Tuesday, October 30, 2007

Tuesday Column: The Coalition's gift to Labor - a smashed piggy bank

When colonial governments in Africa withdrew they are said to have made things difficult for the administrations that succeeded them by allowing power stations to fall into disrepair, removing air conditioners, and filling in sewage pipes with concrete.

Sometimes it was simply loading up the nation with debt. It’s an accusation that has been leveled at George W Bush in the United States. By cutting taxes in a way that couldn’t possibly be funded long-term he has ensured that his successors will either have to slash government spending (something he probably wants), sharply raise taxes or suffer a debt repayment crisis.

It couldn’t be happening here, could it?...

The $34 billion of tax cuts announced at the start of the campaign are “eminently affordable” and “costed, funded, responsible”. The Prime Minister and Treasurer have told us so.

But their own budget figures suggest that the tax cuts are only affordable for as long as Australia’s extraordinary once in a half-century minerals boom continues.

There is no doubt that the government is being flooded in money at the moment. In the five months since the budget it has found an extra $5 billion it didn’t expect.

Most of the windfall is coming in the form of company tax. In almost every year since Australia came out of recession in the early 1990s company tax has accounted for around 14 per cent of government income. That is, until Australia’s resources boom got under way a few years back.

The last few years have seen company tax climb to 18 per cent and then to 20 per cent and now to an estimated 25.6 per cent of government revenue during the current financial year.

If things continue the way they have been it’ll climb higher still.

No wonder the government feels it has money to splash around on tax cuts.

But there’s a problem.

Its promised tax cuts are permanent. Once the effective tax-free threshold climbs to $20,000, it is hard to imagine anyone earning less than $20,000 ever paying tax again. Once the tax rate applying to millionaires falls to 40 cents in the dollar it is hard to imagine millionaires’ ever paying more.

The last five years of tax cuts have pushed down the contribution of personal income tax to government revenue from 52 per cent to 48 per cent. They have pushed down the contribution of superannuation tax from 2.2 per cent to 1.6 per cent.

None of this need be a problem if Australia’s minerals boom and the boom in company tax collections continues.

The Prime Minister used to say that he did expect the good times to continue. According to him there was “no reason why with careful economic management by experienced people we should contemplate a downturn”.

An encouraging thought. Even more encouraging was his planning maxim: “I don’t believe in recessions you have to have, I believe in continued economic prosperity you are entitled to have”.

But just in the last week he has been expressing doubts. By Friday we were in “an increasingly hostile financial environment”.

His Treasurer Peter Costello acknowledged the possibility of a recession and also a financial market “tsunami”, presumably in an attempt to scare us out of voting for the other side.

But he is right. The resources boom will end, and there will be a recession.

The Reserve Bank Governor thinks so. His warning, to a business seminar in June, is especially relevant to a round of tax cuts funded on little more than faith that good times will continue.

As Glenn Stevens put it in June: “The business cycle isn’t dead. It can never be abolished and sooner or later there will be a downturn. I can’t tell you when, but there will be”.

His warning: “Structures and strategies that pay no regard to those possibilities will turn out to be damaging to the people who have got them.”

Businesses that committed themselves to long-term expenditure on the basis that that current short-term boom in income will continue will get themselves into trouble.

And so will governments. Permanently slashing income tax rates on the basis that Australia’s short-term boom in company tax collections will continue is also a recipe for trouble.

Actually, it is a recipe for trouble for the next government or the one after, whichever one is left holding the ball when the resources boom stops.

When company tax collections return to what they used to be or even fall lower. as they have in previous recessions, the government will be left without income it has come to rely on.

Lifting personal income tax rates back up to where they were will not be politically palatable. That government will have to slash spending (potentially magnifying the effect of the economic downturn and being blamed for it) or abandon surplus budgeting and be accused, perhaps even by the Coalition, of being economically irresponsible.

In fact the economic irresponsibility is taking place right now. Our government is taking action that will permanently spend a temporary boost in income.

It knows full well that Australia’s tax take is going to have to rise over time. Its Intergenerational Report says so. It could be salting money away for that future. Instead it has decided to limit its budget surpluses to around one per cent of GDP.

Our countries do much more.

New Zealand’s budget surplus will exceed 3 per cent of GDP this year. Norway is shooting for 10 per cent. Not that you’ll hear that in Norway. The discussion there focuses on the “non-oil structural budget deficit”, a measure of what would be really happening to government finances were it not for the North Sea oil boom.

I would love to find out the size of Australia’s “non-resources boom structural budget deficit”.

Our government is certain to have just made it a whole lot worse.

Not that you’ll hear that from Labor’s Wayne Swan as he debates Peter Costello at the National Press Club today.

Labor supports the Coalition’s tax cuts, almost every one of them.

Wayne Swan even described the last lot as “quality spending”.

Labor is complicit in the Coalition’s attempt to mortgage its future.

It is even prepared to help John Howard and Peter Costello adjust the millstone being applied to its neck.

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