Intergenerational Report shows the problem, but offers no solutions

The Intergenerational Report is a useful document in that it reinforces the need for tough fiscal measures to avoid ever-increasing budget deficits and debt – a need that has been apparent for some time – but alas the IGR offers no solutions to Australia’s fiscal challenge. It will certainly help the Government make the case for tough budget measures, but the Government will need to find a new set of savings that the public considers fair, to use the word that has been prominent in political debates recently, if it is to have any hope of getting changes through the Senate. It’s unclear whether that set of savings exist, as any policies that significantly improve the long-term budget position will almost certainly involve cutting payments or tax concessions to particular groups in the community – groups that will then argue they are being treated unfairly.

Nonetheless, the Government will need to find (in its judgment) the least unfair set of budgetary savings to repair the budget, and a good place to start would be the Grattan Institute’s excellent report on budget pressures on Australian Governments, which I commented on in a post in May last year. The Government appears to have failed in its higher education reforms, which would have led to substantial savings, so perhaps now it’s time to turn to other measures suggested by Grattan, such as cutting back superannuation tax concessions and having a tougher assets test for the age pension (e.g. possibly by including the value of the family home above a certain threshold). Also the Government should review rules around negative gearing and capital gains taxation and determine if any tightening would be worthwhile. Negative gearing is fine as a principle, but arguably it, in combination with the current concessional treatment of capital gains, is diverting too many investment dollars into property. So tightening the rules could save taxpayers’ money and improve the allocation of capital in the economy.

The IGR gives the Government some useful facts with which to illustrate the budgetary challenge Australia faces. It is now up to the Government to identify large savings and convince cross-bench Senators of their merits.  The IGR has set the scene, but now the Government must really perform.

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6 Responses to Intergenerational Report shows the problem, but offers no solutions

  1. I agree with the thrust of your post Gene. Obviously there are some savings to be had in higher education, namely universities, but there are persuasive arguments based on the Aussie “fairness test” that make a lot of these reforms unpalatable. Smarter arguments need to be found here.

    Negative gearing, especially on investment properties, the aged pension assets test and superannuation taxation concessions certainly need some attention. Modest reforms in these areas is warranted.

  2. Simon Hepple says:

    Hey mate,

    Great articles, I’ve been reading them all!

    Quick question: do you know of any research into the possible outcomes of disallowing negative gearing in relation to housing affordability? To me, the main possible outcome would be an increase in rental costs, either due to reduced participation in the investment property market, or landlords increasing rents to make property neutral/positively geared, or perhaps a combination of both. Also, do you think there would be a knock-on effect for investors preferring established houses compared to new, given the depreciation benefits would be mostly lost compared to the premium that is normally paid for off-the-plan, thus resulting in a substantial dip in value for myriad projects completing in the next few years?

    Love to hear your thoughts!

    Kindest Regards,

    Simon Hepple
    B.Bus (Finance)

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    • Gene Tunny says:

      Good question, there’s a big debate on the implications for housing affordability and rents. Australia’s historical experience is typically taken as showing that tightening up negative gearing as was done in the mid-1980s would have adverse implications. However, this is contested by some commentators. I’ll try to cover the debate in a future post. Your question regarding depreciation is a good one and I’m unsure I’ve seen any analysis of this, so I’ll have a think about it and, again, try to cover it in a future post. Thanks for your comment, Simon.

  3. Jim says:

    Gene

    The IGR is a useful exercise, but perhaps is a little simplistic when it comes to some of the core assumptions. For example, it is assumed that life expectancy is continued to improve based on recent trends and changes in mortality rates (the past is a supposedly a good predictor of the future) to a point where, by 2055, newly born people will be expected to live to their mid 90s. I’m yet to see a credible report from a health organisation that suggests this would be the case due to Australia’s increases in ‘lifestyle’ disease. An assumption like this can significantly impact on things like dependency ratios and forecasts of health expenditure.

    Given the fuss that was being made about the IGR, I was expecting something a bit more robust.

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