Cracks in PM Abbott and Treasurer Hockey’s deficit levy
Back in March, the idea of a “deficit levy” was one of several risky budget moves being discussed by Prime Minister Tony Abbott and Treasurer Joe Hockey.
Earlier that month, there had been suggestions of tensions in their relationship, when they articulated differing views ahead of a decision to reject Qantas’s request for assistance.
Both knew they must now be seen to be in lockstep as they devised a budget that was supposed to rein in spending yet boost economic growth. It also needed to fund expensive new commitments, including Abbott’s signature paid parental leave policy.
Finance Minister Mathias Cormann, a close ally of Hockey’s, was in on the talks but it would be weeks before other cabinet ministers found out, courtesy of press reports, about the so-called “temporary levy”.
As the idea crystallised, Hockey’s rhetoric shifted. He began to prepare the public for tough measures that would demand “heavy lifting” from everyone. “If the burden falls on a few, the weight of that burden will crush them,” he said on March 31.
By that time, he had had about six weeks to digest the Commission of Audit’s radical slash-and-burn proposals for cuts to welfare, education and health, which had been delivered to him on Valentine’s Day.
As unpopular as the idea of a new tax might be, targeting higher-income earners would limit the fallout and would provide an alibi for cuts to spending that would disproportionately hit those on lower incomes.
The tax could raise billions of dollars but, more important, it would spread the pain. The government needed to show that even the rich were not spared in a tough budget, though their discomfort may be temporary.
Even though the idea has been considered for some time, the details were still being finalised this week. Cabinet signed off on the measure on Wednesday, without knowing its final structure.
The 11th-hour tinkering on the tax was occurring amid a growing chorus of protest from Coalition supporters – including former treasurer Peter Costello, who warned that attacks over broken tax promises could be devastating – and significant internal pressure to abandon it.
The Abbott government’s first budget, to be unveiled on Tuesday night, is tipped to contain measures that will be even more controversial than the deficit levy. Indeed, the treasurer predicts the new tax will barely rate a mention once the other changes are unveiled.
Hockey appears to have assuaged miners’ and farmers’ concerns about cuts to the diesel fuel rebate, but motorist groups are gearing up to campaign against an increase in the petrol excise, which John Howard froze in 2001.
The lead-up to Hockey’s budget debut provides insights into the workings of this Coalition government. There has been a surprising amount of open dissent within Coalition ranks, but Abbott and Hockey have, at least publicly, maintained a united front thus far. Along with Cormann, whose influence has grown significantly.
Hot on the heels of Hockey’s warnings of “heavy lifting” and a “tsunami”-like growth in expenditure, treasury secretary Martin Parkinson gave a speech to the Sydney Institute on April 2, warning that if Australia kept “drifting along” it would be vulnerable to the next global crisis.
To be clear, Parkinson did not make the case for income tax increases. Quite the opposite. He suggested the challenge was to cut income tax, so people would continue working as they progressed into higher tax brackets. Instead, he suggested more attention to “indirect taxes”, in a reference to the GST.
In hindsight, Parkinson’s speech gave one clue, albeit in coded bureaucratese, that he was aware of the deficit levy proposal but believed bigger structural changes were also needed.
“This is not to criticise special, temporary, measures, like the flood levy,” he said. “Rather, it is to say that, notwithstanding the merits and immediate needs of such short-term measures, longer-run forces drive us in the other direction.”
Soon thereafter Hockey departed for Washington, for a series of international meetings. From the United States, he continued to warn of “hard decisions” in the budget, of shared pain, of the need for debate about lifting the retirement age and making welfare and health spending sustainable.
He returned to Australia for an intensive round of meetings with the government’s budget razor gang, the expenditure review committee (ERC), which includes Abbott, Hockey, Cormann, Health Minister Peter Dutton and Deputy Prime Minister Warren Truss.
As the ERC met with cabinet ministers to consider deep cuts in their portfolios, Abbott, Hockey and Cormann continued to discuss how a temporary tax hike could spread the pain more broadly.
The revenue review committee of cabinet has the same membership as the ERC, minus Dutton. Meetings of the two were running in tandem as the key ministers realised savings measures would not suffice.
There would be “nothing pretty” about revenue increases, according to government sources quoted by the Australian Financial Review on April 16: the budget would raise taxes and charges, as well as cutting spending, as it scrambled to rapidly return to surplus.
The Coalition backbench was nervous. Labor smelt an opportunity and was gearing up for a fight.
Around Anzac Day, vague rumours of an income tax rise reached some Liberal MPs.
On April 26, The Saturday Paper reported on Labor strategists’ pursuit of a “betrayal moment”, when they could turn back on the Coalition the public fury Labor had felt in government over Julia Gillard’s “broken promise” on the carbon tax.
They did not have long to wait. The next day, the News Corp Sunday tabloids broke the story that a temporary “debt tax”, which could be dumped before the next election, was on the table.
Detailed reports the following day suggested it could cost workers earning more than $80,000 at least $800 a year, though it now seems the tax will be targeted at those much further up the income scale, on incomes above $150,000 or $180,000.
At a cabinet meeting that Monday, Abbott faced ministers who demanded an explanation and were unconvinced by his vague statement that it was one of a range of measures being considered.
Malcolm Turnbull and Julie Bishop, whose constituents are among the richest in Australia, wanted answers.
Liberal MPs were incensed by the prospect that the Coalition’s first budget would raise taxes and risk the loss of public trust. Government MPs who objected publicly include Teresa Gambaro, Cory Bernardi, Zed Seselja, Ian Macdonald, John Cobb and Warren Entsch.
Others let it be known privately that they feared it was electoral suicide. But some Coalition members also said voters would accept it, as long as it was temporary, and that it would be forgotten by the next election.
The fury over a tax increase made it harder for Abbott to defend his generous paid parental leave scheme.
Facing internal revolt, he announced he was prepared to compromise on this signature policy, though it still may not survive the senate. Government sources say this decision was taken before the deficit levy was revealed, though it was only confirmed publicly later.
Public anxiety about a new tax was compounded by the release of the Commission of Audit’s findings on May 1. Some polls have since suggested a voter backlash.
This budget season has exposed cracks in cabinet solidarity, as the government struggles to reconcile its promises of a rapid return to surplus and of no surprises.
The prime minister and treasurer have prevailed. It would have been extraordinary if they hadn’t. They will sell the deficit levy and other unpopular decisions as tough but necessary. They will also promise billions of dollars for infrastructure projects, designed to stimulate growth.
Following Wednesday’s cabinet meeting, Abbott said he was confident he would be able to “look people in the eye” after the budget and say, “we are all in this together, we are all doing our bit”.
The other intriguing story has been the emergence of Cormann as the treasurer’s trusted confidant and, in recent weeks, as the chief budget salesman.
It fell to Cormann to make the case for the deficit levy, explaining that an “immediate special effort” was required to repair the budget and targeted tax rises were the only way to ensure higher-income earners contributed.
“What we would ask people across Australia to do is to trust us,” Cormann said on Wednesday. But that same press conference, where he released a pamphlet blaming Labor for the “budget mess”, also highlighted that, eight months into governing, the Coalition is still often acting like an opposition.
That excuse expires completely when Hockey delivers the budget on Tuesday and takes ownership of the economy. The difficult decisions and trade-offs involved in shaping it will then truly be his.
This article was first published in the print edition of The Saturday Paper on May 10, 2014 as "Cracks in the levy". Subscribe here.