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.