Since we are heading towards one of the more interesting elections in decades, taking a look at the Liberal National Party policy approach makes sense.
There are clearly fairness and complexity issues in some of the proposed Labor tax policies, as I pointed to last month. But at least you can call these attempts at genuine reform, even if lacking full consideration of outcomes for all.
On the other hand, the LNP seems to have one broad underlying economic policy framework that doesn’t really rely on reform. That is, it appears to me to be attempting to preserve and revive the debt/asset bubble economy it has helped manufacture and curate over the last 6 years. The LNP is doing this with proposed tax cuts for high and middle-income earners and an ever-promised coming budget surplus.
Some call this “trickle down” economics, but let’s call it what it really is: “debt bubble economics”. As Ray Dalio of Bridgewater said in a recent interview “the notion that tax cuts stimulate growth doesn’t make any sense at all.” Instead, this approach is primarily about supporting asset prices with tax policies that have favoured speculation, creating wealth effects that support consumption (and more debt) and supporting nominal economic growth with high levels of immigration.
The same approach was applied in May 2016 following that year’s LNP federal budget and before the July 2016 election, when new restrictions on super were encouraging Australians to take on an increasing burden of debt to finance or speculate on ever-expensive housing. That policy focus likely helped to support the last leg of the Sydney/Melbourne property boom that continued into late 2017.
Related to this, there was the continued maintenance of social security and tax incentives that encourage Australians to plough money into, and remain in, large homes well in excess of their needs, in some cases driven by the desire to qualify for the aged pension.
Of course, at a simplistic, overall macro level, and if one looks backwards only, a case can be made that debt bubble economics policy has worked. Overall wealth has expanded as asset prices have risen, employment levels have been healthy and easy credit until recently allowed people to keep consuming. But it has led to greater inequality, a divide between generations, one of the highest household debt levels in the world and a greater vulnerability to a full-scale crisis.
The LNP have been playing the “short game” and not just because it is at long odds to win the upcoming election. The short game is simply more of what the party has delivered in 6 years of power – pumping up and preserving the debt bubble economy and pretending it is good economic management.
Of course, the LNP is not alone in the world in adopting this approach and this makes it easier to justify. Meanwhile, economic growth has been sub-par since the GFC in most economies as they partially choke on record overall debt levels that have increased by 50 per cent in absolute terms globally over the last decade.
The LNP opposition to any serious reform of negative gearing in 2016 and now, even though at one point the party thought it was a good idea, is indicative of the emptiness of their policy cupboard. Do nothing, just politic by scaremongering about the risk to housing prices.
Let’s also look more closely at the LNP’s policy approach in action recently in just two areas relevant to advisers and investors – mortgage brokers and SMSF loans.
Regardless of what you think about the value of mortgage brokers, the royal commission recommendations in this area was a big structural change for a financial services business model aimed at minimising the conflicts of interest and reducing incentives for the excessive and irresponsible use of debt.
Yet the LNP backdown on the recommendations for removing upfront and trail commission was breathtaking to watch, quickly giving in to a couple of weeks of fierce lobbying and essentially maintaining the status quo and kicking the can on any real change further down the road. Labor also backtracked somewhat but arguably to a more sensible position still involving the removal of ongoing trail commissions.
What about SMSF loans? With a background where the 2014 Financial System Enquiry recommended their banning, a new report by the Council of Financial Regulators and the ATO raising serious concerns about their risks, reports of poor advice and all four of the major banks plus Macquarie recently exiting the market for such loans, the LNP has boldly decided to… do nothing, again kicking the can down the road to another regulatory review in three years.
Total SMSF borrowings have grown dramatically over the last decade and are now around $42 billion, half of which is in residential property with a third of the total loans backed by a personal or external asset guarantee – the latter despite the core premise of Limited Recourse Borrowing Arrangements.
It seems clear such loans have been subject to misuse and abuse, increasing vulnerability for individual SMSF members. Some have been encouraged to set up SMSFs by “one-stop shops” purely for the purpose of leveraging into overvalued properly assets. The risks of such poorly diversified and leveraged investment approaches is obvious to most. If elected, Labor has said it would restore the general ban on direct borrowing by SMSFs.
In both these cases, and others, LNP policy seems driven by whoever can lobby them loudest, especially if that action suits their debt bubble economic agenda.
Reform in these areas is necessary. It may well be dislocating and quite painful, but Australia needs to move away from its debt and house price obsession at some point and it can do this purposely now or haphazardly later, with a bigger bust down the track.
The LNP has shown it does not understand, or does not wish to manage these challenges. It’s has its chance over 6 years and made a meal of it, no doubt partly due to the leadership mess and internal bickering over what it actually stand for.
The alternative Labor policy platform has problems but, given at least some recognition of the big issues, attempts at reform, and a longer-term focus, perhaps Labor deserves a chance.
This is not about going down some of the crazy socialist paths being proposed by certain far left politicians in the United States. As Ray Dalio also said about the US, which is relevant here: “Capitalism needs to be reformed. It doesn’t need to be abandoned. It needs to be reformed to work better.”
To fully lay my cards on the table, 2019 (along with 2016), will be one of the few times in my life when I cannot bring myself to vote Liberal in a federal election. I suspect many other disappointed, naturally Liberal leaning voters feel the same. This is despite being adversely affected by some of the proposed Labor policies.
The LNP needs a few years in the wilderness to do some serious soul searching, develop new blood, policy coherence and the courage and integrity to implement real reform with a long-term focus. Given the current state of the party, perhaps more than a few years will be necessary.