Did Australia budget put out unwelcome mat to overseas investors?
Foreign buyers of property Down Under will be punished with a so-called ghost tax if they fail to occupy or lease their homes for at least six months
Australia’s budget announced on May 9 includes measures to punish foreign buyers who leave their homes unoccupied, a move that could send a bad message to overseas investors, industry groups warned.
The budget also includes a levy on the country’s biggest banks, seen as part of a populist pitch to restore the fortunes of Prime Minister Malcolm Turnbull’s center-right government.
The ruling coalition, facing sustained political pressure from the center-left Labor party and the far-right nationalist One Nation party, is attempting to reach out to blue-collar workers, who feel left behind by globalization and economic disruption.
It marks a clear break from Turnbull’s previous enthusiastic declarations that “there has never been a more exciting time to be an Australian.”
Treasurer Scott Morrison said as much on Tuesday evening as he began his annual economic address to parliament in Canberra.
“Many remain frustrated at not getting ahead,” he said. “This is especially true in areas where technological change, globalization and the end of the mining investment boom has had a significant impact.”
It had been a while, Morrison added, “since most hardworking Australians have had a decent pay rise” and this had “put real pressure on Australians and on their families.”
The comments set the scene for a suite of measures that targeted regular tabloid media bogeymen such as bank bosses, foreign investors and welfare recipients.
At the same time, however, the government took a political risk and revealed it would increase income taxes to help fund disability services.
Foreign investors in the frame
The Property Council of Australia, which represents developers, said it was disappointed the government had adopted “a range of measures aimed at punishing foreign investors.”
“These seem designed to provide the government with a few good headlines, but these measures will do nothing to improve housing affordability and potentially send a message about Australia’s openness to investment,” Ken Morrison, the council’s chief executive, said.
“The purpose of these charges is to perpetuate the myth that foreigners are driving up the price of housing.”
The measures include a levy of A$5,000 (US$3,700) for foreign investors who fail to either occupy or lease property for at least six months each year – a so-called “ghost house tax” that will raise A$16 million over the four-year budget cycle.
Separately, the government expects to raise a more substantial sum of A$581 million by changing capital gains tax arrangements for foreign investors.
The budget also foreshadows a ban on developers selling more than 50% of new developments to foreign investors.
Brendan Coates, a fellow at the Grattan Institute and former Treasury official, said while some developers currently obtained pre-approval to sell 100% of a new development to foreigners, the share actually sold to this group was typically less.
“Changes that will see temporary and foreign residents denied access to the capital gains tax exemption for their main residence, among other changes to capital gains tax rules for foreigners, may have more of an impact on foreign investors’ appetite for Australian property,” Coates said in an email.
However, he added, “other comparable destinations for foreign investors seeking exposure to housing, such as Canada, have also seen increased taxes on foreign investors.”
With foreign investors owning only about 2% of the value of residential stock in Australia, the changes would not do much to improve housing affordability, Coates said.
The latest measures are part of a package pitched at easing housing affordability troubles that are especially pronounced in the big cities of Sydney and Melbourne.
Other elements include tax concessions for people saving money for their first home and a new A$1 billion housing infrastructure facility to help local governments smooth the way for developments.
The government knows that housing costs are a top-of-mind issue for many Australians; so is the conduct of the big banks, with a string of scandals over the last few years denting people’s confidence in the sector.
While it is still resisting calls for a royal commission into the banking sector, the government has promised a new authority to handle disputes and complaints about financial institutions.
Senior banking bosses will also have face a new “executive accountability regime” with breaches potentially causing them to lose bonuses and be disqualified from holding top positions.
And the five biggest banks face a new levy to raise A$6.2 billion over four years, despite the Coalition’s opposition to the previous Labor government’s proposed “deposit tax.”
Morrison, the treasurer, argued a major difference was that customer deposits of less than A$250,000 would be excluded from the banks’ assessed liabilities. He said the measure was “fair” and he urged the banks not to follow through on threats to pass the cost on to customers.
“Don’t do it,” Morrison said while addressing the National Press Club in Canberra on Wednesday. “They already don’t like you very much … prove them wrong on this occasion.”
But banks have warned the cost will ultimately be borne by some combination of customers, shareholders and employees. The Australian Bankers’ Association said the tax would hurt investment and could have unintended consequences.
“It is naïve and misguided and has already sent the wrong signals to global financial markets about the strength and stability of our banking sector,” said the association’s chief executive, Anna Bligh, who is also a former Labor premier of Queensland.
The budget comes against the backdrop of Australia enjoying its 26th year of consecutive economic growth, much of which was fueled by the mining sector, although that investment boom has been winding down. (Mining business investment is predicted to decline by 21% this financial year, while non-mining business investment is to rise by 1.5%.)
In recent years, wages growth has been at its slowest in decades, but is tipped to pick up in each of the next four years, while unemployment will decline from 5.75% now to 5.25% by the early 2020s.
The budget assumes GDP growth will rebound from 1.75% in the 2016-17 financial year, when the economy was battered by severe weather events, to 2.75% next financial year, before stabilizing at 3%.
Turnbull still aims to cut the corporate tax rate, citing the need to spur growth, but faces a struggle in the upper house where his party does not command a majority in its own right.
While resource exports continue to underpin growth in outbound trade, the budget document says, “strong demand from Asia for Australia’s tourism and education services continues to drive rapid growth in services exports.”
But the budget is not expected to return to surplus until at least the early 2020s; the deficit will shrink from 2.1% of GDP in the 2016-17 financial year to 1.6% the following year.
The fairness test
While the long-awaited surplus remains in the distance, the government has gone out of its way to present budget as “fair.” This is because it is still trying to undo the political damage of the Coalition government’s first budget in 2014, which heavily cut health and education spending and was shown to have a disproportionate impact on low- and middle-income earners.
The misjudgment of the public mood helped bring down the then prime minister Tony Abbott, who never recovered his standing in the polls and was ultimately replaced by Turnbull after their political party voted to change its leadership in 2015.
This year’s economic statement finally scraps many of the so-called “zombie” cuts that were politically dead, but lingered around and remained factored into the budget bottom line.
The new plan locks in higher health and education spending, albeit at a lower level than Labor pledged.
Some of the party’s conservative political base are dismayed that government receipts – a measure of revenue that includes the tax take – will rise from 23.2% of GDP in the 2016-17 financial year to 25.4% in 2020-21.
The tax increases include a half-a-percentage-point lift in the Medicare levy – effectively an increase in personal income tax for all but the lowest paid workers – to raise A$8.2 billion over the budget cycle.
This money will be spent on the National Disability Insurance Scheme, a landmark plan initiated by the previous government that has yet to be fully implemented.
“The budget marks a departure from the recent past for the Coalition government in explicitly embracing tax increases,” Coates said, while noting a lack of progress in reaching the ever-receding surplus goal.
Morrison, in his appeal to under-pressure families, tried to inject a note of optimism: “There is clearly the potential for better days ahead.”