Shadow Treasurer Chris Bowen is at the centre of a political storm created by Labor’s plans to restrict negative gearing of investment properties and halve the discount applied to capital gains tax.
So far he seems to be relishing the fight, despite some withering assaults by Prime Minister Malcolm Turnbull.
When I met with Mr Bowen this week, the obvious question for a party behind in the polls was why Labor would tackle this large reform now. Why do it when the housing market is ‘vulnerable’, to use Mr Turnbull’s term?
“You see, this is the point,” Bowen told The New Daily at his Canberra office. “People say, oh this is a bad time. Well I say, you do these reforms once in a generation. You’ve got to have a view to all sorts of market circumstances.
“It’s a very convenient argument for some people to say ‘this is not the right time to touch negative gearing’. Well those people would be against changes to negative gearing whenever, whatever the market circumstances. So it’s a very spurious argument.”
A lull in returns
Market circumstances are actually fairly unique at present. House prices are flat outside of Sydney and Melbourne – even falling in some metro areas – and wages growth is at a 50-year low.
That’s important, because a negatively geared property makes most money for its owner when house prices are rising strongly and the owner’s tax rate is high due to wages growing ahead of tax threshold increases.
Mr Bowen says Labor’s timing is about more than just this current lull in investor returns.
“Even if that wasn’t the case, you do these things on a generational basis. Negative gearing hasn’t been changed for 30 years. The next round of changes are likely to last 30 years. Market conditions are going to be all over the place during those 30 years. You’ve got to get your policy settings right for any potential market settings.”
Labor is not alone in seeing the current market as ripe for a change. The negative gearing and CGT changes have been backed by economists such as Saul Eslake, Stephen Koukoulas, the Grattan Institute’s John Daley and the ANU’s Ben Phillips, who this week released modeling of some of the effects the policy would have. Mr Eslake quipped in one interview that “there’s never been a more exciting time to be an advocate of changes to Australia’s long-standing negative gearing arrangements”.
Economists and commentators, including myself, have complained for years that these twin tax breaks have a compounding effect in drawing capital away from productive investments elsewhere in the economy.
With business investment and therefore job creation languishing at present, I asked Mr Bowen if this macro-economic consideration was the key driver of Labor’s policy decision.
“When you look at policy options, you look at their implications across the board and certainly I looked closely, for example, at the David Murray Financial Services Inquiry recommendation,” he said.
“It said that these tax concessions should be reduced because it would lead to a more efficient capital allocation. So it was one of the factors. I couldn’t tell you it was ‘the’ driving factor, but it was one of the factors we considered.”
In the months up until the election, the Coalition looks set to run a campaign warning that Labor will “crash” the property market.
That will be backed up by a Property Council campaign featuring “TV, radio, newspaper and digital advertisements promoting the benefits of negative gearing to the Australian economy” – the campaign predicted by The New Daily when Labor announced its policy.
To counter those arguments Mr Bowen will have to stay rigidly on message.
When I asked him if “modest price falls” would be a good outcome, he answered without a flicker in his apparently storm-proof demeanor: “A good outcome would be taking some of the heat out of future rises.”