Crunch time for high-maintenance Australia

Politicians can no longer maintain the public services we've become accustomed to without beefing up indirect taxes.

Australians have become high-maintenance. Whereas we used to drive Holdens and Fords, eat Weetbix, crawl about the web via dial-up modems and repair the old Simpson washer in the laundry, we now buy Audis and Beemers, eat organic muesli, enjoy mobile video-on-demand and throw out the washing machine before it’s broken for one with European styling.

Well it’s something like that. And this trend has been mirrored in the services we demand from government. We want smoother roads, more frequent public transport, better schools, and more friendly customer service from the ATO and Centrelink... The list is endless, though the money to pay for it all is not.

As the nation became richer over the course of the Howard years, Treasurer Peter Costello enjoyed the double good fortune of being able to spend a little more each year in real per-capita terms, but also to collect enough extra tax each year to run surpluses and pay down the ‘Keating debt’.

As the chart below shows, the amount of money collected per Australian resident rose during those years in real terms, to peak just as Howard and Costello handed over the economy to Kevin Rudd and Wayne Swan (note that all dollar figures in the chart have been converted to 2013 dollars to show real spending power -- though this does not account for changes in the terms of trade or issues of ‘purchasing power parity’).

Graph for Crunch time for high-maintenance Australia

As noted previously (An awkward time to mention migration, July 8), net migration was ramped up substantially during the later Howard years to peak at over 300,000 per year.

So Costello was playing with substantially more revenue both in absolute and per capita terms, making it relatively easy to accommodate all those new Australians.

Then along came the GFC and federal tax receipts fell, in real per-capita terms, to the level they’d been at six years earlier. Since then, they’ve been rising at a slower rate than was the case in the noughties.

To compound this problem, a larger proportion of retired and elderly Australians each year means a greater demand on public spending in pensions, health care and infrastructure for cities bulging outward to accommodate the younger generations.

Just a decade ago, forecasters expected that a large slice of those older Australians would not still be with us. We’re living disgustingly healthy lifestyles, obviously.

It is against this backdrop that Martin Parkinson’s most recent warning over the need for tax reform must be understood.

In simple terms, we need more tax receipts per resident to maintain current quality of services, but cannot raise extra taxes, on current settings, without substantially reducing the spending power of households.

Doing that would scuttle the economy, so Parkinson has merely reiterated what every economist knows -- that the growing reliance on income and company taxes must be reversed by beefing up more efficient indirect taxes.

A GST increase is the prime contender in economic terms, but a very difficult political sell, as Callum Pickering explained yesterday (Australia can't run away from tax reform, September 12).

Moreover, doing nothing will allow ‘bracket creep’ to push more of the tax burden onto poorer Australians. That, if anywhere, is where the political message should be targeted -- and that would suggest it is Labor that has the opportunity to sell major tax reform going into the next election. We shall see.

In the meantime, there is one piece of low-hanging fruit that the government could seize, with little political pain -- by living up to its own promises on the ending of profit shifting by multi-nationals.

While increasing company tax is generally a bad idea, some companies get away with shifting profits to jurisdictions with lower tax rates. Companies such as Apple, Google, Airbnb, Facebook and Xstrata have complex accounting structures that, critics claim, cheat the Australian government of around $1 billion in revenue a year.

Labor, which closed loopholes for around a quarter of that figure each year, is now putting pressure on Treasurer Hockey to join a global, co-ordinated push to clamp down on profit shifting.

Hockey, who reversed Labor’s attempts to recover some of that money, has spoken in support of the global push, but shadow assistant treasurer Andrew Leigh is now accusing Hockey of “procrastinating and prevaricating on a key measure to stop multinational companies shifting profits offshore” known as the Common Reporting Standard, by failing to sign up to the plan despite 40 other nations having done so.

But why would the government delay tackling multinational companies?

Could it be that the last time an Australian government asked multinationals for more tax -- the RSPT -- it faced a concerted PR war that ultimately led to the end of Prime Minister Rudd, the creation of the flawed MRRT, and sparked the fatal in-fighting that ended Labor’s tenure?

The fact remains, however, that somebody is going to have to stand up, win voter support, and tackle tax reform head on.

Cutting our way to a balanced budget, as the government tries to pretend is a viable option, just won’t be enough.

Only genuine political leadership -- think Hawke on trade liberalisation, or Howard on the GST -- will stop the nation sliding off a fiscal cliff.

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