Blessed are the moneymakers

16 May 2014

The 2014 Federal Budget has attracted considerable attention for its deleterious effect on the welfare safety net, education and health funding. The impact on the disadvantaged is likely to be considerable, especially young unemployed people, some pensioners and the disabled.

But there is a bigger message in what the Coalition is setting out to do. Investors wielding significant capital are deemed to be useful, while those who can save little, and so have little to invest, are deemed to be a burden. It is not so much class war as a war between capital and the rest of society.

The bias towards investors and against the less well off can be seen in three areas. One is the inattention to negative gearing, which has a doubly adverse effect. It contributes significantly to Australia's Budget deficit — current annual losses on rental properties are running at about $8 billion. And it is a major cause of Australia's inflated house prices, a price spiral that has caused Australia's overall debt profile to deteriorate.

Australian government debt is just over $300 billion, which is unusually low by OECD standards. According to the Australian Office of Financial Management, Australian government debt as a percentage of GDP actually declined from 27 per cent in 2013 to 21 per cent this year.

Australian household debt, by comparison, is out of control: a massive $1.8 trillion, much of it mortgage debt. According to the Australian Bureau of Statistics, the nation's debt burden is among the highest in the developed world. Household debt is 1.8 times household disposable income. In the US it is 1.1 times disposable income.

It means that despite Australian public debt being unusually low, Australia's overall debt position is as poor as most other developed economies.

A large part of that soaring private debt is due to investors using negative gearing to buy houses (over 90 per cent of their purchases are in existing dwellings, disproving claims that it adds to housing stock). At the moment almost half of total finance commitments for housing are undertaken by investors looking to exploit the negative gearing tax loophole. But that is fine, apparently. Well-off investors good; the disadvantaged bad.

The second free pass for investors is superannuation. Superannuants are investors. By having them pool their savings and giving them tax breaks, the idea is that they will take the pressure off the pension system.

But a study by Towers Watson has found that when

ECONOMICS

Blessed are the moneymakers

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