Government changes and interest rate cuts needed to fight Australia’s white-collar recession

Australia today is missing a hidden key ingredient in identifying just why our productivity remains in a spiralling decline. As a real estate agent, I speak with many purchasers on a daily basis, and a common theme keeps resonating through – yes, we are experiencing a mining boom. But on the other hand we are clearly right in the middle of a “white-collar” recession, which clearly identifies a conservative economic holding pattern while weathering this storm.

It is an unknown of whether this storm will pass with minimal damage or inflict massive destruction of cyclonic proportions. Personally, I lean towards a holding pattern that will deliver minimal growth with households continuing to suppress expenditure.

Many businesses are facing savage headwinds in the form of a strong Australian dollar and consumers reducing their household spending while focusing on being actively employed until our markets start performing again – which, in all probability, could be until the next federal election in 18 months.

Productivity growth has been weak in recent years, which has lowered Australia’s potential growth rate. Our estimates suggest potential growth was 3.5% to 3.75% per annum for 2000 to 2005, but it is closer to 2.5% to 2.75% now. Without a pick-up in productivity, Australia will probably have to accept lower GDP growth, higher unemployment and higher interest rates.

Construction for new home starts in the December quarter came in at 33,700, which is equivalent to the number of starts recorded in the early 1970s. Reserve Bank of Australia deputy governor Philip Lowe recently noted that the GFC has brought about a consumer mood swing, and the days of inflating earnings by relying on capital gains in assets are no longer. Households are now experiencing life after an unprecedented two decades of economic growth.

GDP growth has been below 3% since 2008, inflation sits around the RBA mid-point of 2.5%, unemployment remains static with a possibility it may start spiking upwards, and house prices, just like share prices, indicate clearly we have asset price deflation. RP Data announced that in the December quarter 2011 that 6.4% of homes were in negative equity, up from 4.9% in the previous quarter.

This statistic identifies why I am against first-home buyer’s grants given we are not building enough properties to meet demand – hence upward spiralling rents. These grants are much like throwing lollies on to a highway – resulting in huge road toll.

The Gillard government is abolishing the popular living away from home allowance (LAFHA) from July 2012 – Treasurer Wayne Swan said “the tax exemption for living away from home was being rorted by highly paid executives and foreign workers”. So at a time when we have a severe skills shortage within Australia from July, Australia won’t be able to attract any overseas employees? This will then place Australian businesses under greater pressures given these 457 visa holders will now seek employment elsewhere outside Australia. The government will save approximately $350 million based on a $7 billion shortfall in tax revenues in 2011-12.

This decision will have a huge impact on rental markets as 457 visa holders leave our shores – this will definitely impact our rental markets (especially houses.) The LAFHA will significantly impact many businesses, as this was previously used to entice overseas staff to Australian businesses due to our skills shortage. The result will be that Australian businesses will be faced with higher costs, which in turn will result in lower productivity given that they will remove this facility from their business models.

This decision comes at a time when finally NSW is out-performing all the other non-mining states for the first time in over a decade. Analysis of the national accounts identifies that for the 11 years before June 2011, NSW’s annualised demand growth was a percentage point lower than all the other non-mining states.

The O’Farrell NSW government is finally looking at reducing its exorbitant payroll tax rate, which currently stands at 5.45%. This is hardly completive with Victoria at 4.9% and Queensland at 4.75%.

Given the Gillard government’s decision to scrap the LAFHA, NSW urgently needs to assist business by enticing employees to what was once considered Australia’s greatest state. I refused to use “premier state” given the previous premiers helped destroy it.

Look no further than last weekend’s Queensland election to see how an unhappy electorate can destroy a once strong and proud political party. Queensland Labor, just like NSW Labor, will in all probability never recover.

It all comes down to taking care of business – they pay the bills and the taxes (as do their employees).

Not since the recession of the early 1990s has Australia seen such a “white-collar” economic malfunction, The RBA needs to act immediately and shave aggressively 125 basis points from the cash rate.

If the RBA is independent, why does the elected federal government appoint all the board members?

Robert Simeon is a director of Richardson  Wrench Mosman and Neutral Bay and has been selling residential real estate in Sydney since 1985. He has also been writing real estate blog Virtual Realty News since 2000. The RWM real estate model has sold in excess of $1 billion in database sales globally.