April 2016

Comment

The revolting backbench

By Richard Denniss
Malcolm Turnbull’s greatest obstacle to tax reform is close to home

A look of frustration has replaced the Cheshire grin on Malcolm Turnbull’s face. As his priorities and principles are gradually squeezed out of him, the once decisive prime minister is beginning to look defeated.

The roles that big business, media barons and factional powerbrokers play in Australian politics have all been widely discussed, and rightly so. But in recent years the most excruciating source of pressure on prime ministers has been a lot closer to home. The group that has cruelled Turnbull’s tax reform agenda is the same group that rolled Julia Gillard on her promise to better regulate poker machines and punted Tony Abbott after less than two years in office: the backbench.

Malcolm Turnbull said that he wanted to restore “cabinet government”, provide a clear narrative for his party’s economic agenda, and place fairness at the heart of that agenda. He probably even meant it. But, like his recent prime ministerial predecessors, he made the mistake of assuming that his backbench would support his vision.

Just as the Liberal backbench torpedoed Abbott’s plans for a $7 Medicare co-payment in 2014, it recently scuttled discussions about raising the GST. It also blocked Turnbull’s plans to rein in the “excesses” of negative gearing. The backbench, not the prime minister or treasurer, has the final say on what is, or isn’t, in the budget.

And the backbench has an unlikely new champion. Abbott, having recently suffered its wrath himself, is now acting as “backbencher in chief”. In terms of causing harm from the cheap seats, he certainly seems to be getting his eye in.

This is an article about the upcoming budget, but I encourage you to read on anyway. Not just because budgets really matter, but also because the politics of how a budget is put together has never been more ruthless, or visible. No longer do we need to rely on fake leaks or unsourced rumours – these days the Coalition party room both lays down the law and leaks like a sieve. Never before have the choices faced by a government been easier to observe.

In the lead-up to the May budget, the prime minister will need to either break the rules of politics or the laws of mathematics. It’s not clear which will be easier.

Let’s start with the maths. The budget deficit is simply the result of government revenue minus government spending. In 2013 the budget deficit was $19 billion, and this year it is estimated to be $37 billion. Abbott promised that within a decade there would be a surplus of 1% of GDP, which, in today’s dollars, would be around $20 billion. A turnaround of that magnitude would require a big increase in revenue or big cuts in spending. The maths is simple, and so is the conclusion: Abbott was never going to be able to keep his promise to “stop the debt”.

And now to the politics. At the 2013 election, 17 new Coalition MPs were swept into parliament on the back of selling Tony Abbott’s magic pudding of a budget strategy – lower taxes, no big spending cuts and a rapid return to budget surplus. The cherry on top was that, unlike Julia Gillard, the Coalition would keep all of its promises and deliver no surprises. Those new MPs, and the old ones in marginal seats, do not want to go to this year’s election defending broken promises, higher taxes or savage spending cuts. While backbenchers individually lack power, collectively they can dictate Turnbull’s message.

Maybe the prime minister can stare them down. Maybe. But solving his problems won’t solve his government’s problems. It would be electoral poison for those marginal seat– holders to admit the deficit can’t be fixed, that taxes must rise and/or that savage spending cuts are needed.

To say that Turnbull is between a rock and a hard place doesn’t even come close. He is boxed in, by a slow economy, a rising deficit, an agitated backbench and a looming election.

So how did he get into this mess?

Billions of dollars sounds like a lot of money. Even hundreds of millions of dollars sounds like a lot. So when Tony Abbott began to accurately describe the ALP as having to borrow $100 million per day, voters got nervous. But – and only an economist can get away with saying this – $100 million per day is not a lot of money. In fact, it’s around $4 per person per day. Our levels of government borrowing are low by historic and international standards. Foreign banks love lending us money because we are a safe bet.

But facts don’t win elections. And Abbott’s $100 million a day line cut through, as did his “budget emergency”. Just like the ridiculous claim that a small carbon tax would be a “wrecking ball” through the economy, the absurdity of the “budget emergency” did not diminish its political impact.

In 2013 Abbott succeeded in convincing the public that a budget deficit was proof of the ALP’s poor economic management. In typical style he stripped back the complex issue of fiscal policy until it was nothing more than a slogan. Turnbull’s problems today flow directly from Abbott’s successes in 2013: Abbott used debt to scare people, and then failed to do anything about it as prime minister.

Upon taking office, Abbott set about punching holes in his own revenue bucket. He proudly scrapped the carbon tax (while keeping the generous income tax cuts and corporate compensation in place) and the mining tax. His much-vaunted free-trade agreement with South Korea led to the scrapping of tariffs on imported cars, at a cost of some $500 million to the Commonwealth budget – a seemingly strange choice for a man who had so recently raged against the impact of a carbon price on local manufacturing jobs.

As Treasurer Scott Morrison so succinctly put it at the Press Club in February, the two Abbott budgets cut $80 billion from ALP programs they didn’t like … and announced $70 billion in new spending programs they did like. Like his tax cuts, Abbott’s spending cuts weren’t aimed at solving a budget emergency; they were aimed at settling old scores and repaying old friends. It was fun while it lasted, but it’s not fun for Turnbull.

It is mathematically impossible for the current prime minister to significantly reduce the budget deficit without big cuts in spending or big increases in revenue. The backbench has made it politically impossible to do anything substantial in terms of revenue, and a promise of savage spending cuts in the lead-up to an election seems unlikely. So, where to from here?

Turnbull could start telling the public that budget deficits aren’t as scary as Abbott suggested. Easy and true. The hard part, again, will be his backbench. Persuading them, and the conservative commentariat, to change their stories – those about Labor’s incompetence and Coalition government surpluses – won’t be easy, especially after Abbott’s threat to “defend the legacy” of his government.

Next, Turnbull could clamp down on a wide range of tax concessions and loopholes that few people understand and even fewer people benefit from. Scrapping “accelerated depreciation” for the resources sector, getting rid of fuel tax credits and tightening up “thin capitalisation” rules are boring and complicated enough to be electorally painless – but lucrative enough to pick up billions of dollars. Those who currently benefit from these invisible lurks will scream blue murder, but what are they going to do? Encourage people to vote Labor? 

Negative gearing, tax concessions for superannuation, and the 50% discount on tax payable on income from capital gains cost the budget tens of billions of dollars per year and deliver the vast bulk of their benefits to the wealthiest 20% of the population. A few months ago Turnbull, Morrison and even Joe Hockey agreed they needed reform. But that was before Abbott and his backbench buddies trampled into Turnbull’s honeymoon, and before the polls tightened to a neck-and-neck race. Turnbull’s most likely options now are tinkering and off-budget accounting tricks, and dressing them up as serious reform.

It didn’t have to be this way. Turnbull, riding high in the polls, could have reached out to Bill Shorten and offered to work with the Opposition leader on tax reform. Imagine if they had used the recommendations of the Henry tax review to clamp down on the rorts and the loopholes, making our tax system simpler and fairer.

They could have agreed on ways to efficiently and equitably collect an extra ten billion or so in revenue per year, brawling instead about the best thing to do with all that money.

We would have Turnbull in the blue corner, promising to use the extra revenue to cut the corporate tax rate and the top income tax rate in order to provide incentives to “work, save and invest”, and Shorten in the red corner, promising to use the extra revenue to fund affordable child care to improve labour force participation, and to boost education funding to equip the workforce of tomorrow.

Imagine that. Living in a functioning democracy where political parties put forward competing visions for the future. The ALP’s willingness to put new revenue measures on the table in the past 12 months was an opportunity for the Coalition: to agree, take the extra revenue, and move on. But modern politics relies more on product differentiation than it does on strategic alliances. In reality, even if Turnbull wanted to match Shorten on new revenue measures, his grumpy backbench wouldn’t let him.

It doesn’t match the simple story that got them elected, and they don’t want to tell a new one.

Australia is one of the richest countries in the world, at the richest point in world history. As a nation we can’t afford to do everything we want, but we can afford to do anything we want.

For all the implied complexity, budgets are simple things. They list all the things we spend money on, all the revenue sources, and the net result. Much work goes into forecasting the next four years, but the best guesses are still out by billions.

At its heart, a budget is about values. The budget papers tell us that we spend more on defence than we do on caring for the disabled, and that the cost of superannuation tax concessions is rising faster than the cost of the age pension. But they also tell us that the cost of the age pension is what the government is worried about.

If Australia wanted to collect as much tax as northern European countries do, we could have the level of health, education and transport that they do. Or if we wanted to collect as little tax as in South-East Asian countries, we would inevitably need to lower our expectations for those same services.

While they hate to admit it, whenever a politician says they have “no choice” but to cut spending on health or education, what they are really saying is that they would prefer to do that than to collect more revenue or to cut spending on defence. Budgets are about more than economics. They are about choices and priorities, and they matter.

Richard Denniss
Richard Denniss is the chief economist at the Australia Institute.

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April 2016

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