Federal Budget

EXPERT INSIGHT

Despite overwhelmingly endorsing the general stance of the 2021 budget, only a few of the 56 leading economists surveyed by the Economic Society of Australia and The Conversation are prepared to give it top marks.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg&rsquo;s objective of <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/budget-speech-2021-22">securing Australia&rsquo;s economic recovery and building for the future</a>, only three of the 56 economists surveyed gave it an &lsquo;A&rsquo;.

But a very large 41% awarded it either an A or a B, up from <a href="https://theconversation.com/could-do-better-top-australian-economists-award-the-budget-a-cautious-pass-148624">37%</a> in last year&rsquo;s October COVID budget.

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The economists chosen to take part in the Economic Society of Australia survey have been recognised by their peers as Australia&rsquo;s leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among them are a former head of Australia&rsquo;s prime minister&rsquo;s department, a former member of the Reserve Bank board, a former OECD director and two former frontbenchers, one from Labor and one from the Coalition.

Of the panel members who commented on the historic stance of the budget &mdash; expanding the size of the deficit <a href="https://theconversation.com/frydenberg-spends-the-bounty-to-drive-unemployment-to-new-lows-159229">beyond what it would have been</a> in order to drive down unemployment &mdash; all but three offered enthusiastic endorsement.

Emeritus Professor Sue Richardson of the University of Adelaide commended the government for at last turning its back on a &ldquo;debt and deficit&rdquo; mantra, that was &ldquo;never justified&rdquo;.

Professor Richard Holden praised the &ldquo;watershed&rdquo;. In due course there should be increased attention paid to the structure and quality of spending, but for now we should applaud the &ldquo;Frydenberg Pivot&rdquo;.

Saul Eslake said the strategy of providing further stimulus to push unemployment down to levels <a href="https://theconversation.com/josh-frydenberg-has-the-opportunity-to-transform-australia-permanently-lowering-unemployment-156175">not seen consistently since the first half of the 1970s</a> was the right one. It meant the Reserve Bank and the treasury would no longer be working at &ldquo;cross purposes&rdquo; as they had been for most of the past two decades.

But Eslake said the budget fell short in the A$20 billion it devoted to tax concessions for small business in the mistaken and unfounded belief it is &ldquo;the engine room of the economy&rdquo; and in housing measures that failed to heed warnings from history about the risks of ultra-high loan-to-valuation ratios.

Rebecca Cassells of the Bankwest Curtin Economics Centre said the claim that 60,000 jobs would flow from extending the temporary loss carry back and full expensing tax concessions was &ldquo;a stretch,&rdquo; with the connection quite tenuous.

Bucks, but not the biggest bang

Consultant Nicki Hutley said a bigger boost to the JobSeeker unemployment payment would have achieved much more than the $7.8 billion one-year extension of the &ldquo;<a href="https://theconversation.com/the-low-and-middle-income-tax-offset-has-been-extended-yet-again-it-delivers-help-neither-when-nor-where-its-needed-160772">lamington</a>&rdquo; low and middle income tax offset.

Economic modeller Janine Dixon said while spending more to get more people into work was the &ldquo;right setting for the times,&rdquo; Australia had to ensure its workforce was ready to supply the extra aged care and child care and disability services it had funded by delivering the right training, especially in the absence of migration, which has traditionally been used to address workforce shortages.

Labour market specialist Elisabetta Magnani said measures to boost wages in the caring occupations could have achieved the double bonus of drawing more workers into those occupations and shrinking the gender pay gap, given that more than 80% of the workers in residential aged care are female.

Little for net-zero

Michael Keating, a former head of the prime minister&rsquo;s department, said restoring high wage growth would require big investments in education and training, which sits oddly with the cuts in funding for universities. The extra funding for apprentices and trainees only makes up for past cuts.

Professor Gigi Foster said the $1.7 billion spent on childcare subsidies was only &ldquo;surface-level fiddling with the sticker price&rdquo;.

&ldquo;Where is the supply-side intervention required to make childcare services sustainably accessible and of high quality?&rdquo; she asked. &ldquo;Childcare should be viewed as social infrastructure. Instead, when we heard infrastructure, it was mainly code for transportation.&rdquo;

Margaret Nowak of Curtin University said a budget that really &ldquo;built for the future&rdquo; would not have focused on the &ldquo;infrastructure of the past&rdquo;. Professor Richardson lamented that most of the infrastructure spending was on traditional &ldquo;roads and ports&rdquo; when the future was net-zero emissions.

&ldquo;There is little in the budget that supports this transformation,&rdquo; she said. &ldquo;It is an extraordinary lost opportunity.

Nicki Hutley said retooling the economy for zero emissions would have brought forth &quot;more jobs, higher wages, more growth and private sector co-investment&rdquo;.

Some concern about debt

Former OECD director Adrian Blundell-Wignall said a much-greater investment in vaccinations would have helped &ldquo;get the economy back to work and the borders opened sooner which, in turn, would have saved unemployment benefits, tourism, aviation support and the need for the extension of temporary measures&rdquo;.

And he was concerned that a jump in US inflation might cause international interest rates to rise faster than expected, forcing Australia to cut its projected budget deficits in order to stabilise net debt.

Former International Monetary Fund economist Tony Makin, a <a href="https://research.treasury.gov.au/external-paper/the-effectiveness-of-federal-fiscal-policy-a-review">critic</a> of government spending during the global financial crisis, described the budget spending as a &ldquo;knee-jerk primitive Keynesian reaction&rdquo; to the COVID recession.

Unease about going into debt to keep and create jobs aside (and very few of the economists surveyed shared Makin&rsquo;s unease) the criticisms of the economists surveyed relate to execution and details. If Frydenberg had been judged on his approach, most would have given him an A.

<a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, Visiting Fellow, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a>

This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/great-approach-weak-execution-economists-decline-to-give-budget-top-marks-161347">original article</a>.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg’s objective of securing Australia’s economic recovery and building for the future, only three of the 56 economists surveyed gave it an A

jordan_55689

Economists decline to give budget top marks

There was one surprise for the housing sector in tonight's federal budget, and three foreshadowed housing measures were made official.

The federal treasurer Josh Frydenberg advised the parliament in his budget speech that new house starts were now at the highest level in 20 years. 

"New loans to first home buyers reached their highest level in nearly 12 years.

"HomeBuilder has been a huge success and our $2 billion investment in affordable housing is bringing on more supply," he said.

"Our housing measures go even further," he added.

"Helping another 10,000 first home buyers build a new home with a 5 per cent deposit.

"Supporting 10,000 single parents to purchase a home with a 2 per cent deposit. 

"Increasing the amount that can be released under the First Home Super Saver Scheme from $30,000 to $50,000.

"Under the Coalition, home ownership will always be supported," he noted.

The budget effectively continued the First Home Low Deposit Scheme for new homes and off the plan acquistions, and tweaked the First Home Super Saver Scheme, and introduced a new scheme for single parents.

The 10,000 Family Home Guarantees will be made available for single parents over the next four financial years.

The Family Home Guarantee will be available regardless of whether that single parent is a first home buyer or previous owner-occupier. 

Applicants have an annual taxable income of no more than $125,000. 

A fact sheet with further information on eligibility criteria will be available on the NHFIC’s website next week.

The surprise announcement was the government will lower the minimum age for the downsizer super contribution from 65 to 60.

“This will allow Australians nearing retirement to make a one-off post-tax contribution of up to $300,000 per person (or $600,000 per couple) when they sell their family home,” the budget documents advised.

“This improves the flexibility for Australians to contribute to their superannuation savings, and may encourage people to downsize sooner and increase the supply of family homes.”

The budgetary measure will be argued as positive for first home buyers and next home buyers by freeing up established housing stock for younger property buyers.

There was a warning after the budget announcement from the Property Council on the long-term economic consequences of idling population growth.
 
"Budget assumptions anticipate that Australia’s population growth will be limited to only 0.2 per cent over in the next financial year. Net overseas migration is forecast at -77,000 in 2021/22, with a return to normal levels of migration not expected until 2024/25," the PCA noted.
 
“The Budget has revealed that our restricted border is the biggest constraint on our economy.
 
“Our lack of growth is going to catch up with us with economic and employment growth expectations slowing over the forward estimates.
 
“Population growth is not an optional extra for Australia’s economy," the PCA said.

The budget also made $15 billion in additional infrastructure commitments including for:

a) the North‑South Corridor in South Australia
b) the Great Western Highway and Newcastle airport in New South Wales
c) the new Melbourne Intermodal Terminal in Victoria 
d) the Bruce Highway in Queensland
e) METRONET in Western Australia
f) highway upgrades in the Northern Territory
g) Light Rail Stage 2A in the Australian Capital Territory and
h) Midland Highway upgrades in Tasmania.

Josh Frydenberg noted that "when construction work began to dry up, HomeBuilder came to the rescue."



jchancellor

Federal Budget formalises three mooted housing measures

EXPERT INSIGHT

Treasurer Josh Frydenberg calls this a &ldquo;pandemic budget&rdquo; &ndash; one to sustain the economy in times that are still uncertain &ndash; but it also has a substantial element of an election budget.

That&rsquo;s not to suggest Prime Minister Scott Morrison will rush to the polls this year. But given the election has to be held by May 21, 2022, this is likely to be the last budget of the cycle. Another could be squeezed in, as in 2019, but it would have to be brought forward from the normal time.

Last year the treasurer said budget repair and debt repayment &ndash; otherwise known as the hard and unpleasant decisions &ndash; wouldn&rsquo;t be undertaken before unemployment was &ldquo;comfortably&rdquo; below 6%.

Now unemployment is 5.6% (the March figure) but Frydenberg has shifted the goal posts, so the emphasis remains on recovery, with more difficult reckonings a way off &ndash; beyond the election.

Given a grim COVID picture internationally and a long way to go with the vaccine program locally, that is sound &ndash; and also politically convenient.

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In this budget, the government&rsquo;s policy approach is firmly aligned with that of the Reserve Bank, with Frydenberg embracing the bank&rsquo;s objective of pushing unemployment well below pre-pandemic levels, which means to a rate with a 4 in front of it.

Two central spending areas in the budget have been, in effect, imposed on the government.

It had to respond to the damning findings of the aged care royal commission. The fact most Australian COVID deaths occurred in aged care underlined how unfit for purpose the system is. Frydenberg told the ABC there will be more than $10 billion spending on aged care over the forward estimates.

The budget&rsquo;s &ldquo;women&rsquo;s&rdquo; focus &mdash; a sharp contrast to last year &mdash; has drivers that go beyond the urgent need to do more to combat violence against women, and other imperatives.

Morrison&rsquo;s &ldquo;women problem&rdquo;, which exploded with the demonstrations following the high-profile allegations of rape, most obviously increased the attention on women in this budget, which will include a women&rsquo;s statement with initiatives on health, safety, and economic security.

Also, Labor&rsquo;s decision to make childcare one of its main policy pitches, promising a big spend, reinforced economic considerations pushing the government to produce its own childcare policy (which doesn&rsquo;t start until July 2022).

Even in the middle of the pandemic last year, few would have thought that by now we&rsquo;d still have no firm idea when our international borders will re-open.

Morrison is cautious about it, and judges that&rsquo;s in line with the thinking of the Australians public at the moment. He can read those state electoral results as well as anyone &mdash; he knows people put health safety above all else.

&ldquo;International borders will only open when it is safe to do so&rdquo;, he said on Facebook at the weekend. &ldquo;Australians are living like in few countries around the world today.&rdquo;

On the other hand, the pressure for students to come, migration to resume and people to be allowed to travel must build sooner or later.

The budget&rsquo;s assumptions will put the reopening in 2022, Frydenberg told the ABC at the weekend

Economist Saul Eslake says while keeping the country closed to the outside world is obviously not sustainable in the long run, it has, in a perverse way, some short run plusses for the government&rsquo;s economic objectives.

&ldquo;It&rsquo;s very easy to get unemployment down when the border is closed. You only need to create 5000 new jobs a month to prevent unemployment rising.

&quot;Previously [with migrants coming] you needed 16,000 new jobs a month. Currently we&rsquo;re creating 60,000 a month,&rdquo; Eslake says.

Migrants stimulate growth. But so does having Australians unable to travel overseas, Eslake says. They can only spend domestically &ndash; or save &ndash; the $55 billion they would normally be spending abroad. They appear to be spending quite a deal of it on things like home equipment, furnishings, renovations, cars, and even clothing.

While fiscal repair is formally delayed, the budget will show it is gradually, to a degree, repairing itself.

The quicker-than-expected bounce back of the labour market, which reduces welfare costs and boosts tax revenue, and the similar rebound in corporate profits, help the bottom line. Frydenberg says that, despite JobKeeper coming to an end, 105,000 people came off income support in April. High iron ore prices are also a godsend to revenue.

Chris Richardson, from Deloitte Access Economics, has forecast a deficit for this financial year of about $167 billion, compared with the December budget update figure of $198 billion. For 2021-22 , the Deloitte forecast is a deficit of about $87 billion compared with the update&rsquo;s forecast of $108 billion.

Still, a balanced budget will be some years off, Richardson says.

He gives four reasons: substantial structural spending on aged care, mental health, childcare, disability and the like; low wage and price inflation (inflation helps budgets); missing migrants; and interest payments on debt (helped by low interest rates but still significant).

On what we know, the budget will be safe rather than adventurous. And while budgets can always unexpectedly trip over their own feet, and inevitably have plenty of critics, this will be the sort of benign one that doesn&rsquo;t go out of its way to hurt or offend voters.<img alt="The Conversation" height="1" hub="" o3us6t2oy="" src="https://counter.theconversation.com/content/160594/count.gif?distributor=republish-lightbox-basic" width="1" />

<a href="https://theconversation.com/profiles/michelle-grattan-20316">Michelle Grattan</a>, Professorial Fellow, <a href="https://theconversation.com/institutions/university-of-canberra-865">University of Canberra</a>

This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/view-from-the-hill-a-budget-for-a-pandemic-with-next-years-election-in-mind-160594">original article</a>.

Treasurer Josh Frydenberg calls this a “pandemic budget” – one to sustain the economy in times that are still uncertain – but it also has a substantial element of an election budget

A budget for a pandemic, with next year's election in mind

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 GUEST OBSERVER
As is custom, there were a number of official announcements and an abundance of rumours and unofficial ‘leaks’ in the lead up to the release of the 2016-17 federal budget.
As widely anticipated, there was very little in terms of budget measures specifically aimed at housing. However, the significance of the tax reform contained within this budget was arguably underestimated, particularly if you consider the changes projected for the out-years. In the near term, small businesses are the main beneficiaries of the announced reforms. 
The key areas addressed in the budget: 
The Government has held firm on their commitment not to make any changes to capital gains tax or negative gearing provisions. Furthermore, comments within the Treasurer’s budget speech suggest the coalition have solidified this position ahead of the upcoming election.
The plan to lower the company tax rate to 25 percent through a staged implementation over the next decade, with a number of changes for small businesses to take effect in this budget period.
A modest change to the personal income threshold for the second highest marginal income tax rate which was increased from $80,000 to $87,000 (slightly higher than expected) in order to ameliorate concern about bracket creep; Commitment to the Smart Cities Plan; A Youth Employment Package; significant reforms to the superannuation system; the ATO has been provided with additional resources to bolster enforcement activity, primarily aimed at addressing multi-national tax avoidance. 
In the sections below we discuss the overall economic and fiscal outlook presented in the 2016/17 Budget along with some of the key forecasts. This is followed by additional explanatory detail regarding the key announcements most relevant to the residential building industry. 
Economic Backdrop &amp; Fiscal Position 
The Budget presents a “steady as she goes” outlook for economic growth over its forecast horizon. The key economic assumptions on which the Budget was developed are summarised in the table below.
<a href="/images/2016/05/06/Screen%20Shot%202016-05-06%20at%2010.20.14%20AM.png" target="_blank">Click to enlarg</a>e
<img src="/images/2016/05/06/Screen%20Shot%202016-05-06%20at%2010.20.14%20AM.png" alt="">
In terms of the economic assumptions underlying the Budget projections, the Treasury foresees the rate of economic growth returning to 3.0 in 2017/18 and remaining at this level over the forecast horizon. The acceleration of economic growth will help drive a reduction in the unemployment rate to 5.5 per cent by the end of the forecast horizon, a little lower than the 5.75 average rate expected for 2015-16. Against this backdrop, inflation is expected to pick up a little but remain in the relatively comfortable 2 per cent to 3 per cent range. Stronger GDP growth, and the decline in the cash value of the budget deficit over time means that the relative size of the deficit is expected to fall from 2.4 per cent of GDP in 2015/16 to 1.4 per cent of GDP in 2017/18. 
Of note are the estimates of the contribution that dwelling investment will make to economic growth in the years ahead. HIA’s projections are for dwelling investment to fall by 5.4 per cent next financial year and by 6.7 per cent in 2017/18. The HIA’s forecasts are based on the assumption that new home commencements will decline from about 214,300 in 2014/15 to 160,100 in 2017/18, while renovations activity is projected to recover modestly over the same period. Realising the outcomes expected by Treasury will require a continuation of the current record levels of new housing activity and strong growth in the renovation market. 
While the changes to superannuation and the lowering of the Official Cash Rate will encourage more investment in other avenues like rental investment, it is unlikely that this will be sufficient to deliver the continued growth in residential investment that Treasury is anticipating. 
In terms of the projections contained in yesterday’s budget, the size of expected future deficits has increased since the forecasts in December 2015’s Mid-Year Economic &amp; Financial Outlook. In 2015/16, the underlying cash balance is expected to reach $39.9 billion followed by $37.1 billion in 2016/17. Thereafter, the deficit is projected to decline significantly, falling to just $6.0 billion by 2019/20, the latest year for which Treasury forecasts have been prepared.
<a href="/images/2016/05/06/Screen%20Shot%202016-05-06%20at%2010.21.31%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/05/06/Screen%20Shot%202016-05-06%20at%2010.21.31%20AM.png" alt="">
Extension of the provision enabling small businesses to immediately depreciate assets valued up to $20,000 to the end of June 2017, and making this provision accessible to businesses with revenue up to $10 million. 
A ‘Ten Year enterprise Tax Plan’ aims to incrementally lower the company tax rate to achieve a 25 per cent rate for all companies by 2026/27. Over time, the size of companies eligible for the 27.5 per cent tax rate will be lifted each year until all companies are taxed at this rate in 2023/24. The rate for all companies will then be incrementally lowered over the ensuing four years to reach 25 per cent by 2026/27. 
The government will extend the unincorporated small business tax discount. From 2016-17, the discount will be available to businesses with annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. The maximum discount available will remain at $1,000. Over the next decade, the discount will be further expanded in phases, to a final discount of 16 per cent. 
The Youth Employment Package 
This program, Youth Jobs PaTH (Prepare, Trial, Hire), has three components: the first provides pre-employment skills training for young job seekers; the second provides a $1,000 inducement to businesses to provide a 4-12 week internship for program participants along with an income supplement for the participant; and the third is $6,500 ‘Youth Bonus’ wage subsidy payment for employers who take on a young worker who has been in employment services for longer than six months. 
Reforms to superannuation 
The purpose of the superannuation system is to be enshrined in legislation in line with a recommendation of the Murray Review. This will define the purpose as: providing an income in retirement to substitute or supplement the Age Pension. This provides legislative basis the government of the day to target the superannuation tax concessions at those who would otherwise be likely to be remain dependent on the Age Pension, this is likely to come at the expense of tax concessions currently available to those likely to be self-funded in retirement. 
Those with combined incomes and superannuation contributions greater than $250,000 will pay 30 per cent tax on their concessional contributions, up from 15 per cent. This represents a lowering of the previous income threshold of $300,000. 
The superannuation concessional contributions (ie pre-tax contributions or contributions where a deduction is claimed) cap has been lowered to $25,000 per annum, down from $30,000 for those under 50 and $35,000 for those over 50. 
This has been partially balanced by enabling unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less. 
The government have introduced a $500,000 lifetime cap for non-concessional contributions (ie contributions made from savings for which no deduction is claimed). 
The Government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017. 
From 1 July 2017, the Government will lift current restrictions and allow individuals under the age of 75 to claim tax deductions for personal superannuation contributions to eligible superannuation funds. 
The current spouse tax offset has been broadened. The income threshold for the receiving spouse (whether married or de facto) will be lifted from $10,800 to $37,000 
2016-17 Federal Budget 
‘Tax Integrity Package’ – additional resources for the ATO 
The government have provided additional resources to the Australian Tax Office to establish the Tax Avoidance Taskforce. The key focus will be pursuing tax avoidance by multinationals and high wealth individuals. 
The government will introduce a new ‘Diverted Profits Tax’ targeting multi-nationals shifting profits earned in Australia to lower taxing jurisdictions 
Warwick Temby is executive director, HIA and Shane Garrett is senior economist. They can be contacted <a href="https://hia.com.au" target="_blank">here</a>.
<a href="https://hia.com.au" target="_blank"></a>
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jchancellor-FAypfDUnLy

HIA's Federal Budget Report Card

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GUEST OBSERVER
It’s unsurprising that in the lead-up to this year’s federal budget there was a lot of discussion about housing affordability as its centrepiece.
Over the past 20 years price-to-income and price-to-rent ratios have doubled. Sydney’s price-to-income ratio is over 12, making it the second-least-affordable city in the world. Melbourne is in fourth place.
And in a budget tableau as bland as this one, it wouldn’t have taken much to really play up the housing affordability policies.
Yet the measures in this budget involve not much more than tinkering.
On the minus side, the biggest announcement was a “first home super saver scheme”, which would allow voluntary contributions of A$15,000 per annum and A$30,000 in total (per person if in a couple) to superannuation for prospective first home buyers from July 2017. These could be withdrawn and taxed at 30 percentage points below the normal marginal rate and used for a deposit.
This will cost the government A$250 million over four years and do absolutely nothing to help first home owners. We have seen this movie before, with 50 years of first home owner grants in one form or another. All that happens is that this subsidy goes into the price of existing housing. Sellers benefit, buyers get no joy.
It’s bad economics, somewhat costly, and a cruel hoax on prospective home buyers who are struggling with an out-of-control housing market.
But the biggest minus of all was the absence of any measure whatsoever to address negative gearing and CGT exemptions for rental properties. Sorry, there is one: you now won’t able to deduct an airfare to the Gold Coast to “inspect” your rental property. The government has boxed itself in on this, with Labor having taken a plan to the last election to tackle both of these issues (full disclosure, the Labor plan bears a good deal of resemblance to my McKell Institute plan).
Nonetheless, it is reflective of the state of our politics that the one thing that could really help the most (and which the PM has agreed with very publicly in the past) is off the table.
But the measures aren’t all bad. On the plus side, there were incentives for people over 65 to downsize by allowing A$300,000 of the proceeds of a sale of their main residence to go into their superannuation, above the controversial A$1.6 million cap announced in last year’s budget.
Will the budget encourage older Australians to downsize? Maybe. One measure of how powerful an incentive it will be is that it costs only A$30 million over the four-year forward estimates period. This is not a big government spend.
It’s also unclear whether it will be a large enough financial incentive to overcome the emotional and psychological barriers to moving from the family home after many years in it. There was also a conspicuous absence of reforms to stamp duty, which is a major impediment to downsizing.
There was also good news on affordable housing with the establishment of the National Housing Finance and Investment Corporation (NHFIC). It will provide A$63.1 million over four years to operate a so-called “bond aggregator” that aims to provide cheaper financing for community housing providers. This is a good idea that should have a positive effect, and help address the high cost of funds that often plagues financing of housing for low-income earners.
Consistent with the recent populist policy announcements by this government, foreign purchasers of Australian properties were targeted in this budget. There will no longer be a capital gains tax (CGT) exemption for primary residences of foreign and temporary tax residents, and the grandfathering will only last until June 30 2019. There will also be a lower threshold for CGT withholding (A$750,000, down from A$2 million) on foreign tax residents, and the rate will be increased from 10 percent to 12.5 percent.
There were some wishy-washy words about the crucial issue of housing supply. The government has definitely identified the key role that supply plays. They are proposing a variety of “city deals” to provide incentives for zoning reform — especially in western Sydney. That’s all good, but whether it is anything more than the budget-summary feel-good headline - “Working with the states to deliver planning and zoning reform” - remains to be seen.
There was also the announcement of a tax on foreign owners who leave their properties vacant. This is supposed to raise A$16.3 million over four years — which is a rounding error in the scheme of things.
We had a housing affordability crisis before this budget, and we will have one after it. If the first step to recovery is acknowledging that one has a problem, then the government is still on step one.
<a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a> is a Professor of Economics and PLuS Alliance Fellow at UNSW and author for <a href="https://theconversation.com/au" target="_blank">The Conversation</a>.
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Government tinkering with housing affordability in 2017 Budget: Richard Holden

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The latest bulletin from Secret Agent charts the winners and losers in the 2017 Federal Budget with first home buyers, downsizers and renters all appearing on the winning list.
Secret Agent said in Victoria the first home super saver scheme may drive demand for property below $600,000.
"First home buyers will be able to use voluntary contributions to their superannuation to save for a house deposit," the report said.
"Withdrawals will be taxed at a lower rate, but the amount you can contribute is capped at $15,000 a year and $30,000 all up. Both members of a couple can take advantage of the scheme. 
"In Victoria, the state government will abolish stamp duty for first time buyers of homes valued up to $600,000, make cuts to stamp duty on homes valued up to $750,000, and also double the First Home Owner Grant to $20,000 in regional Victoria. 
"With the first home super saver scheme, we may see increased demand for property below $600,000. This will push up the prices of houses and townhouses in outer suburbs such as Cranbourne. Inner city suburbs will be less affected, as average prices are typically above $600,000. 
"Developers will also have to compete more aggressively for development sites that allow sub-$600,000 townhouses to be built and sold in these outer suburbs."
Downsizers 
"A person aged 65 or over will be permitted to make a non- concessional contribution to superannuation of up to $300,000 from the proceeds of selling a principal residence owned for the past ten or more years from 1 July 2018," the report said.
"This is good news for real estate agencies operating in areas popular among downsizers, such as the inner city, as there is more incentive for elderly property owners to sell their home. Developers can also benefit from creating stock in these areas."
Resident Investors 
"There will be new tax incentives for investing in affordable housing; specific incentives for Managed Investment Trust (MIT) vehicles, as well as a CGT concession for resident investors who invest in these schemes," Secret Agent said.
Renters 
"Foreign investors are being slugged with an extra charge for properties left vacant —the Budget proposes an annual levy of at least $5,000 and there will be an increase in their application fees. 
"Combined with the state government vacant tax, these additional costs may bring some rent relief and increase stock available for renters. 
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LOSERS 
Developers 
"The Budget outlines that foreign ownership of new developments will be capped at 50 percent. To fund a development project, banks normally require more than 50 percent of stock to be presold. 
"Given that many new developments, especially high-rise apartments, have traditionally been marketed to overseas buyers, limiting foreign ownership to 50 percent will put the feasibility of many projects at risk. This effect is compounded when combined with the recent state tax changes, such as the increase in stamp duty on off-the-plan purchases in Victoria. The number of construction jobs available will also decrease. 
"One silver lining is that, together with the new apartment design standards, we may finally see new stock designed to a higher quality to capture the interest of local buyers, who are now equally important to the success of a development project.
Foreign Investors 
"Foreign tax residents and temporary tax residents will no longer be able to access the CGT main residence exemption. Grandfathering will be available until 30 June 2019 for properties held prior to 7.30 pm (AEST) on Budget night. 
"The loss of CGT exemption could push foreign investors to sell their property as most of these investments are negatively geared already. This may eventually lead to disposal of the investment since it is no longer profitable. 
Investors 
"The Government has introduced two new measures to restrict the availability of deductions with respect to depreciation deduction and travel expenses, expecting to save $800 million over the forward estimates. 
"The restrictions on residential investment property deductions will reduce incentives for buyers to make new investments. The implications are more severe for high income earners, who can no longer claim as many deductions on tax. As there will be less demand for depreciation reports, qualified quantity surveyors may also be affected. 
Banks 
"The introduction of a major bank levy from 1 July 2017 could increase cost of funding for larger banks, which may seek to be compensated by increasing mortgage interest rates. "
 
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For more information, <a href="https://secretagent.com.au/">click here</a>.
 
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2017 Budget winners and losers: Secret Agent

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GUEST OBSERVER
We need more justification around the NSW Government’s solution for housing affordability after it revealed no concessions would be afforded to buyers making property purchases over $800,000.
The measures, taken to cabinet last week, proposed stamp duty would be abolished on all homes up to $650,000 and relief to buyers of homes up to $800,000.
My offices are already experiencing vendors around both the $650,000 and $800,000 price points asking agents to list their homes for slightly more, given that first home buyers will soon have more to spend. 
When first home buyer grants were introduced a few years ago, as a group, we saw the same thing. The market needs to find its natural level, as otherwise these measures could prove counter-productive and possibly even lead to an artificial increase in prices.
The new measures certainly look like a step in the right direction, but we need to stop the applause and critique the performance. It is a complex matter, as the State Government needs to protect the cash cow that is stamp duty, but also make an attempt at solving the affordability crisis.
If the intention is to alleviate affordability woes amongst first home buyers, how did it reach the figure of $650,000? This tells me the measure was designed to drive more first home buyers into apartments.
With far fewer investors as a result of the macro-prudential measures and tens of thousands of new apartments in the pipeline, who is going to buy them otherwise?
Sydney’s median dwelling price is $872,300 – two thirds the figure proposed for abolishing stamp duty, and according to CoreLogic, 20 percent of Sydney Metro dwellings sold at a price of $650,000 or less over the past 12 months were houses.
This rises to 34.4 percent when looking at dwellings that sold for a price of $800,000 or less.
Last year, the apartment development boom raised concerns about an apartment oversupply in Sydney. The stamp duty changes are designed to drive more first home buyers into apartments. 
First home buyers currently represent about four to five percent of the market. We need to get this to double digits and this measure might not do that.
When you really look at it against the market, less than 10 percent of Sydney’s suburbs would have homes with a median price below $650,000.
If the Government was serious about alleviating barriers, it would completely abolish stamp duty for first home buyers or at the very least make the first $650,000 exempt, irrespective of the purchase price, and not cap it at a price that forces people into apartments to reverse engineer the cycle. 
In addition to believing first home buyers be exempt from paying stamp duty, they should have to reside in the property to be eligible. 
However you spin it, rentvestors are still investors, and we have been overly advocating rentvesting as a wealth strategy, which is taking its toll on the market.
The base of the affordability iceberg is that there have been too many investors in the market and unless we’re careful, these measures could inadvertently make things worse. It is further exacerbating the problem which APRA has tried so hard to alleviate. 
If the Government is not open to completely abolishing stamp duty for first home buyers on all properties, concessions should at least be tracked against median house prices annually. 
House prices are relative against the cost of living – someone in the Eastern suburbs might pay more for property compared to someone in Western Sydney, but they are usually paying more for everything – not just property. Therein lies the problem – the affordability crisis is a Sydney issue, not necessarily a State issue. 
Regional NSW first home buyers are set to benefit the most from this, but what about buyers in Sydney’s Inner West, Lower North Shore, Eastern Suburbs and the South?
If you are looking to buy in these areas and hoping to benefit from the abolishment of stamp duty for properties up to $650,000, you can either uproot your life, don’t buy at all, or buy a garage.
DOUGLAS DRISCOLL is CEO of real estate agency <a href="https://www.starrpartners.com.au/" target="_blank">Starr Partners</a>.
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Budget failing many buyers: Douglas Driscoll

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GUEST OBSERVER
Determining funding for the right housing measures in the upcoming Federal Budget (May 9) would be much easier if the Government had a national housing plan and a Minister for Housing according to the managing director of a leading community housing provider and housing commentator.
Budgets should be developed to meet strategic and operational plans.  It makes no sense that Australia does not have a national plan nor a Minister responsible for something as fundamental as housing.
Housing, including social and affordable housing, needs to be viewed as part of Australia’s social and economic infrastructure and integrated with other infrastructure planning. He agreed with the treasurer, The Hon Scott Morrison, that there is no silver bullet to the housing crisis but says with rising social housing waiting lists, high capital city house prices and an increasing number of working people experiencing housing stress, action is long overdue.  
An effective plan will only be realised if the Commonwealth Government recognises that housing is a fundamental human right and the responsibility of the national Government and a national Minister, not just the states and territories.
The Government’s national co-ordination and responsibility must include direct investment in social and affordable housing.
There are less public housing dwellings now than last decade despite around 200,000 people on public and social housing waiting lists and a general acceptance that Australia has a shortfall of between 200,000 and 400,000 dwellings.
Australia was in a similar situation in 1945s when the national Government took action in conjunction with the States.
Back then there was a need for austerity but there was also acknowledgement that workers needed housing and that constructing housing would stimulate the economy and get people working.
With the current downturn in manufacturing and mining we have many workers for whom constructing housing is a realistic use of their skills; another example of housing’s integration with social infrastructure.
This way, more social and affordable housing becomes possible on the back of economic infrastructure investment and job creation rather than as welfare subsidy.
If we had another “Affordable Housing Commission” type policy response the housing built could eventually sold by Government, as it was previously.
One example of possible integration of housing and other infrastructure planning was high speed rail links. He said such infrastructure is already being proposed and would create new commuter towns between those capital cities, taking pressure of capital city housing demand and boosting regional Australia’s economy.
 A rising tide can lift all ships and makes the provision of affordable housing and housing subsidies more sustainable.
A number of housing and community organisations, economists, academics and other experts have done considerable work to help the Government to create a national plan.
Where are Australia’s long term plans for infrastructure and housing? It is time for such plans rather than one off political cycle centric planning and initiatives.
You can budget for a plan.
Greg Budworth is a managing director of Compass Housing group and co-chair of the United Nations Habitat program’s civil society partner constituent group. he can be <a href="https://www.compasshousing.org" target="_blank">contacted here</a>.
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Infrastructure and housing plan needed before budget initiatives: Greg Budworth

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GUEST OBSERVER
For active investors, the Budget comes with positive changes such as in super and home ownership but many are negative such as targeted measures against the banks and sharp cutbacks on property tax breaks. Everyone will be affected by the recently delivered Budget and here are some key features that affect properties:
The government has constantly been pressured to scrap borrowing in super but it has not reversed its position and SMSF operators can still borrow. However, there is a new super cap of $1.6 million and borrowed funds will be computed based on the $1.6 million cap.
Starting 1st July 2017, first-home buyers may salary sacrifice up to $15,000 or a total of $30,000 a year into their superannuation account at a concessional tax rate. They will be allowed to withdraw the cash to use as a deposit on their first home. This measure allows super to be accessed early.
Those who will sell a property investment will be subject to CGT at a marginal tax rate but those who hold a property for more than a year will get a discount of 50 percent on their CGT tax assessment. The negative gearing tax rate remained the same and investors can claim expenses and interest for the cost of an investment property against their tax bill. One advantage of higher interest rates among commercial banks is that the amount that can be deducted in negative gearing increases.
Downsizers may be able to make post-tax contribution to superannuation of up to $300,000 from the proceeds of selling their home, even if they exceed the $1.6 million cap. Investors will no longer be able to claim tax deductions for travel expenses related to inspection, maintenance or rent collection of a property. Many investors have properties a long distance away from their home and they incur travel expenses when they visit their investments.
This change may upset many investors because an outright ban on claims for travel expenses is an absolute loss. It used to have no limit and the allowance may have been abused because the government expects to collect $540 million from the scrapped tax allowance starting 1st of July.
Depreciation deductions may only be claimed on personally purchased items for an investment property, excluding plant and equipment which was included with the purchase. These measures will not please many investors but the truth is, it is to their advantage that negative gearing remained untouched because any changes related to this could have been more dramatic. Investors are relieved that the changes have not gone further as well.
Lastly, foreign property investors will lose the CGT exemption on the sale of their main residence and are now required to report all sales over $750,000 or have a withholding tax applied upon sale. There will also be a new annual levy of at least $5,000 for properties left vacant for more than six months a year.
PS.
Disallowing deductions for travel expenses and depreciating assets not directly bought by the investor may be the thin edge of the wedge and increasing deductions for work-related expenses can be quite worrisome. This change is controversial and some people suggest that if it is a step towards a slow-down of deductions for Australian taxpayers, debate has to begin now.
Ed Chan is the founding partner of <a href="https://www.chan-naylor.com.au/" target="_blank">Chan &amp; Naylor</a>.
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Federal Budget 2017 features that affect Australia's real estate: Ed Chan

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GUEST OBSERVER
The 2017-18 Budget has a welcome focus on housing affordability and infrastructure.
Subdued wages growth is keeping revenue collection down contributing to a slight deterioration in near term deficit projections (a deficit of $29.4bn for 2017-18) but a return to surplus is still projected for 2020-21. 
This year’s Budget should be positive for confidence.
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.24.06%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.24.06%20AM.png" alt="">
The impact on the RBA and the shares is likely minimal. 
The 2017-18 Budget has much to make it popular. In fact, the goodies make it almost feel like a pre-election rather than a post-election budget. The transformation from the austerity to end “the age of entitlement” of the 2014 budget to the “fairness, security and opportunity” of this Budget has been profound.
Key budget measures
As always, most of the key new measures were pre-announced or leaked. On the spending front, the goodies include:
A further ramp up in infrastructure spending (by an additional $20bn over the forward years) including Western Sydney Airport, inland rail &amp; various road projects.
Extending the small business $20,000 asset write-off scheme and working with states to remove red-tape.
A housing package: first home buyers can save via their super for a deposit out of pre-tax income (up $30,000), retirees who downsize get exemptions from super limits, more stringent rules on foreign investors (eg, vacant home tax), encouraging the supply of low cost community housing and rewarding states for boosting supply.
Increased spending on health through committing to fully fund the National Disability Insurance Scheme and reintroducing Medicare rebate indexation. 
Removal of the “zombie” welfare cuts.
$18.6bn over ten years in extra school funding (Gonski 2.0). This has been offset by various savings, including:
Increased university fees.
An increase in the Medicare levy by 0.5 percent from 2019.
A 0.6 percent levy on the major banks with liabilities over $100bn.
More measures to curtail the cash economy and improve the integrity of the tax and welfare system.
Little change to the deficit outlook
Despite a temporary boost to corporate tax revenue from a bounce in the iron ore price, extra spending and soft personal tax collections on the back of weak wages growth means the near-term budget deficit outlook is a bit worse than MYEFO and $2.3bn worse over four years compared to last year’s budget.
The return to surplus has been maintained for 2020-21 and looks better at 0.4 percent of GDP. After a 2016-17 budget deficit of $37.6bn, the deficit for 2017-18 is forecast to be $29.4bn (1.6 percent of GDP). 
With the Government offsetting all new spending with savings, the actual policy impact on the economy this year and next is trivial (see the red figures in the table above). However, the projected decline in the budget deficit in the years ahead means that fiscal policy will still be acting as drag on growth. 
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.25.02%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.25.02%20AM.png" alt="">
Economic assumptions
The major economic assumptions underpinning the Budget are shown in the next table. Most of the assumptions look reasonable, except that the assumption that wages growth rises to 3.75 percent over the next four years looks too optimistic given unemployment is not expected to fall much. The iron ore price is still expected to average $US55/tonne over the next four years. This looks reasonable albeit the recent volatility in the iron ore price highlights the uncertainty around it. 
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.26.08%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.26.08%20AM.png" alt="">
Assessment and risks
The goodies and the focus on fairness in the Budget should provide a bit of a boost to confidence and spending. But the risks around the projected return to surplus remain huge. Australia still has a budget deficit problem.
Government spending surged 25 percent between 2006-07 and 2008-09 to combat the GFC and this has never been unwound. While our net public debt to GDP ratio is low compared to the US, Europe and Japan, comparing ourselves to a bad bunch is dangerous. The Budget is projecting a 12 year run of deficits totalling 27 percent of GDP which swamps the deficits of the 1980s and 1990s.
And this is without the deep recessions of the early 1980s and 1990s! Rather we have achieved this thanks to a combination of ramping up spending on a whole range of things without facing up to how they will be paid for.
Unfortunately after 102 quarters without a recession there is no support for hard-nosed economic reform in Australia and this also applies to reforms to limit spending growth. So we continue to rely inordinately on assuming the best to drive revenue up.
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.27.14%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.27.14%20AM.png" alt="">
 
This is evident in the Budget’s projections for average revenue growth of a whopping 6.7 percent per annum over the next four years. Such optimistic assumptions have disappointed in recent years and the biggest risk now is that wages don’t accelerate as assumed leading to continuing poor personal tax collections.
While the Budget still projects a return to surplus by 2020-21, it remains pretty thin and the budget deficit projections over the next two years actually take us further away from a surplus not closer. The trouble is we don’t have a lot of flexibility to provide stimulus should the economy turn down. While the 2017-18 Budget should help us keep our AAA sovereign rating for now, the risk remains high that we lose it at some point. 
On infrastructure, the Budget has much to commend it. Infrastructure spending can help short term growth, boost long term productivity and can actually “crowd in” private investment. Increased public investment is helping to offset weak private investment (see the next chart) and the infrastructure commitment in the Budget will help ensure this continues. 
In this regard, the move to report a “net operating balance” in this year’s Budget is welcome and there is much merit in focusing debt on capital spending and not recurrent spending. But debt is still debt and there is always the risk some of the infrastructure projects turn out to be white elephants resulting in “good debt” becoming “bad”.
Finally, it’s commendable to see housing affordability being a key part of this Budget. Certainly the measures are to be welcomed, particularly those helping first home buyers, downsizers and measures to boost supply. Getting housing supply up on a sustainable basis is critical so the key is for the Federal Government to follow through with its plan to incentivise states to meet housing supply targets.
Implications for the RBA
While this Budget should provide a boost to confidence (albeit not for university students), ongoing fiscal tightening will act as a mild drag on growth in the years ahead. As such, it’s hard to see major implications for the RBA. In fact recent data on trade and retail sales continues to point to more risk of a rate cut than a rate hike in Australia this year.
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.28.13%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.28.13%20AM.png" alt="">
Implications for Australian assets
Cash and term deposits – with interest rates remaining low, returns from cash and bank term deposits will remain low.
Bonds – a major impact on the bond market from the Budget is unlikely. With five year bond yields at 2.2%, it’s hard to see great returns from sovereign bonds over the next few years.
Shares – the potential boost to confidence from this Budget could be a small positive for the Australian share market. Overall, the Budget’s impact is unlikely to be huge. Construction stocks may be beneficiaries and banks losers.
Property – the Budget’s housing affordability measures may have an impact on home prices over time if they incentivize states to ramp up supply, but it’s likely to be marginal in the short term. We continue to expect momentum in the Sydney and Melbourne property markets to slow.
Infrastructure – the ramp up in infrastructure spending should in time provide more opportunities for private investors as many of the resultant assets are ultimately privatised.
The $A – the Budget alone is unlikely to have much impact on the $A. With the iron ore price falling back again, the interest rate differential in favour of Australia continuing to narrow and the $A still too high, the downtrend in the $A is likely to resume.
Concluding comments
The 2017-18 Budget has a sensible focus on housing affordability and infrastructure. The main risks remain around the revenue assumptions and when we will get back to surplus. 
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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