Tuesday, 2 October 2012

Higher taxes would only encourage them

Given that Labor is already on a reckless spending splurge, why should anyone agree to give Labor an increase in tax revenues, asks Peter Reith.

While Peter Slipper clings onto the job of Speaker of the House of Representatives, he is a continuing reminder that our PM has made some shockingly bad decisions.

And to add insult to injury, the Government has given up its allegations against Mr Ashby and instead has settled its claims by giving Mr Ashby $50,000 of taxpayers' money.

The performance of Slipper and his sponsor PM Gillard are a blot on the Parliament and another example of the dreadful government Australia has had to endure since 2007.

Over time, the most obvious impact of Labor's dreadful failures will not be Mr Slipper but its incompetent management of the economy and the consequent fall in living standards. If you don't believe me, this is what Labor's favourite economist Ross Garnaut (with endorsement from Bob Gregory) said in the AFR on September 20:

I think we're going to have a very difficult time adapting to the decline in living standards that's going to be a necessary part to the adjustment to the end of phase one and two of the boom.

And in yesterday's AFR:

Merrill Lynch forecasts GDI to grow 1.1 per cent for the 2012-13 financial year, below population growth of 1.5 per cent a year, indicating a fall in real income per capita.

One consequence of the fall in living standards will be that the Government will want to increase expenditure, and to do that they will want to ditch their promise of surpluses. Labor has not yet produced one surplus and the 2012/13 surplus is now unlikely.

Instead of increasing its spending, the Government should be helping business to improve productivity and profits. In other words, they should be trying to grow the economic pie instead of boosting the deficit. But this would require policy changes e.g. workplace relations reforms that are unacceptable to Labor and especially the unions.

The consequence of Labor's policy failures will be, if Labor is returned in 2013, ever growing deficits that will burden Australia for many years.

Given that Labor is already on a reckless spending splurge, why should anyone agree to give Labor an increase in tax revenues? Why encourage them?

It would be folly to give Labor access to more revenue by increasing the GST. Already government as a percentage of GDP is heading towards 40 per cent. If the Government has more revenue, then the Government will squeeze the private sector more and more.

Compared to many other countries e.g. those in Europe, Australia has, partly under Hawke and Keating and strongly by Howard, promoted the private sector and benefitted from the greater efficiency of private sector provision of goods and services. A growing public sector from government activities like NBN will only act as a drag on economic well-being.

The Government's problem is not a lack of revenue but a lack of spending discipline.

Business groups that advocate a higher GST are naive. Australia's GST is only outclassed for economic efficiency by New Zealand because NZ does not, like Australia, have a pesky upper house with second-rate lefties like the Greens and others. Otherwise, our GST ranks as a more competitive tax than most other countries internationally.

Our GST covers both goods and services, which makes it vastly better than the tax it replaced, namely the discredited wholesales tax which was imposed on only some goods and then at different rates. It taxes expenditure, encourages savings, taxes the blacked economy, and it removed a huge burden on business because business collects the GST but it is not a tax on business.

Now some people want to tax food; they want to widen the base. In theory, this is not a bad idea, but its importance is exaggerated because Australia mainly needs a tax system that is internationally competitive; hardly any country taxes food. The idea to tax food was stopped by the Australian Democrats and Labor in the Senate.

The state premiers would probably like an increase in the GST rate. In isolation, this is not a good idea. The only time an increase should even be considered would be in the context of a revolutionary big tax package including something like a flat income tax of 20 per cent, a capital gains tax of 20 per cent, and the abolition of payroll tax etc. The premiers are kidding themselves if they think that an increase in GST would be good for them.

It is absurd to suggest the Coalition should advocate an increase in the GST from Opposition by widening the base or increasing the rate. We lost in 1993 advocating the GST from opposition. At least we had a big package of tax changes. But to advocate a tinkering of the system from opposition would be a mistake and the minimal potential rewards would not be worth the political effort.

NZ introduced a 10 per cent GST, won the following election, and then later increased the GST by 2.5 per cent. The 2.5 per cent increase produced a lot more public outrage than the initial reform. The Coalition will never increase the GST in my lifetime, but a desperate Labor government could easily make another bad decision.

The consequences of poor government were also aired by Lindsay Tanner last week. He is right to point to the deterioration in the quality of the infrastructure of our political system. Labor is not just making bad decisions; it is also degrading the decision making process. Eventually, a weaker system makes it more difficult to make good decisions.

It is most obvious within Labor. The obvious problems were spelt out by John Faulkner last year at Labor's national conference and again by Tanner. The Labor party's raison d'ĂȘtre is the union movement, but it no longer has a broad base and now only represents 13 per cent of the private sector workforce.

Labor is now just a mouthpiece for a minority group who spend most of their time exploiting employers e.g. the MUA, ETU, CFMEU etc, or exploiting their members like the HSU or running financial services for the benefit of the directors. If Gillard wants to keep alive her prospects of a second term, she could do a lot worse than clean up the party machine.

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