“Young people today!” The Yorkshire-accented words emitted from the narrow-screen television in the Monty Python classic skit.
I was reminded of this last week when the “young people today” were hit with a 7.1 per cent increase in their student debt through indexation. On the average debt of $25,000 that is $1775. It is the highest indexation for three decades, but back in the 1990s wage increases matched inflation. In 2023, very few got a 7.1 per cent wage increase.
For many, the compulsory repayment taken from wages by the ATO would not cover the indexation and their indebtedness would increase. If inflation stays high, they may never repay their debt.
In short, unless the ATO increases the amount taken from wages or people make voluntary repayments, the scheme will become unsustainable. In any event, the debt burden will reduce their capacity to borrow to buy a home.
The dream of homeownership has transmogrified into an endless nightmare of despair.
The words of the reminiscing Yorkshiremen have been reversed. They live in baby-boomer property “looxury”. The young people live as the Yorkshiremen said they had lived in their childhood.
“House? You were lucky to have HOUSE! We used to live in one room. . . .
“You were lucky to have ROOM! We used to have to live in corridor . . .
“Looxury . . . . We lived in small shoebox in middle of road.”
This month’s indexation will bring the total student debt to $80 billion.
On the other side of the housing divide, however, higher interest rates and inflation are much less of a burden. Inflation eats their loans and for investors higher interest payments are tax deductible.
And those who have paid off their homes are more likely to have interest-bearing investments and are getting higher incomes from higher rates.
This inter-generational unfairness must be fixed. I suspect it is the main reason that the Reserve Bank’s sharp interest-rate increases in the past year have not been working as effectively as in the past.
Since the last two bouts of major inflation in the 1970s and 1990s our tax system has changed. We now tax labour more and capital and consumption less.
Since then, a 50 per cent discount has been applied to capital gains. Negative gearing, while unchanged in its fundamentals, has been taken up by far more investors. Franked dividends from shares now attract a cash rebate, even when no tax is being paid.
Further, the old wholesale sales taxes, can no longer be silently raised. The GST is very public and very fixed. Trouble is that it does not apply to health, education, government charges or rent which are taking up ever more of our consumption. So, taxes on consumption are falling.
It means that the Reserve Bank has the impossible task of fighting a two-headed inflation Hydra. As it increases rates, wage earners with big mortgages get hit. Landlords with mortgages instruct agents to raise rents as high and as fast as they can. So, renters are hit.
Meanwhile, those who get their income from capital and those with high enough income to have paid off their homes, have more money with rising rates. And it has only been lightly taxed.
The result has been higher consumption and household spending by older, higher-income households whose behaviour has been unaffected by inflation. (see: https://www.commbank.com.au/articles/newsroom/2023/05/cost-of-living-commbank-iq.html ) It is counter-acting all the good done by higher-interest rates among the young and lower-income households whose consumption has been contracting.
The Reserve Bank is fighting this inflation war using the tactics and strategies of previous wars. That often proves ineffective at best, and deadly at worst.
More firepower is needed. That can only come with fiscal policy – revenue measures by governments.
Inflation would be better tamed if higher taxes on capital and consumption were added to the weapon of higher interest rates. A beneficial side effect would be a fairer tax system. Another beneficial side effect would be that interest rates could come down sooner.
Those should be aims of a Labor Government. It would also make good politics, too. At present young people are either angered or apathetic. That is driving them to the Greens. Indeed, people under 30 are now more likely to vote Green than Coalition.
But tax changes and interest-rate cuts alone will not solve the housing crisis that disproportionately affects the young. Nor will the three other main strategies on offer, while ever they ignore the elephant in the room.
Those three are: first, the glib and insulting suggestion by Reserve Bank Governor Philip Lowe and others that we should cram more people into each dwelling; second, the neighbourhood-destroying suggestion of economist Chris Richardson and others that we should infill our cities with high rise; and third, the Government’s housing fund.
All wrongly assume that the problem is one of not enough housing supply. The first reduces the living standards of the less well-off. The second delivers fat profits to property developers. The third is utterly inadequate. The $10 billion fund will produce $500 million a year. That $500 million gets you about 1500 dwellings. With three people in each, it accounts for just 4500 people. But our net migrant intake in 2023 is going to be 400,000 people. The Government’s fund will house just four days’ of that immigration.
That is the elephant in the room. Lowe did not mention it; Richardson did not mention it; the Government and the Green do not mention it; business organisations do not mention it. All of the rich and powerful take high immigration and high population growth as an axiomatic must and given. They profit from it or are influenced by the corporate donors who profit from it.
The people who do mention it, however, are the ordinary people most adversely affected by it.
A Guardian Essential poll a week ago found that 60 per cent of people want immigration capped until the housing crisis is solved. And fewer than 20 per cent were opposed.
There is a swelling anger here. It should not be exploited by dog-whistlers on race. Rather it should be met with a rational economic and environmental assessment and a fundamental recalibration of Australia’s tax system and reduction or removal of student debt. Without them the Reserve Bank will drive us into recession, and resentment and anger among our young people will grow even more This is not a Monty Python skit.
This article first appeared in The Canberra Times and other Australian media on 6 June 2023.