Pearls and Irritations

Part 1 discussed the policy platform that Labor needs to seize leading up to the election. However, such a platform will lack credibility unless all its policies are fully costed, and it is clear how they will be paid for.

Expenditure impact

Tackling climate change is getting ever more critical, as scientists are warning. The good news is the infrastructure required to reduce carbon emissions can largely be financed by redirecting the current wasteful expenditure on transport and irrigation infrastructure.

However, as I discussed yesterday, achieving a more equal society will require a significant increase in government expenditure on education and training and income support for society’s poorest citizens.

The required increase in education and welfare assistance will have to compete with other demands. Unfortunately, many other essential services, which have been badly underfunded by the Coalition over the past eight years, desperately need a boost.

Yet until recently, the Coalition’s main, or even only aim, was to balance the budget, and this was to be achieved by widespread under-funding of public services, not through economic growth.

And as numerous commentators have repeatedly argued, the continual stinginess towards those who are unemployed will continue to hit hopes for economic growth.

The JobSeeker rise – back to 2007 payment levels

In its six budgets prior to the pandemic, the Coalition increased real government payments at an annual average rate of just 1.8% – about the same as the rate of population growth and significantly less than the growth in GDP. This is despite acknowledging in its Intergenerational Report after its disastrous 2014 Budget that the funding of essential services would need to grow at an average annual rate of 2.7% in real terms.

A Labor Government that is true to its foundations would adequately fund public services. If Labor intends to hold fast to its beliefs it will need to set out its policies for funding essential services before the next election.

As Labor’s National President, Wayne Swan, put it: “Now is the time to mount an argument about adequately funding essential services as an economic good, not just as social benevolence.”

A Labor Government that was fair dinkum would be promising:

• Much more investment in education and training, which should include life-long learning, if Australia is to respond adequately to the structural changes in the labour market brought about by technological change and the shift in the pattern of demand from manufactures to services. A priority would be a substantial increase in funding for vocational education, which has fallen in nominal terms under this Government between 2013-14 and 2019-20 by 8.9%. University funding has only increased 7.5% in nominal terms – a fall in real terms – and universities are now suffering from the loss of revenue from overseas students. And as has been regularly canvassed in Pearls and Irritations, achieving needs-based funding in schools is increasingly a pipe-dream.

Numbers don’t lie: Public schools underfunded by $60bn; private overfunded by $6bn

• An increase in income support for people who are unemployed people and for rental assistance, a substantial improvement in aged care, and the increase in childcare support already promised.
• Restoration of the funding for most cultural institutions and many welfare organisations that are now severely under-funded. The revenue to cultural institutions has been hit especially hard by the Covid lockdown. As for the ABC, its budget is only $898 million for the current financial year compared to $966 million in 2013-14 when the Coalition Government was elected.

I am also convinced by experts such as Hugh White that the deterioration in the international situation will require Australia to lift its spending on defence, foreign aid and diplomacy by another 1½ to 2 per cent of GDP over the next several years.

Soft power is as important as hard power for our future security, but foreign aid has fallen under this government since 2013-14 by 8.9% in nominal terms and even more in real terms.

Possible sources of finance

A comprehensive Labor vision for social and economic development would add up the costs of all these legitimate demands for additional government spending and then tackle how to pay for them.

While a starting point should be to look for offsetting savings in existing programs, which media reports have indicated that shadow ministers have been asked to do, there is not much fat to trim given the extent of significant under-funding of essential public services.

My rough guess is that if a Labor Government were to adequately fund public services, total government spending would need to rise a bit faster than GDP over the three years following the election.

In that case, Labor will need to propose some revenue increases for its election platform to be credible. While some may want to believe that this extra spending could be deficit financed, this is not a long-term solution. The key is that this extra spending can be sustained.

The economy will recover and over the next three years the gap between the capacity of the economy to produce and the demand for that production will close. So deficit financing would no longer be appropriate. Much of the extra spending proposed would therefore need to be financed by additional revenue over and above what would be collected by current taxation policies when we return to full employment.

In short, Labor cannot avoid a debate about tax levels if it genuinely wants a fairer, more equal society. The starting point must be what sort of society we want, followed by what that will cost, and then how to pay for it.

Too often conservatives frame the debate by talking about “the burden of taxation”. However, paying tax is just the normal way of paying for a range of essential services that are just as valuable as private consumption, and arguably more valuable than a lot of consumption.

Furthermore, Labor can and should run the argument that the increase in tax levels required would not hit economic growth. Australia would still have lower tax revenue relative to GDP than almost all other OECD countries. In addition, using that extra revenue to increase investment in education and skills, and creating a more equal society will actually assist economic growth.

Proposed tax changes

The easiest way to raise some of that additional revenue will be to drop Stage 3 of the Coalition’s tax cuts, which come into effect after the next election. According to the Grattan Institute, these third stage tax cuts will make the income tax less progressive. While the top 20 per cent of income earners will pay a lower share of tax, middle-income earners in the third to seventh deciles of the income distribution will pay a higher share.

However, this policy is unlikely to raise sufficient revenue. In addition, Labor should therefore hold fast to its policies to increase the capital gains tax and to abolish the tax concession for negative gearing of investments. Both these policies would improve the functioning of markets and are justified improvements to economic policy in their own right. Furthermore, 90% of taxpayers do not negatively gear at all, while almost 70% of all capital gains go to the top 10% of income earners.

Finally, raising extra revenue via a carbon tax is clearly the most efficient way to reduce emissions, but it might prove a bridge too far for any government in Australia, judging by recent experiences.

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