The 2006-7 federal budget is this government’s most significant budget yet. It makes changes to the structure of taxation and government spending that embody substantial economic and social reforms. Not surprisingly, this has ruffled some feathers in the body politic.
Perhaps there is one thing on which both the budget’s critics and supporters may agree – that this is Labor showing its true colours. For the critics – led by right-wing politicians, reactionary commentators and a wealthy elite whose vested interests have been given a megaphone by the Murdoch media – the budget is an unacceptable assault on opportunities for tax-favoured wealth accumulation. For Labor’s supporters, it is a significant step towards making Australia a fairer country, acknowledging the housing stresses in particular, and linking taxation policy with progressive social change.
Combining significant changes to negative gearing, capital gains tax and the tax treatment of trusts is certainly bold reform. It redresses three features of the tax system that have enabled wealthy Australians to pay only quite low rates of tax, thereby shifting more of the tax burden to poorer people. The negative gearing arrangements have enabled them to reduce their income tax by investing in housing they don’t personally need, all too often outbidding younger people who are simply seeking an affordable place to live. Concurrently, an overly generous capital gains tax discount has fueled inflation in asset values, pushing home-ownership yet further beyond the reach of young people without access to a well-endowed ‘bank of mum and dad’. The within-generation inequalities are thereby magnified inter-generationally. Then add the use of trusts as a means of tax-minimisation and it’s not hard to understand why such a growing economic divide has developed within Australian society.
The common element across these pre-existing features of the tax system is that they have enabled people with substantial income-earning assets to avoid paying the same rate of tax that applies to the wage incomes of people working for a living. This is both inefficient and unfair.
Seen from a political economic perspective, Labor’s reforms seek to address the growing inequality by reducing distortions in the tax system that have had discriminatory effects. The moral justification for doing so is starkly evident. After all, who could seriously argue that people getting income from investments should face a substantially lower income tax rate than people getting wage income from their labour? In what sense, if any, could it be either fair or productive to have a tax system that favours financial speculation rather than work?
The government has sought to close the loopholes that have allowed these anomalies to persist. In doing so, it has made some quite astute judgments. For example, eradicating negative gearing for everything other than for investment in newly-built housing makes sense as a means of recognising the need for incentives to increase the housing stock. The capital gains tax reform effectively terminates the Howard government’s tax-favouered treatment of people deriving income from investments rather than from wages. And, for incomes drawn from wealth held in trusts, setting a 30% minimum tax rate limits their use for tax minimisation. Linking the three tax reform measures to a tax rebate on wage incomes is the Labor government’s icing on the cake. The combination creates many more winners than losers, even though the tax rebate is small.
Some would say that a major reform package like this has been long overdue. Indeed, the big question is why it is taken so long, given the pernicious and distorting effects of the previous tax arrangements during the last quarter century. During that time, particularly because of the effects of the low rate of tax on capital gains, Australian society has been getting increasingly unequal. For more than a decade, the Evatt Foundation has been among those organisations urging action to address this trend, undertaking research on the distribution of wealth and issuing publications that have documented the nature of the problem.
Concurrently, a rapidly growing volume of evidence has shown the connections between the extent of inequality and a wide range of economic, social and environmental problems. This evidence shows that countries with greater inequalities of income and wealth tend to have higher incidence of social stresses, bigger ecological footprints and lower levels of personal well-being and happiness. Poorer economic performance is a predictable result too, as the International Monetary Fund’s research shows.
To put these concerns in perspective, it must be said that the Labor government’s budget provides no ‘silver bullet’ for resolving the big challenges of an increasingly unequal society. Indeed, budgeting for a whole nation is never easy because it involves tough decisions about which forms of public expenditure deserve priority as well as which forms of taxation are the most potent, fair and efficient sources of revenue. This year’s budget’s announcement of the government’s intent to rein in the growth of spending on the NDIS is a clear example of this tension. Although necessary to secure the scheme’s long-tern sustainability, the process will need judicious handling. Indeed, in dollar terms this is the budget’s single most ambitious feature. One can only surmise that, without the extra revenues from the announced tax changes, the spending restraint would have needed to be much firmer: indeed, more trenchant cuts is what we could expect if and when the right-wing Opposition parties ever get back into government.
Budgeting is ultimately about priorities and political choices. Quite rightly, it can trigger debate about strategic issues beyond economic considerations of ‘who pays what’ and who gets what’. For example, to what extent are higher financial allocations for defence spending justified if their effect is to tie our nation’s security to a former superpower now floundering under its erratic political leadership? The cost of allocating many billions of dollars for nuclear submarines looks even more huge when measured in terms of what’s foregone in spending to address the nation’s social needs.
Of course, we cannot reasonably expect budgets to fully resolve all social problems. Giving higher than usual priority to dealing with the stresses in unaffordable housing is a commendable priority in this year’s federal budget. Its probable effect will be some slowing of house price inflation below what would have otherwise occurred. To achieve further progress in housing affordability, the government will need to step up the supply of public and social housing. That in turn requires policies for new urban infrastructure and programs for the development of labour supply and skills in the building trades. Meanwhile, some relatively well-heeled young people may feel aggrieved that some tax arrangements from which older Australians have benefited will now not be available to them. But the broad sweep of the announced tax reforms represents a big step towards severing the link between unjustifiable inequalities in tax treatment and the problem of housing affordability. Indeed, the recent submission by the Evatt Foundation to the Senate inquiry on intergenerational housing inequities argued these very points, which makes it doubly pleasing to see those reforms implemented in the budget.
Frank Stilwell is Professor Emeritus in Political Economy at the University of Sydney and the President of the Evatt Foundation.