Missing Link Friday – Sinclair Davidson vs Malcolm Turnbull

A commodities boom can temporarily boost government revenue, says Malcolm Turnbull. Mostly that’s a good thing. But when governments respond by making non-temporary changes to the budget, we have a problem:

If, rolling in a big cyclical surplus, a government were to cut income taxes, that may not immediately send the budget into deficit. But when the cycle turns, tax receipts drop, unemployment benefits rise, the tax cut will still be there and reversing it will cause much more political pain than delivering the cut derived political joy. The same is true with increases to benefits or indeed to new benefits – if these are funded from cyclical surpluses then they may be contributing to a long-term structural deficit.

Turnbull suggests that a sovereign wealth fund could help discipline government decision making and encourage governments to use temporary surpluses for long term economic gain rather than short term political advantage through things like "unsustainable tax cuts" or "infrastructure projects in marginal seats".

Turnbull’s reference to "unsustainable tax cuts" prompted this response from Catallaxy’s Sinclair Davidson: "There is no such thing as unsustainable tax cuts, only unsustainable spending." But according to Turnbull: "That is quite wrong."

See over the fold for links to the full debate including posts by Davidson, Turnbull, Terry McCrann and Andrew Bolt.

A fund to guard against Canberra’s frailty: "When a cabinet is presented with a surplus it is sorely tempted to spend it on some or all of the following: tax cuts, hand outs to politically important interest groups, infrastructure (often in marginal seats) and of course at the same time with lots of money sloshing through the doors it is very hard to persuade ministers to cut the costs in their own departments." Malcolm Turnbull, Business Spectator.

Tax cuts are not government spending: "There is no such thing as unsustainable tax cuts, only unsustainable spending. People can save for themselves and their own children – they don’t need government for that." Sinclair Davidson, Catallaxy (with comment by Malcolm Turnbull).

Government must live within its means: "Cutting taxes, cutting spending, reducing regulation; frankly getting out of the way and letting the private sector generate wealth and opportunity must be a first order objective of any government." Sinclair Davidson, The Drum.

What’s this about “unsustainable” tax cuts? "Professor Sinclair Davidson is rightly suspicious about a Liberal frontbencher who can be so inherently sceptical about returning taxes to the people." Andrew Bolt, Herald Sun.

The missing ingredient in any new sovereign wealth fund is . . . wealth: "Turnbull’s in the wrong party. His instincts are all, all, collectivist. And controlling – of your money." Terry McCrann, Herald Sun.

Dumb slogans vs rational debate on sovereign wealth funds – or the peculiar case of Terry McCrann: "The slogan advanced by Sinclair Davidson and Terry McCrann is “there is no such thing as unsustainable tax cuts” (slogans apparently being the new medium for serious political debate). But if we take it seriously, then we are arguing tax cuts which resulted in the Australian Government being unable to pay wages to soldiers would not be unsustainable." Malcolm Turnbull.

Malcolm strikes back: "When Malcolm Turnbull has cut taxes so much that government is struggling to cover military salaries we’ll talk again. I’ll happily admit to being wrong." Sinclair Davidson, Catallaxy.

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20 Responses to Missing Link Friday – Sinclair Davidson vs Malcolm Turnbull

  1. rog says:

    Ken Henry was no great fan of SWF saying that tax cuts should be given preference. Laura tingle had an article in the AFR by a bloke called Conden sp? who was all for SWF. Tingle said that this guy was highly credentialed, was once in the IMF but the IMF studies have concluded that SWF are of no great value. But SWF remain a talking point amongst the populace.

    Malcolm has been wrong before (he has precedence).

  2. paul walter says:

    I’d take Turnbull as at least rational in his comments. The rest is just ideological bunkum imported from America, where we are currently witnessing the consequences for millions of people of quack nostrums, remedies and sleazy alibis for wholesale appropriation of wealth by a tiny few, dating to the repeal of Smoot Hawley and then the voodoo extremes of the Bush era.

  3. csning says:

    Indeed. Davidson usually comes off as an idealogical/partisan hack. Turnbull at least gives the impression of having thought about issues he writes about.

  4. csning says:

    It is complete rubbish, by the way, to suggest there are no such things as unsustainable tax cuts. Playing useless semantic games like that show that there is no content in that argument.

  5. Bill says:

    I am yet to read Malcolm Turnbull’s essay. However, I am of the opinion that Australia may well have been better off if the Government had saved, or better spent, some of the windfall tax revenue the nation received pre GFC. Governments often need to go into deficit to stimulate the economy in the bad times. It’s therefore not unreasonable that they save in the good times so they can afford to spend in the bad.

    I also think that the tax cuts of the Howard and Rudd Governments have now given us a federal budget with a structural deficit.

    One thing I haven’t seen people mention is Malcolm Turnbull’s calls for tax cuts during the previous commodity boom. http://australianpolitics.com/issues/taxation/05-08-26_turnbull-tax-reform-paper.pdf

    I also note a recent column by Ross Gittins comparing the relative performance of small and big government: http://www.watoday.com.au/opinion/politics/dont-judge-government-by-its-size-20120313-1uyd8.html?rand=1331645689963. Ross’s article seems to contradict some of Sinclair Davidson’s arguments.

  6. Laura says:

    Sinclair Davidson has got religion. His touching faith in the free market and his well-known one note views on all related policy matters make him the most boring and predictable economics commenter in Australia. And that’s saying a lot.

    Davidson is completely decimated on the Drum post. Very embarrassing for him. Why does he keep doing it? When is going to get the sack from academia?

  7. hc says:

    Davidson views are empty rhetoric. Non-economics twaddle.

    Rog, It is Corden as in Max Corden. One of Australia’s great trade economists and now professor emeritus at University of Melbourne.

    The argument for a SWF invested overseas is that it smoothes out a cyclical boom in a way that does not bring about unsustainable tax cuts and reduces the value of the Aussi dollar.

  8. Dan says:

    By heavens, that man is a lightweight. I remember reading something of his a la: haha, we’ve had a mild summer in Australia, the left was wrong about climate change.

    a) the weather in Australia is not the Australian climate, let alone the global climate.
    b) climate change is not a left-right issue (as Arnie, Greg Mankiw, and Clive Hamilton all agree) – it rather puts the kibosh on the emancipation of the global working class just as much as it does runaway profiteering. As such, there are deniers across the political spectrum – all of whom are wrong.

  9. Dan says:

    Oh and he lost the argument re. unsustainable tax cuts in a simple logical sequence. It was like watching a rookie being check-mated in three moves.

    Then, rather than saying: gosh, I’m quite wrong. Heck, if I’m making these sorts of elemental errors I might be wrong on all sorts of stuff! Maybe I should STFU when the grown-ups talk; he said: “I’ll happily admit to being wrong” (which is frankly just as well).

  10. Dan says:

    “… frankly getting out of the way and letting the private sector generate wealth and opportunity must be a first order objective of any government.” The guy simply doesn’t have the foggiest how capitalist development actually plays out. Does he think the phenomenal growth – for better or worse – of China came about because the Party got out of the way?

    As Laura said above: faith.

  11. Nicholas Gruen says:

    Spooky the way the flash-crowd assembles around a slogan.

  12. rog says:

    Harry, Max Corden has a piece out saying that he was misquoted in the headline.

    In this working paper, I point out something that may be surprising. When the government taxes the mining sector and the effect is mainly felt by foreign owners who would have spent their receipts abroad, and the government then puts the proceeds into a sovereign wealth fund that invests abroad on behalf of the government, there will be little or no effect on the exchange rate. Foreign spending by the taxed owners is reduced, and foreign spending by the Australian government is increased. Thus these taxes that bear on foreigners will not reduce the Dutch Disease.

  13. On your Marx says:

    Turnbull s being fiscally responsible in hs statement though he wasn’t when in Cabinet and the Government did exactly what he criticised.

    I maybe mistaken and if I am I apologise but I am sure when looking at past assertions Mr Davidson said he would do exactly as Turnbull said. He would reduce a surplus by reducing income taxes.
    This of course creates or increases a structural deficit.
    One might even call it Costello disease.

    Ironic that he is a fiscal profigate whilst professing to be a hawk.

  14. MV says:

    Turnbull’s thoroughly balanced and sensible comments stand in stark contrast to Davidson’s ideologically-inspired slogans. Davidson’s attempt to back out of his ideological dead-end, with his “I’ll rejoin the debate when soliders start to starve” diversion, is transparently pathetic. Checkmate in three moves, indeed!

  15. johno says:

    Turnbull’s comment about the ‘Australian Government being unable to pay wages to soldiers would not be unsustainable’ is a straw man.

    Commonwealth spending on defence is less than 10 percent of its total spending. As Sinclair rightfully pointed out, if Commonwealth spending got so low that there was a real prospect of the Commonwealth being unable to pay soldier’s wages, then we can start talking about ‘unsustainable’ tax cuts. Until then, it is only unsustainable spending.

  16. hc says:

    Rog, To the extent the tax captures profits that would have accrued overseas anyway that is right. Capturing these profits and then investing them has the same effect on the exchange rate. Max Corden has a great mind and this interesting insight is a good example. It really is just an instance of clear thinking.

    Some of the tax will fall on residents so there is an effect on the exchange rate. But it is second-order. Max is right.

  17. Nicholas Gruen says:

    Spooky the way the flash-crowd swarms around a slogan.

  18. TerjeP says:

    I think this argument is essentially a semantic one that pivots around the word sustainable.

    Obviously Sinclair is right in posing an affirmative answer if we ask a question such as “can a 50% reduction in tax revenue be sustained”. Clearly it could be. We could cut the public sector substantially and revenue would stay low. There is no technical sense in which this could not be sustained. Sinclair wins. Or does he?

    Turnbull however isn’t as far as I can tell trying to make a narrow economic point but a broader point in the context of what he sees as practical political constraints. He assumes that the body politic, that broad ocean of voters out there, would not accept the spending cuts needed to sustain such a reduction in revenue. And that given this constraint any tax cut due to a temporary revenue windfall will ultimately be unsustainable. Turnbull wins. Or does he?

    All this depends on two key factors. Firstly are we asking a narrow question about economics and accounting facts or a broader question about political reality? And secondly is Turnbull right in his assumption about what the body politic will accept?

    On the second point I think Turnbull is fundamentally wrong. The public don’t readily embrace economic liberalisation, be it privatisation or transfer of costs from the government to the individual or other private institutions. However once such measures are implemented the public also generally has little taste for any reversal. The body politic is not static in it’s disposition.

    Many of us who favour small government, and think of Turnbull as a pontential but wayward ally, think locking in tax cuts is a good idea. And that even in Turnbulls terms of practical politics it is readily sustainable because the body politic is not some unchangable static force of nature. That said I think it suits both sides of this debate to talk past each other.

    Personally I am dead against the future fund and have always been. Howard was a dope for establishing it and should have cut taxes far more liberally. He wasted a great opportunity.

  19. csning says:

    No. False equivalence. Bush clearly showed that there is such a thing as a unsustainable tax cut. If you want to make the point that any tax cut can be sustained if you make the requisite spending cuts, then say so. Stuffing around with nonsense phrases is just stupid semantics.

    Whether you are in favour of SWFs or not, it pays to actually think about such things rather than recite crap from your idealogical cheat sheet and hope that your academic pedigree will make people listen to you.

    For the record I have doubts about SWfs myself. I thought the idea of having a corporation tax cut like Henry wanted was a great idea, and perhaps dump the rest into superannuation, so that if the TOT boom turned out to be temporary after all, the budget wouldn’t be in structural deficit.

  20. MV says:

    So Terje, if we pose a different question, Sinclair’s answer wins. Brilliant!

    The problem is that Sinclair’s statement was that “There is no such thing as unsustainable tax cuts”. Notice the “no”. To debunk this absolute position, Turnbull quite reasonably pointed to a case of tax cuts that even Sinclair could not was unsustainable. So, Sinclair actually loses. But that’s what happens when you engage is iedological sloganeering.

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