Will Labor's conversation about everything produce anything much?

Australia Broadcast Center

2 days ago

Labor's triumphant election victory left its true believers with a question: now what?
Before long, Anthony Albanese and Jim Chalmers had a concept of a plan. They would summon leading experts and advocates to Canberra to share economic ideas, with nothing off limits and an appetite not just to talk about reform, but to take it on.
Inside the Labor fold, two camps have formed around the government's productivity roundtable, slated for later this month.
One camp doubts that a cautious Albanese has much inclination to take on a controversial new policy — and question whether "consensus" can be achieved with business and unions appearing poles apart on several issues.
But the other camp sees genuine opportunity to achieve something of substance on the budget, the tax system and productivity — urgent national concerns that have been rotting for years in the too-hard basket.
There is a risk that a talkfest about everything could amount to nothing, but the rewards could be great if the ambitious Chalmers can emerge with a term-defining reform package that he can sell to the public — and most importantly, his prime minister.
The three-day agenda is sorted from easiest to hardest. The theme of the first day is "economic resilience" — that is, how Australia should weatherproof its economy to survive a chaotic world, a worthy but relatively uncontroversial topic.
Day two is about productivity, a misunderstood and long-neglected subject but one where plenty of consensus can be found.
Productivity is what makes an economy greater than the sum of its parts. It does not come from making people work more, as often thought, but from new technology, better regulation, education, or anything that grows or harnesses our economic potential.
Build a road between two towns and you boost productivity because the people in each can visit one another, exchange ideas and find new ways to work together.
Educate kids, and you boost productivity. Remove a bureaucratic obstacle, and you boost productivity. Remove a barrier that holds people back from fully participating in the workforce, such as the cost of parenting, and you boost productivity.
Economists see productivity growth as the main reason living standards have steadily but dramatically improved in countries like Australia compared to a century ago, and the only reliable guarantor that this will continue.
But as in much of the developed world, it has been hard to come by for the last decade or so, prompting urgent conversations about how it can be revived.
Some ideas for how to do so are uncontroversial and even dull.
In its last term, for example, Labor moved to stamp out the overuse of non-compete clauses, used to restrict everyone from hairdressers to data analysts from changing jobs or starting their own businesses, and so stifling innovation. Few objected.
Similar ideas could be steered through the round table, such as removing unnecessary duplication in accreditation and regulation across states and territories or countries.
Other bigger-ticket items match up with Labor's political priorities and may also find broad support.
On housing, where Labor is falling well short of its target of 1.2 million new homes over five years, Housing Minister Clare O'Neil has recognised more needs to be done to make new housing easier to build.
Productivity is part of the story — Australia's construction sector completes half as many homes per hour of work as in 1995, according to the Productivity Commission (PC), which has called for better planning coordination and a review of building regulations.
On major projects, Labor is inching towards landing an overhaul to the environmental approval process, which business, unions and environmental groups all agree are too slow and serve no-one well, even if they have different priorities for reforming it.
There has been some speculation that a deal on these reforms, which Environment Minister Murray Watt appears close to landing, could be announced at the round table.
One of the most obvious frontiers for productivity growth, but where perils are also apparent, is the growth of artificial intelligence.
The question of how — if at all — government should respond is a vexed one and will spark much disagreement between the participants.
Business groups have argued any regulation should be light touch, and the most important task for government is to promote the development of AI and the innovation it can make possible.
Unions see risk for jobs and want government to constrict and contain AI rather than unleash it.
Both views have their sympathisers within the Labor fold. Assistant Minister for Competition Andrew Leigh, is an AI optimist who sees the potential for major productivity gains. Industry Minister Tim Ayres, has appeared more sympathetic to union fears, suggesting internal disagreements that may take more than the round table to fully resolve.
In the care sector, which Labor has devoted billions to expanding, the PC will release a report the week before the round table with suggestions about how to deliver the standard of care the public expects while also doing so more efficiently.
Unions, business groups and many economists also argue that making childcare universal would boost productivity by harnessing the talents and ideas of parents, mostly mothers, for whom the cost of childcare is a barrier to full-time work.
Labor promised at the election to guarantee three days of subsidised childcare each week to nearly all families, and a $1 billion fund to open more centres.
Many still regard universal childcare as the likely choice if the PM wants a "signature" reform for his second term, although the PC dealt it a blow last year when it advised against the move, urging a focus instead on improving access.
The spotlight on the sector's poor regulation following shocking allegations against a Melbourne childcare worker present another obstacle, a reminder of the risks associated with expanding the sector prematurely.
Apart from universal childcare, which does not feature prominently on the roundtable agenda published in late July, none of these items feels like the centrepiece reform Chalmers could be seeking.
If that is to come in the productivity space, it could involve company tax, a key priority for the business lobby and some economists after a decade where investment has fallen.
There has long been support in some quarters — echoed in recent Treasury advice to government, and by Labor backbencher Ed Husic — for cutting Australia's 30 per cent company tax rate, which is higher than some global comparators.
That was last attempted by the Turnbull government, which managed to cut the rate to 25 per cent for small businesses but fell short of doing so for larger companies.
Ahead of the round table, company tax is again on the agenda but with more fine-grained proposals than a simple rate cut.
The PC has recommended a headline rate of 20 per cent for companies with less than $1 billion in revenue — that is, most companies.
This rate applies to profits and is only really meaningful for foreign investors, because for Australian investors the rate is ultimately refunded in the form of "franking credits" so that the tax can instead be paid at the investor's income tax rate.
At the same time, the PC suggests a new 5 per cent tax on cashflows. It expects this would see some larger companies pay more tax, but help smaller companies by allowing them to deduct the cost of new capital immediately, stimulating investment.
Several similar proposals have been floated, including ANU tax professor Bob Breunig's proposal for an effective tax-free threshold for business investors.
Other economists including Chris Richardson favour higher specific taxes on offshore gas companies, mining companies or banks, but lower taxes on others.
The business lobby has focused its calls on a more generous tax credit for research and development spending, although some economists say the current credit mostly benefits companies who would have spent the same amount on research anyway.
Chalmers has shown much appetite to focus on company tax, but a proposal favoured by the business community — and which the Coalition may have no choice but to support as well — could balance out a package that raises taxes elsewhere.
That question — whether to raise taxes somewhere — will consume the third and likely most controversial day of the round table, about the federal budget.
The budget's problem is well documented: we consistently spend more than we collect in tax, and there are reasons to believe this will worsen over time.
Labor bucked this trend in the last two years with budget surpluses, but these were anomalies helped by the good fortune of high commodity prices, which boosted the company tax take.
Strip out these short-term vagaries and the "structural" position of the budget is in deficit to the tune of 1.5 per cent of GDP — or almost the size of the entire NDIS. Add in state governments and the picture more than doubles, to 3.1 per cent.
While Australia's current level of debt is modest by global standards, the trajectory is troubling given spending is at the highest non-crisis level in a generation while the tax take has not substantially changed, and there is more spending pressure ahead.
Debate over the budget tends to be split in two between those who emphasise spending cuts as the solution and those who emphasise higher taxes. But Treasury bluntly stated that both would be needed to fix the budget, and the round table will consider both.
Independent MP Allegra Spender, who will attend the round table, convened high-profile economists last month to canvass ideas on both sides of the equation.
On the spending side, Labor acted in the last term to contain cost growth in the NDIS and aged care, although there are calls to go further on both.
To those two, the e61 Institute's Michael Brennan added what he called a "capital binge" on mega-projects with benefits that did not justify their costs and which were diverting capital from other uses.
Brennan also questioned the budget impact of shifting towards universal payments, for example in childcare, but also in schemes like the NDIS and the health system where care recipients with financial means are not expected to contribute out of pocket.
The counterargument, made by tax professor Miranda Stewart, is that "targeted" payments can actually punish recipients for earning more, because the benefits of higher income are diluted or even eliminated by the accompanying loss of payments.
It is also unlikely to appeal to a Labor government that has made universal public provision — especially in Medicare — key to its political message.
And even substantial changes to infrastructure or to the payments system would likely pale in the context of long-term projections by Treasury and others of how much the cost of health and care will grow — not to mention any higher spending on defence.
The Grattan Institute's Aruna Sathanapally emphasised that spending would need to grow astronomically just to meet our current expectations of care.
"Even if did not raise our service expectations, the nature of an ageing population and growing health technology means that government will get bigger," she says.
For Sathanapally, who has been chosen to deliver the keynote address for the tax section of the round table, that means the federal government must tackle the uncomfortable question of raising more money.
"If we want to find a magic way to have Australian-level service expectations and remain being a low-taxing country, I'd love to know what it looks like," she told Spender's forum.
"But my starting proposition is we're going to have to think about higher taxes or we're going to have to think about taking chunks out of our service expectations."
Former Treasury secretary Ken Henry agrees, but reluctantly, saying any tax reform package should be designed to be revenue neutral at first, but over time lift revenue as a share of GDP over time in a way that would do the least economic damage.
Chalmers has already stipulated that any package brought to the round table should be budget neutral at a minimum and ideally budget positive.
The Coalition has said it will only support changes that are revenue neutral, meaning it would only support a package that repairs the budget if the improvements came from the spending side.
But the tax debate is about "how", not just "how much", and here there is likely to be much disagreement.
Participants in the tax debate tend to complain about one of two things: that the tax system is unfair or that it is inefficient (that is, it distorts people's choices).
The objectives of fairness and efficiency do not always align. The GST, for example, is considered an efficient tax because it applies the same rate to everything and so does not distort spending decisions as it would if different rates applied to different products.
There are exceptions, which create inefficiencies, but the efficient character of the tax is one reason why some economists say raising it could be a worthy option.
But the other side of the coin of a flat rate is that it can be regarded as unfair because it is "regressive" — the same 10 per cent tax is a greater imposition on someone with a smaller income than someone with a larger income.
That is one reason why the proposal has been regarded as politically toxic, and Labor has given no indication it is enthusiastic to adopt it.
But there is one feature of our tax system where inefficiency and inequity are broadly aligned: our system's heavy reliance on the taxes of wage earners, and comparatively low tax on those who make passive income from their wealth.
Australia's tax system is wildly inconsistent in this regard. A couple with no assets, both on the minimum wage, could pay more than a couple with three homes, shares, and hundreds of thousands in annual income. The second couple might even pay no tax.
As e61's Greg Kaplan put it at Spender's round table, this can not only be seen as unfair but can also distort choices in an undesirable way because wage earners pay a higher rate of tax than asset owners who can use deductions and discounts to lower their tax.
"The absolute worst case you can be in is to earn all of your income as an employee working for somebody else," Kaplan said.
"The message that we are sending to our young people is that if you want to be rich … choose a career plan where you can generate capital gains, strive for property development or funds management, not for engineering. That matters for productivity."
But nobody needs a long memory to recognise the political perils of taking on issues such as tax discounts for superannuation, capital gains or the treatment of franking credits, several of which were in Bill Shorten's rejected 2019 policy platform and one of which — super tax — is the source of a current controversy.
Those ghosts — and the ghosts of the carbon and mining taxes in the Rudd-Gillard era — are fresh in the minds of many in the Labor fold, not least the prime minister, and will weigh strongly against the case for any sweeping reform.
While Labor could balance out any of these tax-raising proposals with large income tax cuts or even company tax cuts, any of them risks igniting a political firestorm, and those close to Chalmers have privately sought to lower expectations that this is his plan.
But Ken Henry, perhaps Australia's most prominent tax reform authority, who has been consulted by Chalmers in recent weeks and will attend the round table, has a different view: go big or go home.
"Tax reform cannot be done piecemeal," he told Spender's forum last month. "This is the lesson I take from Australia's tax reform adventures of the last 40 years. If it's going to be successful, it's going to have to be big."