Welcome to Quadrant Online | Login/ Register Cart (0) $0 View Cart
Menu
May 15th 2017 print

Peter Smith

Señor Morrison’s Venezuelan Inspiration

Think of a tax that readily wins the support of Labor and the Greens. Now think of a Coalition eagerly extolling such a tax. What we get is Treasurer Morrison's contrived and arbitrary 'bank levy' -- a travesty of fairness and, worse, an indictment of a government utterly bankrupt of principle

comradesA moral dimension now overlays the budget. Scott Morrison wants to draw a distinction between “good” and “bad” debt. Evidently, he is not as keen to apply this same moral dimension to taxes. Let me explain first one and then the other.

Good and bad debt are stocks. They have flow counterparts called good and bad deficits. The budget papers introduced a new (good) measure of the deficit to complement the (bad) one we all focus on, which is the ‘underlying cash balance’. The new measure is the ‘net operating balance’. This new measure which everyone has ignored, presumably to Morrison’s chagrin, strips new capital expenditure from the deficit.

There is yet another measure buried deep in the budget papers. With a touch of irony this is called the ‘headline cash balance’. I can only assume that this measure of the deficit is regarded as being not just bad but really bad because it is the largest and includes equity investments that the government makes to the NBN and other loss-making entities. In fact, however, this is the most telling of the measures. It tells us how much the government has to borrow.

For a moment assume foolhardily and contrary to recent experience that the forecast deficits for 2017/18 will be close to the mark. Add $10 billion across the board for realism, if you must. Here are the predicted outcomes rounded:

  • Underlying cash balance – $29 billion
  • Net operating balance – $20 billion
  • Headline cash balance – $48 billion

It is fairly clear why the new measure is favoured by the government. And such a measure is not out of place in the business world, where capital investments are governed by the pursuit of profit and failure punished. However, capital investments by government do not proceed under the same strictures. The NBN is a classic example of a major investment decided on a whim.

In prospect among many projects is Snowy Mountains mark 2, the Western Sydney airport, and the Melbourne to Brisbane inland railway. Maybe all of these projects will directly and indirectly return sufficient revenue to service and repay the required borrowings. I seriously doubt it. This doesn’t necessarily mean that they shouldn’t be done. It does mean that their impact on the budget deficit cannot be conjured away. The headline cash balance is therefore a better measure of the budget deficit than is either of the other two alternatives.

Marija Polic: Morrison Woos the Campus Trots

It is also worth bearing in mind that ‘good’ debt so-called, may turn out to be very much worse than ‘bad’ debt. Borrowing to throw another billion-or-two dollars a year on a new entitlement program is most definitely bad debt. But how about a dud capital investment that soaks billions, year after year, on running and maintenance costs without ever turning a profit? White elephants like, say, a poorly performing hydro project, or new airport, or inland railway snaking through regional towns can ultimately cost a lot more than unproductive cash splashes.

Let’s be clear: there is no such thing as good debt. There is just debt. All debt is a burden. Losing sight of that is tantamount to giving license to madcap governments to spend willy-nilly on their pet, vote-winning, capital projects. And in case the Libs are listening, the concept of good debt is a dangerous weapon to hand future spendthrift Labor governments.

Morrison might have more sensibly applied his good and bad descriptor to taxes. I will leave aside his delusion (or disingenuousness more like) that banks pay taxes rather than their shareholders and customers and focus on the discriminatory nature of his bank levy.

Taxes should be competitively neutral. In general, they should not advantage one industry over another or one business over another. Now think of a tax that confounds this maxim and which readily wins the support of Labor and the Greens. Think of a Liberal-National government so utterly bankrupt of principle that it is willing to promote such a tax.

What you get is the bank levy. It is simply a contrivance, arbitrarily set to apply only to the four major banks and Macquarie; their customers and their shareholders. Perforce this damages the competitive position of the five banks in question.

Morrison and Bill Shorten say they will take it amiss if the banks pass the tax onto their depositors or borrowers. That would leave shareholders — poor ones as well as the rich and in-betweens — to pick up the tab. Fortunately we don’t live in a socialist state so the would-be comrades of the Coalition can’t quite yet dictate how banks run their businesses.

Are there are constitutional impediments to this kind of discriminatory tax? There should be. Otherwise the government of the day with parliamentary collusion has carte blanche to undermine and potentially destroy individual companies.

The new (bad) bank tax is the thin end of the wedge. No company is safe when the government can arbitrarily impose such discriminatory taxes. It is a small step, true. But it is nevertheless a step on the road to Venezuela. It is also one further reason not to vote for the Liberals. Left hanging is the difficult question of who to vote for so that it counts for something.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [23]

  1. en passant says:

    Peter,
    This discriminatory tax regime ‘principle’ was tried by taxing the ’100 biggest polluters’ for producing life-giving CO2. Abbott repealed that, but the principle of picking out one sector and penalising it was set by Gillard, so ScoMo is in bad company.

    As for voting Liberal, well, I doubt many will even though the alternative is worse. Oz voters appear to have a choice of being beheaded by an axe or a sword – and no hope of reprieve.

    I watch the water lapping gently in front of my door, secure in the knowledge that Australia’s sacrifice for the greater good and to save the planet does not affect me any more. It is not a good feeling, but I with a good sauvignon blanc, a French imported cheese and a beautiful sunset to watch, I’ll get over it.

    Cue a comment by the Resident Troll …

  2. Egil says:

    Excellent article!
    Australia is, just like Venezuela, USA, Greece, France, Italy etc etc etc, on the same morbid train ride with the same sadly demented crew up front
    pretending to know what they are doing.
    Maybe they do know, but have just decided to enjoy their “Titanic” ride as long as possible.
    They either have gold bullion hidden under rocks in Queenstown to seek up or they are stark raving mad.

    I fear The Correction that must follow the astronomical debts politicians authorize to keep their selfish voters compliant,
    will be far more brutal than the warm up act of 2007.
    Venezuela is a distant joke/tragedy as we speak, but open minds could learn from it as they could from honest studies of history.
    Such appears to be beyond Greens/Labor/X/Lambie and Turnbull’s Coalition team.
    Does not leave many options, does it?

  3. Warty says:

    You no doubt watched Scott Morrison’s performance at the Gosford League Club, last night. This was on Sky’s Paul Murray show, and I must say, I thought he did a wonderful job responding fully and openly to a range of audience questions, and even attracted praise from the likes of Rowan Dean and Ross Cameron. I must admit I didn’t understand the half of what he was talking about, and I’m afraid this also applies to your own article Peter. No fault of yours, just that there isn’t a trace of economic knowhow in my DNA.
    Once the panel (Ross Cameron, Janine Perrett and Rowan) started to pull things apart, the lights came on again, and when Ross and Janine had their animated stoush about the wisdom of Trump firing James Comey I was fully alert.

    • Jody says:

      Expect to see ScoMo thrown under the bus with leaks from Talkbull’s office – coming to a media outlet near you. The minute ScoMo succeeds Talkbull finds a way of trying to destroy him. You don’t know the half of it!!!

      • Warty says:

        Well, spill the beans, Jody. Not much point tantalising us with ‘you don’t know the half of it’. Truth is I don’t know any of it, never mind half. I would have thought that ScoMo’s budget was a triumph in terms of Turnbull’s capitulation to Labor. ScoMo was given the script before the budget speech and followed it to the ‘T’. The triumphant tone was done extempore and as such he performed beyond expectation (quite unlike the ScoMo on of several weeks ago on Ray Hadley’s morning show, who refused to shift from the cover ups, the disingenuous unquestioned support of the Turnbull narrative. Hadley resorted to shouting at him the last three interviews in a row, as he said, because Morrison had become utterly boring.
        As I indicated above, discussions about economics will have me nodding off to sleep in next to no time. Discuss Shakespeare or T.S Eliot and I’m right with you, but I was sufficiently alert to be particularly disappointed with Tony Abbot’s support of the budget. I don’t know what has been happening there, but it seems as though some of his party room supporters may have told him to bite his tongue and the amazing thing seems to be that he followed suit. I’m left scratching my head.

  4. Don A. Veitch says:

    ‘Let’s be clear: there is no such thing as good debt. There is just debt. All debt is a burden’.

    I disagree strongly.
    How is money to be emitted into the economy for growth and development? More debt in PPP? By the way Trump loves debt and recently praised it.
    If all debt is a burden, then you have no money in the economy, no credit to finance productive activity. All money creating is in fact debt creating on a balance sheet, somewhere. But whose balance sheet? Where? Your formulation would lead to permanent austerity, permanent depression. Tragically, now, 80% of bank loans/debt is for speculation and at compound rates of interest can never be repaid. It just keeps growing.

    Good/bad depends on how the debt is raised, for example:
    a 100 infrastructure bond from a real National Bank at almost zero rate of interest could be repaid from taxes by funding from productive output and increasing the national and individual productive powers. That is how China also finances its development. The USA is stalling because it now (as opposed to historically) foolishly relies on private debt, which is expensive and short sighted.

    he tax LEVY of Morrison is (according to budget papers)not really a revenue raiser but is a move ‘ about setting bank capital levels such that they are ‘unquestionably strong’; strengthening APRA’s crisis management powers; and ensuring our banks have appropriate loss-absorbing capacity’.GFC2 is almost upon us.

    The Morrison measures (supported by Abbot, Costelloe and Howard), is a (pathetic) attempt to forestall the next bank disaster.

  5. ianl says:

    Predictably, “King” Henry, now of the NAB, is complaining loud and long about this iniquitous bank tax. It’s divisive, destructive, unfairly singling out specific entities and must be passed on to customers (ie. depositors) and shareholders, he says. I agree with him on that issue and predicted it (not rocket science, I know). The quite separate issue of additional regulations upon bank governance is one I couldn’t care less about – the “Wealth Managers” deserve it for their blatant siphoning activities and blunt arrogance when caught at it.

    Dr. Henry, however, while Treasury Head Mandarin had pushed and shoved the “mining tax” onto very specific activities (ie. iron ore and coal) with deliberately retrospective aspects on already sunk capital. This was in addition to company taxes that all are liable for in any case. He had no qualms about that then. He even lectured us about “Economics 101″, wherein an additional tax impost has no effect on production costs or sales prices – so indeed he said. It is to laugh, of course.

    There is only one principle here – that of rank, unaccountable hypocrisy. These extra little taxes are *only* applied to enterprises that are having a purple patch. Public opinion is deliberately manipulated for this lack of principle by the leftoid MSM with the simple ruse of headlining gross profit in $$ and suppressing the % net return on investment. Envy rules, ok ?

    Wearily, I can only hope Veitch doesn’t run his usual straw men here.

  6. pgang says:

    Didn’t we go through all this with the Mining Super Profits Tax?

    I think we need to get used to the idea that the war against Marxism, which began with Whitlam’s government, is now lost.

    • Davidovich says:

      I presume, pgang, that you mean that the war is now lost against Marxism, which began with Whitlam’s government? I am sure that Whitlam and company did not begin a war against Marxism.

    • ianl says:

      As my comment above said:

      > “Dr. Henry, however, while Treasury Head Mandarin had pushed and shoved the “mining tax” onto very specific activities (ie. iron ore and coal) with deliberately retrospective aspects on already sunk capital”

      Now hoist on his own petard. Black humour …

    • Warty says:

      I tend to agree with Davidovich here, pgang. Actually the Marxist war against all the major institutions in our society (which is what I think you meant to say) began well before Whitlam came to power, and simply received a leg up under his government. My blood still boils when I think of the likes of Jim Cairns and his attempts to sabotage our values, or the dreadful Al Grassby, who ushered in multi culturalism. The puzzling thing is that politicians of all persuasions since thought he was onto a good thing. Virtue signalling attracts all sorts. I’m very much a pro potent of dragging in the smelly carpet: tends to stir things up no end. Mark Latham was one of these, until he was sacked from Sky’s ‘Outsiders’.

  7. Davidovich says:

    I presume, pgang, that you mean that the war is now lost against Marxism, which began with Whitlam’s government? I am sure that Whitlam and company did not begin a war against Marxism.

  8. Keith Kennelly says:

    Debt.

    I only have a manageable tax debt in my business.

    I create wealth by providing services and manufacturing machinery.

    I’ve never had a loan in any of my businesses. I’ve grown through paying for everything from turnover.

    I’m due for a huge expansion. I’ll finance it from current turnover and 40%deposits on placement of orders.

  9. Bran Dee says:

    The extent of Australia’s indebtedness might be better appreciated with trepidation by the public if portrayed visually. One billion dollars is a vague monetary amount until one sees it, for example, as the cost to build a modern huge passenger cruise ship.

    If the cruise ship is taken as our unit of currency then to service our debt, which is to the value of a fleet of 400 ships and increasing, Australia has to send one ship out the Sydney Heads every month to our creditor. Eventually we will have to all contribute to funding the 400 cruise ships that is our debt bondage. Maybe 10 ships per year for 40 years?

    One could turn this into an election ad with good effect!

    • padraic says:

      I have no problem with the terms “good debt” and “bad debt”. I had to borrow at one point to buy a house for my young family and at another time to buy a business. This to me was “good debt”. On another time I used the credit card to finance an extravagant holiday – that was “bad debt”. Governments are no different. Borrowing to build important economic infrastructure is “good debt” whilst borrowing to pay bludgers not to work is “bad debt”. Given the attitude of a hostile Senate of unrepresentative swells what else could have the Government done? If they had persisted with the previous approach they would have been pilloried as being an ineffective government. They can always go back to the original plan if, after the next election, they win and have a friendly, sensible Senate This new way has the Labor and Greens choking on their smashed avocados. Wonderful to watch. I enjoyed watching Scott Morrison give a great defence of his budget last night at Gosford. Politics is the art of the possible in a democracy – only in a totalitarian state can the purists reign.

  10. Peter says:

    To add an explanatory point – by saying debt is a burden I was doing no more than stating the obvious, just as costs are a burden. I did not mean that these burdens should not be taken on. I simply meant that the return must make it worthwhile. Tell me about a business, other things equal, that would prefer owing more than owing less?

  11. Jody says:

    Debt is debt is debt. It can never be dressed up as anything other than debt.

    • PT says:

      Jody, there is “good debt” and “bad debt”. It’s all bad debt if things go pear shaped! Good debt is to acquire capital to build a performing business, or keep one operating, etc! This is why the banking system is vital – it moves capital from those who have it (and need a return) to those who lack it, but can make money if they can access capital!

      Banks are essential, but they do not make an economy! Forgetting this fact is even worse than forgetting the essential role of banks!

  12. PT says:

    Personally I’m amused!! When Krudd and Swan (aka the Goose) unveiled their mining “super profits tax” (note, minerals are owned by the States, not the Comminwealth), I had arguments with a bank employee who imagined that mining was just digging holes in the ground, totally different from his cerebral pursuit! He took umbridge at the notion that to others his profession might be seen as profiteering from other people’s money! At least miners produce something by their effort!

  13. Keith Kennelly says:

    Pt

    A business that needs debt to build or to keep operating isn’t a good business.

    Businesses must st make profit and grow. To have to borrow it isn’t doing that.

    Try getting a business loan or finance without the guarant

  14. Keith Kennelly says:

    Oops

    Guarantee of a mortgage against real estate.

    In small business banks are a threat they are not your friends.

    Avoid banks at all costs they seek to take the lifeblood, money, out of business.

    pt you are dead right about banks and bankers …. and we have a banker as PM.