There really aren’t enough rich to soak, so let’s soak the grand kids.
By Lyle Dunne
The immediate post-Budget period is always a challenge for commentators and readers, drowning in commentary from various media, spin from both sides, and comparing the government’s proposals with those of the opposition.
In fact, a Budget is really too big for a comprehensive response. Instead, here are a couple of aspects I haven’t seen commentary on – at least from this angle.
Labor’s Budget in an image: like the Teatro Olimpico in Vicenza — a trick of illusion.
The Parthian sardines
There’s an element of the trompe l’oeil about this Budget: the Treasurer pronounces calmly about plans and policies, sketching Palladian porticoes stretching toward the horizon – but everyone knows it’s all painted on the backdrop. You expect someone to call out “There ARE no out-years!” In fact, this grandiose plan will be overtaken by events a quarter of the way through its first year.
In this situation, the Budget has a resemblance to the can of sardines nailed to the underside of a desk drawer as a surprise for an incoming government. (I did hear of a staffer who left a whole chicken in a filing cabinet, but I’m assured this was an accident.)
The purpose is not to provide a plan for governing the economy, to win an election, or even really to minimise losses. The purpose is for Labor to saddle the incoming Abbott government with as many expensive programs as possible, to keep Labor’s ideological framework in place – and also to limit the capacity of the Coalition to implement its own programs, and enable Labor to say “See, we told you it was hard to manage budgets!”
Abbott, wisely, has not rushed into matching commitments, undertaking to keep Labor’s savings but not their spending plans – apart from the compensation for the carbon tax.
Free beer tomorrow
This was a joke sign people used to put up in bars, but it seems to be Wayne Swan’s inspiration. Another analogy is the Far Side cartoon of the weather report in Hell, with the devil pointing to a synoptic chart and saying “And it looks like that cool change is just going to miss us again…”
Perhaps there are people out there who believe Wayne Swan’s promise of an $800m surplus in 2015 – 16, even though his prediction for this year has now been revised by about 25 times that amount – with, as Abbott pointed out, most of those revisions occurring in the last two weeks.
But in fact it doesn’t really matter what Swan predicts – come September, the assumptions will become irrelevant, and we’ll never get to find out whether Swan would have stood up on budget night 2015 and told us the Budget would be in surplus – in 2017 – 18.
Labor, of course, has been arguing furiously that it’s not fair to blame them for the projections being wildly inaccurate. Let’s look at how that works.
He who lives by the sword
As I’ve mentioned before, there are many reasons for being cautious about intervening in the economy to “fix” things. Apart from any moral reservations about taking money from one group and using it to benefit others, there really aren’t enough rich to soak, and once you’ve soaked them for a while, unlike brandied raisins, they begin to shrivel, and even disappear altogether, leaving you with an economy with an equally shrivelled tax base, incentive structure, and labour market.
But a more general objection is that government interventions seem fraught with unintended consequences.
The GFC revived the old debate between Keynesians and economic liberals. The latter term is confusing, however, so let’s just say optimists vs pessimists. The optimists are the guys who brought you pump priming, and cane toads. Trust us, they say, we have PhDs in this stuff, we have our hands on the levers of the economy, we know what we’re doing, we know what will happen. Treasury have done the modelling! We’ll borrow money, and use it to seed the clouds, sorry, economy, and in a coupla years we’ll all be back in surplus, sitting on the beach sipping chardonnay and laughing about all this.
And for a while there the optimists had the upper hand. Things looked crook, and the pessimists being pessimists didn’t say “leave it alone – it’ll get better by itself”, or not very loudly. So we borrowed hugely, and put the money into dodgy insulation, radically overpriced school buildings, and some flat-out giveaways.
So are we back in surplus?
Well, it turns out, unexpected circumstances, one-in-a-hundred-year events, not possible to forecast…
OK, fine. But the whole Keynesian GFC-effect-minimisation strategy assumed, with the optimists, that you DID know what was going to happen, that the data WERE reliable, that you KNEW there was not a new and bigger crisis around the corner, which we’d have to face without the reserves we’d thrown at the short-term situation.
In short, this whole point about unexpected events is exactly the argument of the pessimists: don’t spend all the money you have or can borrow, you might need it later. (And the ongoing interest and repayments will retard any prospect of getting the budget into surplus.)
Which segues smoothely into …
Ponzi socialism
A popular quotation (whose authorship is disputed) says that democracy will only last until the majority discover they can vote themselves largesse from the public treasury. Then, of course, the worst would happen: the goose that laid the golden egg, namely the economy, would be killed.
Of course, this view has been proved wrong.
This was NOT the worst. The present reality is worse.
There is some constraint on robbing the rich: you get real-time feedback, or something close. Incentives disappear, industries move offshore, employment and wages fall – and people notice. For one thing, the rich are not slow to point out the effect of such strategies on the broader economy. (Such complaints may be self-interested, but that doesn’t make them invalid.)
There is however one group who can be robbed without fear that they’ll complain, or affect our lifestyles: future generations. Our great-grandchildren can’t do anything about our spending and borrowing heavily so that they’ll be forced to subsidise our lifestyles, because they haven’t been born yet.
Nor will they be able to do anything about the actions we’ve taken to ensure there are rather fewer of them to shoulder this burden.
Which in turn leads nicely to…
The BYO bonus
Both major parties have introduced a range of more or less ad hoc measures in relation to families: baby bonus, schoolkids’ bonus, family tax benefits, various parental leave provisions and childcare subsidies, safety nets, and the like.
Many of these have been characterised as middle-class welfare, or out-and-out political bribes. And there’s a sense in which this is true. Certainly there’s no sign that anyone’s looked at the effect of such measures on the total tax-welfare picture, partly because, as I’ve argued before, the picture is now so complex that literally no-one understands it.
One thing is clear, though: the fundamental principle of taxation justice – that it should be levied according to ability to pay – is being violated. Taxpayers with children, and in particular single-income couples, are systematically discriminated against.
(Understand, I’m not arguing that parents deserve more lenient treatment because they’re providing the taxpayers who’ll pay our pensions, though this argument has merit. I’m saying that parents receive less lenient treatment than non-parents.)
The reason, stated simply, is that income tax implicitly assumes ability to pay is proportional to income, and the GST assumes it’s proportional to spending.
But in fact a family on a given income has less capacity to pay income tax or GST than an individual on the same income, and they will have to spend much more, and pay more GST, to have anything like a comparable standard of living.
The measures identified above go some way to redressing this imbalance, but fall short even for low-income earners. So characterising them as luxuries we can do without in tough times is missing the point.
We may well decide, in tough times, to rein in our expenditure. But we still, in my view, have to collect revenue in a way that’s equitable. Most of the so-called middle class welfare is in fact inadequate compensation for tax injustice, and really deserves to be considered on the revenue side of the ledger. In fact a good hard look at the whole picture, in terms of equity and the incentives it sets up, is long overdue.
One can only hope this issue is addressed in Abbott’s proposed comprehensive review of the tax system.