Time for a serious debate on tax reform

JULIA Gillard's government is trapped in a half-baked argument with one part of the budget.

It wants to boost spending in areas such as education and disability insurance. But it won't address the revenue side of the equation even though it admits the fiscal hole will get bigger with an ageing population.

By looking at expenditure only, Labor is forcing voters to choose between handouts and service delivery. The intention is honourable, but the logic flawed because Wayne Swan and Penny Wong continue to present the trade-off as relatively pain free.

Squeezing family payments and the private health insurance rebate for higher-income earners won't pay for Gonski or the National Disability Insurance Scheme. To make room for new spending on this scale, the real middle class has to cough up, too. But neither side of politics will go there. So the question inevitably returns to how much revenue can be raised to meet community expectations for spending.

The Finance Minister's speech to the second day of the economic and social outlook conference will stop short of calling for a debate on tax reform. A pity, because the content of her analysis makes a very powerful case for looking at both sides of the budget.

"We know that each generation expects improved services to those that preceded them, spurred by improvements in technology and innovation," she is expected to say. "This dynamic has been accommodated for the better part of a century by a large working-age population and an increasing tax base. Without change, the ageing population will see a reducing tax base and this will lead to a sustained period of fiscal imbalance."

The main parties are aware of this because the future shock has been detailed in intergenerational reports. The next IGR is likely to show the hole is even worse than previously thought because Treasury has conceded tax collections will not return to pre-GFC levels for some years.

The sums are not that hard to grasp. Gonski plus the NDIS plus the demands of an ageing population, paid for by a risk-averse squeeze on middle-class welfare does not spell budget stability into the next decade. The problem here is not just one of political will. The big end of town, small business, trade unions, the welfare sector and even the academic profession have contributed to the reform malaise by seeing the budget through their own vested interests. Each group knows how to ask for more money, or to stop government from cutting too deeply.

The lobbies prevent politicians from being bold, ironically, by forcing politicians to make the reform case themselves. It has been 15 years since business and the welfare sector last combined their voices to call for the introduction of a goods and services tax. But the GST as it stands is no longer a viable growth tax because households have reverted to thrift and the tax is missing key areas such as health and education, where spending is already rising faster than GDP.

As the population ages and the focus of the budget shifts to service delivery, the GST will continue to fall behind. Unless, of course, the base is broadened and the rate increased. But politicians won't go there if business and the welfare sector don't first put the tax cart back on the road.