Worst policy idea ever? (1)

The first contender in what I suspect may become a rather long list of irritatingly stupid and ill-conceived policy ideas is a Treasury initiative called ‘First Home Saver Accounts’. The idea behind it is to enable first time buyers to save a deposit for a home. Government contributes 17% of the first $5,000 saved per year (i.e. up to $850) and provides tax preferential status to the accounts at 15% (as opposed to the up to 45% they might otherwise face).

Individuals can withdraw their account balance tax free to buy or build a first home in which to live. So what on earth could be wrong with helping dispossessed and defenceless first-time buyers in this way? Well …

• A lack of problem definition: at an average age of 34 Australian first-time buyers are not particularly old by international or historical comparisons, especially relative to the long term trends for later entry into working and family life;

• No evidence to justify role for government: a complete lack of argument is provided for why government should subsidise first-time buyers. (I’d be willing, though skeptical, to hear an argument based on life satisfaction or community cohesion but it’s not there);

• It’s completely untargeted: there’ll be huge deadweight losses from people who would have bought properties without the generous government support;

• Likely to be regressive: I suspect it’ll be savvy young professionals who’ll take most advantage of the scheme (and the $5k a year limit) rather than the low paid key workers for whom there may just about be a rationale for government action to help (although even then it would probably represent a second-best approach to policies like having more locally-determined pay rates);

• It ignores the real problem: which is that in one of the world’s most urbanised countries supply constraints relating to housing density and developer-hording are the most significant to overcome (indeed even a first year economics student could identify some rather perverse consequences of ramping up demand without ability of supply to respond);

• Easy to exploit: eligibility is broad and provisions to prevent abuse weak. For example, you only need to be ‘resident’ in the property for six months, and I suspect even within that window it’d be quite easy to get away with renting it on the side;

• Expensive: the direct exchequer cost of the subsidy will be up to $850 per person. Of course there’ll be a further hidden cost associated with the tax revenues forgone from granting the accounts a preferential tax status. And, with no cap on take-up the programme could easily start running into tens or even hundreds of millions dollars;

• It’s just political pandering: offering sweeties to vocal groups at the expense of the rest of us. Which is not merely politics at its lowest common denominator but also nothing short of a signal to more such nonsensical initiatives to come sniffing at the politicians’ trough.