by News WeeklyNews Weekly
Part E: A policy agenda for Australia's future prosperity
, January 13, 2001
An integrated package of economic policies - developed over 15 years - is the means to achieving the aims of this New Manifesto.
These policies are necessary to solve major problems of the Australian economy, the foreign debt, and the need for a new bank, for major infrastructure development, to boost national savings, to give urgent assistance to families, and to boost Australia's population.Policy 1: A New Commonwealth-style Bank
The major banks have largely become investment banks for the top end of town. Deregulation of the banks has not delivered lower interest rates to small business and farmers, once fees and charges are included. It is arguable they have not delivered lower mortgage rates than prior to bank deregulation. Services have been slashed to many communities. Despite government assurances, there is the constant threat of takeover by foreign banks or seeing our major banks shift their headquarters overseas.
There is an urgent need for the Federal Government to establish a new Commonwealth style bank, as is being done in New Zealand.
It would lend at lower interest rates to households, to small to medium businesses and to family farmers. In order to do this, it would raise its capital in three ways:
First, from credit issued at low or even zero interest rates from the Reserve Bank.
According to US Federal Reserve Bank Chairman, Dr Alan Greenspan, "Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets or banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank" (Central Banking and Global Finance lecture, January 14, 1977).
Of course, he added the qualification that no government would want to overdo it and flood the nation with money, causing excessive inflation.
The issuing of low interest credit by the Reserve Bank used to be a standard practice, but ceased on the 1981 recommendation of the Campbell Committee. It argued that if the Reserve Bank issued credit at commercial rates, the Bank could operate functionally independent of the Federal government.
However, it did admit that the practice of financing the Federal government at one percent was part of how governments operated in the public interest, involving considerations "beyond economic issues" (Campbell Committee Final Report, page 29).
Such non-economic "considerations" should include helping families buy their own homes. Economic reasons should include helping to give our farmers and businesses a competitive advantage in world markets.
Second, funds can be raised in the capital markets. Being a government backed and secured bank, it could raise funds at the 10-year commercial bond rate, which is about 6.5-6.0 percent, as of the end of 2000. However, were the government to offer concessional tax rates to investors in such bonds, they could be issued at lower than commercial rates.
Third, funds can potentially be raised from the huge pool of superannuation funds, of which about $90 billion is currently invested off-shore. There is sound reason to tap into the latter. What is the point of having a savings system that invests so much off-shore, at the same time as the country has borrowed $294 billion offshore, risking the country's economic stability? Super funds invested in a special Commonwealth-style bank bond issue could be tax exempt, allowing the funds to be raised at lower than government bond market rates.
This Bank could be run through Australia Post commercial centres. This is how the New Zealand Labour Party is planning to implement its new People's Bank. The New Zealand Government has allocated $NZ80 million to its establishment phase.
There are precedents for such a new bank. The Commonwealth Bank was originally established to assist those who were not serviced by the commercial banks. The Commonwealth Development Bank was a special service to farmers and small businesses, offering long term loans at low interest rates. For farmers this is essential. Their incomes can vary enormously because of the vagaries of the agricultural markets, the weather and pestilence.
In Germany, the Kreditanstalt für Weideraufbau (KfW) was established to provide small and medium-sized businesses with cheap, long-term loans to help establish themselves or to expand their operations. The KfW is widely respected, has a gold-plated credit rating, and is seen as pivotal to Germany's post-war resurgence.
Even in the home of the free market, the United States, special assistance is provided to home buyers. Home owners write off $50 billion in annual interest repayments against their taxes. They also have US Congress approved Fannie Mae and Freddie Mae home-lending schemes, with generous tax breaks, currently providing over $US1,000 billion in home loans at one percent less than other financial institutions.
This may contradict American faith in free financial markets, but even the avidly free trade US Congress supports these schemes because it believes "that expanding home ownership is good for families, communities and the economy ... [Without them] mortgage rates would rise to the 'jumbo' level, forcing consumers to pay over $US20,000 more in interest, driving them out of the market" (Letter to The Economist, John Buckley, senior vice-president of communications, Fannie Mae, November 18, 2000).Policy 2: Major infrastructure building
Australia's ports, harbours, rail, road, and many other areas of infrastructure have deteriorated in recent decades. Not only do these need upgrading, but Australia needs a massive expansion of its resources to exploit the huge trade potential of the Asian region. Asia is expected to grow from 3.5 billion to around 5 billion people in the next 50 years.
The use of Reserve Bank long term, low interest credit for such infrastructure work would add to the viability of much-needed projects. It would also have the potential to give employment to those most affected by unemployment, the unskilled and semi-skilled.
The 1913-17 construction of the Trans-Continental Railway was funded in this fashion with an advance of £17 million at one percent interest. Because such infrastructure has a long lead time, with an operating life of 40 to 60 years, it makes good sense to use low interest credit to spread the repayments across the generations who benefit from the project. Commercial credit cannot operate in this way.
Such investment would also attract private investment in its wake. Former US President Clinton estimated that for each $US1 billion infrastructure investment by government in poor areas of America, up to $US16 billion of private investment followed.
Emeritus Professor Lance Endersbee, a leading world infrastructure expert, has outlined several major infrastructure projects, all of which deserve discussion. They are designed to reorient Australia to the fastest developing, most populous region of the world. There are almost two billion people within seven days sailing time from Broome, Derby, Wyndham and Darwin.The Asian Express
In the not-too-distant future, some of our leading primary exports, like wheat and beef, are likely to face strong pressure from foreign producers like Argentina and potentially Ukraine. Wheat and beef are products that survive long distances and delivery times to overseas markets.
But Australia has the potential to develop a whole new range of much higher value horticultural products substantially to replace these products. Two things are required: a fast and reliable transport delivery system (which is fundamental to winning Asian markets) and better use of our irrigation waters.
A very fast Asian Express railway from Melbourne to an expanded, high tech port of Darwin would open up the Murray-Darling Basin, Goulburn Valley, Murrumbidgee irrigation area and the Darling Downs for such products.
This would increase the value of land and irrigation waters of these regions. It would also make it economic for farmers to switch from flood irrigation to less wasteful methods such as drip irrigation, and help solve salinity problems.
The Asian Express would also give mineral and manufactured exports from the three eastern states and the Northern Territory rapid access to Asia.
A two track Asian Express rail would cost about $10 billion, equivalent to the interest Australia pays on its foreign borrowings in one year. The rail should also be extended through to Perth and Adelaide. Estimates of the likely freight volumes on the various sectors of the route indicate that the entire connection would be economic.Irrigation infrastructure
Professor Endersbee has pointed out that most of Australia's major irrigation diversion works are over 50 years old. Some are 100 year old. The diversion structures, canals and irrigated lands were designed as a gravity system, and this has led to serious salinity problems in low-lying areas. At the time of design and construction, there was little knowledge of the need for control of groundwater levels.
The old irrigation system was designed according to the market opportunities, technologies, equipment, energy resources and funds available at the time. The deficiencies in the old system now create additional costs, and cause environmental problems.
Many of these environmental problems would be corrected if we simply used pumping and pressure pipelines to lift us out of the dependence on gravity systems.
Plastic piping is available today, which eliminates the need for canals and diversion channels to follow an exact grade, and also eliminate leakage into the groundwater and losses due to weeds in channels.
If we were to now redesign the irrigation works of the Murray-Darling Basin, using all our new knowledge and resources, the overall layout could be quite different, and much bigger. We could probably double or triple the area under irrigation for the same volume of water.
Turning the northern rivers south: Almost a quarter of Australia's run off flows into the Gulf of Carpenteria.
There are several potential dam and reservoir sites at high levels in the upper catchment of the Gulf Rivers. Storages at these levels could command a wide range of potential irrigation areas in the Gulf country, and in the catchments of the rivers flowing into Lake Eyre, and further south in Queensland, possibly extending to the Murray-Darling Basin. These salt-free surface waters could also supply some of the Queensland towns now dependent on artesian waters.
With a Melbourne to Darwin rail line passing nearby, the incentive for irrigation development in that part of Queensland could improve dramatically. The potential for irrigation from Gulf Rivers has been examined in the past and found to be uneconomic, primarily because the cost to market overwhelmed all other costs. A fast rail system would change that.
The Clarence and Macleay river diversions: The returns on new high value crops of the Murray Darling Basin could be further increased in value by the diversion back across the Great Divide of the seaward flowing waters of the upper Clarence, Nimboida and Macleay Rivers. The water could be delivered over the ranges at no cost, using cheap, off-peak power to pump the water to the top of the ranges. Then it would be released down the western slopes of the Divide to generate hydro-electric power at peak times.
The Northern Rivers Irrigation Project: The Fitzroy River region and other regions in the north have high potential for production of a wide range of tropical and semi-tropical crops and processed food products, on a huge scale.
Australia is often regarded as a dry continent. This is a misnomer. Most of our usable fresh water is above the Tropic of Capricorn. We use only a fraction of our available fresh surface and ground water.
To achieve this potential, there is a proper role for government in creating the basic infrastructure of dams and mainline distribution works so that the private sector may develop irrigation properties to suit particular market needs.Policy 3: A national savings policy
Australia needs a large pool of savings to make the nation self-sufficient in its capital needs. To this end, Australia needs a Singapore-style Central Provident Fund.
Singapore's compulsory savings system has helped transform the island-state from a Third World nation 40 years ago into a modern thriving economy with a standard of living equivalent to that of Australia's.
Begun in 1955, Singapore's Central Provident Fund (CPF) has achieved a high national savings rate, and more. It is a highly efficient self-funded social security system whereby each person saves to provide an individual social security net, rather than being reliant on the welfare state.
In Singapore, a CPF member holds three accounts:
• An Ordinary Account can be used for housing, approved investments, life insurance and transfers to top-up a parent's Retirement Account;
• A Medicare Savings Account for meeting hospitalisation expenses and medical insurance premiums;
• A Special Account which is reserved for retirement contingency purposes.
The contribution rate in Singapore's CPF is 40 percent of a worker's gross salary, with workers contributing 22.5 percent and employers 17.5 percent. Interest on deposits is about 4.5 percent.
However, all contributions, interest and payouts are tax free. This means that while interest on deposits is small, it is not diminished by taxes and other charges as happens to savings in Australia.
Most importantly, it also means that investment loans made from this huge pool of savings can be made at very low interest rates. For example, top-up housing loans from the fund are only 0.1 percent above the interest paid on CPF deposits.
There are no entrance fees, a negligible administration charge, and contributions are immediately vested.
Whereas Australia has more than 150,000 separate super funds, with associated administrative costs, Singapore has one fund with negligible administrative costs. Singapore's home ownership rate is over 90 percent compared to Australia's, which is now below 70 percent.
Also, when the Asian economic meltdown occurred, Singapore did not suffer from a sudden flight of foreign capital, because it is financially self-sufficient.Policy 4: Justice for families
The late B.A. Santamaria once commented, "The largest single immediate cause of marriage breakdown is economic pressure, which brings about distortions in family living patterns."
Many middle-class Australian families are suffering from a steady decline of incomes, the result of Globalism and economic rationalism. This has forced large numbers of women with dependent children into the paid workforce.
Surveys over the past 15 years have shown that at least two-thirds of women with young children would prefer to be full-time mothers, but economic circumstances dictate otherwise.
While the policies described above are fundamental to remedying the employment and family income crisis in the medium-term, immediate assistance is needed to hundreds of thousands of families.
The Homemakers Allowance is a proposal to pay $145 per week ($7,540 annually and equal to the current maximum Parenting Allowance) to any family with dependents where one parent chooses to be a full-time homemaker. The net cost of $6.2 billion would initially less than the interest paid annually on Australia's foreign debt.
The allowance would be means tested, but would be added to the taxable income of the recipient. It involves abolishing the Parenting Allowance and reduced child care costs. Policy 5: Reducing the foreign debt
The burgeoning $294 billion foreign debt, that has left Australia beholden to the vagaries of the foreign markets, is the biggest single impediment to the development of the nation and a threat to its national sovereignty. Although governments have reduced their share of the foreign debt to below 20 percent of the total, private sector debt has risen faster than governments have reduced their share.
What can be done?Public sector debt
Several steps can be taken to reduce the government's share.
First, until the foreign debt is brought under control, a temporary 10 per cent revenue primage duty on Australia's annual $120 billion worth of imports would bring about $12 billion into the government's coffers annually. A primage duty is a short-term measure to help correct a serious trade imbalance. This is not a return to 1960s-style tariffs.
The advocates of "free trade" will argue that our trading partners will retaliate with their own tariffs on Australian exports. However, Article XII of GATT specifically sanctions a general tax on imports "for the purpose of safeguarding the balance of payments" of a nation.
The economic theoreticians may also argue that a 10 per cent primage duty would raise the cost of imports and be inflationary. However, the mark-up on many imports is so large that primage duty need hardly affect sale price. If it does affect important items like farm equipment, then compensation could be paid to farmers.
Second, as most multinationals pay little or no direct tax in Australia, the government needs to negotiate a tax rate with the corporations based on their turnover or their expenditure.
Third, 7,000 multinationals operating in Australia are claiming $30.5 billion annually in interest expenses. The tax deductibility of interest paid on foreign loans should be removed. Paying the company tax rate of about 30% on this amount would yield about $10 billion in revenue annually for the government.
Fourth, the Australian dollar is one of the most traded currencies in the world. Speculation on currency movements is about $70 billion a day in Australia.
Nobel Prize winning economist, Professor James Tobin, has suggested that a tax of about 0.01% should be levied on such turnovers. The UN is currently studying this proposal.
If it were widely introduced, at the level suggested, it would raise $1.75 billion a year for the government.
It is, therefore, possible to reduce dramatically government debt in a short period, without further wholesale privatisation of government enterprises.Private sector debt
The private sector is carrying over 80 per cent of the foreign debt.
Foreign debt is partly due to lower levels of savings for investment. This has several implications:
First, Australia's superannuation funds have assets of about $500 billion, with about $100 billion invested offshore.
While offshore superannuation investments do not add to our foreign debt directly, the fact remains that this money is not available for investment in Australia. This means that governments and business have to look offshore to borrow funds, adding to the foreign debt.
A tax penalty should be imposed on superannuation funds invested offshore, with tax concessions for investing these funds in a new Commonwealth style bank.
Second, to boost the level of savings, Australia should emulate Singapore's national compulsory saving scheme which has given them a national savings rate of 40 percent of the nation's annual Gross Domestic Product. This has helped Singapore to become self-reliant in capital, so that it does not need to borrow offshore.Policy 6: Building Australia's population
For both economic and security reasons, Australia needs to boost its population substantially in the medium to long term. This needs to be done by strengthening the economic foundation of families so that they can have the children they desire, and through an appropriate immigration program.
A growing population helps increase the size of the domestic market for industries, helping them become world competitive.
Strategically, Australia needs a larger population to secure its borders in the long term. As the reputable Jane's World Armies warned in 1996, it was Australia's good fortune that "made it a glittering strategic prize" and that "in the longer term it would not be surprising if during the next century, the country's defences were not tested".Contents of this Special Issue