Senate Economics Legislation Committee, , 37:27 to 1:08:43
Senators examine the distribution of capital gains tax benefits and the impact of tax settings on housing policy.
Topics: Government spending, Social services, Infrastructure
Speakers: Jenny Wilkinson PSM, Nick McKim, James Paterson, Hon Katy Gallagher, Katrina Di Marco, Hon Matthew Canavan, Lisa Darmanin
>> Rotate the call. Thank you Senator McKim.
>> Uh thanks. Good morning folks. Um I've got some questions about the capital gains tax discount. Um in 200 these are treasury figures 2009 39% of the capital gains tax discount went to the highest 1% of income earners in 2022 that 39% going to the top 1% of income earners went up to 54% of the value of the CJT discount going to the top 1% of income earners. Those are both um public treasury figures. And this financial year, based on parliamentary budget office analysis, 59% of the benefit of the capital gains tax discount is going to go to the top 1% of income earners. Can you just talk the committee through why uh those numbers are climbing so steeply and why um the benefit uh so much more of the benefit of the capital gains tax discount is going to the highest 1% of income earners.
>> Uh so Senator I I fear I'm going to disappoint you. I think you're talking about the figures that are in the tax expenditure statement that we released in December. Would that be right? I'm
talking about figures that are publicly available um from Treasury that show
that over time >> but I think they might be fig so
>> is it from that report the tax expenditure statement that was released in I think in December
>> well it doesn't matter where these figures are from and I've I've been clear these are the first two are treasury figures the last one is a public parliamentary budget office figure
>> all I was going to say is that the officers who can speak to um the the the information in the tax expenditure statement uh will be here with revenue group. I believe revenue group here is here for 3 hours uh this afternoon. >> And they will be they will be best placed to speak to what's changed and and you know what do we know about about how it's changed. That's what y
>> I appreciate that um the revenue will be able to go into detail but you're the secretary of treasury. We know the Treasury is modeling potential changes to the CGT discount for government for consideration in the budget this year. You've just gone and I've got no quarrel with this. You've just gone into deep dives into things like productivity. You were even happy to hold forth on, you know, investment into data centers earlier and that's fine. Can you just explain to the committee why the CGT discount and the benefits of the CGT discount are going uh over time so much more strongly into the pockets of the 1% highest income earners in the country? I mean surely you've surely happy to talk about that if you're happy to talk about investment into data
centers. Uh so no it's it's so senator it's just that so that's a sort of a a specific technical question about that component of the tax system and I don't want to mislead the committee. Um uh there will be the relevant officers who will be available uh when revenue group appear in order to to speak about that. So, I don't I I'm I'm just I I apologize, but I am not in a position to uh I'm I'm not in a position to with confidence provide the committee with an explanation for for why that has changed over time. it it the fact that it is increased over time is evident in the Treasury um the tax expenditure statement that's released by the government. Um uh so I [snorts] I'm I'm yes I I'm not sure that I can help you.
So this is a $20 billion a year plus tax concession. You're currently modeling changes for the government for consideration in the budget. The treasur and the prime minister have been very clear not to rule out the potential for changes to the capital gains tax discount settings in this year's budget. Um it it is over time massively concentrating its benefit into the the the very very high income earning cohort in this country and as the secretary of treasur you don't have a view about why that's happening. No,
that that's that's what the distributional data shows you from that that what we're what we are sharing through the tax expenditure statement is is what the distributional data um demonstrates. So I'm not sure whether any either of my colleagues have anything else to add.
>> Well, I'm aware of what the data shows. I mean that's the basis of the question. I mean my question is what's going on here? like why why is it that over the last 15 or so years the the the amount of the capital gains tax discount that is going to the top 1% of income earners in Australia has skyrocketed from 39% to 60 to 59%. Like what why is that happening? Can I mean this you're the you're the Treasury Department. No one no one can help the committee understand why that's happening.
I find it about say Senator Katrina
Demarco, Deputy Secretary um International Corporate Investment Group. I think the secretary is right. I think that's best explored with revenue group. There's just a couple of cautions I'd put about looking at some of these things over time, particularly with regard to capital gains tax. The first is that it is incredibly lumpy. The second is is that the benefit occurs in the year that you dispose and so by nature if you have the gain in that year that can shift where you sit in the distribution of income in the tax scale. So you actually need to be quite careful in comparing these sorts of things over time. At that point they've got a high higher marginal tax rate. So when you measure the gains in this way it does look like it's occurring to a certain part of the distribution but that's kind of by definition in terms of the way you construct these things. So I'm not going to profer a view on why it might have occurred over time. All I'm saying is you've got to be very careful in considering these things over time because these are life course decisions. They may be one disposal in a lifetime, not a disposal by that same person in that part of the distribution in every year.
>> Sure. But th those those matters pertain right through uh right through uh the 15-ear time period that we're talking about. I mean the same the same I'm not asking you Senator Canavan. Thank you. And I've She >> she No, she absolutely has not. And what we've got is a situation where we got the minister for finance here. We got the secretary for treasury and no one can explain why the concentration of benefit of the capital gains tax discount is skyrocketing over time and is going has gone from 39% going to the top 1% of income earners in 2009 up to 59% going to the top 1% of income earners. No,
>> your committee reporting report in the 17th of March and I think this is one of the terms of reference that you're
inquiring [clears throat] and
>> but also
>> I know we haven't yet received
here revenue that's all we're saying that's all we're saying.
>> Yeah, I all right I'll just move on. I find extraordinary I find extraordinary that we can't that there's no no explanation profered from the finance minister
>> the um the Liberal party on CGT
>> I I do find it extraordinary that we got the finance minister and the secretary here
>> and and got a lot of things to say about
>> I find it
>> tax on it's an inflation tax that's what
>> is Senator Canavan going okay do you reckon
>> ask the questions >> better you the call center caravan
>> revenue will be here later.
>> I understand revenue will be here later, but I'm just going to say I find it extraordinary that we can't get any kind of an explanation as to as to why the most unfair tax break on the books in this country is um skewing over time so much further into the pockets of the top 1% incomes. I find that extraord I find that extraordinary. So I I'll move on, but it's still on the CGT discount. And I presume the answer is going to be the same, but it's the same with age distribution. We've seen a higher share over time going to older Australians and correspondingly a younger share over time going a smaller share over time going to younger people. So just to be clear, the the value of the capital gains tax discount that is going to people under 35 years old is 4% and that is shrinking over time. Why is that I mean I'm happy for the for the minister to answer. I'm happy for the secretary to answer. Like why? Like
technical answer and the revenue group will be appearing later and they will be able to answer your question.
>> All right. Well, let's go to um some of the absolute uh figures on the CGT discount. I mean, I I just don't know what what um what response we're going to get here, but I'll give it a go. Um
>> well, if they're questions for revenue group, you'll get the same.
>> Well, these are these are questions on the impact to the budget. I presume that having the finance minister here and the secretary to treasury, we might be able to get an answer on impact of the budget on the capital gains tax discount. So um the parliamentary budget office analysis that was requested by um the Senate select committee into the capital gains tax discount projects that over the next 10 years the CGT discount is going to cost the budget $247 billion. Now that is more than the CGT CGT discount has cost the Commonwealth budget over its entire 25 year history. That number for reference is 205 billion dollars. Firstly, do you does Treasury take issue with the PBO assessment and does Treasury agree that over the next 10 years the capital gains tax discount is going to cost the budget $247 billion and secondly how is that sustainable to the Commonwealth budget?
Um so Senator you will get the same response from me which is that that is a matter of detail which goes to a matter of revenue that that is the responsibility of revenue group and so I think the relevant uh officials should be here in order to provide you with um uh an answer to your question. I I do not have uh an explanation in front of me for how this would change or I'm not in a position to to advise as to whether we uh agree or disagree with that particular piece of um of uh PBLO analysis but I have confidence that when revenue group um attends they will be in a position to answer those questions.
>> Treasuries Treasury's you know analysis is in the tax expenditure statement. I haven't seen the PBO analysis. I don't know if it's public. Um I'm just looking on the submission side for your committee. I can't see it listed there, but um that's they're the figures that Treasury provided out to 28 uh 29.
>> so
>> so I don't know if that they're different to the ones that you're citing
>> Well, how much is the capital gains tax discount going to cost going to cost the budget over the next decade?
Well, I can see figures here until 2829. Um, and so from they're in the order of about n 19 billion in 2627 uh growing to 19.6 in 2728 and 20.380 in 2829.
Okay.
>> Are they the only publishers? We don't >> not published beyond
the treasurer had his economic roundt earlier this year. He said the top two issues that came out of that were a fair go for working Australians and intergenerational equity. You've got a tax system in this country where if you go to work as a plumber or a carpenter or a cleaner or a bartender or a nurse, like you pay double the tax on your income than someone who sits on the couch and flips investment properties You've got a a massive public subsidy to property speculators, only 4% of the benefit of which goes to people under 35. 60% of the benefit goes to the top 1% income earners. I mean, it's a no-brainer, isn't it, Minister, that you would reign in the capital gains tax discount to deliver on what the treasurer says are his two main priorities. Fair go for working people and a fair go for young people. It's a no-brainer, isn't it?
Um, well, that sounds like, you know, the forward to your select committee report. I imagine as chair of that select committee, Senator McKim, uh, we look forward to receiving that report when it's finalized and whether or not you can get, um, you know, a majority report for that. Um, I'm not sure. Uh, the treasurer has been clear about the issues that came out of, uh, the economic reform roundt. uh he's been clear in recent days about in in media statements and otherwise around looking at some of the intergenerational issues in housing um you know and we're working through
>> last question on this and then I I'll move on to other topics in my next bracket but um uh that inquiry has just has been informed by Treasury that Treasury won't be providing a submission to that inquiry. So, Miss Wilkinson, that inquiry has received a submission from the New South Wales Treasury Department, but it appears that that inquiry is not going to receive a submission from you, from your agency. Why is your agency not submitting to that Senate inquiry? So, Senator, I
think that um the tax expenditure statement over time provides I think relevant information um that uh can be considered by the committee. Um uh I um I expect that um uh Treasury officials um uh may well be called to appear before the committee. That's right. And we are happy to appear before the committee.
Thank you, Senator McKim. So, just for all senators, we'll um go in 10-minute blocks now and we'll try and stick to time as much as we can and um break at 11:00 and hopefully be on track for the agenda for the whole day. So, Senator Paterson,
>> thank you, Chair. Um I just want to briefly re v revisit this issue of the medium-term projections, but I will pursue the detail later with fiscal. Um, in my uh the document says, and I quote, "The medium-term fiscal outlook is broadly in line with 2025 PIO." >> Secretary, do you think a 57 billion deterioration, if that's what it is, is broadly consistent with PIO.
>> Um, so Senator, I'm happy with that statement. If I look at the chart on chart three, if I look at the graph on chart 3.1, um uh you can see how the underlying cash balance varies over time. Um you can see how it has varied in terms of the medium-term between PIO and my EHO. Um uh I think that taking into account as I say the uncertainties around doing these projections over long periods of time like over a decade um I don't think it's unreasonable to draw the conclusion that um that change is like that that that it is broadly I think what the the words are I think broadly in line I think it's always said it's broadly in line with the 2025 five PIO. Um uh that that's what I would come back to is is drawing your attention to the chart 3.1 uh including um you know it gives you a sense of how much the fiscal position can change over time.
>> I mean it feels like to me that broadly is doing a lot of heavy lifting in that sentence. Um $57 billion if that's what it is um is a lot of money uh even over a period of time like that. um whether if you want to express it in terms of percentage of GDP you know.3% of GDP uh over a single financial year is a big
>> um I think the statement is about the um fiscal outlook um uh over overall the fiscal outlook um compared with the PO so it is an overarching statement rather than a statement about any particular outcome times in any particular years.
>> Right? But if you were talking specifically about the underlying cash
>> uh so again, I would look at um chart 3.1 or I would look at uh what's the other charts? Uh 3.5 and 3.6 six and um uh so there's there so I you know I think that I think that those charts provide provide information about what's changed what's changed over time. So, I don't you know, as I as I say, I I I think your question was, do I stand behind the overarching statement, which is that the medium-term fiscal outlook is broadly in line with 2025 PIO? I I do. It's not exactly the same, but I think it's it's broadly in line and and um uh and I think the government's been transparent about um how it's changed over time. H
it but it was only 6 months roughly um call it seven uh between PIO and my EO that's in that short period of time that's quite a large deterioration isn't
Uh I think there are probably much more significant deteriorations. I mean so budgets up the budgets get updated roughly every six months always right. So we have budget in May and we have uh myo in November or December most years. Um and there are variations that flow through um in those periods. So I I don't I don't have that in front of me. But there are um uh you know periods where there are more significant changes in um economic variables or other things which can lead to more significant changes in the fiscal in the fiscal position. But I I anyway I don't not sure that I've got anything more to add.
>> Sure. Okay. So just just couple of final questions on this. I mean in one financial year the deterioration is about 11 billion that increases the deficit by about a third. Again I I just want to understand your view that that an 11 billion variation in a single financial year increasing the deficit by a third is broadly in line.
>> No my statement about broadly in line is over the whole of the medium term.
>> Yeah. That's why I'm asking you about this specific. Do you think that is
Uh so there are I as I say I think the budget papers are clear that there are there are particular variations in particular years but overall it's broadly in line. That's that's that's I think the statement that's been made and the statement that I that I'm comfortable with.
>> When you signed off at on PIO were you aware of any um possibility that with this kind of deterioration?
>> No.
>> So it just kind of came out of nowhere
for you? uh every six months there are updates to economic parameters and updates to program specific parameters um and those are reflected in the updated budget documents. >> and so Senator So I was obviously Secretary of Finance at that time and and uh Secretary Kennedy was the Secretary of Treasury at that time >> and we take signing off on PIO very seriously. We have well we've jointly signed off on the PIO in 2022 as well and we um uh we think it's extremely important that um the PIO does provide um our best understanding of what the um what the the the the fiscal outlook uh looks like. So so we take we take that very seriously.
>> Okay. Um, moving on to something that is within the forward estimates. Um, so maybe uh a bit more straightforward. Um, page 317 of my info table E1. Um, it has some updated forecasts for uh, payments and underlying cash balance and receipts. Uh I'm particularly drawn to the um change in payments between 2324 and 2526 um where we go from% of GDP to 25.1 to 26.9 and that results in a deterioration of the budget bottom line from positive.6% of GDP to negative 1.3% of GDP. That's a very big turnaround in just a couple of
so the so obviously those data are published there that is the change in payments over that period. Um there are significant changes in in I mean when I look back in that series there are periods where there are significant changes. I mean >> uh between 2012 13 and 134 payments went from 23.8 to 25.3. I mean, >> yeah, I think you know that's the thing that happened both on the payment side and
>> I think you know that financial year there was a significant payment to the RBA which affected those numbers.
>> Oh, sorry. So, so I'm just I'm just looking back through that series and I don't I don't have an analysis of you know what drove that change but you know I don't I think that the the the um those data are are clear about the increase in payments as a share of GDP between uh o you know over this period. So that's what what you're what you're saying is reflected in those tables.
>> Sure. So we've got almost a 2% deterioration in the budget bottom line over two financial years. 1.9%. And of that 1.8% is due to government
>> Uh the breakdown um between receipts and spending well um I think >> that that's what's that's what's published in the >> in these these these documents. Can you
point to a time outside a recession or when we're making major top- up payments to the RBA where there's that kind of deterioration just two financial years driven by increased spending?
>> I'd have to take that on notice. Uh,
>> Okay.
>> One more minute, Senator.
>> what kind of impact does that have on the macro economy? Such a significant increase in government spending in just two years and such a big increase in the
uh Dr. Grant might uh talk a bit more about that but about this. So when we are doing our macroecon macroeconomic forecasts of course um we take into account um a wide range of factors. >> Um and one of the things we do take into account is um the fiscal stance and the change in the fiscal stance over time. um it doesn't if you like mechanically flow through to macroeconomic forecasts but it is um and it depends on uh the individual elements as to how we think about that potentially affecting outcomes. >> Sure. >> The one thing I would just note
>> can I jump in there because I've got limited time um we're in an environment of hot rising inflation. >> Yeah. Uh the RBA governor has said that the economy is at its speed limit or beyond its speed limit. That's why they had to increase interest rates. Do you think increasing the deficit and government spending by so much at the same time is going to put upward pressure on inflation or downward
what you're asking me is a is is a is a sort of an an in the abstract type
question. No, no, it's in particular, not abstract.
>> No, no, Senator. Um, uh, there is no question that, um, over 2025 and particularly the second half of 2025, um, there was a, as I said in my opening statement, there was a lift in um, inflation above um, where we expected it to be. Um when we try and think about um what led to that outcome, we have to look at what has changed between our forecasts say at PIO last year or the middle of last year and the outcomes and our forecasts. Now when I look at those changes, I would there are a couple of things that I would highlight. One is that private demand has clearly come in higher than we expected. Um the other is that um and and sorry and that has been driven by a combination of private investment and private housing and private consumption. So all of those have come in um a bit higher than we had expected um frankly and the RBA expected and most market economists expected in the middle of At that time when we were producing the macro forecasts in the middle of last year um we had a fiscal stance which is essentially the same as what it is now. In fact if anything fiscal policy has become a bit tighter over that period because we went from surpluses to deficits. So at that what I'm saying is
>> rotate after this
>> you have to take into account all factors and all context and what I'm saying is that at the point sorry at PIO last year uh but frankly also in the middle of last year where other forecasts were updated this current stance in fiscal policy was already factored into the forecast. wasn't
asking about PIO. We've moved on from PIO asking about the last two financial
years.
>> I'm clarifying so there's an understanding what I'm trying to understand.
>> So um so if we are trying to understand why inflation outcomes have been higher than we expected, you have to look at what are the factors which have turned out to be different from what we expected. And there are a range of those like the global economy has turned out to be stronger than we expected. Commodity prices have turned out to be stronger than we expected. Uh private investment has actually turned out to be stronger than we expected like in quite a few other countries. Um uh and consumers have turned out to to to to be uh well we're always we were always expecting a lift in uh private consumption expenditure but it's been a bit stronger than we expected. the the stance of fiscal policy has not changed between those forecasts that were made in PIO.
>> I've clarified that's not what I'm asking about. I'm asking about the 1.8. >> Minister, please let me be clear about my question cuz the secretary's answering your question. I didn't ask. this last chance to ask and then I need to rotate the >> 8% increase of GDP in government spending from when inflation was falling to when it is now rising and a 1.9% deterioration in the budget bottom line from a surplus to a deficit. That is net stimulatory on the macro economy, isn't
So the change in fiscal policy um is absolutely taken into account when we are working out our macroeconomic forecasts and that change in fiscal policy was already evident when uh in the middle of last year we were still expecting uh inflation to fall. So I'm so senator I think that it is it is very difficult in these circumstances to talk in the abstract about individual components. Um uh but I all I'm trying to say is that I think what's critical in this discussion is understanding what has I mean there's no question circumstances have changed from the middle of last year. That's what uh we have what we partly confronted in my EFO where we updated upgraded some of our forecasts. Um that's then also reflected in in the uh RBA forecasts which were released a couple of weeks ago. Um uh what I think is critical is to understand what are the what are the underlying factors or drivers that have changed and the change in the and the the stance of fiscal policy including what you have pointed out in terms of uh fiscal policy um um going from a surplus of 6% of GDP to a de deficit of 1.3% of GDP that has not changed and if anything actually I think if we look back at PIO the change over that period was greater than what it turned out to be.
>> Thank you, Chair.
>> Thank you, Senator Bragg.