Negative gearing could be axed and the banks muzzled, all because the mild David Murray has gone postal.
Ok, looks like it’s hat eating time… again.
Looks like Decembers become quite a month for it. Keep this up and I’ll be so full of hats come Christmas time I’ll have no room for pudding.
First up we had Kelly O’Dwyer and the review of foreign property investment hitting some nails on the head. None of it was rocket science, but these are the times we live in – if the government gets past petty political point scoring and comes up with some good policy recommendations, then Jon Giaan eats his hat.
And now we’ve got the Murray Financial System Inquiry. It’s an “independent panel” led by former CBA CEO David Murray, tasked with looking into the health of the financial sector.
As I wrote all the way back in March this year:
It is ridiculous to have the former head of the CBA heading an inquiry into banking. You don’t put alcoholics on the liquor licensing board.
Putting Murray in charge of a banking inquiry was a bit like putting Chopper Reed in charge of an inquiry into bikie criminal gangs.
The inquiry itself also came from a half-hearted pre-election promise by Joe Hockey to do something about banking that no one on the inside thought he was serious about.
And so my view, like a lot of others, was that the inquiry would be a complete waste of time. The government didn’t want to rock the boat of one of its largest donors, and the expectation was that a loaded panel would come up with some safe, bank-friendly recommendations.
Murray and his mob have gone postal, and have actually gone out and made some pretty sensible suggestions that kick the banks square in the profitability gonads.
And no one saw it coming. Certainly not this little hat-eater.
Murray has gone and delivered some crackers.
The first sacred cow he hit with a stick was negative-gearing and capital gains tax concessions on property.
The government must be livid. ‘We asked you to look at the banks and you’re throwing tax policy back in our face?!?’
This is a bit of a game-changer. Negative-gear and the capital gains tax concession are one of those divisive topics that everyone’s got an opinion about. I personally don’t have a strong opinion about it because negative gearing is a dud strategy, so it’s not going to have a big impact on my game.
But a lot of people have had a crack at it over the years. But no one of David Murray’s stature, and definitely not from the high-pulpit of a financial system inquiry.
The government will be desperately hoping this issue will die a quiet death. It’s been in the too-hard basket for years. Murray’s salvo is going to make it harder, but never underestimate the length politicians will go to, to do nothing.
Here’s what Murray actually said:
Capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns. Reducing these concessions would lead to a more efficient allocation of funding in the economy…
For assets that generate capital gains, the tax treatment encourages leveraged investment, which is a potential source of financial system instability. Investors are attracted by the asymmetry in the tax treatment of expenses and capital gains, where individuals can deduct the full interest costs of borrowing (and other expenses) from taxable income, but only half of their long-term capital gains are taxed. The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing…”
Radical, radical stuff.
I wonder if Murray meant to drop such a bombshell. He was talking about negative gearing and the CGT concession under the umbrella of a broader point – that banks have abandoned business and over-loaded themselves on mortgage lending, and that’s created a systemic risk for the economy.
Yep, that’s the sound of a parliament of chins hitting the floor.
Did he really just say that? He was meant to just shuffle a few bits of paper around. Not unleash carnage like this. Again, in his words:
“Housing is a potential source of systemic risk for the financial system and the economy… Australia’s banks are heavily exposed to developments in the housing market. Since 1997, banks have allocated a greater proportion of their loan books to mortgages, and households’ mortgage indebtedness has risen. A sharp fall in dwelling prices would damage household balance sheets and weigh on consumption and broader economic growth. It would also reduce the quality of the banking sector’s balance sheets and the capacity of banks to extend new credit, which would compromise the speed of a subsequent economic recovery…
This concentration, combined with the predominance of similar business models focused on housing lending, exacerbates the risk that a problem at one institution could cause issues for the sector and financial system as a whole.
That’s right. Not some, but ALL the banks have gorged themselves on housing debt, which has amplified the risks associated with any shock to the housing market.
And his solution – banks need to increase their capital ratios. Ouch. That means locking more money up, which means less profitability.
Someone get this guy on a leash!
This puts the government in an incredibly awkward position. Most of Murray’s recommendations are sensible, and they’re going to be difficult to ignore. The banks will be lobbying desperately to kill these reforms (it’s already started), but coming from a former insider, these criticism are going to be difficult to deflect.
And the government won’t want to put their paymasters at the banks any further off-side – not after being forced to back-flip on the FoFA reforms, which to be honest, already make them look stupid. But they can’t just ignore it.
Anyway, a lot can happen between an inquiry and legislation, but watch this space. 2015 is going to be an interesting year.