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Politiciansí promises: either Peter pays Paul, or productivity pays all

By Geoff Carmody - posted Monday, 16 August 2010


The election campaign is so far mainly “spin” and tabloid trivia. Politicians’ promises tickling hip-pocket nerves blend largely inconsistent interest group-focused bribes.

Politicians’ promises will be paid for in two ways.

Politicians can redistribute from Peter to pay Paul or Mary (or Peter if they are sneaky!). Or they can facilitate more national productivity gains, improving living standards for all.

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Good redistribution options exist. Henry’s super taxation reforms would have made super fairer and produced larger super savings, reducing an ageing population’s pension calls on the Budget.

The Government rejected them, keeping the current “flat tax” superannuation system and raising the Superannuation Guarantee to 12 per cent. This is unfair and inefficient - a poor public policy quinella.

Are any productivity improvements, rather than redistribution, paying for election promises?

The Henry Review proposed increasing the tax-free threshold (to $25,000), simplifying the income tax rate scale, and reducing high effective marginal tax rates (EMTRs) for many on targeted benefits.

If affordable, this reform is a good public policy trifecta. It improves fairness, increases workforce participation and total productivity, and reduces demands on the Budget. Productivity pays some of it.

The Treasurer was a big fan of reducing EMTRs. The government has been silent on this reform. Ironically, the Coalition says it will look at it.

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But looking at “hard” election promises (an oxymoron?) for Australia isn’t encouraging. Consider some examples

The labour market

We need to maximise labour participation in an ageing Australia with looming labour market shortages. Do current government policies support labour market flexibility and productivity?  No, including for young people wanting short hours part time employment, but barred from it.

Student Mary pays Peter.

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First published in the Australian Finanical Review on August 10, 2010.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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All articles by Geoff Carmody

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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