Political parties have no real plans to grow, tax, or cut their way out of debt. They need to get out their micro-reform textbooks.
Put away the Back in Black coffee mugs. Far from Australia achieving a budget surplus in 2019-20 as the Morrison government promised, it has produced deficits that, as a proportion of GDP, are treble the size of the largest Whitlam government deficit.
Who is going to pay? And when?
The Morrison government has said repeatedly that all the debt must be repaid. Yet, even before the Delta variant of COVID-19 was imported into Australia and allowed to spread into Sydney’s west, the ACT and Victoria, triggering hard lockdowns, the budget papers were projecting government net debt to reach almost $1000 billion by mid-decade.
That’s sharply up on the previous Labor government’s net debt of less than $200 billion.
Much of this extra debt is attributable to a once-in-a-century pandemic and the fiscal support the economy needed and which the Morrison government provided. But the debt is not transitory. Treasury’s intergenerational report released mid-year projects persistent deficits to last not four years but four decades.
The Morrison government has asserted we will be able to repay the burgeoning debt through economic growth. But as last week’s OECD report on Australia points out, during the period 2015-2019 – before the pandemic struck – Australia’s GDP per capita grew at only one-quarter the rate of the rest of the OECD.
Add to those woes a 55 per cent plunge in the price of iron ore in just four months https://www.afr.com/markets/commodities/panic-selling-sets-in-as-iron-ore-collapses-20210917-p58sh6 with more falls in prospect and the federal budget bottom line and national income are looking even sicker. That’s before counting the undetermined extra cost of submarines arising from last week’s decision to go with nuclear-propulsion.
Neither of the major political parties will go into the coming election promising to soak up the sea of red through new or increased taxes or large cuts in government spending.
The OECD report recommended budget repair through increasing the GST rate or broadening its base, increasing tax on superannuation, reducing the capital gains tax discount and restricting small-business eligibility for the concessionary 25 per cent company tax rate.
Good luck with increasing the GST rate or extending it to fresh food. Broadening the GST base to include education could be done in a way that makes it a progressive move. An exemption could be given for low-fee schools while high fees payable at elite private schools could be taxed. Try that out with the Liberal Party’s base.
The last prime minister to reduce tax concessions on superannuation for high-income earners was Malcolm Turnbull. Liberals never forgave him.
Increasing the tax rate on small businesses in the aftershock of the pandemic would be political folly.
Another OECD idea is to increase the taxation of resource rents. Both the Resource Super Profits Tax and the Mineral Resource Rent Tax were abandoned following well-funded mining industry campaigns fully supported by the Liberal Party.
A cash flow tax https://www.afr.com/politics/tax-cash-flow-instead-of-profit-say-economists-20181209-h18wjs http://craigemersoneconomics.com/analysis/2021/1/18/replacing-corporate-income-tax-with-a-cash-flow-tax would tax all rents as well as providing strong incentives for new investment through the immediate expensing of capital expenditure. But it has not found support from either major political party.
One OECD proposal that has enjoyed support is replacing stamp duty on conveyancing with land tax. It is the policy of the NSW government. It makes good economic sense for other states to follow. But that wouldn’t solve the federal deficit problem.
If the revenue side of the budget can’t be reformed, fiscal repair would have to come exclusively from cutting expenditure. Labor could pull back on the myriad rorted programs but that wouldn’t fundamentally alter the fiscal outlook. And by the time polling day comes around, the Morrison government will have been obliged to rule out almost all spending cuts.
The Abbott-led Coalition gave us the lived experiment of promising no cuts to health, education or pensions, only to break those promises in its first budget. Just over a year later, Treasurer Hockey was appointed Ambassador to the United States and Abbott was removed from the prime ministership by his own party.
As new deficits are incurred, it is inconceivable that either side of politics would make such enormous cuts to spending as to shift the budget into surplus while also paying back the mountain of debt that has already been accumulated.
When government bonds held by the Reserve Bank through its quantitative easing policies reach their repayment date – their maturity – instead of the government paying the Reserve Bank out of taxation revenue, it could simply arrange that they be replaced by new bonds https://www.afr.com/policy/economy/how-to-avoid-a-september-cliff-edge-20200629-p5573z Coupon payments on these bonds largely return to the government as Reserve Bank dividends.
In the meantime, the government of the day would need to initiate a new round of microeconomic reforms designed to increase productivity and with it, the economy’s capacity to repay government debt.
Microeconomic reform, including seizing on Australia’s comparative advantage in renewable energy production and carbon storage, is imperative. And it would be far more successful than economic austerity or incentive-destroying tax increases on the working men and women of Australia.
Craig Emerson is a distinguished fellow at the ANU, director of the APEC Study Centre at RMIT University and adjunct professor at Victoria University’s College of Business. He is chair of the McKell Institute.