Treasurer Joe Hockey has delivered yet another address saying income tax cuts must be given. That gets him an easy headline but tells us very little about the government’s plans.
Hockey has also given a hostage to fortune. Asked on radio “will there be cuts to personal income tax rates in the next budget”, he replied: “this is what we’re working on. And the starting point is it’s not just about personal income tax rates. It’s also about the interaction with other taxes.”
If the government is to take personal and perhaps company tax cuts to the election the most obvious point is that it has to find a way to pay for them. That means it must cut spending or rejig the tax system or have a mix of the two.
Hockey rules out an increase in the total tax burden – the Coalition wants “lower” tax overall. He implies there is a whole lot more that can be done on the spending side.
Hockey projects a near contempt for much of what the public sector does. In Monday’s speech titled “The economic case for personal income tax cuts”, he said that while governments had vital social spending responsibilities in areas such as social security, health, education, and law and order “we should not pretend that everything government spends taxpayer money on has an economic benefit. The Australian Bureau of Statistics doesn’t even report on productivity in the public sector because not only is it difficult to economically measure the output of public servants but government spending is hardly an economic value add”.
Hockey is dismissive of the spending needs of the states. “I find it unappealing to dress up increased tax and spending as tax reform. Especially, if it’s the Commonwealth raising taxes to help states increase their spending.”
NSW Premier Mike Baird recently proposed a rise in the GST – which is a Commonwealth tax but with all the revenue going to the states – to finance growing health costs.
Baird was honest in recognising some facts – that health costs will grow and that the system is not full of waste, despite the claims of federal health minister Sussan Ley.
Another reality is that while of course spending in health must be kept under control, in a wealthy society people want sophisticated health services. Some of these can be viewed as consumer choices, although of a special sort, given they are subsidised. People may be willing to pay more tax to ensure they can get the best of services, such as minimum waiting times for important but non-urgent surgery.
If Hockey wants to put the weight on spending cuts in financing tax reform, that’s going to go deep into some key areas. These cuts should be spelled out in detail before the election. We know from the 2013 election campaign that generalised promises that certain areas will be protected simply can’t be trusted.
Spending cuts to finance the tax cuts smack of the approach to fiscal repair Hockey took in the 2014 budget, with disastrous results for the government and for his own reputation. While the 2015 budget adopted a much more pragmatic approach, there is little doubt that a Coalition government re-elected on anything other than a very modest margin would be gung ho once again, though it would probably face Senate problems.
The more logical way to finance tax cuts would be to take to the election plans for a change in the tax mix, to rely more on the GST – through a broader base or higher rate – with adequate compensation for those on low incomes. But there is still no sign this can be achieved because the consent of the states and territories is needed and they are divided.
While Hockey says a range of taxes is being considered, the government has ruled out various options, such as reducing the big tax break for superannuation and changes to negative gearing, that could help somewhat in the heavy lifting of financing income tax cuts.
Hockey stresses that the government wants a “fairer” tax system as well as lower tax. But he send out contradictory signals about who he thinks it should be “fairer” to. He speaks of the burden on lower income people moving into work, and bracket creep pushing lower- and middle-income earners up the tax scale. He’s also concerned about the large proportion of the overall income tax take that is falling on a small proportion of high-income earners.
Hockey glosses over the problem that cutting income tax would mean that fixing the budget would be pushed out even further if spending cuts were used to help finance tax relief.
“We still have a budget to balance,” he said. “And it will be managed through continued discipline on spending decisions. We are undeterred in our mission to pinpoint government waste; to stop spending money where it doesn’t need to be spent.”
Hockey thinks both objectives can be pursued simultaneously.
This have-it-all language sounds like aspirational ideology rather than reality.
None of this is to say tax reform is not needed, or to deny that cutting income tax would have a positive impact on the economy. It’s rather that Hockey says the government is in a “conversation” with the Australian people about tax reform, but at the moment he’s leaving the hard talk for later. In its defence, the government points out that we are not at the green paper stage yet, let alone the tax reform white paper, which comes next year.