2026 Budget Recap: Matt Bowes, Jessy Wu, & Manning Clifford

In October 2023, Jim Chalmers told the Sydney Morning Herald about his chocolate-eating habits. He said: "I don't do moderation, in anything. I'm always going 100 miles an hour. If I eat a piece of chocolate, I eat a block of chocolate."

On Tuesday night, he stood up in the House and ate chocolate.

He scrapped the fifty per cent capital gains tax discount. He quarantined negative gearing on existing homes. He cut the growth of the NDIS from ten per cent to two. He pulled the private health insurance rebate off the over-65s and shovelled the money into aged care. He put two billion dollars on the table for states and councils brave enough to reform planning.

It's the most interesting Budget since the Howard-Costello era.

It’s not quite a whole block of chocolate. But it’s a start.

Matt Bowes — Senior Associate at the Grattan Institute. Matt will take the reigns on infrastructure and housing.

Jessy Wu — Founder and Managing Director at comms agency Encour. Jessy leads us through productivity and innovation.

Manning Clifford — Founding Editor-at-Large here at Inflection Points. Manning will steer us through state capacity and human flourishing.

Transcript

SPEAKER_03 0:10

In October 2023, Jim Chalmers told the City Morning Herald about his chocolate eating habits. He said, I don't do moderation in anything. I'm always going 100 miles an hour. If I eat a piece of chocolate, I eat a block of chocolate. On Tuesday night, he stood up in the house and ate chocolate. He scrapped the 50% capital gains tax discount. He quarantined negative gearing on existing homes. He cut the growth of NDIS from 10% to 2%. He pulled the private health insurance rebate off over 65s and shoveled the money into aged care. He put $2 billion on the table for states and councils brave enough to reform planning. It's the most consequential and certainly most interesting budget in quite some time. It's not quite a whole block of chocolate, but it's a start. I'm Jonathan O'Brien, editor-in-chief at Inflection Points, and welcome to the Inflection Points Podcast. We've spent the better part of a year publishing essays by some of Australia's sharpest reformers, arguing for exactly the kind of reform budget that the government has just attempted. So this budget episode will do two things. We'll audit against our own track record, what our authors called for, what landed and what didn't. And we'll talk about where this budget actually gets us as a nation, where we're set up to go, and where we need to go next. Joining me today, Manning Clifford, the founding editor at large here at Inflection Points. Manning will steer us through state capacity and human flourishing. Hello, Manning. Good to be here. We've got Jesse Wu, the founder and managing director at Encore, a comms agency for the AI era. Jesse will be leading us through productivity and innovation. Hello, Jesse.

SPEAKER_00 1:44

Thanks for having me, Jono.

SPEAKER_03 1:45

And we are joined by Matt Bows, the senior associate at Gradon Institute. Matt's gonna take the reins on infrastructure and housing. Hello, Matt. Great to be here, Johnny. Wonderful. We're gonna walk through the four pillars today with simple framing. Good progress, but much more to do. The first nibble. So let's get into it. Manning, you picked the chocolate box framing in your prep notes. Walk us through it. Why is this sort of a first nibble and not a feast binge or a watershed budget?

SPEAKER_01 2:17

Yeah, there's lots of different metaphors you can use to describe what the government's tried to do. Um I think the reason I chose this chocolate metaphor is um Jim Chalmers likes to describe himself in this way. He likes to describe himself as someone who has a really large ambition. And I think that this budget tried to do that really um, really deliberately. Um, the question I think is whether it's going to be enough and whether the government has the ability to see this through to the end of the block. And I think already, as the budget has had some initial reactions, there's been pushback from some areas. Obviously, the opposition, as we record this, is yet to deliver their budget reply speech, but will likely put up some barriers to implementing the budget in full. And so um it it's kind of a useful metaphor, I think, to understand whether Jim Chalmers will actually be able to live up to the ambition that he holds himself to, and whether he'll be able to put the government and the nation at large in the direction that it needs to head.

SPEAKER_03 3:18

When you say the coalition could erect some blockers, though, they don't have sort of a huge amount of leverage, right? Um materialized? Like what's the reason for the government not simply being able to push through with a Labour Green's majority?

SPEAKER_01 3:34

Yeah, I think probably running a scare campaign is what the Labour government would be most worried about in this instance. And without getting into too much of the politics about this, there are two big barriers that I think the government's going to face in implementing this budget agenda. The first is uh navigating the difficulty of doing tax reform. Uh obviously, tax is the first thing that people speak about when speaking about this budget, and it's also the first thing that people talk about when talking about the to-do lists of governments to actually bring uh the nation into a new era of productivity and innovation and growth. But it's obviously politically fraught. You know who the winners and losers will be of budget and tax reform, and they'll often make themselves known, and we've seen that already. The second challenge that I think the coalition will engage with is the fact that Labour didn't bring these policies to the last election, despite having brought it to the two immediate prior elections. Uh, that's possibly because the people who are running policy in the Prime Minister's office are very similar to those who are involved in both of Bill Shorten's campaigns. But I think navigating a broken promise will be particularly challenging for any government, uh, especially at a time when the primary vote of major parties is at all time lows.

SPEAKER_03 4:53

Great. Uh Jesse, the treasurer told the chamber it's the most ambitious and the most responsible budget. Uh there have been various AFR columns, various capital brief columns, including yours, uh calling it uh the most consequential in a generation. Is that fair? What's your assessment?

SPEAKER_00 5:12

I mean, I think the thing that Australia really needed to boost productivity to create intergenerational fairness was to start to rebalance the tax burden from taxing income towards taxing wealth, or or basically the objective should be to tax productive things like work and also productive investments less, um, and and to create a kind of um zero deficit budget by transferring some of that to taxing wealth. So I think we've seen that come in with changes to the CGT, which will see um the removal of the CGT discount, which is currently at 50%, and the replacement of that with indexation, so that um the gains from inflation are not being taxed, um, and also reforms to the way that trusts are taxed and and the removal of negative gearing um on all but new builds, um, which will increase housing supply. So I think, you know, Matt, you pointed this out in your analysis that these measures aren't going to kick in until 2027 and that the initial gains from them will be modest, but in the medium term, they will result in substantial savings, um, and I think pave the path towards um reducing the the burden on income tax in this country. I do think that a lot was saved in this budget, so I think 77 billion. And I I would have probably liked to see a little bit more of that pass through to income earners. Um, but you know, I think that long tax reform is is a long path, and I think that we've taken the first step um towards what I hope will be an ambitious plan to reform tax in this country.

SPEAKER_03 6:50

This leads nicely into my opening question for Matt, which is we've got Treasury forecasting uh $31.5 billion budget deficit, but structural improvement coming sort of mainly from NDIS savings, right? So is this a reform budget or a cuts budget? What's kind of the case here?

SPEAKER_02 7:10

Yeah, I mean, I think this is a budget that does both of those things. Uh, certainly when we look over the Ford estimates, so that first four years of the budget, uh, the NDIS cuts are by far the biggest offset for new spending. So if we're considering, you know, how is this government spending matching up with other spending cuts it's making over the Ford estimates period, it's really relying a lot on some pretty rapid NDIS cuts. And I think that raises some real questions about whether or not they can achieve them. Over the medium term, though, I think this is where this budget really, I think, shows uh shows real promise. And that's, you know, we're looking at 10 years now. When you look at the previous mid-year fiscal update that the government did last December, over that period we didn't see any sort of surplus, uh, despite the fact that when you run the budget numbers out that far, what you're implicitly doing is assuming that a whole lot of bracket creep occurs, and so income taxes keep rising. So the fact that we were looking at this sort of budget trajectory where we had bracket creep going forward for years and we still weren't seeing any return to something like a sort of structural balance, that was pretty concerning. And I think that points to the broader challenges Australia faces when we consider all of the other things that that aren't in the budget, you know, natural disaster spending, aging population that that aren't always necessarily accounted for in the right ways. I think that that pointed to a real budget challenge. And what they've done last night, particularly on tax reform, but but also on the changing the growth rate of the NDIS, I think goes a long way towards changing that. It puts the budget in surplus before the end of the medium term. Uh, and it also importantly, I think creates some more sustainable ways of doing that rather than focusing on uh in general short-term cuts that are often difficult to achieve. If if tax reform sticks, then that's something that really changes the game for long-term budget sustainability.

SPEAKER_03 9:05

NDIS is sort of, I think has been sort of a foregone conclusion, not least because uh, you know, it it was already sort of announced pretty much in full at the National Press Club a few weeks ago. Um, but outside of I think the NDIS, what is sort of the tough trade-off that the government has made in this budget and and and where where maybe have they have they flinched? Uh Matt, start you, but we'll go to the table on that.

SPEAKER_02 9:34

I mean, I think the real challenge the government faced at this budget was with that that question of how do they respond to like the current moment? Because we do have, you know, at this particular moment in time, high fuel prices. We don't know how long that's going to last for. They've obviously cut fuel taxes uh for a period of three months. Uh, they didn't commit to increase it to extending that fuel tax cut in this budget, which I think is a good thing. Like we we should be waiting to see what happens before we bed down further fuel tax cuts that do increase demand for fuel at a time when it's at a premium. Uh, but we didn't see a lot of other cost of living relief there. And I do think that is is challenging for the government in in the short term. It means that there are a lot of people out there who are feeling like they're doing it tough. Uh the media kind of message there, I think, is that the economy, while it has sort of strong fundamentals, who've got pretty low unemployment, got pretty good employment growth because of those sort of broader headwinds globally. I think that the media message is pretty negative around the economic environment. And I think a budget that doesn't commit to those cost of living, uh cost of living packages that we have seen them commit to in the past couple of budgets, while that's important for the budget bottom line. I there's a question in my mind of whether they can make that stick, whether they can continue to hold the line there and think about what are the things we can do really to support uh low-income Australians more sustainably rather than relying on cost of living handouts like they they perhaps have more in the past couple of budgets.

SPEAKER_03 11:06

Yeah, I I I I want to ask about that maybe in terms of the the the WATO, the working Australian uh tax offset. Um $250 in three years time that will be entirely consumed by um by uh bracket creep sort of seems kind of unserious to me. Um is it is it a piece of signaling? Is it an indication that we could, for instance, be seeing uh the first signs of a structural reforming of the tax system where we do have essentially a working tax offset rather than a blanket um a blanket uh tax-free threshold? Is is that the signal there, or is it just here's 250 bucks?

SPEAKER_02 11:51

I mean, I really hope it is a down payment on that kind of further reform. As you say, you can always put these kind of small tax changes in the context of of the broader cost of living challenges that that say the median Australian earner on, you know, somewhere in that $50,000 to $60,000 per year income range faces. That those these small tax cuts are always going to look small in that context. Uh the question really is like, what is what is the direction of the budget when it comes to working Australians versus taxing capital and income, as Jesse was saying. And I think this is an important down payment on that. Um, the other point there is just about sequencing. So we had this sort of almost challenging sequencing, I think, pre-election last year, where the government announced relatively large tax cuts that were focused on low-income earners without really finding a way of funding that over the medium term. And part of what I think they've been able to do is sort of argue, well, we've already done the tax cuts. Now we're finding a way to pay for them sustainably in a way that also has, you know, benefits that they're trying to sell in terms of what they see as improvements to home ownership. So I think that that's a challenging tax reform process. It's probably not the one that I think many kind of tax experts would have would have thought you'd go down. Usually when you're thinking about these things, you sort of think about how can you reform taxes and kind of provide the benefits and sell it at the same time. But I think through that sequencing, they're probably coming to something that um has a higher chance of sticking than if they just come in with here's our big tax package and here's the cost and benefits at once.

SPEAKER_03 13:22

You talked there about sequencing of the budget. Um, and obviously, you know, sequencing can come from any number of kind of chaotic things behind the scenes. Um, you've seen the kind of inner machinations of government, um, and we know that it looks smooth on the surface, but you know, there's choppy waters beneath. Is this sequencing that that you're seeing, do you think it's predominantly a political calculation, or is it sort of the inevitable response to just how chaotic the uh mixture of kind of balancing and figuring out Australia's structural deficiencies in the budget and also responding to sort of three large macroeconomic shocks in half a decade?

SPEAKER_02 14:03

Yeah, I mean, look, I think part of the sequencing question here is just around like what's actually Australia's budget issue? Like what what is the issue that that is like causing people to be concerned, you know, experts to be concerned about fiscal sustainability in Australia? Because ultimately we do have relatively low levels of debt compared to most similar kind of countries. Certainly, you know, the debt to GDP that we have at the moment is not anywhere near the sort of 100% plus debt to GDP that you see in Europe and and see in the US, um, our fiscal trajectory is is much better than say the US's, for instance. Um, so really there's a question of well, why do we care about fiscal sustainability? And I think from from our research and and from kind of seeing the budget over a couple of years now, I think the big answer to that is just that the long-term expenditure challenges that we face are significant. Like we do have this aging population. We can see it coming uh in a way that that is is happening across the world, um, but is probably hitting Australia a little bit later. Um, that puts upward pressure on a whole bunch of government social services, but also just demands on the government are growing. Like I think it is really tricky to make the argument um that that maybe say, you know, the the new coalition government in the UK made in 2010 when they came in to say we are going to drastically cut government spending. And I think again, if if you look now at at the kind of proposals that are being put forward um from the opposition, I don't think they are thinking in terms of, you know, what's our uh what's our response to what's our version of a 2014, you know, Tony Abbott budget. That that's not necessarily, I think, how many of them are thinking. And so then that raises the question, well, well, how do you put the government on a sustainable trajectory? And I think that means you need to kind of think about politics of how you can sell tax increases. And part of that clearly that the government's put forward is we're gonna sell the tax cut first and make the argument for why the small income tax cuts they made are important and do matter. Um, and then long term, we're gonna put in place these these changes to negative gearing and capital gains, which have small revenue implications at first, but over time really grow. And so you you can see the end of the medium term period, so like mid-2030s, we're talking about uh that those kind of tax cuts doing about the same work of fiscal repair as those NDIS savings. So this is a this is a substantial change to the kind of fiscal trajectory. And that's really probably when we most need those benefits. Like it matters less what we do in the next, you know, three or four years. You know, maybe what we do in the next year matters because of its impact on inflation. But really, when we're talking about fiscal sustainability, it's about that long-term trajectory. And that that means you need to make these things stick. So I I think you've got to you've got to think about the politics there when you're thinking about how to make them stick. And that's not something economists are generally that good at. Um, but I think treasuries around the country need to need to start getting serious about it.

SPEAKER_00 16:55

Yeah, very well said.

SPEAKER_01 16:56

Yeah, just to jump in on that as well, I think something that is concerning or that the government will need to hold the line on is the two big reforms that are out for consultation. If you think about the two major savings, it's adjustments to capital gains tax and it's adjustments to NDIS eligibility. Um the first of those is obviously been quite specific in terms of a model of moving to indexation. Uh, but there's still the opportunity for the government to create carve-outs for specific sectors, and I think we'll talk a little bit more about that later, Jesse. The second thing that I think is much more concerning for the government is how do you hold the line on reforms to NDIS? Um, it's very tough to make decisions about what functional needs will be funded and what level different functional needs will be funded to. And um, it's obviously a community that deserves and receives a um a wide degree of engagement from the government whenever policy decisions are made about them. And it will be particularly challenging for the government to hold the line and deliver the savings that they've committed to. But I think it's also an opportunity for the government to think about new ways to deliver services more efficiently that deliver higher quality services to people who have disabilities in the country. And um, so it's kind of a double-edged sword, I think, for the government here.

SPEAKER_03 18:21

Yeah, and we're obviously going to see how that plays out in terms of government delivering services, you know, rather than the sort of distributed market system of the NDAS, which has sort of been fraught for various reasons with sort of thriving kids, which, at least from my understanding, seems to be moving back to kind of a centralized uh provision um rather than this sort of messy market that that the NDAS has created, which is not to say that, you know, markets uh can't be used in these situations and in sort of uh welfare and service provision, but just to say that that I think we we're in we have landed in what I think Australia has agreed is a bit of a mess. And so to the degree that there is political appetite for that reform, I think it's there more than more than it would have been under a coalition government or or you know, sort of pre-um COVID inflation. That gives us a good overview of the general direction of the budget. Um to sort of toot our own horn before we get into the pillars, I want to run through a few of the inflection points publications uh that have you know materialized in the budget. And this is not a taking credit. Um, you know, a long-form journalism uh expedition can only have so much influence over Treasury, but it is nice to know that kind of uh good ideas are being picked up, um, both by us and by the government. So we have from issue three uh Flavio Meniza's uh highest standard for standards. So we wrote about Australian standards uh being behind a paywall, the idea that we have all of this, uh all of these sort of standards that are referenced in legislation, referenced in um regulation like the National Construction Code, um, don't actually uh have a publicly accessible form. That is now, it seems, changing. Um, and and we're really excited to have been able to champion that idea. Um we, of course, have the local infrastructure fund, which we're definitely going to talk about. Um, that reflects uh the planning as a bottleneck to new housing, um, idea of incentive payments. Jesse Woo, of course, we have your diversifying Australian risk capital. Um, the superannuation performance test is going to be overhauled. That's another thing, Manning, that we uh don't have uh full detail on. I assume that'll be going out to consultation as well. Um that's another one to keep an eye on. Um also uh across Jesse and Brandon's various uh changes in terms of how RD taxes work, the ESVC LP, invest e cap doubled, um, fund size caps up, etc. Um, these various changes that kind of do hopefully, and you know, depend pending the specifics of these superannuation changes uh will hopefully unlock more capital for Australian innovation, which would be exciting. Uh, we also had from Victor Dominello uh talking about uh digital ID. Digital ID is being funded to the tune of $600 million in this budget. So that is very exciting as well. Um and uh this one's a stretch, but Jade Lynn did write uh technology adoption in the care sector. Um, while that is not happening, the NDAS payment system is being digitized, and we'll take that as a very marginal, slight, slight win. It is, it is, it is useful to see technology being built into the back end of a lot of these firms and a lot of these systems. Um, and as much as that is very much an administrative change, um, administrative changes are absolutely important. Especially when you're talking about regulating entire government constructed markets where the margins really do matter.

SPEAKER_01 22:05

Can I quickly jump in and say that you buried the lead here, Jonathan, and emitted Allegra Spender's piece, which called for both a minimum tax on trust as well as substantial reforms to capital gains tax, including a uh earned income tax credit-like vehicle to facilitate differential uh rates. So I think we should reflect on uh particularly the role that Allegra Spender and her team have played in driving forward both the government's level of ambition and also some of the specifics about how to turn it into a reality.

SPEAKER_03 22:41

Um I will now be moving us over to infrastructure and housing. Um so uh Matt, the big ticket items are you know the ones that are getting a lot of uh attention is the native gearing limitation just to new builds from the first of July in 27. Uh 50% CGT discount replaced with cost-based indexation, and the local infrastructure fund tied to state planning reform. Um Treasury says house prices will grow slower, um and that we should hopefully see a net increase in supply over over over time. Walk us through the order uh the order of magnitude. Um, what matters here?

SPEAKER_02 23:25

Yeah, I mean, I think order of magnitude is the right way to think about it because ultimately, with any of these tax changes, you know, Gratton's been recommending changes to negative gearing and capital gains tax for a long time. Um, with any of those changes, you kind of need to consider what's the size of those changes compared to the size of the Australian housing market. Uh and there's a couple of things that that mean that those tax changes can be really impactful for individual investors, but maybe don't make a huge difference to the market overall, or not as large a difference, perhaps, as I think some people assume. And there's a couple of things there. The first is just when we're talking about investors, we're only talking about a third of the Australian housing market. So, whatever issues there are with, you know, a really heated market where there's people who are strongly incentivized to bid up prices, a lot of those people are homeowners. And obviously, governments have been targeting increasing homeownership for a long time. They see homeownership as the main way to provide housing security and wealth creation for a large volume of Australians. But the fact is that that anytime we're talking about imbalances in the housing market or prices being higher than we'd like, part of that, a huge part of that demand is not from investors, it's from homeowners. And homeowners are completely exempt from capital gains tax. So that's not changing. Um, that's probably not going to be changing anytime soon, but it just does mean that that part of demand is pretty stable. So what we've previously estimated is that that changes of this kind that are being brought forward on capital gains and negative gearing won't have a particularly large impact on the housing market. So we've sort of estimated a price reduction of around 1% for the recommendations that we'd put forward. Treasury's is a is a little bit higher at 2%. But again, we're not talking about really big changes. Now, anytime you change prices in the market, that does impact development feasibility. So it does have an impact on supply going forward. Um and Treasury and our estimates are pretty similar there. About, you know, we've estimated maybe a reduction in 16,000 homes built over five years. Um, Treasury's estimate is sort of double that over 10, roughly. Uh, so I think we're we're pretty consistent on that. And again, if you think about what that means for rents, um, obviously if you build fewer homes, that does put more pressure on the rental market. And so you end up with rents being marginally higher. But again, it's it's a really small impact. We've estimated $1 a week on the median rental, Treasury's estimated $2 a week. So I think it all goes to show the biggest things that change the outcomes on the housing market are the rate of supply and also cyclical factors, things like interest rates, construction costs, rather than these big tax changes.

SPEAKER_00 26:00

I wanted to ask you, Matt, um, it sounds like some people feel that these changes were where the government flinched. Um, so for example, the grandfathering of negative gearing and also not imposing capital gains tax on the primary residents. Um, what what do you think of those restraints?

SPEAKER_02 26:20

I guess on the second one, I'm I'm not surprised there wasn't a lot of movement. I think if we're talking about the way in which the family home is probably given to preferential treatment in Australia, like the really big lever that we'd like to see the government pull is around the uh a pension assets test. So at the moment, the pension assets test basically ignores most owner-occupied housing wealth. Uh, and and there are ways you could reform that to ensure that that's better reflected and more fairly treats renters and owner-occupiers in retirement. Um, so that's the big lever they could have pulled and they didn't go there. So that's definitely something that they should consider in future. On the kind of grandfathering arrangements, look, like our preferred model would have been something that basically said, well, we've got a capital gains tax discount of 50% today, and we're going to step it down over a couple of years. And that would have meant that if you wanted to sell, you know, in a couple of years' time, you you would have been impacted by these changes regardless of when you bought. Um, that would have raised more revenue and it would have also avoided sort of any kind of negative incentives for investors to hold on to assets for too long. What they've gone with, I think, is is probably a second best to that, but it but it's much better than it could have been. So what they didn't do was say all existing investments are grandfathered. What they said was going forward, gains from next year onward will be taxed under the new regime. And so that means that if you're an existing investor, any gains past 1 July 2027 are taxed. And so that means it's it does create a sort of pretty fair and level playing field going forward. Uh negative gearing is different. They have exempted people who own existing properties that are negatively geared. Um, but that's a little bit different because I mean, people negatively gear for a reason. They're often negatively geared because they want to make a capital gain and take advantage of the CGT discount. So if you remove that discount, you're removing some of the incentive to negatively gear a property. And then on top of that, because of the way negative gearing works, you know, you've got this big sort of uh uh borrowing that you're you're doing sort of to leverage yourself to invest in a property. Um, when you're looking at the negative gearing, most of the kind of loss that you are deducting is from the interest rate on that mortgage that you're you're taking out. So over time, if you sort of leave rents to sort of rise and that interest rate on the mortgage is constant, the interest payments are constant, you end up with a property that becomes positively geared over a number of years anyway. So there's kind of a natural lifespan to most negatively geared properties, and that's why investors will turn over negatively geared properties over time so that they can negatively gear the next one. And so that that kind of puts a natural bottleneck, I think a natural stopper on how many properties there are going to be sitting that are grandfathered over time. Or, you know, it depends exactly how they do the integrity arrangements going forward. But but that's definitely what I think Treasury will be hoping and what they said in the budget papers.

SPEAKER_03 29:07

Matt, I have I have I have a question here around kind of this this this thing we talk about a bit in in Yimbi circles, which is around sort of tenure-blind policy, right? We've got this big kind of push and this big framing from the government, and it seems to be very much a political priority of getting people to be homeowners. Now, this is not some new thing. People say, ah, they're just like Menzies, but like the reason Mao took all the stuff from landlords was to give peasantries like land ownership. Like this is this has been a political strategy from every side of every side of the aisle. Um in terms of kind of the negative gear in grandfathering, is there a consideration there that it ensures that there's a little bit more stability for renters in terms of like no massive sell-up? Is that a thought there at all, or is it simply kind of managing backlash?

SPEAKER_02 30:02

I mean, I think it probably like the grandfathering itself is probably more about managing the politics. One thing they did call out in the budget is that with the approach to kind of rental losses going forward. So again, like people who are listening to this may be all on top of this, but it's like worth like highlighting. Negative gearing is like you're making a rental loss and deducting that from other sources of income. And what the government's doing is basically saying you can still make a rental loss, but you can't deduct it from other sources of income. But what you can do going forward is deduct that rental loss from other investment properties that that you have that you're making a gain on. And you can also deduct it from future capital gains. And part of the rationale for that is that it means that you're not sort of disincentivizing investors for from making uh necessary investments in properties. So upkeep that you do as a as an investor on a property that the tenants might really need, that is a cost that you can deduct. And if you are someone who's deducting costs and suddenly you're in a net rental loss position and you can't offset that anywhere else, that might mean that you're sort of less uh less incentivized to do those kind of upkeep and maintenance jobs that need to be done. So by allowing people to carry forward those losses and offset it against future capital gains, you're you're removing the size of the concession because offsetting a gain in in any in one year from other income is is really the concession that negative gearing has provided. Um this does reduce that concession, but it does mean that there's still an incentive to kind of invest in property um that you own and ensure that it's in good condition going forward.

SPEAKER_00 31:35

I'm curious to ask you, Jano and Manning, about the um restriction of negative gearing to new builds. Do you think that's going to move the needle in supply?

SPEAKER_03 31:45

I I I don't, I mean, I have no access to any modeling on this. Um my my my sense is that it's a slight nudge, right? Um it's saying, like, look, if you want, if you want this juicy tax carve out that that has existed, um, you can get the juicy tax carve out if you invest in something that we consider pro-social. I don't know how much it moves the needle, but the nudge is clearly there. Matt, do you think that's fair?

SPEAKER_02 32:12

Yeah, I think that's right. So, I mean, the important thing to note is that anything, like even if we're just reducing investment in existing properties, like it's all one property market. So if we reduce prices, that does put some downward pressure on supply, regardless of what you're doing with kind of investors investing in new homes specifically. Um, but I think that the more important point really is the fact that by moving to this new system, which is you know, adjusting the cost base of your asset for inflation, I think it does mean that people who are looking at properties now, um, you know, previously there was this distinction between, well, I want to ensure that as much of my return is it is a capital gain as possible, because the capital gain is taxed lightly, whereas rental income in particular is actually taxed at my marginal tax rate. What this does now is it says, well, if you're investing in a property and it's a really low return, you're actually not going to be taxed on much of it because it if it's only 1% above inflation, then you're only going to be taxed on that 1% above inflation return. Um so I think it encourages investment more in uh sort of, I think, land-like assets, which see less speculation over time. So I think that that is good. It probably encourages investment in medium and high density housing more than the existing arrangements have.

SPEAKER_01 33:25

I was just gonna say, I think this raises a really important point, which you wrote about, Jonathan, which is probably the most material changes that will happen are a result of the government's $2 billion infrastructure fund, which is incentivizing changes from state governments to their planning and zoning laws. Um if it's if these negative gearing changes are on the margins going to encourage a slight shift towards medium density properties because of the returns to land and speculative nature of um of those sorts of properties. The $2 billion fund I think has a lot more potential to drive down the cost of land and as a result of that increase housing affordability. But I'm not sure whether you wanted to speak a little bit more about your perspective on this, John or on that.

SPEAKER_03 34:14

Yeah, we'll talk on we'll talk on the fund in a moment. I just wanted to run through one last take that I've seen from um friend of the show, Don Barents, um, which is kind of that the sum of all of these tax changes and whatnot kind of further tilts um the Australian tax system toward allowing or enabling build-to-rent a bit more, just in terms of kind of the shifts away from sort of this favoring of mom and dad landlords. Uh Matt, does that is this something you've thought about at all?

SPEAKER_02 34:46

Yeah, I mean, I I don't think these changes are specifically helping build to rent per se, but certainly they're disincentivizing the kind of mom and dad landlord approach where you're really looking at trying to buy a single family detached home, leverage yourself really highly, claim a big net rent or loss on it against your other unrelated income. I I think it does disincentivize that. And so maybe at the margin that pushes people more towards build-to-rent. But you know, ultimately the big barriers to build to rent are often state taxes. So things like land taxes that the states control. So if there's if there's potential in that industry, it's because states are supporting it rather than necessarily because of what the federal government is doing. At least that's my read.

SPEAKER_03 35:29

Yeah, and we're certainly seeing that a fair bit in Victoria building more, and and they've had sort of the most, the most uh generous kind of state government kind of reforms in favor of in favor of those institutional landlords. Um great. I think we should talk about the um the LAF, the local infrastructure fund. So I wrote in Capital Brief about this, kind of being uh maybe the largest housing line item um within the budget, uh, not maybe in terms of you know sheer numbers, but in terms of its potential to do things. Now, how optimistic we should be about this, um, I think is a question. Uh Matt, am I being too optimistic in terms of thinking about what $2 billion leveraged uh to states uh could do?

SPEAKER_02 36:22

I mean, I think your optimism has to be said in the in the context of how the federal government has previously seen this issue. So, I mean, you know, I think about when I joined Treasury, sort of a young grad in um in 2020, uh, you know, I was really interested in housing. I was like, you know, concerned about the fact that housing supply wasn't as much focused on in the debate as it should have been. Um and so, you know, I when I asked people around Treasury, like, how does Treasury see the housing issue in Australia? Their response was, well, we think it's mainly an issue of a lack of supply. And you ask them, well, like, who whose responsibility is that? Like, how can we unlock this supply? And they said, Oh, well, it's probably the states. And you say, how? And they're sort of like, oh, we don't really know. Uh and that was, I think, not not necessarily because these people weren't smart, but just because they hadn't been pointed at this problem of, in particular, land use restrictions at the state level. These, these barriers to just uh finding finding land if you're a developer where you can build additional homes. And that's like the biggest barrier to new housing supply in our cities. Uh and it's something that we've seen, you know, examples of overseas of major reforms in New Zealand that have unlocked these restrictions that have allowed more townhouses, more apartments in more of our cities. And that has a big supply impact. So if the federal government's going to boost housing supply, it needs to be engaging with the states about how it can encourage these kinds of reforms to allow more townhouses and apartments across our cities. And this, I think, is one of the first signs we've seen in a long time that the federal government is really willing to push the states on that. So whether or not this exact fund and this particular set of negotiations achieves, I think, all of the changes we would like to see. And we can talk about what those might be. Uh, whether or not it achieves that, I think is probably less important than the fact that this is a down payment on the federal government taking a real interest in this issue and really starting to push the states on what is clearly the biggest barrier to housing supply.

SPEAKER_03 38:20

A lot of down payments in this budget on the long road to reform Manning.

SPEAKER_01 38:24

Yeah, I think something that's interesting to build on that point is there's a real shift in the government's focus compared to the new homes bonus. So previously, states were rewarded upon completion of homes. And that is great in theory, but when you think about the timeline that it takes to go from kind of project conception to keys in hand of a tenant or an owner, that can be somewhere between four or five years on specific projects, particularly when you build in some of the policy timelines that are required to actually enable that to happen. And for many state governments who are thinking in three or four-year election cycles, who are making decisions based on forward estimates that are available in for kind of offsets or their planning when it comes to the expenditure review committee decisions that are being made, it's really difficult to think about booking that revenue and thinking about how you connect it to your current political strategy. But in the context of perhaps a much shorter feedback loop between the government and between the federal and state governments here when it comes to planning reforms, I think that there's certainly a punchier level of um impact. And hopefully we'll see state governments taking it much more seriously, particularly those like the Victorian government who are facing an election in the immediate term.

SPEAKER_03 39:44

Yes. Matt, I've written that um a national townhouse code, similar to what the Abundant Housing Network and Leto Grattan put forward uh in 2025, that a national townhouse code uh would be something that if all states signed on to it, three-story townhouses permitted across all residential land, that would be a big bang for buck. Are there any other reforms that you think maybe warrant equal or or more more consideration there? I know there's there's things like parking and and whatnot that could make a big difference as well.

SPEAKER_02 40:22

Yeah, look, I mean, one of the challenges we have here is just that each planning system across each state is so different and the particular ways that states restrict new housing supply in well-located areas through their planning systems are different in every state. So, you know, I started sort of uh uh getting interested in this space in part through advocacy from Greater Canberra, which I was a part of in Canberra. I mean, the ACT planning system is so different to now having looked at the Victorian and New South Wales planning system, they're all unique. And so the challenges are kind of all unique a little bit. Um, but as you say, there are kind of some outcomes that we could push for that I think would be really impactful. So setting the floor in a better place than it is at the moment through a national townhouse code by saying if it's residential zone land, we really should be allowing it to accommodate three-story townhouses without these kind of arbitrary restrictions on number of homes uh per, you know, per square meter or so on. Um, that that seems like a really positive step. Um, in terms of other broader things, as you mentioned, parking restrictions are another big one. So these are mandates that that state governments put in place and and councils put in place on how many parking spaces you need to provide per home or per bedroom when you're building new housing. And often they're not well calibrated to actually matching the demand that there is out there. So if we if we just removed those, developers would still build parking, but they probably would build a lot less of it in many places in our cities, and that would make many more projects stack up. So that's another one that I think is is a common problem across a lot of states, um, along with this issue of just frankly having a base level of zoning that is too restrictive and that could be improved by by allowing more townhouses and low-rise apartments.

SPEAKER_03 42:08

I think that's right. I think the framing of raising the floor uh to build more floors is a useful, useful kind of way of thinking about what kind of reform would work best across these broad markets, right? And you're right, every system is unique and special, but also what we want built actually is, you know, hopefully national. And I think the one last thing to kind of at least briefly touch on is the idea of making a national construction code that is actually national, right? Um states do various uh carve-outs, they sign on to some provisions, they don't sign on to others, and it fragments the national market. Um, Manning, you've done some work that is that is unpublished, but like around kind of looking at um uh the way that that fragments community housing building um and so on. There are a lot of kind of messes with not being national. Does raising the floor potentially push us toward uh conceptualizing a national planning framework?

SPEAKER_02 43:15

I I think that's pretty hard to see from here, um, but I also think it's not really necessary. Ultimately, what we're trying to do is equip state governments who want to make these changes to take up the best reform opportunities they can. Because at the end of the day, they're the they're the ones responsible for writing this legislation. We've really got to convince them that that they need to sort of take the risk and they do see it as a risk of allowing more housing in our cities. Um that that's something that's traditionally been really tricky. And so just just putting the money on the table, and I think the federal government providing, and this can sound a bit trite, but providing some thought leadership, like actually pointing out where are the big reform opportunities, I think is really valuable. And so that's what I think we'll we'll hope to see under this local infrastructure. Structure fund and the negotiations that follow around that.

SPEAKER_03 44:03

Yeah, and this is of course something that the Abundant Housing Network has kind of been saying for ages to the government since our formation, which is you guys have all the money, you guys can take some leadership here. And, you know, one of the points that that I'm that I make in my piece and then that I've been sort of increasingly making, and Howard McLean from Greater Canberra has been increasingly making, is that 80% of our economy is on less than 1% of our land. And that land is primarily in our cities. And we really need to, if the federal government is going to capture most of the value there, then the federal government needs to have an interest in how those labor markets function. And that means housing and planning. We're going to keep moving. Jesse, this section uh leads from you, and I'm going to start uh and and set a fire. Paul Bassett said the CGT changes will, quote, set back the startup ecosystem by a decade or more. Lee Jasper said the industry was completely blindsided and would have built offshore had these settings been in place. And your op-ed called both of these things and, quotes, like them, hysteria. Make the case for prosecution against your own former industry.

SPEAKER_00 45:12

All right. So I guess look, something that's really important is that there is an availability of capital for innovation and for productive, you know, risk taking. Australia has that. We have $4.5 trillion in superannuation. And something that I wrote about in the article for inflection points is that some of that capital is currently bottlenecked from investing in venture capital, for example, and a few other things. But let's take venture capital as an example because of this performance test that was put in place that I think had good intentions, but also had some unintended consequences. So just to explain it really briefly, in order to protect average people from underperforming funds, there was this kind of benchmark test that funds had to meet in order to continue to be able to recruit new members. And that benchmark was set to a kind of average performance of all of other funds. And it was kind of a, I think it was an annually tested thing. What that means is if you want to make sure you absolutely don't fail that test, because it would be pretty disastrous if you weren't able to recruit new members, is that you had an incentive to basically just invest in what other other funds were investing in. Because that means that if you go down, they go down too, and you won't be affected. Now that resulted in a phenomenon called herding, where basically all of the funds were investing in the same kinds of things and they were, you know, ETFs or bonds or whatnot. And there was a risk to investing in something kind of outside of that group, such as, for example, a venture capital fund. That um, and and especially because venture capital funds go through something called the J-Curve, where because you see your failures first and your winners later, and only the extent of winners last, um, funds can sometimes look a little bit underwater in their first three years because the things that kind of fail fail quickly before, you know, before your airwalls or your Canva emerges and makes that fund look fantastic. So that uh, you know, and that and that that's a niche thing, right? Venture capital is a quite nascent asset class. So I don't necessarily um hold it against the designers of the superannuation performance test that they didn't catch that unintended consequence. Um but it it was something that was preventing superannuation funds from investing in VC. And when I was a VC for five years, it was very hard to unlock institutional capital. Um, when you know you could argue like, why wouldn't we tap into this like national resource to be able to stimulate our innovation industry, right? So I think for me, the structural fix of reforming the superannuation performance test or carving out like an emerging asset class, I think is the proposal, unlocks that bucket of capital and means there is heaps of funding now available for innovation. There is VCLP and ASIC frameworks extend on that by making innovate uh investing in VC eligible companies 100% tax CGT exempt. Um so, you know, it given given the changes to CGT, that asset class has has never looked more attractive. Um so I think there's plenty of capital now being unlocked for investment in startups, um, investment in both the really early stage stuff, but also our maturing startups to kind of keep them onshore, to prevent them from having to go afield um to get that capital, um, so that when we create the next Canva or the next Air Wallace, that money goes to Australian superannuans. So I think there's a lot to like in terms of really structural things that have unlocked huge amounts of money. Um I'm really disappointed that there has been very little kind of ink spilt on celebrating those wins. Um, and there's been a lot of ink spilt on CGT. So, you know, on the removal or the indexation of the CGT discount, um, so that um so that yeah, people who hold startup um equity uh have to pay more capital gains in line with with their marginal tax rate on their income, in line with what other income earners pay. Um so yeah, that's why it's hysterical in in my opinion.

SPEAKER_03 49:39

So there's that's that's sort of the the investor perspective. I think there's like a couple of things to unpack here, and Manning, I'll I'll I'll I'll bring you in on this. Um we've got, yeah, the the investor class is mad because the investor class is probably gonna have to pay more tax. But there's two other points here that we should probably sit on. One is the genuine impact that we will probably see on the tax rate paid by uh founders who uh are creating low, low-cost businesses. And then I want to return to the superannuation uh performance tests because it's worth noting that those changes haven't actually happened. They're gonna be consulted upon, right? And I think, and I want to kind of have a bit of a debate here, so we'll we'll park that. Um, but Manning, on the um, on the uh on the on the kind of startup founder incentives, um, there's a real risk here, right, that that people who are just working in electrons will move to San Francisco at greater rates, right?

SPEAKER_01 50:39

It's a real risk, and I think we've already seen some of the like talent within the Australian VC space and early stage business space move to San Francisco because there are reasons that it's more attractive. I think it's important to think, though, about what is really driving people when they found a business. And I think a lot of the time it isn't necessarily the like five versus ten million dollars when you get an exit to then uh sell down your equity. Um, and it's often some of the other reasons why you start a business. And Jesse can probably speak to this from her own perspective, which is being able to do interesting work, being able to work with interesting people, genuinely being passionate about solving a challenging issue. And there are a whole bunch of other preconditions that are required before someone can be in a place to be able to do that. Quite often, that is financial security. Very often it's being able to like know and meet with people who understand what it looks like to raise a Series A fund. Um, and a lot of the time those bottlenecks don't exist in Australia because of how a tax regime is established, but instead it's because of things like how our labor market is established, how our culture thinks about taking risks. And I think before we think too heavily about um making substantial carve-outs that capture very large amounts of our early stage businesses and founders, we should also pause and reflect on what you could equivalently spend that money on to address some of the really structural barriers that exist to founding a business. Um, we've spoken a little bit about the role that housing markets play, and I think there's still some open questions about whether or not housing affordability is really a driver of whether people will start a business or not. But I think living near opportunity is really important. We know that clustering and agglomeration effects are critical when it comes to starting businesses, and it's no surprise that a lot of Australia's leading businesses are in Surrey Hills and in Cremorne. And those inner city areas are difficult for many people to live in because of how expensive housing around them is. And I think it's not too long of a bow to draw to think about addressing that as something that can really improve the ability of people to take a bet on themselves. But but I think the top line point here is um we should take the concerns of founders seriously, but we need to think so holistically rather than being narrowly obsessed around like what your exit would be taxed at.

SPEAKER_00 53:21

Yeah. 100% agree there, Manning. I think, you know, when founders are seeking investment, they are talking about making a dent in the universe. They are talking about creating something that needs to exist about their life's work. Um they are not talking about, you know, uh a kind of tax-favorable treatment on the way they make money. Um, I also quite dislike the commentary we've heard around founders pour their um blood, sweat, and tears into their businesses and they take on this risk and they underpay themselves, you know, or for this future payday, and and therefore they should be taxed favorably on that. I don't understand why there's a special class of blood, sweat and tears for founders, you know, like fire, we tax firefighters, we we tax um people who work for charities, we tax doctors and nurses, um, we tax people who, you know, slave away in the creative arts. Um, and a lot of these jobs are more pro-social. So um as I've been on two sides of this. I've been a VC, um, you know, giving funding to these founders, I've also been a small business owner, um, founded my business in the middle of 2024, have employed 13 people to date, um, have, you know, paid bollops of of tax to the tax office. Um, uh, but you know, also also have had a lot of benefit from running a business, right? A lot of flexibility, um, the ability to be an irrepressible gadfly. Um, but also, you know, the ability to decide where I work from and the ability to leverage the surplus value of my employees' labor to create value for me. And um so I don't think it's so extraordinary that business owners should not be put in a in a special class. Um my in my my input is is is labor, like people who earn us earn a salary. Um, and and uh because I've been able to leverage myself using the framework of a business and having employees um make quite a quite a high income. Um so regardless of whether I realize that income via via paying myself through single-touch payroll or via some kind of capital gain at the at the end of the road, um, I think it's really principally consistent to be taxed at my marginal income rate.

SPEAKER_03 55:39

Let me push back on this via a qu a question to Matt, which is Treasury typically tries to do like a first best policy, right? They don't sort of put something out and then and then walk it back and change. They try not to do that. It seems that in the case of founders, we actually do have a problem here with the lumpiness of the gains via the exits that happen here, right? Do you have any insight into like why Treasury hasn't gone for income averaging, which I think would actually solve quite a number of the concerns, right? Because it would allow people to be taxed like labor, but on a lumpy gain that occurs in in one financial year as opposed to over, say, four to seven.

SPEAKER_02 56:20

Yeah, I mean, I think part of the issue is around just the implementation of that. So income averaging requires you to have quite a long or potentially quite a long tax history for someone. So the way that we used to do income averaging in the Australian tax system in the kind of pre sort of 1999 tax change world was that we just sort of used to assume that you'd kind of earnt whatever income you'd earn over five years. And that's that's a bit arbitr that's a bit arbitrary. Like ideally, you'd like to be able to sort of say, well, if you're earning a big income in this year, we want to look back at your lifetime income and figure out, well, actually, where where do you sit in the sort of spectrum of progressivity of the Australian tax system and what is the tax rate that most makes sense? Um, we don't really have the tools to do that, do that at the moment, I think. Um, certainly it would be a big change to how the tax system works. The other way of approaching this, uh, which which other countries use, is just to sort of say, well, we've got a progressive tax rate for most of the tax system, but we're going to have a flat tax rate for capital gains. And that's a dual income tax system. Other countries do use that. I mean, we're we're kind of moving a little bit closer to that system with the changes we've seen. We've got a minimum tax rate on capital gains now of 30%. Um, that is trying to avoid situations where people are timing their gains, particularly till post-retirement, when most of their income comes from superannuation. So it's not within the income tax system. And so they were facing marginal tax rates that were a lot lower than probably their wealth would suggest that they should be. Uh with with there's a there's a sort of flip side to that, which is what you're pointing out, which is that if you are selling something that's a that's a large asset in one year and you're realizing that gain, then that pushes you up the income tax scale. That means your average tax rate is higher. Uh now, you know, that as you say, there's a lot of ways to deal with that. But I kind of think thinking about how we can move maybe if if there's if there's real concerns about this, and and I'm not entirely sure how much to kind of put on that, uh, if there are real concerns about this, then I'm I think maybe thinking more about how we can move towards that more dual income tax framework might be a better pathway for future discussion rather than what we've probably seen, which is a sort of a focusing on can we just maintain an existing concession that I think does a whole bunch of things at once and doesn't do them very well.

SPEAKER_00 58:33

Yeah. I I share the concern, John. I think it's principally consistent with what I laid out before. I do think that this um notion that you get this windfall exit in cash all in one year is a little bit of narrative engineering that um makes it slightly easier to um make the point you're trying to make. I think in reality, um if you look at some of the recent acquisitions of startups, for example, um Canva acquired a few local startups, Leonardo Magic, Reef, Dooley, um, they would have been paid in shares. Um there would have been an earnout. Um, those shares you can hold on to, you can sell them wherever, so you can you can kind of average the way you sell those shares. Um I think you know, small business owners, it's probably the minority of businesses that actually create terminal value to just kind of be able to exit all at once. There tends to be some kind of earnout period where, for example, if I was acquired, I'd have to earn out over two years and and and transition, you know, my client base and my IP and my relationships over to whoever's bought me out. So it's unlikely it would be all at once either. Um, and also as a business owner, you just have a lot more, there's a lot of structures available to you rather, uh, you know, more so than there is to income owners to do that kind of averaging via trusts. And and people have been taking advantage of this and and some of the measures in this budget make a little bit harder to use some of these artificial ways to tax optimize.

SPEAKER_01 59:58

Yeah, I'd also just say I think when we think about founders and their tax obligation, we're often imposing that at a point where they have a very high ability to pay tax. And I think it's a difficult conversation to have because we recognize that people have taken substantial risk. But a progressive tax system is built on the principles that people who have a greater capacity to contribute to social services ought to do so. And to discriminate based on the way in which you created that wealth, I think, isn't necessarily something that you should necessarily like do at the point at which someone has a far greater ability to pay. And I think having that order of operations in a tax system is really important. What I wouldn't want the government to do is provide a blanket CGT discount to founders. Um because like imagine if we had done that with our Canva founders, right? They're some of Australia's wealthiest people, and we decide that because of the ways through which they created their wealth by starting a business, we're all of a sudden resolving them or um kind of saying that they shouldn't have an obligation to contribute to services. And something that I've been reflecting quite a lot on is at a world like if you believe what the people in Silicon Valley say about how we will all become founders, everyone will be on clawed code building a business. If it's true that there's going to be a large class of our society that is able to create significant amounts of wealth by founding businesses, and we assume that that group shouldn't pay the same rates of tax as others, I think that in a long-term perspective, knowing how difficult it is to do tax reform could hypothetically be something that is a really, really big challenge. And so that optionality to understand the future is really important.

SPEAKER_03 1:01:51

The other elements that are getting brought up is the idea that these changes are going to create sort of a large amount of capital flight. Now, Manning, you you've sort of said exactly right there that you know we don't want just some blanket carve-out. And it's worth noting that there are a bunch of concessions in here that we should talk about that are focused on capturing the positive spillovers from new businesses. Um, for a whole bunch of CGT irrelevant um uh advice for tweaking the tax code and the concession code and tax credits. Uh Brandon Shepard's article in uh Inflection Points is a really great repository of those ideas. But uh in terms of uh capital flight and people leaving Australia immediately, founders, uh founders vanishing, Jesse, why do you think this is not the case?

SPEAKER_00 1:02:37

I mean, Australia's the best country on earth, work up today, and I was like, wow, if this isn't nice, what is? Um founders chase markets, right? Like Australia is a larger market than New Zealand, than Singapore. Um, all of the founders who are like, I'm gonna go build build my business in New Zealand. I'm like, New Zealand has had no CGT for a very long time. All of the brightest people I know from New Zealand, including founders, come to Australia to build their businesses because it's a much larger market, right? Um, so yeah. Um Singapore also has like, Singapore doesn't produce many entrepreneurs at all. Um there's there's not a lot of unicorns. I don't think I can even name one that's come out of Singapore. So, so uh yeah, if we just look at those two examples that have been bandied around, there is no link between low CGT settings and the creation of unicorns. Um the the companies that have been really successful that have come out of New Zealand serve markets where New Zealand is a large market, like Holter, for example, um, is uh something that hypnotizes cows, so you don't need fences. Like great, great company to start in New Zealand. There's a lot of cows in New Zealand. Um Yeah, I think that people who move to the US, um, who move to San Francisco are also chasing a market. They're not uh or chasing talent, or they just want to be at the epicenter of AI or and tech more than they are chasing any you know favorable tax treatment. And and I think that's the thing that's really important, right? Which is how can we have some powerhouse cities, um Sydney, Melbourne, that have these agglomeration benefits where you feel like you can get world-class talent. Um probably these cities both have quite large, large enough markets for companies to start. Um, and and that goes back to some of the other stuff we've been talking about, about how housing and and a social security net undergoes those things.

SPEAKER_01 1:04:35

I might also just jump on this. And so as a bit of context, uh I've been living in the US for the last two years and I'm about to return back to Australia. And that's something that is particularly common. Like Australia is the only country in the world that has net migrant inflows from the US rather than net migrant outflows to the US, which underscores a lot of the reasons why people choose to live in Australia, which is it's the most livable country in the world with a government that can actually deliver services to people. And I think that this like life cycle view of founders is quite important. I think there's like this world in which you know you might go to San Francisco to initially raise equity. Um, but at the point at which you might be on the cusp of an exit or four or five years ahead of an exit, you might be thinking about starting a family. And at that point, you may return to Australia. And there so there are lots of complicating factors that inform people's decisions about where to live and optimizing your tax residency for founders who often are quite ambitious, not just about their um kind of professional lives, but also about their personal lives and achieving their aims, should take that seriously. And as someone who's just done my taxes in the US for income that I've earned while over here, I think there will probably be many founders who expect to move to San Francisco and California. Which is certainly not the kind of MAGA low-tax heartland that many of them may think it is, and be in with quite a rude shock for some of the complexities that also exist in the American system. And I think people are fooling themselves if they think that you can like set up tax settings to turn yourself into a startup hub. Instead, you need to create the conditions where people are able to access funding. And I think that our superannuation system should be one of the places where people should be able to access a huge volume of funding, access a end market that can be addressed, as Jesse speaks to, which Australians should know a lot better than the American market, which is particularly difficult to sell into given the extent of regionalization that exists within that market, particularly if you're doing consumer products. But finally has a startup ecosystem where you have agglomeration benefits. And I think that Australia needs to double down on Surrey Hills and Cremon as probably two of the areas or Chip and Dale, yeah, um, as some of the areas that support Australian um startups. And central to that, as we've spoken throughout this podcast, is land use. And we should think about how do we allow the sorts of businesses that are best placed to be in those opportunity areas to be able to place themselves there. And things like zoning do play a really critical role. Just as a brief aside, there's this bizarre section when you walk through Surrey Hills, which should be some of the most lucrative real estate in the country that is mainly run by textile businesses. And I've never been able to figure out how the economics of that stack up. So if someone who like you, Matt, who's much more across land use regulations, is able to tell me why Canvas's uh nearest neighbor is like wedding dress uh fabric distributors, I'd be interested in understanding that particular friction in our, you know, uh housing markets.

SPEAKER_00 1:08:00

Yeah. Perhaps just to have the last word on this, I saw one good take on LinkedIn um about this, which is founders are worked up over CGT reform, um, not because they're planning to leave Australia, but because they know in their bones that they won't.

SPEAKER_03 1:08:15

That is a good way to put it. That is a good line to end that section on. All right. I said that we would we would have a bit of a discussion around the superannuation um assets test. Um and I do want to have a little bit of one because I think it is interesting and it's something that I feel kind of conflicted on, insofar as superannuation exists kind of if a policy should exist for kind of like a single purpose, a superannuation should exist to kind of maximize my wealth and well-being in retirement, you know, reduce stress on pension payments, et cetera, in the future. If we move the pension asset test, and let's let's not just talk about VC, um, where where you know, investment test. The sorry, the performance test. Thank you. Uh let's not just talk about VC, but thinking about kind of investments in housing and and and things that where we expect to see a lower return. How do we kind of justify using this superannuation vehicle as also a nation-building vehicle? Matt, you've done a lot of thinking on this, so of you, Manning. Um, but let's let's start with you, Matt.

SPEAKER_02 1:09:23

Yeah. So so trying to use super for kind of policy outcomes, I think is the wrong way to think about it. And in part, that's because we set up super funds with an explicit goal that they have to maximize their returns for vendors. Like that, that is their goal. Um, and so trying to sort of water down that goal in the pursuit of other policy objectives clearly isn't the right way to think about it. Um, I think on the performance test, I think the the key thing to remember there is that like this was a hard-won reform. The industry really pushed the super industry, I think, in some instances really pushed back against it because there were some funds who had been poorly performing for a long time, who had high fees, were not doing a good job of providing returns to members. And because we have really low engagement with superannuation and yet we are forcing people to put money into it, I think that creates a pretty sort of difficult market condition where rather than having competitive market dynamics, there were a lot of people who were just stuck in bad funds for a really long time. So we we definitely don't want changes to water down that progress. Um that said, I think there's a trade-off here where perhaps we we can look at how we design that performance test at the same time as we look at how we can expand its scope. And the two big things there are that currently there are a bunch of uh sort of choice products. So these are products that people do opt into, which are not covered by the performance test. And some of those products are quite low performing, and probably we would do well to consider whether they're the kind of products super funds should be offering to people. The other point there is that these kind of uh these kind of rules around the performance of superannuation funds don't apply to retirement phase funds. We have this sort of weird distinction between accumulation phase, so during your working life you're building up, and then retirement phase and you're sort of drawing down, um hopefully drawing down. In practice, a lot of people don't draw down, but but that distinction means that there's a whole kind of separate set of regulations that apply in retirement or a lack of regulations that apply in retirement in a lot of cases. And so one of Gratton's recommendations in the past has been that we should look to apply the performance test properly to retirement products and also all of the kind of market-making institutions that we have that kind of mean that um when you are looking at at your super fund, um, when you're looking at a super fund, there's sort of a better chance for you to be able to choose the best performing fund for you rather than just being defaulted into a fund and and not being able to change and not thinking about it over time, which is which is the kind of conditions that that lead to a lack of comp competition in the superannuation industry and poorer outcomes because of it.

SPEAKER_03 1:11:56

Manning, do you have anything to add there?

SPEAKER_01 1:11:58

Yeah, I I echo Matt's view that the superannuation performance testing regime is a really critical role. Play plays a really critical role in ensuring that all Australians are getting ripped off by their super funds and ending up with less money than they deserve in retirement. I think we need to distinguish between how do we create a performance test that truly reflects the financial foundations that are being delivered by superannuation funds, which is what I think the reforms that would enable them to place more of their capital within things like venture capital and private equity would do by taking into account the risk, the lumpiness that can come with these funds. We know that venture capital funds often are able to achieve really great exits or closures of those funds from one or two superstar unicorns. And if you're a super fund who invests in one that doesn't achieve it while another one invests in another fund which does, you can be punished really severely. And so we need to think about how do you create incentives. And Treasury's done some really great thinking because it's full of people who are obsessed with, you know, the capital asset pricing model to think about how do you use other metrics other than just an annualized return on different products to get a more sophisticated view of what is the quality of performance that's being delivered by funds rather than just a level. Um, I think, Matt, you're completely right to say on the second point, which is altering or diluting the objectives of super beyond outcomes in retirement to achieve broader policy objectives. Um, at the point at which the government is mandatory, like taking money from people's paycheck, which we know that it does, it has a spillover effect on wages and reduces wages, um, particularly labor income at early stages of people's career for a government that is focused on intergenerational equity, I think it would be particularly inequitable across generations to then effectively use that as a shadow form of tax. Because if you're condemning people's money to be put into lower return products, that effectively is a form of tax on their retirement. And I think the government should be particularly careful about how they do that. Um, that's not to say there aren't like some innovative financing approaches that the government can use to crowd in super. There are a whole bunch of ways in which the government uh can use blended finance to either absorb and credit enhance some of the loans that super funds might be providing for specific projects that have a social objective. That would effectively mean that the government takes the first loss if uh investment is unable to make payments because um of issues with cash flow. Those sorts of things are really important and valuable tools to try and crowd in the large pool of capital more efficiently to achieve our social objectives. But saying that super funds should be held to a lower standard because they're doing something in the national interest is just, in my, like from my perspective, a particularly bizarre redistributive process that is likely to be much less efficient than uh our tax system.

SPEAKER_00 1:15:20

And also much my provocation here, Manning, I'm curious for your view, is like, what about instances where there's market failures and you just need like a source of long-term patient capital? Um, but you know, to to kind of, I don't know, make the market for for something, for example, large-scale renewables projects. But then once it's there, it it's actually can deliver a really good return.

SPEAKER_01 1:15:44

Yeah, I think that's probably the instances where government should take on some of that risk themselves, and that risk should be done transparently. And so um that might be government providing senior debt um and oh sorry, providing yeah, providing senior sorry, providing subordinated debt rather than senior debt so that they are able to insure some of these funds. Another thing that can be done um uh is like there are other ways in which government can also support projects that have less kind of certain cash flows. So, particularly in the context of renewables, having longer-term off-take agreements so that there's guaranteed volumes that come through. The thing that's really important though is at that stage, government is often being upfront about the costs that they're absorbing to make those guarantees. Um, often with those forms of financial support, you can price it by comparing it to similar forms of support that are provided or differences across types of funding, as opposed to I think some of the challenges that we would run into if we uh drove superfunds into being involved in these assets because of a national objective or resilience, whatever buzzword you want to use to describe it, which you know the National Reconstruction Fund has run into, um that's when you start to lose some of the clarity about what is the government really trying to achieve and what cost are we willing to absorb as a society. And the challenge is that um if you if you sacrifice several percentage points on someone's superannuation return when they're young, that can compound into many hundreds of thousands of dollars far, far down the line. And I think that's probably something we should tread very carefully on.

SPEAKER_03 1:17:38

The the other point is that you know, where there are market failures, that's absolutely where the government steps in. It's just not extremely clear to me that leveraging superannuation, which is again, as we've laid out, a policy aimed at, you know, a certain set of goals, why that is the pile of capital that that should be that should be a leverage rather than you know government-run future funds or you know, off-budget measures or just general revenue. Um, Matt, I don't know if you had any closing thoughts before we move over to our next pillar.

SPEAKER_02 1:18:08

I think it goes back to this point that really if we want to attract investment in a particular industry, we need to think about, well, why isn't it, why isn't it being attracted already? What is it about that industry that doesn't attract it? And it might just be that it's like not a profitable place for investors to go, in which case we need to be think seriously about like who's going to subsidize that if we think it's worth investing in anyway. Um but it comes back to that question, like look at the industry, figure out why people aren't going there, rather than assuming that we should push this or that pot of money towards it.

SPEAKER_01 1:18:38

And I I think just briefly to give a specific example of that, the half is probably a good example of in some ways how you can achieve that. We know that there's a gap in the returns that are needed from specific funds compared to what the rental rate, that the rental income that's provided through social housing provides. And rather than suggesting that super funds should take a lower return on social housing, the government commits to paying an availability payment over several years. And that's a specific way that they're able to plug that gap, uh, which is transparent broadly about what the cost is to the taxpayer, and we're able to see whether we're getting value for money from it. And so that is the sort of examples of how government can can step in to correct market failures when it comes to challenges uh with crowding in private funding. And then it should be debated as to whether or not that is a cost-effective way to uh delivering services or not.

SPEAKER_03 1:19:41

We're gonna move over to state capacity now. Manning, this is very much your pillar. The budget includes $600 million to the ATO for digital ID expansion and $2.7 billion in reduced external labor and non-wage spending across the APS. That's over five years. And they're also expanding the Australian government consulting capability. So that's roughly up to 150 new stuff. Is this a sign that the government is building an in-house brain?

SPEAKER_01 1:20:10

I think they've certainly made a lot of progress in the space that a lot of people said they found they would find particularly challenging. Um if you think back to the budget, I think two or three years ago, where they talked initially about establishing the Australian government consulting area, um, people were worried that they wouldn't be able to secure the talent to be able to actually do high-quality projects, um, that they wouldn't be able to have the degree of independence that's often important or perception of independence that having outside uh advisors can bring, particularly given that it was nested within Prime Minister and Cabinet, which itself often has a policy agenda. I think there are some early signs based on some of the reporting within this budget papers that they have got a lot more traction. So um there's around 90% satisfaction among people within the departments who have received projects from Australian government control uh consulting. They've done 40 projects across a whole range of different agencies. And uh I think there is reason to say that in many instances, having an in-house capacity can deliver higher quality services than people who don't have expertise or aren't able to draw on global best practice that can augment and improve the capabilities of government rather than replace it. What I would say, though, is that it's particularly challenging to see kind of line of sight to the savings that the government has expected to bake within the Ford estimates. They've anticipated $2.7 billion of cut spend on consultants. And when you compare that to the savings that have been achieved through the first 40 projects that they delivered, they've only displaced around $10 million so far in external spend, which is several orders of magnitude different. Now, there's some things to be said about whether you're reducing, you know, external labor hire, and rather than having people who are doing, you know, APS-like functions on external labor hire, you bring them in as an APS employee full-time. But I think just staring at that order of magnitude is particularly important, especially recognizing that when someone is brought on as an APS employee or an SES instead of being used as an external labor hire, there are additional restrictions that come with that. There are elements around their bargain agreement that they're subject to, and that can sometimes remove the flexibility that government receives when using um when using external support. Um one thing that I would say is I think um that the government is now at the stage of being in a second term with a particularly ambitious reform agenda that it's really important that they do build cap capability and capacity within government. And that often will mean thinking really deeply about the incentives that public servants have. Right now we're at a kind of stage of government where ministers and their chiefs of staff will have strong relationships with people in departments, and it can often go one of two ways. There's one world in which the relationship between private officers and departments ends up becoming deferential and the public service doesn't provide the advice that is needed to government. There's another version where there's trusted relationships that are formed, and it's difficult to speculate as to which way this will end in the second term, but it's certainly something that's worth reflecting on, um, especially when we think about building state capacity, given the ambition of the government's reform agenda.

SPEAKER_03 1:23:48

But there are a lot of cuts within the APS as well, right? A lot of departments sort of facing upward up to 10%. Matt, what do you make of kind of these cuts and and how is the AGS, uh the Australian government consultant the AGC, I suppose, uh trying to plug that hole? Is that is that part of this? Or what are you thinking there?

SPEAKER_02 1:24:10

I think mostly those kinds of of cuts are a way of the government making clear that their budget priority is spending restraint. And so, you know, we've seen a period of time um since sort of 2022 when new government came in, um, they sort of felt that there was a number of areas of the public service which were well under capacity for for what they they saw as their their core purposes. And so they needed to staff up. And now we're kind of turning a bit on a bit of a dime, and and we've clearly had the public service trying not to not to hire as many people as they have for a number of years. There's been a lot of focus on public service hiring in the context of last year's election. And while I don't think the way that the opposition handled that uh was was uh you know uh put the issue in the best light, I I think it's pretty clear that it did put a bit of pressure on Labour to be seen to be doing something about this, um, to be seen to sort of be trying to manage cost growth. Um and certainly, you know, when we look at state budgets, right? Um we've seen, you know, a recent report in Victoria into the the State of Victorian public service, which really made the argument that there was a lot of a lot of spending on public servants in a ways that wasn't really supporting a lot of a lot of priorities for the public. And so I think that just for for kind of the the kind of the the feeling that government is working for you, it people want to see that government is efficient. And I think that's what the government's trying to do here.

SPEAKER_01 1:25:33

And if you look at some of the announcements that have been made, um it was very clear that a handful of them were probably designed for press releases. So reducing the use of Qantas Club memberships by specific departmental executives is one. The reduction in you know branded uh stationery for specific departments is another, which obviously is not going to move the needle when it comes to the like billions of dollars that are faced by the federal government. But I think it's worth thinking about how the government is able to drive cultural change within departments. You know, ministers lead very large organizations in partnership with departmental secretaries, they need to have expectations around what is delivered and the quality of output that is achieved. And I think the challenge I would put to the government is thinking for each minister around what serious expectations they can place on departments to deliver rather than just programs to be announced. Because as we know, it's very difficult to go from an aspiration to a reality.

SPEAKER_00 1:26:40

Something slightly orthogonal, something that wasn't mentioned in the budget very much. I think somebody ran the numbers. Um AI was only mentioned twice in the budget. Um, and something it doesn't touch on is the use of AI within the government. Now, I've heard that there are use cases that are already happening, it's being used in procurement. Um I had an author get up in arms on social media because they found out it was being used to um assess submissions to the cultural policy, um, which they thought was um they thought was, you know, very ironic. Um I think it's also being used to do things like re reply to ministerial correspondence. Now you'd perhaps, you know, but peop people's mileage will vary about whether those are good or just justified um uses of AI in government. Do you guys think that it will um become significant and and a significant driver of a capability and two cost cutting?

SPEAKER_01 1:27:39

I think it w I so on the first point, which is will it improve capability? I think there's a very strong argument to be made um in terms of delivering some of the core functions of government that AI can support in improving capacity. Um one specific example that I've seen work really well is engagement. With the hundreds of documents that are provided as part of consultation processes. Traditionally, if you were to do a review of a policy area, it would take several weeks to engage with all of those documents. It would have you with a very low degree of confidence that you would identify themes across all of those inputs because it was often being done by several people with large gaps of in time. Whereas now there's the ability with bespoke tools to engage with all of them and get a first pass within the space of minutes rather than weeks. And also address more head-on some of the conflicts of interest or clashes and stakeholder perspectives that may have taken several months even to surface. I think there's a really serious question to ask about whether the government will think about using this to reduce cost to serve. I think particularly customer service is the obvious space. If you think about some of the areas where the federal government has the greatest opportunity to innovate directly using AI, it's probably areas like Services Australia. And the reason why I would be perhaps a little bit more pessimistic about the government being enthusiastic about embracing those cost-saving opportunities is because of the checkered history that using technology in the welfare payment space has had in the context of Robodebt. And I think particularly when you're dealing with disadvantaged populations who are engaging with topics that are of great importance to them in terms of access to benefits, I think there's rightly going to be a hesitancy to government to engaging with them. And so I think probably the use cases where it's going to be most likely is where government's, you know, providing additional support to people and where AI may even be able to provide better levels of support than someone who doesn't understand the nuances of a policy who's trying to talk through someone about, you know, how to fill out their tax return or something like that. So bullish on capability, uh neutral, borderline, bearish on cost savings.

SPEAKER_02 1:30:05

I will say I think one of the real challenges on that, like using AI to build capability, is that especially as the way I've seen it as someone who spends a lot of time thinking about data analysis and looking at other people's data analysis, like the big superpower that AI gives you is the ability to write a first-pass data analysis in code to a pretty high standard, and then also QC that, do quality control on that using AI. Like that code writing ability is just so far ahead of I think a lot of the other use cases right now. But it depends upon you being able to give relatively junior people in your organization the space to effectively create new software, new data analytic pipelines. And that's something that I think has always been a real challenge in the public service. So, you know, even if you give people in the public service access to the best coding models, and certainly people I know who are deep in the data in the public service don't have that at the moment, even if you do give them access to that, there's a question of what can they build with it, and are you giving them the space to build? Um and that's a challenge. Like you've got to trade it off against, you know, all of these other concerns that that people rightly have about how their data say is being used in a public service context. But to get the most out of it, to ensure that we're using AI the best to build government capability, from what I see in the kind of data analytic space, that's a real opportunity and it's going to require a change in mindset and probably a change in how government sees risk in the context of using data for analysis and creating creating programs and software that can solve challenges that teams face, but at a sort of distributed level.

SPEAKER_01 1:31:38

I think probably one of the areas where Matt's point is most relevant is implementing large government IT projects. So you mentioned, John O, that the ATO is going to be getting over $600 million to expand the use of a digital ID. Um, that's one of the areas where coding front ends, back ends um should be able to both increase the velocity and speed to delivering features, but also as a result of that reduce the cost to government. And so what's going to be particularly critical, and like Victor Dominello did a great job of articulating this in his article in addition two of inflection points, is demanding outcomes, um, making sure that things that are being built are useful to users and tracking progress that you're actually getting stuff done. And if government's doing that effectively, I don't see any reason why they shouldn't be able to achieve really substantial gains from using generative AI and delivering these programs unless they're really bound by a degree of risk aversion, which um which would prevent them and effectively um kind of banish them to the what is starting to feel now like a bit of a stone age of web development compared to um uh compared to today.

SPEAKER_00 1:32:54

Aaron Powell The broader point that I would make is that reading I get a bit of whiplash, right? Working in in tech, having recently been in SF. Um in in these circles, um the the dominant narrative is that AI is going to change everything, that it's the seismic shift, that it's already arrived in in some form, and that AGI may arrive as early as 2027, you wouldn't know it looking from this budget, right? Like you wouldn't, if you were some kind of alien that was dropped into the world and you only got to read this budget, you would not know that a lot of people in this world thought that there was um this technology that was that was coming down the pipe. Do we think that that reflects a certain kind of obliviousness or uh an unpreparedness um for what might cause a big shock in the economy?

SPEAKER_03 1:33:47

I think it's difficult to imagine justifying for the government sort of a large restructuring of the budget budget based on sort of a 1% tail risk, right? Like I I know we we you and I, Jesse, we have we have very different assessments of this, but I'm gonna call it a 1% tail risk um of of kind of AGI. Happening happening anytime soon. Um the reality is that that the government kind of has to make a decision based on the facts on the ground. Um, and you know, in terms of kind of the resilience that you want to build for the Australian people, like rebalancing the tax base and re-rebalancing things in that way is like much more important for structural reform rather than kind of starting to hedge against something that may or may not happen and that reasonable people, you and I, for instance, uh disagree on. Um one of the other, I think, confounders, um, and I and and uh just to just to wrap up in terms of government kind of adapting these models and whatnot, is a lot of government departments, it seems, have a lock-in contract with with Microsoft and aren't actually able to like justify accessing like good models bluntly. Um, I know from a lot of my public service friends that that they are really trapped in kind of this AI hellscape of kind of four years ago technology, as opposed to kind of having access to things like cloud code and whatnot, that you do see enormous kind of uh productivity benefits from. My sense is that that that is a problem, and and there's just the core problem of like you guys were saying, data access, right? Like you are dealing with sensitive data when you're in the government and giving a junior person access to this thing, particularly when clog code, you know, essentially takes over your computer. Um, there's a real reason to um to be hesitant about taking that forward. Um, so I think those are those are additional confounders in terms of uh the government and AI. What I wanted to ask uh Manning is sort of and Matt, we we talked, we talked about the um we talked about the cuts to the government, right? Uh the you know, there's cuts here and there, and that this is maybe a signal of, hey, we're looking at government efficiency. But it's not really structural, right? It's it it gestures at performance reform, but there's there's not a structural sense of the government kind of saying, and this will be ongoingly better, right? It's sort of a a nudge. Are there are there sort of missed opportunities here to kind of think about performance reform within the public sector for the federal government?

SPEAKER_02 1:36:17

I think one way to put that is that when we're talking about cutting government services and cutting the public service, there's a decision point that governments face where they can either choose to try and do the same amount with less people or less resources, or they can actually make the really difficult choice, which is to say, no, we are not going to do this type of thing anymore. We're gonna do less in this particular area. So we can do more in other areas, is usually how that works. And I think part of the challenge we've seen with the narrative around public service, but in general about narrative around the size of government that that I think has come out from I think a lot of kind of broader uh broader movements across across the world at the moment, is that there's this sense that like a lot of people don't like the size of government, that they'd like it to be smaller, but also I think a complete absence of real specificity about what do you actually want the government to do less of. Because if that's what, if that's your goal, if you want to make government smaller, then you need to mount an argument for why the government should do less, not just why the government should try and do the same amount with less resources, because usually doing the same amount with less resources doesn't work that well. There's not many instances where that's a real thing the government can achieve. And I think that goes to your point that if people really want to prioritize making major cuts to government spending, then they need to bring forward where they want to make those cuts and not just sort of assume that there are cuts to be had.

SPEAKER_01 1:37:41

Yeah, and something I would say on that, Matt, is that the Commonwealth government's in a particularly different position from state governments when it comes to making trade-offs about what it does and how it does things. Um, if you're wanting to deliver genuine savings in, you know, uh how state governments operate, often you can rethink delivery models associated with the health or education system, which means you might provide more in-home care rather than care in hospitals that are run by the government. It might lead to things like innovations in terms of how schools deliver schooling to children in terms of changing and adjusting classroom setups that change the requirements for teachers. It's really difficult for the federal government to make changes along those lines. Um, predominantly, most federal government programs are just providing funding to people. There are very, very few areas where the government provides specific services. Um, and I kind of broadly think of the federal government as like a transfer body. It's kind of like a bank giving money to people and picking who gets money, and then a whole bunch of people who think really deeply about what's the fairest way to do that. And I think it's difficult for government to achieve substantial savings through AI by like, you know, virtue of the fact they're just giving money to people. Um which leaves them with a much more challenging question and a much more politically challenging question of how many people do you need thinking really deeply about what the best way to get that money into the hands of the people who need it most is. And um, I think uh it will be interesting to see whether this government, and I I don't think that this government will look to substantially reduce the size of the Commonwealth Public Service. Um, but that that would be the area that you'd have to look at if you were thinking it really materially reducing the scope and functions of of government.

SPEAKER_03 1:39:40

The last piece of kind of state capacity, and this sort of cuts into what we were what we were talking about with superannuation and and where the government corrects market failures, um, is there's sort of a large number of piles of money that uh have been active kind of throughout Labour's uh Labour's term. Now a few of those have been wound down. There's something like over a hundred different kind of funds and whatnot, and a couple of those have been wound down, particularly ones that were kind of feeding into the university sector. Where where are we kind of sitting in terms of like future made in Australia, National Reconstruction Fund? Like, are these piles of money like in terms of like Manning, you know, talking about most of these programs are about distributing money? Are we doing a good job of that? My sense is that the reviews are mixed. Jesse, did you want to go on the National Construction Fund? Reconstruction Fund?

SPEAKER_00 1:40:26

Yeah. So looking at the investments that the National Reconstruction Fund has made, something that stands out to me is I don't see I definitely see examples of investments where there shouldn't be market failures, where there exist piles of private money that should be very interested in investing in these companies if they are good companies. So Gilmore Space, for example, um is a is a you know rocket company, um, quite heavily backed by Blackbird since 2012, um, invested in um uh through Blackbird's subsequent follow-on funds as well, um received a $75 million investment um from the NRF this year. Um obviously, you know, uh uh a successful rocket company is a very profitable company. SpaceX is probably the most valuable private company. Um I think Gilmore Space Um has shown that it is not a very good rocket company. It has taken a very long time to put something on the launch pad. Um they knew it was gonna fail, you could tell, um, because they didn't allow media and they really manage people's expectations. And then it achieved, you know, 30 seconds in the air, didn't get through, I don't know, the stratosphere or what whatever relevant layer of the of the atmosphere it was. Um and when you compare that to the results that other lock launch companies, such as, you know, Rocket Labs in New Zealand and and lots of ones in the US have had, um it just is a shit rocket company. Like you can tell. Um and and so for the NRF to invest $75 million more into that rather than let that company fail and and let that talent disperse back into the ecosystem and let something else take its place, um, I think is is, yeah, it's it's an example of adverse selection. It's not good for the taxpayer who's footing that bill, and it's probably not good even good for the rocket industry in Australia. Now, gone quite deep on one specific company, um, just happens to be one that I know. Um, but but it doesn't feel like NRF is is playing the role of um you know um being a market maker or correcting some of those market losses that that Manning, you talked about earlier.

SPEAKER_02 1:42:41

Oh yeah, I was gonna say this isn't this isn't my line, so I can't take credit for it. But one of my colleagues at the Grant Institute, Alison Reeve, who is our uh energy and climate program director, often talks about, you know, people are very worried that indust industry policy means the government picking winners, and we really should be more about more worried about losers picking government, because that's just often what happens in in industry policy, unfortunately.

SPEAKER_00 1:43:02

That's a good line. That's a really good line.

SPEAKER_01 1:43:04

Yeah, I think the national can I just quickly have a few points about why I think the NRF has faced some challenges. Um I think there are really three issues with the National Reconstruction Fund. Its top-level ambition is to try and transform Australian industry and um diversify our industry, which is a really big task. In fact, I think that task is probably a little too broad. Um, if you look at successful examples of industrial policy in the past, they've often actually been quite narrow and targeted on a specific set of industries. We're currently targeting somewhere, I think, six or seven specific industries, all that are quite different. And if you look at some of the successful examples, um they focus on quite a narrow set. Um the second thing is that it's actually really focused on giving money to people when a lot of the successful examples of industrial policy have gone much further than just giving money to people. Often it's been thinking about like, what are the structural barriers that exist to building an aerospace industry in Australia? And like, what objectives are we, you know, embedding in regulations that trade off against that that we're willing to give up on because we believe it's so important that we build this industry? And so what that might mean is like getting rid of some environmental regulations that prevent us from operating in areas that are good spaces for launches. I don't know, I'm not a rocket scientist, but like those are the sorts of things that would be really important to do if you actually want to create a successful industry so that when government support retreats and the big push of the industry is over, it's able to stay on its own two feet and keep on moving forward. I think the third challenge that I've really struggled with with the National Reconstruction Fund is if you asked anyone in government, well, is it working? I don't know if anyone would be able to give you a clear answer as to whether or not it was working. And so I think if the government is really committed to transforming Australian industry, they should just have one or two goals in mind. Like that could be what proportion of our exports are not mineral resources based, right? And that is a clear scorecard to hold the executives at the National Reconstruction Fund, who are currently facing like 18 or some ridiculous number of different objectives that have all been like pushed into the legislation, one clear thing to focus on. And also Minister Eyes and Minister Charlton, something to hold them accountable to. And so with that, I think there's the ability to drive the National Reconstruction Fund. And I was um like particularly disappointed that the government didn't think about its success in this budget and think about the $15 billion that are being spent on it more critically.

SPEAKER_03 1:45:56

Yeah, I think if we were to talk about kind of where we would like the government to go next in terms of state capacity, it is this question that we've raised, and we've talked about a lot internally and would welcome any pieces uh on inflection points on this, which is this kind of gratification of government policy. Manning, you you gave a great example there, right? Is this idea that, you know, oh well, if we give Gilmore space some, you know, number of millions of dollars, that will overcome any kind of structural barriers that we have to a hypothetical competitor to them that might be better placed uh to take place. And and that really comes down to kind of structurally kind of structurally uh and that really comes down to engaging with with barriers kind of structurally, right? And think about government, you know, and and I think this is something that kind of uh Ezra Klein and Derek Thompson put forward in in abundance, and think about the idea of um of government as sort of a blocker clearer rather than um kind of any anything like a money distributor, though of course like funding where there's market failures and so on, you know, as we've talked about, is really important.

SPEAKER_00 1:47:02

I think a combination of the gratification and the lack of clear measures of success just makes this a rent-seeking leech conference, right? Um, because there are some companies that make for good headlines. Sure, we're investing in a, I don't know, as a rocket company. Look at this picture of as or Children standing next to a rocket. Um I think it means that the people who are the best at navigating that grant-seeking process and maybe have the the right investors on side who have the ear of some of these ministers are most effective at getting the money, um, regardless of whether they're the most mauriticious or or would actually build Australia's sovereign capability.

SPEAKER_01 1:47:37

Yeah, and I think that you're completely right there, Jesse. The the couple of builds I would have on that is firstly, if you're addressing the real challenges to an industry developing in Australia, kind of doesn't really matter who you pick because the rate deregulatory or adjustments to support the industry should disperse across players. Um, the second point is that if you have confidence that you're actually addressing the real barriers that exist to an industry developing, you're kind of fine to step away from someone who you've given money to in one instance because you know that there's a broader benefit that's coming from this. Um, and I think one of the challenges with industrial policy, and the NRF is a great example of this, is an unwillingness to admit that a mistake was made and effectively not just to pick a loser, but to pick and stick with a loser.

SPEAKER_03 1:48:33

Human flourishing. That's our final uh pillar. Obviously, none of us are NDIS experts, so we can't really speak to the specifics of the reforms here. Um the sector obviously um has its views and researchers in the sector have that have that view. But one of the things that I think is is going to be really challenging for the government is holding the line here, both in terms of reforming the policy to be uh politically feasible, to still have that sort of uh permission to to spend to spend uh on this demographic, as well as kind of having to hit these really hard growth pullback targets. I mean, they're very ambitious. Manning, what do you make of kind of the government's chances of transforming a target into reality?

SPEAKER_01 1:49:18

I think they've gone about this the right way to start with, which is setting a clear goal and holding themselves accountable to it publicly. And I think if they are wanting to succeed here, they will need to think really creatively about maintaining the quality of care that people are able to receive and the quality of supports that people are able to receive under the NDIS while reducing the cost of delivering those supports. Um, so one specific example that's been discussed by the government is um you know providing more community based support. I think there are some really good examples to think of there where you know providing care in group settings can be far more effective and even lead to stronger outcomes in some instances. And providing individual supports. And that was always the intent of the NDIS to provide a really strong community-based model. One thing that I think is worth reflecting on is the role that industry structure plays in delivering efficient care. The NDIS is a government-created market that was established and grew out, grew kind of from nothing. And what that has led to is a really fragmented space with a lot of small providers, often sole providers who are managing quite complex need. That often brings with it competition, but it also brings with it difficulties of delivering efficiently and at scale. And I think if the government is to genuinely be able to deliver, you know, um quality care to people with a disability without continuing to see the increases in costs, they need to think really seriously about what industry structure is likely to be able to do that in an efficient way. And some of that has been done in the budget, but I think there's a lot more thinking to be done about this. Obviously, the the example of aged care is something that is distinct, but I think there are some flavors of similarity that are worth reflecting on. Jade Lynn's article in addition two of Inflection Point notes some of these in an aged care context. It challenges us to think about how can we creatively use technology not just as a way to reduce costs, but also to improve autonomy and choice so that people are able to rely on technology to meet their needs rather than often in a way that can be disempowering, rely on another individual. And I think that those are sorts of things that will be important for the government to focus on as they look to implement what will be a really tricky agenda to deliver.

SPEAKER_03 1:51:51

Absolutely. The other uh point on human flourishing and manning, I know this is a bugbear of yours, is tobacco. Um, so the illegal market is now bigger than the legal one. The excise revenue is down in the order of billions. Um, legal packs are 60 bucks, black market packs are at 15, and the budget allocates drumroll 20 million dollars over four years to enforcement. Everyone has said this is a self-inflicted room uh wound. Why is Chalmers going into bat for cigarettes?

SPEAKER_01 1:52:22

Uh I think he has to, um and for two reasons. The first and most obvious is that uh every cigarette that is purchased on the black market is funneling money into organized crime. And as we have seen in some parts of the country, that is already spilling over into property damage and violent crime. And so um this is something that the government will want to nip in a bud. I don't think 20 million do that though? Yeah, so I don't think that $20 million is anywhere near enough to be able to deliver that. And this is partly a result of fragmentation and responsibilities between state and federal government. A lot of the like law enforcement obligations and capacities that exist sit at a state level, and the federal government often doesn't have those levers available to do that. Um and I think squaring the kind of federal federal state tension that will exist here is going to be really important to tackling it. Um it it is uh, I think a national embarrassment, the extent to which we have let this get out of control. Um I was reading a few months ago in a New York Times piece where dozens of Australians were talking about how they never purchase cigarettes from a legal vendor and always purchase them on the black market. And it is astounding that this degree of illegal activity has been able to permeate throughout the community. Um the second reason why Jim Charmers will be trying to focus on this is the total collapse of revenue for the federal government that uh that has occurred as a result. Um for most of the uh for most of the 21st century, the federal government has taken about $10 billion per year in tobacco tax. Um that peaked at about $20 billion when the rate of excise tax climbed steadily throughout most of the 2010s and has collapsed now to less than $5 billion. Um that's despite a growing population and the fact that uh the government has subset substantially raised the rate.

SPEAKER_03 1:54:34

Um Right, but he is serious about this. Like he's not, right? $20 million is not serious.

SPEAKER_01 1:54:40

Yeah, I I so I don't think they're taking it seriously enough. And if I were treasurer, I would have allocated substantially more money to try and address this.

SPEAKER_03 1:54:48

It is confusing though. It's it's a large budget hole. Um, like you said, like like in the billions of dollars. Um the question, I guess, is like, would any amount of enforcement be enough? Or is it a case of actually having to readjust down the rates of taxation?

SPEAKER_01 1:55:05

I mean, I'm not a I'm not a health economist, so it's tough for me to say. It does seem uh like a recovering economist that incentives do matter here. And if you're an individual who's thinking about breaking the law and purchasing a cash in hand pack of cigarettes for a quarter of the price from what you would have paid, that that incentive isn't clocking. And so there's kind of two things that you can do. There's one way which is you can raise the barrier to doing illegal activity substantially, or you can reduce the benefit, which would be reducing the tax rate. Um, I'm not sure which one of those works more effectively, but I think that what the federal government needs to think about is those two levers. Um, and if you think about it across the forward estimates, it ends up being a question that is materially more substantial than some of the gains that they've talked about in terms of public sector efficiency. And thinking of it in that terms of challenge, I think is what the government needs to do, not just for fiscal savings, but also because of the public health effects that are happening from rates of smoking within the population.

SPEAKER_00 1:56:10

I do think that it's been this runaway thing where because it's normalized now, like nobody's like, oh, you have those unbranded cigarettes, you're fun you're funding organized crime. Like it's just kind of accepted that that's what people smoke now if they do. Um it feels like it's hard to put that genie back in the bottle, even if you lower it from $60 to $40 or whatever it is. I would go um with something more creative and and spend $20, $50 million on a on a public advertising shame campaign to say if you see somebody smoking unbranded cigarettes, they're fun, they're they're funding organized crime. I think I think that the social pressure um might be stronger than than enforcement.

SPEAKER_03 1:56:52

Maybe. I've seen those on vapes and the the vape ads make me want to vape more.

SPEAKER_01 1:56:58

I was just gonna suggest that perhaps for the economists. For any for any economist or bureaucrat listening to the Inflection Points podcast, um you should also know that you're not just funding organized crime, you're also contributing to some of the structural budget problems of the Australian government. And you ought to consider the costs that that imposes on the Australian people, both this generation and next.

SPEAKER_00 1:57:25

It's because of you that founders have to move to UAE.

SPEAKER_01 1:57:28

Exactly. Exactly.

SPEAKER_03 1:57:29

Where cigarettes are probably extremely cheap. Folks, that takes us to the end of uh of rounding up the pillars. The last thing I want to do is go around the table and ask each of you what the next reform you'd like to see, whether it's at uh Maifo or the next budget. Um, starting with you, uh Matt Bowes. You're welcome to take a housing frame or a general frame.

SPEAKER_02 1:57:52

Yeah, well, I'll I'm always happy to chat more about housing. Um it's really tricky to pick out one specific thing. Um, but I I think just as sort of a remedy to some of the conversation we've been having here, um, you know, so much of the conversation from government recently has been about homeownership and how homeownership is central to their housing policy. And I think it it just it can ignore the fact that most people who are struggling in the housing market or people who are struggling the most because they're on the lowest incomes, they're renters. They these are people who are facing the most insecurity, they're the people who are most likely to sort of transition in and out of homelessness over time. So taking a taking attack towards, well, we've done what we can on home ownership, how can we better support renters? I think is is something that the government needs to seriously consider. And there's a bunch of things they could do there. Obviously, supply really matters, right? That getting more homes built matters for renters almost more in some instances than it does for homeowners. But it's also about ensuring that like we have the right supports in place. And I think there you've got to look at rent assistance and raising that, and also looking at our tenure laws, like this is something that that states control. But again, if the federal government is looking to to really look at the the major barriers to secure housing in the states, planning laws is one area they need to look at. Um, but but downstream of that, it's also about tenure security and ensuring that we get the balance right so that renters feel secure.

SPEAKER_03 1:59:17

Wonderful. Manning, same question. Uh, what would you what would you kind of focus on next?

SPEAKER_01 1:59:24

Uh it's a really tricky question to answer, and I think it kind of depends on how some of the reforms that the government are suggesting in this budget land. Um what I would say is that I think the government should shift its focus to some of the really inefficient state taxes. Um if we're thinking about this as what's next on the list of tax reforms, thinking about the most economically damaging taxes within Australia is really where you should be thinking about spending some of the dividends that come from additional revenue from things like changes to negative gearing and change to the capital gains tax. Um it may not be enough to wipe a solid chunk of those inefficient state taxes like payroll taxes and stamp duties at a state level. Um, and it may not be politically popular to do so in that area rather than in the personal income tax system. But if we think about this as truly being a foundational budget to try and move Australia towards a new equilibrium where we have governments that work together to tackle challenges for productivity, challenges in our housing markets, thinking about what's needed and what additional revenue the feds will need to gather in a more efficient way to get rid of things like stamp duty and payroll tax. I think it's going to be an important question for the government to turn its mind to And Jesse, close us out.

SPEAKER_00 2:00:53

A lot of the media coverage in this budget talked about how the budget was a bad one for young people and for aspirants. But what goes through my head is that the vast majority of Australians are not so lucky to come into the world with capital. What we all come into the world with is our labour and our capacity to work and our capacity to create value through that labor. I think that, you know, we've talked about how we're rebalancing the tax system from taxing wealth, sorry, from taxing work to taxing wealth, and would love to see that continue. Um I think perhaps an indexation of the tax brackets that that prevents the kind of um bracket creep. Um that means that you know people are actually paying more each year. Um, or or perhaps a change to, I think the threshold, which is I think it kicks in at $135,000, which is 37, moving that to 35 or something like that. Um yeah, I think that that is the thing that would benefit young aspirants um and allow them to make choices. Um, for example, to take a take a risk on goal once they've been able to accrue some of those savings early on in their career.

SPEAKER_03 2:02:05

Wonderful. Three great answers. When we wrote the spirit of progress, uh, Manning and I, we started with a line that Australia is a country that talks often of reform but struggles to deliver it. I think it's fair to say that this budget is one that does attempt some amount of reform, and that's why we have been like relatively positive here. Um but the test will be in the implementation, right? There are things going out for consultation. The uh local infrastructure fund could entirely flop based on what actual reforms are tied to it. There's a lot of questions here that could be backflipping on CGT that is really actually unhelpful. But if this government can hold the line, then I think we have something on our hands that is meaningful. Matt, Manning, Jesse, thank you very much for joining me. Thank you, listeners, for listening to our budget recap 2026. You've been listening to the Inflection Points podcast. You can subscribe at inflectionpoints.org. I'm your host, Jonathan O'Brien. Thank you, everyone, and we will return into your ears very soon.