Election time and your bottom line

Election time and your bottom line

OK so it looks like we are at last going to have some clear divisions in policy with this weeks announcement by the current Liberal Government that they would not be tinkering with Negative Gearing or Capital Gains Tax exemptions. This puts them in direct opposition to their Labour counterparts who have earlier called for the abolition of Negative Gearing (for all but new properties) and a halving of the Capital Gains Tax exemptions for investors.

In doing so, they have set the stage for two ideologically opposing views on property investment. The problem of course with a lot of this policy debate is that the true outcome of either policy can not be known until some time down the track and will remain the centre of vast speculation until any changes are implemented.

One one hand Labour is batting for the first home buyers and keeping Australian housing more affordable (however they have not really defined what that means). Shadow treasurer Chris Bowen has said "I think mums and dads around the country will be deeply concerned that the Government of Australia has no plan to help their kids with housing affordability.” 

So how much more affordable will this policy potentially make Australian residential property? 

Will existing properties fall in value and if so, by how much? 

Will property prices fall immediately, or will growth in property merely be stunted for example to a few percent p.a, and if so for how long?

By potentially increasing the supply of new houses - will it lead to a dampening on property price growth (and is this even a good thing given that the wealth Aussies generate in their home, is often spent on growing the economy through increased consumer spending elsewhere)?

Opposition Leader Bill Shorten also stated that limiting the tax write-off to recently built properties would save the federal budget $32 billion over a decade (or $3.2B annually). However, this estimate would be based on current property investment behaviours. However, there is no guarantee that those behaviours would remain in play if Labour is successful at the next election. 

  • For example, Chairman of real estate chain Century 21 Australia, Charles Tarbey, said he had seen surveys that suggested about 30 per cent of landlords would sell their properties if negative gearing was tightened. 
  • Saul Eslake, former ANZ chief economist and an outspoken critic of negative gearing, has queried “If Labor wins, will there be a tsunami of people wanting to get their snouts in the negative gearing trough between the election and July 1, 2017?” 
  • And another vocal supporter of the abolition of negative gearing, John Daley of the Grattan Institute has said that Labour’s proposed changes should NOT be grandfathered in but rather "some transition is needed to reduce the risk of a rapid drop in house prices as investors rearrange their portfolios. It would be sensible to phase in the changes over five years so that investors could claim 80 per cent of losses in the first year, 60 per cent in the second, and so on.”

Furthermore, The Australian newspaper recently broke the news that accounting and financial advice firm Bongiorno & Partners last year commissioned BIS Shrapnel to conduct an analysis of the effect of limiting negative gearing to new houses. BIS Shrapnel’s report — which found limiting negative gearing to new houses could lead to lower house prices, rent rises of up to 10 per cent, cost the budget more than it saved and cause unemployment to rise.

In fact, Prime Minister Malcolm Turnbull in rejecting Labour’s planned policy said  "the changes that Labor is proposing to negative gearing will devalue every home in Australia, that is what they are designed to do. What they will also do is jack up rents. Labor has got a trifecta; they want to discourage investment, jack up rents and reduce home values.”

Liberals are saying Labour’s proposed policy would hurt mum & dad investors with treasurer Scott Morrison on record as saying that “a tax on mum and dad investors is not a good plan for families. It's not a plan for jobs. And that's why we will have no bar of it.”

Looking past the headlines, sound bites, and political wrangling though Australia has some headwinds to it’s economic performance. Like many economies around the world Australia has increasing levels of debt (check this out http://www.australiandebtclock.com.au/) and unless good economic policies are implemented is in danger of losing its’ AAA Credit rating. According to Peter Martin, Economics Editor at The Age, “The annual interest payments on the debt, once zero, have climbed to $11 billion." 

To give us some perspective that is more than the government spends each year on higher education and approximately half what it spends on defence.

Therefore, if we are going to have an honest debate about how to "keep Australia great" (to paraphrase Donald Trump) then we do need to address both the revenue side as well as the spending side of government. In fact, ratings agency Moody’s, The Grattan Institute, and the governrments' own Commission of Audit, have all called for raising taxes to reduce the deficit. The Economic Development of Australia examined all the options and decided that the best way to reduce the budget deficit would be to raise about $16 billion a year from higher taxes, and only $2 billion from cutting government spending.

Unfortunately, raising taxes (especially in an election year) is politically unpopular with many voters. Equally, large (and often unfunded) election spending promises may help get you elected, but runs the significant risk of making all Australian’s worse off in the medium to longer term. To have world-class health, education and transport services, governments will need to collect the revenue to fund them.

So what do I expect to see in coming weeks? 

Well there are only so many ways to get blood from a stone, so other than this clear divide in policy on Negative Gearing/CGT exemptions I think you will find that both parties will deliver pretty similar economic policies. Come the release of the May Budget and I expect that all of the low-hanging fruit below will be on the agenda:

  1. Multi-national tax evasion
  2. Superannuation tax concessions for wealthy Australians 
  3. Increased taxes on alcohol, tobacco, & luxury cars
  4. A drop in the company tax rate to 28.5% to encourage more business investment in this country

Labour will probably continue to campaign on the basis of class equality, running the Robin Hood campaign of basically taking from the rich to give to the poor and promising up big on Education & Health (even if these policies are not well or fully funded). These are all very popular come voting season, but if they are unable to fund these promises (as has often been seen in the past) they run the risk of decreasing the wealth of all Australians. In a global world, one must also be careful not to run the risk of alienating your top income earners. It is hard to take from the rich if they have moved their operations to lower taxing countries overseas.

In contrast, the Liberals will likely be campaigning on the grounds of living within our means, promoting innovation, business entrepreneurship and encouraging investment in Australia. Malcolm Turnbull will need to cast aside the perception that his “consultative process” is making him look weak and indecisive. A clear vision for the economy, combined with a stronger social equality platform than the ill fated Abbott/Hockey budget will be required to win the vote of the Australian people.

As we have discovered during this last term however, whether any major party policy actually gets enacted may yet again come down to the minority parties and/or independents who will again likely hold the balance of power in the Senate. 

Australia, pretty soon, the choice will be in your hands! 

Make your vote count!

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