Chris Bowen's fiscal fantasy

Friday, 09 February 2018

Chris Bowen's fiscal fantasy

The Shadow Treasurer acknowledges the Budget deficit but proposes to fix it by raising taxes. By Spiro Premetis.

Australians who don’t know the role fiscal policy plays in their everyday lives could be sold a lemon by Shadow Treasurer Chris Bowen. His strategy to get the budget back in surplus is to punish thrift and enterprise by raising taxes and disregard wasteful expenditure.

By contrast, the Coalition will do the opposite.

Fiscal policy supports the economy during short-term downturns and provides a medium-term foundation for prosperity. But that is also what makes it so confusing – taxes and spending have impacts on incentives to work, save and invest in our economy – and their impacts can be quite different depending on who you are.

The government sets fiscal policy to achieve certain goals - to reduce debt, for example, or improve productivity. It achieves this by adjusting the levers of taxing and spending. All of these flow through to you, the worker, business owner and consumer.

Cue Mr Bowen, who while speaking at the Centre for Independent Studies on 29 January had this to say about his plans for fiscal policy: “While we are yet to announce our fiscal rules and our budget bottom line, and of course it is too early to do that given the budget moves around with each update, of course we will do that in a very explicit sense before the next election. And we do take very seriously the case of budget repair and hence our embrace of very serious reforms.”

Mr Bowen doubled down later in his speech: “[The Budget] won’t return to balance, it simply won’t without, in my view, very substantial policy leavers being pulled. It just simply won’t return to surplus on the current trajectory without significant policy changes.”

Unfortunately these “significant policy changes” are tax increases – reversing reductions to the company tax rate for small business and removing the larger costs from the Budget; removing negative gearing for middle income Australians; increasing the taxation on capital gains; and increasing taxation on family trusts which underpin small businesses.

By implication, Mr Bowen’s desired set of policies to return the budget to surplus entail a drastic change to our fiscal rules. On the current record it would seem Mr Bowen wishes to change Australia’s fiscal rules to see the share of tax to GDP go above 23.7 per cent – a benchmark he previously thought was appropriate when he was briefly Treasurer in 2013 and originally set when Peter Costello was Treasurer.

This is a point he must urgently clarify before the next election – will he rule out raising the tax to GDP ratio as Treasurer? This is doubtful.

Treasurer Scott Morrison’s fiscal strategy is to reduce the payments-to-GDP ratio, which was forecast to be 25.2 per cent this year, below its long-run average of around 25 per cent so that resources are free for private investment to drive jobs and economic growth. This expenditure strategy is coupled with sensible fiscal rules in place that would see the 23.7 tax-to-GDP ratio maintained. This would allow responsible income tax cuts in the future passed onto middle income Australians, easing cost of living pressures.

Absent this fiscal restraint, Treasury Secretary John Fraser noted in 2016: “If payments stay too high and at 25 per cent of GDP or more, receipts will need to be increased very substantially to balance the Budget.”

Most concerning is that Mr Bowen’s plan to increase taxes will not improve the productivity. Neither will his planned tax increases improve people’s wages or boost business investment.

The cost of living is already under significant strain. More than 1 million Australians are due to be hit with increased taxes over the next five years as they are pushed into higher tax brackets by inflation and wages growth.

The largest increase, according to the Parliamentary Budget Office, is expected to be faced by individuals in the middle-income quintile, whose taxable income is expected to average $46,000 in 2017-2018.

Without any significant plans to improve productivity or get more bang for buck from our spending on essential services such as health and education, middle-income Australians will be left behind under Mr Bowen’s plans for the budget.

Mr Bowen did make one thing very clear – he has already told you about his plan to raise taxes and it is here to stay: “When I go to the Senate crossbench and argue for measures that I will introduce in the first Labor Budget, if we’re elected, I’ll be able to say to them, ‘you might not like all our policies but we have the moral authority, we have a mandate to do it’. We’ve actually said to people, ‘we will reform negative gearing, we will reform family trusts’.”

Ironically if this is the case, doesn’t Treasurer Morrison already have a compelling case for the crossbench in the parliament and for Mr Bowen and his colleague in the Labor Party to pass the full set of funded company tax cuts that will improve productivity, keep Australia internationally competitive, promote investment and raise wages and employment?

Regardless, make no mistake that any attempt by Mr Bowen to provide income tax cuts under his fiscal strategy will be a case of robbing Peter to pay Paul. He will have already raised taxes to “fund it” and he has already told you.

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