Colliding imperatives

Twelve years later, the Covid-19 pandemic forced the closure of large sections of the economy. Australia’s total discretionary fiscal response exceeded $360 billion, about 18 per cent of GDP. It was one of the largest economic interventions in Australia’s history.

It is often said that in Australia, we are good at crises. Certainly in both of these recent events we went hard early, and Australia managed to hold up its economy and living standards better than many of its peers. We managed to get through the sacrifices asked of us during the pandemic without turning on each other.

Australians look to government in a crisis, and survey data shows our trust in government lifts when we see action.

The reasons for our relative economic good fortune through both the GFC and the pandemic go beyond simply fiscal firepower, but acting to keep a floor underneath the Australian population is an imperative that any government faces when a crisis hits.

To date, this has involved having money to throw at the problem. History has shown that this spending is slow to unwind. In part, this is because crises provide the cover for other pent-up spending requirements finally to be addressed, without the hard conversation about raising revenue or finding savings to do so. When a shock looms, the surge to meet the moment has too often involved deprioritising, or dropping entirely, progress on Australia’s longer-term needs. Government – and public – bandwidth is limited, and a crisis eats it up.

The war in Iran and effective closure of a key shipping lane for Middle Eastern oil foreshadows a sustained shock to the global economy and possible recession.

Even if the conflict ends quickly, the disruption that is already locked in means Australia faces higher fuel prices, higher inflation, the real possibility of higher interest rates and slower growth.

To date, the government has done as well as could be expected to shore up fuel supplies from our trading partners. But it cannot conjure up supplies if our trading partners start to run dry.

Treasury is preparing a downside scenario as part of the upcoming budget. It must. The war’s impact is like a rock rolling down a hill towards us: we will be hit but how hard is as yet unknown. Consumer price inflation has already risen, to 4.6 per cent in March from 3.7 per cent the previous month.

Regardless of the cause, Australians have come to expect governments to soften the blow of rising prices. This pressure has already resulted in fuel excise relief and free public transport in Victoria and Tasmania. Both are broad, blunt measures that are cutting into public revenue.

Conventional wisdom asks governments to be timely, targeted and temporary in their response to shocks. The International Monetary Fund has warned against untargeted energy subsidies or measures that distort price signals which guide consumers away from something in short supply. We will have to change our patterns of fuel consumption and this will have knock-on effects for prices and for livelihoods across the economy.

How the government can cushion this cost-of-living shock in the near term without worsening inflation is a genuinely difficult question, made more so by uncertainty over how the war will play out. A playbook for crisis response built on putting cash into all households will not work. And we now face a future of rolling shocks, running the gamut from armed conflict to extreme weather to technological disruption.

This budget is not an easy one. But we cannot wait for this unpredictable event to pass before we get back to thinking about our known long-term challenges.

This is where the imperative to respond to the impacts of the war collides with the other imperative that defined this budget until a couple of months ago. This was meant to be the budget that rejected short-termism to start to adapt a tax system that is not match-fit for the future we face.

Last year’s post-election Economic Reform Roundtable laid the foundation for a broader economic reform agenda under the Albanese government. “Productivity-enhancing” measures were presented, many of which related to the slow grind of boosting Australia’s economic dynamism: harmonising regulation and occupational licensing to get to a single, national economy, and getting our cities to function like vibrant economic engines, rather than flinging workers to the fringes. Australia’s federal division of powers means that such reforms take sustained work, and sometimes money, to grease the wheels of jurisdictional cooperation.

On the final day of the round table, the door was opened to the possibility of long-neglected tax reform.

Opening those tax deliberations, I said that our national conversation needs to be about how we sustain a high-quality life for young people today and those who come after them, given the headwinds of ageing, climate change and global disruption.

There is a set of measures firmly in the federal government’s hands. And this budget is a critical opportunity for the government to stand up to noisy losers and fix a tax and transfer system that has favoured older, wealthier Australians, and those who draw down our natural resources – most notably gas – in ways that are neither sustainable nor fair.

We are a relatively low-tax country, yet we have high service expectations and a large Boomer cohort moving into old age, stretching our health and care systems.

While Australia’s taxation of personal income isn’t particularly onerous, the way we collect it is imbalanced. We lean most heavily on wages and salaries from work, while having very generous concessions for income from wealth and housing speculation and ways to manipulate tax through deductions and trusts. As a result, we treat different households on the same income vastly differently.

If we cannot find it in ourselves to withdraw these tax breaks and raise other, more efficient taxes, our default strategy to up our fiscal buffers is to rely ever more heavily on these inequitable taxes on income.

Reducing tax concessions on income from wealth – such as lowering the capital gains tax discount and taxing superannuation earnings in retirement – would give us better options for the future. Redesigning taxation of fossil fuel exports and introducing a price on carbon emissions would give us revenue sources that go with the grain of the transition we need to make away from fossil fuels.

Finally, we can increase the GST. Taxing consumption is a less economically damaging way to raise necessary revenue, so long as we fully compensate poorer households.

These reforms remain wise even in the face of supply shocks. Reducing the preferential treatment of passive income will help us deal with one driver of persistent inflationary pressure in the economy: the continued growth in spending by wealthy older Australians, insulated from the Reserve Bank’s attempts to cool consumer spending.

The changes occurring to the world around us are stark. No one has a clear roadmap for where the febrile geopolitics, rapid development of artificial intelligence, increased authoritarianism, and escalating climate change may take us.

On multiple fronts, it is looking like being a more expensive world, and thriving in it will take creativity, compromise and collective resolve.

In this world, we cannot afford to drop everything and focus only on shielding ourselves from the crisis of the day. Rather, we need to crack on and tackle the longstanding problems we know how to solve. We need to rebalance the tax system, double down on the shift away from fossil fuels to electrification, and build more renewables, because our security depends on it. We need to invest in human capital, resilience and innovation, and encourage households and the private sector to do the same. But we also need to pay for that investment, rather than leave the bill to the kids.

This is what we know to do. We are a middle power at the far end of the world. There is a lot that is out of our hands. Being a democracy doesn’t mean our governments have a magic wand; it means only that we get to govern ourselves through whatever is thrown at us.

In this budget, our government should trust in our better angels and do its best by younger Australians who are inheriting a harder, more expensive world.

It’s time to prove just how good we can be in a crisis.