Danielle Wood
Major parties diverge on economy

In any other election, Australia’s headline economic figures would have the incumbent popping champagne corks. Twenty-eight years of uninterrupted economic growth, unemployment at 5 per cent, record-low interest rates and a budget in balance are close enough to a beautiful set of numbers. But the disconnect between the economic data and people’s sense of economic wellbeing has rarely been larger. And this economic ennui is proving fertile ground for both parties to push very different visions for the Australian economy and what the government’s role in it should be. Voters face a stark choice on economic policy, one of the most distinct in memory.

The headline-grabbing difference between the economic pitches of the two major parties is tax policy. Labor’s “big target” strategy is to promise to wind back tax concessions. The hit list is long: negative gearing, the capital gains tax discount, refundable franking credits, superannuation tax concessions and income splitting through family trusts.

Collectively, the dollars are large. Treasury estimates these policies could raise as much as $150 billion over a decade, although these figures do not take into account the interaction between them.

While I have my quibbles, this list is reasonably well targeted overall. Tax breaks for housing investment and super are much more generous than required, given their policy goals. Family trusts are commonly used by the well off and well advised to minimise their income taxes. Targeting tax increases in these areas should contain the economic fallout.

The Coalition opposes every one of these proposed changes, so we can expect to hear a lot more about Labor’s “housing tax”, “retiree tax” and “family business tax” in the final week of the campaign.

But the Coalition isn’t only opposing tax increases, it’s also proposing cuts to personal income taxes. Its three-stage tax cut plan is the centrepiece of Scott Morrison’s “fair go for those who have a go” economic narrative.

The first stage of the plan is modest. The low- and middle-income tax offset, known as the LMITO or “lamington”, gives everyone earning less than $126,000 a cheque in the mail come July, and another one in each of the following three years. During a period of soft household consumption, it is an arguably welcome stimulus to put money in the hands of people who will spend it. But it adds complexity to the already-byzantine personal income tax system, and because it is gradually withdrawn at higher income levels, it will somewhat reduce work incentives for people earning between $90,000 and $126,000.

Labor has essentially matched the LMITO but with a slightly higher tax offset for people earning less than $48,000. It will also reintroduce a temporary 2 percentage point tax increase on people in the top bracket, who earn more than $180,000.

There is little difference between the Labor and Coalition personal income tax plans over the next term of government. Whether Bill Shorten or Scott Morrison is prime minister, more than 70 per cent of people who put in a tax return will receive the same tax cut.

By mid-2022, the more substantial changes under the Coalition’s plan will come into play, when the thresholds for the 19 and 37 per cent tax brackets are increased. In stage three, rolling out from 2024, the 37 per cent tax bracket will be removed entirely, and the tax rate will be cut, so everyone earning between $45,000 and $200,000 will pay the same 30 per cent marginal tax rate.

This flattening of tax rates erodes the progressive nature of Australia’s tax system. The Coalition’s plan will see the top 10 per cent paying a lower share of the total tax take than they do now, and middle-income earners paying a higher share.

Labor does not support stages two and three of the tax changes, although it has indicated it will consider further cuts to income taxes when the budget is in a stronger position. It will also continue the LMITO beyond four years. Based on current announcements, the Coalition would collect $226 billion less tax revenue than Labor over the decade.

Make no mistake, this is ultimately a size-of-government argument. Though frequently quizzed about his party’s vision for Australia, Morrison is actively prioritising lower taxes. And Josh Frydenberg’s budget contains a tacit acknowledgment that the only way this can be reconciled with the Coalition’s projected growing surpluses is for government spending to shrink as a share of the economy.

Labor, on the other hand, has declined to commit to a tax target. Its policies suggest it is comfortable with the tax share creeping up – mostly thanks to increased contributions from high-income earners. And the money will be used to fund Labor’s promised increases to spending on government services.

Labor is also keen to talk work in this campaign. Stagnant wages are the lead in the saddlebag of the Coalition’s strong-economy narrative. Wages growth has been insipid across much of the developed world. But voters – grumpy at the lack of improvement in their standard of living – are not in the mood to cut the government much slack.

But Labor faces a challenge in that it would also have limited capacity to dictate higher wages growth. Shorten’s response has been to pull together a grab bag of policies that the party can claim will at least boost wages for some.

Labor’s “living wage” policy is really a policy to increase the minimum wage – a boost for 1.2 million or so workers, including those on junior, apprentice and disability rates of pay.

However, the party can’t say how big any increases will be, or over what period they will take effect. Minimum wages are ultimately a decision for the independent Fair Work Commission. Labor will change the direction that the government gives to the commission – asking it to form a view about the wage needed for a decent standard of living before looking at other considerations such as the impact on employment and business competitiveness in deciding how fast to get there.

Whether the change in emphasis will shift the Fair Work Commission’s judgement on the minimum wage is contested. The major concern about increases in the minimum wage is the effect on jobs. Most studies suggest few or no employment effects from modest, regular increases – and the commission regularly cites this literature. But Fair Work will regard sizeable increases, beyond what is justified by the economic fundamentals, as a risk.

And while changing instructions for the Fair Work Commission is one thing, Labor will also directly overturn one of its decisions. Within his first 100 days in office, Shorten has promised, Labor will reverse penalty rate cuts. This will undoubtedly boost incomes for the mainly lower-paid workers who work on Sundays and public holidays. Research suggests the initial stages of the phased cuts didn’t lead to increased hours or employment, and one employer group recently endorsed this view. So, there is no reason to expect that reversing them would reduce existing jobs. But not respecting decisions of the independent umpire opens the door to both sides bringing politics into wage setting.

Labor’s more recent announcement on childcare worker pay also pushes the boundaries. Labor says it will spend $10 billion over a decade to boost childcare workers’ pay by 20 per cent. It is highly unusual for the government to offer “top-up” pay for privately employed workers, and the policy raises big questions. Will government money simply fund pay increases that would have happened anyway? If future governments don’t support the policy, will these workers get a pay cut? Are such payments constitutionally valid? And that is before you even get to the precedent it sets – aged-care and disability workers were understandably quick off the mark to ask why they weren’t being extended the same treatment.

There is a case that wages for childcare workers are unfairly low given their skills and the nature of the work. But Labor had already announced a suite of policies to empower the Fair Work Commission to address pay disparities in sectors with a high proportion of female workers. Labor’s top-up announcement looks to be a costly declaration of defeat before these are given the chance to come into effect.

Labor’s related announcement that it will increase childcare subsidies for families has a lot more to recommend it. Reducing the financial disincentives that single parents and second earners – mainly women – face in increasing their hours will boost workforce participation and yield an economic dividend.

If there is one economic theme that has emerged during this campaign, it is that Labor is throwing out the rule book. It is gambling that going to an election promising more taxes and services, as well as government intervention to boost wages, is no longer the economic heresy it once was. The Coalition is sticking to the usual script – arguing that tax cuts, or at least the promise of them, will boost economic growth. The upshot is that voters have the most distinct choice in economic policy for more than two decades.

This article was first published in the print edition of The Saturday Paper on May 11, 2019 as "Economy clash".

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Danielle Wood is an economist and the chief executive of the Grattan Institute.

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