Sometimes there are signposts as to what a government may be planning to do, and when it comes to the budget in Australia, the Grattan Institute is one.
Its latest pointer is called “Back in Black” and is a submission on this May’s Federal Budget.
As a centre-left think tank, sponsored by the Australian and Victorian governments, Melbourne University, and mining giant BHP, Grattan is a sort of “Bunyip Brookings”—never adventurous and always within the Overton Window (policies deemed acceptable to the public) with the cool kids, whether right or wrong.
During COVID they were right in the centre of the Overton Window and the official advice, even when it was evidently wrong.
So “Back in Black” will tell you what the smart Beltway money is pushing on the government, and while not right, it is not wrong either.
It picks the major elephants in the room—runaway government debt, particularly at a state level, to fund questionable projects; runaway social service costs, particularly in the National Disability Insurance Scheme, old age, and health; an aging population; and the decline in productivity.
It ignores the other elephant in the room—the productivity-sapping cost of the “energy transition”—but then the institute has been at the vanguard of that movement since its inception, so it will be really momentous when it switches direction on that.
However, none of its solutions improve productivity, while many will diminish it, and it has a bean counter’s approach to managing the economy: We have a debt problem, so we will tackle it by increasing taxes and moderating the growth in spending.
They dismiss the alternative of growing the economy through better efficiency or productivity, even though recent history in the 1980s under Margaret Thatcher and Ronald Reagan, and also under Australia’s Bob Hawke and John Howard, demonstrate this is the best way to turn an economy around.
Tax Reform
On tax, they propose increasing the goods and services tax (GST) by 50 percent, from 10 percent to 15 percent, and deferring the stage three personal income tax cuts.They also have some major changes on superannuation; want to increase tax for small business; defer large company tax cuts and tax trusts at the same rate as companies; and double the rate of capital gains tax (CGT) by halving the CGT discount.
Increasing GST is a good idea—Australia is too dependent on direct taxation—but should only be implemented with a corresponding decrease in other taxes. They should also broaden it at the same time as there are too many exemptions.
If anyone can do this, Labor can, because they have a constituency for new taxes, but there are some serious impediments.
The GST was introduced as a states’ tax—all the income is to be distributed to them, and it can’t be increased without them all agreeing. That is a high hurdle.
Then there is the suggestion that Western Australia (WA) should be cut-back in its share of the distribution.
I have long argued that GST ought to be distributed to the states on the basis of where it is paid because the current arrangements penalise successful entrepreneurial states by equalising it between states.
Western Australia is the prime example of such a state. If the rest of Australia was like WA, our financial problems would be over. Yet the Victorian government-backed think tank wants to punish this outperformance.
Lastly, there is the problem with getting it through the Senate.
Meg Lees, as Australian Democrats’ leader, did the deal with John Howard that introduced the tax, which obliterated her party’s electoral support in the process.
If Dutton opposed this measure, as he probably would, are the Greens, Teals et al going to want to “do a Lees” and wave it through the Senate?
The stage three tax cuts are designed to deliver a simple and efficient personal tax system for the majority of the workforce with most paying a maximum of 30 cents in the dollar.
The productivity gains from this should be significant, but because this also means people with higher incomes get an absolutely larger tax cut (as they mathematically should). This presents a problem in these days of equity (not equality).
Grattan wants to cancel this reform, even though it is already in legislation.
Reducing the CGT discount completes the trio of improbable major tax increases. It is generally accepted that capital gains should be taxed at a lower rate because of inflation, and also because capital formation is a critical component in increasing productivity and hence wealth.
The Company Tax changes will contribute to making Australia globally uncompetitive on taxation rates, and the trust taxation changes fail to understand the nature of a trust.
On Super they, get one thing right—freeze the super guarantee charge (SGC) where it is now, don’t increase it. But fiddling with current entitlements on the basis of which savers have invested would be a breach of faith.
Social Welfare Dilemma
There are also severe policy weaknesses in their approach to cutting social welfare costs.They note the problems with National Disability Insurance Scheme (NDIS), which is one of two monsters that will eat the budget, the other being interest (this was before the recent AUKUS announcement, which means defence will become a more significant cost).
There are no suggestions as to how to rein the NDIS in, although the graph demonstrates how big a problem it is.
They also have only minor suggestions for hospitals, defence, and medical benefits.
Their one suggestion for the age pension, which is to decrease the exemption for the family home, will probably result in the sales of some larger houses by their elderly occupants, early receipt of a partial inheritance by some children (or cats’ homes and other charities), and little decrease in the pension as pensioners rearrange their affairs to qualify.
There is little chance that most of these will get up in the current budget, but the pressure will be on to get them up in subsequent ones.
If Grattan is a true pointer, as with COVID, there will be public relations campaigns to squeeze us into assumptions that mean there is no alternative and that if we don’t comply we will doom future generations.
