Monday, April 30, 2007

Tuesday column: Labor's other idea. Let's lend money to millionaires so they can increase the value of their houses.

Labor’s plan to have one of the doyens of Australian public sector economics perform a Stern Commission style inquiry into the effects of climate change on Australia is inspired. Its promise to lend us money in order to make our houses environmentally friendly is not.

I am sure there are good intentions behind the loans scheme unveiled by Kevin Rudd on Sunday, but the lack of attention to detail in preparing it is disturbing.

(And part of a pattern. Remember Labor’s broadband announcement that touted up to $30 billion of economic benefits? The $30 billion figure derived from an obscure dated lobbying document that the authors of the policy hadn’t read.)

First there’s the question of who the $10,000 loans for environmental purposes are aimed at. Kevin Rudd says they will go to “working families struggling hard to make ends meet”. He defines them as households with a combined annual income of up to $250,000. Yes, $250,000. How many families do you know earning that much? Are they struggling?

The Labor leader seems to think they are. Perhaps blinded by the Rudd family’s particularly high household income his first instinct on Sunday was to defend the figure.

“When you look at the income profile of families in western Sydney, when you’ve got one partner or another working, then you often have incomes which are getting close to $200,000,” he said.

When told that in all parts of Australia $250,000 was a considered serious money Rudd dug himself in deeper replying that “In parts of Sydney I’m advised, it’s not necessarily the case. It depends where you live"...

His co-author of the environment policy actually comes from Sydney but is also out of touch. Asked in February whether he was a millionaire, Labor’s Peter Garrett replied: “Well, anybody who owns a house in Sydney or around Sydney probably qualifies for that.”

Not so. Sydney’s median house price is half of what Garrett thinks it is, and about half of those “owners” haven’t paid off their loans and so aren’t even half millionaires.

As for Kevin Rudd’s idea of what constitutes “struggling”, work by Dr Andrew Leigh of the ANU suggests that the typical Australian adult earns just $27,000 a year. The figure looks low because it takes into account the number of Australians who aren’t working at all or are in part-time jobs. Disregarding those people (which there is no obvious reason to do) the typical annual Australian income looks higher at $56,000 – still a lot less than Kevin Rudd imagines. Only some 4 per cent of Australian households earn more than $250,000.

Labor says it will cap the number of cheap loans for environmentally useful home renovations at 200,000. When that number is reached the program will stop and be reassessed. Until then it looks to be first-come first-served - perhaps a stampede. And who will get to the money first? The Labor leader says he assumes it will be “those families who are experiencing difficulties right now in making ends meet”.

I’ll make a more realistic forecast. It’ll be those well-resourced families with financial advisors who recognise the value of and are able to quickly take advantage of a $10,000 loan with a zero real rate of interest. As Kevin Rudd says, it will “increase the value of their homes”.

Another detail of the scheme that I find disturbing is the use to which the low-interest loans can be put. Among them is rainwater tanks. The Labor Party must know that even at a zero rate of interest tanks make no financial sense for most households. A report prepared for the National Water Commission last month found that in every city examined the cost per kilolitre of water from household tanks was “greater than the price currently charged”. In its words: “the typical property owner who installs a tank will, in most cases, face a net financial loss over time”. And that’s with free money.

Well-advised families will stay away from tanks and use Labor’s money for something worthwhile such as solar hot water heating which has an excellent pay-off. Labor will offer such advice as part of its policy. But to the extent that including rainwater tanks in Labor’s scheme does persuade struggling families that they are a worthwhile it will do them no favours.

And also disturbing is the part of the sales pitch for Labor’s loans program that says they will “benefit the small business sector – especially tradespeople”. Hasn’t Kevin Rudd been listening to the Secretary to the Treasury Ken Henry? He has. He quoted from him extensively and with approval in his inaugural Press Club address as Labor leader last month.

But he must have missed Ken Henry’s central point.

Henry told Treasury officials in that celebrated speech leaked last month that in an economy operating at near to full capacity as ours is now, schemes designed to benefit one particular sectors of the economy will usually only do so by harming another.

Nowhere is this more apparent right now than in the market Rudd is talking about - tradespeople. We don’t have enough of them. Spending $300,000 of government money encouraging them to install rainwater tanks, solar panels and so forth is merely going to take them away from other jobs.

There’s the germ of a good idea in Labor’s plan. The loans for environmentally worthwhile household improvements would have a zero real interest rate and be “income-contingent”, as are loans made under the Higher Education Contribution Scheme. Repayments would be limited to 2 per cent of income. As with HECS repayments, they could not become onerous.

Income-contingent loans are an Australian idea (in fact a Canberra idea) sweeping the world. They are the brainchild of Professor Bruce Chapman, once with the Keating and Hawke governments, and now with the Crawford School of Economics and Government at the ANU.

Last month in a paper co-authored with an economist from the Treasury he developed a HECS-style scheme that would provide the same opportunities to TAFE students. They would pay their fees through the tax system if and when they were able.

In a book just released by Routledge, Chapman and a galaxy of co-authors have proposed extending the idea – among other things using the tax system to collect income-contingent repayments from farmers in return for drought support and payments from fine defaulters who would otherwise go to jail.

Chapman’s book reads like a guidebook for an incoming Labor administration searching for exciting ideas.

So long as it thinks through the details.