Monday, July 28, 2014

A more balanced budget might get through Senate

Joe Hockey and Tony Abbott are perfectly right in saying we need to get the budget back into surplus, we need to make a start now and that this will inevitably involve unpopular measures.

But this makes it all the more puzzling that, lacking a majority in the Senate and being unable to claim a "mandate" for breaking many election promises, they should adopt such a highly ideological and unfair collection of budget measures.

In a three-part essay on John Menadue's blog last week, Dr Michael Keating, former senior econocrat, argues that as a nation we're "unlikely to succeed in charting a viable way forward to fiscal sustainability until governments are prepared to subject their views to a proper conversation based on a clear appreciation of the pros and cons of the different alternatives.

"Only in that way can the public support be built that is required to achieve future fiscal sustainability. In present circumstances it is hardly surprising that this necessary support is not forthcoming, when less than 12 months ago the government promised in the election to both spend more and tax less and now seeks to impose a most unfair budget on the community with no prior warning nor any such mandate."

If we are to chart a way forward and establish the necessary public understanding and consensus, he says, we particularly need to drop the ideology surrounding the merits of taxation versus expenditure and consider the claims of each tax and expenditure proposal on its merits.

Just so. There are many ways to skin the budget cat - some fairer or more sensible than others - and it's absurd for the government and its barrackers to pretend, Maggie Thatcher-like, that the measures proposed in the budget are the only alternative to irresponsible populism.

Anyone who knows anything about successful "fiscal consolidation" knows it invariably involves a combination of spending cuts and tax increases (including reductions in tax concessions - "tax expenditures").

And anyone who knows much about economics knows there's little empirical evidence to support the ideology that economies with high levels of government spending and taxation don't perform as well as those with low levels.

Yet Hockey and Abbott thought it sensible to propose a 10-year budget plan that relied almost exclusively on cuts in government spending - apart from the temporary deficit levy and much unacknowledged bracket creep.

Keating points out that, combining all levels of government as a percentage of gross domestic product, Australia already has the lowest budget deficit and public debt compared with Canada, Japan, Britain, the US and the OECD average.

At 26.5 per cent, our level of total taxation seems higher than the Americans' 24 per cent, until you remember their budget deficit is 5 percentage points higher than ours. So the claim that we have a bloated, "unsustainable" level of government spending is itself unsustainable.

To restore some balance to proposed budget savings, to share the burden of budget repair more fairly and in answer to the challenge, well, what would you do? Keating suggests savings on the revenue side that would raise about $42 billion a year in 2017-18, the year most of Hockey's savings would cut in.

One objectionable feature of the budget was the way it laid into spending on the age pension while not merely ignoring the equally expensive superannuation tax concessions but actually reversing some of Labor's timid attempt to make aged-income support fairer. Keating estimates a more balanced approach to tax concessions could save $15.5 billion a year.

To extend the "end of entitlement" beyond welfare recipients to business welfare, he suggests ending the fuel excise rebate for miners and farmers, saving $7.5 billion a year. There's no economic justification for subsidising just one input among many of just two industries among many.

Abolishing the subsidy for private health insurance would save more than $7 billion a year. Many evaluations have shown this money would treat a greater number of patients if spent in public hospitals. Removing the 50 per cent discount on capital gains tax would save $5 billion a year, as well as making the taxation of various sources of income a lot fairer.

About $5.5 billion a year could be saved by restoring the carbon price mechanism and the minerals resource rent tax. That leaves $1.5 billion to be saved by restoring anti-avoidance measures implemented by Labor, Keating says.

We could get the budget back in the black without any loss of economic efficiency and do it in a way much fairer to ordinary voters - remember them? - and less partial to the Coalition's big business backers.