Legalise Drugs — Budget Repair or Social Damage?

The US market steadied overnight — rising a couple of hundred points. That sort of movement is neither here nor there these days. After its meteoric rise last week, gold has understandably taken a breather — back to US$1200 per ounce.

The way I see it, we have a little calm before the next storm. Enjoy it while it lasts.

All this bad news — volatile share markets, falling oil prices, weakening global demand, downward pressure on interest rates — is creating budget pressure for Messrs. Turnbull and Morrison.

The debate rages (OK, plods along) on how the good folk in Canberra can extract more dollars from our pockets.

On the income side we have the option of raiding superannuation. Increasing GST (no longer on the table). Abolishing negative gearing. Imposing a ‘useless bugger’ levy on politicians — just kidding, but it would raise a truckload of dough wouldn’t it?

There is very little talk from the government on winding back any entitlement promises or slashing the numbers of public servants.

Those calls in expenditure cuts are coming from outside the government. We have seen a novel proposal from the Australian Chamber of Commerce and Industry (ACCI). It proposes treating the age pension as a loan that’s recoverable when the pensioner’s home is sold. The Grattan Institute is advocating for the owner-occupied home to be included in the age pension asset test.

Public servants — as Campbell Newman found out in Queensland — are a protected species. So no politicians in their right or left mind will dare go there.

All this kite-flying is due to a budget that promises so much more than it can afford.

In a stagnating or deflationary world, revenues stagnate or deflate right alongside it. And expenses increase with more people relying on government for assistance.

The ‘tax this’ and ‘cut that’ debates being waged on a daily basis are a result of governing for the political cycle rather than for the nation’s life cycle.

I’m not blessed with any psychic powers, but what we are seeing today was evident at least a decade ago.

The following is an extract from an article I wrote in The Cairns Post on 6 August 2006 titled ‘Plan for the future now’

Over the next 20 years, the Government will gradually lose the income tax receipts from the retiring baby boomers.

Where will they source the much-needed revenue to pay age pensions and healthcare for an ageing population? Governments wont be able to significantly increase income taxes on the next generation as it will be too much of a disincentive.

The only logical answer is to spread the cost across the whole community via an increase in GST.

The average retiree of tomorrow will enjoy a longer life but the cost of living will be much higher then expected.

Any government contribution, via the age pension, to their living expenses may not be as generous as the current pension system.

There simply may not be enough tax revenue to share around so a harsher means test would need to be introduced.

I cannot emphasise enough the need to organise your financial planning requirements. There are massive social, technological and economic changes that will occur in the next one to two decades.

Seriously, blind Freddy could see what was coming in the decades ahead. Demographics are baked into the system.

The 55-year-olds of 2006 are the 65-year-olds of today. These numbers are a known known. Why did successive governments not plan for this eventuality well in advance?

Why did they continue to pork-barrel? When you know that expenditure is a known and revenue is an unknown (as we have seen), why not focus on containing expenditure?

That approach doesn’t win you votes. Give-aways, NOT take-aways, get you elected.

When it is all said and done, the political class’ only absolute is power.

It’s easy to take potshots at our honourable members, but when you have a guaranteed indexed pension for life plus pretty generous travel perks and access to well paid jobs on advisory boards — your self-interest can (and does) outweigh public interest.

When the proverbial hits the fan, they’ll be alright. Bugger the rest of us, who have to manage in the world they have created — or destroyed.

But it is what it is. Lamenting about the lack of foresight from both sides of the political divide is wasted energy.

Given that no politician in their self-interested mind is going to dare ask for even a 50 cent co-contribution to Medicare, scale back funding for a thesis into ‘why the sun rises in the east’ or even remotely consider the prospect that not everyone on the government payroll is entirely productive, then here’s a potential revenue option for consideration…do we legalise drugs?

This concept is sure to evoke strong views — mostly negative.

We all have our opinions on drugs. I detest them and the people that peddle them. But I am also certain they are here to stay — irrespective of education and enforcement.

I come to this discussion as man who has been married for 30 years, a father of three daughters (all aged in their 20s), a person who does not smoke but enjoys the occasional glass of red and who has a flutter on the Melbourne Cup.

Mine is not the world of wild parties, drunken orgies and heavy gambling.

My reason for putting forward a debate on legalising drugs follows along the same lines as the other SIN taxes.

From 1920 to 1933 the US introduced Prohibition. This did not stop people drinking. It just drove it underground. Bootlegging and corruption thrived.

The oldest profession in the world — prostitution — was once illegal. It too thrived under the management of criminal gangs with the protection of corrupt officials.

Gambling — SP bookies, illegal gaming housing — did business even though it was illegal to do so.

All these activities — for better or worse — are now legal. The social problems and family breakdowns from gambling are well documented. Alcohol related incidents — one punch kills stories — are reported on an all too frequent basis. Stories of women being forced into prostitution are tragic.

Yet on the other side of the coin there are many people who enjoy having a quiet drink and a play on the pokies. The gambling and alcohol industries provide employment for a significant number of people.

The taxes collected from the legal activities of alcohol ($6 billion), cigarettes ($8 billion) and gambling ($6 billion) total $20 billion.

Depending upon your religious, moral and social views, there’s a case to be argued for and against each one of the so-called sin products.

The reality is whether they are legal or not, they would exist in some way shape or form. In a legal form — with all the negative consequences that come with that — the government at least earns a dollar and can have some input into how these industries operate.

Drugs are consciously or subconsciously classified as more evil than the other addictions such as alcohol, nicotine, punting and sex.

Hence the objection to legalising something as vile (no pun intended) as drugs.

In June 2015 the Washington Post published an article headlined, ‘Why hardly anyone dies of a drug overdose in Portugal’ here’s an extract:

Portugal decriminalized the use of all drugs in 2001. Weed, cocaine, heroin, you name it — Portugal decided to treat possession and use of small quantities of these drugs as a public health issue, not a criminal one. The drugs were still illegal, of course. But now getting caught with them meant a small fine and maybe a referral to a treatment program — not jail time and a criminal record.

According to the article drug overdose deaths in Portugal are now three for every 1 million citizens. In the UK it’s 44.6 per 1 million.

Perhaps the Ice epidemic authorities are dealing with might not be as widespread if drugs are legalised. From the Washington Post article:

…the use of “legal highs” — like so-called “synthetic” marijuana, “bath salts” and the like — is lower in Portugal than in any of the other countries for which reliable data exists. This makes a lot of intuitive sense: why bother with fake weed or dangerous designer drugs when you can get the real stuff?

The legalisation of drugs might, on balance, be more positive than negative. The government can exercise some control over the industry, enforcement agencies could, in time, scale back operations. Crime rates and the attendant social, health, police and judicial costs might reduce. There are potential tangible and intangible savings at all levels of society.

And, given the probable size of the drug industry — it must be well into the tens of billions of dollars — the taxation revenue would be fairly sizeable.

But at what cost to society? There is already a cost — lives lost, families destroyed, health services under pressure, police and customs resources, courts and prisons systems.

Can these costs be somewhat reduced or at least quantified if drugs are legalised? There is a debate to be had about bringing drugs into the open. We need to acknowledge that the war on drugs is one that cannot be won with the current strategy.

Somehow I don’t think legalising drugs is one of the options on the government’s table.

Who knows, in another 10 years it might be. Then I can refer to this article and lament why the discussion did not happen sooner.

Vern Gowdie,

For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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