Posted: April 28, 2005

Free market wisdom to ponder. Not!

On the ABC PM program (Tuesday, April 26) there was a segment on the claim by the Australian Council of Social Services (ACOSS) that the upcoming Federal budget should provide more for the poor by explicitly targetting the rich. Here is the Transcript of the segment. The so-called 'expert' that the ABC interviewed as the 'opponent' of the proposal, one Mike Nahan, who is the Executive Director of the free market think tank, the Institute for Public Affairs (IPA) presented a breathtaking command of economics. If the standard of public debate that the ABC is meant to foster is characterised by the trend of the ABC to interview 'experts' like this then I will soon also be calling for the privatisation of the national broadcaster on the grounds that it is already a 'private sector' organisation - in the sense that it seems intent only on venting the vested interests of private profit seeking groups.

The story began with the ABC journalist stating that ACOSS "says it's identified 11-billion ways for the Federal Government to find more money for essential services, starting with tax concessions for the rich." The champions of free enterprise, the IPA responded with the cliche "One person's tax break is another one's essential.", whatever that means. Well it turns out to mean the following.

First, ACOSS want to do away with negative gearing (wrongly reported by the ABC to be the capital gains tax). This is the scheme where you get a tax-deductions from your total assessable income for all interest payments in servicing a loan for specific investments (and costs) such as property, shares or small businesses. If the interest on the borrowings for a selected investment exceeds the (rental) income from the property, the property is then considered negatively geared. Investors then hope that the net increment in capital value of the property in the future is greater than the 'cash loss' made in the short run (taking into account the tax savings. It is thus a public subsidy to allow individuals with the cash reserves to service the initial debt to speculate in the property market and increase their long-run wealth. It is at the expense of those with less immediate means. It also probably contributes to asset price (real estate) speculation which further disadvantages the poor.

It is spuriously claimed that negative gearing helps maintain affordable housing for poorer tenants via a competitive low price rental market. To justify this claim, proponents point to the 1985 decision by the Hawke Government to withdraw the tax concession and the resulting downturn in private sector new building dwelling approvals. Most of this bluster comes from real estate institutes and related lobby groups or investment banks wanting to expand housing credit. They never try to seek a scientific (that is, a research-based) understanding of the downturn in housing and the rise in rents in 1986. One of the few studies that has delved into this matter is from housing geographers Blair Badcock and Marian Browett (then at the University of Adelaide) who were able to disentangle causality from correlation and implicated factors such as rising interest rates and competition for funds as a result of the then strengthening share market. Coincidently, just as the Government reversed its policy, the sharemarket collapsed and housing assets became more attractive and there were more available funds for housing. The correlation between increased housing investment and policy change though was not causal, as many try to claim.

But back to the story! ACOSS claims that negative gearing has stimulated the growth in "inner city apartments and Gold Coast apartments" rather than in "affordable housing.". Mr Nahan, usually a champion of no government intervention (like labour market regulations, provision of welfare to the poor, etc), now is adding his voice to those who want a tax break for non-productive investment. He told the ABC that "There is a large number of people who are not high income, medium income, people, who live in the Gold Coast, and in the apartments in Melbourne, for instance, where I live. Many of them are students. Many of them are younger people, not wealthy." Well, asinine comes to mind when I heard that. Anyway, the ABC interviewer then noted the renters were not the owners to which Mr Nahan replied "They rent them, people buy them, people rent them. What's the difference if the state builds it and rents them out? These are productive assets. People are using them." Now we are really plumbing the depths. The difference, Mr Nahan, is that the state in case (a) is giving a privileged group of property owners income tax breaks so they can speculate and get wealthier while those who are not so privileged, while participating in the wealth generation process are not the beneficiaries. In case (b), the public sector could provide low cost housing for the low income earners (and subsidised loans) and let the wealthier members of our society fend for themselves - and I am sure they would do this admirably, without the tax subsidy. Further, the other point is that encouraging investment in real estate is not considered a productive use of private capital. While rental income is counted in GDP it is questionable whether it provides significant and enduring employment multipliers in the same way as an investment in plant and equipment.

Second, the interview then went on to discuss the $2.5 odd billion that is transferred from the public sector straight into the coffers of the private health funds - the so-called private health insurance rebate. The argument made by ACOSS is that this money is underwriting the wealth generation of the health industry rather than providing for better health care. Mr Nahan has a different opinion - read on. "Health insurance industry is a, my records are most of it's non-profit. The largest one is Medibank Private and it's unprofitable. So it's not a highly profitable industry. Each one of these things, we've had a long and vigorous debate about whether they should be done, and validly so, but the big ticket items are in fact helping, in the medium to long term, lower income people."

While you are choking back the tears let me analyse this statement. In 2001. the much vaunted (but in my view totally overrated) ratings agency, Standard and Poors said that the Federal Government's multi-billion dollar rebate health care package is equivalent to providing a massive windfall to the private health funds. The S&P report was a topic dealt with by the ABC World Today program. It was noted that in the year following the rebate's introduction, the "private health insurance industry ... recorded a 172 per cent surge in profits ..." Medibank Private had according to the ABC interviewer "achieved a profit surge other industries would die for." The explanation for the surge in profits was according to S&P government-induced. In more recent times, profitability has fallen a little from these halycon days because according to S&P (in their recent industry analysis) - the health funds are facing cost pressures which will dent their profitability. This did not stop funds like Medibank Private raising premiums by 9 per cent in 2004 before recording a profit of almost $45 million - a four-fold increase on the previous 12 months.

And as my blog colleague Sally noted previously - the 2003-04 Annual Report from the Private Health Insurance Administration Council (PHIAC), which is the government body charged with monitoring and regulating the private health insurance industry is good reading. In that Report (the latest available) you find that the equity of the private health funds by $420 million and the difference between total contribution income and total cost on benefits (including state levies) was $1 billion. Some of the individual funds registered huge increases in equity including MBF ($109 million), HBF ($61 million), Medibank Private ($45 million) and HCF ($33 million). Good if you can get it!

And these cost pressures noted by S&P? The PHIAC Annual Report shows that in 2003-04 'management expenses' accounted for 10 per cent of contribution income across the industry, with five of the funds spending more than 15 per cent of contribution income. These are big dollars going into a few pockets. Mr Nahan - how is it justifiable for a free market promoter such as yourself to support a massive 2.5 billion subsidy to this avaricious industry which continues to cry poor and creams off the premium rises to underpin the management lifestyle for a few? Especially when all the long-term unemployed could be given a Job Guarantee opportunity for around the same figure!

But the other salient point to note and it is not the first time I have made this point - what is the ABC doing having characters on its prime-time and influential PM program who provide this sort of nonsense? Their propensity to wheel out industry hacks who only reflect their vested interests is staggering.

Blog entry posted by bill