Tuesday, March 29, 2016

CEDA experts back Labor policy to tackle budget

A high-powered independent commission has backed Labor's approach to capital gains tax and negative gearing, undercutting Prime Minister Malcolm Turnbull and Treasurer Scott Morrison who say it will "smash" housing prices.

The Balanced Budget Commission, established by the Committee for the Economic Development of Australia, includes two former heads of the Department of Prime Minister and Cabinet and one former Cabinet Secretary. Between them, Paul McClintock, Terry Moran and Ian Watt have served prime ministers Howard, Gillard, Abbott and Turnbull.

"No economic problem which is in our power to resolve is graver or more urgent in Australia than the persistence of large budget deficits," the Commission chair Mr McClintock said, launching the report at the National Press Club on Tuesday.

The Commission finds that in order to eliminate the budget deficit by 2018-19, spending should fall by $2 billion and revenue should climb by $15 billion.

It sets out five options for achieving that goal, all of which include a cut in the discount applied to the capital gains tax along the lines proposed by Labor.

Option 1 would halve the 50 per cent discount on capital gains tax, as proposed by Labor, apply a progressive tax scale to superannuation contributions, halve the fuel tax credit scheme and increase taxes on luxury cars, alcohol and tobacco. It would also cut government payments for drug manufacturers under the Pharmaceutical Benefits Scheme and cut budget spending on industry assistance by 10 per cent.

The report says the recommended halving of the capital gains tax discount would "take much of the power out of negatively geared investment strategies" as more of the gain on each investment would be taxed.

As recently as last week, Mr Turnbull derided the proposal saying: "Capital gains tax is obviously a tax on gains from investments, so you increase that tax, what are you going to get? Less investment. The government takes more of the investment gains so people will invest less and they'll certainly invest less in things that are risky."

Mr McClintock said he accepted that the proposal had the potential to cut investment spending, but added that the right question to ask was: "How much support are we prepared to give to a particular activity?.

"It doesn't mean it is a bad activity, but you can say there is too many billions of dollars going into that activity and we cannot afford that. With things like negative gearing, the inflation rates are lower, there is a strong argument to suggest you can lower that and still produce an environment where people are willing to invest. Our judgment call is that, yes, of course, it will have some marginal impact, so will everything, but it's a manageable impact."

Option 2 also adds in a 25 per cent cut in the private health insurance rebate and an efficiency dividend in the higher education sector.

Mr McClintock, a former Chairman of Medibank Private, said the right approach was not to criticise the private health insurance sector but to say: "We respect the role you are playing; we know you are healing the sick and doing good things but we have run out of money and we have to find savings. I am very sorry but we have selected you to assist."

The report says cutting the rebate would not have a big influence on the number of people insured because most were more affected by the prospect of paying the Medicare levy surcharge and the rules governing lifetime cover.

The third option cuts the capital gains tax concession even further, by 75 per cent and removes negative gearing on all types of assets purchased after December 2015. Between them, those two measures save the budget deficit by $8 billion per year. The fourth option boosts petrol tax by 10 cents per litre and cuts industry tax concessions across the board by 25 per cent. The fifth option cuts the capital gains tax concession from 50 to 40 per cent and continues the high income temporary budget deficit repair levy due to expire in June 2017.

Mr McClintock said he thought the public was much more willing to accept measures to cut the deficit than were politicians. After it was cut to zero the government could consider genuine tax reform.

In The Age and Sydney Morning Herald