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May 06th 2016 print

Peter Smith

No Cigar for the Treasurer

You must have heard of the "the rich", the people who pay nearly all income taxes flowing into government coffers and yet are pilloried for doing so. Never mind Labor and the Greens, the safe politics of shaking down the rich is thriving in Coalition ranks.

soak the rich IIBudgets are getting terribly tedious. I think this because the scope for action is narrowing, as every initiative is loudly bagged these days by somebody or other. Joe Hockey took a walk on the wild side and that served him badly – which he deserved, to be fair — because he was monumentally inept.

“We all know what to do, but we don’t know how to get re-elected once we have done it.” So the Prime Minister of Luxemburg, Jean-Claude Juncker, recently said. But do politicians at large really know what to do? I don’t think they do.

Hockey was a poster child for political incompetence. Why do we think a bunch of self-promoters who are good at getting people to vote for them will be competent at running government? Sir Humphrey had it right: politicians can’t be trusted to run governments. What then is the answer? There isn’t one.

Imagine yourself as Treasurer and it is your first budget. You try to cut the deficit by screwing pensioners, denying young people unemployment pay, and charging poor people for doctors’ visits in order to underwrite gee-wiz medical research. You couldn’t write home about such ineptness. This is not an example of a politician knowing what to do and bearing the electoral pain. It is an example of a typically blundering politician who has not the least idea of what to do.

Budget deficits can only be reduced sustainably by cutting the growth in future expenditure below aspirational levels. Of course, even this can’t be done without incurring the wrath of special interests. But it possibly can be done without losing too many votes. Actually cutting expenditure is largely impossible; except for relatively minor amounts in insensitive areas.

Raising taxes doesn’t work because governments can’t resist spending the revenue. To them, an extra dollar of tax revenue is an extra dollar to splurge. That is why they are fond of trumpeting — incurable spendthrifts and debtors that they are — that additional spending has been fully funded; perish the thought that the funds might have been used to pay down debt.

When it comes to welfare expenditure the way to tackle it, certainly in an initial phase, is to target only those earning above a prescribed amount. Don’t hit the poor. When it comes to large items of recurring and capital expenditure, such as on health and education, the only feasible option is to control their future rates of growth; and, vitally, to introduce no new programs.

So how did Scott Morrison do based on these criteria? The answer, unfortunately, is not well enough, though infinitely better than Hockey. Last year, the deficit forecast for this financial year (2015-16) was $35 billion (rounded) it is now estimated to come in at $40 billion. The forecast for 2016-17 is $37 billion. It is anybody’s guess whether this soft target will be achieved. Taking the last three full financial years of the Gillard/Rudd government, the deficit averaged $37 billion per year. From July 2013 until June 2016 it is on track to average $42 billion. If progress has been made it is well disguised.

Treasury reports that net government debt will be $286 billion at the end of June this year; with net interest payments running at $1 billion per month. Savour that as the price of overspending. Net debt is on track to grow by another $40 billion over the course of next financial year; with interest payments growing commensurately. It must be time for belt tightening? Not so tight evidently; the budget papers show that since the last MYEFO, issued only last December, an additional $2.9 billion has been promised for public hospitals (up to 2019-20); and $928 million for schools. These no doubt are worthy expenditures. However, they are patently unaffordable.

Taxation is a vexed economic matter. Reducing income and company taxes is regarded as beneficial by conservative economists. At the same time, it is a brave Laffer-like* call to argue that the boost to economic activity that reduced taxation brings will result in no diminution in government revenue. Oh but wait — Surprise! Surprise — the reduction in taxes on small businesses and the minor adjustment to bracket creep are fully funded apparently; largely by increased taxes on cigarettes and on ‘the rich’.

You know, “the rich” — those people who pay nearly all income taxes and yet are pilloried for paying less tax on their superannuation contributions than they ought. A “too generous” concession it is called. Never mind Labor and the Greens, the safe politics of shaking down the rich is alive and well in Coalition ranks.

Tax reductions are good when they are affordable. Getting them affordable is contingent on reducing the growth in outlays and bringing down debt. Right now too much is owed and too much overspending is occurring. To take the same three year comparison as above, government payments averaged 24.5% of GDP in the last full three years of the Gillard /Rudd government compared with 25.7% in the three years to 2015-16. That lack of progress can’t be disguised.

Increasing taxes on cigarettes is fine. It will have no deleterious effect on economic activity. But the money should have been banked. As to the superannuation changes, they are short-sighted, without merit, and riven with left-wing envy. (editor’s note: buttleggers and chop-chop vendors must love this budget with a passion unequalled since America’s 18th Amendment introduced Prohibition and further incited Al Capone’s entrepreneurial instincts).

Businesses small and large in these times of debt and deficits can best be helped by eliminating burdensome regulations — including labour market, environmental and red-tape regulations — which impede business start-ups, development and expansion. Mind you, finding a way through Australia’s obstructionist Senate is fraught with frustration whether the goal is to reduce spending or eliminate regulations.

At question is whether Australia is any longer governable and, correspondingly, whether growing debt will progressively act as a dead weight on the economy, as it has elsewhere. An exaggeration? Perhaps, but have a listen to Senators Di Natale and Xenophon, who will likely control the next Senate. Prospects are not good. A lot has changed for the worse in Australia’s body politic since Hawke, Keating and Howard.

* Arthur Laffer is a supply-side economist who was part of an economic board advising President Reagan. Famous for the Laffer Curve showing that at some point reducing taxes raises revenue and vice versa.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [11]

  1. Bran Dee says:

    ‘Hockey was a poster child for political incompetence’.
    Indeed he proved it as Treasurer, but consider also that Hockey contested leadership of the Party because in his own eyes he was leadership material and a promising Prime Minister in waiting. Maybe Malcolm suffers from the same delusions because he is going down a similar path.

  2. Ken Harris says:

    The PM has said (AFR 23.10.15) that any future budget surplus should be syphoned off into a sovereign wealth fund for the Government to spend.
    Apart from the obvious objections (pork barrelling, squeezing out the private sector, dud decisions) what does this idea mean for future budgets?
    Does it mean, for example, that we will be unable to escape even the moderation of government expenditure growth? Does it mean that, no matter what, taxes will be spent either on current expenditure through the budget or so-called infrastructure investment through the SWF?
    If Peter reads this I’d be grateful for a comment.

    • Peter says:

      In principle there is nothing wrong with a sovereign wealth fund to stabilise government revenues during economic ups and downs, particularly for an economy dependent a good deal on commodity prices. But unless there are immutable rules around when it can be drawn down politicians are bound to abuse it. Can’t help themselves.

  3. Ian MacDougall says:

    You must have heard of the “the rich”, the people who pay nearly all income taxes flowing into government coffers…

    Depends how you define “the rich.” If the top 50% of income recipients, this may be so. If the top 5%, who can afford all the lawyers, accountants and other experts in tax minimisation and who can set up the sorts of Peter Costello designed personal super schemes etc brought in for that purpose, then it is highly debateable.
    Take a look at the international comparison of Gini coefficients at http://www.rba.gov.au/publications/bulletin/2014/mar/2.html (scroll down), and ask yourself whether it would be better to live in (less unequal) Scandinavia or (more unequal) Turkey, Mexico and Chile. Not to mention Saudi Arabia, which as I recall has about the highest GC of all.

    • Peter says:

      Not too debateable. An ABS study (http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/6537.0Main+Features22009-10)showed this for 2009-10 based on all households.

      Poorer 20% paid zero income tax but received 39% of benefits in cash and kind.
      Next 20% paid 4% of income tax collections and received 24% of the benefits.
      Next 20% paid 12% of income tax and received 16% of the benefits.
      Next 20% paid 23% of tax and received 12% of the benefits
      Top 20% paid 61% of the tax and received 10% of the benefits.

      The US has better figures which show that the top 10% of taxpayers (leaving aside the 40% who pay no tax at all) pay over
      70% of federal income taxes. So the lawyers and accountants aren’t too successful.

      • Ian MacDougall says:

        Peter,
        I have a friend who has a (retirement) income of $250,000+ pa. He is proud of the fact that his accountant has arranged things so well for him that he can tell his friends “I pay no tax.” As the honest truth.
        Your link is to an ABS site concerned with” effects of government benefits and taxes on the distribution of income among private households in Australia in 2009–10.” As far as I can tell, such ‘income’ is very much after tax.
        To get the tax benefits, one has to jump the hurdles complex set up by Peter the Smirk, aka Costello. That course of hurdles is completely arbitrary, but clearly designed to discourage participation in the scheme by the ‘lower orders’.
        The Liberal Party gives us government of the country by the wealthy (the deserving rich) for the wealthy. The ALP gives us government by the trade union bureaucracy, likewise very much in its own interest. The Greens promise us government of the country by the childishly naive.
        Some choice.

        • Jody says:

          It seems reasonable to contribute to taxation with an income of $250,000 pa – retiree or not. Nobody, but nobody, ever mentions Defined Benefits and this is the greatest rort imaginable in the retirement sector. I wonder why they never mention it? (I wonder if I wonder.)

      • Eeyore says:

        At what point does one become “rich” and suitable for a soaking? If we accept that you are considered rich when you are in the top 20% of income and you live with your wife and a couple of kids you are open for a soaking once you reach the combined income of $135,000 per annum.

        I would not be overly confident in that number, the source may well not be all that one hopes but clarification of what is rich in $ terms of income from all sources would make it blindingly obvious it is Mr and Mrs average who are being gutted under the banner of equality.

        https://mattcowgill.wordpress.com/2013/05/13/what-is-the-typical-australians-income-in-2013/

    • Tezza says:

      Ian, those are the stupidest set of country comparisons imaginable for the point you are struggling to make. The relative attractiveness of those countries has practically nothing to do with their Gini coefficients, but a lot to do with their overall affluence, their culture, their corruption, and (dare I say it) their religion (or lack of state religion).

      • Ian MacDougall says:

        Tezza:
        You deserve a medal. That post of yours is as a text-book example of a guarded statement.

        The relative attractiveness of those countries has PRACTICALLY nothing to do with their Gini coefficients, but a lot to do with their overall affluence, their culture, their corruption, and (dare I say it) their religion (or lack of state religion).

        Are you trying to sell me the idea that their overall affluence, their culture, their corruption, and their religion (entrenched right-wing Catholicism) has nothing to do either way with their distribution of wealth?
        Scandinavian history is distinctive because those countries largely missed out on the stultifying institutionalisation of privilege that was European feudalism, which in turn brought about the French Revolution of 1789, and the ‘Ten Days that Shook the World” of Russia, 1917. Such democratic anti-feudal revolutions were fatally delayed on the Iberian Peninsula, by which time the South American colonies of Spain and Portugal had been set up on feudal lines, whose 20th C manifestation was everywhere military dictatorship, and economic stagnation.
        So the Gini coefficients of those countries have practically EVERYTHING to do with their distinctive histories, and relative unattractiveness.

  4. Jody says:

    You Turnbull haters will all have your wishes come true; the Coalition is absolutely destined to lose this election. And, irony of all time, it is they who will have to deal with an obstructionist Senate of ‘unrepresentative swill’. Only, we’ll all pay and pay dearly. Yes, Turnbull is Labor Lite but ask yourselves why. It is the mentality of the electorate and its need to have nanny, a string of handouts, political correctness, minority grievance and this applies to ALL levels of society from Price, Waterhouse, Cooper right down to the local pensioners. Morrison was stuck between a rock and a hard place.

    Don’t make me laugh about “the rich”. The middle class conveniently re-badged as “rich” is the new golden soak in this country destined to provide greater prosperity to those who have less. I’m sorry, this is socialism on steroids. The howling and cries have become so shrill that I cannot spend the next 7 plus weeks listening to the inevitable and its consequent calamitous outcome.

    I’ve been reading Niall Ferguson and he’s the only one with half a brain; that governments cannot possibly be re-elected if they embark on fiscal repair, and that the electorate needs to look at its own profligate borrowing instead of bashing banks and government!! (I’m going to his lecture at SOH on 22/5.)

    Apparently I’m now “rich”. Retired, having to now shell out tax on my (what I regard as) modest SMSF and belonging to ‘the group of 50%’ – the only people actually paying any tax in this “wealthy” (ha) country of ours. When in my working life as a teacher and farm owner I never considered myself “rich”, especially when mortgaged to the hilt with 6 mouths to feed. Please use that as a trope for this country as a whole. Why the middle class isn’t screaming at the top of its voice has got me completely bamboozled.

    We can no longer afford “free” education – I’ve said that for years now and so has the IPA. It’s time for the “rich” to stump up when they have their children in state schools on a means-tested, user-pays system. Just like we all do when we use taxpayer funded infrastructure like roads, hospitals etc. And Labor refusing to support the Coalition to get rid of double-dipping on paid parental leave is the scandal of the new century.

    I’ve drilled down to the problem; it is NOT the job of government or the community to ensure the standards of living of everybody in society. People complain they have 3 children and are ‘worse off’. Lesson 1: if you cannot afford 3 children DON’T HAVE 3 children. Each and every person is responsible for his own financial well-being except for the really disadvantaged. Socialism is the terminal disease of our times and must be destroyed.