Why did Paul Keating bring back negative gearing?

Paul Keating was a peerless Treasurer, a master of inventive invective, and not at all modest when it came to reminding us of his many achievements. Indeed at a Christmas Dinner Press Gallery in 1990 he described himself as the Placido Domingo of Australian politicians, because he was “sometimes great, and sometimes not great, but always good”.

His strength and success as Treasurer stemmed from an uncompromising pragmatism, a willingness to innovate, and to manipulate the many economic levers available to him to achieve his desired results. In mid-1985 he terminated the negative gearing of investment property, only to re-instate it two years later in August 1987.

Labor has now revisited the issue of negative gearing  both to increase revenue, and coincidentally to eliminate what they see as a tax rort for the affluent.  Before accepting this argument, voters should ask themselves, “Why should Australia return to a policy which Labor’s ablest Treasurer discarded nearly 30 years ago after trialing it for two years”

The high profile economists who now advocate again stopping negative gearing, neatly sidestep this question by posing another. Did abolishing negative gearing between 1985-7 push up rents?

http://www.smh.com.au/federal-politics/political-news/cabinet-papers-198687-negative-gearing-almost-axed-20131228-3011r.html

From the above article in the Sydney Morning Herald Dec 28, 2013 by Damien Murphy based on the recently released Cabinet Papers for 1986-7:

  • the objective of the negative gearing restrictions when introduced was to reduce tax sheltering on rental properties, rather than to raise revenue..
  • the changes to rents, vacancies, and property values at the time were heavily influenced by the economic stringencies of the day with high current account debt, high interest rates, low Aussie Dollar, and a booming overheated stock-market, soon to crash (Oct 1987)
  • in 1986 Keating acknowledged that tax reforms and other measures had massively increased business costs
  • it was the tight Sydney rental market with declining investment in rental property, rising rentals, and an imminent election in NSW, that motivated Keating to restore negative gearing in August 1987.

One cannot argue that the overall increase  in rentals of 25%  between 1985-87, before allowing for inflation, was due to the removal of negative gearing per-se. It was only in Sydney and in Perth that nominal rental prices rose, while in other states they were static.

Rental prices reflect increases in property costs and are particularly sensitive to interest rate movements. Rental rates are also dependent on vacancy levels, on the underlying supply and demand. Negative gearing is a factor only in as much as it affects the supply and demand equation. The effects of abolishing negative gearing  and diminishing the capital gain concession, will not be immediately apparent. It will be in the years to come, when new investors will be less inclined to take on the risks and burdens of property investment.

No economist can predict how the property market will respond to Labor’s proposed changes. The outcomes will be influenced by the interaction of other taxation initiatives, and the prevailing economic climate. It seems to me that a taxation policy that favours new house construction over existing properties is particularly unwise when the present market is already softening, and sellers are already finding it difficult to attract buyers when they need to sell.

Another dormant anxiety for homeowners is their ability to service their mortgage in the face of unexpected interest rate rises.

It is not too late for Labor to re-think its policy direction before a federal election. Many will not agree that Mums and Dads have nothing to fear in the proposed changes.

 

 

 

About Kenneth Robson

I studied at Adelaide Boys' High School, and the University of Adelaide, Medical School. graduating in 1961. My field of specialisation was Plastic and Reconstructive Surgery. Prior to establishing my practice in Adelaide, I spent 5 years working in India, and Papua-New Guinea, in the field of reconstructive surgery for leprosy. In retirement I joined the Australian Technical Analyst Association and passed the two examinations for a Diploma inTechnical Analysis, and the designation Certified Financial Technician (CFTe) by the International Federation of Technical Analysts.
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