We will soon find out if we are witnessing government by press release, or a new and necessary era of economic reform.
In yesterday’s partyroom meeting Josh Frydenberg rebuked the idea emanating from state governments that wholesale tax reform is necessary, but the Commonwealth must be prepared to drive the agenda. That means take the fiscal lead.
Frydenberg quite rightly pointed out that the Commonwealth has already done the heavy lifting when it comes to spending taxpayers money to try and ward off the worst of the coronavirus-induced economic downturn. However that is no good reason to rebuke state hopes that the Commonwealth will drive reforms thereafter.
Reform is hard, splashing cash is easy. We are yet to see any tough decisions during this crisis. Big decisions, absolutely. Important, you bet. But tough? Not even remotely. Not yet.
Like it or not, no federal treasurer can escape the reality that vertical fiscal imbalance exists. The Commonwealth collects most of the taxation revenue, the states do most of the spending. That needs reform, which requires the Commonwealth to admit it has an easy fiscal ride compared with the states.
Equally, the one area of taxation reform which can help the states reduce inefficient taxes — lifting the GST — is the preserve of the Commonwealth. It must drive the reform agenda when it comes to embracing the value of consumption taxes over other revenue collection methods.
It requires courage from Frydenberg similar to that displayed by John Howard and Peter Costello when they introduced the GST in the first place. It would also require the backing of the Prime Minister.
There is also no escaping the fact that constitutionally states have limited taxation powers. Having given over income taxing powers to the Commonwealth during World War II, vertical fiscal imbalance has been a problem ever since.
State’s raising revenue requires them to embrace inefficient, productivity sapping and regressive taxation options. All of which need to be reformed out of existence.
Taxes on gambling, stamp duty when purchasing property, payroll taxes, you name it. The options states have at their disposal to fund essential services are almost universally a drag on their economies.
But to reform their way to improved productivity and economic growth, the states need the Commonwealth to recognise that maintaining vertical fiscal imbalance is inappropriate. Indeed self-serving. In the era of the new National Cabinet and a renewed push for more robust federalism, we need the Commonwealth to give up its control of the purse strings.
Doing so will be politically tough. It will require more than announceables or new committees, reviews and hearings. It will require serious heavy policy lifting. It will require this government to rise up and match the reformist credentials of the Howard and Hawke years.
Failure to do so will see the Morrison government instead match the Rudd government.
Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.
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