Scott Morrison wedges himself as ending tax rorts won't help the budget

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In all the analysis of the MYEFO budget update and especially in the myriad suggestions for how to fix the tax take, it's largely been missed that ending the tax lurks and rorts won't reduce the deficit or maintain the services we want.

There's been plenty of advice for Treasurer Scott Morrison along the lines of: "Just fix the loop holes, make the multinationals pay what they ethically should, and/or end the more extreme superannuation generosity, and/or fix the negative gearing/capital gains tax interaction – and that will fix the deficit with cash left over for free beer."

OK, maybe not free beer – maybe the NDIS and Gonski and maintaining Medicare instead.

The Greens had the Parliamentary Budget Office do the sums, finding $38 billion over four years from fixing four perceived tax failings - $38 billion that would push Scotty's station wagon a long way down the holiday road.

Treasurer Scott Morrison all but confirmed the Weatherill income tax option would be on the table at the COAG meeting, saying there would be nothing to allow an overall increase in the tax take.Credit: Andrew Meares

But what all such suggestions miss is one very important point: ScoMo has wedged himself.

With the wave of an arbitrary and doctrinaire hand, the Treasurer keeps telling us that he won't let tax reform increase the overall tax take.

All those helpful suggestions would do just that. So ScoMo is promising to give tax cuts to the value of any tax reform revenue gains. Tax reform the ScoMo way is a zero-sum game on a percentage of GDP basis.

It's a monumental embarrassment to the Liberal Party that the MYEFO shows it runs a big-taxing, big-spending government. It's something Morrison and the Cormannator would prefer you didn't notice.

Given all the stick the coalition gave Labor when it was in government, It's something that Stephen Koukoulas – former economic adviser to Julia Gillard – seems to enjoy pointing out:

"The MYEFO confirms that tax revenue will rise to 23.1 per cent of GDP in 2018-19…Not Whitlam, nor Keating, nor Rudd, nor Gillard ever taxed this high. The only government to have a higher tax-to-GDP ratio was John Howard, who exceeded this rate in eight of his years in office."

Despite the big taxing, the big spending is even bigger, hence the deficit and debt growth. The government will spend 25.9 per cent of GDP this financial year and will stay at or above 25.3 per cent out to 2018-19. Spending under Gillard/Swan averaged 24.9 per cent.

Big taxing, big spending, big debt

The resultant debt issue has been nicely explained by Tim Colebatch, while neatly skewering much of the focus of MYEFO reporting.

"This week's budget update adds roughly $8 billion a year to the forecasts of budget deficits to 2018–19. It adds an extra $62 billion to the forecast net debt of the federal government – that's us, by the way – in 2025-26. The update wipes out virtually all the net debt savings the Coalition had earlier claimed from halving Australia's foreign aid effort and shifting $80 billion of hospital and school bills to the states."

When it was the opposition, the coalition was rather fond of quoting gross government debt figures. It probably isn't now. Treasury reckons it will hit $643 billion in 10 years, $73 billion more than it estimated seven months ago.

"And that's assuming a decade of fine economic weather, and six years of budget surpluses," notes Colebatch. "If the economy hits heavy weather, and/or budget surpluses remain as elusive as they have proved since Wayne Swan told us they were already locked in, then we face even bigger problems."

This big taxing, big spending, big debt, big interest bill story doesn't fit at all well with the coalition's rhetoric and sloganeering – and ScoMo seems to still have a weak spot for a little sloganeering.

Which is why he's happy to drag a Centrelink customer over the coals if he or she has been paid $100 more than the rules allow because it's a saving – but having a rich retiree pay just a little tax on the earnings of a multi-million-dollar super fund would require a balancing tax cut somewhere else and therefore doesn't solve the deficit.

Yep, ScoMo has wedged himself, leaving room only for inevitably unpopular spending cuts and the hope of faster economic growth to solve his problems.

Speaking of which, it's also worth remembering that only the first two years in the MYEFO numbers are forecasts. The rest – the numbers that result in little surpluses next decade – are still happy-ever-after assumptions, what growth would have to be to absorb excess capacity.

So Scott Morrison will never deliver a surplus.

Not that there's anything especially wrong with that. To keep perspective on our deficit fixation, Australia's net government debt, even when it rises to 18.5 per cent of GDP under ScoMo, is not high by international standards. It's manageable and we can afford to service it.

It limits but doesn't rule out our ability to react should there be another international financial crisis. It would be nice if the debt was incurred by productive investment that effectively ends up paying for itself, but that's not quite the case.

And right now, ScoMo is doing the right thing by letting the deficit grow a bit, the economy's automatic stabilisers do their thing to keep economic and employment growth happening. To be totally doctrinaire – a full-on IPA loony – would send the economy into recession with the resultant terrible waste of human talent.

It's simplistic, but if you run into someone chanting about the need to immediately balance the budget, just remind them that GDP growth is about 2.5 per cent and the government's negative underlying cash balance is about 2.3 per cent of GDP – no deficit, no growth.

We need to be in deficit and we need to bring our debt under control over time.

But what we also need to do is work out how much we want the government to spend and tax, not just rely on a slogan about "lower taxes". That way we can solve part of our problem by having a fairer tax system, instead of concentrating on tax cuts.

Mr Colebatch summed it up:

"If we are serious about this, we need to get out of our comfort zones. People on the left can't continue with the illusion that all spending is sacred, and that the only reason the government cuts spending on health or welfare and talks about raising the GST is that its ministers are evil and untrustworthy. People on the right can't continue with the illusion that all tax breaks are sacred, and that the budget can be put back in shape simply by cutting spending. It can't and, most importantly, it won't."

In the meantime, yes, ScoMo has wedged himself – and us.

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