If the Albanese government wants to deliver lasting reform – in education, healthcare, housing and climate – it will have to confront the hardest political question of all: how to raise the revenue to pay for it.

Those of us who would like the Albanese government to adopt a bolder policy agenda need to recognise that it will be limited without tax reform to raise more revenue. But that in turn will require the government to make the case why more revenue is needed and will not damage the economy.

Albanese’s vision when his government was first elected was for a “fairer country with a brighter future for all Australians.” Or as Albanese frequently puts it: “holding nobody back and leaving nobody behind.”

As Albanese recognised, realising people’s potential requires a strong economy, with a focus on education, including early child-hood education, skills and technological innovation, such as new industries powered by renewable energy. Supporting those at risk of being left behind, includes income support, and improving the quality and accessibility of aged care, the NDIS, Medicare and social housing.

But for many Labor supporters the Albanese government is too timid. As the former Labor advisor, Sean Kelly, put it in his recent Quarterly Essay: “What does Labor stand for?”

In response, Albanese points to a record of successes. Real wages are beginning to rise as inflation eases, with minimum wages lifted, care workers better paid, and employee and union bargaining rights strengthened. More than 1.2 million jobs have been created, unemployment remains low, and cost-of-living pressures have been addressed through energy rebates, rent assistance increases, and expanded investment in social and affordable housing. The government has legislated emissions reduction targets, increased funding for climate transition initiatives, improved the budget position while delivering larger tax cuts for low- and middle-income earners, expanded access to healthcare through urgent care clinics, cheaper medicines and aged care reforms, and invested in skills through fee-free TAFE places and student debt relief.

Yet for many Labor supporters this record still falls short. Key structural failures remain unresolved: the punitive university fee regime imposed under Morrison continues to distort tertiary education; equitable school funding under Gonski will not be fully realised until 2034; and public investment in universities, the CSIRO and R&D is lower in real terms than it was a decade ago. Hospital waiting lists remain too long, in part because aged care is still inadequate, with home care packages delayed for more than a year. Income support for the unemployed is widely regarded as insufficient, rent assistance remains too low, and public housing funding falls well short of historic norms.

The question raised by these failures to act is what is holding Albanese back? An obvious answer is that Albanese is leery about tax reform, and especially where the object of tax reform is to raise more revenue.

Albanese, however, argues that locking in reform requires longevity, and that is only possible with small incremental steps.

The counter-argument is that a reforming Labor government must create its opportunities by persuading people why reform is necessary if we are to achieve the society that we want. It is not impossible, as the Whitlam and Hawke-Keating governments showed.

Most importantly, the government must change the public debate about taxation as so many of the reforms that we would like to see will require more funding. At present, however, taxation is too often referred to as the ’tax burden_’,_ with the implication that taxation is fundamentally illegitimate and that we would all be better off it was lowered.

Indeed, Coalition governments have a track-record of adopting an arbitrary tax ceiling, without any regard for what the purpose of taxation is and therefore how much is needed to finance the necessary services.

Instead, we need to improve the link between taxation, the services that it finances, and our mutual obligations as citizens.

The Albanese government therefore needs to get on the front foot and persuade people that taxation underpins our mutual obligation to one another as citizens and is an efficient way of paying for those services that enrich our lives and are collectively consumed. As the great American jurist, Oliver Wendell Holmes, said, “I like to pay taxation. In this way I buy civilisation.”

To achieve that change in thinking, the best way forward would be to commission an authorative and publicly available assessment of what the government needs to spend to ensure the provision of each of the various public services and the society that we want. That assessment should incorporate an evaluation of the cost-effectiveness of the services to be funded to reassure electors that there will be no risk of an irresponsible “tax-and spend” government.

While obviously the government will need to wait on that assessment of expenditure funding needs, my best estimate is that the extra revenue needed in future is around 4 per cent of GDP. That would include not only the money needed to repair the service inadequacies identified above, but also additional funding to meet the demands for defence and to remove the present structural budget deficit, which the Parliamentary Budget Office estimates will be around 2 per cent of GDP over the next decade even if only current spending policies are maintained.

No doubt the Conservatives will argue that this increase in revenue will damage the economy by reducing the returns to employment and investment. But there is limited empirical support for this theoretical expectation.

First, a cross-country comparison does not suggest any direct relationship between present levels of taxation and the growth of labour productivity. For example, the growth of productivity over the last 30 years has been just as high in the high-tax Nordic countries as in low-tax America and Switzerland. Nor does the empirical evidence suggest that taxation is greatly affecting the supply of labour or capital.

Second, Australia is starting from a position where it is an exceptionally low-tax country. The only developed countries in the OECD with a lower ratio of tax revenue to GDP than Australia are Ireland, Switzerland and the US – and the US is only lower because it is risking its future with a much bigger budget deficit.

Fundamentally what matters is how the revenue is spent. For example, there is every chance that if we restore our research base and add to our skills through more education, that will add to our productivity and future growth prospects.

A bold Labor policy agenda that will realise Labor’s traditional values will require more tax revenue, but that extra revenue will not come at any cost to living standards – if anything, the reverse if the consequent increase in spending accelerates productivity growth.

The views expressed in this article may or may not reflect those of Pearls and Irritations.

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