Turnbull and Morrison to fix the budget without really trying

There are a lot of -isms in economics – Keynesianism​, monetarism and many more – but it's now clear the Turnbull government is an adherent to Micawberism.

Mr Micawber, you recall, was the Dickens character who summarised his philosophy of life as: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Micawber's life was miserable because he often found his finances in deficit. A bit like an Australian government post-global financial crisis.

His solution to the problem never changed. He was always waiting and hoping for "something to turn up".

We've now seen enough of the Turnbull government to realise it, too, is doing little more than hoping something eventually turns up to get the budget back to surplus.

To be fairer to the government than it deserves, the main reason repair of the budget's taking so much longer than expected is not because of any great laxness in the control of government spending, but because tax collections have grown so much more slowly than could have been expected, for reasons beyond its control.

Its revenue forecasts have repeatedly fallen short because export prices have fallen much further than expected and because the rates of price and, more particularly, wage inflation have slowed to rates unseen in decades.

Even so, successive treasurers have insisted the budget has a "spending problem, not a revenue problem". They say this; they haven't acted on it.

They've used this false claim to resist pressure to increase taxes (apart from allowing bracket creep, which the weak growth in wages has made far less potent than usual) but, after the public's resounding rejection of the Coalition's first budget, they've made no real attempt to repair the budget by making net cuts in government spending.

If that assertion surprises you it's because you've been bamboozled by the government's actual spending policy: to ensure all new spending programs are offset by cuts to existing programs.

So the unending stream of fights to get these and those spending cuts through the Senate are merely an attempt to hold the line on spending growth, not to slow it down.

That there are so many new spending programs needing to be offset is a demonstration of how utterly unrealistic is the government's professed goal of "smaller government".

The government's lack of enthusiasm for net spending cuts is shown by the increasingly piddling, penny-pinching nature of the cuts it wants to get through Parliament.

Raise the departure tax by $5; tax backpackers for the few months they're here; cut the dole by $4.40 a week; think of further ways to deny benefits to single parents and the disabled.

If you've been a budget-watcher for a few years, you can tell such measures come straight out of the bureaucrats' bottom drawer, where they've been kept for the day when the government was desperate enough to need then.

Their piddling nature is a sign that, in the search for spending cuts affecting only politically weak interest groups, the government is close to the bottom of the barrel.

Actually, what it shows is that even the policy of making departments come up with offsetting savings to cover new measures is running out of puff.

Now, be clear on this: in drawing all this to your attention, my purpose is not to criticise the government for failing to slash spending and the deficit, merely to highlight the yawning gap between what it says about budget repair and what it's actually doing.

So if its true strategy is merely to wait for something to turn up that gets us back to surplus, what could turn up?

This is where its prospects are brighter than Mr Micawber's. Coal and iron ore prices are a lot higher today than they were at the time of the budget in May. If this lasts it will do a lot to restore the growth in tax collections.

Nor is it wildly optimistic to expect that price and wage inflation will recover over the next year or two, putting some bite back into bracket creep.

But much help could come from the recalcitrant Senate. This year's budget included big tax increases – in tobacco excise, superannuation and multinational tax avoidance – intended to partially cover the ever-growing cost of cutting the rate of company tax by 5 percentage points.

If, as seems likely, the Senate accepts the tax increases but declines to pass the company tax cut on to big business, in time the budget should be well ahead on the deal.

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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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