Tony Abbott might well be the last bloke on earth who could plausibly demand a “mature debate” on tax reform. But that doesn’t deny the crying need for such a debate in Australia.
Nor does the fact that it’s the antithesis of what Abbott did in Opposition mean that Bill Shorten should necessarily emulate Tony’s tactics himself. What won the last war won’t necessarily win this one. Abbott didn’t win the 2013 election only because he relentlessly opposed everything Labor tried to do. That tactic worked because Julia Gillard had mortally wounded herself by the manner in which she seized the prime ministership, because that inevitably resulted in ongoing destructive disunity orchestrated by an embittered Kevin Rudd, and because her government consistently exhibited appalling administrative and policy implementation skills despite some excellent policy ideas. Without those self-inflicted wounds, Abbott’s “one trick pony” knee-jerk obstructionism might have failed.
Despite the fact that opinion polls have looked quite respectable for Shorten for some time, Abbott in government isn’t burdened by any of the handicaps that ensured Gillard/Rudd’s doom. Moreover, he now has the additional benefit of wrapping himself in khaki, which John Howard exploited with such great success in 2001 and 2004.
The plain fact is that the general shape of the tax reform package that Abbott appears to have in mind is a sound one, in policy terms at least:
LIFTING the rate of the GST or broadening its base and relinquishing responsibility for health and education to the states are some “options” Tony Abbott has floated in private talks with key Senate independents.
The Sunday Telegraph can reveal that Mr Abbott also confirmed that any GST increases after the next election, which would require the agreement of the states, would also include tax cuts to compensate pensioners, families and low income earners. …
“He mentioned he had to give a major speech and floated his idea of broadening the GST and that the money raised would be enough for the states to pay for health and education. There would be a corresponding fall in other taxes,” he said.
I’m not sure whether Abbott is actually talking about raising enough money from GST to allow the Commonwealth to opt out of funding health and education altogether, or whether he just means generating enough additional revenue to replace the extra federal funds that Gillard had promised the states under Gonski and the needs-based hospital funding scheme negotiated earlier.[1. It’s worth emphasising that those extra federal funds for the states from 2016-17 were completely unfunded by Labor. No doubt they thought it was a really clever idea to leave a “time bomb” for a Coalition government. After all, it was evident for a couple of years before the 2013 election that Labor were long odds against winning. So Gillard “back-ended” both the education and health reforms by loading the lion’s share of extra funding into the budget “out-years” from 2016-17. Why not give Abbott the dilemma of deciding either to deliver the very popular health and education reforms, and be forced to impose significant tax increases in order to fund them, or instead refuse to adopt them and be seen as mean, tricky and unfair? Instead, Abbott avoided the trap and outsmarted Labor by promising to deliver only the first four years of Gonski and the hospitals funding package. That was enough to defuse it as an election issue, and the Coalition’s first Budget quite specifically abandoned both programs from 2016-17 onwards. Labor was playing cynical politics with two incredibly important reforms, so in that respect they got there just deserts.]
If Abbott means only the latter, then in my understanding that only requires finding an additional $12 billion per year from 2016-17. GST raises approximately $5.5 billion for every one percentage point increase in the rate. Thus an increase of 2.5% in the GST rate to 12.5% would comfortably cover the extra funding that Labor promised from 2016-17, although it wouldn’t be enough to fund compensation to social welfare recipients and low income earners to counter the regressive effects of the GST. Nor would it be anywhere near enough to replace the whole of existing federal funding to the states for health and education if instead that is what Abbott is intending. I don’t know what GST rate that would imply, but I suspect it would mean an increase to 15% or thereabouts.
Of course there are numerous other options for raising such revenue. For example, former Labor Minister Craig Emerson suggests that the states could simply levy an increased land tax to find the money to pay for health and education spending increases. He points out that this is a progressive rather than regressive tax and therefore more desirable in equity terms than a GST increase. It is also more efficient in economic terms, helping to ensure that land is put to its “highest and best use”. However, there is no way the Commonwealth could force the states to levy higher land taxes, and one suspects they would be most unlikely to agree to do so.[2. Although, in the context of a tax reform package involving more GST revenue to the states provided by the Commonwealth, the latter could make it a condition of receiving the extra GST revenue that the states increase/introduce an appropriate land tax and abolish stamp duty on property transfers. That would boost productivity by enhancing labour mobility.]
The states … have a well-developed technique of letting the Commonwealth incur the odium of raising tax, then happily spending it while still crying poor and blaming the Feds for their plight.
Abbott seems to have in mind raising the GST rate and then giving the resulting revenue to the states to spend as they see fit (possibly with some being retained to fund compensation to social welfare recipients and low income earners). That might well be consistent with the original spirit of federalism, but whether it is sensible or realistic is another question. [3. Which is very strange, given that Abbott seemed to be anything but a federalist judging by the book “Battlelines” he wrote in his early Opposition years. As this article outlines: “At the time of its publication, Battlelines was notable for offering an unqualified case for central power from the conservative side of politics. Abbott advocated constitutional reform that would give the Commonwealth a free hand to intervene in any area of state responsibility as it saw fit.” It isn’t immediately obvious to me why he has so radically changed his mind. Perhaps he is trying to emulate his hero John Howard, who similarly spent accumulated political capital at the end of his first term in office to achieve the GST in the first place? But Howard had long believed in GST, whereas Abbott is clearly a very recent convert to the virtues of classical federalism.] Australia’s evolved system of “cooperative” (it would be more accurate to call it coercive) federalism has long involved the Commonwealth raising the lion’s share of revenue and then giving it to the states with strings attached by way of tied grants under Constitution section 96. The states in turn have a well-developed technique of letting the Commonwealth incur the odium of raising tax, then happily spending it while still crying poor and blaming the Feds for their plight. There is no reason to expect them to abandon this very successful game merely because they are really finally getting enough money to meet their needs.
That might well be where Bill Shorten and Labor could productively intervene and negotiate to support the necessary increase in GST rate provided that Abbott agrees to reinstate the whole of the needs-based formulae underpinning the Gonski education reforms and the Activity Based Funding system for hospitals, which the Rudd/Gillard government adapted from the successful Case Mix system pioneered by the Kennett Liberal government in Victoria.
Labor would then be seen to be acting responsibly in relation to the budgetary situation while also successfully pursuing the party’s egalitarian aims from Opposition.
In other words, Shorten should offer to support the GST increases that Abbott wants only on condition that Abbott in return agrees to full restoration of Labor’s needs-based education and health reforms. Labor would then be seen to be acting responsibly in relation to the budgetary situation while also successfully pursuing the party’s egalitarian aims from Opposition.
Shorten should also insist as a condition of his party’s agreement that the overall mix of tax and spending reform must achieve a situation whereby it isn’t necessary to impose effective pay cuts on the Australian Defence Force and Commonwealth Public Service. That would undoubtedly involve agreeing to support re-imposition of inflation indexation of fuel excise, and at least some of the less unfair spending cuts from the May budget that have not yet been passed. In that regard, I quite like the analysis contained in Macroeconomics’ Mid-Year Budget Bulletin (written by former Treasury officer Stephen Anthony) and released today:
There are now around $11 billion in annual budget savings by 2017-18 held up in the Senate. In addition, the Treasurer faces up to $10 billion in unfavourable parameter variations by 2017-18. This is the mining boom unwinding, causing an income slowdown due to the interaction of falling commodity prices and sub-trend real activity, perhaps even exacerbated by the confidence-sapping budget deadlock. Down are both earnings for businesses and wages growth for households, resulting in a reduced revenue take. Not even bracket creep will help return the Budget to surplus with such low wages growth. Right now it appears a return to budget surplus is unlikely any time soon but at least the fiscal repair job is now well under way after a decade of waiting.
The real problem with the first Hockey Budget is that it is seen as UNFAIR.
The real problem with the first Hockey Budget is that it is seen as UNFAIR. It imposes too much of the adjustment burden up to 2017-18 on the disadvantaged – rather than wealthy Australians who would benefit most from a resurgent economy driven by structural budget repairs. This has allowed a veritable Greek chorus of budget criers – otherwise known as the fiscal girly men – to howl down the best aspects of the document, for instance: (i) reforming age pension indexation; (ii) tightening Family Tax Benefit B eligibility; and (iii) ending of senior health card benefits.[4. Anthony suggests that these measures (including indexing fuel excise) would together raise almost half of the $40 billion annual budget deficit that he predicts will exist by 2017-18 if no Senate deal is done, whether with Labor or the cross benches.] The Treasurer should focus on a few major savings battles that are worth winning and abandon the rest which are political death by 1000 cuts (health copayments, tighter eligibility for unemployed benefits, uni funding etc).[5. That is, Anthony is suggesting that these measures are too politically hard and should be abandoned.] Any savings shortfall can be funded by winding back superannuation concessions.
I don’t see any reason why Shorten and Labor could not agree to all or most of these measures and successfully (and indeed honestly) present them to the public as the sort of mix of responsible economic management and fundamental fairness that Australia desperately needs. If it was presented in the right way, Abbott could be painted as irresponsible and obstructionist if he failed to agree to such a deal.
Of course it isn’t going to happen, but I can always dream.