Reserve Bank governor Philip Lowe has questioned the wisdom of the global race to cut corporate taxes while taking aim at tax incentives driving Australian real estate prices higher and saying penalty rate cuts could boost the economy.
In a remarkably frank exchange before a Standing Committee on Economics, Dr Lowe said altering negative gearing and the capital gains tax would take some heat out of the housing market.
While he said negative gearing alone wasn’t the issue, it was the combination with capital gains tax discounts that fuelled investment demand.
While he couldn’t quantify the effects, he said, if removed, it would likely help housing affordability.
“It’s likely it would reduce investment demand for a while, and if you have less demand for a while, you’d have lower prices and that would take the heat off housing market.”
But Dr Lowe said he was not specifically advocating for that as a policy.
In another controversial comment he said cuts to weekend penalty rates for retail and hospitality workers may create more jobs and boost spending in the economy.
“If wage restraint leads to more people having jobs, which I think is what’s happened in Australia, more people have money in their pocket than would have been the case otherwise,” he told the committee.
“So the aggregate level of spending might actually be higher.”
Balancing the twin realities of high debt and low interest rates is another concern for the RBA.
Households seemed to be doing well with the central bank case rate now sitting at 1.5 per cent, but high debt and low income growth was affecting consumption spending, he said.
“The balance that is required is to support spending in the economy today while avoiding creating fragilities in household balance sheets that could cause problems for the economy later on. This is also something we need to watch carefully,” Dr Lowe said
Another option for the RBA on property was to tighten bank lending if investor loans kept rising, he said.
“In the last six months it’s picked up again… Talking to a number of banks when it was growing more quickly, they didn’t want to pull back because their competitors weren’t pulling back.”
The RBA still expects the economy to grow by about three per cent this calendar year.
Governor Philip Lowe has told the federal parliament house economics committee growth will be bolstered by higher commodity prices, the end of the fall in mining investment and higher liquefied natural gas exports.
“Looking forward, we still expect the Australian economy to grow by around 3 per cent this year and next,” Dr Lowe said at the hearing in Sydney.
However, the RBA is keeping a close eye on the residential construction cycle and the broader housing market, which is showing high levels of debt.
While construction activity had helped maintain economic growth in recent years, building approvals had slowed and conditions for developers had tightened.
“But there is a large amount of work still in the pipeline, particularly for apartments, so we still expect some further growth in this part of the economy this year,” Dr Lowe added,
The central bank said the patchy labour market was another key concern, as although unemployment was low at 5.7 per cent it could be lower.
“In a historical context this would have been considered a good outcome, although, today, a sustainably lower unemployment rate should be possible in Australia,” Dr Lowe said.
He said the growth of part-time employment was a continuing trend, with all job creation in the past year in part-time work, and said there were both structural and cyclical elements to the pattern.
Negative gearing, which became a contentious election issue last year, is a tax benefit that allows investors to offset losses on their rental property against their income.