Liberals paying for Labor’s bigger government, as usual

The Liberals have always been right to portray themselves as the party of smaller government and Labor as the party of tax and spend. If you think that changed with last week's budget, you don't remember Australia's fiscal history.

But two qualifications. One, Labor often stands more for spending first and reluctantly thinking about higher taxes only when the bills start coming it.

That’s after it has carefully structured some new scheme so its true cost isn’t apparent for several years, after it’s too late to pull back.

Two, the Libs have never had any success at shrinking the size of government after Labor's latest spending spree. Their role when in office has been to keep the lid on further demands for bigger government.

But they've always reluctantly submitted to the reality of the "spending ratchet": once some new spending program has become established, there's no way the electorate will let you chop it back.

That's what last week's budget was about: not the Libs becoming big spenders, but Malcolm Turnbull's recognition that it was his responsibility to find a way to pay for Labor's national disability insurance scheme and shift to needs-based school funding, not to mention the ever-growing cost of Labor's most popular government expansion, Medicare.

The spending ratchet is seen in every developed economy. It's what's stopping Donald Trump abolishing Obamacare. What do you replace it with that's just as good?

The two main parties have played these complementary roles at least since the end of World War II.

Bob Menzies and his successors spent two decades resisting, or fending off for as long as possible, all demands for widening the government's responsibilities.

He even delayed the introduction of television until the looming Melbourne Olympics in 1956 forced his hand.

Leaving aside its ministers' utter inexperience, this does much to explain the excesses of the Whitlam government.

Labor felt it had 23 years of catching up to do, and tried to do all its modernising in three years, more than doubling government spending.

Gough had no worries about how he'd pay for it all: he wouldn't need to raise taxes because rampant inflation meant bracket creep would cover everything. Oh, no probs then.

Malcolm Fraser's government stopped the growth in spending, but did nothing to diminish it. It did, however, manage to dismantle Medibank, deeply hated by the Libs.

The Hawke-Keating government focused more on macro-economic management and micro-economic reform than bigger government, but it did restore Medibank as Medicare, and institute compulsory employee superannuation.

For once it did pay its bills, achieving big budget surpluses before the onset of the next recession.

By the time John Howard won government in 1996, he'd learnt his lesson and pledged not to touch Medicare. He hated compulsory super – which he saw as giving his union class enemies influence in the halls of capitalism – but didn't dare to dismantle it.

Howard did much to undermine our ultra-low-cost, means-tested welfare state – the main reason our tax level remains among the lowest in the developed world – by introducing middle-class welfare in the form handouts for self-proclaimed self-funded retirees, tax subsidies for private health insurance and greatly increased grants to private schools.

Peter Costello's later mania for tax cuts – from which the budget is still recovering – was explained by his still-unchallenged record as our highest taxing treasurer: 24.2 per cent of GDP in the mid noughties. And Turnbull was left to rein in Costello's unsustainably generous super tax breaks for high-income earners.

Kevin Rudd thought every problem could be fixed by spending a lot more money. For instance, he mortgaged the budget's future by increasing the base rate of the age pension, something Howard wouldn't have dreamt of doing.

It was our good fortune to have a spendthrift like Rudd in charge of the national chequebook when the global financial crisis hit and a generous cash splash was exactly the right response.

In the end, however, it was Julia Gillard who moved government responsibility and spending to a new plane with her cowardly no-losers version of needs-based school funding and the hugely expensive NDIS, not to mention higher pay for female childcare workers.

Be clear on this: most of the costly expansions of government responsibility introduced almost exclusively by Labor involved long overdue recognition that a country as rich as ours need not suffer under a third-rate public sector – private affluence but public squalor.

It's just a pity that the party so willing to bring us decent provision of public goods, so often leaves to the other, "smaller government" party the dirty work of finding ways to pay the bill.

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Politicians have worked hard to make house prices so high

It has cost the budget a lot of money to make the prices of homes as hard to afford as they now are.

If this shocks or puzzles you, it's intended to. It shows the economics of house prices is more complicated than most people realise. And than can be deduced from the things politicians on both sides say and do in the name of improving home affordability.

The surprising truth is that most of the things pollies – state as well as federal – do in the name of making housing more affordable actually make it less affordable – as well as having a significant cost to their budgets.

It's not surprising that most politicians, not being economists, don't know much about the economics of house prices. But the same can't be said of their Treasury advisers.

So we're left wondering whether our politicians pursue their counterproductive solutions in ignorance of their econocrats' knowledge, or whether the pollies fully understand they're making things worse for first home buyers, but don't care because they also know the punters won't realise they've been conned.

Why do such a thing? Because the pollies know – thanks to their econocrats' advice – that the actual beneficiaries of the things they do in the name of improving affordability are people who already own a home.

And that's a much larger group of voters than the group of would-be home owners.

Scott Morrison advises that the budget in May will have a "housing affordability package" at its centre. Fine. We'll see then how much it does to help or hinder first home buyers.

This is a tacit admission that home affordability has become too hot politically for the government to get away with merely repeating that the obvious solution is to increase the supply of new homes – which just happens to be the primary responsibility of the states, not the feds.

It's true that house prices rise when the demand for them grows faster than their supply is growing. But to imply that the problem can be solved simply by building more homes is to reveal your ignorance of how the housing market works.

Homes aren't a simple consumer good to be bought and soon used up. They're a long-lived asset, one that delivers a flow of service over many years – shelter – while retaining – and, everyone hopes, increasing – their resale value.

This means there's a huge stock of existing homes, the number of which is increased only a per cent or two by each year's building of new homes.

It means, too, that the demand for home ownership is driven not just by people's desire to own the home they live in, but also by their desire to invest in an asset whose value is expected to appreciate.

But if you already own a home, why stop at one? Why not invest in a few of them – especially if such investments are made more attractive by tax breaks such as negative gearing and the 50 per cent discount on the tax on capital gains?

Homes – units as well as houses – come in all shapes and sizes. Not to mention widely differing locations.

One thing this means is that merely building a lot more houses on the outskirts of the city will do little to satisfy the demand of people fighting over the limited supply of homes close to the centre of the city (where most of the good jobs are).

Sensible thinking about housing affordability is plagued by the "fallacy of composition" – the misplaced assumption that what works for the individual must work for everyone.

Take the Victorian government's decision to help first home buyers by reducing or removing the stamp duty they pay.

The individual couple hears this and thinks this will make it easier to afford a first home. Sorry, it won't. Why not? Because all first home buyers will get the same help, thus robbing the individual of any advantage over the other people competing for the place they're after.

All such attempts to make homes more affordable to first home buyers by supposedly lowering the cost of homes backfire. Because demand continues to exceed supply, what happens is that competing buyers use their tax concession to bid the price of first homes even higher.

So the supposed benefit to first home buyers ends up in the hands of those existing home owners who sell them their home, then move on to another. But this doesn't diminish the concession's cost to the state's budget.

When the Howard government introduced the 50 per cent discount on the tax on capital gains in 1999 and made it available to people with negatively geared property investments, it could argue that, by making property investment more attractive, it would increase the supply of homes.

To the extent it induced investors to buy newly built homes, it probably did – a bit. But the main thing it did was to increase investor demand for existing homes, particularly the type of homes bought by first home buyers.

This tax change prompted a massive increase in negatively geared property investment, at great benefit to the investors (almost all of whom would be existing home owners) and at huge annual cost to the federal budget.

It has cost the budget a lot of money to make the prices of homes as hard to afford as they now are.

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This year changed the politics of tax reform

The disease known as "confirmation bias" is endemic among economists. They have a marked tendency to remember events that seem to confirm the correctness of long-held beliefs, but forget developments that challenge their prejudices.

So their pre-existing notions about how the world works become ever more firmly held.

In which case, let me remind them - and you - of the view-changing lessons about tax reform they probably haven't learnt from the results of recent elections.

Economists, politicians and business people have long-held views about which tax reforms are relatively easy to bring about politically, and which aren't.

But some of these assumptions have been turned on their head by the Turnbull government's poor showing at the election in July, and by the comfortable re-election of the ACT Labor government last month.

In this year's federal election, tax reform was perhaps the biggest single issue. It was, you recall, the one to which the Coalition government was expected to bring a package of comprehensive tax changes, following a green paper and white paper decision process.

The process didn't happen, nor were either Tony Abbott or Malcolm Turnbull willing to propose the much-mooted increase in the goods and services tax.

There was no package as such, just a collection of tax measures announced in the budget brought down just before the election campaign started.

The big one was a plan to reduce the rate of company tax from 30 per cent to 25 per cent, phased in over 10 years, with smaller companies going first and the cuts not reaching big business until 2024.

This was the centrepiece of the government's claim to have a "plan for jobs and growth". To this it added a tiny income tax cut of up to $6 a week for the top 20 per cent of taxpayers, earning more than $80,000 a year.

But the budget included various tax increases to help pay for these tax cuts. It pinched Labor's plan for a further big, phased increase in tobacco excise, and adopted its own versions of Labor's plans to cut back tax concessions on superannuation and extract more tax from multinational corporations.

Labor had been first to put its tax reform cards on the table. It proposed also to phase out negative gearing of property investments and cut the discount on capital gains tax.

The government considered its own measure to reduce negative gearing, but finally decided to do nothing, thus leaving itself free to claim Labor's plan would wreck the housing market. Product differentiation.

But here's our first lesson on the politics of reform: it's a lot easier for governments to propose possibly unpopular reforms when the opposition has already stuck its neck out, or when cabinet has reason to believe the opposition won't attack it for acting.

We can deduce from opinion polling, from the debate during the campaign and from the election outcome how these various reform measures went down with voters.

The tobacco excise increase, the crackdown on multinational tax avoiders and the tiny tax cut hardly rated a mention in the campaign.

Had the small but expensive tax cut not be made, it's doubtful if the Coalition would have lost many votes. Bracket creep is rarely a biting election issue.

The crackdown on multinationals was probably intended to answer the criticism that companies hardly need a tax cut when they were already paying very little, but it could just as easily have reminded voters of this argument.

The super changes attracted little discussion publicly, but did anger some well-lined Liberal supporters. After the election the measures were toned down accordingly.

But it's hard to believe the Libs lost many votes over it when Labor had similar proposals. Nor that many people loaded enough to have a problem with the super changes would have switched their vote to One Nation, as some claim.

It seems pretty clear the cut in company tax wouldn't have gained the Coalition many votes it didn't already have, but probably lost it quite a few.

The public has little sympathy for big business - can't think why - and the claim that the benefit of company tax cuts would trickle down to the rest of us wasn't believed.

Even the government's own modelling showed the belated effect on "jobs and growth" would be minor. For the punters, the link was impossible to see.

By contrast, the government's attack on Labor's negative gearing policy didn't stick and the policy may have gained more young voters than it lost from older property investors.

Economic theory tells us taxes on land are about the most economically efficient - doing least to distort the choices people make about working, saving and investing - of all taxes.

They're particularly attractive when the increasing ease with which financial capital can be moved between tax jurisdictions is used as a key argument for reform, including increasing the GST. Land is immovable.

Land tax is also much fairer - "progressive" - than "regressive" GST, which takes a higher proportion of lower incomes than higher ones.

The value of the land people own tends to be highly correlated with their overall wealth.

But many reform advocates say raising land tax would be even harder politically than raising the GST.

Well, they should note the case of the Labor government in the ACT, which got comfortably re-elected even though it has been implementing a reform long advocated by tax economists: slowly phasing out stamp duty on property conveyances while phasing in a universal land tax.

Of course, there are no controlled experiments in economics, and many factors - notably, perceptions of a government's general competence - play a part in election outcomes.

Even so, this year's elections cast doubt on some supposedly self-evident truths in the politics of tax reform: that company tax cuts won't be a problem, whereas negative gearing, superannuation and land tax are untouchable.

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Why the super tax changes mustn't be watered down

Everyone wants to know what achievements Malcolm Turnbull can point to after his first year as Prime Minister. Well, I can think of something: his reform of the tax breaks on superannuation – provided he gets it through without major watering down.

Why is it such a big deal? Because it ticks so many boxes. Because it makes the taxation of super much less unfair.

Note, I didn't say much fairer. It will still be an arrangement that gives the least incentive to save to those who find saving hardest, and the greatest to those whose income so far exceeds their immediate needs that they'd save a lot of it anyway.

A report by John Daley and others at the Grattan Institute, A Better Super System: Assessing the 2016 tax reforms, independently confirms the government's claim that the changes will adversely affect only about the top 4 per cent of people in super schemes.

That still leaves a lot of well-off people – including the top 4 per cent – doing very nicely out of super.

Remember this when Turnbull's backbenchers embarrass their leader and add to their government's signs of disarray by pressing for the changes, announced in this year's budget, to be watered down.

Whose interests did you say the Liberal Party represents? Why exactly does it claim ordinary middle-income voters can trust the party to look after their interests?

But back to the reform's many attractions. It would cut back one of the major loopholes that make tax paying optional for the well-placed but compulsory for everyone else; that allow very high income-earners to end up paying a lot less tax than they're supposed to.

A lot of the savings from reducing concessions to the high fliers (who, you should know, include me) would be used to improve the bad deal given to low income-earners and to make other changes but, even so, would produce a net saving to the budget of $770 million in 2019-20.

This saving would get a lot bigger over time.

So the super reforms would contribute significantly to reducing the government's deficits and debt, but do so in a way that spread the burden more fairly between rich and poor than the Coalition's previous emphasis on cutting welfare benefits.

A lot of well-off people have been using super tax concessions to ensure they leave as much of their wealth as possible to their children – a practice lawyers refer to euphemistically as "estate planning".

Wanting to pass your wealth on to your children is a human motivation as old as time. The question is whether it should be subsidised by other taxpayers.

If it is, rest assured it's a great way to have ever-widening disparity between rich and poor. In the meantime, it adds to (recurrent) deficits and debt.

The rationale for Turnbull's changes is the decision that superannuation's sole purpose is to provide income in retirement to substitute for, or to supplement, the age pension.

They fall well short of eliminating the use of super tax concessions to boost inheritance, but they make a good start.

This is the goal of the three main measures Turnbull wants. Reducing the cap on before-tax contributions to $25,000 a year will save almost $1 billion in 2019-20.

Capping at $1.6 million per person the amount that can be held in a retirement account paying no tax on the annual earnings. Any excess balance will have its earnings taxed at the absolutely onerous rate of 15 per cent – less dividend imputation credits. This will save $750 million a year.

Introducing a $500,000 per person lifetime cap on after-tax contributions, counting contributions since 2007, will save $250 million a year.

If those caps strike you as low, you're just showing how well-off you are. The huge majority of people will never have anything like those amounts.

They're set at levels sufficient to allow a comfortable retirement even for those anxious to maintain a high standard of living. Anything more and you're in estate planning territory – or you just want every tax break you can get because you're greedy.

The claim that starting to count contributions towards the $500,000 cap in 2007 (the time from which good records became available) makes it "retrospective" is mistaken.

The measure is prospective in that it applies to income earned after the day it was announced, not before.

Where contributions in excess of the cap have been made already, they won't be affected by the measure.

Any tax change is likely to affect the future tax consequences of actions taken in the past. That doesn't make it retrospective.

To say "I had planned to do things in the future to reduce my tax which now won't be effective" is not to say the changes are retrospective.

Sometimes politicians announce changes well before they take effect, to allow people to "get set". But it's common for them to make tax changes that take effect from the day of announcement, precisely to stop people getting set. That doesn't make the change retrospective, either.

As Daley says, "the proposed changes to super tax are built on principle, supported by the electorate, and largely supported by all three main political parties.

"If common ground can't be found in this situation, then our system of government is irredeemably flawed."

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Morrison's unplanned plan to fix the budget

Scott Morrison can use scare tactics in seeking greater support for his task of getting the budget back on track, but he'll do better by spreading the needed sacrifice more fairly. That means holding the line on his superannuation reforms against his own backbenchers.

Morrison isn't alone in fearing that our completion of 25 years of continuous economic growth has left many of us complacent, unaware of the tough measures we needed to put up with to make this success possible and, equally, the further discomfort needed to keep it going.

There's truth to this, no doubt. But I doubt that scare tactics are the way to puncture that complacency and win wider acceptance that we all need to take some pain for the greater good.

Morrison's claim in his latest speech that, given a host of dire but unstated assumptions, federal gross debt could reach a trillion dollars in a decade, is an easy way to get a headline but is unlikely to make anyone more amenable to unpopular budget measures.

Does the man not realise that, after decades of dishonest dealing with voters by both sides of politics, no politician has the credibility to have such extreme claims believed – or even remembered?

More fundamentally, do Morrison and his Treasury advisers not realise that their practice of exaggerating the budget deficit by refusing to distinguish between capital and recurrent spending – by, in effect, claiming that failing to pay for long-lived public infrastructure fully in the year of construction is financially irresponsible – is wearing thin and robbing them of support from the more economically literate?

The truth, if the budget papers are to be believed, is that the recurrent budget is already close to balance – which is not to say we shouldn't now aim for a period of recurrent surpluses so as to liquidate the part of our accumulated debt arising from earlier recurrent deficits.

No, a better way to win public acceptance of unpleasant budget measures is to demonstrate that the burden of restraint is being spread fairly between the bottom, middle and top income-earners.

The biggest single reason the Coalition has, from the beginning, met such resistance to budget repair from the public – and, therefore, the Senate – is its blatant lack of concern for fairness.

Remembering our tightly means-tested welfare system, to start from the premise that the budget has a spending problem, but not a revenue problem, is to pre-ordain that your savings measures will focus on spending programs benefiting the bottom and middle, while ignoring the "tax expenditures" favouring the top.

The Coalition's first term is testament to the truth that making budget repair conditional on achieving smaller government – lower government spending without any increase in taxation – is a recipe for failure on both.

Ostensibly, Morrison's talk of "the taxed and taxed-not" and repetition of his mendacious claim that "you don't encourage growth by taxing it more" suggest he's learnt nothing about the compromises he himself must make if he's to succeed in repairing the budget.

But things have changed, as witness Morrison's weasel-word acceptance of the need for measures to "protect the integrity of our tax base".

This year's (still unpassed) budget was aimed not at budget repair but at tax reform. To this end it nicked Labor's plan for further huge increases in tobacco tax, introduced convincing measures to greatly increase taxes paid by multinationals and cut back and redistributed superannuation tax breaks for high-income earners.

Even its $6-a-week tax cut for the top quarter of taxpayers is insufficient to prevent income tax increasing through continuing bracket creep, let alone give back proceeds from the creep that occurred under the Coalition's previous two budgets.

These tax increases were made to help cover the initial costs of the 10-year phase-down in the rate of company tax, of course. Over its life, however, the tax package looked to be "budget negative".

But here's the trick: Morrison looks a lot more likely to get his various tax increases through the new Senate than his cut in company tax.

If so, he'll end up doing a lot to improve the budget balance, and doing it in a much fairer way than all the collected penny-pinching in his $6 billion "omnibus bill", as revealed by Jessica Irvine.

But the perception of greater fairness, as well as the saving to the budget – both initially and in subsequent build-up – will be hit hard should the revolt by a few government backbenchers over the super changes succeed in letting a handful of rich Liberal supporters off the hook.

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Election result need not be a setback for good government

Maybe those who complain about a boring election campaign are condemned to an exciting election finish. Many in the establishment – particularly the business establishment – have convinced themselves the country is off to hell in a handcart, but it doesn't have to be like that.

The nation won't be ungovernable provided Malcolm Turnbull is willing to negotiate with the minor parties when necessary – hardly a new experience for governments, which rarely have a majority in the Senate.

Nor does it follow that the government will be unable to hasten the budget's return to surplus.

As a study by the Australia Institute has demonstrated, much of this year's budget can be legislated, particularly with a little compromise.

In any case, the budget is not the economy. And, contrary to any casual impression you may have absorbed, the prospects for the economy remain reasonable.

Brexit is bad news for the Brits, and adds to Europe's many problems, but it's not big enough to greatly affect the rest of us. The US economy is gathering speed.

The messy election result won't have much effect on the economy. Business loves whingeing about "uncertainty" – when it's got nothing else to do or say, that's what it does – but the period of transition from the mining investment boom is getting towards its end and, as it does, the rest of business will be getting on with it.

The economy has been growing at a rate that's about average, and the best guess is it will continue doing so. It has been creating additional jobs and this should continue.

For all that, however, there are messages for politicians on both sides from this election. How well they listen will determine how well we are governed over the next three years.

(Don't fall for the one about how we'll be back to the polls in no time. The more-excitable always say that at times like this.)

The first message comes from the continuing decline in people voting for the major parties. The proportion of voters giving their first preference to a minor party reached almost one in four.

This is not surprising when you remember how standards of conduct have fallen: the broken promises, the scare campaigns, the negativity and automatic opposition to whatever the other side says, the statements that are true in some sense but have been crafted to mislead.

The plain fact is that the mainstream politicians have forfeited our trust and lost our respect.

Many of us have concluded they're all liars, and we tune out whenever they start slagging each other off, or arguing about who has the bigger hole in their costings. They could save themselves much energy if they learnt not to bother doing this.

The message for the government is that it must broaden its appeal if it wants to attract a comfortable majority of two-party-preferred vote.

Any lapse into infighting between Abbott and Turnbull supporters will be the final proof the Coalition is no different from Labor.

The Coalition campaigned on its plan for jobs and growth (which boiled down to a cut in the rate of company tax), while Labor campaigned on the public's worries about cuts to government spending on education and health.

Labor's success in this argument explains why it did so much better than expected.

The Coalition suffered from the lingering resentment and suspicion provoked by Tony Abbott's first budget, which attempted to fix the deficit almost solely through cuts to the spending on health, education and welfare depended on by low and middle income-earners, while protecting the earnings of businesses supplying services to government and the tax breaks enjoyed particularly by high income-earners.

Many of those measures were abandoned, though some remain "zombie measures", rejected by the Senate but still on the government's books.

The memory of that deal-breaker budget was kept alive by Scott Morrison's insistence that the budget had a spending problem, not a revenue problem. (Surely Turnbull will use this opportunity to find Morrison "a job to which you're better suited".)

The message for the Coalition is obvious: it must switch to budgeting for all Australians. That means tax increases as well as spending changes that seek genuine efficiencies in contracting with business suppliers (drug companies, for instance), not just cost-shifting to the public.

The message for Labor is that its strategy of not being as obstructionist towards the government as Abbott in opposition was towards it, and of making itself a big target in the election by proposing "positive policies" (such as limiting negative gearing), worked well.

So now is not the time to revert to Abbott-like spoiler behaviour – if I wreck the joint they'll have to give up and hand over to me.

When they combine, the two sides can get anything through the Senate. Labor can win itself voter respect for being sane and sensible without bowing to the government's every wish.

It can help with the compromises. And when the government's fighting the good fight against powerful interests (such as the two big pathology companies, and the Coalition greedies​ making spurious claims about retrospective super changes) it can resist the unworthy temptation to take advantage of it.

With Labor now hopeful of winning next time, any budget nasty it helps the government fix now will be a problem it won't have to fix then.

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Voters reject economics as usual

Assuming the government scrapes back in, this surprisingly poor election result for the Coalition carries hard lessons for politicians and those who seek to influence the policies they pursue: business people, economists and econocrats.

In this election economic issues dominated, and those hard lessons are about economic management and economic reform: what voters will let you do and what they won't.

It was a fight between a "national plan for jobs and growth", and health and education. Guess what? Spending cuts lost more votes than tax increases did, or than tax cuts won.

The temptation to explain the Coalition's disappointing result in terms of personalities ("I've never liked Malcolm and now I have proof") and poor political tactics, shouldn't be allowed to obscure the lessons for economic policy.

There are two. First, the strategy of trying to fix the budget deficit solely on the spending side has been a dismal failure. Only a more balanced approach is likely to be politically acceptable.

The Coalition will do itself a disservice if it believes its own bulldust that it did so poorly purely because of the success of Labor's big lie about privatising Medicare. More on that another day.

The strategy of the Abbott government's first budget was to return the budget to surplus by cutting government spending while avoiding tax increases or cuts in tax concessions almost completely.

The public's reaction was so hostile Tony Abbott was rendered unre-electable. But, though few of those measures went through, Scott Morrison has persisted with the strategy by repeatedly claiming the budget has a spending problem, not a revenue problem.

Such a strategy involves fixing the budget at the expense of low and middle income-earners, while largely shielding high income-earners and business.

The political arithmetic of this was always what Sir Humphrey would call "courageous" and so it proved on Saturday.

Remember, the Turnbull government's plans still included huge cuts in grants to the states for public hospitals and schools, plus measures doctors claimed would force them to stop bulk-billing. Plus an unspecified future increase in university fees.

Many voters would also remember the enormous stuff-up of the attempt to privatise technical and further education.

On the other side of the budget, the Coalition has acted as though fixing the deficit by increasing taxes or cutting tax concessions was economic and political anathema.

This is nonsense - as the election shows. The government actually went to the election with plans to increase taxes, on tobacco and on multinational companies, which drew no criticism.

Its plan to cut superannuation tax concessions drew noisy criticism from a few people who would never have not voted Liberal.

Its heavy past – and future – reliance on bracket creep drew no criticism. Nor did Labor's plan to continue the temporary "budget repair" levy on high income-earners.

Point is, the Coalition's willingness to propose tax increases came only to help pay for its planned phase-down in the rate of company tax, not as part of its efforts to return the budget to surplus.

It lost votes for wanting to cut company tax, thus reducing any political benefit from its plan for jobs and growth. In any case, the cuts are now unlikely to get far in the Senate.

Message: we won't achieve much in fixing the budget until we're prepared to increase tax as well as cut spending and, in the process, share the burden more fairly between the top, middle and bottom.

The election result's second lesson is that, in our efforts to make "reforms" that increase economic efficiency and improve our productivity, we should stop gratifying rent-seeking by big business and start listening to other advice, including the majority of recently polled economists saying the long-run growth dividend from spending on education is greater than an equivalent amount spent on business tax cuts.

We should abandon the voter-rejected experiment with reform via tax changes and shift to productivity-enhancing reform of education, infrastructure and, would you believe, health (because health is one of our biggest and fastest growing industries, but quite inefficient).

If you think this conflicts with all I've just said about repairing the budget in ways voters will accept, it's clear we – and, more particularly, our pollies and their econocrat advisers – have a lot more thinking to do.

Lifting our productivity via education, infrastructure and health doesn't have to involve spending a lot more on them, and may well involve achieving slower rates of spending growth.

That's because it mainly involves making spending in these areas more efficient and effective. That is, genuine reform, not just the mere cost-shifting we tried – and voters have rejected.

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Parties' similarities and differences on economics

I get criticised by rusted-on supporters of both sides of politics when I say this, but that doesn't stop it being true: there are differences between the two sides' policies, but they're not as great as they want us to believe (and their supporters do believe).

So let's identify the main points of agreement and disagreement. Most argument in election campaigns is about economic issues, with much less disagreement on other issues.

On economic management the parties are agreed on the issue which, though it's rarely acknowledged by either side, is by far the most significant: that the day-to-day management of the economy be left to the Reserve Bank, acting independently of the elected government.

That just leaves the government in control of its budget, which does have effects on the economy in the short and longer term but, because it's all the pollies have left to argue over, gets more attention than it deserves.

On getting the budget back into surplus – and so getting the level of public debt falling rather than continuing to rise – there's little to choose from. The Coalition isn't in any hurry, and nor is Labor.

Malcolm Turnbull says his policies won't have the budget back to surplus until 2020-21, after which the surplus will stay tiny.

Bill Shorten's plans say he will get back to surplus in the same year, though he'd spend an extra $16.5 billion over the four years, but then add an extra $27 billion to the surplus in the following years to 2026-27.

(You can say who knows what will happen in four years' time, let alone 10. True. But remember this applies equally to both sides' figuring. All we can do is focus on the estimated effects of the measures each side promises to take.)

The main differences between Labor and the Coalition occur because Labor would not proceed with the government's planned cuts to spending on education and health while, on the other hand, it would continue the 2 per cent "deficit levy" on income above $180,000 a year but wouldn't proceed with the government's planned cut in company tax.

It's because the cost of the company tax cut grows strongly in the later years, as do the savings from Labor's plan to "grandfather" its limits on negative gearing and the capital gains tax discount, that Labor's budget plan would take so long to improve the budget balance.

It's clear from this that when the Liberals accuse Labor of being into "spending and taxing" it is guilty as charged.

The harder question is whether government spending and taxes would be all that much lower under the Coalition. If so, it won't be by as much as it would have us believe.

It's not clear, for instance, that the Coalition will have the political courage to press on with the cuts in grants to the states for public hospitals and schools that are built into its budget figures.

The main difference is likely to be in the categories of spending that grow faster or slower under each side, and in the types of taxes and tax concessions that are cut or increased.

For instance, it's clear to me that the high cost of cutting the rate of company tax will have to be covered by more bracket creep and fewer income tax cuts.

On particular tax promises, though both sides are promising cuts to superannuation tax concessions, the Coalition's plans are clearly superior, whereas Labor's plan on negative gearing is far more attractive to young would-be home buyers.

The public's conviction that the Coalition is the better manager of the economy seems to roll on regardless of evidence. In truth, it's not supported by the record. Both sides have had their achievements and their stuff-ups.

Economic threats don't come bigger than climate change. Here, both sides' plans fall short. The Coalition has announced no credible plan to achieve the commitments it made in Paris which, in any event, were inadequate.

Labor is braver, but not by much. It plans a hugely ambitious target for growth in renewable energy, but doesn't show how it will be achieved. It plans a quite innocuous emissions trading scheme.

Both sides descend to dishonest scare campaigns. Both sides have previously supported policies they now vociferously oppose. Both may oppose policies simply because the other side supports them.

In some cases their disagreement is greater than they want to admit (penalty rates, for instance), whereas in others they disagree more in words than deeds (foreign aid; the national broadband network).

One rule-of-thumb that still works is that, in their decisions about spending and taxing, the Coalition will tend to favour business and higher income-earners, whereas Labor will tend to favour "middle-class and working-class Australians". Take your pick.

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How not to cut government spending

The bloke who really runs the economy, Reserve Bank governor Glenn Stevens, has spoken: "There are quite some years of hard repair work ahead for whoever is the government over the period ahead."

He was endorsing the earlier warning of Treasury secretary John Fraser and Finance Department secretary Jane Halton that, given the Turnbull government's professed commitment to limiting the growth in tax collections, getting the budget back to surplus won't be possible "without considerable effort to reduce spending growth".

Trouble is, "reducing spending growth has proved difficult in practice", they said. Really?

This year's budget does little to reduce government spending and has trouble even in sticking to the Coalition's resolve to ensure all new spending (of which there's always a fair bit) is offset by spending cuts.

The practice of requiring spending departments to nominate equivalent cuts to cover their new spending programs may seem a healthy discipline.

But when you've been playing that game for years, the departments adapt, learning that their inefficiencies are valuable currency, not to be offered up except in return for some exciting new program.

It's a similar story with the ironically named "efficiency dividend" imposed on government departments and agencies, which is to be ramped up for a further three years, saving $1.4 billion on top of the normal "dividend".

Truth is that, contrary to popular impression, the cost of public sector wages, paperclips and so forth is such a tiny proportion of total federal (as opposed to state) spending that no amount of "efficiency dividends" could make a noticeable difference to the deficit.

But that's not to deny that yet further penny-pinching will worsen public service efficiency. The cuts have gone on for so long that "efficiency dividend" is now a euphemism for further compulsory redundancies.

The people who get the bullet tend to be those who could help their department and the government formulate better policies – not to mention the long-gone people in Treasury and Finance who knew where the real inefficiencies are still buried.

The point is that when you see a government resorting to yet another round of indiscriminate, no-brainer cost cutting you realise it isn't fair dinkum about "reducing spending growth".

Another sign of unthinking half-heartedness is when – as in this budget – you see the pollies taking the path of least resistance: picking on only those interest groups that lack political clout and public sympathy.

Such as? Well, public servants, for openers. We could cut the funding and staff of the Australian Securities and Investments Commission (until the opposition demands a royal commission into bank misbehaviour) and the Tax Office (until the punters get wind of how little tax the big multinationals are paying).

But also the unemployed, sole parents, overseas aid (with a budget deficit we can't afford to give money to poor foreigners, though we can afford to give tax cuts to rich foreign shareholders), legal aid and domestic violence (until Rosie Batty caught up with us).

Point is, if screwing the politically defenceless is the best you can do to control government spending you're never going to make it. They don't have enough to cut.

Until you're prepared to take on the powerful interest groups with their hands in the taxpayer's pocket – starting with the doctors, chemists, drug companies and private health funds, then moving on to the mining companies and even, dare I say it, the farmers and the self-seeking "self-funded retirees" – you won't make a dent.

Malcolm Turnbull does get big points for finally catching up with Costello's Battlers aka rich superannuants. The budget's superannuation reforms are a good example of expenditure control (in this case, tax expenditure) measures, carefully worked up by the econocrats over many weeks.

Treasury has had the reform of super high on its to-do list for yonks. My fear is that Finance – which has primary responsibility for the spending side – doesn't have any well-developed ambitions for genuine increases in the efficiency and effectiveness of major spending categories such as health, education and even defence.

There's been far too little championing of sophisticated measures invented by applied economists – such as income-contingent loans and case-mix funding of hospitals – and investing in later spending control, such as preventive healthcare.

When the econocrats aren't working up and pushing genuinely efficiency enhancing reforms, when they don't want to waste money on studies to determine what works and what doesn't, they and their political masters end up falling back on ad-hoc, end-justifies-the-means, no-brainer savings such as inefficiency dividends and cuts to grants to community groups that care more and try harder than any public servant would. Great Idea.

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Shorten gains tactical advantage over Turnbull

Various of the tax changes the Coalition government is taking to the election are things it earlier said it wouldn't do. And various of the tax changes it now says it wouldn't dream of doing are things it earlier dreamt of doing.

What's more, various of the tax increases it ended up copying from Labor – the further swingeing increases in the excise on tobacco, the crackdown on multinational tax shirkers and the cutbacks in superannuation tax concessions for the wealthy – it had earlier criticised Labor for doing.

Partly because of its change of leader, the Coalition has had trouble deciding what it will or won't do. But also, I suspect, Malcolm Turnbull is the kind of leader who tends to make up his mind in semi-public, weighing the pros and cons before deciding which way to jump.

Labor, on the other hand, made up its mind early about its key policies. That's partly in response to the public's reaction against Tony Abbott's extreme negativity while in opposition.

It's also because, lacking much to offer in the personality department – and anxious to counter memories of division and instability in the Rudd-Gillard-Rudd years – Labor decided to be the first Opposition since John Hewson and his phonebook-sized Fightback! program to make itself a large target not a small one.

It's been announcing policies for about a year and talking incessantly about its "positive policies" on 100 topics.

The broader point, however, is that the parties aren't nearly as far apart as it suits them to have us believe during election campaigns, when they're whipping up partisan feeling and trying to convince us the choice we make between them will determine whether the economy heads for heaven or hell.

What in recent months we've observed more clearly than usual is the parties manoeuvring for advantage in this year's election campaign.

Most of us have highly stereotypical, caricatured views of the parties' respective strengths and weaknesses.

The Liberals, being the party of the bosses, are better at running things, particularly the economy. They're better at keeping inflation and interest rates low (except that, at present, they're probably too low). They're better at keeping the budget on track, avoiding wasteful spending and excessive taxation.

Labor, being the party of the workers, is better at ensuring wages and working conditions are reasonable. It will do more to keep unemployment low. Being less of a monetary taskmaster, it will do more to ensure government spending on health and education is adequate.

Or so we imagine.

The goal of the parties' manoeuvring is to ensure the main issues over which the election is fought are those that suit their perceived strengths relative to their opponents'.

When an issue arises that favours your opponents, you neutralise it as quickly and quietly as possible – even if that involves going against your stated values.

When, for instance, Abbott tells us of his implacable opposition to higher taxes, so Julia Gillard tries to "wedge" him by proposing a 0.5 percentage-point increase in the Medicare levy to help pay for the national disability insurance scheme, hoping he'll oppose it, he quickly agrees to the increase.

Since the media know election campaigns are about conflict – not about making sure your audience understand what the pollies are doing to them – this two-party conspiracy to raise our taxes is never mentioned again.

Bill Shorten may not have Turnbull's good looks, but I suspect his long experience in the union movement makes him better at political tactics.

Turnbull's vulnerability is that he's easily portrayed as a rich man – Mr Harbourside Mansion – who's out of touch with ordinary Australians, and is in politics to deliver for the Libs' big business backers.

There's a spate of stories about the banks mistreating their customers, so Labor promises a royal commission into banking. Turnbull says that would be quite unnecessary, especially since we already have that ferocious attack dog the Australian Securities and Investments Commission on the job.

What's more, though he's been cutting the commission's funds until now, now he'll increase them.

Who do you think won that skirmish?

At a time when young people are being priced out of home ownership, Labor promises to act against negative gearing. Turnbull thinks of doing something similar, but decides against it. He's defending negative gearers, claiming Labor would cause house prices to collapse.

Who do you think won that skirmish?

There's a spate of stories about big foreign companies paying next to no tax in Australia. Labor promises new taxes to catch them. Turnbull follows suit. What's more, though he's been cutting the Tax Office's funds until now, now he'll increase them.

Because Labor is, as we're always being told, the tax-and-spend party, it has proposed some big tax increases to be paid by smokers, foreign companies and rich superannuants.

It proposes to use the proceeds mainly to restore the funding to health and education cut by the Coalition.

Turnbull copies Labor's three tax increases, but uses the proceeds to help pay for a tiny tax cut for the top quarter of income-earners and a 10-year phased cut in the rate of company tax which, he claims, will do wonders to generate "jobs and growth".

The public believes companies should be paying more tax, not less. Who you think jumped the right way on that one?

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Hard-working Aussies help pay for company tax cut

I often think Scott Morrison does a remarkably good Joe Hockey impression, but in this budget he's performed a Wayne Swan sleight-of-hand that's better than Swanny ever did.

Consider this. Big business has been desperate for a higher goods and services tax. Why? Because this was the only way the government could afford to grant them their longed for cut in company tax.

So when Malcolm Turnbull balked at increasing the GST, it seemed he wouldn't be cutting company tax either.

When the budget was unveiled, however, we still saw the government committing itself to cutting the company tax rate from 30 to 25 per cent over 10 years, and making an immediate start by cutting the rate to 27.5 per cent for all companies with turnover of less than $10 million a year, from July 1.

For good measure, Turnbull and Morrison threw in a small personal tax cut for the top quarter of earners. How on earth did they afford this without a higher GST?

Over the four years of the forward estimates, the company tax phase-down will cost $5.3 billion. Add $4 billion for the personal tax cut and we have $9.3 billion to account for.

The measures in the "tax integrity package" – which include the Google tax – should raise a net $3.3 billion.

The reforms to superannuation tax concessions will save a net $3.2 billion over the period, and the further hikes in the tobacco excise should raise $5.2 billion, meaning the three big revenue-saving measures will raise a combined $11.7 billion.

This leaves the government – the one so committed to lowering taxation – $2.4 billion ahead on the deal.

Satisfied all is in order? I'm not. Once fooled by Swanny, twice shy.

This government has done nothing but complain about how Labor committed itself to two expensive new spending programs – the national disability insurance scheme and the Gonski school funding – which proved to be "uncosted and unfunded".

What Swan did was stagger the introduction of the two schemes so that they didn't cost all that much in the first four years (the ones shown in the forward estimates) but got a lot more expensive in the following years (which we couldn't see).

Get it? This is the same trick Turnbull is using to hide the unaffordability of his vastly more expensive plan to cut the company tax rate over the next 10 years.

Little wonder he was so reluctant to reveal that the cumulative cost of the company tax "glidepath" was a paltry $48.2 billion.

So we've been told how the first $5.3 billion will be funded, but not the remaining $42.9 billion.

A key figure we haven't been told is the annual cost of the tax cut once it's fully introduced. But Deloitte Access Economics' Chris Richardson's estimate is about $16 billion a year.

Clearly, this is far more than the budget's tobacco excise increase, super reforms and company tax "integrity package" are likely to be able to cover.

In the last year of the forward estimates, 2019-20, those three measures are expected to raise only about $5.1 billion.

So if Morrison can now claim that the 10-year company tax cut phase-in has been costed, can he also claim it's been funded?

He's making the same claim Swan used to make by producing the "medium-term projection" of the budget showing it returning to surplus (in 2020-21, no change from the mid-year update) and staying in surplus until 2026-27.

Trouble is, whereas in last year's budget the government's "budget repair strategy" required it to deliver surpluses "building to at least 1 per cent of gross domestic product by 2023-24", this year's projection shows the surplus plateauing at 0.2 per cent for the last six years to 2026-27.

Why? Because progress in increasing the surplus (so as to pay back more debt) has been sacrificed to covering the ever-growing cost of the cut in company tax.

The cut really becomes expensive in the last three years, when big businesses join the phase-in. You can bet this "glidepath" has been carefully structured to stop the medium-term budget projection looking too sick.

Note too that the medium-term projection assumes tax collections are capped at 23.9 per cent of GDP after 2021-22, with the possibility that any excess is used to fund bracket-creep-returning tax cuts for Morrison's "hard-working Australians".

So the projections purporting to show that the company tax cut can be funded by our settling for seven years of a budget surplus no higher than $3.5 billion in today's dollars, also rely on the assumption of no further personal tax cuts for another six years.

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How the budget stacks up as tax reform

When politicians announce a tax cut to be delivered after they've been re-elected, there are no prizes for guessing it's an electoral bribe. But they never fail to sanctify the exercise by assuring the lucky recipients that the money they're getting will do wonders for the economy.

Malcolm Turnbull is going into this election promising a pathetically small tax cut to the top quarter of taxpayers, which starts – officially, anyway – the day before the election.

Plus a one-sixth cut in the rate of company tax that's to be phased in over the next decade, starting small and ending big.

Company tax will be cut because Turnbull & Co Ava Plan to help Jobson Grothe​.

Which sounds nice. But is it good enough?

Before the last election, Tony Abbott promised to devote his first term to laying the ground for major tax reform. There'd be a full inquiry – with no restrictions on what could be considered – a green (discussion) paper and finally a white paper setting out exactly what the government planned to do in its second term if re-elected.

So we're entitled to view the tax measures announced in the budget against the major renovation we were promised.

How does the budget stack up as an exercise in tax reform? How does it measure up against the two big reform criteria of efficiency and equity (fairness)?

Well, the budget contained five big tax measures, but they don't add up to an integrated whole.

First is the tiny tax cut, which will have an annual cost of about $1 billion, and a combined cost of almost $4 billion over the four years of the "forward estimates" shown in the budget.

Then there's the plan to slowly cut the company tax rate from 30 per cent to 25 per cent, but starting with small business and working up in size, not getting to big business until 2024-25 and reaching the finishing line in 2026-27.

This will cost $700 million in the budget year, 2016-17, rising to $1.7 billion by the last year of the forward estimates, and costing $5.3 billion over the first four years.

We've subsequently been told (reluctantly) that, by 2026-27, the total cost of the phase-in will be just a fraction higher at $48.2 billion. Chris Richardson of Deloitte Access Economics estimates that, by then, the annual cost of the full cut will be $16 billion. Not cheap.

Helping to cover the cost of these personal and corporate tax cuts will be a big rise in the excise on tobacco (raising $5.2 billion over four years), the crackdown on multinationals' tax avoidance (raising about a net $3.3 billion over four years), and the net saving from various reforms of superannuation tax concessions ($3.2 billion over four years).

Let's start with equity: how do the tax measures affect the distribution of income between rich and poor households?

Since the tiny tax cut ($6 a week) goes to only the top quarter of income earners, it's "regressive" (reducing high earners' average tax rate by a higher proportion than low earners' average rate). But, obviously, not by much.

On the other hand, the superannuation changes hit the top few per cent of fund members quite hard, then give about half of those savings to members with lower incomes, particularly women. So, quite "progressive".

Strictly speaking, taxes on tobacco are highly regressive – and getting more so as the better paid give up smoking or never take it up.

But is discouraging poor people from smoking doing them harm? Not in my book.

It's a lot harder than you may imagine to determine whether cuts in company tax and reduced tax avoidance by multinational companies are progressive or regressive.

But I'll unpick that knot on another day so we can move on to efficiency. An economically efficient tax system is one that raises the revenue we need with least distortion of the choices each of us makes about working, spending, saving and investing.

Since most taxes do have effects on our choices, the efficiency objective is about choosing the combination of taxes that does least to affect them.

It's a stretch to imagine the tiny tax cut will have much effect on incentives.

And despite the government's claims about the fabulously beneficial effects of the company tax cut, if you actually read its own modelling you discover the benefits are tiny – and would take 30 years to arrive.

People hit by the super changes will tell you they'd discourage saving, but don't believe them. Their effect – if any – will be on which tax-preferred vehicle wealthy people use for their saving. Studies show high income-earners save a lot of their income regardless of the incentives offered.

But there's a class of taxes that are consciously used to discourage certain forms of behaviour. High taxes on tobacco are an example. So is a tax on emissions of carbon dioxide.

And there's another small class of taxes that can't distort behaviour because they tax only "economic rent" – the profits or other benefits people enjoy that are in excess of the returns they need to keep them doing whatever it is they've been doing.

A good example is a resource rent tax. Another is a tax on the unimproved value of land.

Judged as tax reform, this budget does little to improve efficiency by shifting the mix of taxes away from taxing "goods" (such as work) to taxing "bads" (such as pollution). Nor has it done anything to shift towards taxes than don't distort behaviour.

Though one of its first acts was to abolish a tax on a bad – the carbon tax – and a tax designed not to distort choices – the mining tax – the government has done little to replace them with anything better.

This budget is a plan for jobs and growth? Only at the rhetorical level.

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Why Turnbull's super changes are sorely needed

I'll never forget the budget of May 2006. It was during the first half of the resources boom, before the global financial crisis. The economy was booming, tax dollars were pouring into the government's coffers and it was embarrassed at the way the budget surplus kept piling up.

John Howard and Peter Costello were competing with each other to shovel money back out the door. Howard liked spending it on middle-class welfare, whereas Costello wanted to use it to cut taxes.

He was more than halfway through his eight tax cuts in a row, but in the 2006 budget he found a way to go one better. He had to fix some problems with the superannuation system, and he hit on the idea of making sweeping changes to the various super tax concessions that made them far more generous.

The changes would be pretty expensive, likely to grow rapidly every year. But that didn't matter because the budget was overflowing and mineral export prices would stay high forever. An election was coming in 2007 – when the changes would start – and voters would love 'em.

I remember business people saying privately the largesse was too good to last. Big-name economists were saying publicly the new concessions were unsustainable.

That was 10 years ago. Turned out the doubters were right, and last week it fell to the next Coalition government to correct Costello's monumental miscalculation.

People say the politicians are always tinkering with super. It's true. That's partly because, in the intervening Labor years, Wayne Swan chipped away at Costello's excesses in almost every budget.

But the measures announced last week were much more comprehensive, and braver, than anything Labor did – or has promised to do if it wins this election. This is the Libs cleaning up their own fiscal mess, and doing it at the expense of their own supporters.

You've seen all the articles by personal finance journos explaining how the changes will work and heard all the complaints from the well-lined.

So let's focus on the changes from the perspective of public policy, not your pocket. You start to understand their rationale when you realise that, until now, all the tax concessions for super have never had a formally stated objective.

The new objective is "to provide income in retirement to substitute or supplement the age pension". Which is a nice way of saying we're no longer going to let you use super to amass far more than you're ever likely to need to live on – that is, to get a tax break on savings you're intending to leave to your kids.

In principle, there are three points at which the government could tax money being saved for retirement: when you make contributions to your fund from your annual income, when the money in the fund earns interest and dividends, and when, in retirement, you withdraw money from the fund.

Under the rules Costello established, contributions are taxed at a flat 15 per cent (rather than at your "marginal" rate of income tax which, depending on the size of your income, can vary from 21c in the dollar to 47c).

Earnings in the fund are taxed at a flat 15 per cent and withdrawals are tax free.

Malcolm Turnbull's new rules would lower the annual cap on concessionally taxed contributions and lower the threshold at which concessional contributions are taxed at 30 per cent rather than 15 per cent.

They would limit to $1.6 million the amount you could have in the pension part of your fund, where no tax is charged on annual earnings. Anything in excess of that would have to stay in, or return to, the pre-retirement "accumulation" part or your fund, where earnings are taxed at 15 per cent (less tax credits from dividends).

The new rules would also impose a $500,000 lifetime cap on non-concessional (after-tax) contributions. This affects people who want to transfer other savings or inheritances or the proceeds from selling investment properties into low-taxed super.

Treasury calculates that only the top 3 or 4 per cent of fund members will be affected by these measures. So the plan is to chop back the tall poppies. Even so, because they (including yours truly) have been getting the lion's share of the concessions, by their third year these measures would be saving the budget $2.1 billion a year – and rising.

Some of this saving would be used to pay for changes that made it easier for women to build up bigger super balances despite their years of broken and part-time service.

The changes would make it much harder to use "salary sacrifice" to boost super balances (at one stage Costello was letting people like me sacrifice up to $100,000 a year – a stretch, even for me) but would encourage more savings-splitting as husbands helped wives to get higher balances.

Rather than making super concessions fairer, I'd prefer to say Turnbull's plans would make them less unfair. It would still be true that people on less than $37,000 a year got no concession on their contributions, whereas people on $180,000 to $230,000 got a saving of 32c in the dollar.

The biggest "incentives" – which apply to contributions that are compulsory anyway – go to well-off people who could, and would, save a lot of their income even without any concessions.

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Budget more about politics than jobs and growth

You get the feeling this budget was pulled together with the use of a checklist. "We've got to have something on super, bracket creep, women, company tax, cities, multinationals, infrastructure . . ."

It involves a lot of imminent-election tidying up of loose ends from projects the government has supposedly been working on for three years, plus much squaring away of key interest groups.

What it's not is any kind of carefully considered "plan" for the economy, whatever Scott Morrison's claims.

It is, of course, a plan to get Malcolm Turnbull re-elected. Its measures are much more easily explained in political terms than justified as doing wonders for "jobs and growth".

Coming from the man in whom we held so much hope, it's uninspired and uninspiring. It's neither agile nor innovative, with not a spark of greatness.

That doesn't make it a bad budget, however. It's competent. It will play its part in ensuring the economy keeps chugging on for another year.

It contains all the Coalition biases you'd expect in a Coalition budget.

It's a cautious budget, with little to which many people will take great exception. Most voters' pockets won't be greatly affected one way or the other - certainly not in the near future - which, of course, is the reason for the caution.

If you believe the government should be pressing on with reducing debt and deficit - as it repeatedly promised it would - the budget is a great disappointment.

Turnbull and Morrison have achieved little more than their Coalition predecessors did. They inherited from Labor an expected budget deficit for 2013-14 of $30 billion (or 1.9 per cent as a proportion of gross domestic product).

Now Turnbull and Morrison are expecting a deficit of $40 billion (or 2.4 per cent of GDP) in the present financial year, falling only to $37 billion (2.2 per cent) in the coming year.

They expect government spending to grow by 4.7 per cent and tax revenue by 5 per cent.

Morrison boasts that the budget "outlines a path back to surplus", but that's true of every previous budget, back to the one Julia Gillard took to the 2010 election. The path first supposed to end in 2012-13, now stretches to 2020-21 - if you can believe it.

Up to now, the slow progress is explained partly by continuing falls in export prices. Much of what progress the Coalition has made is explained by it keeping the proceeds of bracket creep.

The truth is Turnbull and Morrison have abandoned any attempt to cut the deficit. Their best effort is to avoid doing anything that adds to it, while they wait for nature - "growth" - to take its course.

But while this lack of enthusiasm for the axe will disappoint those who've been convinced our debt is perilously high, I'm not among them. Morrison is right to say the "transitioning" economy is still too "fragile" to cope with public sector slashing and burning.

To that extent the budget wins high points for its steady contribution to the management of the macro economy.

It doesn't win many points for fairness, however. We now know what more than three years' big talk about tax reform adds up to: not a lot.

Low to middle income-earners have been saved from an increase in the goods and services tax, but gain nothing.

For years we've been told bracket creep is a terrible thing, hitting people on low taxable incomes harder than those on high incomes.

So what's the remedy? A tiny tax cut which, because it starts with people on more than $80,000 a year, will benefit only about the top quarter of taxpayers.

Thus the government gets to keep all the bracket creep to date and most of the bracket creep to come. But remember, only Labor stands for higher taxes.

What else do high earners get? No reneging on ending the 2 per cent temporary deficit levy. No change to negative gearing schemes, to the 50 per cent discount on capital gains tax, to family trusts or to deductions for professional development courses in Hawaii.

Big business missed out on its longed for increase in the GST and on a cut in the top rate of income tax but, even so, did get the promise of a company tax rate falling by 5 percentage points to 25 per cent, starting in the early 2020s and continuing until 2026-27 - if you can believe it will happen.

The big exception to this, however, are the changes to superannuation tax concessions, which will be less generous to high earners and less mean to women and low earners.

In other key areas of reform - particularly improved effectiveness in healthcare, education and infrastructure - after three years the government has hardly scratched the surface, with little further progress in the budget.

"Jobs and growth" is a slogan, not a plan. Its purpose is to create the illusion of a busy, striving government and divert attention from the lack of progress in achieving the much-promised return to budget surplus.

Name the budget - or the government - that hasn't claimed to have jobs and growth as its overriding goal.

To claim that a tiny tax cut and a "glidepath" cut in company tax will have any significant effect on jobs and growth is an exercise in over-optimism and exaggeration.

The tax cuts for small business, and their extension to a relative handful of medium businesses, is more about politics than jobs and growth. Small businesses have votes; big business has most of the jobs.

This is not the budget we were entitled to expect when Turnbull ousted Tony Abbott last September.

It's probably better than Abbott and Joe Hockey would have delivered, but only by a bit.

This is the last of three budgets from a government seeking re-election on the basis that only the Coalition is any good at managing budgets and running the economy.

That was a lot easier to believe at the last election than it is today.

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An independent assessment on negative gearing

Labor claims its "reforms" to "negative gearing" would do wonders to make home ownership more affordable for our kids. But Malcolm Turnbull says vote for high-taxing Labor and the value of your home will crash, while rents soar.

Many voters have strong views for or against negative gearing. But when rival politicians fall to arguing about their policies, most of us find we don't know enough to decide who's right.

We need someone we can trust to act as a kind of umpire, pronouncing on who has the better case. So we're fortunate to have John Daley and Danielle Wood, of the independent Grattan Institute, issuing a report on the topic.

For defenders of negative gearing, it's bad news. The pair explain that there's a good case for acting against the practice, dismissing alarmist claims it would disrupt the property market.

For opponents of negative gearing, however, the news isn't as good as it seems. Since the resulting reduction in house prices isn't likely to be great, acting against the practice wouldn't do much to make home ownership more affordable.

Investment in a rental property is negatively geared when so much of the cost of the property has been borrowed that the interest bill and other expenses exceed the earnings from rent.

Why would anyone deliberately structure an investment to run at a loss? Partly because they can deduct that loss from their income from other sources, thus reducing their tax.

But that means they're still out of pocket for the remaining half or more of the loss. Why do that? Because they're hoping eventually to sell the place at a big capital gain, which should more than make up for the after-tax losses they've incurred.

That's been more likely since 1999, when the Howard government introduced a 50 per cent discount on the rate of tax on capital gains.

Daley and Wood disprove the dishonest claims that negative gearing is used by many people on modest incomes to get ahead. There may be a few of them, but the statistics show high income earners claim the lion's share of the benefits.

The authors say there's no point of principle that supports our longstanding practice of allowing losses on property investments to be charged against wage income for tax purposes.

Very few other countries do this. It makes the housing market more volatile and reduces home ownership. It diverts capital from more productive investments while doing little to increase the supply of homes.

They propose allowing losses on property investments to be deducted only against income from other investments, not against wages. This would save the budget $2 billion a year in the short term, falling to $1.6 billion a year as behaviour changes.

But much of the attraction of negative gearing comes from its connection with the 50 per cent discount on the taxing of capital gains.

They say there is a case for taxing capital gains more lightly than other income – mainly because much of the seeming gain comes just from the effect of inflation, which makes it illusory – but this doesn't justify a discount as great as 50 per cent.

Allowing such a high discount (as well as allowing rental losses to be deducted against wage income) greatly reduces the government's tax collections, meaning it has to rely more heavily on other taxes. Those other taxes often do more to distort economic behaviour than taxing saving does.

In any case, empirical evidence shows people on high incomes save almost as much regardless of the tax rate. Measures intended to encourage saving mainly influence the vehicle through which wealthy people save – superannuation or property or a bank account, for instance.

As well, the high discount on capital gains tax creates opportunities for artificial transactions to reduce tax and encourages investors to focus too much on speculative investment – sit back and wait for capital gains to accrue – rather than investment that earns annual income by producing goods and services.

Daley and Wood propose halving the capital gains discount to 25 per cent. This would save the budget about $3.7 billion a year.

These policy proposals may sound the same as Labor's, but there are important differences. Labor promises that, for new investments undertaken from July 1 next year, deduction of losses against wage income will be permitted only for investments in newly built homes.

Investments made before then will be unaffected, while losses on new investments in shares or existing properties may still be deducted against other investment income.

Labor promises to cut the capital gains discount to 25 per cent for all assets bought after July 1, 2017. All investments made before then will be unaffected.

Daley and Wood criticise both proposals. Retaining existing negative gearing rules for prospective investments in newly built homes adds a new distortion that would, they believe, do little to increase the supply of homes.

And they criticise Labor's plan to "grandfather" existing investments – for both negative gearing and the capital gains discount – leaving them unaffected by the change.

A better way to minimise disruption to the market and to the expectations of existing investors would be to apply the changes to everyone, but phase them in equally over 10 years.

If only making up our mind on the other election issues we'll face could be so easy.

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Let’s stand against misleading modelling

Many people have been left with red faces following their part in last week's disastrous intervention into the negative-gearing debate by forecasters BIS Shrapnel. Let's hope they all learn their lesson.

This isn't the first time that "independent" modelling purchased from economic consultants has been used by vested interests to try to influence government decisions. Nor the first time the questionable results have been trumpeted uncritically by the media and misrepresented by the side of politics whose case it happens to suit.

But BIS Shrapnel's late entry into this dubious game has come at a time when the game's credibility is wearing thin and qualified observers are more willing to go public with their critiques of the quality of the modelling, the plausibility of its assumptions and the internal consistency of its findings.

As is common practice, various of the BIS Shrapnel model's findings were expressed in a highly misleading way. "Rents will rise by up to 10 per cent ($2,600) per annum", for instance, doesn't mean rents will rise by up to 10 per cent a year. It actually means that, by the 10th year, annual rents will be up to 10 per cent higher than they otherwise would be. Not nearly as bad as it was made to sound.

The first lesson for BIS Shrapnel is that when you publish commissioned modelling, but agree not to disclose who commissioned it, you attract a lot more criticism and scepticism. When it's not possible for those on the other side of the debate to say "they would say that, wouldn't they", they examine your assumptions and methodology a lot more critically.

Another lesson is that when what you're modelling looks like it's a party's policy but isn't, you should say so up front, not in mitigation after that party has denounced you from the rooftops.

Similarly, "unfortunate typos" saying $190 billion when you meant $1.9 trillion get you hugely adverse attention. Your "trust me, I'm an economist" line implodes.

I can't remember when so many economists of repute have gone out of their way to attack a modeller's findings, and done it so bluntly.

John Daley, of the genuinely independent Grattan Institute, referred to the report's "convoluted logic", "manifestly ridiculous predictions", "outlandish" and "fanciful" claims, and "implausible" and "unjustified" assumptions. It was "nonsense on stilts".

The lesson for other economic consultants is that the days when you could produce for a client a bit of happy advocacy posing as objective econometric analysis, and have the rest of the profession look the other way, are coming to an end.

There's now a far greater likelihood that other economists or economic journalists will subject your assumptions, methodology and findings to scrutiny and make their conclusions public.

There's now much greater familiarity with the standard tricks of the trade, such as misuse of the Bureau of Statistics' "input-output tables" to exaggerate the "indirect effects" of some measure; saying "employment will fall by X" when you really mean "the growth in employment will be X less than otherwise", or presenting effects that build slowly over many years as changes that occur fully in the first year and occur again in each subsequent year.

The lesson for relatively new treasurers trying to establish a reputation for economic competence, and the ability to explain complex economic concepts persuasively, is you'll never do it if you act like a political brawler and latch on to whatever third-party modelling seems to be going your way.

A treasurer looking for respect doesn't identify himself with any modelling before his experts – the economists in his department, not the ambitious young politicos in his office – assure him it's kosher.

If I was a subscriber to an Australian newspaper that led its front page with a wide-eyed account of BIS Shrapnel's findings as though they were established fact, only to have them exposed the same day as highly debatable, I wouldn't be impressed.

The lesson for the economics profession is that the modelling they value so highly is too often being used by other economists to mislead rather than enlighten. The reputation of models and modellers is being trashed, and with it the credibility of the profession.

If economists don't want to be regarded by the public as charlatans, they should consider the call by the Australia Institute – a noted debunker of misleading modelling – for a code of conduct for economic modelling. It would "require key assumptions to be revealed, context and comparison to be provided, and the identification of who, if anyone, commissioned the work".

Since the profession has failed to act, the institute wants the code implemented by governments.

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Turnbull is fumbling his bid for greatness

Malcolm Turnbull is slipping. Not just in the opinion polls, that's merely a symptom of his problem. No, he's slipping in his shot at being one of our great prime ministers.

And if he rushes off to a double dissolution election in July because he fears he may not win if he waits until September, that will be a sign his place in the prime ministerial hall of fame will be up the back with his three immediate predecessors.

When Turnbull displaced Tony Abbott five months ago I, like many others, dared to hope his ascension represented a new beginning for Australian politics.

An end to the spiral of ever-declining standards of political behaviour, the negativity, the broken promises, the short-sightedness, the tit-for-tat mentality, the reciprocal scare-mongering, the unceasing attempts to "wedge" the other side, the blatant appeal to our baser instincts.

The eternal emphasis on attaining and retaining power, rather than on using that power to make Australia a better place to live and work.

To be fair, there was no way any flesh-and-blood politician could have lived up to the unrealistic expectations we had for him. And Turnbull does fit the bill in one important respect: he speaks and looks and acts like a prime minister should. He has gravitas.

But the closer we get to the pointy end of the Coalition government's first term, the more possibilities for improvement are being taken off the table to leave the second-term work program awaiting the voters' approval, the more Turnbull seems to be shrinking to the size of his stunted predecessors.

Just in the past week or so we've Scott Morrison doing Joe Hockey impressions, and Turnbull resorting to the same cheap tactics as the man he overthrew.

I'm not prepared to condemn Turnbull for failing to slash and burn government spending at a time when the economy is still not fully back on its feet.

But when you remember all the Coalition's carry-on over the "budget emergency", the insouciance with which Turnbull and Morrison have consigned the budget deficit to the too-hard basket is breathtaking.

I've been happy to defend Turnbull against the unthinking notion that increasing the goods and services tax and channelling the proceeds to foreign investors and people on the top personal tax rate is the be-all-and-end-all of tax reform.

Fail to deliver for big business and you're utterly lacking in courage.

Nonsense. The four tax subsidies to which the tax reform spotlight has turned – superannuation tax concessions, work-related deductions, negative gearing and the concessional taxing of capital gains – carry plenty of potential for changes that make the tax system both a lot fairer and more economically efficient, that is, less distorting of the choices individuals and businesses make.

One of my fears has been that the success of Abbott's unrelentingly destructive attack on the Rudd-Gillard-Rudd government would leave us with a Labor opposition committed to nothing more than getting its own back.

Bad behaviour breeds bad behaviour. Labor has descended to pay-back. Bill Shorten's scare campaign on increasing the GST has been a match for all the dishonest things Abbott said about "debt and deficit" and the way the carbon tax would destroy the economy.

But in one important respect Labor has risen above negativity and created an opening for Turnbull to be greater than his predecessors. It has announced controversial policies to reform super tax concessions, negative gearing and the half taxation of capital gains that is the mainspring of negative gearing.

This has presented Turnbull with an opportunity to make this election a contest of ideas and plans rather than a slanging match. My plan's better than his for the following reasons.

I hope I'm wrong but, as each day passes, it seems clearer that Turnbull isn't preparing to match Labor's boldness with boldness of his own. He'll do something on each of those four tax subsidies, but not much.

Rather, he's reverting to the Abbott tactic of portraying Labor as high-taxing and the Libs as low taxers. (Only a true believer would believe it's that simple.) He's launched into an Abbott-like scare campaign, claiming Labor's negative gearing plan would knock house prices for six.

Turnbull's confidence seems to have faltered. He's looking behind him at his fractious backbench and at the Liberal heartland, who don't want to give up a cent of the tax subsidies that go mainly to them.

That's the behaviour of a survivor. The behaviour of a future great prime minister is to look out at all those uncommitted and even Labor-leaning voters who would vote for him if they thought he really cared about making the tax system fairer; if he still inspired them.

We wouldn't be onto our fifth prime minister in five years if federal politics wasn't dominated by moral pygmies – people lacking in courage, who see tactics but not strategy, whose only vision is of their survival in their seat and their progression up the party pecking order.

What the pygmies don't see is that the public can smell politicians and parties who put their careers ahead of serving the nation. What few people in Canberra remember is that Bob Hawke and Paul Keating achieved greatness by making changes they believed the nation needed, but their own supporters hated.

Turnbull will never be great if he takes his political advice from pygmies.

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Tax reform to bring greater fairness, efficiency

The Abbott-Turnbull government may be doing a good impression of a government going round in circles, but don't let big business and its cheer squad convince you we'll be getting little in the way of tax reform.

We look like getting quite a bit of reform, just not the type of reform the big end of town was hoping for. And this will require quite a bit of courage on Malcolm Turnbull's part.

To be fair, however, much of Turnbull's courage will be coming courtesy of his Labor opponents, who've broken the Abbott mould on short-sighted, destructive politicking.

Big business defines "reform" as cuts to the rate of company tax and the top personal tax rate – that is, rejigging the system in favour of foreign investors and high domestic income-earners. There'll be little of that.

What we do look like getting in the way of reform is greater fairness ("equity") in income tax via the removal or reduction of various "tax expenditures" – or tax subsidies as Labor calls them – used mainly by high income-earners.

Turnbull seems to be planning to use savings from the reform of superannuation tax concessions, work-related deductions, negative gearing and maybe even the concessional taxing of capital gains to pay for a modest round of tax cuts.

All four of those tax subsidies have been crying out for reform for years. The fact that they're yet to be fixed despite various attempts and quick retreats is a sign of how controversial they'll be.

Last year, when Joe Hockey was exploring superannuation reforms and Labor said it would definitely be proposing its own reforms, Tony Abbott immediately swore not to touch super so he could portray Labor as high taxing.

Fortunately, Turnbull isn't so destructive. He's more inclined to regard Labor's policies as providing cover for him to act – or maybe even pinch.

The government's super reform may involve limiting the amount of annual contributions able to be made at the concessional tax rate of 15 per cent. It may also tighten the limits on after-tax contributions.

Many workers exaggerate the size of their work-related deductions, but the real rorting is done by wealthy doctors and lawyers claiming for professional development seminars at that renowned hall of learning, Hawaii.

Last week Labor announced good policies to reform negative gearing and the capital gains tax. It proposes to limit negative gearing to new housing from July 2017, with existing investments unaffected.

It would halve the capital gains tax discount to 25 per cent for assets purchased after the same date, with previous purchases unaffected.

Labor's willingness to propose changes that the well-off won't like will encourage Turnbull to do something in this area, though he's unlikely to be as brave.

It sounds like he's planning to put a limit on the number of homes you're allowed to negatively gear, which would affect only a relative handful of investors.

But removing or reducing those four inequitable tax subsidies is only half the story; the other half being what will be done with the tax savings?

If the government had any guilt over its claims of a "budget emergency" to get itself elected, it would use those savings to reduce the deficit.

Instead, it will cut income tax at a time when that's the last thing the budget can afford. Why? Because it's raised expectations of a tax cut that it dares not disappoint.

It's spent its whole term exaggerating the problem of bracket creep to justify a tax cut. If it stuck to that rationale, people near the bottom of the tax scale would get proportionately bigger tax cuts – measured by the fall in their average tax rate – than people near the top.

But I bet they won't.

While all four reform areas would make the tax system fairer, there would also be economic efficiency benefits.

To tax some forms of investment income more lightly than others distorts behaviour.
We've got an investment tax regime that encourages borrowing over saving, speculation over hard work, and passivity over enterprise. A nation already too in love with bricks and mortar has a distorted tax system that makes it worse.

We have a negative gearing loophole no other country tolerates, which is forcing house prices far higher than they need to be and, in the process, locking much of the younger generation out of home ownership.

Don't try to tell me fixing those allocative​ inefficiencies isn't reform.

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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.

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