Where's the money coming from ?
The classic problem facing an opposition is that of funding its promises. In most election campaigns, the government has first move by virtue of its capacity to bring down a pre-election budget. The government can snaffle appealing Opposition policies, while leaving little in the way of a Budget surplus to fund any new promises from the other side.
Here are some suggestions as to how Labor could answer the question “Where’s the money coming from”, and fund up to $10 billion in tax cuts and new expenditure
h4. Duplication and waste
The Opposition has some advantages of its own. In particular, it can promise to finance at least some of its promises through cuts in vaguely specified duplication and waste. Howard and Costello made claims of this kind before the 1996 election and it would be reasonable for Labor to do the same. But there’s only so far you can go with this. It’s necessary to identify some targets. Labor could reasonably aim to find $1.5 billion per year, with specific targets including
* government advertising ($200 million per year, much of which is propaganda)
* consultants (hard to get a total but at least $500 million per year, some useful but quite a lot that is little more than CYA. The growth in spending on legal services is particularly notable)
* pork barrel grant programs – the Natural Heritage Trust, which got $300 million in the last budget is a typical example. Substantial savings could be made if much of this money was rolled into general environmental spending
The typical pattern is that spending in these areas is cut hard by newly-elected governments, then gradually increases over the time a government is in office.
h4. The health insurance rebate
It’s big, expensive and not very effective. The annual direct costs are about $2.5 billion. In addition, the incentive to seek treatment in higher-cost private hospitals costs about $0.5 billion in extra Medicare payments (estimates by Julie Smith TAI and Leonie Segal). Finally, there’s an implicit $1 billion or so in tax expenditures associated with the Medicare levy surcharge on upper income earners. Against this, there is some reduction in use of public hospitals, which benefits the states.
Savings of $1billion to $2 billion could be made by cutting the rebate to 15 per cent and making part of the Medicare levy surcharge payable whether or not private insurance was taken out.
h4. Negative gearing and capital gains
The combination of unrestricted deductibility of interest costs and concessional treatment of capital gains is a recipe for encouraging speculative investment in housing and the biggest single factor in .. Latham to his credit, was the only member of the Labor caucus to speak against the disgraceful deal under which Labor supplied the Senate votes needed to pass the Howard governments guttiing of capital gains tax.
There are two basic ways of addressing this problem. Logically, the most satisfactory is to reverse the cut in capital gains tax. The alternative is to follow the US practice of ‘quarantining’ losses on investment housing, so that tax deductions can be claimed only against profits from the same activity and not from general taxable income.
The potential revenue gain here is large. The ATO pays out about $700 million more in deductions on housing investment than it takes in tax revenue. Bearing in mind that investments are supposed to make a profit, and that at least some investors in housing do pay tax, quarantining of losses would save at least $1 billion per year and possibly $2 billion.
h4. Motor vehicle FBT
Elimination of the concessional treatment of company cars would save around $500 million per year and a similar amount could be gained from further restrictions on salary packaging for a total of $1 billion per year
h4. Cancelling the second round of the Budget tax cuts
Latham has promised wider tax cuts than those in the government’s budget package. This will clearly be unaffordable if it is interpreted to mean giving the whole of the government’s tax cuts and more on top. On the other hand, it’s hard to see Labor promising to take back cuts that have already been given out. The most reasonable basis for proceeding, therefore, is that Labor should scrap the second round of the government’s proposed tax cuts and use the proceeds to finance an alternative. The obvious option is to make no further changes to the top threshold and instead to raise the thresholds for the the 30 per cent and 42 per cent marginal tax rates.
This would provide revenue of around $2.5 billion per year as the basis for an alternative tax cut. \
h4. Tackling tax avoidance through trusts and companies
Under the deal that induced Labor to go along with the capital gains tax cut, the government was supposed to introduce a range of measures to reduce business tax avoidance through personal-service companies and family trusts (the same measures had previously been promised to the Democrats in return for support on the GST). But the government caved in to pressure from its supporters in business and withdrew most of the measures. The government’s own estimates at the time  suggested in could raise $1.5 billion a year from these measures. It would be reasonable for Labor to aim for $2 billion.
Overall, this gives a menu of options that could raise between $9 billion and $11 billion a year when fully implemented. Even if some of them fall victim to political sensitivity, that’s plenty to fund a ‘big target’ campaign.
fn1. At a tactical political level one important issue arises from the provisions of Clause 29 of the “Charter of Budget Honesty”, under which either party may request costings of their election programs from the Departments of Finance and Treasury. Obviously Labor will come under pressure to seek such a costing, pressure to which Kim Beazley succumbed last time around. Although it’s hard to predict the politics in advance, Labor would probably be better advised to get an independent costing from a consultancy like Access Economics before issuing its policies. Government pressure to submit policies to Treasury and Finance could be the occasion for an attack on the politicisation of the Public Service.