From The Age, Saul Eslake offers his ideas for budget reform which make so much plain and simple sense that it is an excellent measure of how bent our politics has become:
”The appropriate level of the budget at any given point of time ought to depend on where we are in the economic cycle. It is appropriate to run budget deficits when the economy is either in recession or growing at a below-trend pace and unemployment is rising. And it is appropriate to run bigger surpluses than you would seek to do on average over the course of the cycle at the height of booms such as we had in the five years leading up to 2007-08, leading up to the financial crisis.
”One of the criticisms I made at the time, and where I had very little company, was that although the Howard government was running budget surpluses, in my view the surpluses weren’t as big as they should have been, having regard to where we were at the time.”
He says he believes the goods and services tax base should be broadened to include all food, because the wealthy, despite the thinking at the time the tax was introduced, spend more – nominally and proportionally – than the poor on the exempt items. This would help raise the money needed to buttress the budget, but should it not be sufficient, there is a strong case to raise GST rates, he says.
On debt, he believes we should examine how it is proposed to be spent. Funding recurrent expenditure by borrowing is poor policy, he argues, but using debt to help finance long-term assets, like roads and railway lines that add to the economy’s capacity, makes great sense.
At the household level, the analogy is borrowing to pay for unnecessary and unaffordable consumption items, which will soon lead to bankruptcy, and borrowing to pay for a home, which generally leads to a long-term, appreciating asset. Eslake argues that federal governments should emulate the states by separating their budgets into a capital account – which would cover investment in infrastructure – and a current account – which would cover recurring items like health, welfare and education.
He also advocates closing loopholes in the taxation system, including the use of family trusts to reduce taxable income: wealthy people in particular are using trusts to pump money into superannuation, thereby paying far less tax than they would on income, and then taking it out tax-free after they turn 60.
He nominates the decision by the Howard government to allow people over 60 to take money tax-free from superannuation as ”one of the worst tax policy decisions of the last decade … that has no sensible or credible economic foundation. It might have been popular … but that does not make it right.”
Don’t expect any politician in this campaign, though, to even suggest changing the policy – too many voters would resent it.
He believes the political parties ought to be proposing reforms to housing policy. A fundamental change required is the end of so-called negative gearing, which allows people to borrow so much that the interest bill is greater than the rental revenue from a property. This loss on the investment is then able to be deducted from taxable income.
The attractiveness of negative gearing was augmented in 1999 when the Howard government, with the support of the ALP opposition, halved the rate of capital gains tax. It has created an almost obscene situation that none of the major parties has had the courage or decency to redress. Almost no other nation allows such a situation, yet here a sense of entitlement has set in. It is said the first law of public policy is the pig with its snout deepest in the trough squeals loudest when you try to pull it out. More than 14 per cent of taxpayers now have negatively geared investments; politicians are too timid to risk a backlash on this one, too.
But they should abolish negative gearing, Eslake argues, because it is partly responsible for keeping prospective home buyers out of the market. ”It has not been an effective instrument for increasing the supply of housing, which would be a legitimate policy objective.
”Negatively geared investors enjoy tax breaks, which, of course, are funded by higher taxes on the rest of us indirectly, in order to compete with would-be owner-occupiers to drive up the price of established housing.
”It is hard to think of anything that would do more to make it easier for people, especially young people who want to buy their own property, than to abolish negative gearing.”
In our interview, Eslake goes into considerable detail about how to improve housing policy, including removal of other market-distorting measures such as first home buyers’ grants. He says a model is Western Australia’s Keystart scheme, in which the government and private developers collaborate to subsidise affordable housing for people on low incomes. When sold, some of the capital gain is returned to the treasury.
”Why the federal government does not get involved in a similar way is one of the mysteries of public policy.”
