Monday, November 23, 2015

Lower-tax dream feeds the budget deficit

Remember when we used to worry about the budget deficit? In case you've stopped following the story, recent developments are well summarised by a headline: Lucky we don't have a revenue problem, because revenue looks bad.

The big budget news last week was that wages grew by just 2.3 per cent over the year to September, taking wage growth in the private sector - of 2.1 per cent - to its lowest in the 18-year history of the wage price index.

Add to that the recent weakness in iron ore and other commodity prices and it won't be surprising to find Treasury revising down its revenue forecasts yet again when we see the mid-year budget review next month.

The closer the review's publication is to Christmas, the more anxious we'll know the government is to avoid having us realise how far the Coalition's concern about debt and deficit has receded.

Apart from the dishonest nonsense the Coalition talked when in opposition, you could feel some sympathy for it as, like its Labor predecessors, it watches Treasury's confidently predicted resurgence in tax collections fail to materialise year after year.

But it's hard to be sympathetic when you find the new Treasurer, Scott Morrison, instead of seizing the God-given opportunity to set his predecessor's follies behind him, jumping into Hockey's hole and starting to dig.

Morrison hadn't been in the job long before he began repeating a line Hockey had belatedly stopped repeating that, with the budget, "we don't have a revenue problem, we have a spending problem".

Why would any treasurer in his right mind say such a patently stupid thing? Because he's allowing ideological preference to override the plain facts.

There's a strong anti-government prejudice alive in the hard right of the Liberal Party, which proceeds on the assumption that all increases in government spending are wasteful and wrong, whereas all cuts in taxes and increases in tax expenditures are a step forward, even if they add to the budget deficit.

There's some sympathy for these prejudices among economists because their neo-classical model of markets assumes a world composed solely of individual consumers and firms, and thus has a built-in presumption against the legitimacy of any form of collective action.

So, though it's true that Labor's big, unfunded spending plans are part of the present budget problem, it's necessary for the anti-government brigade to insist that excessive spending is the only problem.

The eight tax cuts in a row and Peter Costello's unsustainably generous increases in superannuation tax concessions simply can't be part of the problem since, by assumption, all reductions in tax are a good thing.

Trouble is, this prejudice is what shaped the most politically disastrous budget in living memory, the one that did most to cause its treasurer and prime minister to be deposed within the following 18 months.

The 2014 budget sought to return the budget to surplus almost solely by measures to reduce the growth of government spending, but was repudiated by the electorate and the Senate.

The plain fact is, the great majority of voters are not anti-government. They won't tolerate serious cuts in spending on welfare, health or education, even if they're often tempted by happy talk of lower taxes.

You'd expect the man who lusted after Hockey's job to be the first to get that message, but apparently not. So it's time for Malcolm Turnbull to come in over the top and set the government's thinking on a more sensible course, just as he's doing with defence and security.

Both history and commonsense say the budget won't be got back on track without both spending cuts and revenue measures, particularly cuts in tax expenditures such as super concessions.

Tax reform is the enemy of budget repair. It's being pushed by people who really believe the dream of lower taxes (for them, if not for everyone else).

If the tax package doesn't worsen the budget deficit directly - as it probably will - it will harm it in an opportunity-cost sense by appropriating tax-expenditure savings that should have been used to reduce the deficit.

Tax reform is shaping as a huge anticlimax. By the time Turnbull knocks it into shape politically it will involve a lot of change and political risk, while leaving a lot of people feeling short-changed in the lower-tax department and achieving surprisingly little in the way of improved economic efficiency.

As every Treasury intergenerational report reminds us, tax is headed inexorably up, not down.

The sooner Turnbull kills off the lower-taxes pipe dream, the better he'll be able to manage the nation's affairs.