The federal government has just announced an extension of its HomeBuilder program in which eligible homeowners can receive up to $15,000 to help pay for a major extension on their home or a new build next year until March 31 (down from $25,000 this year). While there has already been over 23,000 applications to the scheme, the HomeBuilder package is poorly conceived and designed. In fact, it is an abject failure in good policy. It should be cancelled, not extended. Here's why:
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1. The HomeBuilder package is inequitable. Take two families living in identical houses next door to one another. Both were planning to renovate. But one family's income dropped due to the COVID-19 crisis while the other family's income did not. The family that suffered the income loss is now on shaky ground. They may be uncertain about future income. They don't want to take on more debt, or fear a bank might be reticent to lend to someone whose job is precarious. In that way, the package favours households relatively unaffected by the pandemic. The HomeBuilder package accentuates the relative disadvantage of those adversely affected by the crisis. This, of course, says nothing of the poorest in society, who are completely bypassed by this renovation package altogether.
2. The most likely beneficiaries of this package are households and builders who were already going to build, even in the absence of the package. These existing projects will swamp the number of genuine extra builds generated by the scheme. Depending on how the price changes, the benefits of the HomeBuilder subsidy will be split between the builder and the buyer of a project that would have proceeded anyway. While the subsidy might offer some macroeconomic effect, this is a very inefficient and ad hoc transfer method.
3. Ineligible renovators will be hurt by the scheme. Take the example of the two nearly identical neighbours. The household who can get the government money will be willing to pay up to $25,000 (or now $15,000) more. This will most likely filter into price hike. Now the ineligible household must pay more. The government committee charged with overseeing prices will have little hope of catching an increase of $10,000 or $20,000 on a $200,000 bespoke project.
4. I've got nothing against tradies. But what is so special about the building industry anyway? Construction contributes about 8 per cent to Australia's GDP, which is of course important. But what about other sectors? Health and education contributes around 13 per cent, and mining 10 per cent for example. Arts and entertainment contributes about 6 per cent. One objective of a stimulus package is to increase productive capacity in the economy. Large infrastructure projects can do this, but they take time to get rolling. The HomeBuilder does little to build extra productive capacity in the economy. Long-term capacity can be built in the economy through investment in skills and training, and this could be done relatively quickly accessing the existing vocational and higher education systems that are in desperate need of funds.
5. Sector-based subsidies are prone to corruption. This is particularly difficult to eliminate with a quick rollout. Remember the pink bats scheme? Supposedly you cannot access the scheme if the builder is your relative, but is the government really going to be checking your Facebook page and your wedding album before handing over the cash? The scheme is prone to abuse by the unscrupulous.
6. Rather than the sectoral-based subsidies, the federal government should use its transfer payment system to boost economic activity. Income transfers can be targeted to low income families, for example. It could be targeted at those who have suddenly lost income. It can be implemented quickly, while still relying on the monitoring mechanisms built into it already. A stimulus package implemented through the transfer system could be broad too, much like the scheme implements during the GFC. If households are assured of their income through the crisis they can then comfortably continue to spend, including on home renovations if that is what is right for them.
Allowing consumers to make their own spending choices, rather than channeling spending into a specific sector, will minimise the increase in prices that will ensue. Importantly, the scheduling of transfer payments can be centrally coordinated so that they have the largest stimulatory impact at the desired time.
- Associate Professor Andrew Wait is in the School of Economics at University of Sydney. He is an expert in organisational economics.