In the Land Down Under, Sydney:
Promise Fulfilled?

Edward J. Dodson

PART 2 of 3

SYDNEY TODAY: REFLECTION OF AUSTRALIA'S WHOLE?

By the late 1970s nearly 80 percent of all Australian households were owner-occupied, 15 percent more than in the United States. One reason is that since 1945 housing has been highly subsidized and has remained a major policy concern on the national policy agenda. Nearly 85 percent of the nation's 16.5 million people live in the port cities. Sydney (with the largest population at over 3 million) has undergone substantial expansion and redevelopment during the postwar period. The challenge has been to create employment for this growing population and to continue to provide decent, affordable housing for a new generation of Australians and a continuing flow of immigrants.

Sydney began as a port and continues to serve as a primary center of international (and interstate) commerce and trade. A large portion of the oldest section of Sydney was demolished in the 1920s in order to construct the city's only bridge across Sydney Harbor, where the city's internationally recognizable $100 million Opera House was built in 1973. Much restoration of the Old Quarter has taken place, giving new life to this part of the Sydney, attracting tourists, shoppers and others to the area. The process of gentrification spread east from the Old Quarter into the working-class neighborhood Woolloomooloo (the ‘Loo), originally inhabited by Italian and Maltese fishermen. In the late 1970s developers and residents battled over the area. Tenement houses and their lower-income renters were gradually forced out by rising rents until a government commission intervened with heavily subsidized housing.

To the west of the 'Loo is 40-acre Hyde Park, the Royal Botanic Gardens and other public space stretching north to the port area. The city's business and shopping district fills the voids and is served by a subway system that enters from the southern and eastern suburbs and loops through the urban core. Yet, with its miles of sandy beaches and semi-tropical climate, the acknowledged avocation of many Sydney residents is the pursuit of pleasure. To the more industrious among the Australians, this has been a rather troublesome characteristic of their countrymen and a frequent complaint when discussions ensue of Australia's competitiveness in global markets. Asked why she had sent her son to New York to work, the wife of a wealthy Sydney publisher exclaimed, "I don't want him to catch the terrible Australian disease of 'This'll do, mate.'"

A criticism levied directly on Sydney, related to the informality of its population and culture, is its lack of a strong intellectual community. Political scientist David Kemp of Monash University (Victoria), goes as far as to suggest that Australians as a whole have "a low awareness of democratic values," The average citizen tends to view government as inept and bureaucratic but an essential agent in providing basic necessities to all citizens. Fully one-quarter of all Australians are employed in local, state or federal government. Moreover, domestic industries have until very recently remained protected from outside competition by high tariffs, quotas, direct subsidies and other forms of preferential treatment.

As long as exports continued to bring in foreign reserves and generate the tax revenue required to support Australia's bloated welfare state, there was little reason for anyone to listen to calls for reform. While in the United States and Britain, Reagonomics and Thatcherism ushered in an era of privatization and lower marginal tax rates, Australians were not interested -- provoking U.S. supply-sider Alan Reynolds to write in a Wall Street Journal article: "The Australian government's idea of tax reform is simply to tax every sort of useful activity at 49%." Until 1986, this was exactly the case. Despite a worsening economy, rising unemployment and high inflation, little progress was made in opening the Australian economy to competitive forces.

A great speculative boom period had occurred in Sydney during the early 1970s. The financial services sector had provided the fuel to developers, and the market responded to the free availability of financing. Competition for building sites pushed land prices up by 28% in 1972 and 34% in 1973. In no time at all speculative land hoarding swallowed up an estimated one-half of all developable land in suburban Sydney. Global stagflation (i.e., the inflationary recession) followed OPEC's price rises in the mid-1970s and hit Australia hard. The failure of some very large Australian banks occurred. Some $2 billion in loans had to be written off as land prices collapsed and the value of collateral disappeared overnight. The rest of the 1970s and 1980s became a long period of social and economic adjustment that threatened Australia with becoming what its Labour finance minister in 1986 called "a banana republic."

The Labour government of Robert Hawke came to power in 1983 and moved cautiously for three years. Hawke inherited a foreign debt that equaled 30% of the nation's output in goods and services. Slowly, he and finance minister Paul Keating pushed through budget cuts and reductions in protectionist tariffs. Along with a balanced budget, the Labour government moved to make foreign investment more attractive by proposing a reduction in the tax on corporate profits from 49% to 39%. Slowly, tentatively, they moved to introduce some of the same supply-side measures pushed for by conservatives. Somewhat remarkably, Australia's government adopted a spend what you earn fiscal policy.

CONCLUSIONS

By whatever standards one chooses, the citizens of Sydney (and Australia overall) are well off when compared to those in virtually every other society. They have good housing, adequate food and access to quality medical care and education. Their society is less troubled by ethnic and racial tension than most (although the socio-economic status of the Aboriginal groups and the establishment of large Asian minority groups present continuing challenges to the commitment to maintain and expand Australia's social democracy. Even discounting the vast interior as marginally inhabitable, the population density of Australia is comparatively low and the amount of livable and usable open space plentiful. Per capita wealth is among the highest in the world.

As shown above, the Australian government has for a long period been very interventionist (i.e., more democratic socialist than social democratic) and its income tax structure has on the surface appeared to be highly redistributive unless one looks closely at the extensive exemptions granted and government-sanctioned monopolies endorsed. Australians who have inherited the reform program of the single-taxers can take some satisfaction from the fact that both state and the central governments continue to exempt improvements from property taxes. To the extent that the tax on land values collects the annual rental value of titleholdings, the effect of this tax is distributive to all Australians because such values are societally rather than individually created. The holding of vast estates in both landed and produced property has in Australia also been discouraged by very heavy death duties. Both Liberal and Labour activists have looked upon these tax policies as progressive and as having contributed to creating a society that has effectively protected a participatory environment of both wealth ownership and political power. These are the positives, but this balance -- so dependent upon protectionism -- is now being seriously challenged.

As has become true throughout the world, the globalization of manufacturing capacity, the ease with which technical knowledge is transferred, and the use of electronics in our financial markets have weakened the ability of domestic governments to control the economic circumstances of their own country. Australian producers are being squeezed out of external markets by lower cost and more efficient competitors. The new drive for productivity and competitiveness has the potential for dramatically altering the way Australians live and work. Thus far, Australian consumers have accepted high prices on goods and high taxes in return for full employment and broadly available public services. Immigration (20% of today's Australians are foreign-born) has brought people with different cultural histories who have lived under much harsher socio-political arrangements. The immigrants have displayed a willingness to work longer hours at less pay and are competing with Australians of European heritage for employment and business opportunities. The fact that nearly one-third of the new Australians are of Asian origin may have serious social consequences in terms of ethnic relations.

Despite the above challenges to the status quo, Australians continue to live in one of the most politically stable and economically advantaged societies in the world. Their government is moving cautiously toward a more open and competitively structured economy, tempered by the realization that consumption rather than production has motivated Australian work patterns over the last forty years. Until recently, global prices for Australian minerals, for wool and other agricultural products were sufficiently high to give producers an acceptable return on investment while absorbing the high costs of labor and government. The collapse in global prices has already thinned profits; the slow dismantling of the tariff system will expose these same producers to competition in their own domestic markets. As part of the government's program to balance the budget and discourage imports, the Australian dollar was devalued in 1986; as expected, the cost of living rose but Australian exports became cheaper for foreign purchasers. By the first quarter of 1989, the exchange value of Australia's currency had significantly recovered against the U.S, dollar and Japanese yen, placing the new Liberal government in a position of having to make some hard policy decisions.

For the near term, the Australians continue to have the advantages that accrue to a society blessed by a small, well-educated population more than adequately endowed with natural resources. Although the land taxes have not been sufficiently high to discourage land speculation -- so that housing prices continue to climb -- the widespread existing homeownership and continued government subsidies protect a high standard of well-being to most families. Housing-related expenses actually fall over time for families whose mortgage debt is repaid at a fixed rate of interest. This is because inflation erodes the purchasing power of the money being repaid, while nominal wages increase apace with inflation. Key to the longer term stability, however, is whether Australia's government can maintain its extensive social welfare agenda under conditions of rising global competition. Tax policy is an important ingredient in this scenario, and the basic question is whether government in dismantling its heavy taxation of production will look to its natural tax base (i.e., the rental value of titleholdings and other forms of economic licenses) to balance the budget. British economist and journalist Fred Harrison, a tireless advocate of the single-tax program, summarizes the recent Australian experience this way:

A progressive increase in the land tax would have transformed modern Australian history, and strengthened her against the storms that engulfed the industrial economies of the free world in the 1970s. The existence of speculation in the continental economy has been interpreted as proof of the ineffectiveness of the land tax per se, but all that this demonstrates is that the authorities had failed to pitch the tax at a deterrent level and to administer it intelligently.

Higher land tax revenue would have permitted a reduction in taxes on wages and capital, These,in turn, would have stimulated consumption and investment, raising domestic living standacds well above their present levels. Even so, Australia would have felt a degree of economic discomfort due to her heavy dependence on exports of primary goods, but this would have been a relatively mild set-back to the vigorous process of sustained growth. She would have been well-placed to shift the pattern of investment in favour of extending the domestic manufacturing sector, thereby displacing some of the imports and ensuring a healthy balance of payments from international trade. And the higher level of disposable incomes would have provided a larger domestic market for manufactures, thereby reducing Australia's dependence on foreign trade.

As it was, Australia went through the protracted recession of the 1970s and '80s, and only when she applies her tax consistently on the market values of land, and at a uniform and deterrent rate, will she achieve the level of prosperity that is on offer on the bountiful continent.

And so, Australia --- a land of great promise that has already achieved a commendable degree of equality of opportunity -- is poised for a future that will contain either greater opportunity and economic growth or stagnation under the weight of rising land costs at home and reduced competitiveness abroad. Politics, as it has throughout history, will largely dictate the economics of who gets what.