What should a real Labor Budget look like?

The first Labor Budget of the Rudd Government is a budget of missed opportunities. It is a budget that is timid and mediocre in nature.

With the global financial crisis allowing criticism of the Anglo-American economic paradigm to become mainstream this was the opportunity to turn Kevin Rudd’s rhetoric into a vision to transform Australia.

Australia is facing an issue with an ageing population, this is undeniable. What solution was proposed by the Nambour graduates - raise the retirement age from 65 to 67. This is a solution out of Sir Otto Niemeyer’s playbook. Labor Treasurers like Ben Chiefly and Edward Theodore would be turning in their graves.

What alternatives are there?

We already have the vehicle to address this issue, compulsory superannuation. The failure of the Howard/Costello government during the boom period in not increasing the superannuation guarantee levy to 12 per cent will haunt Australia. However that dismal policy failure is not an excuse for this retrograde policy decision.

What the Nambour graduates should have done was simply, over the next three years, phase in a 3 per cent government contribution to workers superannuation for those earning less than $90,000, followed in the following three years a phased increase of the Superannuation Guarantee Levy to 12 per cent. Thus in six years time workers earning less than $90,000 would be having 15 per cent of their income going to superannuation and those above the threshold would be having 12 per cent of income going to superannuation.

Banking

We are seeing a market failure in finance not being available for certain sectors of the economy. Government intervention is necessary, however the method used by the Nambour graduates transfers all risk to taxpayers.

Why should the risk of providing capital to car salesmen and property developers lie solely with the taxpayers?

What is the solution?

Accept reality that trading banks are a critical part of the economy and that a government-owned trading bank is required, so that in times of significant market failure the risk and cost of providing social capital can be spread among depositors as well as taxpayers.

It is not the Labor way to ask a worker on $30,000 to provide the cost of social capital to property developers and car salesmen and bear the burden of the investment risk when their employment future is uncertain.

To that end the Commonwealth should look at nationalising Suncorp, ensuring that shareholders are properly compensated. Thus providing a commercial framework to make available social capital to key economic sectors.

Thus banking activity could be influenced through the use of competitive pressures within the banking prudential framework without the need for increased regulation and compliance costs.

Finance sector reform

Australia needs to grasp the opportunity provided by the global financial crisis to not only become a financial player in the South-East Asia region but to become a major player in the world financial sector.

To that end we need to dramatically alter the taxation system, which presently encourages debt financing of industry and by default makes Australian industry subject to the whims of international finance.

A key step is to create industry investment funds under the control of trustees comprised of equal representation of workers and employers.

These funds would operate on a voluntary basis where up to 15 per cent of pre tax income can be deposited into the industry funds. Each entity that deposits funds would be guaranteed a return of official interest rates +2 per cent.

This capital would be available for socially responsible investment in Australia to advance the entities’ commercial interests. In other words capital from this fund could not be used to purchase corporate jets or be used on swanky executive retreats. However it could be used on research and development, purchasing new technology, and so on. The guidelines would be broad to give appropriate flexibility but firm enough to ensure the funds are utilised for increasing the long term welfare of the entity.

To this end the contributions, earnings and any capital gain from these funds would be tax free. The establishment of the fund would enable a rationalisation of depreciation schemes and other investment schemes with tax implications.

The funds would be required to keep an actuarial determined reserve, with the surplus available to be invested to improve physical and human infrastructure associated with the industry.

Resources boom and tax reform

The failure of the Howard/Costello government to make structural reform to resource taxation will haunt future generations of Australians.

Taxation of resources is based on a simple flat levy on either the quantity or market value of the resource. On significant projects this leads to a massive under taxation and for marginal projects a significant over taxation to the point the projects may become unviable.

So in the boom periods resource companies enjoy supraprofits.

What is required is the introduction of a resource rent tax system. Essentially calculations are made as to what is a reasonable rate of return and profits above that rate are subject to taxation. The administrative costs involved would require that the scheme be administered by the Commonwealth. The Commonwealth would reimburse states in untied grants what their previous royalty regimes would have raised and the additional revenue would be placed in an infrastructure fund to invest in water, energy, transport and ICT with an emphasis on improving infrastructure in mining regions or to facilitate the opening of mining regions up for development.

Negative gearing

The drain on revenue due to negative gearing is the major stumbling block in funding the ageing population but it is the elephant in the room that no one wants to discuss.

Estimates place the drain between $7 billion and $10 billion a year and it is growing. A real Labor Treasurer would address this revenue drain before contemplating denying ordinary working people access to the age pension for another two years.

Not only is the current taxation regime providing a super black hole in the budget it is distorting the housing market. Speculators/investors are in a commercial advantage to first home owners who are often competing in the same market. There is a risk that an uncontrollable asset bubble will develop if it hasn’t already.

Solution

Change taxation rules for future purchases so that costs associated with investment properties can only be deducted from income generated from the investment. Therefore the costs of borrowing could only be deducted from the rental income. With the exception of investment in new housing units (houses, apartments, townhouses, and so on).

The investors, therefore, if they want the same taxation benefit will create additional housing thus reducing the shortage of rental accommodation. In addition, the removal of the speculators from competing with first home buyers will increase housing affordability.

Also these changes will direct investment into other activity reducing the likelihood of an asset bubble in the housing market.

To the Nambour graduates: please deliver a Labor Budget with some imagination and vision next time.