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A confused start to government’s tax conversation

Treasurer Joe Hockey says fairness is in the eye of the beholder. AAP/Tracey Nearmy

In launching its national “conversation” about tax reform, the Abbott government is caught between the policy imperative of “leading” and the political requirement of “listening”.

A further complication is that Prime Minister Tony Abbott is seeking to wedge Bill Shorten, paving the way to blame him if no real progress can be made in fundamentally recalibrating the tax system.

What we are witnessing in this first stage of the “conversation” is that the government is reluctant to be seen to be “leading”. It’s hinting and nudging, but playing coy about what it believes is required. Inevitably, this makes the beginning of the debate quite confused.

The government is starting the sentence – “we need to fix the tax system” – but then leaving it hanging. Is this some super-sophisticated tactic, or is it not sure itself where things will head?

There are some tantalising points thrown out but what do they mean? “Fairness,” said Treasurer Joe Hockey on Monday, “is in the eyes of the beholder. And this is where I want everyone to think a bit more deeply about things. 2% of taxpayers pay 26% of personal income tax.” He went on to express concern these people could relocate because they felt they were paying too much.

But Hockey also said: “I’m not saying they should be taxed more or less”. From the ordinary person’s point of view, that’s not likely to encourage deep thinking – it’s a signal to tune out until the treasurer has something solid to say about his view on the tax these people pay.

The tax discussion paper is a useful document but hardly a revelatory one. Much of the ground it traverses is familiar; basically, it updates arguments, taking account of fast-moving developments in the globalised economy, and it refreshes the statistics.

On one level, it seems very democratic to just throw the whole discussion open, without putting forward options until later in the year after submissions are received. Also, given the lashing Abbott has got over his lack of consultation on the budget and other measures, it might be said he hadn’t much choice.

But it would make for a more focused community discussion if the government had set out its broad view at this initial stage. To do this does not require a prior national conversation – its preference is pretty clear (although that doesn’t mean it can be ultimately attained).

Hockey dwells on the tax system’s heavy reliance on personal and corporate income tax.

He avoids going to the next logical point, which would be to say “what we would really like to do is lower income tax, both for individuals and companies, and rebalance the system by raising the rate of the GST or broadening the base, or both”.

If the government were being frank with the public it would also say: “If we boosted the GST, which goes to the states, that would enable them to pay for some of the extra burden of future spending on hospitals and schools that we pushed their way at the last budget”.

But the GST is such a dangerous bogland that the government dances around the edge, leaving commentators and others to draw the implications from the discussion paper, which doesn’t make recommendations. Hockey said at one point on Monday that talk of the GST should be put aside – attention should be on other areas. But everyone knows this is avoiding the elephant in the room.

Abbott shifts the onus onto Shorten. “The point I stress is that there can be no change to the GST unless Bill Shorten wants it.”

This is a reference to the consensus requirement reiterated in the discussion paper, which says: “Any change to the GST rate or base would require the unanimous support of the state and territory governments, the endorsement of the Australian government and the passage of relevant legislation by both houses of the Australian parliament.”

But claiming “Shorten” has an effective veto power (only sort of true) is a very negative way to go about an argument for a shift in the tax mix.

This is a corner that, in strict political terms, the opposition leader is unlikely to mind being forced into.

Shorten has ruled out supporting changing the GST base or rate – although Labor is willing to contemplate lowering the present A$1000 GST-free threshold on imported goods if that were practical.

Changes to the GST, even when accompanied by substantial income tax cuts, would be a very difficult sell for Abbott at the 2016 election, especially given the lack of trust the community feels in him.

On the other hand, the tax reform debate is not all plain sailing for Shorten.

If Labor won’t countenance altering the GST, how would a Shorten government meet the escalating pressures on the budget as the community ages, the proportion of workers falls, and the revenue rivers don’t flow as strongly as they did in the years of the mining boom?

The opposition has announced a policy that would crack down on multinationals avoiding tax by shifting profits overseas. It is proposing to look at other areas including the generous concessions for superannuation.

But those sorts of measures are unlikely to be enough to meet the challenges ahead. The logic of that is Shorten would have to embrace tougher spending cuts than Labor might wish, if the opposition is to put forward a responsible fiscal program.

Postscript:

Did someone in Treasury have a long memory when giving an example of the complexity of the GST?

“Pizzas, pizza subs, pizza pockets and similar foods are subject to GST. In contrast, pizza rolls are generally GST-free but can be subject to GST when they are similar to ‘pizzas, pizza subs or pizza pockets’”.

When Liberal leader John Hewson was proposing a GST, he was asked before the 1993 election about how it would apply to a birthday cake. The explanation degenerated into a tangle that haunted Hewson for the rest of the campaign.

If Bishop aspires to be leader, she can’t afford to make slips on economic issues

Foreign Minister Julie Bishop has increased her public visibility in recent months. AAP/Mick Tsikas

Many Liberal eyes are already on Julie Bishop. And given she’s indicated that if there were to be a leadership contest she’d likely be in it, the Foreign Minister will come under increasing scrutiny in coming months.

As a contender she would have the advantage of not being Malcolm Turnbull, but the handicap of questions over her economic gravitas.

These days Bishop seems in the public eye all the time, put there often by events - most recently the Vanuatu cyclone and the air crash in the French alps - but also by her desire for a high profile.

Polling indicates the public has become increasingly aware of and impressed by Bishop.

But colleagues, when thinking about whether, if Tony Abbott can’t hold things together, they should turn to Turnbull or Bishop, both electorally popular, will apply tougher standards.

A scrappy few days have highlighted the hazards for Bishop if she doesn’t both pace herself and display the needed depth when talking outside her portfolio.

She returned from a Sunday flying visit to Vanuatu, a bit off colour and looking tired, to read on Monday that her foreign aid budget was expected to suffer a small cut in the budget. Given the report was in The Australian she’d have assumed this had likely been briefed out by the Prime Minister’s Office or Treasurer Joe Hockey.

She reacted tartly in her public comments, saying she’d be talking to Hockey about it.

This brought a quick result, with Hockey and Finance Minister Mathias Cormann assuring her the aid budget was safe.

Whether this very public muscling up was appreciated by colleagues might be another matter, although it did show she was willing to defend her patch. On the other hand, she had previously lost some $11 billion from aid. It is not clear whether the claim about the cut was a deliberate leak or looser speculation.

Bishop’s eye rolling incident in the House the same day was problematic for her. Sitting on the front bench, she looked exhausted and grim even before Hockey made what he obviously intended as a joke about Malcolm Fraser’s great achievement in setting up the expenditure review committee. It obviously came as salt in the Bishop wound, given the aid kerfuffle.

Bishop’s exaggerated gestures, including covering her face with her hand, made the news bulletins and led to unhelpful publicity about tensions among senior ministers. She’d have done better to appear to play along with the heavy-handed Hockey humour.

Much more serious, in terms of substance, was her reaction on Wednesday to Fortescue Metals Group chairman Andrew Forrest’s suggestion that iron ore producers should restrict production to drive up prices.

Forrest told a business dinner in Shanghai on Tuesday: “All of us should cap our production now and we’ll find the iron ore price will go straight back up to $70, $80, $90 and the tax revenues which that will generate will build more schools, more hospitals, more roads, more of everything which Australia needs — universities etc.”

His proposal has drawn a sharp reaction from the Australian Competition and Consumer Commission; ACCC chairman Rod Sims said that he was “very concerned this has been said”, and the commission is investigating whether the comments breach competition law.

But Bishop, who like Forrest is from West Australia, was initially willing to countenance the idea. “That’s a matter for the iron ore industry,” she said. “I know that we’re challenged by falling commodity prices and the iron ore price does infiltrate the Australian economy. It’s an idea worth considering, it’s not one that I’m expert upon.”

Bishop has had a lot on her plate and mightn’t have thought about the implications of what she was saying; all the same, her economic instincts should have been better, or she should have avoided saying anything.

Her comment is damaging for her because some colleagues have doubts that if she became leader she could effectively carry the economic debate. Those with long memories haven’t forgotten that years ago she had to stand aside as shadow treasurer under criticism of her performance.

In question time Bishop, replying to the opposition, did a quick shuffle to economic orthodoxy.

“I do not know the detail of Andrew Forrest’s proposal, but I have since been discussing the matter with the Treasurer, and the Treasurer says the specifics of Mr Forrest’s proposal would not be acceptable. Of course I support the Treasurer on that basis.”

Bishop’s glitch was revealing and embarrassing for her. If it had been made by Bishop PM it would have been considered a major blunder.

Pre-budget battle weapons – a slogan and a slide show

Shadow minister for families and payments Jenny Macklin at the launch of Labor’s pensions campaign. AAP/Lukas Coch

Playing the slogan game might degrade the political debate, but it worked alright for Tony Abbott – so now Bill Shorten’s launched into it ahead of the May budget.

Labor has unveiled its “Mr Abbott. Don’t Pocket Our Pension” campaign, targeting the government’s plan, still not legislated, to change the indexation arrangements so the rate of pension increases would slow, providing relief to the budget.

There’s a website, with a petition for people to sign, and Labor MPs at the last caucus meeting of the parliamentary session were told to get out in the seven weeks before the budget to push the issue. Shorten declared that “this year’s budget is essentially about last year’s budget”.

According to the Intergenerational Report, government spending on age and service pensions is projected to rise from 2.9% of GDP in 2014-15 to 3.6% in 2054-55. In the government’s 2014 budget aspiration, spending would decrease from 2.9% to 2.7% over the same timeframe.

While the government is signalling this budget will be much more benign than the last one, it is still plugging on with its 2014 effort to put pensions on a more “sustainable” basis. Despite pensions being highly sensitive territory electorally, the government is not cutting its losses as it did with the Medicare co-payment.

Like the defeated higher education changes, the pension package is being regarded as core policy. The government also doesn’t want to lose the (at present) book entry benefit from the projected savings.

Social Services Minister Scott Morrison on Tuesday reaffirmed that the pension measures (which include lifting the eligibility age to 70 in the very long term) “remain before the parliament”. He has been trying to find some compromise to make the indexation change more palatable, suggesting a review mechanism that would examine adequacy every few years. Morrison says the new indexation arrangements don’t come in until 2017 so there is no hurry.

For Labor this area is easy pickings politically, going to the issue of trust – Abbott’s infamous election eve pledge included “no change to pensions” – as well as to the substantive point that in the future pensioners would be worse off than if present arrangements continued.

There is not much incentive, in these circumstances, for in-depth discussion about the budget fundamentals.

The opposition declared on Tuesday that Abbott had lied and now had a choice: “abandon these cuts, or Labor will take this fight right across Australia between now and the next election. We will remind Australia’s 3.7 million pensioners that Tony Abbott wants to leave them as much as $80 a week worse off within a decade.”

Meanwhile, at their final meeting before the budget, Coalition MPs sat through another slide slow from Treasurer Joe Hockey. These presentations, incidentally, are not welcomed by all backbenchers, especially when there is little new – the MPs reckon that party meetings should basically be their time to have a say and a whinge.

They were told in the slides that “all new spending will be offset by savings that are responsible and fair”. They might have noted the word “fair” – a huge vulnerability in last year’s budget was, of course, that the cuts were seen as manifestly unfair.

Hockey also promised to “continue to improve the budget bottom line each and every year”. But when it came to the elusive surplus, the slide was uninformative. “We will get the budget back to surplus as soon as possible.”

As Hockey and his colleagues struggle to match up the difficult fiscal and political imperatives of this budget, Tuesday’s Essential poll findings make depressing reading for Hockey, whose mood is already down.

It shows only 27% approve of the job he is doing as treasurer, while 51% disapprove. In August last year, 35% approved; 44% disapproved. November 2013, just after the election, saw Hockey’s approval at 45% and his disapproval at 28%.

Asked who they would trust most to handle the economy, 26% said Hockey and 25% said shadow treasurer Chris Bowen; almost half didn’t know. In August, Hockey had been ahead of Bowen 34-23%.

People are noticeably more pessimistic about the state of the economy than when they were asked last August – 27% say it is good, 33% believe it is poor. In August, 37% thought it was good and 26% believed it was poor. In April 2013, 45% thought the economy was in good shape.

In contrast to Tuesday’s Newspoll which has the Coalition closing the two-party gap (now trailing Labor 49-51%), Essential had the gap widening from a Labor lead of 52-48% to 54-46%.

Hockey told the Coalition party room that consumer and business confidence were coming back and there were “plenty of green shoots in the economy”.

People are just not seeing them, it seems.