IAN McAULEY. The Liberal Party’s French Connection

Apr 27, 2017

The political future of Kelly O’Dwyer, Minister for Revenue and Financial Services (presently on maternity leave) is uncertain, as Liberal Party members in her electorate move to disendorse her. On one level this conflict can be seen as the shenanigans of Liberal Party faction wars, but at another level it reveals a deep malaise in our political system.  

O’Dwyer is the member for Higgins, an electorate covering Melbourne’s leafy southeast suburbs, including South Yarra, Toorak, Malvern, and Glen Iris. In terms of average income it ranks at 13 out of Australia’s 150 electorates, but in terms of established wealth – “old money” – it almost certainly enjoys a higher rank. It’s a prime catchment for Victoria’s private schools, the Melbourne Club and the shops on the eastern end of Collins Street.

To a Liberal Party member, preselection for Higgins is what preselection for Port Adelaide is to Labor – a near certainty – and in last year’s election O’Dwyer won the seat on first count, without having to rely on preferences.  (Liberal 52 per cent, Green 25 per cent, Labor 16 per cent.)  Her two-party margin was 58-42 per cent.

She has been loyal to the party, going to extraordinary lengths to defend the most indefensible aspects of the Government’s policies, including her extraordinary claim that  two thirds of those who benefit from “negative gearing” have incomes below $80 000.

So what crime could she have committed to incur the wrath of party members in her electorate? Has she gone on the ABC to advocate for the republican cause or a free vote on same-sex marriage? Has she shown undue sympathy for refugees?  Has she invited the wrong people to a Party fundraiser? Has she suggested she will send her newborn son to a state school?

She’s innocent of such atrocities. Her crime was to craft the reforms to the government’s superannuation concessions – the reforms that limit to $1.6 million one’s superannuation holdings in pension phase. That’s the phase when drawings and earnings are tax-free. The $1.6 million limit, and some other changes relating to the accumulation phase, come into effect from 1 July this year.

These reforms have raised the ire of the “Save our Super” group, established by barrister and Liberal Party member Jack Hammond. This group is behind a push to see O’Dwyer replaced as punishment for having supported those changes.

Thanks to the profligacy of John Howard and his treasurer Peter Costello, superannuation has enjoyed extremely generous concessions, and before the recent reforms were introduced the government was forecasting that by 2018-19 these concessions would be costing at least $50 billion a year in terms or forgone revenue – a little more than the age pension. Something had to be done.

So how burdensome is that $1.6 million cap?

Let’s consider a retired couple, each with $1.6 million in their account, enjoying a five per cent return. That provides each with a tax-free income of $80 000. In addition, if they have made some simple arrangements, each could have just enough income outside superannuation to stay below the $18 200 tax free threshold. That means each person’s tax-free income could be boosted to $98 200, or $196 400 for the couple.

For comparison, consider two working-age professionals each earning $98 200 – general practitioners, university lecturers, senior teachers. Their tax liability, including Medicare and the Medicare Levy Surcharge, would be just short of $27 000 each, and even if they had dependent children they would fall just outside eligibility for family allowance.  Their combined taxation would be almost $54 000.

And, for further comparison, the maximum age pension for a couple is around $34 000 a year.

In other words, in spite of the government’s reforms, the $1.6 million limit is still extraordinarily generous. It would be hard to find any justification for allowing a retired couple to enjoy a tax-free income of almost $200 000 while a younger couple with a similar income and with the expenses of raising children and paying off a mortgage, pay more than $50 000 in income tax.  But that’s what the reforms mean.

I’m not suggesting that $50 000 income tax is too high: only around 15 per cent of households enjoy an income of $200 000 or more, and a couple with professional education would have benefited from a great amount of publicly-funded education (even if they had been to private schools). It would beyond the skills of the most adept spin master, however to craft a moral justification for the different tax treatments of a working couple and a retired couple.

Which brings us to the people trying to unseat Kelly O’Dwyer. One has to admire their chutzpah in arguing that they’ve been hard done by.  Yes, they may argue about retrospectivity, but it’s a weak case: John Howard did not have a mandate to pass laws that would endure in perpetuity.

The more fundamental issue about these people is not only their sense of entitlement, but also their lack of reality. Do they really think any government could have justified leaving these concessions in place?  What sort of a world do they live in where they believe that a privileged group of retirees should enjoy a tax-free income even greater than $200 000?

If there is criticism to be levelled at O’Dwyer, it’s for having set such a high limit, but it was a cabinet decision, and for all we know she may have had to fight very hard to get even that generous limit.

The issue is a manifestation of a deep malaise in the Liberal Party. That is the policy influence exerted by people who are so far removed from the lives and concerns of most Australians, whose average superannuation balances will never be anything close to $1.6 million. (The present average is in the order of $200 000.)

The Menzies metaphor of the Liberal Party as a “broad church” no longer holds, the Howard years having seen a purge of moderates and economic pragmatists. The party is now caught in a destructive positive feedback spiral, because the further it moves to the right – as a club of defenders of unearned privilege – the more its membership will go on declining until all that remains is a core of diehards living in a world where they see an injustice in limiting the tax-free income of retiree couples to $200 000.

That’s not to let the Labor Party off the hook – it has its own problems in a narrowing base – but the Liberal Party, particularly at the federal level, has taken disconnectedness to levels not seen since the days of Louis XVI in his isolation in Versailles.

Which brings us to France, where, in last weekend’s election, the main “left” and “right” parties came close to annihilation. There’s a lesson for our politicians.

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development.

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