Labor's tax sledgehammer would damage budget repair

The Australian 26 December 2018

Next year the Federal Budget returns to surplus for the first time since the Howard Government’s 2007-08 Budget. 

This follows years of steely determination by the Coalition Government, in the face of an obstructionist Senate led by a Labor-Greens alliance.  

Yet as we approach budget balance, the Labor Party proposes raising taxes by more than $200 billion if elected.  

Why would Australia change course just as the books are about to balance?

Labor’s tax sledgehammer has barely had any scrutiny. The $200 billion tax hit will lead to less investment and jobs, fail to deliver the reputed revenue and return Australia to permanent deficit, higher debt and higher interest payments.  At least three big questions must be answered before the election.

Question one: can we expect any distortions or negative behavioural changes?

Labor’s two big tax proposals are to (1) introduce a new housing tax and (2) a new retiree tax. 

The housing tax abolishes negative gearing on existing homes while the retiree tax steals franked dividends from self-funded retirees invested in companies that have already paid tax.

Labor claims the housing tax will raise $32 billion over 10 years while the retiree tax is designed to raise $55 billion over the same period.

Both new taxes will only raise money if people continue on the path of saving and investing.

Labor’s signal to hard working Australians is if you invest in housing or Australian shares, “we’ll tax you more”. It sends a clear message to Australians seeking to be self-sufficient in retirement - don’t bother.

Increasing property taxes will drive less investment in housing. With the prospect of paying higher capital gains tax and the loss of negative gearing, rents will have no option but to go up.

Increasing taxes on shares will drive less investment in Australian companies through retail shareholding and self managed super funds. 

Instead, Australians will be more likely to invest in foreign companies. The distortion will lead to fewer houses, fewer jobs and more risky investing to make up returns.

Question two: will the money actually be raised?

Labor loves to create new taxes that come up skint. Labor’s Mining Tax was probably the least credible attempt to establish a new tax Australia has seen. 

The Mining Tax was announced in 2010 and legislated in 2012. Labor projected it would raise $10.5 billion in its first year, whereas it collected just $500 million over the one and a bit years it was in place.  

Labor locked in spending against the revenue that never materialised, such as paying to increase the Superannuation Guarantee and infrastructure.

The national budget is no different to a household budget, if no money comes in, no money can be spent. Unless it goes on the credit card - which must be paid later, with interest!

The proposed taxes on housing and retirees are built on equally shaky foundations. Behavioural changes (reduced investment in housing and shares) will ensure much of the money will never come in the door. Meanwhile the plans to spend it are well advanced.

This is the precise cycle Labor repeats. It’s how deficits are made. It’s how debt is built up. It’s how Labor loses control of the budget every time.

Question three: is history really going to repeat itself if Labor is elected?

The Coalition is Australia’s best economic manager. Partly that is because we believe managing anything requires a rule book. 

In the case of the national budget, the Coalition places a “fiscal rule” which ensures tax revenues do not exceed a certain proportion of the economy – 23.9 per cent. This rule ensure taxes do not stifle growth and it incentivises spending restraint.  Labor’s national platform says:

"Labor considers the Coalition's arbitrary cap on the proportion of tax collected as GDP does not fulfil any useful economic purpose."

Translation: we will raise taxes.  

The other issue is Labor cannot control spending. On the spending side, when last in office, Labor was projected to spend 26.5 per cent of GDP by 2023-24. 

After five years of Coalition government, spending as a proportion of GDP is down to 24.9 per cent. It is on track to be 24.6 per cent from 2020-21. 

Finance Minister Mathias Cormann noted the Coalition has limited “real spending growth to 1.9 per cent on average per annum since our election to government… (and) over the last 30 years, Labor Government have been in office for 14 years.  In that time they have not delivered a single surplus budget.” 

Labor takes its budget advice from Getup who said “deficits are, and should be the norm.” 

No nation can afford permanent deficit with never ending debt. Eventually, borrowing solely to meet interest costs is required.

The past shows how this will play out, Labor cannot manage the Australian budget. Australia cannot afford to repeat the cycle.

Andrew Bragg is a Liberal Senate Candidate for NSW