tip off

Abbott’s fistful of dollars will be a slug on states as well as voters

Tony Abbott’s proposed income tax rise will hurt the states as well as consumers, and risks a demand crunch — all for a fiscal sugar hit.

This isn’t the fifth term of the Howard government,” Prime Minister Tony Abbott said in question time several weeks ago. Indeed: the proposed “debt levy” will restore personal income tax rates to levels last seen in the Howard government’s third term, when Peter Costello, under pressure from newly arrived backbencher-in-a-hurry Malcolm Turnbull, increased income tax thresholds and reduced tax rates. Back when the Howard government took a quarter of GDP in taxation revenue.

But the more accurate comparison is with a different Howard era, the second term of the Fraser government, when the “fistful of dollars” promised voters by the Liberals before the 1977 election was wiped out by then-treasurer John Howard’s “income tax surcharge” of 1.5% to fix the deficit.

So Tony Abbott, who in 2012 promised “tax cuts without new taxes”, isn’t the first Liberal to break a promise and impose a tax levy under the guise of fiscal discipline.

But the Tony Tax won’t merely affect taxpayers. The tax,¬†as outlined by Coalition favourite Terry McCrann today, is highly progressive, and targeted at middle and higher-income earners, as it should be. But in being so, it is aimed at discretionary consumer spending, which is more likely to be subject to the GST than basics like food and health, which form a much greater part of the spending of low-income earners.

As a consequence, the Tony Tax will simply direct revenue away from the GST, and thus state governments, to the federal government. It’s a revenue shift between levels of governments that will leave struggling states, already facing difficulties with flat GST growth, with an even bigger budget challenge.

Assuming the Tony Tax raises around twice as much as the National Disability Insurance Scheme levy, established by the Gillard government last year, which was estimated to earn $3.2 billion in its first year, it will lead to the siphoning away of over half a billion dollars a year from the states and territories and into federal coffers, a neat little trick that state treasurers will be less than happy with.

But even at that level, the tax will be no more than a sugar hit to the budget given the size of the deficit next year. Let’s compare the sort of revenue raised by a levy both to the deficit and to some other budget costs.

Dumping the private health insurance rebate, which has no worthwhile health policy outcome, would save around $5 billion a year; even with increases in spending associated with greater public hospital use, dumping it has been estimated to save a net $3 billion a year, permanently. Removing the GST food exemption would take substantial fiscal pressure off the states by delivering over $6 billion a year to state coffers, although some compensation would be required for low-income earners. The government is already walking away from over $6 billion in revenue from the carbon price next year, although that would have fallen to $3 billion to $4 billion per annum in 2016-17, when the price would have been linked to the European trading scheme.

Revenue from a Tony Tax would likely be much less than Treasurer Joe Hockey’s unsought and pointless handout to the Reserve Bank this financial year. And it would be dwarfed by the huge revenue losses associated with superannuation tax concessions, which together total nearly $30 billion (that’s the revenue Treasury estimates would be gained from removing them, rather than merely the revenue forgone).

The tax will thus be a choice of this government, not something forced on it. It will be a choice to rely on the lazy Howard-era method of lifting the Commonwealth’s overall tax take rather than targeting spending areas deemed to be off-limits to the Coalition, like high-income superannuants and the private health industry.

If that’s all it were, no particular damage would flow from it. And if it were coupled with genuine long-term spending reductions in areas like middle-class welfare — and by the way, how come no one is shrieking “class warfare” when this government proposes a highly progressive tax and curbs on middle-class welfare, like this crowd did when Labor did it? — then it might be a price worth paying.

But the Tony Tax runs the real risk of shocking consumers into closing their wallets. Having been told the budget is in critical condition (which of course it isn’t), that they’ve all got to make a sacrifice for the national good and that they’re going to have hundreds or thousands of dollars a year less to spend, consumers may well end up pulling their horns in and spending considerably less than the billions taken directly from them, curbing retail spending just when it had started to grow again after a long period of stagnation, with flow-on consequences for state GST revenue. This is still, despite the positive growth signs of the last quarter, an economy growing below trend. As any number of European countries have repeatedly demonstrated, short-term austerity¬† rather than a medium-term path to fiscal sustainability simply entrenches low economic growth, deficits and deflation.

Still, at least it will guarantee that the Reserve Bank, already concerned about the impact in public demand of state and Commonwealth budget-tightening, won’t lift interest rates any time soon and may even have to reconsider further cuts, which Hockey is pressuring it to do because he doesn’t like having to budget with a dollar at US$0.93.

Treasurer Howard taking back his “fistful of dollars” prompted Paul Keating to dub him “Honest John Howard”. It was a label that plagued Howard throughout the 1980s. Whether Abbott has any more luck will depend on how successful Labor is at making him wear the Tony Tax. If Labor can’t exploit what is surely a golden opportunity, it should prepare for a long time in opposition.

21
  • 1
    zut alors
    Posted Tuesday, 29 April 2014 at 1:22 pm | Permalink

    The ‘Tony Tax’, the name fits so well. His favourite shock jock will have to repackage this lest Abbott appears to be an almighty fibber. And history has taught us what importance that particular shock jock puts on pre-election promises which are then broken.

  • 2
    Migraine
    Posted Tuesday, 29 April 2014 at 1:49 pm | Permalink

    Enough with the bloody levies, just tax me already!

  • 3
    Robert Brown
    Posted Tuesday, 29 April 2014 at 2:01 pm | Permalink

    But it’s not a tax, it’s a levy! :-D

  • 4
    DiddyWrote
    Posted Tuesday, 29 April 2014 at 2:13 pm | Permalink

    With reports of “internal dissent” over the “crazy” debt levy within the party room, i suddenly had an uncomfortable feeling this was all a big charade.
    Abbott and Hockey get to make out that they were going to spread the pain up the food chain and tax the “wealthy”.
    Unfortunately with the back benchers screaming and the media accusing them of reneging on their pre-election promises it all became too hard and the levy had to be dropped.
    Instead of being Robin Hood, Abbott regretfully has to let the hardship fall fair and square on those who can least afford it.
    Or am I becoming overly cyclical where this government is concerned?

  • 5
    DiddyWrote
    Posted Tuesday, 29 April 2014 at 2:47 pm | Permalink

    Sorry I’m not going round in circles, I meant to write cynical (not cyclical).

  • 6
    CML
    Posted Tuesday, 29 April 2014 at 2:47 pm | Permalink

    I’m cynical enough to agree with you Diddy!
    As Bernard points out, this ‘Tony Tax’ (love it!), will be much less efficient than removing some of the other concessions currently being dished out to the wealthy.
    Why is super for the over 60’s (and I’m one of them) such a sacred cow, anyway? I know of people who have millions in super and they still get a part pension. Not on!

  • 7
    Khupert the Runt
    Posted Tuesday, 29 April 2014 at 2:57 pm | Permalink

    Now let me try and get my simple mind around this….

    We’re going to have a levy to help reduce the deficit, which will raise less money than we decided to give to the Reserve Bank when we didn’t need to.

    So if we hadn’t promised that money to the Reserve Bank we wouldn’t have needed the levy?

    Right?

    So the deficit - after we have given the money to the Reserve Bank we didn’t need to - will be a bit bigger, than if we hadn’t decided to give the Reseve Bank the money, and raise a new tax to pay for it.

    Sorry Tony you are the ultimate phoney.

  • 8
    klewso
    Posted Tuesday, 29 April 2014 at 4:02 pm | Permalink

    The “Jfk tax” - “Just f***ing kidding”?

  • 9
    David Hand
    Posted Tuesday, 29 April 2014 at 4:16 pm | Permalink

    I think the payment to the reserve bank was necessary. I don’t know the details but I can’t possibly understand any other reason than to get a payment that is inevitable at some stage on the books as close to the exit of Labor as possible.

    Abbott’s paid parental scheme is utterly ludicrous.

    The deficit levy is a tax.

    Abbott should not have promised no new taxes in the election campaign if he was ever to consider this.

    The only possible escape hatch is if it kicks in at $100k and is large. Say 4%.

    This budget needs to change course. It doesn’t need to deliver a surplus any time soon. It must simple stop the headlong rush into debt.

  • 10
    DiddyWrote
    Posted Tuesday, 29 April 2014 at 4:42 pm | Permalink

    Hi David Hand at #9,

    The payment of nearly A$ 9 billion to the reserve bank by Hockey was neither asked for or required.
    The reason it was paid, in my opinion, was that Hockey wanted to have as much red ink in the budget deficit as possible. He needs this in order to justify the swingeing cuts to the civil service and excuse the need to sell public assets at both a federal and state level.
    Behind this all is ideology, Hockey and the LNP fundamentally do not believe the government should be supplying services and help to Australians. This can be supplied by the private sector.
    Sadly I believe that this will result in poorer, more expensive services that will further increase inequality and decrease social mobility, forces that are bad for any civil society.

  • 11
    Khupert the Runt
    Posted Tuesday, 29 April 2014 at 6:07 pm | Permalink

    I think you are right about the necessity David but my understanding supported by Crikey’s report:

    http://media.crikey.com.au/dm/newsletter/dailymail_488041510a11247dde0d839340d68445.html#article_27111

    … indicates the Bank sought these funds over a period of time: “this implies the rebuilding of the Reserve Fund can be done over a period of years”.

    The bottom line is that we are being taxed in a way that will not even start cutting the deficit for at least two more years.

  • 12
    James Stopford
    Posted Tuesday, 29 April 2014 at 6:27 pm | Permalink

    The graph tells us why the debt jumped.good old Tony and Joe show. When Swan told us of the problems in the long with an ageing population he was castigated by Ruthless Rupert in all papers and grubby FOXTEL. All is now silent now as RR can see that under this crowd he will simply pay a token tax again.

  • 13
    The Pav
    Posted Tuesday, 29 April 2014 at 7:04 pm | Permalink

    I would just love the media to ask Tricky Tony

    ” If a short term levy is not a tax and therefore not a broken promise why did he call the transitional pricing arrangement for the carbon price until the trading system was in place a Carbon Tax? Does he now accept that Gillard did not lie? Does he accept that he was wrong and will he appologise.

    Why did he give 8.8B to the RBA …Unneeded & Unasked.

    Why did he abolish the mining tax?

    Why did he allow unreasonable tax concessions to top end superannuation

    Why did he allow tax breaks to the big end of town…eg the banks.

    If he is to break a promise then wouldn’t it be better to drop the PPL

  • 14
    DiddyWrote
    Posted Tuesday, 29 April 2014 at 9:18 pm | Permalink

    Thanks for the moderation Crikey. This will be a factor when you want be to re-subscribe.

  • 15
    Sailor
    Posted Tuesday, 29 April 2014 at 11:25 pm | Permalink

    The Pav: Too true, but too factual for Tony’s bunch of planks to grasp. When has there ever been such a mob of drongoes on the front bench? Even Big-Ears McMahon had (I remember correctly) 2 or 3 who were able to hold a conversation without claiming they were born to rule & therefore above debate.

    DiddyWrote
    Agree completely with your post about Tricky Tony. However, last September I did not imagine it would take this long for this mob of liars to revisit John Hubris’ “Core Lies” & “Non-Core Lies”. I’m surprised they’ve waited so long. And I really have been paying attention, I assure you.

    Zut, Agreed. So can we expect the non-Lieberals to do anything worthwhile with this golden chance? on their record, I’d say ‘Unlikely’.
    I’m glum about this opportunity being lost…again.

    Klewso: Really accurate. Too bad the dills who voted his way are too dopey to understand.

    David Hand: With respect, why was the RBA $8B justified? Your evidence is?? Of course the RBA Governor would say “thanks”. But when did he say “It’s essential”? Or justified?
    Evidence?

    What about the other >$50B-$60B that was shunted onto the taxpayer’s loss column of the ledger after the last election for no obvious or explained reason apart from Joe’s “It’s just so” waffle.

  • 16
    David Hand
    Posted Wednesday, 30 April 2014 at 11:01 am | Permalink

    Sailor,
    As I said earlier, I don’t really know why $8b was paid to the RBA.

    I am of the view that deliberately trashing the deficit so we could then have a broken promise deficit tax is so utterly stupid and electorally suicidal that the government would not do it and therefore there had to be a reason for the payment.

    I accept that most posters to Crikey actually believe the Abbott government to be stupid and prone to electoral suicide. I will agree with you should the deficit tax actually show up in the budget.

  • 17
    Bill Hilliger
    Posted Wednesday, 30 April 2014 at 11:08 am | Permalink

    Is there a recession coming our way during the rAbbott term in government?

  • 18
    The Pav
    Posted Wednesday, 30 April 2014 at 12:25 pm | Permalink

    Dear David @ #9 & #16

    Part of Hockeys reasoning is to blow out the deficit and do it close enough to the last govt that it becomes “Labors Massive Debt” and to artificially contrive a “Budget Emergency” which is all “Labors Fault” notwithstanding Abbotts promise that “it will be a Govt of No Excuses”

    Then borrowing from the Costello playbook he will rip dividends out of the RBA ( Costello made Swan look positively moderate) to boost later budgets to aid the continuation of the lie that the LNP repay debt and are superior managers.

    You watch the levy will be sold as Labors Debt Tax.

    Politics before the good of the nation at all times is the Abbott mantra.

    I consider Abbot to be an idiot savant with his genius being in his ability to play political games but unable to do anything else.Unfortunately given the lack of serious scrutiny in Australia and the absence of mature debate ( which requires effort) he escapes unscathed and succeds.

    His inability to speak coherently on any other level than pure politiking is clear evidence of this. On any other subject a disinterested obsever on hearing Abbott would conclude that English is not his first language.

    The true “evil” of Abbott is that he has laid out a path to succes that other policians will follow.

  • 19
    David Hand
    Posted Wednesday, 30 April 2014 at 1:12 pm | Permalink

    I have to differ Pav.
    The deficit tax will be Abbott’s “there will be no carbon tax under a government I lead” moment. The electorate will excoriate him over it.

    When you put it with this foolish PPL scheme which is his own love child and not even debated in cabinet, he runs the real risk of not serving a first term as leader.

    I don’t see this as a path to success at all.

  • 20
    The Pav
    Posted Wednesday, 30 April 2014 at 1:46 pm | Permalink

    Hi David @19

    When I was referring to success I was referring to the fact he won Govt not that he was succesful in Govt.

    He has a good chance of avoiding his Gillard Moment. I do not believe for one minute that Alan Jones for example will call him the equivalent of “Juliar” ( and what a dusgusting cowardly and disrespectful attack that was).

    With other parts of the News Ltd papers effectivel being Abbott cheerleaders ( which he will repay by gutting the ABC so Murdoch can use the Overseas service to suck up to China and advance his other commercial interests and the ABC to worried about “balance” to effectively challenge him and Fairfax almost toothless there will be a substantial lack of accountability. Allied with this is Abbotts brialliance to politic and divert in lieu of any meaningful policy action.

    The opposition is t in name only and Shorten lacks the ability to cut thrhough

    We do agree that in the end it won’t be succesful but alas it will be the ordinary Australians who will reap the sorrow

  • 21
    klewso
    Posted Thursday, 1 May 2014 at 8:44 am | Permalink

    Abbott vs Shorten - and here’s us, caught between the abyss and the abysmal?

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