Budget signals you are on your own
19 May 2014
The 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. It signals an important change to the national priorities and suggests there is a growing need for self reliance.
The massive bias towards investors and against the less well off can be seen in three areas. One is the complete 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 United States 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 superannuation, the age pension and other retirement savings are all taken into account, only 53% of couples and 22% of singles are on track to reach or exceed their target retirement income. There will be a heavy reliance on the pension, which to a significant extent defeats the purpose of the tax concessions.
Yet the government has not looked at super, which is estimated to equate with $28 billion in tax concessions this financial year, because that would mean penalising investors. True, there are many administrative problems with taxing income from super in the pension phase, but this, too is an example of the privileged status of the investor class. In effect, payments from super in the pension phase are treated as return on investment, not income. Well off investors good; the disadvantaged bad.
The failure to include negative gearing or super in the government’s “shared pain” can perhaps be understood as political expediency – although the attack on health, education and welfare shows an appetite for political risk that some have described as suicidal.
But the sheer nastiness of the Coalition’s priorities is most clear in the attitude to lower income people who can, on a small scale, become investors through their super.
The Budget announced the withdrawal of the Low Income Super Contribution (LISC), which is a refund of the 15 per cent contributions tax deducted from the super account of people who earn less than $37,000 a year when their employer makes concessional (before-tax) superannuation contributions. The LISC ensured that people on lower incomes, who pay very little income tax, are not disadvantaged by their compulsory super contributions, on which they pay higher tax. Withdrawing the LISC means that when low income workers become investors, by putting money into their super, they get hit with more tax. Well off investors good; less well off investors bad.
Although the amounts saved in super by low income earners are not likely to fund a happy retirement, it nevertheless reveals the underlying priorities of the government. Capital, and the well off investors who wield it, come first. Everything else, such as a welfare system, health, education, wages, is simply a cost burden that has to be kept strictly under control.
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