Taxes Won’t Fix Budget Woes: Article by Jennifer Westacott

This opinion article by Jennifer Westacott, Chief Executive of the Business Council of Australia, was published in The Australian on 1 May 2013 under the title ‘Taxes Won’t Fix Budget Woes’.

Wayne Swan and Julia Gillard are right to say that less-than-expected company profits have taken a sledgehammer to the budget. But it would be wrong to use this as the only explanation for the weakening state of Australia’s fiscal position.

And it would be foolhardy to attack companies – already struggling with lower profits and dealing with a persistently high dollar – by imposing new taxes or revenue grabs to plug the budget holes.

The risk of such an approach is that the government would achieve the opposite of what it is seeking, hurting economic growth, revenues and profits even more, and worsening an already difficult fiscal position.

The latest Treasury forecast for revenue to be down $12 billion by the end of the financial year only tells us part of the story about why Australia’s budget is broken.

Let’s be clear here: we don’t have an economic problem – our economy is fundamentally strong. What we have is a budget management problem and it’s a problem the government has had four years to address.

The loss of control over the budget strategy really set in when, in 2011–12, the government increased its spending to 25.3 per cent of gross domestic product, a level not seen since the global financial crisis, on the basis of expected rising revenue.

What has made the budget deterioration even worse is the collapse in fiscal discipline. Committing billions in ongoing spending based on assumptions about volatile revenue fails the budget integrity test.

So does deferring or bringing forward spending instead of making the hard decisions about what to continue funding and what to reprioritise.

The government must face up to the problems it has contributed to and change its approach to restore the integrity of its budget management in three key ways.

First, don’t make a bad situation worse. If the profit-based taxes are down on estimates, it would be absurd to further attack business confidence and add to business costs, which will put future profits at risk. The government should be working towards lowering the burden of tax on businesses, large and small. Australia has an internationally uncompetitive corporate tax rate, the equal seventh-highest in the OECD. Countries in far worse economic positions than ours are lowering their corporate tax rates as a priority to grow their economies. The government should rule out more tax grabs on business, such as any changes to business tax arrangements rejected by its own business tax working group. It should retain its commitment to lowering corporate tax levels (as fiscal circumstances permit). To do anything else will further weaken confidence and impact on jobs. The BTWG found a 1 per cent cut in the company tax rate, depending on how it is funded, would boost GDP by 0.2 per cent and increase wages and household consumption.

Second, don’t spend money we don’t have. Both the Gonski education plan and the national disability insurance scheme are important reforms. But we should not pursue them at any cost when our fiscal circumstances don’t allow it. The Business Council has always supported the principle of the Gonski report – funding weighted for student needs – but questions whether additional spending is justified or affordable. Moreover, these reforms should be complemented by reforms to teacher quality and teacher performance.

On the NDIS, now renamed DisabilityCare, the government should finish the pilots, independently evaluate them, bed down the detail, including the service system reforms needed to improve outcomes, and agree to a 10-year implementation plan with the states. Only then should we put all the funding options on the table through a cost-benefit analysis, including a levy paid by all taxpayers.

Third, the government must show it has a credible plan to repair the budget. The best way of doing this is an independent, comprehensive audit of the scope, size and efficiency of government. The community must be confident that the budget can be put on a sustainable footing, that we are getting value for taxpayers’ dollars and that savings options have been properly thought through. An audit would test the duplication between the commonwealth and the states, examine whether programs are working and look for better and more efficient ways to deliver government services. Only an audit will avoid governments choosing ill-conceived savings options that hurt growth and jobs or place an unfair burden on the most vulnerable in our community.

The government is asking Australians to share the burden. But Australia’s fiscal problem was not created by the community. It was created through loss of control of our fiscal strategy. Only a more disciplined and credible fiscal strategy will stop this from being a burden that will fall on every Australian for many years to come.