Independent economist, Saul Eslake, has today published an essay analysing Tuesday’s Federal Budget, whereby he argues that negative gearing is still the elephant in the room for the government which undermines its other Budget objectives, especially its savings measures around superannuation. From The Conversation:
…The budget seems to be saying to people with taxable incomes of less than $80,000 – if you want to pay less tax, get yourself a negatively-geared property investment.
Negative gearing still the elephant in the room
The budget is also arguably saying the same thing to people with taxable incomes of over $250,000, people who have already contributed $500,000 to superannuation over the course of their lifetimes, or people who already have at least $1.6 million in their superannuation accounts. The message is if you put any more into superannuation, we are going to tax you more, but if you put it into a negatively-geared property investment, we won’t touch you, because (in the words of the Treasurer’s budget Speech), “that would increase the tax burden on Australians just trying to invest and provide a future for their families”.
Of course, we are not talking about a large number of people here: and the ones we are talking about are extremely well-off. We are actually also talking about people who are much more likely to have a negatively geared property investment (or indeed, more than one), than people with taxable incomes of less than $80,000 per annum.
The budget’s proposed changes to superannuation arrangements make sense. But I can’t see why people – even wealthy people – who are “just trying to invest” through superannuation should be singled out for less generous tax treatment, while people who are doing exactly the same thing through negatively geared property (or other) investments remain unscathed.
The Treasurer reportedly toyed with the idea of limiting “excesses and abuses” of negative gearing, with caps on claims. This would have more or less exactly paralleled what the budget seeks to do with regard to superannuation.
The decision not to go down that path was reportedly “a political – and not an economic – move”.
But it has, and will have, economic consequences.
Combined with the Reserve Bank’s latest cut in official interest rates, the budget’s decisions and non-decisions with regard to income tax cuts, superannuation and negative gearing are likely to encourage more Australians to borrow more money in order to invest in the property market. As if Australia didn’t already have one of the developed world’s highest ratios of household debt to GDP or personal income, and amongst the developed world’s most expensive residential real estate. And as if we might not be near the bottom of the interest rate cycle and the peak of the property price cycle.
Is it really consistent with building a “stronger, more diverse, new economy” – as Scott Morrison’s budget speech proclaims – to encourage still more Australians to bet, with borrowed money, that property prices will continue to rise at a faster rate than their incomes?
Hear, hear. If you crackdown on one area, but leave the door wide open in another, then those seeking to avoid paying tax will gravitate towards the tax-effective area.
Thus, the Turnbull Government has erred badly in maintaining the negative gearing and capital gains tax lurks, which Malcolm Turnbull himself described as “tax avoidance” and “tax shelters” in 2005.
The cynic in me believes that pushing property prices higher is precisely the point. Treasurer Scott Morrison used to be head of research at the Property Council of Australia after all.
In Tuesday’s Budget speech, Morrison noted that making changes to property tax concessions “would increase the tax burden on Australians just trying to invest and provide a future for their families”. He has also previously stated that “for most middle-income people it is the one chance they’ve got to build some wealth”, while telling Fairfax Media that the Coalition “have no wish to undermine the value of Australian’s homes”.
So it would seem that property is Treasurer Morrison’s preferred path to retirement saving for Australians and that ever-rising house prices are part of this equation.
This is a government managing a bubble, not an economy. So we should not be surprised that its policies are aimed at channelling even more of the nation’s resources into maintaining the ponzi.