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Political correctness at the PC

December 22nd, 2003

Nick Gruen alerted me to this piece by Ross Gittins, excoriating the Productivity Commission’s report on housing affordability. I had only seen the press reports and was struck by the absence of any reference to the cut in capital gains tax, the biggest single factor in converting a boom to a bubble. Ross says

Despite all the fine words and careful analysis in the body of the report, it was no accident that the media’s headlines focused almost exclusively on the recommendation that the premiers abolish stamp duty.

It was no accident because the report was structured to produce that response. And it was no accident the Boss [Costello] exploited it for all he was worth.

After the PC had shut down any talk of doing something about negative gearing and the half-rate capital gains tax, and excused away the federal tax system’s $18 billion annual subsidy to owner-occupiers, its brave call for the abolition of stamp duty was the only significant proposal left. ….

This report is intellectually dishonest and cowardly. It’s idle for the economic rationalists to keep carrying on about the politicians’ “reform fatigue” when, in the face of someone as terrifying as Peter Costello, the bureaucratic leaders of the movement have lost their bottle.

It’s a great read, and I know the economists of the PC well enough to recognise that Gittins has hit them where it hurts most, particularly in that last para – it will be interesting to see if there is a public response.

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  1. Uncle Milton
    December 22nd, 2003 at 22:10 | #1

    The PC these days trims its recommendations so as not to cause political offence to their paymasters in Canberra. The housing report is just one example.

    Probably they are worried that if they cause offence they will be abolished or marginalised by the current government, which tolerates no dissent from its advisers. What the PC doesn’t seem to realise is that by acting as they do, they are marginalising themselves anyway, and the question will be asked what their purpose is if their reports are just meek endorsements of government policy.

  2. December 22nd, 2003 at 22:17 | #2

    The PC report on housing affordability is just pathetic. The run up in housing prices until 2000 was caused by the long secular decline in interest rates.

    After 2000, the bubble was provoked by the unlevel playing field fiscal policies: the first home buyers grant and the capital gains tax-cut. Economic rationalists claim to be against this kind of jiggery-pokery and funny money schemes.

    The stamp duty has little to do with the asset price inflation, since it is set at only negligible tax rates. In fact, since it is a progressive tax, it ought to discourage higer prices. Blaming high asset prices on an asset-price tax the worst kind of economic philisitism.

    The PC economists who signed off on this travesty of economic analysis have lost my respect.

  3. Jill Rush
    December 22nd, 2003 at 22:40 | #3

    In any area of the public service there is the equivalent of ” shoot the messenger bearing bad news”. ie spin doctor any negatives to make it sound good for the Feds and bad for the states

    The cuts suffered by those areas that didn’t produce what the government wanted are very obvious and of course there is no equivalent of Sir Humphrey these days.

  4. Brian Bahnisch
    December 22nd, 2003 at 23:27 | #4

    If you chart the share market from 1990 the trend looks pretty sideways for about 5 years, from early 1999. No-one can say with confidence that it’s on a new uptrend now although it looks better from about March 2003. My impression is that a lot of small investors have switched to the real estate market over the last few years.

  5. December 23rd, 2003 at 08:43 | #5

    Some of Gittins’ observations on the politics behind the report are fair enough. In particular, he correctly identifies the reasons for the RBA fingering negative gearing in its submission on the issue: to deflect attention from monetary policy should the house price boom end badly. A certain amount of institutional shirking and bureaucratic arse-covering is to be expected in this context.

    But Gittins’ view that capital gains tax relief and negative gearing are largely to blame for the recent house price boom in Australia will not hold water. House price inflation has been a widespread development throughout the industrialised world in recent years, suggesting a common price shock to this asset class that cannot be explained in country-specific terms. For all the inevitable politics behind the report, the Commission had the correct focus. Ross was down on capital gains tax relief well before the current house price inflation came along and is just as guilty of using the housing affordability issue to press his pet causes as the other players in the debate.

    Gittins also quotes some economists from the investment banking/funds management community on this issue. It should go without saying that these are not exactly disinterested players in the debate, given that they are in the business of promoting investments in asset classes that compete with residential property among retail investors and that also happen to benefit from capital gains tax relief.

  6. December 23rd, 2003 at 11:09 | #6

    Stephen Kirchner retains his faith in market rationality:

    House price inflation has been a widespread development throughout the industrialised world in recent years, suggesting a common price shock to this asset class that cannot be explained in country-specific terms.

    There is some truth in this, although the same thing could be said about the bubble in tech stocks in the late nineties. This was based on a commmon evaluations alright, by the greater fools the world wide over.

    As the Economists global house price survey indicates, Sydney and eastern seaboard metro realty looks pricey, even allowing for a general move into high-priced real estate due to changing risk premiums or positional goods preferences or whatever,

    The fact that every man and his dog in Sydney is getting into residential property is a sure sign that the bell-hop principle of sales advice should now be kicking in.

  7. December 23rd, 2003 at 12:59 | #7

    My point was not about market rationality (although the modelling done for the last IMF Article IV Consultation with Aust suggests that recent house price inflation is well in line with fundamentals). My point is that Gittins’ attack on the PC is more than a bit rich!

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