Thursday, April 21, 2016

We need more tax but don't expect Morrison to tell you so

Never before has a budget advertisement been prepared ahead of the budget itself. In fact, rarely before has a budget needed an advertisement.

The leaked script read on Sky News is a bit like something for Seinfeld in that it is a script about nothing. All previous budget advertising campaigns have been about something specific, such as small-business tax breaks.

The government has worked up the ads early because it will have only days to air them before the election is called. After that date, they would be, arguably, illegal. 

They will help the government get its lines straight, however. The government minister who said the Coalition had cut Labor's debt probably needs to know that by doing little to cut the deficit, it has allowed debt to balloon. The minister who said Labor's negative gearing policy would push up house prices probably needs to know that the official line is it would push them down.

The ads will help differentiate the Coalition from Labor. Notwithstanding what's expected to be a blatant attempt to pinch Labor's policy of tightening up on superannuation tax concessions, the Coalition will paint itself as the party that's holding the line against higher taxes.

"When you hear someone say we have a revenue problem, what they are saying is that Australians should be taxed more, that the tax burden on the Australian economy must be increased," Treasurer Scott Morrison says. "Bill Shorten and Chris Bowen agree – that is why they are proposing, even boasting, that they will increase the tax burden on the Australian economy by over $100 billion over the next 10 years."

Morrison is right about Labor and wrong about what's needed. We need more tax. Only the dishonest, the ideologues and the self-deluded would say any different.

Under Tony Abbott's and Malcolm Turnbull's watch, net government debt has grown from $202 billion to $279 billion and over the next three years will head for $347 billion. That needn't be a problem, so long as there is a way to stop it growing.

The annual interest payments on the debt, once zero, have climbed to $11 billion. They are already more than the government shells out on higher education each year and almost half what it spends on defence. Unless payments are pulled back, the government will have less and less room to govern.

The government's Commission of Audit searched for politically palatable ways to cut spending in order to wind back debt and came up short. The credit rating agency Moody's has just done the same thing. Without measures to address revenue, "limited spending cuts are unlikely to meaningfully advance the government's aim of balanced finances by the fiscal year ending June 2021 and government debt will likely continue to climb," Moody's said.

The ultra-establishment Committee for the Economic Development of Australia examined all the options last month and reached the same conclusion. The best way to attack the deficit would be to garner about $16 billion a year from higher taxes, and only $2 billion from cutting spending.

Most of the higher taxes wouldn't have to be particularly painful. High-income super contributions and capital gains would be more fully taxed, the business fuel tax credit scheme would be halved, luxury cars and alcohol and tobacco would be taxed more heavily, and the Private Health Insurance Rebate would be subject to tax.

Included on the committee were two former heads of the Department of Prime Minister and Cabinet and one former Cabinet Secretary. Between them, they have served prime ministers Howard, Gillard, Abbott and Turnbull.

John Daley of the Grattan Institute reaches the same conclusion. He says the government doesn't spend enough on administration to enable cuts to spending on itself to make big savings. For instance, the entire department of health costs $1 billion to run. It is true that it doesn't run state hospitals but it does administer Medicare, so the spending on its staff and computer systems can't be cut to zero. Cuts could be made in grants to states and in payments to individuals such as the pension, but they are the kinds of things we expect the government to provide, leaving the only realistic option to raise more tax.

Last week an open letter from 50 prominent Australians made the same point. It declared that by developed world standards, Australia was a low-tax country. "To have world-class health, education and transport services, we need to collect the revenue to fund them," it said.

Morrison is planning to turn his back on reality on Tuesday week. He'll be assisted by an arguably temporary increase in the price of iron ore, which will boost the budget's revenue forecasts; a fall in the unemployment rate, which will enable the budget to forecast higher income tax revenue than it would have; and a healthy dividend from the Reserve Bank, which has been raking in money as the falling dollar has revalued its foreign currency reserves. None of it will fix the revenue problem long term, but it will enable Morrison to paint himself as the champion of relatively lower taxes.

Down the track, someone is going to have to do the hard work and put taxes up.

In The Age and Sydney Morning Herald