Can Grumpy Joe sell the bad news that's coming?

Labor strategists will be breathing a sigh of relief following Prime Minister Abbott's declaration on Thursday that Joe Hockey will retain the role of Treasurer “indefinitely”.

The brief swirl of a rumour that Malcolm Turnbull would soon be given Hockey's job was, perhaps, wishful thinking on the part of progressive journalists. But overall, it would have been bad news for Labor.

Turnbull's broad voter appeal and selling skills could have made the current Coalition strategy much more appealing to swing voters.

However, that is a secondary issue for the hard rump of Liberal MPs that remain from the group, led by Nick Minchin, that voted for Tony Abbott in the leadership ballot of December 2009. For them, it is better to be unpopular with Joe than a bit more popular with Malcolm.

In the 2009 ballot, Tony Abbott beat Turnbull for the leadership spot by a single vote. Half the party, Hockey included, were willing to see out the creation of a carbon emissions trading scheme in a bipartisan deal with Kevin Rudd, though the other half thought going along with Rudd was too dangerous and could split the party in two.

As Paul Kelly has explained, for once a leadership challenge was not just about popularity, but actually about policy.

But there is no doubt that among the 42 votes that sided with Abbott were Turnbull fans who had been spooked by Minchin's belief that rank-and-file Libs and Nationals would just not put up with carbon pricing.

Funny, really, given that they're apparently willing to put up with the creation of a carbon bureaucracy to give multimillion-dollar dollops of tax revenue to carbon polluters. That doesn't seem to be splitting the party.

Now the tables are turned. It is the Coalition's deep unpopularity, rather than any single policy, that is causing tremors of dissent. While it's true that Abbott's ‘signature' dalliance with socialism, the paid parental leave scheme, has upset many Coalition MPs, it is not opening as large an ideological split as carbon pricing once did.

Abbott is betting that together with Hockey, he can rebuild enough trust with the angry electorate to secure a second term.

This could be a miscalculation, however, because what lies ahead are major reforms that Turnbull could present better to voters than the pugnacious Hockey.

In the space of the next week we'll see what those epic reforms might look like.

There are two signs this week: the recommendations of the Murray inquiry to be released this weekend, followed by the release of a discussion paper to get the tax reform agenda rolling.

They will be like two mirrors held up to Australian society. Joe Hockey will be the tailor telling us that ‘Sir may have to shed a few pounds'.

Specifically, in a country in which nearly a third of the value of the listed sharemarket is accounted for by the big banks, the Australian voter really has put on more than a few pounds of private debt.

Borrowing has been made easy by low capital ratio requirements, and even in the post-GFC era, the big four largely got around ‘tighter' capital requirements not so much by raising capital, as re-jigging the risk-weightings of the capital they had. This argument has recently been made forcefully by commentator Christopher Joye, though at the time of writing we still don't know if the Murray inquiry will agree with him.

And yet the banks are nervous that their hand-over-fist lending practices could be suddenly crimped. And the government will also be nervous, therefore, that they'll have to tell voters why the debt binge needs to be reined in a bit.

On the other side of the coin is a tax system that has helped push cream-pies into the faces of Australian borrowers, and pushed the size of first-home-buyer mortgages so high that the young have deserted the market to make way for cashed-up investors from the other side of the mid-life divide.

There is a vicious circle at work that shifts the tax burden around in ways that hurt the young in particular.

To see how it works, consider a story I was recently told by a woman in her early 30s. She and her husband both work, and pay a fair chunk of tax. But each year when they sit down with their accountant to fine-tune their tax return, he practically begs them to buy an apartment to claim the negatively geared tax concession that is rightfully theirs.

Such a move can easily put thousands of dollars back into their pockets each year, and only loses them money if there is no substantial capital gain on the investment property ­-- something Australians have stopped believing is possible.

At an individual level, the accountant is saying: “Why just hand all that money to the ATO?”

But viewed in context, the money is not ‘given' to the ATO at all. Rather, when the investor receives their tax refund of, say, $6,000 they are effectively ‘taking' money from taxpayers who have not taken this investment option (and, incidentally, the young woman and her husband have so far refused to do so).

The argument that they have increased the housing supply has been debunked many times, which means the investor is risking a large chunk of capital on a loss-making venture, with any collapse in the mortgage debt market being underwritten by implicit guarantee by all taxpapers.

What a mess. Especially so because it does tend to be older investors who use negative gearing in this way, and who enjoy the larger tax refunds at the end of the year.

Of course, in a period of a high savings rate, this helps build up the banks' domestic deposits, and they in turn have to be lent -- predominantly into the housing market.

Peter Strong of the Council of Small Business of Australia reminded me this week that there are 200,000 small businesses in Australia that want to borrow substantial sums to transition to become medium-sized firms, but can't get the loans.

The negative gearing vicious circle that pours tax refunds into the bank accounts of people who aren't doing it tough, to be on-lent in ever larger loans to home-buyers who are, only exists in the housing market because of implicit government guarantees.

In this way, the Murray inquiry and tax reform are intimately connected.

Murray can slim down excessive lending with stricter capital controls in the home mortgage market. Personal tax reform can stop churning tax refunds back through the banks to bloat up those loans.

Negative gearing is only one piece in the puzzle, of course. Super tax concessions, capital gains tax concessions, too-high income and company taxes, and a refusal of both major parties to get on with GST reform all form part of the picture.

But in the week ahead, with the twin mirrors held up to our overweight housing-finance and tax minimisation ‘industries', perhaps finally we'll see where the pounds need to be shed.

And Labor will no doubt be loving the fact that it's grumpy Joe, not smooth-tongued Malcolm that will try to convey all that to Australian voters.