As it happens, I don’t think we did ever find a story the Rudd government could tell the Australian people. Nor do I recall hearing anything further about this grand mission afterwards. A year or so later, of course, Rudd was gone and, at the 2010 election, so — almost — was the government itself. Julia Gillard, who led Labor to minority government, called Rudd’s “a good government… losing its way.”

It has recently been hard not to wonder: is Albanese’s going the same way?

In many respects, the comparison is unfair. This Labor government has plainly learnt a great deal from the last and has gone out of its way not to repeat its errors. Many of its ministers were there, in more junior roles, last time. Albanese himself, as a rising figure during that era and leader of the House for almost the entire period before ending up as deputy prime minister, sometimes seemed traumatised by the infighting that more than anything wrecked Labor in government.

The differences matter. Rudd wanted to win the media every day. Albanese often seems more like Malcolm Fraser in his aspiration to keep politics off the front page. Rudd talked a big game in opposition about keeping government accountable but then failed to follow through by calling inquiries into the grand failures and scandals of the Howard era such as the Iraq war and the Australian Wheat Board affair. Albanese’s government, by contrast, has called one inquiry after another, most of them exposing the sheer badness of the Coalition on issues ranging from immigration policy through to robodebt.

Barely six months into the life of his government, Kevin Rudd was being called Captain Chaos by the Australian’s John Lyons. Albanese has gone out of his way to emphasise the careful, orderly and process-driven nature of his government. Albanese probably intends such remarks as a rebuke of Scott Morrison, but they often sound equally applicable to Rudd.

The Albanese government has a right to consider itself a good government, even allowing for the fairly low standards we have so often seen this century in Canberra. It has fulfilled many election promises. It has grappled effectively with key areas of Coalition failure and neglect, including stagnant wages and a shambolic immigration policy. It has responded to the general challenge of rising inflation and the particular one of spiralling energy costs. It has conducted that bewildering range of inquiries — not, seemingly, just to kick a can down the road but with the apparent aim of consulting widely and doing good policy — which gives substance to its commitment to evidence and process.

If good government receives its due reward, you might imagine that this is a government coasting to a comfortable election victory next time round. It is remarkable to consider that Labor won a resounding victory in the Aston by-election as recently as 1 April 2023; at the time, it seemed unassailable.

But politics is rarely so simple, and it tends not to be terribly fair either. Recent opinion polling has been discouraging for the government: Newspoll had the two-party-preferred vote at 50–50 in November, and then Labor at 52 to the Coalition’s 48 just before Christmas. That’s not disastrous — the middle of a term often looks grim for incumbents — but it would have given Labor Party strategists plenty to worry over.

Three issues have figured in the commentary. Almost everyone gives significant weight to the cost of living, which is hitting lower- and middle-income families hard. Pollsters and pundits argue that Labor’s support in the outer suburbs is fragile and it needs to do more to show it is on the side of struggling families. Peter Dutton and the Liberals, meanwhile, see these same voters as their only serious pathway back to government. November’s Victorian state election gave signs that Labor’s vote on Melbourne’s suburban frontiers might be a little more fragile than many assumed at the 2022 federal election. The forthcoming Dunkley by-election will test some of the claims made in recent months.

The second issue was the defeat of the Indigenous Voice to Parliament. Labor championed this cause: it became part of the government’s brand from the moment of Albanese’s victory speech on the evening of 21 May 2022. When, therefore, it went down, it was inevitable that the government’s reputation should go down with it. Governments have not historically been thrown out of office on the back of such a defeat, but failure at a referendum can wrong-foot a government struggling under other pressures — as the defeat of its attempt to ban the Communist Party in 1951 did to a Menzies government grappling with 20 per cent inflation.

Third, there is the Gaza war. The horrors that have occurred in Israeli border communities, in the West Bank and East Jerusalem, and in Gaza will move anyone with a sense of humanity, but the political reality is that they have tended to move different groups of people in rather different ways. Labor’s problem here is that for large parts of the left, the Palestine issue is the defining cause of the age; for them, it divides pretend progressives from real ones.

There are parallels here with the Spanish civil war of 1936–39, which was also a divisive issue for a Labor Party that contained secular leftists and others who supported the Republican government, and Catholic right-wingers who leaned towards Franco and the Nationalist rebels. It was a part of John Curtin’s achievement as federal Labor leader that he was able to steer a course through these turbulent waters, largely by committing his party — then in opposition — to isolationism.

That kind of approach isn’t available to Anthony Albanese and Penny Wong. But they still must steer a course that takes into account Australia’s alliance commitments, its support for the so-called rules-based order and international law, the pressures of the domestic political scene and challenges of electoral politics, and its attachments to basic decency, humanitarianism and justice. The government’s hostility to Hamas is taken for granted everywhere except among the unhinged populist right, whose extremism nonetheless now often finds a platform in parts of the commercial media.

But we can be equally certain that it gives Australia’s Labor government no great pleasure to be seen as too close to the present government of Israel, a regime that is for very sound reasons deeply unpopular in Israel itself as well as among many Australian Jews. There is little doubt that in negotiating these pressures, which it has actually done with fair success, the government has nonetheless at times sounded windy and looked wobbly.

By Christmas, I would not have been alone in wondering if this government was going the way of Rudd’s and Gillard’s amid these pressures. A great part of the difficulty has seemed to me the particular combination of policy wonkery and electoral opportunism that has come to hold too much sway in the Labor Party this century. We all like good, evidence-based policy, and we all like electoral professionalism. Successful political parties need both to get anywhere.

But politics is also an aspect of culture. Otherwise highly intelligent Labor politicians can sometimes appear very naive about such matters. The Rudd and Gillard governments are a case in point: who in the Gillard government, for instance, came up with the idea of appointing a former Liberal Party leader, Brendan Nelson, as director of one of the country’s leading public institutions, the Australian War Memorial — in the lead-up to the centenary of the first world war, of all times? And under this government, which seems to support a new direction for the memorial on the issue of representing frontier warfare, it reappointed to the council a former Liberal prime minister, Tony Abbott. Such statesmanship!

These matters might seem trivial beside the problem of ensuring that millions of Australians can pay for their next power bill. But the political right has fewer illusions — Coalition governments stack boards as if their very existence depended on it. Labor shouldn’t follow that lead, but it should pay much closer attention than it does to the points of intersection between civil society, cultural authority and state power.

The Italian Marxist Antonio Gramsci developed the concept of hegemony to explain how power and culture work in capitalist societies. The “common sense” of the ruling class — coinciding with its interests — comes to be seen as that of society as a whole — the “national interest,” to use some contemporary parlance. Conservatives apply Gramsci’s ideas faithfully in their relentless efforts to dominate culture. Their success in the recent Voice referendum was testament to such efforts. Labor governments imagine that so long as they can get that cost-of-living relief through the parliament next week, winners are grinners. That notion rests on a remarkably shallow understanding of how power operates in a society of any serious complexity.

This is why January has been a good month for the Albanese government. Two things happened almost at the very same time, one in “the economy,” the other in “the culture.” In the economy, it recast the stage three tax cuts to ensure that there was a redistribution of benefits towards low- and middle-income earners. Alan Kohler, so often a devastatingly astute commentator on such matters, was right to point out that this was somewhat of an argument over loose change: the tax system as a whole continues to favour those who are best-off. Yet it was something. Albanese, in a National Press Club speech and elsewhere, has framed the shift as a response to changed circumstances, and especially the cost-of-living crisis. A bolder leader would also have said that social democratic governments support progressive income tax and oppose massive hand-outs to those who already have enough.

At the same time as the upholders of national political integrity were launching philosophical disquisitions about Albanese’s “backflips,” “lies” and “betrayals” — often the same journalists and politicians who met far worse from Scott Morrison with vigorous shrugging or lavish praise — Labor was also attending to the culture. The appointment of Kim Williams as new chair of the ABC suggested a government that has an interest in ensuring that one of the country’s most influential public institutions is led by someone who has not only impeccable professional credentials but also sufficient commitment to public culture, the arts and the goals of excellence, independence and balance to align with values supposedly supported by the government itself.

The government can’t expect an easy run over the second half of its term. Media hostility has been increasingly uncompromising and will be relentless on the issue of tax cuts. The cost-of-living crisis, moreover, doesn’t lend itself to easy solutions.

On broader issues of policy, Labor’s Achilles heel seems to me to be housing. It has acted, but it has not done enough, and the Greens have made this one their own. It is ideally calculated to appeal to anyone under forty, and others too. The Coalition will also continue to pretend it has the solution, which involves allowing people with virtually no superannuation savings to use the little they have for a home deposit. The real estate industry will be delighted.

Labor would be well advised to craft a radical solution to housing in the spirit of the 1945 Commonwealth–State Housing Agreement — one that involves not only bold solutions to private provision but also a renewed emphasis on social housing. Even more than the “backflip” on taxes, a bold, evidence-based, well-costed housing policy could set Labor up for an extended period in office and a genuine opportunity to reinvigorate social democracy in this country. •

The post Gramsci’s message for Anthony Albanese appeared first on Inside Story.

During those two weeks the Financial Review began a series on “the new middle class.” It opened with a long article analysing survey results that revealed how households on $140,000 a year — a lot of money in those days — didn’t consider themselves particularly well-off. Great, I thought — this’ll make for a solid ten or fifteen minutes. I hurried over to the presenter of the program and showed him the article. “Good God,” he exclaimed after reading the opening paragraphs. “How do people manage on that kind of money?”

Sociologists Marcos González Hernando and Gerry Mitchell open their new book, Uncomfortably Off, with an incident that makes a similar point in a slightly different way. In an episode of the BBC’s Question Time during the 2019 British election campaign, IT consultant Rob Barber accused a Labour MP of lying when he said the party’s plan to lift taxes on high earners would only affect people on the highest incomes. Labour wouldn’t be lifting taxes for the remaining 95 per cent, the MP promised.

“But you are!” Barber replied angrily. “Because I’ve read your policy!” The tax would apply to incomes above £80,000, and that meant he’d be among those who’d pay it. “I’m nowhere near the top 5 per cent, let me tell you. I’m not even in the top 50 per cent.”

Barber was wrong: a salary of £80,000-plus put him comfortably in the top 5 per cent of earners. (At around the same time, an Australian earning $180,000 would have snuck into the same bracket here.) His likely mistake, according to Hernando and Mitchell, was to habitually compare himself with people who earn as much as he does or, more importantly, those who earn much more.

As its title suggests, Uncomfortably Off attempts to explain why people on relatively high incomes don’t feel particularly affluent. (Hernando and Mitchell’s interviewees, all British, were drawn from the top 10 per cent of earners, though not the top 1 per cent.) Partly it’s because, like Barber, they compare themselves with people who earn more than they do. Partly it’s because their spending has increased as their incomes have risen and they have to find the money to cover increases in school fees, rising private healthcare costs and mounting lifestyle expectations.

These pressures contribute to what the authors call a fear of falling — the fear that they or their children will end up further down the income ladder. And those pressures have only worsened in recent years. The Conservative government’s austerity program of 2010–19 encouraged wealthier households to abandon overstretched public schools, healthcare and other publicly provided services, adding to the pressure on household finances, and the growing crisis in British schools, hospitals and community care has only added to the incentive to bail out.

But why would well-heeled earners look up rather than down when they’re assessing their own position? Increasingly segregated schooling and housing, more marriage within rather than between income groups, much less shared experience of healthcare and other social services, a greater focus on paid work and its monetary rewards — these are a large part of the explanation, say Hernando and Mitchell.

“All these tendencies,” they write, “mean that it’s increasingly rare for high earners to get to know people outside their usual interaction with friends, family, work and education, especially when other networks (such as those based on religion or hobbies) either dwindle or move online.” Asked to place themselves in the income hierarchy and feeling under pressure, they compare themselves with the relatively small segment of the population that seems typical to them.

This wouldn’t be quite such a problem if it weren’t for the fact that wealthy people have disproportionate political power. Once they withdraw from the spheres that most people inhabit — government-provided schools, healthcare or childcare, for instance — it’s no longer in their interest for those services to be adequately funded. This sets up a malign cycle: underfunded public services push people who can afford it into the hands of private providers. Their services cost more — often much more — and that puts pressure on their own finances, increasing their resistance to taxes and making them more likely to support government cutbacks.

Some of these trends are hard to reverse. We can’t do much about people marrying within their own milieu, for example. But we can begin the slow process of changing that milieu. The obvious place to start is in the school system, where private schools (generally the preserve of the wealthiest families) are reinforcing social segregation to an alarming degree.

Hernando and Mitchell conclude that cracks are opening up in the fearful barriers wealthy Britons have erected against an increasingly underresourced public sphere. “This book’s aim is to invite the top 10 per cent to consider a future in which, for the price of giving up the barriers through which they seek to distinguish themselves from the rest” — a price that would include higher taxes — “they could become less anxious, more secure and less isolated.”

Can Australia learn from Britain’s uncomfortable wealthy? While 7 per cent of British children are educated in private schools, the Australian figure is 35 per cent. Add in selective government schools, particularly in New South Wales, and our school system rates among the most segregated in the Western world. But the groundswell of support for the Gonski report (before it was fatally compromised by federal and state governments of both varieties) shows the soil is fertile. •

Uncomfortably Off: Why the Top 10% of Earners Should Care about Inequality
By Marcos González Hernando and Gerry Mitchell | Policy Press | £19.99 | 256 pages

The post Fear of falling appeared first on Inside Story.

Initially, Menzies’s options were limited by the ten-year Commonwealth State Housing Agreement he inherited from Chifley. The 1945 agreement granted the states long-term loans to build homes for low-income families on the understanding that “a dwelling of good standard and equipment is not only the need, but the right of every citizen.” Its focus was on rental housing, with an option for sitting tenants to purchase their homes on favourable terms.

When the agreement came up for renegotiation, Menzies undermined its intent by encouraging middle-class families to buy public housing too, even though they didn’t live in it. Social affairs minister Bill Spooner argued that it was not “fair” to sell homes to working-class families with “no culture of thrift or sense of community obligation.” Not fair, it seems, to Menzies’s “forgotten people.”

To his credit, Menzies at least built lots of dwellings. Between 1947 and 1961, a period of mass migration, Australia’s housing stock grew about 10 per cent more than its population, with governments responsible for almost a quarter of new construction. Menzies also recognised that the state could play a fundamental role in stabilising a construction industry plagued by booms and busts. As he said in his 1949 campaign speech — the same “little capitalists” speech Kohler quotes — governments could plan public works “for periods when private building falls off.” Subsequent governments have forgotten this insight.

Home ownership rates jumped dramatically under Menzies — rising from about 50 per cent at the end of the war to over 70 per cent in 1966, largely due, claims Kohler, to the aggressive selling of public housing stock forced on the states. With their partisan bias towards home ownership, Menzies and Spooner “set the scene for decades of mistakes by their successors in the Coalition.”

Not that Labor hasn’t made its fair share of housing mistakes. It too failed to invest sufficiently in public housing: prior to the 1983 election, the party promised to double the proportion of public housing stock, but when Bob Hawke replaced Bill Hayden as leader the pledge was dropped.

Equally significant was Labor’s failure to stick to its guns on negative gearing. Treasurer Paul Keating eliminated negative gearing in 1985, arguing that allowing high-income earners to claim interest costs so they could trade forty-year-old Bondi flats “was not adding to the stock of housing or to the stock rental accommodation.” Keating was right, but the Hawke government buckled to the property industry and reinstated negative gearing two years later. If it had followed Keating’s logic and only restored the tax concession for new builds, then the trajectory of Australia’s housing might have been different. Nearly three decades later, having taken such a policy to election defeats in 2016 and 2019, Labor has abandoned it altogether.

Labor has also failed to restore housing to the political and administrative status it enjoyed federally in the postwar years. Chifley had a separate department for works and housing, but Menzies shifted housing to social services, where it sits today. The current deeply flawed development of the Albanese government’s promised national housing and homelessness plan is evidence for Kohler’s view that housing doesn’t belong in the Department of Social Services. Government comes at housing “as a welfare issue rather than an economic one,” he writes, yet housing is “almost everything” in the Australian economy.

Over the past two decades, rocketing real estate prices have taken household debt from 40 per cent to 120 per cent of GDP, tying up capital that could be used for far more productive purposes. Excessive housing costs dampen consumer spending and force families to delay having children. Long commutes in sprawling cities hamper productivity, harm health and worsen the climate catastrophe.

The Reserve Bank “manages the economy mainly through housing”— that is, by changing interest rates — which Kohler labels “a policy of cruelty” because the burden of economic adjustment is borne by those “who are already living on the edge.” Worst of all, Australia’s excessive housing costs drive inequality and erode social mobility. “Education and hard work are no longer the main social determinants of how wealthy you are; now it comes down to where you live and what sort of house you inherit from your parents.”

The most notable policy mistakes that made housing the driver of inequality were Coalition tax concessions. The first was the abolition of inheritance taxes in the 1970s and the second was the halving of the capital gains tax by treasurer Peter Costello in 1999. This was “kerosene on the smouldering coals of negative gearing and the lack of an inheritance tax, and turned property investment from a niche activity into the leaping flame of everybody’s tax avoidance scheme.”

This sets Australia apart: “whereas in the rest of the world investing in real estate is all about getting rental income from tenants, in Australia it’s about getting an income tax deduction and then a capital gain.” It helps explain why Australia’s rental market is dominated by small-scale landlords rather than institutional investors — it is small investors, not big ones, who benefit from tax concessions. Australia has virtually no “build to rent” projects because tax settings encourage developers to build to sell to “individual negative gearers” instead.

Coinciding with Costello’s halving of capital gains tax, which spurred real estate speculation, was a new migration boom that added to supply shortages. Unlike his hero Menzies, though, prime minister John Howard failed to use public investment to help housing keep pace with demand. The result was a two-decade-long price boom that saw the cost of housing diverge sharply from wages. Prior to 2000, the average home cost three or four times average annual earnings; now the multiple is seven or eight.

Kohler also has plenty to say about planning and zoning. He laments that Australia didn’t follow Britain’s postwar lead and standardise development controls across the nation, instead leaving them in the hands of state and local governments. This has created a fragmented, complicated system that not only impedes private construction but also hobbles public projects because state authorities must compete with developers to buy land at market rates. As a result, efforts to address housing need through the planning system are “piecemeal, local initiatives.”

Kohler identifies “two tribes” that dominate housing debates in Australia: “One tribe says the problem is tax breaks that boost demand too much and the other says it’s zoning and planning that restrict supply.”

He avoids taking sides, making clear that the fix for our housing mess will require action on a range of fronts — including not just tax reform and streamlined planning and zoning but also mechanisms to consolidate land in established suburbs. Consolidation would encourage the redevelopment of separate blocks with detached single houses as high-quality European-style medium-density apartments, along with a new vision for urban public transport.

But Kohler is not optimistic about the prospects for change. The politics of housing is “both simple and difficult,” he says. Australia is a “bankocracy” and thanks to Menzies’s legacy housing is “a cartel of the majority.” The most powerful players have good reason to want the cost of housing to keep going up. Those with less clout, like renters in the private market, have the odds stacked against them and will lose out. Ultimately, we’ll all be worse off. •

The Great Divide: Australia’s Housing Mess and How to Fix It
By Alan Kohler | Quarterly Essay | Black Inc. | $27.99 | 144 pages

The post And that’s housing appeared first on Inside Story.

Many politicians and public servants have described to me his rare magic in combining academic rigour with clear communication and a talent for finding a cut‑through line. His retirement this year is a good excuse, if one were needed, to talk about tax reform, the subject of his major academic and policy contributions. Indeed, his research and writing read like a tax reform to‑do list.

Pick up the Financial Review on any given day and you’ll find opinion pieces grounded in John’s decades-long efforts to unpick the efficiency and equity impacts of different tax reform options. He has also made the case for these reforms directly to government as a consultant to the Henry tax review, on the review panel of the NSW Federal Financial Relations Review and in other forums.

And while he has done the hard work of tilling the ground, and has no doubt been pleased with some of the progress made on tax reform, much of the broad agenda he has articulated remains on the shelf.

The question is: why? Why, after so many decades of discussion and so many points of broad economic consensus, does tax reform remain so challenging? Is progress possible or is tax reform simply an impossible dream?

To answer this question, we need to first understand why someone with John’s rare talents decided to use them to make the case for tax reform. The bottom line is that tax matters. It matters to all of us: how much we collect and how it’s collected have implications for economic activity, governments’ capacity to deliver services, and levels of inequality.

One challenge we face when we talk about tax reform is that different people start with very different objectives. So let’s unpack some of those.

The first is economic efficiency. Economists rightly focus on the fact that how we collect tax — that is, what we tax and how much — affects the “economic drag” created by the tax system. Almost all taxes come with some loss of welfare, but some drag on growth more than others.

In a static sense, this can be measured by the “marginal excess burden” — how much economic activity is lost for every dollar collected. As Treasury and others have reminded us, this varies significantly between taxes.

But while there can be big differences in the estimates different modellers come up with, they broadly agree that a tax-mix switch from higher-burden to lower-burden taxes would deliver an economic dividend.

The most clear-cut example is a move from stamp duties to taxes on land. Stamp duties are among the most inefficient of taxes. Treasury estimates suggest that every dollar collected can reduce economic activity by up to 72 cents. Stamp duties discourage people from moving to housing that better suits their needs, and sometimes discourage people from moving to better jobs. Overall, they distort choices and gum up the economy.

Another reason we might advocate for tax reform is to make government budgets sustainable and future‑proof our tax system. At a time when the treasurer has just delivered the first budget surplus in fifteen years and we are seeing apparently endless revenue “upgrades,” it may seem strange to be having this conversation right now.

But government spending overall is projected to average 26.4 per cent of GDP over this period — compared with less than 25 per cent over the three decades before Covid — and revenues have not kept up. The federal government’s latest Intergenerational Report reminds us that the ageing population and the fallout from climate change will only see this fiscal challenge grow over the next forty years. The same is true of state budgets.

The implications of not taking policy action are clear: we are asking future generations to bear the costs of today’s inaction.

Governments have three levers they can pull to tackle long-term budget challenges: they can make economic reforms to “grow the pie,” they can increase taxes and they can reduce spending.

Pursuing policies to boost growth is critical. Much of Grattan Institute’s work has focused on this first lever. And I look forward to pursuing this in a big way when I join the Productivity Commission in a couple of weeks’ time. But, as Grattan highlighted in our Back in Black? report earlier this year, we can’t rely on higher growth alone to close the budget gap.

Given the scale of the challenge, governments will also need to find ways to reduce spending and/or boost revenue. After a decade of looking at this challenge I have come to the view that we will need to do both. The scale of the challenge, and the greater buy‑in that can come when the costs are spread across the population are arguments for looking to both sides of the budget for answers.

If we do accept that some additional revenue is needed to respond to the structural challenge outlined, then we want to make sure that additional revenues are collected with the lowest possible economic costs. In fact, this can also help us grow the pie: more efficient, less distorting taxes are one of the Productivity Commission’s “enduring policy priorit[ies]” for productivity growth.

On the other hand, if we do nothing, we may end up on the path of least resistance: collecting ever-more revenue through ever‑creeping taxes on wage and salary earners. Bracket creep may be the most politically painless way to raise revenues, but it is far from the best.

Tax reform for budget sustainability should aim to broaden the base of income taxes — looking at loopholes and overly generous concessions as well as orientating our collections towards more efficient bases such as consumption, wealth, externalities or resource rents. In other words, we need to revisit the John Freebairn back catalogue.

The atrophying of tax reform in recent decades might make us pine for a golden era. In truth, though, tax reform has never been easy. So let’s take a short history lesson — five decades of tax reform in five minutes — and see what we can learn.

Let’s start in 1975. Many elements of our tax system today can be traced back to the 1975 Asprey tax review. This comprehensive, independent review was commissioned by the McMahon government in response to concerns about bracket creep and tax evasion. (Sound familiar?)

The review outlined the basic principles of efficiency, fairness and simplicity that remain our lodestars and made the case for many aspects of the system we have today, including fringe benefits tax, capital gains tax and a broad-based consumption tax.

But the report initially had little impact. Landing in the final, tumultuous year of the Whitlam government, it was written off in the media as a “tax flop,” and its main recommendations not adopted.

It took another decade for momentum to build. In 1985, fresh off the Prices and Incomes Accord and the floating of the dollar, prime minister Bob Hawke and treasurer Paul Keating turned their attention to tax reform. They released a draft white paper on reform options and hosted a tax summit with unions, business and community groups.

These processes resulted in the adoption of some of Asprey’s recommendations, including a capital gains tax, negative gearing reform, fringe benefits tax, dividend imputation and taxation of foreign source income.

But it was a case of “two steps forward, one step back.” A broad-based consumption tax was central to Keating’s original vision but failed to win support and was dropped. And the pioneering negative gearing reforms were repealed two years later.

So the Asprey blueprint was partly implemented. Another long reform slumber followed. The next big push was John Hewson’s Fightback! platform for the 1993 election, which proposed, among other things, a broad-based consumption tax. Fightback! proved to be a false start — Hewson lost the “unlosable” election — but consumption taxes were back on the agenda.

Another six years had to pass for the reform dream to become reality. Prime minister John Howard took a proposal called A New Tax System, which included the GST, income tax cuts and the abolition of a host of inefficient state taxes, to the 1998 election. He narrowly won and the legislation ultimately passed in 1999, twenty-four years after the release of the Asprey report.

We’ve seen precious little in the way of significant, lasting tax reform since then. The landmark Henry review is close to celebrating its fourteenth birthday with most of its meaty recommendations untouched. State and territory tax reform has also, mostly, been a non-starter, despite a succession of reviews converging on similar recommendations.

So what should we take from this history? What can we learn from those rare moments when we managed to overcome the many barriers I outlined before? I see four key steps for would-be reformers.

Step 1: Put reform on the agenda

History shows that an external push is often needed to put tax reform on the agenda. In 1985, fears about Australia’s economic decline and resentment about tax avoidance pushed the discussion forward. In 1997, the High Court’s decision to strike down a key state tax left a significant hole in the states’ budgets and opened the reform window for the GST.

The optimist in me can’t help but draw parallels with last month’s High Court decision to strike down Victoria’s electric vehicle levy. Perhaps we might have another golden opportunity for a grand intergovernmental tax reform bargain on our hands?

Tax reform was hardly on the radar for the Howard government until civil society groups — representing both social services and business — started championing the cause. The Australian Council of Social Service and the Australian Chamber of Commerce and Industry, in particular, pushed in a coordinated way, culminating in the National Tax Reform Summit in 1996. The strong and united messaging put the GST and tax reform firmly back on the political agenda.

Today many groups feel similarly. Federal independent MP Allegra Spender has been spearheading a push to unite academic, business and civil society leaders to build some consensus on the need for tax reform and the way forward.

Step 2: Build a coherent package

While rewriting thousands of pages of the tax code at once would be a recipe for chaos, relying on incremental changes is probably not going to get the job done either.

History shows that reform packages can work well. In 1985, reforms that broadened the income tax base were bundled with income tax rate cuts and tax avoidance measures — a coherent story to sell to the public. In 1999, removing narrow and inefficient, but lucrative, state taxes and widely variable wholesale sales taxes made sense in the context of the broader GST deal shoring up state budgets.

Packages provide the opportunity to dull the sting of reform by sharing the costs more broadly and perhaps offering some compensation to the losers.

The major tax reforms of the past two decades have come at an upfront cost. The GST package overcompensated households by about $12 billion a year, through personal income tax changes and increases to pensions and family payments. This was a key part of its sales pitch. Former Treasury secretary Ken Henry recalled that:

the distributional tables outlining the impact of the GST were the most “thumbed” part of the documentation, certainly by those Treasury officers answering phone queries. Of course, it helped that every individual and family represented across all income levels appeared better off.

Compensation packages are particularly important where there are equity implications for lower-income households. Australians tend to reject reforms that seem unfair. But, crucially, potentially regressive reforms, such as broadening the base of the GST, can form part of larger, fairer reform packages. For example, the carbon tax package involved substantial assistance for households, particularly lower-income households, to address concerns that poorer households would be particularly affected by higher energy and food prices.

Given the long‑term budget challenges, high‑cost packages of the type needed to ensure there are “no losers” from tax changes are difficult to justify. But it is certainly possible to design packages with much lower upfront costs that still compensate vulnerable households. For example, Grattan’s previous work on the GST proposed a revenue-positive package, with a 15 per cent GST, cuts to income taxes, and an increase in welfare payments, that would leave the lowest 40 per cent of income earners better off on average.

Packages might also help address some of the other political economy challenges of reform. Ironically, opening up more fronts in the tax debate may quiet some of the more over-the-top reactions. As Ken Henry has argued, “if you give a lot of well-armed people only one target to shoot, it will take a pounding. Incrementalism sets up a single target on a battlefield occupied by well-resourced attack forces.”

And while my goal here is not to opine on the “what” of tax reform, let me give a sense of some of the types of packages that a government could put forward.

• On income tax reform, we could return to the logic of 1985: broadening the income tax base by winding back loopholes and overly generous concessions, to support a cut in rates. This could include targeting discretionary trusts and super tax concessions, or reforming capital gains tax — either by reducing the capital gains tax discount or returning to the indexation of gains.

• Another package could tackle the inconsistent tax treatment of different savings options, to reduce the distortion in savers’ choices and simplify the system. This would mean lower taxes on interest from bank accounts and bonds, and somewhat higher taxes on other savings vehicles such as superannuation (which is very lightly taxed even after accounting for the long holding periods). An even “bigger bang ” version would be a dual income tax where income from savings is taxed at a consistent low rate, regardless of source.

• On the corporate tax front, we could better tax resource rents to fund a company tax cut. We could also consider more wholesale reforms such as an allowance for corporate equity or a cash flow tax.

• For states, inefficient stamp duties could be swapped for land taxes over time, along the lines of the ACT government’s gradual phase-in or Victoria’s switch for commercial and industrial property.

• In transport, distance-based congestion charges that vary by location and time of day would be a more efficient replacement for the declining fuel tax base.

• Finally, to aid the climate transition, the government could substantially expand and strengthen the safeguard mechanism, while eliminating many higher-cost interventions to reduce emissions, such as the fringe benefits tax exemption for electric vehicles. The package would deliver both faster and lower-cost emissions reduction.

But while packages make a lot of sense, would‑be tax reformers can’t be too purist. Incremental changes in the right direction are still an improvement on the status quo, and in some cases these more incremental steps can ultimately take us towards more comprehensive packages.

Step 3: Embrace the “vomit principle”

The next step is making a compelling case for change. Complicated reforms that can’t be explained are unlikely to win support, and are more vulnerable to scare campaigns. We saw this in 2019 with the confusion about franking credits — irredeemably branded a “retirement tax” — and in 1993, when John Hewson’s tortured explanation of the effect of a GST on the price of a birthday cake helped turn the tide of popular opinion against the new tax.

Convincing the public of both the necessity of change and the proposed solution takes time and political capital. Howard and Costello spent two years and a lot of political energy highlighting the structural problems with Australia’s tax base prior to releasing their reform package in 1998.

While no one likes to pay extra tax for the fun of it, many are more inclined to agree when higher taxes are linked to better services. The proportion of Australians favouring “less tax ” has declined since the late 1980s, according to the Australian Election Study, and the proportion preferring “more spending on social services” has risen. At the time of the 2022 election, 39 per cent indicated they would prefer less tax, 31 per cent more social spending and the remainder said “it depends” — presumably on the nature of both the tax and the spending increases.

My reading is that when our political leaders do the work of tilling the ground and explaining changes and why they are needed, then hearts and minds can shift.

A more recent example, albeit one contrary to received wisdom, was the then‑Labor opposition’s 2016 policy to wind back negative gearing and reduce the capital gains tax discount. We have already discussed some of the public challenges that reform faced, but it is also worth remembering that negative gearing had formerly been viewed as a “political untouchable.”

Indeed, since the Hawke government lost its nerve and reversed its decision to wind back negative gearing in 1987, it has been considered the “sacred cow” of Australian politics. When Labor announced it would introduce these changes to improve housing affordability and contribute to the budget bottom line in 2016, just over a third of Australians supported removing or limiting negative gearing.

But, over time, as shadow treasurer Chris Bowen and others made the case, support gradually increased. Support for limits on negative gearing climbed almost 10 percentage points, from 34 per cent in March 2016 to 43 per cent in December 2018. By the time of the 2019 election, the Australian Election Study estimated that 57 per cent of Australians supported limiting negative gearing.

To me this is a textbook example of what some political strategists call the “vomit principle ” — repeat something until you feel like you are going to vomit. Only then are you cutting through.

Labor has since dropped the policy, of course, and many reading the media commentary would have gained the impression that the tax reform agenda was deeply unpopular and “to blame” for Labor’s surprise election loss in 2019. The reality was far more complex.

In any case, it’s not just down to politicians to argue for reform. Successful tax reforms need a diverse cheer squad. Historically, academics, premiers, public policy institutions, and community groups have all been important advocates for tax reform. Providing incentives for academics and non-profit organisations to participate in public debate would be a useful step to building these coalitions today.

Step 4: Make it stick

Somewhat dispiritingly, even after these hurdles have been overcome and tax reform has been passed, the job isn’t done. Tax issues tend to linger on the agenda, often for entire parliamentary terms, and reforms sometimes don’t stick. As we’ve just seen, negative gearing reforms were undone after just two years in 1987. The carbon tax and mining tax were repealed. The Perrottet government’s hesitant steps towards stamp duty reform were wound back by the new NSW Labor government.

But in other cases the controversy does die down after reform is enacted. Sometimes social norms change quickly — for example, in Stockholm, congestion charging was much more popular after it had been implemented than before, and many people did not even remember that they once opposed the idea.

In Australia, plenty of tax changes that were controversial at the time — the GST, fringe benefits tax, capital gains tax — are now so entrenched that there is no constituency or any visible public appetite for their removal.

Reforms are more likely to stick if they create positive feedback loops — for example, if they result in institutional shifts, if reform winners can be used as advocates, or if businesses make big investments under the new regime. Taking the GST as an example, the Australian Taxation Office and businesses made significant investments in the infrastructure for administering the new scheme; and the changes to federal financial relations created a key constituency — state governments — who had a strong interest in its continuation.

What are the prospects for tax reform? I, for one, remain optimistic.

First and foremost, I don’t think we have much choice. The slow‑burning platform is still on fire, and over the coming decade the gap between our spending needs and our tax system’s capacity to meet them without ever higher taxes on employment income will be stretched to breaking point.

More and more questions are being raised about the sustainability and intergenerational fairness of our current tax mix. Without action, expect them to get louder and louder over the coming decade. Tax must also come into the conversation if we are going to deliver our policy objectives in other areas, including the green transition.

Second, I am confident that our leaders can make a positive case. While I have focused on the challenges, I am also heartened by the leadership we are seeing on difficult reforms in other areas.

Over the past three months the Commonwealth and state governments have made strong commitments to boost the supply of housing through politically challenging reforms to planning laws. If they can pull it off, this would be a huge economic and social reform, and one that has been in the too-hard basket for many decades.

As a reform proposition, making the case for greater housing density is probably of the same order of difficulty as making the case for major tax changes, and yet we are seeing both levels of government go after it in a big way.

Third, I think there is appetite across a broad swathe of interested parties to shift the dial. Allegra Spender’s tax reform round tables suggest at least a consensus among business, academia and civil society that something needs to change, even if there is not yet broad agreement on the reform priorities. A process to harness this agreement, ideally led and shaped by government, could help move the conversation forward.

Finally, I have confidence in the Australian people to see through the noise. Scare campaigns and a shouty media are one thing, but if state and federal governments can hold their nerve in the rule in/rule out game long enough to make a positive case for change, and keep making it, history shows that people can be brought along.

Tax reform is hard, but it’s not impossible. It’s time we woke up from our slumber and became a little less afraid and a little more Freebairn. •

This is an edited version of this year’s Freebairn Lecture, delivered at the University of Melbourne last week. The full lecture, with charts and footnotes, is here.

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She didn’t repeat that call in front of 1300 delegates at the National Housing Conference in Brisbane, but she came close, saying it should be possible to have a grown-up conversation about tax. She said Australia’s taxes encouraged property investors to focus on capital gains rather than a steady income from rents. A “healthy” housing market, she said, would prioritise “homes not assets.”

Lloyd-Hurwitz now chairs the interim National Housing Supply and Affordability Council, set up at the start of the year to advise the federal government on housing policy. In wide-ranging comments, she spoke passionately about the need to build a better and more secure rental sector, pointing out that more than 200,000 poor households hand over at least half their income to their landlords. She described housing as essential infrastructure akin to schools and hospitals, something that can’t be left to the private sector to sort out.

Yet a major thrust of the federal government’s response to the housing crisis does just that. In the updated National Housing Accord accepted by national cabinet, Labor wants the private sector to build 1.2 million “well-located” homes in five years, in the expectation that those new dwellings will bring down prices and make finding an affordable home easier.

Meeting this ambitious target would require an unprecedented rate of building: 60,000 new dwellings every quarter for five years straight. Steven Rowley from Curtin University told the conference that Australia has never achieved that level of residential construction, and only briefly approached it in early 2017. Currently, at just over 40,000 new homes a quarter, the industry is falling well short.

The federal government sees more efficient planning as the key to unlocking the residential construction boom required to meet its target. A blueprint adopted by national cabinet and supported by $500 million in competitive grants aims to streamline approvals, boost local decision-making capacity and fund essential infrastructure. Canberra is also holding out $3 billion worth of incentives to get the states and territories to improve planning systems. The money will flow as bonus payments once a threshold level of new dwellings is passed.

Rowley doubts such measures will be enough. While people love to blame the planning system for a lack of housing supply, he said, it’s market conditions that determine construction levels. And market conditions “just aren’t right.” “The last three years have seen unprecedented cost growth,” he added, “and that means development is unlikely outside the highest return areas.”

Tanya Steinbeck, chief executive of the Urban Development Institute of Australia WA, spoke about the situation in Perth, where construction costs render medium- and high-density residential projects unviable unless the underlying land values are already high. In other words, only upmarket developments in wealthy suburbs are likely to proceed.

According to Rowley, the only way we’ll get 1.2 million new homes is by dramatically rebalancing developers’ costs and the prices they can command. Construction stimulated by a sharp increase in property prices and rents would defeat the purpose of a scheme that aims to make housing more affordable.

Falling costs offer a more hopeful way forward, but Rowley believes costs have been driven up by factors that are largely beyond government control — labour shortages and the rising price of building materials, for example, and more expensive finance. Governments don’t set interest rates and have little influence over the cost of timber, bricks and steel. And while they can, over time, train more tradespeople, governments can’t stop qualified workers defecting to get better wages in the mining sector.

Even if costs moderate and supply chains flow more smoothly, it will take time for industry to respond to improved conditions. The construction tap can be turned off swiftly, said Rowley, but turning it on again is much slower.

Innovation holds out some promise. “We can do things faster without compromising quality,” said Lloyd-Hurwitz, describing an experiment carried out by Mirvac. Twelve terrace houses were built using traditional methods and twelve using a modular approach, with components of the houses made in factories and assembled on site. The modular homes were completed more quickly, with less waste and less neighbourhood disruption.

More generally, prefabrication is growing rapidly. It can help overcome skills shortages and the difficulty of getting workers and materials into remote locations like western Queensland.

But possible savings from innovation may be offset by other factors that make building more expensive. After all, we don’t just need more houses, we need better houses. From the floor of the conference, delegates called for homes that people with a disability can live in easily and homes that allow residents to “age in place.” Updated design standards often increase costs in the short term, even if prices come down again once economies of scale are achieved.

Extreme weather events, meanwhile, are prompting tighter planning controls over where homes can be located, and more stringent building codes in areas at risk from floods and fires. Energy-efficient homes are needed in greater numbers, built from materials with lower embodied emissions, but governments are dragging their feet.

In 2022, after years of negotiation, the states and territories agreed to making seven-star energy efficiency mandatory under the National Construction Code, with the changes to take effect in May this year. After industry lobbying, most states have delayed implementation, saying builders need more time to prepare. The result is grim: no improvement in housing efficiency standards since 2009. Ralph Horne from RMIT told the conference that if higher standards eventually take effect, they will only match ratings for new homes achieved twenty years ago in comparable nations.

The qualifier “well-located” poses another challenge to building 1.2 million homes. It’s code for increasing urban density in established suburbs using medium-rise developments to fill in the “missing middle” — a reference to both the lack of new homes in middle-ring suburbs and the lack of mid-rise apartment projects. A break with the pattern of going up in the centre and out at the edges has so far proved elusive.

More than two decades ago, the Victorian government’s Melbourne 2030 plan aimed to locate a “substantial proportion” of new housing in sites that had good access to services and transport, and to set “clear limits to metropolitan Melbourne’s outward development.” The aim has been partially met by high-rise inner-city towers sprouting up in the CBD, but greenfield estates on the urban fringe continue to accommodate most of Melbourne’s population growth. Some “transit oriented” residential development has sprung up around train stations — Box Hill is a notable example — but new housing in middle-ring suburbs is otherwise limited.

As Lloyd-Hurwitz pointed out, the average dwelling density of middle-ring suburbs is typically around 750 homes per square kilometre, whereas new greenfield estates now achieve densities of 2000 homes (thanks in part to smaller block sizes). Tanya Steinbeck said that while Perth’s established suburbs are dominated by freestanding houses with three to five bedrooms, the growing demand is for one-bedroom apartments, leading to massive underutilisation of existing housing stock.

Transformation of the urban landscape could be encouraged, Steinbeck said, by shifting from stamp duty paid on sales to a broad-based property tax, another long-sought policy reform. This would reduce the financial barrier to people “right sizing” their homes as their circumstances change. The ACT has gone done this path, but other states and territories are unlikely to follow unless the federal government plays a coordinating role. So far, it’s shown no inclination to do so.

There was talk of easier permitting for backyard granny flats, hardly a recipe for top-quality urban redevelopment. But Lloyd-Hurwitz also referred to Auckland’s 2016 “upzoning” to enable the conversion of family homes on suburban blocks into mid-rise developments without running the gauntlet of planning objections. This has been credited with precipitating a boom townhouse development that has slowed the increase in Auckland rents and real estate prices relative to other New Zealand cities (although causal link is disputed).

The aim, said Steinbeck, is not just density, but density done well. The risk of liberalising planning rules is that we’ll get what she called “dumb density” — small-scale developers replacing family homes on large blocks with two or three townhouses that lack energy efficiency and don’t make the best use of scarce land. Such piecemeal infill occurs without upgraded infrastructure and amenity to improve the neighbourhood for all residents.

My conversations with delegates during the conference breaks often came back to this challenge. Doing density well is hard because it means assembling fragmented housing blocks into parcels big enough to develop at scale — few developers have pockets deep enough to engage in such activity and there are few explicit incentives in planning schemes.

The National Housing Accord also includes an aspiration for 20,000 of the 1.2 million “well-located” new homes to be “affordable.” To put it kindly, this is a modest ambition, amounting to less than 2 per cent of all new dwellings over the next five years. If we include the 40,000 social and affordable homes that are supposed to be built with money flowing from the newly established Housing Australia Future Fund and the extra billions extracted by the Greens — and an extra 20,000 dwellings completed independently by state governments over the same time frame (a generous estimate) — that still amounts to only 80,000 “affordable” homes or less than 7 per cent of 1.2 million new dwellings.

Affordable is, in any case, a notoriously vague and contentious term. It’s usually taken to mean rents 20 per cent lower than the prevailing rate for a similar dwelling in the same area. But, as Lloyd-Hurwitz remarked, a discount in a high-priced market isn’t necessarily affordable, especially for tenants on low and moderate incomes.

Despite the challenges, the overall mood at the National Housing Conference was upbeat. As AHURI managing director Michael Fotheringham said in his welcoming remarks, housing has never been more prominent in public discussion than it is today. There was palpable excitement, especially among not-for-profit community housing providers, about bidding for a share of the new funds flowing in their direction. They want to get on with building homes for the people who most need them.

Delegates welcomed the federal government’s efforts to coordinate tenancy reforms via national cabinet so renters around the nation get a better deal, and they are encouraged by the new dynamism apparent at the state level. Since May, Queensland has a dedicated housing department for the first time, led by a minister, Meaghan Scanlon, whose parents both grew up in public housing. Rose Jackson, housing minister in the new NSW government, has launched herself into the job with energy and plain speaking, and Victoria has just released its long-anticipated housing statement.

If there was a general view of the five-year target of 1.2 million homes, it was probably that the ambition is welcome even if it’s unrealistic. Meeting the target would increase Australia’s total housing stock by about 2.4 per cent every year. Curtin University’s Steven Rowley said this could have a moderate impact on rents and house prices, but he doesn’t think it will make homes dramatically more affordable.

What’s needed, he thinks, is sustained public investment to build new social housing in perpetuity, allowing us to steadily build the stock of decent homes that are truly affordable for Australians on the lowest rungs of the income ladder. He worries that the current burst of new funding could again be short-lived. Like everyone else at the conference, I hope he’s wrong. •

Peter Mares facilitated a session at the National Housing Conference and AHURI paid for his travel from Melbourne to Brisbane.

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There is, however, one prediction that can be made, with almost perfect safety. For the foreseeable future, Australia’s political class will continue to worry about declining birth rates and “population ageing.”

Worries of this kind have been around since the late nineteenth century, when families first began exercising some control over the number of children they had. The panic over declining fertility was briefly interrupted by an unexpected baby boom after 1945, which coincided with an economic boom. But concerns about ageing resumed with increasing force from the 1980s, when the fact that baby boomers would one day retire started to enter budget calculations just as the prospects of continued strong growth were fading. Worse, unlike previous generations, the boomers showed a propensity to live well beyond the official pension age.

This resurgence in concern has coincided almost exactly with my own working life, and I have spent a fair bit of that time trying to debunk it. My attempts began before the first Intergenerational Report in 2002, and have continued, with very limited success, right up to last month’s release of the latest.

Criticising alarmism about fertility and ageing is something of a family tradition. In 1988, my mother Pat, a demographer, produced No Rising Generation: Women & Fertility in Late Nineteenth Century Australia, a study of the first panic about declining fertility. The title, a quotation from a typically gloomy pro-natal advocate, would work perfectly well as a summary of views being stated today.

Alarm is expressed most commonly in terms of the “old-age dependency ratio”: the ratio of people aged sixty-five and over, assumed to be dependent, and those between fifteen and sixty-four, who must therefore work to support them.

The ages built into the ratio reflected the economic realities of 1909 (at least for men), when the age pension was first introduced. Most men left school and entered the workforce at fifteen, possibly after a brief apprenticeship. Young and strong, they reached their peak earning power in their twenties. If they made it to the pension age of sixty-five they were worn out and, in many cases, incapable of working any longer. At that point, they could expect to live another ten years or so.

Women, meanwhile, were expected to leave paid employment when they married, as nearly all of them did. They then undertook the work of caring for children — an activity ignored by the dependency ratio and left out of calculations of national income. Reflecting their limited employment opportunities, women could (if single or widowed) receive the age pension at sixty.

Apart from some fluctuations, these patterns didn’t change much for the next fifty years or so. The birth rate fell sharply during the Great Depression but rebounded in the baby boom. Women entered the workforce in large numbers during the second world war but were pushed out again to make room for returned servicemen. And although reductions in premature deaths (especially infant mortality) produced a big increase in average life expectancy, prospective longevity barely changed for sixty-five-year-olds between 1900 and 1960.

After 1960, though, things changed radically at both ends of the age distribution. Leaving school at fifteen ceased to be a sensible (or even a feasible) option. By the late twentieth century nearly all young people finished high school and most went on to post-school education and training. Dependence on parents, and on publicly provided or subsidised education, continued to around twenty years of age.

At the other end of the age distribution, the number of healthy years someone could expect to live after sixty-five increased steadily. The abolition of official retirement ages meant people could choose to work until they were seventy or even older. Yet the trend of the late twentieth century — exacerbated when the 1990s recession consigned many older workers to apparent unemployability — was towards earlier retirement.

It was in this context that Coalition treasurer Peter Costello launched the first Intergenerational Report. Its predictions (or projections) were less important than the rhetorical purpose: to spread the message that reductions in public spending, and particularly in welfare payments, were urgently needed if unacceptable increases in taxation were to be avoided.

These claims were repeated in successive reports, reaching the height of absurdity under treasurer Joe Hockey, who warned that the 2015 report would make us “fall off our chairs” and raised the prospect of newborn Australians living to 150. (He forgot to mention that these future Methuselahs would not even reach pension age until the last decades of the twenty-first century.)

The alarmist tone of the Intergenerational Reports was based on the idea that old people will represent an unsustainable burden on both the health system and the retirement income system. But most of the policy changes necessary to fix retirement incomes were well under way by the time the first report came out.

First, income and assets tests for the age pension, largely abolished in the 1970s, had been reintroduced in the 1980s. Then, beginning in the early 1990s, defined benefit superannuation schemes were replaced by accumulation schemes that put the burden on workers to plan the retirement investments on which they would live.

The final step, beginning in the late 1990s, was a gradual increase in the age of eligibility for retirement incomes of all kinds. The pension age for women was increased to sixty-five. Further changes in 2009 began the process of increasing the pension age to sixty-seven, which has just been completed.

Ironically, the most important backward steps in this process were taken by Costello himself. His tax concessions for superannuation, of particular benefit to self-managed superannuation funds, have proved both unsustainable and politically hard to undo. It has taken fifteen years of effort by governments of both parties to wind them back. The absurdly generous franking credits system, against which Labor campaigned in 2019, now looks untouchable.

The resolution of the retirement income problem was finally acknowledged, with some justifiable partisan spin, in the 2023 report. As treasurer Jim Chalmers observed, “Our population is ageing but our spending on the age pension will fall — that’s the intergenerational genius of super. Super is delivering on its promise — providing a better retirement for more Australians and a better outcome for the budget over the next forty years.”

Despite this, the 2023 report sticks with the outdated dependency ratio, noting that the term “refers to the number of people aged sixty-five and over for every 100 people of traditional working age (fifteen to sixty-four).” The only concession to twenty-first-century reality is the word “traditional,” hinting that a document supposedly designed to prepare for the future is still using the mental categories of the past.

But if we use a more realistic age distribution, and take account of the fact that both young and old people are dependent, the apparent crisis vanishes. There are currently about two people aged under twenty or over seventy for every three people in between. This ratio will barely change between now and 2063.

And what about the old bugbear of health spending? Ever since the first Intergenerational Report, critics of the conventional wisdom have pointed out that the growth in health expenditure has been driven mainly by the new and better treatments that lead to longer and healthier lives. This is the reverse of the alarmist claim that an increase in longevity (the cause of which is left unstated) means longer periods of late-life illness and greater demand for medical services.

New medical technologies are part of the process of structural change inherent in modernity. In the first half of the twentieth century, manufacturing displaced agriculture as the central focus of economic activity, only to be displaced in its turn by services. Now change is occurring within the service sector, with information technology and artificial intelligence replacing some services and enhancing the importance of others.

Much of the growth in the service sector comes from human services like health and education, which governments are best placed to provide or at least fund. This will indeed require an increase in the share of national income going to government, and therefore an increase in tax rates. Rather than calling for alarm, the Intergenerational Report ought to be raising awareness of the need for these structural changes.

Like its predecessors, the latest Intergenerational Report will almost certainly fail to create the hoped-for sense of alarm among voters. But in two crucial respects it ought to be generating some alarm in the political class that produced it.

First, the report spells out the need for more tax revenue. Yet the major parties have a bipartisan commitment to cutting taxes for those with the greatest ability to pay. The stage three tax cuts, designed by Scott Morrison first as treasurer and then as prime minister, will put a hole in tax revenue that will take decades to fill. And Labor’s 2019 election defeat led it to abandon most proposals to close tax loopholes.

Our government ought to be even more alarmed about global heating. For the first time, this year’s Intergenerational Report at least attempts to estimate some of the monetary costs of the disaster towards which we are accelerating. But the government that commissioned it is doing little to improve the situation, and a great deal to make it worse.

Every day, it seems, we read of a new coalmine being approved or a new gas project receiving massive subsidies. And every day the results are evident around the world in catastrophic fires, devastating floods and the accelerating destruction of natural habitats.

We are, indeed, driving younger generations of Australians towards a poorer future. But this poverty won’t be caused by higher tax rates or the costs of aged care. Rather, our poisoned bequest will be the unliveable planet that is already in plain view. •

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Howard’s promise was a dog whistle to Australians that he would end the continual economic change of the Hawke–Keating years and the turmoil caused by the 1990–91 recession and other policy errors. Under pressure from big business, he broke his promise and introduced the GST, but in the generation since then, the only substantial reform we’ve seen has been the short-lived carbon tax.

Almost a year into its term, the Albanese government has fine-tuned many small things but embarked on no really big changes, and none are foreshadowed. It’s unleashed no surprises other than committing future governments to spend up to $14,000 for every Australian on nuclear-powered submarines. Nothing the PM and his team have learned in office seems to have changed their priorities or their sense of what Australia needs.

At each policy announcement, Albanese reminds us that Labor put this policy to voters at the election. Fulfilling campaign promises has become his mantra, his commitment: it proves that his word can be trusted. He is governing as he campaigned: as a small target, promising changes only if they are popular. And politically, as the opinion polls show, it’s working.

After almost a year of Labor in power, perhaps the main surprise is that so little has changed. It feels a bit like Orwell’s Animal Farm. Refugees remain locked up in Nauru, but now it’s a Labor government that is paying a US security firm hundreds of millions of dollars to provide “garrison and welfare” services. Whistleblowers David McBride (Afghanistan) and Richard Boyle (tax office intimidation) are still being prosecuted for exposing unwelcome truths, but now by a Labor attorney-general, Mark Dreyfus.

The real wages of Australian workers are falling even faster than before, yet the Labor government plans to deliver tax cuts to the rich. Australians on lower incomes remain priced out of home ownership, endless economic debates bring no action, and sky-high energy prices haven’t lifted the budget out of a structural deficit the International Monetary Fund now estimates at 3.25 per cent of our GDP — more than $80 billion a year.

This is one of the few Western countries with no economy-wide carbon price and no vehicle-emission standards, and no plans for the former and endless reviews for the latter. Sure, the Voice to Parliament could prove an important step forward, maybe, if it works well and governments listen to it. But the pace of reform generally under Albo’s rule has been a gentle trot.

Welcome to Australia 2023, where life is relaxed and comfortable.

Have Anthony Albanese and his ministers found no urgent issues in their first year that can’t be solved by Labor’s 2022 campaign promises? Given the problems we face, is it enough for them to stick to their pre-election script and aim to keep out of trouble?

Or is the reality, rather, that Labor’s campaign policies, designed to be popular, do too little to fix some of the biggest problems confronting us? It will be challenging for just 215 selected companies to deliver Labor’s target of reducing emissions to 43 per cent below 2005 levels by 2030 — assuming integrity reforms ensure those reductions are genuine. Australia’s per capita emissions will probably remain the highest in the Western world.

Labor’s policies are clearly inadequate to fix the problems of the economy, or of the budget: more on that in a moment. Across the board, its problem is that as the traditional party of social justice it has raised expectations it has no plans to meet. By camping in the middle ground, it leaves its traditional radical base looking for an alternative. Increasingly, they are finding one.

As psephologist Ben Raue of The Tally Room has pointed out, Labor won the election with 52.1 per cent of the two-party-preferred vote — but only 32.6 per cent of voters gave the party their first preference. Three in every eight voters in the broader Labor camp preferred Labor to the Liberals but chose to vote first for other parties (mostly, the Greens) or independents.

It’s been a long-term trend, and it’s getting stronger here and around the world. Ten years ago, the Socialists ruled France: today they are a minor party. Germany’s Social Democrats are gradually being overtaken by the Greens.

When Labor came to power in 2007, the House of Reps had just two crossbenchers, Bob Katter and Tony Windsor. Today it has sixteen, with another eighteen in the Senate. Overwhelmingly, they are to the left of Labor. Sure, they won’t support the Coalition. But if Labor keeps losing voters and seats to the left, will this be its last majority government?

Contrast the responses treasurer Jim Chalmers gave to two key reports he released last week. The first, by the government’s expert Economic Inclusion Advisory Committee, reported that Jobseeker and related benefits for people of working age are “seriously inadequate,” leaving many recipients in such financial stress that some “[have] to choose between paying for their medicine or electricity bills.”

Chalmers released the report at 5.10pm on Tuesday evening, too late for it to get appropriate media coverage, and issued a statement making it clear that Labor would not implement its proposals. “We can’t fund every good idea,” he said, emphasising that support for those most in need had to be “responsible and affordable… and weighed up against other priorities and fiscal challenges.”

Two days later, Chalmers released another report, this time on the Reserve Bank, by three monetary policy experts, essentially into how interest rates should be set. He announced that all fifty-one recommendations would be accepted, including its core proposal that interest rates be set by a committee of experts, as in the United States, to embrace a wider spread of informed opinion.

The contrast was striking. Labor today feels at home with highbrow issues of economic policy, and is willing to act swiftly and decisively on them. But it doesn’t want to know about the problems of those most in need, and does not intend to do anything about them.

Yes, the budget is in a desperate situation, and this is no time for unfunded new spending (such as $380 billion to buy a dozen or so submarines). That’s why many of us have been arguing that Australia needs to get the budget back in the black by closing the tax loopholes that mean we raise far less revenue than most other Western countries.

A recent report by Grattan Institute economists Danielle Wood, Kate Griffiths and Iris Chan conceded that there are no easy options but proposed getting there mostly by closing loopholes — and making normal budget rules apply to politically driven spending on infrastructure and defence. We don’t need to raise taxes: we can get there by scrapping tax concessions.

For example:

• Reduce tax breaks for superannuation, especially for retirees and high-income earners.

• Redesign the stage 3 tax cuts to eliminate the overcompensation of high-income earners.

• Scrap the Coalition’s decision to tax small business profits at a lower rate than those of bigger firms.

True, Grattan also recommends some tax rises on mainstream Australia, notably lifting the GST to 15 per cent, widening its base, and compensating only the bottom 40 per cent of income earners for their losses. But closing loopholes is easier politically than raising the GST or tightening the assets test for pensions.

A Resolve Strategic poll last weekend in Nine’s Sunday papers found that only 17 per cent of Australians say they want to close the deficit by raising taxes, whereas 40 per cent say they want to close it by cutting spending (and another 26 per cent want to just keep running up debt). But the poll failed to ask what spending the cutters wanted to cut, whereas it asked everyone what they thought of specific tax increases. And, hey, most of them attracted more support than opposition.

For example:

• Increase taxes on the profits of resources companies: 58 per cent support, 12 per cent oppose, 30 per cent undecided.

• Reduce tax concessions for negative gearing: 44 per cent support, 21 per cent oppose, 35 per cent undecided.

• Cancel or reduce stage 3 income tax cuts: 34 per cent support, 23 per cent oppose, 43 per cent undecided.

• Reduce tax concessions for superannuation: 37 per cent support, 28 per cent oppose, 35 per cent undecided.

• And, on raising the $50 a day rate paid to unemployed people reliant on Jobseeker benefits: 43 per cent support, 31 per cent oppose, 26 per cent undecided.

That contrasts sharply with voters’ usual knee-jerk opposition to any tax rises. The more Australians have been talking about it, the more people have come to see them as necessary. On negative gearing, for example, the number opposed to reform is now about the same as the number of people who own rental properties. Unfortunately, one of those is Anthony Albanese.

Chalmers has been given a looser rein to let us know that the budget is in bad shape, and has led the way in encouraging debate on tax increases. But Albo himself has seemed to stand above all that. He is not warning Australians of hard times ahead. He is not asking us to make any sacrifices. And above all, he is not drumming home a message that things must change. His message is: business as usual.

But times are tough. The IMF recently downgraded its forecasts of Australia’s economic growth to 1.6 per cent this year and 1.7 per cent in 2024. With our population swelling at a record 400,000 a year, that implies two years of zero or negative growth in per capita GDP. It hasn’t led to rising unemployment yet, but if the IMF forecast is correct, it will.

What wasn’t reported here was that the IMF’s medium-term projections see Australia’s growth per capita sliding towards the bottom of the pack: over the next five years, only Canada will rank lower among the dozen largest advanced economies. On the IMF’s projections, Australia would also lose its proud position as one of the world’s twenty largest economies. (That’s on the IMF’s preferred measure, which adjusts for differing cost levels to measure the real volume of production.)

With real wages set to fall by 8 to 10 per cent over this period, it seems a very strange time to be delivering tax cuts costing more than $25 billion a year and directed overwhelmingly to high-income earners — those who by definition are doing well and least need help.

We can all understand Labor’s desire to be seen as keeping its word. But this was a bad reform that ordinary households’ loss of buying power has made worse. I suggest a compromise that keeps some key elements of the package but redistributes the gains more fairly. Rather than abolishing the 37 per cent marginal tax rate, reduce it to 35 per cent with the same thresholds as now — but add a new 40 per cent rate for income from $180,000 to $200,000, and a timetable to raise that threshold to $250,000. Over time, that would save the budget a lot of money, without taking everything from those who would gain from the plan Labor promised them.

As the Grattan Institute report points out, the budget is in even more trouble than it seems to be, because it assumes continued underspending in areas where that is clearly unsustainable. In areas like aged care and regional hospitals, jobs can’t be filled because governments have failed to ensure enough funding to pay the going rates. Country and even suburban GPs are closing down because the long Medicare freeze on rebates has made general practice unviable as a career.

These are just some of the many areas where Labor has raised expectations of change that it can’t deliver with existing revenues. Australia already has full employment; mineral prices are already close to record highs. This budget can’t be fixed, and the underspending lifted to adequate levels, without revenue increases on a wide range of fronts. Labor is flagging a few nibbles at tax reform in the 9 May budget. That won’t do it.

In the end, these are moral issues: we should raise the rate of Jobseeker because it is wrong to make people relying on it (40 per cent of whom have mental health issues) live in such abject poverty. One told last week of taking the lightbulb with her from room to room because she couldn’t afford a second one. But the moral issues don’t seem to resonate with the cynical hardheads running Labor.

They ignore them on political grounds. The Coalition won’t do anything about them, so there’s no need for Labor to do anything either. Most voters, they say, don’t care how low the dole goes — at $50 a day, it’s now about a third of the median wage — and those who do are soft-hearted lefties who end up having to vote Labor anyway.

But wait. Yes, back in 2007, when Rudd was elected, voters on the left had no other choice. Labor had 43.8 per cent of the votes, while the combined vote of the Greens and independents of all shades was 10 per cent. The Greens won 20 per cent of the three-party vote in just one seat, when a young lawyer named Adam Bandt pipped the Liberals for second place in Melbourne. They couldn’t win seats: their role was to help Labor win seats.

Fifteen years later, that reality has gone. At the 2022 election Labor won just 32.6 per cent of votes for the House of Reps, while the Greens and independents won 17.5 per cent. Their vote has been swollen by former Labor supporters who have moved left because of issues like these. They don’t want unemployed people to be condemned to live in dire poverty. They don’t want refugees to be locked up on Pacific islands. They don’t want whistleblowers to be prosecuted, or Australia to keep dragging its feet on action to slow global warming. Labor is no longer their party.

Peter Dutton is risking giving Liberal voters more reason to abandon his party and vote independent. Albanese risks giving Labor voters more reason to abandon his party to vote for the Greens. Last year they took Griffith from Labor, overtook it to claim the marginal Liberal seats of Brisbane and Ryan, and came just 300 votes short of taking Macnamara (formerly Melbourne Ports), a seat Labor has held since 1906.

Honeymoons rarely last until the next election. If Labor alienates more of its base by inaction or half-hearted measures on issues that matter to them, it risks losing more seats. Macnamara would fall to the Greens in a swing of 0.3 per cent, while its neighbour Higgins (2.4) and Richmond (1.3) in laid-back northern New South Wales are very marginal. Another seven Labor seats had a margin of less than 10 per cent over the Greens — and while that’s big, the Greens won most of their seats with higher swings than that.

Remember 2010. The media focus was on Tony Abbott and Julia Gillard, but the vast bulk of the voters who deserted Labor went to the Greens. Their vote jumped from 7.8 to 11.8 per cent, and they picked up Melbourne — and four extra seats, and the balance of power, in the Senate. Labor has never regained the seats it lost.

Another swing like that would take a lot more seats with it. It could mean this is Labor’s last majority government. •

The post Albo’s choice appeared first on Inside Story.

In the early 1980s John Howard — Liberal treasurer at the time — expressed interest in a consumption tax but was warned off by prime minister Malcolm Fraser. Howard’s successor at Treasury, Labor’s Paul Keating, energetically spruiked one in 1985, inside the party and in public, but he too was eventually rolled by his leader. Then, early in the next decade, Keating betrayed not a skerrick of embarrassment as prime minister as he employed his substantial rhetorical skills to help bury John Hewson’s Fightback! package, which had a GST at its centre.

A couple of years later, in 1995, opposition leader Howard was forced to promise “never ever” after some loose-lipped equivocations to a business audience. Then, in his first term as PM, he announced he’d changed his mind and would seek an electoral mandate for a GST at the next election.

Did he earn popular kudos for promising to run the plan past voters first? A bit, but not much: his personal ratings and party voting intentions immediately dropped. Claiming it wasn’t a broken promise didn’t wash.

The 1998 election vote outcome was not very different from that earlier “GST election” in 1993 — Labor won both — but this time the Coalition retained a comfortable majority of seats. When the GST started operating in July 2000 it was not without teething problems, but also not the cataclysm most voters had expected. (Read this tasty excerpt from an exchange between Labor’s Mark Latham and his party’s former pollster Rod Cameron on Lateline at the time.) At the next election the Kim Beazley–­led Labor opposition, rather than promising to unscramble that complex GST egg, offered something called “rollback” — a bit of tinkering around the edges. The Howard government was re-elected.

Since then the GST has sat securely in the policy infrastructure. Econocrats regularly urge a broadening and a lift in the rate (with compensation for people on low incomes) but that’s a no-go politically, something that each side of politics routinely forces the other to rule out.

How about the Gillard government’s “carbon tax”? Like the GST, it involved revenue gathered with one of the government’s hands and then returned through spending and direct tax cuts with the other — though, at around a fifth of the dollars, it was much smaller than the earlier tax. The “tax” was announced in March 2011, was immediately branded a broken promise (in reality it was a price rather than a tax, and not really a busted pledge), was legislated later that year and came into operation in July the next.

Folks with memories uncluttered by post-hoc projection will recall a stark difference between the sixteen months before its introduction — endless headlines, rallies, and fear and loathing of what this “big new tax” would do to people’s budgets and the economy — and the time after. With no new items on payslips, a few price rises and a bit of compensation, it largely subsided as a salient issue. In fact, polling for the unpopular Gillard government marginally improved. (Things turned south again the following year.)

Opposition leader Tony Abbott’s longstanding promise to repeal the carbon price got some mentions in the 2013 election campaign, but like all politicians he preferred to emphasise his opponents’ crimes rather than spell out his own plans. And when the Abbott government got rid of the price the next year, the enthusiasm in the electorate was underwhelming.

What is the point of these frolics down memory lane? Most importantly, to hammer home the big difference between the electorate’s fear of change before it happens, and the relative ease with which voters tend to adapt to the new reality.

Going even further back, most of the still-ballyhooed Hawke–Keating changes were sprung on voters midterm and — importantly, vitally — put in place well before the next appointment at the polling station. By then the bite had turned out to be infinitely less painful than the bark for the vast majority, and the opposition, having warned of Armageddon, had to decide whether to promise to repeal.

(In the 1980s and early 1990s the Coalition generally did put its money where its mouth was by promising to undo policies it had opposed. It remained in opposition until its successful 1996 campaign, at which “small target” entered our political lexicon.)

This week the Albanese government flagged a new twist on tax reform. Its superannuation changes are a small-ticket item, not remotely in the same league as the GST or the carbon price, and not even like opposition leader Bill Shorten’s franking credits; for one thing, the Coalition and News Corp will find it impossible to dig up lovable old codgers of meagre means who will affected by it.

But Anthony Albanese has broken a basic rule of the politics of reform: the changes, if legislated, won’t happen until after the next election. In that way, on a much smaller scale, it’s more like Howard’s GST, which nearly cost him the 1998 election.

A policy bedded down before voting day becomes part of the status quo, and if the opposition says they’ll undo it, it’s they who are proposing change. And that makes them susceptible to questions about how it will work, where the money will come from, whether the sums add up, and what the unforeseen consequences are.

Now it’s true that, all else being equal, if you’re taking a new policy to an election you’d rather be the government than the opposition. Governments are known quantities, and the risk factor doesn’t  attach so easily to their plans. But as Howard found in 1998, the policy itself, or imaginings of its repercussions, can still generate a great fear of the unknown.

Albanese evidently believes his strategy will enable him to claim he’s not breaking a promise — that there was always a subliminal “in the first term” asterisk when he talked about tax during the 2022 campaign. (From memory, this caveat was uttered during the campaign, but only once or twice. It’s a rather dangerous thing to say, because individual voters can’t be sure that if the new government proposes something obnoxious, other voters will deny them a second term.) So he’s running it past the electorate first. Yes, he’ll get a few points for holding off until after the election, but that won’t negate the “broken promise” charge.

I’m not saying first-term governments shouldn’t break campaign undertakings. Most of the time it’s inevitable.

Abbott’s prime ministership is the oft-cited cautionary tale about breaching trust in this way. But Abbott’s unpopularity had many causes, and the biggest problem with most of his 2014 budget nasties was that, thanks to the Senate, they never even became law, let alone begin operating. They just floated around, discussed ad nauseam, creating a greater and greater stench. He got the worst of both worlds.

Albanese is generating a similar interplanetary configuration. If the super changes were coming into effect this July or next, they would quickly more or less cease to be a topic of interest. As it is, he’s being seen as an election promise breaker but will go to the 2025 contest with no pay-off, no added authority from making us eat our greens.

Unlike Kevin Rudd and his rhetorically woeful treasurer Wayne Swan, the current government has not slouched in the important task of burying the legacy of its predecessor. Treasurer Jim Chalmers in particular never misses an opportunity to repeat the “trillion dollars in Coalition debt” line. The government even leads the opposition in surveyed perceptions of economic competence, something I don’t believe was ever achieved under Rudd (or Gillard).

(For various reasons Scott Morrison’s government is an inherently juicier punching bag than Howard’s.)

But if a first-term government is going to renege on a promise (as all of them, including — or especially — the successful ones, do) it should be done sooner rather than later, accompanied by heartfelt regret that its abominable predecessors, still fresh in voters’ minds, left no other option. And the new measure needs to be operating well before the next election.

It’s natural that a newish prime minister still enjoying sky-high ratings and an easy life with the media will be reluctant to rock the boat. But the good times will be over one day. As Kevin Rudd learned, a determination to postpone the inevitable can be fatal: the honeymoon has to end eventually, and when his ended in 2010 he had few difficult decisions to show for it.

True, this isn’t the GST, or anything like it. But if Albanese thought this week’s announcement would stop the hubbub then he already knows he was wrong. Sweet-talking journalists into describing something as a political masterstroke won’t make it one. One of them is already speculating that the government, having “found a way not to breach voters’ faith,” might attempt “an overhaul of negative gearing and capital gains tax” by the same method: legislation that doesn’t kick in until the next term.

Now that would make the next election very interesting indeed. We would truly be closer to GST territory.

Labor supporters should hope this tactic is a one-off. It is not a habit Albanese should get into. •

The post Not-so-super strategy appeared first on Inside Story.

To Sims, and many others around Australia, that’s how crucial the new tax debate is. It’s no longer just about whether Labor waves through Scott Morrison’s stage three tax cuts, amends them or abandons them. There is a much wider question, with much greater consequences for our country.

Governments can never satisfy us all. But from hospitals to defence, from childcare to aged care, from schools to fixing potholes, government services are falling way short of what Australians need and expect from their country. That shortfall helped Labor get into government. Now Labor’s there, what is it going to do about it?

Labor came to office as the flagbearer of many Australians’ hopes for a government that would end the chronic underfunding of education, health and welfare, not to mention the miserly $47.74 a day we give the unemployed to live on.

Some of those areas have now reached the point where things fall apart. GPs, tired of being cast as the poor cousins to specialists, are deserting country towns and suburban practices, and young doctors are not replacing them. Aged care homes and childcare centres are perpetually short-staffed because low pay and high workloads create constant turnover. Across the board, Australia is short of skilled workers because apprentice wages are so low that only half of them stay on to complete their training.

We could all add more examples. To me the most important is that Australia now finds itself in the most dangerous environment since the second world war, yet the Coalition kept defence spending to just 2 per cent of GDP (lower than in the 1960s when we faced no real threat) and settled on submarines that will be delivered between 2038 and 2050.

Faced with all these needs, Labor nonetheless went to the election with a platform of relatively modest, tightly targeted new spending, promising no new taxes and a big tax cut primarily for those in least need.

You can understand why. It wanted to be elected, so it played safe. And in 2025 it wants to be re-elected, so it doesn’t want to risk breaking any promises now. At least, not yet.

You see what Rod Sims meant? All those spending goals require more money, much more money. In the short term, the only way governments can get more money is by raising taxes, to reallocate spending from private purposes to public ones. What do we want Australia to be?

The looming budget is the government’s first test — and the timing is not good.

The fallout from Russia’s invasion of Ukraine (amid other factors) has lifted global food prices almost 50 per cent above pre-Covid levels, blown global energy prices to several times pre-Covid levels, provided cover for businesses everywhere to sneak their prices up — and could throw some big economies into recession.

The International Monetary Fund this week estimated that after decades of low price growth, global inflation has jumped to 8.75 per cent. Even with central banks slamming the brakes on hard (which the IMF applauds), it predicts global prices will rise 6.5 per cent next year before returning to something like normal in 2024.

Contrary to some commentary, the IMF is not forecasting a global recession; its half-yearly World Economic Outlook is towards the optimistic end of the spectrum. It predicts the global economy to grow by a relatively low 2.7 per cent next year, dragged down by global supply disruptions, a permanent slowing of China’s growth rate (to 4.4 per cent) and the fallout from the war in Ukraine.

It expects the United States to keep growing, albeit slowly (1 per cent); other forecasters expect much worse. The IMF envisages some big developing economies like India (6.1 per cent) and Indonesia (5.0) more or less hurdling the upheaval, while Brazil, Russia and Turkey now seem to be doing better (or in Russia’s case, less badly) than was forecast six months ago.

If there is a recession, it would be in the advanced economies — whose growth collectively is expected to slump to 1.1 per cent — and centred in Europe. Germany, Italy and Sweden are forecast to experience mild recessions: no upsurge in unemployment, just a year without growth.

On the IMF’s forecast, Australia will also be hit. It expects our growth to fall to 1.9 per cent next year and 1.8 per cent in 2024, and to stay low thereafter. Unemployment would gradually edge back towards 5 per cent, per capita growth would total just 4 per cent over five years. Governing Australia would not be fun.

These are only forecasts. But clearly the budget outlook is far worse than the one Josh Frydenberg unveiled in his budget in March. And even that projected a string of hefty deficits as far as the eye can see. At a time of record mineral prices and low unemployment, there is no good reason why Australia should have run up new debt of $32 billion in 2021–22.

A cardinal rule of budgeting is that, by and large, you pay for what you spend. If you don’t, you are leaving the bill for the new generation to pay. There are exceptions: you run deficits in bad times and cover them by running surpluses in good times. Infrastructure spending largely benefits the next generation, so it is fair to borrow to build. But at federal and state level — especially in Victoria and the ACT — governments have simply lacked the courage to make us pay for what they spend.

This combination of a grim global outlook, a grim state of the budget and a government still new to the job does make it likely Labor’s first budget will be, as treasurer Jim Chalmers keeps saying, responsible.

I assume he means that Labor will give priority to reducing the budget deficit. And that in working out the numbers, Treasury will err on the side of caution in guessing future energy prices, and hence company tax revenue. And that any new taxes and spending will implement the commitments Labor made in the campaign, and little else. And, of course, that Labor will go after the Coalition programs it has identified as rorts.

All that buys time. But circumstances are conspiring to force Labor to confront Rod Sims’s question: what does it want Australia to be? To deliver First World services, you need a First World revenue base. And for Australia, that means higher taxes.

Let’s take the long-term issue first. Australia is a low-tax country. At the government’s recent jobs summit, economist Ross Garnaut cited OECD figures showing that total federal, state and local government tax revenue as a share of GDP was 5.7 percentage points lower than the developed country average. That’s a shortfall of almost $140 billion a year.

The IMF’s data for total revenue reports a similar gap: governments in Australia raise 5 percentage points of GDP less revenue than the median advanced economy. In 2019 federal, state and local governments raised 34.6 per cent of GDP, well below 40.7 per cent in Canada (the country we most resemble), 46.5 per cent in Germany, and an average of 50.6 per cent in Scandinavia.

In part, that’s because retirement income in Australia is semi-privatised through superannuation, whereas retirees in almost all other Western countries, even the United States, rely on government-run retirement benefits funded by a separate social security tax on income. (The reason Australia appears to rely so much on income tax is that we have only one income tax. Most other Western countries have two, under separate names.)

But the OECD’s data show Australia also has the highest private spending on education of any OECD country, and the third-highest “voluntary” private spending on healthcare. Unemployment benefits are among the very lowest in the Western world.

Once, Labor ministers might have rebelled against this two-stream system in which the best services are reserved for those who can pay the fees demanded in the private sector. Now, as we saw when the Gillard government squibbed on the Gonski report’s school funding reforms, preference to private schools is one British tradition Labor still loyally supports.

In theory, Labor could use more desirable ways to meet the cost of bringing Australia’s services to the standards we expect. It could reduce spending on lesser priorities and reallocate the savings. Or it could take on the politically difficult economic reforms needed to speed up Australia’s sluggish rate of productivity growth.

In reality, speakers at the revenue summit agreed, the gap between today’s service levels and those we expect in aged care, the health system and so on is too vast to be filled by cutting services in other areas. Sims called it “self-evident” that savings from those cuts, while they could and should be made, are not on the scale needed to get us where we want to be.

For ten years until recently, Sims chaired the Australian Competition and Consumer Commission. The experience has made him sceptical of the potential for dramatically improving our productivity and hence growing a bigger economy. Rapid productivity growth, he said, requires increased competition — and the reality is that business is reducing competition, not increasing it.

“Our political debate always favours low taxation,” he said. “We have to point out that what comes with that is low expenditure. And we have to keep asking the question: is that what we want? If you want to spend extra money, you have to raise extra revenue. There’s just no avoiding that.”

He went on: “If you are against higher taxation, then you are against higher government expenditure… Many do not realise that in opposing taxation they are opposing extra spending on health, education and much else. I think we need higher taxation. I think it’s unavoidable.”

Why? Sims and other speakers at the summit gave several reasons:

1. Australians need better services

Annie Butler of the Nurses Federation cited the findings of the aged care royal commission: neglect and substandard care are widespread and systemic in aged care because the industry is underfunded by $10 billion a year. “Ridiculously low” wages lead to high staff turnover and hence shortages.

ACTU secretary Sally McManus argued that a lot of the crises Australia is experiencing in health and other services result from years of “chronic underfunding.” Economists predict that 30 per cent of all jobs created in the next decade will be in caring for others, but unless those jobs are better paid, workers will not stay in them. Our priorities have to change.

2. The transition to a low-carbon economy

The big economic reform facing Labor is going to be an expensive one: valuable in the long term but costly upfront. Business and government will need to invest tens of billions of dollars in building the solar and wind farms that will generate the power, the batteries that will store that power, and the transmission lines that will bring it from the inland to the cities. And if our coal stations are to close down by 2035, this money needs to be spent in the next decade or so to guarantee that we will still be able to turn on the lights.

The task is made even bigger and more crucial by the need to transition cars from oil to electricity and households and businesses from gas to electricity. Tim Washington, chair of the Electric Vehicle Council, told the summit that electric vehicles comprise, at best, 3 per cent of Australian car sales, compared with 15 per cent in other Western countries. With a global shortage of EVs likely to persist, he urged business and government to manufacture them here, using Australian designs, software, metals and lithium to create an entire value chain. He’s not likely to get that.

Fortunately, there is an ideal solution. Unfortunately, only the Greens, teal independents and economists support it. It is a carbon tax.

Sims confessed he found it baffling that so many Australians want action on climate change but instantly condemn the idea of a tax on carbon. Governments are going deeper into deficit to subsidise solar panels and electric vehicles, whereas the carbon tax would give the whole economy an incentive to decarbonise while raising taxes to fund the investments required.

“No such transition can be painless,” he said. “We need to decide whether we are serious about climate change. If we are, then it can be funded by a tax that will have the benefit of directly changing behaviour while insulating low income earners [through compensation].”

3. Get out of deficit and start paying down debt

Australia has less government debt than most Western countries, but only because the Hawke, Keating and Howard governments made fiscal responsibility a priority from 1985 until 2005. In both 2009 and 2021, as a resilient Australia emerged from the global financial crisis and Covid lockdowns respectively, our governments kept piling on stimulus as if money were no object. And the pollies’ fear of tax rises — much of it due to the vicious hostility of the Murdoch press towards anyone, especially anyone from Labor, brave enough to impose them — has kept us in deficit ever since.

Federal government revenue in this century peaked at 25.6 per cent in 2005–06, when it was 24.1 per cent of GDP. Since then spending has swollen to 26.8 per cent of GDP. Yet, far from keeping pace, revenue has fallen — because governments are frightened of raising taxes.

As ANU economist Ben Phillips put it, “We have plans for increased expenditure, but not for increased revenue. All we’ve got to increase revenue is bracket creep: it’s sneaky, but it works.”

(Bracket creep is the additional tax you pay when inflation pushes more of your nominal income into a higher tax bracket. The stage 3 tax cuts are often defended as simply handing back that extra tax. But only the high income earners will get their bracket creep back, and they get back more than they lost.)

Phillips estimates that Australia faces a revenue gap of $25 billion to $50 billion a year for the next decade. The summit heard lots of suggestions on how to close that gap: one that Labor has flagged for this budget, and others that we should be debating and putting to a new tax review.

Sims alone proposed five:

• Crack down on multinationals avoiding tax by non-commercial transfer pricing, including paying ridiculously high interest rates or “marketing fees” to a head office in a tax haven.

• Ensure Australians benefit when our mineral and energy resources are extracted. Norway takes almost 80 per cent of the revenue from its oil and gas fields, yet Australia allows companies to take those resources for virtually nothing. The petroleum resource rent tax, which is meant to do the job, desperately needs big repairs — and an extension to cover coal and iron ore.

• Introduce an excess profits tax, as the European Union has done recently. Australian Bureau of Statistics figures show that in the Coalition’s nine years in office, mining output rose by $195 billion but wages in the industry by just $5 billion. Net profits by the mining industry grew by $190 billion, yet taxes on mining shrank by $0.1 billion. If there is ever a time for a tax on excess profits, it is in Australia now.

• A carbon tax. (See above.)

• At state level: a comprehensive land tax covering all private property except farmland, to replace stamp duty on conveyancing. Economists generally see land tax as a most efficient tax. Sims called it a progressive tax, “based on assets that cannot be moved,” that produces a steady revenue flow.

• Road-user charges will be inevitable as electric vehicles replace petrol-driven cars. Their advantage is that they can be fine-tuned for vehicle type (trucks pay for the damage they do to roads) and time of day (peak-hour pricing).

Other speakers added at least another five:

• Prune tax breaks for superannuation.

• Prune or phase out negative gearing of property investments.

• Scrap fossil fuel subsidies, including the mining industry’s exemption from fuel excise.

• End concessional tax rates for family trusts.

• Increase the Medicare levy to pay for extra spending on aged care.

Sims emphasised that the reforms would need to be sold as a package, with compensation where appropriate, as the Hawke government did when it reformed tax in 1985. That package was preceded by a tax review by Treasury and a tax summit where a wide range of groups put their case.

Albanese has pledged no new taxes in this term apart from the ones Labor took to the election (primarily a crackdown on tax avoidance by multinationals — no votes lost by tackling that). But independent MPs Allegra Spender (Wentworth, NSW) and Zoe Daniel (Goldstein, Victoria) both urged a new tax review “with everything on the table” — with Spender adding “including the GST” and a hopeful plea: “We need to have grown-up conversations about tax.”

Well, good luck with that. I suspect most tax economists would agree that the GST rate should be raised, or its field widened, or both. New Zealand lifted its GST rate to 15 per cent back in 2010 without suffering any visible social collapse, and its GST is far more comprehensive than ours. That’s the main reason its government can spend more than ours.

The left needs to stop demonising the GST and think of tax reform as a package. You can introduce or increase or widen a GST fairly so long as you design the right package — as we saw in 1999 after the Australian Democrats stopped the Liberals using the GST to shift more of the tax burden onto lower and middle income earners.

But so long as we are unable to see any bipartisanship on tax, the GST will remain a no-go area. And bipartisanship is probably off the agenda as long as Peter Dutton is Liberal leader.

Where does that leave the stage 3 tax cuts? It looks like this movie has ended now, with treasurer Jim Chalmers apparently losing the fight despite his skilful attempts to persuade colleagues to revise, reduce or even scrap the cuts — which would be in line with his theme of protecting the budget in increasingly dangerous times and giving support only to those who really need it.

But good movies these days have a sequel, and these tax cuts won’t take effect until mid 2024. Given his impressive debut in the role, Chalmers has time to perfect it when he plans his next budget. He knows the case for either abolishing the cuts or reducing and retargeting them is very strong.

Stage 3 contains three elements:

• abolish the 37 per cent marginal tax rate on income earned between $120,000 and $180,000

• raise the threshold for the 45 per cent top rate from $180,000 to $200,000

• reduce the standard 32.5 per cent rate to 30 per cent — which would then be a flat tax rate for all income from $45,000 to $200,000.

Modelling by the Parliamentary Budget Office and by Ben Phillips found the first and the third are the expensive items. And the consensus at the summit seemed to be that if there is compromise, we should keep the third while scrapping the first.

A few points are important to note.

First, these tax cuts were proposed by treasurer Scott Morrison way back in 2018, six years before they would take effect. Since then, we have had a global Covid pandemic and the global inflation breakout. Committing to tax cuts six years before they took effect had no economic rationale. What drove it was politics. Morrison assumed the budget in 2024 could afford it. He was wrong.

Second, the cuts follow stage 1 (in 2018), directed to lower-middle income earners, and stage 2 (in 2020), focused on upper-middle incomes. Stage 1 was small, and has since been abolished by the Coalition itself. Stage 2 was bigger: it cut taxes for people earning less than $90,000 by $10 a year, and taxes for people earning over $120,000 by $1890 a year. The idea that high earners have been kept waiting while others have had tax cuts is quite untrue.

Stage 3 is seriously big money. The Parliamentary Budget Office last year estimated their cost at $18 billion in year one (2024–25), then more than doubling to $37 billion by year nine (2032–33). Treasury is now revisiting those numbers — and the cost will almost certainly be even higher now.

But even on the PBO’s 2021 estimate, that would reduce total government revenue by 3.5 per cent initially, and by more than 4 per cent by the start of the 2030s. That is a huge cut in revenue at a time when the budget is unable to cope with Australia’s existing spending needs, let alone the new ones coming over the horizon from the ageing of our population, China’s attempt to assert hegemony over the region, the excesses of the NDIS, and so on. We need tax rises, not tax cuts.

Third, the PBO estimates that 78 per cent of those billions of dollars would go to the richest 20 per cent of Australians. That’s largely because they pay 68 per cent of all income tax — but that in turn is because they get such a high share of the nation’s income. They would rank low on a list of those in need.

That said, it seems fair to say that the threshold of $180,000 for Australia’s top tax is too low. If Chalmers and his colleagues want to compromise, one option they might consider is to reduce the 37 per cent rate to 35 per cent with the same thresholds as now — but add a new 40 per cent rate for income from $180,000 to $200,000, and a timetable to raise that threshold to $250,000. Over time, that would save the budget a lot of money, without taking everything from those who would gain from the plan Labor promised them. •

The post Time to talk about tax appeared first on Inside Story.

It was a success according to its intentions. But that won’t take us very far. Its directors managed to evade almost completely an issue that is crucial to how Australia is to tackle the many, deep social problems spelt out by speakers on the floor of the Great Hall of Parliament House. I’ll come to that shortly.

The summit was intended to show Australians that our political climate has changed with the new government — and it did. The participants, speakers and moderators were mostly female. There was an abundant sprinkling of young faces, of non-white faces, of foreign accents. It looked and sounded like Australia.

The vibe was overwhelmingly positive. Political differences were set aside (except by the absent Peter Dutton). Everyone was given a chance to speak at some point, and most were worth listening to. Their contributions were mainly constructive.

The PM was his avuncular self, the friendly, trustworthy Uncle Albo, heir to the good Labor leaders of long ago. He urged the summit: “We have not gathered here to dig deeper trenches on the same old battlefield… Australians have conflict fatigue. They want politics to operate differently.” The contrast between his positivity and Dutton’s sniping showed why Australians, according to Newspoll, prefer him by a 61–22 margin.

This summit was a stage production. The cast spoke when they were meant to, and not otherwise. I didn’t see any debate on day one, though ANU vice-chancellor Brian Schmidt started some when he took the chair on day two. Mostly, if anyone wanted to disagree with what was being said, tough luck: they had no opportunity to do so. The “consensus” Anthony Albanese praised was more staged than real.

The summit was intended to produce a set of policy outcomes — and in a sense, it did. Soon after it ended, the government published a fourteen-page document listing what Treasurer Jim Chalmers described as thirty-six “concrete steps [it] intends to take… as an outcome of this… summit” plus a similar number of priorities for future discussion. Everyone got something to take back to their constituencies.

Seeing the speed with which the document appeared at the end of the summit, a cynic might wonder if, rather than responding to what it heard on the floor, the government took these decisions well before the summit, but held back the announcements to make it look like they came from the floor.

The summit was intended to highlight the importance — economic, social and political — of getting more women into work, into decision-making and into higher-level roles in the economy. And it did. Its three main policy themes were: how to fix the skills shortages in Australia’s workforce; how to change wage-fixing rules so that workers get a bigger share of the cake; and how to lift participation in the workforce. In the presentations, women’s work was central to all three.

Grattan Institute chief executive Danielle Wood sounded the bell in her opening keynote speech. Australia has one of the most gender-segregated workforces in the OECD, she noted, and market realities are now in sync with fairness in dictating that we tackle the underpayment of female-dominated caring occupations.

She cited an example: childcare workers are paid as little as $22 an hour, less than they could earn washing dishes at McDonald’s. No wonder we are perpetually short of them. Every year, Australia needs more than 33,000 more aged care workers, but they are grossly underpaid and overworked, so a huge turnover means a constant search for workers.

We can’t put off this issue anymore, and Labor’s leaders clearly recognise that. Treasury’s paper for the summit estimated that a quarter of Australia’s gender pay gap comes from low pay in the female-dominated caring and education professions. The Fair Work Commission is now hearing a case in which unions are seeking a 25 per cent pay rise for aged care workers. The government has promised to pick up the tab. That is where the action is.

But the obvious stage management of the summit should not obscure its genuine achievement. For two days, leaders of business, unions, community groups and federal, state and territory governments focused on contributing their knowledge, identifying the problems, finding common ground and scoping out solutions. They didn’t solve Australia’s problems, but they made progress on some fronts, and established good working relationships for future dialogue.

Yet the progress they made was marginal to the key issues facing Australia. Getting consensus meant the organisers could not allow the conference to tackle issues where consensus was impossible. Danielle Wood and fellow economist Ross Garnaut, the dinner speaker, certainly touched on some of them, but they were not targeted in any session.

One of them is crucial to almost every issue the summit addressed. It is tax.

The federal government is running deficits of $75 billion or more a year. While claimants were putting urgent cases to the summit for more spending in this area and that, Labor still insists on delivering an already-legislated tax cut, mainly for the rich, that will reduce tax revenues by 3 to 4 per cent. Where is it going to find the money to solve the problems the summit presented to it?

Garnaut pointed to the elephant in the room. “We have to stop kidding ourselves about the budget,” he said. “We have large deficits when our high terms of trade should be driving surpluses. Interest rates are rising on the eye-watering Commonwealth debt.

“We talk about the most difficult geo-strategic environment since the 1940s requiring much higher defence expenditure, but not about higher taxes to pay for it. We say we are underproviding for care and underpaying nurses, and underproviding for education and failing to adequately reward our teachers…

“[Yet] in the face of these immense budget challenges, total federal and state taxation revenue as a share of GDP is 5.7 percentage points lower than the developed country average.”

To put it another way, our governments every year raise roughly $120 billion less than they would if our tax rates were at the Western average. With that money, we could tackle every issue raised at the summit. The government, if it chose, could finance 25 per cent pay rises for aged care and childcare workers, raise the dole to $70 a day, restore the funding the Liberals took from universities, invest in research and new technology, pay the states 50 per cent of hospital costs, give state schools their fair share of funding, etc., etc. — and close the deficit.

There are many good ways to raise revenue. Australia has an abundance of tax loopholes allowing companies and individuals to avoid tax: negative gearing is a classic example, but as the International Monetary Fund once suggested, Australia could apply the same principle to business, and stop firms deducting interest bills from their tax.

In the June quarter, the Australian Bureau of Statistics tells us, the total wage bill for Australia’s millions of corporate employees was $164 billion, while its mining companies made a gross operating profit of $81 billion. In just three months! If any country ever had cause to levy a tax on super profits it is Australia, now. Jim Chalmers needs to make this a centrepiece of his October budget.

But no one in the sessions I heard mentioned tax in their speeches. Like all those who argue for more spending on worthy causes, they urged more spending without a word on how the government should find the money to pay for it. Tax is the issue we don’t talk about. The summit would have had more cutting edge if some delegates had dared do so.

There’s been little argument over the summit “outcomes” because they are mostly agreements on principles, aspirations, processes or short-term supports to be applied while longer-term outcomes are negotiated.

They are modest: first steps, not solutions. Maybe they needed to be to get tripartite agreement between government, business and unions. And having tripartite agreement on sensible first steps in the right direction gives the government more freedom to plan bolder steps to solve the problems.

One of the summit’s big moves to tackle the skills shortage, for example, was to increase the permanent migration target for 2022–23 from 160,000 a year to 195,000. Almost all that increase will comprise skilled workers and their families, mostly sponsored by state governments (who are primarily chasing health workers) and employers in the regions.

No one objected to that. Nor should they, because if the target follows current patterns, it will make little difference. In recent years, two-thirds of permanent residence places were awarded to migrants already in Australia, working or studying on temporary visas.

And while the government would like to bring in new migrants to help reduce our skills shortage, particularly in hospitals and aged care, it has an even more urgent priority: tackling the scandalous backlog of unprocessed visa applications piled up by the Department of Home Affairs under the Morrison government.

Immigration minister Andrew Giles told the summit Labor inherited a backlog from the Coalition of almost a million unprocessed visa applications. It was an unbelievable number, including applications from all types of people: separated partners, skilled workers, overseas students, business. Brian Schmidt recalled the department taking twenty-one months to process the ANU’s applications to bring in some Indian academics — for three-year appointments.

Giles said the government has now swung an extra 180 staff onto clearing the visa backlog, and has so far reduced it by 100,000. One of the thirty-six “outcomes” was that it will now spend an extra $36 million to lift visa staff by 500 people for the rest of this financial year.

But the waiting list includes a staggering 330,000 people who are already in Australia on bridging visas until their applications are processed. It’s fair to assume that many, maybe most, of them are applying for permanent visas. Given the scale of this backlog, an increase of only 35,000 in the migration target seems extraordinarily timid. Labor will have to revisit that, and soon.

The big “outcome” for the young unemployed and school leavers was the agreement by the prime minister and premiers to pump $1 billion into TAFE in 2023 to provide 180,000 extra fee-free places while they negotiate a longer-term agreement to reform the sector. Again, you applaud the direction — and in this case, the boldness and the federal–state cooperation — but it’s only a short-term solution.

Another “outcome” was Albanese’s announcement that, as an inducement for older workers to keep working, or retirees to return to work, pensioners will be allowed to earn an extra $4000 — just for this financial year — without losing any of their pension.

Good, but I think the PM is safe from being knocked down by a stampede. For a few months, it might induce some pensioners to put in a few hours a week at some nearby workplace. But why make it so small? Why end it on 30 June? It’s almost as if it was designed to avoid having any substantial impact. It’s tokenism, when big gains are possible from a comprehensive policy to extend working lives for those who want to keep going.

Chalmers and finance minister Katy Gallagher routinely fob off questions about spending proposals such as raising the Jobseeker allowance by declaring sympathetically, “There are lots of good ideas out there, and I wish we could fund them all. But we have inherited a trillion dollars of Liberal debt…”

Someone must call that out. First, Table 9.2 of the 2022–23 budget papers implies that Labor inherited $979 billion of gross debt from the Liberals — but $303 billion of that was inherited in 2013 by the Liberals from Labor (who in turn inherited $64 billion in 2007 from the Liberals, and so on). It’s Liberal and Labor debt. It’s Australia’s debt.

Second, gross debt looks at just one side of the balance sheet — which is why we focus on net debt. Table 9.2 estimates Labor inherited $631.5 billion of net debt from the Liberals, who in turn inherited $161.6 billion of net debt from Labor back in 2013. It’s a cheap, false political point.

But on the first part of its routine line, Labor is right: there are a lot of good ideas out there, and the government can’t fund them all. Its job is to sift through them and set the priorities. And if it picks a bad priority, such as backing the Liberals’ stage three tax cuts, it sticks out like a sore thumb.

These cuts were Morrison at his worst. They do not take effect until mid 2024, yet became law in 2019 — with Labor’s support, because it was frightened of being depicted as a high-tax party. This is the legislation that will give tax cuts of almost $175 a week to someone earning $200,000 a year, and $2 a week to someone earning $50,000.

The Parliamentary Budget Office estimates the cuts will deprive the government of $243.5 billion of revenue — 3 to 4 per cent of budget revenue — over their first nine years alone. The PBO says 78 per cent of that will go to the richest 20 per cent of households: by definition, those who need it least. And that, at a time when the budget is perpetually in deficit, and the government assailed on all fronts for spending too little.

The summit’s speeches ranged far and wide. Many speakers gave interesting accounts of what they were doing, or their experiences dealing with the systems now in place. Highlights are on YouTube, and the entire summit can be seen on Parliament’s video stream.

Transcripts regrettably are not available, except on ministerial websites and those of some speakers. I recommend Danielle Wood’s challenging and probing overview of Australia’s economic potential, which castigated business leaders for their risk-averse “economic funk,” and called for Australia to adopt “full employment as our lodestar” and remember that, if we want to raise living standards, in the long run, “productivity is almost everything.”

Peter Davidson, principal advisor to the Australian Council of Social Service, also made a lot of challenging points in urging Labor to reform the employment services system. “The system [has] not been working for a long time,” he said. “Jobactive was more of an unemployment payment compliance system than an employment service. It sent people out into the labour market and when they didn’t find jobs, told them to search harder. People were literally told: ‘It’s not our role to find you a job.’”

Ross Garnaut’s dinner speech recounted the reasons for Australia’s success in the postwar era, and the challenges reformers faced then — and in the Hawke-Keating era — and now. “I grew up in a Menzies world of full employment,” he recalled. “Workers could leave jobs that didn’t suit them and quickly find others. Employers put large amounts of effort into training and retaining workers. Labour income was secure and could support a loan to buy a house. Steadily rising real wages encouraged economisation on labour, which lifted productivity.”

In the postwar era, and in the 1980s, Garnaut said, “success was based on using economic analysis and information to develop policies in the public interest; on seeing equitable distribution of the benefits of growth as a central objective; and on sharing knowledge through the community about economic policy choices. This built support for policies that challenged old prejudices and vested interests.

“Personal and corporate taxation rates were much higher than before the war. Full employment and a wider social safety net supported structural change and much larger and more diverse immigration… Menzies’s political success was built on full employment — helped by Menzies insulating policy from the influence of political donations to an extent that is shocking today.”

Garnaut ended by exhorting Albanese and Chalmers to follow the path of Hawke and Keating, strong politicians who took big risks to bring in reforms when they were clearly needed. “We have to raise much more revenue while increasing labour force participation and investment,” he said, urging two radical reforms he advocated last year in his book Reset: a guaranteed income scheme, and a shift to cash flow taxation of business.

But Albo is not Hawke and Chalmers is not Keating. Like the business leaders who have dragged down Australia’s business investment to the lowest share of GDP ever recorded, they are risk-averse. Their priority is to retain power, and they see the way to do that is by giving people what they want, not trying to persuade them that tackling tough reforms is in the national interest.

It is possible, though, even likely, that they will end up having no choice. The crisis in aged care, in hospitals, in GP practices, in childcare and in teaching will force an end to governments’ model of saving money by underpaying those who work for you (or whose wages you pay indirectly). Australia’s system of doing government on the cheap has been tried, and failed. We are going to have to learn from how the rest of the West does it, and that means raising taxes.

Many have noted that the Hawke government, like this one, began its term by staging an economic summit, which brought business and union leaders to Old Parliament House with the similar aim of “bringing Australia together” to tackle its economic problems. But we should also recall that its follow-up two years later was to invite a similar cast for a tax summit.

That is what Albanese and his team should start planning for. We cannot solve our problems without an honest national dialogue on the need for higher taxes, and where we should be looking for increased revenue. It could be combined with the announcement of a super profits tax on mining companies and the big banks. Reform needs to start now. •

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One of those ideas, raised most recently by the never-boring economist Steven Hamilton and the sometimes-boring OECD, is that we should cut income tax and fill the gap with a broader and higher GST. The GST is currently set at 10 per cent — lower than most advanced economies — and excludes things like fresh food, education and healthcare.

Dr Hamilton argued that Dominic Perrottet should use his newfound position as NSW premier to take the lead on this reform. The OECD made a similar recommendation in its latest economic survey of Australia. The proposal has popped up many times before that.

It’s a popular idea, but is it right? Sadly, reducing income taxes and filling the gap with a larger and broader GST would do next to nothing for the economy. It would involve a lot of churn for little gain. It might even send us backwards.

There are several reasons for this. First, the GST is about as close as you can get to a flat rate tax on wages. Because lower earners spend a larger share of their income on consumption, they lose a much greater proportion of their income to the GST. The higher the GST, the more regressive its effects, which is the opposite of what we expect from Australia’s income tax system.

Reducing the progressive income tax and increasing the regressive GST means poorer people would need to be compensated through the welfare system. But so will those who don’t receive government payments, such as self-funded retirees. People who spend a lot on healthcare, fresh food or education — all of which would be covered by a broadened GST — will call for, and no doubt receive, extra compensation. The argument that we could get away with compensating pensioners and welfare recipients based solely on the consumer price index doesn’t gel with the political reality.

The result would be a big increase in government spending. And this means that replacing revenue raised through income tax with a higher and broader GST is not a one-for-one trade-off. Every $1 we don’t raise from income tax will require an additional $1 raised via the GST, plus additional revenue to pay for this new compensation to households.

Broad-based consumption taxes (like a broadened GST) are good in theory because they are less likely to distort people’s decisions. If the government taxes apples but not bananas, people buy fewer apples and more bananas. The tax distorts consumer behaviour and doesn’t raise as much money as first thought because consumers switch away from the taxed good. But if you tax apples and bananas (and every other good and service) then people can’t switch away from the tax and thus the government raises more money without distorting the economy.

The problem is that these benefits from an expanded GST would likely be modest, and even those modest benefits would probably be offset by the increase in government spending needed to make the reform politically palatable.

The other claim is that raising the GST is a good way to stimulate investment. By taxing consumption instead of savings, the argument goes, we get more savings and thus more investment. But this argument falls flat in an open economy like Australia’s, where the link between domestic savings and domestic investment is weaker because we can (and usually do) borrow the shortfall from overseas.

Nor do we lack savings. In fact, our savings rate has gone through the roof during Covid-19. Corporate profits, share buybacks and dividend payments are all at elevated levels. Businesses and households are sitting on mountains of cash and could easily get more given historically low interest rates. Trying to boost investment by throwing even more savings at the economy is like giving a glass of water to a drowning person. There’s no evidence to suggest that our anaemic rate of investment reflects insufficient savings.

It’s also misleading to think that the GST is harder to avoid than income tax. Australia already has one of the world’s most comprehensive systems for withholding income tax — that’s why almost everyone’s pay packet has the tax already deducted — which forces taxpayers to justify any reduction in the amount they pay. Put simply, raising the GST won’t suddenly make tradies declare income for cash-in-hand services.

Collecting GST on imported services is also a problem. Given these are increasingly important in the global economy, a heavier reliance on the GST would mean a growing amount of lost government revenue.

To be sure, those calling for a greater reliance on the GST are correct when they say we should be doing more to remove investment tax barriers and improve the fairness and efficiency of savings taxation. But plenty more direct options exist. Lower and broader taxes on savings as part of a Scandinavian-style dual-income tax (where business income is split between labour income — taxed at progressive marginal rates — and capital outcome — taxed at a lower rate) would improve fiscal sustainability, economic resilience and fairness. A corporate equity deduction (where businesses can deduct the imputed cost of using their equity for investment) would help drive domestic investment.

And it is absolutely right to be focusing on the tax system. Covid-19 has devastated federal and state government budgets. The ANU’s Tristram Sainsbury and Bob Breunig have shown that government won’t return to a sound structural budget position simply by relying on “natural” revenue growth from current tax sources. Comprehensive tax reform will be needed to repair the budget and better align incentives to invest, save and work. Switching one tax for another will achieve neither of these things, and result in nothing more than pointless, and potentially costly, churn.

The NSW premier is already driving a push to replace stamp duty on housing with land tax, certainly the most difficult and substantial tax reform since the GST was introduced more than twenty years ago. Right now, this should be the main feature. Let’s leave zombie ideas for the late-night reruns. •

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Or perhaps even less. Despite exuding “a bluff, hearty status quo solidity,” as the Weekly’s Lorraine Hickman wrote, Syd had been increasingly worried about his health. If he were to die, he feared that death duties would eventually leave his wife Olga uncomfortably short of funds. In fact, he calculated, 50 per cent of their assets would go to the state and federal governments.

Whether or not he got the figure right, his arithmetic led him to create an anti-tax campaign that would have a spectacular real-world impact. Within just over a decade, every Australian government, state and federal, had abolished death duties, making Australia one of just two Western countries that no longer taxed bequests or inheritances.

Negus’s success attracted the attention of Willard H. Pedrick, a professor of law at Arizona State University. With a research grant from the privately funded Lincoln Institute he came to Australia in 1980 to interview Negus and visit the state capitals to find out how and why Australia had gone it alone. He published his findings in the Western Australian Law Review under the unlawyerly title, “Oh, to Die Down Under!”

As Pedrick described it, Negus’s campaign started small. He began by placing ads in local papers arguing that “bereaved and bewildered widows” were being “robbed of their just rights” by estate taxes, and inviting readers to sign a petition and donate to his campaign. The results, according to Pedrick, were “simply astounding.” Thousands of people signed the petition forms in the ads and posted them to Negus, many of them adding a small cash contribution. “The Negus mail,” Pedrick wrote, “became a flood.”

“We started off with our own phone and a few volunteers,” Negus told the Women’s Weekly. “Then we had to employ two full-time shorthand typists and two juniors, helped by about forty volunteers… We turned the sleep-out into our post office, ended up having to get three telephones and four extensions, and made the sunroom into an office. And I overflowed into the dining room.”

First in Perth, then further afield, Negus began addressing public meetings and appearing on radio and TV, displaying the “unflagging self-confidence, an almost abrasive assertiveness and the ability to talk quickly, constantly and at great length” that an Adelaide Advertiser journalist remarked on the following year. After he turned up uninvited to a meeting of the state’s farming organisation, he recalled, the meeting voted to donate $1000 to his campaign.

The opportunity to go national came with a Senate half-election scheduled for November 1970. Negus professed to be pessimistic about his chances of becoming Western Australia’s first-ever independent senator — “I was doing a lot of praying” — and told Ferrell he wasn’t able to outlay anything like what the major parties spent on campaign materials. Nor did he have much on-the-ground help on polling day: “I don’t suppose — when the time for the election came up — there would’ve been twelve polling booths throughout the West with people on it handing out how-to-vote cards for me.”

Across the continent, though, the Bulletin’s Donald Horne thought “the poujadist from the west… will probably surprise us (and himself) by this week being elected one of Western Australia’s senators.” Horne was right: Negus beat the third candidate on Labor’s Senate ticket by 4000 votes and headed off to Canberra.

But it turned out to be a frustrating few years for the surprised senator. He made virtually no headway with his campaign during the dying days of William McMahon’s Liberal government. Then, after Gough Whitlam became prime minister in 1972, he tried unsuccessfully to amend the Estate Duty Assessment Act in various ways, and then suggested the federal government subsidise the abolition of state probate duties. The latter proposal was supported by the Asprey inquiry into taxation, which reported in 1975, but wasn’t taken up by the Whitlam government or its successors.

It was Negus’s focus on the impact of the taxes on widows that eventually struck a chord. “With the Women’s Electoral Lobby adding their voice to the view that death duties were discriminatory to women,” wrote Ferrell, “Whitlam responded to the mounting pressure by promising that if Labor was re-elected, no widow or widower would be forced to sell the family home to meet death duties.”

Negus might have been surprised by WEL’s support. “Personally, I’m sorry to see these ladies talking about equality,” he told the Weekly. What did worry him was that women weren’t aware of the tax implications of their homes and other assets being held in their husband’s name, which was often the case.

Still, Whitlam’s promise was progress. Not only that: Negus had achieved one very important thing before his Senate career was cut short by the 1974 election. He had turned inheritance taxes into a national issue. And the apparent popularity of his bid to abolish death duties hadn’t gone unnoticed in at least one premier’s office.

The premier in question was that shrewd rural populist Joh Bjelke-Petersen, part way through his nineteen years at the helm in Queensland. Egged on by a series of articles in the Courier-Mail highlighting inequities in the estate duties levied by his own government, he announced in 1975 that spouses’ inheritances would no longer be taxed. Then, two years later, he declared the taxes’ complete abolition (much to the surprise, it emerged, of the state treasurer). It was a popular move in a state Pedrick described as a “hotbed of agrarian resentment.”

In the hope of attracting new residents and new spending, Bjelke-Petersen’s ministers — enthusiastically supported by the state’s tourism authority and business groups — set about promoting Queensland as a tax haven for retirees from the south. “Millions Could Flow North,” said the Bulletin’s headline. “Many observers,” Pedrick found three years later, “thought the abolition of death duties in Queensland was in fact a significant factor in a movement of capital to the Gold Coast state.”

Agrarian hotbed: Queensland premier Sir Joh Bjelke-Petersen. Lakeview Images/Alamy

Were they right? Another American, economist Philip Grossman, painstakingly analysed the data during a visiting fellowship in Australia in 1989. Complicating his task were two other events that might have boosted Queensland’s population at around that time: the Whitlam government’s 25 per cent tariff cut in 1973, which sent some unemployed manufacturing workers northward from Victoria and South Australia, and the destruction wrought in December 1974 by Cyclone Tracy, which drove some people out of the Northern Territory.

Undeterred, Grossman took interstate migration figures compiled by Adelaide University geographer Graeme Hugo, ran them through an eye-glazingly complicated formula he explained at length in the journal Publius, and came to a clear conclusion: “Queensland’s population growth during the first three years after abolishing death duties was an average 0.20 per cent higher due to migrants avoiding the death duties of the other five states. On average, population growth in each of these states was 0.04 per cent lower as a result of the tax.”

Not earth-shattering perhaps, but perceptions were as important as facts. Worried that an exodus might be underway and anxious to head off tax-dominated elections, New South Wales, Victoria and South Australia abolished taxes on estates left to a spouse. Western Australia and Tasmania followed in 1977, and the federal government dumped its inheritance tax altogether in 1979. Estates passing to children continued to attract duties in those five states until 1980 (in South Australia and Western Australia), 1981 (in Victoria and New South Wales) and 1982 (in Tasmania).

And so Australia joined a very select group of Western countries — Canada was the only other member — that spared estates from taxation. New Zealand soon joined up, then Sweden, Austria and Norway. But every other comparable country — including Britain, France, Germany and even the United States — retained inheritance taxes, and still levies them (though often with very generous exemptions).

But Syd Negus shouldn’t take all the credit, or the blame, for setting in motion the abolition of Australia’s estate taxes.

As Willard Pedrick discovered, the taxes’ “monumental defects” made them ripe for attack. Unusually, they were levied separately by both state and federal governments (the former raising about twice as much between them as the latter). The state taxes were tougher, in some cases cutting in on estates worth as little as $20,000 (about $130,000 in today’s dollars), which could mean a family home had to be sold to raise the necessary funds. Farmers and other small businesses with income-generating assets faced a particular problem finding the cash to pay the duties — which created another highly receptive constituency for efforts at abolition.

The taxes also had another big flaw: they could relatively easily be avoided by people with access to the right expertise. As a result, they fell more heavily on the middle-income households who came within their scope than on more well-heeled households.

Among the justifications for abolishing the taxes was the belief that wealth was distributed more equally in Australia than in other countries, making inheritance taxes unnecessary here. “There is a kind of folklore to the effect that the Australian society, if not egalitarian, is at least more egalitarian than other industrialised countries,” Pedrick wrote. “The myth is attractive,” he added, “but it does not conform to the facts.”

If the myth was off the mark in 1980, it’s unmistakably ill-founded in 2021. In a recent report, Inheritance Taxation in OECD Countries, the OECD pointed out that the wealthiest 10 per cent of Australian households own 46 per cent of the country’s wealth — scarcely an egalitarian paradise. And, as John Quiggin showed recently in Inside Story — and the OECD report confirms — that concentration of wealth will inevitably worsen.

The growing evidence that inequality this great is not just socially and politically damaging but also economically harmful has fuelled proposals to toughen up inheritance taxes, at least in countries that do have them. The latest expert support came in the OECD report, which argued that inheritance taxes could play a “particularly important role” following increases in inequality and falls in tax revenue fuelled by the pandemic. As the report shows, other countries have tended to react to complaints about inheritance taxes over the past half-century by limiting their reach rather than abolishing them altogether.

Here in Australia, support for a well-designed inheritance tax dates back decades. As far back as the mid 1970s, in the midst of Negus’s campaign, a Senate committee backed state-level estate and gift duties, Treasury was arguing that estate duties were “important and basic in the system,” and the Asprey committee concluded they played “a quite essential role” in the tax structure as a whole.

Thirty-five years later, the final report of the Future Tax System Review (better known as the Henry review) concluded that “a tax on bequests would fit well with Australia’s demographic circumstances over the coming decades.” During the next twenty years, it went on, “the proportion of all household wealth held by older Australians is projected to increase substantially. Large asset accumulations will be passed on to a relatively small number of recipients.”

Those recipients aren’t only relatively few; they are also relatively old and relatively rich, according to an analysis of detailed probate data from Victoria released in 2019 by the Grattan Institute. “On current trends,” the institute’s Danielle Wood and Kate Griffiths write, “much of accumulated wealth in the hands of Baby Boomers will be handed down to the wealthiest Generation Xers, significantly exacerbating wealth inequality, and inequality of opportunity. Inheritances reinforce the advantages of having rich parents, such as better schooling, connections, and a greater ability to take risks because of a parental safety net.”

Inheritance tax rates, thresholds and exemptions vary enormously across the OECD. Intergenerational transfers of more than US$11 million are taxed in the United States, for example, whereas the threshold in Belgium is just US$17,000. “Most countries have progressive tax rates,” says the OECD, “but around one third apply flat tax rates, and tax rates differ widely.” Gift taxes are generally used to reduce pre-death tax avoidance.

An Australian inheritance tax would need to be not only as straightforward and hard to avoid as possible — the Henry report covered these issues in some detail — but also politically viable. (Labor’s complex franked dividend proposal in 2019 was an object lesson in how not to sell a tax change.) The recipient rather than the estate should be taxed, says the OECD, and the Grattan Institute argues that the funds raised should be directed — and be seen to be directed — to low- and middle-income households. Spouses would be exempt from the tax.

As the campaign for its abolition shows, an inheritance tax should aim to moderate Australia’s growing concentration of wealth by targeting the largest bequests. It would be set at a rate high enough to moderate the growth in inequality but low enough to undercut the inevitable opposition from people whose wealth gives them undue political influence.

Syd Negus’s campaign back in the early 1970s targeted an unfair and badly designed system of inheritance taxes. With the Australian Bureau of Statistics reporting that wealth inequality worsened by nearly 5 per cent between 2005–06 and 2017–18, the time is right for a well-designed inheritance tax system. •

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The most glaring example is the lack of systematic action on climate change. Australia drags the chain on emissions reduction and continues to punt on energy-intensive exports with a dwindling customer base. A price on carbon wouldn’t have solved all our climate challenges, but it would have left us better placed than we are now.

The failure to rein in house prices is another case in point. The tax system has helped turn housing into a speculative asset, pushing funds into property rather than productive sectors of the economy, driving household debt to spectacular levels, and ramping up inequality. Again, reforming the tax treatment of residential property would hardly solve all our housing woes, but it would ameliorate some of the real estate boom’s worst effects.

In a new essay in Monash University Publishing’s “In the National Interest” series, Wayne Errington and Peter van Onselen argue that carbon pricing and property tax reform have become “pariah policies.” Despite evidence that they would have a net positive impact on Australian society, these measures have become untouchable. Events bolster their case: as we gear up for a federal election, Labor has walked away from its modest reforms to negative gearing and capital gains, and the phrases “carbon price” and “emissions trading” are banned from its political lexicon.

But, Errington and van Onselen argue, weak opposition means poor government: “The progressive side of the two-party divide is too inept to apply pressure to the conservative side, meaning conservatives stay in government without lifting their game.”

The title of their short book is Who Dares Loses. If this bleak declaration is true, then ambitious policy proposals are a recipe for electoral defeat, which appears to be the conclusion Labor has drawn from its loss in 2019. The flip side is that winners aren’t reformers. Having achieved office, governments avoid risking political capital to change society for the better.

Errington and van Onselen set out to “selectively challenge the conventional wisdom” by arguing the case for several “pariah policies,” including a universal basic income, the reintroduction of estate duties, a tax on the family home, a price on carbon, a levy on sugar, and the commercialisation of the ABC. Some of their arguments are convincing, others less so.

The case for a levy on sugar is strong. It would induce manufacturers to produce healthier food and encourage consumers to eat it, reducing the burden of diseases like diabetes and raising extra health dollars to boot. The idea that education campaigns and better labelling can drive this much-needed behavioural change was debunked long ago.

By contrast, the case for putting ads on the ABC is thin. Bizarrely, the authors propose this as a way of countering the decline of quality journalism in Australia. Their argument runs as follows: having lost valuable revenue streams like classified ads, commercial media have cut their newsrooms to the bone; as a result, subsidies for investigative reporting and quality debate must now “reach beyond the current public broadcasters.” So far so good — the case for funding more public interest journalism is strong. But their conclusion — that the ABC, like SBS, “will have to generate more of its own revenue” — is a non sequitur.

Are budget constraints so great that we can only increase funding in one area by reducing it in another? Believing that would be inconsistent with Errington and van Onselen’s support for a universal basic income, at an estimated $125 billion annual cost they claim “isn’t quite as eye-watering” as it may have seemed before JobKeeper.

In order to get more of the public interest journalism and investigative reporting that the ABC still does well, they want to make the ABC more like the commercial media. With the ABC competing for ads, they say, the other networks “would have a market incentive to lift their standard of news coverage, in a bid to steal ABC viewers and their lucrative advertisers.”

The reverse scenario is far more likely — the ABC would move downmarket as it sought to peel advertising dollars away from its (more) commercial rivals. And if it succeeded, the government would quickly cut public funding accordingly.

The “pariah policies” in Who Dares Loses overlap significantly with the reforms identified by the former chief executive of Grattan Institute, John Daley, in his recent report, Gridlock. Daley identifies carbon pricing, the tax treatment of housing, and sugar taxes as areas where government action has stalled. (He doesn’t mention commercialising the ABC.) Other initiatives consigned to the too-hard basket include congestion charging on roads, raising the pension age, introducing an effective mining resource rent tax, broadening (or increasing) the GST and lifting unemployment benefits.

Gridlock sets out to answer three questions. To the first — are twenty-first-century governments more reform-averse than their predecessors? — Daley’s answer is an emphatic yes. The 1980s and 1990s under Bob Hawke, Paul Keating and, initially at least, John Howard were “golden years” for reform. We might argue about the relative merits of measures like floating the dollar, cutting tariffs, deregulating the banks, introducing compulsory superannuation, imposing the GST, and privatising Telstra, Qantas and the Commonwealth Bank, but it is hard to dispute Daley’s contention that recent governments have been far less ambitious.

Daley’s second, more difficult, question is why are contemporary governments so timid? He identifies three obstacles that seem to be stopping governments from tackling major reforms: the lack of popular support for particular changes; the power of the “shibboleths” that mark out loyalties within parties or factions; and the opposition of powerful interest groups. The size of the required budget investment can also be a barrier, but Daley dismisses as relatively insignificant two of the most oft-cited roadblocks — the Senate and the messy division of responsibilities between the Canberra and the states.

But these obstacles aren’t new. The GST was deeply unpopular, but Howard risked electoral defeat to go ahead anyway. Privatising the Commonwealth Bank contradicted Labor shibboleths, but Hawke and Keating pressed on regardless. Vested interests vigorously opposed native title legislation, but it was still steered through parliament.

What’s different today? The glib response is that we’ve stopped electing politicians willing to push through obstacles in the belief that the change is worth the fight. As we contemplate an unedifying electoral contest between “ScoMo” and “Albo,” it’s easy to believe that current leaders don’t measure up to leaders past. That might be an emotionally satisfying answer, but it leaves us hoping forlornly that someone better will eventually turn up.

Deeper answers lie in structural economic and social changes. The echo chamber of social media has driven polarisation and division. The twenty-four-hour news cycle and the professionalisation of politics mean policies are more likely to be shaped by polling and focus groups than by evidence. The shifting and shrinking bases of the major political parties have reinforced polarisation.

Meanwhile, the hollowing out of the public service, the rising power of political staffers and the outsourcing of advice to corporate consultancies have weakened governments’ capacity to generate and implement good ideas. And the “revolving door” that turns a ministerial adviser into a “government relations” professional has picked up pace, as has the “golden escalator” from ministerial portfolio to corporate board or strategic advisory role.

Daley’s third question is obvious: what is to be done? If we want more ambitious, reform-minded leaders, we need to change the system that supports the current epidemic of policy timidity. “Institutional changes to ministerial adviser roles, to processes for appointing and dismissing senior public servants, to ministerial influence over government contracts and grants, and to controls over political donations, campaign finance, lobbying, and post-politics careers would all help to break the gridlock in policy reform,” he writes.

Errington and van Onselen recommend similar changes, and throw in a shift to proportional representation. If New Zealand can change its electoral system, why can’t we? The catch, as always, is that the people we need to fix these problems are a big part of the problem. As Daley says, the institutional changes he proposes “are themselves an example of blocked policy reform.” If our political caste can’t manage to abolish franking credits, let alone create a federal corruption commission, then the chances of substantial systemic reform appear slim.

Daley puts his hope in more independent MPs getting elected to parliament and using the balance of power to force systemic change. It’s hardly a quick fix, but it chimes with the fact that the reform highlights of the past two decades — including the (shortlived) carbon pricing mechanism, the NDIS, the Gonski school funding scheme, and plain-paper cigarettes packaging — mostly came when Julia Gillard was leading a government reliant on crossbench MPs.

Daley’s conclusion suggests the answer lies in getting back to the basics of political organisation at the local level: engaging citizens, listening to their concerns, and involving them in developing campaigns and policies. This is the nuts-and-bolts work that helped the campaign for marriage equality succeed. It is the kind of community organising that elected independent Cathy McGowan in the formerly safe Liberal seat of Indi in 2013, and enabled Helen Haines to succeed her in 2019.

In other words, we need to build democracy from the bottom up, not suffer it from the top down. Electing more independents to parliament seems like a good place to start. •

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Political ideology was also driven by assumptions about what structures would deliver the best results. Labor believed that government delivery of services would solve the failures of the private sector to deliver. The Liberals believed that competition between service providers would deliver better services overall.

During the 1980s and 90s these ideologies broke down in many ways. People on all sides of politics realised that much of the time they weren’t disagreeing about which results were worth having. They were instead disagreeing about a factual question rather than a values question: which structures delivered the best results? Experience showed that well-designed competitive markets, with government regulations to protect the worst-off and prevent exploitation, delivered cheaper and better electricity services than a government monopoly. And so privatisation — well designed — was an idea that all sides of politics could back. Of course, that meant market design was vitally important, but that’s another story.

Today, a new kind of tribal belief is increasingly blocking policy reform, as we show in our recent Grattan report, Gridlock. These are tribal beliefs that some policy positions are simply right. Often these beliefs aren’t based on any consistent view about the importance of one value over another, or about what kind of regulatory structures work in practice. Rather, they’re often the result of history — political battles won or lost, sometimes many years ago.

For example, you won’t find a single Labor parliamentarian prepared to suggest (publicly at least) that changes to the rate or scope of the GST might be a good idea. It’s not a belief based on ensuring the needs of the worst-off are met. A well-designed GST reform package could deliver welfare changes and income tax reductions that would make people in the bottom 30 per cent of the income distribution much better off on average, an outcome Labor has traditionally sought. Having fought and lost two elections over a GST, though, it’s hard to move on.

Among the conservative wing of today’s federal Coalition, you won’t find anyone who thinks government should do anything about climate change. Some of them don’t think that carbon emissions are leading to global warming; some think global warming is a good thing that will increase rather than reduce prosperity; some think the costs of reducing emissions exceed the costs of living with a hotter world. Many believe all three. What unites those beliefs is not a value, or an observation about what kind of policy works best, but a commitment to a particular policy outcome.

To take another example, no serving federal Labor member has publicly acknowledged that there is any argument against increasing the superannuation guarantee from 9.5 to 12 per cent. I’m unaware of any of them having conceded in the past few years that an increase in that rate will lead to lower wages. No matter the conclusions of independent experts, backed by Treasury modelling, that a contribution rate of 9.5 per cent is already pushing the living standards of people on low wages lower than their incomes will be once they retire. No matter the conclusions of distinguished academics, the Reserve Bank and the Fair Work Commission (and many Labor MPs in the past) that increases in the super guarantee are an alternative to higher wages growth. And no matter that the major beneficiaries of increasing the rate will be the top 20 per cent of income earners, who will pay less tax over their lifetimes.

So if these beliefs aren’t about values — or what kind of government works best in practice — what are they about?

Their major function is to mark membership of a tribe. That’s why the need to conform to these beliefs is seen within a party as much greater than in the past. Simply holding the right belief marks you as “us” rather than “them.”

They are “shibboleths,” a word now at least 2500 years old. The book of Judges in the Old Testament tells the story of two warring tribes, one of which got stuck on the wrong side of a river. The other tribe, which controlled the river crossing, set as a password the Hebrew word for an ear of corn. They knew that people from the opposing tribe pronounced “shibboleth” differently. And so, in contemporary English, a shibboleth is a belief that marks membership of a tribe, rather than a consequence of rational thought or a particular value. Indeed, beliefs tend to make better tribal markers if they’re irrational. Otherwise there would be people who believe them because they think they’re true rather than because they identify with the tribe.

Having tribal markers is very important if the tribe looks after its own. If the leaders of the tribe are handing out government appointments, grants and contracts to their own members, they need a way of knowing who is “us” and who is “them.”

Shibboleths only work like this if there are penalties for not holding to the right belief. Another Coalition article of faith is that tax rates should never go up, particularly not taxes on investments. So when the Turnbull government announced that it would wind back generous tax concessions on superannuation, all hell broke loose — inside the party. The party’s broadsheet, the Australian, published article after article denouncing the changes. Major donors said they would never give again because the party had abandoned its “values.” The preselection of Kelly O’Dwyer, the responsible minister, was threatened.

Never mind that these changes were popular — particularly with those who had the most to lose, perhaps because they realised how indefensible the concessions were. Never mind that the proposals were consistent with the underlying policy purpose of superannuation. Never mind that the Coalition disproportionately won votes in the electorates most affected. A shibboleth had been questioned, and there had to be consequences.

Shibboleths are a big problem in politics precisely because they’re not rational. Almost by definition they lead to policy outcomes not based on the evidence. Over the past decade they’ve blocked progress on ten significant reforms recommended by Grattan Institute, particularly in three of the most important policy areas for Australia’s future prosperity: tax, superannuation and energy.

It’s a far cry from the golden years of reform in the 1980s and 90s, when the Hawke–Keating government jettisoned large quantities of party dogma to bring down tariff barriers, privatise industries and reform industrial relations.

So why are shibboleths dictating policy outcomes? Two forces are coming together: shifts in the electoral bases of our major parties; and the professionalisation of major parties so that they become almost arms of government rather than organisations that mediate between the population and government. Both trends are mirrored in other democracies around the world.

As Thomas Piketty and his colleagues have shown, the base of political parties is shifting. Traditionally, right-wing parties were aligned with business owners, high-income earners and people with high levels of education. But now people with high levels of education, including those with relatively high incomes, increasingly vote for left-wing parties. People with lower levels of education don’t belong to unions as much as in the past, now often work as sole traders, and are more likely to vote for right-wing parties.

Because the interests of their core constituencies are changing, policy issues are becoming more fluid within the parties. Issues that defined political parties for decades, such as government intervention in the economy and industrial relations, have converged on largely consensus positions. Social and identity issues such as marriage equality, workplace harassment, migration and racial disadvantage remain more contested. Many of these social issues cross traditional party lines. Bill Shorten has many policy views in common with Simon Birmingham, Joel Fitzgibbon has much in common with George Christensen, and it’s less obvious what policies they share with others in their respective parties. So instead, parties need shibboleths to mark who is a member of the tribe.

And tribal membership is increasingly important because of what political parties do. Politics has professionalised. Many more people have a career that starts as a political adviser, a union representative or an analyst at an aligned think tank and then progresses to preselection, parliament and the golden escalator to a lucrative government-relations role.

The professionals working for each party look after their tribe. Longstanding conventions are being trashed as government appointments to bodies such as the Administrative Appeals Tribunal and state government corporations increasingly favour those connected to the party in power rather than those best qualified. Government grants and contracts are often awarded to party donors, and those well connected — which may just be coincidence, but because the processes are increasingly opaque, who would know?

Patronage like this reinforces shibboleths. The rewards for toeing the party line are much higher. Breaking with the tribe can disqualify you from future patronage and jobs.

The disease is hard to cure. Politicians from all major parties have trashed valuable conventions that restrained politicisation of appointments, grants and contracts, and imposed consequences when politicians behaved badly. But there’s no going back. To restore good governance, these conventions will need to be replaced by hard rules policed by genuinely independent and well-armed regulators. The insider world of political advisers needs to be opened up to more people with policy expertise from the public service and fewer people with political expertise from student politics. Limiting political donations and campaign spending, and tightening controls on lobbying would also help to weaken the cosy coterie of politics and its clients.

Unfortunately the patient is not very interested in being cured. The current arrangements suit the major political parties and the professional political class very well. Although the treatments for the disease are well known, and voters strongly support them, the list of excuses for inactivity just gets longer.

History suggests that major institutional changes mostly happen only when there is an ongoing public scandal. Damning auditor-general reports aren’t enough. Only the nightly theatre of cross-examination at a royal commission or an independent corruption commission leads to voters focusing on institutional change rather than their usual concerns of jobs, health and education.

So the most likely path to change is for independent and minor-party members of parliament to insist on institutional reforms when they hold the balance of power. That’s how we got the Parliamentary Budget Office, the most significant institutional reform of the past fifteen years. And it’s an increasingly plausible scenario as the vote for minor parties and independents marches upwards, not least because voters are losing trust that the traditional parties are putting the public interest ahead of their own.

Shibboleths are a cancer eating away at good government. We need institutional change to weaken their tightening grip on our political class. Otherwise, many policy reforms that would benefit the country will continue to sit on the shelf. •

Gridlock is John Daley’s last report for Grattan Institute, where he was the CEO from its creation in 2009 to 2020.

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At the company’s AGM, directors faced a barrage of questioning from gambling reformers. One asked how much Crown and Packer knew about the experiences of those harmed by gambling, and particularly gambling on poker machines. Packer professed to be sympathetic: Crown endeavoured to be a good corporate citizen, he said, “but we are not perfect.”

He wasn’t wrong.

Shonica Guy’s case against Crown didn’t succeed, but the allegations of machine tampering (which Packer labelled “a lie”) led to a fine of $300,000 by the Victorian Commission for Gambling and Liquor Regulation. At that stage, this was the largest fine ever imposed by the Victorian regulator. The China accusations and Crown’s allegedly poor treatment of staff would continue to haunt the company for years, all the way to the Victorian royal commission, led by Ray Finkelstein QC.

Yet Packer remained upbeat. His confidence in the success of the Barangaroo development on Sydney Harbour was growing daily, he said. Crown’s well-cultivated political connections and network of influence appeared impregnable.

Then, in mid 2019, long-circulating rumours about Crown’s operating practices coalesced into a series of sensational media reports in the Nine newspapers and TV network that alleged extensive money laundering, poor treatment of Crown’s staff in China, and criminal infiltration of the casinos in Melbourne and Perth.

Crown denied these reports, going to the extent of taking out a full-page advertisement in major newspapers signed by the board. Nonetheless, it was clear that the company had a case to answer. In Sydney, the resulting Bergin inquiry lifted the lid on money laundering and criminal infiltration; as a result, Crown’s Sydney casino has yet to open.

The bad press continued this week when Adrian Finanzio SC, senior counsel assisting the Victorian royal commission into the casino and casino operator, made his final submission. In his view, it was open to the commission to conclude that Crown was not suitable to operate the casino and that it was not in the public interest for it to do so. In effect, he was saying that Crown should lose its licence on multiple grounds.

Unlike the Bergin inquiry, which concentrated on Crown’s money laundering record, Victoria’s royal commission expanded its gaze to include issues such as Crown’s application of its Responsible Gambling Code of Conduct, its breaching of the Casino Control Act by allowing patrons to convert credit card purchases into gambling chips, the underpayment of gambling tax, Crown’s combative relationship with the regulator and other authorities, and the doubtful feasibility of the reform program that Crown has initiated.

As to money laundering, Finanzio argued that “the preponderance of evidence is that Crown has significant, current vulnerabilities to financial crime and only a basic or preliminary state of preparedness to counter money laundering and financial crime.”

It was also clear that Crown failed to produce documents for the Bergin inquiry until months after they should have been provided. Finanzio applied the analogy of an “accused in a criminal trial standing behind the onus of proof and taking every point to avoid conviction” — except that Crown has an obligation to meet a test of character, honesty and integrity. In fact, Crown had demonstrated the opposite, even quite recently, and some employees who had clearly failed to meet those standards remained in the organisation.

Finanzio also pointed out that the Bergin inquiry had been confined somewhat narrowly to certain aspects of Crown’s activities when it outlined potential reforms. The Victorian commission had found a much deeper set of problems “of culture and risk… through more levels of the organisation than the Bergin inquiry could ever have anticipated.” Indeed, everywhere the commission had looked “it has unearthed behaviour that is deeply troubling and obviously ingrained.”

Bergin associated Crown’s culture and governance problems with the influence of James Packer and his company CPH. Because of this, Packer, who retains a significant slice of the Crown shares, is prohibited from exercising his influence via CPH until at least 2024. Finanzio went further, submitting that no shareholder in Crown Melbourne should exceed a 5 per cent interest without permission from the regulator. The Packer influence, if it remains, looks to be further diluted.

Now that its initial hearings are over, the royal commission has two basic questions to deal with. Is Crown a suitable entity to operate the casino — and if not, could it become one? And is it in the public interest for Crown to continue to operate the casino as its licensee?

There is a strong case that Crown is not a suitable operator. Bergin found that the path to reform would be difficult and uncertain. To say this has been reinforced by the Victorian evidence and submissions from counsel is to put the situation mildly. Finanzio also saw many impediments to Crown’s rendering itself suitable, not least the continued tenure of Helen Coonan, current executive chair, and Xavier Walsh, chief executive of Crown Melbourne.

And the public interest in taking away Crown’s licence? Adrian Finanzio argued strongly that many matters need to be considered. Employment and state revenue are significant, but so too is the loss of confidence among many stakeholders, not least the people of Victoria. What action Crown could take to restore that confidence is difficult to imagine.

It’s hard to see how anything other than a loss of licence could convince anyone that gambling regulation is taken seriously in Victoria, or Australia more generally. Crown’s longstanding disregard for its responsibilities, and its recurring misconduct and breaches of regulation and legislation are breathtaking, and at the most serious end of the spectrum of misconduct.

As Finanzio put it, “It is open on all of the evidence for those regulating Crown Melbourne’s affairs to doubt whether they could ever trust Crown Melbourne again. The Casino Control Act demands that a licensee is suitable, rather than one in transition to or on a journey to suitability. The Casino Control Act contemplates that the casino licence is reposed in a person who is capable of maintaining the trust and confidence of the community and the credibility, integrity and stability of those operations. Crown is neither of those things.”

Crown (and other parties with leave to appear) will have its chance to argue its case when the commission reconvenes on 3 August. With premier Dan Andrews pledging to accept the commission’s recommendations, the stakes are high — not just for the company’s value and credibility, but also for the future of Australian gambling regulation. Politically, it would be difficult for the government to do anything but accept Finkelstein’s advice.

Whatever else occurs, the seemingly impregnable edifice of Crown, constructed from influence, compliant political and regulatory institutions, and a disregard for public perceptions, has been breached. There is a good chance it may end up as a monument to failed ambition, hubris, greed and arrogance. We shall see. •

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Thinking about debt as a percentage of GDP is important for two reasons. First, it puts that debt into perspective. Australia’s debt as a percentage of GDP — forecast to peak at 40.9 per cent in 2024–25 — is less than half the average of the other advanced economies we tend to compete with for investment, and a quarter of that for Japan.

Second, thinking of debt as a percentage of GDP, combined with some basic maths and reasonable assumptions, throws cold water on the claim that the debt accumulated during Covid-19 will be a burden on future generations.

To see why, let’s assume that the government balances the budget in 2024–25 when Australia’s net debt peaks at 40.9 per cent of GDP. Let’s also assume that the government makes zero effort to pay back that debt, meaning it runs a balanced budget without accumulating a cent in surplus. What happens to Australia’s debt as a percentage of GDP?

There are two opposing forces. On the one hand, Australia’s debt will grow at the rate of interest on that debt (making our debt as a percentage of GDP bigger). On the other hand, our economy will grow at the rate of GDP growth (making debt as a percentage of GDP smaller). Provided our economy is growing faster than the interest rate on our debt, we will slowly grow out of our Covid-19 debt without future generations ever having to repay a cent of it.

How long would this take? If Australia’s economy grows at the same average rate of the past ten years (hopefully a conservative estimate given our real GDP growth has been pretty mediocre) and the real interest rate on government debt similarly follows the average over the past ten years (also conservative because these rates have tended to fall through time rather than stay the same), Australia would whittle away its Covid-19 debt as a percentage of GDP in just twenty-seven years, without having once actively attempted to pay it off.

It follows that paying back our Covid-19 debt is not only unnecessary but also hardly intergenerational. Even if we did decide to pay it back, the majority of today’s taxpayers will still be paying tax over the next twenty-seven years.

Unemployment, on the other hand — especially at the level it would have reached had we not incurred the debt in the first place — has clear intergenerational effects. Research shows, for example, that having unemployed parents can have long-term consequences for children’s happiness, education and income. To look at the intergenerational impacts of debt while ignoring the intergenerational impacts of higher unemployment is to look at the world with only one eye open.

But is this all too optimistic? One reason people are concerned about our Covid-19 debt is that they fear inflation and interest rates will not follow their past trends and might start increasing faster than GDP growth, making our debts unsustainable. Luckily, this is both unlikely and, if it were to occur, manageable.

First, we are not powerless to influence these variables. We can help ensure the economy grows faster than the interest rate on our debt by making sure we spend that money on things that boost long-term, sustainable growth. This means directing the budget towards spending that raises productivity: investments in things like high-speed broadband, infrastructure and early childhood education.

When the government does splash cash on things with limited long-term productivity benefits, it should use the political opportunity created by the sugar hit to implement the structural reforms that will boost productivity, such as tax reform, trade reform, competition reform, labour market reform, and financial reform, to name a few.

Second, while many have pointed out the risks of higher inflation and higher interest rates, few have convincingly explained how or why they would come about.

Before Covid-19, inflation and interest rates were subdued across the world and had been declining for decades. Theories on why this has occurred range from structural changes that have boosted savings (like ageing populations, rising inequality and global integration with high-saving countries) to structural changes that have reduced investment (like declining competition between firms and a lack of investment opportunities, or “secular stagnation”).

None of these deep, structural drivers of low inflation and low interest rates is going away anytime soon. Those who fear a sharp rise in inflation and interest rates struggle to explain why these structural factors in the pre-Covid world will mysteriously vanish in the post-Covid world.

Others who fear rising inflation and interest rates point to the big fiscal stimulus packages, like President Joe Biden’s, as a potential trigger. While some inflation is likely, it’s hard to imagine why temporary stimulus would result in any permanent change in inflation or interest rates, particularly when the Fed has already flagged that it would tolerate above-target inflation for a period without raising interest rates. And if inflation and wages were to suddenly take off, this would also boost the other side of the equation — economic growth — meaning that, even with higher interest rates, those interest rates need not necessarily exceed GDP growth: the recipe for debt as a percentage of GDP to rise.

Another concern is that Covid-19 may have severely weakened the supply-side of the economy, with collapsed businesses and damaged supply chains causing demand for goods and services to exceed supply, resulting in higher inflation and rising interest rates. The problem with this argument is that, so far, we are seeing the opposite: too few businesses are failing, not too many. And while some supply chains have struggled during Covid-19, these challenges are short-term, not long-term, and out of the thousands of supply chains we engage with each day, the vast majority have not experienced any challenges at all.

In sum, it’s hard to see high inflation and high interest rates coming about. And even if they did eventuate and we started paying down debt, the time horizon of twenty-seven years means most of the heavy lifting would fall on existing taxpayers, not future generations.

Not that this means we’re not burdening future generations: we’re doing that in plenty of ways. But fiscal policy is low on the list. Indeed, the more we talk about debt and deficits, the less we are talking about the real damage we are inflicting on our children and grandchildren through climate change, loss of biodiversity, and rising geopolitical tensions. It’s time to focus less on the intergenerational problems that might happen and focus more on the ones that are well under way. •

The post How Australia’s Covid-19 debt will look after itself appeared first on Inside Story.

Nine days after federal treasurer Josh Frydenberg unveiled a pre-election borrow-and-spend budget, Victorian treasurer Tim Pallas brought down another big-spending budget, but one that adds taxes to the mix — taxes targeted almost exclusively at big business and large landowners.

It was not the only thing worth noting in his budget. Pallas proposes another huge (and clearly inflationary) increase in what is already a record level of infrastructure spending. In government services, mental health is the top priority for new spending. The budget funds Australia’s first truth-and-justice process, a mostly Aboriginal commission to examine the state’s history and shine the spotlight on the dispossession and injustices that followed white settlement.

The budget plans to give 4000 women a year access to low-cost public IVF treatment. It funds innovative early-intervention programs, such as the Rough Sleeping Initiative by the Sacred Heart Mission, which proposes to work with newly homeless people to try to find them housing, social networks, job training and employment, so as to prevent them becoming chronically homeless.

And on the same day that the Bureau of Statistics reported that Victoria’s unemployment rate is now a smidgeon lower than Australia’s, the budget poured even more stimulus into a state economy it projects will grow by 6.5 per cent in the coming financial year. It’s fun to be pouring out the cash as Frydenberg and Pallas are doing, but ultimately someone has to pay for it — and that someone will be the kids.

Most of this new spending is unfunded, resulting in another big deficit by state standards: $11.6 billion on the budget estimates, down from $17.4 billion for the financial year just ending. And that excludes infrastructure spending, which is forecast to soar 67 per cent next year, from $14.5 billion to $24.2 billion.

“There is much to praise in this budget, but also much to regret,” I wrote of last year’s Victorian budget. That seems to apply to every budget the Andrews government produces.

Debate on this one will be dominated by the fact that, unlike its federal counterpart, it had the courage to raise taxes to finance some of its new spending — and is making business pay them.

The new taxes were so audacious, they were startling. Once in place, Treasury estimates, they would raise more than $1.5 billion a year, a not insignificant amount. But just $115 million of that would fall on the general public, mostly from higher fines and taxes on gambling. The rest would come from a range of tax hikes on developers, large landholders and people buying expensive properties (almost $600 million a year), and from payroll tax surcharges on big business, to raise $800 million a year earmarked to finance mental health programs.

That “mental health levy” could be tricky. Pallas said eligibility for the surcharges would be determined by the size of companies’ national payrolls. Those with national payrolls of more than $10 million a year would pay an extra 0.5 per cent on their Victorian payroll, while those with national payrolls of more than $100 million would pay an extra 1 per cent.

It seems cunningly designed to reduce the incentive for business to shift jobs out of Victoria. But it does not remove that risk — and it may provide fertile ground for a legal challenge. Might the High Court rule that Victoria is effectively trying to tax jobs in other states? The lawyers will be giving deep thought to this tax bill.

You couldn’t imagine a Labor government anywhere else in Australia, except perhaps the Labor/Greens coalition in the ACT, targeting higher taxes so directly on those they see as the rich rolling in money. But in 2018, Labor won a stunning 57.6 per cent of the two-party vote; as long as Covid stays under control, it is hard to imagine it losing next year’s election. The Age reports that enough crossbenchers support the tax rises to get them through the Legislative Council.

The biggest tax hike on property would introduce similar surcharges on land tax for property holdings worth more than $1.8 million — primarily hitting land developers, big rental investors and commercial property owners, since homes and farms are exempt. And with Australia now experiencing a massive inflationary boom in house prices, property sales of more than $2 million will attract an extra 0.5 per cent on their stamp duty bills.

“You don’t get that much in inner Melbourne for $2 million,” an old friend laments. Core Logic reports that housing prices in Melbourne have already risen 10 per cent since the state’s lockdown ended, with even bigger rises in regional towns (partly from city investors outbidding local residents). This surcharge could put some brake on price rises at the top end.

Developers will also have to pay a windfall levy equivalent to half of their gains when land is rezoned in their favour. Pallas was unable to give a convincing answer when asked why the government didn’t impose similar windfall levies on owners of the shopping centres who will benefit if Labor ever builds its scandalously wasteful so-called Suburban Rail Loop.

You could not imagine any previous Labor government in Victoria contemplating hits on business like this. John Cain, Steve Bracks and John Brumby all ran essentially centre-left governments that put a high priority on keeping business happy so it kept generating jobs. But Daniel Andrews is no centrist. He is a self-confident, skilful leftie who dominates Victoria’s political stage and gives the impression that keeping business happy is not high on his priority list.

If his government gets away with this one, it would be thanks to Brumby, the last government leader in Australia to pursue a Hawke–Keating agenda of economic reform. As treasurer and then premier, Brumby pursued jobs rather than votes, cutting Victoria’s payroll tax rate across the board to 4.9 per cent, the lowest rate in the nation for most of the businesses Andrews and Pallas are now targeting.

An economics graduate, Brumby’s goal was to simplify and streamline the tax structure and minimise the impact of taxes on economic activity. This government has the opposite goal: it is run by social engineers, who want to make every tax or spending measure discriminate between those they see as underprivileged (who will benefit) and those they see as privileged (who won’t).

The silliest of yesterday’s tax increases would exclude “gender-exclusive” clubs from the land tax concessions available to all other clubs. It is aimed at the Melbourne Club, of course, but why bother? Treasury estimates the measure will raise the grand total of $600,000 in four years. Wow.

Andrews has been out of sight for the past two months after falling downstairs at a holiday home and suffering spinal damage. But close observers say he still keeps in touch from home, and would have been calling the shots on key decisions in this budget — such as making the mental health reforms its centrepiece, and soaking the rich to pay for it.

The row over financing should not obscure the importance of the government giving priority to mental health reforms. Like the federal government’s aged care reforms, they follow a royal commission that highlighted how widespread mental illnesses are, and how few resources and programs we have to tackle them.

“Around half of Victorians experience a mental illness at some point in their lives,” Pallas told parliament. “Around one in five are struggling with it right now. They are our children, parents, partners and friends. They are us. But in our worst moments, we turn to a system which is clearly broken.”

The budget rolls out a wide range of programs designed to meet the needs of particular groups, from primary students up. From the stories you hear, you do wonder how much difference it can make without overcoming the shortage of psychiatrists — which presumably would require their professional college to lower the bar which blocks other doctors from entering their specialty.

In all, the budget proposes $19 billion of additional spending on services over the next four years, with sizeable dollops to fix Victoria’s under-resourced ambulance service, attract more filmmakers to Victoria, rebuild and better protect bushfire-hit communities, build and repair more schools, and build a new sporting centre at La Trobe University to be the new home of the Matildas. Most of this will be ongoing new spending, added to a budget already in structural deficit.

On the definition used by Victoria and other states, the budget will still be in deficit in 2025 — that is, revenue won’t pay for government services, or make any contribution to new infrastructure — and that would be after four years of recovery. Precisely because its tax rises are so narrowly targeted, they cannot raise the revenue needed to close the gap and create a surplus to pay for some of the infrastructure. Net borrowing is projected to continue at $18 billion a year into the blue horizon.

I am no deficit fetishist, but running a deficit in a booming economy is weak government. Victoria’s economy is booming. Treasury projects it to grow by 6.5 per cent in the coming financial year before settling back in its long-term groove: high population growth, relatively high economic growth, and wages rising faster with each year.

Yesterday’s jobs figures from the Bureau of Statistics show that even the end of JobKeeper hasn’t derailed the state’s remarkable comeback from last year’s massive job losses. In April Victoria squeezed past New South Wales to claim the second-lowest unemployment rate of any state, bettered only by Western Australia. Pallas proudly points out that since the long lockdown ended, most of Australia’s job growth has been in Victoria.

No one expected that to happen when last year’s budget planned a 25 per cent growth in Victorian government spending. It seemed appropriate then, and Pallas and Andrews can fairly claim their share of credit for the exceptional rebound since. The government hired unemployed women as tutors for struggling schoolkids, hired tradies to build social housing, and hired jobless blokes to repair roads all over the state. It handed out subsidies so groups and businesses could hire people themselves. It helped restore confidence, which has proved as infectious as Covid.

In the end, it looks like spending growth in 2020–21 will be 19 per cent: the government spent a bit less than it planned on services and a lot less than it planned on infrastructure — despite substantial hikes in the estimated cost of works such as the Melbourne Metro tunnel (now $12.25 billion), the Monash Freeway upgrade, regional rail upgrades and so on. Yet the government has responded by rolling the undone works into an even bigger package, and projecting a 67 per cent rise in infrastructure spending in the coming year.

Get real. Infrastructure spending is already at record levels as a share of the Victorian economy: roughly 3 per cent of gross state product. Andrews and Pallas now propose to raise that to almost 5 per cent — despite evidence throughout the state that the resources just aren’t there to carry out the work. A home-building recovery is getting under way, partly through the state’s own laudable program to build social housing. Andrews and Pallas don’t need to aim for the sky — and they can’t reach it anyway.

Their government has been applauded and re-elected for having lifted Victoria’s infrastructure spending off the floor. It has used these years of low interest rates to build projects that previous governments found too hard: the replacement of fifty level crossings in suburban Melbourne, building the first metro line under the city, planning the North East freeway link, and many lesser but locally important projects throughout the state.

Rather than trying to increase spending by another 67 per cent, it should consolidate and focus on the quality of projects rather than the quantity. Labor is still locked into building the Suburban Rail Loop, a very expensive underground tunnel to take a small number of passengers between six stations in marginal seats in southeast and eastern Melbourne. It was dreamed up in Andrews’s office, and it’s the lemon that makes other lemons taste like oranges.

One remarkable thing to note about Labor’s infrastructure program is that, both next year and in the long term, it plans to spend more on rail than on roads — and the roads budget includes spending on new trams and replacing level crossings. (This government spends very little on buses, even though they serve its outer-suburban voters, and its own surveys find they have the highest customer satisfaction of any public transport mode.)

Victoria’s net debt, once negligible, will reach 20 per cent of gross state product next year and 27 per cent by 2025. As the budget papers remind us, it has been much higher in the past, so that’s no cause for alarm. But nor is it a good thing. With the economy entering a boom, Labor should be moving quickly into surplus, allowing current revenues to make a substantial contribution to current infrastructure investments.

This should have been the budget that flicked the switch from stimulus to consolidation. Pallas and his team did make some efforts to do that — $2.9 billion of spending in the next four years was “reprioritised,” the annual indexation of departmental budgets was reduced, saving $1.9 billion, and $1.7 billion of savings were found from “departmental efficiencies.”

Yet even so, the bottom line is that now that the need for stimulus has gone, the Andrews government plans to spend $20 billion more in the next three years than it had last year when stimulus was needed. It is as economically dumb and politically driven as the same strategy is in the Morrison government’s budget.

Victorian Labor, like the federal Coalition, is giving us more of what was appropriate last year, not what is appropriate now. Yes, you can always increase jobs now by borrowing from the future. But that just means future generations will lose jobs whenever the bills have to be paid.

There’s a country that has tried out this strategy extensively in the past. Its name is Italy. It is the only country in the Western world that is now poorer than it was twenty years ago. Italy may be a role model in many areas of life, but fiscal policy is not one of them. •

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We were already in recession when Paul Keating brought down the August 1990 budget, but neither the government nor the bank admitted it. Keating blithely forecast no recession, and did nothing to stimulate activity. Earlier in 1990, the Reserve Bank had lowered the cash rate from its ridiculous peak of 18 per cent to 15 per cent, but then sat on its hands for months without cutting it further, as companies collapsed and workers were laid off around it.

Even a year later, when the recession was at its peak, the August 1991 budget did nothing to tackle it, with Treasury persuading the new treasurer, John Kerin, that there was no need. The Reserve Bank’s cash rate was still 10.5 per cent — it had gone up in the lift, but had to come down by the stairs.

The classic summary of Australia’s policy in that recession was a cartoon by the great Bruce Petty in the Age. Kerin, at the wheel of a cobweb-smothered car labelled “Treasury Driving School,” asks his instructor, “Don’t you think I should try to restart the motor?” To which the Treasury guy replies, “What! And risk having it stop again!”

The contrast between economic policy then and now is stunning. The recession of 2020 was over almost before it began. It stood no chance against the deluge of money flowing from the federal government to households and business, and from the banking system (directed by the Reserve Bank) to anyone who wanted to borrow.

In this recession, incomes soared: the Bureau of Statistics estimates that household disposable income in 2020 shot up by $85 billion, or 6.6 per cent. House prices soared: Core Logic reports that at the end of April, prices nationally were already up 10 per cent since September, and rising by roughly 2 per cent a month. In most areas of the economy, the jobs came back quickly. By March, the employment/population ratio was back where it was when Covid struck. The recession was over, the economy booming – and the need for stimulus was gone.

Yet, in the mirror image of what we saw in 1990–91, today’s federal government and the Reserve Bank aren’t changing course. This time they both have their feet jammed on the accelerator pedal.

And just as in 1990–91 — when the commentariat (except for a few of us in Melbourne) either applauded the government for holding firm or suggested it should be even tougher — this time the commentariat is either applauding the government for keeping its foot down, or arguing that it should accelerate harder.

The last criticism is bizarre. We may think the government spends too much in some areas — for example, the $10,000 per person per day it reportedly pays Brisbane company Canstruct to run the offshore prison for asylum seekers on Nauru (per Ben Doherty in the Guardian) or the $50 million it has reportedly spent to drag a Tamil refugee family from Biloela through the courts and imprison them on Christmas Island (per Michael Pascoe in the New Daily) — but the economy is already back in gear, by any sensible definition, and yet this big-spending budget is still pumping on the accelerator.

In the coming financial year the government plans to spend 27.6 per cent of the nation’s GDP, compared with our long-term average of 24.6 per cent. Just on that measure, it will be the third-highest rate of spending in any year since the second world war, beaten only by the current year and last year. In round figures, the government will spend an extra $60 billion on pumping up an economy that is already back to normal.

This year’s deficit, at 7.8 per cent of GDP, is easily the highest on record. On the budget estimates, next year’s will be the second-highest, and 2022–23 will be the third-highest. There is no need to run deficits on that scale.

As for the Reserve Bank, nothing in its previous history remotely compares with the measures it is now taking to flood the economy with money, as spelt out last week in a speech by deputy governor Guy Debelle.

Debelle was very direct in declaring that the bank’s goal was to lower unemployment, and the collateral damage to other goals — notably, housing affordability — wouldn’t stop it. I accept that there are good arguments for this. We will come to them.

But let’s take stock. Unemployment in March was 5.6 per cent, a smidgeon below the average of the pre-Covid unemployment rate since the Coalition took power. If unemployment at that level wasn’t a good reason to stimulate the economy anytime between 2013 and 2020, why now?

Forecasting is a risky game, but most of Treasury’s forecasts this year feel more realistic and less wishful than in the past. It forecasts the economy to grow by 4.25 per cent in the new financial year, driven by strong consumer spending and the public sector’s foot on the pedal. It predicts unemployment this time next year to be 5 per cent, the lowest for a decade. The Reserve Bank tips it to be even lower, 4.75 per cent, the lowest rate since mid 2008.

Sure, we want it to be lower than that. A sad bit of humbug that Treasury persists with in this budget is its estimate that unemployment can only fall to between 4.5 and 5 per cent without causing inflation to accelerate. As it knows, that estimate has no factual evidence to back it; the last wage-driven inflation we experienced was in the 1980s, under a quite different industrial relations system. Comparable countries like Germany and the United States have driven their unemployment rates down to 3.5 per cent and lower without experiencing rising inflation.

As Ross Garnaut argues in his recent book Reset: Restoring Australia after the Pandemic Recession, it makes more sense to aim to drive unemployment to 3.5 per cent or lower, then put the brakes on only when you see signs of inflation heading higher than you want it to be.

To the extent that the government is being driven by a desire to lower unemployment and increase wage growth, more power to its arm. But is this the best way of getting there? Or should the Morrison government drop its aversion to economic reform, especially tax reform, and find a better way?

The problem with this budget is not that it is spending too much money. It is that it is spending too much money without paying for it — and sending the bill to the kids.

Unless you think the government should make the Reserve Bank fund whatever deficit it wants to run, that is the inescapable impact of budget deficits: you kick the can down the road, but the debt must be paid at some later time. That’s fine if you are using the deficit to build the economy’s capacity to pay it later, but most government spending doesn’t really do that.

The single biggest item in the budget is a substantial unfunded increase in aged care spending, from $19.75 billion in 2019–20 to $31.1 billion five years later. The spending is needed, as the royal commission demonstrated, but that is not something we should be asking future generations to pay for. We should be paying for it ourselves.

The royal commission proposed a Medicare-style levy. I have no doubt that this would have been accepted by the majority of Australians. But it was not acceptable to Scott Morrison and Josh Frydenberg. They are happy to spend the money but lack the political courage to ask us to pay.

Some genuine conservatives would argue for an alternative system that would set higher standards for nursing homes, and improve their ability to access the value of their patients’ real estate to fund the improvement. That alternative would leave the government picking up the tab just for those without the means to pay for care themselves. But that too was unacceptable to the Morrison government. So instead it is spending without paying.

The table that holds the key to the whole budget is on page 79 of Budget Paper No. 1. It reveals that in the five months since the midyear outlook last December, the unexpectedly strong recovery improved the underlying cash balance for the five years to 2025 by $104 billion. But the budget banked just $8 billion of that. Instead, the government has opted to spend an extra $68 billion and cut $28 billion off tax revenue — boosting the cumulative budget deficits by $96 billion.

Most of the tax cuts will defer revenue rather than wipe it, so the net long-term cost is more like $80 billion for those five years, plus the $15 billion a year cost of continuing the unfunded spending. It’s like spending an extra $155 billion over the next ten years, waving to the kids and saying, “Thanks, guys. You can pay for this.”

While spending as a share of GDP is at record highs, taxes as a share of GDP are at near-record lows. In the past forty years, the only years when taxes have been lower as a share of GDP were 1991–94 (the long recession) and 2009–12 (the unaffordable tax cuts Peter Costello unveiled to try to win the 2007 election, which Labor then implemented).

The political reasons for this are obvious. In 1990 Labor had just been re-elected (just!), and so was not concerned by the prospect of rising unemployment. In 2021 the Coalition is preparing to face an election. For it, winning that election takes priority over any economic argument. People want jobs more than they want a balanced budget, so that’s what this budget aims to provide.

Most commentators have missed the obvious corollary. After the election, assuming the government is re-elected, pleasing people will not matter so much. Expect to hear Josh Frydenberg wax as righteous next year about the need to reduce the deficit as he is now about the need to reduce unemployment.

I don’t believe this is a long-term change of strategy by the Coalition; it won’t dump its political tactic of branding itself as the “fiscally responsible” party and Labor as the party standing for deficits. This is a short-term tack that will be reversed after the election. Of course no government promising $503 billion of deficits in five years can be called fiscally responsible, so it will make cuts then to reclaim the brand.

Some will say: “Dude, you’re out of date. Our modern thinking is that governments don’t need to run surpluses. They can just send the bill for the deficits to the Reserve Bank, and it can finance them — and tear up the debt.”

The government and the Reserve have already taken a first step in that direction. At the end of March 2019, the bank held just $3 billion of the roughly $620 billion of government securities then on issue. At the end of March 2021, it held $150 billion of them. While it has bought them in the market rather than from government directly, in net terms it has financed about half of the Covid deficits so far.

But there is no suggestion that it is buying worthless assets that will be torn up down the track. To treat Australian government securities like that would run big risks for all the nation’s financing on global markets. The government will eventually have to repay the Reserve Bank the value of that debt. It will have to get the money either by running significant budget surpluses or (more likely) by issuing new debt at whatever the going rates are at the time. They are unlikely to be as benevolent as those we have now.

As for the Reserve’s own monetary policy, it knows that while cutting interest rates helps stimulate business investment — its ostensible aim — it has even more impact on asset prices. It is throwing fuel on the fire of housing prices, putting home ownership even more of out of reach for aspiring homebuyers.

It is time we went back to economic reform, which the Coalition largely abandoned twenty years ago after its near-death experience introducing the GST. We need to get the adults back in the room, to look at how governments can do their business more efficiently. Bad politics has made good economics take a back seat for too long.

We don’t have to spend $10,000 a day locking up refugees who pose no threat to Australia. We don’t have to allow housing investors to run up losses they can use to reduce their tax bills. We don’t have to allow business to deduct interest bills from their taxable income. We don’t have to allow family trusts and offshore tax havens to enjoy special tax status. We don’t have to allow mining companies to be exempted from the fuel taxes others pay.

Similarly, if our goal is to lower unemployment, we need to look harder at why so many Australians have remained unemployed even though we pride ourselves on having been one of the fastest-growing economies in the Western world over the past thirty years. We would look at the importance of skills training, how we could provide support rather than punishment to vulnerable people out of work, and how we could stop skilled employment visas being used to bring in cheap foreign labour to do the entry-level jobs that formerly gave young Australians their start in the labour market.

We could do more to achieve our goals without leaving huge bills for the kids while pricing them out of home ownership. But it takes political courage. And after 2019, that is in short supply.

Two last points. The $68 billion of net new spending didn’t apply to universities, where the budget proposes to cut support — even though, as the ANU’s Andrew Norton has pointed out, the need for government help is intensifying as the number of foreign students falls sharply. It is breathtaking, and it is tragic, to see this government deliberately starving one of Australia’s main growth industries because it sees universities as the home of political opponents. Menzies would be appalled.

Second, it is not true that the government has decided that Australia’s borders will not reopen until mid 2022, as other media have implied. Rather, to estimate the budget numbers Treasury and Finance had to make some assumptions about what will happen with Covid and the borders — and this was one of the assumptions they chose to make. Frankly, anybody who was shocked by it can’t be following the rising rate of global Covid infections very carefully.

For many reasons, it would be in Australia’s interests for the federal and state governments to be moving faster to expand the areas in which we are opening up. But that involves taking an increased risk, and it seems clear that most Australians don’t want their governments to do that.

Having chosen to “eradicate” Covid-19 rather than learn to live with it, as others have done, it follows that Australia will be one of the last countries to open its borders to the world. I for one would be surprised if this happened by mid 2022. •

The post Kicking the can down the road appeared first on Inside Story.

But much of the debate about how to close this gap misses the bigger point. By focusing on retirement income policy — especially superannuation — it focuses on the symptom, not the cause.

The gender gap in retirement can only be fully understood in the context of the gender gap in lifetime earnings. The size of that gap is even more striking: an average woman with children, for example, earns $2 million less over her lifetime than an average man with children. Women are financially vulnerable even before they retire, and tinkering with super rules won’t fix that fundamental problem.

But the government has some tools to close the gap at its source, starting with the biggest economic reform available: cheaper childcare. High out-of-pocket childcare costs are the single biggest barrier to secondary earners, most of whom are women, taking on more work. The barrier is so high that in a household where both parents have a full-time earning capacity of $60,000, the second earner would be working for about $2 per hour on her fourth day in a week, and for free on her fifth day.

Raising the childcare subsidy from 85 per cent to 95 per cent for low-income families, flattening the taper, and removing the annual cap, as Grattan Institute has recommended, would ensure 60 per cent of families would pay less than $20 per day for childcare. We estimate these changes would cost an extra $5 billion a year and deliver a GDP boost of about $11 billion a year — and, crucially, an extra $150,000 of lifetime earnings for the typical mother.

If the government were looking for a smaller step in the right direction, it could consider making childcare free for second and subsequent children, recognising that childcare is especially expensive for families with multiple children in care.

A more equal government-funded paid parental leave scheme would also help. We recommend six weeks reserved for each parent plus twelve weeks to share between them, paid at the current rate of the minimum wage. Overseas experience shows that more equal sharing of care early on establishes habits for life.

By supporting women who would like to do more paid work, these reforms would go a long way to closing the gender gap. KPMG estimates that 39 per cent of the gap is the result of caring responsibilities, including career interruptions, part-time employment and unpaid care.

But the gap exists even for women and men who spend the same amount of time in paid work. This problem is harder for governments to fix, since much of it plays out in the private sector and is a result of prevailing norms. KPMG finds that 39 per cent of the gap can be attributed to explicit or implicit discrimination, since it can’t be explained by either the type or the amount of work.

But another 18 per cent of the gap reflects the difference in pay for male- and female-dominated occupations and the undervaluing of traditionally “female” jobs. This is something the government does have some power to change, because it is either directly or indirectly responsible for a large share of wages in the female-dominated care sectors. Care jobs historically have had very low remuneration despite their importance and complexity. We have recommended a review of pay and conditions in care sectors, including how to finance higher pay.

Other changes to retirement income policies can make a difference downstream. A case exists for paying super contributions on government-funded paid parental leave, for example, as already applies to other forms of remuneration. But a Grattan analysis shows that these payments would yield only modest income gains because they would be offset by lower pension payments after retirement. A high-earning woman who takes two stints of leave in her early thirties would get an extra $356 a year in retirement, a low-earning woman $164 a year, and an average-earning woman just $73 a year.

Another long-overdue change — abolishing the $450-a-month threshold for paying compulsory super, which can’t be justified in a world of electronic payrolls — affects almost twice as many women as men. Abolishing it would increase retirement incomes for affected workers by between $100 and $300 a year — another modest improvement.

Both those reforms would help, but only at the margins. Instead, the real priority when it comes to the gender gap in retirement is closing the holes in the social safety net for older women who are approaching retirement or already retired.

Single women who don’t own their home are at greatest risk of poverty in retirement and are the fastest-growing group of homeless Australians. Raising the rate of Commonwealth Rent Assistance by at least 40 per cent would lift the incomes of those women by at least $1300 a year, or about 5 per cent.

These changes to retirement income policy would tackle some of the most acute symptoms of the retirement gender gap. But the economic gaps between men and women begin much earlier.

The problem has no quick fix. It will require ambitious and often expensive changes. But unless we drastically reduce the lifetime earnings gap, we can expect to be papering over the retirement income gap for many decades to come. •

The post Minding the wrong gap? appeared first on Inside Story.

Yellen’s plan is to end what she calls a “thirty-year race to the bottom on corporate tax rates.” The problem is well known. Countries have an incentive to lower corporate tax rates to attract multinational firms, and the jobs and investment they bring. But once all countries join in, many of these multinationals end up paying no tax whatsoever.

It gets worse. Because rich households have shown a cunning ability to dodge taxes using companies, trusts and various deductions, the bulk of the tax burden shrugged off by multinationals falls on middle- and lower-income households, eroding the progressivity of the tax system and inflaming inequality.

To be sure, Yellen’s plan is strongly motivated by American interests. President Biden wants to raise the US corporate tax rate from 21 per cent to 28 per cent to help pay for US$3 trillion in spending on roads, bridges, home care for seniors, and manufacturing. Acting alone, this would reduce US competitiveness. But if the rest of the world is doing the same thing, competitiveness is preserved. Of course, the rest of the world benefits too, through increased tax revenues and lower inequality.

Despite its merits, though, Yellen’s bold plan has already faced a host of criticisms. While the devil is in the detail, the criticisms thus far don’t stack up.

One criticism is that lower corporate taxes are a good thing because they promote investment and growth. Is this true? It depends on timing. If an economy is running hot, forcing up inflation, then cutting corporate taxes could be a good way to raise growth, boost investment and cool inflation by giving firms extra cash to expand their businesses and increase supply.

Alas, we haven’t lived in that world for quite some time. The notion that a lack of funds is constraining growth in Australia or any advanced economy is baseless. Even before Covid-19, corporate profits and retained earnings were at record highs, and interest rates on borrowings at record lows. Businesses had plenty of cash and could get more of it if they wanted.

Since Covid-19, businesses are sitting on even more cash, interest rates are even lower, and businesses can use the government’s instant asset write-off initiative. Cutting corporate taxes in this environment is like giving a glass of water to a drowning person.

A similar criticism of Yellen’s plan is that tax-rate competition between countries keeps governments accountable. If they unfairly raise taxes, the argument goes, companies will move to other countries.

Not only is this argument tone deaf to the race to the bottom we have witnessed in recent decades, it also ignores how, in countries like the United States and Australia, tax rates are determined by democratically elected politicians who should be accountable to their citizens. Competition between countries on corporate tax rates reduces accountability rather than increasing it, eroding trust in democratic processes.

The other criticism of Yellen’s plan is that coordination between countries won’t work. At least one country won’t play ball, and all the world’s multinationals will simply move there. This argument has several flaws.

First, the United States and Europe alone represent half the world’s largest multinational firms, according to analysis by Emmanuel Saez and Gabriel Zucman. This means that any US–Europe agreement will immediately cover more than 75 per cent of the world’s corporate profits. When the other G20 countries are included, almost all the world’s profits are captured. France and Germany have already given in-principle support to Yellen’s plan — which she is pushing through the G20 — so substantial inroads have been made already.

Second, the number of firms that relocate to tax havens is smaller than politicians make out. Out of the world’s 2000 largest multinational firms, according to Saez and Zucman, only forty-two have taken the plunge: eighteen to Ireland, thirteen to Singapore, seven to Luxembourg and four to Bermuda. The risk of a wholesale exodus from the United States is more political rhetoric than economic reality.

Third, those pessimistic about a global agreement ignore the unprecedented level of cooperation on tax measures in recent years. One of the most pervasive forms of multinational tax avoidance is “BEPS” — base erosion and profit shifting — by which companies buy and sell assets between their subsidiaries at lower prices to reduce their tax bill. Led by the OECD, G20 countries have taken major steps to clamp down on this practice by improving transparency, data collection and cross-border cooperation. Countries have made strong commitments in the G20 and have complied with them.

The fact that this plan is being led by the United States is a game changer for international cooperation. Washington not only has the power to lead the world on these issues, it also has the financial heft to punish countries that don’t comply. Joe Biden has plenty of carrots and sticks to make this plan work.

So, will Yellen’s plan work? The chances of success are the highest they have ever been, but plenty of details remain to be ironed out. Headline corporate tax rates (the tax rate companies are meant to pay), for example, are quite different from effective corporate tax rates (the tax rates companies pay after deductions). If the G20 commitment relates only to the headline tax rate, countries could continue to compete by offering more generous deductions.

Yellen also faces domestic challenges — she still has to get the plan through Congress (in which she doesn’t have a filibuster-proof majority) — and France and Germany are already tying the proposal to other items on their wish list, like European rights to tax Big Tech. In Australia, dividend imputation has an impact on who bears the cost of corporate tax, as do the intricacies of the various tax systems across G20 countries.

These are difficult issues, but none are deal-breakers. The G20 has worked through complex, country-specific matters before and has secured agreement with an incremental approach: first agreeing there is a problem, then agreeing on a general solution and then chipping away at the details.

The critics of Janet Yellen would be wise to heed the advice attributed to the playwright George Bernard Shaw: people who say something cannot be done should not interrupt those who are doing it. •

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The Morrison government said exactly that when it promoted its three-stage personal income tax cuts, which passed into law not long after the 2019 election. Working Australians would receive greater “rewards for effort” without the progressivity of Australia’s tax system being sacrificed. Later, when the government brought forward its stage two tax cuts, it argued they would “improve incentives to work.”

John Howard made similar claims about the income tax cuts at “the heart” of the tax changes his government introduced in 2000. Australian workers would now be given a “genuine reward for their efforts,” he declared. And, lest it be thought this line of thinking is confined to one side of politics, Labor treasurer Paul Keating asserted back in 1985 that “lower marginal rates will enhance our economic performance by better rewarding initiative.” Among other things, he was proposing a substantial reduction in the top personal tax rates from what was then 60 per cent.

It’s certainly true that tax cuts can deliver a sugar hit to the economy, especially in response to an economic downturn. And the design of the tax system — how taxes are collected, and from whom — undoubtedly has an impact on economic performance, for better or worse. But any clear correlation (let alone a causal relationship) between the level of tax and the rate of economic growth — or any other measure of economic performance — is far less obvious, as research by the OECD and the IMF has shown.

The most contentious of all tax cuts, of course, are those targeted at high earners. The frequent claim that they encourage economic growth was recently examined in some detail over a fifty-year period by David Hope and Julian Limberg at the London School of Economics. Using data on economic growth, unemployment and income inequality, the two economists tracked the impact of cuts in income and wealth taxes for high-income or high-net-worth individuals in eighteen OECD countries.

Their conclusion? While the top 1 per cent of income earners undoubtedly captured a greater share of national income (by an average of 0.8 percentage points in the five years after each tax reduction), the cuts had no statistically significant impact on real per capita GDP growth. Nor did they reduce unemployment.

Hope and Limberg’s findings are consistent with other research showing that reducing top marginal income tax rates has no significant impact on the amount of paid work undertaken by people who benefit from them. Without that increase in effort, the argument for the tax cuts breaks down.

What about the other claim made by the federal government: that its cuts will preserve the progressivity of Australia’s tax system?

As a starting point, it’s important to recognise that Australia’s income tax system is more progressive than generally recognised. Its progressivity arises from the complex interaction of its rates and thresholds.

The top personal rate — effectively 47 per cent — is in the middle rank of OECD countries. But the threshold above which it applies is relatively low as a proportion of the average wage — lower, in fact, than all but six OECD countries. Our tax-free threshold, on the other hand, is very high (and twenty-six OECD countries don’t have one at all). And our flat-rate Medicare levy is a lot lower than the social security contributions levied in the United States and most European countries. (Our GST rate is also low compared with the OECD average of 19.2 per cent, with only four of thirty-six comparable OECD countries being lower.)

Combine these factors with a tightly targeted social security system and Australia achieves a significant measure of income redistribution — and it does that despite having a smaller overall tax “burden” than most OECD economies.

Treasurer Josh Frydenberg is correct when he says that Australia will “retain a progressive tax system.” But the income tax system as a whole will nonetheless become less progressive. In fact, an analysis by Grattan Institute suggests that 60 per cent of the plan’s benefits will flow to the top 20 per cent of taxpayers, reducing the share of income tax paid by this group from 68 per cent in 2017–18 to 65 per cent by 2029–30. As a result, Australia’s personal income tax system will become less progressive than in any year since at least 2003–04, and by one measure since the 1950s.

This is only partly because of the proposed rise in the top threshold from $180,000 to $200,000 (which would still leave it relatively low by OECD standards). The reduction in progressivity stems mainly from the fact that people in the top tax bracket will benefit significantly from two other changes: the lifting of the threshold for the 37 per cent marginal rate from $90,000 to $120,000 from the beginning of the current financial year, and its abolition entirely from 1 July 2024; and the increase in the 32.5 per cent threshold from $37,000 to $45,000, and its reduction to 30 per cent from 1 July 2024.

Of course, shielding high-income earners from the benefits of reductions in tax rates or increases in those thresholds is difficult without more substantial adjustments to the rate scale. But that doesn’t justify the pretence that the progressivity of the tax system is unaffected by changes envisaged by the Morrison government.

I’m certainly not advocating (as the opposition did at the last election) that the top marginal rate should be increased — and particularly not at the current or prospective threshold. Among other things, that would almost certainly encourage tax avoidance strategies that (legally) exploit the already large difference between the top personal income tax rate and the company tax rate (especially now that small businesses pay a company tax rate five percentage points lower than other businesses).

More generally, I don’t see any compelling reason why employees who are earning wages or salaries of $200,000 or more and are not using tax-minimisation strategies should be paying more of their wages or salaries in tax than they currently do.

What does worry me is the tax treatment of income from other sources — from capital gains and rent, for example, and from superannuation fund earnings and “business” income routed through trusts. This income goes mainly to people whose annual pre-tax income is well in excess of $200,000 but who don’t pay tax at the same rate as people whose wage or salary income exceeds that threshold. It’s perhaps understandable, but nonetheless regrettable, that the federal opposition has walked away from its reforms to negative gearing and capital gains tax.

If the government truly believes that high marginal tax rates adversely affect incentives to work, save and invest — and if it also believes that Australia’s tax system should be progressive — then it should be looking at how high earners unfairly benefit from features of the tax system intended to benefit low-income earners (including that very high tax-free threshold), at taxing capital income at a similar rate to income from working, and at curtailing high-income earners’ use of tax-preferred saving or investment vehicles to reduce their tax bills.

If it did this, the case would be much stronger for reducing the top marginal rate or making much larger increases in the threshold at which it becomes payable. Or the government might even use the extra revenue to better fund aged care and other worthy programs without having to raise taxes or introduce new ones. Or it might feel less need to raise taxes (or introduce new ones) when the time comes to start reducing the budget deficit. •

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Paid for by industry superannuation funds, this recent TV ad is designed to pressure the government to deliver on its promise to lift the compulsory super rate from 9.5 per cent to 12 per cent in increments of 0.5 per cent, starting in July and finishing in 2025.

The ad’s promise of extra money for nothing sounds great. Except, of course, it doesn’t work that way. Four pieces of research over the past decade — the review of taxation by former treasury head Ken Henry, a Grattan Institute study, work by the Reserve Bank and, most recently, the Retirement Income Review headed by former treasury official Michael Callaghan — have all come to the same conclusion: increases in compulsory superannuation come predominantly from wages.

Arguments to the contrary, including by Labor and the super industry, are unconvincing. Sure, wages growth has been very slow anyway, but that doesn’t mean it wouldn’t be slower still if employers have to increase the superannuation rate further.

Yes, the ad’s description of a 12 per cent rate being guaranteed is correct — so long as you believe politicians keep their promises. This particular pre-election promise by the Morrison government falls into the category of making-promises-we-don’t-believe-in-but-are-necessary-to-help-us-win-the-election. Whether Morrison keeps the promise depends on how much pressure is applied through public opinion, including that influenced by advertising campaigns, versus the wishes of those in the government who have always opposed compulsory super.

And if the future is even more super, as the ad argues, then the future is also even greater inequality — something the Labor Party is supposed to be against. More super is fine if that’s what people want to do with their money, but it’s a bad idea if a large chunk of it comes from taxpayers boosting the retirement incomes of people often better off than themselves.

When treasurer Josh Frydenberg released the final report of the Retirement Income Review in November, he highlighted a few of its findings, including that “the age pension reduces income inequality among retirees, as low-income retirees receive the largest age pension payments.” That’s true, but he left out the rest of the report’s conclusion: “While the age pension helps offset inequities in retirement outcomes, the design of superannuation tax concessions increases inequality.”

That design applies a flat rate of 15 per cent tax on contributions and earnings, meaning the higher your income, the more you save in tax by not paying normal income tax rates of up to 47 per cent.

In June 2018, more than 11,000 people had more than $5 million each in their super accounts. The review calculated that a super balance of $5 million attracts around $70,000 a year in tax concessions on earnings. A $10 million balance attracts more than $165,000. By contrast, the full age pension, with supplements, is worth $24,552 a year for an individual or $37,014 for a couple.

To those who argue that people who pay more tax should be entitled to higher concessions, the review points out that higher-income earners receive not only bigger concessions in dollar terms but also “more superannuation tax concessions than lower-income earners as a percentage of superannuation contributions.” (My emphasis.)

The Henry report calculated that 37 per cent of superannuation tax concessions went to the top 5 per cent of taxpayers. The latest report says the total cost of the concessions on both contributions and earnings grew by almost 40 per cent to $42 billion in the four years to 2019. Unchanged, it projects their value to increase from 4.6 per cent to 5 per cent of GDP over the next forty years, while spending on the age pension will fall from 2.5 per cent to 2.3 per cent. In short, inequality will increase.

Politicians on both sides of the fence used to worry about such unfairness. “A major deficiency of the current system is that tax benefits for superannuation are overwhelmingly biased in favour of high-income earners,” treasurer Peter Costello said in his first budget speech in 1996. And he did something about it by imposing a tax surcharge on superannuation contributions for high-income earners. But a few years later, in 2003, he responded to complaints about administrative complexity by starting to phase out the surcharge. It disappeared altogether in 2005.

Costello’s complete conversion to the interests of the super industry and greater inequality came in 2006, when he introduced tax-free super for all retirees as well as allowing people to tip up to $1 million into their funds before applying generous caps on their annual contributions.

When Wayne Swan’s turn as treasurer came in 2007, he started in the same place as Costello nine years earlier. He spelled out the regressive impact of super concessions on an income tax system that was supposed to be progressive. While those on incomes above $180,000 received a 31.5 percentage point reduction in their marginal tax rate, someone on $35,000 received just 1.5 percentage points.

The situation was even worse for those whose incomes were below the tax-free threshold, who were still taxed 15 per cent on their compulsory super contributions. In other words, they were being penalised for being required to put money into superannuation. Swan fixed that with a rebate, as well as halving the caps for super contributions attracting the tax concession. But he baulked at further reform to tackle inequity, including the Henry report’s recommendation for a uniform 15 per cent tax deduction on contributions for most people.

Apart from their gaining little or nothing in tax subsidies, the superannuation system is a raw deal for many low- and middle-income earners for another reason: as their super income increases, their pension payments fall because of means testing, with the result that they are little or no better off for having been compelled to put aside 9.5 per cent of their salary.

Governments have tinkered further to tackle some of the worst excesses. Costello’s surcharge has been resurrected, with people with incomes above $250,000 now paying 30 per cent tax on contributions. Superannuation balances above $1.6 million (around 1 per cent of retirees) also attract extra tax.

But the basic inequity of the system remains. And it has increasingly been ignored in the debate, despite the best efforts of organisations such as the Australian Council of Social Service, which has a long track record of well-researched campaigning for a fairer system.

The system’s inequity also raises questions about its sustainability. When Josh Frydenberg released the Callaghan report he highlighted its finding that the costs of the overall system were “broadly sustainable.” But he didn’t mention why the report uses the word “broadly.” While higher superannuation balances should reduce the cost of the age pension slightly over the next forty years, the cost of the super tax concessions are projected to grow and exceed the cost of the pension by about 2050. “The increase in the SG [super guarantee] rate to 12 per cent will increase the fiscal cost of the system over the long term,” the report adds.

While the report doesn’t make specific recommendations — something for which the politicians will be grateful — it does make some pointed observations. One of them stresses the unfairness and unsustainability of tax-free super in retirement:

There are areas where superannuation tax concessions are not a cost-effective way to help people achieve adequate retirement incomes. In particular, the cost of the earnings tax exemption in retirement will grow faster than the growth in the economy as the system matures and provides the greatest boost to retirement incomes of higher-income earners.

The report observes that “extending earnings tax to the retirement phase could also simplify the system by enabling people to have a single superannuation account for life and would improve the sustainability of the system.”

It also points out that the present structure discriminates against women, who retire with smaller super balances, on average, and less of a taxpayer subsidy.

Successive reports, including Henry’s, the Grattan Institute’s and Callaghan’s, have found that increasing the super guarantee is not necessary to give people adequate retirement incomes. The benchmark typically applied for maintaining living standards in retirement is 65 to 70 per cent of previous income. This is based on people facing lower costs in retirement, often having paid off their home and raised and educated their children, and no longer needing to save for retirement.

The latest review found that, assuming what it called an efficient drawdown of savings, this benchmark was reached or exceeded for all income levels at the present compulsory super rate of 9.5 per cent. Even given the “inefficient” way many people spend their super — by withdrawing at only the minimum required rates of 4 per cent or 5 per cent, for example — the inquiry found that most retirees’ income was 60 per cent or more of that while working.

Particularly in the earlier years, that means retirees often aren’t running down their savings and feel that they can cover unexpected expenses and, in particular, leave an inheritance. While that is their choice, it doesn’t mean that it should be encouraged by government policy. “Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations,” is how the report puts it. And because inheritances are not distributed equally, it adds, they increase inequity in the next generation.

Many developed countries have some form of inheritance or wealth tax. Australia has none. To the contrary, we have a form of reverse wealth tax, with taxpayers subsidising inheritances via the super system. The bigger the amount, the bigger the subsidy.

The super guarantee should not be increased without first making the tax concessions fairer. Otherwise, higher-income earners will receive even bigger taxpayer subsidies — largely paid for by the taxes of lower-income earners, many of whom benefit little from the system but are compelled to put money aside that could be better used to meet their present-day needs. •

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It’s not just theory. Recessions in the United States have come in all shapes and sizes since the end of the second world war, but most have been V-shaped. Australia’s few recessions have generally followed the same pattern.

But as financial wonks like to say, past performance is not a sure guide to the future. There are many reasons to think that Australia’s Covid-19 recession won’t follow the pattern. The government’s reliance on the shaky V-shaped assumption has resulted in a budget that’s big on spending but small on stimulus.

Covid-19 has not created a normal recession. While some recessions affect demand (like the 9/11 attacks, which kept US consumers at home) and others affect supply (earthquakes and tsunamis that cripple businesses), Covid-19 affects both. Government lockdowns and the fear of getting sick have kept consumers at home, while the shutdown of supply chains, shortages of workers, the inability to source inputs, and the sudden fall in international tourism, students and migrants have devastated businesses.

More than 900,000 businesses are on JobKeeper. The sad reality is that many will collapse once supports are removed, and that will reduce the economy’s capacity to produce goods and services. The speed of the recovery will hinge on the economy’s flexibility — how quickly workers can shift into new jobs, how quickly new businesses can be created and how quickly capital can be redeployed. Australia’s reduced labour mobility and high barriers to entry for new businesses suggest a slow process awaits.

International developments throw more cold water on a V-shaped recovery. It’s quite a list: Australia’s deteriorating relationship with China, our biggest trading partner; America’s unpredictability; growing calls around the world to reduce dependence on overseas suppliers; the collapse of the World Trade Organization’s dispute settlement system; the tightening of Australia’s foreign investment regime; an exchange rate already back at pre-crisis levels; and that collapse in tourists, immigrants and the international tertiary students who make up our third-biggest export sector.

All these conditions suggest less international support for the Australian economy after Covid-19 than we had before. This is a big problem for a country that gets a fifth of its gross domestic product from exports, $4 trillion of its capital stock from foreign investment and most of its GDP growth from immigration.

Then there’s the health crisis itself. The budget’s V-shaped recovery assumes not only no more outbreaks — a bold assumption when we look around the world today — but also the widespread availability of a vaccine by 2021. As the budget itself notes, the timing and efficacy of a vaccine is highly uncertain. Even if it eventuates, the US Centers for Disease Control and Prevention has sought to moderate hopes that it will mean an instant return to life as normal, noting that face masks are more guaranteed to protect against Covid than a vaccine.

Yet a V-shaped recovery is the budget’s baseline — and the flaws in that assumption have significant consequences for the government’s planning.

The budget’s income tax cuts, for instance, are liable to be saved, not spent. While an investment allowance is worth a try, it assumes that cost is stopping businesses investing, rather than an absence of customers. (The poor take-up of similar measures in the past may suggest it’s the latter.) The budget has no plan for substantive structural reform to boost confidence, and some of the areas where stimulus would be most effective are conspicuously absent — infrastructure investment and the construction and repair of public housing represent an unusually small share of a big-spending budget.

There is also the question of where money is being directed. Covid-19 has hit the services sector the hardest, but it’s manufacturing that’s singled out for support. Covid-19 has disproportionately affected women, but most budget measures favour men and male-dominated industries. Covid-19 has caused massive unemployment, but it’s the employed who get the tax relief. Covid-19 has caused huge challenges for young people, but funding changes and a lack of support for universities threaten to make things worse for many.

The new JobMaker wage subsidy program, an improved NBN and investments in apprenticeships are the bright spots in the budget. But the risk is that Australia’s recovery more closely resembles a K than a V, with some industries booming (digital, manufacturing) while others go bust (universities, tourism), and with some cohorts of people benefiting (men, the middle-aged, the employed) while others aren’t (women, young people, the unemployed).

A V-shaped recovery is the goal, but it won’t be achieved if large segments of the population and the economy are left behind. The need to make growth more inclusive has never been stronger. •

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In the episode called “A Waste of Energy,” the PM’s advisers are struggling with the fact that the government’s plan to supply China with more coal will expose their boss’s grand rhetoric about fighting climate change. A brainstorming session ensues:

Adviser 1: What if we were to say we were selling them clean coal?

Adviser 2: Unfortunately, there’s a problem with that.

Adviser 1: What?

Adviser 2: [exasperated] There’s no such thing.

Adviser 1: Aren’t we working on it?

Senior Adviser: Yeah… but not with a straight face. It’s a long way off in the future. [Wistfully looking to the sky with a smile] But boy it’s been a fantastic distracting phrase.

Adviser 1: What if we come up with another one?

Senior Adviser: Pleeease!

Let’s put aside the fact that this latest technology roadmap policy is eerily similar, though less thorough, than a government document released in 2017 — which, incidentally, was also called the Low Emissions Technology Roadmap. (Yes, they aren’t much good at coming up with new distracting phrases.)

The fault with this latest roadmap doesn’t lie so much in the technologies it recommends for funding (including, you guessed it, clean coal, aka carbon capture and storage). Its fatal flaw is that even if it managed to achieve all its “stretch targets” for these technologies by the ten-year mark, we’d still be no closer to achieving emissions-reduction goals unless the government also accepted the need for a carbon price.

Of the five nominated technology priorities, three would remain completely uncommercial without a significant carbon price or some other incentive for carbon abatement.

Hydrogen: The government’s target is a production cost of $2 per kilogram. This equates to a price per gigajoule of energy of almost $17 (measured by lower heating value). Yet manufacturers say they’ll be ruined by gas prices in the realm of $8 to $12 per gigajoule and energy minister Angus Taylor talks of bringing that figure down to $6 per gigajoule as part of his gas-fired recovery.

Low carbon metals: The government has set a target of $900 per tonne for low-emissions steel and $2700 per tonne for aluminium. Yet the average price for a conventional tonne of raw steel has been around $500 to $650 per tonne and for aluminium between about $2000 and $2500.

Carbon capture and storage: Here the target is $20 per tonne of CO2 captured and stored underground. But this involves extra equipment and a reduction in the conversion efficiency of existing fossil fuel burning processes, which means it will cost an extra $20 per tonne of CO2 relative to what we’ve done in the past.

The remaining two of the roadmap’s five technological priorities — long-term storage and enriched soil carbon — are also hamstrung by the lack of a carbon price or some other financial incentive for reduced emissions. Long-term energy storage is completely unnecessary unless we significantly expand renewables, but investment commitments in wind and solar farms have collapsed over the past twelve months except where state government initiatives apply.

Enriching soil carbon certainly provides agricultural productivity benefits to farmers. But the roadmap effectively concedes that this too relies on a carbon price. Its aim isn’t to foster technologies to help farmers increase soil carbon; it is to measure soil carbon more cheaply so farmers can then make money selling carbon credits.

The government wants us all to think about the technologies we might need ten or twenty years down the track. But this is just a distraction from its failure to materially reduce emissions right now. And for those future technologies to be of any interest to the private sector they will need exactly the same type of policy mechanism that we need to reduce emissions immediately.

Getting businesses to adopt new technologies to reduce emissions, or even to use old and well-proven technologies, isn’t rocket science. You don’t need to be the chief scientist, or a Rhodes scholar, or have a technology roadmap. For businesses to reduce emissions they need an attractive financial incentive to do so.

Yet the government’s one and only mechanism to do this — the Emissions Reduction Fund, since rebranded as the Climate Solutions Fund — is hamstrung by an inadequate budget and an inability to attract meaningful levels of abatement at a price the Clean Energy Regulator is able to pay. The two charts below help to explain why the government is so desperate to distract us from the here and now.

The grey line in the first chart shows that by 2030 emissions will be almost the same as they were in 2000. This is based on the government’s own projections and includes an array of optimistic assumptions about what existing policies will achieve.

Let that sink in for a second or two: this would represent three decades of almost no progress in getting our emissions down.

Source: Green Energy Markets LGC/Carbon Credits Price Drivers Report derived from data within the Federal Government’s Emissions Projections 2019

The blue dashed line extrapolates the trend of the small annual average emissions declines the government expects over the 2020s all the way to 2050, and the green line shows the emissions trajectory required to 2030 to meet the government’s target of a 26 per cent reduction in emissions relative to 2005 (conveniently the year when our emissions almost peaked).

I’ve then extended this green line beyond 2030 to illustrate the path we’d need to take to bring emissions down to net zero by 2050. This is consistent with the targets adopted by Britain, New Zealand, France, Germany, Korea, Canada, Chile, Norway… the list goes on. It will include the United States, too, if Joe Biden is elected president in November, and China has recently committed to net zero by 2060.

The yellow bars that build steadily from 2020 to hit 530 million tonnes of CO2 by 2030 represent the amount of new abatement the government needs to acquire to meet its 2030 target. This is a function of emissions not just in the year 2030, but in all the years from 2021 to 2030. The government will of course claim that because Australia’s historical emissions were below prior targets under the Kyoto Protocol this counts as credit towards its Paris 2030 target. There’s just one problem — the other major signatories to Paris don’t agree.

That brings us to the next chart, which looks at what the government’s Emissions Reduction/Climate Solutions Fund has actually achieved. The green bars show how much annual abatement the projects contracted in each year’s auctions will deliver. The blue bar towering above most of these green bars is the annual amount of abatement the fund needs to be contracting each year in its auctions if the government is to achieve the 2030 target.

Source: Green Energy Markets LGC/Carbon Credits Price Drivers Report based on data within the Clean Energy Regulator’s Carbon Abatement Contract Register and the Federal Government’s Emissions Projections – 2019.
Note: Lapsed or terminated contracts are excluded. Annual abatement is calculated by dividing the total contracted abatement by total contract length including time to fulfil conditions precedent. The amount of annual abatement the government needs to contract in each year’s auctions is not 530 million tonnes divided by ten years. Rather, it is a function of the fact that projects contracted to deliver abatement in 2021 will provide that annual abatement over ten years; meanwhile, the next year the projects contracted will only be able to contribute nine years’ worth of abatement towards the 2020–30 Paris target, the subsequent year’s contracted projects provide eight years’ abatement, and so on. So the total number of years for which the auctions can contract projects to deliver abatement to 2030 is fifty-five.

The two auctions in 2015 contracted a combined total of 10.3 million tonnes of abatement per annum, in line with what the government needs to be procuring in future years. Unfortunately the amount of abatement the fund has procured has since collapsed.

Why? When the fund began conducting auctions in 2015 it had the benefit of being able to piggyback on myriad abatement projects that had been developed either under the Gillard government’s carbon pricing regime or, in many cases, with the support of the old Renewable Energy Target or the NSW Greenhouse Gas Abatement Scheme (the world’s first emissions trading scheme). And a big bunch of low-hanging fruit — NSW land-clearing permits — were another cheap, never-to-be-repeated pick-up.

The other side of the equation is the price the Clean Energy Regulator has been prepared to offer for abatement, which is shown by the yellow line with blue dots. While the volume contracted in 2017 collapsed, it still had to pay a higher price to get this much-diminished volume compared with what it paid in 2016. Since then the regulator has slowly increased the price it will pay, but the abatement volume offered remains tiny.

In order to stimulate abatement volumes to remotely near what’s required, the regulator will almost certainly have to pay a substantially higher price than the roughly $16 per tonne offered recently. But to make its budget of $2 billion stretch to purchasing 530 million tonnes, it can only afford to pay $3.77 per tonne.

The government likes to assert that its climate policy is about technology, not taxes. But it’s not technologies that we’re lacking, it’s the money to drive businesses to use and improve them. And that has to come from either a carbon price of some kind, or raising other taxes. •

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There are several reasons for this. First, these tax cuts are a permanent solution to a temporary problem. Covid-19 will certainly have long-run consequences, but the major impacts that necessitate stimulus are temporary. Tax cuts are not. They represent a permanent, structural reduction in the size of the federal budget. This is fine if the demands on government spending are expected to be smaller in the future. But an ageing population and years of alarm bells in Treasury’s Intergenerational Reports suggest the opposite — and this isn’t even including big new spending proposals to deal with challenges ranging from climate change and aged care to dental, childcare and mental health supports.

Second, these tax cuts are poorly targeted to the people who have been hit hardest by Covid-19. Tax cuts aren’t much help when you don’t have a job. The combined three-stage tax cuts provide little assistance to the poor and unemployed while favouring the rich. A part-time worker earning $30,000 a year will secure just $255 a year from the planned tax cuts while someone on the prime minister’s salary will ultimately see an $11,640 annual benefit. It’s not surprising that tax cuts favour the rich given the rich pay most of the tax: the top 5 per cent of income earners will pay more than a third of the total tax collected in Australia in 2024–25. But the fact that low-paid workers are the ones bearing the brunt of Covid-19 makes these tax cuts a poorly targeted support program.

Third, the poorly targeted nature of these tax cuts makes them a weak form of stimulus. Rich people save more and spend less of their income than poorer people. Since more than 60 per cent of the total cost of these tax cuts through to 2029–30 come from stage three, which benefit people on high incomes the most, the majority of this stimulus will be saved, not spent. Research from the United States shows why this is a bad idea. The boost to GDP from tax cuts that favour the rich is less than one-quarter of that which comes from other forms of stimulus, including transfers to individuals, transfers to state governments for infrastructure, and purchases of goods and services by the government.

Finally, tax cuts will not only worsen inequality, they will also exacerbate the low-growth, low-inflation, low-interest-rate, low-investment economy we struggled with pre-Covid-19. Economists Atif Mian, Ludwig Straub and Amir Sufi show how diverting more national income away from the poor in favour of the rich fuels increased savings while reducing spending. This results in exactly what we’ve seen in recent years: lower inflation, lower interest rates, increased household debt, and lower investment and growth. Diverting even more resources towards wealthier Australians through these tax cuts will continue this cycle of increased savings by the rich and increased debt among the poor as they struggle to keep up, spurred on by low interest rates.

The biggest problem with these tax cuts is that there are better ways to stimulate the economy. The best fiscal stimulus is the kind we don’t regret later on; it’s stimulus that boosts the economy while tackling long-run challenges we’ve been reluctant to address because of the spending it would entail.

Public housing is an obvious option. With the pre-Covid-19 shortfall in homes estimated at 650,000, increasing the supply of public housing stimulates the construction sector, deals with a long-run challenge and, best of all, leaves the government with valuable assets on its balance sheet. An even bigger bang-for-government-buck could come from increasing rent assistance, releasing more land for housing construction, and easing restrictions on the number of tenants and the eligibility of public housing tenants.

Infrastructure is the best and worst form of stimulus: it boosts short-term demand and long-term productivity but takes too long to plan, prepare and build to be useful. But a balance can be struck by directing funds to state and local governments for infrastructure repairs and small-scale projects. And if Covid-19 permanently boosts the digital economy, then commencing longer-run projects to improve the NBN and access to the internet, software and hardware make sense, and would lock in near-zero interest rates for high-return investments.

The other big long-run challenge that needs funding is climate change. The best solution to climate change is pricing carbon, not a Green New Deal; but with interest rates at rock bottom, government spending can help encourage household investments in insulation, double glazing, energy-efficient lighting, energy-efficient water heating and solar panelling (while learning the lessons from the pink batts disaster during the global financial crisis).

Each of these ideas is a better form of stimulus than tax cuts. But if the government is committed to implementing tax cuts, now is the time to combine them with substantive reform. Much could be done in reforming the tax and welfare systems to improve their efficiency and fairness, increase incentives to invest and work, and ease the cost of doing business. The usual challenge with tax reform is that it creates winners and losers, the latter of which tend to oppose the reform process. Combining tough reforms with crowd-pleasing tax cuts is a practical way to build support for the measures.

Implementing tax cuts without broader reform is not only a poor form of stimulus, it is a missed opportunity. We can do better. •

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New research from economists Atif Mian, Ludwig Straub and Amir Sufi shows that this cycle is fuelled by inequality. Wealthy people have cornered a greater share of national income, and are saving more. Less well-off people are receiving a smaller share of income, and borrowing more. The resulting decline in interest rates has kept the cycle going.

It sounds eerily similar to the situation in Australia, and it’s not the only cycle that’s increasing inequality. A lack of competition between firms is having a similar effect: transferring wealth from poor consumers to rich shareholders. Breaking these self-perpetuating cycles will be critical to Australia’s economic recovery.

The nub of the problem is that rich people have a nasty habit: they save too much and spend too little. This isn’t necessarily a problem if their savings are invested in expanding businesses, creating jobs and contributing to economic activity. Sadly, though, Australia’s well-documented increase in inequality hasn’t been accompanied by an increase in investment. Quite the opposite: while inequality has grown, investment has flatlined.

Mian, Straub and Sufi’s research shows that this “savings glut of the rich,” as they call it, is creating as well as financing the debts of the non-rich. Too much saving and too little investment has depressed interest rates; and lower interest rates are fuelling debt levels among non-rich households, which are borrowing to keep up. For the first time, this research shows, the rise in the share of income taken by the rich can explain almost all of the increased household debt of the non-rich.

We can see a similar cycle playing out elsewhere in the economy. In the Oxford Review of Economic Policy last year, Joshua Gans, Andrew Leigh, Martin Schmalz and I showed how market power is transferring wealth from poor people to rich people. The mechanism is straightforward: big companies have more power to increase their mark-ups, and so they do. That might be good for shareholders (who get higher profits), but it’s bad for consumers (who pay more to consume).

With poor people spending most of their income on consumption and owning few shares, and rich people spending a smaller proportion of their income but owning lots of shares, market power increases inequality. This is a serious problem in a country like Australia, where more than half of our industries are concentrated and, unsurprisingly, mark-ups have risen 60 per cent since 1980.

What to do? Australia’s inequality problem isn’t new, but we are becoming increasingly aware of just how damaging it is economically, politically and socially. More alarmingly, we are learning how the macroeconomic and competition effects are creating self-perpetuating cycles of inequality. The recovery from Covid-19 will require deep structural reform to lift growth, and also presents an opportunity to break these cycles through holistic reform of tax, welfare and competition.

The tax system is too generous to the rich, and the welfare system is too mean to the poor. Tax reform is an opportunity to remove the incentives for companies to borrow rather than seek new investors (by introducing a corporate equity allowance, for example) and to tackle the tax breaks that boost the savings of the rich (by reducing superannuation tax concessions, for example). It is an opportunity to broaden the tax base to fund public investment projects that boost productivity.

We can also change the welfare system to directly reduce poverty and thus inequality. Covid-19 hit households at a time when their debts were already high. Strengthening the safety net and boosting household incomes in a way that preserves incentives to work — such as through an earned income tax credit — would help repair household balance sheets and reduce the debt burden constraining consumption.

To boost competition, the government should reform the laws that shield many industries from competition — including those in airlines, pharmacies, coastal shipping, the legal profession and the medical profession. Opening up mature industries to fresh investment is a good way to reduce market power.

The laws regulating mergers and acquisitions should be tightened to guarantee more scrutiny of proposed mergers in industries that are already concentrated. And more can be done to make it easier for people to start new businesses, including the use of profit-contingent loans, the scrapping of non-compete clauses, and the release of appropriately zoned land by state governments.

Past epidemics have one thing in common: they made inequality worse. There’s no reason to think Covid-19 will be any different. The Australian economy can’t afford to snap back to old habits. •

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In thinking about economic reform, the federal government needs to start with some hard truths. The first is that most of the reforms that need to be done are not within the federal jurisdiction. States and territories are responsible for our most inefficient taxes, our most anti-competitive policies and our biggest infrastructure bottlenecks. They are primarily responsible for health and education, and will need to play key roles in meeting many of our energy and climate challenges.

The second hard truth is that the states and territories often have few economic and political incentives to undertake these reforms. Many of the benefits of these reforms, from tax reform to competition reform, push more revenue into federal coffers than state coffers, but the states get left with the political burden.

The third hard truth is that, in the current environment, reform is economically and politically futile if it is not holistic and widespread. The sheer scale of the Covid-19 economic shock means that the piecemeal, business-as-usual reforms that have characterised the last twenty-five years will be like a glass of water on a bushfire.

Economically, reforming the tax system without reforming the welfare system is like giving someone only a left shoe. It is the interaction of these systems that shapes economic incentives and outcomes. Reforms create winners and losers, but piecemeal reform guarantees more losers. Holistic reform is the best way to ensure fairer, more balanced and more economically effective outcomes, because people who lose from one reform will benefit from others.

Politically, holistic reform expands the frontier. It allows for policy trade-offs where both sides of politics can give and take and achieve more than they otherwise could. It allows for the losers from reform to be fewer and better compensated, and can help ease political concerns. If the concern about raising the GST is its impact on the poor, then reform the welfare system to fix it. If the concern about franking credit cash refunds is the impact on retirees, then reform the retirement system to fix it. A holistic approach makes it easier to solve these problems.

The fourth hard truth is that reforms are transitions, not one-off events. Reforms have different impacts in the short run and the long run. They are often costly in the short run and beneficial in the long run, and they produce different winners and losers at different times. This means that properly sequencing reforms is vital if they are to be effective.

Achieving these things requires a national political framework. Australia’s history shows how this can be done.

From 1997 to 2006, Australia implemented the largest set of reforms of this kind in our history through prime minister Paul Keating’s National Competition Policy. These reforms fundamentally reshaped numerous sectors of the economy, including electricity, gas, road transport, water, infrastructure, telecommunications and agriculture. The reforms saw major changes to the structure and governance of public monopolies, created new independent institutions, and undertook sweeping reviews of the impact of laws and policies on competition across the economy.

How did these governments do it? The political framework was everything. First, governments sought independent advice on what needed to be done, culminating in the Hilmer review. This time round, we have no shortage of excellent reports and reviews, so this step has already been done.

Second, the Productivity Commission modelled what the benefits of these reforms would be and, more importantly, how they would be distributed between the states, the territories and the federal government. They found that many of the reforms meant states would do all the hard work while the financial benefits flowed to the federal government. So they created a system of “national competition payments,” which redirected money received by the federal government to the states and territories undertaking the reform. This not only created a financial incentive for states to undertake reform, it also gave them vital political cover. Labor’s competition policy minister, Craig Emerson, recalls the states raising with him the idea of the federal government getting involved in reforming the taxi industry. “They essentially said ‘we’d like you involved because when the shit hits the fan, we can blame the Commonwealth.’”

The third thing the governments did was to get the institutional settings right. They created a new national body — the National Competition Council — to assess progress in implementing the reforms, working with new competition policy units set up by each state and territory government. The National Competition Council made recommendations to the federal treasurer as to the level of compliance and how much states and territories should receive as a result, including penalties for noncompliance.

The result of this political framework was the implementation of the largest, most widespread reform program in Australia’s history. These reforms permanently increased Australian GDP by a whopping 2.5 per cent. They reduced the price of electricity by 19 per cent, the price of telecommunication services by 20 per cent and the price of milk by 5 per cent, to name a few. The reforms were overwhelmingly revenue-positive for all governments.

Looking back at this history, it is disappointing that the current push for reform has already collapsed on the old battlegrounds of whether to cut the corporate tax rate and whether to raise the GST. Without holistic reform, the benefits of these measures will be woefully insignificant. And without a national political framework, holistic reform is a pipedream. Time will tell whether the economic fallout from Covid-19 will be large enough to generate more ambition. •

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Applying the lessons of the global financial crisis to the coronavirus stimulus package announced by the government this week reveals that we have learned a lot from the past, but we’ve also forgotten a few things.

The first lesson is to diagnose the shock properly. Putting cash in consumers’ pockets works well when the demand for goods and services is flagging. But if the problem is a supply shock — if businesses can’t produce enough because they lack workers or access to their supply chains — then boosting demand ranges from pointless (more customers are of little value if you can’t sell them anything) to counterproductive (the increased demand for a limited supply of goods can force up prices).

The coronavirus is both a demand shock and a supply shock. Consumers are abandoning airlines, shops, restaurants and travel agents at an alarming speed (a demand shock) while many businesses are struggling to source their supplies or to get their workers to come to work (a supply shock).

The government’s $17.6 billion stimulus package should therefore target both households and businesses, which it does. The problem is that most of the package (72 per cent) targets businesses while only a fraction (28 per cent) targets households. This is a gamble. The government is punting on the fact that the virus is much more of a supply shock than a demand shock. Although we don’t yet know the exact nature of this shock, confidence effects and tightening financial conditions in many countries suggest that a lack of demand might now be the dominant force. A more balanced stimulus package would have been prudent.

The second lesson is to target stimulus at the right households and the right businesses. People on lower incomes already struggle to meet basic needs, and are therefore more likely to spend additional money than save it. Stimulus packages that benefit the rich are much less effective than those that target the poor. The government has got this right by targeting income supports at pensioners, social security, veteran and other income support recipients, although the duration of these benefits, discussed below, could be improved.

The same is true for businesses. Qantas, for example, is seeing a big drop in customers. But in recent years, with interest rates and bond yields at historic lows, businesses like Qantas have used their profitability to buy back shares and make record dividend payouts. They have the resources and the borrowing capacity to ride out the shock and are more likely to use government money to buy back shares rather than invest and create jobs.

Business stimulus is best targeted at smaller businesses, which are more likely to suffer cashflow challenges and less able to obtain credit during a shock. The government’s package does well by targeting small and medium businesses. But money will not be enough. The government must focus on keeping supply chains open, particularly through international trade, and ensuring transport and logistical firms keep operating, given their systemic importance across the economy. The slowing in global trade is of huge concern to Australia.

The third lesson is that stimulus needs to be fast. Infrastructure investment can tick both boxes: it boosts demand in the short run when it is being built and boosts supply in the long run through higher productivity. But the time it takes to plan, prepare and build infrastructure makes it a poor candidate for the kind of stimulus we need right now. Some tax measures can suffer the same problem if households and businesses don’t see any benefit for many months and their anticipation effects are small. The government’s significant preference for tax measures over spending measures in the stimulus package could therefore be a problem.

The fourth lesson is that stimulus needs to happen over the right duration. Making some stimulus measures permanent can mean that households and businesses feel no pressure to act immediately, thus defeating their purpose. For this reason, it makes sense for the government’s tax measures to be temporary. But there is no reason to make increases in social security temporary: many of these payments are in dire need of an increase — particularly Newstart, which has remained unchanged for two decades while the age pension has doubled. Given we don’t know how long the recovery will take, now is the time to tackle this long-term challenge.

The sixth lesson is not to fret about budget deficits. The bulk of the government’s revenue comes from personal income and corporate taxes, which fall when economic activity declines. Trying to protect the budget by short-changing fiscal stimulus can be false economy: insufficient stimulus sees a bigger economic downturn and a bigger economic downturn causes a budget deficit anyway by reducing government revenues. Record low interest rates and government bond yields make it an ideal time to increase spending.

Finally, perhaps the biggest lesson from the global financial crisis is that fiscal stimulus should be coordinated across countries. A country’s stimulus can have twice the impact on gross domestic product if it is coordinated with other G20 countries. Why? Some of the increased consumer spending that comes from stimulus is spent on imports from other countries, meaning countries benefit from each other’s stimulus; and increased government spending can lift the value of the local currency at an inopportune time, an effect that is neutralised when countries act together (although with ultra-low interest rates the exchange rate effect is much smaller). Most importantly, my interviews with policymakers showed that countries will launch larger stimulus packages if they are part of a globally agreed effort. At their meeting this weekend G20 officials should prioritise coordinating stimulus and keeping trade and investment flows open.

The government has its work cut out for it. The fact that this is a supply shock as well as a demand shock puts us in uncharted waters compared with 2008. Our historically low interest rates mean that — leaving aside quantitative easing — fiscal policy will have to do more of the heavy lifting. The government’s stimulus package gets many things right, but there is room for improvement. When it comes to fiscal stimulus, the cost of overshooting is far lower than the cost of undershooting. •

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By video, prime minister Scott Morrison, champion of “quiet Australians,” invoked the “homes material, homes human and homes spiritual” of Robert Menzies’s forgotten people broadcast to remind attendees that “housing is much more than a roof over your head.” Also by video, housing minister and assistant treasurer Michael Sukkar declared that the government’s priority is to “reduce pressure on affordability” and pointed to the first home loan deposit scheme and other Coalition campaign promises. In person, assistant housing minister Luke Howarth, whose responsibilities include community housing and homelessness, stressed that the government is aware of the shortage of social and affordable housing and “wants to get some wins in this space.”

All three ministers lauded the policy-oriented research of the conference organiser, the Australian Housing and Urban Research Institute, and praised the practical efforts of the housing and homelessness workers who attend each year in large numbers. None of them offered any new initiatives.

Like climate change, housing is in the political too-hard basket, acknowledged as a pressing national problem but tackled in a piecemeal and ad hoc manner. There’s no mystery about why: a comprehensive response would cost a lot of money and upset core constituencies.

Perhaps this is what induced Luke Howarth’s clumsy attempt to put “a positive spin” on homelessness recently. Only a “very, very small percentage of the population” is affected, he told Radio National Breakfast, and “parts of homelessness” have actually “reduced.”

Technically, he’s right. The number of people counted as homeless in the 2016 census represented 0.5 per cent of the population — a small, though not negligible, minority. And while homelessness was higher than in the previous census, the number of rough sleepers had fallen. It was other forms of homelessness, especially severe overcrowding, that got worse. Indigenous homelessness was also down, though the rate among Aboriginal and Torres Strait Islander people remains ten times higher than for non-Indigenous Australians.

On Radio National, Mr Howarth also rejected the idea that Australia has a housing crisis. At first glance the latest Australian Bureau of Statistics data on housing occupancy and costs seems to support that view too. Home ownership might have declined slightly, but two-thirds of Australians still own their own homes. On average, keeping a roof over your head is no bigger burden on your household budget —around 13–14 per cent of gross income — than it was a decade ago. Rising house prices may have forced buyers to take out larger mortgages, but falling interest rates have brought down the cost of servicing loans.

So we might be tempted to ask, along with the assistant minister: Crisis? What crisis? But it’s more appropriate to ask: Crisis? Whose crisis?

Housing costs for those on the lowest incomes — the bottom fifth of households — have risen dramatically from 22 per cent to 29 per cent of gross income. Tenants in the private rental market haven’t benefited from falling interest rates, and rents have risen faster than incomes — especially with wages and government payments stagnating over the past decade.

Housing costs as a proportion of household income, 1994–95 to 2017–18

Source: ABS 41300, Table 1, Housing Occupancy and Costs, Australia, 2017–18

The result is high levels of rental stress, now affecting 57 per cent of low-income households in the private market. This means that about 600,000 households with an “equivalised disposable income” below $775 per week hand over at least 30 per cent of that income to their landlord (and often much more than that). At the conference, Wendy Hayhurst from the Community Housing Industry Association described homelessness as “the tip of a rental stress iceberg,” and the group experiencing the most rapid increase in homelessness is older women, often as a result of the compounding effects of poverty and relationship breakdown (frequently caused by domestic abuse).

If people are spending a large proportion of their income on rent, that’s money they aren’t spending on goods and services in other parts of the economy. (Most landlords don’t spend their rent income either, but use it to pay down mortgages.) Renting in the private market on a low income not only shrinks the budget for other essentials like heating and healthy food, but means that the housing itself is insecure and unhealthy too.

The conference heard that the Warm Up New Zealand Program, which improves insulation in rental properties, has a benefit–cost ratio of four to one. It has been shown to significantly reduce hospital admissions, with the greatest benefits going to the poorest tenants, and to elderly people and children. Even though Luke Howarth said he was keen to hear positive ideas from the conference, the legacy of Australia’s “pink batts” controversy is likely to prevent governments from replicating such a commonsense program here.

Against the vociferous objections of landlords, New Zealand is also enforcing minimum standards in private rentals to ensure that housing is “warm, dry, safe and stable.” As Patrick Veyret from the Australian consumer organisation Choice told the conference, tenants here have more recourse against a mouldy loaf of bread than they do against a mouldy rental property.

The problem for low-income earners is compounded by the fact that they are competing for tenancies with a growing number of higher-earning people who are staying in the private rental market because they can’t scramble into home ownership. This is the phenomenon that lies behind terms like “generation rent,” the cohort of Australians seemingly locked permanently out of home ownership. But viewing the problem solely through a generational lens is misleading: as the Grattan Institute noted in its recent Generation Gap report, home ownership is “dropping fastest for the young and the poor.”

The flipside of generation rent is generation landlord. Australian Tax Office statistics show that the number of individuals reporting an interest in a rental property has been rising rapidly, with the fastest growth among people with an interest in multiple rental properties. The number of investors declaring an interest in three or more properties has grown 40 per cent in a decade. Government ministers are fond of pointing out that 70 per cent of investors own just one property. This is true, but from the tenants’ perspective, they are just as likely to be renting from a landlord who owns two or more properties as from “mum and dad” investors.

People who already have property are able to acquire more as they borrow against existing assets. The rich are getting richer, and my calculations from the latest ABS data show that housing plays a big role. In 2003–04, the mean value of the property owned by the wealthiest fifth of Australian households was worth 1.3 times as much as the mean value of the property owned by all other households combined. By 2017–18 that multiple had blown out to 1.6 times.

Average property wealth, 2003–04 to 2017–18: the rich versus the rest

Sources: ABS 6554.0 Household Wealth and Wealth Distribution, Australia, 2003–04, Table 6. ABS 6523.0 Household Income and Wealth Australia 2017–18 Table 7.2. Note: Property assets minus property liabilities.

While home ownership is falling relatively slowly, the share of Australians who own their homes outright is falling much faster. On current trends, the number of Australians who own outright will soon be overtaken by the number who rent in the private market.

Shifts in housing tenure, 1994–95 to 2017–18

Source: ABS 41300, Table 1, Housing Occupancy and Costs, Australia, 2017–18

As new AHURI research shows, this has profound implications for future welfare spending. First, homeowners entering retirement (or prematurely forced out of the workforce) may be tempted to use their super to pay off their mortgages and then qualify for the age pension. Second, there will be more low-wage earners leaving the workforce without owning a home at all. As renters in the private market, they will become eligible for both the pension and Commonwealth rent assistance. According to the AHURI, the combination of ageing and declining home ownership will be a “seismic shock,” bringing a 60 per cent increase in the number of seniors eligible for rent assistance by 2031.

The budget cost of rent assistance has already jumped from $2.8 billion to $4.6 billion since 2008. Interestingly, a senior Canberra official at the conference couldn’t answer a question about future projections for spending on Commonwealth rent assistance, but we can expect it to keep going up.

Changes in demography and housing tenure are not the only factors. Another driver is the transfer of public housing stock from state-owned authorities to not-for-profit community housing associations. Ten years ago, Australia’s housing ministers agreed that community housing should make up 35 per cent of all social housing. With little money available for new housing, this target could only be met by moving thousands of dwellings into community hands. In the process, thousands of tenants became eligible for rent assistance for the first time. (Tenants in state-run housing don’t qualify, but tenants in community housing do.)

The continuing transfer of social housing stock from state to community hands seemed to be taken as a given by most conference delegates, including housing officials from all jurisdictions. But there are mixed motives behind these transfers. One aim is to boost the community housing associations’ asset base so that they can leverage more funds. Another aim reflects the view that community housing providers are more efficient and innovative than public authorities and cater better to tenants’ needs and interests. It’s certainly true that surveys consistently report higher levels of tenant satisfaction in the community sector.

Equally, though, the transition to community management shifts costs and liabilities off the states’ balance sheets. One community association in regional New South Wales has seen its housing portfolio grow 170 per cent in twelve months as a result of stock transfers, but most of the dwellings it has acquired are already forty years old. As buildings age, maintenance costs increase. Old public housing stock may have been designed to house families, which means it won’t be appropriate for the six in ten social housing tenants who live alone. Or it may not be accessible for the one in three tenant households that include someone with a disability. Where the funds to refurbish or replace these houses will come from is far from clear.

The solution to this problem is supposed to be the National Housing Finance and Investment Corporation, a relatively new means of channelling investment into community housing. An initiative of Scott Morrison when he was treasurer, the NHFIC was variously described at the conference as “a game changer” and “the one bright spark” in housing policy in recent years, though even its biggest enthusiasts stressed it is only one part of the housing jigsaw.

In his address, Luke Howarth spruiked NHFIC’s debut $315 million bond issue, which was four times oversubscribed. So far, though, apart from one construction loan to build ninety-three new affordable dwellings in Sydney, NHFIC’s main role has been to enable community housing providers to refinance their existing debts at lower rates.

For two of Australia’s larger housing providers, one in Victoria and another in New South Wales, refinancing using the NHFIC bond has freed up about $1 million a year for new spending. Another talks of saving $6 million over ten years. These are welcome amounts, but just a small fraction of overall need.

Social housing is in long-term decline, falling from about 6 per cent of all households to about 4 per cent over the past twenty years. Housing finance expert Judy Yates calculates that if we want to restore the share of social housing to the level of 1996, then we need to build 16,500 new dwellings every year for the next twenty years. To meet the total projected shortfall of more than 700,000 dwellings, the City Futures Research Centre at the University of New South Wales estimates that we need to build 36,000 units annually. By way of comparison, about 3000 units of social housing were built last year.

The last major injection of funds — Kevin Rudd’s 2009 stimulus package in response to the global financial crisis — built about 19,000 homes. His National Rental Affordability Scheme resulted in 38,000 new dwellings over ten years, but this was mostly “affordable” rather than “social” housing. (Under charity rules and NHFIC’s guidelines, affordable housing must be offered at a 20 per cent discount on market rates, which can still be very expensive in major cities or tourist towns. Tenants in social housing, on the other hand, pay a fixed 25 per cent of their income in rent, regardless of location.)

These are early days, but NHFIC will only increase the stock of community housing by about 560 dwellings in its first twelve months. If it is going to enable the scale of building Australia needs, then it needs to unlock vastly larger amounts of funding. A secure return above 4 per cent could attract billions of dollars from Australian superannuation schemes and overseas pension funds seeking safe, long-term investments. But community housing associations can’t generate adequate returns by housing people on the lowest incomes. As Bill Randolph from the City Futures Research Centre put it, “there is always a gap” between the cost of building and maintaining social housing, and the rent that the lowest-income tenants can afford to pay. Modelling by Randolph and his colleagues shows that the average gap is about $12,000 a year, even with discounted finance via NHFIC and the added income flowing to community housing tenants from Commonwealth rent assistance. The gap will be larger in city centres, where land is expensive, or in remote Aboriginal communities, where building costs are particularly high.

There are many ways to bridge this gap. The cheapest option would be for government to fund more social housing with up-front capital investment, but this is not politically palatable. Governments — state, federal and local — could also provide vacant or underutilised land for community housing on a long-term peppercorn lease. Or Australia could adopt a version of the tax credit scheme used to encourage investment in affordable housing in the United States.

Another option discussed at the conference was Jacqui Lambie’s proposal that the federal government waive state and territory housing debts so that money can be spent on new dwellings instead of repayments to Canberra. But evidence from South Australia suggests caution here. That state managed to get the Commonwealth to wipe hundreds of millions of dollars off its debt in 2013, when Labor’s Mark Butler was federal housing minister. But an SA official told the conference that increased social housing investment didn’t follow. Instead, the savings were banked by the state treasury and spending on social housing actually fell.

Regardless of how the funding gap is bridged, any government subsidy needs to be stable, predictable and bipartisan so that it can survive a change of government. One-off programs with limited time horizons won’t be sufficient. “How have other countries unlocked affordable housing supply?” asked Carrie Hamilton from the Housing Action Network. “In every single case it has been credible permanent programs of national government subsidy.”

To fulfil election promises, NHFIC is getting an extra $25 million to administer the government’s first home loan deposit scheme and to take on a new research role. The scheme will enable purchasers with a 5 per cent deposit to get into the market without paying mortgage insurance, and the government hopes it will assist 10,000 first homebuyers each year. The research will focus on housing demand, supply and affordability with the explicit aim of ensuring that “owning your own home stays within the reach of most Australians.” Expanding the supply of affordable rental housing for those on the lowest incomes is not a priority. As Ken Marchingo, CEO of the Victorian community housing provider Haven Home Safe commented, “What we get is $25 million worth of research when what we need is $25 billion worth of new housing.”

Given its Darwin location, the conference had a strong focus on Indigenous housing. Under a ten-year agreement and a fifty–fifty funding split with the federal government, the Northern Territory is investing $1.1 billion in remote Aboriginal housing, with the aim of reducing the chronic overcrowding that contributes to easily preventable illnesses. The program has a big emphasis on training and employing local workers and encouraging the development of Aboriginal enterprises.

It’s a promising initiative, but hard-won. Jamie Chalker, the Territory public servant overseeing the program, ended the conference with an impassioned plea to delegates to tell the truth about what they had learned in Darwin: that the Territory has twelve times the rate of homelessness and twenty-two times the rate of overcrowding of the rest of Australia, and that it is a world leader in rheumatic heart disease. Given there have been six reviews of remote Aboriginal housing, he left his audience in no doubt that a Commonwealth contribution of $550 million over ten years is woefully inadequate.

Still, the Territory has done better than other jurisdictions since the expiry of a ten-year national remote-housing partnership in June 2018. Western Australia has managed to negotiate a one-off payment of $121 million from Canberra, South Australia has secured $37.5 million over five years, and there is still no deal in place in Queensland. Overall, says Labor senator Malarndirri McCarthy, remote Aboriginal housing remains a “wicked mess.”

The same term could be applied to social housing in general. There is a glaring need for public investment of at least $5 billion a year to meet the urgent housing needs of people on the lowest incomes. If Labor had won the federal election, its reforms to negative gearing and the capital gains tax discount could have raised revenue on this scale. But it lost, and tax reform is off the agenda.

Significantly, not a single presentation at the conference discussed tax settings. The Coalition says it is open to new ideas but only appears to be interested in initiatives that don’t cost much. The refusal to raise the level of Newstart payments shows that the government has no inclination whatsoever to increase social spending. Neither the Commonwealth nor most of the states and territories have clearly articulated targets for increasing the share of social housing or even for preventing it from declining further.

Even if we don’t invest in social housing, though, we are going to spend a lot more public money on housing anyway. We’re just going to spend it in different, less effective ways: on more rent assistance, more welfare payments, more homelessness services, more visits to emergency departments, more Medicare claims, more police and ambulance call-outs, and more people going through the courts and being put in jail. And tax revenue will be lost as a result of lower employment and declining productivity.

As Scott Morrison said, “housing is much more than a roof over your head.” It is also essential economic infrastructure, the foundation of good health, a building block for educational success, and the cornerstone of flourishing communities and flourishing lives. •

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Despite their appeal to economists and others concerned about rising wealth inequality, inheritance taxes are often nominated as the least popular taxes with the public. Their mere mention is a sure way to incite talkback radio vitriol and angry letters to the editor. Opposition to inheritance taxes is strong everywhere you look: among Labor and Coalition voters, rich and poor, young and old.

Even people who would never pay inheritance taxes seem to hate them. In a debate about the repeal of the estate tax in the United States in the early 2000s, people arguing to retain the tax stressed that the high thresholds meant only the richest 2 per cent of Americans would ever actually pay it. But this line of argument made the tax even more unpopular, because it came to be seen as an opportunistic tax grab targeting a minority. Astoundingly, in the nation where everyone is “created equal,” defending policies that entrench hereditary advantage became the high moral ground.

So why do inheritance taxes arouse such passion? Survey and focus group evidence from countries with such taxes give some clues.

The most common objection is that they amount to double taxation. Wealth is built from income that has already been taxed, the argument goes, so transferring that wealth to an heir should be tax-free. But in a world where we pay GST on the goods and services we buy with our post-tax income, the aversion to just that one form of double taxation makes little sense. Income taxes would have to be substantially higher if we really wanted to eliminate double taxation.

Ultimately, most people’s objections to inheritance taxes are emotional. Leaving money to family is seen as an expression of sacrifice and affection. People argue that they have worked hard so they can pass on something to their children.

Taxing such a bequeath is condemned as a “tax on love” levied at a time of grief. “You shouldn’t have to visit the undertaker and the taxman on the same day” was a powerful slogan used by US repealers. And these arguments are supercharged if the tax will be imposed on the value of the family home, a place of memories now tinged with sadness.

Given these sentiments, it is a brave politician who would float the idea. But the same focus group data suggest that some arguments can boost the appeal, or at least acceptance, of inheritance taxes.

The key is to invite people to consider it as a tax on the recipient rather than the giver. Compare a person who receives a $1,000,000 estate tax-free and a person who works for fifteen years to earn the same amount, paying a substantial amount of tax along the way. Suddenly, the fairness argument makes a lot more sense.

Another persuasive argument is that most people in their twenties, thirties and forties would be better off if we taxed inheritances. If all inheritances above $500,000 were taxed at 20 per cent, for instance, and all that revenue was used to fund income tax cuts, then most people would be ahead financially.

And this is before we even consider the economic benefits of such a tax change. Income taxes — “work taxes” — reduce people’s incentive to work and invest; inheritance taxes impose very little drag on the economy because they tax a one-off gain. So a healthier economy and more jobs could be added to the case for inheritance taxes.

Perhaps a tax reform package that includes an inheritance tax with a corresponding drop in work taxes would be saleable. People who are “having a go” would “get a go” by paying less tax on their hard-earned income. People with the advantage of well-off parents could make a contribution to a fairer society. Rather than a tax grab, such a package would be a reform to make our economy stronger.

It makes sense. But will any party run the risk of the inevitable scare campaign? •

The post Death and taxes appeared first on Inside Story.

Malcolm Turnbull labelled Labor’s proposals “reckless,” and accused the opposition of putting “the value of every Australian home at risk.” Scott Morrison claimed its policies would “erode the value of Australians’ homes and push up people’s rents.” Yet Treasury, the Reserve Bank and think tanks like the Grattan Institute argue the effect on house prices and rents would be modest. And we now know that Mr Morrison himself acknowledged negative gearing “excesses” when he became treasurer, and was open to reforming it.

One significant difference between the two election campaigns was the backdrop. In 2016 house prices in most capital cities were rising fast; in 2019 they were going in the opposite direction. The Coalition’s campaign against Labor’s plan was also helped along by a better-organised real estate lobby, with agents around the country warning tenants that their rents would rise while simultaneously telling property holders that the value of their houses would fall.

Still, even if Labor’s negative gearing policies were sensible — and potentially more saleable if house prices start booming again — they may be too severely tarnished for another outing.

But Labor’s housing policy had a second, less-discussed element: it wanted to scale back the capital gains tax discount on rental housing. The Grattan Institute has recommended the same policy and, again, it didn’t ring alarm bells at Treasury or the Reserve Bank. In an era of low interest rates and low inflation, the discount probably has a far more significant influence on the housing market than negative gearing, and reforming it could have a more transformative effect, especially for renters.

Negative gearing allows landlords to deduct interest payments not just from their property earnings but also from any other income. When interest rates are going down, the interest paid on the investment — and hence the deduction — will fall, especially if rents are rising at the same time. The latest Tax Office data bear this out: deductions for interest payments were lower in 2016–17 than in 2012–13, while gross rental income was substantially higher.

Over the same period, the proportion of landlords claiming a tax loss on their property investments dropped from 64 per cent to 60 per cent. With interest rates expected to fall even further and stay near rock bottom, negative gearing is much less of a reason to invest in property than it was in the past.

The opposite is true of the capital gains tax discount, which halves the rate at which investors are taxed when they sell a property, as long as they have held it for at least a year. Peter Costello introduced the discount as treasurer in 1999, ostensibly to make tax law simpler and encourage saving and investment. Capital gains tax calculations had previously taken account of inflation and then used complex averaging provisions to work out what tax rate to apply. Costello’s reforms did away with all that, compensating investors for the eroding effect of inflation by offering a flat 50 per cent capital gains tax discount.

As a result, capital gains from passive investments like rental properties are taxed much more lightly than earnings from wages. And when inflation is low, investors are overcompensated, especially if they only own the asset for a relatively short time. As the Grattan Institute argues, the tax discount “distorts investment decisions” by encouraging investors to focus on “capital growth rather than annual income.”

The Australian Council of Social Service warned in 1999 that Costello’s decision, in combination with negative gearing, was likely to lead to an escalation in house prices. By 2004, economics commentator Ross Gittins was agreeing that ACOSS was on the money. “First,” he wrote, “it’s clearer today than it was five years ago that the return to low inflation is a lasting thing. In a world of low inflation (in the prices of goods and services, of course, not asset prices), people making capital gains are much better off under the Costello regime.”

For Gittins, the “privileged minority making capital gains” (himself among them, as he acknowledged) “had the best of all worlds. When inflation was high, they had indexation; when inflation reverted to low, thus minimising the benefit from indexation, the regime was switched to half rates.”

At both the 2016 and 2019 elections, Labor promised to cut the capital gains tax discount to 25 per cent. If it had won and implemented the policy, investors would have paid tax on three-quarters of their capital gain rather than only half of it — undoubtedly a fairer approach, and also a boost for government revenue.

But have two election losses made any change to housing taxation too hot for Labor to handle? Would the Coalition contemplate changing course given the extent of the problem?

There is a way forward, but it involves creative thinking and a measure of political sophistication. It would work like this: rather than simply halving the capital gains tax discount, as Labor proposed, the government would phase in reductions according to how long a landlord has hung on to a property. A discount of, say, 20 per cent on the capital gain might apply after one year, a discount of 40 per cent after five years, and a discount of 60 per cent after ten.

This could boost government revenue but still compensate investors for inflation in a relatively simple way. More importantly, it would induce investors to see residential property as a long-term asset rather than a short-term punt. Landlords would have an interest in seeking out reliable tenants and offering them secure, long-term leases.

At the moment, Australia’s generous tax treatment of capital gains combines with its negative gearing rules to feed a speculative spiral that pushes up property prices while — seemingly paradoxically — reducing rental returns per dollar of investment. As a result, Australian landlords generally want maximum flexibility, including the right to terminate a lease with short notice so they can sell the property at any time to realise a profit.

I recently heard an executive from one of the Big Four banks explain that when her staff assess house values, they lower the value if there is a sitting tenant, whereas when banks assess commercial properties tenants would generally be seen as a positive. Her observation highlights the fact that investors in residential property prioritise capital gains over stable long-term income.

It doesn’t have to be this way. Germany, for example, offers residential property investors a capital gains tax discount, but only after they have owned a property for ten years. Landlords have an incentive to offer secure, long-term tenancies rather than stringing renters out month to month.

With around 60 per cent of Germans renting, the interests of landlord and tenant are better aligned: the tenant wants secure accommodation and the landlord wants a consistent long-term return. The average tenancy in Germany is eleven years, so renters are generally able to feel secure in their homes.

Here, by contrast, rental bond data suggests that the average tenancy varies from less than one year in Queensland to a little more than two years in Victoria. Renting is often regarded as a temporary phenomenon — something you do for a few years before buying your own place. But this was never true for everyone, and today the private rental sector is the fastest-growing segment of Australian housing. More people are renting in middle age, more renters have young families and more households are lifelong renters. More than half of all renters over thirty-five have been renting for at least a decade.

So it makes sense to adjust capital gains tax settings to encourage longer, more stable tenancies. And Scott Morrison set a modest precedent when he was treasurer. Since the start of last year, as a result of measures included in the 2017 budget, residential property investors “receive an additional capital gains tax discount of up to ten percentage points” if they provide affordable rental housing for at least three years. This means that they only pay tax on 40 per cent of their capital gain, instead of 50 per cent.

Having recognised that the capital gains tax discount can be modified to encourage investment in affordable housing, it would be no great stretch to make a more substantial change that could have a positive effect on Australia’s private rental market overall. Scott Morrison knows a bit about property. After all, he spent six years managing policy and research for the Property Council of Australia. With his political stocks high, he should act in the interests of housing fairness. •

The post If we won’t fix negative gearing, then what? appeared first on Inside Story.

But let’s think about it another way. Imagine that refundable franking credits and negative gearing didn’t exist, and instead the Coalition was promising to introduce them. How might the debate be different?

First, instead of simply pointing to people who lose from their removal, the Coalition would have to explain why these policies should exist in the first place. That’s a much harder ask.

The Coalition would no doubt rely on some standard tax policy principles. The basic principle of franking credits is that company tax is simply paid on behalf of shareholders, at each shareholder’s marginal personal income tax rate. And so any unused franking credits are in effect an overpayment of prepaid tax, and should be returned via a cheque from the government.

In addition, it would point to the unfairness of retirees in self-managed super funds being denied (non-refundable) franking credits, whereas retirees in industry and retail super funds can get the benefits because their credits can be used to offset the tax of younger members who are taxed on their contributions and fund earnings.

In arguing for negative gearing, the Coalition would presumably point to the standard principle that losses should be offset against income before it’s taxed. Tax experts would quibble that any losses would be deducted in full, while only half the capital gains are taxed.

But such arguments from principle are rarely enough to win a tax debate. Theoretical purity is all well and good, but there are plenty of other considerations that take into account how things work out in practice. And here the case would become much harder to make.

Retirees might question why the government should send cheques for $6 billion a year to the wealthiest Australians, instead of doing more to help pensioners, especially renters, at risk of poverty and financial stress in retirement.

After all, more than half the benefits of refundable franking credits for self-managed super funds go to funds with balances of $2.4 million or more. And shareholdings among over-sixty-fives outside super are also highly skewed towards the wealthy: the richest 20 per cent of households over sixty-five own 86 per cent of the shares held directly, while the poorest half of all retirees own less than 2 per cent.

Others would question whether the budget can afford such giveaways, especially when fifteen years of intergenerational reports have warned us of the long-term budgetary threat from the ageing of the population. Are refundable franking credits really appropriate when fewer than one in six retirees pay any income tax? Are they affordable if they lead to the average retired household with $100,000 in income a year paying the same amount of tax as a working household earning $50,000?

With negative gearing, we’d be debating whether it’s really a priority to spend between $1 billion and $2 billion a year of taxpayers’ money on tax breaks for housing investors, especially when most investors would simply purchase existing properties. Voters might also be worried by projections showing that negative gearing would push down home ownership as negatively geared investors outbid first homebuyers at auctions.

And how would the public weigh these policies compared with their alternatives?

The $6 billion annual savings on refundable franking credits would be enough to fund a 40 per cent increase in Commonwealth Rent Assistance for all income-support recipients ($1.2 billion) and relax the taper rate on the age pension assets test ($750 million a year), with plenty left over to shore up the budget against the long-term costs of an ageing population.

And if we’re serious about boosting housing construction, $1 billion in incentive payments to state governments to reform land-use planning rules and get more housing built in the inner and middle suburbs of our major cities would be far more effective.

Of course, the big difference between this imagined world and real life is that we wouldn’t have a cacophony of special interest groups arguing so loudly to keep refundable franking credits and negative gearing.

People prefer what they know, and like keeping what they have. These biases are powerful allies for those defending bad policies. Take them away, and the case for change becomes clearer.

The reality is that no major party would be able to defend introducing these policies today. And if you can’t make that case, we should worry less about abolishing them. •

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The phrase that describes the opposite strategy, the “small target,” entered Australian political lexicon after the 1996 election, when the Coalition, having promised to change virtually nothing in economic policy, coasted to victory under John Howard against a thirteen-year-old government.

After that, Labor leader Kim Beazley was frequently derided for taking very small targets to two elections and losing them both. When one of his biggest detractors, Mark Latham, took over the top job in 2003, he promised to muscle up, take the fight to the government and display what the people were yearning for — guts and conviction. The following year, he and his party clocked in what remains the worst result for any federal opposition since 1977.

Under Kevin Rudd, Labor ran what was widely seen as a small-target campaign, also known as Howard-lite. Tony Abbott’s 2013 policy manifesto was the same; most memorably, he promised “no cuts” to virtually anything.

The logic behind the small target is that oppositions rarely take office simply because Australians yearn to be governed by them. Governments are flung out when voters, or at least enough swinging or softly committed voters, have had enough of them and find the alternative, her majesty’s opposition, at least tolerable.

It’s a useful template because it’s pretty much true. With major-party support continually on the decline, its applicability won’t last forever, but in 2019 the choice is still one party or the other.

Yet sometime before March last year Bill Shorten and his team took a deep breath and agreed on the big bang. Why? What was their rationale?

Did they believe they were headed for victory anyway, and didn’t want to be accused of springing surprises after the election? That’s hard to believe, because no political player ever assumes an election is in the bag.

It might have been to burnish their economic credentials by putting forward a fully funded manifesto. Unfortunately, the market for such detail is limited to policy wonks and technocrats. It simply washes over the vast majority of voters.

And because the government’s argument is that reneging on pre-election assurances and overspending is in Labor’s DNA (an argument that has admittedly, after a stream of Coalition budget deficits, lost some of the power it had five years ago), the detailed elegance and robustness of the opposition’s platform becomes somewhat moot.

The most likely explanation is that the opposition was emboldened by the experience of the previous election. In early 2016, it unveiled an ambitious housing affordability policy that would halve the capital gains tax discount and restrict negative gearing to new stock. From then until the July election the government barely laid a hand on it, and on election day Labor did better than generally expected. The big target didn’t seem to do any harm; in fact its boldness possibly helped the opposition.

So perhaps it made sense to throw the dice again when franking credits were being discussed.

Now, I was one who believed in 2016 that Labor’s housing policy was a political blunder that would cause it grief. With some humility I now suggest the following possible reasons why it didn’t work that way:

• The Turnbull government made a strategic decision, for some reason, to run a positive campaign.
• Malcolm Turnbull was not a natural politician. While well regarded by voters, he was not a great campaigner.
• Crucially, no one expected Labor to win. It’s difficult to get voters’ minds focused on the dire consequences of a policy they don’t believe will be implemented.

The adjunct to the big target is the “scare campaign,” the best-known of which is probably the 1993 election, which the Coalition was generally expected to win, right up until polling day; instead there was a swing to the Keating government.

Like all political history, that event is distorted by mythology, but the major dynamic remains clear. Most voters wanted to get rid of the decade-old Labor government, but they found the opposition too scary. Had John Hewson and his suite of policies been less stress-inducing, or had voters been even more determined to dispense with Paul Keating, the result would have been different.

In 2019 it’s all very well to insist Scott Morrison is no Keating. He’s not, but neither he nor his government is as loathed as the former prime minister and his party were. Nor has Bill Shorten ever enjoyed the public esteem in which Hewson was held (for a time, that is).

Scare campaigns rely on misinformation and exaggeration. Because most Australians are semi-engaged (if that) in politics they catch snippets and ingest half-truths. The more difficult the policy is to understand, the better from the scarer’s point of view.

In the case of franking credit refunds, older Australians are juicy targets. Even if they themselves won’t be affected, they might be convinced they will be. Perhaps their offspring will buy in as well. (And don’t take any notice of the argument that older people vote conservative anyway: some 23 per cent of the electoral roll is aged sixty-five or over, and even if three-quarters of them automatically support or preference the Coalition, more than 5 per cent of the national vote is still in play.)

Even Tim Wilson’s overreach as chair of the House economics committee won’t much damage the cause: Labor’s policy is in the news; people are talking about it.

And there’s still that housing package, this time complicated by the softening housing market. The government will regularly return to that. “Under Labor the value of your home will drop” is obviously true (or at least it will be lower than it would otherwise be); it’s part of the point of the policy (the other part is the revenue raised).

Chirpy Chris Bowen gives the impression of not having a care in the world, but I suspect behind closed doors things aren’t necessarily so relaxed. Labor remains the probable victor this year, but recent polls have shown signs of narrowing. Much more of that and concern will turn to panic at Labor headquarters.

And, as the sorry 2010 saga of the Rudd government dropping its emissions trading scheme surely drummed into even the most reductionist, polling-focused clipboard addict in Sussex Street, you can’t just cut your losses. Dumping a policy that you’ve long and strenuously argued for has its own repercussions. •

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Labor claims that most of those hit by the change are wealthy retirees who are not paying their fair share of tax. Scott Morrison counters that abolishing refunds of unused imputation credits will mainly hurt low-income earners. So, who’s right?

Part of the confusion stems from the fact that data on what retirees earn, what they own and what tax they pay is highly fragmented. Personal income tax returns provide only a patchy picture of the earnings and wealth of retirees. Superannuation payouts have been tax-free since 2006: they don’t even have to be declared on personal income tax returns. And drawdowns of savings other than superannuation to fund retirement — whether shares, bank deposits or investment property — are not declared as income.

Australian Bureau of Statistics surveys tell us which retirees own shares and what other assets they own, but not whether they receive imputation credits or claim other deductions, or precisely how much income tax they pay. Meanwhile, data on self-managed super funds — which will pay most of the extra tax — is not connected to members’ personal income tax returns or retirees’ other assets.

Picking up these various threads and weaving them into a coherent story about who would pay more tax under Labor’s reforms is no easy task. But here goes.

Australia’s dividend imputation system ensures that shareholders are not taxed twice on corporate profits. “Franking credits” are attached to dividends paid to shareholders, reflecting any company tax already paid, and can be used to offset any personal income tax the shareholder owes to the Tax Office.

Refunds for unused franking credits were introduced in 2001. The logic was simple: people with no or low income should receive equivalent tax treatment as others. Any unused or “excess” franking credits left after someone had reduced their tax liability to zero were returned via a cheque from the government.

Labor’s plan would restore the pre-2001 system: most taxpayers could still use imputation credits to offset other tax owing to the ATO, but those with no income tax liability — mainly retirees and their self-managed super funds — would no longer be able to claim cash refunds.

The government claims that 54 per cent of people affected by Labor’s policy — some 610,000 individuals — have taxable incomes of less than $18,200. And it says that 86 per cent of the value of all franking credits refunded are received by those with taxable incomes of less than $87,000 a year.

These claims are deeply misleading. Taxable income ignores the largest source of income for many wealthier retirees: tax-free superannuation.

Take the example of a self-funded retiree couple with a $3.2 million super balance, plus their own home, and $200,000 in Australian shares held outside super. Even drawing $130,000 a year in superannuation income, and $15,000 a year in dividend income, they would report a combined taxable income of just $15,000, and pay no income tax whatsoever.

And is the treasurer seriously suggesting that 610,000 retirees actually get by on less than $18,200 a year, or nearly 20 per cent below the poverty line? If that were anywhere close to the real story, it would signal a full-blown retirement-income crisis.

Whoever they are, Scott Morrison’s 610,000 “low-income earners” are clearly not the poorest retirees. Few, if any, are maximum-rate pensioners.

A single retiree receiving the full age pension has an income of $23,318 a year, and more if he or she earns extra income in dividends from shares. All this income would show up as taxable income if this retiree submitted a personal income tax return — as required to claim refundable imputation credits.*

Some maximum-rate couple pensioners could have a taxable income below $18,200. The maximum-rate pension for a couple is $32,000 a year, or $16,000 each. So one half of such a couple could receive dividends of up to $2200 a year (including refunded franking credits) and still receive a full pension. The maximum hit for them from Labor’s policy would be $660 a year.

But most of those affected by Labor’s policy who declare taxable incomes of less than $18,200 a year are far from being low-income earners. They are either part-pensioners, or not receiving any pension at all. And they’re drawing much of their income from tax-free superannuation.

When superannuation withdrawals are stripped out from income in ABS survey data, as is done to calculate taxable income, almost half of the wealthiest 10 per cent of over-sixty-fives report incomes of less than $18,200. On average, though, they have wealth of nearly $2 million — and that’s even before considering the value of their home or any other property assets they might own.

Of course, there will be examples of seniors with low incomes being hit hard by the change. But media reports highlighting their plight rarely tell the full story.

When we hear of part-pensioners with a taxable income of less than $18,200 a year being hit by Labor’s plan, it is worth asking why they’re only receiving a part-pension in the first place. As single retirees, they must have either an assessable income of more than $27,700 a year or assets exceeding $253,750 (excluding the family home if they’re a homeowner) or $456,750 (if they rent). To be on a part-pension, a retired couple will have an income of between $40,000 and $78,000 a year, and assets of between $380,500 and $1 million.

The full story is that many part-pensioners are relatively wealthy, especially because the home is excluded from the pension assets test. Half of all pension payments go to those with assets of more than $500,000. Almost 20 per cent of payments go to those with assets of more than $1 million. They’re clearly much better off than the bottom 40 per cent of retirees, who draw a full age pension.

Nor is it clear that incomes are the best way to judge just how well-off retirees are. People build up retirement savings during their working lives, which they then draw down to fund their retirement. Or at least that’s the idea.

One reason so many retirees report such low incomes is because they only draw down very slowly on their retirement savings, or not at all. One recent study found that at death the median pensioner still had 90 per cent of their wealth as first observed.

Many retirees who report having very low incomes in retirement have substantial retirement nest eggs. A retiree homeowner with $1 million in super, enough to make him or her ineligible for a full pension, but drawing down at the minimum required rate of 4 per cent, would declare an annual income of just $40,000 a year. And although $40,000 a year, even tax-free, may sound low relative to average full-time pre-tax earnings, retirees tend to have lower expenditure because they are no longer saving and typically are no longer paying off a mortgage. This is a well-off group; few working-age Australians have the chance to accumulate $1 million in superannuation, and pay off their own home, before they retire.

It’s also worth remembering who will pay most of the extra tax under the Labor policy. About 33 per cent will be paid by (mainly wealthy) individuals who own shares directly, 60 per cent will be paid by self-managed superannuation funds (typically held by wealthier retirees), and the remaining 7 per cent will be paid by super funds regulated by the Australian Prudential Regulation Authority.

The poorest half of all retirees own less than 2 per cent of all shares held directly. By contrast, the wealthiest 40 per cent of retirees own 97 per cent of all shares held directly, and the wealthiest 20 per cent alone own 86 per cent of all shares held directly.

Among self-managed superannuation funds (primarily held by wealthier retirees), half of the refunds are currently going to people with balances over $2.4 million.

For more than a decade, superannuation tax concessions have been absurdly generous to older people on high incomes. They are one of the major reasons older households pay less income tax in real terms today than they did twenty years ago, even though their workforce participation rates and real wages have jumped.

These age-based tax breaks help to explain why the proportion of seniors paying tax almost halved in twenty years, from 27 per cent in 1995 to 16 per cent in 2014. The rise of these “taxed-nots” coincides with the introduction of the Senior Australian Tax Offset in 2000, and tax-free super withdrawals in 2007.

Generous super and other age-based tax breaks have been funded by deficits. The accumulating debt burden will disproportionately fall on younger households.

The government’s claim that abolishing refundable imputation credits will mainly hit low-income earners is deeply misleading. Taxable income ignores the largest source of income for many wealthier retirees: tax-free superannuation.

Retirees with the lowest taxable incomes are likely to be wealthier self-funded retirees — precisely the group Bill Shorten wants to target. About 14,000 maximum-rate pensioners and 200,000 part-pensioners would be hit, but the vast bulk of the revenue would come from wealthier retirees. That’s the real story. • 

* The Pensioner Guarantee, announced by Labor soon after the original policy was released, ensures that every recipient of an Australian government pension or allowance who has direct shareholdings or shareholdings via an SMSF before the cut-off date would continue to receive cash refunds. The Parliamentary Budget Office estimates this change reduces the revenue from the policy by $300 million, or around 5 per cent, in 2021–22. In other words, most of the revenue was never coming from those with low levels of income and wealth.

Of course, even with the Pensioner Guarantee not all people adversely affected by the policy change would consider themselves wealthy. But they have generally accumulated a reasonable nest egg — especially if they also own their own home.

People over sixty-five are not eligible for the pension if they have assets of at least $564,000 apart from their home (if they are homeowners), or $771,000 for non-homeowners. A retired couple will have assets of at least $848,000 (homeowners) or $1,055,000 (non-homeowners).

• An update to this analysis, accounting for subsequent changes by Labor to exempt all pensioners from the policy, can be found in Grattan’s submission to the parliamentary inquiry into the implications of removing refundable franking credits.

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Oliver Bullough calls this world Moneyland. You’ve probably never been to Moneyland but you certainly know of it. Moneyland is the home of shell companies that seemingly don’t do anything but somehow make huge profits. It shelters offshore bank accounts that are owned by nobody but still benefit somebody. As if by magic, a person on a declared salary of $4000 a month can afford to buy a $35 million mansion in Malibu. Even national identities can be bought or hidden.

Are you ready to jump down the rabbit hole?

Bullough will be your white rabbit. Follow him and he’ll show you this surreal world and its hidden influence over your day-to-day life.

He knows the terrain well. A Russian-speaking journalist, he’s been observing the emergence of Moneyland since the fall of the Soviet Union. In those heady days, Bullough believed (along with almost everyone else in the West) that the “good guys” had won. Democracy, capitalism and globalisation promised to bring liberty and prosperity to Eastern Europe and beyond. The end of history — the final point of political, economic and social development — was nigh.

But as it turned out, history didn’t end. If anything, Bullough says, it accelerated.

When developing countries opened up to global financial markets, corrupt officials found it much easier to siphon public funds into their own pockets without anyone catching on. And because there’s profit to be made by catering to footloose international capital, financial institutions that should have known better took the money without asking where it came from.

Take Ukraine, for example. Bullough details how the country’s president, Viktor Yanukovych, made hundreds of millions of dollars from a “shadow state” operation that engaged in bribery, intimidation and fraud.

When the citizens of Ukraine revolted and threw Yanukovych out of office in 2014, they were gobsmacked by the extent of his personal wealth. His presidential palace, an enormous log cabin, was situated on a block so big it required bicycles to traverse. While living off a state salary, Yanukovych had somehow amassed countless treasures: among them, a private galleon restaurant on his lake, golden golf clubs, a private cinema, and a piano worth more than $100,000.

The bathrooms in Yanukovych’s palace even had televisions mounted on the wall at sitting height, in front of the toilets. As Bullough writes, “While Ukraine’s citizens died early, and worked hard for subsistence wages… the president had been preoccupied with ensuring his constipation didn’t impede his enjoyment of his favourite TV shows.”

Corruption is not new, especially in countries with weak democratic institutions. What has changed, Bullough says, is how effectively pilfered funds can be secreted away in the nooks and crannies of the global financial system. Corruption now takes place on a global scale.

Fraud of the state procurement system may have cost the Ukrainian government US$15 billion a year. It’s hard to say exactly where all that money went; it is exceedingly difficult to find stolen funds once they have entered the Moneyland machine. It might have flowed into Swiss bank accounts, or offshore companies (apparently) located on a tropical island in the Caribbean, or high-end London apartments seemingly owned by no one.

The trouble is that globalisation allows money to flow freely across national borders, but democratic laws stop at those boundaries. As Bullough shows time and again, the laws of Moneyland are whichever laws anywhere in the world are “most suited to those wealthy enough to afford them.”

Economic competition should lead to efficient outcomes by rewarding investors who put their money into productive activities. Everyone benefits from the economic growth and innovation that result. But that can’t happen when there’s more profit to be made in rent-seeking. By making money out of loopholes and contradictions between different countries’ tax and legal systems, or by embezzling public funds, the denizens of Moneyland divert investment into activities that don’t benefit anyone — except themselves.

Bullough couldn’t be a better guide through this strange world. Fuelled by his impeccable research, he expertly follows the trail of breadcrumbs left behind as money moves from one jurisdiction to another. He takes you from Yanukovych’s palace in Ukraine to a retired mechanic’s garage on a tropical island, to a bridal shop in Britain. The stories he tells along the way paint a picture of a broken system.

What he lacks is a solution to all this. If we agree that Moneyland is unfair and unproductive, what should we do about it? Bullough might be wearing rose-tinted glasses: at times he speaks wistfully of the Bretton Woods era after the second world war, when capital controls prevented money from flowing freely across national borders. One gets the sense he wishes the controls had never come down.

I’m not convinced that capital controls are the answer. This egg can’t be unscrambled. But the only solution I see is almost as hard: countries need to work together to protect democracies with weak institutions, and to increase transparency and prevent fraud. Ironically, that might require forfeiting some national sovereignty so that when money flows across borders, laws can too.

It won’t be easy. Like Alice, we’ll have to be brave and jump. •

The post Curiouser and curiouser: the strange world of the global super-rich appeared first on Inside Story.

Sure, when Shorten told the world yesterday that Labor in government would move to repeal the recent measures cutting the company tax rate to 25 per cent for businesses with turnover of between $50 million and $10 million a year — and possibly even down to $2 million a year — he was not stating new Labor policy. Labor opposed the tax cuts when they were passed in the Senate, and had not set out a new policy position since.

But trying to repeal a tax cut that has already become law is a different matter from opposing it in the first place. Then, Labor was opposing a bill to give small and medium businesses a benefit they did not have. Now, it is proposing a bill to take that benefit away from businesses that already have it.

The biggest flaw in Shorten’s position is not even the fact that it would affect small and medium businesses, for which the media and the government are now flaying him. The real problem is he will not be able to get his tax increase through the Senate — so Labor is exposing itself to a public flogging from here to election day for a policy it will be unable to deliver.

Moreover, if Labor counts the anticipated revenue from its tax rise to pay for its spending commitments, then its election costings will not be credible. This will be a zombie tax rise. And while the Coalition has been able to implement some of its zombie spending cuts simply by freezing spending on things it doesn’t like, such as universities, there is no back door a Labor government could use to get around the Senate’s opposition to tax rises.

What on earth was Shorten thinking when he made this “captain’s call”? It offers no gain, and a lot of pain. It could cost him the election.

As one of Napoleon’s aides remarked after his leader used flimsy evidence to order the execution of the Duc D’Enghien, “It’s worse than a crime. It’s a blunder.”

It wasn’t Shorten’s first misstep this week. Labor’s new ads implying that Malcolm Turnbull is supporting company tax cuts to line his own wallet may leave some mud that yields political benefit, but at some damage to Labor’s own integrity and to the level of Australian political debate.

It’s a ludicrous argument. Turnbull is already a zillionaire; money is not what he needs. What he needs are our votes, and he has defined himself as a tax cutter because he thinks that will make us more likely to vote for him. He’s also looking after the corporate interests that finance the Liberal Party. Turnbull may be an aristocrat in nature, but it’s ridiculous to imply that he’s a kleptocrat.

Shorten himself has been the object of equally offensive and untrue insinuations by the Liberals and their media allies, but that is no excuse for getting down in the gutter with them.

Nor is there any real excuse, on such an important policy issue, for Shorten to be making policy on the run, like Tony Abbott or Julia Gillard, without consulting the shadow cabinet or caucus. One of his great strengths as leader until now has been his self-discipline, and respect for process.

Yes, when the government is planning another attempt to get its proposed company tax cuts through the Senate, it’s natural for the media to ask Shorten what he will do about the tax cuts that are already L-A-W. He might have felt nettled on Tuesday morning after the Financial Review’s bureau chief Phillip Coorey confirmed with Senate crossbenchers that they would block any attempt by Labor in government to take back the tax cuts that are now law.

But politics is a nettling occupation, and Shorten always appeared to be rather good at putting up with its stings. He only had to do what his shadow treasurer Chris Bowen does every other day, and play a dead bat, telling the world that Labor’s position on this matter is being carefully worked through, and its policy will be released before the election.

Was it that Shorten had become unhinged by the now-famous Whitlam Oration last Friday night by shadow infrastructure minister Anthony Albanese, in which his main leadership rival clearly did put out a partial political manifesto which, while praising Shorten effusively in places, nonetheless set out an approach to government that is clearly at odds with the style of his current boss.

It might have been the Whitlam Oration, but Albanese’s approach echoed Bob Hawke’s 1983 campaign slogan “Bringing Australia Together.” He argued that Labor should try to enlist the support of business through “collaboration and compromise” and went on: “Our job is not to sow discord. It is to bring people together in the service of the national interest. Labor doesn’t have to agree with business on issues such as company tax rates, but we do have to engage constructively with business large and small.”

Albanese also advocated party reform to give more power to branches — definitely not a Shorten priority — and went out of his way to praise a Liberal party icon, former NSW party secretary and Fraser government minister Sir John Carrick, who died recently at the age of ninety-nine. Carrick was a wartime mate and lifelong friend of Albo’s mentor Tom Uren. And Uren himself was a Whitlam and Hawke government minister who came from Labor’s left — yet made it his priority to find common ground with conservative state governments so they could get things done. He was one of Whitlam’s more successful and effective ministers.

Albanese made no direct criticism of Shorten, but rather seemed to be offering a different model of leadership. You would have thought Labor has had enough of changing leaders shortly before elections, but you don’t have to be a conspiracy theorist to read Albanese’s speech as a job application.

If so, it may explain why Shorten appears to have become so rattled. He would be sensible to front the media again, eat humble pie, and wave away his words on Tuesday as simply stating Labor’s current policy, and not as one that it will be taking to the election.

As I pointed out last month, there is little chance that the next Senate will agree to repeal the tax cuts it voted on just a year earlier. If anything, there could be even fewer Labor and Green senators in the next parliament than in this one. A smart Labor leader would accept that, cut his losses, and reshape his priorities to promise the voters only things he will be able to deliver.

To continue on this course would be to destroy Labor’s fiscal credibility. It won’t get that measure through the Senate. Therefore it won’t have the money it had assumed from it, and it won’t be able to spend it, however noble the intended cause. It lost that battle, so it has to go back to the drawing board and work out what to do next.

If Shorten won’t do that, Labor MPs might look for a leader who will.

The question of what the right rate for company tax is, and what size of business should pay what rate, is entirely subjective. It essentially comes down to weighing up the balance between the government’s desire to stimulate new investment and its need for revenue.

Taxes are a necessary evil. Virtually any tax cut, in itself, stimulates more economic activity. Those who suddenly pay less tax have more money to spend, and even if they save some of it at first, they will spend it some day. That’s as true for companies as it is for you or me.

Proof of that comes from a valuable exercise by Alpha Beta, the consultancy founded by economist Andrew Charlton after his previous life as Kevin Rudd’s adviser through the global financial crisis. With the help of accounting software firm Zero, his firm looked at what 70,000 businesses with turnover just under $2 million a year had done with the money they saved from the first wave of company tax cuts in 2015.

Charlton found that 27 per cent of the firms that benefited used most of their gains to increase investment, 19 per cent used it to hire more workers, 3 per used gave their workers pay rises, and 51 per cent put it in the bank. (In time, of course, that money in the bank will probably be spent too.) He described the net impact as “a small effect on employment and investment and an insignificant effect on wages.”

That was a very small tax cut. A bigger tax cut, in itself, would have a bigger impact on stimulating investment, employment and wages. If you abolished all taxes completely, you could assume a bigger impact still.

But taxes are necessary. They finance all the things that government does: providing free education at schools, providing free care at doctors’ surgeries and hospitals, protecting us with defence forces and police, building and operating our roads and railways, providing pensioners, the poor, the sick and the unemployed with most of their income, and doing the thousand other things that governments do to relieve us of costs or provide us with things that make our lives better (such as the ABC).

And those things also have an economic impact. The higher taxes in the world, by and large, are imposed in the richest countries: especially in Western Europe, but also in the United States, Canada, New Zealand, Japan and here. It is the free public goods provided by our education, infrastructure, health care, defence and a trustworthy legal and regulatory system that make it possible for businesses to operate at high levels of productivity. Go visit the developing world if you want to see how low-tax countries operate.

The theory promoted by the Business Council and its media allies that company tax cuts are the only way we can stimulate the economy is bunk. Better transport infrastructure that saves us time and money stimulates growth. So does better education etcetera.

The core of the intellectual argument between the Coalition and Labor on company tax is where to draw the line between these two goals. The Coalition says its budget projections show that the revenues flowing from higher future growth in employment, investment, wages and profits means it can pay for its proposed company tax cuts, the income tax cuts passed by the Senate last week, and all the other spending we will need, and still run up small but consistent budget surpluses through the coming decade.

Labor — joined on this by some budget-watchers — disputes that, on several grounds. The government’s growth assumptions appear optimistic, especially on wage growth. Some of its spending assumptions are unrealistic, unfair or unaffordable: for example, Anthony Albanese argued last Friday night that the forward estimates would see Commonwealth investment in infrastructure halved over the next decade, to just 0.2 per cent of gross domestic product.

Some of us have watched with gritted teeth as first Labor, then the Coalition, have made phony promises to the voters that they will bring the budget back into surplus. Ten years after the global financial crisis (which we supposedly escaped), next year’s budget is still expected to run up a deficit of $14.5 billion. Yet the government is now demanding that parliament commit to income and company tax cuts some years away when it has still not got the government back into surplus!

There is also the argument, put most powerfully by Victoria University economist Janine Dixon, that Australia’s almost unique system of dividend imputation means Australian shareholders would receive little benefit from the tax cuts because lower company tax would mean lower imputation credits. Dr Dixon argues that the benefits of lower taxes would go overwhelmingly to foreign investors, whose share of the tax burden would fall, with Australian residents picking up the tab. The growth in jobs and wages generated by the tax cuts would not be enough to offset that.

There is little evidence that the company tax rate has any significant impact on business decisions on where to invest, unless the differences are very large. But there is no doubt that globally, governments are engaged in a tax “race to the bottom,” with the US corporate tax rate cut last year to 21 per cent and rates being progressively lowered in Britain, Singapore and other countries. There is a risk that Australia’s 30 per cent rate could become a disincentive to foreign investment in future.

That is why the International Monetary Fund and Reserve Bank governor Philip Lowe have suggested that Australia should lower corporate tax rates as part of a comprehensive tax reform package designed to be revenue-neutral, rather than as a standalone measure that could jeopardise fragile budget surpluses. For political reasons, the government has rejected their advice — and so has Labor. That’s a shame, because it was good advice. •

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The cut in numbers doesn’t come as a result of any official reviews. Indeed, a joint Treasury/Home Affairs report last month lauded the contribution of skilled migration to Australia’s economy and budget, as did a 2016 Productivity Commission report on Australia’s migrant intake. They echoed a strong response by treasurer Scott Morrison to Tony Abbott’s calls for sharp reductions in migrant numbers earlier this year.

In Budget Paper No. 3, Treasury says Australia’s total fertility rate was a shade over 1.8 babies per woman in 2017, which it expects will rise to 1.9 babies by 2020 and then level off. This may explain why Treasury expects the natural increase in population, after trending down for a decade, to bounce up from 145,500 in 2016 to 186,600 by 2021.

But Australia’s fertility rate has declined since the Australian Bureau of Statistics released its population projections in 2012. And given the changing circumstances — a growing proportion of women in the workforce, high childcare costs, slow wages growth and record levels of household debt — it is difficult to see why Treasury assumed the fertility rate would rebound to 1.9 babies per woman by 2020.

Over the forward estimates, it would be safer to assume that the natural increase remains around 150,000 per annum, or slightly lower, with the annual number of deaths increasing at a slightly faster rate than the annual number of births.

Treasury is on slightly safer ground with net migration, which it assumes will decline from 242,600 in 2017 to 221,400 in 2021. Such a decline is highly unusual at a time when the economy is forecast to grow strongly. But given Dutton’s actions, has Treasury actually underestimated the rate of decline in net migration?

Home Affairs has confirmed that the 2017–18 migration program will come in significantly below the “ceiling” of 190,000 people (possibly 20,000 lower). The new visa category for New Zealand citizens resident in Australia for at least five years will intensify the fall in numbers: these visas, granted to people who have already been counted as arrivals, will be included in the skill stream of the migration program. With around 10,000 expected to be issued in 2017–18 (and numbers likely to remain at that level or higher for a number of years), the effective cut to the program will be closer to 30,000.

The ceiling for the humanitarian program has increased to 18,350 for 2018–19. This is not very different from the level in recent years, when the one-off intake of an additional 12,000 Syrian refugees boosted numbers. Those 18,350 visas will also need to allow for those among the 30,000 onshore applicants for refugee status who are successful in their bid.

Then there’s temporary migration. The number of skilled temporary entrants (formerly 457 visa holders) has been in steady decline since a peak of just over 200,000 in March 2014. By March this year, the number was just over 150,000. While a strengthening economy would usually lead to an increase, Peter Dutton’s changes, which took full effect from March 2018, will not only significantly reduce the contribution these visa holders make to net migration but also have a flow-on impact on overseas students and working holiday-makers.

The number of overseas students in Australia has surged since the Knight Review was implemented in 2012. But the growth in offshore overseas student visas slowed in 2017–18 as a result of a range of factors, including a significant increase in fees charged by Australian education institutions and the narrowing of opportunities to extend stays in Australia.

Because the number of student visas granted to visitors, students and others already in Australia continued to increase strongly in 2017–18, the stock of overseas students will continue to grow in the short term. But the significant narrowing of opportunities to extend stays will result in a substantial increase in departures of students over the next few years.

The number of temporary graduates in Australia (currently over 50,000) will continue to grow as many of the 500,000 overseas students in Australia complete their degrees and apply for a temporary graduate visa. The number of people whose temporary graduate visa expires will also grow, and departures will rise as a result of the narrowing options for staying beyond that period.

The impact on working holiday-makers — whose contribution to net migration has been declining since 2012–13 — will be similar. They too will face fewer opportunities to extend their stay in Australia.

Offsetting these factors will be an increase in people arriving on visitor visas and then applying for a long-term temporary stay or permanency. This group has been growing in recent years and numbers are likely to accelerate because of the large backlog in the family stream and a further increase in processing times for employer-sponsored visas.

Net movement of NZ citizens to Australia will continue to be subdued. When the NZ economy performs poorly, NZ citizens become a substantial component of net migration. With current forecasts suggesting that the NZ economy will remain strong, the push factor has weakened.

Finally, Australian citizens also play a role in migration flows. A relatively weak Australian economy can drive up the number going offshore for work — as was evident in the period 2011–12 to 2014–15, when the net outflow of Australian citizens increased from 6480 to 26,170.

While Australia’s stronger economy in 2016–18 may have attracted some of these expatriates back (and slowed the departures), the stronger world economy will still be attractive to many ambitious young Australians. Unless there is a sharp downturn in the global economy, a high level of emigration from Australia will continue.

All this suggests that there is little chance of Australia’s population maintaining an average annual growth rate of 1.6 per cent. As a result, the level of net migration in 2016–17 will represent a one-off peak. Peter Dutton’s policy changes will ensure net migration averages less than 200,000 per annum over the next four years. The key swing factors will be the extent to which overseas students and temporary graduates delay departure (given that their options for staying are now very limited) and the relative strength of the Australian economy.

If the economy continues to strengthen over the next few years, net migration may only fall to around 200,000 per annum, giving an annual population growth rate of around 1.4 per cent over the forward estimates. But if the economy weakens — or at least if it doesn’t strengthen compared to the world economy, and the NZ economy in particular — then Dutton’s gamble may further drive down net migration, and with it Australia’s population growth rate. Net migration of less than 150,000 per annum and a population growth rate closer to 1.2 per cent per annum is quite possible.

This would have serious implications for Treasury’s assumptions about gross domestic product, household consumption growth, jobs growth and tax revenue over the next four years. Given that the cuts target the skilled migration stream and temporary entrants, who have high participation and employment rates, there will also be a negative impact on Treasury’s assumptions for participation and productivity.

This is a gamble the government should be explaining to the Australian public, to state and territory governments and to the business community, many of whom will be making decisions on the basis of the assumed 1.6 per cent population growth. The minister’s gamble also raises questions about the affordability of the government’s proposed tax cuts. ●

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At the very least we should be honest about the redistribution that will occur. Unfortunately, much of the discussion about the government’s tax plan has used arguments that conceal it. Those on the right conceal the fact that they want the poor to bear a greater share of the tax burden. Those on the left conceal the fact that they want the rich to bear a greater share of the tax burden.

I don’t want to express a view here about what is the “right” level of redistribution. But I do believe that this choice should be made in the light of day rather than in the shadows. And the choice should be made free of a number of received myths about income tax.

The simplest analysis of redistribution is shown in the first of the charts below. Over the next ten years, overall, bracket creep will move more than 2 per cent of the tax burden from the top to the middle. After the government’s tax plan, almost 3 per cent of the tax burden will be moved from the top to the middle.

The second chart makes this clearer. It shows how average tax rates would change for people across the income distribution. The top orange line shows the effect of bracket creep over ten years. Those at the fortieth percentile would see their average tax rate increase by six percentage points over ten years. These are true middle-income earners, on around $36,000 a year. For taxpayers between the seventieth and one-hundredth percentile, bracket creep would typically only increase average tax rates by about 3 percentage points.

This brings me to myth 1, that bracket creep hurts high-income earners more. This isn’t true: it hurts middle-income earners most, because they have the biggest gap between their average tax rate and their marginal tax rate (helpfully illustrated on page six of Treasury’s submission).

The middle brown line of the second chart shows how average tax rates will change given bracket creep and the tax plan. Over the next ten years, assuming the plan is implemented, average tax rates will increase for middle-income earners by around four or five percentage points, but will barely move for those in the top 10 per cent of income earners.

The bottom red line shows the difference between the orange and brown lines. It isolates the long-term impact of the tax plan. This shows that the plan reduces average tax rates by about one percentage point for everyone between the twentieth and sixty-fifth percentiles, but reduces tax rates by two to three percentage points for high-income earners between the eightieth and ninety-ninth percentiles. Much of the other available modelling is consistent with these conclusions.

The only modelling I’m aware of that is not consistent is the analysis by Deloittes cited in submissions by the Business Council of Australia, the Centre for Independent Studies and the Institute of Public Affairs to the Senate inquiry into the government’s tax plan. The Deloittes analysis claims that the plan will redistribute about 2 per cent of the tax burden from the bottom to the top. We have tried to reproduce the Deloittes results, but unfortunately we can’t reconcile the numbers. We have taken into account the fact that Deloittes looked at 2024–25 rather than 2027–28, and looked at all adults rather than just everyone who files a tax return. But we still find that bracket creep and the tax plan redistribute about 2 per cent of the tax burden from the top 20 per cent of adults to the second quintile — bearing in mind that the remaining 60 per cent of Australia’s adults don’t pay tax, because most of them don’t work, often because they’re retired.

Instead of looking at whether tax changes are progressive or not, much of the rhetoric about the tax plan focuses on how many taxpayers will be moving into a high-tax bracket. This is myth 2: that the tax system is “hitting the top” because more people are in a high tax bracket. Bracket creep means that the proportion of taxpayers in a high tax bracket increases over time. So, of course, the proportion of tax paid by people in that bracket increases. But at the same time the proportion of tax paid by the top 10 per cent of taxpayers falls.

On the other hand, some have attacked these tax cuts as unfair because they are bigger for high-income earners. This is myth 3. In reality, a moderately progressive tax change overall would still give more to high-income earners, in absolute dollars, as a percentage of the budget cost and as a percentage of post-tax income. Those on higher incomes pay a higher proportion of the tax take, so pretty much any tax change — including a highly progressive change — will give them a bigger tax cut, at least in absolute dollars. Those who claim that the tax cuts are unfair using these analyses need to explain why they think it is inherently “fair” that ultimately a very small number of people should pay all of the income tax.

Finally, I want to look briefly at the economic impact of the tax plan. Many of the submissions to the Senate inquiry assert that a high marginal rate for top income earners has a big economic cost because it discourages people from staying in Australia, depriving Australia of their talent.

This is myth 4. On the contrary, there is no evidence that Australia’s high top marginal tax rates materially affect decisions to work more, or to live in Australia. The recent AfrAsia Bank Global Wealth Migration Review looked at migration of millionaires around the world. It found that 10,000 millionaires moved to Australia last year, and almost none left. This is the highest net migration of millionaires to any country last year — in absolute terms, let alone correcting for population. And this in a year when Australia’s top marginal rate was relatively high, and cut in at a relatively low income. Singapore, with its famous 15 per cent tax rate, only attracted 1000 millionaires.

If you want tax cuts with a big economic payback — and that is not the only reason for income tax cuts — then you would focus the tax cuts on middle-income earners (those earning $50,000, not $80,000). That’s because their decision to work is more sensitive to effective marginal tax rates, after taking into account the withdrawal of welfare benefits and the net cost of childcare. Effective marginal tax rates are typically much higher for middle-income than for high-income households because of our highly means-tested welfare system. This is also the conclusion of the Treasury submission. Incentives for high-income earners matter less because they’re probably working full-time anyway.

To sum up, bracket creep hurts middle-income earners (those on $50,000 a year) more than those on high incomes. Even though more people will be in high marginal tax brackets, high earners will not be bearing more of the tax burden. Tax cuts are not inherently “unfair” just because they give more to those on high incomes than those on low incomes. And while cutting top marginal tax rates in Australia will not materially affect economic outcomes, a tax cut focused on middle-income earners (those on $50,000, not $80,000 a year) will have more of an effect on the economy.

The key facts are that bracket creep will reduce the progressivity of the tax system, and the tax plan doesn’t materially unwind this. Having agreed on that fact base — on which there is a broad consensus — we can argue openly about whether reducing the extra burden on high-income earners, but increasing the proportion of tax paid by middle-income earners, is “fair.” ●

The post Four myths about income tax appeared first on Inside Story.

I want to argue that the share of tax paid by the highest earners needs to be judged in relation to the share of total income they receive — not simply their proportion of the population. The more unequal a society, the more the rich should be expected to pay in taxes. Compared to other high-income countries in the OECD, Australia’s income tax system is very progressive, yet the overall level of taxes paid by Australians — including high earners — is lower than in most.

The Coalition plan would extend the 32.5 per cent tax rate to taxpayers in the current 37 per cent bracket, beginning in the mid 2020s. It would increase the cut-in point for the highest marginal tax rate from $180,000 to $200,000. As a result, the majority of taxpayers would face the same marginal tax rate regardless of whether they earn $41,000 or $200,000 per year. Once the budget goes into surplus (which the government expects to happen in 2019–20), personal income tax revenue would be capped at 23.9 per cent of gross domestic product, or GDP.

Labor’s plan involves slightly larger cuts for lower- and middle-income groups by 2019–20, followed by further reductions for lower- and middle-income groups after that, but offers much less assistance for higher-income groups.

Both approaches have been analysed and in some cases criticised. The Grattan Institute argues that the Coalition’s plan sacrifices necessary revenue to pay for lower taxes on high-income earners, and that the richest 20 per cent of taxpayers would benefit most from the proposed flattening of the scale. Nevertheless, it says, “the plan itself doesn’t make the tax system much less progressive.”

The Centre for Social Research and Methods at the Australian National University has assessed the Coalition’s proposals and compared the government’s and the opposition’s plans. It, too, concludes that the government’s plan would lead to a modestly less progressive tax system, as would the Labor policy, but that the difference would not be large. Under the Coalition, the share of tax paid by the richest 20 per cent of households would fall from 61.2 per cent currently to 58.3 per cent in a decade; under Labor, it would fall to 59.1 per cent.

A range of other assessments of the tax plans appear on the Budget Forum website of the ANU’s Tax and Transfer Policy Institute. Miranda Stewart discusses the advisability of the “cap” on Australia’s tax-to-GDP ratio, as well as the desirability of flattening the income tax scale. She concludes that “the government’s personal tax rate cuts, if fully implemented, would flatten our income tax rate structure more than ever in the past.” Bob Breunig argues that, while income tax cuts have their attractions, cutting rates without broadening the tax base poses a substantial risk to the budget’s bottom line. Teck Chi Wong points to the fact that the budget papers offer no analysis of the budget’s distributional impact. And Andrew Podger argues that both the Coalition’s and Labor’s plans complicate the income tax scale, mainly via the income-tested tax offsets they include in order to limit the cost of next year’s tax cuts.

This discussion, and other coverage of the budget, raises two main questions. What is a fair share of tax from each income group, and how much tax in total should be collected from Australians?

Fair share? It depends how you look at it

Finance minister Mathias Cormann has one answer to the first question. “We will be prioritising low- and middle-income earners when it comes to tax relief,” he said on 5 May, “but of course it’s important that the tax policy settings are appropriate overall.” He went on: “Higher-income earners overwhelmingly carry the heaviest tax burden in our economy today, and obviously, if we want to ensure that Australians are incentivised and encouraged to work hard… there’s got to be appropriate reward for effort as well.”

It’s a familiar theme. Back in 2013, the Financial Review’s Fleur Anderson was suggesting that “the middle class and the professions are staging a revolt as they find their growing share of the tax burden too hard to bear, after over a million people were made exempt from the tax system over the past ten years.” In that newspaper and elsewhere, commentators pointed to the Australian Tax Office’s tax statistics for the 2010–11 financial year, which showed that the top 5 per cent of income earners paid 34.1 per cent of net income tax and the top 25 per cent paid just over two-thirds. (The share paid by the top 5 per cent had fallen to 33.0 per cent by 2015–16.)

Just last week, also in the Financial Review, Chris Richardson of Deloitte Access Economics quoted Tax Office data showing that the top 1 per cent of earners pay 17 per cent of all personal income tax and the highest-earning 10 per cent pay 55 per cent. “That’s not what Mr and Mrs Australia think is happening…” he wrote, “mainly because the analysis you’ve been reading has talked dollars rather than shares of tax paid.”

But is “share of taxes paid” really the right way of looking at whether the tax system is fair?

Data released by the government in budget week showed that the roughly 400,000 taxpayers who earn more than $180,000 per year have a median tax bill of $85,000, which equates to an effective income tax rate of 36 per cent. The effective tax rate for those earning less than $87,001 (the point at which the second-highest marginal tax rate cuts in) was 19 per cent.

The most obvious reason why the top 1 per cent or 10 per cent pay a higher share of tax is that they receive a much higher share of taxable income. Tax Office figures show that in 2015–16 the highest 1 per cent of income taxpayers — just over 100,000 people earning $330,000 or more per year, which adds up to about $72 billion of taxable income, or an average of roughly $720,000 per taxpayer — paid 16.9 per cent of net tax but received 9.6 per cent of all taxable income. (After their income taxes, that 1 per cent of taxpayers still netted about 7.2 per cent of all after-tax income.)

So even if Australia had a completely flat tax — a single rate with no tax-free threshold — very high–income earners would still pay close to 10 per cent of all income taxes. They pay 16.0 per cent rather than 9.6 per cent because Australia has a progressive income tax scale: the rate of tax paid increases as the taxpayer’s income increases.

Rates of income tax currently begin at zero on incomes up to $18,200, with rates of 19 per cent, 32.5 per cent and 37 per cent up to $180,000 per year and 45 per cent above that level (not including the Medicare levy and the low-income tax offset). The stepped scale means that the marginal rate of income tax paid will always be higher than the average rate of income tax paid, and the most important contributor to this phenomenon is the zero rate on incomes up to $18,200. So long as we have a zero-rate range, the income tax system will be progressive.

But is it too progressive? Should the richest 1 per cent pay 17 per cent or so, as they currently do, or should they pay closer to the 10 per cent that would apply if we had a completely flat tax?

How Australia compares

Australia’s overall level of taxation is well below the average of other high-income countries in the OECD. The latest figures, from 2015, show that the ratio of total taxes to GDP in Australia was 28.2 per cent of GDP while the OECD average was 34.3 per cent. That put Australia at twenty-eighth place out of thirty-five, with most of the countries with lower tax-to-GDP ratios being lower-income countries — including Mexico, Chile and Turkey — and the outliers being the United States and Switzerland.

The composition of Australia’s taxation is also very different from that of other OECD countries, this time apart from New Zealand. Personal income taxes made up about 41 per cent of total tax revenue compared to an average of 24 per cent across the OECD, making us the second-highest in the OECD, and the share of taxes paid on corporate income was the third-highest. Australia also has relatively high taxes on property, but mainly because we have widespread home ownership. Taxes on goods and services are relatively low, mainly because the goods and services tax, or GST, ranks at thirty-three among the similar taxes in thirty-five countries.

But the main reason for our relatively low level of total taxation is that our government does not collect social security contributions, and we therefore rank equal last (with New Zealand and Denmark) on that measure. On average across OECD countries, employee and employer social security contributions account for just over a quarter of total tax revenue, or close to 8 per cent of GDP.

This is also a significant part of the reason why income taxes account for so high a proportion of total revenue in Australia. Social security contributions are very similar to income taxes, however, with employee contributions usually being deducted at the same time as income taxes in the countries that collect them. Like income taxes, they are generally counted as direct taxes on households or individuals. Employer social security contributions, by contrast, are usually treated as if they were indirect taxes, even though they too are paid directly to government and are commonly regarded as effectively being paid by employees through lower wages.

It is sometimes suggested that tax comparisons should take account of the superannuation guarantee paid by employers in Australia. As Treasury argued in its 2015 Re:think tax discussion paper, “Australia’s compulsory superannuation system — the superannuation guarantee — is sometimes equated to a social security tax. However, as it is paid directly into private superannuation accounts (currently set at 9.5 per cent of an employee’s ordinary time earnings) rather than to the government, it does not meet the definition of a tax.” It’s also important to remember that twelve other OECD countries also have either mandatory occupational or private pensions, or schemes that are close to mandatory under industrial agreements.

But the lack of social security contributions still gives a clue as to why Australia has a relatively low level of overall taxation.

Compared to other rich countries, Australia is well down the OECD rankings in terms of government spending and taxation, with the third-lowest level of government spending and the fourth-lowest level of overall government revenue. And a major reason for Australia’s low overall level of spending is that our outlay on social security is among the lowest of the OECD countries. Total government spending as a proportion of GDP in Australia is about 78 per cent of the OECD average and spending on areas other than social protection is about 90 per cent, but spending on social security benefits is only about 70 per cent of the OECD average.

Tax revenues in Australia are about six percentage points of GDP below the OECD average, and our total level of spending is eight percentage points of GDP below the average, with our social security spending being four percentage points of GDP below average. In this sense, our low social security spending accounts for nearly half of our overall lower spending and consequently our lower taxes.

As the chart shows, spending on cash benefits in 2014 was 8.6 per cent of GDP, the sixth-lowest level of thirty-five OECD countries. Why so low? Our social security system differs markedly from those in most other countries. In Europe, the United States and Japan, as we’ve seen, social security is financed by contributions from employers and employees, with benefits related to past earnings; this means that higher-income workers receive more generous benefits if they become unemployed or disabled, or when they retire.

Australia makes flat-rate payments, financed from general taxation revenue, that are income-tested or asset-tested. The rationale for this approach is that it reduces poverty more efficiently by concentrating the available resources on the poor and minimises adverse incentives by limiting the overall level of spending and taxes.

In fact, Australia relies more heavily on income-testing than any other OECD members. OECD figures show that nearly 80 per cent of Australian cash-benefit spending is income-tested, compared to just over half in Canada, 37 per cent in New Zealand, around 26 per cent in Britain and the United States, and less than 10 per cent in most European countries. (These figures include spending on state government workers’ compensation schemes and federal and state public service pensions, which are not income-tested.)

As a result, lower-income earners receive a bigger share of benefits than in any other OECD country. The poorest 20 per cent of the Australian population receives nearly 42 per cent of all social security spending; the richest 20 per cent receives around 3 per cent. In other words, the poorest fifth receives twelve times as much in social benefits as the richest fifth. In the United States, the poorest get about one and a half times as much as the richest. At the furthest extreme are countries like Greece, where the rich are paid twice as much in benefits as the poorest 20 per cent, and Mexico and Turkey, where the rich receive an extraordinary five to ten times as much as the poor.

In economic terms, income-testing can be seen as analogous to taxing. Social security recipients lose between 40 and 60 per cent of any income earned above “free areas” (currently between $52 and $84 per week for single people receiving allowances or pensions). When these withdrawal rates overlap with the income tax system, recipients can face very high effective marginal tax rates, created by the combination of income tax paid and benefits withdrawn. They might lose 70 per cent or more of any earnings, a reduction greater than the top marginal income tax rate.

Income-testing also affects the way the Australian tax system is structured, and particularly its treatment of low incomes generally. As we’ll see, this has important implications for the overall progressivity of the tax scale.

Distributing taxes

The distribution of taxes across countries or across time can be compared in a number of ways, none of them perfect but each throwing some light on the question. Using administrative data from the Australian Tax Office and its overseas equivalents — as the finance minister and many newspaper articles do — can be misleading because the reported statistics are not always directly comparable. Complicating the picture further is the fact that income tax is paid by different proportions of the population in different countries (in Australia it’s around half of all adults, or roughly ten million individuals).

We can calculate the taxes individuals must pay at different income levels by using the tax schedules of each country. The OECD publishes estimates of these statutory tax liabilities at different wage levels in its series Taxing Wages. It includes calculations of the income tax liabilities and the employee’s social security contributions payable by individuals at 67 per cent, 100 per cent and 167 per cent of the average wage, and by families with and without children, using different combinations of earnings by each partner.

According to these data, Australia ranked twenty-fourth out of thirty-five countries in 2017 in terms of the taxes paid by a worker at 67 per cent of the average wage, twentieth for a worker at 167 per cent of the average wage, and twenty-eighth according to the level of total tax revenue, suggesting that Australia is more progressive than average.

While these figures are extremely useful for understanding how the tax systems work in each country, in Australia’s case they don’t include most taxpayers — for example, 67 per cent of the average wage is close to the median income taxpayer, while 167 per cent of the average wage is close to the ninety-second percentile of the distribution of taxpayers. Comparisons based on this source, at least for Australia, leave out the bottom half of taxpayers and most of the richest 10 per cent.

A related OECD series, Benefits and Wages, provides more detailed spreadsheets of the income tax liabilities and social security contributions of employees in different family types at single percentiles of the average wage, from zero to 200 per cent. They include families receiving social security benefits but don’t cover the richest 3 per cent of Australian taxpayers, who pay roughly 30 per cent of net taxes.

To compare progressivity across countries we also need to know the share of the population at different income levels. For this purpose, the best source of data is household income surveys — the type of data that the Centre for Social Research and Methods at the ANU used in its analysis of the potential impact of the federal budget. These data are more comprehensive because they cover the entire population, including people who don’t pay income tax, and they combine the incomes of all members of a household and then adjust for the number of people who live in the household.

The most recent analysis of the progressivity of household taxes by the OECD was in Growing Unequal?, a report published in 2008. The chart below shows the share of direct taxes (income tax and employee social security contributions) paid by the richest 10 per cent of households in OECD countries around 2005. The rather surprising result of this analysis is that the share of direct taxes paid by the richest is highest in the United States — a finding that provoked a good deal of controversy. (Disclosure: I wrote the chapter with this finding in the OECD report, although the calculations were made by other colleagues at the OECD.)

After the United States, the distribution of taxation tends to be most progressive in the other English-speaking countries — Ireland, Australia, Britain, New Zealand and Canada — and in Italy, followed by the Netherlands, the Czech Republic and Germany. Taxes tend to be least progressive in the Nordic countries and in France and Switzerland.

Part of the explanation for the US finding is that, as we’ve seen, the progressivity of the tax system partly depends on the level of inequality of taxable income. In other words — all other things being equal — the greater the share of income received by the rich, the greater their share of taxes paid.

Among high-income OECD countries, the United States ranks third-highest according to income received by the richest 10 per cent of households (after Italy and Poland). The richest 10 per cent of American households capture 33.5 per cent of income, compared to an OECD average of 28.4 per cent and 28.6 per cent in Australia.

One way of adjusting for this inequality is simply to divide the share of taxes paid by the share of income. On this measure, the United States still has the most progressive system of direct taxes in the OECD: the richest 10 per cent pay a share of taxes that is 35 per cent higher than their share of income. But Australia moves from being ranked the fifth most progressive to the second most progressive, with the richest 10 per cent paying a share of taxes that is 29 per cent higher than their share of income.

Other OECD measures reach very similar conclusions. One is the concentration coefficient, which is calculated in the same way as the better-known Gini coefficient, but with taxes ranked by the share of income held by different income groups. As Growing Unequal? shows (see page 107), dividing the concentration coefficient of taxes by the concentration coefficient of income results in Ireland having the most progressive direct tax system in the OECD, with the United States and Australia coming in at second and third positions respectively.

Why is the Australian tax system more progressive?

The progressivity of the tax system does not tell us how high the level of taxes is; a more progressive tax system is simply one where the level of taxes increases with income at a more rapid rate than in a less progressive tax system. One of the main reasons why Australia has a more progressive system than most other high-income countries is not that high-income groups pay high rates of tax but that low-income groups in Australia pay very low rates of tax.

Growing Unequal? (page 116) gives comparative figures for around 2005. It shows that the poorest 20 per cent of Australian households paid only 0.8 per cent of all direct taxes, compared to an average for twenty-three OECD countries of 4.2 per cent. This was the lowest share of all OECD countries, and far short of up to 6 per cent in Denmark and Sweden and 12 per cent in Switzerland. The taxes paid by the poorest 20 per cent of Australian households were 0.2 per cent of total household disposable income, the equal lowest in the OECD.

On average for all Australian households, direct taxes were 23.4 per cent of equivalent household disposable income, compared to an average among twenty-three comparable OECD countries of 28.3 per cent, placing us sixth-lowest in the OECD, a ranking similar to that found when total taxes are expressed as a percentage of GDP.

While the richest households in Australia pay one of the highest shares of direct taxes, this does not mean that the taxes paid by the rich are higher than in other countries. The chart below shows the taxes paid by the richest 10 per cent as a share of their disposable income. When people talk of the “tax burden,” this is what they are likely to be most concerned with — how much of my income do I pay in taxes?

The chart below shows that the richest 10 per cent of households in Australia paid 37.8 per cent of their disposable income in taxes, just below the OECD average of 38.8 per cent, a little higher than in Britain but lower than in Canada, the United States or New Zealand — and very much lower than in Denmark, Sweden and Iceland.

It is notable that in some of the countries where the rich pay a low share of total taxes, the share of their income paid in taxes is extremely high. The most striking example is Denmark, where the richest 10 per cent pay not much more than 25 per cent of direct taxes, but pay tax at an average rate of 70 per cent.

Put another way, the poorest 10 per cent of Danish households pay 2.5 per cent of household taxes and the richest 10 per cent pay 26.2 per cent of taxes, a ratio of about 10.5 to one. In Australia the poorest 10 per cent pay 0.2 per cent of all taxes and the richest 10 per cent pay 36.8 per cent of household taxes, a ratio of 184 to one. The progressivity of the Australian tax system is much greater than the progressivity of the Danish system, but mainly due, as we’ve seen, to the very low share of taxes paid by low-income Australian households.

The reason why low-income Australians pay very low taxes reflects the nature of our social security system. In many European countries social security benefits are a high proportion of previous earnings, while in Nordic countries, where they also tend to be high, they involve a mix of more universal provisions and earnings-related provisions. In these countries, it makes sense to tax social security benefits as if they were ordinary income because they replace a large share of previous income.

In Australia, where benefits are more modest and flat-rate, it makes little sense to tax them highly. If benefits are intended to alleviate poverty, then imposing higher levels of taxation on them would imply that we were paying people too much. Instead, we ensure that people receiving benefits are not liable for income tax on their basic payments through the combination of a high basic tax threshold, the low-income tax offset (which replaced earlier special tax offsets for pensioners and beneficiaries) and the seniors and pensioners tax offset, as well as the exemption from tax of family payments.

Two ways to target welfare

A corollary of the fact that our benefit system targets the poor more than any other country’s is that our tax system claws back less of our spending.

The chart below shows OECD estimates of the proportion of direct taxes (income taxes plus employee social security contributions) that are paid out of cash transfers. In Australia, direct tax payments made from social security benefits amount to only 0.2 per cent of GDP, with the only countries with lower levels of direct tax paid out of benefits being lower-income countries. At the other extreme, high-spending Nordic welfare states collect direct taxes on benefits of close to 3 per cent of GDP, or in the case of Denmark around 4 per cent of GDP.

The next chart shows OECD estimates of clawbacks through indirect taxes, including the GST in Australia and value-added taxes in Europe. Again, Australia has one of the lowest levels in the OECD, at around 0.7 per cent of GDP, compared to 2.5 per cent or more in a range of Nordic and other European welfare states.

The final of these charts shows the combined effects of direct and indirect taxation on the level of social spending, expressed as a percentage of gross social spending. Australia had the equal third-lowest level of tax clawback in the OECD in 2011, at 4.9 per cent of social spending. At the other extreme, in Luxembourg, Finland and Denmark, 20 per cent of a much higher level of spending is clawed back.

The fact that Australia overall has the most income-tested social security system of all OECD countries is linked to the fact that we tax cash benefits less than most. Income-testing is a way of taxing in advance rather than clawing back spending through the tax system after payments have been made. Each can be regarded as differing ways of seeking to achieve rather similar goals.

Is that the whole story?

As we’ve seen, the progressivity of the tax system is usually measured according to the difference between the tax rates paid by high-income and low-income groups. Australia’s system is highly progressive not because we tax the rich heavily but mainly because we tax the poor very lightly. This is primarily the result of a relatively high tax threshold, which benefits all taxpayers by reducing the average rates of tax they pay to well below their marginal rate. The combination of our low level of social security spending and low tax on social security benefits results in lower levels of average taxation overall.

But the conclusion that Australia has a relatively progressive tax system can be challenged in several ways. First, not all high-income earners actually pay the taxes that would normally be assumed to apply to their circumstances. As the Age’s economics editor Peter Martin has pointed out, forty-eight millionaires paid no tax at all in 2017, according to what were then the latest Tax Office statistics (compared to seventy-five reported in 2014, fifty-five in 2015 and fifty-six in a 2016 article).

These examples certainly mean that the income tax system is not as progressive as it is intended, but they don’t mean the system is not progressive overall. The forty-eight who paid no tax in the 2017 report, for instance, had an average pre-tax income of close to $2.5 million dollars, or a combined $120 million — about one-fifth of 1 per cent of the $70 billion-plus declared taxable income of the richest 1 per cent in 2015–16. These cases might show that effective progressivity is less than the statutory progressivity of the tax scale, but the Tax Office data show that this group still pays a high share of total income tax.

More serious is the second objection, which hinges on the issue of money held in tax havens. In The Hidden Wealth of Nations, economist Gabriel Zucman estimates that assets in tax havens amount to around 8 per cent of global financial assets. (In Russia’s case, the figure is 75 per cent.) The release of the Panama Papers in 2016 prompted the Tax Office to investigate 800 “high net-wealth Australians,” according to the Financial Review, although the scale of their offshore holdings was not stated.

Third, it’s important to remember that income tax and other direct taxes are not the only taxes paid by Australians. The table below shows estimates of the share of direct and indirect taxes paid by different income groups in Australia between 1984 and 2015–16 in the case of direct taxes, though only up to 2009–10 for indirect taxes and total taxes. (The Australian Bureau of Statistics will publish more up-to-date estimates of indirect taxes and total taxes, for 2015–16, within the next twelve months.)

The table ranks households by their gross income without adjusting for household size, because these data are readily available from the 1980s onwards and are less affected by definitional changes over time. The share of direct taxes paid by the richest 20 per cent has gone up over time, although it was not quite as high in 2015–16 as two years earlier. This partly reflects a higher share of income going to the rich between the 1980s and the mid 1990s.

Although the share of indirect taxes paid by the rich has been broadly stable, the poorest 20 per cent of households pay a much higher share of these taxes than they pay of income taxes, most recently close to 10 per cent, up from around 8 per cent in the 1980s.

The share of total taxes paid by the richest 20 per cent is very similar to their share of income. In 2003–04, the richest 20 per cent of Australian households received 49.8 per cent of private income before taxes and paid 48.2 per cent of total taxes. On this measure, total direct and indirect taxes are substantially less progressive than direct taxes alone — in fact, they are closer to proportional than progressive.

It’s therefore possible to argue that the reduction in income inequality achieved by the Australian tax–transfer system is primarily brought about on the spending side of the equation (although, of course, that spending is funded by tax revenue).

That’s not to say that governments haven’t been conscious of the impact of indirect taxes on overall progressivity. When the GST was introduced in 2000 it was accompanied by income tax cuts designed to compensate low-income taxpayers. Effective income tax thresholds were increased, making that part of the system more progressive, even while the overall system actually became less progressive.

As the table above shows, between the 1998–99 and 2003–04 surveys the overall tax system became less progressive because of the increased share of much-less-progressive indirect taxes: in fact, the ratio of total taxes paid by the richest 20 per cent to the taxes paid by the poorest 20 per cent was cut from seventeen-to-one to a little more than twelve-to-one between 1998–99 and 2003–04. In other words, the complaint that income taxes have become more progressive ignores the fact that this partly reflects regressive changes in other parts of the tax system.

While indirect taxes make the Australian tax system much less progressive, they are unlikely to change Australian rankings in international comparisons. The level and coverage of value-added taxes in most other OECD countries are much higher than for the GST in Australia. New Zealand’s GST rate, for instance, is 15 per cent, and it covers a broader range of purchases than Australia’s; many European countries have value-added tax rates of 20 per cent or higher and also have a broader coverage than here.

Speed limiting the future

While much of the discussion of the federal budget tax proposals has focused on the “fairness” of different plans, an important element is the proposed federal tax cap of 23.9 per cent of GDP. This is based on an average of tax levels from 2000–01 to 2007–08, a benchmark that doesn’t make much sense. As Ross Gittins observes, “in none of those eight years did the [tax-to-GDP] ratio actually hit 23.9 per cent. Rather, it ranged between 23.3 per cent and 24.3 per cent. Indeed, it exceeded 23.9 per cent in five of the eight years.” Setting the average as a cap and allowing some years to be below this level is actually equivalent to reducing the future average tax rate. Moreover, as Gittins points out, the cap would require tax cuts when the economy is doing strongly and tax revenues are rising — that is, tax cuts would be hazardously pro-cyclical.

In the longer run, as Miranda Stewart argues, “It seems likely we will need to increase our tax level somewhat in future, to ensure fairness and sufficient investment in Australia, in a changing and risky world with an ageing population. At least, this is a debate we should have.”

Mike Keating, a former head of the finance and prime minister’s departments, argues in Pearls and Irritations that “it will be necessary to increase the ratio of government revenue to GDP by three percentage points over the next three decades. In our view, that is not much to maintain an inclusive society, and it would still leave Australia as a low tax country.”

Reinforcing the point, he notes that both “the Committee for Economic Development of Australia and the Grattan Institute have independently concluded that budget repair will require action to be taken on both the revenue and expenditure sides of the budget, and that most of the proposed fiscal adjustment will have to come from increased revenue. Indeed, the Grattan Institute is quite adamant that ‘governments will not be able to restore budgets without also boosting revenues.’”

The 2015 Intergenerational Report projected that government spending on healthcare will increase from 4.2 per cent to 5.7 per cent of GDP by 2055, on age pensions from 2.9 per cent to 3.6 per cent of GDP, and on aged care from 0.9 per cent to 2.1 per cent of GDP. Spending on other payments to individuals, by contrast, would fall from 4.5 to 3.4 per cent of GDP, with much of this being accounted for by a fall in family payments.

Like the architects of the proposed tax cap, the Intergenerational Report assumed that the federal tax-to-GDP ratio stays at 23.9 per cent of GDP for the whole period. With stable tax revenues and rising age-related spending, budget deficits would persist over this forty-year period, the cash deficit reaching about 6 per cent of GDP in 2054–55 and net debt rising from 15.2 per cent to 60 per cent of GDP.

At the time, I pointed out that the report’s assumed continuation of legislated policies would mean that payments to the unemployed and families would nearly halve relative to projected future wage levels. Unemployment would stay fairly constant, but with those who experience it becoming increasingly impoverished. Family Tax Benefit Part A for the lowest-income families would nearly halve relative to wages by the middle of the century, leading to a significant increase in the depth of child poverty.

If we assume that the age-related spending projections are accurate and we do not want to see the deep impoverishment of future low-income working-age Australians — or at least we believe that deep poverty will be unacceptable in a significantly richer future Australia — then we certainly do need to debate how to increase future tax revenues. (We might also want to increase foreign aid, which has been cut for five years running, and in an uncertain international environment it may be necessary to increase defence spending.)

The public seems to agree. In the latest Per Capita Tax Survey, around 87 per cent of more than 1500 respondents favoured increased spending on health, nearly 78 per cent favoured increased spending on education, and 55 per cent wanted more spent on social security. Around 44 per cent believed they paid around the right amount of tax and 43 per cent thought they paid too much. Two-thirds believed high-income earners pay too little tax.

Is increased progressivity of the tax scale the answer? Those who question whether high-income groups pay an “unfairly high” share of tax are likely to say no, yet the Per Capita survey suggests this is where a majority of Australians think the answer lies.

As we’ve seen, though, high-income groups in Australia do not face particularly high average tax rates by international standards. It is certainly possible to increase the effective progressivity of the tax system by broadening the tax base and addressing tax expenditures and concessions like negative gearing.

It is particularly important to remember that we should look at the whole system of taxes and transfers and other social spending when setting policy directions. The progressivity of just one part of the overall system of taxes and transfers should not be the only factor taken into account in determining whether we have a fair distribution of taxes and spending.

This lesson was underlined by social policy analysts Walter Korpi and Joakim Palme in their 1998 article, “The Paradox of Redistribution and Strategies of Equality.” They show that the main determinant of the degree of redistribution achieved by Nordic welfare states is the amount of revenue they collect, even though their tax and welfare systems are not as progressive as Australia’s. The lesson of international comparisons is that it is necessary to balance progressivity with the collection of the revenue needed for social spending. The federal budget’s tax measures can scarcely be seen as a step in the right direction. ●

The post Is Australia’s tax and welfare system too progressive? appeared first on Inside Story.

The centrepiece of the budget could have been the return to surplus, coupled with the modest but well-targeted tax cuts for lower- and middle-income earners planned for next year. Australians would have welcomed both parts of it. It would have given credence to the Coalition’s claim to be the better economic manager, and chimed with its long-running narrative of trying to get the budget back in the black.

But Malcolm Turnbull and Scott Morrison clearly felt they needed something there for the Coalition’s base, the well-off and those who aspire to join them. So they added a stage two of the tax cuts from 2022–23, which would mean anyone earning between $41,000 and $120,000 would be on the standard marginal tax rate of 32.5 per cent.

Okay, there’s a case for that too, so long as the budget can afford it, which is impossible to tell from this point. But by and large, the second round of cuts provides significant savings only to people earning more than $100,000. It offers nothing to the great bulk of taxpayers.

Even that, however, was not enough for Turnbull and Morrison. So they added a third stage of tax cuts from 2024–25, solely for those who are already well-off. The standard marginal rate would apply to incomes all the way up to $200,000.

Put it all together, and the panel shows what that means.

A cleaner on $30,000 a year would get a tax cut of $200. A nurse on $80,000 would get a tax cut of $540. But a lawyer on $200,000 a year would get a tax cut of $7225 — thirty-six times as much as those on low incomes.

The best measure is the gain in incomes after tax. Everyone earning up to $100,000 a year, the vast bulk of Australians, would get an increase in disposable income of around 1 per cent — and that’s their only tax cut for fifteen years. Those on $200,000 a year would get a boost in disposable income of 5.4 per cent.

That’s fine if you think that what’s wrong with Australia is that the rich have too little money and the poor have too much. I doubt that many swinging voters share those values. It’s a very easy target for Labor to attack, and the fact that it would not happen for six years — two elections away — makes it implausible as well.

Why give your opponents a second target when you are already on the defensive over unpopular company tax cuts and you have a good story to tell in the shorter-term budget projections? Future historians will wonder.

If you accept the budget’s assumptions, the next four years look very good for the economy, and the budget itself. It projects growth of 3 per cent a year throughout that period, which seems to me a reasonable forecast for the next two years, at least.

It projects employment to grow by 700,000 jobs, although with only a slight reduction in unemployment, presumably because most of the jobs, as over the last decade, will be taken by recent migrants.

The budget surplus would be achieved a year early, in 2019–20, albeit at a skinny $2.2 billion, just 0.1 per cent of GDP. But then it would climb to $11 billion in 2020–21 and $16.6 billion a year later, before settling down at about 0.5 per cent of GDP as a result of all those tax cuts. It takes until 2026 to reach the target the government set for itself of 1 per cent of GDP, but for the next four years the trajectory would be admirable if achieved.

(I suspect many readers think that surpluses don’t matter. They do. Remember that over the past decade, Australia has run budget deficits averaging 2.5 per cent of GDP. That’s why we have a net debt estimated to hit $350 billion next year, plus another $23 billion of debt held by off-budget companies such as NBN, Inland Rail, Western Sydney Airport etc. That money has to be paid back in good times, otherwise the interest bills will weigh on future budgets indefinitely, as they do in Europe, eating up money that should be used to provide government services or lower taxes.)

But it is very doubtful that that trajectory will be achieved. The forecast budget surpluses in 2019–20 and beyond depend on another set of numbers that look decidedly flaky.

Wage growth has averaged 2.1 per cent over the last three financial years and, despite many official forecasts of rising wages, was still stuck there when last measured at the end of 2017. Yet Treasury, undeterred, has forecast that it will surge to 2.75 per cent in the next financial year, then to 3.25 per cent in 2019–20, and then to 3.5 per cent.

What is Treasury’s forecasting record? In the past two budgets, on average, it overstated wage growth for the year ahead by 0.5 per cent, and for the following year by 0.7 per cent. If it’s that far out again this time, the thin surplus forecast for 2019–20 will disappear, and those in future years will be much reduced.

The other dubious assumption in the budget is that spending growth from 2019–20 will be contained to average just 1.1 per cent a year in real terms over the next three years — which implies real falls in per-capita spending, since the population is growing by 1.6 per cent, and the government wants it to stay that way.

That is only half the 2.1 per cent average growth in real spending over the government’s two terms in office — in which the austerity has been pretty severe in many places, including the lack of wage rises for many public servants.

If you look at the projected spending in different policy areas, you see only islands of real per-capita growth, mostly the areas the government has specifically prioritised (schools, the NDIS), or where the ageing population is forcing it to spend more.

Some of those contradict the image of the Coalition held by many on the left. By and large, the Coalition has delivered the hard part of the bipartisan commitment to a properly funded NDIS. It is seriously tackling the relative disadvantage of government schools, while Labor has opportunistically played up the complaints of overfunded Catholic schools. The Coalition might not be spending as much on hospitals and medical services as we would like — the 50/50 split of hospital funding between Commonwealth and states was a good rule we should bring back — but it is increasing funding for them substantially.

But if nominal GDP rises 18.7 per cent in the same four years, as Treasury forecasts, then only spending on the NDIS and schools will be growing as a share of GDP. (I don’t count aged care, because that spending boost is just a correction to the misguided cuts in an earlier Coalition budget.) Spending on everything else, even defence, will be shrinking as a share of GDP, and in most areas of government responsibility, shrinking in real per-capita terms. This budget means smaller government, with a vengeance.

The budget shows the impact in some of the larger spending areas. Renewable energy subsidies, of course, are slated to end (and given the speed with which renewables’ prices are falling, that’s one of the more defensible cuts). It is heartless that the government has slashed real support for social housing at a time when so many are homeless and living on the streets. The ABC has been singled out again for cuts, with a three-year funding freeze. Funding for employment programs for jobless Australians, as well as vocational education, has taken severe cuts.

And, to its shame, this government proposes to reduce foreign aid to the lowest levels, as a share of our income, since records began. China, of course, has been doing the opposite. We are making ourselves less relevant to our neighbourhood. They are making themselves more so.

Then there is transport. Turnbull talks up his $75 billion program for transport infrastructure as if it is all happening here and now. But it is a ten-year program, and much of it has been moved off budget. It will be a long time before you can take a rail trip to Melbourne airport.

Transport spending within the budget is shrinking, and not just in the outyears, where projects are yet to be decided. For 2018–19, total transport investment in the budget will be cut by 9 per cent, in both rail and road. Investment in key projects will be slashed by 13 per cent from the equivalent plans a year ago.

But isn’t that coming off historic highs? In nominal dollars, yes — in nominal dollars, most things are usually at a historic high. But as a share of GDP, both total infrastructure investment and transport investment specifically were significantly higher under the Rudd–Gillard government than they are now.

In calendar 2011, the Bureau of Statistics reports, new transport construction by or for governments made up 1.21 per cent of Australia’s GDP. In 2017, it was just 1.10 per cent. And, of course, in 2018 and 2019, it will be even lower. We talk about it more now, and there is more of it because there are more of us. But for all that, it has slid down the scale of our spending priorities at a time when the surging population in our four largest cities has made the need for it greater than ever.

The Bureau’s figures include both budget spending and spending on projects that have been moved off the budget, on the grounds that they are — supposedly — commercially viable. Labor pioneered that trick to keep the NBN off budget, and the Coalition has adopted it with gusto.

It has now put its spending on Western Sydney Airport and Inland Rail off budget, claiming that they are commercially viable, even though Inland Rail executives concede that it won’t make profits in the next fifty years. Snowy 2.0 will be off-budget if it happens, as will the Melbourne Airport Rail Link, if the Victorian government seizes Turnbull’s offer to unload half its ownership (and future losses) onto Commonwealth taxpayers.

If all this was happening on budget, the budget balance would look very different. In 2018–19 alone, the government’s non-financial corporations are forecast to add another $10 billion of net debt, while the budget sector itself adds just $9 billion. It’s one of those tricky details that remind us that once a government sets a rule for itself, it quickly starts finding ways around it.

To sum up: the government is forecasting an admirable path back to surplus, but it depends on heroic assumptions about wage growth, and on its plans to cut real government spending per head in most areas. Its three-stage tax plan begins well, but ends with handing out big bickies to those who have, and little ones to those who have not. And while the atmospherics suggest record infrastructure spending, the Bureau of Statistics figures show that is a mirage.

But tax is where the debate will focus. The government now plans to bring in legislation to limit taxes to 23.9 per cent of GDP, and make the coming election something of a referendum on tax. The faultlines will be predictable, but the evidence of the polls suggests that voters in the middle tend to prefer better services to lower taxes.

Certainly the economic case for the plan is weak. High-tax countries like Sweden have been just as successful as low-tax countries like Switzerland; it’s how you raise the taxes and what you do with them that matters. The Howard government itself went over the proposed limit in every year from 2000–01 to 2005–06 — except for 2001­–02, when it instead went into deficit.

As Brendan Coates and Danielle Woods argue, the growing costs of an ageing population make it inevitable that taxes too must grow, or other services must be cut to make room for them.

One of those services is defence. If one shares the Coalition’s unease about the way China intends to use its new power in the region — not just under its current leader, but under future leaders brought up on its claims to hegemony over the rest of us — then there is surely a strong case for increasing defence spending from 2 per cent back to the 2.5 per cent it averaged over the decades of the cold war.

I don’t suggest that lightly. The future role of a dominant China is the most serious issue that Australia has faced in my lifetime. Few of us will be experts on it, but more of us should be thinking about it. If we see China as a potential threat, then defence has to claim a much bigger share of our future spending. There is no hint in the budget that the government is prepared to do that.

It is disappointing that the Turnbull government has adopted the tax limit as policy without considering other needs that conflict with it. It is a glib gimmick. Australia has the eighth-lowest taxes of the thirty-four nations in the OECD. In 2015, the only countries where taxes were lower were Chile, Ireland, Korea, Mexico, Switzerland, Turkey and the United States. Twenty-six countries had higher taxes, most of them much higher, including successful economies such as Austria, Canada, Denmark, Germany, Israel, Japan, the Netherlands, New Zealand and Britain.

The government appears to want tax versus spending to be the election issue. It has chosen to fight on weak ground in economic and, I suspect, political terms. It will make for a historic ideological battle.●

The post A high-stakes budget with a perplexing message appeared first on Inside Story.

For the first time in years, a federal treasurer has had some luck in the lead-up to the budget. Over almost a decade, tax revenues have repeatedly fallen short of forecasts. But this year, tax receipts have exceeded expectations.

Total receipts are up $31.5 billion over the four years to 2021–22 compared to the mid-year update in December, driven by stronger personal and company tax receipts. Australian companies appear to have finally run out of tax-deductible losses from the 2008 global financial crisis and are suddenly paying far more tax. Wages are still stagnant, but personal income tax revenues have risen anyway as employment has increased, due in part to record migration. And with the world economy the best it’s been in years, there’s also good news in commodity prices, which feeds into higher company tax revenues in Australia.

All this good luck means Treasury now expects the budget to return to surplus in 2019–20, a year earlier than previously forecast. But the projected surplus in 2019–20 — of $2.2 billion, or just 0.1 per cent of GDP — hangs in the breeze. A more solid surplus of $11 billion (0.5 per cent of GDP) is expected in 2020–21, but that too still relies on the treasurer staying lucky.

Basking in such good fortune, the treasurer plans to share it around. He will not proceed with the planned 0.5 per cent increase in the Medicare Levy to help pay for the National Disability Insurance Scheme. Most Australians will get tax cuts, starting on 1 July 2018 with the creation of a new low- and middle-income tax offset worth up to $530 a year; together with slight tweaks to the tax thresholds, this will deliver modest tax cuts of up to $665 a year to those earning between $20,200 and $125,000.

The government has also set out a radical plan to flatten Australia’s tax scales over the next eight years, including abolishing the 37 per cent tax bracket. By 2024–25 the vast majority of Australians will pay the same marginal tax rate of 32.5 per cent, for incomes starting at $41,000 all the way up to $200,000 a year. The tax cuts might favour low- and middle-income earners in the short term, but high-income earners will be the beneficiaries in the long term.

Tax cuts were inevitable after a sustained run of bracket creep. Income taxes were closing in on the peaks of the late 1980s and the 1990s. But the size of the personal tax cuts — worth $4.5 billion by 2021–22 — and the decision to abandon the planned Medicare Levy increase leaves lots of room for Bill Shorten to offer his own basket of budget goodies in the budget reply speech on Thursday night.

Like all budgets, this one also has its share of fudges. But gone are unrealistic forecasts for nominal GDP and revenues, the fudges of budgets past. Instead, projected budget surpluses, in spite of planned tax cuts, are built on herculean spending restraint.  Spending is supposed to grow by a mere 0.7 per cent in 2020–21 and 0.5 per cent in 2020–21, after adjusting for inflation.

Given recent experience, such spending restraint looks wildly optimistic. After all, real spending grew by 2.7 per cent in 2017–18 and is projected to increase by 1.9 per cent in 2018–19. Health spending is projected to grow by just 1.9 per cent a year over the next five years, well below average growth of 3.8 per cent in the past five years. Meanwhile, federal spending on courts, housing, agriculture and transport are all forecast to fall in absolute terms between 2017–18 and 2021–22.

Reclassifying federal money for new transport infrastructure projects as “off-budget” capital spending also helps. This buy now, pay later approach has allowed successive governments to commit around $50 billion in infrastructure spending over the past decade — including on the NBN, Inland Rail, Western Sydney Airport and the Snowy Hydro share buyback — without any immediate hit to the budget bottom line. But if the numbers on these projects don’t stack up, future taxpayers will be on the hook for today’s bad decisions.

The budget forecasts for wages growth, driving much of the planned increase in personal income tax collections, also remain optimistic. Like the Reserve Bank, treasurer Scott Morrison is banking on strong growth in full-time employment translating into higher wages. Wages growth is expected to accelerate from just over 2 per cent a year today to 3.5 per cent by 2020–21.

And a plan to collect tax on tobacco at the border will bring forward $3.3 billion in tax revenue, providing a one-off boost in 2019–20, without which the government wouldn’t have achieved its early surplus.

Looking further ahead, the government is set to tie itself in knots with a plan to formally adopt a tax-to-GDP limit of 23.9 per cent, writing it into this year’s budget rules. The political logic is clear: to wedge Labor, which is relying on tax increases to pay for higher spending while still balancing the books.

But the inconvenient fact is that spending has averaged more than 25 per cent of GDP for the past decade. Non-tax receipts, worth 1.7 per cent of GDP in 2018–19, help bridge the gap between spending and tax revenues. But the government’s approach still relies on a strong economy and unprecedented spending restraint to keep spending down as a share of GDP. Most recent successful budget repair has occurred through tax increases, not spending cuts. Past attempts to bring down spending, such as those in the 2014–15 budget, proved deeply unpopular. Many ended up languishing in the Senate, or were later abandoned.

More importantly, the pledge to limit taxes to below 23.9 per cent of GDP is likely to crash headlong into the growing budgetary costs of Australia’s ageing population, as successive intergenerational reports have shown.

Spending per older household on health and the age pension has grown faster than the economy: governments already spend twice as much on each sixty-year-old as they do on each thirty-year-old. The 2015 intergenerational report showed Commonwealth health spending was projected to increase from 4.2 per cent of GDP in 2014–15 to 5.5 per cent of GDP in 2054–55.

The Coalition is unlikely to cut back spending on health and education, especially with fresh memories of the “Mediscare” campaign from the last election. The planned increase in the pension eligibility age to seventy years — although worth pursuing — remains unlegislated. So the tax cap, combined with rising spending from an ageing population, is a recipe for ongoing budget deficits.

This is clearly a pre-election budget. Of course, the polls suggest the next budget is just as likely to be brought down by Labor’s Chris Bowen. Which means that Thursday night’s budget reply speech could prove just as important as last night’s announcements. And the contrast couldn’t be clearer. But the question is whether either side can make the numbers work over the longer term. •

The post Built on good fortune, relying on luck appeared first on Inside Story.

What advice could Australia possibly want from a team of economists from Washington, who come down here for two weeks, talk to Treasury, the Reserve Bank and a few others, and then head home to write a report published three months later as the International Monetary Fund’s annual report on Australia and discussion of additional issues?

Judging from some of the media coverage, including today’s editorial in the Financial Review, you would think the IMF’s goal was to spruik the government’s plan for corporate tax cuts. The editorial was full of fantasies about what the IMF said: whoever wrote it obviously had more important things to do than to read the report.

Shadow treasurer Chris Bowen was closer to the mark when he claimed that the IMF report vindicates Labor’s policy to shut off the tax break on negative gearing and reduce the tax break for capital gains. The latter, at least, is an issue the report comes back to repeatedly, as it examines how to improve housing affordability and reduce the risk that a housing price crash could push Australia into recession.

In fact, the IMF report carefully avoids endorsing the tax plans of either side of politics. AAP economics correspondent Colin Brinsden summed it up perfectly: “The IMF has backed the Turnbull government’s pursuit of a lower corporate tax rate, but has again called for a broader tax reform package.”

The IMF mentions corporate tax cuts in one paragraph of a report of more than 150 pages, and only as part of a wider series of tax reforms, which is just one of six proposals to lift Australia’s growth. In order, they were:

● further increase investment in infrastructure
● bump up government support for innovation
● strengthen labour market programs to equip the unemployed with new skills
● tackle the barriers to female employment
● increase taxes on land and consumer spending and reduce them on incomes and profits
● beef up competition policies as part of a structural reform drawing on the Productivity Commission’s wishlist issued late last year.

Since the coverage has focused on the company tax debate, let’s read what the IMF economists actually wrote on that topic:

A broad tax reform package would benefit productivity and reduce inequality. The government seeks to broaden the corporate tax reduction beyond small enterprises. With Australia being a capital importer, it is appropriately concerned about the international standing of corporate tax rates. Australia’s effective average corporate tax rates are currently in the upper third among advanced economies, but the international environment is evolving. A more comprehensive tax reform has the potential to increase efficiency of the tax system, increase investment and labour demand, and reduce inequality. This would entail lowering taxes on income from mobile factors of production (capital and labour) and increasing reliance on income from immobile factors of production (land) and indirect taxes on consumption, undertaken in a revenue-neutral way. According to a comprehensive reform scenario outlined in [the IMF’s 2015 report on Australia] such a reform could raise real GDP by at least 1.3 per cent. Concerns about the regressive nature of higher taxes on consumption at a time of low wage growth could be addressed by broadening the base, reducing generous tax concessions (some of which are not means-tested or are limited), and revising the design of the income tax reform.

The final sentence might seem confusing, but Brinsden’s report, written after a briefing from the head of the IMF’s team, Thomas Helbling, clarifies that the IMF meant that rather than raise the GST — a regressive tax that falls disproportionately on lower- and middle-income earners — Australia could finance its corporate and personal tax cuts by broadening the tax base, reducing tax breaks and targeting its income tax cuts.

It’s all good advice, similar to that given to a parliamentary committee a week earlier, in forthright fashion, by Reserve Bank governor Philip Lowe. It also pretty closely resembles the advice that the IMF has given in previous reports on Australia, and that many of us have been giving successive governments for years — sadly, without success.

But it does not resemble the government’s plan to cut corporate taxes, which is not revenue-neutral, but is expected to cost the budget some $80 billion in its first decade alone. There are many relevant issues in the corporate tax debate, but one of the core issues is the question of which goal should take priority: getting the budget back into a sustainable surplus, or cutting corporate and individual taxes? The IMF is saying that lower taxes should not come at the expense of the budget.

Dr Lowe made the point very clearly in his testimony. Let’s read what he had to say too:

The debate (on corporate tax rates) has moved on internationally, and it does look like there is a form of international tax competition going on. The US has moved. The UK has plans to lower its corporate tax rates, and a number of European countries do as well. And you can view this competition as good or bad. If you want lower taxes, it’s probably good. If you need to fund a budget, then maybe it’s not so good.

So whatever side of that debate you come down on, it is actually occurring, and it’s hard to ignore. In the last [2016] IMF annual Review of Australia, they noted that relative tax rates were something that did influence capital flows… We mightn’t like it, but we can’t ignore it.

Another point I’d make is that if we were to respond to this competition by having lower corporate tax rates here, then it’s really important that it doesn’t come at the expense of higher budget deficits. And in the US… the official estimates at the moment are that for the next five or six years, the budget deficits are going to average almost 5 per cent of GDP [a year]… I think that’s very problematic, and if we were to go in the direction of having lower corporate tax rates, then I think it would be a big mistake to do that on the back of higher budget deficits…

However we finance [cuts to corporate tax rates], it can’t be by running bigger budget deficits. There could be some other changes to the tax system.

Here, the IMF and the Reserve Bank governor are on the same page. Yes, there is a case for cutting corporate tax rates to avoid losing out on foreign investment we would otherwise get. But it is crucial that the tax cuts are paid for, and not financed by running budget deficits. What the government is proposing are tax cuts that are not paid for, and would come out of what it claims to be future surpluses, based on rosy assumptions about future growth, particularly in wages.

The IMF has pointed to where the parties could find middle ground, if they wanted to. We could have company tax cuts that are paid for, and would not threaten our very fragile budget balance. Neither side is remotely interested in that, at least this side of the election.

In the end, as Peter Martin argued in yesterday’s Age, it’s a question of priorities. Both the IMF and the governor are at pains to point out that there are many other paths to increasing Australia’s potential growth rate.

The IMF report shows that on an international matrix of Australia’s economic strengths and weaknesses, our main weaknesses relative to our peers are in innovation, labour-market efficiency (matching the skills of the unemployed to those needed for the jobs on offer) and business sophistication. “Strengthening trend [productivity] growth through a stronger innovation system, labour force skills upgrades, and reduced gender imbalances is critical,” it concludes. “Related programs should be underpinned by longer-term strategies, and longer-dated resource commitments.”

Moreover, lifting growth is not the only first-order economic issue: defending growth is just as important. Former Reserve Bank governor Ian Macfarlane once said that the role of the bank was to work out where the biggest threats to economic growth could come from and try to counter them. The IMF report, like many others, highlights two serious threats: a potential hard landing in China (which it sees as a “medium” probability) and a potential slump in housing prices (to which it, somewhat unconvincingly, assigns a “low” probability).

In a separate chapter, the report argues that a hard landing in China would hurt Australia only temporarily, in fact, and in the longer term could help us. At first sight, that’s hard to believe: last year we sold China $110 billion of goods and services, 30 per cent of our entire exports and 6.3 per cent of our entire output. If China experiences a hard landing, much of that would disappear rapidly.

But in that event, the IMF argues, the Australian dollar would fall sharply relative to other currencies. That would make our exports more competitive globally, and the sales lost to China would be made up in other markets. It could well be right. Some analysts argue that, with China maintaining a de facto currency peg to the US dollar, the markets buy or sell the Australian dollar as a substitute yuan, rising and falling with China’s fortunes.

The IMF is far more concerned about the need for tax reform in relation to housing than about company tax rates. It is particularly keen to see the states abolish stamp duties on property transfer and increase land tax instead; but the only government to do so has been the Australian Capital Territory’s, which almost lost an election over it. It is offended by recent Commonwealth and state reforms to impose higher taxes on foreign property buyers. It argues that the exemption of the family home from the capital gains tax “may encourage ‘excess’ demand for housing, excess in the sense that families prefer more to less space.” It goes on:

On the investment side, the combination of high capital gains discount rates and unlimited negative gearing can encourage leveraged real estate investment in market upswings. While similar tax incentives are also present in other countries, they tend to be more limited… Housing tax reform would strengthen the effectiveness of the overall policy response.

It backs this up with a three-page comparison of Australia’s tax regime on housing with those of comparable countries, noting recent reforms in Britain, New Zealand and Hong Kong to reduce incentives for property investment. Of the other seven countries surveyed, five ban negative gearing outright, and only New Zealand treats investors as generously as we do.

While the IMF is generally positive about the future of the economy, and echoes the government’s line that real wage growth will return as the labour market tightens, this part of its analysis is of little value. It relies on old, selective data that makes you wonder what its team learnt by coming here.

It declares that Australia’s recovery has been “robust,” and says “Australia has enjoyed high growth in per capita terms.” But Australia ranked only thirteenth out of twenty-seven comparable countries, even between 2010 and 2016. That’s the report’s only reference to per capita growth, which is, after all, the bottom line for economic performance. The IMF’s own data (see chart below) shows that while Australia’s GDP growth over the past decade has been among the highest in the Western world, it slips to eighth among comparable countries when you focus instead on the issue that matters: growth in GDP per head.

The IMF team seems not to have even noticed that, while Europe has rebounded vigorously, Australia has sunk to almost the bottom of the ladder. Within the twenty-eight-member European Union, its current per capita growth rate of 0.9 per cent would place it equal twenty-seventh with Britain. That’s not “robust” growth, my friends.

Similarly, it declares that unemployment in Australia “is relatively low,” giving as evidence the fact that it was lower than most other Western countries between 2010 and 2016, when Europe took a long time to recover its mojo. But by the end of 2017, Australia’s stagnant unemployment rate ranked only equal fourteenth of the twenty-seven countries on the IMF’s list. Were its experts not even aware of that? Or that Australia’s underemployment rate is just about the highest in the Western world?

One last thing that has escaped notice. In his testimony to the House committee on economics, Dr Lowe pointed out that a combination of low wage growth and strong growth in employment is not unique to Australia. It is happening throughout the Western world, as companies and workers fear losing their competitiveness. It’s a very good point, which we’ll come back to in another article. ●

The post Good advice, and puzzling blind spots, in the IMF’s latest report on Australia appeared first on Inside Story.

Malcolm Turnbull reacted in fury. He and two of his ministers complained to ABC management, and on Friday one of the articles, the analysis, was pulled and the other tweaked. (You can still read the analysis on John Menadue’s Pearls and Irritations.)

Cue lamentations about the end of the ABC’s independence. Social media lit up and Labor MPs tweeted, outraged, in Alberici’s defence (which she might or might not have particularly appreciated). The ABC had buckled under political pressure!

Or had it? To my eye, the real problem lay in the fact that the analysis got through the ABC’s editorial processes in the first place. The glee with which opponents of the government heralded its existence on Wednesday morning provided a clue. It might make many valid points but it is polemical in tone and, in parts, quite tendentious. Alberici’s defenders insist that no one has been able to find an error of fact, and that may be so (though one tiny nitpick: gross government debt is a little under, not “more than,” $600 billion), but it doesn’t mean the piece wasn’t one-sided or selective.

It’s one thing to argue that the federal government, while running large deficits, can’t afford corporate tax cuts, and to point out that their supposed benefits are being overhyped. It’s quite another to use red herrings, non sequiturs and a relentlessly aggressive tone to make your case.

One central theme of both pieces — that “it’s hard to see how a lower tax rate is an incentive for investment when one in five of our biggest companies haven’t paid any corporate tax at all in at least three years” — is simply not a serious point for or against the tax cuts. It is a rhetorical sleight of hand, the kind of argument a politician might use (and, indeed, the part Labor seemed to particularly like).

Leaving aside arguments about tax minimisation and the legitimacy of companies’ stated losses — and indeed the fact that cutting tax is not inconsistent with closing loopholes — businesses like Qantas can’t run at a loss (and pay no tax) forever. Presumably management intends to keep making profits until they can no longer be offset against past losses, and then the company will pay tax again. Otherwise, why would they care what the rate is?

In fact, you could turn Alberici’s logic around the other way: companies aren’t paying tax, so we might as well cut the rate.

A tax cut is unnecessary, Alberici says, because Qantas “has already indicated an intention to invest $3 billion across 2018 and 2019.” This, too, is beside the point, because the government’s argument is that a tax cut will lead to more investment than companies are currently planning.

In a similar vein: “Business investment in Australia has been at historically high levels over much of the past decade despite our comparatively high headline corporate tax rate.” Again, so what? The useful comparison is with other countries (and Alberici is on much more solid ground when she does just that).

It’s reasonable, I suppose, to note Qantas boss Alan Joyce’s salary, but was it really worth 130 words over several paragraphs?

And: “There is no guarantee at all that cutting the tax [foreign companies] pay in Australia will lead them to increase the level of business investment in Australia.” Well, no, there are no guarantees in life.

Alberici quotes the estimated $65 billion cost of the tax cuts three times, but not once does she note that it applies over ten years. Again, this is the kind of thing politicians and other advocates do.

In fact, it’s likely that both the cost and the supposed benefits are being overhyped. The tax cut was devised before the 2016 election because strategists reckon a party has to take something to a poll. It now seems more an instance of government virtue signalling, designed to assure the country and the world that the Coalition is “pro-business.”

Labor, as is well known, was also in favour several years ago. In fact, it still says cuts are a good idea, but only when the budget is in surplus.

Since the ABC pulled the article, parts of social media have been in a tizz about censorship and the death throes of Aunty’s independence. The ABC claims that its investigation began before the government complained. Had the broadcaster nipped the article in the bud, or convinced the author to inject more balance and extract the hyperbole, we would all be none the wiser. Editorial decisions like that are made all the time.

Only Alberici knows what possessed such an experienced journalist, writing in her area of expertise, to over-bake her analysis in this way. Perhaps it was all about the clicks, a chief metric in today’s ABC.

Once upon a time sensationalism was a no-no at the national broadcaster. Across news and current affairs that no longer seems the case. ●

The post Why the ABC was right — eventually appeared first on Inside Story.

The debate over negative gearing illustrates a broader problem ignored by many affordable housing advocates. While negative gearing and a number of other housing tax reforms are definitely worth pursuing, they alone won’t solve our housing affordability crisis.

Treasury’s advice confirms previous Grattan Institute research showing that abolishing negative gearing and halving the capital gains tax discount to 25 per cent would leave house prices roughly 2 per cent lower than otherwise, favouring would-be homeowners over investors.

Of course, the price changes wouldn’t be uniform across Australia. Prices would probably fall a bit more for cheaper housing, since tax breaks have channelled investors into low-value homes that pay less tax under state land tax thresholds. But even in apartment markets dominated by investors, the maximum rational price impact shouldn’t exceed 3 to 4 per cent. In other markets the impact will be practically zero. And price falls could be larger in markets where the tax breaks have encouraged highly leveraged investors to chase higher capital gains, or where investors place more value on the tax benefits of negative gearing than they’re really worth.

And so the dominant rationale for reforming negative gearing and the capital gains tax discount remains their economic and budgetary benefits. The current tax arrangements distort investment decisions and make housing markets more volatile. Abolishing negative gearing and halving the capital gains tax discount would boost the federal budget’s bottom line by around $5 billion a year.

Extending state land taxes to owner-occupied housing would have a bigger impact on prices while also helping state budgets to the tune of $7 billion nationally. If the funds were used to abolish more economically costly taxes — such as taxes on insurance — they would give a big boost to the economy. Again, though, the impact on house prices is modest: they would be around 3 per cent lower than otherwise.

State governments should also abolish stamp duties on property, and replace them with a general property tax, as the ACT government is doing at the moment. But replacing one tax on property with another collecting the same revenue won’t have a big impact on house prices. The real justification is that it would help workers to take a better job that’s only accessible by moving house, and so improve economic growth. It’s a big prize: a national shift from stamp duties to broad-based property taxes could leave Australians up to $17 billion a year better off.

Including the family home in the age-pension assets test would also make only a small difference to housing affordability because few seniors would choose to downsize. Research shows that downsizing is primarily motivated by lifestyle preferences and relationship changes. Surveys suggest that no more than 15 per cent of downsizers are motivated by financial gain, with only 1 per cent nominating the impact on their pension as their main reason for not downsizing.

But reforming the pension means test would still make the retirement incomes system fairer and contribute to budget repair. Half of the government’s spending on age pensions goes to people with more than $500,000 in assets.

If the value of homes above $500,000 was included in the age pension assets test — and the asset-free area for homeowners was raised to the level that currently applies to non-homeowners — the Commonwealth budget balance could improve by between $1 and $2 billion a year.

And no senior would be forced to move. Asset-rich, income-poor retirees could continue to receive a full pension by borrowing against the value of the home until the house is sold. If well designed, this scheme would have almost no effect on retirees — instead, it would primarily reduce inheritances.

All these reforms are worth pursuing. Each would produce big budgetary and economic benefits. But even if federal and state governments adopted them all, they would have only a modest impact on Australia’s $7 trillion housing market. House prices would be unlikely to fall by more than 10 per cent from where they would be otherwise — small beer compared to the tripling of house prices over the past three decades. And governments have little control over two of the biggest drivers of rising housing demand: higher incomes and record-low global interest rates.

If governments are serious about affordability, then a boost in the supply of housing is also needed, even if it will take time.

Until recently, the supply of new homes wasn’t keeping pace with demand. Planning rules and practices made it reasonably easy to build apartments in the CBD and to develop new housing estates on the city fringe. But they made it relatively difficult to redevelop the inner and middle-ring suburbs of major cities, where many people would prefer to live because they would have better access to jobs.

Development in middle suburbs has increased in recent years, especially in Sydney. But today’s record level of housing construction is less impressive than it seems because population growth in Sydney and Melbourne has been so strong.

In fact, development at today’s record rates is the bare minimum needed to meet both cities’ housing supply targets over the next forty years.

The best evidence suggests that boosting housing supply will improve affordability, albeit only slowly. Even at current record rates, new housing construction increases the stock of dwellings by only about 2 per cent each year. But, on one estimate, adding an additional 10,000 homes a year above current rates of housing construction for the next decade could see national house prices almost 20 per cent lower than they would be otherwise.

Within living memory, Australian housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home close to jobs. Now, home ownership rates are falling among the young and the poor. Owning a home increasingly depends on who your parents are, a big change from thirty-five years ago, when home ownership rates were similar for all income groups.

Perhaps the most frustrating aspect of the Australian housing affordability debate is the tendency to focus on any one policy lever to the exclusion of all others. The federal government insists that supply alone will make housing more affordable. Many affordable housing advocates argue the opposite. As the battle lines sharpen over whether demand or supply is the right way to tackle housing affordability, we risk getting bogged down without achieving anything. And all the while housing will become even less affordable for younger generations.

There is no silver bullet. Both strong demand and weak supply have pushed house prices higher. Improving affordability will therefore require policies affecting both demand and supply. Tax reforms that reduce housing demand could reduce prices somewhat. In the long term, though, boosting the supply of housing will have the biggest impact on affordability. ●

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Those fine words are backed by C$15.9 billion of federal money. Evan Siddall, president and CEO of the Canada Mortgage and Housing Corporation, told the conference that contributions from provincial and local governments could bring the total investment to around C$40 billion over ten years, sufficient to repair 300,000 existing dwellings and build 100,000 new ones.

Ottawa is spending C$4.8 billion to increase the quality and supply of public and social housing provided by provincial governments and community organisations, and putting another C$11.1 billion into a National Housing Co-Investment Fund offering low-interest loans to build affordable housing for the private rental market.

To get finance from the fund, 30 per cent of dwellings in a project must be rented out for less than 80 per cent of median market rates for a minimum of twenty years. That’s double the duration required under the successful but short-lived Australian equivalent, the National Rental Affordability Scheme, or NRAS, which funded about 37,000 new homes renting at a 20 per cent discount to the market. The Canadian government is also leveraging its fund to achieve other objectives: projects must outperform existing national codes on energy efficiency and greenhouse gas emissions by 25 per cent or more and at least one in five dwellings must meet specified accessibility criteria.

On top of all that, Canada’s strategy sets a target of halving chronic homelessness within ten years through a C$2.2 billion program that Siddall said would take a housing-first approach, regarded by many advocates as the most effective long-term way to tackle the problem.

The relevance of the Canadian example was not lost on the Australian audience. Measured by housing prices and the pace of their rises, Toronto and Vancouver are up there with Sydney and Melbourne. Both countries are federations, with split responsibilities across three tiers of government complicating housing policy. Both struggle to find a coherent response to chronic homelessness.

Perhaps the reason that Siddall’s presentation had the Sydney audience buzzing was the extent to which the approach of the Canadian government appeared to reflect their own aspirations for policy in Australia. This goes beyond the language of human rights to encompass the benefits of secure, appropriate and affordable housing for health, education, employment and economic growth. Siddall, who helped develop the strategy and described his role in the Canadian system as equivalent to that of a deputy housing minister, cited research showing that housing has “a higher multiplier effect than personal or corporate tax cuts” with a return of $1.50 for every $1 invested. He described the strategy as “community renewal on a national scale” and said the Trudeau government conceived housing as “shelter, not bricks and mortar.”

The sincerity of Trudeau’s promises will only become clear over time. Australia, too, has had a prime minister who vowed to halve homelessness and then found the problem to be far more intractable than expected. Critics note that Trudeau’s new approach to homelessness won’t be launched until early 2019, about six months before Canada’s next federal election. Another key element of the program, a C$4 billion rent subsidy called the Canada Housing Benefit (which looks like it might be similar to Australia’s Commonwealth Rent Assistance) is not due to start until six months after that election, in April 2020. As Australian housing advocates know only too well, programs are only durable if they have bipartisan support solid enough to withstand changes of government and changing budgetary circumstances.

Still, Evan Siddall’s presentation on Canada’s strategy set the tone for many conversations during the rest of the conference. For the more optimistically inclined, there was a sense that measures announced by treasurer Scott Morrison in this year’s federal budget had also moved Australia closer to a coherent national policy.

The most significant step is the creation of the National Housing Finance and Investment Corporation. If it works, the NHFIC will attract new long-term institutional investment into affordable housing by acting as a bridge between community housing providers and superannuation funds. While community organisations can, and do, borrow from banks, each loan must be separately negotiated. Super funds won’t deal one-on-one with individual providers in this way, so the NHFIC and its associated bond aggregator aim to offer them a standardised, rated investment product. “The NHFIC is not a national housing policy,” said Carrie Hamilton from the Housing Action Network, “but it is a very important piece of the puzzle.”

Hamilton was introducing a keynote presentation by Piers Williamson, chief executive of the Housing Finance Corporation. This British forerunner of the NHFIC was set up in 1987, after Margaret Thatcher’s controversial “right-to-buy” program had depleted Britain’s supply of affordable rental dwellings by selling off council houses. It provides long-term loans to Britain’s 170 individual housing associations, which between them own 2.49 million homes and account for 10.5 per cent of all housing.

Williamson, who is advising the Australian government on setting up the NHFIC, described himself as a specialist in risk — “not in taking risks but avoiding them.” He is proud of the fact that no bank or institutional investor has lost money lending to a British housing association over the corporation’s thirty-year history. He also points out that the Housing Finance Corporation helps smooth economic cycles. When commercial banks were falling over in the global financial crisis, its lending grew. Under a government scheme introduced in 2013, the Corporation also guarantees loans to housing associations, reducing the cumulative cost of borrowing for affordable housing, he says, from 3.7 per cent to 2.5 per cent.

On the final day of the conference, when assistant treasurer Michael Sukkar announced that the Commonwealth would offer a similar guarantee on bonds issued by the NHFIC, delegates burst into spontaneous applause. Two other announcements also pleased the audience. The first was that the NHFIC will have an independent board when it begins operations on 1 July 2018. Williamson had earlier told the conference that independence has been crucial to the success of Britain’s housing finance corporation because “politicians always like to dabble and dabbling is not always good.” Sukkar’s third bit of news was that a $1 billion facility set up to finance infrastructure to expedite new housing supply will now be ongoing, rather than terminating after five years.

The NHFIC has the backing of both Labor and the Greens, which means it should survive any change of government, and in his conference speech Sukkar added some small but essential elements that move it closer to being a core piece in the bigger picture of a coherent national housing strategy. But the most important part of the puzzle is still absent — government money.

“Subsidised housing requires a subsidy,” Williamson told the conference. He said that “sitting at the bottom” of Britain’s affordable housing model was £45 billion (A$75 billion) in grant money. “Grants,” he said, “are one of the things missing over here.”

The crucial role of public investment in providing housing for low-income households is well established. Private developers will not build affordable housing because it does not make commercial sense for them to do so. It’s a clear case of market failure.

Two charts from reports by the Australian Housing and Urban Research Institute, or AHURI, help illustrate the point. The first, from a report on the responsiveness of Australia’s housing supply, tracks new dwelling supply over a decade. The authors argue that this data shows that the vast majority of new houses and units are “concentrated in the mid-to-high price deciles” and that there is a “paucity of new supply at the bottom end of the housing market.”

In theory, though, an increase in higher-priced supply should still help reduce the cost of housing overall. As buyers or renters of more expensive homes move up the property ladder, they release their former cheaper dwellings onto the market — a process known as filtering. If filtering works effectively (and there are arguments about that), then what matters for affordability is not so much an increase in supply at the bottom of the market as an increase in supply overall. But what is happening to supply is also disputed, as seen in a current public debate between leading Australian housing researchers.

Ben Phillips and Cukkoo Joseph at ANU’s Centre for Social Research and Methods recently concluded that Australia had an oversupply of new dwellings between 2001 and 2017. If this is correct, then other factors must be stopping filtering from increasing affordability. If new properties are bought as second homes or by overseas investors, for example, then there is no previous property to filter down.

But the Grattan Institute challenges the ANU analysis of oversupply. “Phillips and Joseph ignore how rising prices and worsening affordability pushed people into larger households than they would have chosen,” wrote John Daley and Brendan Coates in response to the report. “And so their estimates underplay the number of dwellings needed to accommodate Australia’s growing population.” Daley and Coates give the example of young people staying longer in the family home than in the past and conclude that this is less likely to be driven by “a social wave of filial affection” than by the fact that “there is less housing to go round.”

Even if the Grattan Institute is right that “a sustained increase in supply over several years” would materially lower prices, it will be a slow process, because high rates of new construction only increase the stock of existing dwellings very gradually. This is why many delegates at the Sydney conference focused less on market settings and more on public investment in social and affordable housing.

Which brings us to the second chart, from an AHURI report on public housing that shows how government investment in the sector has tracked steadily downwards over a thirty-year period, with one brief, spectacular exception. The blip in the chart that resembles the sudden resuscitation of a stalled heartbeat is the dramatic effect of Kevin Rudd’s second stimulus package during the global financial crisis. In February 2009, Labor pumped $42 billion into the economy, including $6.6 billion to build 20,000 new units of social housing dwellings and 802 defence homes. At the time, surprised housing advocates called it a “quantum leap” for the sector. As soon as the stimulus ran out, though, construction of social housing fell off a cliff and the heartbeat of Australia’s social housing sector returned to its dangerously low levels.

On the same day as Justin Trudeau was launching Canada’s national housing strategy, the British government released its autumn budget, which included “£15.3 billion of new financial support for housing over the next five years, bringing total support for housing to at least £44 billion over this period.” Oona Goldsworthy, CEO of Bristol housing provider United Communities, who was at the Sydney conference, told me that “a lot of government effort” is going into housing in Britain, with prime minister Theresa May giving it equal priority, or greater, to health, education and growth.

Despite Michael Sukkar’s announcements, housing doesn’t seem to be getting the same level of attention here. Nor is there evidence of the cohesive approach that unites all levels of government as in Canada. This became obvious at a conference session that brought together senior state, territory and federal public servants. The focus was on housing policy innovation around the nation but the session ended in a degree of acrimony.

The final speaker was Paul McBride, manager of welfare and housing reform in the Commonwealth Department of Social Services. He was endeavouring to explain why the federal government wants to replace its existing deal with the states and territories — the National Affordable Housing Agreement, or NAHA — with a new National Housing and Homelessness Agreement, or NHHA. This was another 2017 budget initiative but it has stalled, not least because of resistance from state governments.

The Commonwealth says NAHA has failed because only one of the four performance benchmarks set up under the agreement has been met. Despite $9 billion in funding since 2009, “growth in the size of the social housing stock has stagnated and numbers on waiting lists have increased.” In return for future funding under the replacement NHHA, the Commonwealth wants the states and territories to put in place credible housing and homelessness strategies and provide data for transparent and consistent reporting. As an incentive, it is offering to index $115 million in annual funding for homelessness services provided under the current agreement and to make that funding permanent.

When McBride described this as “a significant concession from the Commonwealth,” Caryn Kakas, executive director of Housing NSW, shook her head in disbelief. She accused Canberra of holding the states hostage over housing funding. “If the Commonwealth is serious, it should be putting forward a national housing strategy, not just stitching together state programs,” she retorted. She pointed out that the Commonwealth can pull levers like tax reform that are beyond the reach of the states and territories. McBride’s response was interrupted by interjections from the floor. “There’s no strategy, absolutely none,” yelled one delegate. “Spend more money!” called out another.

McBride had earlier noted that treasurer Scott Morrison “wants a pathway to home ownership” and that all subsidies and state programs should point in that direction. And this is perhaps where the difference in views really resides. For most of those at the conference, the core issue is not assisting first homebuyers to take their initial step up the property ladder, but helping low-income households to put a secure roof over their heads.

Sydney University’s Nicole Gurran told the final conference session that Australia lacks a properly funded social housing system, which would require government and institutional investment to increase supply at the bottom of the market. “If we want stable supply, then we have to be serious about building, irrespective of the fluctuations of the real estate market,” she said. “And we have to make sure that we are delivering what we really need, and that’s affordable, new rental housing.”

Gurran noted that forgoing billions of dollars in revenue through negative gearing and the capital gains tax discount failed to deliver this outcome. Labor has promised to reform negative gearing and the capital gains tax discount if it wins the next election. Even if it only saved half of the $11.7 billion calculated to be lost on these concessions to property investors annually, that would still bring in enough funding to revive the heartbeat of Australia’s social and affordable housing sector, not just in a one-off stimulus package, but year on year. Wherever the money ultimately comes from, if we want a national housing strategy, public investment is still a missing piece of the puzzle. ●

The post In search of a national housing strategy appeared first on Inside Story.

But changes to negative gearing and the capital gains tax — the preserve of federal government policy — aren’t sufficient to make housing fairer and more sustainable. At least as important, according to analysis by the Grattan Institute, is reform of state taxes, and particularly the abolition of stamp duty and its replacement with broad-based property tax — something that is even more difficult to achieve politically.

Research released at the 2017 National Housing Conference in Sydney suggests that there is a way forward, though, given sufficient will. A new report on pathways to property tax reform published by the Australian Housing and Urban Research Institute, or AHURI, argues that a gradual transition from stamp duty to a property tax is possible without severely disrupting the housing market or disadvantaging home owners.

Change in this area is difficult because state governments — particularly those with booming house prices — are addicted to stamp duty. State and territory property taxes raised around $40 billion in 2014–15, or more than 10 per cent of all taxes collected in Australia.

But University of Tasmania political scientist Richard Eccleston, who led the AHURI research, says a recurrent property tax could raise the same amount of money as stamp duty. “This is not about increasing taxes, it’s about using a new and more efficient tax,” he told the Sydney conference.

Economists and housing experts generally agree that there are good reasons for using property tax rather than stamp duty to raise revenue.

First, stamp duty is levied at the point of purchase, when buyers, particularly first homebuyers, can least afford it, whereas a broad-based property tax is spread over time. A property tax also brings in more revenue as house prices rise and so captures a share of windfall gains that would otherwise accrue solely to home owners when, for example, government builds a train line, school or hospital that improves the amenity of an area and boosts their property values. It also means that taxes fall with house values, and so home owners pay less if their notional equity is reduced.

Second, the big up-front cost of stamp duty is a deterrent to moving house, making people less likely to move from areas of low to high employment or to take up positions where their skills are more effectively used. Speaking on the same panel at the AHURI conference, Grattan Institute researcher Brendan Coates said the really big benefits of a shift from stamp duty to property tax were productivity gains, which could be worth up to $17 billion a year.

Third, by lowering the cost of moving, the shift to a property tax could encourage more efficient use of housing. Empty-nesters may be more willing to move to smaller dwellings if downsizing doesn’t cost them tens of thousands of dollars in stamp duty.

Finally, property taxes give state governments a more predictable, stable and reliable revenue stream than stamp duties. While New South Wales and Victoria may be rolling in cash right now, if the housing bubble pops and the real estate market slows, then the rivers of gold could quickly slow to a trickle.

The question is not whether shifting from stamp duty to property tax is a good policy idea, the question is how to do it. Asking existing home owners to start paying property tax would seem like double taxation, since they paid stamp duty up-front when they bought their homes. Yet exempting them would create an even bigger disincentive to moving. “Grandfathering is bad for mobility,” Coates told the conference, “because it locks people into their current homes.”

Both Coates and Eccleston recommend a twenty-year transition from stamp duty to property tax — just like the process that has been under way in the Australian Capital Territory since 2012. It’s true that the transition is simpler there because the ACT government is also effectively the local government and can incorporate property taxes into council rates more easily than other states and territories. But such practical obstacles are not insurmountable.

The new AHURI report recommends a four-step process. Eccleston says the immediate first steps are to develop consistent methods for valuing residential property across all states and territories and to establish a national register of property valuations and ownership. The second, short-term step is to simplify stamp duty into a single flat rate of 6 per cent applying only above a significant threshold. Eccleston says this would benefit those 60 per cent of buyers purchasing property at the lower end of the market and transfer costs to those buying more expensive houses. The third, medium-term step is to add a stamp duty surcharge for investors and top-end buyers or increase the rate of stamp duty they pay. According to the report, this would “meet housing policy goals by dampening demand for investment properties and increasing home ownership rates.”

Converting stamp duty into a “single progressive system” in this way would provide the foundation for the fourth and final substantive reform: replacing stamp duty altogether with a recurrent property tax. Stamp duties would gradually fall over the twenty years, and property taxes would gradually increase. Eccleston’s study estimates that the annual rate of property tax needed to fully replace stamp duty on a median-priced dwelling in New South Wales or Victoria would be less than $1300. In Tasmania, the figure would be less than $500.

The transition from stamp duty to property tax requires national leadership and national coordination. Eccleston says the obvious precedent — in terms of process rather than outcomes — is the implementation of National Competition Policy under the Howard government. The Commonwealth should take a similar leadership role in relation to property taxes, he says, because it would be the main beneficiary of the resulting increase in economic growth and output. And only the Commonwealth has the capacity to put a deferred payments scheme in place to enable asset-rich but income-poor retirees to put off paying property tax until they sell their home, or to have those taxes paid out of their estate.

Richard Eccleston acknowledges that moving to what is “essentially a wealth tax based on property” is a political challenge, but says it’s not as hard as the obvious alternative, removing capital gains tax exemption on the family home.

Grattan’s Brendan Coates adds two more big measures to the housing tax wish list. The first is to include the value of the family home in the pension assets test, but only above a certain threshold (say $500,000). Not only might this encourage some older Australians to downsize, it would also save the government money and even up the pension treatment of home owners and renters.

Coates also wants to flatten progressive state land taxes. In terms of fairness, this might sound counterintuitive, but the aim is to encourage a shift in the private rental sector from “mum and dad” landlords to institutional investors. Coates makes the point that investors who only own one rental property often don’t make very good landlords, partly because they are scared of getting a bad tenant and not being able to kick them out, and partly because they want to be able to sell the property any time to cash in on the value of their asset. As a result, they don’t like to offer tenants long tenure.

Institutional landlords, by contrast, invest at scale, spreading the risk of a bad tenant across many dwellings. They are also seeking long-term rental returns ahead of capital gains. Under current arrangements, the rate of state-based land taxes rises with the value of property held, quite steeply in some cases. This significantly reduces the yield for institutions like superannuation funds and creates a disincentive for them to invest in the private rental market.

Politically convenient changes “are often ineffective or harmful,” notes Eccleston, while “meaningful reforms are generally politically difficult.” The major beneficiaries of a transition from stamp duty to property tax would be younger Australians buying their first home. “Do we have leaders with the courage to make that argument?” he asks.

With his own battle wounds from attempting significant tax reform, former Liberal leader John Hewson has his doubts. “Politics is even more short-term, populist and opportunistic than in my time,” he told the same conference session. “It is hard to imagine a serious and sustained debate about any aspect of public policy.”

Changing the way housing is taxed wouldn’t necessarily have a huge impact on housing affordability, but it should make it easier for younger homebuyers to enter the market. It would also help to boost growth, deal with budget challenges and reduce inequality, and so make the entire system fairer and more sustainable. As Hewson told the conference, continuing to push such problems further down the road is “basically intergenerational theft.” ⦁

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The Panama Papers, released in April 2016, were another quantum leap in size. Where the cables released by WikiLeaks had filled 1.7 gigabytes, the Panama Papers were 2.6 terabytes, or roughly 1500 times the size. They opened an unprecedented — and unprecedentedly detailed — window into how offshore shell companies were being used for tax evasion and international money-shifting.

The era of digital leaking is clearly upon us. The Panama Papers were emblematic not just of the relative ease of copying vast troves, but also of new opportunities for international cooperation among journalists. It was the innovative techniques of the Washington-based International Consortium of Investigative Journalists, or ICIJ, under its Australian director Gerard Ryle, that made the Panama Papers possible.

The story of that breakthrough began when two German investigative reporters, Bastian Obermayer and Frederik Obermaier, were contacted in 2015 by a source using the unpromising name of John Doe. The source wanted to expose criminal wrongdoing allegedly facilitated by a Panama-based law firm, Mossack Fonseca. “It will take years, possibly decades, for the full extent of the firm’s sordid acts to become known,” the source later wrote. “In the meantime, a new global debate has started, which is encouraging.”

The material soon overwhelmed the two journalists. “As more and more data sloshed in,” wrote Guardian editor Alan Rusbridger, “the Brothers Obermay/ier [as they were nicknamed] repeatedly had to purchase ever-larger computers…” The pair approached the ICIJ, which had a track record of collegial investigative work on similar, though much less ambitious, stories, including LuxLeaks, SwissLeaks and tobacco smuggling.

What followed has been described by one of the participants, Guardian journalist Luke Harding, as “a thrilling and secret year-long journalistic collaboration across more than eighty countries.” Almost 400 journalists set to work with the aim of publishing on 3 April 2016. “Via a secure platform called iHub,” writes Harding, “journalists were encouraged not to compete with each other but to share information actively and to swap leads and tips. We did, in a flurry of encrypted emails.” According to Rusbridger, his editor, “A new breed of data specialists from around the world had to be assembled to advise on encryption, creating databases, search software, data visualisations, graphics, and communications.” By the time the material was released, more than 107 media organisations in seventy-six countries had participated.

Simultaneous publication in so many countries gave the story great momentum. Mossack Fonseca, where the documents originated, was one of the five leading law firms advising clients on how to use tax havens. Most of its clients were legitimate businesses, but the firm also happily handled much murkier clients, including at least thirty-three people and companies blacklisted by the US government on the basis of evidence they’d been selling drugs, supporting terrorism or engaging in other major wrong-doing. The company had helped South African fraudsters who robbed the fund for widows and orphans of mineworkers, and they had helped the British criminals who perpetrated the 1983 “crime of the century” robbery of gold bars, diamonds and cash.

Much of the public focus was on the 140 politicians and public officials who had accounts with Mossack Fonseca, as well as those closely connected to political elites. Some clients had close ties to China’s president Xi Jinping, to allies of Vladimir Putin or to Ukrainian president Petro Poroshenko. (In response, China blocked the words “Panama Papers” behind the Great Firewall, and jammed the Guardian’s website, while Putin denounced what he called a Western “information attack.”) Mossack Fonseca had “serviced enough Middle East royalty to fill a palace,” said the ICIJ. The names of various celebrities came up, too, though none appeared to have engaged in illegality. British prime minister David Cameron was briefly embarrassed when his late father’s account was exposed, as was Malcolm Turnbull when the leak revealed funds he and former NSW premier Neville Wran had invested in what turned out to be a failed gold-mining venture in Siberia.

Now, just a year and a half later, come the Paradise Papers. Gerard Ryle has argued, quite plausibly, that this is the biggest leak of all, 13.4 million files compared with a mere 11.5 million for the Panama Papers. Much like its predecessor, the Paradise Papers leak is largely made up of files from a major law firm, in this case the Bermuda-based Appleby Global. The company specialises in offshore transactions, many of them based on the investors’ wish to hide assets and income and take advantage of Bermuda’s attractive tax rate (zero). Also like the Panama Papers, the initial leak was to the German newspaper Süddeutsche Zeitung. Publication on 6 November involved ninety-six media partners in sixty-seven countries.

The rash of revelations has put many people and companies in an uncomfortable spotlight. Donald Trump’s commerce secretary, billionaire Wilbur Ross, is exposed as being in business with a son-in-law of Vladimir Putin. Indeed, despite the publicity given to political tensions between Russia and the West, we now know that the links between Putin’s cronies and many Western businesses are much closer than in the past. Stephen Bronfman, an adviser and friend of Canadian prime minister Justin Trudeau, had millions of dollars invested in the Cayman Islands; as his boss was campaigning to close down such tax evasion, Bronfman’s company was lobbying to preserve it.

Global giants Apple and Nike have had their geographically convenient profits exposed. The Swiss-based mining giant Glencore could find itself pursued by the Australian Taxation Office. A clutch of celebrities — not least the Queen, who pays tax voluntarily but whose estate makes good use of Appleby — will be subjected to short-term embarrassments.

But beyond the immediate embarrassment, will the leak have a significant real-world impact? If the Panama Papers are any guide, then the answer is yes.

Although they didn’t result immediately in sweeping reforms, and although dubious financial movements still happen on an enormous scale, the Panama Papers led to major reforms and claimed some high-profile scalps. In Australia, the Australian Taxation Office began investigating 800 of the company’s high-net-wealth clients. (Although most of the activities were legal, this pointed to the inadequacy of the law.) The papers exposed the use of foreign trusts in New Zealand, which then reformed its disclosure laws; as a result, the number of foreign trusts registered in New Zealand dropped from almost 12,000 to below 3000.

There were also some notable political casualties. The most spectacular was Iceland’s prime minister, Sigmundur Gunnlaugsson, who was ambushed in the middle of what began as a soft interview on Swedish television. When he was asked about tax havens, Gunnlaugsson said that his country placed great emphasis on everyone paying his or her fair share. But when a second journalist quizzed him in detail about his and his wife’s accounts with Mossack Fonseca, he stormed out of the studio. A few days later, he resigned.

The exposure of the offshore investments of Pakistan’s prime minister, Nawaz Sharif, and his children led to lengthy investigations. Sharif was eventually forced to resign in July 2017 after the country’s Supreme Court found against him.

The impact of the Paradise Papers can only be guessed at. After the Panama Papers, the German journalists Obermayer and Obermaier optimistically proclaimed, “No one, anywhere, who conducts secret transactions and leaves a digital trace is safe anymore.” And the scale of the enterprises being investigated is enormous: according to a leading scholar in the area, Gabriel Zucman, about US$7.6 trillion is held in tax havens globally, or about 8 per cent of the world’s financial wealth. ⦁

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Through the course of the day, the Paradise Papers didn’t quite manage to steal the headlines from the parliamentary citizenship saga. For many of us, there is something rather esoteric about the world of high finance, and the story of trillions of dollars being funnelled through Bermuda can seem both preposterous and remote. That north-Atlantic island, as its former finance minister Bob Richards was happy to confirm in an interview with Marian Wilkinson for Four Corners, has a tax rate of zero.

The Guardian ran a live news link, providing key information on the major angles of the investigation. But effective television coverage is critical if stories like this are to get any traction in the public imagination. Well-paced editing has the capacity to take the audience almost effortlessly through complex arrangements and multiple locations. In a few minutes, Four Corners viewers went from the idyllic seafront at sunset in Bermuda — where cash flows are cordoned off from the tax claims of other governments, and then used to influence their policies — to Parliament Hill in Ottawa, the US Capitol in Washington, and the Kremlin.

It’s easy for television to feed in some of the backstory without losing the immediacy of the breaking news. We can flash back, for example, to billionaire Wilbur Ross, Donald Trump’s commerce secretary, being questioned at his nomination hearing by Democratic senator Elizabeth Warren about his dealings with a corporation run by members of Vladimir Putin’s inner circle. Inner circles in Washington and Moscow have ways of intersecting through Bermuda. Companies in the US alone acknowledge having earned over $100 billion in profits in Bermuda — a sum roughly eighteen times the size of the island’s entire economy. You can read a statement like that and baulk; as voiceover, its impact is all the greater.

The explanatory work of documentary is vital, but just as important is the challenge of conveying the significance of the practices being exposed. Ordinary human beings have been exploited by the rich and powerful from time immemorial. Unless it affects us in a direct and visible way, it’s easy to shrug it off as one of the enduring realities of life. A leak of thirteen million documents exposing shady goings-on in Bermuda may be an important matter, but do we care enough to push hard enough to stir reluctant governments into action?

Judging by the response of high-school students who were invited to comment afterwards as guest panellists on Q&A, the Four Corners report stirred up a good deal of indignation. It was “unacceptable” and “absolutely wrong.” We’re missing out on funding that should go to health, education, defence. Everyone should pay their fair share. You can’t have one law for the rich and another for everyone else. One student wanted to focus more sharply on the need to distinguish between tax evasion and tax avoidance: what forms does the distinction take?

The students were vibrant, articulate, lucid — considerably more so, one might say, than the average set of panellists on Q&A — but the limitations of their perspective show where the work of communication needs to be done. This is about so much more than “being fair.” It’s about the manipulation of governments and, in turn, their manipulation of how electorates understand the economy. I wonder how Scott Morrison would have fared on that panel if he had trotted out the trickle-down dictum that remains the linchpin of the Turnbull government’s economic vision. The cheating is not just financial, it is also cognitive.

And feel-good generalisations about the need to support health, education and public services don’t get at the urgency of a situation in which public services are breaking down, the health system is failing and disabled people are being left without benefits. All this is already happening in Britain, and we’re heading along the same policy route in Australia.

On Sunday night, the BBC’s Four Corners counterpart, Panorama, focused on the case of Lord Ashcroft, former deputy chairman of the Conservative Party and a major donor to the party. Ashcroft funnelled money through trusts that acted as tax shelters; the Paradise Papers suggest that he was playing the system, involving himself in decisions made by the trusts regarding the disposition of their assets. Nicholas Shaxson, author of Treasure Islands: Tax Havens and the Men Who Stole the World, described it as “an abusive structure.” Ashcroft is seen on camera, trying to escape the Panorama crew at the Conservative Party Conference, saying, “Dear, dear, dear, dear, dear.”

Ashcroft is also a donor to the Liberal Party of Australia — the Guardian published a photo of him chatting with Malcolm Turnbull in the prime minister’s office earlier this year — but he didn’t appear in the Four Corners report. This highlights the choices made in the treatment of any story with multiple angles, and the question of how and why they are made. The Ashcroft case shows how the interests of the super-rich have become embedded in party politics and been able to control government policy, a matter that needs to be front and centre in the minds of the electorate. The “fair share” argument seems weak in comparison.

Capturing the viewer’s attention is an important goal, but there’s also a need to get at the critical issues at stake, and I’m not sure Four Corners got the balance right. They chose to devote a lot of time to the case of the musician Michael Hutchence, whose legacy was sequestered by an executor working through offshore agencies. The family has seen almost nothing of it: a bad situation, but one that doesn’t really illustrate the critical concerns arising from the Paradise Papers. In this context, it was a distraction.

The real story in this leak isn’t about damage done to individuals, serious as it can be, but about the behaviour of a large corporation like Glencore, touched on by Four Corners, which can mine Australian assets, reap the profits and avoid returning anything to the common wealth of the nation. More time might have been devoted to this case, and its implications. It’s about how the dispossession of the citizenry has become an article of faith in a certain political ideology heavily promoted by its few beneficiaries.

There is a clear upside to the story, though, and Four Corners is part of it. In the words of the head of the International Consortium of Investigative Journalists, Gerard Ryle, Paradise Papers is “the biggest leak in history.” The Süddeutsche Zeitung, as the original recipient of the material, reached out through Ryle’s organisation to media organisations around the world, who mined the data for local angles. Using the reporting of the Panama Papers as a template, that modus operandi is a massive breakthrough for the fourth estate at a point when the freedom and impartiality of the press has seemed to be in terminal decline. ⦁

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The first of three tax-haven channels Shaxson describes, and the one he explores most thoroughly, is the new British empire said to have arisen since the mid 1950s. Having been shunted into second place as an economic power by the Americans during and immediately after the second world war, Britain saw the majority of its colonies breaking away. Faced with the prospect of unrelenting economic and political decline, the Bank of England and the financial industry hit on a system of off-the-books banking, and built up highly profitable links with the remaining outposts of empire. While American power waxed, Britain, or more specifically London, remained number one in finance, as in many ways it still is today.

In describing this new empire, Shaxson reveals the web of ties linking London financiers to the Channel Islands of Jersey and Guernsey (which are formally separate from Britain), Caribbean outposts like the Cayman and British Virgin Islands, and other centres like Hong Kong. Many are substantial players in their own right: the Cayman Islands, with not much more than 50,000 inhabitants, is commonly said to be the world’s fifth-largest banking centre. But according to Shaxson, the prime function of these centres is to feed money back into the imperial core (London) while providing “plausible deniability” in relation to the less savoury aspects of the business. The self-styled dissidents Shaxson interviews in the Caymans and Jersey paint an unflattering picture of governments in thrall to the finance industry, and heavy pressure to conform in communities not much larger than an average country town.

Some of the scandals referred to in the book have a fact-is-stranger-than-fiction quality: tins packed with secret financial documents hidden aboard a ship full of guano; the Caymanian offshore bank whose female tellers’ uniform was hotpants and leather; and Castle Bank, whose records were obtained by the US tax authorities through the expedient of hiring a prostitute to distract the chairman (though the case fell through when it turned out the CIA was one of the bank’s main customers). Though Shaxson has little to say about the South Pacific havens, they often have the same quality of unreality. Griffith University’s Anthony van Fossen has written about how Tonga’s entry to the offshore world was facilitated by the right-hand man of the American reclusive millionaire Howard Hughes, who redirected funds dedicated to cryogenically freezing his boss’s body, and how the “ambassadors” of the pseudo-states that claim various uninhabited Pacific islands peddle fraudulent government bonds.

But one of the most intriguing oddities Shaxson’s research throws up is the City of London itself: a medieval corporation governing the Square Mile that includes the headquarters of the largest and most prestigious banks and financial firms. In many instances exempted from British law thanks to thousand-year-old prerogatives, the City maintains its own corps of diplomats to lobby on the finance industry’s behalf around the world. The British monarch must request the permission of the lord mayor to enter the Square Mile, and the City has its own permanent representative in parliament.

Beyond the new British empire, predictably enough, the United States is an important player in the offshore world, though in some ways rather late to the game. Thanks to a more diversified economy, and the New Deal economic policy after the Great Depression, bankers were on a much shorter leash in the United States. This began to change from the 1970s, as the US government tired of seeing its firms take advantage of an offshore system, either in the Caribbean or London itself, run by the British. In a refrain that has been echoed hundreds of times since, the American financial sector argued that, because others allowed certain practices, the United States should do the same, or see business up and leave for greener pastures. (The Australian government has certainly not been immune to this siren song, allowing businesses to use “offshore banking units” after they threatened to decamp to Singapore.) While the United States has taken a very tough line on foreign countries sheltering American tax-evaders, the US government has resolutely protected tax evaders from Latin America who park their money in Florida, Texas and elsewhere. So while, for example, it is unacceptable for Switzerland to host American tax-avoidance money, it is apparently perfectly fine for the United States to host funds hidden from Mexican tax inspectors.

Switzerland is Shaxson’s home base, in the banking centre of Zurich where I met him late last year. Familiar to any James Bond fan, the Swiss numbered bank account is somewhat less than reputation suggests. There are no anonymous accounts, and of course all bank accounts in any country are numbered. Yet Switzerland has long had a law on its books that makes it a criminal offence for bank employees to reveal any information about account holders, even to the Swiss government itself. Bludgeoned by repeated outside campaigns, the Swiss have created more and more exceptions to this rule. Indicative of this changing attitude, Swiss banks were notably quicker than any others in suspending accounts connected with Hosni Mubarak and Muammar Gaddafi.

Yet in the era of WikiLeaks the Swiss model is vulnerable. In the tiny Principality of Liechtenstein next door, a bank employee, Heinrich Kieber, walked out the door with a CD containing the details of thousands of private accounts, which he sold to the German intelligence service for almost €5 million. This information was later on-sold to a variety of other national authorities, including the Australian Taxation Office. Kieber himself has been forced to assume a new identity, while various shady former customers offer a large reward for information as to his whereabouts.

As the book’s subtitle indicates, it’s fair to say that Shaxson doesn’t pull any punches in his assault on the offshore world of tax havens. Several charges stand out. The first of these is the worsening inequality in rich countries, as the wealthy use the offshore option to evade their tax obligations while everyone else foots the bill in terms of increased tax and/or decreased public services. The second is the continued poverty of much of the developing world, as corrupt leaders and tax-shy elites hide funds offshore. The third is the fact that criminals use havens to launder the flow of illicit money from drug trafficking and other illegal enterprises. Finally, tax havens are said to be responsible for producing the environment that gave rise to the global financial crisis.

Given Shaxson’s charge sheet, it might be difficult to imagine that the offshore world has its defenders (aside, of course, from those who directly profit from it). Yet tax havens do have their partisans, who have been highly effective in the past. One such outfit is the Washington-based Center for Freedom and Prosperity, led by Dan Mitchell. Mitchell is an engaging, larger-than-life figure whose right-wing politics have no equivalent in Australia. During a conversation in Sydney in 2007, he described George W. Bush to me as “a stupid, left-wing asshole.” Mitchell is ever one for the sound bite, a few of which are included in the book. For example, he tells Shaxson, “Some people fantasise about supermodels. I fantasise about having government at 5 per cent of GDP.” (Most rich countries’ governments consume 40–50 per cent of GDP.) In a presentation, Mitchell relates his concerns about where the United States is heading: “We will have a bigger government than any European welfare state — even France and Sweden... I don’t know if this means we’re going to have to stop using deodorant and train our army to surrender if there’s a war.” In Mitchell’s YouTube appearances he characterises the opponents of tax havens as tyrannical, socialistic and often, worst of all, French.

Defenders of tax havens point to two arguments in particular. The first is that havens promote tax competition between governments, which leads to positive outcomes for taxpayers, in the same way that competition between firms leads to better outcomes for consumers. The second argument is that big states are actually doing many of the same things as the Cayman Islands and other stereotypical tax havens, and that the small islands are being targeted only because they are so small and powerless. Shaxson is unimpressed by the idea of beneficial tax competition, but has mixed feelings about the second argument.

The claim that big states are being hypocritical when they attack island tax havens, because they are doing the same thing, is often hard to dispute. Treasure Islands is forthright on this score: Britain and the United States are the world’s two most important tax havens. But this blunt conclusion causes problems for the book, as it does for many people studying tax havens. It raises what seems like a simple question: what is a tax haven, and how can we tell them apart from “normal” countries?

WHETHER they’re experts or not, when people hear the term tax haven, the image that usually comes to mind is a small, faraway, exotic tropical island. As stereotypes go, this is fairly accurate. Small tropical islands in the Caribbean, Indian Ocean and South Pacific probably make up a majority of tax havens. In general, they have a population of under a million people, are former British colonies and, apart from financial services, rely on tourism and a couple of key primary industries for viability. Given this image of the typical haven, why would Shaxson lump Britain and the United States in the same category?

Shaxson defines tax havens as places that bid for outside business by helping people and companies escape regulations and laws at home. Most obviously, individuals and firms might be escaping tax obligations, but they might also be avoiding other sorts of financial regulations. The most useful feature that havens offer in achieving this goal is secrecy. In important instances Britain and the United States are actually the worst offenders in the provision of financial secrecy. In 2009 and 2010 I posed as a would-be tax evader looking to buy prohibited anonymous shell companies: companies that are a legal fiction with no assets or employees, and cannot be traced back to the real person in control. Approaching more than fifty incorporation agents in twenty-two countries, I found that such untraceable companies are much easier to obtain from Britain and especially the United States than from any of the usual suspect island states. Shaxson is right on the money in insisting that the most severe problems are caused by these two big countries rather than small havens.

Though our country is outside the scope of Shaxson’s work, there is no reason to believe that Australian public institutions are themselves squeaky clean. Two firms closely connected with the Reserve Bank of Australia are currently under investigation in Nigeria, Malaysia and Britain for secret multimillion-dollar “commissions” paid to accounts in the Bahamas, Seychelles and Switzerland in order to win tenders for printing local banknotes. Labor and Liberal senators have combined to block any investigation.

Underlying all these points, Treasure Islands argues that tax havens large and small are both the cause and the effect of the successful attempts by big finance to control and subvert political power. The ringing declarations about outlawing tax havens made by politicians like Barack Obama and Gordon Brown at the height of the crisis are shown to be so much cant. Shaxson concludes with a call to arms against a system that has so successfully privatised the gains and socialised the losses. The fact that governments here and abroad have equated the interests of the financial sector with the national interest shows how important this cause is, but also what tough odds it faces. •

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They felt that they had done a workmanlike job, and, within the constraints this government has imposed on itself – “we don’t do tax rises, even when the budget needs to be fixed” – they had. Cormann pointed out that they had funded all their election commitments while making policy decisions that, in net terms, are expected to reduce the four-year deficit by $2.5 billion without causing serious political storms.

How they did that is an interesting point we’ll come back to. And there are many other things of interest here, not least the Turnbull government’s extraordinary discrimination against Melbourne, epicentre of Australia’s population growth, in allocating transport funding. We’ll come back to that too.

But the big story in this MYEFO is that the deficit remains stubbornly unbeaten. Despite all that workmanship, the government’s estimates of future debt and deficits have blown out yet again, and on a scale big enough to make an objective observer wonder when Australia will ever get back into surplus.

For the fifth time in a row, the government has had to front up and admit that revenues are falling well short of its forecasts. The only time since taking office that it hasn’t done so was in the 2014 budget, when, with hindsight, it was seriously deluded about the size of the problem – and how to tackle it.

That 2014 budget forecast a tax take this year of $412 billion. The new forecast is $379 billion. Missed it by that much!

By contrast, despite the Senate’s blocking some spending cuts, spending this year is now forecast to be $3 billion less than predicted in 2014. The government and its media supporters are only deluding themselves in proclaiming that this is a problem of too much spending. It is primarily a problem of having too little revenue.

If you don’t believe me, compare today’s numbers with the way the Howard government did things. In its eight years in office after introducing the GST, its revenues averaged 25.4 per cent of the nation’s gross domestic product; this year they are expected to be just 23.3 per cent. Spending averaged 24.2 per cent of GDP under Howard; it’s 25.2 per cent now. The revenue gap is twice as large as the spending gap.

The International Monetary Fund and the OECD have urged the government to look at tax rises, for policy reasons as well as deficit reduction. The government refuses to do so, for ideological reasons. The bottom line is that there are many ways to close the deficit. In ruling out half of them, the government and its media allies raise questions about how seriously they are committed to doing the job.

It is not a trivial issue. Yes, Australia’s net debt is the seventh-lowest in the Western world, but it will stay that way only if, at the very least, we keep the deficit close to balance – and with the deficit forecast to be $36.5 billion, roughly the same as two years ago, we are far from that.

For every $1 it earns, the government is spending $1.08 – and that’s eight years after the financial crisis. Even in crisis-battered Europe, only five governments are running bigger deficits than Australia – France, Britain, Spain, Greece and Portugal – and in all but Britain, that’s mostly due to the unavoidable cost of servicing their massive debts.

The rating agencies have waved Australia through this time. Frankly, credit ratings are overrated – markets accept very little yield on US bonds, even though Standard & Poor’s now rates them only AA – and you can’t imagine any Australian government defaulting on debt payments. Still, if the agencies make such fine distinctions, it is hard to see how they can continue to rate Australia in the select few with AAA ratings when it is running one of the loosest fiscal policies in the Western world.

Running such large deficits so long after any crisis has passed isn’t normal. This is policy failure, for which both Labor and Coalition governments are to blame.

Don’t blame the Senate. It is elected from a much wider base of Australian opinion, and its job is to review government legislation and reject that which it judges unacceptable. On the government’s own figures, even if the Senate were to pass all the budget cuts it has rejected, that would shave just $3 billion off the $36.5 billion deficit. The Senate is not the problem, it is the scapegoat.

The latest blowout reflects the weakness in wages and job growth, on which we reported last month. Over the four years to mid 2020, $31 billion has been wiped off forecast tax revenue, mainly because fewer people are expected to have jobs, and those jobs on average are expected to earn less than previously forecast.

Even the surge in iron ore and coal prices – in the case of metallurgical coal, to astronomical record highs – has been more than offset by the decline in expected profits outside the mining sector. I hope Treasury knows more than I do, because its forecast of an almost $10 billion jump in company tax revenue next year looks decidedly optimistic.  

The economy is not doing that badly. It is slowed down by excessive household and government debt, yet it’s within cooee of the average per capita growth we’ve had since the crisis. But it’s not doing well enough to close a budget deficit of this size by itself. And that’s what the government is asking it to do, with a bit of help from every treasurer’s friend, bracket creep.

Morrison at least now admits that revenue (he calls it “earnings”) is a problem. But he insists that the revenue gap will close naturally by growth, so the government doesn’t have to do anything, except to make sure that it includes enough spending cuts to offset its new spending, as it did this time.

But it’s been telling us that since the 2014 budget, and every single budget and MYEFO since then has reduced its forecast tax take. After that’s happened five times in a row, why should we – or the ratings agencies – think they’ve got it right this time?

Where did they make the savings to pay for all the new spending they promised during the campaign, much of it in country seats under threat from Labor or independents? Four areas stand out:

• The budget reports $16.5 billion of unexpected savings from “parameter variations.” Almost half of that comes from a spectacular slowing of the growth in demand for childcare payments of all kinds. The finance department offered no explanation, but Morrison told AM it was because earlier reforms had shut down the rorts in the system.

• Low growth in prices and wages has cut expected outlays as well as revenue. Growth in pensions and benefits is linked to growth in wages and prices, so low inflation has saved the budget billions on the spending side; the budget does not tell us how much.

• This budget update’s weasel word is “efficiencies” – which it uses freely as a euphemism for spending cuts. Seven of them have cut $538 million from various programs. Tony Abbott’s program for the government to subsidise wealthy people to hire nannies is axed completely. But the biggest cut, $330 million over four years, will more than halve wage subsidies for employers to hire disadvantaged older workers. It staggers me that Turnbull, Morrison and Cormann, who seem reasonable people, could think it a good idea to reduce our efforts to help long-term jobless people find work.

• The government has stripped $2.2 billion over the next four years from funding from priority infrastructure projects to pay for the pork barrel projects – a bridge here, a road upgrade or a community development grant there – it pledged during the election campaign to shore up Coalition seats.

This is serious. As I’ve reported earlier, for all the talk about infrastructure, actual investment in transport infrastructure by and for governments, federal and state, has slumped from 1.20 per cent of GDP in 2010–11 to 0.89 per cent in 2015–16. This year the quantity is up, but the quality is down. On the running tally kept by the infrastructure department, of 104 community infrastructure projects the Coalition promised during the campaign, only six were in Labor electorates. Clearly these projects were chosen for political reasons, but they were funded with money that had been earmarked for priority projects: “land transport projects that will deliver the highest benefits to the nation.”

MYEFO cuts $850 billion from this year’s budget for infrastructure programs run jointly with the states. Once again, Victoria is the Turnbull government’s target enemy: it proposes to spend just $621 million on infrastructure works in the state, while spending $3.1 billion in New South Wales, $1.9 billion in Queensland, and so on.

At a time when Melbourne is housing almost a third of Australia’s population growth – last week’s figures imply that more than 100,000 of the nation’s 337,821 population increase in the year to June settled there – the Turnbull government is doing little to help solve the city’s transport crisis. Victoria as a whole is slated to receive only $2 billion of the $26.4 billion allocated for the next four years, compared to $8 billion for NSW and $7.6 billion for Queensland. The state with 36 per cent of the nation’s population growth would get only 7.7 per cent of funding for new transport projects.

Turnbull and Victorian premier Daniel Andrews need to repair their personal relationship over the Christmas/New Year break. It is in no one’s interests for them to be constantly seeking to score off each other rather than working together. Victorian voters might well take it out on both of them.

One more suggestion. The government’s plan to cut company tax by more than $10 billion a year is clearly unaffordable while the budget remains broke. Why don’t Scott Morrison and Chris Bowen also have a drink together over the Christmas holidays, and shake hands on a more targeted way to get the new investment Morrison is aiming for? Using accelerated depreciation allowances or some similar tax break would give businesses an incentive to make new investments without doing the budget as much damage as an across-the-board cut in company tax. •

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After two years, the Hawke government wobbled under pressure from vested interests and restored the tax break for negative gearing. But the United States has never restored it. If we want to know what might happen if Labor removes it again, the American experience has valuable lessons.

The motivation was similar. Tax breaks for capital gains and what Americans call “passive investment losses” (negative gearing) were widely seen as tax loopholes for the rich. At astonishing speed, a bipartisan political swell developed in 1986 for a sweeping trade-off that would close such loopholes and use the revenue saved to slash tax rates, especially for people on middle incomes. It became a kind of political tornado that swept through Washington: no interest group could stand in its way, and by the time it had passed, the US tax system had been revolutionised.

There, as here, there were predictions of doom. A pair of accountants from the University of Nevada forecast that rents would have to rise 28 per cent to allow investors to maintain their after-tax earnings. As late as 1990, renowned housing economist James Poterba of the Massachusetts Institute of Technology forecast that the change would drive up long-term rents by 10 to 15 per cent.

“The majority of policy analysts… viewed the reform as anti-housing,” Poterba explained in a 1994 retrospective for a conference of the Federal Reserve. “There was little doubt that the reforms would reduce incentives for rental housing construction… Many studies pointed out that the long-term stock of rental housing would decline as a consequence of the tax reform.” The result, they predicted, would be higher real rents.

Reality didn’t follow the script. Even as Poterba made his prediction in 1990, rents in the US were falling. And they were falling despite new apartment construction slumping by two-thirds, a crash even more intense than the industry had forecast. What had happened?

It’s a story we should remember when we see any forecasts of what will happen if Labor is elected and implements its tax reforms. Essentially, the impact of the 1986 US tax reforms was overrun by bigger forces. It would be the same here. The impact of Labor’s plans would be just one in a mix of forces that would shape future house prices, rent levels, home ownership rates and the rest.

In the US, the reforms coincided with three things: the bursting of the apartment building boom of the early-to-mid 1980s, which created rental vacancy rates of more than 10 per cent; the arrival of low inflation, which reduced the value of the tax breaks anyway; and the 1990–91 recession, which drove down demand for housing.

Not that Labor’s proposals are identical to the US reforms. There, investors were focused largely on apartment construction; in Australia, 93 per cent of money lent to investors is used to buy existing homes – and Labor plans to retain negative gearing for construction of new rental housing.

The US reforms went further than Labor has, phasing out tax breaks for existing negatively geared investments. Commenting on Poterba’s paper, Reagan’s former chief economic advisor, Martin Feldstein, blamed part of the apartment construction slump on this “retroactive” legislation, and said the reforms should have been aimed at future investments only – advice Labor has followed in drafting its plans.

But while the industry blamed the tax reforms for the slump in apartment construction, Poterba and Feldstein agreed that there were bigger factors at work. “Vacancy rates above 10 per cent were unprecedented in this market,” Poterba said. “A savvy analyst would have predicted in early 1986 that new construction would decline even without changes in tax provisions.” Feldstein concurred: “The excess building would probably have caused a glut by the late 1980s, leading to falling asset values and declining rents.” And that is exactly what happened.

Bear that in mind. In Australia during 2015, work began on 105,797 new units and apartments, almost double the highest number recorded in any previous boom. The signs of a glut that will force down prices in Sydney and Melbourne are already evident. In four years, the Bureau of Statistics tells us, prices for established houses rose 61 per cent in Sydney and 34 per cent in Melbourne, while per capita household income rose just 10 per cent. Both cities often experience sustained price falls, and they are almost certainly heading into another one now – whether the negative gearing rules are changed or not.

House prices did fall after the 1986 US reforms, Poterba reported, but only by an average of 1 per cent a year. Other factors were clearly at play, and once the US came out of the 1990–91 recession prices resumed their upward path. Real rents stabilised in the late 80s, then fell due to the glut of vacant homes. As the glut was worked off, they began rising again, but not dramatically. From 1994 to 2012, rents rose just under 3 per cent a year, while consumer prices averaged growth of 2.5 per cent. Falling prices of computers and audiovisual equipment explained the difference, not surging rents.

One other important difference must be mentioned. The efforts to close the US loopholes created their own loophole. Because they targeted only “passive investment losses,” they allowed rental losses made by “active investors” – those who manage their own property portfolio – to continue to be written off against tax. A 2012 paper by Larry Ozanne of the Congressional Budget Office notes that in 2006, 60 per cent of taxpayers reporting losses on rental investment wrote them off against income from other sources.

In all, the US experience suggests that the forecasts of the impact of the reforms added up to much ado about nothing. Their impact on real world activity was minor, and in some areas undetectable.

The same might be said of Australia’s experience when negative gearing deductions were abolished from 1985 to 1987. Saul Eslake has won the debate over what happened to rents: there was a marked rise in rents in Sydney and Perth, but it was a result of extremely tight vacancy rates, and would have happened anyway.

Yet just as that myth has been dispelled, a new one has been created this week by Louis Christopher of SQM Research in his critique of Labor’s reform plans. The headlines focused on his forecasts of falls of between 4 and 15 per cent in house prices, and up to 20 per cent in real estate turnover. But no one has highlighted the clear flaws in how he reached those conclusions.

Christopher looks for guidance to what happened in 1985–87, when Australia saw a marked slump in housing construction and sales. He assumes that all the damage was done by the government’s scrapping tax breaks for negative gearing – and takes that as his guide to what would happen if Labor did it in 2017.

Whoa, boy. Louis, are you really unaware of what happened to home mortgage rates in that time? In 1985 they were still regulated, and the Reserve Bank hiked them from 11.5 per cent to 13.5 per cent to try to slow down activity. That worked a treat in reducing lending to owner-occupiers. Then, in April 1986, the government deregulated mortgage rates, and the banks immediately hiked them to 15.5 per cent. That does tend to have an impact on housing activity. But Christopher’s analysis fails to mention it.

Nor does he mention the home lending data. It shows that, far from activity falling because “buyers ultimately lost interest in non-negatively geared properties,” as he claims, lending to investors buying existing homes in fact rose slightly as a share of home lending during the period in which negative gearing was banned! Tax Office data also shows that in 1986–87 the number of rental investors rose by 6000. It wasn’t the investors who toppled the market.

Rather, the housing slump Christopher ascribes to the abolition of tax breaks for negative gearing was primarily due to a combination of the interest rate rise to 15.5 per cent, the bust of the 1984–85 construction boom, and the economy hitting a speed hump as the Reserve pushed up interest rates generally. Trend unemployment rose by 55,000 or 0.5 per cent. New car registrations slumped by 26 per cent, from 511,000 to 376,000. You’re surely not going to blame that on the end of tax breaks for negative gearing?

That is not to say that his forecasts are necessarily wrong. I don’t know what would happen either, but the conclusion that Labor’s reforms could slice 4 per cent off future growth in house prices, as forecast at the lower end of his projections and in a separate report this week from Gene Tunny of Adept Economics, sounds in the right ball park to me.

Tunny’s report was prepared for Brisbane firm Walshs Financial Planning, whose website says it provides “accounting and taxation services to high net worth individuals (including medical practitioners), family businesses and other small-medium enterprises (SMEs).” Fair enough: they’ve got a vested interest in this, and they don’t hide it. While the report is clearly tailored for the development industry and makes many debatable claims, its estimate that Labor’s reforms would cut $20,000 from the future value of a $500,000 home seems to me a reasonable guess.

But that is, after all, the main point of the reform: it aims to make housing more affordable by restraining future growth in house prices. There would be benefits to the budget too, but Adept argues persuasively that they would be relatively minor and develop only slowly. It also makes a case that Labor’s plan to cut the capital gains tax break from 50 per cent to 25 per cent goes too far, and that 40 per cent would be a better target.

It argues less convincingly that lifting housing supply would be a better way to make housing more affordable. That is a cliché in this Sydneycentric industry, which ignores the fact that Melbourne has zoned vast amounts of land for development but has similar problems with affordability.

The fact is that you can only make housing more affordable in a sustained way by reducing the future growth in prices. Suppose you raise housing supply: how will that have an impact on affordability? By bringing down prices – or at least, as Tunny rightly puts it, growth in house prices. The record housing supply we’ve had in the past year will reduce growth in prices. But if you’re serious about making housing more affordable, it’s not an either/or issue. There’s no reason why you can’t tackle both negative gearing and land supply issues.

Since negative gearing was restored in 1987, Australia has had three decades of extreme inflation in the housing market. In that time, the average price of an established home in our cities has risen by 727 per cent. Household debt has soared from 60 per cent of household income to 186 per cent. The tax break for negative gearing diverts investment into existing housing, where it simply inflates prices and prices poorer families out of the market. It is inequitable, and it is not a sustainable basis for economic growth.

Sadly, inflation does not make us any richer. In housing, we buy in the same market that we sell. Unless we are downsizing or moving somewhere cheaper, our increased “wealth” from rising property prices is an illusion.

In my judgement, Labor’s tax reforms are the most important policy package either side has put forward in this campaign. They are carefully crafted to avoid creating a “rush for the exits” by investors. They would gradually restore housing affordability, and restore home ownership – which was a key policy objective of the Liberal Party in the Menzies era.

Malcolm Turnbull clearly understood the problems with negative gearing when he was writing his 2005 tax paper, and in the work he and Scott Morrison did last summer – before Labor announced its plans and the Coalition decided, for opportunistic reasons, to oppose any reform. I have not given up hope that if Turnbull wins the election he will reclaim that Menzies legacy and work for a bipartisan reform to make it happen. •

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At 67 per cent, it was still a lot higher than in 1954, but the rate has nonetheless been gradually trending down since the peak of 72.5 per cent in 1966, as this chart shows.

Chart 1: Australian home ownership rates at censuses, 1911–2011

Source: Australian Bureau of Statistics, 2011 Census Quickstats; A Picture of the Nation and historical censuses (catalogue 2107.0–2112.0).

The next census will be taken on 9 August this year (although we won’t get the first results until mid 2017). But surveys since the last census suggest that home ownership rates will have continued the trend.

Worryingly, the relatively modest declines recorded in successive censuses mask a much larger decline among significant segments of the Australian population over the past two decades. In particular, as Chart 2 shows, the home ownership rate among households headed by people aged twenty-five to thirty-four dropped by 9 percentage points (from 56 per cent to 47 per cent) between 1991 and 2011; among households headed by people aged thirty-five to forty-four it dropped by 11 points (from 75 per cent to 64 per cent); and among households headed by people aged forty-five to fifty-four it dropped by 8 points (from 81 per cent to 73 per cent).

Chart 2: Home ownership rates by age of “household head” at censuses, 1961–2011  

Source: Australian Bureau of Statistics, Census results; and Judith Yates, Housing and the Distribution of Wealth, 2012 Giblin Lecture, and personal communications.

The impact of these quite sharp declines among young adult and middle-aged households on the overall home ownership rate has been largely offset by households headed by people aged fifty-five and over, which now make up a larger proportion of the population. In that age group, home ownership rates are much higher, and have fallen by much less since the 1991 census.

The decline among households headed by young and middle-aged adults since the early 1990s is particularly striking given that mortgage interest rates during this period have been roughly half what they were over the previous fifteen or so years – and also given that federal and state governments have spent billions of dollars during this period on programs ostensibly directed towards promoting home ownership, such as first home owner grants and stamp duty concessions.

No doubt there are many reasons for this striking trend. Young adults nowadays typically spend longer in the education system (which is a Good Thing), and thus start earning (and saving) at older ages than they did in previous generations. If they have a tertiary education, they are likely to have accumulated HECS or HELP debt that has to be repaid – unlike those who were lucky enough to have gone to university when it was “free.” But whether they have a tertiary education or not, since they started working they will have been making compulsory superannuation contributions, which most people didn’t do until the early 1990s.

Young adults are also more likely to be in casual employment – which can make it more difficult to gain access to mortgage finance – than they were in the 1960s, 70s or 80s. And if they do form what they intend to be permanent relationships or have children – events often associated with buying a first home – they tend to do so later than previous generations.

Yet it is hard to escape the conclusion that the main reason for the drop in home ownership among twenty-five- to fifty-four-year-olds since the early 1990s has been the enormous increase in home prices. Depending on which series you use, residential property prices in Australia’s eight capital cities have risen by between 340 per cent and 390 per cent. By contrast, average weekly earnings for full-time adults have risen by about 165 per cent. As a multiple of average household disposable income, capital city dwelling prices rose from just under three times in the early 1990s to around five times by the early 2000s, around which level it has fluctuated ever since. Australia is by no means unique in this regard, although the ratio of house prices to incomes has risen further, relative to its 1990s average, in Australia than in most other OECD countries.

This outsized increase in Australian housing prices reflects the interaction of powerful forces on both the demand for and supply of housing. The “underlying” demand for housing has been propelled by rapid population growth, driven in turn by one of the largest immigration intakes of any advanced economy. “Effective” demand for housing has been further boosted by the dramatic fall in mortgage interest rates since the early 1990s, and by the greater availability of mortgage finance as a result of financial deregulation and greater competition among mortgage lenders. Together, these developments allowed households to borrow considerably greater sums for the purchase of housing than hitherto. On top of that, changes to the capital gains tax regime in 1999 greatly enhanced the appeal of leveraged property investment.

At the same time, increases in the supply of housing have been constrained not only by inherent geographical obstacles in many of Australia’s larger cities, but also by increasingly onerous land-use planning and zoning regulations, changes in how suburban infrastructure is financed, and underinvestment in transport links from “growth areas” to places where employment growth has been concentrated.

This sharp decline in home ownership rates among a significant segment of the Australian population is likely to have a number of profound consequences, especially if (as seems probable) it has continued since the 2011 census.

First, Australia’s retirement income system rests on an implicit assumption that the majority of retirees will have close to zero housing costs (beyond repairs, maintenance and council rates) – because a large majority of them will own their own dwellings, and moreover own them outright. That assumption is likely to become much less valid in future. Not only will fewer people own their homes as they reach retirement, but an increasing proportion of those who do will still have a mortgage outstanding – and thus will (quite rationally) elect to use some or all of their superannuation savings to pay off that mortgage, with the result that they will be less able to fund their own retirement incomes (in whole or in part) than intended. The result is likely to be greater pressure for increases in the value of the age pension, and more pensioners claiming Commonwealth Rent Assistance.

Second, declining home ownership rates among people who would once have been home owners – people who nonetheless have access to greater economic resources than those who would never have expected to become home owners – means increased competition for rental housing. Greater upward pressure on rents is one likely result, as are increased “housing stress” among low-income tenants and increased demand on the limited supply of public and community housing.

Third, since the ungeared equity in owner-occupied housing commonly provides the collateral that lenders require for loans to small businesses (especially startups), the decline in home ownership rates among this large age group may detract from the rate of small business formation over time. Given the outsized contribution that new businesses, in particular, make to economic and employment growth, this shift has potentially adverse consequences for long-run economic and employment growth.

Fourth, since property ownership has traditionally been the major source of wealth accumulation for middle-income households in particular (although that role has more recently been challenged to some extent by superannuation), declining home ownership rates may presage greater disparities in the distribution of wealth. Over the past decade, according to the Australian Bureau of Statistics, the average net worth of home-owning households has risen by $485,000 while that of renting households has risen by less than $95,000.

Government policies haven’t been the only cause of the escalation of property prices over the past twenty-five years, but they have clearly contributed to it. Federal and state government policies have helped to inflate the demand for housing – for example by giving cash grants or tax breaks to homebuyers, who in turn spend more on housing than they would otherwise have done, and by enhancing the appeal of property as an investment vehicle by increasing the generosity of the taxation treatment of capital gains. State and local government policies have helped to constrain the supply of housing by “locking up” land that could otherwise have been used for residential development, by imposing increasingly onerous building construction standards and controls over higher-density redevelopment of established areas, and by underinvesting in urban public transport and urban arterial roads.

More recently, governments have begun to step back from some of these policies. Every state and territory government has now either abolished, or substantially reduced, cash grants to first-time buyers of established dwellings (grants that would more accurately have been termed second-home vendors’ grants, since that’s where the money usually ended up), in favour of increased grants to first-time buyers of new housing (in the hope of inducing an increase in new dwelling construction).

The federal government has bolstered the Foreign Investment Review Board’s monitoring and enforcement of restrictions on the purchase of established housing by foreign residents, dampening a source of demand for housing that, at least anecdotally, had become more important in recent years. Last year, the Australian Prudential Regulation Authority, which supervises the banks and other lenders, required the banks to tighten the criteria they use in determining the creditworthiness of property investors and the amounts they are willing to lend – which also appears to have led to a softening in demand from that source.

Each of these measures has been implemented without any obviously deleterious impact on the housing market, beyond (perhaps) slowing the rate at which property prices have continued to escalate.

There’s no reason to think that the impact of the Labor Party’s policies on negative gearing and the capital gains tax discount would be any different. They would certainly not prompt a “wave of selling” by existing property investors, since they would be “grandfathered” under the Labor Party’s proposal. If anything, these investors would be less likely to sell their properties than otherwise. On the other hand, there would clearly be less additional investment in established housing, since after 1 July 2017 that would no longer be eligible for negative gearing for tax purposes.

But there may be additional investment in new housing, since that would be the only form of new investment eligible for negative gearing for tax purposes. Whether that turns out to be the case, and whether it results in an increase in the supply of new housing or an increase in developers’ and builders’ profit margins may depend on state and local government planning and zoning decisions.

But anything that lessens the demand for established housing from investors means that would-be homebuyers will face less competition in purchasing residential property. This should do something to stem the decline in the home ownership rate, even if only at the margin; and because the greater the number of people who succeed in becoming home owners, the smaller the number of people who need to rent (all else being equal), it’s hard to see why the Labor Party’s proposals will inevitably or necessarily lead to an increase in rents. •

The post The housing affordability trap appeared first on Inside Story.

Late last month, at the same venue, the Coalition’s first-term fiscal frippery came full circle. Malcolm Turnbull unveiled “the most fundamental reform to the Federation in generations,” designed to plug some of the health and education funding gaps opened up in Hockey’s first failed budget. The catch was that the states would have to shoulder responsibility for raising taxes themselves. The staging of Turnbull’s rambling announcement was hasty, and the backdrop of a snarling, pouncing panther only added to the sense of absurdity. Scott Morrison, Hockey’s replacement as treasurer, sounded decidedly unbriefed and the response from the premiers at the April Fools’ Day COAG two days later was emphatic. No, we will not take the political hit for your self-inflicted problem. What’s for morning tea?

If Malcolm Turnbull meant what he said last September about respecting the intelligence of the Australian people, now would be a good time to level with them. And a good place to start would be the fact that tax receipts are going up. That’s a good thing, and it would be even better if the next government seized one of the many options to make that happen more efficiently and equitably.

Next, he could try something bolder, and revisit the bipartisan commitment to keeping Australia’s tax-to-GDP ratio at the lower end of OECD tables. Yes, we face tough trade-offs and choices. No, they are not as simple as choosing either higher tax or better spending, either “jobs and growth” or a decent safety net, or either a global economy or a thriving, fair society. The public investments most threatened by a focus on shrinking government – hospitals, education, disability services and public sector capability – are precisely those requiring more revenue so that Australia can deliver growth and fairness at the same time. A bit more tax would be a small price to pay if higher revenue and better government sustain Australia’s social compact and ensure that the grand globalisation bargain sticks for the long term.

Instead, just in time for another budget, the Coalition’s new economic leadership has reverted to form: Australia must live within its means, and this can only be done by cutting government spending. For this treasurer, like the last, the only way is down: lower taxes, smaller government and, so far, worsening polls. We’re back to the absolutes – only without, so far, catchy slogans like “stop the taxes.”

Yet it’s unclear what “no tax increases” actually means. Last week, chatting on ABC Radio’s AM a day after fifty prominent Australians urged the government not to cut company taxes, Scott Morrison was unequivocal. Cutting spending will “strengthen our national finances against external shocks.” Lifting taxes “only weakens the national economy.” What, he might have asked, would the agencies that issue Australia’s cherished AAA credit rating think of that?

Only he didn’t have to. If Joe Hockey took in the non-event in front of the Panthers’ shiny new gymnasium with a touch of schadenfreude, an overworked Moody’s analyst somewhere in East Asia with half a hemisphere to monitor was closer to exasperation. While Morrison was on the air, the Bloomberg wires were carrying an unhelpful headline: “Australia debt will rise without revenue measures, Moody’s warns.” Having witnessed the fierce democratic resistance to spending cuts, and observed the persistence of the debt the government promised to end, Moody’s had come to the logical conclusion. To safeguard Australia’s credit outlook, a bigger tax take has to be part of the picture.

The good news is that, whatever the government’s low-tax pretensions, revenues have actually been increasing under both Hockey and Morrison. The government has been adamant that whatever the problems we face in matching community expectations with government resources, more tax isn’t part of the answer. That hasn’t stopped them from banking on a big recovery in government coffers to do just that. Between 2007–08 and 2010–11, the ratio of tax receipts to GDP dropped from 23.7 to 20.0 per cent – the biggest fall since the 1950s. Since then, albeit in painfully slow fashion, the tax take has been rising. Tax receipts are projected to recover to 23.9 per cent of GDP by the early 2020s. If the Coalition happens to remain in government that long, it will have presided over the biggest trough-to-peak rebound in revenues in at least three decades.

Any recovery in revenue undermines the near-term narrative about the pressing need to slash expenditure. But Morrison (like Hockey before him) is more concerned about how tax is increasing – or more precisely, which taxes are doing the heavy lifting. Collections from the GST are declining in relative terms, while revenues from personal and company income taxes are growing. On last year’s budget projections, income taxes will account for almost 70 per cent of total tax receipts by the end of the decade, the highest proportion since the GST was introduced in the late 1990s. The recovery might be even larger if bracket creep remains intact and if tax commissioner Chris Jordan’s stark warnings to corporate tax dodgers that “enough is enough” bear fruit.

Some economists say that taxing “mobile” labour and capital is inefficient, but income and company taxes do lots of the redistribution that makes for a fairer system overall. They are popular targets for tax cuts for both reasons. With the Coalition ruling out any increase to the GST, however, a major shift away from these direct taxes is unlikely. That is unless government embraces some more ambitious ideas. Australia’s leading economists are practically falling over themselves with suggestions for raising money in ways that would be fairer and more efficient. Proposals include shifting more revenue towards taxes on land, rents and pollution, as well as plugging huge holes in the existing tax bases and removing overly generous concessions. Many of these are realistic options for closing the deficit sooner, in a way that shores up the budget for the long term. If advocates of personal and company tax cuts are not prepared to explore better alternatives than the long-debated and frequently decried revenue-neutral switch from income tax to GST, they can hardly blame the politicians for deciding to play it safe.

If tax revenues do recover to 23.9 per cent of GDP without being derailed by the next round of tax handouts or another global crisis, then the medium-term budget projections assume, consistent with recent practice, that revenue will be capped at that point. Last year’s Intergenerational Report made the same assumption for its longer-term projections. This benchmark is equivalent to the average (that is, below the highs) of the 2000–07 period, described by the Committee for Economic Development of Australia’s Balanced Budget Commission as the level that governments of both colours have pegged as the “maximum average that would be sustainable.” On current projections, this would be enough revenue to deliver tiny and temporary surpluses in the mid 2020s. After that, the budget would return to deficit, or more aggressive spending cuts would be needed to keep the books balanced.

There is another way to match government resources to community expectations, though it poses a question that neither of our major parties is inclined to ask: is it time to revisit their commitment to a tax-to-GDP ratio that places Australia at the low-tax end of the spectrum compared to its developed-economy peers? What if, as well as reprioritising and reviewing spending, we raised a bit more revenue overall when and where we decide it is justified? Governments of both stripes have been willing to make the case for extra revenue in the right circumstances. The Abbott government’s temporary budget repair levy on the highest-income earners was a rare, pragmatic and largely uncontroversial departure from the reverse class warfare favoured in 2014. More notably, the National Disability Insurance Scheme – a popular bipartisan expansion of the role of government into facilitating disability services – has been funded in part by a 0.5 percentage point increase in the Medicare levy. And despite the current government’s low-tax fixation, the upcoming budget looks set to include revenue-boosting measures involving the tobacco excise, superannuation concessions and multinational tax avoidance. Even in an era characterised by a relentless debt-and-deficits narrative and anti-tax scare campaigns, there have been indications that the answer to this question of greater revenue is not so straightforward as to be dismissed out of hand.

The progressive design of our tax system, combined with a parallel set of decisions on social expenditures, reflects another important choice Australia has made. We have decided to direct our taxes and transfers towards achieving fairness in a way that few other countries either attempt or achieve. These measures are relatively cheap: as with tax revenues, our social expenditures are well below the OECD average as a share of GDP. They are typically subject to asset and income tests, and funded out of general revenue rather than linked to how much someone has contributed in social security taxes from his or her earnings. As a result, our social expenditures are more targeted to the poor than is the case in any comparable nation: for each dollar we spend, we get more bang for our buck reducing poverty and inequality. As ANU Crawford School professor and Centre for Policy Development fellow Peter Whiteford puts it, Australia is “closer to the Robin Hood end of the spectrum than any other country.”

This means that when government cuts social expenditures as part of an undifferentiated attack on welfare or entitlement, or in the name of budget sustainability, the impacts inevitably fall disproportionately on the poor. The effect is accentuated if cuts extend to investment in public education and health services, which are an equally crucial part of Australia’s redistributive bargain. Unless you believe that the impact of such cuts will be more than offset by a resultant increase in employment, higher wages, or more efficient and effective schools and hospitals, then the implication is higher inequality. And, as the International Monetary Fund has found, inequality is itself bad for medium-term growth.

These are complex issues, and there are important policy challenges stemming from an ageing population and the interactions between income-tested payments and incentives to work. But a good starting point is to recognise that the sustainability of social expenditures involves not only their affordability in the budget, but also their adequacy and effectiveness as policy tools. As Peter Whiteford argued in Inside Story in November, it is not true that government spending is growing out of control; the bulk of Australia’s social expenditures are broadly sustainable even within anticipated revenue constraints. Despite the tabloid chatter, the share of the working-age population receiving basic social security payments fell from one-in-four in the mid 1990s to one-in-six by 2008, and has been broadly stable since, despite slower growth and higher unemployment. But benefits provided, particularly in the case of unemployment, are low and they are only growing slowly: because they are indexed to the CPI rather than wages, benefits will rise at a rate that will see the living standards of the least well-off fall relative to the wider population, even as Australia becomes richer over time. (The Newstart payment for unemployed people has increased only fractionally in real terms since 1994.)

In these areas, the real question about sustainability isn’t whether we can afford what we have but whether the low level of resources we currently devote is enough to provide a safety net that is worthy of the vision and values that once underpinned it.

This takes us back to Scott Morrison and the idea that, even if we wanted to make different decisions about tax and spending, Australia can’t get ahead in the global economy with more revenue or more redistribution. As Morrison claimed repeatedly in various formulations on AM, in a global economy, “increasing the tax burden on the economy” is incompatible with “jobs and growth.” It’s an old and well-rehearsed view. Last year’s Re:think tax discussion paper skipped straight to the point. Paragraph 1.1 read:

In recent decades, changes in the global economy have put strain on tax systems around the world and Australia has been no exception. Key factors include technological change (particularly the rise of the digital economy), highly mobile investment and greater labour mobility. These developments pose two critical issues for tax systems: they can weaken the ability of tax systems to raise revenue from traditional tax bases and they can increase the economic costs of taxation, dampening economic growth.

These arguments have to be taken seriously, especially for an economy that relies heavily on foreign trade and investment. But there is another side to the story. Effective income redistribution and good government, and the revenue to pay for it, are absolutely fundamental to the political and economic bargain that makes globalisation possible. Economic openness and free markets can be a powerful force for improving efficiency and living standards if harnessed correctly. But the practice doesn’t live up to the promise unless government gets its role right. The gains from trade are distributed unevenly. There are winners and losers. Big exposures create big risks. Effective redistribution and regulation is required to ensure that the risks are mitigated, the gains do not accrue to a privileged few and most people are better off. And a strong safety net is needed to protect those who lose out.

Failure to deliver on both sides of this bargain discredits the policies that make broadly shared benefits from globalisation possible. It also undermines the political systems and institutions that are responsible for maintaining this balance.

We only have to look to the United States to see how fragile things can become when government gets the balance wrong. On paper, the United States has one of the more progressive tax and transfer systems in the OECD. But the amounts it raises in tax and spends on the safety net are relatively low, meaning that taxes and transfers do little to narrow the high and rising gap between rich and poor. This dynamic exploded, economically and politically, when an under-regulated financial sector tipped the United States into its longest and deepest recession since the second world war, taking much of the world down with it. Working-class Americans who battled through the downturn, and those young enough to have missed out on the boom years altogether don’t need to have read the fine print in the Trans-Pacific Partnership Agreement to see the writing on the wall. When government strips itself of the mechanisms for managing risks and sharing the benefits of trade and globalisation, those people lose.

Understandably, many Americans are revisiting the “small government” choices that an earlier generation of purists, insiders and ideologues made on their behalf. The rush away from mainstream candidates in this presidential primary season reflects the frustration of those who got a bad deal. This is an exciting prospect for progressives who want to re-examine the baked-in inequities of the post-1980s liberal order. You don’t have to agree with the platform to be energised by the policy freedom apparent when a leading contender for the White House is a democratic socialist from Vermont. But the mood that has carried Donald Trump and his wall-building promises to the top of the Republican presidential pecking order also carries unmistakable risks.

Australia might seem a long way from its Trump moment. But it is hard to be complacent when almost 40 per cent of eligible Australians vote for minor parties or independents, or informally, or not at all. Four years ago, before he was ousted by the incoming Coalition government, then Treasury secretary Martin Parkinson said that the shift to a post-boom economic footing required a considered and informed national debate about “what governments can and should provide, and how these will be funded.” By the time he was restored to influence as the head of the Department of Prime Minister and Cabinet, Australia had cycled through four prime ministers, abandoned white papers on tax and Federation reform, and confirmed that blunt cuts to pensions, health and education were not only an unoriginal but also a decidedly unpopular answer to fiscal challenges.

In the meantime, Australians’ living standards have gone sideways and, as all treasurers like to remind us, the challenges we face are becoming ever more daunting in a competitive global marketplace for finance, investment and ideas. This is precisely why it is so pernicious to present the public with false choices on revenue, spending and globalisation. Cloaking ideological positions in arguments of economic orthodoxy or inevitability shuts down debate and politicises issues when all sides might otherwise be prepared to engage in good faith. Blunt populist attacks on welfare and public spending privilege existing winners and damage the redistributive mechanisms that make our social compact and openness to the global economy sustainable.

Such an approach also comes at a spectacular cost to the policy expertise and capacity that the public sector needs to help Australia do better in that global economy. It’s hard to imagine the Australian Taxation Office doing a better job cracking down on tax-dodging multinationals, the Australian Securities and Investments Commission improving its oversight of the financial sector, or CSIRO offering up cutting-edge science and innovation when in the past few years these three agencies alone have lost almost 6000 jobs between them. That is just the prominent tip of an iceberg that includes sweeping cuts to public service funding and permanent staffing levels in state and federal government departments. The resulting policy amnesia and rundown public sector capability undermine the effectiveness of governments to do exactly what we expect them to: safeguard future generations and plan for the long term.

Voters in Australia and elsewhere seem to be saying that if this is the best we can do in the contest of ideas, we might as well try some new combatants. At a minimum, we could try some fresh thinking for some old problems. The opposition’s decision to take some big risks in the tax reform debate has raised the stakes. As February’s brouhaha over negative gearing showed, unprincipled opposition to good ideas can make even the most agile opponents look ordinary. When the country’s political leaders next descend on Lindsay it will be on an election footing, with every sign that their parties will be neck and neck in the polls – a situation that was a long shot just a few months back. With everything on the line, the odds of some long-overdue straight talk on tax and spending are not that great. But stranger things have happened. If they can dispense with the lines we’ve all heard before, including that higher revenue cannot be part of the answer, then the next political leader standing in front of a snarling panther might find an audience that is willing to listen. •

The post Financing government in uncertain times appeared first on Inside Story.

This context, and the class perceptions woven into it, explains much of the savage glee at Cameron’s bumbling reaction to the local fallout from the Panama Papers leak. Among the 11.5 million documents extracted by a whistleblower from the files of the tax-haven law company Mossack Fonseca are those concerning a high-end investment fund, Blairmore Holdings, established in Panama in 1981 by Ian Cameron, who died in September 2010, four months after his son David entered 10 Downing Street.

Asked about his own financial affairs as the story broke on 4 April, and questioned again in subsequent days, the prime minister delivered his usual masterclass in smooth reassurance, though this time mixed with a fatal hint of evasiveness over detail. In particular, repeated statements couched in the present tense – “I have no shares, no offshore trusts, no offshore funds, nothing like that. And so that, I think, is a very clear description” – served only to entice the listening pack. It took until 7 April for Cameron to acknowledge that he and his wife Samantha had bought shares in Blairmore worth £12,500 (A$23,000) in April 1997, selling them for £31,500 (A$59,000) in January 2010.

More details followed, each reported with an ominous thud. (A thesis could be written on the contrast between the sadistic cast of the English press and the legalistic one of the American, a thought raised by turning to the New York Times during any British paroxysm in order to discover what is actually going on.) Blairmore had been set up in 1981 after Margaret Thatcher’s government lifted currency exchange controls. Its Panama domicile enabled its clients to avoid London’s corporation tax, though Britain-based investors would pay tax on capital gains. It operated with “bearer” shares, which anonymised ownership and were thus conducive to tax evasion. Cameron had also inherited £300,000 (A$560,000) from his father, the exact provenance of which (from offshore sources or not?) is as yet unclear.

By this stage, three days in, the new mediacracy – a potent, mutually reinforcing composite of breathless headlines and phone-ins, twitter feeds and talk shows, print stridency and online urgency, all released by the thorough, collaborative journalism of the participating outlets– was in full, and in many cases murderous, swing. In apposite 1789 terms, the tumbril was by now near the guillotine, to joyous acclaim from the boulevards. We’ve got posh-boy Cameron at last! Guilty from his own silver-spooned mouth! Off with his smarmy head! Panamagate (Scotland’s Herald actually used this term) would achieve what, so far, two general elections and two referendums had failed to do: knock the lord of presumption into amply deserved ignominy. Aux armes, tricotons! De cliquer jamais ne cesserons! Never stop clicking!

Cameron’s gilded background and polished mien has always attracted a distinctly personal form of loathing (most often, in a country of fifty-seven varieties of class coding, of the faux-proletarian kind.) Singer-songwriter Paul Weller berated him in 2008 for having fond memories of The Jam’s song “Eton Rifles,” guitarist-songwriter Johnny Marr “forbade” him in 2010 from liking The Smiths. This time, serendipitous return fire came from a newly ubiquitous 1969 song whose co-performer had just died: “Lock up the streets and houses / Because there’s something in the air / We’ve got to get together sooner or later / Because the revolution’s here, and you know it’s right.”

Labour joined the cacophony, with prominent figures calling variously for Cameron’s resignation and imprisonment. The party’s deputy leader Tom Watson – a candidate for the unlikeliest source of moral rectitude in British political history – hauled his necks of bull and brass around the TV studios. The Scottish National Party, on course for another election win in May despite burgeoning scandals, and the Liberals and Greens, glad of the publicity, added their scorn. Cameron’s own Conservatives, meanwhile, now thrilling to the chaos of civil war as the referendum on European Union membership on 23 June approaches, are barely able to muster even nominal support for their leader. A year after delivering a stunning, if narrow, election victory, the prime minister is beleaguered.

Yet by Saturday, at the end of the “worst week of his career” (the latest of many), he was as ever on parade, and in rueful mode at the Conservative Party’s spring forum: “I should have handled this better... I will learn the lessons.” It was no more than a holding moment, and many were unforgiving. His performance in the House of Commons on 11 April will in turn be the latest of many efforts to regain the political initiative.

Beyond his personal affairs Cameron has spoken often about the importance of tackling tax evasion. He made this the core theme of the G8 summit in Northern Ireland in 2013 (which in the event was diverted by Syria), and foregrounded the issue in Davos, Singapore and Jamaica. In 2014 he pressed the United Kingdom’s worldwide assortment of overseas dependencies and crown territories to compile transparent public registers of companies domiciled there, though with limited results. He will also host a long-planned summit on global anti-corruption in London on 12 May. The domestic tax authorities claim to have brought in more than £2 billion from offshore tax evaders since 2009–10, and £1.5 billion in additional tax revenue from Britain’s wealthiest people.

Seven days on from the Panama leak, however, the drama’s domestic momentum was behind Cameron’s own finances rather than corruption and concealment among the global mega-rich (what Gabriel Zucman calls “the hidden wealth of nations.”) This was confirmed later on 9 April when he revealed his last five years’ tax details, redeeming a pledge first mooted in 2012. The Sunday papers were on the case in an instant, several headlining the information that Cameron’s mother gave him two separate payments of £100,000 ($187,000) in 2011, potentially avoiding an inheritance tax bill of around 40 per cent of that sum. (The Mirror’s description, “tax dodge bombshell,” is typical.) The now proliferating story is outrunning even this most dexterous of prime ministers.

Nothing illegal in Cameron’s actions, nor those of family members, has so far been found or even seriously hinted at. In the absence of a killer fact, the press’s hyberbole fatigue and the public’s boredom may spare him real damage – at least until the EU vote, when a majority for “Brexit” would make his resignation inevitable.

But that’s not the end of the matter. In Britain (the contrast with the United States again comes to mind), public reputations are made and broken by culture and atmosphere as much as by law. Alertness to intangible shifts in the social and moral climate is thus a prized currency. At present the shift seems to be away from those with expansive portfolios and ample homes towards those with meagre payslips and pinched horizons. Cameron's trauma may signal that wealth far beyond the reach of most citizens – especially if it is held “offshore” – can become a liability to a public career.

Cameron is at least temporarily wounded, having lost a couple of points in the polls (echoing the impact of Malcolm Turnbull’s state income tax suggestion, as analysed by Peter Brent in Inside Story). His political mistake, an aeon ago as it already seems, was not instantly to report the income he had accrued on his father’s (legal, taxable, declared) fund. Instead he dissembled, perhaps because a protective filial instinct overrode his judgement. Trapped by his initial response, amid an escalating media frenzy, his belated admission was inevitably a bad look. The result has been open season: on his hypocrisy, sleaziness, deceit, untrustworthiness, and unfitness for office. And underlying all the calumny is the matter of class, the sense that Cameron cannot be “one of us” because of his privileged social origins. His almost plaintive last words in the interview confessing his Blairmore dealings – “I have never tried to be anything I am not” – cut no ice.

In this perspective, Cameron’s bit part in the Panama hacktivism has also made him a symbol of an era whose insecurities and fears combine with technology-enabled awareness of rooted inequality, inordinate wealth and systemic corruption. The fact that London itself is a central player in the laundering of illicit global funds, and that some of its Caribbean outposts (the British Virgin Islands, Bermuda and the Cayman Islands) and offshore dominions (Guernsey, Jersey, Isle of Man) are components of the global tax-avoiding archipelago, hands Britain a prime responsibility in bringing tax havens or secrecy jurisdictions (Nicholas Shaxson’s alternative term in his indispensable book Treasure Islands) into the light. After Mossack Fonseca, any British government will now be judged by that standard.

The deafening response to Cameron’s embarrassment in Britain has meant corresponding neglect of the wider information cascade, including the 140 political leaders named in the documents. Associates of Putin and Xi, Assad and Kim, Poroshenko and Macri have been almost invisible in much of the coverage. If seeing events in their true proportion is the beginning of political wisdom, then a degree of rebalancing would be timely.

But already the affair has marked British public life. The leaders of Scotland’s four main parties released their own latest tax returns on 9–10 April, while the Labour leader Jeremy Corbyn has promised to match Cameron’s openness. In classic British fashion – that is, on the hoof – a new and immutable tradition is hereby invented. The chancellor George Osborne, whose family is far richer even than Cameron’s, is next in line for a tax inquisition. After his misfiring March budget, his chances of succeeding Cameron may be further weakened.

More broadly, a new front in the war on tax secrecy has been opened up, one whose big targets are the pillagers and plutocrats who steal the people’s assets. But keeping those same people onside will require statecraft as well as moral fervour. Britain may be tiring of its moneyed elites, but neither is its temper Jacobin. The wrong people in the tumbrils and nothing done would lose this precious opportunity. Getting the law, the transparency, the enforcement and the politics right, hard as these are, is the only way through. •

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That doesn’t mean it will take off. To do that, it would need bipartisan support, yet it has been floated at the worst possible time. Of course Labor premiers won’t support it on the eve of a federal election. It isn’t going to happen.

The lesson of the past six months is clear: if we want tax reform to occur, it will need to be handled from the outset on a bipartisan – or tripartisan – basis, with a clear recognition of the goals it has to meet. Tax reforms are like referendums: without support from both sides of politics, there is no prospect of success.

The two big tax reforms of recent decades – the Hawke government’s reforms in 1985, and the Howard government’s GST in 1999 – became law only because of the support of the much-maligned Australian Democrats, a responsible centre party that held the balance of power in the Senate. We are unlikely to see another party like the Democrats again, so we will need to find a way of negotiating tax reform without them.

And if and when we do, a state income tax should be high on the list of options for change. It would be one of several, but in many respects it is better than the alternatives.

First, it would give the states better tax choices. It would be fairer than a GST. It would do less economic damage than payroll tax or stamp duties on property transfers, the two main taxes the states now control. And it would provide the states with a growth tax to match the increasing demands on government services.

Second, it would allow the states to raise the money to keep schools and hospitals going, after the Abbott government cut $80 billion from their future funding. There is a bizarre reluctance among most of the commentariat to grasp the seriousness of this issue for ordinary Australians, who rely on state-run schools and hospitals, and do not have the means to opt for private education or healthcare.

Somehow, the states are going to have to raise that extra revenue. We need to debate the best way of doing so, and a state income tax would be one of the best options.

Third, it would almost certainly be accompanied by reforms to federal–state relations to reduce the wasteful duplication of responsibilities between the two levels of government, which are ultimately paid for by taxpayers. It would streamline the process of government, and reduce its cost.

It’s to be hoped that the reform of federal and state responsibilities would be politically more sensitive and attuned to public sentiments than the prime minister’s bewildering suggestion on the ABC that the Commonwealth might end funding of government schools but continue funding non-government schools. That’s a policy strongly recommended for any party that is tired of being in government and would prefer a spell in opposition.

This is why the state income tax idea has been around for a long time, and keeps coming back. In 1976 Malcolm Fraser as prime minister unveiled a similar proposal, as stage two of his New Federalism policy, and parliament subsequently passed legislation to allow any state to impose an income tax surcharge.

As in the not-so-distant past – the states lost their income tax powers only in 1942 – there would be just one tax return, one agency collecting it, one set of rules defining the tax base, exemptions and so on. Each state would just decide which rate it wanted to add to the federal tax, and Canberra would collect it and pass it on.

Yet although the legislation sat on the books for twenty-one years, no state ever did levy a tax surcharge. Why not?

Former Victorian premier Dick Hamer, Fraser’s firmest ally at state level on this issue, claimed Fraser had welshed on an unwritten agreement that the federal government would pave the way by cutting its own income tax rates to “make room” for the states to impose theirs. Without that political cover, any state government imposing its own surcharge would be lifting taxes overall, and taking a huge political risk. Fraser denied there had ever been such an understanding, and blamed the states for preferring to spend federal money rather than raise their own.

The issue was revived in 1991 when NSW Liberal premier Nick Greiner and Queensland Labor premier Wayne Goss were partnering Labor prime minister Bob Hawke in wide-ranging reforms aimed, in part, at ending duplicate federal and state policy management. As part of that effort, they proposed a broadly similar scheme, in which part of the federal income tax would initially be earmarked as a states’ income tax, with the states able to vary the rate after three years.

But the same old parrot cries of “dual taxation” were heard loudly once Paul Keating, then on the backbench, seized on the issue in his ultimately successful campaign to unseat Hawke as PM. The plan died when Keating won. The Howard government then repealed Fraser’s legislation as part of its GST reforms.

To sum up: the issue keeps coming back because there are good arguments for it. But it is very tricky to handle politically – which is why no one would introduce a serious proposal on the eve of a federal election. It won’t happen this time. But there are good reasons why it should happen next time.

Let’s look at some of the arguments raised against it.

Wouldn’t it mean double taxation, with Australia going from one income tax system to nine separate ones?

It is double taxation in the sense that both federal and state governments would be charging us income tax. But we already have that in other areas: the states apply land tax to our homes, or some of them, while the local council taxes the same home with municipal rates. No one regards that as an outrage.

As for nine separate tax systems, shadow treasurer Chris Bowen, who made the claim, knows it is phoney. Bowen has written a book on Australia’s former treasurers, and surely knows that that was not how the system worked when the states had income tax powers. There was only one income tax system then, and there would only be one in future.

Would it mean different tax rates in different states and territories?

Possibly. If it lasts long enough, then probably. The states levy their other main taxes at different rates: payroll tax, stamp duties on property sales, and land tax rates all differ between one state and another. In time, if they are free to change the rates, they will no doubt do so – either raising them to help meet a revenue crisis, or cutting them to try to win votes.

Wouldn’t that spell chaos for business?

Nope. States in the United States levy income tax at different rates. Strange to say, the American economy still works, quite well in fact. Business manages to function in Australia with different rates of state payroll tax. And note: business does not pay individual income tax. The only impact on nationwide businesses would be that their accounting systems would have to be adjusted; that’s easily fixed.

Wouldn’t people move interstate to avoid higher taxes?

Are you kidding? We are only talking surcharges here. Even if there were a difference of 1 per cent in the tax rates in New South Wales and Queensland (which is very unlikely), and your taxable income is $80,000, that’s an extra $800 you would be up for that year. The cost of selling your home, moving interstate and buying another one would be at least $40,000. And when you got there, you might find that the relative tax rates had changed, and you’d moved the wrong way.

Will it mean higher taxes?

Maybe. One hopes so, because the alternative is that Canberra will continue running deficits far into the future. Even after all those spending cuts in the 2014 budget, the Abbott government was spending $1.10 for every $1 it raised in revenue. Coalition and Labor governments have been doing that, or worse, for eight years now. If you don’t want that to continue, you have to make even deeper spending cuts, or raise taxes, or most likely both.

A report this week from the Committee for Economic Development of Australia warns that as expenditure rises with the ageing of the population, and as interest bills mount, the Commonwealth could remain stuck in deficit far into the future unless it bites the bullet and raises taxes – either directly, or by a sidestep in which the states raise taxes in return for losing Commonwealth grants.

Would the smaller states be disadvantaged?

Possibly, but only if there were a separate policy change to abandon the ideal of “horizontal fiscal equalisation,” under which the Grants Commission adjusts GST grants to the states to take account of their different capacities to raise revenue.

Certainly the states’ income tax capacities are very different; incomes in Sydney, Canberra, Melbourne and Perth are considerably higher than in South Australia and Tasmania, and hence a uniform state income tax of 2 per cent would raise very different amounts per head in different states. Tax expert Neil Warren, of the University of New South Wales, has estimated that the Australian Capital Territory would raise more than twice as much per head as Tasmania from an identical income tax rate.

But the Grants Commission routinely adjusts state GST entitlements to fully offset these differences. Just as Western Australia gets a low share of the GST because it raises so much from iron ore royalties, so the states and territories that would raise most from a state income tax would find their relative gains redistributed away when the commission calculates their next GST payment.

The Fraser government’s 1978 legislation made it clear that state income taxes would be included in the commission’s estimates of states’ entitlements. If the Turnbull government wanted the states to get different benefits, it would have to specifically direct the commission not to include state income taxes in its calculations. There is no sign that it plans to do that.

Wouldn’t it mean a “race to the bottom” in which states compete to cut tax rates, forcing them to cut services as well?

Only if state governments think they will win more political support from lower taxes than they would lose from lower services. It is no more likely than the opposite fear, that states will keep raising taxes so they can expand services.

The issue we are not facing up to is that the federal government is spending more than it earns, much more. This is not normal. This is not just a stage we are passing through. This is not something harmless, with no negative effects down the track. It is as dangerous in the long term as it would be if a family constantly spent more than it earned, year after year.

Eventually the debt collector calls. Your options become limited, painfully so, and stay limited for a long time. Your former lifestyle is now out of reach. As the CEDA report points out, this is not somewhere we want to go.

But all that depends on bringing a realistic approach to tax reform. That is no longer possible this side of the election. •

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The convoluted logic of the report, its manifestly ridiculous economic predictions and the fact that the consulting firm in question refuses to disclose who commissioned it were not enough to stop the report being the lead story of at least one national newspaper.

The report’s claims must not go unchallenged. But nor should the fact that a report that would flunk any first year economics course has been allowed a serious voice in the public debate.

Here are just two of its outlandish claims. First, the headline-grabbing $19 billion GDP figure. The report claims that removing negative gearing for existing (but not new) properties would shrink cumulative GDP by up $190 billion over ten years.

All tax increases drag somewhat on economic growth, but some have less of an economic effect than others. Treasury estimates that the loss of economic activity from every dollar of tax collected ranges from almost nothing, for broad-based land taxes, to 50 cents for company tax and more than 70 cents for residential stamp duties (the most inefficient taxes).

The consultancy’s report suggests that the annual increase in tax collections from the change to negative gearing would be $2.1 billion. The $19 billion hit to GDP would make the loss of economic activity from each additional dollar of tax collected more than $9. That’s right, more than ten times the economic harm of stamp duty, almost universally accepted among economists as the most economically damaging tax. While Treasury hasn’t published estimates of the economic effects of limiting negative gearing, Grattan Institute has previously made the case that it is likely to be one of the least damaging tax changes on offer.

While difficult to divine, the extreme GDP effects threatened in the report seem to be driven by an assumption that the change would shrink new home building by 4 per cent a year.

That is implausible. A standard economic model would suggest that reducing a tax concession for investors would reduce their willingness to pay, leading to a one-off decline in land prices (and therefore a drop in house prices that we estimate to be between 1 and 2 per cent). Developers with existing banks of land would take a hit – hence their strong campaign against change – but they would maintain their returns on new investments going forward.

By contrast, the report assumes that land prices won’t fall. Instead, residential land would become attractive for industrial, commercial or retail uses. That’s a strange conclusion for a specialist property consulting firm that is paid to know something about zoning restrictions and the higher return on residential development.

Beyond ignoring the lower cost of investment from lower land prices, the report makes a series of unjustified assumptions to reach the 4 per cent figure. It ignores the fact that tax losses would still have a value because they could be written off against future investment income. It assumes that investor demand is extraordinarily sensitive to changes in after-tax returns for property. It also assumes that new housing starts would fall by almost the same proportion as investor demand. In fact, negatively geared investors account for only about a third of property investment. So this assumption would imply that for every negatively geared investor that leaves the market there would be three fewer new home starts.

The second of the more fanciful claims is that restricting negative gearing would lead to rents rising by up to 10 per cent. This assumes that the reduction in the tax concession for investors would be passed on in full through higher rents. Yet there is no basis for assuming that landlords could recoup anywhere near the full loss in tax benefit through increasing rents.

That’s because rents are ultimately determined by the balance between demand and supply for rental housing. In property markets – as in other markets – returns determine asset prices, not the other way around. Rents don’t increase just to ensure that buyers of assets get their money back.

Competition in rental markets would limit material rent rises. Because the negative gearing changes modelled in the report are grandfathered, the vast bulk of landlords wouldn’t pay higher taxes. Nor would new landlords with positive net rental income. And tenants could beat rent rises by threatening to move.

Some people may choose not to invest in property if tax concessions are less generous. This might reduce house prices, but it would have a minimal impact on rents. Every time an investor sold a property, a current renter would buy it, so there would be one less rental property and one less renter, and no change to the balance between supply and demand for rental properties. Indeed, one of the benefits of changes to negative gearing is that lower prices are likely to make housing more accessible for first home buyers.

The report claims that rents would rise because of the fall in new housing supply. But 93 per cent of all investment property lending is for existing dwellings. And as we already discussed, the assumptions in the report massively overstate any impact on new activity.

But the real concern of this episode goes beyond the claims of this nonsense-on-stilts report. The rise of consultancies churning out “independent” reports to advance the causes of vested interests has been well documented. What is alarming is the prominence these reports receive in public debate. No matter how outlandish their claims or how obscure their provenance, the media report them and politicians quote them. The public, confused or frightened by the numbers, forms the view that policy change is simply too risky. That’s a pretty cheap way of buying policy outcomes, especially ones that help special interests but go against the long-term interests of the country. •

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And for four months or so, it did. Turnbull engaged us in the adult conversation he had promised; he respected our intelligence. He embarked on a bold course of tax reform, leaving everything on the table, and highlighting its importance for our future growth. Few decisions were made, but they were mostly sensible ones. It seemed that due process and cabinet decision-making were back as the framework of government. The polls showed Australians were happy with their leader.

Then the tax reform debate started going off the rails – and the economic horizon grew cloudier. Those two developments arrived together, and it is important to grasp the link between them. Tax reform was always going to be hard, but it becomes a lot harder if the economy is heading into trouble. That might have played a part in Turnbull’s decision to put off big tax reforms.

The economic news in 2016 has been more bad than good. The main threat to Australia’s economy lies outside these shores: it’s the price, as yet unknown, that China will be forced to pay for its long binge of reckless lending for unviable investments. At home, too, the signs aren’t good; Wednesday’s first peek at next week’s national accounts shows construction activity falling by the equivalent of almost 0.5 per cent of GDP in the December quarter. Mining investment is still shrinking faster than residential and other building investment is growing to replace it.

Also on Wednesday, the Australian Financial Review published a disturbing article by Anne Hyland in which analysts John Hempton and Jonathan Tepper used anecdotal and statistical evidence to argue that extraordinarily lax credit standards were behind the boom in which banks and others last year lent out $391 billion – that’s almost a quarter of the annual output of the Australian economy – to people buying houses and apartments.

Banks, we were told, rarely checked with employers whether borrowers really received the wage they claimed. More than 40 per cent of their lending last year was in interest-only mortgages, which make sense only if house prices rise faster than the costs of the loan.

The Fin drew a long bow in likening it to the lack of credit standards in the US housing market that led to the global financial crisis, as depicted in the film The Big Short. But an ominous drumbeat ran through the piece, warning of the potential for disaster ahead. The banks and the authorities were quick to dispute the findings, but there’s no disputing the fact that the median Sydney property price has soared by 60 per cent in four years. Fears of a sharp corrective slump might also have influenced Turnbull’s sudden change of policy and persona on tax.

There are certainly risks. Remember that in the past twenty years, the median house price in capital cities has quadrupled – or, if you’re in Melbourne, quintupled – yet median household disposable incomes have risen at only half that rate. The gap has been filled by massive increases in debt. Total household debt now tallies at 185 per cent of household disposable income, twice the ratio of twenty years ago. Debt due to rental housing investments is now 40 per cent of household income, up from 6 per cent in 1995. It’s not another subprime crisis, but that huge debt burden makes the economy slower, less agile, and more at risk of capsizing.

Whatever happens next, we, and the world, need to rethink the role that debt and the finance sector now play in economic development. Are we right to allow firms to write off their interest bills against tax? Or is this an incentive to overgearing at the risk of economic stability? Debt can be useful. It can also be dangerous.

The tax debate was already going badly for Turnbull. Labor, having been locked out of the reform process, was scoring points in its scare campaign against a higher GST, and government MPs were becoming nervous. Why do we have to risk my seat, they asked, to raise money for state governments that don’t even have the guts to campaign with us? Why does it have to be the GST? Why do it now?

So Turnbull backed off – so suddenly that for a few days he and treasurer Scott Morrison were sending out conflicting signals. It didn’t look pretty, and raised doubts about whether the cabinet process under Turnbull really has replaced the captain’s call. Soon, the higher GST Morrison had been trying to sell was swept off the table, at the same time that Labor, which we had scourged for its lack of courage, decided to put negative gearing on the table.

Since the PM and others appear confused about exactly what Labor is proposing, let’s spell it out. From 1 July 2017 (the start of the 2017–18 financial year), landlords who claim to be losing money on their financial investments – whether in rental housing or other areas – would be able to offset those losses for tax purposes only against other investment income. They would no longer be able to deduct them from their wage or salary income.

There are, however, three caveats. The new policy would apply only to properties purchased from that date; in other words, the existing tax breaks would remain for existing rental properties. Landlords who invest their money in building new housing would still be able to deduct rental losses against income from other sources. And others would be allowed to carry their losses forward to claim against capital gains tax when the property is eventually sold.

At the same time, the tax discount applied to income from capital gains would be reduced from 50 per cent to 25 per cent. (Or, to put it another way, you would have to pay tax on 75 per cent of your capital gain, rather than 50 per cent as now.) Again, the new rule would apply only to new investments from 1 July 2017; the current rules would remain for all investments before that date.

In the circles of non-partisan tax economists, the Labor policy has won widespread applause; the only criticisms have come from industry lobbies and predictable Liberal partisans. Leading economists such as Chris Richardson, Saul Eslake and John Daley have endorsed the policy as one that, in Richardson’s words, “has the potential to help provide better outcomes for all Australians.”

As someone who has been writing on tax reform for a long time myself, I see it as a bold policy, but with sensible safeguards to meet the obvious objections. My one criticism is that it should also incorporate the measure the Turnbull government is reportedly planning, which puts an annual cap on the value of tax breaks from existing rental investments.

Why do this? First, because the negative gearing tax break alone is now so widespread that it costs revenue – that is, other taxpayers – between $3 billion and $6 billion a year, depending on the level of interest rates. In effect, other taxpayers are subsidising the beneficiaries in their aspiration to become landlords.

Second, unless rental investment is used to supply new housing – which only 7 per cent is – rental housing can expand only by shrinking owner-occupied housing. Lower- and middle-income people who want to buy their own home are outbid at the auctions, and forced to remain renters. Sydney housing economist Judith Yates told the recent House of Representatives inquiry into home ownership, under Liberal MP John Alexander, that since 1981 – which was roughly when negative gearing started to spread as a tax avoidance strategy – home ownership rates among households headed by people aged twenty-five to thirty-four have fallen from 61 per cent to 47 per cent. Among those aged thirty-five to forty-four, they have plunged from 75 to 64 per cent, and among those aged forty-five to fifty-four, from 79 to 73 per cent. This is a cost of the tax break that’s always ignored by its supporters.

Labor’s move opened up various options for Turnbull. First, and most obviously, it gave him the option of taking over Labor’s policy himself, at no political cost; as the superior debater, he could quickly establish his ownership of it, yet he would be protected from political harm because Labor could not back away from its own policy. That option is gone now.

A second option is still open to him: as an alternative, adopt the Henry tax review’s proposal for a flat 40 per cent discount to apply to net income from all savings-related investments: bank interest, rental housing, capital gains (and losses), and share trading. This would cover a wider range of investments but in a less dramatic manner, and would create a level playing field across the very uneven tax laws now applying. In particular, it would remove the tax system’s discrimination against bank deposits, and hence make them a more attractive savings option – with gains to the wider economy.

Instead, Turnbull somehow decided to discard his better self and try to morph into Tony Abbott. He is making heavy weather of it; he is much better being true to himself. If you admired the real Malcolm, his recent performances in parliament and press conferences have been embarrassing to watch, a pastiche of outright lies, made-up statistics and ridiculous statements.

One example: “They want the price of homes to go down – that is their objective! And if they win the election, they will succeed in smashing home values… Vote Labor, and be poorer! Every single home owner in every single electorate represented in this House will be poorer if the Labor Party is elected to government.”

Well, when Sydney prices have shot up 60 per cent in four years, it’s very likely that they will fall some time soon, whoever is in government. They often do; the Bureau of Statistics tells us that in the past twelve years they’ve had three sustained falls, of up to 10 per cent. Sydney prices in fact have fallen for five of the past twelve years. That’s often the pattern of Australian property prices: dramatic surges followed by flat periods or prices drifting gradually up or down until a new surge hits.

Another example, a blatant fib from question time on Wednesday: “They [Labor] are proposing to remove from the market for established dwellings one-third of demand. All investors would be gone.” The PM is well aware that Labor is not proposing to ban people from owning rental investments. There will always be rental property investors, and they will do what investors did before negative gearing became fashionable: they will borrow prudently, charge the rents the market will bear, and make a profit. Even now, a third of Australian rental investors do precisely that. Rental investments provide them with an income, not a tax loss. That’s the way it’s meant to work.

Buried under Turnbull’s bluster is a serious issue: what will happen to a housing market in which prices have peaked, and the incentive for rental investment is sharply reduced? That could be very interesting indeed.

First, if Labor wins the election and can get its policy through the Senate, we’d expect to see some shift of new rental investment from established housing to new housing. That’s what Labor wants to have happen, and so long as the shift goes to filling real gaps in the market rather than building substandard apartment blocks where there’s already a glut of them, that would be a good thing. The consensus is that we need more housing, except in and around Melbourne’s CBD, and more housing choices. This policy would help in that direction.

But what would happen to the established housing market? The reduced incentive for investors would shift the balance between supply and demand. Depending on the circumstances, this would reduce either the price of houses or the growth in their price.

We can’t be sure which, but given the size of the recent price surges in Sydney and Melbourne – 61 per cent in Sydney, 30 per cent in Melbourne – falls are likely in those two cities. In regional Australia and the other capitals, where price rises since 2011–12 range from 9 per cent in Hobart to 17 per cent in Brisbane and Perth, it’s less clear.

Second, the demand vacuum created by investors moving out of the established home market would quickly be filled by would-be owner-occupiers. Rapid price rises are already telling us there is no shortage of demand. But the aspiring owner-occupiers would not be able to pay the same prices as the investors, so that too makes it more likely that prices would fall, although it is impossible to say how much.

Third, what is the likelihood of existing investors deciding that the game is up, and making a stampede for the exit gates? That would be the most disruptive outcome for the economy, although very good for those who have been forced to rent because they can’t afford to buy. Labor’s policy does try to guard against this by grandfathering existing investors from both rule changes, but it is certainly true that future house prices will be lower under its policy than they would be if the tax breaks remain.

No doubt some existing investors, particularly those with interest-only loans, would decide that speculation on future housing prices has become a risky game, and might sell out and switch to alternative investments. No doubt many others will remain in housing because they don’t see a disaster looming and/or because housing is a traditional favourite of investors seeking a safe choice they understand. Again, it’s impossible to guess from here what the balance between these two groups will be.

Finally, some confused souls have told us that if some housing investors leave the market, rents will rise. It’s a common misconception, but no, they won’t. If there are fewer housing investors, then it is axiomatic that there must be more owner-occupiers – someone has to own the joint. If there are more owner-occupiers, then there are fewer renters. The balance between supply and demand determines the price, and that will remain unchanged – except that by stimulating an increased supply of housing, Labor’s tax changes would tend to reduce rents.

Labor’s proposed policy reform is the most important that has come out of this tax debate. It would redirect some investment towards creating new assets instead of simply changing the ownership and bidding up the price of existing assets. It would make housing more affordable, for aspiring owner-occupiers and (at the margin) renters. It would save the budget (and other taxpayers) many, many billions of dollars over time.

It would also make the tax system fairer, by closing off a loophole that delivers the biggest benefits to high-income earners who need no help. And it would make the housing market fairer by gradually removing a subsidy to investors that is not available to those who want to own their own home.

The risk is that it could exacerbate a slide in housing prices that already looks likely, and in an economy that could be in fragile shape. Who knows? Economist and former Reserve Bank board member Warwick McKibbin summed the choice up well: ‘‘The question is, do you want to avoid the problem now, or do you want to wait until the thing just bursts?’’

Act now, and you make it less likely that our housing market will suffer a US-style meltdown in the future. Malcolm Turnbull should find a way to get on board, and not cheapen himself by trying to run a low-quality scare campaign. •

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Is it possible to make our tax system more conducive to lifting growth and jobs, and less conducive to wasting money in speculation? Yes, it is.

Given that the federal government now spends $1.10 for every $1 it earns in revenue, is it possible to raise more revenue without harming the economy? Yes, it is.

Is it possible to carry out a tax reform that will make our system fairer and more conducive to lifting growth and jobs, while raising more revenue to reduce the deficit? Yes, it is.

But it is not going to be easy. There is no certainty that the tax reforms actually adopted will do any of these things. There is not even any certainty that there will be tax reforms: there’s no shortage of advice to the Turnbull government to drop the whole idea, from former treasurers Keating and Costello, from its own backbenchers and advisers, even from some commentators.

And you can see why. However strong the arguments for reform, no government wins votes by changing the tax system. Tax reform loses votes, as John Howard found when he scraped back in 1998 with just 49 per cent of the two-party vote. Whatever the reality, a lot of voters believe instinctively that any changes to the tax system will make them worse off. If you want to stay in government, the best tax is one that’s already there. Politically, the ideal tax policy was memorably summed up by Britain’s first and longest-serving prime minister, Sir Robert Walpole: let sleeping dogs lie. (Or, as Geoffrey Chaucer put it more poetically: “It is nought good a sleepyng hound to wake.”)

That was Keating’s attitude to tax reform after 1985; it was always Costello’s view; and on Friday morning prime minister Malcolm Turnbull highlighted the difficulties of implementing a GST rise so persuasively that journalists thought he had dropped the idea, too.

Not so, he replied immediately: “What I was trying to do was to set out what the issues are and, you know, what the criteria are by which we would judge any changes to the GST… I can assure you there are three things. We’re not going to raise more tax overall, number one. Two, any changes are going to be rigorously fair, absolutely fair. And three, you have got to drive jobs and growth.”

Importantly, Turnbull implied that the government’s tax reform blueprint would be unveiled in or with the budget in May. That was a welcome reassurance that decisions will be made and released in line with the normal processes of government, rather than held back to be sprung on us on the eve of an election. It’s good, because it gives time for debate. It also shows Turnbull’s confidence that the government will be able to win the argument.

We know from earlier reports that at this stage the government is open to either of two options: a big tax reform including a rise in the GST to 15 per cent, or a smaller one that would offer lesser income tax cuts, paid for by plugging tax loopholes such as the overly generous tax breaks for superannuation. Turnbull’s language in recent days has certainly fostered the view that he has become wary of taking on the big reform given the difficulty in selling it to a cynical electorate, and is more likely to go for a small package.

Yet a small package will deliver only small benefits, if any. A big tax reform could help us in a lot of ways: to provide more stimulus for business to invest and employ, to give young mothers more financial incentive to return to work, to realign investment incentives so that we direct more money into creating new assets rather than driving up house prices, to reduce tax rates and pay for it by plugging tax loopholes, and (with welfare reforms) to provide support where it is most needed.

Moreover, anyone who is serious about getting the budget back to surplus has to see tax reform as a central way of doing it. Frankly, people like Paul Keating and the Financial Review and the right-wing think tanks who say no, it should be done by reducing spending are just being politically correct and useless, unless they tell us what they think should be cut. The silence on that front is deafening.

The Abbott government, too, decided to close the deficit by spending cuts, and look what happened. It made huge, morally obnoxious cuts to foreign aid projects that save lives and help people out of poverty, then used the money instead to pay for its own new spending. With the support of federal Labor, it slashed $80 billion over a decade from future grants to state-run hospitals and schools, which just shifts a big chunk of its deficit to the states. And despite all that, the Coalition will still be running deficits until some time next decade.

If you are serious about repairing the budget, then you have to make tax reform part of the solution – or come up with a list of politically acceptable spending cuts that somehow have escaped the notice of all previous governments.

We don’t get many chances at tax reform. The last big reform in Australia happened more than fifteen years ago. The previous big reform happened fifteen years before that. Now, for once, enough stars in the political cosmos have aligned to make a good tax reform possible. Those who form what Ross Garnaut calls “the responsible centre” in Australian politics – whether centre-right or centre-left – should try to make the most of this chance.

It is possible now because, in Malcolm Turnbull, we have a prime minister who is highly intelligent, is well-informed on tax issues, and has a broad political base and a track record of taking bold decisions. In Mike Baird and Jay Weatherill, we have state premiers from both sides of politics who are not playing politics as usual, but have taken risks to lead the way to reforms that would deliver better policy outcomes. And, apart from federal Labor, we don’t have any wreckers trying to sabotage the process.

That makes it politically possible. What makes it politically necessary is not just the state of the federal budget – both parties seem united in denial about the seriousness of the challenges they face on that front – but the Abbott government’s decision to strip $80 billion (and vastly more than that over time) from future funding for state-run hospitals and schools.

Treasurer Joe Hockey announced those cuts with nudge-nudge, wink-wink hints that if the states asked the federal government to raise the GST to help them meet the bill, he would oblige them. Okay, in the end only two premiers were brave enough to put up their hands and ask, but the others have hardly been manning the barricades in opposition.

Unless you are innocent of political reality and think voters won’t mind if their schools and hospitals reduce services, then it is obvious that the states will need far more tax revenue in future to fill the gap, and to meet the increasing demands of ageing baby boomers on hospital and welfare services. Lifting the GST to 15 per cent is not the only option they have, but given all the debate that has taken place, it would be politically easier than opening up a whole new area of argument.

The other alternative is to raise state taxes. Land tax and payroll tax are the main options. Economists broadly agree that land tax is underused, given that land can’t be moved overseas, whereas factory and office jobs can. There’s a strong economic argument for raising more revenue from it, rather than via taxes that reduce our ability to attract (or keep) footloose investments.

But there is also a consensus that there should be a trade-off between raising land tax and reducing stamp duties on home purchase – which are seen, perhaps naively, as a major disincentive to older people downsizing into smaller homes, and to people moving interstate to find jobs. If you’re raising land tax to reduce stamp duties, you can’t also use it to pay the hospital bills.

Some economists suggest that the states could fill the gap by removing their costly payroll tax exemptions for small business. Prominent among them is Martin Parkinson, the former Treasury secretary who now heads the Prime Minister’s Department, a good man and a bright mind who keeps voicing a dangerous misconception: that payroll tax has the same economic effects as a GST.

As his former Treasury colleague Greg Smith points out, that is quite wrong. Payroll tax favours imports over domestic production; the GST treats both equally. Payroll tax favours outsourcing and non-labour inputs over employment of workers; the GST treats all factors of production equally. Smith, now chair of the Commonwealth Grants Commission, told a recent tax conference at the Australian National University, “Payroll tax is probably a lot more distorting (to efficient production) than most of our models suggest.” He suggested it be replaced by a tax on business cashflow.

There is no good alternative, which is why the states need a higher GST; the premiers who have remained on the sidelines have shown a distinct lack of courage. But while they need more revenue, the Turnbull government has locked itself into promising that tax reform will not be used to increase revenue.

Somehow Turnbull and treasurer Scott Morrison have to square that circle. Mike Baird’s option, which he envisages as a short-term fix, would see the Commonwealth raise the GST to 15 per cent but keep the additional revenue. Most of it would be used to compensate households through income tax cuts and higher welfare benefits, some to cut company tax, and some to give the states an extra $7 billion over three years to keep the hospitals afloat and implement the Gonski school reforms.

That deal would last only three years, leaving open the question of what a higher GST would be used for in the long term. Sensibly, Baird has concluded that there is no consensus possible on that question at this point, and it would be better to sideline it until a GST increase has been shepherded through.

Weatherill’s plan is bolder, including the extension of the GST to cover financial services. (The GST now applies to less than half of all consumer spending, greatly undermining its supposed virtue of applying neutrally to all spending, across the board.) He proposes that the GST be raised to 15 per cent, and that the Commonwealth takes a third of that (all the new money, that is) and gives the states a fixed 17.5 per cent of federal income tax in return. He would like to trade a share of the GST for a share of income tax, whose revenues have been rising faster than GST revenues because those areas exempted from the GST (health, education and so on) now account for most of the growth in consumer spending.

But the prevailing view now is that neither plan will be adopted. The Australian’s Newspoll this week found that 54 per cent oppose a rise in the GST to 15 per cent, even with compensation, and only 37 per cent support it (with 9 per cent uncommitted). In his heart, Malcolm Turnbull is one of the 37 per cent; but while he is brave, he is not foolhardy.

Yes, Mike Baird won the NSW election last March despite his unpopular promise to privatise the state’s electricity assets, but despite Labor’s efforts that was not the central issue of the campaign; Baird made himself the central issue, and won handsomely. A rise in the GST is much more of a kitchen-table issue, and hence more dangerous; Turnbull would rather have a campaign in which he and Bill Shorten were the central issue.

That doesn’t rule out all tax reform. The same Newspoll found overwhelming support for reining in superannuation tax breaks for high-income earners, as Labor has proposed; but that would not raise much, unless the Turnbull government undertakes a much more thorough overhaul of superannuation tax breaks. The government would need to look beyond that to raise the funds to cut income tax and company tax by appreciable rates.

Many would argue that the most destructive tax break is negative gearing – restored by Keating in 1987 on the specious grounds that its removal was causing rents to rise. As Saul Eslake has since pointed out many times, the rent rises were confined to Sydney and Perth, “and that was because in those two cities, rental vacancy rates were unusually low (in Sydney’s case, barely above 1 per cent) before negative gearing was abolished.”

This tax break has inexorably eroded Australia’s traditional pride in being a society in which ordinary people own their own homes, and is gradually replacing it with a landlord-and-tenant culture. We now have about 1.5 million investors – three times as many as we had twenty years ago, let alone thirty – who claim to be running their rental investments at a loss, and hence deduct the losses against their tax on other income. It is a colossal misdirection of household investment, which, as economist Stephen Anthony points out, should be employed to create new assets, not simply transfer ownership of existing ones.

No government can undo what Keating did, but Turnbull and Morrison do have two good options. First, they could shut the gate; all existing negatively geared investments could be grandfathered, but no new ones allowed. Over time, the damage would gradually subside, house prices would stabilise and become more affordable, and investment would be directed where it would do more for growth and jobs.

Second, they could limit the damage. The average tax loss claimed by rental investors is about $10,000 a year; only those with incomes over $100,000, and those who claim to have no net income, claim bigger losses than that. The government could limit the losses allowed on existing investments to $10,000, or $15,000 or even $20,000. That would impose a cap that protects the interests of the small investors the Coalition sees itself as representing, but stops the tax break being used for large-scale rorting.

Doing anything on tax has its risks. That’s why governments in the past have chosen, in Mike Baird’s words, to “kick this problem down the road for future generations,” with the problems getting bigger all the time. We now have a window of opportunity to fix at least some of the problems. One hopes Malcolm Turnbull and his team will mix some boldness with their prudence. •

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Of the four obvious candidates for the second option – food, health, education and financial services – only one looks politically attractive. Taxing financial services sounds like taxing banks and taxing banks sounds a lot safer than taxing food, health or schooling. It’s not surprising that broadening the base with an eye on financial services remains the preferred option for many.

It almost seems counterintuitive that financial services aren’t already fully taxed under the GST. As a source of tax it would have a far more benign distributional impact than taxing food, for instance, which absorbs a far greater percentage of the income of the poor than the rich. In the original negotiations to get the GST through the Senate, the Howard government was forced to grant concessions on food, health and education to gain vital support from the Australian Democrats in the Senate but there was no pressure to extend the concessions to financial services. Why weren’t these fully subject to the GST?

The answer is purely technical. In 1998, when the first draft of the GST law was prepared, the designers couldn’t figure out how to extend the tax to financial services. They looked for precedents elsewhere and discovered that neither the New Zealanders, with their modern GST, nor the Europeans, with an older, more traditional version (the VAT, as they call it), tax financial services fully.

The problem, it turns out, is the unique pricing of financial services, which is a consequence of the unique nature of the services. The value of all other types of consumption covered by the GST is the amount paid for goods or services. A $15 bottle of wine has a consumption value of $15. If the bottle puts you over the blood-alcohol limit and you need to fork out another $20 for a taxi ride home, the value of the taxi service is the $20 paid for it.

In contrast, the cash that flows in financial services bears little relationship to the amount actually paid for individual financial services. They are intermediary services, linking lenders and borrowers. Plenty of people are happy to lend money they may not need immediately for consumption, and a roughly equal number of people are interested in borrowing for immediate consumption, but the potential lenders don’t know where to find the potential borrowers (and vice versa). Banks step in to link the two – they accept deposits from savers and pass the funds on to borrowers. The fee they charge for the intermediary service is based on the gap between the interest paid to depositors and the rates charged to borrowers.

Most of the movements of money on a loan involve no consumption. A loan principal provides the borrower with resources to consume but there is no consumption when the loan is advanced or repaid. The consumption happens when the borrower uses borrowed funds to buy goods or services. Pure interest payments also involve no consumption – they are a cost to move consumption forward but are not themselves payment for consumption.

The only payment for actual consumption of services is the charge imposed by the intermediary bank for linking depositors and borrowers. This fee is not imposed by way of direct charges but rather is collected by both parties through the gap between interest paid to depositors and charged to borrowers.

As it turns out, calculating the value of the fee paid for intermediary services – the gross amount kept by a bank for its financial services – is not all that difficult. The tax problem arises because the value of the services subject to tax can only be calculated on the total amount collected by a bank for its services. So far, no one’s adopted a system that could attribute an appropriate share of this charge to each depositor and borrower. But the fundamental design feature of the GST that makes the tax work is the determination of tax borne by every individual customer. Customers receive tax invoices that set out clearly how much tax they paid for the services acquired and registered businesses then claim a credit or refund of the tax so it remains a tax on final consumption only.

While neither country fully taxes financial services under its GST regime, New Zealand and Singapore have devised systems to remove any embedded “input tax” – the tax borne by banks on the acquisitions they make – from loan services to business customers. The 2010 Henry Review of taxation, commissioned by the Rudd government, mapped out a variation of these systems that could do the same in Australia. This reform is, however, of marginal interest at best for state governments hungry for revenue, as it would actually reduce overall GST collections.

The large returns envisaged by advocates of taxing financial services come from the tax that would be collected on services to depositors and services to consumer borrowers. The latter makes sense in terms of the goal of the GST – a neutral tax, applied equally to all services, that generates revenue without distorting business or consumption decisions. The former violates a key principle on which the GST is built – that it should be a tax on consumption, not on savings. Imposing the tax on savers would undoubtedly raise revenue but that revenue may come with an economic cost if the reduced returns to savers cause them to save less or shift savings to other forms, with a detrimental impact on the banking system. In the politicians’ view, though, this might be a risk worth taking given the growing need for new health and education revenues. •

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The real question is whether it should have gone further. “Coalition Gives Up On Surplus,” screamed the Financial Review, before scrapping that headline for a more positive spin. “Deficits Fuel Debt Nightmare” howled the Australian yesterday, followed by “Debt Bomb Builds After Surplus Slip” today. There’s more than a bit of journalistic licence there, but also more than a bit of truth.

And that links into the government’s other economic headache: tax reform. To try to placate the voters, and its own right flank, Morrison has pledged that tax reform won’t be used to increase revenue. That means it will not be used to fix up the budget. The government will fix the budget, if it does so at all, on just one engine: spending. The 180 measures in the budget update may be pretty minor, but the issues surrounding them are not.

A lot of Australians – indeed, a lot of Australian economists – think the budget position is overhyped. Maybe you do too. We remember Tony Abbott thundering about a “budget emergency” when Labor was in office and then, when he took power, immediately increasing spending and cutting taxes, making the deficit even worse.

Over the longer term, the Abbott government did reduce the projected deficit, but essentially by two measures. First, it halved the amount Australia would spend in future to save the lives and improve the livelihoods of some of the world’s poorest people. Second, it shifted $80 billion of hospital and school costs over a decade to the states without offering them any support in paying the bill.

It’s a fact that Australia still has one of the lowest ratios of government debt to GDP in the Western world. It’s a fact that it still has one of the lowest ratios of government spending to GDP in the Western world. The global credit ratings agencies have heard all the arguments of the debt and deficit hawks, and yet they have all decided that Australia is one of the few countries worthy of a AAA credit rating.

Moreover, if the projections in Tuesday’s budget update are correct, Australia’s deficit will gradually vanish, and we will emerge in surplus by 2020–21, and stay there. Net debt as a percentage of GDP is forecast to peak in 2017–18, and then decline as the surpluses pile up. No worries!

All that is true, and reassuring, but it’s only part of the story. Each successive downgrade of the budget forecasts means the risks ahead grow – and when you add up the risks we now face, it is time to jettison the nonchalant view. We’re not Greece, nor in danger of becoming like it, but if the government continues to spend far more than it earns, we are going to end up with an uncomfortable level of debt that will slow our growth, constrain our choices, and make the problem of financing an ageing population all the worse.

If we are serious about this, we need to get out of our comfort zones. People on the left can’t continue with the illusion that all spending is sacred, and that the only reason the government cuts spending on health or welfare and talks about raising the GST is that its ministers are evil and untrustworthy. People on the right can’t continue with the illusion that all tax breaks are sacred, and that the budget can be put back in shape simply by cutting spending. It can’t and, most importantly, it won’t.

What are the facts? This year, excluding the Future Fund, the government now expects to earn $391 billion from taxes and other revenue but to spend $428 billion. For every $1 it raises, it will spend roughly $1.10. And that is for 2015–16, seven years after the peak of the global financial crisis.

Government spending this year is 25.9 per cent of GDP, compared to an average of 24.5 per cent between 2010 and 2013 under Julia Gillard and Wayne Swan. Compared to the average of the post-GST Howard years, spending is 1.9 per cent of GDP higher while revenues are 1.5 per cent of GDP lower. One side says we have a spending problem; the other says we have a revenue problem. It’s pretty clear to me that we’ve got both.

This week’s budget update adds roughly $8 billion a year to the forecasts of budget deficits over the period to 2018–19. It adds an extra $62 billion to the forecast net debt of the federal government – that’s us, by the way – in 2025–26. The update wipes out virtually all the net debt savings the Coalition had earlier claimed from halving Australia’s foreign aid effort and shifting $80 billion of hospital and school bills to the states.

Why? Lower minerals prices are part of the reason, but only part: in reality, the fall in the Australian dollar against the US dollar since May has cushioned the budget from half the impact of falling prices. More significant is Treasury’s downgrade of its growth projections: it now expects lower economic growth ahead than it foresaw in May, about half a percentage point less per year. And after falling for seven years, global interest rates have started to rise.

Let’s just dwell on that for a moment. Treasury now estimates that by 2025–26 Australia will have a net debt of $263 billion, rather than the $201 billion projected in the May budget. But these net debt estimates are a bit iffy, because some of the people who owe money to the government (for example, HELP/HECS debtors) will never pay it back. Even if they did, Treasury now estimates that our net interest bill on bonds alone will be almost $20 billion a year by 2025–26.

What about gross debt? After all, the government’s own debt will certainly have to be repaid. Treasury now estimates that by 2025–26 it will have hit $643 billion, a cool $73 billion more than it estimated in May. And that’s assuming a decade of fine economic weather, and six years of budget surpluses. If the economy hits heavy weather, and/or budget surpluses remain as elusive as they have proved since Wayne Swan told us they were already locked in, then we face even bigger problems.

Add to that the risk of rising interest rates. Yesterday’s Mid-Year Economic and Fiscal Outlook (affectionately known as MYEFO) includes a cautioning note on “forecast uncertainties.” On pages 65–69 it points out that bond yields have risen modestly since the budget but are still at historically low levels. What would happen if global supply and demand for money come back into balance, and bond yields rise?

Even if we just step back eighteen months, and assume that bond yields rise back to the levels of May 2014, Treasury projects an extra $5 billion a year on our expected interest bills in 2025–26. Since the projected surplus for that year is less than $5 billion, that in turn would wipe out the surplus and put us back in deficit. And expecting that bond yields return to those levels is not unreasonable. In fact, it’s probable. And it’s possible that the rise in yields could be much higher, and the budget damage far worse.

And note this: even assuming an unbroken fair-weather scenario, Treasury estimates that the budget surplus would peak in 2021–22, and then decline as more baby boomers go from paying taxes to receiving pensions, healthcare, seniors card concessions and the like. That’s why the budget surplus would be negligible by 2025–26, and then disappear completely. We have a long-term budget problem, and the tax debate needs to be harnessed to tackle it.

There’s a range of other risks too. As other commentators have pointed out, the budget still includes billions of dollars of “zombie savings” from measures in the May 2014 budget that have not passed the Senate and probably never will. The $2.9 billion that MYEFO forecasts can be saved over the next four years by “integrity measures” to detect welfare cheating or errors – on top of $1.5 billion claimed from the same source in the May budget – is unlikely to be realised, and that is the main budget saving.

Morrison and finance minister Mathias Cormann are on safer ground in claiming $650 million of savings from terminating bulk-billing incentives for pathology tests and diagnostic imaging services, although Cormann is certainly optimistic in predicting no significant impact on consumers. Of course there will be, but personally, I can’t see why pathology tests should have a different payment regime from GP services. The reality is that we can’t expect governments, state or federal, to pay all our health bills on the tax revenue we give them.

That brings us back to where we started. Seven years after the global financial crisis, the government is still spending $1.10 for every $1 it taxes. That is not sustainable. It is not just a spending problem, it is also a revenue problem. Over the summer, Malcolm Turnbull and Scott Morrison need to think hard about how they could recast the tax debate to focus on fixing that problem, rather than skirting around it. •

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Perhaps it has already begun doing so. Last week’s annual conference on economic and social reform hosted by the Australian and the Melbourne Institute (the economic think tank of the University of Melbourne) heard treasurer Scott Morrison insist that the government would not be using tax reform to increase revenue, a position he has since repeated. If so, then the government has already ruled out using net gains from tax reform to reduce its own deficit. That is worrying, when $1 in every $10 it spends is being funded by borrowing; and the Coalition promised us at the 2013 election that it would close that gap.

(If you take the treasurer literally, he is pledging to make the budget deficit worse. It is inescapable that some of the compensation for low- and middle-income Australians will be delivered through higher welfare payments, not tax cuts. If those higher welfare payments are not funded by higher revenues, then the tax package would clearly increase the deficit. At this stage, I would give him the benefit of the doubt, and assume that he would in fact raise revenues to cover those higher payments.)

But Morrison also appears to be ruling out using tax reform to raise more revenue for state governments. That is worrying, too, because the Coalition plans to strip $80 billion from hospital and school funding over the next decade, and the states will need even more than that amount to meet the growing health and welfare bills of an ageing population.

You can see why it makes sense politically for Morrison to placate the right by declaring there will be no increase in taxes. There is going to be opposition to the tax package from anyone it hurts. The less revenue it raises, the fewer the complaints.

But the less revenue it raises, the less it achieves. If it raises no net revenue at all, as he suggests, and simply swaps one set of taxes for another, then, as Grattan Institute CEO John Daley pointed out at the conference, the economic gains would have to be very high to justify the political costs of trying to make any change at all. And that is far from certain.

Daley explained why it is so hard. Suppose you increase the GST rate from 10 per cent to 15 per cent, just on its existing base. In 2014–15, that would have raised $27 billion. Of that, he estimated, $22 billion would have to be returned as tax cuts and higher welfare payments. That leaves just $4 or $5 billion a year for everything else people are putting their hands out for: reducing the Commonwealth deficit, reducing company tax, increasing the states’ revenues, whatever.

If the only benefit from all the pain of creating this tax package is to reap the economic gains of having a better weighting of taxes – well, that’s a tough sell, even for someone with the gifts of Malcolm Turnbull.

Remember that while the Commonwealth imposes the GST, it hands all the revenue (apart from a collection fee) to the states. That’s the law, and it can only be changed with the support of the Senate. Indeed, the law says that the level of the tax can be changed only with the approval of the states; to change that requires the support of the Senate too.

And getting the support of this Senate will be very, very hard, even if Turnbull and Morrison come up with an inspired tax package that makes us drop to our knees in awe.

They have only two ways of getting their hands on the revenue from raising the GST. One option, proposed by the International Monetary Fund, would be to tear up the Howard government’s agreement and award the Commonwealth a large share of the higher GST. It is hard to imagine that getting through the Senate – and, as Daley pointed out, impossible to imagine it winning the support of the states.

“I can’t imagine that the states would agree to share the GST with the Commonwealth,” Daley said. “It would be a slippery slope, with the Commonwealth taking a bigger share next time it is in trouble. A rational state treasurer would insist that the states get all the GST revenue.”

The other option is for Turnbull and Morrison to negotiate an agreement with the states in which the states get the higher GST revenue, but lose some Commonwealth grants – and some of their own business taxes.

Last year the Abbott government directed $46 billion of grants to state governments to spend on specific agreed programs – ranging from school and hospital funding to things like the national partnership on whale and dolphin entanglements (I kid you not). In addition, there are a host of programs through which the Commonwealth makes direct payments to local governments and other institutions. The High Court ruling in the school chaplains’ case implies that most of these payments not only step outside the Commonwealth’s areas of responsibility, but do so by unconstitutional means.

For the Commonwealth to be able to compensate low- and middle-income earners for the GST – without making the budget deficit even worse – it will have to stop funding many of these programs. We haven’t even begun talking about this aspect of tax reform: which ones?

Former Victorian premier and treasurer John Brumby, one of the first campaigners for a higher GST, suggested at the conference that the Commonwealth should get out of school funding. Fine, said Daley, but imagine what response that would get from Catholic schools – and from the parents who send their children to them.

You could expect the same in most of these areas, Daley argued. Even if the decisions are entirely justifiable – even if the Commonwealth is getting out of areas of state responsibility that it should never have got into – populists, shock jocks, the opposition and interest groups will present them as the Turnbull government cutting funding for schools, infrastructure, whatever. Politically, it’s very risky.

The Commonwealth would try to extract some protection for itself by requiring the states to get rid of some of the taxes that are least popular with business, economists or voters. Insurance tax tops every commentator’s list: it’s a perverse tax that punishes those who show the foresight to protect themselves. Stamp duties on business activity are high on the list for business lobbies; stamp duty on conveyancing is the enemy for homebuyers.

But removing business taxes won’t win votes or placate ordinary voters who oppose a higher GST. And it’s more likely that the government will tackle stamp duty on home sales in the same way the ACT Labor government has – by gradually increasing property taxes such as land tax (and, in Canberra, rates) and phasing out stamp duty.

Brumby argued that the Commonwealth should aim to fund its income tax cuts not from the GST but by closing the obvious loopholes. “There’s a lot of things that could be done in the income tax system to pay for tax cuts: tackling negative gearing, before it becomes a runaway train, cracking down on high-income superannuation concessions.” And it’s crucial, he said, that the GST reform ends up giving the states more revenue to offset the $80 billion of Commonwealth funding cuts ahead.

Talking about tax reform can be exhilarating. But actually doing it is painful stuff. There are many decisions to be made, and every one of them will cost Turnbull some of his support – whatever he and his cabinet choose. “In the current environment, it will be hard to get a big reform over the line,” Daley summed up. “You need to show that there will be a big economic payoff, and it’s not obvious that the economic gains would be large.”

Yes, they will, the government says, quoting OECD estimates that show company tax and income tax depress growth much more than a GST does. But let’s be honest about this: any estimates of the economic impact of particular taxes, by the OECD or anyone else, rely on subjective assumptions. In the real world, so many variables interact that it is impossible to measure the impact of any one of them. The OECD estimates are guesses. They cannot be proved. Many economists have set out to estimate the impact of different taxes on growth; each has reached a different conclusion.

John Daley is not opposed to tax reform: he’s a firm supporter, but he warns that the government will need to be acutely aware of the dangers. His own wishlist is a pretty good blueprint to work off:

1. The states should replace the old land tax and stamp duty on conveyancing with a beefed-up property tax levied at 0.4 per cent of the value of virtually all property. (For a million-dollar property, that’s $4000 a year.) That would raise a net $7 billion a year, which could pay for the coming cuts in federal grants to hospitals.

2. The GST should be increased to 15 per cent, as proposed. Of the extra $27 billion in revenue, use up to $9 billion to raise welfare benefits to overcompensate the poorest 20 per cent of Australians. Then use the rest to cut the 19, 32.5 and 37 per cent marginal tax rates to 15, 28 and 34 per cent. That would provide a tax cut of $752 a year for someone earning $37,000, $2687 for someone earning $80,000, and peak at $5687 for those earning $180,000 or more.

3. Income tax loopholes should be tackled by halving the 50 per cent discount for capital gains, quarantining investment losses from wage and salary income (in effect, banning negative gearing) and tightening the tax rules for superannuation by sharply limiting taxpayers’ ability to move other money into super accounts, and reinstating a 15 per cent tax on superannuation earnings for retirees.

4. An emissions trading scheme should be introduced with a modest carbon price.

You can be sure that Turnbull will not take up that final option, at this stage. But everything else is on the table. And, despite the government’s high ratings in the opinion polls, as soon as it starts deciding what to put in its package, however well it does so, it will become vulnerable. Sadly, that will be the end of a lovely honeymoon. •

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This week he will meet with unions, business and representatives of youth organisations and the aged to make preliminary soundings about areas of agreement and potential sticking points.

There’s so much to be fixed. We raise too little revenue to pay for our spending – the Abbott government has run up an operating deficit of $38 billion – and the Intergenerational Report warns of endless deficits ahead as the population ages. Our tax system is unfair, unnecessarily complex, and riddled with inconsistencies and loopholes vulnerable to those with smart accountants.

And if the secret to success is to “work, save and invest,” as treasurer Scott Morrison tells us, then the tax system offers us the wrong incentives. It punishes mothers who return to work, encourages us to retire early, overtaxes bank deposits while rewarding debt with unlimited deductions, and encourages us to invest in driving up house prices rather than fostering startup enterprises.

Further, there are growing signs that hardcore tax avoidance – actions whose sole or main purpose is to avoid tax – is moving from the fringe to the mainstream in corporate Australia, as in the rest of the world. Only wage and salary income remains fully taxed; the system offers investors many ways to dodge tax on their earnings, and offshore tax havens are adding to the options for corporates.

The assumption that lower tax rates alone would change that behaviour is wishful. But lower tax rates financed by plugging the loopholes certainly worked in Australia and the United States in the 1980s, and it remains the main game for any serious plan for tax reform.

Turnbull is off to a good start. He has declared his commitment to making tax reform work – as he did a decade ago, when he produced options for lower tax rates paid for by closing loopholes. They were applauded by economists, but rejected with ridicule by then treasurer Peter Costello.

Costello saw tax reform through the prism of realpolitik. He once remarked, “People don’t think it’s tax reform if you’re increasing their taxes.” And since virtually all worthwhile tax reforms would make some people worse off, and they would complain, the near-death experience of the GST killed his interest in doing anything more.

Well, realpolitik still rules. No one should underestimate the difficulty of designing a tax reform package that will work both politically and economically. Massive difficulties stand in the way, particularly if the Turnbull government tries to do it the way we usually do politics in Australia: on a partisan basis.

You see it all the time. If one side proposes a tax change, the other side opposes it. That was also true in the 1980s and 1990s, when the Coalition opposed virtually every revenue-raising element of Labor’s tax reforms: the fringe benefits tax, the capital gains tax, compulsory superannuation and so on. And it was true when Labor opposed the introduction of the GST in any form.

Tax reform in those decades was possible only because the Australian Democrats, a responsible centre party, held the balance of power in the Senate, and gave it their support to push it through. But there are no Democrats now. In the current Senate, which will run until mid 2017, the Coalition needs the support of either the Greens or six of the eight crossbenchers to pass any bill Labor opposes. The government is unlikely to be in a stronger position in the Senate after the next election, and may well be even worse off.

And if a higher and/or wider GST is to be part of the package, in effect that also requires agreement with the states – half of which have Labor governments, and all of which have separate, often conflicting, agendas. Think of Tasmania and Western Australia.

Australians who have their tax lurks closed will erupt in a loud, sustained fury, drowning out the more reasonably expressed support for the package. The Murdoch empire, which has made heavy use of offshore tax havens, can be expected to campaign in its usual style against any moves to close off avenues for tax avoidance.

In the court of public opinion, tax reform is a battle that is very hard to win. The reformers are always the underdogs.

Yet with imaginative leadership – and, critically, a supportive party – that weakness could be made into a source of strength. With an honest, fair-minded, moral approach, it could become one of those causes that snowball until other politicians and interest groups dare not stand in its way: as it did in the United States in 1986, especially after President Reagan climbed off the fence to give it his support (not to be confused with his earlier, disastrous flirtation with the Laffer Curve).

What if Turnbull decided at the outset that, given the degree of difficulty, he would not attempt tax reform on a partisan basis? What if he tried to persuade Labor and the states to tackle it together, on a bipartisan basis?

Sure, that has a cost. It would mean abandoning the Liberals’ successful tradition of using lower taxes as a form of brand differentiation to wedge voters against Labor. That partisan branding would have to be set aside, at least temporarily, in the interests of the bigger goal of ensuring the nation a revenue system that will be sustainable over the long term.

Success would bring its own political rewards. All governments have a common interest in ensuring they have adequate revenue to meet their spending commitments.

With skill, and luck, Turnbull could persuade Labor and Coalition leaders, state and federal, to join him in thrashing out reforms that could right the tax system, streamline our impossibly complex federation – and, importantly, reduce the excessive polarisation of Australian politics and strengthen the centre against the extremes of partisanship.

So far, the public conversation has focused on the what of tax reform. That is natural, but for Turnbull and Morrison, it is just as important, and urgent, to focus on the how and when. Unless they are confident that they can win support for tax reform on a do-it-yourself basis, they need to work out first of all what role they want state governments and the opposition to play in designing the new system.

They will also need to decide whether to move fast on tax reform, while their popularity is still high, or allow time for the “national conversation on tax reform” to break down resistance to change. The political risks in delay would be minimised if the opposition is part of the process.

The potential gains are colossal: particularly if the deepening and widening of the GST is used to redraw the boundaries of federal and state responsibilities, to create a system in which the states have more independence and more control over the resources they need to do their job.

Greg Smith, chair of the Grants Commission, designed Australia’s dividend imputation system in the 1980s, and went on to head Treasury’s budget and revenue divisions before serving on the Henry tax review. At a conference on GST reform convened this month by the Tax and Transfer Policy Institute at the Australian National University, he said the first issue Turnbull and his team need to decide on – if the GST is to be raised or widened – is what the money is to be used for.

Smith noted that different interest groups are campaigning for the additional GST revenue to be used in five different ways:

• To compensate the states for the $80 billion and rising the Abbott government decided to cut from the federal government’s previously agreed share of health and education funding (cuts that neither Turnbull nor Bill Shorten has disowned).
• To shore up state revenues to meet the long-term health and welfare costs of our ageing population, as identified in successive Intergenerational Reports.
• To allow the states to scrap their worst taxes: stamp duties on conveyancing, insurance taxes, and possibly payroll tax.
• To finance income tax cuts by the federal government.
• To finance company tax cuts by the federal government.

“You can’t spend the same money five times,” Smith warned. He reminded reformers that even with the polls showing rising support for lifting and/or widening the GST, 58 per cent of the electorate is still against it. The question of how the money is to be used, he said, will be crucial to winning acceptance.

(Why could both Canberra and the states help themselves to the additional GST revenue? First, while the GST is a federal tax, all the money is passed on to the states; it is by far their single biggest revenue source. But, second, on top of $57 billion a year in untied GST grants, Canberra intervenes in dozens of state responsibilities, handing over $50 billion a year of tied grants for schools, hospitals, roads and much more. To have two governments running the same policy areas is increasingly seen as an indulgence. While Canberra rarely gives up any power, passing on bigger GST revenues to the states would give it a perfect excuse to withdraw tens of billions a year of tied grants and use the money to pay for income and/or company tax cuts.)

But as a number of speakers at the ANU conference pointed out, whether the tax package succeeds or fails depends on whether the public – and possibly, crossbenchers – are convinced that it is fair. The idea in business circles that you can lift the GST simply to pay for cuts in company tax or the upper rates of income tax is politically ludicrous.

Ben Phillips of the National Centre for Social and Economic Modelling pointed out that most income tax (61 per cent, in fact) is paid by the top 20 per cent of taxpayers. By contrast, the GST is “mildly regressive,” because low-income earners spend all they earn but high-income earners save much of their income.

While an across-the-board income tax cut of 10 per cent sounds neutral, Phillips said, it would leave the top 20 per cent better off and everyone else worse off. A compensation package targeted at low-income earners, as many people advocate, would soak up about a third of the revenue raised, yet would still leave middle-income earners significantly worse off.

“Compensation will be complex and expensive,” Phillips concluded. “Income tax cuts would need to be biased towards those on lower and middle incomes.” That’s not the way Coalition governments normally deliver tax cuts. Scott Morrison’s initial comments implied he wants to give priority to tax cuts for those at the top.

Paul Abbey, senior tax partner at KPMG, has been modelling possible packages and sounding out key players. He told the conference that civil society groups would oppose any package that didn’t tackle the sacred cows of Australia’s tax system, such as negative gearing and the privileged tax treatment of superannuation, capital gains and family trusts. “Unions and charities are looking for some of the sacred cows to be slaughtered,” he said.

And with good reason. The Bureau of Statistics’ latest study of income distribution found that the top 20 per cent of income earners gained almost 80 per cent of all the growth in after-tax income in the two years to 2012–13. Since the start of the Howard era, their share of Australians’ after-tax income has grown from 37 per cent to 41 per cent, while the shares of all other groups have shrunk.

None of the conference speakers opposed the idea of a tax package that raises and/or widens the GST while cutting income and/or company tax. Their argument is that it will be very difficult, and therefore will have to be done with great care. It will have to give priority to fairness. It will have to recruit the widest possible coalition of supporters. The how and the when will matter as well as the what.

Senior Treasury tax guru David Pearl, currently on secondment to KPMG’s tax-reform taskforce, said that above all the government must ensure that it wins the public’s trust. In the recent past, he said, “both sides [of politics] have proposed tax changes without making any serious effort to explain them. Both have used models in ‘gotcha!’ ways. Both have dismissed legitimate concerns, and displayed an absence of frankness… It is understandable that the community is sceptical.”

A successful tax reform package offers the opportunity to improve our economic future, and change the way we are governed. Achieving it will be a supreme test of Malcolm Turnbull’s political skills. •

The post Turnbull and tax reform: How, what, when? appeared first on Inside Story.

A draft Labor plan for an ETS has been passed to News Corp, and the Abbott government has leapt on it enthusiastically, warning of the return of the diabolical “carbon tax.”

Shadow environment minister Mark Butler insists, with a note of desperation, that it’s nothing like a carbon tax, it’s an emissions trading scheme – and these are very different things.

The opposition has already said it’s likely to take a carbon price plan to the next election. The aim of this week’s leak was presumably to force Bill Shorten to drop the idea. The ambush betrays such a simple-minded, reductionist view of political dynamics that we can reasonably conclude it involved people associated with the party’s NSW Right.

In Labor’s perfect world, the issue of climate change would just go away. Back in the here and now, if the party fronted the next poll promising not to take meaningful action, no one would believe them. As Kevin Rudd and then Julia Gillard discovered in 2010, having no policy is much worse than having one.

After years of Labor hyperbole about the importance of meeting this “moral challenge,” the Rudd government’s April 2010 decision to “postpone” its carbon pollution reduction scheme, or CPRS, not only revealed the prime minister as a flake, it also created a vacuum into which the opposition shovelled permutation after combination of horror stories about what Labor might actually do.

Yet just a few years earlier the Howard government had scrambled, not terribly convincingly, onto the climate change wagon, and then Kevin Rudd had swept into government promising action. How did we get from then to now? Back then, an ETS sounded nice but the devil was in the detail: the fine print of cost-of-living increases, although compensated for, provided scare campaign fodder. Still, even after Rudd dumped the policy, a Nielsen poll found 58 per cent support for “an emissions trading scheme for Australia.”

The CPRS was troublesome, but it is grotesque revisionism to portray it as unpopular in 2010. Rudd’s determination to cause political mischief for Malcolm Turnbull, and the need to deal with a Coalition–Family First veto in the Senate, eventually led to his undoing. It was also a case study of modern Labor political malfunction, of excessive influence enjoyed by people who know everything about polling and nothing about voters.

Fundamentally, though, the politics was driven by semantics. What is a tax and what is a scheme?

Rudd’s CPRS was an emissions trading scheme that would commence in July 2011. It would have a fixed price for one year and then a floating price. When new opposition leader Tony Abbott christened it a “great big new tax on everything” he was indulging in rhetoric, in metaphor. (The current opposition took a leaf out of his book by describing the Coalition’s now-abandoned Medicare co-payment a “GP tax.”)

A year earlier, Abbott had actually explained that he preferred a carbon tax to an ETS. In a Sky News interview (nine minutes and fifteen seconds in) he seemed to have in mind a consumption tax.

Gillard, upon assuming the leadership in June 2010, bizarrely declared that action on climate change would have to wait for “deep and lasting consensus.” But when it became evident that the government would need a policy for the election, “cash for clunkers” and the citizens’ assembly were born. The Coalition opposition warned that Labor would introduce a “carbon tax.” No, Gillard insisted, there would be no carbon tax under a government she led.

Yet, just a day before the 2010 election, the Australian’s Paul Kelly and Dennis Shanahan commenced an article with these words: “Julia Gillard says she is prepared to legislate a carbon price in the next term.” They reported that she had said, “I don’t rule out the possibility of legislating a carbon pollution reduction scheme, a market-based mechanism – I rule out a carbon tax.”

What did Gillard mean? She probably didn’t know; the aim was to kill any possibility in voters’ minds that something called a “tax” was on the way. She knew very well that the “t” word is a powerful negative motivator to the unengaged voter; it takes money from their pockets and can damage the economy.

Then in February 2011, alongside Bob Brown, she announced the carbon-pricing scheme. Whereas Rudd’s had involved a fixed price for twelve months before moving to a floating price, this one would be fixed for three years. Fatefully, diabolically, the government made a decision to immediately wave a semantic white flag. Yes yes, Gillard conceded, you can call this a carbon tax if you want; let’s not quibble over words.

She changed her mind before too long, but the damage was done. It was widely known as a carbon tax, with the Greens as co-authors, and a broken promise to boot.

Not long after Abbott’s 2009 carbon tax ruminations, high-profile businessman Dick Warburton wrote of his scepticism about human-induced climate change in the Australian Financial Review. He then turned to the Rudd government’s policy:

Until we know for certain [that anthropogenic climate change is real] we should take a measured approach, which means limiting man-made carbon dioxide emissions. There are two strongly promoted means of doing this. The first is to introduce an emissions trading scheme (ETS) such as the federal government’s proposed carbon pollution reduction scheme. The second is to introduce a carbon tax. Both aim to induce people and businesses to reduce carbon dioxide emissions. Both have pros and cons and both have strong support. I believe either could work.

He explained that a carbon tax would be preferable because it “is more transparent, more direct and, importantly, more flexible. Should the supporters be right, you can ramp up the tax, but should they be wrong, you can diminish or eliminate the tax.”

Two years later Warburton publicly opposed Gillard’s plan; when asked about the apparent contradiction he argued that “the carbon tax was just going to be a tax as such” back in 2009, “but now we are getting into permits and rights which the ETS is involved in.” In other words, Gillard’s policy was not a carbon tax, but an ETS.

From 2011 to 2013 Labor MPs – leaving aside some moments of indiscipline – always referred to the Gillard government’s policy as a “carbon price.” But across the media it was almost universally described as the “carbon tax.” Until it came into operation in July 2012 it was widely feared, but then for most people it turned out to have been a lot of fuss about not very much; they discovered no extra deductions from their paypackets and witnessed no towns wiped out.

After Rudd returned to the leadership in June 2013, he miscalculated by announcing he would “terminate the carbon tax.” What his policy change actually involved was bringing the floating price forward a year, to July 2014.

His sudden backflip and embrace of his opponents’ nomenclature meant that the party conceded that Gillard’s scheme was a “tax,” but that Kevin was going to kill it. Perhaps he was determined to differentiate himself from Gillard, but his capitulation validated the Coalition’s campaign. Again, the decision revealed such a linear view of the psychology of voter behaviour that the brothers and sisters of Sussex Street can’t have been far away.

Gillard’s 2011 surrender on the wording, and Rudd’s two years later, continue to cause problems for Labor. But the importance of the “carbon tax” to the 2013 election result is vastly over-hyped by the political class. That election was predominately about debt and deficits.

And a threatened return to the “tax” would not be as terrifying to Australians the second time around, given how little noticed its introduction (and abolition) were. But no opposition wants to take a new tax to an election.

So how will Labor’s climate policy be projected into suburban households? Will Channel Nine consumers hear Laurie Oakes describe it as a scheme or a tax? Will it be seen as the progeny of Rudd’s policy, or Gillard’s? Or, ideally, of neither of them?

Let the word games begin. Because that’s what this contest is about: words. •

The post The name game appeared first on Inside Story.

Three statistics issued in recent days reveal the scale of the problem.

• On 26 March, the Bureau of Statistics issued the latest national population figures. They revealed that Australia has grown by more than three million people in just eight years to last September. We are gaining almost 400,000 people a year. Every two and a half years or so, we add another million people.

• On 31 March, the Bureau released its regional population estimates for the year to last June. They showed that almost half of that rapid population growth is going into just two cities: Melbourne and Sydney. Add Brisbane and Perth, and almost three-quarters of it is going into just four cities.

In a single decade, Melbourne added three-quarters of a million people; it is now growing at almost 100,000 a year. Sydney added more than 600,000 people – equivalent to adding almost half an Adelaide. Perth’s population swelled by a third, Brisbane’s by a quarter.

This is extraordinarily rapid growth. It is roughly double the rate Australia averaged in the 1990s. You will not find it happening in any other Western country. How are our governments providing the extra infrastructure needed to service all these extra people?

• On 1 April, the Bureau released its estimates of engineering construction work in 2014. You might wish it was an April Fools’ Day joke, but sadly, that’s not so. It reported that work done on infrastructure plunged last year for the second year in a row, falling 12.5 per cent below its 2012 peak.

In every mainland state, infrastructure investment is now in freefall. In most of them – New South Wales, Victoria, Queensland and South Australia – the work carried out in the December quarter was down by between a quarter and a third from its recent peak.

But hang on, you say: isn’t that because the mining investment boom peaked in 2012? That’s true, it is winding down. And our governments have told us that they’re increasing infrastructure investment to fill the gap, and to help sustain economic activity as the mining boom subsides.

But what they’re doing is the exact opposite. Since 2012, the Bureau’s figures show, public sector investment in infrastructure has collapsed even faster than private sector investment. In 2014 alone, it shrank 15 per cent. Since 2012, it has shrunk 20 per cent.

At the very time when Keynesians would expect governments to increase their investment, to pick up the slack left by the winding down of the mining boom, the states in particular have given priority to getting their budgets back in surplus.

In the past two years, investment carried out for the public sector, whether by government workers or private sector partners, expanded only in relatively small pockets like the NBN, sports stadiums and ports. Other areas saw massive cuts. Instead of investing more in roads and rail to match the rapid growth in the population, governments cut investment in new roads by 15 per cent, in rail by 26 per cent, and in bridges by 30 per cent.

In some areas, the deep spending cuts might seem like a good thing: $2.7 billion was cut from investment in the electricity network (no more overpriced transmission lines) and $1.9 billion from water, sewerage and drainage (no more overpriced desalination plants).

But when all our big cities are choking on their traffic and our public transport is far below the standard of our new rich Asian counterparts, surely the money saved on electricity and water should have been invested in transport infrastructure? Instead, our governments, presumably acting on advice from their economic officials, have simply slashed investment.

That is bizarre. On the one hand, federal Treasury recently forecast that Australia’s population will have grown to forty million by 2055 – and the vast bulk of the sixteen million-plus extra people will pile into Melbourne, Sydney, Perth and Brisbane. That growth will roughly double their populations.

Yet Treasury’s state counterparts are telling their governments it is not crucial to build the infrastructure that will be required to preserve those cities’ liveability and economic efficiency. Rather, they say, the crucial thing is to maintain or regain an AAA credit rating – a rating designed for countries with low population growth and hence little need to borrow to build infrastructure.

Germany’s population, for example, is projected to fall over coming decades. It has little need to borrow to build new infrastructure. Australia is a very different country.

We already have a vast backlog of infrastructure needs after decades of underinvestment. In the twenty-five years to 1987, public infrastructure investment averaged 8 per cent of GDP. In the past twenty-five years, it has averaged 5 per cent. That is a very big decline in infrastructure investment. Privatisation of electricity and other assets explains part of it, but only part. The more infrastructure we need, the less of it we are building.

Why? Because to invest, governments need money. To get money, they need to either raise taxes, slash other spending, borrow, or fudge it by getting the private sector to borrow the money – at far greater cost, since the banks know that governments will pay them back, whereas private infrastructure builders can go broke, and often do.

The problem is that voters don’t want their governments to do any of those things. And governments lack the courage to tell voters that unless they do them, our cities will grow ever more congested, and our government services ever more inadequate to meet the demands a growing population places on them.

As I write, the ten-year bond yield for new Australian government debt is 2.33 per cent. New South Wales and Victoria can borrow at interest rates of about 2.6 per cent. The other states can borrow at around 3 per cent.

While scandalously few cost–benefit studies of transport projects are ever published in Australia – that is one of our problems – it is widely agreed that many smaller projects, such as removing level crossings, streamlining complex intersections, and updating railway signalling, would deliver benefits several times greater than the cost of building them. And that’s on the standard, outdated assumption that the government funds the project by borrowing at rates of 6 or 7 per cent.

At current interest rates, in an underperforming economy at some risk of recession, it is simply a no-brainer that our governments should be borrowing as much as they can sensibly invest to start repairing the infrastructure backlog, and fit our big cities for the growth they have had in the past decade, let alone the growth to come.

Yes, the states would lose their AAA or AA credit ratings, and have to pay more on their borrowings. But the interest rates they pay would still be extremely low, for the full duration of the loan.

When the loan ends, they would have to repay the debt or refinance it at whatever the rates are then. That should impose a discipline on them to pick only the projects where the benefits will outweigh the costs: no indulgences like Melbourne’s loss-making East-West tunnel, or Canberra’s proposed Northbourne Avenue tram line.

It can be done. As respected economists Max Corden and John Freebairn have argued in an excellent paper on the issue, “it is important to avoid purely political or populist decisions in choosing government investment.” Governments need to set up better institutions to evaluate and publish the economic merits of alternative projects, including the assumptions relied on for the evaluation. We also need a firm federal–state agreement to share their costs (and benefits), rather than using an utterly ad hoc approach, as the Abbott government has.

But the infrastructure backlog we face is too big to be tackled by borrowing alone. We need to bite the bullet and raise more revenues from the users of roads and public transport, and conduct a hard-headed review of public transport services to reduce their costs.

To give one illustration of the latter: the Alamein line in Melbourne is a charming historic relic of the railway age, but on an average weekday in 2011–12 its six stations were used by just 4746 people. Taxpayers in Melbourne pay 70 per cent of the cost of running the public transport system, while the users pay only 30 per cent. Should we adopt a goal that users should meet half the cost of running public transport services?

Congestion pricing has been adopted in cities like London, Stockholm and Singapore to help pay for new transport infrastructure and encourage people not to drive on congested roads. After initial opposition, London’s £10-per-day tax has broad bipartisan and community support, and is estimated to have reduced traffic volumes by at least 10 per cent from what they would have been in its absence.

Tolling existing freeways is seen as a political minefield. Yet the Kennett government showed how, when voters realise that the tolls will pay for improving the freeways (or building new ones), the political cost can be inconsequential. And such tolls could play a big part in financing an attack on the infrastructure backlog.

For example, Melbourne transport planners argue that the city’s biggest single need is for a second motorway over or under the Maribyrnong, to take the pressure off the overladen Westgate Bridge. But a second Maribyrnong crossing will be expensive. If it is to be financed by tolls, then tolls will need to be reintroduced on the Westgate, otherwise no one will use the new crossing.

It would probably be easiest if governments were brave enough to grit their teeth and announce that all existing freeways would become toll roads, with tolls at relatively low levels.

Last month’s tax reform paper confirmed that Australia is one of the most lightly taxed countries in the Western world. Only Korea and Switzerland have lower government spending. But since John Howard almost lost office in 1998 over the introduction of the GST, governments have lacked the courage to argue that we should tax ourselves more to build the infrastructure we need. They have also lacked the courage to argue for more borrowing to build infrastructure.

And so, people, we have a problem. We are fenced in by the community’s opposition to increased debt, tax rises and spending cuts.

If we persist in punishing governments that increase borrowing, increase taxes or cut spending, we rule out all possible ways to tackle our infrastructure problem. Our roads will become more congested, and our public transport more inadequate to the demands placed on it as our cities double in size.

We need a better balance between prudence and vision. •

The post How to bridge the infrastructure gap appeared first on Inside Story.

To make it happen, governments also need very high levels of political skill, social understanding – and ultimately, as John Howard showed in the GST debate, the humility to strike a deal.

Does the Abbott government have that capacity? For that matter, would a Shorten government have it? We shall see.

Joe Hockey has always been keen to take on tax reform, and by and large, he is off to a good start with the 203-page Treasury discussion paper he released on Monday. In a relatively short space, it covers an amazingly diverse canvas of issues, for the most part with exemplary clarity and objectivity.

Hockey has learnt from the debacle of Labor’s handling of the Henry tax review – and the contrasting success of the Key government’s approach across the Tasman. Most importantly, he has ruled nothing in and nothing out. Negative gearing, superannuation concessions, a higher and/or wider GST, dividend imputation, work-related deductions, capital gains tax breaks: they’re all there.

Hockey wants us to join in “a national conversation on tax reform.” Treasury’s paper itself nominates sixty-six questions for discussion, and touches on many more. It invites us all to lodge submissions by Monday 1 June. The government will then absorb all these views and come up with an options (or green) paper in the second half of the year. We will be invited to respond again, and then the Coalition – and presumably, Labor and the Greens – will take their policy proposals to the next election.

But beware. While most economists argue that tax reform is crucial to lifting Australia’s economic potential – Ross Garnaut put it at the top of his reform list in his recent book Dog Days – the politics of reform is so difficult that this whole process could end in nothing.

Tax reform is essentially a zero-sum game. Assuming that the government is not aiming to raise less revenue – which would put the budget in even worse shape – it will aim to take an extra dollar for every dollar it gives away. The people who have to pay those extra dollars tend to object, and loudly.

As former treasurer Peter Costello once put it, people don’t think it’s tax reform if they end up paying more tax. The losers in tax reform will complain more than the winners will cheer. That’s the government’s problem.

The only revenue-raising tax reforms that voters support are those that aim to get more money out of business, and the rich. But business these days is pretty good at defending itself (see Tax, mining), which means that tax reform has to be designed so that, at most, only the rich end up worse off.

That rules out a lot of things. For example, business lobbies have been campaigning for an increase in the GST, with the rate increased to 15 per cent (as in New Zealand) and the tax widened to cover at least most consumer spending (the Treasury paper reports that Australia’s GST base has shrunk to just 47 per cent of consumer spending, compared with 96 per cent across the Tasman).

But there are two complications. First, GST revenue goes to the states, whereas company tax goes to the feds. That could, however, be turned into a win–win reform. The federal government could pay for the company tax cuts by cutting tied grants to the states, especially in education and health. The states would instead get much more untied GST revenue, giving them more fiscal independence, and allowing them to run their own areas of responsibility as they see fit.

The other complication, however, is that almost any tax on consumer spending will be regressive. Because poor consumers spend all of their income whereas the rich save much of theirs, the GST clobbers the poorer two-thirds of society for a higher share of its income than the shares it takes from those at the top.

That is why raising the GST is politically so hard. It can be fixed, by increasing welfare payments and reducing taxes for lower-income earners, so that those in the bottom two-thirds are not made worse off. But can you recall any Coalition government weighting income tax cuts to favour the bottom two-thirds of income-earners? I can’t.

The headlines on Monday said Treasury was making the case for a higher GST, and shadow treasurer Chris Bowen claimed that this was the whole point of the paper. Bowen must have missed not only its lengthy discussion of the problems with a GST, but also that crucial final paragraph on page 131, which says that the government will consider proposals to change the rate and/or base of the GST “only… if there is broad political consensus for change, including by all state and territory governments.”

Translation: if Labor opposes it, it won’t happen. If the government of the Northern Territory, Tasmania or the Australian Capital Territory opposes it, it won’t happen. On Monday, Hockey all but ruled out changes to the GST. Sadly, that is one reform that is effectively off the table. Many other issues are likely to join it there as we approach the election.

That would be our loss. For, as the discussion paper argues, the right tax reforms could make a future Australia better off by encouraging more people to work and channelling our savings into more productive areas. They could make it fairer by closing the loopholes used disproportionately by wealthy people to avoid tax.

They could give us a tax system that is simpler and easier to comply with: in New Zealand, again, only a third of taxpayers file returns, and business compliance costs are lower than here. And, finally, they could give us a revenue system that is better able to tackle what appears to be a rising tide of transactions, large and small, being shifted offshore into low-tax countries.

In essence, the key thrust of Treasury’s discussion paper is to argue for a tax system that has lower tax rates, both for individuals and for companies, and pays for them by felling the forests of tax concessions, deductions, exemptions and rebates that allow people and companies with good tax advisers to avoid the taxes others are paying.

Its recurring theme is that the tax system should aim for “the right balance between simplicity and fairness.” It should also be efficient – with low collection and compliance costs per dollar raised – and sustainable in this age of digital global transactions, where money is so easy to shift from country to country, and often so hard to trace.

The paper reads as though Treasury has generally been given a free hand to put the arguments as it sees fit. To anyone who has been through previous tax debates, the arguments are mostly familiar. On some issues, Treasury is scrupulously neutral between the rival arguments; on others, you can read a clear preference between the lines.

For example:

• Treasury argues that Australia’s high company tax rate relative to its neighbours is costing us investment, and hence jobs and growth. The paper effectively argues for a significant cut in the 30 per cent rate – but implies that it should be paid for by removing dividend imputation, once seen as Australia’s star example of tax reform.

(Dividend imputation gives a tax break to Australians who hold shares in Australian companies. When BHP, for example, pays company tax to the government, that tax is deemed to have been paid by its shareholders, so their dividends are then tax-free. It was part of the Hawke government’s 1985 tax reforms, but it now costs billions of dollars a year and some argue that it is archaic in a global economy.)

Nicholas Gruen, director of Lateral Economics, first proposed such a trade-off a decade ago in a paper for the Business Council, and it has slowly gained support among economists and in business circles. But will it get support from the Abbott government? Or the Shorten opposition? Hmm.

• The paper is clearly targeting the massive tax breaks for superannuation, which Treasury’s last Tax Expenditures Statement estimated at $35 billion a year, and that excluded the most egregious of them, the fact that people over sixty cannot only take their superannuation tax-free, but also funnel their other income through super to receive it the same way.

Politically, the brave pioneers in this field have been the Greens, who recently commissioned the Parliamentary Budget Office to calculate how much could be saved by replacing the flat 15 per cent tax rate on employer contributions to superannuation with a progressive scale that more or less applies a tax rate 15 per cent below whatever marginal rate the beneficiary is on.

The PBO found that reform would save $10.2 billion over four years, and there seems little reason not to apply the same model to the flat 15 per cent tax rate paid on the annual earnings of your superannuation account. On Monday Bowen expressed support for reforms in this general area, and since most taxpayers would not be hurt by it, something like this probably has a reasonable chance of being implemented.

• Negative gearing is also in Treasury’s sights, although dealt with in surprisingly soft terms. Treasury points out, correctly, that all investors – not just housing investors – are allowed to write off their losses against income from other sources. But it fails to add that no other tax break has done so much social damage, by encouraging investors disproportionately into housing and thereby driving up house prices to levels that price lower-income Australians out of the market.

Frankly, its discussion of the issue is disappointingly shallow. It notes that in every year since 1999–2000, housing investors have reported more losses than profits, but it neglects to add that the tax statistics show two-thirds of housing investors are now claiming losses against tax – almost all, because they claim to be paying more in mortgage bills than they receive in income – and that in the past twenty years, their numbers have almost trebled, while those reporting profitable housing investments have risen only gradually.

The Henry review tried to deal with this subtly, by proposing to limit deductions for losses on all investments to 40 per cent of the loss claimed. Even that was too big an ask for the politicians.

Today there are probably close to 1.5 million Australians using this tax break. The force of their numbers suggests that it is futile to argue that the tax break should be abolished. Rather, the sensible strategy for reformers would be to limit the amount anyone can claim as a tax deduction: say, to $10,000 (which is roughly the average claim).

But beware: the Treasury paper does not hint at any proposal for tackling negative gearing. I would not hold your breath waiting for one.

• Treasury seems far more eager to take on Australia’s most widespread tax deduction: work-related expenses, or WREs. This is, after all, the main reason most of us bother to fill out a tax form. Treasury reports: “In 2011–12, around 8.5 million people claimed WREs totalling nearly $19.4 billion, although around 38 per cent of tax filers had claims of less than $500.”

The paper relates with approval how New Zealand long ago “cashed out” WRE deductions by scrapping them, and giving income tax cuts in return: that’s why so few Kiwis now fill out tax returns. Another option, Treasury suggests, is to allow a standard deduction set at, say, $500, and get rid of all that paperwork. You sense that, one way or another, it sees this area as one where a bold government could find the savings needed to reduce tax rates.

There are literally dozens of other issues canvassed in the paper, but you’ve got the gist of it. Whether the issue is the taxation of business income, or the GST, or payroll tax, or the states swapping stamp duties for a bigger land tax, the thinking behind the discussion paper is that we need to make the tax system simpler, fairer and easier to comply with, and the way to do that is to remove tax breaks and use the money to reduce tax rates.

It’s a good aim. Similar reforms worked well in the United States in the 1980s – the so-called Reagan tax cuts, although President Reagan was actually a late convert to the cause – and they have wide support from economists. Can Joe Hockey or Chris Bowen handle the politics well enough to win wide support for them from the voters? That’s the question now. •

The post Simpler, fairer and easier to comply with: the tax option with bravery added appeared first on Inside Story.

Abbott the prime minister would not much like Abbott the opposition leader 2009–13, for whom screaming and opposing was the default position. Fiddling with the GST, whether or not it is taken to another election first, would also represent a broken election promise. But we’ve lost count of those.

It is one of the little secrets of Australian politics that trashing campaign commitments is not, from the voters’ point of view, a hanging offence. Most expect it; they know politicians are loose with the truth. It’s only the political class that seems hung up about it. To paraphrase John Howard a decade ago: the question is not who you trust to tell the truth, but who you trust to run the country.

Today there seems a broad technocratic consensus for at least broadening the GST base. Then there are the political considerations: what’s in the Coalition’s interests and what’s in Labor’s.

The Howard government’s GST, taken to the October 1998 election, inflicted near fatal short-term pain, but the long-term political gains were considerable. At first it was seen as another of John Howard’s weaselly “non core” promises: he hadn’t said before the 1996 election that he would only introduce it after taking it to an election, he’d declared it would “never ever” be Coalition policy.

The GST was tossed into the public domain partly to provide definition and purpose to a drifting first-term government. There is a school of thought that believes it saved the Howard government, with the evidence being the modest recovery in its opinion poll stocks after the release of the package in August 1998.

But that ignores the backstory of how Howard and the Coalition found themselves in such a poor position. It was a year earlier, in August 1997, that the prime minister leapt out of bed after a spell in hospital to invite Australians to join him on a new tax “adventure.” When it became clear this would involve the dreaded GST, voters reacted with horror: the government’s poll figures, and Howard’s personal numbers, went dramatically south.

To say the Howard government successfully “sold” the GST is a distortion of history. The package remained unloved right through to election day and beyond. The government survived in office despite rather than because of it. Many Australians voted against the Coalition because of the GST, and others voted for it while wishing the GST wasn’t part of its manifesto.

Howard won that election with just 49 per cent of the two-party-preferred vote, the lowest winning vote on federal record, and parties opposed to the GST received more than 50 per cent of the primary vote between them. If it was a referendum on the GST, it received a thumbs down.

But eventually, after Australians got used to it, the GST became a political plus for Howard. It buttressed his post-2001 “conviction politician” persona, that of a strong leader who did what he believed was in the country’s interests, no matter how unpopular.

He dines on it to this day, and so does the Liberal Party. When boasts are made of his having been a “reforming” government, the GST is invariably (and often exclusively) provided as evidence.

The GST was unusual in going through the electoral process, but apart from that it presents a textbook case of how policy change comes about in Australia. Settled political history often depicts past leaders heroically convincing the country of the need for reform through relentless force of argument, but in reality there isn’t much of that. Most politicians are much better at demonising the other side.

Instead, unwanted change tends simply to be forced on the populace, often in direct contradiction of what was said before the last election. The downside of the change eventually turns out not to be as severe as had been feared. Relatively few people are personally disadvantaged. Most voters simply get used to it. And by the time the next election comes around what’s done is done and there’s usually no way back. People vote about the future much more than about the past.

Sixteen years ago it made sense, politically, for Labor to oppose the GST, and the strategy came quite close to delivering it government. But later, when the public became reconciled with the policy, it damaged the party’s image. In a similar way, when Labor’s carbon price became law in 2012 and the sky didn’t fall in, Abbott looked pretty stupid.

The renewed GST push presents a similar trap for Labor. When Kevin Rudd and Abbott faced off last August in the first campaign debate in the National Press Club, the then prime minister devoted a lot of time to warning voters of a GST hike under a Coalition government. The contrast with Rudd’s approach just weeks earlier, when the reinstalled leader was consciously rebuilding incumbency and authority, was jarring.

The party’s machine men had their claws into him, and Rudd was now behaving like an opposition leader. Abbott’s response during that debate, no doubt equally well-rehearsed, was that it was “embarrassing” to see a prime minister behave like this. It was a pretty effective line.

Rudd’s bleating and carping shrank him. Along with his policy thought-bubbles during the campaign, this desperate negativity defined his re-election strategy. (Of course, he was proven right: Abbott did have plans to “cut, cut – and cut,” and probably to raise the GST, but that provides no comfort to Labor today.)

It usually makes political sense for oppositions to oppose unpopular government measures, but a 2016 campaign against a tweak of the GST can’t hope to reap anything like the dividends of that accrued from opposing its introduction late last century. A party behaving with such obvious cynicism depletes itself in the eyes of the voter, especially if it is reduced to feebly parroting and reparroting corny lines devised in the bowels of some market research unit.

And if the chief orator is one Bill Shorten, one of the least convincing speakers to lead a major party in recent history, the benefits of opposing the tweaks will be even fewer.

If only there were a third way for Labor between outright opposition to changing the GST and total support.

Maybe there is. •

The post The GST trap appeared first on Inside Story.

ACCORDING to social services minister Kevin Andrews, the latest figures from his department show that one-in-five Australians received some form of government income support in 2012, at a cost of over $70 billion. The minister described the level of welfare as “unsustainable” and “relentless” and said that more must be done to reduce the burden on the federal budget. He highlighted two areas for attention – the disability support pension, or DSP, and Newstart, the payment for the unemployed – and announced that the review of the welfare system will now report at the end of February.

The number of people receiving those two payments certainly seems to have grown significantly over the past five years: from 714,000 in 2007 to 827,000 in 2012 in the case of the DSP, and from 486,000 to 634,000 for Newstart and unemployed recipients of the youth allowance. Even more strikingly, recent labour-force figures show another large jump in the number of people receiving unemployment payments to just over 800,000 in mid 2013.

What explains these trends? Are they likely to continue “relentlessly” and do they mean that the system has become “unsustainable”?

Where to start?

To understand the changes in welfare numbers, we need to consider a range of factors, including Australia’s growing population and evolving demographic composition, trends in the labour market, and the impact of government policy changes in other parts of the welfare system. Part of the explanation is also likely to involve the way individuals respond to changing incentives within the welfare system. We also need to take a longer-term perspective, using Department of Social Services statistical reports going back to 1991 and data collected by its predecessor departments since the 1960s.

Because the Australian population has grown quite significantly over time, the best way to track the trends is to look at the number of people receiving payments as a percentage of the working-age population – people aged between sixteen and sixty-four years.

Chart 1 shows the proportion of people in this group receiving income-support payments between 1976 and 2012. After rising steadily in the late 1970s, the figure jumped significantly in the early 1980s, declined in the second half of the 1980s, then jumped again in the early 1990s. From 1996 onwards there was a long steady decline, with a more modest rise and fall since 2008.

Chart 1: Trends in per cent of working age population receiving income support payments, Australia, 1976–2012

Note: Working age is defined as the population aged 16 to 64 years. Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years and Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

What explains these fluctuations? The number of working-age people receiving welfare payments at any one time is strongly related to the state of the labour market. Not surprisingly, it increases significantly in periods of recession. Unemployment was generally below 2 per cent of the labour force up until the 1970s, but doubled to 4.6 per cent between 1974 and 1975, and then rose to over 6 per cent in 1978. The recession of the 1980s saw a peak unemployment rate of 9.9 per cent in 1983, followed by a decline through to 1989. In the midst of another recession, it increased to 11 per cent in 1993. Unemployment declined after 1993, falling to 4 per cent, the lowest level since 1974, in February 2008.

But other factors are at work as well, including the dynamics of different categories of payments. Changes in the number of lone parents receiving benefits, for example, partly reflect shifts in family formation. People who are unemployed for lengthy periods and experience a disability may drop out of the labour market and end up on the DSP, for example, and unemployment can lead to family breakdown and growing lone parenthood.

Nor does the number of people receiving welfare payments necessarily fall as rapidly as the unemployment rate. The most commonly cited reason is that long-term unemployment leads to a deterioration in skill levels and morale, which reduces the intensity of an individual’s search for a job. This can lead to higher wage pressures at a given rate of unemployment, lifting the rate of unemployment towards which the economy tends. Between the 1970s and the 1990s, unemployment in Australia “ratcheted-up” after recessions but didn’t return to its pre-recession levels afterwards – and the people who gained jobs during those recoveries were not necessarily the people who had lost jobs during the recessions.

Policy changes are also a major cause of changes in the number of welfare recipients. In periods when benefits are more generous or easier to access, the number of recipients tends to grow, while periods of tighter eligibility or entitlement conditions have the opposite impact.

Reflecting these and other factors, the proportion of people receiving welfare payments peaked at nearly one in four of the working-age population in 1996, before falling to one in six in 2008, just before the global financial crisis. After the GFC, the proportion of working-age people receiving benefits rose to 17.4 per cent in 2010, then started to fall again, reaching 16.9 per cent in 2012 – not quite back to the 2008 level, but the second lowest level in the past two decades.

Chart 2 breaks down trends since the late 1980s, showing what has happened to the share of the working-age population receiving the DSP, the share receiving unemployment-related payments, and the percentage receiving any other form of working-age income support, including lone parents, the sick, carers and recipients of student assistance.

Chart 2: Trends in per cent of working age population receiving income-support payments, Australia, 1989–2013

Note: Working age is defined as the population aged 16 to 64 years. Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; Department of Social Services, Labour Market and Related Payments, and Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

A fairly steady rise in the number of people on the DSP is apparent, as is an initial rise in the number of unemployed, followed by a decline until the GFC, and a sharp increase in 2008–09 and 2012–13. What is most striking, however, is the trend in the number receiving other payments; this peaked at 12.3 per cent of the population in 1996 but continued to fall to 7.1 per cent by 2012.

Chart 3 shows changes in the number of people receiving specific payments between the 1996 peak and 2012. It highlights the fact that the reduction of approximately 250,000 in the total number of working-age people receiving payments is the product of an increase of around 330,000 people receiving the DSP and 180,000 receiving the carer payment and a small number of widow allowances, figures that are more than completely offset by declines in all other forms of income support.

Chart 3: Changes in numbers of people receiving income support payments, Australia, 1996–2012

PPP: Parenting allowance (partnered); PPS: Parenting payment (single)
Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years.

While the decline in the number of people receiving unemployment payments (180,000) is the largest single component of these declines, the cumulative effect of the declines in other payments is much larger (465,000). While the improvement in labour market conditions after 1996 certainly contributed to the decline in numbers on these other payments, policy changes – discussed below – appear to be the most important factor behind these falls in welfare receipt.

1996 and all that

With fewer people receiving assistance from just about all income support programs after 1996, why are DSP and carer payment numbers rising?

The state of the labour market is part of the answer, and so are two other factors that have had a major impact among people of working age: the ageing of the baby boom generation and the major social security policy reforms introduced by Australian governments over the past two-and-a-half decades.

It’s well known that the Australian welfare system – like those in other welfare states – will face pressures from the ageing of the “baby boom generation” in coming decades. But the boomers’ impact on DSP numbers started to be significant nearly twenty years ago. Receipt of the DSP is strongly age-related, mainly because the incidence of disability rises with age. In 2012, for example, about 1.7 per cent of people aged sixteen to twenty received the DSP, but this rose to 2.2 per cent among people in their twenties, 3.1 per cent in their thirties, 5.4 per cent in their forties, 9.0 per cent in their fifties and close to 15 per cent of those aged sixty to sixty-four.

This is important because the age structure of the Australian population has changed significantly over the past two decades as a result of the ageing of the baby boom generation, conventionally dated to those born between 1946 and the early 1960s. Up until 1996, demographer Natalie Jackson has shown, changes in the age structure of the Australian population acted to slow the growth of the DSP. But people born in 1946 started to turn fifty in 1996, reversing that slowdown.

Chart 4: Change in number of persons sixteen and over by age, Australia, 1996–2013

Source: Calculated from ABS, Australian Demographic Statistics, June 2013.

The effect of the ageing of the baby boom generation is illustrated in Chart 4, which shows the change in the number of persons by years of age between 1996 and 2013 (after taking account of deaths and migration). The largest population increase is among fifty- to sixty-six-year-olds, with each year group around 100,000 larger than the comparable group in 1996. Cumulatively, there were 1.7 million more people aged fifty to sixty-four years – the age at which rates of receipt of the DSP start to rise significantly – in 2013 than in 1996.

Between 1996 and 2012 the proportion of people of working age receiving the DSP rose from 4.3 per cent to 5.6 per cent. If the age structure of the population were held constant at 1996 shares, then the figure would be 5.0 per cent – in other words, nearly half of the total increase is unrelated to any changes in the labour market, the incidence of disability or individual behaviour.

More importantly, a series of policy changes from the mid 1990s also had a major impact on the number of people receiving the DSP and other payments. One of the most important of these was the increase in the age pension qualifying age for women from sixty to sixty-five in 1995. Previously, women receiving the DSP were required to shift to the age pension once they turned sixty, and women who became disabled after turning sixty weren’t able to claim the DSP unless they had lived in Australia for less than the ten years needed to qualify for an age pension. As the cut-off age started to increase, women with disabilities in this age group increasingly claimed the DSP. As Chart 5 shows, the proportion rose from close to zero to about 13 per cent by 2013.

Chart 5: Change in percentage of women aged 60–64 years receiving DSP, Australia, 1995–2013

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years and Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

But as the number of women receiving the DSP went up, the number receiving the age pension went down – and, as Chart 6 shows, it went down by much more.

In 1995, only about 650 women aged sixty to sixty-four received the DSP and 211,000 received the age pension. By 2012, 86,000 female DSP recipients were in that age group, but only 28,000 age pensioners. So the total number receiving one or other of these pensions has nearly halved, and now the majority receive the DSP. Where once 60 per cent of women of that age received a pension, now the figure is 13 per cent.

Chart 6: Percentage of women aged 60–64 years receiving DSP and Age Pension, Australia, 1995–2013

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years and ABS, Australian Demographic Statistics, June 2013.

Starting around the same time, the government began phasing out a number of other payments, including mature age allowances, the partner allowance, the wife pension, the widow B pension and the widow allowance. These payments had effectively been based on the assumption that women were “dependents” of men, or in the case of widows that they had been dependent and should not be expected to look for work. In addition to the phasing out of these payments, the income test for unemployment payments was changed to require both individuals in a couple to claim benefit in their own right, and part of their individual earnings did not affect their partner’s benefit entitlements.

These changes had a profound impact not only on the total number of people receiving welfare payments but also on which payments they received. In the mid 1990s, the “closed payments” – mainly for women – were received by around 4 per cent of the working-age population; now, only 1 per cent of the population receive their successor payments. As with the age pension/DSP trade-off for older women, the rise in the number of people on the carer payment is more than offset by the decline in the number of people on these “dependency” payments.

In future, these two major pressures on DSP numbers – the ageing of the baby boomers and the increase in women’s pension age – won’t operate to the same extent. Because the last of the baby boom generation turned fifty in 2013, the pressure on DSP numbers should start to lessen. As was shown in Chart 4, there were close to 100,000 more fifty-year-olds in 2013 than in 1996, but only 50,000 more forty-nine-year-olds. The younger part of the baby boom generation will not turn sixty-five until 2028, but the rate of increase will slow because the size of the age group is not increasing as rapidly. Moreover, the increase in the pension age for women was also fully phased in by 2013, so this pressure will also decline.

It is worth noting, however, that the previous government announced an increase in the pension age for both men and women from sixty-five to sixty-seven years, to phase in between 2017 and 2023. It is likely that some of the people affected by this change will be entitled to the DSP, leading to an increase in numbers on the DSP after 2017, but past experience suggests that the overall number of people in this age group receiving payments will be significantly reduced.

In addition, the most recent figures for numbers on the DSP show a fall from around 827,000 in 2012 to 821,000 in 2013; excluding people over sixty-five who receive the DSP this is a fall to around 5.2 per cent of the working-age population, about the level it has been since 2004.

What about the unemployed?

Two main factors have driven the growth in Newstart numbers. The number of people receiving unemployment benefits tracks broader labour-market trends fairly closely, and so the increase in the unemployment rate from around 5.0 per cent to 5.5 per cent since June 2012 could be expected to result in around 64,000 more people on benefits. Changes to the DSP under the previous government that appear to have slowed its growth may have increased numbers on Newstart, while policies designed to shift people from parenting payments to the lower level of Newstart payments at the beginning of 2013 have added to the total. The government forecast that around 10,000 people would lose all entitlement to benefits as a result of that decision, and that around 75,000 would transfer onto Newstart. (This effect is the same as the substitution between the age pension and the DSP and carer payment and other closed benefits, as described above.)

The monthly statistics on labour force payments show that between December 2012 and February 2013 the number of people on unemployment payments jumped from around 700,000 to 796,000, an increase around four times as great as the corresponding periods for the previous two years. Moreover, around 83 per cent of the increase in the number of recipients was made up of women, reinforcing the impression that this very large jump is mainly explained by parents transferring from parenting payments.

The monthly figures don’t identify whether beneficiaries have children or not, and the annual statistics won’t show the effect of this policy change on the number of people receiving the parenting payment until next year. Nevertheless, it seems very likely that much of this recent increase will be offset by reductions in numbers on other payments.

Together, the increase in the unemployment rate and the transfers from the parenting payment potentially nearly fully explain the growth in numbers on Newstart.

Where to from here?

To sum up, the data on trends in the number of welfare recipients show a prolonged fall since 1996 due to a long period of economic growth, a strong labour market, and the positive impacts of policy changes since the early 1990s. While trends have not been as positive since 2008, they are far less worrying than in North America or Europe, and they are also mild by the standards of earlier economic downturns in Australia.

This analysis also shows that past trends are not necessarily a reliable guide to the future. The two main pressures on DSP numbers – the ageing of the baby boomers and the increase in women’s pension age – won’t continue to have such a significant impact.

While concerns about relentless growth are difficult to substantiate – particularly when the total number of welfare recipients is close to its lowest level in the past twenty years – we should not be complacent and there are still strong arguments for a comprehensive review of the welfare system. But then there are always strong arguments for reviewing its effectiveness.

The evidence shows that our main concern should be to avoid any significant blow-out in unemployment. The fact that unemployment didn’t rise to levels predicted after the global financial crisis set in means that – so far – we are much better placed to meet the challenges of an ageing population than are countries in Europe or North America. Previous increases in unemployment in the recessions of the 1980s and 1990s had very long-term consequences, particularly for jobless families with children.

Nor should we be complacent because welfare numbers are at their second-lowest level in the past two decades. The minister’s argument that the “best form of welfare is work” has force, and is in accord with the previous government’s rationale for moving people from the parenting payment to Newstart.

The problems that some people on welfare face in moving into work require a comprehensive analysis, however. Not all these problems are caused by the welfare system: other barriers to work include labour-market programs that are not equally effective for all, a lack of job opportunities in the regions in which people live, poor public transport, inadequate and expensive child care, mismatched skills, and negative employer attitudes to people disadvantaged in the labour market. Incentives in the welfare system are only part of an effective response to these barriers.

While most of the aggregate growth in DSP numbers is related to population ageing and transfers of older women from the age pensions, it remains the case that age-specific rates of receipt have risen quite significantly for people under thirty years of age, and this appears to be related to a growing incidence of mental health problems among young people. This problem should also be addressed by the welfare review – but it is difficult see how changes in entitlement to the DSP – compared to more effective mental health services – would be an important part of the solution.

Finally, the wide and growing gap between the level of Newstart benefits and the level of the DSP needs to be reviewed urgently. In fact, those looking for the “unsustainable” and “relentless” elements of the welfare system would do well to start there. •

The post Is Australia’s welfare system unsustainable? appeared first on Inside Story.

THE recent Grattan Institute report, Budget Pressures on Australian Governments, argues that the federal government and the states and territories could face a combined annual deficit of around 4 per cent of GDP by 2023, of which around 2.5 per cent of GDP would be at the federal level. The scale of the federal government’s fiscal challenge was also a theme of the debate about the Federal Budget last month and will undoubtedly feature in the election campaign later this year.

In a speech at Per Capita in late April the prime minister, Julia Gillard, foreshadowed a reduction in projected tax revenues of around $12 billion by the end of this financial year, which would demand “urgent and grave Budget decisions.” In a speech to the Institute of Public Affairs in early May, the shadow treasurer, Joe Hockey stressed the urgency of “attacking spending” and “looking for structural saves” and referred to a speech he gave last year to the Institute of Economic Affairs in London in which he argued that “all developed countries are now facing the end of the era of universal entitlement.” According to Hockey, “Addressing the ongoing fiscal crises will involve the winding back of universal access to payments and entitlements from the state.”

To a significant extent, the media reacted to these developments by calling for cuts in public spending, and particularly cuts to “middle-class welfare.” The Business Spectator’s Alan Kohler has argued that Australia’s means-testing regime is unduly loose. “Too many people are getting too many benefits they don’t need because successive governments have tried to buy their votes,” he wrote. “The health and welfare systems have been used as political tools, not safety nets” and poor means testing means that “the health budget is out of control and ‘middle-class welfare’ is blowing a huge hole in the budget.” The Sydney Morning Herald referred to the family assistance system as a “hotch potch… ripe for an overhaul,” and former Labor Minister Gary Johns argued in the Australian that too many households are on the receiving end of middle-class welfare, and that for those on low incomes “there is no dignity in not paying tax… [W]here is the dignity in not making a contribution?”

The criticisms aren’t confined to Labor’s spending. The Australian Financial Review has labelled the opposition’s plan for substantially more generous paid parental leave as “costly middle-class welfare.” In the Australian, business writer Adam Creighton described the Family Tax Benefit Part B, a relic of the Howard era, as “a superfluous $4.5 billion-a-year cherry on a welfare cake that is choking economic growth and operating contrary to other government policies.” Surely, added Creighton, “it is not unfair to rein in a benefit that is paid to families in the top 10 per cent of the income distribution, with household incomes up to $175,600?”

This preoccupation with middle-class welfare is partly motivated by the view that the budget gap shouldn’t be bridged by increasing taxes. In the Financial Review, Fleur Anderson suggested that “the middle class and the professions are staging a revolt as they find their growing share of the tax burden too hard to bear, after over a million people were made exempt from the tax system over the past ten years.” In that newspaper and elsewhere, commentators have pointed to the Australian Tax Office’s tax statistics for the 2010–11 financial year, which show that the top 5 per cent of income earners pay 34.1 per cent of net income tax and the top 25 per cent of income earners pay just over two-thirds of net income tax. Correspondingly, about 45 per cent of Australians pay no income tax at all.

Interestingly, that figure of 45 per cent is very close to the one used by Mitt Romney in the 2012 US presidential election campaign when he argued that 47 per cent of Americans pay no income tax and were therefore “moochers.” The economist Nicholas Eberstadt subsequently argued that the United States is now “on the verge of a symbolic threshold – the point at which more than half of all American households receive, and accept, transfer benefits from the government” – and suggested that there was now a divide between the “takers” and the “makers.”

Should we deal with the growing budget gap by cutting spending or increasing taxes – or by some combination of the two? Before we try to answer that question we need a clear understanding of the current distribution of welfare spending (who gets what?) and how spending is financed (who pays for it?). Are higher income groups already overburdened with taxes or are they actually benefiting too much from profligate spending?

Fortunately for those interested in accurate answers to these questions, the Australian Bureau of Statistics has published studies of government benefits and taxes and their impact on household incomes since the 1980s, with the most recent results being for 2009–10. These studies provide the most comprehensive accounting of government spending and taxation in Australia, taking into account not only the impact of social security cash benefits and direct taxes but also the effects of government spending on healthcare, education and community services, and the impact of indirect taxes, such as the GST. The ATO statistics used by the Financial Review and others are certainly useful, but they only identify who pays income taxes and don’t include the GST or other indirect taxes. Nor do they tell us what benefits households receive from governments.

Chart 1 shows the distribution of benefits and taxes in 2009–10 across households divided into five equal groups, or quintiles, ranked from the poorest to the richest in terms of their private income. (In these figures, household incomes are “equivalised,” or adjusted for the number of people in the household. Tax expenditures such as superannuation and capital gains concessions are not separately identified, but are included in the measured distribution of taxes or, in the case of the health insurance rebate, in non-cash benefits.)

Chart 1: Benefits received and taxes paid (dollars per week) by quintiles of equivalised private income, Australia, 2009–10

Source: Calculated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009-10, Cat. No. 6537.0

The poorest 20 per cent of households received about $435 per week in cash benefits and received services worth about $446 per week (mainly public healthcare); they paid negligible amounts of income tax but around $105 per week in indirect taxes (excises, rates and the GST). In contrast, the richest 20 per cent of households received only $15 per week in cash benefits (or about one-thirtieth as much as the lowest income group), received $234 per week in government services (mainly education and healthcare), and paid $756 per week in income taxes and $273 per week in indirect taxes.

Not surprisingly, government spending on health and education is far more important than social security for the richest households. The richest quintile received only 1.7 per cent of social security benefits, but benefited from $83 per week in education benefits, or around 14 per cent of total government education spending, and $140 per week in health benefits, or 15.5 per cent of health spending. Overall, the non-cash benefits received by the richest were worth nearly sixteen times as much as the cash benefits they received ($234 per week compared to $15 per week).

Of the cash benefits received by the richest 20 per cent of households, only $1 per week came in the form of family payments, the most common target of the criticism of middle-class welfare and the main target for reduced spending in the 2013–14 Budget. Most of the social security benefits received by the richest 20 per cent were age and disability pensions, veterans’ pensions and unemployment benefits. This is not because the income-testing of these payments is lax; income tests in the social security system are based on the nuclear family, so this “leakage” to high-income households is mainly the result of aged or disabled people or the unemployed sharing a house with their parents or their children.

On the tax side, the richest quintile of households paid around 58 per cent of income taxes and 30 per cent of indirect taxes, although they had 45 per cent of private income. Direct and indirect taxes paid by the richest households amounted to 46.5 per cent of all taxes paid; so while indirect taxes offset some of the progressivity of income taxes, the overall tax take is still progressive, as shown in Chart 2. Most importantly, of course, these taxes pay for the benefits received by lower-income households.

Chart 2: Direct and indirect taxes as percentage of income by quintiles of equivalised disposable income, Australia, 2009–10

Source: Calculated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009-10, Cat. No. 6537.0

The overall scale of redistribution in Australia can be gauged from the fact that while private incomes among the richest 20 per cent were more than twenty-one times higher than the private incomes of the poorest 20 per cent, that disparity was reduced to about three-to-one, or by 86 per cent, after benefits and services were received and taxes paid. In terms of improving the incomes of the poor, social security and government services are roughly equally important, with the social security system increasing its share from 2 per cent of private income to nearly 7 per cent of gross income. Because the poorest income group pay a small fraction of 1 per cent of income taxes, their share of disposable income was increased to 8 per cent, with government services increasing this further to 11 per cent of final income. Although indirect taxes are regressive, in this case taking 12.7 per cent of the income of the poorest households compared to 9.5 per cent of the income of the richest, they did not materially alter these disparities.

THESE ABS figures provide a snapshot of the distribution of benefits and taxes at a point in time, but in assessing proposals for reform it is important to keep in mind the longer-term impact and objectives of taxing and spending.

Overall, the Australian welfare state performs two main functions – redistribution between rich and poor (the Robin Hood function) and insurance and consumption smoothing (the “piggy‐bank” function). In Australia we tend to focus on the idea that the welfare state should mainly be about redistribution to the poor, which is why we focus so much on concerns about middle-class welfare. But as I have argued previously, Australia actually has the lowest level of middle-class welfare in the developed world and targets its spending to the poor more than any other OECD country.

As well as redistributing between rich and poor, however, Australia redistributes considerable resources to older people (as do all other developed welfare states). For example, households with a head aged seventy-five years and over have by far the lowest average private incomes, but in 2009–10 they received 43 per cent of all age pensions and 21 per cent of all health spending, and they paid less than 1 per cent of income taxes and 5 per cent of indirect taxes. In combination, this pattern of spending and taxing boosted their incomes from about one-third of the population average to three-quarters. Similarly, households with a head aged between sixty-five and seventy-four years got 46 per cent of age pensions and 16 per cent of health spending and paid 2.5 per cent of income taxes and 9 per cent of indirect taxes; this boosted their incomes from just over half the population average to just over three-quarters.

The welfare state also provides insurance against the kinds of risks faced by working-aged Australians enumerated in the latest report of HILDA (the Household, Income and Labour Dynamics in Australia survey):

• Around 3 per cent are fired or made redundant each year, and 10 per cent over four years.

• Around 8 to 9 per cent experience a serious personal injury or illness each year and 26 per cent over four years. Between 15 and 17 per cent experience serious injury or illness to a close relative or family member each year and nearly 50 per cent over a four year period. Around 10 per cent experience the same each year for a close friend.

• Around 1 per cent experience the death of a spouse or child each year, and 3 per cent over four years. Around 11 per cent experience the death of another close relative or family member per year, and 40 per cent over four years.

• Around 3 to 4 per cent separate each year and more than 10 per cent separated from a spouse or long-term partner between 2004 and 2008. Separation or divorce is by far the most important cause of lone parenthood. Between 1 and 1.5 per cent change each year from being a couple with children to being a lone parent and 4.1 per cent over nine years.

As a result of these and other risks, many Australians experience significant changes in their economic circumstances both in any given year and cumulatively over time. Commentators who praise Australia’s performance on measures of income mobility tend to focus on upward movement – low-income young people finishing their studies and then moving into jobs and people moving up the occupational ladder. But the HILDA report shows that in each year between 2001 and 2008 between 40 and 50 per cent of Australians experienced a drop in income and roughly 10 per cent fell more than 20 percentiles in the income distribution. Over the whole period, 44 per cent of the population moved more than 20 percentiles. Around half of those in the richest income quintile in 2001 were still in that income group in 2008, but the other half were in lower-income groups; only 30 per cent of those in the middle-income group in 2001 were in the same group in 2008, with 30 per cent being worse off and around 36 per cent being better off.

THIS mobility is also important in thinking about who benefits from and who pays for the welfare state. There is a tendency to think of welfare recipients as people permanently dependent on payments – the “takers” as described above, with the corollary that other people are the “makers,” permanently “independent” of welfare. But the impact of unforeseen events and consequent changes in incomes mean that over time many people change their status as recipients of welfare payments on the one hand or as taxpayers on the other.

In 2001, for instance, fully 37 per cent of working-age people received income support at some time in the year, although in 2008 – after a period of strong economic growth – this had fallen to 29.5 per cent. But 65.7 per cent of working-age Australians lived in a household where someone received welfare at some time between 2001 and 2009. In any one year in this decade between 5 and 7 per cent of working-age Australians received 90 per cent or more of their income from welfare payments (not including family payments) and fully 15 per cent of the population was in this position at some stage in the period (although only 1.2 per cent were reliant for all nine years).

In other words, people of working age who are “welfare dependent” for long periods are only a tiny percentage of the population, while many highly and very highly paid individuals face substantial risks of large income drops, associated particularly with health changes but also with changes in employment and family status. In summary, the welfare state – defined broadly to include health and education as well as social security payments – touches the lives of many more Australians than is commonly thought. Nearly everyone may be a “maker” or a “taker” at different stages in life.

It is certainly important to review government spending regularly to assess whether it is meeting its objectives. But the idea that there are vast amounts of wasteful social security spending that can easily be cut back simply does not accord with the reality that the Australian benefit system is the most targeted to low-income groups of any developed country. A further tightening of this targeting will unavoidably mean higher withdrawal rates for benefits and higher effective marginal tax rates over the range of incomes where benefits are withdrawn. For large savings to be achieved it is necessary either to cut social security spending well down the income distribution and shift the consequences of adverse risks and contingencies onto households, or cut spending in the politically popular areas of health and education.

It is also worth noting that there is an inconsistency in some of the arguments of those who favour cutting spending but not increasing taxes. On the one hand, there are those who argue that we should not increase taxes on higher-income groups since they already pay a disproportionate share of the tax burden; on the other hand there are those (including sometimes the same people) who argue that we should cut government benefits going to higher-income groups, when cutting benefits can obviously have a similar effect on disposable income as increasing taxes.

Given the projected size of the Budget gap in coming years, it seems sensible to consider all options on both the spending side and the revenue side. Reforms that encourage labour-force participation can also help by maximising the number of taxpayers relative to the number of people requiring support. Most importantly, it will be necessary to have a well-informed debate about who wins and who loses from welfare and tax reform. •

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ABOUT $30 billion will go missing from the federal budget this year to pay for the incentives built into Australia’s compulsory superannuation scheme. Within a few years, according to Treasury, that number will exceed $40 billion.

The purpose of the scheme, which is now twenty years old, is to improve the savings of Australians for retirement. But according to research published this week by CPA Australia, the nation’s largest accounting body, the scheme has failed. People approaching retirement are typically no better off than they would be if the scheme didn’t exist.

Coming after recent inquiries into savings and investment in response to financial scandals and widespread public concern, the evidence that this gigantic scheme doesn’t do its job is remarkable but perhaps not surprising.

One of the curious features of compulsory super is its sanctity. Considering the sums involved, it’s subject to very little debate – not nearly as much as the defence budget, which is about $20 billion a year, and nothing at all like the national broadband network, which is forecast to cost the same as a single year of superannuation concessions. For many reasons, the national savings plan needs a serious review – starting with its most basic premise.

Economist Simon Kelly, who undertook the study, identified a number of issues of concern. The highlights for me were these three findings:

• People near to retirement have typically accumulated debts that will consume their superannuation.

• Each dollar directed to compulsory superannuation reduces other savings by about 30 cents.

• People whose work life typically is disrupted and people who rent their home are severely disadvantaged.

There are very good reasons why we need to be certain that compulsory superannuation is at the very least delivering a level of household savings that warrants the massive cost to the budget. The first reason is the cost of an ageing community.

Treasury’s last Intergenerational Report, published in 2010, estimated that by 2050 the costs of ageing will add roughly $60 billion a year to the federal budget in today’s terms. That’s a 50 per cent increase on today’s social security and welfare costs – or very close to double the current health budget of the Commonwealth.

What we know already is that, regardless of their savings decisions, the average person approaching retirement expects a substantial rise in living standards in retirement. The behaviour of the baby boomer generation to date certainly suggests this feeling is widespread.

It seems clear that the typical or average approach of retirees has been to consume the “windfall” of compulsory super and then fall back on a comfortable pension. This is not a long way removed from the underlying causes of the fiscal stress that has put public finances in many European nations into crisis.

Hang on, you say. Australia is a world champion at private savings. Our $1.4 trillion super account represents one of the biggest global savings pools. That’s true. Yet for most of the time we’ve had compulsion, total household savings have been in decline. And in the period when share prices peaked – from around 2005 onwards – household savings were briefly negative.

Get the picture? What we appear to have created is a Potemkin village. There’s the façade of a gleaming financial bulwark against the challenges ahead, yet the reality for the villagers is that nothing much has changed at all.

It’s fair to assume that the strongly rising value of their superannuation accounts in years up to around 2007 would have excited a lot of people. When their super balance arrived in the post, they might well have thought it was time to buy a new boat or take a holiday. And, of course, they would have started feeling queasy when, soon after, the GFC not only cut down asset prices but also changed global credit conditions very sharply.

Of course some people are saving heaps. The fact that most of the tax expenditures are either exemptions for tax on employer contributions or exemption for tax on the income earned from investment is one guide. The size of total balances is another. But we really need to look at average behaviour.

When super started, it was a compulsory 3 per cent claim on earnings. That rate is now 9 per cent and from 2013–14 it will be 12 per cent. People who have the means may add up to $50,000 a year to the compulsory amount and all of that income will be taxed at just 15 per cent. All of which is fine if you’ve enough room in disposable income to absorb that loss of spending power. But a lot of people do not.

The CPA study strongly suggests that average people, who might need incentives and assistance, don’t benefit from the scheme. It seems therefore safe to assume that the bulk of the benefit is a tax bonus for people who don’t need an incentive to save. In fact, what we seem to have is a compulsory savings regime attached to what used to be an elective superannuation market. The more you look at it, the less it looks like a savings policy for an ageing population.

You would think that the design of a savings policy would start with the people who need it most: those whose ability to save is most constrained. Given that most people’s primary savings asset is their home, savings policy might then focus on housing affordability. And given the need to promote self-directed and adequate retirement incomes, you’d think that measures to promote savings over consumption would be a priority.

If we focused on the people who need help to avoid serious financial stress in retirement, we’d look at home affordability. We might well look at the effect on house prices of the over-investment caused by the exemption for capital gains tax. We might look at better town planning and transport relationships. And if we wanted to improve their ability to save we might switch the emphasis of tax policy away from income to consumption.

People in the industry and its adjacent interests might well object to this sort of approach. But the evidence is in, and it’s plain that they haven’t covered themselves in glory. The facts suggest that we need to spend our $30 billion a year a lot more effectively.

On the other side of the ledger, the management of the $1.4 billion acquired by compulsion in super funds is not a whole lot more publicly accountable than the Vatican Bank. It is somewhat ironic to see the funds that press so hard for performance and disclosure by the major listed companies don’t themselves generally don’t comply with much of what is required of those corporations. And of course no one makes you buy a share in BHP.

It would be a good thing if, instead of being the beneficiaries of compulsion, those who want to earn a living by managing savings were forced to demonstrate superior relative performance that is suited to the risks and rewards chosen by the investor. And, while we’re about it, it would be great if someone would have a good look at what happens to the compulsory flow of funds. Because on some of the raw evidence it does appear that quite a lot of what we enforce as savings is actually being shaved away as fees and other costs.

At any rate we know that both Treasurer Swan and Shadow Treasurer Hockey have reviews in mind. The government seems to be looking at reining in the tax benefits. The opposition has flagged a broad but unspecified financial sector review.

Whatever we end up with, we shouldn’t keep handing out $30 billion a year for a nil score line. •

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ALMOST four years of living in Britain probably doesn’t quite qualify me for the title “returning expat.” In any case, I visited Australia fairly often during those years and as someone teaching Australian studies in London – I think the historian Tom Griffiths once referred to the role as “professional Australian” – I couldn’t really afford to cut myself off from the Antipodean scene even if I had wanted to.

Still, in terms of Australian politics, my departure from Antipodean shores in September 2007 seems more like forty years ago than four. The big story just before I left was the Liberal Party’s leadership crisis, rivalled only by the Chaser gang’s Osama bin Laden stunt at the Sydney APEC meeting. Kevin Rudd’s rise and rise seemed inexorable, and the opinion polls had Labor winning the forthcoming election in a landslide. If the idea of a political cycle has any meaning at all, the spring of 2007 was surely a turning point – the end of a long period of conservative dominance in federal politics, the arrival of a new political agenda, perhaps even a moment of generational change. The myth of John Howard’s invincibility was shattered.

Less than three years later, I was in the audience of a conference on Patrick White in London. Why was the Sydney Morning Herald’s David Marr, White’s distinguished biographer, repeatedly looking at his mobile phone and ducking out of the room? Was he checking the sales figures for his recently published Quarterly Essay? In the sensational Power Trip, he had presented Rudd as a man twisted with anger, a startlingly different article from what had been packaged so professionally for unwary voters’ consumption at the November 2007 election. But Marr had also ruled out any suggestion that Rudd would be thrown overboard in favour of another leader before the next election. Now he was doing his best, at a distance of 17,000 kilometres, to follow the biggest political news story for years. For back in Canberra, it was that evening: the one on which Kevin Rudd’s political world fell apart. Within a few hours, Julia Gillard would be prime minister. Within weeks, she would call an early election.

Even in August 2010, as the parties fought one of the least inspiring election campaigns almost anyone could recall, the modest hopes raised by Labor’s victory in 2007 seemed a little embarrassing. Labor had come to power in 2007 promising to deal with climate change but it had already effectively abandoned a stalled effort to introduce a Carbon Pollution Reduction Scheme. It had foreshadowed more humane treatment of asylum seekers but that issue was back on the political agenda, with Labor tacking ever more closely to the hard line associated with the Howard government. And before calling the election, Gillard had made terms with mining companies opposed to the government’s proposal for a super profits tax.

The decks were being cleared of anything likely to make the government a target of vested interests, radio shock-jocks or the Murdoch press. In the process, Labor also largely abandoned any pretence that it provided a distinct alternative to the right-wing populism of the Abbott-led coalition. Most seriously of all for a party historically more vulnerable than the Liberals to the charge that it represented a section rather than the community, the government symbolically ceded to the mining industry its claim to custodianship of the national interest. This surrender was a historic defeat for the Labor Party, probably of greater long-term significance than the actual results of the 2010 election – as bad as they were. And in the year since that election, Gillard has laboured in vain to overcome the problem of political legitimacy caused by the failure to implement the carbon scheme, the overthrow of Rudd and the formation of a minority government held together by the votes of rural independents representing conservative electorates instinctively hostile to Labor.

I HAPPENED to be in Australia at the time of the 2010 election, which came just months after a general election in Britain that saw the ejection of a long-serving Labour government. That election had also yielded an indecisive result, followed by post-election haggling. Yet in each case – Britain and Australia – the government that resulted has been more stable than anyone had a right to expect in the circumstances.

Stability has not, however, translated into popularity. In the British case, the reasons for the dire public opinion polls seem only too clear. The Conservative–Liberal Democrat government has announced swingeing spending cuts – £81 billion over four years combined with £30 billion of tax increases – that will affect virtually every aspect of national life. It has done so in the belief that Britain’s high level of government debt was a standing menace to the economy, an argument either discounted or only half-believed by a majority of voters.

By contrast, Australia’s public debt is far lower than Britain’s. So is its unemployment rate. And the Australian economy is also growing faster. The Confederation of British Industry has predicted a 2011 growth rate of a miserly 1.3 per cent, some way behind the modest official projection of 1.7 per cent. Even before the recent rioting in London drew sensational attention to the bleak prospects faced by Britain’s urban poor, many commentators believed that the economic policy of the Cameron government was failing as miserably as its plans for civic renewal. In Australia, there are concerns about recent economic contraction, declining consumer confidence and the weak performance of much of the economy in comparison with the resources sector. But things hardly seem in such a state of disrepair as to explain the Gillard government’s deep unpopularity.

Still, this was also true of the Howard government in 2007. That election should surely have put to rest the myth that people only turn governments out of office when the economy goes bad. Voters were worried about rising interest rates and rising prices, but to the extent that they cast their ballots in response to the urgings of the hip-pocket nerve at all, they seemed more worried about what might happen in the future than what was actually happening at the time.

The fact that the still relatively healthy state of the Australian economy has been accompanied by no obvious political dividend for Labor is unquestionably concentrating the mind of many a Labor Party strategist. But in trying to solve this riddle, it is worth pausing over the psychological effects of Australia’s singular experience of the global financial crisis.

These are really only thrown into relief when set beside the experiences of those other developed nations with whom we are accustomed to comparing ourselves. This was the greatest economic meltdown since the 1930s. It threw millions out of work. It created mass homelessness. It has led to massive government deficits that, even with huge cuts in public spending, will take years to bring into balance. It threatened – indeed, still threatens – the banking systems of countries that just a few years ago were being held up as models for the rest of the world. Ireland, for instance, was until recently the Celtic Tiger; but when I spent an evening with some Irish historians in Dublin a few months ago, they were talking of their little republic as if it were a failed state, not just one that had fallen on hard times.

THE EFFECTS of the crisis on Australia were extremely mild by world standards. Americans and Europeans would die for our economic “problems.” In the circumstances, perhaps we can be forgiven for taking our affluence for granted, for imagining that governments come and go, creating mere “surface disturbances, crests of foam that the tides of history carry on their strong backs” – as the French historian Fernand Braudel so eloquently put it.

The “tides of history” that now matter most to Australians mainly concern the apparently insatiable Chinese demand for our resources. Most Australians, I think, expect that this will go on irrespective of who happens to be warming the government benches in Canberra. The economists also seem to think so. And for all I know they may be right. Western Australian premier Colin Barnett, in a recent Menzies Lecture at King’s College London, with the title “More than China’s Quarry,” unwittingly spent his allotted hour making the opposite case – that his state was indeed, in global economic terms, essentially a big hole from which to dig up stuff to send to China. He made it clear that his state now looks north to China and not east to Canberra. If there had been an opportunity for questions, I had intended asking him why, as mining magnate Lang Hancock wanted, they didn’t just secede.

Today, just as in late 2007, Australia seems to be experiencing a robust material affluence, shadowed only by a sense that our luck cannot last, that it all might come crashing down. Four years ago, it was spiralling personal debt and rising interest rates that worried many. Now, our sense of insecurity comes from a dawning realisation that the rest of the world is not doing quite as well as us. What if the United States defaults on its massive debts? What if the financial problems of Greece, Portugal, Spain or Italy provoke a general panic that brings the global banking system to its knees? And above all, what if the Chinese economy falters, and with it the market for our iron ore, our coal and our natural gas? Are we, as in the 1960s, a “lucky country” whose luck might be running out?

For the time being, we worry over global financial instability but expect that Chinese growth will continue to shelter us from the storm, just as we once counted on things like tariffs, quotas and fixed exchange rates. But like reliance on those now unloved economic instruments, a heavy dependence on resource exports has its costs. Economists already worry over the effects of the so-called two-speed economy, in which the mining sector outstrips all else, sucking in investment and skilled labour and pushing up the value of the Australian dollar to the disadvantage of other exporters. Conservationists worry over the industry’s damage to the Australian environment and the contribution of our exports to global warming. Farmers are increasingly anxious about the coal seam industry’s damage to land and water resources. International relations experts warn that we are in distinctly unfamiliar territory in having as our major trading partner a revisionist power with which we have no strategic alliance. Human rights advocates remind us that China is a political tyranny in which cheap labour is sustained by suppressing workers’ rights. Sociologists are concerned by the failure of mining companies, with their “fly in, fly out” approach to labour supply, to support regional development or foster community life among families dependent on the industry. And we should all be worried about a mining sector so rich and powerful that it can dictate to governments and pose as the ultimate guardian of the national interest.

How a Labor government seemingly old before its time, and a still relatively new prime minister, respond to these challenges will determine the course of Australian politics over the next couple of years. As a first step, the Labor Party itself will have to resist its own habit of navel-gazing. Its internal problems – which are also part of a larger global crisis for parties of the centre-left – need urgent attention, but not at the expense of considering the really big questions facing Australian social democracy, such as how to respond to continuing financial instability, what the mining boom means for the vast majority of us not directly involved in it, and what kind of relationship a middle-power, Western liberal democracy will have with a dynamic Eastern global superpower with a very different view of itself.

But for the time being, the “carbon tax” needs to be “sold” to a hostile electorate. Tony Abbott and the opposition parties hope this will be Labor’s Work Choices. Labor wants an outcome more along the lines of the Howard government and the GST: political pain followed by triumph. Either way, it will need to learn to tell a more appealing and persuasive story about where it is taking the country than it has so far managed under either of its last two leaders. •

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