ADDRESS TO PER CAPITA REFORM AGENDA SERIES

I acknowledge the Kulin people, traditional owners of the land on which we meet today and pay my respects to elders past, present and emerging.

 

I’d like to thank Per Capita for hosting us today and more broadly for your contributions to progressive thought and debate.

 

I also want to thank Maurice Blackburn for hosting us today.  They fight for fair, which is what we in the Labor Party do as well.

 

We gather today on the 35th anniversary of the election of the Hawke-Keating Government.

 

And so I want to reflect on the Hawke-Keating Government and the approach of modern Labor in my remarks today.

 

Watching Malcolm Fraser concede defeat that night and triumphant Bob Hawke arrive to the rapturous crowd at the National Tally Room is pretty much my first political memory.

 

Of course while the occasion was momentous, it would have been difficult to predict that that day ushered in not only the longest serving Labor Government in history, but the most important period of economic reform in our history.

 

There remain of course lessons for modern Labor in this period of successful reform.

 

Firstly, Hawke and Keating didn’t lack for courage. They took on difficult fights and vested interests. 

 

These years later in sometimes easy to forget the ferocity of some the campaigns against some of the reforms that were so necessary to open up the economy, improve the Budget and create room for important social investments. 

 

Tax reform was a crucial part of this reform process.  The capital gains tax and fringe benefits tax being particularly stark examples. 

 

The idea of a golden era of bipartisanship in which both sides of politics supported good policy is by and large a myth. 

 

John Howard campaigned in the 1987 election on the platform of abolishing both the capital gains tax and the FBT.

 

The restaurant industry ran a ferocious scare campaign about the impact of PJK’s abolition of the tax deduction for a business lunch. But the Government wasn’t deterred. 

 

They knew that the loopholes and gaps in the tax system had to be closed down. They knew that reductions in tax rates had to be funded and that broadening the tax base was a good way to do it.

 

They knew that the Australian tax system was like a block of Swiss cheese, full of holes, but holes that were available mainly to high income earners while PAYG taxpayers had little choice but to pay their headline rate of tax.

 

Secondly, the Hawke-Keating model was about fairness as well as bold change. They entered into a compact with the Australian people. 

 

The reforms that opened up the economy like the floating of the dollar, big reductions in tariffs and national competition policy certainly caused plenty of dislocation.  But Hawke and Keating had a story to tell about investing in new community standards at the same time. 

 

As they engaged in those big sweeping economic reforms, they were also creating Medicare, lifting school retention rates from 30% to 90% and giving working Australians a chance of a more dignified retirement by providing universal superannuation.  

 

“Restraint with Equity” was their central theme.

 

And finally, they believed in strong fiscal management.  Australia hasn’t had too many surplus years in 73 years since the end of World War II and Paul Keating delivered three of them.

Of course the three surpluses mask the level of difficulty.

 

They were delivered at a time when our national income was under immense pressure and Australia’s terms of trade hit post-war lows. A far cry from the conditions today.

 

Now of course, while we have much to learn from the Hawke-Keating model, a Shorten Labor Government will face a different set of challenges.

 

Relying on a carbon copy of 1983 policies would be exactly equivalent of Hawke and Keating in 1983 proposing the same policies as Labor in 1948.

 

The ethos remains but the context is different. 

 

This is what I mean when I talk about our approach to modern government being “Hawke-Keating refurbished”. 

 

We face stagnant wages growth, rising inequality, challenges to global openness and discontent exhibiting itself as populism in politics.

 

But today I want to focus the rest of my remarks on our approach to two related themes from that period of reform: tax reform and repairing the Budget.

 

Firstly, the need to get back to Budget balance.

 

We were once told by advocates on the Right of Australian politics that budget repair was our most urgent national task.

 

It wasn’t that long ago that we were advised by the liberal Party that we were in a budget emergency a debt and deficit disaster.

 

The urgency has gone.

 

Chest beating has now turned into feebleness.

 

The party that once hailed budget repair as its hallmark now offers a $65 billion tax cut that puts the medium term Budget at risk. 

 

At the end of the Government’s proposed 10 year reduction in corporate tax, the tax cut will be costing the Budget a staggering $15 billion a year.  It is a fiscal ram-raid.

 

And a ram raid at a time when the Budget deficit remains over 1% GDP, 8 times the deficit forecast just a few years ago.

 

And gross debt has now crashed through the half a trillion dollar mark for the first time in Australia’s history, and is set to get to $684 billion by the end of the medium-term

 

Recently the Treasurer’s argument has hit a new low as he says the tax cuts are funded because they are in the Budget.  Simple!

 

This is ridiculous argument but he makes it, so I’ll refute it.

 

Of course the tax cuts are in the Budget.  No surprises there. But simply ensuring that the Budget bottom line reflects the cost of the tax cuts does not mean they are funded.

 

The fact is that the Budget would be $65 billion better off over the decade if the tax cuts weren’t proceeded with.

 

In fact, the Treasurer undermines his own argument. 

 

Of course NDIS and the Gonski schools funded model were both reflected in Labor’s budgets. Putting aside the fact that Labor in government made other cuts and revenue decisions to fund both initiatives, even if we hadn’t, by the Treasurers logic, they were funded because the Budget bottom line reflected them. 

 

The Treasurer has killed his own scare campaign on NDIS funding.

 

The fact is, even though the Budget bottom line reflects the corporate tax cuts, the surpluses that are projected over the medium term are relatively thin, and reliant on pretty crude assumptions which means they are anything but certain.

 

The Government has had to water-down its fiscal rules as a result of their change in priorities.

 

They once promised surpluses as big as 1% of GDP.

 

A fiscal strategy that now states now that the goal is to achieve a strong surplus ‘as soon as possible’. 

 

Under current assumptions, the government will never get there of course.

 

The Government’s own surpluses aren’t forecast to get above ½ per cent GDP over the entire medium term.

 

The Government’s fiscal strategy of “maintaining budget balance over the economic cycle” is but a few words in their Budget document. Nothing more.

 

Labor believes in strong fiscal policy and return to surplus and we are prepared to make the tough decisions to do it.

 

I believe in the return to surplus when conditions allow because locking in the AAA rating reduces borrowing costs and gives more room to fund important social initiatives.

 

The progressive case for return to surplus also recognises that this would give me and future Treasurers more room to move if we face another global downturn.

 

Part of the problem with the Budget of course is that another historical government, the Howard-Costello Government, locked in a lot of unsustainable spending and also tax concessions when the Budget was being hit with gold bars during the mining boom. 

 

The mining boom was always going to end one day, it’s one of the golden rules of economics. 

 

But the Howard Government locked in new permanent initiatives from funded by the temporary boost to government revenue from the commodities boom.

 

The fact is, despite the headline surpluses, the Howard Government left office with a Budget heading into structural deficit.

 

While Keating faced record low terms of trade conditions when he achieved his three surpluses, Howard and Costello were gifted record high terms of trade in achieving theirs. And this masked the damage being done.

 

Of the $334 billion tax windfall the Howard Government received during the mining boom years, $314 billion of swiftly disappeared on other new spending decisions and other commitments like tax concessions.

 

This is why the IMF has previously observed that the Howard years were some of the most profligate years in Australia’s history.

 

The Howard/Costello largesse is impressive:

 

•           Family tax benefits for high income earners

•           A baby bonus

•           An un-means tested private health insurance rebate

•           Tax free super in retirement for everyone regardless of income or wealth 

•           The 50% capital gains tax discount

•           Failing to act on Trusts, despite at one point committing to do so, and despite it being recommended by several reviews.

 

I could go on.

 

These types of decisions swiftly eradicated a healthy structural budget balance of 2% GDP in the mid-2000s.

 

This brings me to the second point.

 

An important part of any sensible fiscal strategy is identifying those tax concessions which eat away at the revenue base and reform them or abolish them in order to underpin both budget repair and the funding of new initiatives.

 

As I said at the outset, this was a key part of the Hawke-Keating agenda. And it remains a key part of our agenda.

 

As Ken Henry said just last week “our present tax system is not sufficiently robust to finance government spending….the tax system is a critical determinant to our social fabric”.

 

Reforming negative gearing and family trusts in particular has been in the too hard basked for many years.  We’ve taken them from the too hard basket and put them on the to-do list.

 

Failure to do this would just put more and more tax pressure on low and middle income earners.

Recent PBO analysis shows that for the middle income quintile with people earning just $46,000, average tax rates are set to rise stronger than any other group.

 

This is the key point: every dollar not recouped through winding back these loopholes and concessions is another dollar that Australian workers will have to shoulder.

 

The Government’s priorities are of course more deliberate than this.

 

When it comes to raising new revenue, instead of looking at closing down loopholes and strengthening the tax base, they would rather increase income taxes by $44 billion tax which hits all workers earning more than $21,000.

 

At a time when wages are growing at record low rates, this is a tax hit that will see someone earning $70,000 with $350 less in their pocket from next year.

 

Meanwhile, the tax base remains full of holes and tax concessions and other loopholes go unreformed.

 

They would rather attack low and middle income earners than even begin to close down loopholes and unwind tax concessions that cost the Budget billions each year.

 

Using an infamous metaphor of the Treasurer’s, the government has barely even taken a scalpel to tax concessions which largely accrue to wealthier Australians.

 

The careful but bold approach to closing down regressive loopholes in the tax system is also true to our goal of budget repair which is fair, in keeping with the Hawke-Keating ethos of improving fairness whilst improving the Budget. 

 

•           50% of all the benefits of negative gearing accrue to the top 10% of income earners

•           Around 80% of the benefits of capital gains accrue to the top 10% of income earners

•           And it is a simple fact that Trusts are used across the country as income splitting tools by high income earners to bring down their taxable incomes

 

We recognise that dealing with these structural problems in the Budget opens us up to the usual scare and misinformation campaigns from the Government. Scare campaigns that are all the more sanctimonious given we know they wanted to deal with some of these excesses.

 

But they are important to do for a number of reasons.

 

Take our negative gearing reforms. Conventional political wisdom was that negative gearing is the third rail of Australian politics: touch it and you die.

 

But we knew that something had to give.

 

Here is a reform which is good for the Budget. By the end of decade our negative gearing and capital gains tax reforms will together be adding $8 billion a year to the Budget.

 

It’s good for housing affordability: putting first home buyers on a more level playing field with investors, removing the distortion in the market created by the tax concession.

 

And it’s good for financial stability. 

 

When thinking about the risks facing the Australian economy, our record household debt levels are very high among them. 

 

Why should we be surprised that household debt is so high when we have the most generous property tax concessions in the world, which encourage household leverage.

 

 

It is fair to say that Labor has shown we are prepared to lead the policy debate.

 

We have shown that we are prepared to tackle big issues.

 

The Howard/Costello largesse which largely benefits wealthier Australians continues to hamper the Budget getting back to surplus.

 

So it is fair to say that we have more to do.

 

To repair the Budget and to pay for initiatives that are necessary and in the national interest

 

We’ve also shown that the policy work we do is thorough and our policy announcements are well grounded in detailed preparation.

 

That work has been continuing and you’ll be hearing more from us in the future in terms of more detailed policy announcements which meet the policy objectives I’ve outlined today.

 

We are under no illusions that the Liberal and National Parties won’t engage in their standard practice of ridiculous and shrill scare campaigns.

 

But good policy will win out.  Good policy, accompanied by courage and a concern for fairness was the hallmark of that Government elected 35 years ago today.

 

And it will be a hallmark of the economic policy of the Shorten Labor Government as well.

 

And we’ll continue to outline our plans from Opposition, seeking a mandate and the moral authority in Government to do big and important things.

 

We didn’t get into politics to do easy things, anyone can do that!

 

We got into politics to do hard things.

 

Hard but worthwhile.  Hard but important.

 

We have much more to do.  And I look forward to Per Capita’s contribution as we set about doing it.