Sarah Ferguson:
The Treasurer has made his way from the floor of the House of Representatives to the studio and joins me now. Congratulations on the Budget and welcome.
Jim Chalmers:
Thanks very much, Sarah.
Ferguson:
As Jacob just pointed out, negative gearing, capital gains, the Prime Minister categorically ruled out these changes before the election. Will you first acknowledge the broken promises, and then we can talk about why?
Chalmers:
Yes, I acknowledge that the government’s come to a different view about some really important policy areas. The comments and commitments we made at the election reflected the government’s almost singular focus on housing supply. We’re maintaining that focus on supply, but the challenge begins there, it doesn’t end there with supply.
We also need to take these decisive steps, these contentious steps to re‑balance the tax system, because the interaction of the housing market and the tax system is locking too many Australians, particularly young Australians, out.
Ferguson:
No acknowledgement of broken promises despite the fact that they are blindingly obvious to everybody watching. Breaking iron‑clad election promises so blatantly, you must have spent a long time calculating the consequences. When did you decide that the rewards outweighed the risks?
Chalmers:
Well, I think it’s important to see these changes for the substance of the changes, not the politics of the changes.
Ferguson:
There’s always politics as well, Treasurer.
Chalmers:
Well, this decision was taken in recent weeks, it was taken relatively late in the Budget process, and it was taken because we became increasingly of the view that the focus on supply, which is still the main game when it comes to the housing market, was not enough to deal with some of these intergenerational issues in particular when it comes to housing.
Now obviously we are aware that people who want to defend the current tax arrangements, or they think that the current housing market is working just fine, they will want to focus on this element of it, the political element of it, I understand that. Obviously, that doesn’t come as a massive surprise to me. But we’re focused on the substantive issue, the substantive change. We’ve come to a different view on these policy areas, we’re explaining to the Australian people why.
Ferguson:
You’ve just said recent weeks. The decision to make these major changes to negative gearing, trusts and capital gains was made in recent weeks.
Chalmers:
Yeah.
Ferguson:
Is that what you’re saying?
Chalmers:
Yes, it is what I’m saying.
Ferguson:
How many weeks ago?
Chalmers:
The Expenditure Review Committee finalises the Budget in the usual way towards the end of April, sometimes the beginning of May. Obviously this has involved a fair amount of work, but the decision was taken in recent weeks to make this policy change, and more than deciding this policy change and the substantive difference that we hope to make, encouraging another 75,000 Australians into the housing market over the next decade, re‑balancing the playing field when it comes to housing and tax, obviously we know that that invites an element of political risk. Obviously, these changes have been contentious for some time. And so you asked me before would I acknowledge that we’ve come to this different view? We have.
Ferguson:
It wasn’t the question; the question was about broken promises.
Chalmers:
Well, we’ve come to this different view for very good reasons, and I’m here to explain to your viewers why.
Ferguson:
Yep. Now you are presenting this as a major change, quite reasonably, re‑balancing the system, the whole system in favour of workers and in particular young people. But how do you justify not doing that before the election where the conditions were not materially different to where they are now?
Chalmers:
Well, the commitments we made at the election, as I said, were overwhelmingly about investing more than $40 billion in housing supply.
Ferguson:
You know what I mean, the Prime Minister ruling out these changes.
Chalmers:
Yeah. But that reflected our focus at the time, which was almost exclusively on supply plus the 5 per cent deposits. And they were the positions that we held at the time. It’s become increasingly clear to us that if we continue to kick the can down the road on some of these difficult policy changes, which have been ignored in our tax system and our housing market for too long, then that would make life harder and lock more Australians out of the system.
And so we had a choice. I mean fundamentally this Budget was a choice. Do we use what’s happening in the Middle East as a reason to do less, to just focus on fuel security and some of the near‑term measures, or do we understand that all of this global volatility and uncertainty is a reason to accelerate reform, to act with more decisiveness and more urgency? And we decided on the latter path, and I’m proud that we did.
And I know that there will be, of course there will be people who want to focus on the commitments we made at the election, I understand that.
Ferguson:
But it’s not just that you accept it, that it’s reasonable. As I said before, the conditions that existed before the election are not materially different now in terms of the difficulty of obtaining housing. Why did it take a war in the Middle East to make you –
Chalmers:
Well, it’s another year –
Ferguson:
– reset your policies so drastically?
Chalmers:
Well, it’s another year of too many people getting locked out of the market and some of these challenges intensifying.
Ferguson:
But you accept that’s a substantial change in terms of the locking out of the market between now and 12 months ago at the time of the election?
Chalmers:
Well we became increasingly of the view that some of these other challenges which go beyond supply, they go to the composition of the market, they go to the fact that tax policy settings have had, I think, a negative impact on the housing market. When these policies were changed in 1999, it fundamentally distorted the way that investment happens in this country.
It encouraged people to pile into existing housing, push prices up, locked people out of the housing market, particularly younger people, and so we had another year of that. And these challenges will become more and more serious if we neglect them for longer, and that’s why we came to a different view and changed our policy.
Ferguson:
In the end is the calculation also that hundreds of thousands of young voters will care more about getting access to housing than they will do about the notion of trust in politics; is that the calculation also?
Chalmers:
Well, I think that people care more about the substantive issue and the substantive change, that’s my personal view, and it remains to be seen. There will be people very focused on the politics of the last election campaign, I understand that.
Ferguson:
It’s also a question about integrity, it’s not just politics with a small P, it’s integrity in politics, isn’t it?
Chalmers:
I think people will be most focused on the positive change that we’re making in the tax system and in the housing market. It has obviously involved a level of political risk because we’ve come to a different view. And I’ve said in recent days, and I really mean it, that one of the reasons I’m here taking these characteristically difficult questions from you, Sarah, is because I do understand when you come to a different view you have to front up and explain why, and that’s why I’m doing it.
Ferguson:
We respect that. Will there be fewer homes built because of these policies, as the Prime Minister said before the election when ruling out these policy changes?
Chalmers:
We have to look at our housing package in its entirety. So our housing package is not just these tax changes, as important as they are, there’s another $2 billion to invest in more supply, and so the net effect of our housing policy across the Budget is to increase supply, and that’s really important, because supply is still the main game.
Ferguson:
So those 35,000 fewer houses –
Chalmers:
Are more than made up for, almost double as many, when it comes to the additional investments we’re making in supply.
Ferguson:
In the speech you gave just now you identify the huge increase in property prices over the last 25 years, essentially as a great Australian wrong. Will prices now fall?
Chalmers:
Prices will grow more slowly in the Treasury modelling that we’ve released alongside the Budget, prices will continue to grow, but about 2 per cent slower. On a median house that’s about $19,000.
But what we’re doing here is we’re not targeting a particular price, what we’re trying to do is to make sure that there are more affordable options for people to buy, particularly people who are buying their first home. We’re trying to make sure that these tax arrangements, where they are concessional, encourage people to build new houses and new units, that’s another thing that the package does.
But most of all what we’re trying to do in this tax reform package is to deal with this issue where the big distortion that was introduced in 1999 is rectified, at the same time as we try and better align the way that we tax people who work, in relation to how we tax people who make their income in other legitimate ways. We’re trying to re‑balance the tax system.
Ferguson:
Let’s talk about the grandfathering, which is how you are dealing with those people who are currently doing – are negatively gearing their properties. Forgive me. Essentially this creates 2 tiers of property investors, those who are lucky enough to keep their negative gearing tax advantages and those who are not. Are you comfortable with a two‑tier investment system like that?
Chalmers:
Well, a lot of the transitional arrangements are about recognising and respecting decisions that people have already taken, and so overwhelmingly the tax policy is prospective rather than retrospective. People who want to still invest in homes and negatively gear those homes can do that if they make a contribution to housing supply and do that with new homes, so that will continue to be available to people who want to make new investment.
Ferguson:
But just on the question of that –
Chalmers:
Yeah.
Ferguson:
– grandfathering if I may.
Chalmers:
Yeah.
Ferguson:
The Budget shows – the Budget papers show that you’ll be able to build 75,000 households over 10 years, or sorry, 75,000 households will be able to buy their first home –
Chalmers:
Yes.
Ferguson:
– under these policies. Would that number have been higher if you had taken even tougher decisions on grandfathering?
Chalmers:
Well, obviously the numbers in the modelling would be different if we made different decisions, but don’t forget as well –
Ferguson:
There’d be more homes available to people, wouldn’t there?
Chalmers:
Don’t forget as well, Sarah, when it comes to the grandparenting arrangements, the transitional arrangements, is that houses and properties which are negatively geared are often not negatively geared forever, typically between 5 or 10 years later they become positively geared. So there’s an element of transition built into the system already, and that will continue to be the case. But if you’re a new investor, you can invest in new supply.
But what we’re doing here is making a meaningful difference to the number of people who can get into the housing market for the first time; that’s our objective.
Ferguson:
Let’s talk about some of those most vulnerable people in that category, that is renters. Will these changes mean fewer rentals and higher rental prices?
Chalmers:
Once again, you’ve got to look at the housing package in its entirety. We have presented some modelling around rent, and we have presented some modelling around housing supply, but that’s only for the tax changes, and we’re not only changing the tax system when it comes to housing. So the net effect of the extra homes will put downward pressure on rents, even as the tax changes make a modest difference in the other direction.
Ferguson:
So it depends on all of the pieces working together, but you will get – in the short‑term, you will get slightly lower – you will get higher – there will be fewer rentals available and slightly higher prices?
Chalmers:
Not in its entirety. You have to look at right across the Budget. You can’t pull out any one change. What matters is the net effect. We’re building more homes, that will put downward pressure on rents.
Ferguson:
There’s a new tax offset that people will get in 2028. Is that delayed in order to avoid stoking inflation as the Reserve Bank Governor has repeatedly warned against?
Chalmers:
Look, partly, but that’s not the main reason. The main reason is to align it to when we’re raising some of this revenue through some of these other changes that we are talking about.
We provide tax relief in all kinds of different ways, 5 different ways, to cut income taxes, but we have to do that in a responsible and affordable way, and in this instance it’s by aligning it with the other revenue measures in the tax reform package. And what that means is we’re actually returning the revenue from those difficult tax changes to workers and to businesses over the forward estimates, and that means that where we’re seeing all this budget repair, it’s not being done by the tax reform package over the forward estimates, it’s being done by our responsible approach to savings.
Ferguson:
I’ve got to question you about that, because your tax package appears to improve the budget’s bottom line by $77 billion over 10 years. Is that how much extra tax you are taking?
Chalmers:
That’s the 10‑year period. Over the forward estimates it is broadly neutral, and over the 10‑year period, what we’ve put in that medium term projection assumes that there’s no more returning of bracket creep. There will be more tax relief.
But the $77 billion figure that you cite is accurate. It is creating more room for us to return more bracket creep over time, but the main driver of that very significant and very substantial improvement in the medium‑term budget position is actually from our savings.
By the end of that 10‑year period the contribution of savings is 3 times the contribution of our tax reform. So once again, the heavy lifting on budget repair is being done by spending restraint and savings in the budget in important areas like the NDIS.
Ferguson:
If this Budget is framed to some degree around social cohesion, the need to change the housing arrangements, particularly for young Australians because of the contribution that it is making and will make towards social cohesion, so how do you explain a net migration number that will be higher than expected for 2 years given that that will put pressure on housing?
Chalmers:
Well, first of all, on the specifics of the net overseas migration numbers, they’ve come down by 45 per cent from their peak, so we have very substantially managed down net overseas migration –
Ferguson:
What direction are they heading in the next 2 years?
Chalmers:
The 2 smallish revisions to net overseas migration are about fewer departures rather than a spike in arrivals, and even after that they are still down very, very substantially from the surge that we inherited from our predecessors.
Ferguson:
But you accept that’s still putting pressure on the housing market today?
Chalmers:
We’re taking pressure off the housing market by taking a serious approach to housing, our predecessors didn’t do that.
Now you’ve asked me about social cohesion. One of the things that worries me most about our society is this idea that too many people have that we can’t let take hold in our society, which is that a fair society is a feature of our past but not a feature of our future.
One of the things that keeps me awake at night, one of the defining motivations in this Budget is we have to make the ‘fair go’ the defining characteristic of our country in future generations, not just in past generations.
Ferguson:
But do you also at the same time have to level with young people to whom you are making this grand offer that we will never go back to the kind of ratios we saw between housing prices and wages in the past? Do you need to tell them that at the same time?
Chalmers:
Well, it remains to be seen, but the efforts that we’re making in the budget, the difficult contentious decisions that we’ve taken –
Ferguson:
That ratio’s gone up 9 times, so we’re not going back to –
Chalmers:
If you look at –
Ferguson:
– that fast.
Chalmers:
– house price growth since the Howard change in 1999, house prices have gone up around 400 per cent, income has gone up by about half of that, the Howard‑Costello changes de‑coupled house prices from incomes, and that’s a problem.
And no Treasurer has sat here on Budget Night and done more to address that particular challenge for a quarter of a century than this Treasurer.
Ferguson:
Just on the issue of budget repair, your promised committed budget repair in these papers, of course, depends to a very large degree on the extremely difficult task of fixing the NDIS. Will you be tough enough to hold the line when it becomes clear how many needy people are being excluded from a scheme that had promised to support them?
Chalmers:
Yeah. And the reason why I’m confident about that is because we believe in the NDIS and we’re trying to save it from itself. We could not have a sustainable scheme that was growing as fast as it was. And so as big believers in the scheme, big supporters of providing a level of care that people need and deserve in our local communities –
Ferguson:
Should you be –
Chalmers:
– we’ve taken –
Ferguson:
– should you be essentially putting an asterisk on those Budget papers? It’s a very ambitious change, your budget repair depends on it, there’s a lot of people who think that it’s unrealistic that you’ll reach those figures.
Chalmers:
Well, it is an ambitious change, and it’s an ambitious budget, and this is an ambitious government, and we couldn’t sit by and let the NDIS costs blow out to the extent that they were. Spending will still grow, but much more slowly. I pay tribute to Mark Butler and Jenny McAllister, and the other colleagues, for the work that has gone into this.
This is a really important part of the savings package, but more than that it’s a key economic reform. The way this Budget has been interpreted is that tax reform is a big part of it, it is. Productivity package, big reform, it is. But also, in the NDIS and in budget sustainability there’s a number of important reforms there too.
Ferguson:
We’re also sitting on Australia’s weakest productivity growth in 60 years, I think, 2 terms, 5 budgets; that’s on you, isn’t it?
Chalmers:
Well, hang on a minute. The weakest decade for productivity growth in the last 60 years was the Coalition decade. In the last year we’ve seen things turn around in welcome ways. In the market sector one and a half, overall 1 per cent, that’s higher than the 20‑year average, but it’s not enough to deliver the higher living standards that we want to see for more of our people and lift the speed limit in our economy.
So there’s a very broad and ambitious productivity package in this Budget, to grow the economy and lift living standards and wages over time.
Ferguson:
I just want to loop back to the idea of promises and integrity. Do you accept that even if these changes are very well received amongst young voters, no one will believe a promise from this government ever again?
Chalmers:
I’m not sure about that. I mean I think that the most important thing, genuinely, is if we come to a different view we explain why, and the most important thing beyond that –
Ferguson:
Wouldn’t it help if you acknowledged that these were broken promises?
Chalmers:
Well –
Ferguson:
It’s such a simple formulation that you keep avoiding.
Chalmers:
Well, I don’t think I have. I mean I’ve taken responsibility for the fact that the government has a different view now than it had 12 months ago. I do take responsibility for that, and that’s because I’ve come to a different view on these policy changes, and I’m explaining why.
But more important than any of that, let’s not lose sight of the actual issue that we are addressing here. Now the easiest thing in the world would have been for me to sit here and rationalise to you why we hadn’t made any of these changes, and that would have been so much easier than explaining why we have, but it wouldn’t have been the right outcome for 75,000 Australians who would stay locked out of the housing market. It wouldn’t have been the right outcome for workers who continue to be treated in an inferior way to people who make their income in other ways legitimately in our economy.
And so I’d rather make the difficult decision and explain why than take the easy decision and escape some of these questions.
Ferguson:
Treasurer, congratulations again on your fifth budget, and thank you very much indeed for joining us this evening. I appreciate it.
Chalmers:
Thank you, Sarah.
Ferguson:
Thank you.