Please Explain, Mr Brumby

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By Lev Lafayette.

Derived from the presentation at the Hume Global Learning Centre, June 28, 2006


Tonight I am representing Prosper Australia, an organisation which has, in various guises, been a part of Victoria for over one hundred years. One key objective of the organisation is the reduction, as much as possible of taxes on labour and capital, and for public finances to be derived instead from site rental. Because when it comes down to it, there are only two sources for public revenue; the goods and services which are produced or the resources that are used.

The idea of public financing through site rental was extremely popular in the early days of Australia, supported by both the Liberal Party of Alfred Deakin and his Labor opponent Andrew Fisher. Indeed Alfred Deakin illustrated the case quite succinctly when he said;

“The whole of the people have the right to the ownership of land and the right to share in the value of land itself, though not to share in the fruits of land which properly belong to the individuals by whose labour they are produced.”

In this period many local councils adopted site rental as the main source of income and for a period the Commonwealth derived much of its income from site rental. The idea was not subject to the partisanship of Party politics; famous supporters of site rental include Labor’s Arthur Calwell and Clyde Cameron and the Liberal Minister in the Menzies, Holt and Gorton governments, Sir Allen Fairhall.

Because we also have a candidate from the Liberal Party here tonight, I should also mention that I am a member of the Australian Labor Party. For several years I was the policy convenor of the Labor Left – Pledge Unions faction, the so-called “hard left” socialist group which strongly opposed the privatisation of public assets and had such disconcerting foreign affairs policies such as ending
apartheid in South Africa, self-determination of East Timor, democracy in Indonesia and a state for the Palestinians.

The point of laying these cards on the table is to illustrate that regardless of whether one believes that economies are best served by markets or by planning, or whether social equity has a greater priority over economic efficiency that one can find good and just reasons to be part of the site rental movement, whose claims include equity, efficiency, markets and planning! The fact that you would find stubborn socialists such as Clyde Cameron in agreement with amicable liberals like Allen Fairhall should give indication of the adaptability of the basic principle of site rental.

This leads to the purpose of tonight’s presentation. Some elements of the last State budget seemed quite contrary to the Labor Party’s stated objectives as put in their National Constitution. That constitution refers to matters such as the abolition of poverty, a
greater equality in the distribution of wealth, income and opportunity, and the abolition of exploitation. The assumption is that these decisions; decisions which will reduce opportunity and further impoverish those who are already poor, were made in ignorance rather than malice. Hence the title of tonight’s event: “Please Explain, Mr. Brumby”.

Something that should be said is that Prosper Australia made multiple attempts to contact Mr. Brumby and invite him to tonight’s function in his own electorate. However, he has chosen to attend a different engagement. Offers were also made to send a representative of his office or to have a written statement presented at the meeting. These opportunities also have not been taken up.

What Was In The Last State Budget?

The last State budget made (almost) everyone very happy. With a large surplus, the preparation to spend big in an election year and with the assistance of some rather optimistic economic projections, the mass media sang the praises of the State government and indeed, in most cases, this is deserved.

The last state budget witnessed a 10% reduction in Payroll Tax over three years costing some $533 million, and a $170 million reduction in WorkCover premiums. A $300 “School Starting Bonus” will be paid to families with children entering prep and year 7, along with a $500 Trades Bonus to those completing apprenticeships. A ten-year allocation of $10.5 billion has been made to improve mass transit facilities in Melbourne and regional Victoria. A budget surplus of $300 million per annum is planned and net financial liabilities remain below 7% of Gross Social Product.

There are flies in the ointment however; $100 million dollars was earmarked to the “Building Tomorrow’s Schools Today Fund” from the expected sale of Victoria’s share in the Snowy Mountains Hydroelectric Scheme. The budget also announced that schools in needy areas such as Broadmeadows, Altona, Western Heights and Dandenong would be modernised and upgraded. This announcement is now at risk because the Federal government pulled out of the sale of the Snowy leaving the State governments of New South Wales and Victoria with unfunded promises. Why the State government tied upgrades and maintenance of schools to the privatisation of a public asset is beyond reason.

One can also certainly argue that the cuts to payroll taxes are too modest and too slow. It is true that payroll taxes have a low compliance cost and it is also true that they effect a narrow band of employers (those whose payroll is greater than about $40 000 per month). But this does not change what the tax effectively is; a tax on employing too many people. This occurs when organisations like the Australian Industry Group claims that over 13,000 manufacturing jobs would be lost in Victoria this year.

But the biggest problem now facing Victoria is the issue of housing affordability. There is a real crisis in this issue and the actions in the State budget will make matter worse, contrary to the vested-interest claims of organisations such as the Real Estate Institute of Victoria and the Property Council of Australia. In particular the big cuts in land tax to those who have what is mis-named “investment properties” valued at over $2.7 million of unimproved site rental. This change, costing the public coffers some $167 million dollars, is on top of last years’ massive cuts which announced $823 million over five years.

Although this seems politically expedient, a very strong case can be made that this is not in the best interests of Victoria. Land is not like any other economic good. It is obviously in fixed supply and “investments” in buying land are demonstrably different to capital investments in buildings, manufacturing, or service-provision. If you spend money in any of these other areas goods are produced; people are employed. But putting money into land neither employs nor creates any additional goods or services. Indeed, what it does do is increase the cost of land as the available supply is reduced. Increases in the value of land are primarily due to inaction on the part of the landlord; either through community-provided infrastructure and economic activity, or by increases in population.

This matter can been seen rather simply and empirically. Research from the Housing Industry Association over the past thirty three years shows quite clearly that the cost of building a house in Australia has gone up slightly less than the rate of inflation, that is an increase of 8.4 fold. However, in the same period the price of land has gone up sixteen-fold in Melbourne, eighteen-fold in Perth, nineteen-fold in Brisbane, fifty-one fold in Sydney and a massive seventy-fold in Adelaide.

The only brake on this mindless speculation has been land tax. It stands to reason that if land is taxed and other goods and services are not, then an investor will strongly prefer to put their money in something productive. This has been well-known to economists since the days of Adam Smith and if you read the statements of Nobel Prize winners in economics over the last thirty years you will discover that they are virtually unanimous on this matter; from the left-wing to the right you find the likes of socialist Franco Modigliani, the iconoclastic William Vickery, social democrats like James Tobin and the Keynesian Paul Samuelson, conservatives like Robert Solow and James Buchanan Jnr, and the arch-capitalist Milton Friedman.

These names are all Nobel Prize winners in economics; you can assume that they know something about the subject matter. The expert opinions in Australia say the same thing; the 2001 Harvey Commission on Business Productivity suggested rolling numerous property taxes into a single land tax. The Commonwealth’s Productivity Commission pleads to the states to broaden the base of the tax rather than thumping people with more onerous charges on the productive labour they carry out. Yet the politicians are not listening; or they are listening to the wrong people.

Future Problems and Solutions

Serious problems will arise due to the decisions made in the last state budget. Where a greater return is available from land speculation than from productive investment it is obvious that an investment will prefer the former; and whilst the individual speculator will benefit greatly in the short term the community as a whole will suffer in the longer term; this is as per the laws of the multiple prisoner’s dilemma problem in game theory. Ultimately it means that everyone loses – even those who gain in the short run relative to everyone else.

The most obvious effect of the changes will be that housing affordability will continue to worsen. Encouraging “investors”, to put money into landed estates rather than productive use will inevitably reduce the effective supply of land and reduce the quantity of dwellings produced. The rather dramatic statistics provided previously from the Housing Industry Association will get worse; the possibility of young people in this state ever owning their own home becomes increasingly remote and onerous.

Apart from the obvious loss of jobs in the home building industry resulting from such changes, one must also be aware of the losses in commercial and industrial building. And, as mentioned previously, whilst the modest cuts to payroll tax will slow down job losses it will not reverse them. The highly internationally competitive manufacturing industry will be harshly hit.

One final area of great concern is the viability and stability of returns on superannuation funds. Like any other individual investor, group investment organisations, like superannuation funds, will seek to maximise their return. If the taxation system is changed, as it has been, to encourage resource holdings rather than productive investment then the funds will follow; even if in the long-run there’s detrimental effects overall.

There are however some practical measures that can be taken to reverse these dire trends and some of the disconcerting changes in the last State budget and subsequent events. Indeed, it would be very remiss to come here with just criticisms and offering no solutions.

The first is to renege on the proposal to cut the top rate of land tax and use the monies raised to pay for the aforementioned school upgrades in needy areas. It makes sense to reduce a strong incitement to short-term speculation, preferring to encourage long-term investment to the more impoverished elements of society. The $167 million dollar gift to the biggest landlords in the state stands in stark contrast to the need to invest in our children and their future.

The second is to investigate the funding and provision of public transport infrastructure through increases in land values. The proposed construction of a train station at Coolaroo has, to say the least, taken far too long to be implemented in reality. To give an example of alternative method of funding consider California in 1890s who in 1887 passed the Wright Act which allowed communities to irrigate districts and pay for them by taxing the resultant rise in land value.

In the next ten years, the Central Valley was transformed into over 7,000 independent farms. Within a few decades, those tree-less, semi-arid plains became the “bread basket of America”, one of the most productive areas on the planet.

Thirdly, lobbying one’s local council is of critical importance. Despite an excellent history in Melbourne, following the forced amalgamations in the 1990s nearly all local councils rate property rather than land; Monash is the exception and the continuing success of that municipality is worthy of note. The rating of property rather than land means that rate-payers are punished for improving their home. A comparison can be made with cities like Pittsburgh and Harrisburg in the United States which rate land much more than property. The results are obvious; less vacant sites, less derelict buildings, more industry, more effective use of land.

In the 1970s Dr. Ken Lusht, visiting from Pennsylvannia State University, found those Melbourne councils that rated land alone had 50% more built value per acre than those that rated both land and buildings. Between 1974 and 1984, the last year the government released these statistics, the number of businesses in the towns taxing property decreased by 20% while in the towns taxing only land it increased by more than 10%.

Finally, joining Prosper Australia and advocating the justness and positive effects of land taxation is imperative. There are, undoubtably those who prefer to receive as much income as possible from the most unproductive investments. They are a powerful and well-financed lobby group. The distribution of income in Australia means that the the top twenty percent of Australia receives 48.5% of the national income whereas the bottom forty percent earns 13%, whereas in terms of household assets the top twenty percent have 63% of national household assets, whereas the bottom fifty has a mere 5%. One can be certain that the distribution of land values is worse still.

A handful of people in Australia receive the lion’s share of the site rent of this nation; this is monies extracted from labourers and productive investors and wealth created from such people. The economist, David Ricardo, saw with great clarity, describing the interest of the landlord (by which he meant literally – not the person who owns and invests in houses) as utterly opposed to the interests of all other classes. Then John Stuart Mill following this lead wrote;

“Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”

This simple principle of public finance, so far-reaching in its justness and effectiveness, is the orientation that Victoria needs.

Further References

Indeed, it is fascinating to read of such organisations complaining bitterly about land tax, when the real tax slug on housing is invariably from stamp duty and GST. See: “Push to ease land tax pain”

‘A $366,660 house and land package on a housing estate in Melbourne’s northwest puts $54,520 into government coffers. The $54,520 tax bill includes $4548 land tax, $32,727 GST as well as thousands of dollars of stamp duty.’Sun reference on Stamp duty (now removed from website)

“Housing affordability in Australia has hit its lowest point since the residential property boom of the 1980s, a report has found.” The Age Affordability ref

“The cuts follow predictions by the Australian Industry Group in February that 40,000 manufacturing jobs would be lost this year – a third of them in Victoria – on top of a loss of 30,000 manufacturing jobs last year.”The Age Manufacturing ref

DOZENS of run-down Victorian schools will be forced to wait at least six years for long-overdue maintenance upgrades after the collapse of the Snowy Hydro sale left the Bracks Government with an unfunded election promise.The Age on Schools

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