Chalmers’ Budget in search of more productivity and less rent-seeking

In negative gear and CGT. Jim Chalmers’ aim is to alleviate Australia’s inequality while easing intergenerational inequality sad productivity. Harry Chemay Budget related reports.

Before diving into this sequel to the Budget, let me make a confession. Some of what I’m about to explain can be attributed to a lifelong interest in economics that dates back to Grade 11, then continued through college and into my professional life.

Here’s what I learned. An economy’s total output is essentially equal to its income. I’ll leave you with the GDP formula that all economics students have already memorized, but the important thing is this: investment is not the same as saving.

Companies invest, households save. And yes, this includes shares in publicly traded companies and holdings in residential investment properties. If it does not increase the production capacity of the economy (such as facilities, equipment, training and R&D), it is savings, not investment.

Of course, some of these savings structures (such as the land on which residential investment property is located) may increase in value over time, but this in itself does not contribute to Australia’s ability to create goods, services and intellectual property, produce them, trade, export and therefore generate income, the aggregate sum of which (excluding imports) is our national GDP.

There are countries that understand this, and there are those that struggle with it, like some of the dynamic economies to our north.

Unfortunately, Australia is in the second camp.

Housing obsession reduces productivity

That’s why we have a housing market of $12 trillion, almost four times the market capitalization of all companies listed on the ASX. This stifled economic productivity (the income the economy can produce for each hour of work) while shrinking housing affordability; It led Paul Schroder, chief executive of Australia’s largest super fund, to observe last year:

“[Housing] It is the crisis facing Australia. All we did was pour all this money into homes, which deprived the economy of masses of productive capital. “We keep all this money in our homes and we don’t support business, we don’t create new things, we don’t increase productivity.”

The chart below from the Grattan Institute, which points out that economic efficiency drives long-term household income growth, seems to confirm Schröder’s comments.

This disconnect is what this latest Budget aims to address by stripping away business red tape while negatively impacting house price speculation.

Housing affordability. The crisis that the major parties are afraid to fix

Tightening negative gearing and CGT concessions

As has now been widely reported, this Budget will reduce the tax benefits that residential property investors have experienced over the last 25-odd years. By doing this, it aims to reduce the ‘crowding out’ effect of higher-net-worth, better-funded investors pushing first home buyers away from property ownership.

The government hopes to reverse a decade-long decline in homeownership rates, with a seven percentage point decline in households aged 25 to 34 between 2001 and 2021. The long-term decline across different age groups is set out below from the latest Treasury Intergenerational Report.

The budget estimates that around 75,000 new host households could be created over a decade with changes to the status quo.

It is also proposed to limit the negative burden on residential real estate investments to new buildings only, starting July 1, 2027, and to allow property-related losses to be deducted only from other income from residential real estate.

Currently, losses on investment properties can be used to reduce other types of taxable income, and this is one reason for some taxation. the most enthusiastic advocates The group for which property is negatively affected includes high-net-worth individuals such as surgeons, anesthesiologists and other medical professionals.

Capital gains, loss of productivity

As for capital gains, the Budget proposes to return to the pre-September 1999 regime of applying tax only on real, inflation-adjusted capital gains.

The 50% discount (for assets held for 12 months or more) was introduced in 1999 as a recommendation of Ralph’s review of business taxation. It was reasoned that it was likely to encourage investment in capital-intensive assets such as plant, equipment and R&D; assets that increase productivity and therefore Australia’s per capita income over time.

In hindsight, animal spirits fueled by the 50% CGT cut were channeled more enthusiastically into residential property investments that did little outside the margin to boost Australia’s long-term productive capacity and household income growth.

Residential land may increase in value over time, but it does not create any economic output on its own.

Previous analysis by the Parliamentary Budget Office in 2024, from which I have produced the chart below, shows that 80% of the estimated tax revenue lost due to CGT relief was generated by the top 10% of taxpayers, who were also responsible for 43% of the revenue lost due to negative gearing cuts.

A recent update from PBO broadly confirms this analysis.

The government clearly hopes that a shift in individual investor preferences away from established residential property towards new buildings and other economic activity will lift Australia’s economic situation while easing intergenerational inequality. sad state of productivity in the process. Two to one win if successfully navigated.

Who benefits from negative gearing? Hint: it’s probably not you.