Labor’s new upper class welfare – the first Home Savers Account

Ben Spies-Butcher, Macquarie University
Adam Stebbing, Macquarie University

Imagine a new Labor Government, fresh from winning an historic election on the basis of defending collective bargaining. It identifies the core concerns of working families—job security, petrol prices, grocery prices, and housing affordability. Then it announces a new welfare payment where those earning over $180,000 per year will receive twice as much as those on average weekly earnings.

Well, that is what Labor is currently proposing to do to assist first home buyers. Having complained that the grant offered under the former Howard Government’s First Home Owners Scheme (FHOS) could be claimed by millionaires, the Rudd Government wants to offer a government co-payment that actually increases with earnings.

How did such an astonishing policy ever get to this point? The answer lies in an often neglected but very significant change in the Australian welfare state, which has moved from delivering payments and services to increasingly focusing upon tax expenditures, concessions that allow people to get out of paying tax. Because those on higher incomes pay more tax, often when governments grant tax expenditures, those on higher incomes gain most.

Australia is developing new welfare spending policies that are highly regressive.

More recently these tax expenditures have taken on a new form. Rather than being received as deductions at the end of the financial year, they are being transformed into payments, either to individuals or to private welfare service providers. Thus, Australia is developing new welfare spending policies that are highly regressive, through a policy backdoor.


The First Home Saver Accounts (FHSA) scheme aims to assist first home buyers in saving for a deposit while encouraging a ‘savings culture’ (Commonwealth Government of Australia 2008, p. 15). The FHSA scheme provides a cash payment and tax concession to a prospective first home buyer who is able to invest up to $10,000 annually in a FHSA to put towards a deposit. The cash payment takes the form of a co-contribution calculated by reference to the marginal tax rate paid by the individual on the amount of earned income they invested into the account, up to a ceiling of $5,000. As Table 1 shows, individuals who invest $5,000 and earn an annual income of up to $80,000 receive a co-contribution of $750, while individuals with an income of $185,000 or higher who invest the same amount receive $1,500. The tax concession on the interest earned once in the account, similar to the concessions on superannuation, levies a flat tax rate of 15 percent on interest earned on previous contributions, rather than the individual’s applicable marginal tax rate.

The FHSAs are only available to prospective first home buyers who include those individuals that have not previously purchased housing to ‘live in’. To open an account, an individual must make a minimum individual contribution of $1,000. If both members of a couple have not previously owned a home to live in, then both are eligible to open accounts. To withdraw funds from an account, an individual must have made a minimum contribution of $1,000 over the previous four years. Individuals can only withdraw funds from FHSAs for the purpose of purchasing housing or property on which to build housing. Otherwise, the funds can be transferred to superannuation.

Table 1. Government Contributions to the First Home Savers Accounts
Taxable income* Marginal income tax rate* Government contribution
rate on post-tax investment
Maximum benefit based on
$5,000 of individual contributions
$0–$6,000 0% 15% $750
$6,001–$37,000 15% 15% $750
$37,001–$80,000 30% 15% $750
$80,001–$180,000 40%   25%* $1,250
$180,000+ 45% 30% $1,500

*Based on proposed 2008–09 tax scales.

Source: Commonwealth Government of Australia (2008)


The FHSA is a response to growing public concern over the declining level of housing affordability. The property boom in the late 1990s and early part of this decade led to a marked deterioration in housing affordability for first home buyers that is yet to be reversed. In 2007 the average monthly repayment on a typical first-home mortgage rose above $2,000 for the first time (Housing Institute of Australia 2007). The temporary reprieve gained through a relative lull in housing prices in recent years has once again given way to a renewed property boom, particularly outside Sydney. Rising interest rates, resulting from both the deliberate decisions of the Reserve Bank and the flow-on effects of the US sub-prime crisis, have added to the cost of purchasing a home. The combination of high purchase prices and higher interest rates insures that housing affordability is unlikely to improve substantially in the near future.

However, the bulk of housing stress is not experienced by those buying, but by those renting. The number of low-income households experiencing housing stress, defined as spending more than 30 per cent of their gross income on housing, was over 850,000 in 2002–03, the majority of whom were private renters (Yates & Gabriel 2006).

In a damming summary of the situation, Julian Disney outlines the changes taking place in the Australian housing market. Over the past decade and a half he notes that house prices have roughly doubled, the proportion of first home buyers has fallen by 20 per cent, the proportion of low rent homes has fallen by at least 15 per cent, and opportunities to rent in public housing have declined by about one third (Disney 2007). In addition, recent interest rate increases, on top of high house prices, have led to an increase in mortgage foreclosures, particularly in New South Wales (Reserve Bank of Australia 2007).

The bulk of housing stress is not experienced by those buying, but by those renting.

The current proposal only attempts to deal with one aspect of this dire situation—the plight of the first homebuyer. This is not the only element of Labor’s plans for dealing with the problems of housing affordability; however, it is an important component. Unfortunately, in terms of effectiveness, Labor’s scheme suffers from similar difficulties to the previous government’s First Home Owners Scheme.

The FHOS initially provided a $7,000 unmeans tested grant to first home buyers, with the stated rationale of compensating first home buyers for the inflationary effects of the introduction of the Goods and Services Tax. The grant was temporarily increased between March 2001 and June 2002 in the case of purchases of newly constructed dwellings, but has since reverted to a uniform rate of $7,000 (Productivity Commission 2004, p. 204).

There remains considerable dispute over the effectiveness of these sorts of schemes, which aim to address affordability by increasing purchasing power. There is relatively little comprehensive research isolating the effect of the FHOS on house prices, however it has been broadly acknowledged that the scheme is likely to increase house prices to the extent that supply is relatively inelastic (Productivity Commission 2004, pp. 72–73). As a result many prominent economists and policy analysts with diverse points of view have claimed that much, if not all, of the first home buyers grant has been capitalised into higher house prices (Australian Associated Press 2007; Gittins 2007; Saunders 2005, p. 7).

Unfortunately Labor’s new proposal mimics the structure of the FHOS in important respects. It, too, aims to address affordability by increasing purchasers’ ability to pay. Part of this will presumably be achieved by an increase in a ‘savings culture’. However the scheme also provides for a direct increase in purchasing power through government subsidy and tax concessions.

The FHSA differs from the FHOS in that there is a delay of at least four years between the first government payment and the purchase of a home. But this is unlikely to dampen the inflationary effect of the policy. Inflation occurs because there is an increase in demand that is not matched by an increase in supply. Demand is represented by ability to pay at the time of purchase. As all of the money granted through the savings scheme is available prior to purchase, its effect is likely to be the same as the FHOS. The main difference is presumably on the culture of savings, at least in the context of housing, (with the requirement to save $1,000 per annum for a minimum period of 4 years as an incentive to develop a savings culture), and that the inflationary impact will be delayed several years.

The delayed natured of the FHSA payment makes it particularly appealing in the context of high inflation and rising interest rates. Circumstances today are not unlike those in the mid-1990s when the Keating Government diverted tax cuts into superannuation, hoping to dampen inflationary pressures by adding to domestic savings, and this proposal mimics the structure of superannuation in several respects. However, in this case there is a degree of uncertainty generated by the delayed inflationary effect on housing prices, and the possible strategic behaviour of others in the housing market, who may act in anticipation of the likely price rises in four years time.


The policy design of the FHSA is a close relative of the various policy instruments known as tax expenditures, which offer tax breaks to taxpayers who undertake certain actions or are members of particular social groups. Tax expenditures have comprised an increasingly significant component of the Australian welfare state since the mid-1980s due to their increased number and budgetary impact (Smith 2003). The number of tax expenditures reported by the Australian Treasury has increased by around 75 per cent from 170 in the 1984–85 financial year to over 300 in 2006–07 (Department of Treasury 1986, 2008). The budgetary impact of tax expenditures has grown in monetary and proportional terms. The cost of tax expenditures swelled from $7 billion in 1984–85 to $50 billion in 2006–07, which amounts to an increase from 3.6 per cent to 4.8 per cent of gross domestic product (Department of Treasury 1986, 2008).

Three key features of tax expenditures explain their popularity and growth.

This trend has been most marked in the growth of the tax expenditures for superannuation, which levy a flat concessional tax rate of 15 per cent at three stages of superannuation investments: at the time when individuals make deposits; on interest earned on deposited funds; and during withdrawals from superannuation accounts. The concessional taxation of superannuation is regressive, because the flat tax rate of 15 percent provides a greater saving to individuals who pay 45 per cent marginal income tax rates than those who pay 15, 30 or 40 per cent marginal income tax rates. In 2006–07, the two biggest ticket items reported by the Treasury were superannuation tax concessions. Further, the tax concessions for superannuation accounted for around $24 billion or just under half of the total amount spent on tax expenditures (Department of Treasury 2008, p. 8; pp. 129–130).

Three key features of tax expenditures underlie their recent popularity and rising magnitude. First, unlike cash benefits and services, tax expenditures facilitate private enterprise by providing taxpayers with cash to purchase their services while reducing transfers between the household and state. To some extent, this explains the popularity of tax expenditures with the succession of Labor and Coalition governments over recent decades that have attempted to limit or reduce the size of government by fostering markets and reducing traditional forms of expenditure.

Second, tax expenditures have been popular amongst policymakers, as they are perceived to accommodate choice or encourage desirable behaviours. Tax expenditures require their recipients to either make decisions over what to do with their larger disposable incomes, or, alternatively, to choose to undertake certain actions that may require the further choice of a private service provider. This is in contrast to state financed cash benefits and services that are often criticised by commentators sympathetic to the market for constraining the choices of their recipients (particularly services) and encouraging economic dependence on the state.

Third, and perhaps most significantly, tax expenditures have increased in magnitude due to their open-ended budgetary impact. Tax expenditures are open-ended since they are demand driven and take-up rates amongst eligible taxpayers can only be estimated in advance (Wanna 2003). This is particularly the case when tax expenditures seek to encourage savings—such as in superannuation and the proposed FHSAs—and provide exemptions or concessions for taxes levied on investment earnings.

The rise of tax expenditures, however, is not the full story. In several cases, policies initially framed or devised as tax expenditures have evolved into direct spending programs or been modified to incorporate aspects of direct spending programs. Two examples illustrate this trend. The first is the Child Care Rebate (CCR), which the current Government proposes to increase to a 50 per cent tax offset on approved childcare expenses with a ceiling on the rebate at $7,500 during 2008–09 (Schubert 2007). The proposed changes to the payment structure of the CCR mean that although it remains a tax expenditure, it will be paid to its recipients on a regular basis like income transfers.

The FHSA continues the trend of transforming tax expenditures into payments.

A second example is the Private Health Insurance Rebate (PHIR), which provides a 30 per cent subsidy of private health insurance premiums for individuals and families. Recipients of the rebate choose to receive it in one of three ways: as a tax expenditure at the end of the financial year, a cash reimbursement through Medicare, or an upfront payment to subsidise the premiums of private health funds. The PHIR is predominantly paid as a direct subsidy to private health funds; in 2005–06, $2.9 billion was spent on direct subsidies of premiums with only $150 million paid as a rebate through the taxation system (Australian Institute of Health and Welfare 2007, p. 42). So, despite being framed as a tax rebate, the PHIR is a direct subsidy of the private health insurance industry.

The trend of transforming tax expenditures into direct spending programs provides the Government with a backdoor to implement policies that may not otherwise survive the scrutiny of direct spending programs—even though some become direct spending programs down the track. As Wanna (2003, p. 3) observes:

Tax expenditures are not included on balance sheets nor in operating statements; they do not come in for scheduled debate or scrutiny in the legislature; they are not rationed in any systematic way; they do not automatically come before a cabinet committee for routine review; and they are not audited by the Auditor-General or other independent auditors.

The lack of public scrutiny received by tax expenditures—coupled with the increased likelihood of them having inequitable payment structures—means that the trend to converting them into direct spending programs is more likely to lead to the adoption of less equitable public policies that may not have public support.


The FHSA continues the trend of transforming tax expenditures into payments. In fact, the FHSA have been converted from a tax concession into a cash payment during the proposal stage of policy development. It is also feasible that the FHSA might be converted back into a tax concession, as the Government has signalled its intention to deliver the co-contribution through a salary sacrifice mechanism alongside the cash-contribution option (Commonwealth of Australia 2008, p. 4).

Nevertheless, the FHSA scheme goes one step further than previous conversions of tax expenditures into cash payments by maintaining the structure of a tax rebate, which means that the government is effectively paying people back their tax. By paying people back their tax, the FHSA scheme maintains the payment structure of a tax rebate, which effectively reverses the progressivity of the tax scales. Our argument is that by maintaining the payment structure of a tax rebate, the proposed cash co-contribution of the FHSAs sets a dangerous and highly inequitable precedent for Australian public policy by providing those on the highest incomes with the highest payment.

The inequitable structure of the cash co-contribution was displayed in Table 1, which showed that high income earners served to gain more from the direct payment than low income earners. However, the inequity of the contribution is compounded when it is taken into account that both members of couples, as well as single individuals, are able to open FHSAs.

To emphasise the range of benefits received by couples with different incomes, we compare two hypothetical scenarios where individuals in couple relationships each invest $5,000 in FHSA during 2008–09 and both earn (1) $58,000 in the first couple, which is around average weekly earnings (ABS 2008); and (2) $185,000 in the second couple. For the first couple where both individuals have an annual income of $58,000 each (total income of couple is $116,000), they receive a total government contribution of $1,500 for their investment of $10,000. Conversely, in the second couple both individuals each earn $185,000 over the year (total income of couple is $370,000) and receive a total government contribution of $3,000 for their investment of $10,000. People tend to partner others with similar income and educational backgrounds—a trend that is becoming more pronounced as educational institutions become more homogeneous (Blossfield & Timm 2003). Thus, this sort of example is typical of reality.

The Government could provide investors in FHSAs with a flat rate payment.

Clearly, the co-contribution of the FHSA scheme is highly inequitable; for a single individual on average weekly earnings who received the maximum available contribution of $750 from the government, would receive only one quarter of the benefit that could be received by a couple with a combined annual income of $370,000 ($185,000 each). Although the increased economies of scale enjoyed by individuals living in couple relationships when purchasing property are largely inevitable, and in many ways desirable, it cannot be maintained that couples with combined annual incomes over $370,000, however small in number, require more support from the government to purchase housing than individuals on around average weekly earnings.


The proposed FHSA scheme accrues the greatest benefit to those who are in least need of it due to the novel decision to maintain the structure of tax rebates for the cash co-contribution. The precedent that would be set by implementing the FHSA scheme in its current form is particularly alarming considering that it is predicated on the aim ‘to help aspiring first home buyers to purchase a first home’.

The scheme also suffers from broader economic shortcomings, particularly in relation to its inflationary effects. Also, alternatives that provided directly for the provision of more affordable or social housing, such as through the Commonwealth State Housing Agreement, are much more likely to provide assistance to those most in need—low-income private renters.

If the scheme is to be implemented, its equity and efficiency could be improved significantly with only relatively minor changes. The Government could provide investors in FHSAs with a flat rate payment, like the PHIR and CCR outlined above, rather than maintaining the structure of a tax rebate that provides more benefit to the wealthy than the poor. The scheme could also introduce a taper—gradually reducing the benefit for those on very high incomes. Again, an example of this already exists with the government’s superannuation co-contribution. Only those on below average earnings are eligible for the full payment. These simple changes would not only make the scheme far more equitable, they would also remove the dangerous precedent of designing payments to look like tax concessions.


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Ben Spies-Butcher is Lecturer in Sociology and Adam Stebbing is a PhD Candidate, both in the Department of Sociology at Macquarie University.

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