The government’s fiscal position was hopelessly tangled up before last week’s state income tax debacle. Now, especially after Malcolm Turnbull’s attacks on the states on the weekend, it’s become a kind of fiscal Gordian knot. For every single position the government has adopted, it has either done or said something exactly the opposite.
That isn’t so much about its successive ideas about tax reform that have come and gone since last September. To the government’s credit, it has certainly become much more efficient at killing off its own ideas — taking a GST increase off the table took months, income tax cuts weeks, negative gearing days; last week’s “journey” to a state income tax didn’t last 48 hours. It’s more about what, exactly, the government’s entire fiscal strategy is. When Turnbull railed at the states and their calls for a restoration of the $80 billion in funding cut from their health and education budgets as a “fantasy” invented by Julia Gillard, he insisted that Australians have to “live within your means”.
For a start, if the $80 billion in lost funding is a fantasy, if the “money was never there”, it’s peculiar that the government’s own budget overview in 2014-15 contained the statement:
“In this Budget the Government is adopting sensible indexation arrangements for schools from 2018, and hospitals from 2017-18, and removing funding guarantees for public hospitals. These measures will achieve cumulative savings of over $80 billion by 2024-25.”
If the lost funding is a fantasy, it’s a fantasy the Coalition believed in two years ago.
And there was no talk just six weeks ago of “living within your means” when Turnbull unveiled a defence white paper committing $30 billion in additional defence spending over the next decade, primarily aimed at supporting Australia’s defence manufacturing sector (and the government’s prospects in South Australia and Victoria), with no explanation of where that additional funding would come from given the budget will be in deficit most of that time.
In fact there’s been no talk at all of “living within your means” while government spending as a proportion of GDP went from 24.1% of GDP in Labor’s last full year to 25.6% of GDP in 2013-14 and 2014-15 and then to 25.9% this year.
Nor was there talk of “living within your means” when the Abbott repealed the carbon price (cost: $6.2 billion over four years), the mining tax (cost: $3.4 billion over four years) or tax and superannuation changes announced by Labor but abandoned in December 2013 ($3.6 billion over four years, and much more over the long term), significantly exacerbating not merely the government’s short-term fiscal position but crimping long-term revenue growth as well.
Turnbull’s chief complaint about the states is that they didn’t want to do what he himself doesn’t want to do — raise income tax. This is about the only area of at least rhetorical consistency on the part of the government: its position is that it is not interested in lifting taxes — although the remorseless rise in tax:GDP that will slowly return the budget to surplus is exactly that.
But what Turnbull has also done is ensure that the already problematic tangle of tax reform and the return to budget surplus is now further complicated by the specific issue of health and education funding. Tax reform — and for that matter, federation reform — is a matter best pursued separately from the shorter-term goal of returning the budget to surplus. Australia has the time and strong credit rating to return to surplus at a pace that will not damage economic growth; improving the effectiveness and efficiency of the tax system is a separate challenge that is about encouraging economic growth, innovation and workforce participation. In the hands of a gifted communicator, which we all believed Turnbull was, it should be a separate discussion.
But the two are already tangled up in the minds of voters and, it seems, in the minds of Turnbull and Scott Morrison as well. And despite Morrison’s insistence that tax reform would be revenue neutral and unrelated to the issue of funding health and education, suddenly last week Turnbull chucked health and education into the mix as well, proposing a short-term funding fix while the Council of Australian Governments nutted out not merely an allocation of income tax revenue to the states but a separate income tax power that would leave health and education entirely in the hands of the states.
Mixing two of those together makes the chances of successful reform considerably smaller. Mixing all three was fatal. The fact that is was done within, probably, weeks of a federal election is even more extraordinary. Voters were already confused about what the government was trying to do on tax reform. Now it’s less clear than ever.