Shane Oliver: Will Budget go far enough on housing and productivity?

Glenn Freeman

Livewire Markets

You can be forgiven for thinking the content of this evening's yet-to-be-announced Federal Budget already feels like yesterday's news. (That's the 24/7 social-media-driven news cycle for you.) Still, you can never be sure of everything that Josh Frydenberg will conjure. And as AMP Capital chief economist Shane Oliver told me: "There will probably still be a few rabbits out of the hat.” 

Widely tipped as the most important Budget in more than a decade (save for last year's COVID budget), it’s expected to chart Australia’s course out of the pandemic down-turn. 

And while Frydenberg has emphasised it won’t be a “spendathon,” it’s clearly not going to be austere, either.

“The budget needs ongoing economic support for the recovery because parts of the economy are still lagging, particularly those that are travel and border-related – and they’re not going to reopen until sometime next year,” says AMP Capital’s Oliver.

Treasury’s plan to commit $4 billion to infrastructure spending is already in the public domain, part of the broader push to get the unemployment rate below 5%.

Spending commitments for aged care, childcare and women’s health have also been “pre-announced.” These include:

  • A $17 billion aged care package, which the government describes as “once in a generation investment” in the sector.
  • $1.7 billion investment in childcare, targeted to low- and middle-income families, with measures expected to come into effect from mid-2022.
  • a $354 million women’s health package, including funding for cervical and breast screening, mental health and services for new and expectant parents.

“The debate is whether we’re going to see enough on those fronts,” says Oliver.

“But it looks like we’re moving in the right direction, particularly in terms of avoiding fiscal austerity and maintaining a focus on ongoing stimulus.”

But Oliver says the bigger issue is whether the government is doing enough to boost longer-term productivity growth: “You could argue that there’s still a fair way to go on that front.”

In the following Wire, I spoke to AMP Capital chief economist Shane Oliver and Fidelity International's Australian head of retirement income Richard Dinham. 

Chronic problems in housing

Another issue that will be addressed in this Budget, as it has in most of them over recent years, is housing affordability.

One of the pre-announced measures is the extension of the government’s “downsizing” scheme, to encourage older Australians to move out of larger houses. 

First introduced in the 2019-20 Budget, this was initially open to those aged 65 years and older, but now eligibility will start from 60 years of age.

“It’ll be interesting to see if this gets much more interest because so far only 22,000 Australians have taken it up, with between 5,000 and 10,000 homes downsized,” says Oliver.

From another angle, single-parent families (most of which are headed up by women) are also being afforded access to home loans with deposits as small as 2%.

“The problem is, as people start to take up these schemes en masse, it does have the effect of pushing property prices up. When you provide support to one group…it has the effect of increasing demand relative to supply,” Oliver says.

“But the fundamental underlying problem is a lack of supply relative to very strong demand, and we really need to solve that. There’s some fundamental problem we’re not really addressing.”

Oliver believes the tax system surrounding housing remains skewed in favour of property investors: “I think the biggest issue is capital gains tax."

New Zealand introduced radical reforms in recent years to tackle housing affordability, removing negative gearing entirely and tightening lending standards for property investor borrowers. But there seems little chance similar changes could be implemented in Australia.

“Perhaps some of those types of things here would help, but we had an election on it in 2019 and it was soundly rejected,” says Oliver.

Retirement income and superannuation

One of the biggest proposed changes to Australia’s mainstream superannuation system in decades, lifting the Superannuation Guarantee contribution rate to 12% from 9.5% currently, had seemed at risk last year.

But Fidelity International's Australian head of retirement income Richard Dinham believes we’ve seen “an about-face on that” in the last few weeks. There had been growing suggestions the current level was sufficient.

“The Retirement Income Review that was issued in November seemed to be strongly hinting there was no need to increase super beyond 9.5%, but the last two or three weeks I think maybe it’s now become politically too hard to once again freeze those legislated increases.”

“It was done of course five or six years ago after increases were first legislated around eight or nine years ago … to then put them on ice again would’ve been difficult, and there’s been a lot of debate over the last 12 months.

“But I think the weight of the argument is too strong, and we’ll see SG rise to 10% in July as scheduled, and the increases of half a per cent per annum each year beyond that, up to 12% by 2025.”

Early access to super

For many Australians, this time last year was quite a desperate time in the face of company closures and job cuts amid the uncertainty of the pandemic. It was at this time that the government opened early access to preserved superannuation benefits, up to $10,000 before 1 July 2020 and the same amount in the next financial year.

“In terms of the Budget, we might see some measures to encourage those people who took money out to try and top those balances back up,” says Dinham.

“There may be some form of incentivisation around that, possibly in the form of a salary sacrifice scheme or some other short-term measure.”

Fixing Pension eligibility

Dinham also suggests the time may be ripe for a change to the Aged Pension deeming rates, which have long been a source of angst for Australian retirees. These rates underpin the pension eligibility test, and there is a broad view that the bar is currently set too high.

“There’s quite a vocal movement which suggests that those rates are too high, so you’re deemed to have earned quite a bit more income than you’ve realistically achieved,” he says. This is exacerbated by the low-interest rate environment, with term deposit rates at historic lows of around 50 basis points over one or two-year terms.

“Your deeming rate is well above that, so you’re deemed to have earned quite a bit more, and that’s quite a source of angst for retirees, so you could legitimately argue that deeming rates should be lower so it more accurately reflects what retirees are looking for.

“There are calls that rather than it being government-controlled, there should be some type of independent body that determines what these deeming rates are so that the process is more equitable and not a political tool.”

What’s in it for women?

Though details are sparse, there has been wide speculation this Budget will see the government attempt to unwind some of the negative sentiment surrounding its treatment of women. Several scandals have unfolded in recent months, including Brittany Higgins’ rape allegations and the sacking of Christine Holgate from Australia Post.

Alongside the $354 million women’s health package mentioned earlier, we may see measures such as super contributions alongside existing taxpayer-funded parental leave payments.

“It’s talked about, but it’s politically quite difficult. I would suggest that rather than push something down the pipe, there may be a broader consultation,” Dinham says.

“We might get a consultation to look at how to address these problems better, to get feedback from the industry.”

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Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has around 10 years’ experience in financial services writing and editing, most recently with Morningstar Australia. Glenn’s journalistic experience also spans broader areas of business...

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