Coles Myer and Telstra: Peas in a poisoned pod.

What do Coles Myer and Telstra have in common? Each is a monster created by a merger. Neither would have been permitted under the competition rules applying today. And, as unlikely as it seems, each would have been better off if a regulator had said, ‘No,’ and forced it to remain a smaller, unmerged company.

What follows is a real-life Australian parable about how big often isn’t better.

The competition regulator never even got to run a ruler over the merger of Telecom and the Overseas Telecommunications Corporation (OTC) that created Telstra. Both were government-owned, and the Minister at the time, Kim Beazley, argued that scale would allow the conglomerate to promote Australian industry.

When Telstra became partly privately owned, its suddenly highly paid executives began to feel all the cash it was generating burning holes in their pockets. It expanded overseas (after all, its shareholders expected growth and it already had most of the Australian market) and lost billions on speculative high-tech start-ups in Asia.

When I was the ABC’s correspondent in Japan in 2001, I was invited to a function in the office of Telstra in Tokyo. When I asked why an Australian telecommunications company had an office in Tokyo, the executive launched into a pre-prepared spiel about fish. He said Telstra wanted to be a ‘big fish’ and that meant it had to swim in the ‘big ponds.’ Billions of burnt dollars later, I am not sure that Telstra’s shareholders would agree with him.

How different might things have been if the OTC and Telecom had been allowed to compete against each other... Each would have had a reasonable size and each would have been forced to concentrate on serving Australian customers rather than burning excess cash.

Telstra is now worth roughly half of what it was. Quite an achievement. I have a feeling it may have held its value better as two competing institutions.

It’s not just Telstra of course. The National Australia Bank (NAB) under Chief Executive Don Argus was forever promoting the ‘national champions’ argument. He said banks needed to become big, really big, so they would be able to take on the world on behalf of Australia. The NAB expanded into the US, bought the mortgage processor Homeside, made a basic mistake about fixed versus variable mortgage interest rates and lost four billion dollars of its shareholders’ money.

We hear less about ‘national champions’ these days.

Coles was allowed to merge with Myer at a time when big was generally held to be better. Two subsequent Chairmen of the Trade Practices Commission and its successor the ACCC have told me they never would have permitted it.

The Coles Myer monster began life with 70 per cent of Australia's department store sales, and 77 per cent of its discount store sales. It was Australia’s biggest private sector employer.

And it was also almost impossible to manage. Target’s raison d’être had been to steal customers from Kmart. Kmart’s reason for being had been to steal customers from Target. Combined they didn’t really know what to do. Eventually Target differentiated itself by specialising in more clothing and Kmart gravitated towards hardware, unwisely (and perhaps arrogantly) lifting its prices.

Coles Myer built a gleaming black monster of a national HQ in the Melbourne suburb of Tooronga — nicknamed the ‘Darth Vader Building.’ One of its Chief Executives, Brian Quinn, renovated a gleaming home in one of Melbourne’s leafier suburbs using Coles Myer contractors and served time in Pentridge Prison for fraud.

Meanwhile, Woolworths concentrated on retailing. It now turns over more than Coles Myer with far fewer stores.

Coles Myer became so weak it had to sell the Myer Department stores and now there’s talk of it breaking itself up even further in order to fend off an unwelcome takeover. Kmart, Target or Officeworks may be next on the block.

The market is doing what our regulator wouldn’t — busting Coles down to a manageable size.
And it might happen with Telstra soon.

Further privatised, a rational Telstra management might find that it has more value as two distinct companies: one that runs the boring wires and pipes, renting them out to all comers; and another that rents those wires and competes for retail customers, unencumbered by government-imposed ‘universal service obligations.’ Institutions such as the Macquarie Bank have discovered legions of investors who are prepared to pay very well to own stakes in boring pieces of infrastructure — be they toll roads, radio transmitters or electricity wires — just as long as the company is unable to take risks.

It would be deliciously ironic if in its attempt to unlock value, the market broke up Telstra and Coles Myer in a way that our regulators could not or would not.

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Canberra's self inflicted budget woes

There’s something about the ACT’s funding crisis that doesn’t add up. In last month’s Budget, the Territory’s Chief Minister and Treasurer, Jon Stanhope, announced plans to close around one quarter of the Territory’s schools. He is to pull the pin on 22 preschools, 15 primary schools, 1 high school and 1 college.

And he is to do it at a time when the wealth of Australians, and ACT citizens, has never been higher. Australia is enjoying its 15th straight year of economic growth. The ACT’s unemployment rate is Australia’s lowest.

If Australia was in a recession it would be easy to understand belt-tightening.

But at a time of record prosperity?

Jon Stanhope says it’s a question of Government income. While the citizens of the ACT are indeed spending more than ever before, that money hasn’t been trickling through to their Government. In his words, the ACT has the ‘narrowest revenue stream’ of any State or Territory.

But why would that be? It was meant to have the most lucrative.

When Canberra was built on land acquired from farmers in 1913, the land was to remain government-owned. The Constitution requires that the national capital be on land ‘vested and belonging to’ the Commonwealth. Speaking in the House of Representatives in 1903, founding father Sir Edmund Barton made his intention absolutely clear: ‘Within the area that is chosen, the Commonwealth should be the landlord or the proprietor of every square inch of private land.’

Rather than selling blocks of land, the Commonwealth sold leases permitting the use of that land for specified periods of time. Householders were sold 99-year leases and businesses were usually sold shorter leases, many of them for 50 years...

Continuing to own the land on which Canberra’s businesses and houses sit has been enormously useful to the Commonwealth, and later to its successor, the ACT Government. It has enabled them to enforce very strict planning controls (‘build it our way, or you will be in breach of the lease’) and made it simple to collect rates (‘if you don’t pay, we will kick you off’).

It has also provided the ACT administration with a guaranteed future revenue stream, as intended by the drafters of the Constitution.

That revenue was never likely to come from householders. The residential lease term of 99 years was very long, and electoral pressure would likely prevent the charging of a new fee to extend leases when they expired. All of the Territory’s residential leases have since been extended to 999 years (complying with the letter, but certainly not the spirit, of Edmund Barton’s wishes).

But business leases were set up to be a source of continuing revenue. After the first 50 or so years of Canberra’s life, business leases were set to come up for renewal virtually every year. Because the leases were sold and valued in the knowledge that they expired after a period of time, businesses planned in the knowledge that they would have to shell out fresh money to buy new leases when they expired.

But it was easier and far more lucrative for businesses to lobby both sides of the relatively young ACT House of Assembly. Just before Christmas in 1996, both the Liberal and Labor Parties in the House of Assembly voted to convert all commercial leases from 50 years to 99 years, without charge.

It represented a windfall for the holders of existing commercial leases. Estimates put the value of the change at between $115 million and $1.2 billion.

Australian National University economist Julie Smith predicted that ‘present and future ACT citizens [will] pick up the tab … with either a 13 per cent addition to residential rates, or further cuts to health, education and community services.’

Smith specialises in urban economics and the economics of public health. As it happens, she is a pretty good economic forecaster.

At the time, members of the ‘Liberal and Labor branches of the ACT Property Party’ as Smith called them, poured scorn on her claims. But she was right. The baby government of the ACT (self-government was less than a decade old) had sold out its economic future.

Jon Stanhope wasn’t in the ACT Government at the time. It was his predecessors who ensured that he has, as he now puts it, the ‘narrowest revenue stream’ in the country.

As an ACT resident explained at the time, giving evidence to a Commonwealth Parliamentary Committee: ‘it was as if they said to single mothers living in public housing “okay, we will give you the house now, you can stop paying rent”’.

The ACT has been the author of its own decline.

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A return to debt

As he rose to his feet to deliver the 12th Budget of the NSW State Labor Government, Treasurer Michael Costa’s opening words said it all:

"Today, I present the first State Budget of the Iemma Labor Government."

Labor was not just distancing itself from its earlier 11 Budgets, it was repudiating them.

As well it might.

Bob Carr and his assorted Treasurers were proud of cutting their Government’s debt, each and every year. They even adopted the elimination of government debt as a government policy.

Within months of taking on the job, back in 1995, Bob Carr’s first Treasurer Michael Egan declared that, ‘the ultimate long-term fiscal objective is the elimination of general government net debt by the year 2020.’

It is a statement that must have puzzled virtually every businessperson who heard it. It would certainly puzzle executives of the Macquarie Bank for whom Bob Carr now works.

No well-run business of any size aims to be debt free... To do so means to not fully exploit the balance sheet, and to avoid achieving the most you can, given the resources that you have.

In order to cut government debt for a decade the Carr Government starved its hospitals, schools, railways and other services of the money they needed to expand or replace the buildings and equipment they had.
It is a policy that made Carr and Egan look good, for a while. It took some years for the NSW railway system to collapse and for cracks to appear in the operations of our hospitals, schools and outfits such as the Department of Family and Community Services.

That is not to say there weren’t some pockets of massive capital spending — for example, on Olympic-standard sports facilities that now barely pay their way. The replacement program for hospital and schools was wound back further in order to make room.

And that is not to say that there wasn’t new government-induced borrowing within the State. The NSW Government sold many of its buildings, only to lease them back. The private sector was more than happy to borrow the money to buy them.

The Government asked private partners to build its roads in return for tolls and all sorts of other concessions not made public at the time, and those private partners were more than happy to borrow in order to do so.

It is a strategy that would have worked beautifully for the Carr-Egan Labor Government had it not stayed in office so long. It would have had left office with a (false) image as a prudent financial manager, and its successors would have inherited the resultant crises in health, education, transport, electricity, and so on.

As it is, Bob Carr’s political skills in winning elections have ensured that Labor itself has inherited the wells it poisoned. (But not Carr and Egan themselves — each having resigned.)

Now, the Labor Government’s only chance of survival is to repudiate its modus operandi of the last 10 years. That’s why, last night, it announced a record $10 billion program of spending on infrastructure — in just the first year. Over four years, it’ll spend more than $40 billion.

The new Treasurer Michael Costa devoted five pages of his Budget speech to listing the by-now urgent priorities his Government has belatedly decided to fund. It reads like an indictment.

One of Bob Carr’s predecessors as Premier, Nick Greiner had it right. He said that State Governments were essentially businesses. Their customers (their citizens) employ them to provide services. It the Government stuffs up — by, for instance, allowing services to run down — it gets booted out.

The new NSW Treasurer seems belatedly determined to run his operation in a more businesslike manner.

He says his Budget ‘ leverages the State’s sound balance sheet to invest for the future.’

What’s the bet that goal of eliminating government debt by 2020 has been quietly shelved?

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The 'economics' of nuclear power in Australia

If you listen carefully to the new debate over nuclear power you can hear the sound of furnace doors being opened and bundles of the Treasury’s $100 notes being loaded on to shovels.

The Prime Minister says he wants to find out whether nuclear power is economically feasible in Australia. He must know that it is not a commercial proposition. There have already been enough reports prepared for his Government telling him so.

The most recent, prepared by a British scientist sympathetic to the nuclear industry for the Australian Nuclear Science and Technology Organisation (ANSTO) finds that any private operator who attempted to build a nuclear power plant in Australia would produce electricity ‘at a cost that is significantly higher than would a new coal-fired or gas-turbine power station.’

In many places overseas it is a different story. For countries that don’t have ready access to coal, are densely populated and are rapidly industrialising, then nuclear power might well be the ideal (perhaps, the only) commercial solution.

So what will the Australian Government do?

Well, I fear that it’ll do what it’s done before — notwithstanding its proclaimed commitment to the free market.

Back at the start of the 1980s, media moguls including the late Kerry Packer became fascinated with the idea of a national communications satellite. They wouldn’t build it or fund it themselves — as a business proposition, it made no sense. But persuading the Government (Malcolm Fraser Prime Minister, John Howard Treasurer) to part with its own money to ‘position Australia well for the future,’ the moguls played with the new technology for which they could never make a sound business case.

A decade later the government-owned aussat was $400 million in debt and derided as a piece of ‘space junk.’ The Hawke Government couldn’t give it away — literally. In order to persuade the firm that became Optus to take it off its hands, the Government threw in a domestic telephone licence.

AUSSAT was built and launched at a time when Australia was about to be covered by a web of cheaper-to-use optical fibre cable. In order to ensure that AUSSAT had paying customers the Government forced the ABC to use it exclusively to transmit its programs between Australian cities. But the economics of doing so were horrendous. Even after the ABC had paid for all of the transmission costs, the cost of an extra receiving dish was sometimes still more than the cost of using optic fibre cable.

I worked at the ABC during the 1980s and remember one instance when the ABC got around the spirit of the Government’s requirements by installing a cable between Sydney and Wollongong rather than buying yet another satellite receiver.

Smart people knew that AUSSAT made no financial sense. But it suited them for taxpayers to take the plunge and then take the bath.

Smart people are at it again.

The report prepared for ANSTO finds that a privately-owned nuclear power plant could only make money if the Government contributed 14.3 per cent of the cost of building it, and then paid 21.4 per cent of the electricity bills for the first 12 years. It’s a finding based on best-case assumptions. The interest rate used in the calculations is one of the lowest on record (that for 2002-2003), the plant is of a type not yet built, and it is assumed to be far cheaper than have been previous nuclear power plants.

It wouldn’t surprise me if the Government bites again.

Some of the arguments for it doing so are incredibly thin. The report for ANSTO says that a nuclear power plant would improve the security of electricity supplies ‘by adding diversity to Australia’s sources of electricity.’ This makes about as much sense for a nation built on top of a near-inexhaustible supply of coal as does the claim that Iran needs nuclear power in order to diversify away from oil.

It is correct that a nuclear plant might become more economic relative to coal-fired plants if the Government imposed a tax on carbon emissions and allowed carbon trading — something it has said it is not yet ready to do.

But if it did do so, all sorts of other actions might become more economic as well — among them the installation of technology to cut or offset the emissions from coal-fired power plants.

The market would decide. And my tax dollars would be safe.

Wouldn’t that be something?

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A Super Budget. Not.

High-income earners do well indeed out of the tax cuts in the Federal Budget. Andrew Leigh from the Australian National University says that whereas an average worker will get an extra $510 a year, Malcolm Turnbull will get $6200.

But that’s just the beginning. The real gift to the well-off is in the plan to abolish the tax on superannuation payouts.

Don’t believe for a moment that the benefits will trickle down.

Lump sum payouts below about $130,000 are already untaxed...

Removing the tax won’t help low-income earners. But it will help high-income earners, and the higher the income the greater the help. This is partly because the higher your income the more you put into superannuation automatically; and partly because the higher your income the more spare cash you have to pump into superannuation over and above what is required.

And if you can get your employer to pump it in for you, there’s no better place for it...

High-income earners are well advised ‘salary sacrifice.’ They get their employer to cut their take-home salary by, say, $30,000 and put the money into superannuation instead. They no longer lose perhaps as much as half of that money in tax. They lose only the 15 per cent superannuation contributions tax. And any earnings the fund makes are taxed at only 15 per cent as well, instead of something closer to 50 per cent.

It’s such a rort for the well-heeled — who scarcely need encouragement to save for their retirement — that in his first (and some would say, only) courageous Budget Peter Costello introduced a superannuation surcharge for high-income earners of an extra 15 per cent, taking the total tax to a still-concessional 30 per cent.

Here’s what he told me at the time in an interview on the ABC’s AM program:

"At the moment if you’re on a 48 per cent marginal tax rate, and an employer makes a contribution into superannuation on your behalf, you get a 33 cent tax concession — if you are a millionaire or a multi-millionaire.

If you happen to be under $20,000, and an employer makes a contribution on your behalf, you get a 5 per cent tax concession.

Now, our tax system is premised on the fact that rates should go up as incomes go up. But under this superannuation system, concession goes up as income goes up. That’s the basic unfairness.

How do you look the battler in the eye and say ‘when your money goes into super, you get a 5 per cent tax concession. When a millionaire’s money goes into super, he gets a 33 per cent tax concession?"

Peter Costello’s concern about the rort for the rich was short-lived. About a decade later when his Party gained control of the Senate it abolished its own surcharge.

The only thing left standing in the way of Australia’s biggest government-created tax lurk was the superannuation exit tax of 16.5 per cent applied to lump sum payouts of more than $130,000.

The Treasurer now plans to remove that as well as part of his plan to ‘simplify and streamline’ superannuation. As the plan revealed on Budget night puts it, from mid 2007:

All lump sum benefits paid from a taxed source to an individual aged 60 or over would be tax free when paid. There would be no reasonable benefits limit.

In removing the last hurdle facing one of Australia’s last legal tax dodges the Treasurer hasn’t even pretended that superannuation is overtaxed. He knows it is not.

Three budgets ago at the lock-up press conference a television journalist who had presumably been worded up by the superannuation industry asked the Treasurer why superannuation was so heavily taxed, and taxed ‘three times’ — on the way in, as money is earned, and from the well-off on the way out.

Peter Costello’s reply sent a chill through some who listened. He said that, even after those three levels of tax, the overall tax take from money paid into a super fund was lower than it would have been if the money had been paid out in the form of wages.

His implicit threat: if you really think superannuation is heavily taxed — how would you like to be taxed at normal rates?

The Treasury’s estimate is that the concessional tax treatment for superannuation costs it an astonishing $16 billion a year. It is by far the biggest of Australia’s so-called ‘ tax expenditures.’ The extra tax breaks proposed in this latest Budget will push that bill up by an extra $2.4 billion each year.

There was scarcely pretence by the Treasurer on Budget night that the proposed extra tax break will boost national savings. As he put it, in his interview with Kerry O’Brien:

If you are thinking of saving, put some money in superannuation. When this plan goes through it will be the best way of saving.

Too right. Some of the money that was going to be saved anyway will be saved now in the form of superannuation. The rich and well-advised will get a much bigger tax cut than the one advertised, and the rest of us will pay an extra $2.4 billion to give it to them.

The superannuation plan isn’t a done deal — yet. The Treasurer has called for comments. He wants them by 9 August.

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The Topsy-Turvy Politics of Climate Change

There are two major political parties in Australia. Only one of them trusts markets. That’s the inescapable conclusion to be drawn from comparing the Government’s position on climate change with the Opposition’s, released last week.

The Government can’t countenance the idea of allowing traders to buy and sell licences to pollute.

Kim Beazley and his otherwise Left-leaning environment spokesman Anthony Albanese not only want to allow trading in pollution licences but also want to hand them out for free, with the most licences going to those firms that pollute the most.

It’s a policy that is not only pro-market, but also pro-polluter. So why on earth aren’t environmentalists screaming?...

Because there are some problems that markets are extraordinarily good at solving, and in the most painless way possible.

The idea of trading in pollution permits has an impressive parentage. When in the mid-1990s the United States had a problem with acid rain it handed out permits to emit sulphur. The firms that polluted the most got the most permits. And then it encouraged the Chicago Board of Trade to set up an exchange on which those permits could be bought and sold.

Polluters liked the idea because they could make money by installing filters on their chimneys and selling the excess permits they no longer needed. Firms that found it difficult to install filters didn’t need to. They could go to the exchange to buy the excess permits, providing a tidy profit to those firms that had installed filters.

Each year that followed the US handed out fewer new permits. Over a decade the price of a sulphur emission permit on the exchange climbed from $US100 to $US800 a ton. The polluters who could cut back found themselves rich. Those that couldn’t found business increasingly expensive — but not as expensive as it would have been if they had been made to install filters. The market rewarded the firms that could cut emissions cheaply and cushioned the blow for those that could not.

The European Union introduced the first scheme for trading in permits to emit carbon in January last year. It handed out permits to 12,000 carbon-intensive businesses such as oil refineries, electricity generators, and iron and steel foundries. Any firm found emitting carbon without such a permit faced a steep fine.

And then it sat back and waited. At first, the permits weren’t much traded. Their price actually fell. But then the EU knocked back a number of applications for extra permits and the price soared, leapfrogging from €6 per tonne of carbon to around €27 per tonne at the moment.

Along the way an entire new industry of professional carbon permit traders evolved. Once you get used to the idea it is not unusual. Financial markets that trade in bonds are just as bizarre. In his book Bombardiers author Po Bronson describes a bond trader who one day demands to see an actual bond, ‘… any kind of bond. He says he can’t sell bonds anymore if he’s never seen one.’

It is too early say whether the EU’s trading scheme will actually cut the amount of greenhouse gasses emitted by the EU. But there are reasons for confidence.

Over the ten years since the US sulphur trading scheme was introduced, sulphur emissions there have halved. In some parts of the US acid rain is down 25 per cent. The annual saving in healthcare costs is said to top $US20 billion.

The US and Australia would have seemed to have been likely starters for a European-style carbon trading scheme. Both have governments that are thought to approve of market-based solutions and

Yet both have said no to a legislated system of tradeable carbon pollution permits. This might be because they have both refused to sign up to the greenhouse gas reduction targets set out for them in the Kyoto Protocol. Yet the two questions — targets and means to achieving them — are really quite separate. It is possible to have a system of tradeable permits together with a very mild greenhouse gas reduction target. It is also possible to have no system of trading at all and a very severe and damaging greenhouse gas reduction target.

Permit trading is simply the most polluter-friendly means of achieving whatever target the government sets.

Support for the idea is spreading. In Britain, Tony Blair wants to extend the European scheme worldwide. Japan will begin a pilot program next month. Eight States in the US are banding together to introduce their own unified trading scheme without waiting for President Bush. And in Australia, New South Wales and Victoria are considering combining separate State-based schemes for carbon trading in the electricity industry into one semi-national market.

Even the Coalition may not be able to resist the lure of market-based solutions for much longer. Australia’s Environment Minister, Ian Campbell, says carbon trading might have a place in the future, but that he first wants to kick start some ‘breakthrough’ pollution-fighting technologies.

This preference for ‘picking winners’ over harnessing the power of prices may only be temporary. The Treasurer Peter Costello is said to privately support emission trading. His nemesis Malcolm Turnbull lives and breathes market-based solutions. Generational change might soon make Labor’s policy bipartisan.

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A Tax by Any Other Name

Spare a thought for business figures Dick Warburton and Peter Hendy. They’ve been given just five weeks to produce an ‘authoritative statement’ on how Australia’s tax take compares to that of other countries.

And every second member of the commentariat is telling them that the task is dead easy.

Andrew Leigh of the Australian National University says Warburton and Hendy are being asked to find out what anyone who uses Google can get from a public website. Malcolm Turnbull says a lot of the work has been done before. And economist John Edwards dismisses the exercise, saying there is ‘absolutely zero point in having an inquiry to ascertain facts that are well known.’

But if the facts are so well known, why is it that all the accounts we get of them seem different?

The truth is that it is impossible to authoritatively compare Australia’s tax take to that of other countries. The reasons why this is so tell us a lot about the meaninglessness of the question.

I’ll explain.

Rich nations other than Australia also impose so-called ‘social security contributions’...
They are extracted from both workers and their bosses. Germany, for example, hits workers for 21 per cent of their income, and their bosses for another 21 per cent. The UK charges workers 16 per cent and employers 10 per cent, and the US 8 per cent and 8 per cent. Even low tax Japan charges workers 12 per cent and employers another 12 per cent.

When compulsory social security contributions are counted as taxes (as they should be) it is the rest of the OECD , rather than Australia, which looks high taxing.

The Australian Treasury says by this measure Australia collects less tax as a proportion of national income than all but seven of the OECD’s 30 members.

But this comparison also leaves something out.

Australia — uniquely — enforces the collection of another impost, very similar to a tax. Our Tax Office compels employers to pay nine per cent of each of their employee’s earnings into a superannuation fund.

It is true that the money goes into private rather than government hands, but it does it at government insistence in order to fund retirement, just as it does in those OECD nations that impose compulsory social security contributions.

Compulsory superannuation contributions are a tax by any other name. That’s certainly the view of Dick Warburton who will be conducting the Treasurer’s inquiry. Last week he aroused the ire of the father of Australia’s superannuation system Paul Keating by saying plainly: ‘I definitely do call it a tax because it is money taken from the people to do the same sort of task that we pay taxes for.’

For what it is worth, when you count the Superannuation Guarantee as a tax (as I think you should) Australia’s total tax take looks pretty unexceptional compared to the rest of the OECD.

By now you might be forgiven for wondering whether such an exercise is worth very much.

Ask yourself this: What if Australia removed its system of compulsory superannuation contributions? We would then be called a ‘low tax country,’ but what would have changed? Without compulsion, the well-off among us would still put aside money for their old age (perhaps even just as much money as before, and perhaps to the same fund managers).

Very little might have changed when it came to financial flows — except that we would be called a ‘low tax country.’

Similarly, Australia could become a ‘low tax country’ if our governments stopped providing free schools. But the drain on parents’ resources would be little changed. They would still have to pay for schooling — perhaps just as much as before, perhaps more — but directly out of their own pockets with the money they no longer contributed in tax.

Working out whether Australia is a high-taxing or a low-taxing country, as the Treasurer has asked his Task Force to do, is meaningless without also looking at what the tax buys. You wouldn’t judge an internet plan or a holiday package by assessing whether it was high-price or low-price and leaving it at that. You would also want to look at what that high or low price bought.

To his credit the Treasurer recognises this. The terms of reference he has given Warburton and Hendy note that: ‘Some countries have a much larger/smaller government sector than Australia, and therefore require a higher/lower level of taxes.’

But he doesn’t seem to have followed through the implication. The team should be examining value for money, not the absolute amount of whatever it is they choose to define as ‘tax.’

That would be an inquiry worthy of a future Prime Minister, and certainly worthy of more than the five weeks and the handful of researchers that will be available to Warburton and Hendy.

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Is Brash City About to Crash?

The success of Australia’s brashest, crassest city has been something we’ve had to endure through gritted teeth for decades now, all the while holding onto memories of the days when it meant something to come from somewhere else, such as Adelaide or Melbourne.

Sydney is still the gateway to the rest of Australia. It sucks in almost half of Australia’s new arrivals. It serves as the regional headquarters for nearly every international corporation and is the Australian headquarters for most Australia-wide corporations. Its glittering harbourside real estate is said to be among the most desirable in the world.

But in the last year or so, it has begun to fall apart. Unthinkably, the unemployment rate in NSW is now almost the highest in the country (eclipsed only by Tasmania and the Northern Territory). The State is technically on the edge of recession and Sydneysiders are fleeing Sydney at the rate of thousands each month.

Even with the lion’s share of immigration, Sydney’s population is now scarcely growing. It climbed by just 0.7 per cent in the last year. By contrast Melbourne grew by 1.1 per cent; Brisbane by 1.9 per cent.

Who’s to blame?

As unlikely as it seems, I believe it is a Sydneysider....

John Howard is perhaps the ultimate Sydney Prime Minister. Aside from mainly enforced overnight stays in Canberra, he’s never lived anywhere else. Even though it is just down the road, Canberra was too far away for him and his family to live when he became Prime Minister ten years ago. He commandeered Kirribilli House — Sydney’s most impressive piece of real estate. Then, a year or two later, his Government set about feeding Sydney’s real estate obsession.

It wasn’t widely understood at the time what he was doing.

Added to the otherwise innocuous terms of reference for an inquiry into business taxation was one oddly specific measure dealing with personal, rather than business, taxation. The Ralph Committee, chaired by one of Howard’s friends, businessman John Ralph, was asked to examine the scope for ‘capping the rate of tax applying to capital gains for individuals at 30 per cent.’

At the time, income from capital gains was taxed at the individual’s marginal rate, often 48.5 per cent, minus the rate of inflation.

John Ralph did even more than he was asked. He recommended that only half of each capital gain be taxed — effectively cutting the top rate to 24 per cent.

Ralph’s report spoke of the boom in investment in Australian companies that would result, ‘particularly in innovative, high-growth companies.’

Others saw the likely result more clearly.

At the time Mark Latham was in self-imposed exile on Labor’s backbench. His then-leader Kim Beazley ensured that the Party supported the capital gains tax cut.

Latham described the cut in Parliament as ‘the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value-adding in the information technology sector.’

He was prescient.

As the Macquarie Bank’s Rory Robertson observed later: ‘Since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.’

Borrowing to buy properties became amazingly tax effective. Much of the interest expense could be written off as a tax deduction — if the house or unit was new, the investor could claim a deduction for depreciation (whether or not the property had actually depreciated) and half of the capital gain was never taxed.

Property prices roughly doubled in the avalanche of buying and selling that followed, pushing up the already-high Sydney prices to levels previously unimaginable.

Those of us already well advanced on the property treadmill didn’t mind. In fact we felt richer. Howard’s then Parliamentary Secretary to the Treasurer, Ross Cameron observed succinctly: ‘[rising prices] makes for happy voters.’

But for many of those Australians not yet into housing — often too young to vote — Sydney was suddenly out of reach.

They are now leaving the city in droves. Six thousand more Australians now leave NSW each month than move to it. In South Australia and Victoria the net outflow is less than 1000. Queensland, Western Australia and Tasmania are actually drawing people to them.

It isn’t only those who can’t afford houses who are leaving. Many Sydneysiders who’ve done well out of the Ralph/Howard property boom are cashing in and buying more, cheaply, in more affordable cities. The ABC’s Richard Glover calls the phenomenon ‘Hobartering.’ Others are moving in order to find jobs.

Industry appears to be leaving Sydney as fast its people. The land prices in Sydney’s Inner West have made factories uneconomic. The owners can get far more by selling their land for housing than they can by continuing to run their factories . Some are relocating interstate or to the country, others are closing for good. Sydney’s Inner West is awash with so-called ‘brown field’ apartment developments, many with the factory exteriors intact.

In a less obvious way the Ralph/Howard property boom has also devastated Sydney’s State Government. It got it hooked on ever increasing stamp duty revenues, which eventually collapsed. Last week Premier Morris Iemma announced spending cuts worth $2.5 billion over four years. Five thousand public servants are to lose their jobs — at a time when the State’s unemployment rate is the highest it’s been in years.

Success is said to have many fathers; failure, very few. But it seems fair to acknowledge that John Howard is one the fathers of Australia’s manic real estate boom, the aftermath of which is set to send his beloved home city into recession.

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