More Tax Or Deeper Cuts – It's Time To Choose

It says a lot about the Abbott Government that it has taken a speech by a bureaucrat it wants to sack to get the economy back on the political agenda.

Martin Parkinson is the Secretary of the Treasury. One of the most important bureaucrats in Canberra, Parkinson is expected to stand down after the G20 later this year. His days were numbered as soon as the Coalition won office in September: as a former boss of the Department of Climate Change, Parkinson has long been thought suspect by some in the Coalition’s ranks, owing to the ideological contamination he brings from his involvement in designing Labor’s carbon policies.

Perhaps Joe Hockey and his colleagues may be ruing that decision today, because Parkinson has delivered a precious gift to his political masters: cut-through.

After a fortnight of knights, dames and racial bigotry, it is Parkinson, rather than Hockey or Abbott, who has managed to get the economy back into the news. The Treasury Secretary’s speech to the Sydney Institute this week has been reported widely, and the message he brings will be much to the Coalition’s liking.

Australia is living beyond its means, Parkinson warned. We don’t collect enough taxes to pay for public services. The good times can’t go on forever: sooner or later, we will face a recession. There are no easy answers; only tough decisions to raise taxes and cut spending can bring the budget back to balance.

“We do face a significant challenge in maintaining the rate of growth in living standards that Australians have come to expect,” Parkinson said.

“If we do not start making these changes and simply keep drifting along, we will be increasingly vulnerable to the next global crisis and will also lose out on the opportunities presented by the rising Asian middle class.”

Just to put the icing on the cake, despite a lengthy discussion of Australia’s revenue woes, Parkinson scrupulously ignored the two new taxes that the Coalition wants to abolish: the carbon tax and the mining tax.

Instead, Parkinson explicitly recommended raising and broadening the Goods and Services Tax, which he argues will give the states and territories much-needed breathing space to pay for their ever-increasing health and education costs. Raising the GST will also alleviate the need for increases in income tax, which Parkinson thinks the budget risks becoming over-reliant on.

All in all, it must have been music to Joe Hockey’s ears.

If Parkinson’s diagnosis is right, Australia is indeed headed for some tough times — but do we have to sign up for his course of treatment?

Let’s take his claims in turn. It is true that Australian living standards have risen very rapidly in recent decades, and that the good times can’t roll on for ever. Parkinson rightly observes that with the mining boom moving to its production phase, fewer jobs will be created and investment will begin to decline.

Parkinson is also right when he says that the real opportunity for Australia in future decades lies in providing goods and services to the rising Asian middle class.

“To capture the benefits,” he writes, “we will need to compete on the global stage for Asian demand for services and high-end manufactures on the basis of both cost and quality.”

Parkinson is also right about Australia’s deteriorating budget position, which, as we’ve long argued here at New Matilda, is unbalanced, largely owing to the low level of taxes Australians enjoy.

But if the diagnosis is largely correct, the treatment is not. Parkinson’s remedy consists largely of restraining spending and raising indirect taxes in order to keep income taxes low. That’s not a long-term solution to Australia’s economic challenges.

Take productivity, for instance. Australia’s productivity performance in recent years has been unimpressive. This is partly due to massive investments in mining capital and equipment.

But we also lag many of our competitors in our levels of tertiary education, in the skills of our workforce, and in the nous of our managers. Australia does not invest enough in research and development. Our businesses are only middling performers in terms of innovation. On a range of measures of the knowledge economy, from patents to PhDs, Australia ranks well down the international league tables.

Parkinson probably knows this, but there is nothing in his speech that suggests he has any policy agenda to lift Australia’s productivity performance through increasing our innovation or raising our human capital.

Indeed, Parkinson complains about two government spending programs that will actually improve our productivity: the Gonski schools reforms and the National Disability Insurance Scheme. “The net cost to the Commonwealth of the NDIS to be $11.3 billion per annum by 2023-24,” he cautions, “and with a total net cost of around $64.5 billion over the decade to 2023-24.”

But schools reform and the NDIS are not just dead loss spending. They are expected to bring returns for their investment. Both schemes will provide real productivity dividends, by bringing the excluded into the workforce and raising the performance of our poorest schools. Like so many in the Coalition and business community, Parkinson appears to have bought into the contention that government spending is only a cost, and never a benefit.

Similarly, Parkinson’s contention that the GST must rise in order to keep income taxes from ballooning is half-right, at best. It is true that broadening the GST base and perhaps raising the rate would make a big difference to struggling state budgets. It’s also true that the GST is low by international standards. But so are Australian income taxes. The broader truth is that Australia is a low tax country by OECD standards. Parkinson doesn’t mention this.

Nor does Parkinson mention the indirect taxes the Abbott government will abolish. As poorly designed as the mining tax was, it still represents billions in revenue over the forward estimates. So does the carbon tax. Both are sources of income that are no longer available to pay for schools, roads and hospitals.

The Treasury Secretary’s argument about the budget balance is at its weakest when he discusses the massive tax cuts given away by John Howard and Kevin Rudd in the 2000s.

“If we had held on to that revenue,” he argues, “it may well have been spent on outlays rather than on tax cuts, meaning average earners would have faced higher marginal and average tax rates than they do now.”

It’s hard to be polite about hand-waving like this. “What’s the point of earning more money?” Parkinson is saying. “We’ll just spend it anyway!” Australia deserves better analysis from the top economic policy maker of the land.

Of course Peter Costello and Wayne Swan could have held on to that revenue. All they had to do was refuse to give away massive tax cuts. In the feverish atmosphere of the 2007 election campaign, that kind of restraint was sadly lacking.

Australia does have a fiscal problem. But it’s a problem most other rich countries, still recovering from their deepest downturns in seven decades, would love to have. Australia can balance the budget and even save a modest surplus for the future, while retaining our high living standards and first-world public services. All we have to do is raise more tax.

The alternative, as Parkinson has warned in previous speeches, is austerity: a program of progressively deeper cuts to public services. That’s the fork in the road we find ourselves at. We can pay more tax in return for better services, or we can pay lower taxes and expect poorer schools, crumbling infrastructure, and sicker hospitals as a result. There is no other way.