Labor’s budget promised reform, but delivered only half measures

On Tuesday night, Treasurer Jim Chalmers handed down the first budget of this Labor government’s second term.

In his speech, the treasurer referred to “future generations” no less than eight times, a clear nod to his government’s ambition to address intergenerational inequality. And while they have no doubt addressed it, I’d say the reforms are more of a tiptoe than a slam dunk.

In this masthead last week, I called on the government to reduce intergenerational inequality through ambitious tax reform, housing supply expansion, and fairer university fees.

On these three topics, I grade the government a B, an A-, and an F, respectively. Out of the seven policies I called for, two were met, three were somewhat addressed, and two were missed entirely.

On tax (B grade), the government courageously moved to restrict negative gearing, scrap the capital gains tax (CGT) discount, and tighten family trust loopholes. Credit where credit is due: these are all great policies, but the devil is in the detail.

Negative gearing changes have been grandfathered, meaning existing investors are exempt from the new tax rules. I explicitly argued against this because it goes against the exact intergenerational equity goals the government purports to advance.

This debt burden is effectively being placed onto younger generations to repay throughout their working lives.

First, it’s essentially a “kicking the ladder behind you” phenomenon, where older generations were able to profit from negative gearing, but the benefit is closed off from younger generations.

Second, grandfathering creates what economists call the “lock-in” effect, whereby existing property investors will hold on to their houses to keep their negative gearing benefit. This reduces housing supply, and places upward pressure on prices.

This decision may have been politically wise, and I do understand the “fairness” rationale, but the government shouldn’t get to claim credit for improving intergenerational equity here.

I will admit that the negative gearing and CGT carveouts for new builds were a slick move, as they ensure no tax disincentives for expanding housing supply. But the trade-off is that making new-build property investments more attractive will increase their prices, making it harder for first home buyers.

The reversion to a Keating-era capital gains tax will likely reduce artificial incentives to invest in housing, which should help with affordability.

Admirably, these changes avoid the kind of grandfathering seen in the negative gearing reforms, and the addition of a 30 per cent tax floor helps mitigate the lock-in effects those changes create.

The government also expects to raise $4.5 billion by introducing a minimum 30 per cent tax on discretionary trusts, closing the income-splitting loophole that richer households use to minimise their taxes.

However, I suspect that the expected revenues here may be slightly optimistic because whenever tax laws change, so does behaviour.

Given 90 per cent of private trust wealth belongs to the top 10 per cent of households (with net worths above $2.3 million), I’m confident they won’t all just sit there and pay higher taxes but will instead use every legal method available to find new ways to minimise their taxes.

The real unsung winners of this change are the accountants.

Last on tax, when it comes to the $250 working Australians tax offset (WATO): at $5 a week it doesn’t even cover the cost of a latte in most cities, making it seem this exists purely for the headlines, not taxpayers.

On housing (A- grade), these tax measures will likely help on net (despite the “lock in” effect problems), but they are no silver bullet for restoring the Australian dream.

However, having largely avoided the budget spotlight so far is an important housing measure that I called for last week: using National Competition Policy to incentivise the states to expand housing supply.

Here, the government will use federal funds as a carrot to encourage states to change their zoning and building regulations so more homes can be built, which is particularly relevant as Australia has seen negative home construction productivity growth in recent decades.

This policy – as unsexy as it may sound – will increase affordable housing by expanding supply. Although, it is unclear whether the $2 billion provisioned will be enough to make a major difference.

Finally, on higher education the government gets a big, fat F. The treasurer didn’t so much as mention universities or HELP fees in his budget speech, despite recent Treasury modelling showing that one in four students will take more than 25 years to repay their student loans.

The result of a flawed Morrison-era policy that the government’s own Education Minister Jason Clare called a failure, the budget made no effort to address eye-watering $52,000 arts degrees.

Lastly, Treasury estimates project that net debt will rise to one fifth of GDP next financial year, at a record high of $617 billion, or just over $22,000 per person. Worse still, Treasury doesn’t expect any budget surpluses in the five-year forward estimates, projecting a net debt of $768 billion in 2029-30.

This debt burden is effectively being placed onto younger generations to repay throughout their working lives.

The treasurer closed his speech by claiming the government was “fulfilling our obligations and responsibilities to the generations to come”. And while some impressive strides have been made, I must admit that I’m not feeling 100 per cent fulfilled.

Max Yong is a Teaching Fellow in personal finance at Harvard University. He previously taught personal finance at Melbourne University.

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