Former Treasury boss Ken Henry accused Jim Chalmers and past treasurers of breaking the budget law by failing to manage the risks of an eroding tax system that he warned was robbing younger workers and future generations.
Henry expressed alarm about the future of democratic capitalism because the social compact with younger people – that if they worked hard they would be better off later in life, as their parents were – was being eroded by rising income tax burdens and higher public debt.
Populism inflamed the risks because it caused politicians to shirk tax reform and pander to selfish voters, as well as fossil fuel donors who opposed taxes on mining and carbon, he said.
Ken Henry (right) says politicians like Jim Chalmers must avoid a “tragedy” on tax reform. Wayne Taylor, Arsineh Houspian
The veteran bureaucrat and author of the Rudd government’s 2010 tax review, also took a swipe at Chalmers’ characterisation of Labor’s tax reform efforts as addressing “bite-sized chunks” one at a time, such as tweaking the Coalition’s income tax cuts and increasing tax on superannuation balances above $3 million. Henry said it was “nuts” to adopt a “tiny bite, by tiny nibble” approach to long-overdue tax reform.
In the most serious accusation, a visibly frustrated Henry said Chalmers and Coalition treasurers over the past 15 years had breached the Charter of Budget Honesty rules legislated by Liberal treasurer Peter Costello in 1998.
“There is no plan to control government spending,” Henry said at the Per Capita think tank tax summit in Melbourne.
“There is no plan to balance the budget. The budget places a heavy reliance upon fiscal drag [bracket creep] that punishes innovation, enterprise and effort.
“But the big thing is the looming intergenerational tragedy. If you wanted a tax system to punish the young, this is what you’d do.”
Chalmers did not respond for a request to comment.
Budget rules breached
The Charter of Budget Honesty, put in place by Howard-era treasurer Peter Costello, requires the treasurer to adopt a fiscal strategy to ensure a balanced budget over the medium term to avoid calling on private savings, while allowing for short-term stimulus such as during the global financial crisis under the Rudd government.
The charter contains five principles: managing financial risks including debt levels prudently; achieving adequate national savings to buffer against moderate economic fluctuations; spending and taxing that ensures stability and predictability in the tax burden; integrity of the tax system; and considering financial effects on future generations.
Peter Costello introduced the Charter of Budget Honesty and GST. Oscar Colman
“Every Australian government since, including the present, has breached all five principles,” Henry said.
In particular, he pointed to three principles being indisputably breached due to a failure to manage the financial risks arising from the erosion of the tax base, maintain the integrity of the tax system and have regard to intergenerational equity. “You might wonder what the government’s long-term fiscal objective is,” he said.
For the first time, Henry said the government should consider indexing income tax thresholds in line with increases in inflation or wages to protect younger workers from a rising burden, putting him at odds with Treasury secretary Steven Kennedy who last year argued bracket creep had helped slow inflation.
Henry said the failure to deliver tax reform since the introduction of the 10 per cent GST in 2000 had contributed to weak real wage growth, sluggish productivity and business investment languishing at the “recessionary” levels of the 1990s.
Henry was instrumental in many of Paul Keating’s tax reforms such as introducing the capital gains tax, fringe benefits tax, franking credits and cutting company and personal income tax in the 1980s.
He led Treasury during the Howard government’s GST introduction in 2000. The Rudd government commissioned Henry’s 2010 tax review but failed to act on most of his 138 recommendations after the prime minister was rolled following Labor’s proposed mining tax and carbon price. Henry was Treasury secretary when Chalmers worked for treasurer Wayne Swan.
Eliminate ‘stupid’ taxes
On Thursday, he laid out a potential package of tax changes for a treasurer, which he said would first require a reallocation of federal and state spending responsibilities across areas such as health, education, aged care and infrastructure.
Tax reform could include removing exemptions for the GST and state payroll tax to broaden their application, while eliminating other “stupid” taxes such as on insurance. Or these three taxes could be replaced by a new business cash flow tax, as recommended in his 2010 review, he said.
Second, income from personal investments such as interest, rent and capital gains should have a discounted but uniform rate of tax applied, instead of the highly varied rates and concessions currently imposed.
“If you did so, that would help address housing affordability concerns,” he said.
Third, so-called “economic rents”, generating above normal rates of return, should be taxed more highly than normal capital income and capital gains, he said.
“Fourth, reduce personal marginal income tax rates. Reduce the number of tax brackets. And this is the first time I’ve ever said this publicly, in fact I think at all. I think it is time to consider indexing tax thresholds for inflation. I think fiscal drag has become such a punishing thing that it’s time now to consider tax indexation.”
Fifth, Henry said Australia should levy a carbon tax on coal and gas exports before importing countries do it on the carbon embodied in these exports.
“You don’t have to put a very high carbon tax on that to raise tens of billions of dollars every year to fund the Australian budget.”
He also stepped up calls for a distance-based road user charge on vehicles instead of fuel excise and other charges.
The founder of the budget charter, Costello, told a conservative event in London that governments must rein in spending or risk deepening the financial black hole for generations to come.
“I always argued when I was paying off federal debt in Australia, that debt is not just an economic problem, it’s a moral problem,” Costello said. “That by running up debt, society is consuming its resources on itself and sending the bill to the next generation.”
Costello said there was also a crucial need for governments to focus on core responsibilities.
“It’s a truism that the more government does, the worse it does,” he said. “If it was doing its core business well – we wouldn’t mind it expanding. But if it does its core business badly, why is there any reason to think it will do its new business well?”