Evidence is a stranger in Labor policy push

The Australian

Judith Sloan

22 December 2018

Don’t you hate those earworm songs? You know — the ones you just can’t get out of
your head. There is even a technical term: stuck song syndrome.
Cliff Richard’s Summer Holiday is one of my examples: “We’re all going on a summer
holiday / no more working for a week or two / fun and laughter on our summer
holiday / no more worries for me or you / for a week or two.” Stupid words, irritating

But as many of us take a summer break over summer, it could be worth spending some
time thinking about what a Shorten Labor government will mean for you, your family
and the country. And let’s not forget one of Paul Keating’s more memorable
campaigning messages: “When the government changes, the country changes.”

Earlier this week, The Australian columnist Nick Cater undertook a forensic
comparison of the Labor Party’s platform in 2007 just before the election of the Rudd
government and the current platform endorsed by the party’s biennial conference this
week in Adelaide.

He notes that there are now 43 “enduring values” in the Labor platform compared with
only 11 in 2007. Back then, working families were given top billing and Kevin Rudd
told us that he was a fiscal conservative at heart. Individual aspiration was even

Today, individual aspiration is out, replaced by no one being left behind. It’s the “fair
go” vibe.

Rudd was never a union man but, under Shorten, government policy will be
implemented via the “the timeless truth of solidarity … alongside the mighty trade
union movement”. That would be the mighty trade union movement that commands
only 15 per cent coverage of workers and less than 10 per cent in the private sector. (It
was 19 per cent in 2007.)

Labor is far to the left of the policy platform it took to the 2007 election. While
determined to run a competent administration, the primary concerns of Labor today
are bound up in identity politics, inequality, redistribution, climate change and social
issues such as domestic violence and the treatment of refugees.

Gone are the days when Labor focused on the factors that would promote wealth
creation (free markets, limited government, light regulation of the labour market,
incentives for hard work and investment), thereby laying the groundwork to assist the
most disadvantaged in the community.

Nowadays, Shorten is keen to use the organising principle of inequality to increase the
size of government, to add to the overall burden of tax, to touch up higher-income
earners and companies, and to spend big on health, education and welfare.

The fact that evidence on inequality in Australia points to a middle-level pegging by
international standards and no obvious recent trend towards greater inequality doesn’t
seem to concern Shorten and his team. Maybe evidence-based policy is so yesterday
for Labor — another case of the vibe.

Also in the background is the unproven and improbable theory of Labor Party
president and former treasurer Wayne Swan that aggressive redistribution of income
and wealth by a central government will lead to higher rates of economic growth.

Having failed as treasurer, he is still around to try to destroy public finances and
impede economic prosperity.

Let’s take a look at some of the ingredients of the Labor “fair go” approach. It should
be pointed out that Labor has not sought to hide what is being planned in the event of
an electoral victory.

Labor has no intention of placing a cap on the tax take as a percentage of gross
domestic product (the Coalition’s figure is 23.9 per cent) or on government spending.

There is scant regard that spending on education, for instance, represents a case of diminishing returns and that there are trade-offs to spending on education rather than on other ends. If a lot of spending is good, more must be better: that’s the basic thinking of Treasury spokesman Chris Bowen.

To finance the planned splurge in federal government spending, Labor’s tax plans
involve significant increases in expected revenue. The combination of the changes to
negative gearing and capital gains tax and the elimination of cash refunds for excess
franking credits alone are expected to raise an additional $100 billion across a decade,
although these figures are rubbery.

Depending on what Labor decides to do about future company tax and personal
income tax cuts foreshadowed by the Coalition government, there is considerable
scope for even more spending while maintaining the semblance of budget balance —
even repair.

Mind you, in the past, Labor would have regarded major changes to tax arrangements
to be about much more than raising more money. Keating, for instance, introduced
capital gains and fringe benefit taxation to make the tax system more efficient (as well
as more equitable.) Micro-economic reform is so passe for today’s Labor Party.

Consider the radical decision to eliminate negative gearing for all assets apart from
new residential real estate. Since the policy announcement, it has become less clear
what outcomes Labor expects to achieve from the change — well, apart from raising
more money.

Initially, it was all about promoting housing affordability, but Labor has since walked
away from any proposition that there will be any significant impact on house prices.

Bowen also has been keen to dismiss any impact on rents. This is notwithstanding the
fact that the economics are clear-cut: an upward sloping supply (of rental
accommodation) curve with supply dependent on post-tax returns will lead inevitably
to higher rents across time.

Then there is the highly controversial policy to eliminate cash refunds for franking
credits — a policy position Bowen may well be regretting.

During the past several years, it has become clear that Bowen takes many of his riding
instructions from former Labor treasurer and prime minister Keating. Keating’s advice
is simple: if he didn’t do it, it must be bad. He didn’t have cash refunds, cash refunds
are bad.

Sadly for Bowen, this self-serving guidance is not only out of date but extremely
misleading. When dividend imputation was introduced, it hardly mattered that cash
refunds were not part of the deal. The tax-free threshold was extremely low and it was
many years before a significant number of retirees would be in receipt of tax-free
income sourced from superannuation.

There is absolutely no logical reason cash refunds should not be paid out when
franking credits can be used to reduce taxable income. There is absolutely no
difference in terms of the fiscal cost.

Bowen has got himself into a terrible pickle. He also has dug himself a bigger hole by
exempting those on any Age Pension as well as offering a free pass for members of
industry super funds but not those in self-managed superannuation funds.
Interestingly, the negative gearing changes and the elimination of cash refunds for
franking credits appear to be reasonably unpopular with significant segments of the
electorate. Arbitrarily hurting some voters who are not all high-income earners while
leaving others unaffected is a difficult political sell.

I have touched on only a small number of the far-reaching changes that will be
ushered in by a Labor government. While you are enjoying your summer holiday, you
may find your mind drifting to another song: The Times They are a-Changin’.

Judith Sloan, Contributing Economics Editor