RBA's Philip Lowe takes aim at negative gearing, questions global race to cut corporate taxes

Extract from ABC News

By business reporter Thuy Ong

Updated about an hour ago

Photo: The NSW Government is planning to redevelop the harbourside Bays Precinct over the next 30 years. (Supplied: NSW Government)

Related Story: High debts, house prices mean no more rate cuts likely: Reserve Bank

Related Story: Reserve Bank warns Australia needs to remain competitive

Australia could "take the heat out of the housing market" and make home prices more affordable by cutting negative gearing and capital gains tax concessions, the head of Australia's Reserve Bank admitted today.

Reserve Bank Governor Philip Lowe also questioned the wisdom of a global race to the bottom on corporate tax cuts, in a blow to the Government's claims that the central bank backed its view that cutting corporate tax would create "jobs and growth".
In a remarkably frank exchange before a Standing Committee on Economics, Dr Lowe said altering negative gearing and the capital gains tax would take some heat out of the housing market, at least in the short term.
While he said negative gearing alone wasn't the issue, it was the combination with capital gains tax discounts that fuelled investment demand.
While he couldn't quantify the effects, he said, if removed, it would likely help housing affordability.

"It's likely it would reduce investment demand for a while, and if you have less demand for a while, you'd have lower prices and that would take the heat off housing market."

But Dr Lowe said he was not advocating for that as a policy.
Negative gearing, which became a contentious election issue last year, is a tax benefit that allows investors to offset losses on their rental property against their income.
Another option was to tighten bank lending if investor loans kept rising, he said.
"In the last six months it's picked up again... Talking to a number of banks when it was growing more quickly, they didn't want to pull back because their competitors weren't pulling back."

RBA eyes household debt, borrowing

Adding to comments he made earlier this week, Dr Lowe highlighted the difficult position in which the Reserve Bank now finds itself; cutting rates could further fuel real estate prices while raising rates could threaten highly indebted households.

"Is it really in the national interest to create vulnerabilities in household finances?" he asked the committee.

He noted that it would be better if unemployment was "a bit lower, and inflation a bit higher".
But he argued easing rates to lift growth would only push up borrowing and house prices.

Photo: Dr Lowe argues easing rates to lift growth would only push up borrowing and house prices. (AAP: Alan Porritt, file photo)

When asked if the central bank was concerned over the levels of household debt, Dr Lowe replied: "It's a risk factor. It's just one of the risk factors that plays into our decision making."
Debt is still rising faster than income, spurred on by record low interest rates and low borrowing costs. Australian household debt to income reached a level of 177 per cent in 2016, according to Prime Capital.

Competitive tax system

The Reserve Bank governor made headlines recently when he said Australia may have to consider cutting company tax - a statement the Government seized on as evidence the RBA was backing its policy.
While the RBA governor highlighted the importance of having an internationally competitive tax system, he questioned the wisdom of the global race to cut corporate taxes.
There is a form of international tax competition going on, and in the post crisis environment, lowering corporate tax rate as a potential strategic advantage to attract investment elsewhere around the world, he said.

"I think you could argue that, this is from a global perspective it's not actually that useful," Dr Lowe said.

"Because just lowering the corporate tax rate from one country to another just changes the location of investment, it doesn't increase aggregate investment."
Dr Lowe said Parliament would have to make a choice between responding to international tax competition, or say no, confident that the country has other advantages that attracts investment.
The Reserve Bank expects the Australian economy to grow by around 3 per cent in 2017 and 2018, with LNG production expected to add 0.5 per cent to GDP growth.
Headline inflation is expected to be back above 2 per cent later in 2017, boosted by higher prices for petrol and tobacco.