Monday, August 26, 2013

Checkmate election spells fiscal indiscipline

It's truly ironic that after spending five years banging on about debt and deficit, and then proclaiming us to be in a budget emergency, the side most likely to form the next government has made one fiscally irresponsible commitment after another.

It's all part of the way the two sides' long-running battle of the scare campaigns has morphed into a checkmate election campaign in which most effort has gone into eliminating the differences between the parties, leaving them with little to debate and voters with little choice other than which side to "trust". What if you don't trust either lot?

It's just bad luck for those of us who believe fiscal sustainability is something to be achieved, not just talked about when it's convenient. Perhaps the most irresponsible act arising from the checkmate game is Tony Abbott's commitment - without time limit - never to change the goods and services tax.

This puts paid to big business's dream of increasing the rate or broadening the base of the GST (or both) to finance a cut in the company tax rate. But lots of people have their eyes on the GST as a solution to their problems and I think the premiers have first go.

They were promised a growth tax, but the return of the prudent household (whose consumption spending grows no faster than its income) and the faster-growing exclusions from the GST's base (most notably, private spending on health and education) mean collections from the GST aren't keeping pace with the public's demand for increased spending on most areas of state responsibility, but particularly hospitals.

When Labor keeps accusing its opponents of planning to cut spending on health and education, the Coalition vigorously denies it. But any federal party that refuses to increase collections from the GST will inevitably be squeezing state spending on health and education. (Meaning a re-elected Labor government would too.)

Rivalling the irresponsibility of refusing to change the GST is the Coalition's promise to make no further changes to the concessional tax treatment of superannuation, which Labor matched with a promise to make no changes for five years.

Super is the most egregious example of middle-class welfare - the less help you need, the more you get. So the side that needs to pay for about $28 billion worth of promised tax breaks over four years before it finds ways to cover government spending growing at an underlying real rate of 3.5 per cent a year swears not to touch the biggest rort going.

And the other side, which still doesn't know how it would cover the ever-growing later-year costs of the disability scheme and the Gonski education funding - on top of the inescapable strong real growth in healthcare costs - makes the same undertaking.

One thing you can be certain of is that the Coalition's pledge to avoid further reform of super means its two-year postponement of the phase-up of compulsory employer contributions to 12 per cent of salary will end up being permanent. No bad thing.

Next, note that in one of the few cases where one side outbid the other rather than merely matching it - the Coalition's far more generous paid parental leave scheme - the conservatives have opened up a brand new source of middle-class welfare, a lucrative new entitlement program, one that as well as being expensive and unfair will do little to increase labour force participation.

It's true, however, that there are two big examples of checkmate politics where the Coalition hasn't been as fiscally irresponsible as it would like voters to believe. The first is its me-too on Labor's disability scheme.

As Saul Eslake, of Bank of America Merrill Lynch, has pointed out, the little-remarked 0.5 percentage-point increase in all rates of income tax the Coalition has accepted as part of the package will start four years before the full scheme starts. I'm sure the extra revenue will come in handy.

The second checkmate that won't be as costly as it seems is Abbott's supposed about-face in accepting the Gonski education funding reforms. The first trick is that he's agreed only to match the first four years of spending. Most of the increase is in the following two years. And when he says he'd remove the strings Labor has attached to its scheme he means he will neither make the states contribute towards the cost of Gonski's reforms nor check to ensure they don't use the fed's new Gonski money to cut back their existing spending.

So Abbott's deathbed conversion to more equitable sharing of federal grants to public and private schools turns out to be no conversion at all, just an old private school boy's three-card trick.