The times call for courageous tax reforms

It has been two years since the Reserve Bank started raising interest rates. Sharp rate rises and clear messaging from the central bank were intended to nip inflation in the bud: collective pain for the necessary gain of price stability.

But two years on, inflation has proved stickier than hoped, with housing costs the standout culprit. The effect of prolonged high interest rates is also starting to show. And it turns out the pain is not quite so collective, but rather concentrated.

A responsible pre-election budget in this environment is a delicate balancing act. It is a budget that must not stimulate the economy, but cannot ignore the fact that some Australians are bearing more than their share of the pain.

This is particularly true for young people and low- and middle-wage workers. Without savings to buffer them, or the comfort of owning a home that has grown in value in a gravity-defying housing market, these groups have seen their real incomes go backwards.

The government has already made known the core of this budget’s cost-of-living relief: the redesigned stage three tax cuts. While they will provide some welcome relief to low- and middle-income workers, these tax cuts are a large cost to the budget and diminish the role of our tax system (including the role of bracket creep) in doing its part to cool down an overheating economy.

The choice to proceed with the stage three tax cuts leaves little room for any further spending.

Near-term spending measures must be highly targeted. The announcement of payments for 73,000 teaching, nursing, and social work students undertaking practical elements of their course fits the bill. These payments will help alleviate “placement poverty” for these mostly female students in professions that are short in supply.

There is still some scope for other spending measures that make social and economic sense, such as government support to tackle the undervaluing of feminised jobs in early childhood education and care. Low wages for early childhood educators are not only unfair but reinforce continued staff shortages in a sector that is critical both for children and for parents.

As RBA governor Michele Bullock has said regarding wage rises for aged care workers, the economic environment is no reason to begrudge early childhood educators a long-deserved pay rise.

But generally, the government’s hands are tied on near-term spending. This explains why it is keen to focus on a longer time horizon: on initiatives focused on the future economy, and which probably won’t involve much spending next year.

If we are thinking about budget measures that suit our economic circumstances and build a brighter future, we shouldn’t look past fixing the broken housing market.

At the core, we have failed to build enough housing for planned and necessary population growth in the places where people need and want to live, and this has been made worse by the demand for more space after the pandemic.

The state and federal push to build more homes is welcome, but it will take time to redress this fundamental imbalance between demand and supply in the housing market.

No single budget or government can fix it, but the federal treasurer does hold some important levers.

Federal tax concessions drive money into the housing market, at the expense of more productive investment, which only adds fuel to the fire, while the Age Pension assets test (alongside state stamp duties) deters older Australians with extra space from downsizing to a home that is a better fit.

The capital gains tax discount should be halved, negative gearing limited in line with most other comparable countries, and home equity above $750,000 should be included in the Age Pension assets test.

Unpicking overly broad housing-related tax concessions is good economic policy, and reining in their cost helps tackle Australia’s structural budget deficit.

The same goes for superannuation tax breaks. They are one of the biggest holes in the income tax base, costing the budget $45 billion a year, and they are also poorly targeted: two-thirds of the benefits flow to the wealthiest 20 per cent of households, who already have enough to fund their retirement.

Perhaps a pre-election budget is the last place you would expect to find these type of courageous tax reforms.

Yet, it was only nine months ago that the 2023 Intergenerational Report laid bare our underlying budget challenge. Without bold reform, we are leaving young people and children growing up today to contribute far more towards supporting older generations than our older generations ever contributed when they were of working age.

Failing to tackle the structural problems – and inequities – facing future budgets only postpones even more pain for the years to come.