The Politics    Monday, August 24, 2015

Tax cuts – too good to be true?

By Sean Kelly

We should believe in Hockey’s tax cuts when we see them

Today offered a brief lull in the heady fistfight that usually counts as federal politics these days. Two weeks of parliament have come to an end. The next we will hear of the Dyson Heydon saga is the decision of the man himself tomorrow. Today, then, offered an opportunity for the government.

Joe Hockey, showing unusual political acumen, gladly stepped into the breach, offering newspapers an advance copy of a speech he was due to give today. The speech didn’t promise anything very specific, but it did offer a case for income tax cuts, focused on repelling the encroaching threat of bracket creep (when people’s incomes rise naturally, pushing them into higher tax brackets). On a quiet news day, and perhaps even on a busy news day, a federal treasurer offering even a faint hope of lower taxes is a strong news story.

Hockey’s argument about bracket creep is a fair point, but not a new one. Following a report on bracket creep released by the National Centre for Social and Economic Modelling (NATSEM) last year, the treasurer said: “The principle of bracket creep is that it hurts people on the lowest incomes. We are the party of lower taxes. But we need to get the budget under control and the Labor Party is holding up $28 billion in savings. That is why it is times to have a Tax White Paper to inform the government.”

The government’s discussion paper on tax, ahead of the White Paper, came out in March this year. It focused heavily on the issue of bracket creep. But it didn’t propose income tax cuts, as Hockey did today. Instead, it suggested indexing income tax thresholds (which would effectively deliver tax cuts). In an interview with the Australian Financial Review at the time, Hockey poured cold water on this idea.

Which is all fine, of course – governments can come up with whatever solutions they like. But it does force the question to be asked: what exactly was the point of the “national conversation” on tax to begin with?

You wouldn’t ask that on the basis of indexation alone, which is an idea that can be argued from both sides. But, of course, also put on the table were changes to negative gearing (now ruled out), superannuation (ruled out), capital gains tax concessions (ruled out), the GST (ruled out pending Bill Shorten having a road-to-Damascus moment).

You might dismiss that as a petty policy purist’s approach to politics. Politics, after all, is the art of the possible, and politicians can only afford to have so many conversations running at one time. Fair enough.

But where all this gets significant is that it’s impossible to see how Hockey will afford tax cuts without at least some of the changes he has been so busy ruling out, all of which could have brought in significant revenue. (To be fair, as often as not it’s been the PM doing the ruling out, sometimes over Hockey’s clear objections, but the result is the same.)

The budget, over the next few years, is projected to become more, not less, dependent on income tax. That means any chance the government has of delivering a surplus, or of getting any closer to a surplus than it is now, depends on maintaining the revenue it is currently projected to get from income tax – which means maintaining bracket creep in its current form.

If the government is determined to offer tax cuts, thereby forgoing the revenue it would have collected from bracket creep, then that means either that the money has to be made up from somewhere, or that the budget is destined to slide further and further away from surplus.

Hockey was asked today what his priority was, tax cuts or delivering a surplus. He said: “Well, it’s both … they’re not mutually exclusive.” That leaves the third option: that the cash is going to come from cutting spending. And to be fair to Hockey, that is precisely what he said today, that budget repair would be “managed through continued discipline on spending decisions”.

But it’s hard to see precisely where that spending is likely to be cut. The government notoriously tried to cut spending in its first budget, which meant cutting deep into family payments and recouping some money through trimming back the social safety net. Given the dramatic failure of that budget – primarily a political failure, but also a substantive one given its inability to pass the senate – it seems unlikely the Coalition would attempt a similar strategy again.

There are two options the Coalition might be considering.

The first is simple enough, but still audacious: the gamble that while the electorate was not willing to suffer the pain of benefits cuts for the goal of budget purity, voters might be persuadable if that pain was ameliorated with tax cuts instead of the amorphous warm feeling one gets from having contributed to national fiscal responsibility.

The second is that tax cuts won’t be taken to the next election – at least, not exactly. Instead, voters would be tantalised with the faint shadow of tax cuts, depending on various other things falling into place. Note Hockey’s language in the speech: “Our forthcoming options paper on tax reform will include options for cutting personal income tax.”

In other words, it is possible the government will take only “options” for tax cuts to the next election, arguing that budget responsibility is “in the Liberal Party’s DNA”, and that a re-elected government, with a more compliant senate, would be able to do what it wanted and give the people the tax cuts they deserve. This too has risks: the hidden caveat is that the government must be allowed to deliver some of the harsh spending cuts it has previously been refused. But in an “options” form those spending cuts are more intangible, and thus harder to argue against. That, too, is a political gamble. But then with low-hanging spending cuts gone, and revenue-raising largely ruled out, gambles like these might be all the treasurer has left.

 

Today’s links

  • A huge fall in Australian shares today.
  • Former Labor minister and former union boss Martin Ferguson says unions have far too much control in the Labor Party.
  • ICYMI on the weekend: Peter Hartcher on what the next leadership challenge will look like. Laurie Oakes looks for the faint glitter of a bright side for Tony Abbott.
  • What the public figured out from one journalist’s metadata.
  • The President of Kiribati, a small Pacific island nation threatened by rising sea levels, takes aim at nations (like Australia) that continue to promote coal for economic reasons. Greg Jericho gets into the nitty gritty of carbon costing.
  • Joshua Cohen on Nobel laureate Mario Vargas Llosa’s “Notes on the Death of Culture”.
  • Examples of fraud and corruption in foreign aid (and what Julie Bishop did about them).
  • The nearly insurmountable challenge of surveillance when it comes to European terrorism.
  • Japan faces the opposite problem from Australia: more and more houses are being abandoned, and being left empty.
  • Because we all need something to feel good about: Usain Bolt saves his sport from drugs. (Sometimes you’ve just got to go with the hyperbole.)

Sean Kelly

Sean Kelly is a columnist for The Sydney Morning Herald and The Age, and was an adviser to Labor prime ministers Julia Gillard and Kevin Rudd.

@mrseankelly

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