Wednesday, March 30, 2016

Today by Sean Kelly


Fool me twice, Prime Minister?
We’ve seen this trick before

Malcolm Turnbull today tried the same trick he played last week. Last week it involved political tactics, and it worked a treat. Today it involved actual policy, and I don’t think it quite came off. It certainly doesn’t deserve to.

That trick is to produce a top hat, quickly, and then, before anyone’s realised it’s a hat you’re holding, produce a rabbit. I didn’t even know he had a hat, you think, let alone a rabbit! The surprise is supposed to overwhelm any other reaction. “Bold,” we coo. “Audacious,” we coo. I said both those words last week, when Turnbull announced his double dissolution plans.

But when it comes to policy, surprise is rarely enough. The plan has to actually make sense. It has to solve the problems you say exist. And what happened to all the calls for governments to lay out problems for months before putting forward a solution, anyway?

The plan the PM announced today is to cut the amount of income tax the federal government collects, and allow the states to collect that amount instead. For instance, the tax rate of 32.5% could be cut by 10 percentage points, but then the states would add a 10% income tax “surcharge”, bringing the total rate back to 32.5%. The states would get extra $25 billion, the commonwealth would lose $25 billion, but the commonwealth would then keep back $25 billion of the money it currently gives to the states, so everyone comes out even.

In other words, everything stays the same, but with two differences. The first change is that the states, which are currently told what to do with their money by the federal government, would have freedom to do what they wanted with that $25 billion (but not the rest of their funding). The second change: after 2020, the states could change the amount of tax they charge, hiking it or dropping it.

Turnbull is desperate for everybody to see this as a big deal, describing it today as “the most fundamental reform to the federation in generations”. And in some ways it is. But unfortunately those ways are mostly political.

(Kevin Rudd, by the way, no enemy of hyperbole, described his hospital changes as “the most significant reform of Australia’s health and hospital system since the introduction of Medicare almost three decades ago”. Sounds familiar, doesn’t it?)

Let’s go through it. I’ll try to make this as quick and painless as I can.

It’s true that income tax is a good way of raising money, and much better than the pretty awful taxes the states currently rely on, like payroll tax. But if Turnbull was simply interested in ensuring there was more money for health and education via income tax, he could take on the political challenge of increasing taxes himself. He very deliberately has decided not to do that, instead handballing the task to the states.

That’s where we see the real politics. Turnbull says he wants to end the “depressing blame game”. The plan announced today will actually make the blame game worse. It’s true that the states will now have more control over how to spend some of their money, and more ability to raise money. But it’s very doubtful they’ll be able to raise all of the money they need. That’s certainly not the case under the 10% plan, above.

And that’s a major problem. The states will remain dependent on the federal government. The difference is that now, every time the states ask for money, the feds can say “Just raise income taxes! It’s your problem now!” Same thing if the feds decide to cut health or education funding. Unless the states have the full ability to raise all of the money they need, which will never happen, the blame game will continue. Today just makes things muddier. It will be easier for the commonwealth to cut funding, and harder for the states to ask for it back.

For a prime minister who intends to be around a long time that is a huge political advantage.

The second problem is that the small states are potentially big losers. They have fewer people, earning less, which means less ability to raise income tax. They also have poorer health and education outcomes (health and income are strongly correlated). In other words, they need more cash per person, and have fewer ways to raise it. Which is exactly why we have the system we have now, where the federal government raises the money then distributes it based partly on need. Turnbull’s plan will, perversely, allow the bigger states to raise even more money, via higher income taxes, because the bigger states are where the jobs are and most people won’t leave, even in the face of rising taxes. Turnbull said today he’d find a way to help the smaller states, but we don’t know what that is yet.

The other potential political gain for Turnbull and his party is that this move turns state elections into tax battlegrounds, whereas they are normally focused on spending and services. The Liberals have an advantage when it comes to arguing they will keep taxes down (however unfairly).

Turnbull today said his plan was the “only way” to reform the federation and fix the central problem of vertical fiscal imbalance. But here is the Commission of Audit, which first put forward this plan:

“Other options for reducing the current level of vertical fiscal imbalance also exist, including the prospects for the States to extract more revenue from their existing tax bases, changing arrangements for the GST, or through the Commonwealth simply providing a greater proportion of existing financial assistance in the form of untied grants.” [emphasis mine]

The Commission rejected those options, but only because they didn’t promote “competitive federalism”, where the states compete with each other, for example on the minimum wage – a principle it’s not at all clear Turnbull is interested in.

If a politician puts forward a policy, and tells you what it’s meant to fix, but then, on closer examination, you realise it won’t fix much at all, you have to ask yourself why it’s happening. You know the answer: politics.

 

Today’s links

Sean Kelly

Sean Kelly is a columnist for Fairfax and a former adviser to Labor prime ministers Kevin Rudd and Julia Gillard.

@mrseankelly

 

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