In economic battleground, tax reform is a dirty word

Josh Frydenberg’s first budget helped the Coalition win the unwinnable election. It will be much harder this time.

The Treasurer Josh Frydenberg in his office in Canberra talking to journalists from The Australian this week. Picture: Gary Ramage

Tuesday’s budget will be the most politically important of Josh Frydenberg’s parliamentary career. If he gets it wrong it almost certainly will be his last and the Coalition will lose the May election. No pressure.

Three years ago the Treasurer handed down his first budget after Scott Morrison assumed the prime ministership. In polling at the time the government was trailing Labor 46-54 per cent on the two-party preferred vote. That represented an improvement from the depths plummeted to shortly after Malcolm Turnbull’s removal from the Liberal Party leadership.

Frydenberg’s first budget was the moment the Coalition started to build momentum towards winning the unwinnable election. It helped shift the public debate on to economic management, a consistent Liberal Party strength according to the polls. The first Newspoll after the budget recorded a lift in support for the Coalition, halving the eight-point gap and leaving it trailing 48-52 per cent.

Off the back of the polls tightening Morrison called the 2019 election and the campaign focused almost solely on the economy, on the Coalition’s pledge it was returning the budget into the black (which never actually happened). Labor leader Bill Shorten’s sizeable spending agenda came into sharper focus. The planned tax and spending reforms Labor had enunciated were put under closer scrutiny.

Frydenberg used his budget to address problems that had built up during the previous two terms in government: concessions and simplicity for small businesses, handouts for lower-income earners, more money to address mental illness – the list went on.

Fast forward to here and now and we are starting to see pre-budget announcements that are similarly geared: sole traders have been given what they asked for, low income tax offset guarantees have been extended. Frydenberg is attempting to repeat history and save the government, only this time the task is more difficult.

The Coalition trails 45-55 per cent on the two-party vote. Mor­rison was a neutral figure three years ago, able to help Frydenberg by taking up the cause during the campaign. Today the Prime Minister appears to be a dead weight around the neck of the government. His personal numbers are in the toilet.

While the centrepiece of the election-saving budget three years ago was the “back in black” mantra, we now have a budget much deeper in the red. Government debt has tripled from where it was when Labor was in power. While the pandemic is a legitimate excuse for a large chunk of that build-up in debt, it can’t explain away all of it. Besides, the Coalition never accepted Labor’s excuse that the debt accumulated on its watch was courtesy of the global financial crisis.

Can Frydenberg manufacture a political budget capable of demonising Labor as the alternative economic manager while satisfying disaffected constituencies? Perhaps, but the great shame of where Australia is at right now is that doing so will be achievable only via glib statements and the mother of all scare campaigns.

Too few of us are interested in debates over what the role of government in a modern democratic society might look like in future.

We will hear a lot about the low unemployment rate, but this simple statistic masks underemployment, which is the real concern. It also ignores the fact wages are largely stagnant during times of rising inflation and expected higher interest rates to follow soon. People aren’t employed to the capacity they would like to be, to the extent they need to be to help pay for the rising cost of living.

Frydenberg no doubt will remind us in his speech that the AAA credit rating has been maintained, forgetting to mention that it was achieved on Labor’s watch. We have an economy that remains the envy of the world, but that’s despite the current generation of politicians, not because of them. We are the lucky country after all.

We have not seen serious economic reform since John Howard’s time as prime minister and Peter Costello as treasurer. Again, it was a bipartisan era of success because the microeconomic reforms enacted by Bob Hawke and Paul Keating allowed the Howard government to expand the remit of reforms to keep the good times rolling.

Right now Australia needs what neither side of politics is willing to give us. The government is long in the tooth and short on ideas, and Labor is afraid of its own shadow after finding a way to lose the unlosable election last time. Indeed, that’s because the populace doesn’t know what it needs most either, and the political class is addicted to populism and pandering to what works superficially to secure votes. The wrong lessons from Shorten’s defeat were learnt on both sides.

We need major tax reform to lower the burden on income earners and increase the taxes on accumulated wealth, which worsens inequality. Some of the world’s best economists and political scientists have written extensively about the detrimental impact of inequality on democratic societies, and inequality is on the rise in our country.

We also desperately need a serious debate about what we want Australia to look like. Historical debates about the tax to GDP ratio needing to be kept low are becoming culturally redundant. Citizens expect more of modern governments. Look at the crisis in aged care, the desire to reduce the cost of childcare, the need to pay for improved maternity leave provisions so we don’t reduce female workforce participation rates.

Foreign policy hawks worry about defence spending; perhaps that too needs an overhaul if they are right. Whether the needs are in social policy or national defence spending, or the many other areas that put the budget under strain, if we want more from government we need to accept it has to tax more. But in our highly globalised world that can have a depressing impact on economic growth, and it does lead to offshoring by businesses and a brain drain if citizens move abroad.

The answers aren’t easy, but without the debates we will continue to kid ourselves that all is well and nothing major needs to change. All of that said, how Frydenberg crafts his budget will be vitally important to the government’s re-election chances. It’s what comes next that counts, and on that score neither major party has much to offer.

Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.