Independent economist Saul Eslake welcomed last month’s budget. Not everyone agrees.
Fitz: Mr Eslake. Thank you for making the time at such short notice.
SE: Pleasure, Peter I remember meeting you at that banking function in Queenstown 15 years ago, when you had to drive through that storm because all the flights were cancelled.
Fitz: I remember, but didn’t think you would! You and I talked till late, and I was struck then that you had a singular capacity to explain economic theory and practice in terms that even the more economically obtuse of us could grasp … which is why I turn to you now, as the backlash against the federal budget still goes on. The Herald’s own Ross Gittins is a hard marker, and he thought it a good one. What about you?
SE: I think it is the best budget that [Treasurer] Jim Chalmers has brought down, in the sense that at least by scrapping negative gearing, other than for “new builds”, and abolishing the 50 per cent capital gains tax discount for assets held longer than 12 months he was trying to use some of the tools at his disposal to achieve meaningful reforms, something that he hasn’t tried to do, or I suspect hasn’t been allowed by his prime minister to do, in the four budgets he brought down previously.
Fitz: Go on …
SE: That’s because political conventional wisdom in Australia now is that you cannot win government from opposition for the first time on a platform of bold reform because the government of the day will use all the vastly superior powers that it has at its disposal to frighten the bejesus out of voters as to what would happen if by some chance the opposition ever won. The last person to win an election on a platform with bold reform was Gough Whitlam in 1972. And subsequently John Hewson and Bill Shorten showed that if you try to do the same thing again, you’ll lose an election that everyone expects you to win.
Fitz: While the “true believers”, and those who’ve “always believed in miracles”, celebrate …
SE: Yes, so, the only way you win an election for the first time is to promise not to do anything at all, just to do it more competently than the mob that you say have been there too long. That’s how John Howard got elected in 1996, saying that there’d “never ever be a GST”. It’s how Kevin Rudd got elected in 2007. It’s how Tony Abbott got elected in 2013, saying, “there’ll be no cuts to education health and the ABC and SBS”. And it’s how Anthony Albanese got in, in 2022, and repeated the dose at the 2025 election. “Vote for me and you’ll get more of the same.” And one of the problems that he and Chalmers have had in selling what I think is essentially good policy is that they said they wouldn’t do it.
Fitz: Bearing in mind my own economic illiteracy, my understanding is that Chalmers was trying to rebalance the seesaw so that things are less favourable for my generation of Boomers and make it easier for the 20-somethings, 30-somethings – including making it easier to get their first home. But the problem that he’s got, is that to make it easier for first home buyers, he’s got to make housing prices come down. But now they are coming down, everybody’s screaming blue murder?
SE: Yes, that’s exactly right. I’ve been saying for a long time that we in Australia have a massive double standard when it comes to housing. The Consumer Price Index which measures inflation is divided up into 87 different categories, and if the price of 86 of them falls, everyone will welcome it and the government of the day will try to claim credit for it. But when it comes to a fall in the 87th – housing – there’s hell to pay. Despite the fact that housing is the biggest component of the CPI, nobody wants house prices to fall and nobody certainly wants to claim credit for house prices falling.
Fitz: It’s politically intractable?
SE: Yes. We saw that in last year’s election, which was supposedly about the cost of living. Despite the fact that the biggest component of the cost of living is the cost of housing, both Dutton and Albanese explicitly said they want house prices to keep going up, and they both offered policies that were designed to produce that result. The government offered the 5 per cent deposit scheme for first home buyers, which I call the “95 per cent loan scheme”, which was bound to put upward pressure on prices, and it did. And the opposition was promising an even dopier scheme, allowing people to take 40 per cent of their super out and use it as a deposit to get a big mortgage. So thank God they didn’t get the chance to implement that.
Fitz: I still can’t see any solutions up ahead?
SE: I’ve been saying for a long time that the reason our housing affordability problem would never be solved was because a very large majority of Australians don’t want it to be solved, and politicians know it. So for all the megalitres of crocodile tears that politicians of all persuasions routinely shed for the difficulty faced by would-be first home buyers, they know that in any given year there’s only about 150,000 of them. And even if you assume that for every one of them that succeeds in buying a first home in any given year, there’s five or six who’d like to, but can’t … that’s only a million votes for cheaper housing. Whereas there are 11 million Australians who own their own home, and there are 2 million or so who own an investment property. And even though they overlap a lot, there’s still at least 11 million votes for more expensive housing, so even the dumbest of our politicians can do the maths.
Fitz: That’s a hard calculus to overcome.
SE: That’s 11 million votes for more expensive housing, whereas for, say, 30 years after WWII, most people and all politicians thought that housing existed to serve basic human needs for shelter and security, and for a stake in the community in which you lived. Over the last 35 or so years, Australians have come to think of housing as a means of accumulating wealth, or as people like to say these days, “getting ahead” without ever asking “ahead of whom?”. The answer to which is, of course, their own kids and grandchildren and their peers.
Fitz: But, here’s the thing. When I said something along the lines of the changes to CGT and negative gearing were about moving towards intergenerational equity, some of the blowback was, “well, it’s okay for you, you bastard, you’ve already accumulated your wealth. How will younger people in their 20s and 30s generate theirs?”
SE: Well, yeah, and that’s not an unreasonable point, except that the number of people in their 20s who are accumulating wealth in that way is tiny. Fewer than 5 per cent of individuals under the age of 35 have rental income in their tax returns, and only 4.3 per cent of people aged between 18 and 34 have capital gains in their income. This is compared with 19.7 per cent of people aged 55 and over with rental income, and that income is 45 per cent of the total amount of rental income. What is more,11 per cent of people over 55 claim capital gains, and the capital gains which they have, account for 62 per cent of all the capital gains. So, this idea that the budget is an attack on the way young people are accumulating a deposit is just simply not true. Yes, there are some people doing it, but probably they are ones who have rich parents, or who have finished their double degree in law and commerce and are now working for Goldman Sachs.
Fitz: That still leaves many of us Boomers in an inordinately lucky position.
SE: Yes.I don’t like “grandfathering” the fact that the budget changes only apply to future investments, while existing investments keep the old tax treatment, because that’s in effect privileging people on the basis of birth order. It does give some substance to the charge that you’re kicking the ladder away from the next generations to do what you have done. I wish they wouldn’t grandfather it, but the judgment they make, and it’s not difficult to see why they make it, is that they have to grandfather it, otherwise they would never survive the next election, because too many people who’ve had their snouts in the trough for decades would be pissed off at being told they have to take their snouts out of the trough.
Fitz: All up though, you make the case that house prices coming off, despite the media hullabaloo and the outcry from those who are homeowners, is actually helpful for us as a society?
SE: Yes. But with one caveat. If house prices were to fall by, say, 25 per cent in a year, like they did in America, Spain, Iceland, Greece, or Ireland during the financial crisis two decades ago, that would threaten the stability of the banking system as many people would owe more money than their homes are worth. No-one wants house prices to fall 25 per cent. But if they were to fall by five or 10 per cent, which some people are forecasting, it would be no bad thing.
Fitz: And yet they’re not saying that?
SE: Precisely! None of Jim Chalmers and Anthony Albanese and Housing Minister Claire O’Neil are willing to say it out loud. O’Neil, who’s no fool – she’s an intelligent, capable person – couldn’t bring herself to say on TV the other day that the solution to housing being too expensive is … cheaper housing. None of them can say it, they know that there are 11 million voters who think that more expensive housing makes them better off. The truth is the only people who are actually worse off with these changes are people with investment properties.
Fitz: In terms of the politics of all this, you are an independently professional economist, and must survey the political landscape to see what’s coming. Right now, the big political noise is coming from One Nation. For the life of me, I can’t discern that they have any nuanced economic policy per se on things like housing. Can you, or not?
SE: I don’t think they have either, other than the belief that adopting a net zero immigration policywill reduce the demand for housing and hence make it cheaper. The more substantive point is the people who are attracted to Pauline Hanson – like the people who are attracted to Donald Trump in the US and Nigel Farage in the UK, and all the other weirdo parties in France and Germany, and so forth – don’t care about policy, they just want to chuck the bastards out and bring the system down.
Fitz: And? What would happen? If One Nation did get power – let’s say in a coalition with the Coalition, or whatever – what would that do to the economy?
SE: Send it backwards. My only uncertainty is whether it would happen quickly or slowly.
Fitz: But why, ipso facto, backwards?
SE: Because the kind of populist policies that they would implement would first of all cost a lot of money that they have no idea how to pay for, other than put it on the tab. So we’d run bigger deficits. Hanson wants to bring back tariff protection that – just as it did for 90 years – once again forces Australians to pay higher than necessary prices for badly made goods.
Fitz: When I interviewed the treasurer, he made the point that Tim Wilson was the third shadow treasurer he’d faced in the last 12 months. What do you do make of him? Do you lean forward when he speaks? Does he make sense?
SE: It is part of my job to form a view about what might happen if the other guy gets to be treasurer, so I do pay some attention to it. But I’m more focused on his leaders. I’ve said – although I don’t think anyone’s quoted me as saying it – that Angus Taylor and Jane Hume together were the least effective shadow economics team I can remember since Gareth Evans and Bob McMullan after Keating lost the 1996 election. But at least Gareth Evans and Bob McMullan can claim significant achievements in their prior ministerial careers, which neither Taylor nor Hume can. Right now, I suspect Wilson will be more effective than Taylor was when he was shadow treasurer, but that’s not exactly setting the bar very high.
Fitz: Last question. If a 25-year-old Australian asked you whether they should spend the next decade trying to buy a house, move overseas, or simply rent and invest elsewhere, what would you tell them?
SE: I would begin my answer by asking that person what he or she thought was most important in his or her life. If it was stability, a sense of belonging, “a place to call home” then I would say try to buy a house and don’t worry about whether it goes up in value or not. If that isn’t one of your life goals, then by all means rent and invest – you could change your mind later in life, in which case if you’ve invested well you will be better placed to change your mind. And moving overseas doesn’t have to be a permanent choice. Indeed, probably the only significant regret I have about my life is that I never lived or worked overseas (at least not as an adult). But then again if you get to 68 and only have one major regret, you’ve had a pretty good life!
Fitz: Thank you for your time.
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