The new Senate looms as a disaster for tax reform

It's unlikely "The Political Sayings of Malcolm Fraser" is a well-thumbed volume in Tony Abbott's library. Yet this week, in the wake of the Senate throwing his government's budget plans into disarray, as well as the repeal of the carbon tax and financial planning industry reforms, you'd have to think one of Malcolm Fraser's sayings might have come to mind: "Life wasn't meant to be easy."

Woefully under-prepared in their understanding of the stances that would be taken by the new senators, and in their planning for how the first week of the new Senate might play out, Prime Minister Abbott and his senior ministers were then forced to accept whatever amendments came their way, in a desperate attempt to preserve an impression of being in charge.

Colour and drama may be fun. But it needs to be said that what happened in the Senate last week does not bode well for economic policy making in Australia.

Populism rules

Let's extrapolate from the voting positions taken by the new Senators. It seems two new Senators, David Leyonhjelm and Bob Day, will oppose tax increases and are not likely to favour extra government spending initiatives. And we have the three PUP Senators plus Ricky Muir whose stance will primarily be populist, also opposing tax increases but probably equally unlikely to want to reduce spending. If these voting positions were to become critical in determining the future of government tax and spending in Australia, it would be a major problem.

That Australia's fiscal position needs attention has now been widely understood for some time. The attention that is required is to reduce and ultimately remove the structural budget deficit that currently exists. Commentators differ over the severity of this problem, and about the time frame in which the problem must be dealt with, but few disagree that it needs fixing.

Fixing the deficit gap in a way that takes us back to the past, as John Edwards has demonstrated in his recent book "Beyond the Boom", would involve using higher taxes to make up about 4/5 of the gap and lower spending for 1/5 of the gap. There's no suggestion we must go back to the size of tax and spending in the past. Nor, however, is there any apparent imperative to change from that past balance. Public support for initiatives such as the National Disability Scheme, and the backlash against cuts to services and income support payments in the 2014-15 Budget, suggest much of the population thinks the past balance is about right.

Getting tax back on the table

Here, then, is the problem with the new Senate. Tax increases seem to be the main way in which budget deficit gap can be removed, yet the balance of power Senators are opposed to tax increases. Moreover, where opposition to tax increases is added to an unwillingness to cut existing programs, the task of reform is going to be made even more difficult.

Perhaps though this is all too much supposition based on one week's events. Hopefully the new senators will learn that more is required than piecemeal policy-making. It is not enough just to say whether you like or don't like each individual policy. Decision making in the national interest also requires preferences about individual policies to be disciplined by a recognition that the whole set of policies must be feasible and sustainable.

If that doesn't happen, it may be up to the Labor Party to take up the slack. It might only be through a combination of Coalition and Labor senators that necessary budget reform can occur.

Scope for Labor support is likely to take some rejigging of Coalition policy – a move away from policies based on notions of undoing the age of entitlement towards policies that take a fairer approach to restoring budget balance such as removing tax superannuation benefits for high income earners or ending negative gearing. The Labor Party might then have to decide between enjoying the Coalition's discomfort and giving Australia a sound fiscal framework.

Jeff Borland, Professor of Economics , University of Melbourne

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