From: c.oneill@trl.oz.au (Chris O'Neill)
Subject: Re: Australia's "foreign" debt...
Organization: Telecom Australia Research Laboratories, Melbourne, Australia
Date: Fri, 16 Oct 1992 05:40:02 GMT

In article <1992Oct14.070515.1923@cs.su.oz.au> mrj@cs.su.oz.au (Mark James)
writes:
>In article <chris.719034840@suite.sw.oz.au> chris@suite.sw.oz.au (Chris
Maltby) writes:
>>
>>In other words, you can't blame the massive foreign debt on those
>>corporate cowboys alone. Everyone has to take responsibility for
>>the problem. If we all stopped pointing the finger and started
>>consuming less and saving more we could go a long way toward fixing
>>Australia's foreign debt problems as well as its competitiveness.
>>If you don't do it voluntarily, one or another future government will
>>tax it out of you instead - but the result may not be as good.
>
>The corporate cowboys should get most of the blame because if the
>funds they borrowed were used wisely (generated a level of exports or
>import replacement greater that their interest bill), the fact that
>the capital was imported would matter little.  (Even investment in
>productive non-export replacing industries is not too bad.)
>
>Increasing our savings ratio has the disadvantage of deferring
>consumption, which is dangerous in a recession. 

The main point is that saving should have occurred in the boom before the
recession.  It didn't.  Different considerations apply in a recession but this
is (hopefully) only a temporary situation.

> However, considering
>our huge foreign debt and the fact that the large capital inflows
>overvalue our dollar, harming exporters, saving more would
>probably be the best move.  It means a drop in current standard of
>living --  but we are living beyond our means!
>
>What is the best way to encourage savings?  The Labor Party
>always baulks at doing anything to avoid accusations that they
>are giving people with invested wealth (especially inherited)
>a free ride.  

I thought their hypocrisy was unbelievable.  There they were in charge of a
rort on an unprecedented scale (negative gearing made far more accessible by
financial deregulation) and then they had the gall to say they didn't want to
do anything that might benefit the rich (who incidentally only have a
relatively portion of their wealth in bank accounts).

>Remember the Liberals under Peacock looked at
>this in late 1989 and decided that it couldn't easily be done.
>Anyone seen the advice given to him (Access Economics I think)?

Access Economics (many of whose staff came from the Treasury) probably had the
same idealogical dislike of anything that admitted that inflation existed as
the Treasury does.  This included inflation adjustment of taxation on interest
and negative gearing.  Once they have an idealogical dislike for something
(such as inflation adjustment of taxation) they have no motivation for finding
out if the implementation problems can be solved.

>Does anyone have workable ideas to encourage savings?  The GST has
>the potential,

The two "global" approaches (apart from GST which doesn't have much effect on
saving) are inflation adjustment and taxation of expenditure.  I've written
about inflation adjustment before.  Taxation of expenditure means that if you
save some of your income (and put it in a bank say) then you don't pay tax on
it.  If you take some money out of the bank and spend it then you pay tax on
it.  Hence your expenditure is calculated from your income and your change in
savings over the financial year.  This is an intriging approach and I haven't
heard much about it.

The other aspect is that we need to avoid encouraging unproductive borrowing
such as can occur with negative gearing.

In spite of what a lot of people believe there is no economic justification for
negative gearing when the income used for the negative gearing does not depend
on the activity producing the negatively geared loss.  If an economic activity
makes a loss and requires a capital injection what justification is there for
obtaining that capital from a separate source of income without paying any tax
on that income whatsoever?  There is justification when the two activities are
related and the income producing activity depends on the existence of the loss
producing activity to produce its income but if the income producing activity
is say a salary earner then there is no way in the world that his salary
depends on the existence of some negatively geared property.

Unfortunately the Government and Opposition have no intention of changing the
negative gearing rules.  So unless inflation is zero we can look forward to
continuing low saving, high borrowing and increasing foreign debt 

> but inequitable compensation rules out Hewson's model
>(in my eyes at least).  Will superannuation do the job?
>
>Mark James                                   |  EMAIL : mrj@cs.su.oz.au  |
>Basser Department of Computer Science, F09   |  PHONE : +61-2-692-4276   |
>The University of Sydney NSW 2006 AUSTRALIA  |  FAX   : +61-2-692-3838   |

Chris O'Neill
Telecom Research Labs
Newsgroups: aus.politics