Coalition's confused economic strategy and fiscal tricks - Breaking Politics - Monday, 28 April 2014

This morning I joined Andrew Laming and Breaking Politics host, Chris Hammer, to chat about the latest federal budget speculation - a 'deficit levy' - a new Abbott Government tax that if introduced would represent another broken promise.


SUBJECT/S:  Flagged income tax levy;  Unfair PPL Scheme; Grattan Institute Superannuation Report

CHRIS HAMMER:  Well, the budget is now just two weeks away and pre-budget speculation is running hot, not least because the Government continues to float ideas out into the public. On the weekend the Prime Minister Tony Abbott declined to rule out a special income tax levy designed to get the budget back into surplus.

To discuss this and other issues, I'm joined by Andrew Leigh, here in the studio. He's the Shadow Assistant Treasurer as well as the Labor Member for Fraser here in the ACT. And Liberal MP, the member for Bowman in Queensland, Andrew Laming, joins us by Skype...

Andrew Leigh, to you first. There's this idea of an income tax levy. Is it a good idea given that, shouldn't the Government be looking at the revenue side of the budget and not just spending cuts?

SHADOW ASSISTANT TREASURER, ANDREW LEIGH: Chris, according to reports the Prime Minister is going to tonight compare himself to John F Kennedy. To that I have one simple response: Prime Minister, you’re no JFK.

HAMMER: That's a good line but what about the subject at hand? Should the Government be addressing the revenue side of the budget.

LEIGH: Absolutely, and you can start by not getting rid of the mining tax and carbon price, the removal of which has blown a massive hole in the goverment coffers.

HAMMER: How much of a hole has getting rid of the mining tax [created]. It hasn't raised very much money.

LEIGH: Let's not look at my estimates of that. Let's look go to Joe Hockey's estimate of what it will raise in 2016-17. He says it will raise $1.8 billion. So this is significant tax - according to Joe Hockey - which he intends to remove. Add on top of that, that he is not proceeding with 55 different tax measures which Labor had announced but was yet to enact. So all together, the Government has effectively doubled the deficit since they came into office. And now, having gone weak on the strong, they're turning round and saying, we are going to get tough on the weak. We're going to hurt pensioners, we're going to charge people with chronic disease more to go to the doctor and we're going to push up income tax rates, all of which are clear breaches of promises. JFK would have never have done that.

HAMMER: What essentially is the problem with an income tax levy? Is it that it's bad economic policy or it simply that it's a broken election promise.

LEIGH: Well certainly it's a broken election promise. This is a Prime Minister who has been telling us for many years that keeping promises is vital and he would certainly not increase income taxes. Now, having manufactured a budget crisis, he's discovered his economic strategy and his political strategy are in conflict: because he has foregone such large amounts of revenue, because he has willy-nilly given $9 billion to the Reserve Bank. He's ended up with a much bigger deficit, a deficit twice as large as Labor had over the forward estimates.

HAMMER: So, the money given to the Reserve Bank, will-nilly not necessary, not desirable?

LEIGH: Certainly, we have no evidence they asked for it Chris. We've asked for the paper work on that to be produced. Joe Hockey is currently defying a Senate order to produce those papers. He says it's because Labor took large dividends out of the Reserve Bank, but when you adjust for inflation, Labor took half as much from the Reserve Bank as the Howard Government did.

HAMMER: Okay. Andrew Laming, this idea that's being floated over an income tax levy to help restore the budget, what do you think of it?

ANDREW LAMING: It's obviously just speculation, that's the first thing to say. Secondly, the principle of a levy is usually to address a specific concern over a defined period of time. That's what separates a levy from a tax. Look, ultimately, we know that if we can get the economy going, and get Australians into work, highly productive activity, then of course we increase our tax yield. And that's by far the preferable way of doing it is having a strong economy. But you can see that turning the Titanic around after six years of Rudd-Gillard government isn't going to be easy. Those large accumulated deficits over six years, in excess of $100 billion are mind-boggling figures that puts Paul Keating in the shade. So, you can understand that every option is being considered. And of course, Australians are familiar with levies including the flood levy in recent years. I can appreciate it's part of the mix but I can't say much more than that.

HAMMER: As you pointed out, levies are usually hypothecated. This is a very general hypothecation, if I can put it like that, to get the budget back into health. Do you support such a levy?

LAMING: Well, that's right. Convincing the Australian people of any strategies to reduce the debt that Australia has accumulated over the last six will be politically challenging. People will want to see that everyone is taking their share. That will be the first concern. Secondly, those that benefitted most over the last six years are also going to be facing the reality, that these are going to be a couple of lean years ahead. You're quite right, we don't know how many, but one things for sure, if you don't start your political term with a tough budget in year one, it becomes more and more difficult in subsequent years to do it. This is an important year for Joe Hockey and obviously for Tony Abbott.

HAMMER: Let me have another crack at that. Would you support such a levy?

LAMING: Well, it's in the balance, within the context of all the other decisions, I don't have a problem with a well-conceived and well-constructed levy if it's fixing a problem of national significance. But, I mean that's a very general answer. You'd have to look at what the other measures are; that there's a reasonable balance and that everyone's contributing towards solving what is a national problem. We can't simply say the Australia Labor Party pay off the deficit. It's being born on the shoulders, like a heavy cloak on every Australian and that's why we're going to need everyone's shoulder to wheel to fix it.

HAMMER: But you would agree that you can't tax your way to prosperity?

LAMING: In a general sense no, and in a Liberal philosophy, definately not. But, currently we know that the settings for income tax, the result of years of Costello and Howard economic management, tweaking down the tax rates as low as we possibly could for Australians, well, that may not always be the situation. It's a hard decision which ever government comes up against that fiscal squeeze. You could argue it's here now.

HAMMER: Did the Costello-Howard tax cuts go too far?

LAMING: No. I think they were spot on. We have one of the lowest GSTs in the world at ten per cent. And my focus at the moment, within welfare, and health and social services spending is getting that as effective as possible, well-targeted as possible. We don't have that at the moment. So, at the moment we're writing large cheques that are quite ineffective and that's government money wasted and as long as you're doing that, it's hard to justify taxing Australians more.

LEIGH: Chris, I agree with Andrew's sentiment of a common purpose. But let's be very clear. Andrew didn't support a flood levy to help rebuild his home state of Queensland. Yet he's now effectively arguing for an additional levy which will go to give a tax cut to mining billionaires, which will give $75,000 to millionaire families when they have a child, which will go to multinationals because this is a government that is going soft on multinational taxation. That seems like a very strange set of priorities and I don't see anything in that that suggests that we're sharing the burden evenly across the community or in proportion to the benefits people have gained. Because let's face it, we've had a big rise in inequality and yet all the give-aways from this government go to the top and all of the cuts hit the bottom.

HAMMER: Andrew Laming, if you going to have a hypothecated levy, why not do it for the paid parental leave which is a very defined but rather expensive area of new government spending?

LAMING: Certainly I'm one of the biggest supporters of Tony Abbott's paid parental leave [scheme] and I think it's essential that we do it and I think that people that most gain from this policy are extremely supportive of it. So, I wouldn't want to see that touched and I don't think we need to. I think the numbers of high income earners that get PPL are relatively small, we've made this argument before. No, we have to look at large nation-wide measures and Andrew makes a fair point. I'm not in any way arguing for a levy but both, having done a bit of economics, I appreciate it's one of the options available.

HAMMER: Can I ask you this, if the Prime Minister pushes ahead with his paid parental leave, would it make it no sense then to help people in the first six months of having a baby but then cut back say Family Tax Benefit B, that helps stay at home mums essentially.

LAMING: I think the point that's missed in paid parental leave is the very, very strong force of pulling working parents back into the workforce after six months. When you've got some continual income at wage replacement you set up your household in such a fashion that at the end of six months the propensity to return to work is so much higher. Australia has a very low rate of returning to work after having children. We're low with OECD comparisons and that's what's missed in this debate. It's vital we get these young parents back into the workforce. They are highly-skilled and it's what makes a productive difference to our economy and it's one of the great untold stories of the Tony Abbott scheme unlike Labor's minimum wage scheme that considers every working woman worth no more than the minimum wage.

HAMMER: Is there then a major shift in the philosophy of this government as opposed to the Howard-Costello government? That government seemed to support stay-at-parents. Is the emphasis now, not on stay-at-home parents but getting working mothers back into the workforce?

LAMING: Well, the emphasis is to get people to choose their own paths in life and try and reduce any disadvantage in choosing one area over the other. I'd simply say, that if you've been in the workforce before, it's a national priority to get you back into the workforce. If you've never worked before and you're a stay-a-home mum and you choose to work then we want to make it as easy as possible for you to make that transition. The problem at the moment is we have a nation that often goes off, has children and doesn't return to the workforce. That comes at an enormous economic cost to Australia.

HAMMER: Andrew Leigh, what's your reaction to all this speculation. Every couple of days there seems to be a new idea floated in the public... What do you think is going on here?

LEIGH: I can't work out this government's economic strategy or political strategy to be honest Chris. But certainly I think that this is a government which is quite confused about what it wants to do. You’ve got Joe Hockey talking about the importance of means-testing, but then their signature policy - as Andrew has pointed out - is a parental leave scheme that's the opposite of means testing. Means testing means you give more to those at the bottom. The Government's parental leave scheme gives more to those at the top. And if you look at an independent economist like Saul Eslake, he finds no evidence that it will boost productivity or participation. They are worthy goals, as Andrew as outlined, but there's no evidence that this government's policy, effectively a baby bonus for the rich, will do anything to boost participation.

HAMMER: Given the trouble the budget is in, there's a lot of new spending coming through in future years. There's education spending, health, disability. The government has an emphasis on infrastructure spending. Does that infrastructure spending need to be put on hold because of the budget situation?

LEIGH: I think infrastructure spending is important Chris. We took Australian from being 20th in the developed world for infrastructure spending to being 1st in the developed world in our last two years of office. So, I really hope that this government maintains that record. And it needs to do so while looking at decade estimates. If you look at Labor's last budget, you'll see charts there outlining how the long term spending on schools and DisabilityCare would be paid for, not just over four years, but over ten. The thing is the government has played some odd fiscal tricks. It's weirdness on foreign aid is the strangest, where the Prime Minister said during Question Time, that he wouldn't give 0.5 per cent of national income to foreign aid at the end of forward estimates, and yet that's exactly what his budget numbers say. And then, on more substantive things, the big tax breaks to mining billionaires, the give-aways to high income superannuants have, by doubling the deficit, really caused the vast bulk of the problem the Government finds itself in.

HAMMER: If I can change subjects slightly to superannuation. There's a report you're both aware of by the Grattan Institute, which shows essentially that people are being fleeced on their super contributions because of default funds; they don't shop around essentially and the suggestion is that the government should run some sort of auction for default funds. Andrew Leigh, is this a good idea?

LEIGH: We focussed a lot on superannuation fees in office. The MySuper reforms focussed on bringing down fee costs.

HAMMER: So why are the fees in Australia some of the highest in the world?

LEIGH: Well this is a big challenge in our super system. We've emphasises choice, but I think - as behavioural economics advances over the last two decades have taught us - most Australians are in the default fund and they're in the default plan within that fund, because we give too little attention to shopping around. One of the good things that might come from the Grattan Institute report, which I've read, and I think is a good report, is a greater attention by all of us to making sure that we're not losing too much of our superannuation to fees. But I also think the Grattan Institute raises some important proposals around minimising the overheads that we lose to superannuation.

HAMMER: Well given that the behavioural economics is teaching us that less than two per cent are shopping around, some market failure? People have the choice but they're not taking it. Should the Government step in? Should it tender for these default funds?

LEIGH: I'm not sure I agree with where Jim Minifie ends up in his final proposal. But I think we need something to put downward pressure on fees. The challenge in this area is that sometimes continual tinkering with the system to get the perfect outcome generates more uncertainty that it's worth, which is why we went to the last election saying we wouldn't change superannuation tax treatment for five years beyond the announcements we'd already made.

HAMMER: Andrew Laming, what do you think of this report and is there a role for government?

LAMING: Well, they're fair points by Andrew Leigh. Look Australia led the way with Chile with compulsory employer contributions into super and building superannuation up early. It was one of the shrewd moves made by the Hawke-Keating Government. Of course, to look at the fees that are being paid and that we're higher than the OECD must be a big concern because, as you've pointed out, to most Australians, superannuation is a black box. You set it up and it just ticks away and if we're paying 2-3 times more in fees. That's of enormous concern and the inefficiency potentially within default superannuation firms is something we have to look at because it amounts to billions and billions of dollars of Australians' savings that they are going to need in retirement.

HAMMER: Do you think there's a role...

LAMING: ...Those numbers will be a big surprise and let's hope it's a wake-up call.

HAMMER: So do you think there's a role for government?

LAMING: There's certainly a role for increasing competition between default firms and ensuring they compete. By simple definition, if you're a default firm and you know that only two per cent of people are shopping around, then it gives a fair bit of head room for administrative fees and we need to be pushing those down and certainly government has a role if it's not happening in the market.

HAMMER: Gentlemen, thank you for your time this morning.

LEIGH: Thanks Chris, thanks Andrew.

LAMING: That's great. Thank you.


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