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Plenty of fat for Rudd's axe to trim

By Nicholas Gruen - posted Thursday, 6 December 2007


Fiscal problem - what problem?

It’s the alarm du jour. Going into the election with an overheating economy, the election became a fiscal auction. That was despite the unanimous agreement of those with any kind of reputation to protect that this was a recipe for further inflationary pressure, necessitating further tightening by the RBA.

Still ... I'm not so sure there’s a problem. Unless the world economy goes badly awry, the new government should set itself the objective of facing the next election having kept its promises with increased budget surpluses.

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If revenue doesn’t surprise on the upside - as it’s consistently done for years now - there’s a suite of other options.

First: let's be grateful for small mercies. The greater fiscal responsibility of the ALP’s election promises turned out to be more than merely token.

Second: our current situation reflects the fecklessness of the Howard government. To have no idea how one should spend a few extra billion the first time it turned up in your coffers was a misfortune. To still have no idea the next time ... and the next … year after year looks like carelessness. That leaves plenty of things that can be wound back without much pain. Some departments have more than doubled in size.

And just as the Coalition took credit for the economic boom without telling us just what government policies produced it, so their scare campaign was equally generic.

So, oddly and unusually, Labor wasn’t forced into a long list of denials about what it wouldn’t do. Together with its insistence that it would get out the “meat axe” this gives the new government surprisingly clear air.

Third: as governments age there’s an accumulation of policy “no-go zones” - where change would reverse previous policy commitments. Thus for instance Labor could nibble away at the worst rorts. It could leave negative gearing intact but constrain it to claims not exceeding some proportion - say 20 per cent - of deducted costs.

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And there’s lots of small fry. Some examples:

  • small gifts to employees and contractors are deductible if kept under $300. It used to be $100 before April 1. But just like a bottle of wine at a travelling lunch, such expenses should be after both GST and income tax;
  • paintings can be depreciated at 1.5 per cent. Yet they appreciate; and
  • deductible company car costs could be capped at the luxury car threshold.

And so on ... raising revenue and lowering compliance costs.

Finally there’s the elephant in the room. Emissions trading. If emission permits were auctioned and fetched $20 per tonne, they’d bring in nearly $12 billion per year - that’s 1 per cent of GDP right there! If trading applied only to stationary emitters, its revenue haul would be around half that. Sadly political bribes to ease the introduction of trading will probably eat into the windfall, but here’s hoping the government hard heads snaffle most of it.

To paraphrase a lame joke, fondly retold within treasuries the world over, a million here, a billion there. Pretty soon you’re talking real money.

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First published in the Australian Financial Review on November 28, 2007.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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