Income tax has to go up

The Coalition has made little headway in cleaning up Labor's structural deficit, and nipping and tucking the budget won't offset election spending commitments.

Political bluster aside, tomorrow’s Mid-Year Economic and Fiscal Outlook statement will mainly show that the Australian government doesn’t raise enough taxes.

It’s true that bluster on both sides is justified to some extent: Labor left a big structural deficit, also known as a shocking mess, and it’s also true the Coalition has only added to it in its first 100 days, by giving $8.8 billion to the Reserve Bank, putting an extra $1.2 billion into education, cancelling $3.1 billion in taxes and having to backtrack on 12,000 public service job cuts because Labor had already done that, and a bit more.

That lot adds up to $18.3 billion. The pre-election Treasury document put the deficit at $30.1 billion: hey presto, the new starting point is $48.4 billion – so I make it 62 per cent Labor and 38 per cent Coalition. The noise from each side tomorrow will no doubt be in reverse proportion to that.

The blame is not irrelevant. The ALP’s fiscal management was hopeless and it has left a structural deficit of more than $40 billion, having inherited a structural surplus.

The trouble is that to guarantee its election this year, the Coalition based its campaign on cutting taxes and going along with key Labor spending commitments on education and disability. As a result, that’s what Tony Abbott has a mandate for: extra spending and lower taxes. There is no specific mandate for actions to reduce the deficit beyond the broad rhetorical one of cleaning up Labor’s mess.

And with the polls showing a remarkable slump in the new government’s popularity 100 days into office, he doesn’t have the political capital to do it either.

Tony Shepherd’s Commission of Audit should help with some specifics when it reports before the May budget, but given the fact that the Coalition went into the election with only new spending plans and tax reductions, and is now less popular than it was then, it will be tough for Abbott and Joe Hockey to announce sufficient spending cuts in May.

And in any case it probably won’t be possible to ever get the budget back into structural surplus with spending cuts alone.

As RBA Governor Glenn Stevens said in his interview with the Financial Review last week: “The real question is have we got the revenue streams to cover the good things the community wants the government to give us out over the medium term.”

“…the real conversation ought to be about the five to eight year horizon, whether our aspirations for government spending are matched by our revenue sources and if they’re not what are we going to do about that. We should start that conversation now, because it’s going to be a long conversation. That’s the one to have, I think.”

Joe Hockey would have read that and clutched his brow: “Oh no, not a conversation about tax. Anything but that.” He might just announce tax increases in the 2014 budget, having leaked them first of course.

GST concessions for food, health, education, childcare, water and sewerage; the capital gains tax discount, superannuation, and excise indexation are all tax holes that Treasury will be advising the Treasurer to plug as they prepare for the budget.

But the simplest and fairest thing would be to simply raise the marginal income tax rates.

As Glenn Stevens suggested, Australia just doesn’t raise enough revenue to cover the community demands on Government for infrastructure, disability support, and free education and healthcare.

Taxes have to go up.

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