Budgets have always been a platform for governments to announce major policy shifts. However, in the modern day such shifts are typically responses to a rising wave of populism surrounding a particular topic rather than the execution of a longer term strategic plan. The 2017 Budget attempted to do both.
In the lead up to the 2017 Federal Budget, Prime Minister Malcolm Turnbull described the impending delivery of the proposal for changes to the nation’s finances as being one “to realise their dreams”, with a focus on “fairness, opportunity and security” for all Australians.
A significant infrastructure splurge, spending boosts to Defence and the Australian Federal Police, continued support and funding packages for small business, increases to health spending and public hospitals, and further commitments to encourage investment and foster job creation were all present and accounted for.
But to balance a Budget, or these days to get close, inevitably cuts have to be made elsewhere or taxes need to be raised.
In previous years, there have been difficulties in passing proposed cuts through a senate for a minority government. This year, rather than dealing with the potential for delays and difficulties again, the government chose to avoid this by raising additional revenue. Consequently, we saw a levy introduced on the five largest banks, a permanent increase to the Medicare levy and tightening of the screws for education, and some areas of welfare.
A demand versus supply equation
One of the centrepieces for the 2017 Budget was clearly aimed at addressing housing affordability, in particular, ‘Is it a bubble, what’s causing it and what should, or can be done to address it?’. It’s a contentious issue which has been simmering away for a few years. Some blame overseas investors, some blame the capital and income spread or ‘social divide’ between the classes and others blame the taxation system which allows for investors to offset income losses on rental properties against other forms of income, which is known as negative gearing.
Many years ago, the price of housing was a simple equation of supply and demand. We tracked the number of housing starts and building approvals against the demand as driven from the growth in the population. As the population grew, so too did the demand for housing. Supply was constrained by the ability and time taken to construct a dwelling and the availability of finances to afford one.
Over many decades, shifts in the capacity of an individual or family unit to pay for a dwelling evolved. Dual and multiple income households emerged, taxes reduced and more recently, interest rates have fallen to record lows. This combined to significantly improve the family unit’s ability to service a loan and ultimately dramatically increase the amount they could borrow.
Additionally, external factors began to creep through further heightening demand as residential property became a substitute for commercial premises, hotels rooms and the like. Foreign students requiring rooms to rent at Australian universities, small businesses seeking lower rents than traditional commercial premises around popular shopping strips, and the emergence of short-term letting via Airbnb are now all competing against the family unit for a slice of the ‘housing pie’. Consequently, supply has simply not been able to keep up with demand.
In this year’s Budget we bear witness to the Turnbull Government’s first serious attempt to address the supply “crisis”, in turn allowing more Australians “to realise their dreams”. The Treasurer described the Government’s approach to dealing with the problem, using a package of tax, superannuation and other measures, as being that of “a scalpel and not a chainsaw”.
Addressing the housing affordability crisisThe Government is proposing to address the housing affordability crisis through the following targeted measures: