Posts by "Sam Ridsdale"

Budget 2017/18: Should we repair the Budget? Or our Democracy?

Should the Government repair the Budget? Or should they repair our democracy?

Reading the 2017 Federal Budget papers may have led you to ask questions such as, ‘What does that mean?’ and ‘Are they kidding?’. One question it probably didn’t lead you to ask is: ‘Are democratic systems fundamentally flawed?’

Well, it turns out that the answer is: probably not. However, it is also probably the case that a country’s education level plays a vital role in the performance of their democracy.

Recently, Professor Bob Gregory delivered the Freebairn Lecture, a free guest lecture put on annually by the University of Melbourne and timed to coincide with the release of the Federal Budget. This year’s topic, fittingly, was federal fiscal policy in Australia – or, more specifically, the Federal Government’s alleged desire to ‘balance the budget’.

Professor Gregory reminded the audience that each Federal Treasurer since 2007 has valiantly pledged to achieve a budget surplus. But their plan was never to do it the easy way. They wouldn’t simply increase taxes, they would do the responsible thing and cut spending, while at the same time making the system fairer and more efficient.

We now know that none of them were able to achieve their goal, and it is unlikely that our current Treasurer will be around to claim credit for a future surplus either.

According to Professor Gregory, we should not be surprised.

A closer look at the Budget papers over this period reveals that while each Treasurer touted this plan to decrease spending rather than increase revenue, they intended to do the opposite. Over the past ten years, government spending has continued to increase, so any progress made on cutting down the deficit was brought about by increasing tax revenue.

The personal income tax system offers a convenient option for those in charge of fiscal policy. This is because of the slightly sinister-sounding phenomenon known as ‘bracket creep’, whereby tax revenue automatically increases as taxpayers move into higher brackets. Treasurers can take advantage of this to collect more revenue each year while claiming they haven’t increased taxes (because they haven’t increased the rates) and every now and then (usually before an election) they can even take credit for being the generous bloke who came along and ‘cut taxes’ by adjusting the brackets.

But while the increasing revenue from bracket creep helped their courageous cause, in each case the government hoped to further benefit from national income rising to an optimistically high rate of growth. Of course, governments don’t tell voters they are relying on hope and optimism to keep their promises. Instead they order public servants to calculate forecasts and then they show us a neat, official-looking graph. Tellingly, these forecasts are almost always wrong.  Whether you view this fact as the result of honest mistakes or as evidence of deliberate attempts to mislead the public depends on your own level of cynicism.

It would be unfair to put all the blame for these fiscal failures on the government. Forecasting is difficult to get right (although that is a reason to try and under-forecast, rather than over-forecast) and this is because there are many factors that influence fiscal outcomes besides the policy itself. Two notable problems the government has run into over this period are the worst global recession since the Depression, and the slowing economic growth of our most important trading partner, China. But this issue nonetheless throws up several interesting questions.

These include economic questions, such as whether it’s sustainable to rely so heavily on personal income tax, rather than other, more efficient (and therefore more predictable) taxes. Political questions, such as the question of what it might take for voters to accept an increase in the income tax rate – or, more to the point, an increase of the size that would allow governments to fund an apparently ever-increasing array of government services.

But perhaps the most interesting question is one a little more philosophical in nature: Is there something fundamentally wrong with democracy if politicians apparently feel the need to tell voters one thing while doing the exact opposite?

This question is part of a debate that is as old as Western civilisation. In the 4th century BCE, Plato argued that democracy is an unjust (and undesirable) system because it results in a society that is ruled by carnal desires. Democracy leads to a lack of authority which means that society isn’t organised according to rational design but is rather like an anarchic society where all that matters is what each person decides they want. This leads to Plato’s famous argument that society should be ruled by an elite group of ‘philosopher-kings’, who could be trusted to think things through before making decisions.

In a more contemporary work – a report called ‘The Crisis of Democracy: On the Governability of Democracies’ published in 1975 by a controversial organisation called the Trilateral Commission – a similar argument was put forth, this time with a modern context. The authors argued that as democratic decision-making became more prevalent during the 20th century, Western governments became increasingly overburdened with providing the services demanded by citizens, while at the same time their authority to use expert advice to make decisions was eroded.

Since the release of that report, the ‘crisis of democracy’ has been a popular topic in academia. But recently, it seems to have become popular outside of academia, as well.

Electoral results in the United States and parts of Europe have become a common source of worry, particularly among progressives and advocates of international trade. The well-publicised economic success of an authoritarian China has led some casual observers to question whether democracy is all it’s cracked up to be, as a relatively small group of technocrats appeared to lift 700 million people out of poverty. Then there was the shock of the ‘Brexit’ referendum result, while in Eastern Europe there was the democratically-sanctioned annexation of part of the Ukraine.

But when approaching this topic, it’s important to be clear about which question we are trying to answer. Two caveats are in order.

The question should not be, ‘Do we need to improve democracy in Australia (or any other democratic country)?’. In the real world, no system is perfect, so there are always ways to improve the mechanisms that determine how well a system works. In the case of democracy these mechanisms are institutions – the rules that prevent things such as corruption, lobbying and media manipulation from adversely affecting outcomes. That we can and should improve these institutions goes without saying.

Another question we might ask is if democracy is the most ethical system. An argument can be made that authoritarian systems are more efficient at improving a society’s wellbeing, but that democracy is the superior system because the ability of citizens to participate in decision-making is more important than the outcomes. Where one stands on this issue depends on their moral values.

Both of those questions are important, but the question that Plato and the Trilateral Commission report were addressing is arguably more important. From a practical point of view, why would we choose a democratic system over an authoritarian system?

The most obvious reason is that democracies are better able to prevent corruption. Provided that the aforementioned institutions are doing their job, democracy creates a level of accountability that doesn’t exist in authoritarian systems.

There are factors that provide some accountability in authoritarian systems: it’s possible that poor performance by a dictatorship will lead to a revolution, and a dictator’s own ego and desire for a positive legacy could drive them to at least appear to be doing a good job. But a well-functioning democracy will certainly be better at incentivising leaders to improve the wellbeing of their citizens (rather than focus on their own wellbeing, or the wellbeing of their friends and family).

A less obvious reason that democracies work better than authoritarian systems is that they can utilise a larger pool of cumulative knowledge.

Theoretically, a democratic government asks the opinion of an entire population before making any decision. But the information they receive amounts to more than just conventional knowledge (such as language and maths skills) and wisdom (knowledge gained from experience). Perhaps the most important information that democracies have at their disposal is local knowledge – a farmer in a rural town will likely have a better idea about the effect of a policy or the demand for a service in their town than a politician who spends most of their time in capital cities. This may explain why China, despite being authoritarian on-the-whole, holds direct elections at the local level.

The problem is that making the most of this informational advantage is not straightforward. Again, the role of institutions is clearly important, but a population’s education level also becomes crucial.

The level of education in this case refers to the rate of attainment, the level of attainment and the quality of the education received. When any of these attributes are lacking then a government is less able to rely on the information it gets, which means that the population is less able to rely on the government to make well-informed decisions.

The ability to read and perform basic statistical analysis is less likely to lead to worthwhile knowledge unless a voter knows how to ask the right research questions. Wisdom gained from experience is virtually useless if a voter is easily tricked by fallacies such as the ‘post hoc ergo propter hoc (correlation proves causation)’ fallacy. And local knowledge about the services a community requires is less useful unless a voter understands how to think about basic economic problems.

It follows, then, that the level of education is an important determinant of how well a democracy performs. This makes sense intuitively but it is worth investigating empirically, as well.

The Economist Intelligence Unit (EIU) releases a report each year which includes an index containing 167 countries called the ‘Democracy Index’. It rates countries according to a score based on answers to 60 questions covering five categories: electoral process and pluralism, civil liberties, functioning of government, political participation and political culture. If a country scores between 8 and 10 they are categorised as a ‘full democracy’, if they score between 6 and 8 they are a ‘flawed democracy’. A score below 6 indicates the country is either ‘authoritarian’ or a ‘hybrid regime’. (To learn more about how the index is compiled, check out this article.)

Finding a standardised measure for the education level of a population is more difficult. The best statistic to use is arguably tertiary (post-secondary) education attainment rate. This is certainly an imperfect measure, partly because each country measures this slightly differently, but also because there is likely a large difference between the education levels of, for example, someone with a Doctorate in Theoretical Physics and the holder of an Associate Degree in Business.

However, students who complete post-secondary education were likely required to demonstrate a greater ability to perform research and analysis than the average secondary school graduate. Furthermore, to complete the qualification, they require not only the ability to learn but also a certain amount of inquisitiveness.

The following graph plots 2016 Democracy Index scores for X countries against attainment rate data from the Organisation for Economic Cooperation and Development (OECD). As expected, it shows a positive relationship, indicating that a higher attainment rate is correlated with a higher level of ‘democratic performance’. (Note: the graph only includes countries that scored above 6 on the Democracy Index, so each of the countries included is categorised as a democracy.)

Democracy Graph

This graph doesn’t allow us to conclude that a higher attainment rate leads to better democratic performance. However, it does throw up some more interesting questions. For example, why is the United States categorised as a ‘flawed democracy’ by the Index despite having one of the highest attainment rates?

One explanation for this is that the Americans’ institutions are letting them down. Indeed, political scientist Francis Fukuyama has argued that the United States is an example of a country suffering from what he coined as ‘institutional decay’.

Another explanation is that the high attainment rate of the United States doesn’t reflect a high level of quality in the education Americans receive. It has been argued that the quality of American universities – long considered the world’s benchmark – has been declining in recent years. But it may also be the case that the quality at lower education levels is lacking. Surveys indicating that American literacy rates are below the OECD average suggests this is the case. (While a large immigrant population explains part of these results, a low rate for Black Americans is evidence that poor educational outcomes are also a significant part of the story.)

Australia enjoys a privileged position in the top 10 of the Index at number 6. However, the distance between our score and that of the impressively-rated number 1 Norway, which has a similar attainment rate, tells us that there is room for improvement.

One of the spending reduction measures in the 2017 Budget is a cut in university funding. If this cut leads to a lower attainment rate or a reduction in the quality of Australian universities then it would be a poor policy. However, the fact that the cut will be largely neutralised by an increase in tuition fees, which can be covered by the HECS-HELP loan scheme, means that both of those outcomes are unlikely (or at least that the effect will be minimal).

Alongside this policy is a proposal to direct more funding to disadvantaged secondary schools. There is a strong argument to be made that education funding at the secondary or early education level is more likely to increase the tertiary education attainment rate – particularly in Australia. Due to a largely merit-based system, access to university in Australia depends almost entirely on educational outcomes at the secondary level.

Furthermore, if a student enters university with a higher quality secondary-level education, then they are more likely to complete the degree, and they will probably get more out of the degree, as well. This would mean the end-result is not only a larger university-educated population, but also a smarter one.

If this occurs then it may be that as our tertiary education attainment rate increases, the quality of our democracy will move closer to Norway, rather than towards the United States.

Astronomer Carl Sagan is perhaps most famous for his efforts to popularise science. He believed that being human means living in a ‘demon-haunted world’, where our own irrationality makes us vulnerable to becoming a victim of potentially harmful things such as pseudoscience and superstition. In a brilliant interview recorded shortly before his death, he summed up his view on the importance of education with the following words:

“If we are not able to ask sceptical questions, to interrogate those who tell us that something is true, to be sceptical of those in authority, then we’re up for grabs for the next charlatan, political or religious, who comes ambling along … People [have] to be educated, and they [have] to practice their scepticism and their education. Otherwise, we don’t run the government, the government runs us.”

Budget 2016: Company Tax Cuts – Catalyst for Growth or Waste of Money?

One of the “centrepieces” of the Federal Government’s 2016 Budget is a 10-year plan to lower the company tax rate. Unfortunately, partly due to a gaffe by Mr Turnbull on Sky News, much of the commentary has focused on the  cost rather than the merits of the policy.

The plan is as follows. From July 1st this year there will be an immediate cut from the current rate of 30% to 27.5% for firms turning over between $2 million and $10 million. Over the next four years the upper threshold will progressively rise to $100 million. It will eventually apply to all firms by 2023-24, and then finally in 2026-27 it will drop to 25% for all firms.

A cut in the company tax rate has long been anticipated—the Henry Tax Review recommended it way back in 2010, and both sides of government have previously said they were committed to it. Like the villagers in the Aesop fable, The Boy Who Cried Wolf, a lot of us had stopped believing it would ever happen. Indeed, if the Coalition government is not re-elected, it probably won’t happen, since both Labor and the Greens have apparently decided to launch a ‘class warfare’ campaign in response to the Budget.

It is the job of the opposition and the media to hold the government to account on issues such as transparency and fiscal responsibility, but as one commentator has pointed out, requesting the forecasted cost of a policy over 10 years is quite absurd. There is so much uncertainty involved, particularly in regards to this policy, that such a forecast is unlikely to be worth the paper it’s printed on. And Treasury does not have a good track record with even 6-month forecasts in recent times.

But cost aside, we need to ask: is a company tax rate cut a good idea?

The unapologetically left-wing think tank, the Australia Institute recently released a report that argues the answer is no.

The report’s conclusion is based on a number of findings.

First, there is no correlation between company tax rates and economic growth rates of OECD countries (and in fact, there is a positive relationship between living standards and company tax rates).

Second, time-series analysis of Australian macroeconomic indicators shows that the gradual increase of the company tax rate between 1960 and the late 1980s—from 40% to just under 50%—and the gradual reduction to the current rate of 30% both seemed to have no effect on the economy. Indeed, the economy performed better when the high tax regime was in place.

However, the conclusion that a cut would not improve the economy based on these findings is problematic. As the report notes, there are many other variables that must be considered when comparing countries, and the existence of a correlation in Australia between high tax rates and good economic performance does not mean high tax rates lead to good economic performance.

Further, these findings still provide no evidence against the argument that a company tax cut will lead to “jobs and growth,” as the Treasurer claims. Indeed, an argument such as this, which needs to take so many factors into account, is difficult to provide evidence for or against.

A recent, peer-reviewed journal article has provided some evidence.

The article first discusses the two empirical challenges involved: changes in tax policy are not random—they are influenced by many factors, including economic conditions—and even if they were random, it is not possible to observe counterfactual outcomes, as is necessary for a true scientific experiment.

One way that economists attempt to overcome these challenges is by seeking out what are called ‘natural experiments’—occurrences that by chance happen to resemble random assignment of some ‘treatment’. In the case of this article, the authors were able to exploit the fact that US states who share borders tend to have similar economic conditions. Provided that a tax change doesn’t lead to firms shifting operations interstate—which can be tested—then bordering states could be used to observe counterfactual outcomes.

The study looked at 140 increases and 131 cuts in 45 states going back to 1969. Its main findings are that, historically, increases in corporate tax rates have a negative impact on employment and wages, while cuts have fairly little impact unless they occur during a recession. A 1% reduction in corporate tax during a recession was found to cause around a 1% increase in wages, and a 0.6% increase in employment.

These findings make intuitive sense. Investment decisions are unlikely to be significantly altered unless tax changes or economic conditions make the investment more risky or less profitable. A tax increase reduces potential profit, and while a tax cut increases potential profit, it is unlikely to be a large enough increase that the business would not have gone ahead with the investment anyway—unless economic conditions also made it less attractive. A tax cut during a recession works as a nudge to businesses to go ahead despite their trepidations.

Again, a word of caution is in order. The authors note they are hesitant to extrapolate their findings to the potential effects of corporate tax changes at a federal level, since their study only looked at the effect of tax changes on employment and wages. However, this means that the positive effect of a tax cut on the economy is probably understated, since the observed increase in wages and employment is likely caused by increased investment, which also affects economic growth through other avenues, such as increased capital income.

Their findings are also fairly consistent with studies on the effect of federal-level corporate tax cuts, which generally find a moderate-to-high positive effect on GDP, implying a positive effect on wages and employment, as well.

Other favourable evidence comes from Ireland.

A government report examining the economic impact of Ireland’s famously low tax rate looked at data from 26 European countries and found that corporate tax has a ‘strong negative effect’ on where multinational firms decide to invest. The report argues that their highly competitive tax rate has been necessary for Ireland to address the economic limitations of their ‘peripheral geographical location’.

It also cites research by the OECD which used data on 21 OECD countries over the period 1971-2004 and found corporate income taxes to be the ‘most growth-damaging form of tax’, when compared to taxes on personal income, consumption and property.

Each of these studies are relevant to Australia’s current situation, for the following reasons.

First, much of the recent tax debate in Australia has rightly focused on how to address an increased need for funding of services that are predominantly the responsibility of state governments, such as health and education. Many argue that an increase in the GST is crucial to deal with this issue, while others convincingly argue that an increase in property tax would also be effective.

If we need more tax revenue to fund health and education, we should be looking at these taxes, since they are more efficient and less damaging to growth. And if a lower company tax rate leads to higher growth, then it will also increase the revenue take from these taxes, as well as from personal income tax.

Second, while our growth rate is currently keeping its head above water, some economists are predicting a recession by 2017. Evidence suggests that cutting company tax at a time of limited growth leads to more enhanced results, and is therefore an effective way to help the economy out of a hole.

Third, one of the Government’s arguments for cutting the rate is that it’s too high relative to the rates of our Asian neighbours. As the rest of Asia grows, we need to look at ways to make ourselves unique in the region, besides the fact that we have a lot of iron ore in the ground.

Australia has no choice but to transition away from being a resource-based economy. To do this we must begin to rely on new areas of the economy for growth, and generating growth in new areas requires investment and job growth in those areas. The evidence suggests that cutting company tax may be one way to do this, but the extent to which the results will be positive is not clear. This is perhaps why the Government’s plan is such a cautious one—the uncertainty may have them worried that a lack of results will leave them with too much of a revenue hit.

However, the evidence also suggests that less of a delay may mean the cut will have a greater effect, due to the relatively poor state of the economy.

Further, if the government is banking on attracting foreign investment, then they may want to consider a greater cut in company tax, and a greater reliance on revenue from more efficient sources of tax, such as property and consumption.

The Real ‘Budget Crisis’: Housing Affordability

The 2015 Budget shows the language used in the last federal election – words like ‘crisis’ and ‘emergency’ – to be nothing but the over-the-top rhetoric that we’ve come to expect from our politicians. Economists all over the country have lamented this impoverished use of language and distortion of fact.

The real ‘budget crisis’ revolves around Australian household budgets, specifically the cost of housing. Much of the recent discussion on housing affordability has focused on property prices, but the ‘crisis & emergency’ concerns disadvantaged people, unlikely to ever afford their own home.

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The Abbott Government has done a good job of convincing people that, after ‘the mess Labor left behind,’ tough decisions need to be made to get Australia’s fiscal position back in order. However, after releasing the 2014 Budget they found, seemingly to their surprise, that the public – not to mention a number of representatives in the Senate – would not accept any proposals deemed unfair.

The most recent budget was crafted to ensure the government could deflect accusations of unfairness, while still continuing their objective of, eventually, getting the books back into the black. The latest data from Newspoll indicates they have done the job – certainly better than the last budget anyway. But has the government missed an opportunity to address the difficult, but extremely important, issue of housing affordability?

At the end of last year that old chestnut, the negative gearing debate, found its way back into the media cycle. It culminated in a showdown on an episode of Q&A between Joe Hockey and the Grattan Institute CEO John Daley, which was characterised by the Sydney Morning Herald and others as Hockey being ‘outclassed by an economist’ (despite Daley never having studied economics formally).

Hockey trotted out the usual argument against abolishing negative gearing: if investment in the property market is discouraged, then rents go up. If this is true, he has a point.

Sure, getting rid of artificial demand – which critics argue is created by negative gearing – might slow down growth in property prices, but it would also mean that people without the means to purchase their own home are made worse off. Removing negative gearing would improve affordability for potential buyers, but would lead to higher rents.

Daley countered by arguing that rents would not rise if the policy was changed. According to Daley, the ‘rise in rents’ argument is based on the fact that when the Hawke Government abolished negative gearing – 30 years ago – rents rose in Sydney and Perth, yet crucially they hardly moved in other major cities.

He also pointed out that economic theory shows abolishing negative gearing to be sound policy. Since investors at auctions are competing with other potential buyers, who are often renters, then one less house bought for investment means one less person who needs a rental property. This would imply no impact on the rental market.

Both arguments have merit. Yet the current debate rests on a false dichotomy between abolishing negative gearing altogether or keeping the status quo – there are better alternatives.

Negative gearing is a hot topic because it is perceived to be inequitable. The policy gives rich investors tax exemptions. As a result, Commonwealth tax revenues are reduced, and public resources for programs that benefit the poor are diminished.

Recent research by The Australia Institute (TAI) shows this view to be well founded. According to TAI the majority of people utilising negative gearing are average income earners. Yet this majority only receives a small share of the 3.7 billion dollars the tax break is worth annually. Only one fifth of this amount flows to the poorer 50 per cent of households. On the other hand over half of the benefit goes to the richest 20 per cent of households.

The capital gains tax (CGT) discount tells a similar story. The tax break is worth 4 billion dollars a year. Of this, 82 per cent flows up to the top 20 per cent of households, but only 7 per cent benefits the bottom 50 per cent.

The first implication of these figures is that many people that benefit from negative gearing are not on high incomes. Also the benefit gained by the majority of ‘negative gearers’ is fairly modest. Trimming the excessive benefits accrued by high income earners may be better policy than abolishing negative gearing.

The second implication is that the CGT discount is the bigger contributor to inequity. If people want a more equitable tax system then the CGT discount makes a more potent target for abolition.

A potent problem is that Australia has one of the highest homeownership rates in the world. This is likely why politicians are reluctant to alter negative gearing and CGT arrangements. Even modest proposals for change that affect only few, tend to alarm the large numbers of property owning constituents.

Some commentators point out that targeting the demand-side of the market with national policy changes to negative gearing and the CGT discount misses the problem. Instead the problem comes from the supply-side. Rising house prices in Melbourne and Sydney are cause for concern, but aren’t so bad in the rest of the country. Inadequate and overly constrictive planning policy is to blame for restricting potential housing supply in these large cities. If this is the case, local councils rather than the Commonwealth are the level of government to be held responsible.

Yet it would be dangerous for Federal policymakers to use this argument to back away from the problem. Most Australians live in capital cities, and the trend towards urbanisation will continue. Also, even though property prices are stable outside of capital cities, over the last few decades the gap between house prices and income has widened, as well as the gap between household debt and income. Of course there are many factors that affect these ratios. Some of them, such as monetary policy, are out of the government’s control. But there aspects of the housing affordability problem that the government can affect.

The statistics above make clear that there is no quick fix to the problem. Unfortunately many people will never afford their own home and will have to rent for the rest of their lives.

Taking this into account, as well as the earlier observation that property owners hold electoral power over those without property, rental affordability should be an immediate policy focus for the Commonwealth.

The creation of the National Rental Affordability Scheme in 2008 indicates that the federal government at that time recognised the imperative. But a report by Anglicare last month revealed shocking statistics that shows much more needs to be done.

Anglicare calculated that of the 65,614 rental properties listed nation-wide, only 1 per cent were suitable for a single person on government payments, and only 2.3 per cent for a single person on minimum wage. While 23.8 per cent of the dwellings were suitable for a couple living on minimum wage with two children, only 0.9 per cent were suitable for the same family composition on a Newstart allowance.

The common benchmark measures affordable rent as being no more than 30 per cent of a household’s income. Some might argue this is too ambitious. Yet figures from the ABS show that before 1988 low income households spent less than 30 per cent of their income on rent. Single persons spent well under 30 per cent of their income on rent. Middle and high income households spent less than 20 per cent of their income on rent, with the exception of single parents.

Surely people that can’t afford to rent privately can access affordable state-owned housing? The statistics tell another unfortunate story.

According to a factsheet by National Shelter, from 2008 to 2013 the amount of people on a waiting list for social housing increased by nearly 9 per cent, to over 200,000 people. There were just over 400,000 social housing dwellings in Australia. The 2011 Census counted the total amount of dwellings at about 9.1 million. This means that social housing accounts for an unbelievably small fraction of the total housing stock in Australia – less than 5 per cent.

These figures shouldn’t be particularly surprising.

According to the ABS, there has been a steady decline in construction undertaken by the public sector since the early 1990s. Public housing construction was 7 per cent of total housing construction in 1992, but by 2002 had fallen to just 2 per cent of total housing construction. This was accompanied by an increase in government housing assistance such as Commonwealth Rent Assistance.

In September last year, NSW Minister for Family and Community Services, Gabrielle Upton conceded that an increase in waiting times – the current average is 4 years but can reach 10 or more years in certain locations – was a sign that the social housing system needed reforming. She also said that one explanation for the increase is a lack of affordability in the private system for people on low incomes.

Housing affordability is a complex issue, but there is a simple solution which addresses all of the problems highlighted in this article.

The approach apparently decided on by policymakers to move away from social housing provision and instead concentrate on enabling low income earners to enter the private rental market has failed. Providing financial assistance to people who want to rent a home privately but are unable to does make sense, but it also means that landlords can charge higher rents, in the knowledge that taxpayer money makes up a portion of the income needed to cover rent increases.

There are better ways to improve housing affordability.

If governments increased the supply of social housing, there would be less demand in the low end of the private rental market. This would likely lower rents, reducing expenses for low income households, as well as expenses for the government departments responsible for providing financial assistance.

As shown above, a significant portion of money forgone under the current tax arrangements regarding negative gearing and capital gains is unnecessarily going to high income households. These arrangements should be altered so that money which investors in this demographic currently receive can instead be directed towards building more social housing.

This would improve affordability for those on low incomes and also increase accessibility for thousands of homeless people. At the same time it would mean decreased demand by investors in the mid-to-high end of the private rental market, where investors on high incomes are more likely to invest.

The effect of this, all other things equal, would be less upward pressure on property prices, since there will be fewer wealthy investors at auction sites who are able to outbid home buyers. Lower property prices means a greater incentive to buy a home instead of renting and therefore reduced demand in the rental market, pushing down prices there as well.

Understandably, the political difficulties surrounding this issue made the current government reluctant to make changes such as those proposed here in their first two budgets. But political capital can be gained here if policymakers are brave.

Doing something about housing affordability doesn’t just go to addressing that ever-present concern for voters of cost-of-living, it also addresses other issues that in the last few years have rightfully begun to gain more exposure.

Particularly since the Global Financial Crisis in 2008, wealth and income inequality appears to have become a greater concern for the public. Research conducted last year by Oxfam found that 79 per cent of Australians surveyed believed the gap between the richest and poorest members of society has widened over the previous decade, and 64 per cent said this has made Australia a worse place to live.

On the first count it is safe to say that they are correct. Despite Australia experiencing record long economic growth, inequality has not only been rising, it is actually worse than people realise. The issues raised in this article have been exacerbated due to governments failing to address this problem, but they are part of the cause of the problem as well.

Domestic abuse is also intertwined with housing affordability. There is increased pressure on the federal government to address the failure of the current system to prevent violent abuse of women by their partners. Some experts claim that the situation is endemic and that financial insecurity is an important part of the problem. Concerns about housing affordability contribute to victims of abusive relationships feeling like they have no escape and possibly even losing their lives as a result.

It is unfortunate that the Abbott Government didn’t take advantage of the opportunity to use these arguments in a budget released under the banner of ‘fairness’. But a recent Senate committee report on the issue which included members of all three major parties is encouraging. It made some 40 recommendations – looking at both demand and supply problems – and called for more leadership from the federal government, suggesting they develop and implement a plan for a national approach to housing affordability.

A recent commitment by the ALP to cut superannuation tax concessions also indicates they have identified that political ground can be made in the area of equity in the tax system. With the Coalition largely relying on tax bracket creep to reduce the deficit at the moment, it’s looking increasingly likely that they will have to consider widening or increasing the GST. Bracket creep and the GST hit middle and low income people hardest, so failing to address the issues raised in this article increases the risk of losing further ground in the equity battle.

However, the real costs of inaction are much more important than the politics. The impact of limited affordable housing on the livelihoods of Australians, particularly those on low incomes, has become a serious problem. In some cases it may even be costing lives. There is no doubt that this is the ‘budget crisis’ that deserves to be in the news.