The Australian Greens announced over the weekend their policy to quarantine negative gearing so that rental losses on both houses and shares could no longer be claimed against unrelated wage/salary earnings.
Under the Greens plan, those already holding negatively geared investments would be grandfathered, with the changes only affecting new investors from a specific date.
The Parliamentary Budget Office (PBO) has costed the Greens’ negative gearing policy and estimated that it would increase Budget revenue by $2.94 billion over the 2014-15 forward estimates, assuming the policy was implemented for all asset classes purchased on or after 1 July 2015. This includes $2.95 billion in revenue and $11 million in departmental expenses to administer (Table 1).
Moreover, the PBO estimated the proposal would increase revenue by $42.5 billion over the period to 2024-25.
In my view, the Greens’ proposal is the best way to reform negative gearing.
By grandfathering existing investors, political backlash would be minimised from the circa 1.3 million Australians holding negatively geared properties, thus making it a realistic reform option (as opposed to a pipe dream).
Nevertheless, there would still be a significant dampening effect on the housing market, since home prices are set at the margin by new entrants.
The resulting ‘correction’ in home prices resulting from the Greens’ policy would likely also be far more orderly than if negative gearing was banned outright, since it would not cause a sudden flood of sales from existing investors exiting the market.
Including both property and financial assets in the Greens’ negative gearing policy is also sensible, since it would minimise tax distortions and overcome concerns about unequal tax treatment between asset classes.
While the Greens will never form government, and therefore would never actually be able to implement their policy, their contribution to the debate around negative gearing is still important.
The Labor Party has already flagged that it may reform negative gearing, if elected, and will debate the policy at its upcoming national conference. Now Labor can rest assured that it would achieve support from the Greens in the upper house, making reform less risky politically.
Labor now also knows from the PBO that they could raise significant Budget dollars from reforming negative gearing, providing them with another point of difference in their battle with the Coalition, who has refused to reform negative gearing altogether.
In short, the Greens’ policy has given Labor the blueprint and political cover to reform negative gearing once and for all. Let’s hope they grasp it with both hands.