Getting rid of Negative Gearing and Private School Funding- Ed Chan

From time to time someone attempts to put forward a case for getting rid of negative gearing.

It’s such an easy target without considering the bigger picture.

The Hawke government removed negative gearing in July 1985, which scared investors away and rents soared and the back log in public housing got too much that the government had no choice but to bring it back in September 1987.

Mark Latham whilst a minister wrote articles about removing negative gearing, but once he became leader he no longer mentioned it. I suspect as leader he had access to better data and advisors who knew the real cost to the economy.

Whilst it was great political rhetoric and a great headline which attracted attention the real economic cost would borne out in trying to fund public housing without the private sector helping out.

The increase to government liability in trying to supply public housing would cripple any government budget.

Whilst most people thought numbers such as the ATO publication, showing negative gearing was worth a cool $13.2 billion in 2010-11 and it’s easy to simply say let’s get rid of it and the government gains a cool $13.2 billion.

The reality is that the domino effect of this strategy will cost far more than the $13.2 billion that the government will gain by getting rid of negative gearing. Perhaps the cost could be in the hundreds of millions.

The cost to government in building public housing alone would wipe that amount out in one go.

As rental properties become scarce, people will turn to public housing and expect the government to build and supply public housing accommodation as we saw in 1985.

The waiting list for public housing increased by more than 50% in 1985 when negative gearing was abolished.

Not to mention the cost to the wider economy when the housing sector slows down as more and more people pull out of the investment property market.

Negative gearing does not simply apply to new housing which only makes up 10% of housing supply. Negative gearing affects all properties and if housing slows everybody suffers including tradesmen and builders and bank loans slow and real estate agents suffer and the domino effect is huge.

The renovation market of existing housing alone is a multibillion dollar economy and contributes billions of dollars to the economy.[sam id=43 codes=’true’]

Everyone may recall when Bob Carr as Premier of NSW introduced a stamp duty on Vendors selling their properties.

This in effect would have had a far less impact on the property market in terms of the effect on the economy than removing negative gearing.

The negative impact on the economy was so detrimental that he removed it after several months.

The negative gearing impact would be a hundred fold greater than the impact of stamp duty on Vendors selling their properties.

Secondly most property investors are ordinary mum and dad battlers who only have one property.

Should they remove negative gearing they are hurting the average person in the street who is trying to save for their retirement.

That’s the same as removing incentives for the ordinary person to put money into a Superannuation Fund. They will simply become a burden on the public purse when they retire and draw on an old age pension.

The short term grab for money by getting rid of negative gearing will come back to haunt them as people join the old age pension queues.

This is similar to the argument put forward by those who argue against the government supporting private schools.

The argument often put forward is that private schools are already well off so why should the government provide them any further funding.

Again the simplistic view is that if the government removed their support of private schools then they can afford to put more money back into public schools.

The reality is that the government spends around $8,000 per child in public schools and around $3,000 per child in private schools.

If they were to remove private school funding and the number of private schools closed and more children went back to public schools, the cost to governments would go through the roof  because instead of costing the government $3,000 per child it would now cost them $8,000 per child and this would be unsustainable for any government budget.

Additionally many parents who send their children to private schools are not wealthy and struggle to find the money for their school fees and however they manage this and save governments many millions of dollars.

Often comments such as “let’s get rid of negative gearing” and or “let’s stop private school funding” are pushed by the misinformed or those with a political motive.

Either case will do our economy a whole lot of damage.

Thank goodness our governments over the years, whatever their political persuasion, have had the leadership wisdom and foresight to look beyond the rhetoric and looked at the numbers to determine what is best for our people and our nation.

[post_ender]



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Ed Chan

About

Ed is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Visit www.Chan-Naylor.com.au


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