Tag Archives: neoliberalism

Who Pays for Public Services?

I was at a meeting last week discussing prices for public transport. One of the government representatives there noted that we needed to be careful about providing concessions on ticket prices because if discounts were too widely available that would limit their revenue and ability to provide services.

At one level this was reasonable response from a departmental officer responsible for service delivery within budget parameters over which they had no control. But at another level, it struck me that it was a statement of a particular political economy and a service delivery model within that political economy. My first thought was that we don’t talk about roads like that: “oh, we can’t reduce motor vehicle registration because we won’t be able to build or maintain roads”.

Of course, vehicle registration fees don’t really pay for roads – no matter how many times motorists yell this at me as they scream past me on my bicycle. Large roads are least partly federally funded (and thus largely funded by income taxes), and most small roads are the work of local councils paid for by rates on property. Even the state government money from vehicle registration does not go directly to roads, it goes into general revenue and is not hypothecated (specifically allocated) to road building and maintenance.

Then again, train and bus tickets do not cover the cost of public transport either. Those services “run at a loss” and are subsidised by taxpayers – although again, (perhaps with the exception of some privately-built expressways) we never talk about roads running at a loss or being “subsidised” by the taxpayer. Yet in theory, we could set vehicle registration to pay the costs of roads. The fact that we don’t do that means that roads and public transport are quite similar in that they are a mix of user-pays charges and tax-payer funded public goods.

The reality is that for both public and private transport, and indeed the provision of any good or service, there are a range of possibilities for how it is provided and paid for. In a sense there is a spectrum with total user pays at one end:  the private market is the most obvious example, but public ownership at this end is also possible (think SA Water which returns a dividend to government). At the other end of the spectrum is the total taxpayer-funded provision of services provided basically for free (think public hospitals or schools). And in between there are all manner of shared-cost options from gap payments and below-cost service charges, to direct grants and subsidies to third-party providers.

Where on this spectrum any particular good or service fits is a political-economic choice. We could provide free public transport to everyone as we provide free roads, or even, as I suggested in a previous post, provide electricity in the way we provide public education. Alternatively, we could construct artificial markets to enable user-pays models for the provision of public services – as we actually have done for electricity. There are reasons why such choices might be made in terms of the characteristics of the good or service (e.g. the relative difficulty/cost of capturing payment and excluding non-payers [very difficult on roads, but easier on public transport], or where monopoly provision is preferable to having multiple competing networks [electricity, water]). However, it is not just a technical issue – because we choose to have free public hospitals and schools as well as private user-pays institutions providing the same or similar services.

There is a significant ideological element in the choice of where on the spectrum we locate a particular service provision. It was social democracy that built the public electricity system, and it was neoliberalism that justified its privatisation. And to return to our original example, it is a neoliberal application of business language to public services that sees public transport as “running at a loss” or its provision being governed by the prices charged (rather than the amount of government funding).

The point here is not how public transport should be funded, but rather that not seeing the bigger picture constrains the policy options available. Rather than a suite of possibilities on the spectrum of public and consumer funding, we see prices for public services being set by a business logic which is arguably foreign, and at least only partially relevant to the provision of those services.

And suddenly, we can’t afford to offer concession tickets on half-empty public transport!

“Hard Labour”: A Review of Wage Theft in the Age of Inequality

For a book on industrial relations, Ben Schneiders’ Hard Labour is a good read – interesting, passionate, depressing and hopeful in equal measure. Based on investigative journalism done for the Age newspaper, it traces the rise and exposure of wage theft in Australia over the last 10 years.

Cover Photo: Hard Labour - Wage Theft in the Age of Inequality by Ben Schneiders

I am not sure Schneiders ever gives a formal definition of wage theft, but the book is concerned with workers being paid at rates below the legal minimum or award wages. Many of the examples are familiar (including from Schneiders own reporting): Spotless laundry, McDonald’s, Coles, 7-Eleven, Woolworths, a series of high-end restaurants, and piece-work on farms and in the gig economy. That is the depressing part, but what is interesting is the different models of underpayment and wage theft.

Three Types of Wage Theft

The most straight-forward was unpaid work hours forced on workers by bosses threatening visas, or by industry norms or by the star-power of the workplace. Celebrity chefs and fancy restaurants were Schneiders’ case studies for the later – made even more egregious in some cases by corporate structures which evaded tax as well as industrial relations responsibility. But such unpaid work is also a norm in industries not considered in the book: for instance, for young academics and young lawyers needing to work their way into a decreasing number of secure jobs.

Beyond this enforced free labour, the book also details cases where the standard piece-rates of fruit-pickers, farm workers, delivery drivers and task workers in the gig economy are set so low that it is impossible to make the minimum wage. This is a long-stranding problem, but the stories of successful new union organising among migrant workers in farms on Melbourne’s periphery was one of the most hopeful parts of the book.

Perhaps the most outrageous form of wage theft was hidden in plain sight: workplace agreements which traded away penalty rates and left workers earning less than the award wage. These were negotiated with the union and were rubber-stamped by the Fair Work Commission. The book covers cases with supermarket and fast-food giants effectively sidestepping the “better-off-overall test” (although eventually many of these agreements were voided after legal challenges). Ever-present here was the union, the SDA, which not only failed to protect low paid members, but actively colluded in the negotiation of these (ultimately) illegal workplace agreements – sometimes in the context of cosy closed-shop recruitment schemes.

That matters not just for the workers affected, but for the future of unionism. In one of his most chilling observations, Schneiders notes that in 2020 only about 5% of young workers were members of unions. The rest were rarely exposed to unions, indeed barely knew they existed – or perhaps their first or only experience was with a union that had sold them out. And their remedies appeared to lie outside of union structures (in local organising, in media, or in government watchdogs). It is not a pretty picture for unionism, notwithstanding that some of the heroes in the book are organisers in other unions.

The Bigger Picture

Many of the stories of wage theft in Hard Labour are well known and have been documented by media, Senate Inquiries, and finally in Fair Work Commission findings. But the book is much more than a series of stories lifted from old reporting. It also gives us the background to the media stories (i.e. the campaign organising), the reaction to publication and the industry push-back, and the development of the issue as it unfolded over the last decade.

That story is interesting, but for me the power of the book lies in the broader context. While he says it is not a book of economic or political theory, Schneiders nonetheless puts the story of wage theft in the context of neoliberalism: the choices made to deregulate the economy and to curtail union and worker rights. In this context, wage theft is not a coincidence, nor the work of a few rogue companies. It is a manifestation of a fundamental shift in power in favour of (global) capital. For Schneiders, wage theft is ultimately not an industrial relations story, but a story of power and inequality – and I am not going to argue with a framing that starts with Thomas Piketty and the statistics on rising inequality and the accumulation of wealth and income at the top end.

The point of Hard Labour is that wage theft is both a manifestation of and a contributor to that disproportionate rise of capital incomes and inequality.

Yet despite everything, there is some hope in the book with cases where wage theft was addressed and wages paid out. Perhaps the “golden age” of wage theft is over – or perhaps (as I hinted above) we simply await another series of reports from different firms and different industries?

Time, and further activism, will tell.

Sidenote

Underlying my reading of the book was of our research at SACOSS on waged poverty. One in four Australian households below the poverty line have wages as their main source of income – and that that employment adds costs to already impossible household budgets. Not every worker below the poverty line will suffer wage theft, but many live in the same milieu of precarious work, and wage theft is inevitably part of the story of waged poverty.

Hard Labour is another reminder that (as I argued in my previous post) poverty and inequality need to be tackled in the primary distribution between wages and capital, not just in after-the-fact welfare redistributions.

Beyond Neoliberal Energy – A Thought Experiment

This is a follow-up to my previous post in response to the IEEFA report on the $10bn supernormal profits reaped by energy network providers within the National Energy Market. In that post I suggested that neoliberal ideal of energy provision via the regulation of monopoly energy transmission and distribution networks reflected neoclassical economic orthodoxy. Other schools of economic thought would give rise to different approaches to regulating the energy market, with different methods of analysing returns on investment and hopefully different outcomes of revenue and pricing determinations.

However, all that discussion was still within the parameters of a regulated market. The commentary was relevant (though slightly different) regardless of whether the monopoly owner of the network was publicly or privately owned. In this post, I want to extend the analysis, not with further economic theory, but with a thought-experiment going beyond neoliberal energy frameworks.

Imagine if energy transmission and distribution was delivered the way we provide most school education – by a government department with a goal of service provision rather than profit. This is not simply government ownership of a business enterprise (though who owns and reaps the profits of such enterprises is an important question), but rather de-commodifying energy transmission and distribution.

Imagine a government department running the network. It might be the same engineers, tradespeople and staff providing the service, but without the same need for value-capture (and the restrictions and investments that that requires). Each year (or five) the department would put up budget bids for government funding of new infrastructure required to maintain, upgrade or expand the network (much as the current network providers put proposals to the AER).

The energy network would be paid for by a (hopefully still) progressive tax system, rather than the current customer base which sees disproportionate impacts on poorer households.

Imagine – I wonder if you can?

Of course, such a proposal of government provision of energy would bring howls of “inefficiency!” from neoclassical economists, right-wing pundits and those who simply can’t imagine any other options beyond neoliberalism (which incidentally has delivered economic growth rates over the last 30 years well below those of pre-neoliberal period – but that is another story).

However, as I noted in my previous post, the current regulatory regime does not and cannot imitate market disciplines and alleged efficiencies. But even if it did reflect a real market, would the alleged “market efficiencies” make up for the $25bn of profit/costs (including $10bn “above the reasonable costs”) quantified in the IEEFA report?

That is an empirical question. Any claim of public inefficiency without an analysis of relative in/efficiencies is simply ideology and/or vested interest.

Doubtless though, at the thought of a government department providing energy network services, energy system analysts would also tell us the electricity grid and economics is all very technical and complicated, and too important for pricing and investment decisions to be left to government departments and politicians without the expertise or discipline of the market.

Granted, politicians do have limited time-horizons by virtue of our electoral cycle, and the mathematical models for determining costs and revenue are truly complex. But at the base level, is the flow of electrons down a wire really more complicated than the development of the human mind, with all the complexities of childhood learning and social contexts? The education of the next generation is certainly no less important than the provision of energy. Yet the market is an attachment (and often a parasitic attachment) to the education system in Australia. It is not its centrepiece and regulatory mechanism.

In Governomics, an excellent book published a few years ago, Ian McAuley and Miriam Lyons set out arguments and criteria for when a good or service is best provided by public service provision, and when best provided in the market. On their criteria, as a natural monopoly it is a no-brainer that energy networks should not be privatised. However, as energy is a saleable commodity, even where public ownership has been retained the default has been to a government-owned business model – publicly-owned corporations mimicking private corporations selling to retailers or consumers. The same model was adopted for the NBN, for the same reasons.

But my thought experiment here challenges us to leave the market and neoliberal energy behind altogether. It is hard, because we have been so socialised into neoliberal ways of thinking, we are losing the ability to think of different possibilities. And yet, direct government service provision is how we provide much large-scale education, health and other services.

Of course, the universal government provision of energy is not going to happen in the foreseeable future – although in a SACOSS submission to a parliamentary committee, I did argue for an iterative approach of government investment in new energy initiatives. And there are hopeful signs here. The previous Labor government in South Australia brought new emergency energy production online via publicly-owned generators (although later sold off), but on a much bigger scale we have just seen the Federal, Victorian and Tasmanian governments announce public funding for a huge new electricity transmission project across the Bass Strait, albeit through a publicly-owned corporate entity model.

More importantly though in the context of this argument, even to contemplate government provision opens a new window on the current neoliberal energy model which is failing on so many fronts. Profits from energy transmission and distribution are ripped out of the system (and the country), environmental impacts remain an externality, equity and social justice outcomes are morphed into narrow consumer rights issues, prices are increasing, and those who can afford to are bailing out via solar and non-grid options.

We need to imagine alternatives.

Blowing the Whistle on Energy Network Supernormal Profits

A recent report by the Institute for Energy Economics and Financial Analysis (IEEFA) blows the whistle on energy network owners in Australia who have reaped $10bn in supernormal profits from 2014 to 2021. “Supernormal” profit refers to the profit made over and above the return on investment the energy regulator determined was necessary to provide reliable electricity network services.

Context

Energy network service providers are the companies (public and private) who get electricity or gas from its point of production to consumers. In most states they operate in the National Energy Market, a governing mechanism established by legislation at the height of neoliberal faith in the market. However, these transmission and distribution networks are natural monopolies (as it is inefficient to duplicate expensive network infrastructure). To ensure that they do not exert unfair pricing power, the Australian Energy Regulator (AER) regulates and must approve the total revenue that the network providers can receive. This revenue amount is set in a complex determination process that is meant to ensure that networks charge consumers only what is required to cover the costs of investing in, building, maintaining and operating the networks, plus a reasonable profit to ensure compensation for investors.

Sources of Supernormal Profits

The IEEFE report analyses the difference between the profits built in to the regulatory determinations and the actual profits made by electricity network providers (gas network data was not available). The following graph from the report summarises the key contributions to these “supernormal profits”.

Graph showing $15bn normal profits and $10bn supernormal profits, from $1.9bn gearing, $3.5bn interest rates, $1.1bn Opex, $1.2bn Capex, $0.5bn tax, $0.7bn other.
Source: Simon Orme, “Regulated Electricity Network Prices are Higher than Necessary“, Institute for Energy Economics and Financial Analysis, October 2022.

As can be seen, the biggest single factor was interest rates, where companies were able to source finance at below the interest rates factored into the regulatory model. (This was not just falling rates, but also some dubious assumptions about risk and credit ratings). However, the system also allowed for supernormal profits arising from “gearing” different mixes of debt and equity finance (with different rates of return), as well as under-spending on operating and capital expenditures and, in the early years, paying significantly less tax than was factored into the regulatory model.

The issue that has caused most controversy is the profits from incentive schemes to reward savings made from productivity improvements. The report suggests the regulatory model is overly generous in the proportion of productivity improvements allowed to be retained as profit. I don’t have a view on this, but simply note that even if the profit retained is reasonable and not “supernormal”, it only accounts for 15% of the supernormal profits identified in the report.

Implications of Supernormal Profits for Equality

The IEEFA report focuses on the implications of supernormal profits on electricity prices for consumers, and whether the regulator is fulfilling its key objective to ensure “consumers pay no more than necessary for the safe delivery of reliable electricity and gas network services”. While this is important, my interests are a bit different.

It is well-established that energy expenditure is regressive, that is, energy accounts for a greater proportion of the expenditure of low-income households than of those with higher incomes. Accordingly, the supernormal profits reaped from inflated consumer prices represent an economic flow from consumers to capital, with disproportionate impacts on low-income consumers. Where energy networks are private companies, the owners of that capital will be wealthier people – meaning that money is being syphoned from the poor to the rich. Even in the case of government-owned utilities, this flow of supernormal profits is the equivalent of a regressive tax borne disproportionately by the poor – the sorts of taxes usually opposed by those interested in equality.

Solutions and Limitations

Given these implications, this is a really welcome report – more so because the issue of profit-taking is largely ignored in energy debates dominated by prices, reliability and emissions.

Inevitably, energy market insiders with interests to protect will attack the report (often on technical detail without addressing the key question of whether the actually achieved profit-levels are acceptable). Equally inevitably, regulators will to try to ignore or resist the report’s conclusions.

However, despite that, the report itself is fairly conservative. It is very much a critique from within the system. It accepts most of the neoliberal framework of the purpose and role of the national energy market and is simply concerned with how that is being done. Indeed, the author, energy consultant Simon Orme, and presumably the IEEFA, accept some level of supernormal profit above the regulated rate, but believe that the current magnitude is unacceptable.

Further, in response to my questioning, the author and IEEFA did not believe a change to include social equity as one of the legislated objectives of the market regulation was needed, despite regressive impacts identified above. This was based on a confidence in the effectiveness of the technical proposals put forward. Yet even if that were true in theory, I am not sure that changes which would cost dominant market players millions of dollars will happen without political pressure. And in this context, a requirement for the regulator to take account of social equity outcomes would add to the arguments to implement the very technical fixes the report is calling for.

A market which operates without political context or interference, and where social outcomes are externalities beyond market logic (and regulation), is a hallmark (and failing) of neoliberalism, but perhaps the most obvious place where the theoretical framework underlies and limits the report’s analysis is in the theory and categorisation of profit.

Theory of Profit

The IEEFA report utilises a neoclassical theory[1] of profit as a cost of production, one cost among many factored into the market supply price. This is orthodox microeconomics based on an idealised market, and it is the logic behind how the national energy market is set up. The report works within this paradigm, but simply disagrees with the amount of the profit.

However, there are different schools of economic thought which start from premises other than a perfect market. As I understand it, Kalecki and Post-Keynesians incorporate monopoly and imperfect competition into theories of profit – arriving at some form of higher-than-perfect rate of profit as “normal”. That suggests to me that when the AER benchmarks energy networks’ rates of return on investment using the standard returns of energy or other uncompetitive industries (rather than an economy-wide normal rate of return), it incorporates a monopoly mark-up into its regulated rate of return. Accordingly, even energy network “normal” profit includes some economic rent above “reasonable costs”.

From a different perspective, classical political economy views profit in a capitalist economy as the purpose of production rather than a cost, and it is an appropriation of income after the fact of production, not a cost in the process of production. Investment decisions are based on expectations of profit (rather than actual profit – although there is a messy interaction between expectations and reality), but profit is not guaranteed and the rate of return on investment is inevitably contested in power struggles between capital and labour, and in real competition in the market (see Anwar Shaikh’s monumental reframe of classical economics).

One thing to draw from this is that the regulated a priori rate of return for energy network providers does not and cannot replicate market processes, disciplines and efficiencies. Indeed, where any approved investment is guaranteed a profit, there is an incentive to over-invest as investment size rather than efficiency/effectiveness becomes the base for earning profit. Even a regulator’s most technically proficient calculation of a market rate of return is based on a false premise.

However, a broader point can also be drawn from the classical tradition. If profit is by definition a capture of revenue that has been generated by production, rather than a cost of that production, then the arguments above about the regressive impacts of supernormal energy profits also apply to “normal” profits. They too are a flow of funds from consumers to capital (or in the case of publicly-owned utilities, to a government revenue stream) which places a disproportionate burden on the poor.

In summary, while the magnitude of the flow of profits is important, the Kaleckian and Post-Keynesian theories question the distinction of normal and supernormal profits in practice, and classical political economy suggests it is unnecessary in theory – and also arguably unhelpful in practice as it hides a key dynamic of the “normal” operation of the system.

Conclusion

Of course, in a capitalist economy, profit is required (though not guaranteed) as without it there would be no investment and production – no capitalism. This inevitably means there will be flows of income to those who own capital wealth. It is simply the price of capitalist production and in this context, the extraction of profit from energy transmission and distribution is not a surprise.

However, the differences in the various economic theories remind us that even a privatised monopoly could be regulated with a different set of assumptions and possibly different outcomes. What that might look like in the national energy market is beyond both my competence and the scope of this post, but once we move beyond the framework of neoliberalism and neoclassical economics, we open up alternatives to a model which is fundamentally failing – in ways beyond simply supernormal profit-making.

In that sense, while the IEEFA report is really useful in focusing on and quantifying profit-levels, it is also limited in its ambition and framework.

[1]              To be clear on definitions, by neoclassical economics, I am referring to the body of orthodox economics stemming from the work of Marshall, Jevons and Walras in the late 19th and early 20th century (Thesis Ch 1) and which proceeds from a founding assumption of autonomous rational actors in a perfect market. Neoliberalism is the political project which attempts to actively apply that market logic to understandings of economic policy, the state and society.

Rental Affordability Help: Comparing Public Housing and Commonwealth Rent Assistance

When it comes to rental affordability, the two main ways Australian governments provide assistance to those who would struggle most (or miss out on housing entirely) are through the provision of public housing, and through the payment of Commonwealth Rent Assistance (CRA) to households with Centrelink incomes in the private rental market.

Background

These programs are generally the responsibility of different levels of government. State governments provide public housing (although sometimes with federal funding), while the federal government provides CRA (although state governments also provide some cash-based assistance to renters). But the two schemes also represent very different philosophical or political economy approaches to housing support. Public housing is a direct intervention involving government provision of goods and services, while CRA is premised on the primacy of the market and private rental, with the government role simply to assist those on the margins.

To put it crudely, the former is a social democratic approach, the later a neoliberal one.

Unsurprisingly given this broader political economy, since the 1980s we have seen an increased role for rent assistance at the expense of investment in public housing. (The parliamentary library has provided a nice summary of the shift in the 1980s and 1990s). A comparison of how the two approaches to rental affordability assistance stack up (and for who) therefore not only has relevance for the policies themselves, but also has broader political economic implications.

The following comparison does not deal with important issues of renters’ rights, landlord behaviour, or the maintenance and condition of properties, but simply focuses on rental affordability – “following the money” at a number of levels. While the data is South Australian, the patterns are likely to be similar in other states.

Results: Rental Affordability and Costs to Government

The results can be summarised in a simple graph, noting that it refers only to public housing (i.e. government-owned and managed housing) and does not include community or other social housing.

Graph: Benefits and Costs of Public Housing vs CRA, 2020-21. Public housing has higher support for renters, costs government about the same as CRA in current costs, and less when capital gains are included. Numbers are in the table below.

The numbers are based on calculations made primarily from Productivity Commission data, supplemented by the SA Housing Trust financial statements, and are summarised in the table below. The rationale and detail are set out in the methodology section below, along with some caveats.

Table: Public Housing v CRA, South Australia, 2020-21. Summary data. The figures are available in the methodology section.

Based on these figures it is clear that public housing provides a higher level of support to tenants and gets renters out of housing stress. Further, public housing costs the government/taxpayer about the same as CRA in year-to-year expenses, and slightly less when capital costs and changes in asset valuations are taken into account.

These figures do not include, on the one hand, the opportunity cost of the upfront investment in public housing, and on the other hand, the full capital gains and land tax implications. There are some estimates of these below, but the figures get rubbery and are incomplete.

In summary though, the conclusion from the more concrete rental affordability comparison is simple and stark: public housing is better for tenants and for tax-payers.

Commonwealth Rent Assistance to private renters is important (and is currently too low), but even an increased CRA is no replacement for public housing. The fact that recent years have seen a chronic under-investment in public housing and a preference for support in the private market is another neoliberal own-goal.

Method and Explanation

Comparative Level of Support

The Productivity Commission (PC) data shows that in June 2021, some 26,804 SA public housing tenants were paying less than market rent (Table 18A.5). This was around 89% of all SA public housing tenants. That is, 11% of public housing tenants received no financial support for renting: they were paying the full market rate (and in theory, with efficient management the government should have been receiving a return on investment from these renters).

For the rest, there is a simple calculation of the level of financial support. PC Table 18A.5 estimates that for the week of 30 June 2021 the difference between total market value of rent for all public housing and the rent actually collected in South Australia was $3,483,000. Based on the number of tenant households paying less than market rent, this equates to an average subsidy of $130 per household (per week). (With higher average market rents, the figure for the whole of Australia is $192 per week).

By comparison, the maximum CRA at that time was $70.40 per week for an individual household (or $82.81 per week for a household with 2 children, going up to $93.52 for three of more children).

There are of course great intricacies in eligibility criteria and rates for CRA, and there are fundamental difficulties accessing public housing with long waiting lists, but on the basic comparison above, provision of public housing provides far greater level of support per household than Commonwealth Rent Assistance.

Implications for Rental Affordability

The provision of public housing is not only a more generous benefit to those who could not afford market rental, it makes a significant difference to the household budget. Public housing rent in South Australia is capped at 25% of household income, so by definition no public housing tenant should be in housing stress (based on the widely-used 30/40 rule: housing stress = being in the bottom two income quintiles and paying more than 30% of income for housing).

By comparison, calculations I did for a recent SACOSS Cost of Living Report showed that even with CRA, key Centrelink recipients would still be in significant housing stress. The rental affordabilty table from that report is reproduced below and is based on SA government data for median rental prices in the cheapest Adelaide suburbs of $300 per week for a 2-bedroom unit, and $400 for a 3-bedroom house.

Table: Rental Affordability for Low Income Earners, (Dec 2021). Table from SACOSS Cost of Living Update, https://www.sacoss.org.au/cost-of-living-49

Overall, ACOSS estimates that 45.7% of CRA recipients nationally are paying more than 30% of their income on housing as CRA has failed to keep up with increasing rents over recent years. Accordingly, advocates are calling for a 50% increase in CRA (alongside significant investments in public housing). However, on the figures above, even this would not be enough to get many households out of housing stress (as other income support increases are also urgently required).

Again, CRA fares badly in the comparison to public housing.

Cost to Government

The figures above might suggest that public housing is more expensive than CRA (because the support is more generous). However, this is not necessarily the case due to the rent paid and capital gains (which, as I have pointed out elsewhere in relation to private housing, is a game-changing income stream which is often ignored).

Current Yearly Costs

The Productivity Commission data (Table 18A.43) shows a net current expenditure of $10,361 per public housing dwelling (a figure in line with the South Australian Housing Trust financial statements (SAHT) for 2020-21 when capital costs are subtracted from expenses). However, calculating from PC Table 18A.5 which shows total rent collected in the week ending 30 June as $4,169,000, the rent collected equates to $6,730 annually per property (rent collected x 52 weeks, divided by 32,212 properties as per Table 18A.43). Deducting this rental income from the annual expenditure, the net current expenditure is $3631 per household.

The expenditure for CRA is simply the weekly rate of $70.40 multiplied by 52 weeks for the year. The total is $3,661, which means the recurrent cost of assisting one household through CRA is about the same as the public housing current costs above.

Including Capital Costs

The Productivity Commission data (Table 18A.43) shows an annual depreciation of $1,578 per property in South Australia – which equates to nearly $51m for the whole public housing estate (again, broadly in line with SAHT data). However, the Productivity Commission does not account for any capital gain.

By contrast, Note 5.2 to the SAHT financial statements includes the periodic revaluation of public housing rental properties with increases in 2020-21 of $69.6m in land value and $24.4m in buildings. This $94m equates to $2,799 per household when allocated across the 33,590 public houses (including State-Owned and Managed Indigenous Houses [which are included in the SAHT data, but not in the PC data used above]).

The difference between this capital gain of $2,799 and the depreciation of $1,578 per household results in a net capital gain of $1,221 per public housing household. This is not cash income, but represents a fair accounting of capital income based on the official data.

Subtracting this capital income from the net current costs to government gives the bottom line of public housing costs of $2,410 per household. Again, this is cheaper than the $3,661 yearly cost of Commonwealth Rent Assistance to one household.

However, this capital accounting is not complete – although in going further the figures get rubbery. For this reason, they are not included in the summary table above, but are discussed here.

The big drawback of public housing is the cost of the upfront investment to build the houses, or as the Productivity Commission describes it: “the cost of the funds tied up in the capital used to provide social housing”. While the PC suggests caution in interpreting the data, at Table 18A.43 it estimates this “Indicative user cost of capital” at $18,933 per year for each SA public housing dwelling – an imputed figure which dwarfs all other public housing costs (and would make CRA much more attractive to government).

Yet this accounting is one-sided and does not complete the picture because while capital costs are imputed, the capital gains are not included – and not even fully recognised in the SA Housing Trust revaluations of its rental properties.

The SAHT (Note 5.2) estimate of a total value of rental land and buildings of $7,121m at the beginning of the 2020-21 year, and so the $94m revaluation noted above represents only a 1.3% annual increase in the capital value of public housing assets. This was at a time when market analysts CoreLogic were suggesting a 17.9% increase in Adelaide housing prices. It is not clear why the capital revaluation was so low, but is perhaps based on accounting practice based on depreciated asset (book) value rather than changes in current market price.

That said, market prices are very volatile and uncertain, and both the Productivity Commission’s indicative user cost of capital, and any market valuations, require bold assumptions about interest rates and market behaviour. But if, or to the extent that the Productivity Commission’s imputed cost of capital represents a market value of public housing assets, it is equivalent to about 8.5% of the $7,121m public housing estate valuation. That is, when housing prices go up by more than about 8.5%, the government makes a net capital gain on public housing (or loss when less than that) even with the inclusion of the cost of capital.

Again though, I am not confident of this figure as a true market costing or representation of capital gain. If the market value of public housing properties is significantly higher than the book value, then a smaller capital gain is needed to balance the cost of capital.

Final Caveats

There are a two final caveats to the calculations above.

Firstly, there is no accounting for differences in land tax revenue to government from public or private ownership of rental properties. The SA Housing Trust financial statements show $139m in land tax equivalent expenses – which was 42% of their rental property expenses. While this is the government paying money to itself, it is legitimate accounting and necessary for a comparison to private market support costs – not least because if rental properties are left to market provision with government subsidy through CRA, the land tax take may be considerably less.

For instance, apportioned evenly across all public housing rentals, averaging the total land tax paid across all public housing properties gives a land tax bill of $4,179 per property. By contrast, if a property with the average (book) value of a public housing dwelling ($215,000 based on the $7,121m total valuation) were a private landlord’s only investment property, they would pay no land tax. Even if the private landlord owned 4 such properties, they would only pay $2,535 land tax – about 15% of the housing trust land tax bill for four properties.

It is impossible to calculate the extent of the difference in land tax income for government because it depends on private landlords’ individual circumstance, but rental housing in public hands clearly maximises land tax revenue. Accordingly, in the comparison of public housing costs vs CRA, public housing costs to government should theoretically take account of this land tax gain.

Finally, while the comparison is not a support for existing tenants or a cost to government, there is a difference in the impact of public housing and CRA on rental affordability more generally. CRA payments create no new housing, and while they assists renters into the market they also allow them to bid up rental prices because those renters have (slightly) better rental affordability. By contrast, public housing brings new supply to the market and puts downward pressure on market rents.

Given the above caveats, my calculations are incomplete, but even without precise cost-benefit calculations, the figures above that are available and robust suggest a strong case for public housing.