Through the GFC Labor while was spending like a drunken sailor, the coalition was warning that deficits increased the cost of borrowing money, which was ridiculed by Labor.

Now Swan has has had to eat crow, and has endorsed the longstanding Coalition line on the link between fiscal policy and interest rates. Having made great play of the role of pump-priming during the global financial crisis he has belatedly conceded that large deficits put upward pressure on interest rates and, in effect, the exchange rate by reducing national savings relative to investment and increasing our reliance on foreign capital inflow.

The $100m that Labor is borrowing every day is adding to the $6bn required to service the federal debt annually, and pushing up the rate at which the banks pay to borrow money from overseas and forcing the ANz and other banks to raise rates to their customers. Swan's tirade against the big banks is simply to cover a problem of his own making.

Well SM, how do we get out of the present situation ?
We have a large debt which requires servicing and paying out but that
requires surplus income, which it is my understanding has to come from GDP.
However, high and rising energy costs will keep reducing GDP until
it reaches zero. When that happens how do we pay anything off ?

Many countries have negative GDP, a better word contraction, and must
face bankruptcy.
This is the problem which Hockey refered to on Lateline a couple of nights back.

I now suspect that if the price of minerals falls we will join that club.

What no one acknowledges is that this zero growth economy is permanent !

Swan is a lifetime member of my union.
Yet he is showing he is becoming a grumpy old man, did his reputation no good in the Rudd thing.
Good job he has and is doing it very well.
Stay on track bloke SM like the party he serves will complain about any action you take.
Even if it is the one they would take.
And even if it is washing your hands after going to the toilet!

Belly,

Either there is a link between interest rates and debt or there isn't. Swan could have spent far less for the same benefit, and not have to now try and dig Australia out of the hole he created.

The $6bn p.a. interest that Australia pays for Swan's debt could have paid for the disability insurance scheme.

I think there is two different equations here, one is debt and the other is a surplus, Julia says a surplus will aid the treasury, but the banks can only shift interest rates if their borrowings from overseas decline in rates.

Joe Hockey is doing a good impression of a swan song himself of late. Talking about how Aussies have to be weaned of a sense of entitlement regarding welfare but seems quite happy to dole out taxpayer dollars willy nilly in middle class pork barrelling and to his big end of town mates.

Don't think the libs really know what they are doing. One minute they are opposing means testing of programs like the private health insurance rebate and opposing billionaire mining taxes, then lamenting the 'largesse' of the poor. Yet again more reasons to stay away from the Coalition who want, according to Hockey, reduce us to the standards of Asia as thought that is some admirable norm.

Gawd help us if the win the next election. Can Gillard turn it around? The ALP have made some faux pas for sure but the alternative is even scarier.

579,

The whole point is that the higher the federal debt, the higher interest rates the banks have to pay to borrow money from overseas, which they have to pass on.

Pelican,

The Tag "middle class welfare" is created by Labor to vilify the incentives given to encourage investment. Is negative gearing middle class welfare?

Now Labor is looking at targeting super for high income earners. That 0.5% increase with an additional 15% tax is really going to encourage people to save for their retirement. What an idiotic approach.

Australia's largest banks are warning that borrowing costs will continue to climb higher after the European debt crisis sparked further increases in borrowings and margins in the previous quarter, according to a report by The Australian.

Banks are seeing their wholesale cost of funds rise sharply, which is expected to be passed on to customers.

“It's looking like the cost of investment-grade loans will rise by at least 30 basis points in the first quarter,” NAB managing director of debt markets origination Christine Yates said, according to the newspaper.

The banks say that companies with $A145 billion in loans falling due by 2014 in particular will likely accelerate early refinancing because of the rising borrowing costs.

Syndicated loans in Australia cost, on average, 191 basis points, which surpasses benchmark rates last quarter, compared with a 177 basis-point margin in the US, the newspaper reported, citing Bloomberg data.

The largest lender in Australia, Commonwealth Bank of Australia (CBA) paid a record spread of 175 basis points more than the benchmark swap rates when it sold $3.5 billion of covered notes earlier this month, according to The Australian.

579

Thanks for making my point.

Australia has one of the strongest banking systems in the world because our banks didn’t play the silly overseas banking games of lending to people, organisations or governments who were unable to repay loans. But we have a weakness – our so-called ‘funding gap’ – and it's time to bring that weakness into the open, given that ANZ is this week deciding whether to lift mortgage interest rates.

Australian banks’ funding gap is the money they need to raise from the expensive overseas inter-banking market. It’s expensive because global banks no longer trust each other, as no one knows the extent of bank exposure to high-risk securities.

To determine the size of the Australian funding gap I needed help, and not everyone will agree with the method of calculating the difference between bank loans and deposits (excluding wholesale deposits). But the methodology shows that we have a massive $625 billion funding gap.

In times gone by this funding gap could be filled overseas at interest rates that were lower than Australian rates. Now the overseas borrowing costs have risen sharply and are slightly above the local term deposits rates. It is the rising cost of filling the funding gap that is causing the banks to think about lifting mortgage rates despite the Reserve Bank’s latest steady interest rate stance.

Is negative gearing middle class welfare?

If it artifically increases the cost of housing and exists only to provide tax breaks to those who use that particular minimisation vehicle, and if most property investors are indeed "middle class" then the answer would have to be "yes".

Especially so if the majority of PAYE taxpayers then have to pay more tax to make up the revenue shortfall it creates.

The ALP is also guilty of pork barrelling via middle class welfare but the Libs are the masters of wasteful spending in this regard.

Forget the term if it offends you, what about the principle behind wasting tax dollars on what are essentially personal choices-baby bonuses, overly generous parenting payments, health insurance subsidies.

Why are those on higher incomes not in Hockey's sights, why target pensioners. Sorry I just don't get that at all. There is certainly some room for reform on welfare but removing a safety net without being mindful of the long term consequences is just plain dangerous IMO.

Hockey may be on the government gravy train with a good pension package in his future but many people of his and older generations did not have super as part of their salary when they first started work; and many women stayed home with children for a time.

Yes negative gearing is a good example. As wobbles writes NG has been one factor in housing unaffordability.

I am not sure how baby bonuses, rebates and subsidies to those who earn way above the median wage stimulate investment over the long term.

Fact is both Lib and Labor have erred in this area, but putting the blinkers on when your side is responsible for some of the worst policy handouts is not going to help Australia into the future.

If this is part of Liberal's vision I would rather pass.

Wobbles,

The tax act allows expenses incurred against an investment to be deducted. That this happens in housing is not welfare. It is an example of where an incentive creates demand for housing, and should therefore increase building of housing.

Where the costs increase is where the councils pile up to $200 000 per plot of land in "development fees"

What labor calls "middle class welfare" is in most cases incentives to drive good behaviour. For example if the state subsidises private schooling at an average of 70% of the cost of public schooling, the take up of private school places frees up more money for public schools. Similarly the health insurance incentive encourages people to self fund their health expenses and reduces the net outlay by the state. These are prime examples where the state ends up better off, and so do the public.

Means testing these incentives reduces federal costs and increases state costs by more.

Negative gearing does NOT increase the amount of housing being built.

Most rental property investors prefer to buy established properties and so it diverts funds that could have been used for new buildings. It also drives up the price of housing that may otherwise have been used for private residential purposes by creating more demand in the market.

Australia is one of the only countries in the world that still has such a scheme but politicians of all persuasions have been too scared to address it.

I also don't know where you got the idea that private schools cost the taxpayer 70% of the cost of public schools. There is a reduction in the rate-per-student but that doesn't include the massive additional amounts paid via SES funding model. I can't think of 50 public schools who shared a windfall of $62 million. I think they should replace all these schemes with a standard equivalent voucher system for every student, to be spent on either public or private schools - then see who squeals the most.

Subsidising private health funds diverts public money away from public health, not the other way round.

Finally, the term "class" - like "elitist", "politics of envy" and "socialist" - is nowadays used more often by conservatives than leftists as a way of avoiding real policy analysis in favor of creating a simple generic emotional response. The so-called "class war" has been over for a long time. The debate is more to do with people who can afford to do so, paying more of their own way. People being paid total welfare amounts greater than the amount of tax they pay isn't sustainable.

For a political party that stands for private enterprise and independence, the previous conservative administration has created the biggest welfare state in our history.

Wobbles, it would appear that you are at odds with economic theory.

Even if all the new investment went to established housing (which it doesn't, as many new developments actively recruit landlords) it would make existing housing more expensive relative to new housing, and new buyers would prefer to build as they would get better value.

Wobbles, negative gearing actually provides housing for those who either don't want to own their own home, or, can't afford one.

If you remove the tax breaks (NG), then investors, like myself, will simply invest elsewhere.

It is not rocket science.

Labor are also looking at slashing super perks.

They are simply in a desperate situation and will look at and do anything they can to return to surplus.

Remember the words AT ANY COST when things start to crumble.

BTW, I repsonded to a post from another thread,

Wobbles, the word 'dud' was the word used by Toyota, not me.

I was simply repeating what THEY said.

Sorry to post it here, but it's important you understand it's not my view that anyone who looses their job is a dud.

Negative gearing did increase investment in housing what it did though on balance weighing up pros and cons was contribute to an inflated housing market. Recent figures reveal in the not too distant future only 22% of young Australians will own their own home. The decision to allow foreign investment in the domestic property market has also inflates prices.

When the government decided to reduce the amount of social housing, in fact selling off some stocks, it meant people on waiting lists went into the private rental market with rental assistance packages. Either way the support comes from the government.

Hockey at least has the courage to stand up and say what he really believes. I wish more politicians would do it. That is the idea of a democracy. The candidates relay their beliefs and policies and the voters decide who they want. There were some good points in Joe's speech and interview but he did not criticise the Liberals own policies in voting against means testing (usually with a high income bar) and other middle class welfare.

The Liberals really need to decide what they are about and what they represent. The public still doesn't know. I hope we do know before the next election. Beazley made the same mistake in Opposition under Howard Goverment changing his party's line everytime the wind changed.

There is no clear message from the Coalition. Just more negative responses to whatever the Government does, even the good stuff. I reckon they are at risk of cutting their noses...('scuse the cliche').

Negative gearing describes the situation where the costs associated with a leveraged investment are higher than the income from it. In other words, when the project runs at a loss.

Negative gearing is a popular strategy in investment property. The word ‘leverage’ is used to describe the process whereby an investor borrows a significant percentage of the total cost of the property so as to have the funds needed for the transaction. The investment can then be described as being ‘geared’. In other words, the investor’s (small) deposit is added to the bank’s (large) mortgage loan. This enables this ‘geared’ investment to achieve far greater returns for the investor.

Mortgage costs are the highest costs a geared investor must face. When maintenance and property management costs are added to the mortgage costs, the income – in the form of rent from the tenants – can often be lower than the total costs, particularly in the early years of the project. This is then described as a project that is ‘negatively geared’.

Investors are prepared to ‘lose’ money in this way for two reasons:

The geared investment property is able to generate capital growth that history has shown has averaged at 8 per cent per annum. In other words, the capital growth is very attractive, and more than offsets the monthly income shortfall*.
The annual interest paid is fully tax deductible – along with maintenance and some other costs**. Any shortfall in income relative to the costs can be offset against income from other sources, such as the wage and salary income of the investor.

*Assumes a well-planned and well-structured investment, in a growth location, and assumes the investor has the monthly cash flow needed to cover the shortfall.

** A full list of tax-deductible costs can be obtained from McCarthy Group.

The government has structured these tax deductions to encourage private investments into the property market, which relieves it of the need to provide large-scale social housing.

This is a article on the same subject:

http://www.theaustralian.com.au/national-affairs/what-was-once-labelled-absurd-is-now-government-policy-in-wayne-swans-world/story-fn59niix-1226335431317

Note that the government has promised strict budget cuts for 3 years running and not delivered. The deficit in 2011/12 was budgeted for $12n and is now looking at $40bn. If Swan presents a budget surplus of $1.5bn, the reality would be a deficit of $30bn.

a lot of countries have been suffering bankruptcy nowadays becasue they have to have another debt to pay for a debt that they had prior to that which is why it will only become a vicious cycle that these countries really suffer a lot economically speaking. it is really difficult to recover from debts and it will really take a lot more than a good leader to be able to solve this problem.

If Swan and co hadn't been in denial for so long, sprouting the old, how clever are we line, things may be a little easier to swallow.

I say again, brace yourselves, as we are in for a rocky road.

Since pelican’s suggestion that the Liberal Party will pork-barrel the middle class, this thread has digressed into a discussion on so-called middle class welfare. We have heard that the middle class is showered with such benefits as private health cover rebates and negative gearing for investment properties. This is in the context where the federal Labor government has been spinning the concept of “working families” and how low income earners have been “subsidising the rich”.

Let’s run the numbers by comparing two hypothetical taxpayers – equal in all fundamental ways related to costs of living (eg married with 2 kids, etc) except one earns $50,000pa and the other $150,000pa. The first has no private health cover and the second has private cover and an investment property. All amounts stated are “per year” unless otherwise noted and male gender used for convenience only.

Mr $50,000 pays $8,550 PAYG income tax and $750 Medicare levy. His 9% super contributions taxed at 15% also add $675 to the coffers – a total contribution to “the system” of $9,975.

Mr $150,000 pays $43,450 PAYG income tax and $2,250 Medicare levy. His 9% super contributions taxed at 15% also add $2,025 to the coffers – a total contribution to “the system” of $47,725.
But his private health cover attracts a rebate of $1,389 (ie. he pays a net of $270 per month). Also, his $500,000 investment property fully financed at 6% is rented at $350/week with $10,000pa expenses runs at a “loss” of $30,458pa, which reduces his tax bill by $11,269 at the marginal tax rate of 37%.
Hence his net contribution to “the system” is $35,067.

Mr 50k contributes $750 to the health system; Mr 150k contributes $5,490. Presumably there is no discrimination on who gets sick more.

I have not included the range of additional benefits available to Mr 50k denied to Mr 150k by means testing (eg family benefits, child care rebates) nor have I included the fact that Mr 150k will pay $750 to the flood levy fund this year while Mr $50k pay nil.

Now, who is subsidising who again?

Peter Mac, this 'tall poppy' thing is always there.

Those who despise the $150K'ers seem to forget the fact that they (the $150K'ers) also provide for many $50K'ers.

It is fast becoming a case of 'why bother'for many, because, rather than being respected for having a go, they often just get ridiculed.

As I have said many times over, we are all presented with an equal opportunity to fail.

I remember reading a report about welfare gained vs income tax, and for someone earning about $55k the welfare received equalled the tax paid. The gist of this is that anyone on $55k or lower is subsidizing no one.

Those on >$150k pay vastly more in tax and get almost nothing in return. a couple starting a family now get no more than a couple with no kids. If your cost of living increases with the carbon tax, suck it up. If your mortgage increases because of government waste, suck it up. If you get hit with a flood levy, suck it up.

SM where do you find that govt' borrowings affect bank borrowing.

579,

Other than Basic economics, the last one to make that connection was Wayne Swan. As this was the basis of the thread, where were you?

Whine Swan spent 4 years racking up debt and claiming that it had no effect on interest rates. Now he is claiming that it is vital to get to surplus to reduce the pressure on interest rates. He is either lying now, or was lying then.

Swan wants a surplus to encourage the reserve bank to cut rates, but that will not guarantee the mortgage banks will cut their rates.
The banks borrow money from overseas at higher rates now after the GFC,
These rates have nothing to do with national debt.
There is a bigger chance banks will again raise mortgage rates for new loans.
Your previous post blamed wasteful spending for the banks borrowing rates. Can you explain that.

579,

In small words for the economically challanged:

The government is borrowing $100m per day, $17m of which is interest on existing debt, competing for capital with the private banks. Then while the country's debt is low compared to other nations, it is still increasing, and there is no sign that Labor is able to control it.

The overseas lenders with limited resources are thus able to charge far more for money going to Australia.

Your explanations have as much credibility, as abbott and the fat boy.
Your story keeps changing, so this doesn't have anything to do with treasury, you are saying.
Wouldn't you think the banks would go somewhere else if there was any credibility in what you say.
Our banks are govt; guaranteed.
There is no link between national debt, and bank borrowings. The banks are paying more for finance now, since of the GFC, overseas borrowing has become limited, and so charge more.

No credibility! this is first year economics.

Also bit rich coming from you 579 you are clearly economically illiterate. I would take a wild guess that you have no university education at all.

That Wayne Swan is drawing the link with government borrowing and interest rates in spite of denying it earlier, means that the lesson must have been drummed into his skull. When the government competes with industry for manpower, land, loans, etc, it always pushes the price up.