THE TARGET may be awry, but its objective is not: former Prime Minister Paul Keating yesterday said government spending could be slashed by $90bn per year — or 20% — to fix the federal budget without endlessly lifting taxes; Keating is not only right, but his words are a siren call to the spineless minnows on all sides of politics who live in perpetual fear of electoral doom, lest efforts to rein in haemorrhaging red ink produce so much as a single loser.
It really does say something — and render horrific judgement in passing on the 226 individuals sitting in elected sinecures in Canberra, along with their thousands of mostly useless advisers — that the clearest message to date on fixing the stinking mess that is the federal budget should come from a former Prime Minister booted out of office 20 years ago, and whose heyday and (deserved) reputation as a reformist Treasurer was at its zenith a decade before that, but there you have it: like him or not, Paul Keating can still cut through the bullshit.
I have been thinking about his remarks yesterday (predictably seized upon by the government and opposition in Question Time to try to bludgeon each other into submission) and they form a useful starting point not just for a debate about how to fix the budget, but also to consider additional reforms beyond that (and yes, I’m talking about lifting and broadening the GST) that keep it sustainable into the future whilst enabling massive cuts across the board in direct taxes and the elimination of some of them altogether.
And in that vein it says something, too, that what I say today will likely never form the basis of any mainstream political party’s blueprint; the ALP,
Communist Party Greens, and all the other state socialists who think taxing hell out of everything in sight in order to shovel largesse out to “the underprivileged” as a way to buy elections is the way to perpetuate a “civilised” society will leap down my throat. Those on the Right (or who claim to be) will simply distance themselves from the points I make: for them, cutting into the Labor-woven social spending infrastructure is a path paved with peril, and these gutless types who are incapable of selling an idea (let alone come up with one themselves) will simply dismiss me as a crackpot.
But let’s look at a) what Keating has had to say; b) how his initial $90bn in savings could be redeployed; and c) how this could form just the first stage of a two-step process for comprehensive reform of Australia’s tax system, which is cumbersome, uncompetitive, labyrinthine, and ripe for evasion and abuse.
Keating’s central (and I would have thought, obvious) point is that “what the world pays us” — i.e. the proceeds from exporting things like mineral commodities — has fallen, which in turn is eating into both personal and company tax receipts, and that rather than simply jacking up taxes in whatever way possible to enable the shortfall to be covered, cuts in spending are the logical and requisite path to budget repair.
Too much has been said, on both sides of the political divide, about whether Australia has a “revenue problem” or a “spending problem” and it should surprise nobody that both sides are capable of producing immaculately sourced and referenced statistics, pie graphs, bar charts and other impressive-style (but worthless) paraphernalia to “prove” their case and debunk that of their opponent.
But as a small-government conservative with a philosophical distaste for the idea that government not only knows better than its citizens but that it should be the arbiter of what monies are spent and where, it is hardly a generalisation to suggest that too much of the money doled out by federal governments is tax revenue being stolen from the Australian public and abused in the form of electoral bribery that is tantamount to institutionalised corruption.
Federal governments pay for “black spot” road programs in local council areas in which they have no road funding responsibilities. They promise a few million dollars to help revamp a local sports stadium. They cough up $10,000 to first home buyers for a grant that makes minimal difference these days to the affordability of housing but which still soaks up billions in outlays. They provide funding to propaganda-peddling groups like this one that ought to be community-funded (or not exist at all, ideally). They gift money into low-income earners’ superannuation accounts, from a defunct tax that raised no money, for no other reason than to bribe to poor.
On and on it goes.
This is a problem that has existed for decades, but which has really taken on a life of its own in the past 20 years: ever since the Howard government introduced modest levels of so-called “middle class welfare” which in themselves have driven up the costs of everything they were meant to alleviate — the home owners’ grant is a case in point; the “baby bonus” is another; there are plenty of others — and all of it, all of it, is money taken from Australian residents and citizens to be arbitrarily pissed up against a post in whatever politically expedient fashion best suits the government of the day.
This country is in real — perhaps where its fiscal arrangements are concerned, existential — trouble, unless drastic steps are taken to bring the avalanche of unaffordable and unjustifiable spending to a shuddering halt; I’m politically pragmatic enough to acknowledge that there are limits to what might be done, and that any systemic program of cuts is more likely to be a process rather than some wham-bam-thank-you-ma’am king hit. But unless that process starts very soon, the prospect of fixing Australia’s debt and deficit spiral may well evaporate altogether.
But to go down the path Keating alludes to (and to which I’m a ready subscriber), whoever forms government in Canberra will need a few attributes that are conspicuously lacking at present: ideas that target the problem at its core, rather than reshuffle it and perpetuate it by creating “new” spending from “identifying savings” in a zero-sum game. The ability to communicate and sell those ideas in the form of policies to an understandably jaundiced and cynical electorate, which has rightly come to expect nothing from politicians in order to avoid disappointment. The backbone to take risks, to make decisions, and to pursue policies that are actually right in the knowledge that inevitably, some people will lose out. And above all, the intellectual honesty to concede publicly that governments of both political stripes have been playing fast and loose with taxpayer cash for decades, and to admit that the vicious spiral of largesse simply has to stop.
Keating talks of sitting in the Expenditure Review Committee for 10 hours per day for ten weeks of the year, looking for ways to cut government outlays and in the process slash government spending by 6% of GDP: this is exactly the approach that must be taken now, with spending running at or near historic highs. So much is now handed out by the federal government for no credible reason that Keating’s target of $90bn in annual savings should be a cinch: his target figure might be awry to whatever degree, but the sentiments and objectives that underpin it are not.
If it means a whole lot of people all lose a bit here and a bit there, then so be it; they will also get something back, as I will discuss shortly. But government isn’t meant to be your big brother or your nanny, who gives you cash and tells you what to buy with it, just like it shouldn’t tell you what to say or think or do. Government in Australia is guilty of doing all of these things, and it’s time it stopped.
So without bogging down in the minutiae (which in any case is impossible: I don’t have thousands of hours to go through the budget line-by-line on my own time), let’s accept the Keating figure of $90 billion per year is correct.
Remember, at this point, we’re talking about $90bn in expenditure cuts which won’t affect revenue in any meaningful sense; for the purposes of my point, we’ll divide that $90bn into three chunks.
The federal budget deficit is currently running at about $45bn per year: the first half of Keating’s $90bn in spending cuts eliminates it altogether. Hey presto, the budget is balanced, or even slightly in surplus over a four-year estimates period.
Of the remaining $45bn, half of it every year should go directly to paying down the principal component of Commonwealth debt; in 15 years’ time, the government debt pile is approaching zero (or, if it’s possible to renegotiate those obligations, combined with ongoing reductions in interest payments, it may in fact have reached zero). The progressively falling interest on the debt is a secondary source of budget savings that will grow over the 15 year period as it did during the Howard years.
My reasoning in setting this out over 15 years is simple; the debt burden we face today — accounting for inflation — is roughly double what the Howard government inherited in 1996; it stands to reason that it will take roughly double the time to get rid of it if the hard calls on cutting spending are made. Many people remain blissfully unaware that whilst the Howard government left the Commonwealth debt free, that milestone was only reached in late 2004: almost a decade after the Coalition was elected. 15 years to get rid of some $400bn in debt in today’s dollars seems a realistic timeframe.
The remaining $22.5bn should simply be handed back to where it came from: the taxpayer.
With such a large amount of money to play with, big changes that would otherwise be prohibitively expensive become possible. The tax-free threshold could be lifted from $19,200 to $25,000, for example; that $50 per fortnight everyone clamoured to have added to pensions and unemployment benefits a few years back might be possible. The PAYE tax scales could either be indexed to end the scourge of bracket creep and/or flattened, thresholds lifted, or the rates reduced. The options are almost endless. But for the whole thing to become possible, a government must first find a spine: and an opposition (in the present circumstances probably a forlorn if not utterly pointless hope) would need to behave responsibly, and desist from mindlessly opposing everything simply for the hell of it.
Yet even for those who say the number of losers would be too punitively high to make such a wholesale overhaul possible, I’d counter very strongly that most of those people would get back the money in their own pockets to make the decision to pay for whatever was taken away themselves; this is how it should be, and even if a zero sum game in the end, what we’re talking about — ultimately — is curbing the lethal culture of government being involved in things it shouldn’t be, and empowering people to make their own decisions on how to spend their money.
I would point out that for those who are wont to crap on about “Tory tax cuts for the rich” and similar melodramatic twaddle, I have included measures that would benefit the least well-off in my list of possibilities.
But once we get this far, I think there’s a strong case to go even further.
It is a fact — whether your political outlook permits you to like it or not — that taxes on consumption are more efficient, more sustainable and more straightforward than taxes on income; this is why many countries (not least the economically glittering jewel three hours’ flight east of Sydney and Melbourne) have in recent decades enacted the “tax switch.”
The application of Keating’s thesis, as I have theorised above, is just the first portion of what can and should be a two-tier process for a colossal overhaul of this country’s taxation arrangements.
If I haven’t lost readers just yet (and if people aren’t screaming at me for advocating, once again, a healthy dose of orthodox Tory finance), I disagree utterly with those who claim there is no case or reason not to lift the GST and to expand the base of goods and services it covers.
Most comment on the issue of broadening the GST base notes that healthcare and education should be exempt; I agree, and believe financial services (or at least that section of the financial services industry that applies to retail banking and consumer items like car insurance, home and contents insurance, personal loans and so forth) and residential rents should also be added to that list.
All other goods and services should be subject to GST — yes, that means food too — and as comment in the Courier-Mail observes today, the bulk of the GST burden on fresh food would disproportionately fall on wealthier consumers. There goes the “smash the poor” counterpoint, although in any case, I will deal with that, too, in a moment.
I think the rate of GST should be lifted to 15%; and as consensus seems to dictate, those changes would raise a further $35 billion in consumption tax receipts. A program of closing existing tax loopholes (I mean actual loopholes like deductions, not arbitrary imposts on “the rich” or other ideological gobbledygook) would probably push that pot of additional revenue billions higher still.
In return, the states could abolish stamp duty on residential property and/or payroll taxes; the company tax rate could be cut from 30% to perhaps 25%; PAYE scales could again be adjusted — one of the ideas I’m leaning to here is to align a 25% company tax rate with a 25% PAYE bracket that covers income up to $250,000 per year — thus eliminating the avenue for tax avoidance through incorporation; fuel excises could be slashed; another $50 per fortnight could be added to pensions…and of course, a fair chunk of the money would end up with the states, whose unfunded liabilities to provide health and education services should, finally, be resolved, although I must note that whether or not state governments behave responsibly, and not go on spending sprees with their newfound GST booty as they did in the 2000s with nothing in the end to show for it, is a question for them.
The end destination would be a debt-free federal government within ten years that does not throw money at everything in sight to buy it off: the sort of irresponsibility that will never be excised from electoral politics, I know, but which right now needs to be quite literally attacked with an axe.
It could see people earning less than $30,000 taken out of the income tax system altogether; it would realign Australia’s personal and company tax rates to make them competitive with most comparable countries; it would target more direct aid to those who most need it, whilst studding the system with incentive and reward for effort at the other end; and it could render redundant a raft of state taxes and charges that might be incremental in scale, but which all add up to overrun the capacity of the individual to make ends meet.
These do not need to be complex arguments, and if set out clearly and logically, do not need to sound the death knell for any party proposing them.
Indeed, I may have been a little muddled in recording my thoughts and I apologise: one, it’s already 3am and I’m tired; and two (and more to the point), I’m very passionate about this stuff, and the temptation to let it just to flow into print is one I have to temper with oversight of what the reader will see. Sometimes, that gets to be a difficult line to navigate.
One thing I would like to emphatically point out is that I have refrained from ripping into either major political party today, and to the extent I have criticised, both sides have received a bit of the treatment: today’s post isn’t to score political points, although it is obviously an expression of conservative economic principles. I just wanted to run with Keating’s comments, and apply them to some ideas for real tax and budget reform that are positive in outlook even if the hard political courage and determination to enact them is in short supply at present.
But were a program like this to be set out as a two-term economic reform strategy by, say, the Turnbull government — with the first stage presented to the electorate this year, and the second subject to a further mandate three years hence — and were that program explained clearly, sensibly and logically, and capably sold by the government’s communications people in the proper execution of their duties, then I think the reservoir of public support would run very deep indeed.
What do you think? I didn’t come down in the last shower, and I have been around politics long enough to comprehend just how hard this kind of fundamental change can and would be to implement.
But with one eye on the country’s problems and the other on the Senate (and how to get control of it at an election, or close enough to it to render it functional), if anything could kill both birds with the one stone, I think an integrated tax and budget management package along these lines is almost certainly it.