Big talk on bracket creep doesn't change anything - Breaking Politics





SUBJECT/S: Entitlements; bracket creep; GST; budget.

CHRIS HAMMER: Andrew Leigh, six weeks of parliamentary break, the Government is still doing badly in the polls. Is that simply because of the entitlements issue or do you think there is more to it than that?

ANDREW LEIGH, SHADOW ASSISTANT TREASURER: Chris, as many serious commentators are    starting to ask: what is the point of the Abbott Government? Where is their serious reform agenda? Where are the things they want to put in place in order to create a better future for the next generation of Australians? We have got a Government which is so beset by internal infighting, so concerned with itself that it has lost touch with the concerns of everyday Australians. The importance of seeing more jobs, better paid jobs, has been lost in a context now in which we have got the highest unemployment rate in two decades. We have got sluggish wage growth, and according to the Climate Institute, we are not going to make our 2020 carbon targets. There is a range of really concerning intergenerational factors about the current state of play in Australia.

HAMMER: The Reserve Bank has cut its projection of economic growth, slightly, but what are the implications for the budget?

LEIGH: Potentially very serious. The budget growth figures jump up to 3.5 per cent in the out years. The Reserve Bank governors are now suggesting that might not be met. If 2.5 per cent is the new normal, as some people in the United State are suggesting as well, then that means that the Government's strategy of razor thin surpluses in five years or so is going to be imperilled. But the Government is still unwilling to look at sensible revenue sources such as cracking down on our unfair and unsustainable superannuation tax breaks that even the superannuation industry thinks should be reformed, or looking at multinational taxation, where Labor's package raises 60 times as much as the government's own announced measures.

HAMMER: Now, Joe Hockey is flagging tax reform. He has written an op-ed in the Australian newspaper. He says the problem is there is an overreliance on personal income tax. Do you agree with him?

LEIGH: Well, if you look at the personal income tax rates paid by someone at average earnings, 167 per cent of average earnings, 67 per cent of average earnings, all of those sit below the OECD average. But it is certainly true that, given that we have a lower consumption tax than other countries, the share of taxes comprised by personal income taxes is a smidgen higher than those countries. Let's not lose track of the broad fact here, across the advanced world, Australia is a low tax, low spend country, far closer to Korea and the United States than to Scandinavia.

HAMMER: So if the government was to, in the future, go to the election promising income tax cuts, as far as that was to correct for so called bracket creep, that would be loosely acceptable to Labor?

LEIGH: Well as Milton Friedman once put it: 'To tax is to spend'. So if the government wants to cut taxes then it needs to either blow out the deficit still further or else cut spending. We need to know from Joe Hockey not just what taxes does he aspire to lower, but what spending does he aspire to cut?

HAMMER: So you think that bracket creep, people moving into higher income brackets, should be allowed? Or do you think that governments should act to avoid that?

LEIGH: Well, I am simply making the mathematical point, Chris, that it is all well and good to aspire to lower personal income taxes, but the budget has to balance. So Joe Hockey needs to say what implications that is going to have for funding to schools and hospitals, if we are to have that sensible debate he promised.

HAMMER: But if you correct for bracket creep you are not raising more tax, you are simply keeping it the same. His argument is if you allow bracket creep to happen you start just collecting more tax by default.

LEIGH: Chris, his own budget numbers are built on bracket creep. According to the Grattan Institute, around four-fifths of the government's return to surplus depends on bracket creep. If Joe Hockey doesn't want to have that happen, then he has to make clear what that means on the spending side. He promised before coming to office that there would be a surplus in his first year and every year after that. He has broken that promise, blown out the deficit again and again. Perhaps his strategy is continuing debt and deficits; I think that would be a mistake.

HAMMER: Now, bracket creep, correcting for bracket creep is one thing, changing the tax mix overall away from personal income tax is another, he is saying the overreliance on personal income tax is the problem. If the government wanted to shift from income tax and have a greater reliance on say the GST, is that an acceptable argument as far as Labor is concerned?

LEIGH: Chris, on the government’s own estimates the GST and income taxes have a similar efficiency cost. What that means for economists is we think about the amount of economic activity that is destroyed, when you raise a dollar of revenue. The government’s own tax white paper says that when you raise a dollar of revenue through GST, you destroy 20 cents of economic activity, and again the same when you raise a dollar of revenue through income taxes. But the GST is much more regressive, much more inequitable than income taxes. So in a shift where you raise the GST and cut income taxes it wouldn't have any efficiency gain, but would have a big equity cost.

HAMMER: And what about correcting the income tax system, the rates, to make up for bracket creep, but clamping down on some of the concessions? Because unlike the GST, which is a fairly pure tax, the income tax system over many decades under governments of all persuasions, there's been all sorts of incentives and disincentives and everything built into. Would that make more sense than say cutting income tax, just to make sure it actually works better?

LEIGH: We have said we are open to a sensible discussion around high-end superannuation and around negative gearing. The government has run scare campaigns against us on both of those, saying they wouldn't ever touch them. That puts them at odds with, for example, the Business Council of Australia and the head of the Treasury, who think that these sorts of unfair and unsustainable tax concessions need to be looked at.

HAMMER: Andrew Leigh, thanks for your time today.

LEIGH: Thank you, Chris.



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