Abbott hits Labor's tax obsession

MOCKING the idea of an orthodox budget reply, Tony Abbott has delivered an aggressive election manifesto seeking to destabilise the Rudd government and dictate the political agenda.

Abbott refuses to conduct politics by the rules of the Rudd government or scripts of the Canberra press gallery. His budget reply was about values, not details. It was about politics, not economics. It was about making Rudd Labor the issue, not the Abbott opposition.

It is proof, once again, that Abbott refuses to become a stationary target for Labor. He has wrong-footed the government yet again. Abbott's judgment is that Kevin Rudd is faltering under pressure, that Labor has lost its strategic direction and that Wayne Swan's highly responsible budget can be discredited.

Facing a wall of commentary insisting that he should have identified a list of saving cuts to establish his credibility as alternative prime minister, Abbott wasn't mug enough to put his head on the chopping block.

Instead, in a pivotal move, he turned his guns on Labor. Abbott believes Labor's new resource super profits tax is a huge blunder. He intends not just to reject this tax but to exploit this Labor decision to brand Rudd as an old-fashioned, tax-obsessed, anti-enterprise government, hostile to the resource states and unable to manage the rising cost-of-living pressures afflicting households as the economic recovery gathers momentum.

"The die is cast," Abbott said. "Neither side will retreat. The only way to stop this great big new tax on the people who saved us from the recession is to change the government."

When Labor embraced the resources tax it never imagined that Abbott, in his budget reply, would declare the tax the central election issue. Labor utterly ignored the lesson of the climate change debate when Abbott popularised the emissions trading scheme policy as a great big new tax and forced Rudd's abject retreat.

Having abandoned one "tax", Labor promptly embraced another tax and included the word "super" in its title. This now looms as a fateful move. While the tax does not begin until July 1, 2012, it raises $9 billion in its second year and is the most significant initiative in the budget.

Abbott depicts Swan's budget not as a template of fiscal prudence but as proof of Labor's tax obsessions. He presents this as a mainstream tax hitting "every product that comes out of the ground" and fanning cost pressures across many products.

If polling shows public opinion firming against the tax and against Rudd because of the tax, then Labor will face a diabolical dilemma: does Rudd stand firm, as Abbott hopes, or does Rudd stage another damaging retreat and modify the tax?

Mark this situation: Rudd's authority as Prime Minister is in the balance. The proof of Labor's growing desperation is its resort to another Work Choices scare, a sure sign of weakness.

The origin of this tax lies in the remarkable chemistry between the Treasury and Rudd Labor and the profound sway that Treasury chief Ken Henry exercises over this government. Australia has seen a long line of powerful Treasury secretaries but Henry's clout outranks any recent comparisons. The reason lies in the budget papers. The story they tell is how Australia, on Henry's advice, surmounted the global financial crisis and how it is hurtling back into recovery with a return to budget surplus in three years.

While the Treasurer forecasts a $40bn deficit in 2010-11, he projects a small surplus in 2012-13, giving Labor its election narrative of saving Australia from recession and managing its surging recovery. Rudd once would have sold this message with mastery. Yet his credibility is so damaged there are serious doubts about his ability to carry the brief.

There is no basis whatsoever to Abbott's assertion that Labor is "unlikely ever" to reach surplus. That misreads the government's fiscal commitment. Abbott, however, believes Rudd Labor is looking rattled. He judges that Rudd, exposed for lack of conviction and breaking promises, does not have the constancy of conviction to turn this budget strategy into a saleable political message.

Note that actual spending in this budget increases by only 0.9 per cent next year, thereby giving Rudd plenty of leeway for election promises within the 2 per cent real spending cap that keeps Labor fiscally honest. For Rudd, this temptation to more spending will be a two-edged sword.

Rudd's strange fate is that managing Australia's recovery looms as more difficult than combating last year's downturn. This is because his two dominant instincts are thrown into conflict: his desire to be an excellent economic manager and his compulsion to spend money and offer benefits.

Labor faces rising inflation, more interest rate hikes, higher water, electricity and gas prices, strong cost-of-living pressures, a two-speed economy, a stronger currency and heightened community expectations because Australia never had to adjust its national psychology to the crisis that has ripped through most of the rich world.

It is easy to see how Rudd decided to embrace the resources tax: such a profits tax is justified in principle on equity and efficiency grounds; it had Henry's authority; it was designed to limit the risks in the two-speed economy; it is a powerful revenue vehicle; and the re-distribution it offered seemed a winning political sell. The moral here is the curse of prosperity leading to more complex politics.

Both Swan's budget and Abbott's reply are about private-sector recovery requiring the rapid withdrawal of the government spending stimulus and imposition of relative restraint.

Abbott's reply is filled with traps for the unwary.

First, in macro terms his policy runs close to Labor's. The unconfirmed signal is that Abbott will seek to reach surplus in three years, the same as Swan. It would be folly for Abbott to try to get there a year earlier when the budget predicts a $13bn deficit, thereby opening up a series of horror spending cuts for the Coalition.

Second, Abbott is ready to wear sacrifices to abolish the resources tax; witnesses his acceptance that Labor cannot therefore fund the company tax breaks and assistance for small business. His hostility to lifting the superannuation guarantee from 9 per cent to 12 per cent gives Rudd and Swan a suite of attractive measures that will be lost under the Coalition.

Third, Abbott intends to run against Rudd on values, namely, that the Coalition will always deliver a lower-taxing, lower-spending, smaller government outcome. Yet these pledges remain short of bottom-line verification. The truth is that spending and taxation totals will differ little between Labor and Liberal.

The point is that Abbott knows the power of philosophy and conviction; he locates policies such as resources tax abolition in a values framework.

Fourth, as Abbott signalled, the final costs of Coalition policy will come "nearer the election" when the fiscal update is revealed. Swan told this column yesterday Abbott faced "a day of reckoning because he has got up to $15bn in unfunded promises and no account of how he can return to surplus anytime soon". In the end, Abbott must provide an accounting. But present evidence is that he will defer this to keep the political heat on Labor.

The two new measures Abbott announced this week are safety first: a two-year public service freeze to save an improbable $4bn across the forward estimates and cutting government advertising by 25 per cent.

Abbott's speech was short on genuine economic reform.

Rudd insists that Abbott runs on negatives but Labor is lurching towards the ultimate negative: another Work Choices scare. Abbott wants an industrial relations policy that exempts most small business from the unfair dismissal laws and backs statutory contracts with a "no disadvantage" test. As Labor's political standing sinks, it will grab at this chance.

Rudd and Swan are right to argue that a new profits-based resources tax is justified. Yet they failed to prepare the ground; the design they chose was different and complex; the mining industry is serious in its resistance; and the governments of Queensland and Western Australia are alarmed.

Was it only a month ago that Labor told us the election would be dominated by health?