DUM, DUM de DUMB ... Sydney's median price across both houses and apartments rose by $10,000 last month. (OK, it was $9,900.) If it maintains that pace, then median housing prices will rise by $120,000 in the coming year. How many young people do you know who will be able to save more than $120,000 - after tax - in the coming year? So if you were to nominate the policy that you'd LEAST want to see coming into operation today, it'd be the one that lets new homebuyers buy on a 5% deposit ... To repeat the obvious, Australia doesn't have a lack of money chasing housing. We have a lack of housing. The policy coming into operation today will make the owners of housing about $60bn wealthier. What it will have the exact opposite of doing is making housing more affordable. I'm writing an article for the weekend on why governments regularly choose 'feel good' policy over actually good policy. Sadly, all governments do it ...

IT’S TIME FOR INDEXATION Yesterday I recommended a minimalist reform to personal tax – doing what we do now, but with fewer moving parts. But we can do better than merely reducing complexity: we can index personal tax thresholds. In brief, there’s a trade-off: switching to indexation reduces flexibility for politicians, but it would improve the trust that our systems increasingly lack. And that’s a trade-off I’d happily make. Our default is faulty. Shortfalls in money collected from the failing parts of our tax system (cigarettes, gas, banks etc) get made up over time by bracket creep – by higher taxes on workers. That means the existing bias in the tax system against workers and the young is on a ‘set and forget’ course to worsen over time. Why should we index? The average personal tax rate rises relative rapidly over time as wage increases push people into higher tax brackets. Governments love that, because it allows them to announce relatively regular tax cuts: · Yet those aren’t really cuts at all – they’re just handing you back what inflation took away. · Even better for the politicians, they get to choose when they hand that money back. Unsurprisingly, their generosity tends to be on show when there’s an election coming. · That’s why politicians love the existing system: they get to pretend to be generous when they’re merely handing money back that inflation stole from families, and they get to time that to maximise their electoral chances. · Even better, at any given moment the lack of indexation means that official forecasts always show the budget balance improving over the long haul. That allows the pollies to point to that and pretend that they’re being responsible. But there’s a growing problem: the punters are increasingly losing faith in the system. And that failing faith risks being increasingly costly over time. So it’s time. I’d be happy to switch to indexing the personal tax thresholds by a set 2.5% a year, and doing the same for some government payments too That idea isn’t mine: it’s been proposed by Luci Ellis of Westpac (ex-RBA). It would: · Help restore trust in the system. · Remove the ability of governments to pretend that they have budget repair under control. · Remove the flexibility of the government of the day to time tax cuts around elections. Are there good reasons not to do it? You’ll hear some people say that “it would cost a fortune”. But that’s only true if governments didn’t regularly hand back the money anyway. So that’s not an apples-with-apples comparison. (Besides, shifting to indexation doesn’t completely stop the average rate of personal tax drifting up. That’s because, over time, wages grow faster than prices.) Yet there is an argument against indexation that I do think has merit: you take away some of the ability of governments to bribe their way to reforming the tax system (as, for example, happened when the GST was introduced). Yet that last argument isn’t enough to change my mind. The big point is that our failing trust in governments of all stripes means we should be actively rebuilding that trust. Indexing the personal tax system would be a good way to start that journey …