Turnbull channels his inner Roosevelt and realigns our political economy

Brendan Rynne, Partner, Chief Economist
Brendan Rynne, Partner, Chief Economist

Last week’s Budget saw the introduction of new taxes, more recurrent spending, and a greater focus on delivering infrastructure. Spend more on everyone, tax the few more heavily, all the while saying the government will be treading a very steep path to budget recovery in 2020-21.

One would not have been surprised to hear the Prime Minister Turnbull refer to the ‘New Deal’ when talking about the Budget. And one would not have been surprised to hear the Treasurer Morrison say in his Budget speech, “if a government is to be prudent its taxes must produce ample revenues without discouraging enterprise; and if it is to be just it must distribute the burden of taxes equitably”.

Those of us with a recollection of history will remember that quote was part of the special tax message President Roosevelt sent to Congress prior to the introduction of the Revenue Act 1935, the so called ‘soak-the-rich’ bill. That bill was signed off, and although watered down from the original proposal, incorporated graduated income taxes on corporations, surtaxes on individuals, capital stock and excess profit taxes. Sound familiar?

The situation in the United States in 1935 was recovering from the Great Depression, with high levels of unemployment, below trend economic growth and a focus on reforming the financial system. This economic disruption can be readily seen by numerous measures, including through the number of individuals filing tax returns with net incomes over $1 million (in $2017), which declined from about 30,000 in 1929 to about 7,500 just four years later.

While more extreme than the current state of play in Australia, the solution proffered by the then democratic President was drawn on the philosophy that, despite the great importance of individual effort and ingenuity, wealth is the result of ‘mass cooperation’. Again, Prime Minister Turnbull echoed these sentiments some 80 years later when he suggested that “he did not believe that my wealth or frankly most people’s wealth is entirely a function of hard work”.

It is clear this philosophy was at the heart of the new revenue and expenditure measures contained in the Budget. It represents a further shift to the left of the political spectrum.

This realignment of our political economy has a consequence on the social compact held by all of us in our community – the haves, the have-nots, the taxed-nots and the have-nothings. Recent analysis by KPMG Economics found more than half of our households pay less income tax and GST than they receive in government transfer payments. Further, the top 20 percent of households pay income tax equivalent to 150 percent of the cumulative income tax paid by the remaining 80 percent of households.

Even with the proposed increases to the Medicare Levy, and the allowance of the Temporary Budget Repair levy to roll off as per its legislated mandate, this redistribution of income and wealth from the haves to the have-nots and taxed-nots is only increasing as a consequence of the settings within our progressive tax system. Following the theme of WW11 era political leaders, the Budget works on the underlying principle that never was so much owed by so many to so few”.

While we are constantly having the debate about how much more we can ‘soak-the-rich’, the question that doesn’t seem to be answered by any political party – in the context of the tax and transfer debate – is how much are we prepared to reward individuals due to their differences in skill, effort and responsibility.

The Budget also drew our attention away from bigger picture ideals of reforming the profile of public expenditures. Taxing more means we can put off fixing the underlying problem; that we as a nation spend more than we (should reasonably) earn. The analysis discussed earlier also confirmed the view that that once middle-class welfare is given – or in reality, it’s really any-class welfare is given – it is politically difficult to take it away. Simply, once voters attach a property right to a temporal benefit, even if that benefit is no longer needed in its proper sense, voters will react bitterly towards any government if they attempt to claw it back.

But reforms to the expenditure side of the budget are necessary, and actually, the lesser of two evils from an economic impact perspective. KPMG Economics has found that when governments have to target on balancing their budgets, the optimal policy arrangements is one where 85 percent of the fiscal consolidation is achieved through cuts to government expenditure, while the remaining 15 percent is achieved through increases in tax receipts (one-third from companies and two-thirds from households).

Not only is such a discussion off the table – in fact we saw $13 billion worth of ‘zombie budget’ measures killed off for good – it seems the political economy race is to see how quickly you can shift the discussion to taxing the rich, taxing the banks, and taxing multinational corporations.

Finally, if there is any doubt about whether or not Prime Minister Turnbull seems to be channeling his inner Roosevelt, then decide which quote was said by whom,

“the test of our progress is not whether we add more to the abundance of those who have much it is whether we provide enough for those who have little”

“the object of welfare is, as far as possible, is to provide a safety net”

One was said 80 years ago, and one was said last week. Both are consistent. Both are focused on ensuring the social welfare of their country population. Both, it now seems, were said by left-leaning politicians.

A version of this blog first appeared in the AFR

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