Prime Minister Malcolm Turnbull promised stronger economic leadership. What should his priorities be?
by John Daley
Published by The Australian, Wednesday 16 September
Malcolm Turnbull has become Prime Minister, promising stronger economic leadership. The basic objectives are clear and were the subject of vociferous agreement at the National Reform Summit two weeks ago. We want higher economic growth that provides prosperity to everyone and a budget that balances to future generations don’t pay for today’s spending.
But getting there is hard. All the reforms that make a real difference create losers, although we will be better off overall. For reform to have any chance, these trade-offs must be explained, and government must lead. Scarce political capital must be focused on a limited number of issues that will make the most difference.
In its Game-changers report, the Grattan Institute identified the biggest levers for economic growth as tax reform, changing tax and welfare to encourage female workforce participation, and increasing the age of access to pension and superannuation to encourage the participation of older workers.
The key aim of tax reform is to reduce tax that drags hard on economic growth, and fund the reduction through taxes that drag less. Which taxes drag most? Many National Reform Summit participants agreed tax rates on middle incomes discouraged second-income earners with children from working more hours — or working at all. The combined effects of tax, withdrawal of welfare benefits and childcare costs leave very little take-home pay. Increasing the GST (which drags relatively less on growth in practice) could pay for these income tax cuts and associated welfare changes.
The other villain is stamp duty on property, which discourages people from moving to live near a job on the far side of town, or to a home that better suits their needs. Shifting to a broad-based property tax would give states a more stable tax base, spread the tax burden more fairly and add up to $9 billion annually to gross domestic product. This is a state responsibility but the commonwealth could provide incentives to help.
Although many are keen to reduce corporate taxes, it may not be the right time. The theory is lower corporate tax rates would attract more foreign investors. But global interest rates are at their lowest for at least 5000 years and the world is awash with capital. In this environment, corporate tax rates may make less difference to the attractiveness of Australia for foreign capital.
Budget repair is also important. Deficits impose heavy debt and interest costs on the next generation. Once the budget balances, corporates will be more confident and likely to invest.
The National Reform Summit concluded budget repair required spending cuts and tax increases. Given the size of the budget hole — about $40bn a year — the alternatives are implausible. And the reaction to last year’s budget shows the politics of budget repair are unworkable unless everyone is seen to be sharing the pain, and that requires both spending cuts and tax increases.
Key spending cuts include looking at how much we pay for generic drugs, further tightening age pension eligibility for those who own valuable homes, and continuing to wind back programs that have low pay-offs. The most attractive tax increases are the tax concessions singled out by many at the reform summit. Reducing super tax concessions, limiting negative gearing and winding back the capital gains tax discount are the least bad tax increases because they would do less harm to growth and inequality.
Lifting the age at which people qualify for the age pension is one piece of unfinished business from last year’s budget that a Turnbull government should prosecute. It also needs to pursue the other half of this reform: increasing the age at which people can draw on their super to match the pension age.
Infrastructure is often seen as the solution to many of the economy’s problems. But it has to be the right infrastructure, in the right place, at the right time, for the right price. The commonwealth’s selection of infrastructure projects under multiple prime ministers has been influenced too much by election promises and marginal seats. It needs to lock in a much more disciplined process. And it needs to re-enter the business of funding (the right) rail projects. These can have big impacts on economic growth because they allow more people to get to the centre of our capital cities, where a high proportion of the new jobs in our economy are being created.
The commonwealth can also introduce sector-based reforms. The pharmacy and pharmaceutical lobbies have blocked sensible reforms for years. The superannuation lobby is stonewalling on reforms that would increase price-based competition even though superannuation administration and management now cost more than 1 per cent of GDP.
In health, the commonwealth could improve how chronic health conditions are managed, reduce the number of treatments that are known not to work or that have poor pay-offs. In higher education, it could encourage new institutional entrants to drive competition and innovation — although this reform does not need to be linked, Pyne-style, to the much more contentious uncapping of university fees.
The agenda proposed here is ambitious. It will require strong advocacy to explain why the changes are in the public interest when vested interests squeal loudly. But this is what leadership looks like.