Hooked on sugar-hit policies, we keep ignoring the tax elephant in the room

As the latest possible federal election date of May 17 approaches, politicians across the spectrum are gearing up to fight for the votes of roughly 18 million Australians, and the smell of pork (barrelling) is distinctly in the air.

Both the government and the Coalition have spent most of the current parliamentary term talking about responsible spending, and they’ve been right to do so because since the 2022 election, the Australian economy has gone through serious turmoil.

Treasurer Jim Chalmers said Australians would face much more pressure under Peter Dutton.Credit: Alex Ellinghausen

Inflation began to rise, quickly climbing well above the Reserve Bank’s comfort range of 2-3 per cent, which then forced the central bank to start lifting interest rates, taking them to a 12-year-high. The government, in the meantime, had the tricky work of both keeping people out of abject poverty while not adding to inflationary pressures.

One thing we’ve heard constantly through this period from economists, the opposition and the government itself is that the government must ensure its fiscal policies – that is, its plans on spending, taxing and saving – don’t work against the Reserve Bank of Australia and add upward pressure on inflation.

This is important. Let’s take a hypothetical scenario: say inflation is coming down slowly and the RBA is happy with the economy’s progress, but then the government decides households are struggling too much, so it is now going to give every working Australian a one-off cash injection of $500 to help tide them over.

Most economists would expect most people would spend the bonus pretty quickly which, in turn, would tip a bunch of extra cash into the economy. That would then increase demand for goods and services, and economics 101 will teach you that an increased demand for goods and services leads to increased prices, lifting inflation.

This is a very crude hypothetical example, but the point stands. Those in control of the country’s purse strings have to carefully analyse any policy that might either encourage people to spend more, or plans that will leave people with more money in their pockets.

This all sounds well and good from a policy standpoint, but it’s trickier from a political perspective. When households around the country are still smarting from years of rapid price increases in everything from groceries and utility bills to housing costs, they want the government to do something about it. For the government, it gets even trickier when you’re trying to encourage those same people to either elect you or put you back in power at the same time. And this is where the danger of sugar-hit policies arises.

Opposition Leader Peter Dutton has announced that businesses with a turnover of up to $10 million would be able to deduct up to $20,000 of meal and entertainment expenses provided to clients, employees and vendors as long as it was business-related, without incurring fringe benefits tax should he win the next election.

Treasurer Jim Chalmers responded to the announcement by calling the policy “a complete farce”. But the same media blitz highlighted that at almost the same time one year earlier, the treasurer announced the government’s plan to give working Australians an income tax cut that will leave us with an estimated average of $1660 more in our pockets by the end of this financial year, but that will have little or no benefit within two years.

In an ideal world, politicians will put sugar-hit policies to one side for the next few months, and focus on real, lasting reform instead: tax reform.

Boring though it may sound, this is one of the few topics on which you’ll get almost unanimous agreement from economists (an otherwise unheard of event) because, as it stands, Australia’s tax system is not fit for the future. Very briefly, our tax system heavily relies on individual income tax to generate revenue, which is a major problem with an ageing population that will not only stop working, but also have increasingly expensive needs (more spending on healthcare and pensions).

Admittedly, tax reform policy isn’t something that can be done on the run – it takes time to formulate. But luckily for Labor and the Coalition, independent MP Allegra Spender has done a lot of the groundwork already.

Late last year, after 18 months of round tables with experts, community groups and unions, Spender released a green paper on the country’s tax system that handily highlighted six priority areas for reform that could assist the economy, including rebalancing tax so that it favours home ownership over investment in existing dwellings, and so that it doesn’t penalise certain groups.

The paper noted that changes such as reducing capital gains tax concessions and narrowing negative gearing could fund cuts to personal income tax and would help more people get into the property market.

No treasurer or shadow treasurer wants to be seen simply adopting a policy created by a member outside their own party. And it would take a brave treasurer (or treasurer to be) to pitch major tax reform for other reasons. These are big ideas that would hit a lot of people where it hurts – namely those who’ve spent years arranging their assets and incomes to get the most out of the current tax system.

Voters are also not used to being convinced of the need for major tax reform. The last major tax reform successfully introduced by a federal government was the introduction of the goods and services tax a full 25 years ago.

But the risk of not taking action is that we continue with sugar hits that, over time, will make us addicted to short-term solutions rather than addressing the root cause.

Rachel Clun is a former economics correspondent for The Age and The Sydney Morning Herald.

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