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MORRISON LEAVES REGULATORS TO DO THE HEAVY LIFTING

Posted April 12, 2017

 

There are many reasons why negative gearing and the capital gains tax discount need to be reformed. Housing affordability. Budget repair. And importantly, financial stability.

Financial stability is important because it maintains the smooth and efficient flow of funds between savers and borrowers, making the economy more resilient in the face of shocks. What the GFC taught economies around the world is that there is a real human cost of financial instability – financial distress for families, people losing their homes, business bankruptcies and high unemployment. If there is one thing Treasurer Scott Morrison should be focused on, it is keeping the financial system stable.

Yet the evidence is mounting that the government is failing in this duty.

It has been 28 months since the government received its Financial System Inquiry (FSI) report. More than two years. Despite tax not being part of the terms of reference, David Murray put up in big red flashing lights that negative gearing and capital gains tax concessions were ‘‘major tax distortions’’ which tended ‘‘to encourage leveraged and speculative investment in housing’’ and that ‘‘housing is a potential source of systemic risk for the financial system and the economy’’. Murray recently confirmed he stood by those remarks.

Yet here we are more than two years on, and leverage continues to rise, hitting new record levels. According to the Bank of International Settlements, Australia’s household debt to GDP now sits at 123 per cent, the second highest in the developed world, way above Britain at 88 per cent and the US at 79 per cent. And house prices in Australia’s largest cities have soared, with recent data showing they are rising at their fastest rates in seven years – 19 per cent in Sydney and 16 per cent in Melbourne over the past 12 months alone.

The opposition will always keep our remarks about financial stability carefully calibrated, and we’ll eschew shrill scare campaigns. But we’ll also call it as we see it. And we see a lack of action on leverage and financial stability as a risk and a failing of this government. Worryingly, this investor fuelled debt splurge comes when the average wages of everyday Australians are barely keeping up with the cost of living.

There’s been more than one warning. There has been a chorus of observers since the release of the FSI report mirroring a similar message. The IMF is on the record last year as saying "the tax system provides households with incentives for leveraged real estate investment that likely amplifies housing cycles’’. The Grattan Institute has stated that ‘‘negative gearing has many undesirable consequences. It reduces rates of home ownership. It reduces the availability of long-term rentals. It increases the volatility of housing markets, increasing the risks to the Australian financial system’’. Yet the government still sits on its hands.

The Treasurer is seemingly happy to leave the heavy lifting to the regulators, with the Australian Prudential Regulation Authority in recent weeks introducing more drastic measures to rein in the rapid increase in interest-only loans. This is despite the governor of the Reserve Bank subsequently pointing out that one of the key driving factors of the run up in interest-only loans are ‘‘taxation arrangements that apply to investment in residential property in Australia’’. It’s only the Treasurer who can’t seem to connect the dots. The regulators are doing their best, and we support their actions. But they can’t do everything. And they certainty can’t rein in the current distortionary tax settings. That’s the Treasurer’s job.

What’s often ignored here is that contrary to the Treasurer’s statements, these interventions from APRA are not conventional. They are extraordinary measures aimed to curb the growth of investor lending and now, the increase in interest-only loans. These extraordinary measures are required in part because the underlying housing market fundamentals are distorted due to existing tax concessions.

The most disturbing part of this debate is that the government knows there’s a problem but won’t act. New evidence from an ABC-induced Freedom of Information request shows that the federal cabinet formally considered curtailing the ‘‘excesses’’ of negative gearing early last year. Yet it chose politics over substance and preferred to go down the path of an old fashioned scare campaign. Not that it has worked out well for them. So, while the government could have implemented reforms to negative gearing and the CGT discount over a year ago, its failure to do so sees the risks in the Australian economy continue to build.

Negative gearing and the capital gains tax discount are the most generous tax concessions on housing in the world.

They are making housing affordability worse, are a drain on the budget, and are increasingly a source of financial risk in our economy.

The government should push aside the politics and pay attention. Before it’s too late.


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