Checkmate spells fiscal indiscipline
It's all part of the way the two sides' long-running battle of the scare campaigns has morphed into a checkmate election campaign in which most effort has gone into eliminating the differences between the parties, leaving them with little to debate and voters with little choice other than which side to "trust". What if you don't trust either lot?
It's just bad luck for those of us who believe fiscal sustainability is something to be achieved, not just talked about when it's convenient. Perhaps the most irresponsible act arising from the checkmate game is Tony Abbott's commitment - without time limit - never to change the goods and services tax.
This puts paid to big business's dream of increasing the rate or broadening the base of the GST (or both) to finance a cut in the company tax rate. But lots of people have their eyes on the GST as a solution to their problems and I think the premiers have first go.
They were promised a growth tax, but the return of the prudent household (whose consumption spending grows no faster than its income) and the faster-growing exclusions from the GST's base (most notably, private spending on health and education) mean collections from the GST aren't keeping pace with the public's demand for increased spending on most areas of state responsibility, but particularly hospitals.
When Labor keeps accusing its opponents of planning to cut spending on health and education, the Coalition vigorously denies it. But any federal party that refuses to increase collections from the GST will inevitably be squeezing state spending on health and education. (Meaning a re-elected Labor government would too.)
Rivalling the irresponsibility of refusing to change the GST is the Coalition's promise to make no further changes to the concessional tax treatment of superannuation, which Labor matched with a promise to make no changes for five years.
Super is the most egregious example of middle-class welfare - the less help you need, the more you get. So the side that needs to pay for about $28 billion worth of promised tax breaks over four years before it finds ways to cover government spending growing at an underlying real rate of 3.5 per cent a year swears not to touch the biggest rort going.
And the other side, which still doesn't know how it would cover the ever-growing later-year costs of the disability scheme and the Gonski education funding - on top of the inescapable strong real growth in healthcare costs - makes the same undertaking.
One thing you can be certain of is that the Coalition's pledge to avoid further reform of super means its two-year postponement of the phase-up of compulsory employer contributions to 12 per cent of salary will end up being permanent. No bad thing.
Next, note that in one of the few cases where one side outbid the other rather than merely matching it - the Coalition's far more generous paid parental leave scheme - the conservatives have opened up a brand new source of middle-class welfare, a lucrative new entitlement program, one that as well as being expensive and unfair will do little to increase labour force participation.
It's true, however, that there are two big examples of checkmate politics where the Coalition hasn't been as fiscally irresponsible as it would like voters to believe. The first is its me-too on Labor's disability scheme.
As Saul Eslake, of Bank of America Merrill Lynch, has pointed out, the little-remarked 0.5 percentage-point increase in all rates of income tax the Coalition has accepted as part of the package will start four years before the full scheme starts. I'm sure the extra revenue will come in handy.
The second checkmate that won't be as costly as it seems is Abbott's supposed about-face in accepting the Gonski education funding reforms. The first trick is that he's agreed only to match the first four years of spending. Most of the increase is in the following two years. And when he says he'd remove the strings Labor has attached to its scheme he means he will neither make the states contribute towards the cost of Gonski's reforms nor check to ensure they don't use the fed's new Gonski money to cut back their existing spending.
So Abbott's deathbed conversion to more equitable sharing of federal grants to public and private schools turns out to be no conversion at all, just an old private school boy's three-card trick.
Frequently Asked Questions about this Article…
Tony Abbott promised never to change the goods and services tax (GST). For investors that matters because it rules out using higher or broader GST revenue to finance things like company tax cuts, which limits federal revenue options and could increase pressure on other parts of the budget.
The article says GST collections aren’t keeping pace with public demand because household consumption growth is slow and important items (like private health and education spending) are excluded. If the federal government won’t boost GST revenue, states are likely to be squeezed and may have to cut or re-prioritise spending on hospitals, schools and other services.
The Coalition pledged no further changes to concessional tax treatment of super, and Labor matched with a five‑year promise. The piece argues this protects a costly middle‑class tax concession and likely makes the Coalition’s two‑year postponement of the employer contribution rise to 12% permanent, which could slow the growth of compulsory employer contributions into retirement accounts.
Yes — the article points out Abbott’s commitment to never change the GST effectively blocks the idea of raising GST revenue (by rate or broadening the base) to finance a lower company tax rate, removing that funding pathway for company tax cuts.
The Coalition’s more generous paid parental leave scheme is described as a new, expensive entitlement that mostly benefits the middle class, is unfair, and is unlikely to significantly boost labour force participation — meaning it creates another fiscal cost for taxpayers.
The article notes the Coalition accepted a 0.5 percentage‑point increase in all income tax rates as part of the package, and that increase begins four years before the full disability scheme starts. That earlier revenue recognition helps fund the scheme, the article says.
Abbott agreed to match only the first four years of Gonski funding, while most of the cost occurs in the following two years. He also said he’d remove the strings Labor attached — meaning he wouldn’t force states to contribute or prevent them from using federal Gonski money to reduce existing spending, so the real cost and impact could be limited or shifted.
‘Checkmate’ politics, as described, means both major parties have largely matched each other with open‑ended promises rather than clear funding plans, which the author calls fiscally irresponsible. Investors should care because unclear or unsustainable fiscal policy can create uncertainty about future taxes, government spending priorities and the broader economic backdrop.
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