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Ahead of tax reform, it is worth considering how much of Joe Hockey's advice comes from the finance sector. By Richard Farmer.

The bankers behind Hockey’s tax Re:think

Treasurer Joe Hockey
Credit: Mick Tsikas / AAP Image

It was not long after attending a birthday party for one of Joe Hockey’s children that Grant Lovett got a call from the then shadow treasurer. Hockey’s then chief-of-staff, Tony Pearson, was taking three months personal leave and Hockey wanted Lovett to fill in.

Lovett had worked with Hockey’s wife, Melissa Babbage, at the merchant bank UBS before she rose to become a managing director at Deutsche Bank Australia. He was perfect for Hockey’s office. The “Re:think” discussion paper on taxation Hockey delivered this week reflects as much.

During his years in opposition, Hockey had grown distrustful of Treasury, the usual feeder for his portfolio’s staff. For starters, Treasury costing of Coalition policies had leaked to the media in 2012 and Hockey was resentful of the fact. Then departmental secretary Martin Parkinson had the baggage of having previously been secretary of the Climate Change Department from its inception in 2007 and, with Abbott’s ascendancy to the Liberal leadership, carbon pricing became one of the twin tax evils to be eliminated. The other was the mining tax, where it was assumed by Liberals that its final neutered form was an example of Treasury’s lack of understanding of how business really operated. Add in the consistently wrong estimates of future economic numbers and the Coalition regarded Treasury to be clearly staffed by duds. How could it be that they got the estimates of future revenues so wrong and came up with a resources tax that yielded nothing?

To help him put into practice in government what he preached from opposition, Treasurer Hockey ensured he had economic support staff of a different kind. Not for him the orthodoxy of those public servant economists who, as he told a radio interviewer, “spend a lot of time looking at information that comes out of the Australian Bureau of Statistics and a handful of other areas”. He wanted advisers with experience in the real world of business.

The influence of such pedigree can be felt in the Coalition’s obsession with debt and deficit, only recently tempered in government by political and budget realities.

“It’s the Treasury portfolio, so obviously there’s a lot to do with banking,” Lovett told The Australian Financial Review back in 2012. “The government has an initiative to get the corporate bond market going and that’s something we [the Liberal Party] support. There are plenty of things that, from my point of view with a credit and fixed income background, concern me. The whole issue of the level of net debt the government is building up is something I’m interested in pursuing.”

Clues such as this to the shift in thinking in Hockey’s office didn’t start with Lovett. The man Lovett filled in for, Tony Pearson, was another bank economist – first the Reserve Bank of Australia and then ANZ and NAB. Returning from his sabbatical, Pearson moved aside as chief of staff to become principal economic adviser before departing to join the Australian Bankers’ Association. Lovett stayed in the top job.

Re:think's sloganeering

When Hockey delivered Re:think – Better tax, better Australia, he employed the Coalition’s preferred method of delivering policy: eschew details in favour of three-word slogans. Hence the official summation of this week’s taxation conversation starter: Lower, simpler, fairer. That’s what Re:think is supposedly about. Hockey told us so in his own words: “… a reform that will give all of us a better tax system. One that delivers taxes which are lower, simpler and fairer.”

The slogan appears four times in the short introduction and executive summary of the main taxation discussion paper. It is only used a couple of times more in the hundreds of pages that follow, where the reading gets serious, but that’s understandable. The pollsters and spin merchants know that the people they are interested in reaching won’t be getting anywhere near the end at page 203. Better to concentrate on the shorter brochure version, designed for mass distribution. A few punters might glance at that, so the slogan appears front and centre on the cover. Lower, simpler, fairer.

For those who do read further, it’s all rogue colons. “Re:consider” (“We want to reshape our tax system and together put forward options for the future”) and “Re:form” (“The Government will work with the Australian people to develop a tax system that delivers taxes which are lower, simpler, fairer”) to accompany our “Re:think” (“We want you to discuss the tax system with us using the discussion paper to start the conversation”).

It’s the detail that contains the telltale thumbprints of Hockey’s internal office advice. There should be no surprise that reducing business taxes gets a favourable treatment in the Re:think document. Two of its big ideas are perennials of big business: cut corporate tax to increase productivity and look to direct tax for increased revenues, which in basic terms means raising and broadening the GST. A break for business, in other words, and a slug for taxpayers.

Australia, Hockey’s tax paper says, relies more heavily on corporate income tax than most other countries. “In 2012, Australia’s corporate taxation was 5.2 per cent of GDP, while the OECD average was 2.9 per cent. A relatively heavy reliance on corporate tax has been a consistent feature of our tax system over several decades.” Yet it did not attempt to explain why, or describe the advantage Australia gains compared with most countries from producing large profits by digging natural resources out of the ground. That would not be so extraordinary if the possible tax changes included a return to some form of resource rental tax, which it does not.

Further, there is a suggestion that a lower corporate tax rate might be offered as a way to tackle the problem of international businesses avoiding paying virtually no tax at all. That “would reduce the incentive for tax planning and profit shifting from Australia”, says the official conversation starter. It amounts to countering tax avoidance by multinational corporations by cutting company tax for all companies.

Perhaps the discussion could start with whether it’s desirable to build up reserves to cover the future costs of bailing out banks affected by financial crises. Hockey was questioned about that this week. A special tax to make such a provision has been on the political agenda since the global financial crisis but put in the too-hard basket. Last week Hockey was scurrying to keep it there lest savers think some $500 million was about to be raised by a charge on bank deposits.

“This bank tax is Labor’s tax – they announced it, they budgeted for it and they are the ones that said it was necessary. And from our perspective, we have said, righto, we will refer it to the Murray inquiry,” he said. It is unlikely he received advice from his brains trust that a tax on bank super profits might be an alternative to slugging the ordinary savers.

Traditional Treasury recruiting

Advisers experienced in the difficulties of major change by government might have been less ambitious and aware that some of the loudest voices in the current tax reform debate were coming from “vested interests”. As Martin Parkinson explained in a speech just before he was shown the door to the Treasury secretary’s office last December: “A lot of what this debate is about is people saying of government, ‘Take money from the citizenry at large and give it to me.’ ”

Before Hockey, treasurers had economic advisers more sceptical of pleading from business – much more so than could now be expected from those who have made their way wheeling and dealing for the rent seekers. The likes of Peter Costello and Paul Keating armed themselves with experienced and practical political operatives.

Phil Gaetjens, for example, was a public servant for 20 years before joining Peter Costello’s office in March 1997. He was there to advise on 11 budgets before briefly returning to Treasury as chief adviser in the competition and consumer policy division and then moving to head the NSW State Treasury.

Ken Henry, later to be appointed Treasury secretary by the Howard government, spent almost five years from 1986 as a senior adviser to Treasurer Keating before returning in 1991 to the bosom of the Treasury as head of the Microeconomic Modelling Unit. John Dawkins as treasurer during Keating’s prime ministership had the long-time Treasury official Tony Harris in his office. Harris subsequently went on to be a long-serving auditor-general in NSW.

These officials had experience across Treasury and in delivering advice to electorally testy governments. But it is not just the absence of such advisers in his personal office that stamps Hockey as a different kind of treasurer. He also set out to give a different twist to Treasury advice by appointing another economist with financial industry experience to take charge of his department. John Fraser, appointed secretary to the Treasury in January, gave up his posts as chairman of UBS Global Asset Management, UBS Saudi Arabia and UBS Grocon Real Estate to return to the employer he left in 1993, after 20 years that included appointments as deputy secretary (economic) from 1990-93 and postings at the International Monetary Fund (1978-80) and as minister (economic) at the Australian Embassy in Washington, DC (1985-88).

Ideas such as cutting company tax to combat multinational tax avoidance are the sort of thing Treasurer Joe should have a chat about with strategist Mark Textor, assuming the Coalition is listening to him these days – and the change in approach since Tony Abbott’s near leadership death experience suggests they are. I think I know what the recommendation will be. In simple summary: people believe in lower taxes for themselves with any higher ones to be paid by others. The public’s reaction to proposals such as this is likely to be as negative as to the suggestion from the financial economic purists that increasing the GST is the way to go.

It’s not that the assembled purists in the Hockey office are not bright. They are. But their view of the world is filtered through their experience and the company they keep. Politics is not about what someone believes is the perfect solution but about the achievable solution. And we are in for a lengthy conversation before changes to the tax system get to that.

This article was first published in the print edition of The Saturday Paper on Apr 4, 2015 as "The bankers who run Hockey’s office". Subscribe here.

Richard Farmer
is a political commentator.