Former federal Liberal Party Leader, John Hewson, has written a detailed piece in The Drum today, urging Australia’s politicians to face up to Budget realities and begin embarking on a broad-based reform program aimed at boosting productivity and improving the efficiency and equity of the taxation/expenditure system:
The origins of the current and prospective budget challenges go back to the Howard years, and were compounded by both expenditure and tax commitments made by both sides of politics in the run-up to the last election…
Howard/Costello enjoyed several years of unexpectedly strong revenue growth that (as Treasury data has confirmed), essentially, they spent…
Both sides of politics made huge, mostly unfunded, expenditure commitments in the run-up to the last election, which will compound over the next 10 years…
So, where to from here? I would suggest that [the Government] need[s] to start with the overarching strategy. Say, commit to a 10-year target to double national productivity, and then seek to pull together the economic, industry and social policy reforms that will be required to get there. The restructuring of our Federation and tax, the reforms to education and training, industrial relations, industry policy, our financial system and infrastructure, along with strategies to develop technology, innovation and science, all against the challenge and opportunities of an adequate response to climate change, and so on…
The basic point is that, ultimately, any reform will need to be a deal between the Commonwealth and the states, with both sides willing to compromise in the national interest.
Once the expenditure side is agreed, the emphasis will turn to the most effective way to fund the agreed division of responsibilities and service delivery. Hence, on the nature and detail of essential tax reform.
The basic reality here is that, with the existing revenue base likely to remain subdued for many years to come… [And] the overall burden of taxation will need to be increased in the medium term.
This should see a very detailed stocktake and assessment of taxation at all levels of government, again calling for some quite decisive shifts in taxing powers and in the structure of our overall tax system.
While some state taxes, such as stamp and insurance duties, should be scrapped as part of any reform, other state taxes, such as land and payroll, where the states have worked, by competing, to reduce their effectiveness, could be quite effective if set and administered nationally…
Consider superannuation tax concessions as an example. In total, they cost the budget some $40 billion annually, not too different from the cost of the aged pension, but rising faster. They are also distributed extremely unfairly…
Those at the bottom of the income scales actually have to pay to get a superannuation benefit, while those at the top enjoy almost obscene benefits. For example, somebody earning $20,000 has to pay about $118 to get a $100 benefit, while somebody earning $250,000 pays only about $62.50…
Clearly, all options should be identified and debated publicly. The GST offers the capacity to compensate those most disadvantaged from any changes, as well as fund some of the desired/committed spending programs, abolish some ineffective/distortionary taxes, lower others, and address distribution issues between the states.
Finally, it would be desirable to consider splitting infrastructure spending and financing from the annual budget, both state and federal. The Commonwealth could beef up Infrastructure Australia, making it responsible for analysing and ranking all significant national infrastructure projects much more transparently than it does at present, against well established, accepted and published financial assessment principles.
The financing could be by way of a new, government-guaranteed, 30-50 year infrastructure bond at an attractive coupon rate. These funds would need to be collected and managed outside government, probably by way of a Future Fund type structure, with an independent board and management, on a fully transparent and accountable basis…
Of course, our political leaders would have rise above their simplistic political notions that “all debt is bad”…
Hewson’s approach is spot on, in my view.
Reform of the Australian economy is essential, and boosting productivity will be key if Australia is to avoid the lowest income growth in at least 60 years as the terms-of-trade falls, as illustrated by the next chart from the Australian Treasury:
Australia’s tax structure is also highly inefficient, inequitable and unsustainable. Too much of the tax burden is levied on productive activity – wages, salaries and profits – and too little on more efficient sources such as land, minerals and consumption. Too much tax revenue is also lost on Australia’s world-beating tax concessions, such as superannuation, which overwhelmingly benefits older and wealthier Australians, who have effectively been cast outside of the tax net.
One of the key reasons for the Abbott Government languishing in polls, and its Budget measures being stuck in the Senate, is that it has failed to articulate an overarching vision for the nation, explain the challenge Australia faces in a post-mining boom environment, nor present the case for reform. Its policies have also been half-baked and contradictory, for example by attacking the entitlements of younger, poorer Australians, whilst completely ignoring those of richer, older Australians. Combine these with an opposition that opposes everything (good or bad) for opposition’s sake, and provides no policy alternative of its own, and you have the recipe for poor policy outcomes.
Unfortunately, under Australia’s current political set-up, whereby bipartisanship has gone out the window, I hold little hope that the required reforms will be undertaken, due to short-term political motivations always trumping the greater good.
It’s a diabolical situation, which will perhaps only resolve itself once a crisis hits Australia, and the costs of inaction become too great to ignore.
