A titanic clash between optimism and pessimism

Abbott's attempt to reshape the economy takes Australia miles away from Labor’s softly, softly approach. The nation is either investing in a better future, or has made an awful miscalculation.

Two important speeches in the past 48 hours tell us a lot about what’s really going on with the Abbott government’s astonishing first budget. 

First, Treasury secretary Martin Parkinson has given qualified support for the Abbott program, particularly the need to push tax-raising back on to the states so that they can find the $80 billion in spending promised by the Gillard government that now will not materialise over the next 10 years. 

Before examining this idea, it is breathtaking to note that this is the same Martin Parkinson whose department was so thoroughly derided by the Coalition in opposition. 

The revenue forecasts that Parkinson’s team delivered to Wayne Swan turned out to be over-optimistic, and back then Joe Hockey and Tony Abbott spent weeks slamming Treasury as capitulating to the government of the day. 

Parkinson was not partisan then, and he is not now. The fact that he has strongly backed some of the key thrusts of this year’s budget should be taken seriously -- right after Hockey and Abbott have apologised for so disgracefully politicising his role. 

But let’s move on. Parkinson explained in his speech on Tuesday that the states could look at increasing payroll tax to help fund the shortfall. 

Why would he back that over the income tax ‘state surcharge’ suggested by the Commission of Audit? Because in his view, it is much less harmful to the economy. 

Parkinson pointed out that extensive studies show that payroll tax is passed through to a firm’s customers, meaning it acts as a de facto GST increase. And the GST is, whatever its critics say, one of the most efficient ways to raise tax -- particularly if the harm it causes lower socio-economic groups is offset by other measures. 

By contrast, allowing income taxes to rise through bracket creep (and I must admit that I previously argued in favour of this being allowed to occur to an extent), is, according to Parkinson, much more harmful.

In short, seeing prices rise across the board damages consumer confidence less than a scenario in which prices do not rise, but the consumer pays more income tax. 

Ironically, both measures mean that the nation’s tax bill has been raised. Payroll tax increases by the states will act like a GST rise, whereas a federal income tax hike will be a direct impost on the consumer.

Importantly, though, the former is largely invisible, whereas the latter would be blamed on the Prime Minister -- and he was out yesterday promising tax cuts, clearly planning to watch the states squirm over raising payroll taxes. 

It’s important to note that payroll tax law in Australia was harmonised among six states and territories in 2007, and effectively harmonised in the remaining two. That means there is basically one way of policing the tax, and one central register of whom is liable -- it is a case of ‘co-operative competitive federalism’. All states agree to the rules of the game, but impose different rates on companies, with the tax cutting in at different payroll thresholds. More on that another time. 

So the states are more than able to follow through on Parkinson’s advice, and Abbott’s direct injunction. If the Coalition government survives, this move will help Abbott claim that he maintained taxes at a level lower than Labor would have delivered.

In truth, the sum of federal, state and local taxes would most likely be higher, even if the federal tax take stayed below the target of 23.9 per cent of GDP. 

And so on to the second speech.

It is always hard to see current events the way future historians might read them, but Shadow Treasurer Chris Bowen’s speech yesterday gives a pretty good idea. 

In short, Labor was convinced -- and remains convinced -- that had all things remained equal (i.e. their legislative program carried on rather than being torn up after last year’s election), that economic confidence would have returned to the economy, and that growth and tax revenues would have returned to eventually balance the budget. 

We will never know. 

Bowen called the Abbott government: “A government that preaches pessimism. A government that says we have to become a lesser country and accept lesser standards. A government that has no faith in its people and no confidence in our ability to meet challenges. A government determined to throw a blanket of gloom and doom over our country.”

Some of that is wrong. The Abbott team has not lost faith in the people, but some time ago utterly lost faith in the story Labor was telling them. 

In essence, Abbott does not think the growth and revenues that Labor spoke of will arrive in the near or long term. The budget is about reshaping Australia for an economic scenario which I have previously highlighted: that Asia is beating on our door, offering to do everything we do just as well, and at a lower price.

Pessimistic, I know. However, it would be inconsistent and hypocritical for this columnist to abandon those views. There is enough hypocrisy washing about between left and right partisan commentators already. 

What historians will have to decide is whether this fierce budget -- and the sudden change in national direction -- was justified by those economic forces (Abbott’s position), or could have been done more gently and gradually (Bowen and Shorten’s position). 

One thing is certain: the die has been cast. 

Yesterday’s consumer confidence figures, including the lowest level of confidence about household finances since the Westpac survey was begun 40 years ago, demonstrate that with perfect clarity.

If there was a confidence-driven recovery possible under the plans Labor took to the election, it has all but been lost. 

The hard reality this budget thrusts on Australia serves to make the ‘budget emergency’ real. 

One can only hope that as the rest of the Abbott government’s plans unfold, they really do lead to the best outcome Australians could have hoped for. If not, the nation has just made a terrible mistake.