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  • Writer's pictureKatherine Kohan

Financial Opposites: Two economic strategies that Australia gets wrong

Updated: Sep 26, 2023

Why Australia's decisions on tax deductions and credit scores could be limiting the country's growth potential

I spent the last two months setting up bank accounts in Australia, getting an apartment and buying a car. This has been an intensive exercise in learning about the Australian financial systems versus the US financial systems. There are a few “polar opposites” I found interesting. Please note - this is not financial advice and is my personal opinion only.

Opposite #1 - Residential tax deductions

Real estate interest is only tax deductible if it is an investment versus a personal residence in Australia. In the US, primary residence real estate interest (with some exclusions, caveats, etc…) is tax deductible but real estate investments are not (again as a general matter).

Tax deductions tip the scales of investment towards the tax deductible item. The higher the taxes, the more powerful the tax deduction tips the balance of power of where a marginal dollar of investment will go. In Australia, the taxes are around 40%, so similar to a high tax burden state like CA or NY, but higher than a low-no tax state like TX or Florida.

My suspicion is that what this does is encourage Australian individuals to put more of their investment dollars in real estate, versus small businesses or other non-real estate opportunities or assets. If I were a government and wanting to keep investment dollars “on the island” I can understand how that could be a desirable outcome, but from a total value creation, having so much capital tied up in less efficient value creating assets doesn’t optimize for overall value accretion. I suspect that a small business would generate more jobs (likely closer to a 1-1 each $ invested leads to a $ of wage), than a piece of real estate, which I would suspect is lower than a 1-1 investment to wage creation.

Small business contributed 32% of Australia’s total economy - The Australian Small Business Ombudsman, 2018-2019
Small businesses accounted for 44% of American GDP - 2019 report from U.S. Small Business Association

An additional downside, that I have not seen play out yet given the high demand for housing, is that there could be over-investment in real estate, like has happened in China. Now a critical difference in Australia is if the property is not built, the consumer only puts a deposit down, which acts as a market check on putting the risk more on the builder, which likely acts as a brake to over development. And lastly, when does anything ever actually change once a government policy is in place, but this policy likely inflates real estate values by pushing marginal investment dollars to it, and depresses investments in small business, the engine of economic growth and success of the US.

Opposite #2 - Credit limits

Australia’s lending system effectively discourages leverage. America’s lending system encourages leverage - arguably by too much, particularly when the Federal Reserve kept rates (too!) low for so long. My suspicion is that this plays through the economy somewhat similar to the real estate point made above, in that there is less commercial and personal non-real estate lending happening. This reduces consumption power, which reduces overall economic output. Now, it could be argued that leveraged consumption is not consumption that a government wants to encourage - but I prefer a free market economy where consumers can make their own, educated decisions on the amount of leverage that they feel comfortable with.

The average American carried $5,589 in credit card debt at the end of 2021 - Experian
The average Australian carried $1,255 ($1,948 AUD) in credit card debt in 2023 - Finance comparison website Finder

To really get at the heart of this, there should be overall credit issued per capita, or some other similar metric, but I find the differences quite striking. To be clear, I am not saying anything on absolute levels but that this data suggests that a different approach to debt is being taken in the US vs. Australia, presuming that the overall cost of living is similar enough such that Americans are not being 'forced' to take on higher levels of credit card debt to support their lifestyles.

And now

Back to travel posts - enough serious thoughts for one post.

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