The policy and politics of negative gearing reform

PessimistGearing

Negative gearing was first introduced in the Tax Act of 1936 in an attempt to stimulate Australia’s economy following the Great Depression. Its aim was to incentivise new building activity, thereby making home ownership more affordable. And, for a time, the policy performed admirably at achieving this goal.

By the mid-1980s, however, it was clear that negative gearing had long since begun yielding the opposite of its proposed effect. Rather than boosting new construction, the majority of investor loans were being spent on already established housing, thus fuelling property speculation and inflating housing prices. The Hawke government abolished negative gearing between 1985 and 1987 in what Keating described as an effort to ‘reduce tax-sheltering opportunities in the rental property area.’ Results were somewhat mixed. Rental prices largely stagnated or fell around the country, with the exception of Perth and Sydney, where the public backlash against the minor increases seen was sufficient to pressure the government into reversing its policy.

The 1999–2000 financial year saw the Howard government halve the rate of capital gains tax, the result of which has been a doubling of the number of negatively geared properties. By 2012–13, 1.3 million people owned loss-making properties, meaning a transfer of $12 billion dollars from the public purse to private hands.

Negative gearing and capital gains tax concessions have grown rapidly ever since. This year, they will cost the federal government over $10 billion—more than is spent on higher education or childcare—despite doing precious little to increase housing stock.[1] A large-scale 2015 rental affordability study by Anglicare Australia found that fewer than 600 properties—or 0.9 per cent of Australia’s total rental stock—would be affordable for a single person on the age pension. For a single person receiving the Newstart allowance, the total number of affordable rentals was just ten.[2]

In February this year, Opposition Leader Bill Shorten announced that negative gearing tax concessions will be restricted to investments in newly constructed housing, should the Labor Party win the 2016 election.[3] Any negative gearing arrangements that predate the reform will remain in place—known as ‘grandfathering’—but buyers of existing real estate will be unable to claim the tax offset from the 1st of July, 2017.

The cost of maintaining current negative gearing policy is unsustainable without significant cuts to other areas of the budget, and the proposed reform would be a significant step toward redressing the shortfall. Parliamentary Budget Office figures show an estimated saving of $565 million for the federal budget over forward estimates, and $32.1 billion over the next decade.

The Government has vowed to leave existing negative gearing policy unchanged. Prime Minister Turnbull has responded with an appeal to voters’ aspirations, claiming figures that show wealthy property speculators overwhelmingly benefit from the existing policy are ‘beside the point’, since ‘hard-working mum and dad investors’ account for ninety per cent of negatively geared properties.[4] While the latter claim is demonstrably true, it obscures the fact that these are overwhelmingly owner-occupiers who do not profit from rental losses and do little to drive up housing prices. The former highlights a fundamentally different conception of fairness in the Coalition’s rhetoric to that expressed by Labor; a point of difference that, as will later be shown, perhaps provides some insight as to why the ALP would now choose to back a policy that has long been perceived as a political third rail.

The main actors responsible for driving the ALP’s decision appear to have been relatively few. Statistics provided by think tanks and interest groups will undoubtedly help bolster Labor’s argument for the policy, but the extent to which they actually drove the decision to announce it is questionable. While numerous[5] recent[6] reports[7] whose conclusions support negative gearing reform have been published, this is hardly a new phenomenon.[8] The majority of housing affordability studies conducted since the mid-1970s have produced similar recommendations[9], especially those subsequent to 1999.[10] But, since the Hawke government’s reversal of its own short-lived negative gearing abolition in 1987[11], the issue has gained little political traction or media attention.

Further, Labor’s decision to grandfather existing arrangements cannot be said to be wholly evidence-based policy. For example, Louis Christopher, Managing Director of independent property advisory and forecasting house SQM Research, while broadly supporting Labor’s proposal, suggests that it does not go far enough; recommending instead a ‘scaling mechanism’ that would see existing arrangements completely phased out over time. He warns that an unintended consequence of grandfathering will likely see a spike in housing prices as demand grows in the lead-up to the July 2017 deadline, before any reduction in prices will occur.[12] So, we can probably assume that Labor’s grandfathering decision was a strictly pragmatic one, intended to placate current investors and property speculators, who will have ample opportunity to buy up established loss-making dwellings before the new policy takes effect.

In order to determine what constituted the tipping point that spurred the ALP’s announcement, analysis of the policy alone is clearly insufficient, and closer examination of the political landscape is required. It seems plausible that the catalyst for Labor’s announcement was provided by a combination of two key factors.

First, a widespread increase in the public’s appetite for media stories about economic inequality. Such stories gained prominence in much of the Western media after the 2007 Global Financial Crisis and the resultant Occupy Movement, but largely failed to resonate with the Australian public. This is perhaps due to the effectiveness of the Keynesian-style stimulus package implemented by then-Treasurer Wayne Swan, which saw middle- and lower-income Australians avoid much of the immediate economic hardship experienced by those in the United States and Europe. At the time, the policy was effectively framed as ‘waste’ by the Coalition, and dutifully reported as such by much of the media.[13] But, the nine years since have seen a gradual increase in the general public’s awareness of the effects of neoliberal economic policies, as Australia’s fortune has begun to falter under the pressure of falling global commodity prices.[14]

And second, the rude health[15] of Turnbull’s polling numbers in the ‘honeymoon period’ following his replacement of Tony Abbott as Prime Minister arguably gave the ALP cause to think they had nothing to lose.

Much has been made by the public, the media[16], and academics alike[17], of the perceived policy convergence of Australia’s two major parties. In short, when voters feel that there is precious little difference between the parties, and no viable alternative, elections tend to become a battle of personalities. Prior to the change in leadership, polling suggested that Labor stood a healthy chance of winning the next election, simply by virtue of its leader not being Tony Abbott, whose approval ratings had been in steady decline since shortly after taking office.[18] In stark contrast to Labor’s 2010 replacement of Kevin Rudd—who had little internal party support and whose only ‘faction’ appeared to be the Australian public[19]—Abbott remained a party favourite, but lost the support of both the public and many formerly sympathetic branches of the media.[20]

Turnbull’s public statements on issues such as climate change and same-sex marriage had long seen him considered too ‘progressive’ by many of the Coalition’s conservative members.[21] But, the wider party, seeing his potential as a vote-getter—both from centrist swing-voters and the ‘cultural Left’ alike[22]—opted to install him as Prime Minister in a bid to ensure a 2016 election win. And, given the number of pro-Turnbull articles that appeared in traditionally left-leaning media outlets[23], it can safely be assumed that Labor, too, would have recognised this potential.

Given that Bill Shorten was not even the first choice of Labor’s own rank-and-file members to lead their party[24], a battle of personalities was the worst possible scenario for them. Few have accused Shorten of being a charismatic leader. As such, a change of strategy was urgently needed if Labor was to stand any chance of winning the upcoming election.

Although it is, of course, impossible to verify, it seems probable that Labor would have tested a number of potential policy ideas on focus groups in order to find one that ‘stuck’. And, considering the aforementioned inequality narrative, the public were as primed as they were ever likely to be to revisit a long-standing driver of inequality within Australia. The ALP had been gifted an opportunity to meaningfully distinguish themselves from the Coalition by the knowledge that, if they failed to do so, they faced certain electoral annihilation. Somewhat ironically, they would have to revert to their ‘mass party’ roots if they were to stand any chance of beating a ‘catch-all’ opponent; the latter of which two approaches Labor had introduced to the Australian political landscape in the 1980s, with great success.[25]

This is not to suggest, however, that there has necessarily been any kind of fundamental ideological shift in the ALP. The Labor Right, effectively converted to the post-materialist Third Way[26] thinking of Anthony Giddens by way of Paul Keating during the 1980s and ‘90s, is still the party’s dominant faction. It is simply to say that, the proposed reforms provide a substantive way for voters to distinguish between two competing approaches to fairness: the deontological approach of the Coalition, which guarantees everybody the ‘right’ to be a property tycoon; or the more consequentialist approach of the ALP, which recognises that abundance for the few must necessarily come at the expense of the many. Unfortunately for Labor, though, the former lends itself much more easily to a five-second sound bite.

Notes

[1] Australian Labor Party (ALP), Positive Plan to Help Housing Affordability, ALP fact sheet, 2016, retrieved 30 March 2016, http://www.alp.org.au/negativegearing

[2] Anglicare, Rental Affordability Snapshot, April 2015, p. 5, retrieved 2 April 2016, http://www.anglicare.asn.au/docs/default-source/default-document-library/rental-affordability-snapshot-2015.pdf

[3] Heath Aston, ‘Shorten Unveils Labor Election Policy: No More Negative Gearing for Existing Homes’, Sydney Morning Herald (SMH), 12 February 2016, retrieved 1 May 2016, http://www.smh.com.au/federal-politics/political-news/shorten-unveils-labor-election-policy-no-more-negative-gearing-existing-homes-20160212-gmsyky.html

[4] Gareth Hutchens, ‘Malcolm Turnbull: It’s “Beside the Point” That the Rich Earn More from Property’, The Guardian, 27 April 2016, retrieved 1 May 2016, http://www.theguardian.com/australia-news/2016/apr/26/malcolm-turnbull-hits-back-at-grattan-institute-over-negative-gearing

[5] John Daley and Danielle Wood, Hot property: negative gearing and capital gains tax reform, Grattan Institute, April 2016, retrieved 1 May 2016, http://grattan.edu.au/wp-content/uploads/2016/04/872-Hot-Property.pdf

[6] Matt Grudnoff, Top Gears: How Negative Gearing and the Capital Gains Tax Discount Benefit Drive Up House Prices, The Australia Institute, April 2015, retrieved 1 May 2016, http://www.tai.org.au/sites/defualt/files/Top%20Gears%20-%20How%20Negative%20Gearing%20and%20CGT%20benefits%20top%2010%20per%20cent.pdf

[7] Peter Davidson and Ro Evans, Fuel on the Fire: Negative Gearing, Capital Gains Tax & Housing Affordability, Australian Council of Social Services, 2015, retrieved 1 May 2016, http://www.acoss.org.au/images/uploads/Fuel_on_the_fire.pdf

[8] Judith Yates and Vivienne Milligan, Housing Affordability: A 21st Century Problem, Australian Housing and Urban Research Institute, Report No. 105, September 2007, pp. 9–10, retrieved 1 May 2016, http://www.ahuri.edu.au/__data/assets/pdf_file/0018/2178/AHURI_Final_Report_No105_Housing_affordability_a_21st_century_problem.pdf

[9] Callum Pickering, ‘Why Negative Gearing is Australia’s Biggest Policy Failure’, Business Spectator, 9 July 2014, retrieved 30 March 2016, http://www.businessspectator.com.au/article/2014/7/9/australian-news/why-negative-gearing-australias-biggest-policy-failure

[10] Mike Seccombe, ‘The Rich People Who Pay No Tax’, The Saturday Paper, 12 March 2016, retrieved 3 April 2016, https://www.thesaturdaypaper.com.au/news/politics/2016/03/12/the-rich-people-who-pay-no-tax/14577012002989

[11] A result of public backlash against rental price rises in Sydney and Perth. The increases were minor, not reflected in the rest of the country, and chiefly the result of high interest rates and a share-market boom. Damien Murphy, ‘Cabinet Papers 1986–87: Negative Gearing Almost Axed’, SMH, 28 December 2013, retrieved 2 April 2016, http://news.domain.com.au/federal-politics/political-news/cabinet-papers-198687-negative-gearing-almost-axed-20131228-3011r.html

[12] David Taylor, ‘Negative Gearing Won’t Push Up Rents: Property Experts’, ABC News Online, 16 February 2016, retrieved 2 April 2016, http://www.abc.net.au/news/2016-02-16/negative-gearing-wont-push-up-rents-experts/7172502

[13] See, e.g., ‘Anger Over $40m in “Dead” Bonus Payments’, Editorial, SMH, 28 May 2009, retrieved 30 April 2016, http://www.smh.com.au/national/anger-over-40m-in-dead–bonus-payments-20090528-bob8.html

[14] Neal Woolrich, ‘Commodity Price Crash Causing Australian Economy to “Unwind”’, ABC Online, 2 December 2014, retrieved 2 May 2016, http://www.abc.net.au/news/2014-12-02/commodity-price-crash-causing-australian-economy-to-unwind/5933532

[15] James Massola, ‘Malcolm Turnbull Extends Huge Lead Over Bill Shorten in First Poll for 2016’, SMH, 22 January 2016, retrieved 30 April 2016, http://www.smh.com.au/federal-politics/political-news/malcolm-turnbull-extends-huge-lead-over-bill-shorten-in-first-poll-for-2016-20160122-gmc9w7.html

[16] See, e.g., Peter Chen, ‘Party Spin Steps on Policy Toes in Election Dance’, The Drum, 5 August 2013, retrieved 1 May 2016, http://www.abc.net.au/news/2013-08-05/chen-federal-election-convergence-dance/4864560

[17] See, e.g., Benjamin Reilly, ‘Convergence Theory Explains the Lack of Choice in Australian Politics’, The Conversation, 19 May 2015, retrieved 1 May 2016, http://theconversation.com/convergence-theory-explains-the-lack-of-choice-in-australian-politics-41956

[18] Australian Associated Press, ‘Poll Gives Tony Abbott Record Low Approval Rating’, The Guardian, 9 February 2015, retrieved 2 May 2016, http://www.theguardian.com/australia-news/2015/feb/09/poll-tony-abbott-record-low-approval-rating

[19] Emma Rodgers, ‘Gillard Ousts Rudd in Bloodless Coup’, ABC Online, 24 June 2010, retrieved 2 May 2016, http://www.abc.net.au/news/2010-06-24/gillard-ousts-rudd-in-bloodless-coup/879136

[20] Lisa Cox, ‘Conservative Commentators Bolt, Jones and Albrechtsen Turn on Abbott’, SMH, 28 November 2014, retrieved 1 May 2016, http://www.smh.com.au/federal-politics/political-opinion/conservative-commentators-bolt-jones-and-albrechtsen-turn-on-abbott-20141128-11w0qx.html

[21] Paula Matthewson, ‘Turnbull: Too Left to Be Right for the Liberals?’, The Drum, 16 February 2015, retrieved 1 May 2016, http://www.abc.net.au/news/2015-02-16/matthewson-turnbull:-too-left-to-be-right-for-the-liberals/6114396

[22] As opposed to the ‘materialist Left’, who are traditionally ALP voters. See, e.g., Helen Razer, ‘The Left Has Lost Its Way Through Symbolism and Stupidity’, Crikey, 3 May 2013, retrieved 2 May 2016, http://www.crikey.com.au/2013/05/03/helen-razer-the-left-has-lost-its-way-through-symbolism-and-stupidity/

[23] See, e.g., Sean Kelly, ‘Malcolm Turnbull: Still Not Tony Abbott’, The Monthly, 19 January 2016, retrieved 2 May 2016, https://www.themonthly.com.au/today/sean-kelly/2016/19/2016/1453181751/malcolm-turnbull-still-not-tony-abbott

[24] Emma Griffiths, ‘Bill Shorten Elected Labor Leader Over Anthony Albanese After Month-long Campaign’, ABC Online, 13 October 2013, retrieved 2 May 2016, http://www.abc.net.au/news/2013-10-13/bill-shorten-elected-labor-leader/5019116

[25] Dean Jaensch, The Hawke–Keating Hijack, Allen & Unwin, Sydney, 1989.

[26] Anthony Giddens, The Third Way: The Renewal of Social Democracy, Polity Press, Cambridge, 1998.

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About samquigley

I'm Sam Quigley.
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