If we had become a banana republic as Paul Keating warned 40 years ago, at least we could have proudly specialised in something useful to the world. Alas, the risk after the government’s latest budget is on the path to becoming a Renovation Republic, a sclerotic nation obsessed with buying and renovating principal residences on credit to harvest limitless tax-free capital gains.
Treasurer Jim Chalmers’ fifth budget was an egregious reminder of how government takes advantages of the public’s limited economic and financial literacy, parading aims and outcomes likely to be the opposite of what’s actually likely.
Far from improving intergenerational equity by helping younger generations without sizeable inheritance in prospect to get ahead, the budget has made housing, already a dangerously high share of national wealth, an even more lucrative tax shelter, and further entrenched the privileges of the already wealthy.
Renovate the bathroom or start a business? Add a granny flat or invest in a start-up? The choices are obvious: zero tax on the first (even if you live elsewhere for up to six years, as per ATO rules), and now much more on the second, after the government’s latest capital gains tax changes.
For millions of Australians, the effective tax rate on nominal capital gains on any asset apart from “the family home” has gone from zero to the new 30 per cent minimum CGT rate, or 23.5 per cent to 47 per cent for the growing army of top-marginal-rate taxpayers.
After reducing the scope for pre-tax superannuation contributions for anyone earning more than about $250,000 a year, ending negative gearing for everyone who isn’t already doing it – for most property investments – has brought the curtain down on the last remaining legitimate escape from the ever more penal marginal tax rates, about to ensnare more than a million taxpayers.
The combined effect of the changes is even more regressive and economically revolting than you think: Why hold taxable assets when you can simply buy a bigger, better principal residence and enjoy tax-free gains forever?
Instead of encouraging productive investment, the reforms deepen Australia’s longstanding bias toward pouring wealth into housing consumption. Around two-thirds of Australians’ household wealth is tied up in housing, basically the highest in the developed world, and more than double the share in the US. Isn’t that enough already?
In practice, that means more money chasing prestige owner-occupier property in suburbs in desirable locations in the major capitals where affordability is already bad. Far from reducing overall dwelling price growth by a few percentage points, as the government claims, increases in dwelling prices in inner city Green and teal seats could more than cancel out falls in the outer suburbs as some investors offload their properties.
So much for tilting the playing field in favour of the young and “whacking the Boomers”, as the government’s left-wing cheer squad likes to claim. Anyone already negatively gearing will be grandfathered under the government’s proposals, and pensioners (who can easily be worth many millions) will be exempt from the new minimum 30 per cent CGT rate. Indeed, more than half of the 3.65 million people aged 18-29 earned less than $45,000 in 2024, as former senior Reserve Bank economist John Simon has pointed out this week. “That means their marginal tax rate was below 30 per cent, so for almost two million young Australians, the 30 per cent minimum is effectively a tax increase on their investments,” he wrote in a recent online missive.
The $250 Working Australians Tax Offset is an insulting distraction from this reality, which will be more than wiped out by the relentless bracket creep that’s driving the attraction of the whole tax avoidance industry in the first place.
If the remainder of the budget had done anything to reduce the explosion in government and cut income tax rates, shifting from the arbitrary 50 per cent CGT discount to a more theoretically sound taxation of real capital gains might be more defensible.
But the government has obviously given up on even the fig leaf of fiscal rectitude. Federal government spending was $478bn in the 2019 financial year, the last before the Covid madness erupted. It’s forecast to be $882bn a decade later, almost double.
Without the highly unlikely declines in NDIS spending growth announced in the budget, total federal spending would be on track to surge past 27 per cent of GDP, capping the biggest four-year increase in Canberra’s footprint since the Whitlam era.
The spending excess has become so outrageous that ministers appear to be driven to lying. Finance Minister Katy Gallagher told The Australian spending growth on net-zero “initiatives” was “unsustainable” only a few days before the budget papers revealed another $18.2bn over a decade, swamping the $2.3bn in reduced hydrogen and electric vehicle subsidies.
Coming up to a million increasingly ordinary workers will be paying 47 per cent marginal income tax so the government can spend an additional $178m on “international climate leadership”.
Supercharging demand for apprentices in the home renovation sector will be about the only genuinely progressive outcome in what in reality has been a shockingly regressive, economically destructive budget that will clobber what little incentive remains in Australia to innovate and invest in actual enterprise.
Australia urgently needs more risk-taking, more enterprise and more productive investment. Instead, this budget tells ambitious Australians the safest path is not to build a business, but a bigger ensuite.
