Monday, February 1, 2016

Big business-biased 'reform' won't fly

I'm confident this year will see the economy performing better than many people expect – those who underrate the importance of domestic influences – but I'm far from confident it will be a year of great progress on economic reform.

There are plenty of things that need reforming, but anyone who thinks the top two are the tax system and industrial relations is confusing rent-seeking with reform.

Rent-seeking involves interest groups pressuring governments to change laws and regulations in ways that advantage them at the expense of others. Look at our tax "debate" and that's just what you see.

Big business and high income-earners want to pay less tax – a cut in the rate of company tax and in the top personal tax rate – and if that means other people paying higher tax, say through a higher goods and services tax, so be it.

Naturally, their self-interest is cloaked in claims about how good this would be for the economy. Benefits going directly to the well-off, we're assured, will trickle down to the punters.

But rarely do the advocates of such reforms spell out the mechanisms by which lower rates of tax are supposedly transformed into greater effort to "work, save and invest", much less produce empirical evidence.

It's remarkable how many highly trained economists go along with this self-serving pseudo-science.

There are two giveaway signs that the present push on taxes isn't genuine reform. First, the one area where there's solid evidence that high (effective) marginal tax rates are discouraging work effort is in returning mothers' transition from part-time to full-time work, but no one's proposing to do anything about this.

Second, if people are so anxious to respond to globalisation's threat to our tax base by shifting it away from taxing mobile resources, how come they're so set on increasing the GST rather than taxing the ultimate immobile resource, land?

Of course, we've yet to see how far Malcolm Turnbull will go in seeking to give his party's business backers the "reform" they seek. If he doesn't go far, they'll brand him as lacking courage. It will be more accurate to say he lacks foolhardiness. Rejigging the tax system to favour the better-off will always be hard to sell to the rest of the electorate.

As for industrial relations reform, there's never been a time when it's less needed. Certainly not the reform that gives employers more power to limit the wage rises of their workers. This stuff is straight wishful thinking by bosses.

One thing we'll notice this year is the potential for conflict between tax reform and budget repair. It was good last week to see the secretary to the Treasury, John Fraser, discharging Treasury's sacred duty to put fiscal rectitude above all else, by reminding us of the importance of returning the budget to surplus.

Predictably, the political journalists' conclusion that Fraser was warning of the imminent loss of our AAA credit rating missed the point. Rather, he was openly correcting his masters' repeated contention that a return to "growth and jobs" (mysteriously brought about by business-biased tax reform) would fix the budget problem.

Not when the deficit you're running is more structural (caused by explicit spending and taxing decisions) than cyclical (caused by temporary weakness in the economy), he told them. So there's no substitute for hard decisions to cut spending and raise taxes.

Can the Turnbull government reform taxes and repair the budget in the same year? We'll see, but I doubt it.

In any case, it won't get far as long as it sticks to its political ideology that higher taxes are the greatest economic evil, so the only acceptable way to return the budget to surplus is to slash government spending.

Trouble with this mentality is that while it rests easily in the minds of conservative governments – and Treasury secretaries – in practice it's almost impossible to implement.

That's because it shifts the burden of repair towards welfare recipients and ordinary wage-earners, and away from high income-earners using concessions and loopholes to pay less tax than they should.

Problem: the votes of the chosen victims far outweigh the votes of the high-income beneficiaries. Surely Turnbull, Scott Morrison and Fraser learnt that from the utter disaster of the government's first budget.

He didn't say it, but Fraser's speech implied that recent increases in spending on the disabled, on disadvantaged school kids and on higher wages for welfare and childcare workers were a waste of money and needed to be chopped back.

If we never get back to budget surplus, such ideological bias and pig-headedness will be a big part of the reason.