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Balanced budget needs higher tax take, but which taxes should be hiked?
The treasurer, Scott Morrison, appears to be having something of a Gough Whitlam moment. Not in terms of far-reaching social and economic reform, but rather a realisation that the size of government needs to increase. The electorate is demanding a certain base level of healthcare, education, disability care, roads, defence, infrastructure and all manner of goods and services.
Morrison is talking about the need to raise taxes to ensure these government services are provided while simultaneously moving the budget towards surplus, which is an essential element to avoiding the credit rating downgrade that appears to be just around the corner.
He is explicitly acknowledging that, to keep voters happy with decent services, spending must remain above 25% of GDP and perhaps needs to rise further, towards record highs.
Prior to the Whitlam government in the early 1970s, government spending and revenue was generally at, or a little below, 20% of GDP. With the Whitlam reforms, this rose to about 25%, and apart from the swings in line with the business cycle and policy changes over the past 40 years, it has remained around 25%. It has not reverted to pre-Whitlam levels. Not gone close.
In recent times, a lot of the focus of public policy has been on negative gearing and how the associated tax rules encourage ‘excessive’ investment in the housing market. This in turn, it is argued, pushes up house prices and freezes first home buyers out of the market. There is something in that argument which will no doubt carry on in 2017 and probably beyond.
What is often overlooked in the debate is the fact that negative gearing investment strategies also apply for shares, in the form of margin lending and related products. So why is it that the overwhelming focus of investors when they negative gear is dwellings and not shares?
Over the past decade or so, as property investment borrowing has boomed, margin lending for stocks has slumped.
According to data from the RBA, outstanding credit for investor housing stood at $562 billion in November 2016. This was up a staggering 319% from the level in December 2007 when it stood at $134 billion.