Deception works best when it appeals to the victim’s deepest anxieties. The Trojan Horse promised divine protection to a profoundly superstitious society. The poisoned apple promised true love to a besotted Snow White. And the Federal Budget promises intergenerational equity to young Australians feeling rightly discouraged about the future.
Disappointment awaits. There are five clear signs that this Budget will neither galvanise growth nor rescue the young.
First, a return to an indexation-based capital gains tax (CGT) for all asset classes is unlikely to move the needle on home affordability. Housing may become less attractive to investors, but so too will all other high-growth assets. This leaves no incentive for investors to redirect their capital away from property. Dr Jonathan Kearns, Chief Economist at investment management firm Challenger, estimates that changes to the CGT will reduce home prices by just 1 to 2 per cent – even when coupled with restrictions on negative gearing.
Meanwhile, our immigration intake remains fixed, the 5 per cent deposit scheme endures, and construction activity continues to suffocate in the coils of red tape.
Second, the new CGT policy will mar alternative avenues of wealth creation. Locked out of the property market, many young Australians seek to get ahead through growth stocks. The best of us even establish new businesses: an endeavour that is hard enough without punitive taxation.
The fatal flaw of the policy is that it penalises ambition. Moving from a 50 per cent discount to an indexation-based system will enlarge the tax burden for most investments, but those with high returns will be hit hardest. This doesn’t just impose a ceiling on Australians striving to build their financial position – it also discourages risk-taking in the pursuit of a big upside. Even if the government introduces carve-outs for startups, the new arrangements may still push stock investors to prioritise the low-growth blue chip above the burgeoning powerhouse. Pretty soon we’ll need another Productivity Roundtable.
Third, changes to negative gearing will entrench inequality and generate perverse supply-side effects. Permanent grandfathering grants existing property investors special access to a benefit that has been revoked from everybody else. To retain that access, those investors may choose to hold on to properties when they would otherwise sell. Fair-minded people can disagree on the merits of negative gearing – but the new specifications won’t do young people any favours.
Which brings us to the fourth point: this Budget appeals to envy over empowerment. For all the bluster around intergenerational equity, there are no direct measures that actually open new doors for young Australians. The flagship policies simply raise taxes on assets while offering little compensatory relief. No material cuts to the personal income tax, even though we rely more heavily on income taxes than almost every other OECD nation. No indexation of tax brackets, even though bracket creep is set to confiscate $26 billion between 2027-28 and 2030-31 according to ANU economist Ben Phillips. No reform of the company tax, even though Australian businesses face the second-highest tax rates in the developed world. But hey, at least we get a $250 rebate in 2028.
Fifth, Labor has given up on fiscal prudence. Government expenditure as a percentage of GDP is at its highest level in 40 years, excluding the pandemic era. The next five years will bring a cumulative deficit of $265 billion, and national debt will soon surpass $1 trillion. Worst of all, the government doesn’t seem to think that any of this is a problem.
Debt-funded spending is a dangerous game. It can fuel inflation, crowd out private investment, drive up the cost of borrowing, and engender a culture of dependence. However, in the most fundamental sense, it is a penalty on the future. Large, persistent deficits today mean higher taxes and weaker social services tomorrow.
Forget intergenerational equity. The foremost objective of this Budget was to raise revenue, and capital growth was targeted as a matter of expedience.
Nevertheless, the greatest disappointment of this Budget lies not in its vapidity but in the harsh truths it reveals about our government. With a historic majority in the Lower House, a struggling opposition, and no federal election for another two years, this was the perfect time to initiate bold reform.
On top of that, Australia’s precarious economic position offered a rare opportunity. Given the nature of our problems, there are a number of actions this government could have taken to stimulate growth and level the playing field at the same time. It was, in many respects, exempt from the prosperity-fairness tradeoff that ordinarily plagues policymakers.
Shifting the tax burden from income to consumption and land would encourage work, investment, and enterprise. A cut to the company tax would attract capital, bolster productivity, and make Australians richer (it is often forgotten that capital deepening is one of the most powerful drivers of wage growth). Modifying the pension assets test to include residential property would put an end to one of the most regressive arrangements in our tax and transfer system.
None of these opportunities were seized. Although there are a handful of measures that will make life easier for overtaxed and overregulated businesses, the Budget reflects a disturbing lack of ambition. There is little in its pages that will reverse our ongoing economic decline or elevate the young.
The only thing we can count on is the expansion of state involvement in every facet of the economy, from energy and manufacturing to credit markets and childcare. Welcome to the era of sweeping subsidies, universal handouts, and middle-class welfare.
Sometimes, deficits in aspiration do show up on the budget papers.
