Hypothecation and housing

In my first post on Labor’s $10 billion housing fund, I pointed out that the $10 billion number is misleading.  The key idea is to borrow $10 billion at the low rate of interest payable on government debt, invest it in higher-yielding assets and use the profits (maybe $400 million a year, based on historical average returns) to finance social housing. The same model has been used by the LNP government to set up funds for a variety of purposes. There’s a total of $50 billion across five funds, the biggest of which is the Medical Research Future Fund of $22 billion, twice the size of Labor’s housing fund.  

All of these off-budget funds are managed by the Future Fund, which was established to offset the government’s unfunded superannation liabilities, and is currently just below the target level ($200 billion in the fund vs target of $215 billion).  The Future Fund can be seen as matching off-budget assets and liabilities

I’ll look at the general idea of sovereign wealth funds in a later post.  A separate question is whether it makes sense to allocate the proceeds of a particular source of revenue (the fund) to a particular policy objective (social housing). In the jargon, this is called hypothecation.

Economists generally dislike hypothecation, but it’s often a harmless way of making the link between revenue and expenditure clear. For example, some road projects in Queensland are funded by the revenue from speed and red light cameras. That encourages law-abiding motorists to think positively about the idea, and weakens the position of dangerous drivers complaining about ‘revenue raising’.

But the housing fund has no such merit. To the extent that the hypothecation is genuine, it means that the money available for social housing depends on the performance of the share market. And this dependence is the wrong way around. The case for public spending on social housing is strongest, both in terms of need and the availability of resources, when the economy and the share market are doing badly.

The Housing Fund is, quite simply, a poor substitute for direct public expenditure.

7 thoughts on “Hypothecation and housing

  1. Yes it is a dumb political game to do it like that. What is not dumb is borowing money at those right now incredible low goverment rates and invest it in general. Someone tell that the German government please.

  2. One has to ask why governments of the major persuasions persist in these boondoggles. They don’t set up future funds for bombing people who have never hurt us. They just add $500 million then and there to the budget to fund the missions and the bombs. This really happened by the way during Australia;s involvement in the 2nd Iraq war and aftermath.

    To me this sort of dishonesty, inhumanity and inconsistency indicates the complete disinterest of the elites in actually doing something about any social problem(social housing in this case). It’s all about pretending to do something while actually doing nothing. In all likelihood other funds slated for social housing in other parts of other budgets will be withdrawn or never allocated and the sum increase in spending on social housing will be zero in real terms.

    I could type more but I would go ballistic. I think I’ve been in this world too long in some respects. I’m sick of this crap. It’s been going on for 40 years under neoliberalism.

  3. Is there something particularly absurd about a fund which uses the stream of benefits from assets to purchase assets which will deliver a stream of benefits? If the Australian government had continued 70s levels of public housing investment until today, hundred of thousands of homes would be part of the common wealth, generating benefits and rent. A broad based public housing scheme such as that would have significant numbers of residents paying market rents on land which cost nothing or very little.

    How long until we see a scheme where a dedicated fund is set up whose returns will be invested in a fund whose returns will be used to fund pubic housing?

  4. It is hard to understand the make up of consolidated revenue, and spending.

    People want our resources used wisely.

    Hypothecated schemes help make it clear what the revenue and spending are.

    I suggest a large levy on land zoned for development, undeveloped for more than 4 years, which is spent on public housing.

  5. Yes, of course it is mystery, involving the economy and what pieces are actually tied into schemes out of a total amount.

    With this article, Prof. Quiggin mentions early, “Borrow…at the low level of government debt, invest in higher yielding assets and… fund social housing”. Sorta like just a wander out the back for the next harvest off the money tree down back shading the barbecue area.

    Toward the end, however he raises the issue of using monies directly on social infrastructure instead.

    The other way is good if invested monies are earning, or bad like the 1980s, losing. But neoliberalism is obsessive against government and participation and foreign to the entire mindset of something like Morrison neolib as well as parts of Labor, who still haven learned out what went wrong in the eighties and nineties.

    Perhaps they want to take the heat out of the housing market early, to prevent excessive prices and a crash should other things go wrong as well.

    Personally, it sounds suspiciously like what we used to call “selling a pup” when I was younger.
    Given that neolib governments find their first enemy to be openness and accountability, are we still guaranteed to know much of what has been invested in under what terms and conditions and how the project progresses?

    I think it has been mentioned by others that even qualified people have a limit to their access to the guts of deals made within things like the Future Fund; how much is being through “consultancy” fees and other fees by fiat.

    After the late Eighties, the Melt down and the dodgy nonsenses involving Adani and Jobkeeper, for example. I can see why Quiggin wants the bird in hand. We know from just about everything else governments have done lately we cannot expect honesty and accountability to be at the top of any priorities list, so unless the Future Fund and other funds are not structured incredibly carefully, what’s to keep them honest?

    It works different because Labor are nicer people?

    Why didn’t it work earlier then? But then, considering the nature of the system, have the ALP that many legs to stand on opposing the drift?

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