Last week’s adventure in federalism by Prime Minister Malcolm Turnbull, in which he proposed fleetingly that the states be given back their own income taxing power including (after a transitional period) the ability to either raise or lower the tax rates, has attracted various descriptions from media pundits. They include “dithering” and “crazy/brave”. Peter “Mumble” Brent hypothesises that “he totally subjugated any public political considerations to the demands of the deal-making”.

Mumble also concludes:

Still, if we accept that last week’s clanger produced this week’s Newspoll, then this means that, if not for that error, the government would now be comfortably ahead in the polls. And because Turnbull has unloaded this policy, the long-term damage should be minimal and the Coalition remains almost as likely to win the next election as it did this time last week.

I think that’s probably correct, and we’ll soon know. However, Brent conditions his opinion on the necessity (as he sees it) for the Coalition to avoid proposing any new tax policies that Labor would inevitably demonise. I largely but not entirely agree with that proposition. I had a truncated Twitter conversation with him about it yesterday:

Quite apart from the fact that it’s rather rare for a government (as opposed to an opposition pursuing a “small target” strategy) to go to an election without the voters having any clear idea what the governing party is doing or what it stands for, Malcolm Turnbull has created high public expectations that his government will pursue an “Ideas Boom” comprising policies which are “agile”, “innovative” and “exciting”. Many voters, tired of the relentless negativity and empty three word slogans of Tony Abbott, took Turnbull at his word or at least hoped that we would see government with rather more substance. Apart from last week’s cock-up on state income taxing powers, the current unexpectedly close state of opinion polls can best be explained by the disappointment of these hopeful voters, who are beginning to think that Turnbull is just Tony Abbott with an expensive suit. For Turnbull to turn the current close contest into a strong election victory, he will need to come up with strong and exciting policies including a credible economic strategy, albeit one that strongly differentiates the Coalition from Labor’s “tax and spend” by avoiding any net increase in the “fiscal envelope”.

How might Turnbull go about achieving those seemingly tricky objectives? Here are my thoughts for what they’re worth.

Tax policies

The broad outline of the Coalition government’s intended tax and economic policy seems to be fairly clear, assuming that the leaks, hints and removal of ideas from the policy table we have been given are reasonably accurate. There won’t be a GST and there almost certainly won’t be any attempt to tackle either negative gearing or Capital Gains Tax (because that would undermine Turnbull’s fear campaign against the ALP’s policy announcements in that area). It appears likely that there will be some trimming of high income earner superannuation perks/concessions, and some increase in the rate of tobacco excise (although not as large as the one proposed by the ALP). It is said that this is aimed at raising around $10 billion per year, and suggested that this might be used to fund a reduction in company tax of around 1.5% with a foreshadowed path to further reduce the rate to 25% over time.

The problem with this is that, while corporate tax cuts are said to stimulate growth, such a package clearly doesn’t meet the test of Budget “fairness” set by Turnbull himself when he became Prime Minister, by which he clearly meant appropriate burden-sharing between rich and poor. Of course Turnbull’s self-imposed test was itself a thinly veiled condemnation of Abbott’s thwarted 2014 Budget, so it isn’t surprising that Abbott himself has sought to exact retribution and simultaneously box Turnbull in by christening removal of superannuation rorts as a “pensioners’ tax” and increases in tobacco excise as a “workers’ tax”.

Turnbull/Morrison will need also to propose measures that allow them to assert plausibly that the forthcoming Budget meets the fairness test. I suspect that, even before last Monday’s Four Corners program about the Panamanian fixers Mossack Fonseca, they probably already had in mind some sort of package of measures targeting major corporate tax avoidance and evasion using international tax havens. There are many votes to be gained and none to be lost by such a strategy. The Liberal Party’s major corporate backers might not be pleased, but they’re still not going to go out and begin campaigning for Labor. Depending on the measures proposed, they could plausibly claim that such measures would add up to $5 billion per year to government revenue. If I was Turnbull, I would be opting to apply that $5 billion to adjusting the income tax threshold for the 37% tax bracket. That rate currently cuts in on an annual income of $80,000 per year, and average weekly earnings are rapidly approaching that amount. Cracking down on the major corporate tax evaders and using the proceeds to give tax relief to average Australian workers would certainly allow Turnbull and Morrison to claim that their Budget meets the fairness test. I would be very surprised if they just deliver a corporate tax cut and don’t also include some measures giving tax relief to ordinary Australians. Turnbull may be an Eastern Suburbs toff, but he isn’t stupid.

Health and education

Last week’s state income taxing powers fiasco has helped to clarify the Coalition’s intended approach in these key areas. They are giving the States just on $3 billion over the next couple of years to help them with health spending, but otherwise demanding that they “live within their means”. Turnbull isn’t going to attempt to find a way of funding any significant part of Julia Gillard’s “fantasy” $80 billion, which was disavowed by the Abbott government in 2014 and the lion’s share of which had been intended to assist the states to cope with an expected blowout in health and hospital costs after 2020.

One clear positive to emerge from last week’s apparent fiasco was that a couple of the state premiers conceded that they really didn’t have a budgetary problem until after 2020 (most presently have budgets that are in surplus, in contrast to the Commonwealth). Accordingly there is time to sort out a workable solution to the expected blowout in health costs after 2020, preferably through a cooperative approach between the Commonwealth and States. One such approach may well involve cracking down on unnecessary surgical and diagnostic procedures, which a Four Corners program last year estimated costs taxpayers something like $46 billion per year. Even the Federal Treasury apparently estimates waste in these areas at around $15 billion per year. Accordingly, any sort of serious crackdown should by itself be enough to allow the states to cope with the post-2020 health cost blowout without any need for either the Commonwealth or the states to increase taxes. If Turnbull and Abbott make it clear that this is the approach they will be taking, anticipated health cost blowouts may not end up being the problem for the Coalition that many pundits are imagining. Instead, it could even become an electoral advantage, emphasising both the government’s superior economic management credentials and the ALP’s wasteful “tax and spend” approach.

On education, Turnbull isn’t going to make any decisions about further assistance to the states until after the election. In other words, he isn’t going to match Labor’s promise to fund the last two years of Gonski (estimated to cost $4.5 billion). That might provide some electoral advantage to the ALP, but not necessarily very much. At least for any voters who are not completely disengaged from current events, it must now be abundantly clear that the states COULD raise the funds to pay for Gonski themselves but are choosing not to do so. Moreover, that actually remains true even without reinstating their power to raise their own income taxes. The states have always been able to levy a range of taxes and charges including a broad-based land tax, mineral royalties, payroll tax, road congestion charges, death and estate duties, and taxes on any services (although not on goods – although services now comprise a significant majority of the economy and so the states’ inability to impose taxes on goods is not as large an impediment as it once was).

Nevertheless, although all of this would be good sound basic economic management, it certainly isn’t sexy and couldn’t be sold as “agile”, “innovative” or “exciting” let alone part of an “ideas boom”. Turnbull still needs a signature Big Idea to convert a shaky position into a strong election victory.

Turnbull’s Big Idea – major infrastructure funded by “value-capture”

As an article in the Australian Financial Review late last year noted:

A modern-day equivalent of a little-known economic concept that everyone seems to be talking about is “value-capture”, where the private sector contributes to the costs of public infrastructure. It was kicked along this week when the federal government announced that its ambitious Victorian large projects agenda would feature this unique funding mechanism. It is also a cornerstone of Bill Shorten’s Infrastructure Australia reform package. …

Essentially, developers – and their eventual customers – share the benefit of increased land values and densities that flow from the provision of rail lines past their planned apartment block, from raised dam walls that allow flood-prone property rezonings or from new power stations that make factories more productive. …

Done properly, value capture is the magic bullet that might allow us to build the economic and social infrastructure we need for a sustainable path forward – but we need the safeguards to make such a taxation revolution sustainable.

I strongly suspect that Turnbull and Morrison intend announcing in the Budget on 3 May a visionary programme of building major public infrastructure funded by value-capture. Moreover, I fearlessly predict that they will also announce that the first project to be built in this way will be a Melbourne to Sydney (via Canberra) Very Fast Train line, with the northern section out of Sydney going via Liverpool, the new Badgerys Creek airport, and Campbelltown.

Why do I say that? Well there have been some pretty clear hints that that is the way the government’s thinking is running, at least for those paying attention. Only days after announcing his retirement from politics in late February, Trade Minister Andrew Robb strongly advocated building the Melbourne-Sydney VFT immediately:

Australia should grab the opportunity of very low interest rates to build the very fast train now along the east coast, according to former trade minister Andrew Robb.

“We have to do it … we should do it now whilst the world is awash with cheap money,” he said.

A couple of days later, an international expert made exactly the same point to a Parliamentary committee:

An international expert in high speed rail says the “stars are aligning” for Australia to make a decision on building a line to link Sydney, Melbourne and Canberra.

Torkel? Patterson, vice-chairman of the International High Speed Rail Association, will tell a parliamentary committee in Canberra on Tuesday “it’s time” for Australia to act.

“Australia’s flirted with it for a long time, I think this is the time to make a decision on this,” he told Fairfax Media before his appearance before the House of Representatives standing committee on infrastructure, transport and cities.

And at around the same time Prime Minister Turnbull himself advocated the building of a rail line to Badgerys Creek, if possible by the time the airport is finished in 2026. Moreover, he expressly linked the idea to value-capture funding approaches:

“We are already setting aside space for rail, including station boxes and approaches at the airport during construction so that the rail link can be established whether at the time the airport opens, which would be preferable, or later,” he said.

He said, under his leadership, the Federal Government was looking at other funding options for projects including asking the private sector to partly fund public infrastructure projects.

“What the Federal Government has done in the past is to be essentially a passive ATM and just provide grants for this project or that project,” Mr Turnbull said.

“The approach that we will take is one of being much more engaged. We’re not going to tell states or cities how to plan their cities but we want to do is be collaborative or part of the solution.

“Let’s ask ourselves how do we improve our city, how do we increase the value of our city and its amenity? Then having done that with this piece of rail infrastructure, how do we then capture some of that to support its construction?”

Of course, I could be completely wrong about this, but I reckon something along these lines is going to be announced in the Budget. Turnbull isn’t going to allow himself to be a political rabbit caught in the electoral headlights, or a Tony Abbott clone in a top hat. A project like this would certainly qualify as “agile”, “innovative” and “exciting”.  Requiring any VFT tenderer to maximise the involvement of Australian industry in providing the rails, engines, rolling stock and components would also help to redevelop our national industrial capacity in a similar way to some of the proposals Turnbull inserted into the recently announced defence policy.

Moreover, building the sector from Sydney CBD to Campbelltown via Badgerys Creek as a first or pilot project would fit well with the excellent recommendations of the recent Shergold Inquiry on management of future public infrastructure programs. I’ll wager that Turnbull has read and absorbed Shergold’s recommendations.

Value-capture may also provide a financially viable means for old Everald Compton’s long-touted Melbourne to Brisbane inland rail freight line to be built, possibly along the same corridor as the VFT line between Melbourne and around Goulburn before swinging inland. Compton’s Big Idea has copped a lot of ridicule over the years, but I for one have always thought it’s a great concept that should be built in the national interest.

Tony Abbott labelled himself the “Infrastructure Prime Minister”, but infrastructure spending actually fell on his watch.  I’ll be looking forward to Turnbull rubbing Abbott’s nose in this failure by noting that under HIS prime ministership Australia is building the “infrastructure of the 21st century”

In any event we will soon know. It may just be an exciting time to be an Australian railways aficionado.