IAN VERRENDER. Malcolm Turnbull faces growing discontent from the middle, not just the fringes

Mar 1, 2017

Has there ever been a more demoralising time to be Prime Minister?  There’s been the expected sniping from the sidelines and the continued calls for the Coalition to shore up its base and prevent leakage to parties like One Nation. 

But in recent weeks, disillusionment has begun welling up from a range of sources that rarely utter a peep, suggesting a growing discontent not just from the fringes but from the middle over the policy torpor that has gripped the national capital.

First off the mark was business lobby outfit the Australian Industry Group, with a point-blank rebuttal of the Government’s suggestions it remained open to a coal-fired future.

Given no bank on the planet is willing to finance new coal-powered generators, the response was understandable and highlighted the growing frustration among industry, particularly manufacturers, that as the nation’s ageing generators are shut, nothing serious is being done to address the impending energy crisis.

Next came a full page advertisement in a national daily from Energy Australia, owner of one of the country’s dirtiest coal-powered generators at Yallourn, urging the Government to commit to renewables.

Canberra ‘trench warfare’ blasted

As if that wasn’t enough, National Australia Bank chairman Ken Henry let loose with a vitriolic spray about the “trench warfare” in Canberra as politicians hunkered down in a “dreadful spectacle” over increasingly urgent issues such as budget repair, tax reform, population growth, infrastructure, energy security and climate change.

“I have no confidence that this list of urgent and essential reforms will be achieved by today’s politicians,” he told a dinner gathering at the Committee for Economic Development of Australia’s 2017 summit.

Dr Henry is a man who has learnt from bitter experience the difficulties of achieving proper reform in the modern political era. A former head of Treasury, his landmark 2010 review of the tax system was only partially implemented and then largely dismantled.

Ever since, we’ve embarked on a series of ad hoc tax “reforms” that have pandered to sectional interests in exchange for votes, rather than attempting to construct a new and simpler system that would benefit the nation.

And that’s the dangerous territory newly minted Reserve Bank governor Philip Lowe stepped into on Friday during his regular appearance before the Parliament’s Standing Committee on Economics.

The new governor stunned his inquisitor with his candour, suggesting cutting the corporate tax rate was not a panacea for our economic ills.

“You could argue that this is — from a global perspective — not actually that useful,” Dr Lowe said of the global trend towards lower corporate tax rates.

“Lowering of the corporate tax rate from one country to another just changes the location of investment, it doesn’t increase aggregate investment,” he said.

Exactly. And the problem is that the very politicians from around the globe who wail and moan to the OECD about multi-nationals gaming the system, with stern condemnation about ensuring they pay their fair whack, regularly attempt to undercut each other in a vain attempt to win new business investment.

The problem, as Dr Lowe saw it, was that with the rest of the developed world embarking on this race to the bottom, it would be difficult for Australia to ignore.

According to some, this contradicted statements he’d made just a fortnight earlier when some media outlets reported not only had he endorsed the Government’s corporate tax cuts, he had attacked the Opposition for not supporting the proposed cuts. That was not the case.

Company tax rate not the most important factor for investors

Tax has become an intractable battleground, the debate hijacked by those who argue any change that makes them personally better off is reform, and any change that negatively affects them is retrograde.

Lowering the company tax rate to 25 per cent overwhelmingly would benefit foreign companies.

Australian companies already pay a substantially lower rate of corporate tax through dividend imputation. Australian shareholders — who own the companies — receive individual tax credits if the companies in which they’ve invested pay the full tax rate.

There are two arguments put forth for those in favour of lower corporate taxes:

The first is that it will increase net profits, thereby enabling more investment, which ultimately will lead to stronger growth and better employment. Unfortunately, Treasury’s own modelling doesn’t support that.

If corporate tax was dropped to 25 per cent, the economy is forecast to double in size by September 2038. If kept where it is now, it will double in size by December that same year. That’s a lot of revenue foregone for a few months of extra growth two decades down the track. In fact, it looks like a rounding error.

The second argument is that we need to cut corporate tax to stay globally competitive.

It’s true, we’ve always relied on foreign investment to fund our growth and we probably always will, but tax is only one of many factors that swing a corporation’s decision as to whether to bring their cash here.

The main reason is that we have the minerals and energy resources the world requires. We also have enormous food-production capacity.

We’re not unique in that regard. But we also have a democratically elected government, a robust legal system, a highly educated population, efficient capital markets and an array of sophisticated service providers from accountants to engineers.

It’s that combination that makes us unique. Tax is a factor, but it’s far from the overriding factor.

Just ask Rio Tinto, a company that was forever comparing its Australian assets with its prospects at Simandou in Guinea until a series of coups disrupted proceedings and senior Rio executives were accused of bribery.

Tax reform unlikely without a crisis

Seven years ago, Ken Henry put forth a blueprint for true reform in the tax system, part of which was to cut corporate taxes to 25 per cent. But as anyone with a vague understanding of even a household budget can attest, if you cut off your revenue you either have to make up for it somewhere else, or cut your spending accordingly.

Dr Henry opted for a Resources Rent Tax to cover all minerals and energy production. Until 2010, only oil and gas extracted from our oceans was taxed in this way.

It sparked years of political upheaval within the Labor government, which the then opposition capitalised upon, saw the removal of a sitting prime minister, resulting in a drastically diluted and unworkable Resources Rent Tax that eventually was repealed.

The dream of tax reform was shattered and along with it, any chance of budget repair. It will probably take a crisis in our finances for the Government to revisit it.

The Prime Minister is a strong advocate that political endorsement and legitimacy comes from the middle ground, not the fringes. When it comes to climate and energy policy, the calls from the middle are becoming increasingly louder.

On tax, that may take longer. But without a total overhaul — one that takes all Australians with it — our finances will continue to deteriorate.

Ian Verrender is the Business Editor at the ABC. This article was first posted by ABC Online on 27 February 2017.

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