Post-pandemic, let’s rekindle economic reform - Grattan Institute

Early in the COVID crisis there was much talk of “building back better” – making sure we emerged with a stronger and more inclusive economy. Now, more than a year later, hopes are fading fast that the crisis will unleash a new a wave of economic reform energy. This week’s comments by the new NSW Treasurer, Matt Kean, casting doubt on the future of mooted stamp duty reforms certainly reflect a cooling of enthusiasm.

So what does it all mean for economic reform efforts nationally?

The NSW reforms – championed by former treasurer now Premier Dominic Perrottet – held promise not only for that state but the entire nation, were other states to follow his lead. These involved slowly weaning the state off stamp duty revenue and replacing it with a broad-based land tax. The economic case is watertight: a big, one-off stamp duty payment upon the purchase of a property can be prohibitive and deters families from moving to the house or location that better suits their needs. In contrast, gradual land taxes paid each year, much like council rates, don’t distort people’s decisions.

In economic parlance, land tax is a much more efficient tax, so the mooted swap would improve average living standards. The reform would also improve the stability of the state budget – stamp duties are volatile, which makes planning difficult.

So why haven’t our state treasurers been rushing to do this? First, the politics is hard. Like most tax reform there will be some losers. Households that are going to stay in one home for a long time currently make little contribution to state revenue. Under the reforms, they would be asked to pay more. On the flip side, more mobile, often younger people would pay less over time than currently.

Further, land taxes are more visible: the arrival of the annual bill is sure to trigger plenty of grumbling at the government. In contrast, stamp duties, while a huge impost, are incurred when you are already buying something very expensive and so might trigger less angst.

Second, the transition can be tricky. People who have recently paid a big stamp duty bill would understandably feel aggrieved if they received a land tax bill soon after. There are ways to take the edge off that challenge. Perrottet had proposed an opt-in model: when homebuyers made the move, they could choose between it being a land-tax property or a stamp-duty property.

However, the more painless a government makes the transition for the buyers, the bigger the long-term budget cost.

The fact that the NSW government appeared willing to take one of the biggest tax reform opportunities was a point of hope in a country that has done very little in the way of meaningful economic reform in two decades. A move to step back from this reform would signal that, even in the wake of a crisis, this is all too hard.

Unpopularity seems to have become an insuperable obstacle to reform in Australia. This is a significant change from the past when political leaders implemented many reforms even if they were unpopular, doing their best to explain why they were in the public interest. Think GST, tariff reforms, privatisations.

Governments also seem to have less appetite to make the downpayment on economy-shaping reforms. Most tax reforms cost money upfront: the 2001 GST overcompensated households by about $12 billion a year. This was simply seen as the sticker price of doing a major change.

If governments are unwilling to accept there will be any losers from reform, this sticker price ends up much larger than it needs to be. This may be what is keeping Matt Kean up at night. Notable in this case also is the lack of interest from the federal government in supporting the state to make the change.

In the 1990s, the Keating and then Howard governments offered payments to states in return for reforming their economies. These payments provided the states with political cover for difficult changes but also reflected the fact that the Commonwealth is a major beneficiary of productivity-enhancing state reforms.

So here is a short plea from an economist. The NSW government has been brave to put this on the agenda. It is promising that Perrottet is apparently pushing back against his Treasurer, insisting he is still committed to the reform.

NSW should be willing to invest to ease the transition, but will have to accept some losers if the price tag is going to be worth it. And finally, if the federal government has any serious ambitions for economic reform, it should give the NSW government financial support and offer the same for any other state government that takes the plunge.

Otherwise, I fear that rather than build back better, what we can look forward to is another few decades of more of the same.

Danielle Wood

Chief Executive Officer
Danielle Wood is the CEO of Grattan Institute, where she heads a team of leading policy thinkers, researching and advocating policy to improve the lives of Australians. She also leads Grattan’s Budgets and Government Program.

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Danielle Wood – CEO