Budget Forum 2025: Household Investment Subsidies Offers a More Sustainable Solution Than Bill Rebates

Cash or bill rebates have recently been used to help Australian households struggling with the cost of living. For example, the 2024 budget had a $3.5 billion scheme providing energy bill rebates to households and small businesses. The upcoming 2025 budget is also expected to include similar rebates.

While these rebate schemes provide temporary relief, they often fall short in addressing the financial challenges faced by disadvantaged households. In contrast, household investment subsidies offer a more sustainable approach to providing long-lasting support.

For example, subsidies for the installation of solar panels and batteries can help households to save around $1,000 per annum on energy bills, depending on individual circumstances. This is just two examples of investments that could benefit households. Other potential investments include electric vehicles and energy-efficient appliances.

However, it is important to acknowledge the challenges associated with household investment subsidies. One significant drawback is the high investment costs that households have to pay upfront to reap the long-term benefits. Additionally, these subsidies may support households who would have made the investment even without the subsidy.

A rough generalisation based on many energy-investment studies is that for every four household investment subsidies, three of these may support households who would have made the investment regardless of the subsidy. Consequently, the marginal benefit of household investment subsidies can be less than expected.

For example, a $5,000 subsidy per investment could require $20,000 to get one additional investment, with three lots of $5,000 going to households who would have made the investment anyway.

Therefore, these investment incentives are generally costly and sub-optimal from an equity perspective.

Household investment subsidies can be improved via targeting

The key principle for improving household investment subsidies is targeting. This would simultaneously enhance both equity and cost-effectiveness, because it is usually the more advantaged households who receive subsidies for investments that they would have made in the absence of a subsidy. The challenge is in knowing how to do this targeting.

I suggest seven ways to improve household investment subsidies:

1. Means testing can be used more extensively, and whenever possible, the eligibility criteria should be based on assets, rather than solely on income. For example, an assets test is already used for the Australian age pension, while a small number of state and territory schemes have partial consideration of assets. Research using a range of methods suggests a positive correlation between higher wealth and household investments, such as solar panels.
2. Means testing can be more precise by targeting particular sub-groups of households. In addition to targeting groups like renters, means testing can be used separately within groups. For example, renters with wealth below a means-tested threshold could receive higher subsidies than higher-wealth renters. Otherwise, inequality is likely to increase among groups, such as among renters.
3. Subsidy amounts can vary by groups. For example, instead of a flat subsidy of $3,000, an alternative could be $1,000 for advantaged households, $5,000 for disadvantaged households, and $3,000 for households in between. In contrast, if relatively advantaged households continue to receive the same subsidy as disadvantaged households, then many subsidies will continue to support investments which would have happened anyway. Inequality will continue.
4. Governments can adjust investment subsidy amounts by eliciting information from households on how much each household needs. A simple expression of interest could be used. To give households an incentive to only request what they need, equitable reverse auctions can be used to provide requested subsidies for those requests which are lower from groups of similar households.
5. Subsidies can also be adjusted based on prior behaviour of households. For example, subsidies for electric vehicles can be lower for households who have solar panels. These solar households are more likely to get an electric vehicle in the absence of a subsidy, and so a smaller subsidy avoids some unnecessary subsidies.
6. Subsidy amounts can vary over time. This can take economic circumstances into account. For example, subsidies can be higher during periods of low economic growth, as a form of economic stimulation. Subsidies can be lower according to the timing of technology price reductions.
7. Subsidies can be given for bundles. For example, one subsidy can be available for one of numerous technologies. This provides flexibility to households. It can reduce the inequality in support where one household gets support for many technologies while disadvantaged households are unable to access support for any technologies.

These principles can be broadly applied to many investment types, including superannuation co-contributions, health insurance rebates, childcare subsidies, and other future investments. Some of the principles can also be extended to targeting small businesses.