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Further interpretations have emerged on the address by the head of Treasury and, now, on an address by Reserve Bank Governor Stevens. Along with other letter writers in similar vein, yours truly had a letter on the budget issue published in The Australian (see below).

That paper’s editorial used it to lambast Labor for failing to learn the lesson of “its roller-coaster six-year ride in government”. It also has a good cartoon (not included below) portraying Shorten as a cowboy holding up Hockey outside “Treasury” and threatening to “burn the joint down” unless he hands over the Audit report. Hockey’s on the ball response is “What? Again?”  

And, while the editorial gives in principle support for an increase in the GST, it suggests that should  only happen if “Canberra  is put on a path where it reduces the call on our resources”. However, increasing the GST would itself imply an increased call on resources by government.

In practice, once the Commonwealth government started down the path of  increasing the GST for its own use, that would risk going down the increased size of government path. That is essentially what has happened in Europe, where overall tax levels have been increased by edging up indirect taxes (the ones much less resisted by the electorate than direct taxes).

Doubtless with tomorrow’s Senate re-election in mind, both Treasurer Hockey and Shadow Bowen have stated publicly that they do not support an increase in the GST.  But big government journos in the Fairfax press are supporters and, in their write ups, leave the implication that Parkinson and Stevens are too.

The question remains as to the extent to which the government will reduce spending. The Australian has an article speculating that a projected deficit of about $40 bn for next year will be reduced to about $20 bn. Such a first year outcome would fall short. Of course, nothing will be said on this before the “WA” Senate election or the budget. As my letter suggests, the hope must be that before the budget a comprehensive public rationale for lower spending will be published.



A welcome dose of reality from the Treasury

Various letters published in Turning Point - The Australian, April 4, 2014

IT is pleasing to learn at last that Treasury secretary Martin Parkinson believes that reining in spending is the key to securing the budget’s sustainability (“The tough road to fiscal repair”, 3/4). But it is a pity my old department has not published analyses that would support this.

What is needed is not projections of hypothetical budget figures, but a coherent rationale for persuading the public. For example, over the past 20 years real incomes have increased by almost 50 per cent. Thus a significantly larger proportion of individuals and families are capable of taking care of themselves without government assistance, or with less of it.

The main focus should be on those in higher income brackets who pay taxes but receive back a large proportion in forms of government assistance. A reduction in such churning is an important rationale.

Des Moore, South Yarra, Vic

THE reality check from Treasury secretary Martin Parkinson is timely (“Don’t rely on growth: Treasury”, 3/4). But we’ve known that digging holes in the ground was not going to be enough in the long term. But higher taxes will not be our saviour. We should significantly increase our productivity so that the non-mining sector can underpin much more of our growth.

There’s no better place to start than with the white elephants: the NDIS, Gonski and the NBN. When we desperately need to improve productivity we can’t afford these in their present forms.

Properly designed, each has the potential to lift productivity but the NDIS and NBN costs are already out of control. Malcolm Turnbull’s NBN will not lift productivity to the potential such a costly project should.

Gonski is essentially throwing more money at education which we already know doesn’t improve outcomes. It will also represent another productivity-killing layer of bureaucracy.

George Finlay, Balaclava, Vic

HOW refreshing to see a Labor appointed head of Treasury come out with a pragmatic and honest appraisal of the state of the budget. For the past few weeks all we have heard from Labor’s Chris Bowen is unqualified and ill-researched propaganda aimed at discrediting the government on fiscal policy and the possible outcomes of the May budget.

Martin Parkinson has not only reinforced Joe Hockey’s stand on the need to wind back spending, he has contradicted Bowen’s assertions that the budget could be returned to surplus in five years while continuing to spend wildly.

Hopefully the electorate is listening to Parkinson who has nothing to gain by telling it other than how it is. It is up to the Abbott government to sort out the mess and get us all to understand and accept that the national coffers is not a bottomless pit.

John George, Terrigal, NSW

SUPPOSING the Coalition doesn’t do well in Western Australia, will your readers be entitled to suggest some second thoughts about how well Tony Abbott is travelling? Because his journey so far has been patchy and clunky, what with his captain’s calls and setting himself up for ridicule over his reintroduction of imperial honours when the average household’s financial pips are squeaking.

His backbenchers have a shocking budget to sell now that Martin Parkinson — I suppose with Joe Hockey’s blessing — is preparing ground to trawl for ways to bring a surplus back sooner. By the time all this happens, Labor will be back in and back out again.

If Abbott’s capacity for surprises continues as part of his deep-seated nature, will he regard them as so many mini-clangers that the electorate will forgive him? That’s unlikely. Smarten up, Prime Minister, and quickly.

David Hall, Labrador, Qld

HOW times change — the Australian Treasury which consistently got everything wrong over the past six years and whose optimistic forecasts fed the spending addiction of a profligate government, has now become the voice of pessimism.

Greg Kater, Sydney, NSW

Time for a new tax compact

Article by Fleur Anderson (the AFR's main leftie is on leave)
published in the Australian Financial Review, April 4, 2014

Ten days ago former Labor prime minister Kevin Rudd regaled a small room of Harvard students about the highs and lows of politics and economic management.

It was snowing in Boston, where the globe-trotting Rudd is now based as a senior fellow at the John F. Kennedy School of Government.

Rudd is earning his keep by giving a series of lectures to students about how he kept Australia from falling into the abyss of the global financial crisis.

“I went to the cabinet room and I brought a book,” he tells them.

“It was by Keynes and I said ‘guys and gals’ we are going to read this.

“And I threw down on the table, The General Theory. He wrote it in the 1930s and Treasury advice to us is that today is as bad as it was then.”

Rudd was setting out his government’s philosophy behind the $42 billion stimulus package.

While he is building a thriving international career on his government’s economic intervention between 2008 and 2010, the political debate in Australia has moved on.

With budget deficits stretching beyond a decade, Labor’s temporary stimulus package disguised the real culprit of the nation’s now parlous financial state.

Australia has enjoyed 22 years of uninterrupted economic growth, yet our government finances are broken.

Now our two most respected economic officials, Treasury secretary Martin Parkinson and Reserve Bank governor Glenn Stevens, have warned this week the odds are stacked against us that the good times will continue.

Tax system must change

Parkinson belled the cat on Wednesday night: Australia’s tax system must change.

Put simply, workers cannot continue to pay an ever-increasing tax burden, companies must eventually get a tax cut, and indirect taxes – such as the GST – must be allowed to do the heavy lifting.

And there must be spending cuts. “Individual hard decisions,” Parkinson put it. Inside the Canberra political bubble, the idea that the GST will have to rise or expand is accepted wisdom.

But Parkinson’s other message is a little more surprising in our current straitened circumstances: that the average worker should not be allowed to pay an ever-increasing portion of their wage to return the budget to surplus.

Hoorah! Election-sweetening cash splashes are back on the agenda.

When Treasury and the Parliamentary Budget Office published their long-term analyses of the budget’s structural weakness, it pinged years of income tax cuts under Howard and Rudd for blowing billions of dollars in forgone tax revenue.

Now Parkinson has neatly set up both political parties for an almighty tax brawl in the 2016 election.

Voters will be entitled to demand from the leaders what they will do to encourage personal enterprise, and avoid a life of tax servitude.

Bracket creep – a political buzz word during the Howard era of super-surpluses – occurs when workers are pulled into higher tax brackets as their wages rise with inflation. It’s bad news for workers because it destroys any incentive to work hard, to get ahead, because every extra dollar earned means a greater slice goes to the government. At its worst, some – like working mothers – find they go backwards as the tax system and the welfare system conspire to withdraw family tax benefits for each extra dollar they earn.

But it’s good news for government coffers because it’s a tax increase by stealth, delivering more coin for doing stuff-all as long as the workers agree to keep working.

Parkinson warned that by 2016 – coincidentally an election year – the average full-time worker will be paying 39¢ in income tax for every extra dollar they earn. This is compared to only 31.5¢ in the dollar during the tax-cut glory days between 2001-02 and 2009-10.

Within a decade, the average worker will lose 28 per cent of their income in tax, compared to 23 per cent this year.

Bracket creep

This bracket creep is an insidious evil, hitting low- to middle-income earners while encouraging higher-income earners to exploit loopholes in the system.

Once upon a time, political parties put their reputations on the line by nominating an appropriate individual tax burden.

In the 1998 election, the Howard government promised that 80 per cent of taxpayers would pay a top marginal tax rate of 30 per cent or less.

In 2007, the Coalition government promised its five-year goal was to ensure that 85 per cent of taxpayers would pay a top marginal tax rate of 30 per cent or less. Of those, 45 per cent of taxpayers would face a top marginal tax rate of 15 per cent or less.

The Rudd government promised similar tax cuts but the global financial crisis put an end to the aspirational income tax cuts at the higher end of the income tax scale. Former treasurer Wayne Swan made a more malleable promise: that total tax revenue as a proportion of GDP would not exceed the 24.4 per cent level in 2007 when Labor won government.

Now it’s time for both sides to deliver a new tax compact with the Australian people. If the GST is to rise or expand, voters will need an assurance that income tax – which is as addictive to cash-starved governments as any drug – will be controlled.

Stephen Bartos, executive director of ACIL Tasman consulting and a former deputy secretary of the Department of Finance, says promising a headline tax burden is one thing. Educating taxpayers to understand the services their taxes provide is another.

Bartos was one of earliest advocates of a commission of audit, and his blueprint for an audit was championed by the Business Council of Australia. The terms of reference of the government’s eventual audit – chaired by former BCA president Tony Shepherd – closely mirrors Bartos’s work.

Bartos says the government should consider linking certain tax revenues to specific spending. For example, broad-based taxes such as GST linked to spending on defence, and income taxes to more personal services like health, education and social safety nets in the welfare system.

If you want a more inclusive health system, be prepared to pay for it through higher personal taxes, Bartos argues.

Remember that Joe Hockey promised during the 2013 election campaign that the Australian Taxation Office would send a “tax receipt” to every taxpayer showing how their money was spent?

We’ve heard nothing since but don’t be surprised to receive an Abbott government tax receipt after lodging this year’s tax return. Then you’ll know the great tax battle has finally begun.

RBA's Glenn Stevens backs Treasury secretary Martin Parkinson on tax

Article by Peter Martin published in The Age, April 3, 2014

Reserve Bank governor Glenn Stevens has backed Treasury head Martin Parkinson, saying Australia needs "a conversation" about tax and government spending.

On Wednesday Dr Parkinson said taxes such as the GST and fuel excise would have to be boosted or broadened if the budget was to ever return to a sustainable surplus.

He said the alternative of letting inflation push Australians into ever-higher tax brackets was “unlikely to be politically feasible”.

Addressing the American Chamber of Commerce in Brisbane on Thursday, Mr Stevens said there were things Australia wanted to do and had voted for "that are not fully funded by taxes over the medium term, as is starting to become clear in the lead-up to the May budget".

“Here I refer to the very important speech given last evening by my colleague, Treasury secretary Martin Parkinson," he said. "Our situation is not dire by the standards of other countries but neither are the issues trivial. A conversation needs to be had.”

A spokeswoman for Treasurer Joe Hockey hosed down suggestions of changes to the GST, saying the Treasury secretary’s views were his own.

“We are not changing the GST – full stop, end of story,” she said.

The Coalition has promised to prepare a taxation white paper within its first term of office. It has ruled out changing the GST in its first term but has left open the possibility of taking a proposed change to the next election.

Labor's Treasury spokesman Chris Bowen welcomed Dr Parkinson's contribution to the debate but said Labor did not support either an increase in the GST or lifting the fuel excise.

Instead the government should drop its "expensive and unfair paid parental leave scheme" and its "direct action" carbon reduction fund.

Mr Stevens told the Brisbane audience that too often governments and oppositions stuck to scripts rather than seeking solutions.

“There is something of a tendency for governments, when asked to outline their growth plans, to list the things that they already want to do for political reasons, and then to claim that they will help growth,” he said.

“Many of the things that are needed to spur growth seem not to make it on to such lists: things that boost competition in markets, that genuinely free-up trade, that reform the governance and financing of infrastructure projects (and the pricing of use of infrastructure), that put retirement income streams on a sustainable footing, that realign incentives ... and that minimise distortions from tax - many of these often don't make in on to ‘to do' lists in the way that perhaps they should."

If Australia made its way through the downturn in mining investment without a slump, it "would be a major achievement".

There were early signs that it would. "But early signs are just that: early. It is far too soon to think about counting any chickens yet. Let's also be clear that the capacity to fine-tune these outcomes is very limited," he said.

Coalition targets big deficit cut

Article by Sharri Markson published in The Australian, April 4, 2014

THE Coalition is looking to significantly reduce the deficit forecast for next financial year as it begins the process of repairing the federal budget.

The Australian understands a deficit figure of $20 billion for the 2014-15 financial year has been discussed in meetings earlier this year, meaning cuts of almost $14bn in the budget.

Joe Hockey’s office denied the $20bn figure had been discussed. But sources present in budget meetings said the Treasurer hoped on budget night next month to announce he had significantly reduced the deficit left by Labor from the 2013-14 financial year by about half. The deficit is $47.6bn, which includes a one-off grant to the Reserve Bank of $8.8bn.

The deficit projected next financial year is $33.9bn, according to the mid-year economic and fiscal outlook released in December. This means savings of about $13.9bn would be required to bring in a $20bn deficit.

With five weeks to go, the budget document is still in negotiation. The decisions that will materially change the final deficit amount have not yet been taken.

A spokeswoman for the Treasurer would not comment on the size of the deficit but said “it’s true that the Treasurer wants to reduce the deficit left by Labor, which is at historic highs”.

“You’re reaching that point where the hard work is being done at the current time to repair this structural mess that Labor has left and we are trying to get on to a more sustainable footing,’’ the spokeswoman said.

“The Treasurer is driven to do that repair. The Treasurer wants to repair the budget and address a significant overspending undertaken by Labor.”

The final report from the Commission of Audit, which will inform the expenditure review committee razor gang preparing the budget, was delivered to the government this week.

While the government is committed to finding significant savings across government, Tony Abbott has repeatedly said all election promises would be fulfilled and has denied there would be any major changes to the paid parental leave scheme, which the government promised to introduce in its first term.

Parliamentary Secretary to the Prime Minister Josh Frydenberg said deregulation and reducing red tape would create an annual saving of $1bn. “It’s going to significantly lift productivity, so you create jobs, which leads to more revenue and a healthier economy,’’ Mr Frydenberg said.

The budget announced in May last year under Labor forecast a deficit of $18bn for 2013-14.

The deficit remained consistent in the Pre-Election Economic and Fiscal Outlook but in the MYEFO released on December 17, Mr Hockey revised this figure to $47bn. Some of this was due to increased government spending, including the Coalition’s $8.8bn grant to the RBA, along with higher unemployment benefits and lower tax revenue from a weaker economy. At the time, Mr Hockey said that combined deficits over the four-year period would be $123bn.

Mr Hockey also revealed government revenues had collapsed by about $1bn a week since Labor’s last budget and said total tax revenue was forecast to fall 1.3 per cent to $343.5bn.

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