Monday, February 16, 2009

Infrastructure, taxation, stimulus: Tanner caps tax and expenditure

This article concerns caps on expenditure and tax - mooted by Labor Finance Minister, Lindsay Tanner... Browsers are encouraged to read and discuss.

For further analysis of Labor's stimulus and the recession - also see the immediately prior entry: Debating the Stimulus - and the rights of the needy

Labor Finance Minister, Lindsay Tanner has 'ruled out' any increase in taxation to service debt as a consequence of the government's $42 billion stimulus package.

Furthermore, the Minister has ruled out any additional expenditure beyond a 'cap' of "2 per cent" until the Federal Budget is again in surplus."

The conservative Opposition, meanwhile, has criticised Labor's stimulus package as landing future generations with the cost of servicing debt.

Such claims comprise a cynical attempt to 'posture' politically for the future - with no concerns for the needs of workers, families, pensions - in the here and now.

In light of the enduring benefit to future generations from the infrastructure we build now, Turnbull's posturing appears all the more so absurd.

But there are significant questions, also, which arise with Lindsay Tanner's 'self-imposed restraints'. For instance - what does a '2 per cent cap' refer to? Does it refer to 2 per cent of GDP? (somewhat over $20 billion?)

And what would be the consequences of this for welfare reform, as well as new infrastructure programs - such as a public 'National Broadband Network'; or massive investments into renewable energy?

Setting a minimum standard for single pensions of 30% of Male Average Total Weekly Earnings (MATWE); just what kind of budgetary comittment will this require into the long term?

Assuming Labor borrows in order to get broadband 'off the ground' - what kind of commitments will be necessary to service this debt into the future? Here, even 'part-private monopoly' is undesirable. Therefore, it is worth asking: what would be the costs of funding such infrastructure fully with public funds?

Taking the scenario of unemployment rising by an additional 300,000 by mid-2010, how can such structural impositions on the Federal budget be sustained without tax reform?  

If we are to see meaningful welfare reform, including provision for hundreds of thousands of unemployed, there must be cutbacks elsewhere; or otherwise there must be an increase in progressive taxation.  The only other option is to let pensioners 'bear the brunt' of austerity.

Regardless of this, one option is to 'do more with less': restructuring the taxation progressively around the current base.  In so doing, Labor could provide greater assistance for low-income earners.   Here, means tests for pensioners could be eased - effectively cutting back on tax - while making up for the shortfall by increasing rates at the higher end of the spectrum.

Because those on low incomes generally spend a greater proportion of their income on domestic consumption, such moves could provide the economy with extra buoyancy.

But even this would be insufficient for those overwhelmingly dependent upon their pensions.

In the long run, Labor's commitment to hold taxes down is irresponsible. It is a policy which is driven by focus groups and polling.

Who knows when - or if - Australia will return to the kind of minerals boom which allowed for our dependence on Company Tax receipts under Howard?  Systemic restructure is necessary to maintain - let alone expand - the tax base.

Given extraordinary circumstances, Labor would be better advised to place a cap of no less than 4% of GDP on additional annual expenditure - with an expansion of the total tax base by 2%. 

The dilemma faced by Labor is encapsulated well by veteran columnist, Ken Davidson, in a column in 'The Age' for February 16th.  

Mr Davidson supposes the need for an even more robust package than would be allowed for by a 4% cap on additional expenditure.

As Davidson explains:

"The collapse in private-sector demand must be replaced by a corresponding increase in government spending to avoid lower economic growth and higher unemployment.

Rationally, the problem is the size of the hole that will be left by the collapse in private spending. This should dictate the size of the stimulus needed to fill the gap and avoid growing unemployment.

On this basis, the $42 billion package introduced to the Parliament by Treasurer Wayne Swan was about half that necessary to sustain non-inflationary growth without rising unemployment over the next four years."

Clearly an even more formidable stimulus package is necessary to sustain growth.

Interestingly, though, Davidson holds that it does not therefore follow that taxes must rise.

This is hard to understand - and is confusing given Davidson's usual support for tax reform, and an expanded social wage.

Ultimately, social democratic governments are elected to enact just and progressive social reform.

This means: improving public education, transport and health care; providing communications infrastructure and participatory social media such as with the ABC; providing generous and just welfare; ensuring decent and humane care for the frail and vulnerable; 'bridging the gap' in indigenous health and education; promoting public pension funds - which minimise individual risk; promoting economic democracy through tax subsidies and low-interest loans for co-operative enterprise, mutual societies and the like.

Excellent infrastructure and services ultimately come at a price - even regardless of the long term benefits they provide.

While Labor might hold off on expanding overall tax now - to maximise stimulus - in the long run the ALP must 'deliver the goods.' 

Failure to do so could see Labor left behind - as the social democratic mantle is taken up by the Greens: and/or other parties of the Left.

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