Labor’s big challenge is nothing less than full structural reform
Beyond the cost-of-living crisis lies the need for a new social contract.
The destiny of the Albanese government will be to confront the overdue economic, social and fiscal challenges requiring a reset of Australia’s core public policies – a challenge that demands a bold new era of reform that will determine the character of this government.
Australia is heading down the path of bigger government sanctioned by public demand, a decision that was taken under the Morrison government and will require a more flexible economy and an overall increase in the taxation burden that must drive, sooner or later, a new tax reform process.
Chalmers, sensibly, doesn’t want to discuss this second stage when the first stage is so precarious. Inflation is still rising, the Reserve Bank is locked into a lifting interest rate pathway, households face increasing financial pain and the global outlook is dire with Europe going into recession, Russia declaring an energy war, China in slowdown, and the US fighting to avoid recession.
The October budget will be a modest affair for a new government. The budget will implement Labor’s election pledges, trim spending, address supply chain defects, and offer limited cost-of-living support.
But, as Chalmers says, it won’t cut “savagely” into aggregate demand, it won’t scare the horses, and it won’t impose major reforms with a cast of losers.
It will be economically incremental and politically prudent. But that’s deceptive. It will also be something else – the pathway to bigger decisions down the track that tackle Australia’s structural problems. It is these decisions that will determine whether Anthony Albanese runs a historically important reforming government in the Hawke-Keating fashion to revitalise our investment, income and productivity arteries.
For the time being, the Reserve Bank holds centre stage. Chalmers’ message this week as the bank took the cash rate to 2.35 per cent is that his job is not to make the bank’s job even harder. De-coded, Chalmers won’t announce short-term spending to cushion households because that would only drive the bank into even higher interest rates to curb inflation thereby creating a cycle of futility and more misery.
Yet the pressures from the next phase are already present. Will the government amend the 2024 stage three income tax cuts? Will the government have the nous to revive enterprise bargaining? How can the huge spending demands from health, the NDIS, aged care, welfare and defence be reconciled with fiscal repair? How will Labor utilise the super funds to assist its national goals? What are the bold steps that can lift the long-run growth rate and productivity performance?
The shape of Australia’s new social contract was foreshadowed in June by Treasury secretary Steven Kennedy, when he detonated the long-held Coalition-Labor assumption that record budget debt can be repaired by economic growth. That fantasy is consigned to history.
Kennedy had two messages: big government is here to stay, and its financing will demand higher overall taxation. And higher taxation must necessitate tax reform.
Interviewed for Inquirer, independent economists Saul Eslake, Ross Garnaut and Chris Richardson delivered the same message: the contours of our public policy are shifting, driven by powerful forces that will require a new settlement between national interest policy and public sentiment.
Kennedy said spending as a proportion GDP will average 26.4 per cent across the coming decade compared with 24.8 per cent in the decade before the pandemic. That’s a significant shift and, after nine years, a Coalition legacy. It is Labor’s inheritance. Bigger government spending is here.
Given the record debt levels, Treasury sees higher overall taxation as the logical response (and no politician has offered a tenable alternative). “The effects of a larger tax take can be minimised by ensuring the design of the tax system is optimal,” Kennedy said. He warned major tax reform was needed “to ensure the tax system remains adequate to fund spending commitments”.
Interviewed by the ABC this week, Chalmers signalled a two-stage challenge, saying he took “a bit of a two-budget view” – this October and next May – and adding that people need to think “differently” and the government needs “to engage the Australian people in a big conversation”. But that conversation will last years, if done properly.
For Albanese and Chalmers, the dilemma will be whether to embark on the required new reform era this term without any mandate, thereby breaking public faith, or settle upon a more ambitious reform agenda put to the next election seeking a mandate (a variation of Howard in 1998). This hinges upon public opinion finally recognising that fundamental change is needed to retain living standards and equip Australia for a more volatile world.
Asked whether he believed established spending demands, driven by the compassion factor – witness the NDIS and health – along with the security factor (think nuclear-powered submarines) meant overall tax must rise, Richardson said: “Absolutely, it’s a reminder of the old Maggie Thatcher phrase ‘there is no alternative’.
“The national social contract in Australia has become more expansive,” Richardson added.
“But we have not yet chosen what to do about this. And that cannot be avoided. We will need to address that. We need action on pretty much every major area you can point to: federal-state relations, climate change, infrastructure, tax, cities and competition policy. A range of problems have built up that are steadily becoming more dangerous.
“There are political risks for the government in pushing too hard on a mandate they don’t have, but the other side of the equation is if you don’t do things that need to be done then you slip behind.”
Eslake said Australia was on a trajectory to higher spending levels and higher overall taxation but Labor’s dilemma was how to make the transition to ambitious reform, given its limited mandate from the 2022 election. An obvious test is its management of the stage three personal income tax cuts taking effect from July 1, 2024, three budgets away, estimated by the Parliamentary Budget Office to cost $243bn over a decade.
The full package, stages one to three, was legislated in 2019 with Labor’s support and at the recent election, with the first two stages assisting low and middle income earners having been implemented, Labor pledged to give effect to stage three. There is no need for any further decision on these tax cuts at this stage.
Eslake said: “The political problem is that the Albanese government committed to delivering those tax cuts and it knows from recent history that there are serious consequences for a government that fails to uphold such a promise.”
Just note Albanese’s comments on Thursday that “we need to recognise that there is a breakdown in faith and trust and we need not to take democracy for granted”.
Straight cancellation of the tax cuts would be an epic blunder. It would smash trust and mock sensible policy. The progressive assault on the tax cuts is that they are an unjustified bonus for the rich and should be converted into higher spending, an option no sensible government would contemplate.
As Eslake said, the more substantial argument against the tax cuts is their damage to the budget bottom-line. “The outlook for the budget is very different now from how it seemed when the tax cuts were legislated,” he said. “Back then, the budget was forecast to be in surplus by the time they took effect. There was a legitimate argument at the time they could be afforded. Now there are no budget surpluses in sight until the middle of the next decade if not longer and net debt is considerably higher.”
Richardson agreed, saying the tax cut was “always too big”. He said the Twitter stuff about fairness was “considerably overdone”. The argument for revision was about the budget. The full package, stages one to three, kept the progressivity of the system, with the top 5 per cent of taxpayers paying a third of personal tax and the top one per cent paying 17 per cent of personal tax.
Stage three creates a 30 per cent marginal rate across incomes from $45,000 to $200,000 and abolishes the 37 per cent rate. Richardson said keeping the 37 per cent rate would substantially reduce the cost to the budget.
Eslake said: “It seems to me the best option for Labor that doesn’t require the government to break an explicit promise is to seek to build a more expansive mandate at the 2025 election.”
Eslake and Richardson agreed that any decision by Labor to alter the tax cuts should be recruited as an opportunity for a wider tax reform package. This is essential. It should become an opportunity. Richardson said such a package could include popular measures such as changing the tax cuts, improving the petroleum resource rent tax and adding a series of unpopular tax reforms as well.
Former economic adviser to the Hawke government Ross Garnaut said it was imperative that Australia run strong public finances, but said the tax system was “deeply flawed” and our economic bounce back from the pandemic, off the back of a bigger fiscal expansion, now saw Australia “looking ordinary in a troubled developed world”.
Interviewed by Inquirer and in his recent speech to the Jobs and Skills Summit, Garnaut said Australians “must stop kidding themselves about the budget” and about the contradictions in our policies.
He said total government tax revenue in Australia as a share of GDP was 5.7 percentage points lower than the developed country average.
In a message to Albanese and Chalmers, Garnaut said that in meeting the coming challenges Australia must “recognise the need for policies that we now think impossible”. He said Australia kept talking about the most difficult geo-strategic challenge since the 1940s but not about the higher taxes needed to pay for stronger defences.
“We need to avoid vulnerability from international economic and geo-strategic shocks,” Garnaut told Inquirer.
“We need to keep the cost of capital low for a long period of transformation of the Australian economy that will demand higher levels of investment. Maintenance of democratic support for our system of government will require emphasis on equitable distribution of services and income. But it is difficult to see how we maintain strong public finances without a significant increase in the tax share of GDP.”
Garnaut believes the task facing Albanese Labor resembles the scale of Labor’s two great reforming eras – the Curtin/Chifley era of post-war reconstruction and the reform age of the 1980s and 1990s that set up “the longest period of economic expansion unbroken by recession ever in any developed country”.
At the summit, he told Albanese and Chalmers “the challenges are bigger than the public official forecasts told you to expect”. Garnaut advocates reform on a comprehensive front. On tax, he warns that over the past couple of decades huge loopholes have been created in the personal and corporate tax systems. Reform is needed at both levels. The massive profits from resources and fossil fuel companies require reform of mineral rent tax.
As their first term advances, the political challenge for Chalmers and Albanese will be to keep control of the debate on the centre-left – from tax to industrial relations to government spending and to productivity enhancement. The first lesson of the Hawke/Keating era was to remain on the policy offensive and exert intellectual and policy leadership over the party and its left progressives. Without this achievement, the cause will be lost.
As Eslake argues, the political task for Labor will be the transition path from its understandably cautious agenda at the 2022 election to evolving a policy agenda that meets the immensity of the challenges Australia faces. In a far more volatile, unpredictable and changing world, Australia is no longer fit for purpose. Labor’s job is rectify this defect.
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