A taxing solution to budget dilemmas

The Conversation

In the end, the disabled outsmarted the politicians. Julia Gillard will bring legislation to the current parliament for her tax increase to contribute to the cost of the national disability insurance scheme. Tony Abbott’s Coalition will vote for it.

Political reality overtook some cynical power play from both sides, but especially by the prime minister, because they couldn’t afford to be seen point scoring at the expense of people with disabilities.

Gillard had wanted to delay introducing the legislation for a 0.5 percentage point increase in the Medicare levy, so she could get maximum leverage from the NDIS issue in the run-up to the election. Abbott called her bluff, demanding the bill come in at once. But he wouldn’t undertake to support it unless the prime minister revealed the rest of the funding for the scheme.

Neither could hold out. Abbott yesterday announced the Coalition would “consider” providing support. He outlined various other things the government had to do, including the release of “operational details” for the scheme.

Gillard read “consider” supporting as “will support” and waved aside assorted demands as things on which the government was already working.

Whew. Both leaders are out of awkward holes, and quickly.

Gillard has lost an opportunity to wedge Abbott; the Opposition leader has agreed to a tax rise and even described it as “modest”.

Who would have thought he would be using the word “modest” in relation to an increase that will raise more than $3 billion annually? Shadow treasurer Joe Hockey must be choking – but then this “modest” tax rise is now incorporated into the Opposition’s own funding for the NDIS, which is a boon for Hockey’s difficult numbers exercise.

There was consultation among the senior opposition leadership before Abbott’s announcement. The Coalition is holding out the prospect of removing the levy “when the budget returns to strong surplus and the NDIS can be funded without it”. That sounds like a very long time.

From Gillard’s point of view, having bipartisanship on the levy helps defuse the embarrassment of her previous opposition to one.

This tax hike is a godsend for the cash-strapped budget. In the out-years it will be a vital offset to the diminished funds from the carbon tax, when that is linked to the European price from 2015.

The government is caught in a perfect storm as it finalises the May 14 budget: a worsened revenue situation (this week it announced a tax receipts writedown from October estimates of $12 billion for 2012-13, which will ripple through to future years); big spending projects; and an election bearing down.

In normal circumstances there would not be a debate about a levy at all, because it wouldn’t be part of an election-year budget. That the government is resorting to it is a result not just of lower-than- anticipated revenue but also the fact it is embarking on huge programs late in the term.

Despite the optimism that those around her insist she retains, Gillard must know she is almost certain to lose office. She wants to construct the foundations of big monuments, even if she doesn’t get to finish the buildings. The Gonski school funding and the NDIS are not just programs she hopes will help win votes but potentially lasting “Gillard” legacies.

But the timing has been out and the costs worryingly high for the economic conditions in which Labor finds itself.

The government dawdled on Gonski and rushed with the NDIS. It received the school funding report at the end of 2011; it should have negotiated with the states last year, not be talking with then now.

In contrast, it brought forward the NDIS’s start by a year. The future will tell whether the original schedule recommended by the Productivity Commission might have been better for best planning. This is a huge scheme; the fact that it has such strong and all-round support should not blind us to the probability that it will have some serious implementation challenges. These are likely to fall to Abbott to deal with.

Former treasurer Peter Costello this week criticised both sides for their big spending commitments in current financial circumstances. He is censorious of Abbott’s paid parental leave scheme and his climate action plan, as well as of the Labor initiatives. For Abbott, the over-generous parental leave plan is a monument in prospect. (The direct action blueprint is something he had to have after his rejection of an emissions trading scheme.)

Abbott insists his PPL is a workforce participation measure and says the funding isn’t a problem because a levy on big companies will pay for it. He has either become locked into this expensive idea because he didn’t want to face a retreat, or he’s done an excellent job of convincing himself of the virtues of a plan many of his own colleagues consider an indulgence.

The NDIS and the Gonski funding are easier to defend than the PPL scheme. But if they are to be considered responsible they do demand that sacrifices be made elsewhere. The levy is only a first instalment. If the budget’s forward estimates do not contain an eventual return to surplus – an achievable, well-based one this time – the government will have driven another stake into its own heart.

Michelle Grattan is a professorial fellow at the University of Canberra. She does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published at The Conversation. Republished with permission.