Federal Budget

EXPERT INSIGHT

Despite overwhelmingly endorsing the general stance of the 2021 budget, only a few of the 56 leading economists surveyed by the Economic Society of Australia and The Conversation are prepared to give it top marks.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg&rsquo;s objective of <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/budget-speech-2021-22">securing Australia&rsquo;s economic recovery and building for the future</a>, only three of the 56 economists surveyed gave it an &lsquo;A&rsquo;.

But a very large 41% awarded it either an A or a B, up from <a href="https://theconversation.com/could-do-better-top-australian-economists-award-the-budget-a-cautious-pass-148624">37%</a> in last year&rsquo;s October COVID budget.

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The economists chosen to take part in the Economic Society of Australia survey have been recognised by their peers as Australia&rsquo;s leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among them are a former head of Australia&rsquo;s prime minister&rsquo;s department, a former member of the Reserve Bank board, a former OECD director and two former frontbenchers, one from Labor and one from the Coalition.

Of the panel members who commented on the historic stance of the budget &mdash; expanding the size of the deficit <a href="https://theconversation.com/frydenberg-spends-the-bounty-to-drive-unemployment-to-new-lows-159229">beyond what it would have been</a> in order to drive down unemployment &mdash; all but three offered enthusiastic endorsement.

Emeritus Professor Sue Richardson of the University of Adelaide commended the government for at last turning its back on a &ldquo;debt and deficit&rdquo; mantra, that was &ldquo;never justified&rdquo;.

Professor Richard Holden praised the &ldquo;watershed&rdquo;. In due course there should be increased attention paid to the structure and quality of spending, but for now we should applaud the &ldquo;Frydenberg Pivot&rdquo;.

Saul Eslake said the strategy of providing further stimulus to push unemployment down to levels <a href="https://theconversation.com/josh-frydenberg-has-the-opportunity-to-transform-australia-permanently-lowering-unemployment-156175">not seen consistently since the first half of the 1970s</a> was the right one. It meant the Reserve Bank and the treasury would no longer be working at &ldquo;cross purposes&rdquo; as they had been for most of the past two decades.

But Eslake said the budget fell short in the A$20 billion it devoted to tax concessions for small business in the mistaken and unfounded belief it is &ldquo;the engine room of the economy&rdquo; and in housing measures that failed to heed warnings from history about the risks of ultra-high loan-to-valuation ratios.

Rebecca Cassells of the Bankwest Curtin Economics Centre said the claim that 60,000 jobs would flow from extending the temporary loss carry back and full expensing tax concessions was &ldquo;a stretch,&rdquo; with the connection quite tenuous.

Bucks, but not the biggest bang

Consultant Nicki Hutley said a bigger boost to the JobSeeker unemployment payment would have achieved much more than the $7.8 billion one-year extension of the &ldquo;<a href="https://theconversation.com/the-low-and-middle-income-tax-offset-has-been-extended-yet-again-it-delivers-help-neither-when-nor-where-its-needed-160772">lamington</a>&rdquo; low and middle income tax offset.

Economic modeller Janine Dixon said while spending more to get more people into work was the &ldquo;right setting for the times,&rdquo; Australia had to ensure its workforce was ready to supply the extra aged care and child care and disability services it had funded by delivering the right training, especially in the absence of migration, which has traditionally been used to address workforce shortages.

Labour market specialist Elisabetta Magnani said measures to boost wages in the caring occupations could have achieved the double bonus of drawing more workers into those occupations and shrinking the gender pay gap, given that more than 80% of the workers in residential aged care are female.

Little for net-zero

Michael Keating, a former head of the prime minister&rsquo;s department, said restoring high wage growth would require big investments in education and training, which sits oddly with the cuts in funding for universities. The extra funding for apprentices and trainees only makes up for past cuts.

Professor Gigi Foster said the $1.7 billion spent on childcare subsidies was only &ldquo;surface-level fiddling with the sticker price&rdquo;.

&ldquo;Where is the supply-side intervention required to make childcare services sustainably accessible and of high quality?&rdquo; she asked. &ldquo;Childcare should be viewed as social infrastructure. Instead, when we heard infrastructure, it was mainly code for transportation.&rdquo;

Margaret Nowak of Curtin University said a budget that really &ldquo;built for the future&rdquo; would not have focused on the &ldquo;infrastructure of the past&rdquo;. Professor Richardson lamented that most of the infrastructure spending was on traditional &ldquo;roads and ports&rdquo; when the future was net-zero emissions.

&ldquo;There is little in the budget that supports this transformation,&rdquo; she said. &ldquo;It is an extraordinary lost opportunity.

Nicki Hutley said retooling the economy for zero emissions would have brought forth &quot;more jobs, higher wages, more growth and private sector co-investment&rdquo;.

Some concern about debt

Former OECD director Adrian Blundell-Wignall said a much-greater investment in vaccinations would have helped &ldquo;get the economy back to work and the borders opened sooner which, in turn, would have saved unemployment benefits, tourism, aviation support and the need for the extension of temporary measures&rdquo;.

And he was concerned that a jump in US inflation might cause international interest rates to rise faster than expected, forcing Australia to cut its projected budget deficits in order to stabilise net debt.

Former International Monetary Fund economist Tony Makin, a <a href="https://research.treasury.gov.au/external-paper/the-effectiveness-of-federal-fiscal-policy-a-review">critic</a> of government spending during the global financial crisis, described the budget spending as a &ldquo;knee-jerk primitive Keynesian reaction&rdquo; to the COVID recession.

Unease about going into debt to keep and create jobs aside (and very few of the economists surveyed shared Makin&rsquo;s unease) the criticisms of the economists surveyed relate to execution and details. If Frydenberg had been judged on his approach, most would have given him an A.

<a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, Visiting Fellow, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a>

This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/great-approach-weak-execution-economists-decline-to-give-budget-top-marks-161347">original article</a>.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg’s objective of securing Australia’s economic recovery and building for the future, only three of the 56 economists surveyed gave it an A

jordan_55689

Economists decline to give budget top marks

There was one surprise for the housing sector in tonight's federal budget, and three foreshadowed housing measures were made official.

The federal treasurer Josh Frydenberg advised the parliament in his budget speech that new house starts were now at the highest level in 20 years. 

"New loans to first home buyers reached their highest level in nearly 12 years.

"HomeBuilder has been a huge success and our $2 billion investment in affordable housing is bringing on more supply," he said.

"Our housing measures go even further," he added.

"Helping another 10,000 first home buyers build a new home with a 5 per cent deposit.

"Supporting 10,000 single parents to purchase a home with a 2 per cent deposit. 

"Increasing the amount that can be released under the First Home Super Saver Scheme from $30,000 to $50,000.

"Under the Coalition, home ownership will always be supported," he noted.

The budget effectively continued the First Home Low Deposit Scheme for new homes and off the plan acquistions, and tweaked the First Home Super Saver Scheme, and introduced a new scheme for single parents.

The 10,000 Family Home Guarantees will be made available for single parents over the next four financial years.

The Family Home Guarantee will be available regardless of whether that single parent is a first home buyer or previous owner-occupier. 

Applicants have an annual taxable income of no more than $125,000. 

A fact sheet with further information on eligibility criteria will be available on the NHFIC’s website next week.

The surprise announcement was the government will lower the minimum age for the downsizer super contribution from 65 to 60.

“This will allow Australians nearing retirement to make a one-off post-tax contribution of up to $300,000 per person (or $600,000 per couple) when they sell their family home,” the budget documents advised.

“This improves the flexibility for Australians to contribute to their superannuation savings, and may encourage people to downsize sooner and increase the supply of family homes.”

The budgetary measure will be argued as positive for first home buyers and next home buyers by freeing up established housing stock for younger property buyers.

There was a warning after the budget announcement from the Property Council on the long-term economic consequences of idling population growth.
 
"Budget assumptions anticipate that Australia’s population growth will be limited to only 0.2 per cent over in the next financial year. Net overseas migration is forecast at -77,000 in 2021/22, with a return to normal levels of migration not expected until 2024/25," the PCA noted.
 
“The Budget has revealed that our restricted border is the biggest constraint on our economy.
 
“Our lack of growth is going to catch up with us with economic and employment growth expectations slowing over the forward estimates.
 
“Population growth is not an optional extra for Australia’s economy," the PCA said.

The budget also made $15 billion in additional infrastructure commitments including for:

a) the North‑South Corridor in South Australia
b) the Great Western Highway and Newcastle airport in New South Wales
c) the new Melbourne Intermodal Terminal in Victoria 
d) the Bruce Highway in Queensland
e) METRONET in Western Australia
f) highway upgrades in the Northern Territory
g) Light Rail Stage 2A in the Australian Capital Territory and
h) Midland Highway upgrades in Tasmania.

Josh Frydenberg noted that "when construction work began to dry up, HomeBuilder came to the rescue."



jchancellor

Federal Budget formalises three mooted housing measures

EXPERT INSIGHT

Treasurer Josh Frydenberg calls this a &ldquo;pandemic budget&rdquo; &ndash; one to sustain the economy in times that are still uncertain &ndash; but it also has a substantial element of an election budget.

That&rsquo;s not to suggest Prime Minister Scott Morrison will rush to the polls this year. But given the election has to be held by May 21, 2022, this is likely to be the last budget of the cycle. Another could be squeezed in, as in 2019, but it would have to be brought forward from the normal time.

Last year the treasurer said budget repair and debt repayment &ndash; otherwise known as the hard and unpleasant decisions &ndash; wouldn&rsquo;t be undertaken before unemployment was &ldquo;comfortably&rdquo; below 6%.

Now unemployment is 5.6% (the March figure) but Frydenberg has shifted the goal posts, so the emphasis remains on recovery, with more difficult reckonings a way off &ndash; beyond the election.

Given a grim COVID picture internationally and a long way to go with the vaccine program locally, that is sound &ndash; and also politically convenient.

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In this budget, the government&rsquo;s policy approach is firmly aligned with that of the Reserve Bank, with Frydenberg embracing the bank&rsquo;s objective of pushing unemployment well below pre-pandemic levels, which means to a rate with a 4 in front of it.

Two central spending areas in the budget have been, in effect, imposed on the government.

It had to respond to the damning findings of the aged care royal commission. The fact most Australian COVID deaths occurred in aged care underlined how unfit for purpose the system is. Frydenberg told the ABC there will be more than $10 billion spending on aged care over the forward estimates.

The budget&rsquo;s &ldquo;women&rsquo;s&rdquo; focus &mdash; a sharp contrast to last year &mdash; has drivers that go beyond the urgent need to do more to combat violence against women, and other imperatives.

Morrison&rsquo;s &ldquo;women problem&rdquo;, which exploded with the demonstrations following the high-profile allegations of rape, most obviously increased the attention on women in this budget, which will include a women&rsquo;s statement with initiatives on health, safety, and economic security.

Also, Labor&rsquo;s decision to make childcare one of its main policy pitches, promising a big spend, reinforced economic considerations pushing the government to produce its own childcare policy (which doesn&rsquo;t start until July 2022).

Even in the middle of the pandemic last year, few would have thought that by now we&rsquo;d still have no firm idea when our international borders will re-open.

Morrison is cautious about it, and judges that&rsquo;s in line with the thinking of the Australians public at the moment. He can read those state electoral results as well as anyone &mdash; he knows people put health safety above all else.

&ldquo;International borders will only open when it is safe to do so&rdquo;, he said on Facebook at the weekend. &ldquo;Australians are living like in few countries around the world today.&rdquo;

On the other hand, the pressure for students to come, migration to resume and people to be allowed to travel must build sooner or later.

The budget&rsquo;s assumptions will put the reopening in 2022, Frydenberg told the ABC at the weekend

Economist Saul Eslake says while keeping the country closed to the outside world is obviously not sustainable in the long run, it has, in a perverse way, some short run plusses for the government&rsquo;s economic objectives.

&ldquo;It&rsquo;s very easy to get unemployment down when the border is closed. You only need to create 5000 new jobs a month to prevent unemployment rising.

&quot;Previously [with migrants coming] you needed 16,000 new jobs a month. Currently we&rsquo;re creating 60,000 a month,&rdquo; Eslake says.

Migrants stimulate growth. But so does having Australians unable to travel overseas, Eslake says. They can only spend domestically &ndash; or save &ndash; the $55 billion they would normally be spending abroad. They appear to be spending quite a deal of it on things like home equipment, furnishings, renovations, cars, and even clothing.

While fiscal repair is formally delayed, the budget will show it is gradually, to a degree, repairing itself.

The quicker-than-expected bounce back of the labour market, which reduces welfare costs and boosts tax revenue, and the similar rebound in corporate profits, help the bottom line. Frydenberg says that, despite JobKeeper coming to an end, 105,000 people came off income support in April. High iron ore prices are also a godsend to revenue.

Chris Richardson, from Deloitte Access Economics, has forecast a deficit for this financial year of about $167 billion, compared with the December budget update figure of $198 billion. For 2021-22 , the Deloitte forecast is a deficit of about $87 billion compared with the update&rsquo;s forecast of $108 billion.

Still, a balanced budget will be some years off, Richardson says.

He gives four reasons: substantial structural spending on aged care, mental health, childcare, disability and the like; low wage and price inflation (inflation helps budgets); missing migrants; and interest payments on debt (helped by low interest rates but still significant).

On what we know, the budget will be safe rather than adventurous. And while budgets can always unexpectedly trip over their own feet, and inevitably have plenty of critics, this will be the sort of benign one that doesn&rsquo;t go out of its way to hurt or offend voters.<img alt="The Conversation" height="1" hub="" o3us6t2oy="" src="https://counter.theconversation.com/content/160594/count.gif?distributor=republish-lightbox-basic" width="1" />

<a href="https://theconversation.com/profiles/michelle-grattan-20316">Michelle Grattan</a>, Professorial Fellow, <a href="https://theconversation.com/institutions/university-of-canberra-865">University of Canberra</a>

This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/view-from-the-hill-a-budget-for-a-pandemic-with-next-years-election-in-mind-160594">original article</a>.

Treasurer Josh Frydenberg calls this a “pandemic budget” – one to sustain the economy in times that are still uncertain – but it also has a substantial element of an election budget

A budget for a pandemic, with next year's election in mind

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GUEST OBSERVER
For active investors, the Budget comes with positive changes such as in super and home ownership but many are negative such as targeted measures against the banks and sharp cutbacks on property tax breaks. Everyone will be affected by the recently delivered Budget and here are some key features that affect properties:
The government has constantly been pressured to scrap borrowing in super but it has not reversed its position and SMSF operators can still borrow. However, there is a new super cap of $1.6 million and borrowed funds will be computed based on the $1.6 million cap.
Starting 1st July 2017, first-home buyers may salary sacrifice up to $15,000 or a total of $30,000 a year into their superannuation account at a concessional tax rate. They will be allowed to withdraw the cash to use as a deposit on their first home. This measure allows super to be accessed early.
Those who will sell a property investment will be subject to CGT at a marginal tax rate but those who hold a property for more than a year will get a discount of 50 percent on their CGT tax assessment. The negative gearing tax rate remained the same and investors can claim expenses and interest for the cost of an investment property against their tax bill. One advantage of higher interest rates among commercial banks is that the amount that can be deducted in negative gearing increases.
Downsizers may be able to make post-tax contribution to superannuation of up to $300,000 from the proceeds of selling their home, even if they exceed the $1.6 million cap. Investors will no longer be able to claim tax deductions for travel expenses related to inspection, maintenance or rent collection of a property. Many investors have properties a long distance away from their home and they incur travel expenses when they visit their investments.
This change may upset many investors because an outright ban on claims for travel expenses is an absolute loss. It used to have no limit and the allowance may have been abused because the government expects to collect $540 million from the scrapped tax allowance starting 1st of July.
Depreciation deductions may only be claimed on personally purchased items for an investment property, excluding plant and equipment which was included with the purchase. These measures will not please many investors but the truth is, it is to their advantage that negative gearing remained untouched because any changes related to this could have been more dramatic. Investors are relieved that the changes have not gone further as well.
Lastly, foreign property investors will lose the CGT exemption on the sale of their main residence and are now required to report all sales over $750,000 or have a withholding tax applied upon sale. There will also be a new annual levy of at least $5,000 for properties left vacant for more than six months a year.
PS.
Disallowing deductions for travel expenses and depreciating assets not directly bought by the investor may be the thin edge of the wedge and increasing deductions for work-related expenses can be quite worrisome. This change is controversial and some people suggest that if it is a step towards a slow-down of deductions for Australian taxpayers, debate has to begin now.
Ed Chan is the founding partner of <a href="https://www.chan-naylor.com.au/" target="_blank">Chan &amp; Naylor</a>.
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jchancellor-FAypfDUnLy

Federal Budget 2017 features that affect Australia's real estate: Ed Chan

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GUEST OBSERVER
The 2017-18 Budget has a welcome focus on housing affordability and infrastructure.
Subdued wages growth is keeping revenue collection down contributing to a slight deterioration in near term deficit projections (a deficit of $29.4bn for 2017-18) but a return to surplus is still projected for 2020-21. 
This year’s Budget should be positive for confidence.
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.24.06%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.24.06%20AM.png" alt="">
The impact on the RBA and the shares is likely minimal. 
The 2017-18 Budget has much to make it popular. In fact, the goodies make it almost feel like a pre-election rather than a post-election budget. The transformation from the austerity to end “the age of entitlement” of the 2014 budget to the “fairness, security and opportunity” of this Budget has been profound.
Key budget measures
As always, most of the key new measures were pre-announced or leaked. On the spending front, the goodies include:
A further ramp up in infrastructure spending (by an additional $20bn over the forward years) including Western Sydney Airport, inland rail &amp; various road projects.
Extending the small business $20,000 asset write-off scheme and working with states to remove red-tape.
A housing package: first home buyers can save via their super for a deposit out of pre-tax income (up $30,000), retirees who downsize get exemptions from super limits, more stringent rules on foreign investors (eg, vacant home tax), encouraging the supply of low cost community housing and rewarding states for boosting supply.
Increased spending on health through committing to fully fund the National Disability Insurance Scheme and reintroducing Medicare rebate indexation. 
Removal of the “zombie” welfare cuts.
$18.6bn over ten years in extra school funding (Gonski 2.0). This has been offset by various savings, including:
Increased university fees.
An increase in the Medicare levy by 0.5 percent from 2019.
A 0.6 percent levy on the major banks with liabilities over $100bn.
More measures to curtail the cash economy and improve the integrity of the tax and welfare system.
Little change to the deficit outlook
Despite a temporary boost to corporate tax revenue from a bounce in the iron ore price, extra spending and soft personal tax collections on the back of weak wages growth means the near-term budget deficit outlook is a bit worse than MYEFO and $2.3bn worse over four years compared to last year’s budget.
The return to surplus has been maintained for 2020-21 and looks better at 0.4 percent of GDP. After a 2016-17 budget deficit of $37.6bn, the deficit for 2017-18 is forecast to be $29.4bn (1.6 percent of GDP). 
With the Government offsetting all new spending with savings, the actual policy impact on the economy this year and next is trivial (see the red figures in the table above). However, the projected decline in the budget deficit in the years ahead means that fiscal policy will still be acting as drag on growth. 
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.25.02%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.25.02%20AM.png" alt="">
Economic assumptions
The major economic assumptions underpinning the Budget are shown in the next table. Most of the assumptions look reasonable, except that the assumption that wages growth rises to 3.75 percent over the next four years looks too optimistic given unemployment is not expected to fall much. The iron ore price is still expected to average $US55/tonne over the next four years. This looks reasonable albeit the recent volatility in the iron ore price highlights the uncertainty around it. 
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.26.08%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.26.08%20AM.png" alt="">
Assessment and risks
The goodies and the focus on fairness in the Budget should provide a bit of a boost to confidence and spending. But the risks around the projected return to surplus remain huge. Australia still has a budget deficit problem.
Government spending surged 25 percent between 2006-07 and 2008-09 to combat the GFC and this has never been unwound. While our net public debt to GDP ratio is low compared to the US, Europe and Japan, comparing ourselves to a bad bunch is dangerous. The Budget is projecting a 12 year run of deficits totalling 27 percent of GDP which swamps the deficits of the 1980s and 1990s.
And this is without the deep recessions of the early 1980s and 1990s! Rather we have achieved this thanks to a combination of ramping up spending on a whole range of things without facing up to how they will be paid for.
Unfortunately after 102 quarters without a recession there is no support for hard-nosed economic reform in Australia and this also applies to reforms to limit spending growth. So we continue to rely inordinately on assuming the best to drive revenue up.
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.27.14%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.27.14%20AM.png" alt="">
 
This is evident in the Budget’s projections for average revenue growth of a whopping 6.7 percent per annum over the next four years. Such optimistic assumptions have disappointed in recent years and the biggest risk now is that wages don’t accelerate as assumed leading to continuing poor personal tax collections.
While the Budget still projects a return to surplus by 2020-21, it remains pretty thin and the budget deficit projections over the next two years actually take us further away from a surplus not closer. The trouble is we don’t have a lot of flexibility to provide stimulus should the economy turn down. While the 2017-18 Budget should help us keep our AAA sovereign rating for now, the risk remains high that we lose it at some point. 
On infrastructure, the Budget has much to commend it. Infrastructure spending can help short term growth, boost long term productivity and can actually “crowd in” private investment. Increased public investment is helping to offset weak private investment (see the next chart) and the infrastructure commitment in the Budget will help ensure this continues. 
In this regard, the move to report a “net operating balance” in this year’s Budget is welcome and there is much merit in focusing debt on capital spending and not recurrent spending. But debt is still debt and there is always the risk some of the infrastructure projects turn out to be white elephants resulting in “good debt” becoming “bad”.
Finally, it’s commendable to see housing affordability being a key part of this Budget. Certainly the measures are to be welcomed, particularly those helping first home buyers, downsizers and measures to boost supply. Getting housing supply up on a sustainable basis is critical so the key is for the Federal Government to follow through with its plan to incentivise states to meet housing supply targets.
Implications for the RBA
While this Budget should provide a boost to confidence (albeit not for university students), ongoing fiscal tightening will act as a mild drag on growth in the years ahead. As such, it’s hard to see major implications for the RBA. In fact recent data on trade and retail sales continues to point to more risk of a rate cut than a rate hike in Australia this year.
<a href="https://www.propertyobserver.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.28.13%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/10/Screen%20Shot%202017-05-10%20at%208.28.13%20AM.png" alt="">
Implications for Australian assets
Cash and term deposits – with interest rates remaining low, returns from cash and bank term deposits will remain low.
Bonds – a major impact on the bond market from the Budget is unlikely. With five year bond yields at 2.2%, it’s hard to see great returns from sovereign bonds over the next few years.
Shares – the potential boost to confidence from this Budget could be a small positive for the Australian share market. Overall, the Budget’s impact is unlikely to be huge. Construction stocks may be beneficiaries and banks losers.
Property – the Budget’s housing affordability measures may have an impact on home prices over time if they incentivize states to ramp up supply, but it’s likely to be marginal in the short term. We continue to expect momentum in the Sydney and Melbourne property markets to slow.
Infrastructure – the ramp up in infrastructure spending should in time provide more opportunities for private investors as many of the resultant assets are ultimately privatised.
The $A – the Budget alone is unlikely to have much impact on the $A. With the iron ore price falling back again, the interest rate differential in favour of Australia continuing to narrow and the $A still too high, the downtrend in the $A is likely to resume.
Concluding comments
The 2017-18 Budget has a sensible focus on housing affordability and infrastructure. The main risks remain around the revenue assumptions and when we will get back to surplus. 
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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After 102 quarters without recession pragmatism and fairness rule in 2017 Budget: Shane Oliver

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GUEST OBSERVER
An estimated 300,000 vacant dwellings across Australia will be unaffected by the Budget’s new ‘ghost house’ tax on foreign investors which will do nothing to increase housing affordability.
QUT property economist Dr Andrea Blake said Australia’s empty housing stock was an overlooked resource in an era of high demand for affordable housing.
Some inner city apartment developments have more foreign investors (20 percent) than domestic owner occupiers (19 percent).
While I welcome a vacant house levy being applied to foreign investors as a mechanism to support other affordable housing initiatives, this new tax will do nothing to help the current issues.
This levy will affect only applications for foreign investment made after 7.30pm on 9 May 2017 rather than the more than quarter of a million dwellings we have going empty.
The $5k per annum tax is unlikely to deter an overseas investor. The only thing it could do is put more money into the pot for other housing initiatives.
Another issue could be determining that an apartment is vacant and ensuring compliance.
“Foreign investment in inner and near city markets has driven supply and pushed real estate prices up while much-needed rental and housing stock from the market goes empty when we have a severe affordable housing shortage.”
Dr Blake said the impact of foreign investment on property values in the inner Brisbane apartment markets had caused much debate.
 “In markets such as Hamilton and West End we have seen a price drop of up to 30 per cent on apartments bought in 2011," she said.
This is because strong foreign investment has created a two-tier market - prices for off-the-plan sales are undoubtedly linked to foreign investment and would not be sustainable at the volume or prices for the domestic market alone.
Consequently the impact has been felt by the second tier of the two-tier market - domestic buyers.
The reasons foreign investors buy in Australia are varied. For some purchasers it is part of a future lifestyle plan and so the apartments are left unoccupied, and, in many cases, not even furnished.
“These apartments still deteriorate and bring down the value of the other apartments in the complex, causing owner occupiers and those who do rent out their properties some distress.”
Andrea Blake is senior lecturer at Queensland University of Technology [QUT] and can be contacted <a href="https://staff.qut.edu.au/staff/blakea/" target="_blank">here</a>.
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'Ghost house' tax won't solve housing affordability: Andrea Blake

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GUEST OBSERVER
Neither the Government nor the Opposition are being bold enough in their actions to address Australia’s housing crisis.
In particular, the Budget measures intended to encourage investment in affordable housing will do little to change the investment decisions of “mum and dad” investors.
Australian’s have a love affair with property, and a penchant for negative gearing.  If the Government, or the Opposition, was clever, they’d use these tendencies to help resolve Australia’s housing crisis. 
The Government needs to appreciate that investing in affordable housing means lower rental income and lower capital growth. It needs to be as financially attractive for someone to invest in affordable housing, as compared to investing in any other residential property.  This is where tax policy can help.
A key reason for introducing the CGT discount was to encourage capital investments.  Modifying how the CGT discount operates will change the way people invest. Increasing the CGT discount is going down the right path, but an increase from 50 per cent to 60 per cent is not enough to change the investment decisions.
Our bold suggestion: increase the CGT discount to 100 per cent for affordable housing held for 10 years or more.  Make the capital gain tax free.  This will move investment in affordable housing from being a marginal investment decision, to being very attractive.
At the same time, consider reducing the CGT discount on other residential properties from 50 per cent to say 40 per cent, or lower.  Or require a property to be held for five years, rather than one year, before the CGT discount applies.  This change would temper investment into residential property, and reduce speculative investment decisions.  It would also help balance the impact on the Budget.
That is an intelligent policy decision. That is bold, and would start to change people’s investment decisions. 
This change would need to be a long term one.  The CGT discount can become like the superannuation rules, and get changed every Budget. That would only serve to undermine investor confidence.  
If the Government can look to be bold in seriously addressing housing affordability with a scalpel rather than a feather approach, it would really start to make a difference.
 
Greg Travers is tax director, William Buck Chartered Accountants and Advisors and can be contacted <a href="https://www.williambuck.com" target="_blank">here</a>.
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It will take a bold approach to fix housing affordability: Greg Travers

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GUEST OBSERVER
The Department of Finance released the February monthly financial statements on March 24, just prior to the Easter holiday period. This note examines the latest data.
Budget improves: In the twelve months to February 2016, the budget deficit stood at $36.1 billion (around 2.2 percent of GDP), down from $44.7 billion in the year to January and the lowest rolling annual deficit in almost two years (since April 2014).
Lower-than-expected spending: The Department of Finance says the underlying deficit for February was $743 million lower than the ‘profile’ forecast and “primarily relates to lower than expected cash payments and net future fund earnings, partially offset by lower than expected cash receipts.”
The monthly Budget figures can provide insights on the broader economy and policy settings. If fiscal settings are tight, the Reserve Bank may allow easier monetary settings.
What does it all mean?
While figures can bounce around from month to month, all analytics suggest that the Federal Budget is on track to meet Government forecasts. Not only are rolling annual aggregates showing improvement, so are the so-called ‘profile’ positions estimated by the Department of Finance.
Revenue remains hard to come by with annual growth rates hovering around 2 percent. Meanwhile growth of expenses or spending is well contained, with expenses barely growing over the year. The Government was projecting a budget deficit near $37 billion and that expectation remains on target.
Looking ahead, if nominal annual growth of the economy continues to hold around 2-3 percent, then the current Government – and the next Government later this year – will find it increasingly difficult to keep spending static and thus chip away at the budget deficit. Aussies want spending maintained on schools, hospitals, defence and public services but at the same time aren’t keen to pay any more in tax. Same for all levels of Government. The hard decisions on tax will become increasingly more difficult the longer that the major parties put off reaching some form of agreement.
GST revenues continue to lift, but for state governments the difficulty – as it is for all businesses – is the absence of inflation to drive revenues.
What do the figures show?
The underlying budget deficit for the twelve months to February 2016 stood at $36.1 billion, down from $44.4 billion in the year to January. This was the lowest rolling annual deficit since April 2014.
Smoothed revenues (twelve months to December) were up 5.9 percent on a year ago, above the average growth of 2.6 percent over the past year. Expenses rose by 0.3 percent over the same period, down on the 1.7 percent growth over the past year.
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<img src="/images/2016/04/6/Screen%20Shot%202016-04-06%20at%202.56.24%20PM.png" alt="" width="726" height="555">
The Department of Finance noted: “The underlying cash balance for the year to 29 February 2016 was a deficit of $38,719 million, compared to the 2015-16 Mid-Year Economic and Fiscal Outlook (MYEFO) profile deficit of $39,462 million. The difference of $743 million primarily relates to lower than expected cash payments and net future fund earnings, partially offset by lower than expected cash receipts.”
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<img src="/images/2016/04/6/Screen%20Shot%202016-04-06%20at%203.03.04%20PM.png" alt="">
In terms of the fiscal balance, the Department of Finance noted: “The fiscal balance for the year to 29 February 2016 was a deficit of $35,292 million, compared to the MYEFO profile deficit of $36,719 million. The difference of $1,427 million primarily relates to lower than expected expenses, partially offset by lower than expected revenue.”
“Revenues: Total revenue was $1,223 million lower than the MYEFO profile, primarily due to lower than expected taxation revenue and dividend income.
Expenses: Total expenses were $2,831 million lower than the MYEFO profile, primarily due to lower than expected supply of goods and services, wages and salaries and grants expenses.”
The Government currently expects an underlying deficit of $37.4 billion for 2015/16 (around 2.3 percent of GDP).
Receipts from the Goods and Services Tax stood at $59.6 billion in the twelve months to February, up 7.0 percent on a year ago but affected by the one extra day in the month. The Government has forecast GST receipts of $59.79 billion for the entire 2015/16 year.
Actual GST receipts for the eight months to February stood at $41.367 billion, above the Budget ‘profile’ of $40.734 billion.
What is the importance of the economic data?
The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current budget position and provides insights into the  effectiveness of fiscal policy.
What are the implications for interest rates and investors?
The Federal Budget is on track to meet forecasts. Spending restraint including low public service wage growth (similar trend in private sector) is driving the improvement. The Federal Government and Opposition parties will eventually have to agree on tax reform to address medium term challenges for the economy.
The Government is showing restraint on spending at present, but this is actually constraining stimulus to the economy.
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<img src="/images/2016/04/6/Screen%20Shot%202016-04-06%20at%203.04.17%20PM.png" alt="" width="731" height="535">
 
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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Federal Budget is on track to meet forecasts: CommSec's Craig James 

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GUEST OBSERVER
As well as restricting supply to an already full rental market, the 50 percent foreign ownership restriction removes some of the competitive advantages overseas developers had over local developers.
Prior to this change coming into effect, overseas developers had a competitive advantage as they had no overseas sales limits whatsoever. Overseas developers using overseas banks could, if they so desired, have 100 percent foreign sales, with 100 pe cent en masse sales occurring overseas.
What Scott Morrison has done is even the playing field between local and overseas developers, with overseas developers now forced to generally work within the same FIRB sales metrics as local developers.
To commence a development, local banks require local developers to presell approximately 70 percent of the apartments in a development and impose a 25 percent Foreign Investment Review Board (FIRB) restriction on these presales. This means local developers require 52 percent local sales prior to construction commencing.
Once the developer has achieved financial close with a local bank, they are free to sell the rest overseas. Meaning, under a 25 per cent FIRB presales limit, local developers using local banks can develop buildings with circa 48 per cent foreign ownership.
Banks are always looking at the FIRB presales limit and whilst many current developments are at 25 percent, there is a more recent bank trend to constrict this further – more in the realm of 15 percent. If this is the case, then locally banked projects can end up with 40 percent foreign ownership.
It is also fair to say that overseas purchasers have settled better than local sales. Many pundits were nervous about large buildings settling this year, yet what we are seeing is that very few overseas purchasers are falling through when it comes to quality developments (just 1-2 percent in fact), even against Australian Prudential Regulation Authority’s (APRA) headwinds of overseas purchaser mortgage finance.
With the 50 percent FIRB restriction placed across the whole market, coupled with APRA’s new powers across non-bank lenders, it means that the metrics by which local and overseas developers, local and overseas banks, and local and overseas non-bank lenders are becoming converged.
As a flow on effect of the overseas sales metrics now being similar, this policy change will result in overseas developers using local banks and non-bank lenders more readily to avoid foreign exchange risk, again levelling the playing field.
Perhaps this new measure may even narrow the gap between what an overseas and local developer can pay for a site, which sets the market and ultimately gets passed onto the (local) consumer.
As an unintended consequence however, this change will further constrict supply to rental markets, thus driving rental and housing prices further out of reach of local first home owners and owner occupiers. It is only state planning ministers that can affect real change by encouraging the supply side of the housing economic supply/demand pendulum.
Andrew Hogan is a managing director of Point Polaris. He can be contacted <a href="https://www.pointpolaris.com.au/" target="_blank">here</a>.
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How will the 50 percent foreign ownership limit affect developers? Andrew Hogan

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GUEST OBSERVER
Two weeks following the budget, the topic of housing affordability is still not waning.
Australia and the world united last week to slam young real estate mogul, Tim Gurner, who claimed young Australians can’t afford to buy property because they are spending “$40 a day on smashed avocados” and “not working”. The story spread like wildfire nationally as well as globally with media outlets including TIME Magazine, Washington Post, and The LA Times picking up the story.
While sensationalised, the crux of the problem has still not been addressed.  
Recent research conducted by iBuildNew which surveyed Australian FHBs to examine how much an affordable house is considered to cost, what the biggest barriers to entry are, where and what housing alternatives were being considered, and other useful statistics and insights. The full findings can be found in the Appendix below.
About the super saver scheme
The Government will help Australians boost their savings for their first home by allowing them to build a deposit inside superannuation. These contributions, which are taxed at 15 per cent, along with deemed earnings, can be withdrawn for a deposit from 1 July, 2018.
While the 'First Home Super Savers Scheme' will provide some benefit to Australian FHBs, it needs to still be kept in perspective in terms of popularity among its target audience:
As an incentive to help FHB's save I really like the scheme, but am skeptical as to how effective this will be in terms of how many people will take this up.  
I suspect FHB's will not see the incentive as strong enough and have concerns their savings will be locked away until retirement if they can't ultimately save enough, property prices keep rising, or their personal circumstances change, which are all legitimate concerns. 
In theory however, if a FHB is on $80,000 pa and elects to salary sacrifice $1,000 per month into super for a deposit, within 2.5 years they will save the $30,000. Depending on their state, they should be eligible for the FHB grant of $10,000-$15,000 (let's say $15,000), so they then have $45,000 in total savings. An average off-the-plan house and land package across Australia is $440,000 and if you assume you need 20% of the total amount (worst case) to secure a loan from the bank, the FHB still needs to save or access another $43,000.  
This is in no way a slam dunk but may be possible if they already have some sort of additional savings or can access equity in their parent’s home, for example. However, with only just over 20 percent of FHB’s considering new home builds with most preferring established properties at much higher starting prices, this savings challenge is far more acute for most. Unfortunately, the numbers don’t lie, and while this initiative may create some savings discipline from the few that take it up, most FHB’s dream of owning their own home will still be out of reach.
Relevant statistics (per iBuildNew recent survey findings): 76 per cent of first home buyers can’t get into the property market because they can’t save the deposit or secure a loan.
Only 22 percent of FHBs are considering a new home build as their entry option to the property market, with 60 per cent preferring to buy established despite the significant price differential between the two options.
About retirees downsizing super exemptions 
In a bid to release more property to the market and help tackle housing affordability for Aussie first home buyers, Australians over 65 years of age will be able to contribute an additional $300,000 from the sale of their main residence (if they have owned it for 10 years) into their superfund at non-concessional rates.
Starting from July next year, this scheme was designed to encourage retirees to actively consider downsizing in an attempt to free up larger homes for younger families and FHBs. Downsizing to free up capital makes a lot of sense for the older generation as they often own their own home with significant equity, but may not have much super to live off.
I am is very skeptical about this initiative. He thinks this won't help first home buyers at all and is simply a strategy from the government to relieve pressure on pension entitlements:
Firstly retirees that have been in their home for more than 10 years generally live in homes that cost $1,000,000 or more, so creating new supply in this high-cost range won't help first home buyers at all. Any impact is likely to be at the upper end of the housing market, not in the sub $450,000 where most FHB’s consider affordable. This initiative in the short term actually has a negative impact on supply as some retirees that would have otherwise downsized in the next 6-12 months will now be holding off selling their house until this initiative takes effect in July 2018.
Secondly, and most importantly, we see this as being a strategy from the government to relieve pressure on pension entitlements. At the end of the day the country has an issue on how to fund pensions entitlements, so this would take some pressure off if retirees took it up. However, accountants will advise their clients to think very carefully about this as the principal place of residency is excluded from the net asset means test calculations when it comes to pension eligibility.
Many simply don’t want to leave what they know, but many won’t want to forgo the state pension in lieu of their super pension, so you really have to question what impact this will have on housing supply. Branding the retiree downsizing scheme as a housing affordability measure I find very strange, at least for FHB’s.
Relevant statistic (per iBuildNew recent survey findings): 63 pe cent of first home buyers believe an affordable house costs less than $450,000, 85 percent think it’s less than $600,000.
About the foreign owners rent levy
Overseas property investors who leave their houses unoccupied will face an annual charge to help encourage foreign owners to make their property available to rent to improve rental supply – or that’s the plan anyway. Predictions on empty properties put the number as high as 300,000 across the country, however Mr. Peterson believes the levy will do nothing to increase housing affordability:
The levy only starts from $5,000, so even the more expensive properties around Australia will only attract a $15,000 slap on the wrist. For the Chinese who are using this as a strategy to get money into a safe haven (often several million dollars), a small annual charge is unlikely to drive a change in behavior from these types of investors who are more concerned about capital preservation than realizing rental returns. Even if it does, all this would do is ensure more blue chip houses are available for rent, generally at rental rates that people who are looking for affordable housing, can't afford anyway.
I think this is bit of a cop out by the Government who are trying to blame foreign investors for the housing supply shortage and affordability, when in reality they are a minority group undertaking this activity, so they have missed the mark.
About the release of surplus government land
As part of the housing affordability package released in the budget announcement the government has earmarked 127 hectares of surplus land in Melbourne which could house up to 6,000 properties. They have also outlined similar measures for Western Sydney. It is initiatives like this that can make a real difference.
The release of government land is one of the few genuine measures announced in this year’s budget that will actually help the housing affordability challenge. It directly impacts supply of land, and that has a direct impact on price and affordability.
In my view this type of land should be made almost exclusively for first home buyers, with a double FHB grant available on the purchase of such land when committed as part of a house and land package. If the super saving scheme is going to have any real impact, it still needs to be coupled with a first home buyer grant if FHB’s are going to be any chance of saving sufficient deposit in the Melbourne and Sydney markets.
However, FHB’s need to look beyond the inner suburbs of Melbourne and Sydney, lift their eyes and explore some of the outer suburbs if they are serious about getting into the property market. A new build house and land package is typically 40% plus cheaper than an inner suburb established property, not to mention its brand new.
Relevant research (per iBuildNew recent survey findings): 64 percent of first home buyers are only prepared to look at properties within their suburb of choice or surrounding suburbs.
Only 22 percent of first home buyers are considering a new home build while 60 per cent are focused on buying an established home or townhouse.
76 percent of first home buyers can’t get into the property market because they can’t save the deposit or secure a loan.
Daniel Peterson is chief executive officer, iBuildNew, and can be contacted <a href="https://www.ibuildnew.com.au" target="_blank">here</a>.
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