The Prime Minister seems to have been encouraging speculation that the Government has decided not to consider any reform of taxation that involves an increase in the GST. If true, hardly a courageous decision, given the support he has received from some State Premiers. But this posting is concerned about the consequences.
First, in the absence of any extra GST revenue, it now is almost certain that the Australian Government will not give the States any more money. Instead the States will have to wear the $80 billion cut to health and education funding that the Commonwealth has already imposed on their budgets.
Of course, the Commonwealth will say that the States should find the savings or tax more themselves to ensure that vital health and education services are maintained. But on any stretch of the imagination, it cannot be expected that the States will raise the missing $80 billion by increasing land tax or payroll tax, and any other State taxes are inherently inefficient as well as not raising much revenue.
As for expenditure savings, the reality is that as readers of this blog know, there are opportunities for savings in the health budget. However, these savings will take time, and more importantly many of the savings opportunities in health are in areas of Commonwealth responsibility. For instance, long run savings could be made by more effective public health systems aimed at prevention and by keeping people out of hospital, but the relevant programs are mainly the responsibility of the Commonwealth and not the States. Indeed, the funding of hospitals, which is the principal State government health care responsibility, is now based on the efficient cost of individual services, and the principal savings have already been obtained.
Similarly, although there are opportunities for savings in education, there is equally a need for more investment in tertiary education, and for improving the funding in disadvantaged schools. This extra expenditure has a very high benefit-cost ratio, and so it is the antithesis of “reform” if any education savings are not reinvested in better education programs.
The second major consequence of not increasing the GST is that the Australian Government then has only limited capacity for what it deems to be “tax reform” as measured by lower personal and corporate income taxes. Instead, the only significant way of increasing the revenue to finance lower income taxes would be to broaden the income tax base, by removing or reducing some of the tax concessions. A number of such possibilities have been floated, including:
- A fairer and less generous form of taxing superannuation contributions and earnings,
- Reducing the possibilities for claiming deductions of interest costs through negative gearing, and
- Reducing the taxation concession for capital gains.
The problem with all these types of proposals is that they don’t raise much money; in fact a lot less than their proponents imagine. For example, the superannuation tax concessions have received a lot of publicity lately, and based on the Treasury Tax Expenditures Statement, some commentators have sown the idea that as much as $30 billion might be raised by abolishing these concessions. However, it all depends upon what is the standard against which these concessions are being measured. So on closer examination savings of around only $6 billion is a much more realistic figure.
Similarly, reducing the capital gains discount and the opportunities to claim interest payments by negative gearing might eventually raise an extra $10 billion in each year. However, there would be grandfathering provisions as part of any such adjustment, so that this amount of extra revenue would not be realised for the best part of another ten years. In the short-term, these proposals could even cost the Budget, if people adjusted their investments in between the announcement of the changes and the date that they would take effect.
In addition, a proposal to abolish claims for work expenses in return for lower taxes has also been floated. This could reduce the amount of irritating form filling, but the amount of revenue gained would hardly finance much of a tax cut. In addition, would people feel better off if it didn’t, and what they gained in one hand was taken away from the other.
In sum, the amount of extra revenue available in the next few years from reducing concessions is likely to be not much more than $10 billion, slowly increasing further over time.
So what should be done with this extra revenue, on the bold assumption that it is actually realised? Arguably the first call should be repair of the Budget deficit, for which according to the latest official estimate, the underlying cash deficit will be as much as $35.4 billion in the current financial year and still $33.7 billion next year. Clearly this is quite a lot more – indeed three times more – than any extra revenue, now on the horizon from likely/possible “tax reform”.
Furthermore, the present projections of the Budget deficit rely quite heavily on fiscal drag as people move into higher tax brackets as their incomes increase, if only in line with inflation. Thus the Budget for this year was based on a projection that over five years, revenue would rise by 2.4 percentage points relative to GDP, while expenditure would only fall by 0.2 percentage points relative to GDP. Clearly revenue is expected to do almost all the work of closing the Budget deficit, and 1.7 percentage points of the 2.4 percentage points increase in revenue (or 70%) is due to fiscal drag.
The Treasurer, Scott Morrison, has implied that his highest priority is to neutralise this fiscal drag by redrawing the tax scales, and personally I find it hard to disagree. But if the Treasurer wants to do that he will not have enough revenue to finance the necessary tax reduction, and he will add significantly further to the Budget deficit, especially as so much of the projected reduction was reliant on maintaining the fiscal drag.
Of course, there will be some cheery souls in right wing think tanks, who have never had to depend on the state, who will then draw the conclusion that expenditure should be cut further – indeed by as much as the 5 percent of GDP necessary to achieve their agenda. But no government has ever embarked on such a draconian savaging of expenditure programs. Not even the Hawke Government cut by this amount, and although it did achieve very large expenditure reductions, the opportunities for savings were much greater then. Thus the Hawke Government savings were principally realised through more targeting and user charging, but those opportunities have now been taken up, and cannot be implemented twice.
Indeed, the only realistic scenario is that in this election-year the Turnbull Government will not repeat the first Abbott/Hockey Budget of 2014, which was rejected as being very unfair. So we are essentially stuck with a continuation of existing policies, no tax reform worth boasting about, continuing reliance on fiscal drag, and negligible progress towards fixing the nation’s finances.
Furthermore, it is hard to see how this situation will change until we face up to the real fact that the number one priority is to find an agreed way to increase the overall tax take by a couple of percentage points relative to GDP. On this critical issue, Jay Weatherill and Mike Baird have been absolutely right and so far federal Labor has been absolutely wrong.