'Scalpel not chainsaw'
An interesting address by Treasurer Scott Morrison in Sydney yesterday in the lead up to the May Budget, in retort to some 'smart aleck' quips from Shadow Treasurer Bowen.
From a housing market perspective, ScoMo strode forth to bat each of Labor's proposals calmly and serenely to the fence.
Capital gains tax increase...thwack.
Negative gearing quarantining...swat.
Banning borrowing in self-managed super funds...clonk.
A short section of the speech is copied below:
Source: Scott Morrison MP
To be fair, there was plenty of common sense in the speech.
The plan of attack appears to be to ratchet back interest-only lending over time with APRA's oversight, while getting jobs and the economy moving again, to eventually stimulate inflation and wages growth.
Morrison also noted that foreign investor interest is declining.
Given that rental price growth is likely to be moderate at best in the face of the apartment building boom, an accelerating economy and in turn mortgage rates rising to 6 per cent or above would naturally calm property investor activity.
One of the challenges with low interest rates is that macroprudential measures do not "get in all the cracks" as evidenced by the rapid rise of non-bank lenders such as Pepper Group.
How, then, does Morrison intend to get the economy moving again?
In short, by borrowing and spending.
The government proposes a change to the way that the Budget is reported, differentiating between bad debt (sad face) for recurrent expenditure and good debt (happy face) for investment in major growth producing infrastructure assets, such as transport or energy infrastructure.
The Budget will now report a net operating balance (NOB?) in addition to the underlying cash balance to differentiate between recurrent expenditure and investments in productive capital, including infrastructure.
If the process is well managed, taking on debt for investments that increase productive capacity seems eminently sensible in an era of low interest rates, and it is something I've mentioned here on several occasions.
The types of assets we can expect to see funded include inland rail and a second airport for Sydney, assets which should deliver a rate of return far in excess of the cost to the Budget in interest charges.
The challenge of course will be to pull this off without incurring a downgrade, Australia being one of only ten countries with a AAA rating from all three of the major ratings agencies.
We'll have to wait for Budget night for all the details, but on paper this sounds promising.