It seems the scare campaign against Labor’s proposed improvements to negative gearing and capital gains tax (CGT) has shifted gear, with property rent-seekers now warning that Australia faces a recession if Labor is elected.
Over the weekend, Australia’s Treasurer and former head of research at the Property Council of Australia (PCA) warned that Labor’s policy would “crash” the economy:
“If you want to crash confidence in the economy, go and play around with the value of the family home, which is what Labor’s proposal, their housing tax proposal, does,” Morrison said on Sunday…
“A big housing tax will undermine consumer confidence, undermine people’s own home values, and have all sorts of disruptive impacts on the economy,” he said…
And yesterday afternoon, Morrison was joined by Stockland CEO and head of the (PCA), Mark Steinert, who echoed Morrison and claimed that Labor’s policy has “the potential to destabilise the entire economy” to the extent of “risking a recession”. From The AFR:
“At the end of the day, house prices are unlikely to adjust so much that it would really change that affordability equation anyway,” Steinert says. “And if they do, believe me it won’t be a recession. It will be a depression”…
“Housing represents $6.5 trillion of the Australian people’s wealth,” he tells The Australian Financial Review. “It is so big and so many people are involved that even when that order of magnitude of change is obviously small compared to the stock market…its affects people. It becomes the new dinner party conversation. People feel poorer. They buy less in the shops and people employ less and people are less willing to borrow money to start a business and suddenly that goes on. That is how markets work.
Righto. So using Steinert’s logic, Australia’s property bubble has gotten so big and has distorted the economy so much that it must be maintained at all costs. This means that Australia cannot implement any reforms to lurks like negative gearing and the CGT discount – despite the fact that they helped cause the bubble in the first place. In effect, the whole Australian economy is now captive to the bubble and the parasite is now controlling the host.
While there are elements of truth to Steinert’s claim, where is the benefit in letting the bubble grow even more, distorting the economy even further? At some point, it has to be allowed to deflate for the long-term good of the economy, society and inter-generational equity.
This means that rent-seekers like Steinert and Highrise Harry must take some pain.
Rather than take the advice of vested interests like Steinert, I’d rather listen to those who have the whole economy’s interests in mind. Take, for example, Bernie Fraser, former Governor of the Reserve Bank of Australia, who noted the following about Australia’s negative gearing and CGT arrangements in March:
“From a national interest – rather than political interest – perspective, tax measures (and policy measures generally) should be assessed in terms of their contributions to four goals, namely resource allocation, economic growth, price stability, and what is too often forgotten these days: fairness.
The current negative gearing (and related capital gains) tax arrangements score poorly on all four tests – they divert savings and resources away from potentially more productive investments into (sometimes speculative) property investments to take advantage of the tax concessions; this does nothing to improve economic growth (or the budget bottom line ); they can accentuate short term fluctuations in house prices and sustain long term increases in house prices which far outstrip increases in the earnings of most Australians; this last mentioned consequence, plus the fact that the benefits of the concessions flow disproportionately to people on higher incomes, make the current measures manifestly unfair”.
We could also take the word of Malcolm Turnbull himself, who in 2005 described negative gearing and the CGT discount as “tax shelters” and “tax avoidance” and noted that they are “skewing national investment away from wealth-creating pursuits, towards housing”, and have caused a “property bubble”.
Or we could take the word of 51 economists surveyed by the McKell Institute, who do not support the view that Labor’s policy would “crash” the housing market and economy:
I’ll see your rent-seeker spruik and raise you 50 economists…
