Policy debate will require specifics soon – November 2015

Filed under: Australian Politics, Economy, Tax, Education, Competition,

At present Malcolm Turnbull’s national leadership is riding a tide of enthusiasm and relief that at last Australia can have a sensible and wide-ranging discussion about the nation’s and economy’s future.

The community mood was captured by Catherine Livingstone, the Business Council of Australia’s president in her speech after this week’s economic reform conference when she said, “You have given us the permission to have conversations about things that matter to people, and helped, through your own example, to make those conversations positive.”

She said that for some time the BCA had been trying to start a conversation around fostering an innovation-capable economy to drive the next decade of growth and job creation. It now had permission to build on what it had been saying about the impact of disruptive forces; keeping Australia competitive in a vastly more competitive global economy; and the role of liveable cities, “a topic on which Lucy Turnbull is an acknowledged leader”.

In other circumstances the overwhelming reaction would have been that she was over-doing the flattery. That it was not the reaction is symptomatic of the changed public mood and widespread willingness to believe in the new leader.

But while Malcolm Turnbull’s strategy of building public support for reforms – not just tax, but in other areas including industrial innovation, education and competition reform – is working well and makes excellent political sense (as evidenced by the Government’s and Prime Minister’s stellar opinion poll results), the mood will change relatively soon unless the Government starts spelling out its decision-making strategy.

Prime Minister Malcolm Turnbull has made clear that he wants to focus the tax reform debate – at least initially - on “fairness” rather than on changes to specific taxes.

The tax reform debate – post-Abbott – began in earnest this week, encouraged by Mr Turnbull and Treasurer Scott Morrison and shaped by economic modelling of changes to the GST by NATSEM and the Parliamentary Budget Office.

Mr Turnbull, in two sets of comments, one following the release of the first round of modelling by the PBO and the second, in his first major economic speech to an economic reform conference in Melbourne, made clear he wants the initial emphasis in any debate to be on fairness.

In his earlier comments Mr Turnbull said, “Any changes to the tax system have got to be ones that ensure that there is no disadvantage to ... vulnerable Australians to less-well-off Australians.

“We've got to ... be absolutely clear that any changes to the tax system, or the transfer payment system, are ones that are fair are seen to be fair across the board.

“We are a very fair society in Australia and it's important that our tax system reflects that.”

In his later comments to the ‘Rebuilding foundations for reform’ conference in Melbourne, with the debate over increasing the rate and broadening the base of the GST building a head of steam, Mr Turnbull pointedly avoided any mention of GST or any other specific tax changes.

Rather he set tax reform in a broader agenda for modernising Australia with the Government encouraging innovation and competition.

And, he said, “I think you understand the point I am making there. A reform package must at the very least, raise the revenue we need, share the burden fairly across the community and do so in a way that incentivises employment, investment and innovation. Fairness I repeat is absolutely critical. Any package of reforms which is not and is not seen as fair will not and cannot achieve the public support without which it simply will not succeed.”

However ‘fairness’ means different things to different people and now that the Government, with the strong support of civil society groups including the organised business community and welfare sector, has established that that the debate should be broad-ranging and that nothing should be ruled out – as it had by Tony Abbott – the imperative will be to move into a discussions of priorities and specifics soon.

This is clearly where the debate will get difficult, particularly for Malcolm Turnbull and where his honeymoon could come to an end.

Immediately before the reform conference the Australian Council of Social Services released modelling it had commissioned from the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra, showing that lower income earners would be hit the hardest by any increase in the GST or widening of its base.

But ACOSS chief executive Sandra Goldie emphasised that the point of the modelling and ACOSS’ argument in relation to it was not to oppose any increase in the GST. Dr Goldie told the ABC’s 7.30 program, “let's keep everything on the table. That's why we're here continuing to debate the merits of a GST and so we will stay with: let's keep talking about it. But if you look at, for example, the Government's own discussion paper on the most inefficient taxes, stamp duties is the top priority. We would love to work with the public on how we shift away from stamp duties to land tax, which everybody in the economic community acknowledges is a really efficient tax base. Now that'll have to be done carefully, but we're up for that. And, look, we want to talk with business about that company tax rate because we want to see jobs coming through as well and that's where I think, if we get some consensus, ideally we go out to the public together and say: this is going to be good socially, equity reasons and also for the economy.”

In its statement on the NATSEM modelling ACOSS said, “ACOSS does not rule out any increase in the GST. However, an increase in the GST should not be our starting point, when low and modest incomes earners carry the greatest risk.”

The full NATSEM report and the ACOSS commentary on it warrant reading: they are not an argument against an increase in the GST – as Labor’s Treasury spokesman Chris Bowen suggested after their release. Rather they are an argument for broader tax and transfer payments reforms (such as was suggested, for instance, by the Henry Tax Review), including possibly an increase in the GST with compensation for low income earners. They are very specifically an argument against an increase in GST being used (purely) to cut income taxes.

In its conclusion the full report says, “The more comprehensive GST base modelled in this report [ie broadening the base to include exempt items but maintaining the rate] suggests a base expansion could fund significant personal income tax cuts of 3 percentage points to each marginal rate of income tax but this would not offset the regressive nature of the base expansion. These tax cuts would do little to benefit the lowest income household who would see their households incomes fall by 4.1 per cent ($1,156 per annum), while the incomes of the highest income households would increase by 1.5 per cent ($2,411 per annum). Like the lowest income households, middle-income household (third quintile) would also see their incomes reduced by 0.4 per cent ($341 per annum).

“Repeating the process using the $29.4 billion in additional GST revenue from an increase in the rate of the GST to 15 per cent, and cutting personal income tax rates by 5 per cent across all tax brackets, would also be regressive. The incomes of the lowest income households are estimated to fall by 6.2 per cent ($1,736 per annum), on average. Middle-income households (third quintile) would also lose, their household incomes would fall by an average of 0.7 per cent ($848 per annum) while the highest income households would increase their incomes by 2.1 per cent ($3,549 per annum).”

At the moment diverse groups such as ACOSS and the Business Council have been able to have a serious discussion and agree that any tax reform should be broad-based. This has been achieved in the absence of the Government mediating their discussion. But the different interests are now starting to spell out their priorities. The real challenge for Malcolm Turnbull will be to keep the disparate groups in the discussion while the Government spells out its specific changes and priorities.

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