How to save the Coalition

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By Leith van Onselen

With the Victorian and Queensland Coalition Governments obliterated, and Tony Abbott facing an imminent leadership challenge, the odds that the Federal Government will become one terms wonders are increasing by the day.

As argued by The Guardian’s Lenore Taylor over the weekend:

[Tony Abbott]…has squandered the electorate’s trust, with broken promises and harsh policies not mentioned before the election… [He] thought slogans, rather than explanations, would convince voters…

Spot on. If you want a textbook example of how not to run a Government, Tony Abbott’s would provide an ideal candidate.

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The fundamental reason why the Abbott Government is languishing in polls, and its Budget measures are stuck in the Senate, is that it has failed dismally in articulating an overarching vision for the nation, explaining the challenges Australia faces in a post-mining boom environment, nor present the case for reform. Instead, it has chosen meaningless slogans like “debt and deficit disaster” and “cleaning up Labor’s mess” – none of which are substitutes for genuine engagement with the electorate.

The Government’s policies have also been unfair, half-baked and contradictory. Most glaringly, its Budget cuts targeted lower and middle income earners, along with the young, whilst completely ignoring those of richer, older Australians.

This view was perfectly encapsulated by the Freedom of Information (FOI) request lodged by Fairfax Media last year, which revealed Treasury modelling showing the measures introduced in the May 2014 Budget would be highly inequitable and punish lower income workers:

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The combined effect is that an average low income family loses $844 per year in disposable income (earnings after tax and government payments) due to the budget. Middle income earners forgo $492; while a high income family is down by $517.

Another example of the Government’s misguided budgetary approach was provided in the run-up to Christmas when it threw its moral compass out the window and informed a broad range of welfare agencies that they would no longer receive federal funding, with the homeless and the low-income housing sector particularly badly hit by Budget cuts.

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Ultimately, the only way for the Coalition to get back on track, and earn a second electoral term, is to craft a Budget and reform program that places equity considerations front-and-centre.

Instead of attempting to claw back loose change from the most vulnerable members of society in a desperate bid to plug the Budget deficit, the Abbott Government must instead attack Australia’s world-beating tax expenditures – such as superannuation, negative gearing, and capital gains tax concessions – which deprive the Budget of many billions of dollars of revenue, make the tax system less progressive, and overwhelming benefit richer, older Australians.

Tightening the Aged Pension also makes good sense. That the biggest asset most households retiree with – one’s principle place of residence – is essentially excluded from their capacity to fund their retirement makes little ethical or budgetary sense. The Aged Pension is also one of the largest and fastest growing areas of the Budget, and very poorly targeted.

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As noted by Treasurer Hockey on Budget night, “currently, an individual with a home and almost $800,000 in assets still qualifies for the age pension; a couple with a home and almost $1.1 million in assets also qualify for the age pension”. This level of taxpayer support is clearly more generous than necessary and allows precious tax dollars to flow to those that are not in genuine need.

Tony Abbott’s signature paid parental leave (PPL) scheme should also be scrapped. As argued by Ben Phillips from NATSEM, PPL is regressive because “the more you earn the more you get”. It also offers “no obvious benefit for workforce participation”, not to mention undermines the Government’s message on ending the age of entitlement.

Again, if the Coalition is serious about making the Budget sustainable, and ensuring it earns a second term, it must place equity considerations front-and-centre, and tackle the massive tax concessions that erode the tax base and make the tax system less progressive, along with tightening means testing of the Aged Pension, and abandoning its own PPL entitlement scheme.

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Otherwise, richer and older Australians will continue to receive a free taxpayer ride, while poorer segments of society (and the young, in particular) are required to shoulder the burden of Budget cuts.

A reform-minded government would also champion fundamental tax reform that broadens the base and shifts the tax burden away from labour and onto more efficient and equitable sources (e.g. land, resources and consumption), raising productivity in the process.

Australians will accept reform, but only when it is clearly explained and the burden of reform is equitably shared. The Abbott Government has failed on both counts and must quickly reverse track.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.