MS: Tax election to hit growth

From Morgan Stanley comes the RBA and Treasury’s nightmare:

The Federal Opposition’s proposal of a broad overhaul of the housing and investment tax regime challenges the incumbent Government to deliver on promised broad-based tax reform. Change is coming and the impact on macro and markets could be meaningful.

Tax reform to dominate election debate: We have sensed a building movement for reform of Australia’s negative gearing system, which allows the full deductibility of interestand expenses against incometaxes. One of our 10 Surprises That Would Matter from January 27, 2015 was that negative gearing would become an election issue.The reform agenda launched by the ALP this weekend confirms it as a core debate, and the response thus far suggests that the Coalition may not counter with the status quo.

Change is coming: Something not seen from opposition platforms in the last 9 years has been proactive policy signals. Labor’s move at the very least should put focus on the incumbent government’s reelection ramp.This means the promise of meaningful tax reform made late last year will now surface in policy and reform proposals to counter Labor’s. The Government’s Tax White Paper process was held up with the change in Federal leadership, and with a GST riseseemingly unlikely (‘GST hike not in Turnbull Government’s tax reform plans, ministers say’, C Uhlmann and N Woodley, 8 February 2016), the policy battle could be made around the broad collections of “investment” tax (‘Cap on negative gearing and work-related deductions being considered by Treasury’, P Martin, 12 February 2016).

Implications for Markets: The simple observation is that the uncertainty around Government policy for key sectors of the economy (financial services and housing-related) will weigh on business confidence and activity. Should the polls continue to deteriorate for the Government we note the potential for another hiring and investment hiatus, as industry and consumers wait to see who wins and what is actually implemented. In the context of an already below trend growth outlook, this will only hinder 2H16 earnings momentum.

Yep. This is what you get when you attempt to offset a mining bust requiring structural solutions using a cyclical remedy like a housing bubble. The RBA and Treasury which together cooked up the disastrous plan are now in the way of the real reform we need. Too bad.