Why Tax Cuts Without Economic Leadership Won't Work

Australians haven't seen any serious tax reform since the 2007 general election.  On the first day of that election campaign the then Howard government announced serious tax cuts;  quickly matched by the Rudd opposition.  Some of those tax cuts were "aspirational" and never implemented.

Since then changes to the tax system have constituted fiddling at the edges.  The Gillard government provided some "compensation" for the carbon tax, while the Turnbull government fiddled to prevent some politically damaging bracket creep.  To suggest the abolition of Abbott's temporary deficit levy constitutes tax relief is an insult to our intelligence.

In the meantime we have seen proposals for new taxes and tougher enforcement of existing taxes;  not to mention the vilification of taxpayers perceived to not be paying their "fair share", and there was the raid on superannuation.

THE GOODWILL CUPBOARD IS BARE

Having told everyone that tax concessions are a "gift of the government" it seems the Turnbull government have realised that holding office is a gift of the electorate, and the goodwill cupboard is bare.

There are good arguments to cut income taxes at company and personal levels.  Government routinely makes bad spending decisions once we get away from providing the very basics of civilised society.  Even on national security — a legitimate government function — we have seen unnecessary wasteful spending.  Money that ultimately comes out of the pockets of 24 million Australians.

According to the budget papers government revenue as a percentage of gross domestic product is very close to the historic highs seen in the mid-2000s under John Howard.  Spending is even higher.  This is a major challenge for the government — talk of tax cuts while the budget is in deficit.

I have long argued that the success of the Howard-era tax reform was cutting taxes from a position of budget strength.  True — taxes were not cut enough, but nobody can deny tax reform was prudent and sensible.  The GST was introduced at a time when the government didn't need the money.  Genuine reform could occur.

CUTTING FROM A POSITION OF WEAKNESS

Now the government has a much harder task — it must make the case for tax cuts from a position of budget weakness.  The Coalition has already failed to convince Parliament to fully implement company tax cuts — now it must convince the electorate and Parliament about the need for more tax cuts.

Right now every dollar of tax cut will be financed by a dollar of borrowing.  In essence, tax relief now to be financed by somewhat higher taxes in future.  That is not necessarily a bad thing.  We can imagine arguments being made about smoothing income over time.  Alternatively we might imagine that increased private spending now will boost economic activity and reduce the relative tax burden in future.

The point being, however, that these arguments have to be made and are yet to be made.

Furthermore those sorts of arguments cannot be made in isolation.  The government needs to spell out a credible return to surplus.  Right now the strategy appears to be a reliance on economic growth lifting revenue to exceed spending.  But wage growth, according to the Australian Bureau of Statistics, is "moderate" while the Reserve Bank claims that business investment lacks "animal spirits".  The budget strategy rests on shaky foundations.

VULGAR KEYNESIAN ANALYSIS

Given the high-levels of government spending, vulgar Keynesian analysis of the economy suggests economic growth should be robust.  Yet the opposite is true — that is why the government are proposing politically risky tax cuts.  After 10 years of indifferent economic policy the vultures are coming home to roost.  The economy is under-performing because of too much government.

Spending is just off 2009-10 GFC stimulus levels.  The government brags about the increased powers it is giving regulatory agencies and the Australian Tax Office.  NGOs are waging war against the mining industry while a royal commission is threatened against the financial industry.  With a bipartisan anti-business sentiment originating in Canberra and infecting the rest of the country, it is unsurprising that growth is sluggish and the budget mired in deficit.

No amount of tax cuts in isolation is going to overcome deliberate sabotage of the economy.

Inspired economic leadership that sees business and enterprise as the driving force of a prosperous economy is what is required.  That means tone down the anti-business rhetoric.  Restrain the regulators.  Cut red tape.  Cut green tape.  Cut taxes.  Cut spending.

It is only within a coherent and comprehensive economic framework that tax cuts will drive economic growth and return the budget to surplus.  It is an open question whether any of our current crop of politicians can deliver on that framework.