The two big policy ideas of week three election campaign
By Nico Louw
First published in the MRC’s Watercooler newsletter. Sign up to our mailing list to receive Watercooler directly in your inbox.
Two policy issues dominated week three of the election campaign - income taxes and housing.
Indexing tax brackets
The recent history of personal income tax cuts in Australia has been a never-ending battle to chase bracket creep.
Our tax system is locked in a political cycle where the average tax rate paid by Australian workers increases every year as wages rise, until a (usually Coalition) Government steps in with tax cuts designed to reduce average tax rates back to a more acceptable level. The cycle then begins again.
It’s a battle that can never be won without indexing tax brackets to inflation or wages growth.
We were pleased to see Peter Dutton voice support for ending bracket creep by indexing income tax brackets, an idea the MRC has long supported.
While it would be great to see this happen now, it’s understandable that the Coalition has only committed to do this when the Budget can afford to do so. We hope to see that sooner rather than later, but it’s commendable to see the idea raised in an election campaign.
Indexing tax brackets can be contentious amongst economists and policy makers. Some argue against it because they think the tax brackets should be set at different levels, and indexing them now means locking in inferior policy settings.
That’s a completely reasonable argument and we have sympathy for it, but we have to deal with the world as it is, not as we would like it to be.
The fact is that, following the significant multi-stage tax cuts of recent years that were started by the Coalition, the current tax brackets are in about the best position they’ve been in for 25 years, as a proportion of average full-time earnings.
Equally as important, these tax brackets are broadly bipartisan, with Labor’s amendments to the Stage 3 tax cuts last year being supported by the Coalition (this was also true at the last election, when Labor promised to support the Coalition’s original Stage 3 tax cuts before breaking that promise).
This provides a unique opportunity to pursue indexation and finally end bracket creep, joining the 18 OECD countries that automatically adjust tax brackets to offset inflation, and further five where indexation is not automatic but is the norm each year.
Indexing tax brackets would not prevent future tax cuts, improvements to tax brackets or reforms such as abolishing entire tax brackets (as occurred under the original Stage 3 tax cuts). But any future tax cuts would be real tax cuts, on top of indexation.
In addition to the obvious benefits for taxpayers, indexing tax brackets would have another important but often overlooked benefit - imposing spending discipline on future governments. Future governments could no longer free-ride and fund their spending with bracket creep and inflation, as the Albanese Government has done, because the decision of when to hand bracket creep back to taxpayers would be forever taken out of their hands.
Labor’s housing ‘plan’
Both major parties announced assistance for first home buyers at their respective campaign launches. These demand-side policies received a lot of media attention, leaving Labor’s supply-side ‘plan’ to build 100,000 homes reserved for first home buyers to slip under the radar and evade the scrutiny it deserves.
Labor’s track record on these kinds of announcements is poor, to say the least. Anthony Albanese has spent much of the campaign claiming an existing $43 billion investment in housing, whereas in reality this funding either hasn’t been spent or, worse, has been spent paying states for things they were doing anyway. The net result is that after three years, the Government’s housing policies have yet to deliver a single additional new home.
At first glance, Labor’s plan to spend $10 billion for 100,000 homes seems reasonable, but it falls apart quickly once you get under the hood:
This is only $100,000 per home, whereas the latest ABS data shows the average cost to build a residential dwelling is around $450,000. It’s much higher in capital cities.
Only 20% of funding is grants, with the remaining $8 billion in low interest loans. How loans to state governments, which are perfectly capable of borrowing their own money, will help build 100,000 homes is left unexplained.
Of the $2 billion in grants, only $600 million is committed in the next four years. At an average cost of $450,000 a home, this would fund 335 homes a year, or 2 per electorate.
Anthony Albanese has yet to explain how this poor excuse for a plan is meant to deliver 100,000 homes, given the Government’s track record of zero delivery in this space.
This is a policy in search of a headline, not an outcome. If Labor is successful at this election, expect to hear stories in three years of how Labor’s first home buyer fund paid billions to the states for homes that were already being built, and actually delivered no new additional homes.
Hopefully this policy gets the scrutiny it deserves well before polling day.