Land of the Tweedles

With roughly 100,000 First Home Buyers every year, 90% of whom buy an existing property rather than a new one, the abolition of this house price support scheme (that's not what Dee and Dum call it, but that's what it is) could save $600 million a year-and the continued support for new housing might spur housing construction as the Boost did in 2008. That's a rather more responsible way to save money than by cutting medical research funding, which is one of the deficit reduction kites Dee flew a month back.

Limiting negative gearing to new properties only would also do something to increase the supply of new housing for renters. Both Dee and Dum claim that is the real goal of the current policy, but despite their bleatings, everybody knows that, as a scheme to encourage speculation on rising house prices, negative gearing is simply another plank in their mutual house price support scheme. So-called investors actually do less real investment than even owner-occupiers these days-less than 2 percent of new dwelling finance goes to investors building or buying new properties.

Figure 3

If negative gearing was restricted only to real investors-people who actually build something new, rather than buying something old and waiting for its price to rise-then renters might someday be able to find somewhere to rent.

Limiting negative gearing to new properties only wouldn't affect current property speculators (I'm sorry, I meant investors)-at least not directly-but it would reduce the growth of this Budget-sapping Black Hole by 95% or more.

Finally, the decision to halve the rate of capital gains tax back in 1999 was one of the stupidest things Dum ever did (when he was in power)-and therefore it worked a treat in Looking Glass Land. It costs the government close to $10 billion dollars a year-almost the amount of the deficit they're both claiming to know how to reduce. And, like everything else Dee and Dum don't bicker over, it promotes speculation over true investment.

Now it's the main cause of a blowout in the Budget deficit this year we're told, as capital gains have evaporated from our anaemic share market and the now bursting house price bubble. So why not make the Budget hit less extreme by bringing the rate back to the same as that for income?

Are either of them likely to even discuss abolishing this tax distortion? Not on your Nellie. And the same goes for the other two policies too, because behind their facade of debate, Dee and Dum both know that anything that would reduce house prices-and genuinely make them affordable-would lose them votes with the Looking Glass electorate. So even though these policy changes would probably eliminate the deficit overnight-which they both claim to want to do-they will instead fight about how hard to hit the soft targets of welfare recipients, universities and their own bureaucracy.

Which brings us to the other issue on which they both agree: the need to reduce the government deficit. Are they right?

In the interests of promoting healthy scepticism here, let me propose a simple rule of thumb: almost anything that Dee and Dum agree upon is likely to be wrong (and this applies in the USA as well to their Dee and Dum).

Firstly, government debt didn't blow out on its own accord: it grew because private debt stopped growing. This is obvious in the US data: government debt fell after the 1990s recession ended-and only rose since late 2001 because of foreign wars. Government spending blew out in 2008, not because the Dumocrats took over from the Deepublicans, as their political debate would have it, but because private debt-financed spending collapsed when the housing and stock market Ponzi Schemes ended.