Swan's rolled-gold stuff-up

With Wayne Swan’s “rolled-gold” surplus promise now in tatters, the government has now resorted to dumping a component of its income tax cut compensation flowing from the carbon price revenue.

The government had already increased the tax-free threshold from $6000 to $18,200 from last July as part of the carbon price tax reforms. However it had also legislated to further increase the threshold to $19,400 in 2015. Dumping this further increase of $1,200 in the threshold seems small relative to the original $12,200 rise in the threshold last July. Furthermore the government could rightly point out that the carbon price will be far lower than anticipated, so the existing tax changes already far outweigh the costs to households from the carbon price.

But such intricacies are likely to be lost on the general public. All that they’ll retain will be those stereotypes already embedded in their mind, specifically that:

-- The government broke its promise to cut taxes as compensation for the carbon tax. Just as they suspected all along this is just a plain tax grab by politicians, not an environmental measure; and

-- As usual Labor can’t manage government finances and is running up a big deficit – just as they did in the early ‘90s.

The Coalition is no doubt jumping for joy at this announcement. The introduction of the carbon tax was Julia’s great lie, and now she’s delivered a lie within a lie by breaking her commitment to compensation.

The one possibly positive spin for the government is that this event could serve to focus households’ attention on net impact of the carbon price on the cost of living – very little. 

In spite of Abbott’s ad nauseam visits to Weet-Bix factories, fish markets and butchers, as well as Barnaby Joyce’s claims of $100 roasts (which he has now admitted on ABC Q&A was “hyperbole”), grocery prices didn’t go through the roof.  In fact inflation is so contained that the Reserve Bank again cut interest rates yesterday. 

The latest polling suggests that a majority of households now think they are no worse off as a result of the introduction of the carbon price. This is a far cry from what they thought before the carbon price was introduced. Also the economy remains close to what many economists consider full employment (which rather strangely involves 5 per cent unemployment). 

The reality is that even with this broken promise, the vast majority of households will be substantially overcompensated from the introduction of the carbon price.

But households just won’t grasp this reality.

Back in 2010 I suggested that household compensation for the carbon price should be delivered by a straight cash cheque to households that was directly linked to the value of the carbon price. This wouldn’t provide the same gain in economic efficiency that the change in the tax free threshold will deliver. But it would do a far better job of embedding electoral acceptance of the scheme.

It would have transparently demonstrated to households that they were not being ‘ripped-off’ via a tricky tax grab. It would have also acted to make it clear to households what would be taken away from them with the rescinding of the carbon price.  

In addition it would have ensured the government didn’t lock in tax cuts based on carbon price revenue that was highly uncertain, avoiding the fiscal pickle the government now finds itself in.