% a year.
Watch, I promise they will because its the only tool they have in their toolbox that wont make people riot.
I feel so so sorry for Gen Y. They are getting the hard rough crap covered end of a very very long stick that the Baby boomers and Gen X are both trying to force Gen Y to swallow and bend over for.
Gen Y will most likely take it too which is even sadder and they will be locked into almost slave like conditions for most of their working lives. Unless its the straw that broke the camels back and they all quit on mass.
Everyone knows its true…
Also, let see the government collect tax from the 20+% youth unemployment… See how that works out for you.
Not going to happen.
Australian housing is a plague on the government worse than automotive manufacturing.
We subsidised Holden and ford till they became bloated. Outdated. Inefficient. And all together useless. And that was just a few million a year…
Australia’s housing gets billions and billions a year and is worth trillions of dollars.
They will never ever ever touch housing. Not in a million years.
It’s unexportable so they will never have to worry about competition. 3/4 of their votes come from homeowners and 95%+ of all housing relies on government handouts. It’s made everyone ‘millionaires’ with money they can’t spent or eat or sell.
The government will do everything in its power to keep the housing bubble inflated. Everything. Because they know if it fails that’s it for Australia. We sink out of the international spotlight. We lose education and international students. We lose festivals and tours. We lose everything.
Australia’s whole economy (60-70%) of it is based on housing. They know it. We know it. They will never let it crash. If it does crash they will ban people selling homes for less than the last sold price.
Well put Sam, I agree assuming we have 100% control of our economy. You left out one word and consideration….China.
The taxpayers bail out the banks? You wish! They keep talking about a “bail-in” where depositors are robbed to keep the criminal banksters in operation, as per Cyprus – the RBA was the last to float this lead balloon.
Meanwhile, the banks with their ever-increasing record profits are unable to provide for their own security… talk about moral hazard. It’s a total scam and they’re after anyone with savings.
I remember watching Graham Richardson state on TV in 1996 when Labor lost the federal election that (I’m paraphrasing here) one of the reason that Labor was voted out was because most people weren’t or didn’t feel like millionaires. John Howard fixed that and secured himself 11 years in office. No government since has been unable to undo the Gordian Knot that is middle and upper class welfare. It’s John Howard’s poisoned chalice.
The reason for the demise is that the major car manufactures are consolidating high volume car production capacity around the Asian economies and are looking for economies of scale. Taking a dig at the people that work in these plants is cheap and ill informed.
Australia has good engineering research that is tied back to the Universities – I believe 60% of engineering R&D is automotive related. Australia should move up the value chain like they have in the UK into high end advanced engineering, manufacturing, design, etc, and develop capability across multiple engineering sectors. If there is no reorientation all of the skills and knowledge tehse will be lost.
Looks like we now have a perfect storm brewing in terms of a housing bubble, a slowing China and rising unemployment.
Countries that dig dirt and grow things get poor as no value is added to unprocessed materials.
Australia is becoming a busted flush economically but the property muppets do not understand that yet and keep on borrowing more debt. Contrary to the deluded markets do go into decline.
Given the growing public debt I think the current bunch of clowns will ‘adjust’ negative gearing. They will probably ‘grandfather’ current investments if they do.
@ GaryW
I believe that the Cyprus style bail-in is already approved: One of Labor’s last major actions. Most G20 nations have agreed and made this law.
I have a feeling that this “tuff” budget will be exactly like the last several from Labor. No real reforms of any type.
As I keep saying, when this all collapses, don’t be on the wrong side of it: Keep Debt free!
@Nexus
Sorry to say we have really really poor R&D in manufacturing. Its not because of economies of scale. Thats all lies. Its because of protection and subsidies which let the industry become inefficient and bloated.
I’m a senior project and mechanical engineer and do quite a bit of work on this, techniques and employment and design. Engineers Australia’s last report outlines how many manufacturing engineers in Australia we trained.
Our manufacturing SUCKS so hard its not funny. We are USELESS and its all because everyone has 90% of their assets in housing. We have ZERO diversification so when the need to expand and grow into other areas has occurred like right now we have no chance.
Not just no chance. We have zero chance.
https://www.engineersaustralia.org.au/sites/default/files/shado/Representation/Publications/Overview%20Document.pdf
Automotive engineers in Australia are non-existent. Less than 1%
In 2006 we had ZERO manufacturing graduates… ZERO. But we had 193 resource engineers 😉
What does that say about Australia. Its Fked. Hobby groups are established at universities for R&D into cars but its an old old field which australia is 100 years behind. All universities care about is R&D into making money and to make money in Australia its housing or resources. Thats it.
Just to put it into prospective…
2009 we had 8 manufacturing engineers and 28 automotive. Lets assume EVERY engineer goes on to build cars which they don’t.
Of all the engineers we have 36 engineers out of 3547. 1%… its most likely a lot less.
The result is that the plants we have in Australia are like a bunch of cave men banging away to make inferior products like the Italians which lost all their manufacturing because of it.
If the government hadn’t of subsidized them so heavily they would have survived and upgraded but nope. They bowed to union pressure and screwed an entire sector.
for example,
Holden, 60,000 cars, 3000 workers. 20 cars/person
CNJ, 150,000 cars/trucks, 3000 workers. 50 cars/person
Mitsubishi, 1110000 cars, 30000 workers, 37 cars/person
Toyota, 10000000, 330000 workers, 30 cars/person
Australia would have to cut costs by 30% to even come close but the real problem is numbers like you said. You would need to double production to remain competitive. Lets see a person work 24 hours a day 7 days a week with no sick or holiday pay, because thats what the automated factories in Japan and Korea do. Australian cars are all based on 1950’s designs, no fuel efficiency, no solar power, no batteries, no anything to make them built for our environment. They had ‘plans’ but they were just a feel good exercise to make them look like they were conducting R&D but they wernt.
It makes me SO angry when people say the car industry was in good shape and we had the capacity because it was the WORST.
Multiply that by 100 and you have our housing industry. Protected from up high by every man woman and dog with every cent they have for a product that generates no income or work or product other than a roof over your head. INSANE.
Australia is about to get hammered harder than a freshman at his first frat party. He wont even see it coming and he’ll wake up with no cloths on, flat broke, and trying to explain to everyone why last night he was screaming at people how he’s ‘different’ and how he has ‘strong fundamentals’ but then ended up with his face in a toilet full of other peoples vomit and crap because he didnt learn from others experiences.
@ #2 Theo
In my opinion, a system based on land tax is not the solution, but will, in long run, make the homeownership dilemma even worse.
Say, your house is valued at $500,000, with a 3% annual land tax (just to pick a number) of $15,000. That $15K goes to the government. The government is not in business to lower taxes, or to accept lesser revenues, quite the opposite.
So let’s suppose the housing market goes through a lull, or a mild correction – 10%. Your house, in latter case, is now sitting at $450K, with a land tax of $13.5K. The tax base that the government is “used to” just dropped significantly. What is the government to do, but to raise taxes, and if you can’t afford to pay the increased rate of taxes, you lose your house to the government.
Land tax is the fastest way to vote yourself out of free and clear home ownership because you are *always* in debt to the government just because you decided to buy a home. The land, therefore, is no longer yours, but belongs to the government and you pay them for the privilege of renting it.
I say consumption based tax, without any other taxes (income, GST, etc) is the only way to go.
Andrew, that was a brilliant post. The last paragraph resonated like a bell.
Houses, houses, houses absolutely sick of hearing about investment in houses.
I want to blame the banks for the mess but they do what is in their nature. They follow the market and without any restraint on their lending they will follow the money with impunity. They know they are safe because they are the backbone of our economy. They cant be allowed to fall so off they will toddle leaving others to pick up the inevitable pieces….that’s us the proletariat!
Think I must settle on our leaders who inevitably reflect the contemporary views of the electorate and give them the blame. There is a case for strong leadership, but haven’t seen any…just opportunistic hectoring. They are weak, and it must be said, a very inferior breed, reflecting obvious easy short term gain cheaply bought by a ticket on the gravy train.
We have been very lucky in Australia. The family silver was sold and is being sold and it has provided a sense of wealth and prosperity. It has engendered a feeling, that we as a nation are different to the rest of the world. I suppose we are because we are willing allow our leaders to squander the inheritance. This is done even without any sign of a long term strategy beyond digging up minerals and privatising whatever is left. They proceed then to divvy out the gains to lobby groups and other mates.
Good to read all posts on this site as it is a statistical representation of a growing group of disaffected people in search of a change to a very weak and flawed economic strategy. A strategy, which has little to no benefit for the bulk of the population.
The spirit of the age appears to be changing….hope so!
I’m not sure a “bail in” is likely either, because that would erode the deposits the first home owners need to prop up the bubble. They might go after everyone’s super though, not that that money ever belonged to anyone but the government.
Saul Eslake vs Professional vested-interest bullshit artist
ABC Business
https://www.youtube.com/watch?v=0w5D9gAxrlk&list=UUi3WZlKputf4Kv6AFDiLYVg&feature=player_embedded
The property Industry is really shitting itself.
There is a full page advertisement in the weekend AFR:
“NRAS IS THE MOST IMPORTANT STIMULUS PACKAGE FOR THE DEVELOPMENT INDUSTRY THAT HAS EVER BEEN IMPLEMENTED IN AUSTRALIA. THE NRAS PROGRAM DESERVES TO BE CONTINUED INDEFINITELY”
And yes, it is has been published in caps.
Stimulus… Indefinitely…. LOL they want their gravy train to continue, so they can rort it for all it’s worth.
Hi all,
Please consider signing this.
http://www.petitionbuzz.com/petitions/aussiegold
Also consider talking to your federal member about this.
I think Australia would benefit greatly if this action were to be taken before the current financial system (paradigm) makes its necessary change
prepper
payback is coming……
http://www.theaustralian.com.au/news/almost-one-in-five-home-buyers-need-help-from-their-parents/story-e6frg6n6-1226892716297