In Uncertain Global Times, Abolishing Negative Gearing Is An Act of Lunacy

The shocking news of Britain’s vote to exit the EU has thrown the global economy into uncertainty, with currency and financial markets around the world in meltdown. It’s now more important than ever that Australia’s economy does not suffer any radical shocks.

The property industry is Australia’s largest and also its largest employer: the Property Council of Australia estimates the industry employs one in four Australians. If it is to be adversely affected by wholesale changes – the effects of which can’t be fully predicted or anticipated – then every Australian will suffer, either directly or indirectly.

SQM Research has predicted a fall in the number of residential property sales in the first year following the abolition of negative gearing of between 17%-21%, which will result in rising unemployment and in some cases, business closures.

It gets worse, though. If negative gearing is heavily restricted and capital gains tax discounts slashed in-line with the policy from the ALP, BIS Shrapnel estimates some $19bn will be slashed from Australia’s GDP every year: this money isn’t the profits made by “rich” investors, but consumer spending that flows from property investment, employment, construction and real estate activity that washes through the whole economy.

The recent SQM Research predictions are even more sobering – valuing the property market at $5.6tn, their worst case scenario of property price falls will see $900bn stripped from our economy over four years.

Ironically, Labor’s estimated “savings” to the budget are said to be roughly $5bn, and aren’t really savings at all – if you read the fine print of the Labor policy, any losses that would otherwise be negatively geared will still be able to be claimed as tax deductions, just not against wage income.

These are the “savings” to the federal budget that will never be realised – but SQM Research has also forecast a hit of between $3.1bn to $3.8bn to state budgets in lost stamp duty. This money will have to be made up somewhere else, either by more taxes or less Government spending.

When you weigh up all the likely outcomes – no  improvement in affordability for first home buyers, no protection for existing property owners, rising rents, falling house prices and a contracting economy – this policy just doesn’t make sense.