Who's Ready To Raise Taxes?


As budget debates go, we’ve been particularly short-sighted in Australia lately. Commonwealth policy-making has been dominated for more than two years by Labor’s overriding political goal of returning to surplus. Yesterday’s announcement of the Mid-Year Economic and Fiscal Outlook — really a mini-budget — moves the Government six months closer to the magical surplus figure. Perhaps now Wayne Swan and Penny Wong can finally minimise their spreadsheets and turn their minds to the policy settings Labor will take to the next election.

It’s an unfashionable thing to say these days, but the Government deserves considerable credit for the tough decisions made to deliver this surplus. This Labor government is a model of fiscal discipline. Whatever the Opposition and the hawkish commentators say, Labor’s fiscal management under Wayne Swan has been incredibly disciplined. There has been no blow-out in spending. Far from it: despite the charges levelled against it, this government has been very restrained.

As tax revenues continued to evaporate throughout Labor’s second term, the Government has found the surplus an ever-receding target. The Government has had to cut, and keep cutting, just to keep the budget in the black.

But were the cuts necessary? As Fairfax’s Tim Colebatch sagely observes today, there is no good economic reason for Australia to run a budget surplus. Australia’s public debt is tiny and our bond yields are at record lows. Colebatch points out that many sectors of our domestic economy are in trouble:

"Non-mining business investment is at the lowest share of GDP for 40 years. More and more shops are empty. Mining export prices have fallen, yet the dollar remains crushingly high. The job market has weakened. Housing appears to be turning, and more mines are ready to produce, but falling prices and weak overseas demand mean they can’t support a fragile economy."

Given the weakening domestic economy — not to mention the gloomy outlook in much of the rest of the world — the Government is looking pretty optimistic with its 3 per cent growth forecasts. In purely economic terms, this would be a good time to be borrowing ultra-cheap foreign money to invest in productive assets for the future competitiveness of the economy. If growth stutters, all these spending cuts will look rather hollow.

Instead, the Government has cut half a billion dollars out of research infrastructure funding, for no good reason other than to deliver a surplus. It’s likely to be counter-productive in both the short and long terms, as I argued last week.

The other decision that has attracted media attention today is the sudden announcement that company tax will have to be paid monthly instead of quarterly by big businesses from July next year. This decision won’t actually increase the rate of company tax, but it will bring forward a lot of revenue — as much as $8 billion over the forward estimates — as companies shift their accounting practices to meet the government’s new timetable.

There’s been some predictable squealing about a "lack of consultation" for the business lobby about the decision, but the truth is it won’t represent a big impost for big businesses, most of whom will be comfortably able to finance the more frequent tax payments. Medium-sized businesses will eventually suffer though, as the new rules move down to those turning over $20 million or more. For these outfits, the extra payments will suck up much-needed liquidity. Even so, as Rob Burgess notes in today’s Business Spectator, the actual impact on business cash flows will be less than $1 billion, most of which will come from the most profitable companies.

Another talking point today has been that hardy perennial — "middle class welfare." Labor has wound back the baby bonus for second and subsequent children, saving $461 million, and will further tighten the private health insurance rebate in various ways, saving more than a billion. Both of these decisions are justifiable. The baby bonus reduction is covered by the fact that Labor’s comprehensive parental leave scheme is now up and running — and the private health insurance rebate was never good health policy anyway.

But the various cuts, nips, tweaks and fiddles can’t disguise a more fundamental problem in Australia’s fiscal outlook. Australia doesn’t collect enough taxes. Tax receipts remain at levels below what they were for much of the Howard government, and the GST is also growing less strongly than anticipated. As Ian McAuley observes today, "we aren’t collecting enough revenue to provide the economically important public services required in a developed country".

The Australian’s George Megalogenis also notes that the Government has a revenue problem. Federal tax revenue collapsed in the 2007-08 downturn, especially compared with earlier, more severe recessions. "Paul Keating’s taxation system still yielded 22.2 per cent of GDP at the bottom of the last recessionary cycle when the unemployment rate was still above 10 per cent," he points out. "The Swan and Costello regime collected its low of 21.6 per cent of GDP with unemployment at less than 6 per cent."

Why is out revenue so anaemic? The reason is that our tax system is now far more cyclical than it used to be. The Costello years saw personal income tax rates slashed, with expanding company taxes making up the difference. New taxes under Swan have also been directed towards the corporate sector, such as the carbon tax and the mining tax. But in an economic downturn, company profits evaporate and big losses can then be carried forward into future tax years. As a result, corporate tax revenues can take a long time to recover. Australia is going to have get used to very tight government spending in coming years. Big, transformative reforms like Gonski or the NDIS are going to be that much harder to deliver.

Of course, it’s not all bad news. The weakening economy and the tight constraints on government spending have helped keep inflation low. This gives the Reserve Bank plenty of ammunition to keep cutting interest rates. The RBA has already cut interest rates quickly in recent months. Expect another quarter per cent rate cut, as early as Melbourne Cup day.

Eventually, all that cheap money washing through the economy will make an impact. But just at the moment, it’s hard to see where. The government and many economists hope it will be in housing, where cheaper mortgages might just restart the sick home construction sector. But there’s not much evidence of that so far. If lower interest rates helped the Aussie dollar depreciate, that would certainly help exporters. But there’s no guarantee that will happen.

What about the politics of the MYEFO? At present, it’s something of a stalemate. With his typical anti-charisma, Wayne Swan has again failed to make a case for the government’s superior credentials in economic management. Also typically, the opposition has done little but bluster in rebuttal.

Wayne Swan and Penny Wong have done what they needed to do to keep the budget in the black — a boast on which Labor has foolishly staked much of its credibility. Really, they should be crowing about the result, which makes some of the doom-laden commentary from a year ago look rather silly. But voters and the media seem to be giving them few brownie points for all that hard work. The MYEFO is hardly a triumph for Labor. But in the current climate, an absence of disaster for the government is a type of victory in itself.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.