Tuesday, 18 October 2011

Prime Minister Abbott and the Carbon Tax

Abbott government unlikely to be tax innovator
Tony Abbott

DON'T look to a first-term Abbott government for bold new ideas on taxation reform to improve Australia's growth, and not just because there will no tax summits in sight.

Tony Abbott as prime minister would be focused on the old-fashioned version of sound economic policy: cutting spending a lot, cutting taxes by somewhat less, rebuilding the surplus. The absolute priorities for a Coalition government would be to rescind the carbon tax and the mining tax.

That means, in effect, returning the tax system to where it was rather than advancing anywhere new. Clearly the opposition thinks this is a large enough agenda for its first term. This won't be as simple as it sounds, as it will include clawing back the money to be given to households in compensation for the carbon tax as well as telling businesses that have invested in carbon credits they had fair warning not to.

This sort of argument will dominate the political agenda indefinitely, but what of the rest of the tax policy agenda under a Liberal government? Plenty of business leaders will consider just rescinding badly timed and badly designed taxes is insufficient to foster a resilient modern economy that is facing extensive structural change.

Combine that with Abbott's reluctance to make too many dramatic changes to industrial relations law and it means the calls of the business community for a much greater commitment to boosting national productivity aren't likely to be quickly met. Real reform is always going to produce winners and losers, and the absence of a surplus means there won't be any money to try to mollify the losers. That will make a cautious Coalition even more cautious.

The opposition will instead be relying heavily on the psychological appeal of having sensible "grown-ups" back in charge, living soberly within the country's means rather than being tempted by radical reform notions that can backfire. The most excitement promised by an Abbott government is to deliver instead "sustainable" tax cuts, based on less government spending and ultimately on a stronger economy. Given the extent of disillusion with the Gillard government and the risk of unintended consequences in tax policy, this will be seen as an improvement.

But the more dramatic tax reforms urged by participants in the Menzies Research Centre forum held last Friday are likely to remain conceptual for years. Tax changes, the Opposition Leader declared at the forum, could be considered reform only if they made an economy more productive. His view was that the carbon and mining taxes did not deserve the title because they did the opposite. He was, however, much less forthcoming on additional positive changes to lift productivity.

And there was not even a hint of any possible increase in the GST, no matter what economists might think about its efficiency. Certainly, the Coalition's determination to cut spending will have to be resolute, especially when the national mood is for better services as well as lower taxes. But the election of a conservative government is not suddenly going to end the wrestling over taxes and spending between Canberra and state governments of whatever persuasion. It won't reduce the demands on the federal government for greater financial contributions for bottomless pits such as healthcare for an ageing population. Nor will it end the complaints of the business community that the present system is not providing sufficient incentives for investment in everything from infrastructure to innovation.

Abbott's message is more basic. Ditch the newest and most unpopular taxes. Growth will then take care of itself. We'll see.

1 comment:

  1. Rather than alot of detail about Abbott and what he would do I'd focus more on him getting the job. The major stumbling block is workplace reform and it would require him to guarantee to the vast amount of people who ousted the last coalition on that very matter. People's jobs are such a major factor in their lives and the prospect of having wages and conditions eroded is a real concern, especially if you are an ordinary worker with no bargaining power at the job interview table. The vague notions of 'workforce flexibility' being good for the economy don't wash when a shift worker might lose $6.00 per hour penalty. That's real. Abbott has quite a few people in his party already pushing for 'workplace reform' and his aim will be to keep them as quiet as possible until after he wins (supposedly) the next election.


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