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Tag Archives: Paul Keating

Many people believe that in 1985-87, when Negative Gearing was abolished in Australia by the Hawke/Keating government, that rents rose, and rose dramatically.  This is certainly the assertion of the Turnbull government as part of its 2016 Federal Election campaign strategy in which the spectre of massive rent rises coupled with a  dramatic fall in housing prices is daily utilized as a scare campaign.

In fact, during that period 1985-1987, while rents did rise in Sydney and Perth as NG was abolished, they fell in Adelaide, Hobart and Brisbane and remained steady in Melbourne. In other words there was no relationship between the abolition of Negative Gearing (NG) and rental prices in that period.

The predominant reason that rents increased in Sydney and Perth during that time was tight rental vacancy rates. Sydney, in particular had very low vacancy rates (less than 1%).

If the abolition of Negative Gearing leads inevitably to rent increases it should have done so in all cities during 1985-1987.

It did not.

This alone is enough to disprove that abolition of Negative Gearing has a dramatic influence on rents.

Even the recent (March 2016) BIS Shrapnel report which modelled a particular set of assumptions about Negative Gearing and which has been used by the Turnbull Government to forecast general economic disaster should Negative Gearing be abolished, agrees that rents did not rise during 1985-1987. It says

neither rents nor dwelling prices displayed any notable change of behaviour or deviation from trend during 1985-87 [when negative gearing was abolished]

The CEO of the Commonwealth Bank, Ian Narev, whose bank owns a $400 Billion property portfolio says that Negative Gearing is only a minor influence on housing prices. He said:

I can tell you having a $400 billion home loan book – your assumptions on unemployment and what’s happening in global interest rates will dwarf whatever assumptions you’ve got on the modelling about the impact of negative gearing by a factor of…I can’t tell you the number but it’s a big number.

It would appear that the BIS Sharpnel model is drivel.

Macrobusiness characterises the BIS Sharpnel modelling outcome as hoplessly inconsistent on its own terms:

 [BIS Sharpnel say] restricting negative gearing to newly constructed dwellings would somehow crash dwelling construction, raise rents, and destroy employment, the Budget and the economy? Even in its own terms this makes no sense. How does a sagging economy and rising unemployment lead to a rental cost spike?

One should also note that the NG scenario that BIS modelled is significantly different from the actual policy that the ALP has proposed, though Prime Minister Turnbull and Treasurer Morrison used the BIS Sharpnel scenario to criticise the ALP’s NG proposals.

So Why, Then, Was Negative Gearing Restored In 1987 ?

We are thus left to answer the question: So if Negative Gearing has a negligible effect on housing prices and rents, why then did the Hawke/Keating government resume Negative Gearing in 1987 ? My assessment is that they caved in to political pressure, possibly due to the upcoming NSW State Election being fought in a climate of rental stress and declining construction activity.

The Cabinet Submission prepared by Keating in 1987 said, in general agreement with Ian Narev above, that

Evidence suggests local factors rather than tax measures dominate in metropolitan rental markets

But the submission nevertheless stated an expectation that Negative Gearing would re-stimulate the construction sector, which had dropped off over the prior 18 months, during the time that Neg Gearing had been abolished. Keating’s submission said

restoring negative gearing could be expected to provide some stimulus to construction in the medium term

This ‘expectation’ of Keating’s is nowhere backed by evidence in his submission.

As we have already noted, the actual available evidence (listed in detail in the submission) points to ‘local factors’ driving rents. Not Negative Gearing..

My contention is that Keating was feeling political heat and just wanted to be seen to be doing something to assist the Building Construction sector and ease rents. But he knew re-establishing Negative Gearing wouldn’t help much, if at all.

The failure of Negative Gearing In Australia to provide its stated aims of stimulating Housing Construction and reducing rents is well-established by the prominent Australian economist Saul Eslake.

An Expensive And Failed Policy

In 2013 Eslake noted that 92% of housing investors buy established dwellings, so NG has not significantly improved housing supply. All it does is assist investors to buy established homes, this bidding up prices on the existing housing stock.

Eslake also notes that in the decade 2001-2011 Australian Housing Stock grew at a rate less than the population growth. Negative Gearing has simply been ineffective at increasing housing supply to any significant extent, if at all.

In fact, by rewarding speculative investment in Housing,  The National Housing Supply Council, of which Eslake is a member calculates that NG has assisted in the suppression of  investment in new housing during 2001 and 2011, such that the national housing stock was 228,000 dwellings less than would otherwise have been under historical rates of housing formation.

In summary then

  • Abolition of Negative Gearing did not increase rents between 1985 and 1987
  • Negative Gearing does not stimulate housing construction
  • Negative Gearing is a very minor factor in housing prices
  • Negative Gearing does not reduce rents
  • The March 2016 BIS Sharpnel report is based on a faulty and self-contradictory model of Negative Gearing effects.








One Million Unemployed

The Liberal/National Party Coalition in Australia has two great indictments on the former ALP Treasurer and Prime Minister, Paul Keating. The first is ‘17% Interest Rates’ and the second is ‘One Million Unemployed’. Here’s Peter Costello long-term Lib. Treasurer in 2007 stringing the insults together into his party-preferred summary of Keating’s anti-achievements

I love seeing Paul Keating out on the media. And I would say: Paul, keep it going, remind people of what it is like under a Labor Government. And you saw all of the old vitriol coming out and it reminds people of a million unemployed, 17 per cent interest rates, a budget deficit of $10 billion, Commonwealth debt at $96 billion

Interview with Virginia Trioli 702 ABC, Sydney Friday, 26 October 2007

Was Keating clueless on Employment ? Could he have done better ? What do he do wrong ?

Keating The Chiropractor

The high profile Blogger and academic John Quiggin scores Keating low on Employment, claiming Keating had no focussed Employment Policy apart from a brief period following the 1993 election with the program Working Nation and even that ran for only a short time before being overtaken by other priorities.

See Quiggin in his article from 2000 ‘Unemployment: Still Hoping For A Miracle ?’

The main reason for pessimism is the fact that unemployment is at the bottom of the policy agenda, just as it has been for all but a few years in the past two decades. In the absence of a serious policy response, we are reduced to ‘hoping for a miracle’. (p.3)

The Working Nation program, […] was introduced by the Labor government
in 1994, cut back in 1995, and slashed by the incoming Liberal–National coalition
government in 1996…(p.19)

Quiggin regards Keating as a technocratic, neo-liberal economist, who aimed merely to calibrate the economy so that it would function efficiently, thereby producing Employment as a natural by-product of health. If true that would make Keating’s approach to the economy rather like that of a Chiropractor, attempting to maximize the efficiency of the body’s nervous system and waiting for natural feedbacks to produce a vigorous equilibrium.

Mega An’ Me

I decided to find out more about what Keating did on Employment and started by borrowing ‘The Longest Decade’ by George Megalogenis from the local library. Lo and Behold, Chapter 1 summarized Keating’s Economic Project as Treasurer/Prime Minister and gave me an outline of what Keating did and its effects on the broad economy.

I enjoyed the chapter so much I have decided to blog The Longest Decade as a series of posts called ‘Mega An’ Me’…maybe.

Mega Loves Paul

From Chapter 1, I would say Mega loves Paul (Keating). He makes it pretty clear that he regards Keating as having done the hard work of reform and that Howard was the beneficiary of Keating’s brave reforms. Mega says:

“[Keating’s] interest rates begat another recession…[but Keating] wanted praise for ending the speculative orgy of the 1980’s. At first we thought he was crazy […] but history has validated […] Keating […] The decade that followed his recession (which began in November 1990) expired on 24 November 2007 [with the defeat of the Howard Government]”

The catch for Keating is that the longest decade still belongs to Howard.
– The Longest Decade, pp.9-10

Mega claims, I feel a little blithely, that most people did not feel any pain in Keating’s recession.

Neither number [17% interest rates or one million unemployed] happens to be mainstream.[…] In NSW only one out of 24 workers were retrenched… Three out of four households were on a fixed interest rate of 13.5%, the ceiling that applied before April 1986…Also the banks shielded the remainder by extending the term of the loan, so repayments did not rise…

Longest Decade, pp.12-13

…but there has to be some reason for that ALP vote in 1996 shrinking to post-Great Depression lows. People were feeling it. Pretty much only the rusted-ons stayed attached to the ALP in 1996.

As it is, Keating and Mega are supported in their views by Ian McFarlane, Reserve Bank Governor from 1996. Mega quotes McFarlane addressing the Australian Business Economists Annual Conference in 2005 as Governor Of The Reserve Bank, where McFarlane stated Keating’s recession should be regarded as a ‘policy triumph’ as it delivered Australia ‘a low-inflation, stable growth eceonomy’.

Is VIC There ?

Mega traces the pain of Keating’s recession squarely to Victoria. He notes that three-quarters of the job losses of the recession were sufferred in that State due to the reduction of tariffs on the automotive and other manufacturing industries. In Mega’s view those job losses were the price that Victoria had to pay for being ‘dragged into the global economy’ pp.18-19

One might also apply those comments to South Australia, another state that had Manufacturing Industry job losses at that time.

Mega supports his case (only VIC and SA suffered) by presenting results from the 1996 election that show the ALP losing 9 seats in Victoria, but picking up 5 seats in NSW and Qld combined. He could also have mentioned that the ALP was almost obliterated in SA, being reduced to only 2 seats out of 12.

Keating’s Interest Rates

Keating portrays his 17% interest rates as necessary evil required to finally conquer the inflation monster that had risen in the middle of every boom. Wage inflation was being controlled through the Accord, but Asset inflation notably house prices but running at 15% with the help of the newly deregulated financial sector. Keating pumped interest rates until they trumped asset inflation (Longest Decade pp.13-15)

Keating’s interest rates deepened the recession but they were the tool employed to kill inflation which allowed The Longest Decade of stable growth and therefore deserve to be lauded as a policy triumph.

So Was Keating Clueless On Employment ?

I’ll go with ‘Probably Not’. Mega and Keating spin a very plausible yarn on tariffs and the task of destroying inflation but Quiggin speaks in other articles of ‘paths not taken’ on employment policy. I would like to hear some of those other voices.

Mega also makes the point that the international economy was not vibrant in the early 1990’s which gives PJK some further excuses.

But the Coalition are shameless to criticise Keating for his reforms, since they voted for all of them. Have they ever explained what magic wand they would have waved over Victoria to prevent job losses in a manufacturing sector denied its tarrif barriers ?

Note to self: I do not really understand why it is necessary to destroy asset inflation unless maybe to forestall wage demands to cover said inflation.

Loose Ends

There are some other strands of this story to be covered such as Keating’s ‘jobless recovery’ inlcuding the changing technological profile of work and jobs which meant that lost blue-collar jobs could not be immediately replaced. Having peeked ahead I know these topics will be covered in due course.