So, the Budget has been handed down. The Opposition Leader has delivered his Budget Reply.
And where does that leave us?
As investors, probably right where we were at the beginning of last week. Not only was there nothing in this Budget (or reply) that might move the needle for some companies in some circumstances, but there are very, very few Budgets that change how we should or would invest.
That’s because our companies’ long term futures are very rarely influenced to any great extent by these changes in government spending or taxation, and nor is the investing landscape itself.
Sometimes, there are changes that matter, including when the capital gains tax system was changed, or when Super rules are (almost inevitably) tweaked for the 243rd time – but these are relatively few and far between.
But, as I’ve written before, what investors should be mindful of is what each successive Budget does to the economy itself. Because over time, companies that are listed on the share market will generally benefit from favourable economic settings and circumstances, and be hurt by unfavourable ones.
So while watching (or reading about) the Budget will rarely change what we buy, or the price we pay, we should be hoping our elected officials to make changes that improve both our economy and the society it serves.
Which takes me to a few hot button issues that continue to swirl around, as a result of those announcements.
And strap in⦠they’re controversial.
I would ask (in vain in the broader community, but hopefully productively of our informed and thoughtful readership) that you put the political barracking and ideology aside for a few minutes here. Or, hate-read it if you must, but know that it probably isn’t helping (and you’ll love the things your political opponents hate, and vice versa, but that won’t get us anywhere).
Let’s start with ‘Future Made in Australia’. I’ve gotta say, this one is electoral gold. It seems that, somewhere deep in our DNA and/or in our rose-coloured-glasses-case, we just want to make stuff. We justify it on a lot of grounds: employment, national security, supply chains, keeping profits here. They’re all good things. But we seem to have trouble comparing that to the drawbacks. Probably because, as the boffins describe it, international trade has ‘large, but diffuse benefits’. In other words, we don’t easily see the aggregated national benefit of buying more cheaply from overseas buyers, or the costs of dragging workers from more productive pursuits into subsidised work.
I don’t know an economist (and certainly not an impartial one) who thinks this is good policy. It’ll likely lead to lower living standards, higher taxes or both. But it just sounds good. Which might just be why the pollies love it.
So, let me say clearly: it’s not. It’s less efficient, less productive and wastes money. Buying stuff from international trade partners, and selling them our stuff, is a far more prosperous endeavour.
And it only gets more controversial from here.
Can we talk about immigration? How’s that for a starting line. At the barest mention, people are already manning the barricades. On the ‘pro’ side are those who want more people so that companies can sell more stuff, the people who shout about ‘skills gaps’ (they’ve been doing that for decades), and those who see any mention of immigration as barely-disguised racism. On the other, the actual racists (the former group aren’t entirely wrong), those who worry about house prices, and those (like me) who’d point out that population growth is masking a decline in per-person GDP.
My take? I think we have a short-term question and a long-term challenge.
In the short term, household formation growth is exceeding dwelling completion growth. (‘Population’ isn’t the right number, because a family of 6 needs one house, just as a childless couple does. So it’s not the number of people, but the number of households that matters.) That’s a technical way of saying the growth in demand for housing is outstripping the growth in supply of housing. That’s⦠bad. It’s bad for housing affordability. It’s bad for economic activity (those who pay more for housing have to pay less for, or buy less of, other things), and it’s bad for really important, if uncounted-in-GDP, things like homelessness and mental health.
There are plenty who say the issue is supply. And it is. But â and this is important â supply is only an issue if we continue to have more people who need houses. A moderation in demand would mean a moderation in the required supply. But also, supply takes years to come on stream. Meanwhile? Meanwhile the growing number of households need somewhere to live. We need to meaningfully reduce demand, in the short- to medium-term, while supply catches up. And then, if it was up to me, I’d peg our population growth (births plus arrivals) at maintaining housing vacancy rates at something around 3% or so, ensuring that housing is both available and (more) affordable.
In the long term? Man, if you think the short term issues are above our politicians’ ability or willingness to grasp, try asking them to think 10, 20 or 50 years out. See, we have some really important conversations to have â on our own behalf and on behalf of our kids and their kids. And that is ‘How big do we want Australia to be, and what do we want to trade off?’
Think: infrastructure. Congestion. Density. Environmental impact. Quality of life. Access to open space. You get the idea.
I don’t have a solid view on this one. I’m not sure that many more people want to live in higher density, but instead are forced to by affordability. (Some do, of course. And we should build for that.) I don’t think we want more sprawl, at the expense of our farms and bushland. I’m not sure we have the water. I would suspect that best case (for economic and non-economic outcomes) is that our long term population is closer to the current level than to 100 million people. But more important than my guess is that we have a national conversation, informed by expertise and information.
(Oh, and if you think ‘but the economy would be bigger with more people’, you’d be dead right. But, remember, a larger economy can also come with a reduction in per-capita GDP. How do I know? Well, that’s precisely what we’re seeing now.)
By the way, both major parties are promising a reduction in immigration. It’s harder to do â and/or has more significant consequences â than the soundbites suggest. It’s not an easy thing to tackle.
And one last one on population/immigration: decent people can disagree for decent reasons. But there can be no excuse for this conversation to be a barely-there fig leaf covering racism and xenophobia. There is never, ever an excuse for racism, and our immigrants themselves aren’t the issue â our policy settings are what we should be discussing. The distinguished list of immigrants-done-good in Australia is extraordinary, and we are lucky to have them.
Speaking of housing: affordability and availability are probably the biggest short-term economic issues facing the country. Too many people are priced out (or just crowded out) of the housing market, as owner-occupiers and/or renters.
As I said above, a relatively swift and sizeable cut in population growth is the fastest way to get more people in houses, and reduce the upward pressure on rents and prices. But also, remember that economically, the more money that goes into housing, the less that is spent in the rest of the economy. Excessively high house prices are good for those who own them, but not good for our economy â or the long term prosperity of the country.
And, assuming we agree that the cost of housing is an issue, our politicians should grasp the nettle and make some additional significant and swift moves to reduce upward pressure on prices: namely moving capital gains taxation back to the previous model of indexation (replacing the 50% discount), stopping (but grandfathering) negative gearing on residential property, and stopping foreign purchases for a period of time. Frankly, I don’t think any of these will individually have a significant impact on prices. Even as a group, it’s probably not huge. But if we’re going to take action on affordability, every little bit helps.
The Opposition’s Super-for-housing policy, that Opposition Leader Peter Dutton recommitted to on Thursday night? I don’t have enough scorn for that policy, as I’ve written before. Yes, housing is more important than Super. But we shouldn’t make our young people choose between the two. In a wealthy, prosperous country, both housing and Super should be the non-negotiable starting point.
So they’re my thoughts on what was announced last week. But I want to finish with something that wasn’t covered: productivity.
The word simply means ‘more output per unit of input’. And it is almost solely what’s been behind the rise in living standards over the past 300 years. Population growth helps the pie get bigger (and can have some scale benefits, especially early on), but productivity is why we’re much, much better off than our forebears.
And so where was the conversation from the Government or Opposition? What are the specific steps being taken to improve our standard of living? What investments are being made and obstacles are being removed? It might not be as sexy as ‘Future Made in Australia’ or as arousing as ‘I’m putting Australians first’, but it’s far, far more impactful, done right.
I’m old enough to remember serious policy discussions in the 80s and 90s about national productivity, and the macroeconomic and microeconomic reforms that came as a result. We⦠haven’t had those conversations for a long, long time â much to our national detriment.
So there you go. Something for everyone (and something to annoy everyone). But also some considered responses to some of the soundbites and sloganeering we’ve heard, recently.
I’ve tried to make it thoughtful, and nuanced. And there are no perfect solutions. Everything is a trade-off and every good idea comes with downsides.
But I hope it adds a little to the national conversation. At the very least, it should be more grist for the mill. Let’s hope we get more nuance and substance from our sloganeers in future.
Fool on!
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