Date created:13/6/03 Last modified:13/6/03 Maintained by: John Quiggin John Quiggin
22 May 2003
With the post-budget opinion polls behind us, this is a good time to think about lessons from the recent budget before it disappears into the realm of economic history.
The first conclusion to be drawn is that the old game of returning bracket creep in the form of tax cuts has been played out. The 'rabbit from the hat' aspect of the tax cuts announced by Treasurer Costello secured the desired favorable response, but this was quickly eroded by the derisory amount of the cuts ($4 a week for most taxpayers).
The Fraser government briefly adopted indexation of tax scales, but the lure of announcing tax cuts as electoral bribes was too great for Fraser, or his successors, to resist. Now, however, with inflation at low levels, it is time for indexation to be adopted once and for all.
Indexing tax scales to inflation would still yield a modest increase in the average tax rate as real incomes increased. However, as both the demand for publicly provided services like health and education and the cost of providing those services tend to increase with income, this is not really a problem.
If tax scales were indexed, the community would face a clear choice between private consumption and public services financed by taxation. As the opinion polls following the budget show, responses to such choices depend on the way in which they are framed, as well as the way in which they are reported.
Newspoll found that 15 per cent of voters thought the budget would make them better off 38 per cent thought it would make no difference, and 32 per cent though it would make them worse off. This mildly negative result (fairly typical of responses over the 15 years Newspoll has asked this question) was spun by The Australian into a ringing endorsement '53 per cent of voters thought the Budget would make them better off or no worse off (emphasis added)'.
The AC Nielsen Poll asked a clearer question and got a clearer answer. Asked whether they would prefer the tax cuts announced in the budget or improvements in health and education, 20 per cent opted for the tax cuts and 77 per cent for improvements in services.
In the absence of windfall gains from bracket creep, improvements in health and education can only be funded from explicit increases in taxes. The choice is posed most clearly by hypothecated levies, such as the Medicare levy, in which higher taxes are explicitly tied to improved services
For Labor, a policy based on an explicit tax levy would provide a resolution of the inconsistency inherent in promising both the return of bracket creep and improvements in public services. Although such inconsistencies are par for the course in opposition, they will have to be resolved before Labor can present a credible program to the Australian electorate.
To take this course, Labor would have to drop the refrain that Howard's is 'the highest taxing government in history'. The argument is bogged down in definitional disputes about whether the GST is a state or federal tax, and has gained no electoral traction.
By contrast, Crean's proposals on health, education and the rehabilitation of the Murray-Darling have produced a strong positive response. In particular, the AC Nielsen Poll, showing Labor with 49 per cent of the two-party preferred vote is scarcely consistent with the view that the next election is unlosable for the government. With the right strategy, Labor would be a serious contender. Looking back at the last 'unlosable' election, in 1993, it is evident that the threat to Medicare was a more potent issue than the much-overrated GST.
The government should also reconsider the wisdom of cutting taxes and services It might seem paradoxical to commend a policy of tax increases to the current government, but Howard and Costello have shown a surprising amount of flexibility on this score. Despite the disdain of economic purists, they have introduced a string of special-purpose hypothecated levies, and do not seem to have suffered electorally as a result.
Given the adverse reaction to the erosion of Medicare under this government, an increase in the Medicare levy to finance a return to bulk-billing would be a sensible political response. And, for a government that prides itself above all on not being like the Fraser government, it's worth considering that Fraser scrapped Medicare and abandoned tax indexation. This government would do well to take the opposite course of action on both issues.
Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the University of Queensland and the Australian National University.Read more articles from John Quiggin's home page
