Life Down Under

Why we are mainly focused on Europe we take a look at other parts of the world. In Australia the country is battling with many of the problems we have here in Europe. This Fabien Society report tells a lot about the problems Australia is facing

Positive Changes to Negative Gearing

The 2015 ‘Inequality in Australia: A nation divided’ report, released by the Australian Council of Social Service, found that Australia’s household wealth is more unequally distributed than household income; households in the top 20% have around 70 times more wealth than households in the bottom 20%, as compared to the top 20% earning 5 times as much income as the bottom 20%. Much of this disparity is caused by property ownership, and in particular, investment property ownership. The report found that ‘the top 20% of the wealth distribution owns 80% of all wealth in investment properties’, but that wealth in owner-occupied homes is ‘more equitably shared than any other wealth’. The report did caution that ‘many people, particularly younger generations, are now finding it harder to enter the housing market. Home ownership rates have declined since 1981, with the declines greatest amongst young people aged 25 to 34’.

There are therefore two structural factors in the property market leading to growing wealth inequality: investment property wealth flowing disproportionally to the richest 1 in 5 households and owner occupied housing increasingly being unaffordable to those who then rely on the rental market for housing, especially young people, who end up renting the investment properties owned by the richest 1 in 5. It is obvious to anyone who sees growing wealth inequality as undesirable that this is a problem that a responsible government would address.

The Labor Opposition are putting this problem on their election-agenda by promising a future Labor government will ‘put the great Australian dream back within reach for the middle and working class’ through changes to negative gearing and a reduction in capital gains discounts from 50 per cent to 25 per cent. Labor’s policy would see negative gearing tax concessions applicable only to new housing. The policy has the three-pronged benefit of 1) increasing housing stocks as property investors would move away from established homes, 2) increasing construction jobs to build the new investment properties and in turn economic growth and 3) making home ownership more obtainable for owner-occupiers who would no longer be competing with tax-payer subsidised property investors. The policy grandparents current negative gearing arrangements so is designed to protect property investors who already use these tax concessions. For this reason, Labor’s policy won’t immediately have a large impact on the budget bottom line, but it will have longer term structural benefits for tax revenues.

Liberal Prime Minister Malcolm Turnbull has somewhat predictably reacted to Labor’s policy announcement with a fear campaign by telling home owners to ‘be afraid of Bill Shorten’, and that house prices will be ‘smashed’ by the ‘very blunt, very crude’ idea. However, as reported in the Sydney Morning Herald, independent modelling of Labor’s policy has found ‘the policy would likely slow the pace of house-price growth and boost new housing construction, making it "potentially the biggest housing affordability policy the country has seen."’ A slower pace of house-growth is a completely different scenario than a price reduction, and should be an outcome welcomed by Australians saving to enter the housing market, and home owners fearing the threat of unsustainable growth resulting in a bursting bubble.

Chris Bowen, Labor's Shadow Treasurer, explained in The Guardian that he and Bill Shorten were driven to propose their negative gearing policy through an 'impulse to fix problems and make things fairer'. Bowen painted a picture of the inequity of the current negative gearing policy by pointing out that ‘Data from the Australian Tax Office tells us surgeons get an average tax benefit that is 100 times that received by cleaners and 16 times that of nurses’. With any tax policy change, there are always winners and losers. Labor is unapologetic that their negative gearing changes are aimed at helping the 20% of Australians who currently have 70 times less wealth than the top 20%. A policy that reduces wealth inequality, after all, in the long run, makes winners of us all.