Former Treasurer, Peter Costello, has re-written history once again, slamming both sides of politics for not doing enough to reduce government debt, while ignoring that policy decisions made when he was Treasurer are largely responsible for placing the Federal Budget in its current predicament. From The Australian:
Writing of his time as treasurer in a new book edited by Tom Frame, Back From The Brink, 1997-2001 (UNSW Press), Mr Costello argues the budget would be in surplus if governments had the same commitment to fiscal consolidation as the Howard government…’
“Our fiscal journey over the past 10 years has been bad, although the starting point in 2007 was extremely strong.”
Peter Costello is the last person that should be handing-out Budget advice given his own poor record.
Consider the revenue side of the Budget first.
Peter Costello was fortunate to have been Treasurer during a period of benign macroeconomic conditions, both locally and abroad, which produced unprecedented levels of taxation (revenue) – something the current government could only dream of:
Costello’s good luck arose primarily because he presided over the most lucrative part of the resources boom when commodity prices and the terms-of-trade exploded, providing the key impetus for the rising disposable incomes:
In turn, nominal GDP – which is the dollar value of what’s produced and earned across the economy and is also the measure that drives federal taxation revenue – surged as it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed:
Costello was also lucky to experience a literal explosion of household debt:
This extra demand (spending) by the household sector meant that the Federal Government was able to run bigger surpluses, without adversely affecting overall demand in the economy:
Costello’s time as Treasurer was also littered with a raft of short-sighted and damaging spending/taxation decisions, including:
- Halving the rate of capital gains taxes in 1999, which pushed up house prices, overwhelming benefiting the rich, and now costs the Budget some $4 billion in revenue foregone;
- Freezing fuel excise indexation in 2001 (now reversed), which still costs the Budget more than $5 billion annually today;
- Greatly loosening the assets test to qualify for the part Aged Pension and the Commonwealth Health Card (now reversed by the current Government);
- Implementing tax free superannuation for those aged over-60, a move dubbed by Saul Eslake as “one of the worst taxation policy decisions of the past 20 years”;
- Removing the superannuation surcharge on high income earners;
- Implementing generous “transition-to-retirement” superannuation rules, assisting those approaching retirement to avoid paying tax;
- Allowing the conversion of franking credits into cash refunds for shareholders in 2000, which costs the Budget around $6 billion today; and
- The overall expansion of middle-class welfare.
I could add others, such as continually lowering income taxes (a good move, in my view) and ballooning middle-class welfare (e.g. baby bonuses – a bad policy in my view). And to be fair, there were some wins, such as implementing the GST.
But overall, Peter Costello has no right to lecture anybody on fiscal management, given he enjoyed highly favourable global and domestic macroeconomic conditions, and was chief architect of multiple Budget howlers, which we are still paying dearly for today.
To its credit, the Coalition Government has since unwound some of Costello’s Budget mistakes.
In May 2015, the Coalition successfully negotiated with the Greens to re-introduce fuel excise indexation. While this move did not claw back the $5 billion-plus in revenue foregone from Costello’s initial short-sighted decision, it did at least stop the revenue lost from escalating over time.
As part of the 2015 Budget, the Coalition also successfully negotiated with the Greens to undo Costello’s reckless 2006 decision to loosen the assets test for the Aged Pension and Commonwealth Health Card.
In November 2016, the Coalition passed modest (but sensible) superannuation reforms which partly unwound Costello’s vandalism by capping at $1.6 million the amount which can be kept in a super retirement account, lowering concessional contributions to a maximum $25,000 a year, and lowering from $300,000 to $250,000 the income threshold at which a person pays a higher 30% on contributions. This reform was budgeted to save $3 billion over 4 years, but still left superannuation ridiculously generous to higher income earners:
For its part, the Labor Opposition has promised to partially unwind Costello’s CGT discount to 25% from 50%, as well as end cash refunds for excess dividend imputation credits for everybody but those on the Aged Pension, thus partially unwinding Costello’s initial reforms.
In each attempt to unwind Costello’s Budget vandalism, both the Coalition and Labor have been greeted with strong opposition both from beneficiaries of this largesse (generally wealthy retirees and their industry and media respresentatives), as well as from opposition politicians. This has made fully unwinding Costello’s rorts next to impossible, and resulted in compromises and carve-outs that give rise to greater complexity.
The moral of the story is that Peter Costello should never have made his reforms in the first place, which largely were a sop to the older generation and enabled richer older people to avoid paying tax and shifted the tax burden to the younger generations.
In turn, Costello laid a budgetary boobie trap that future governments are still trying to defuse, even his own party, so far with only mixed success. Costello is a Budget vandal writ large.
