Inside Story

Recipe for a one-term government

Labor’s capitulation on tax policy may help them regain government, but what then?

John Quiggin 10 August 2021 1061 words

More with less? Shadow treasurer Jim Chalmers with opposition leader Anthony Albanese. Lukas Coch/AAP Image

In a decision presented as a piece of political pragmatism, shadow treasurer Jim Chalmers announced recently that Labor would wave through the Morrison government’s stage three tax cuts, which predominantly benefit high-income earners, and dump the proposed changes to negative gearing taken to the 2016 and 2019 elections. Shortly afterwards, it was reported that Labor planned to drop a policy of free cancer treatment and dental care for pensioners, which was judged to be unaffordable

It remains to be seen whether these shifts will help Labor win the next election. The initial reaction was not promising, with an Essential poll reporting a sharp decline from 41 to 34 per cent in favourability for Anthony Albanese. And despite an appalling month for Scott Morrison, his commanding lead as preferred PM was unchanged.

We shouldn’t make too much of this. It’s always difficult to attribute changes in polls to particular current events, though this is exactly what the Labor “hardheads” have done in attributing the party’s narrow loss in 2019 to particular tax policies. By the same logic, it will be hard to disentangle the effects of Labor’s tax policies whether it wins or loses next year.

What can be said with more certainty is that, even if Labor wins the 2022 election, its capitulation on tax policy will make holding office for more than one term very difficult. The concession on negative gearing, while regrettable, was mainly symbolic. The lost revenue could be made up in other ways, or else with tolerance of a modestly higher budget deficit.

But the tax cuts are big. They will cost the budget around $15 billion in their first year of operation and the cost will rise steadily after that. That’s more than the entire annual value of the spending commitments Labor took to the 2019 election, which would have reached $11 billion in 2022–23, according to the Parliamentary Budget Office.

In other words, to offset this concession, Labor would need to abandon its entire program, and then find even more savings.

Richard Denniss and Matt Grudnoff of the Australia Institute have argued for a “Buffett rule,” inspired by American billionaire Warren Buffett’s views on the responsibilities of the rich, which would apply a minimum rate of tax on income for high-income earners before deductions. Although Anthony Albanese has advocated such a policy in the past, it’s hard to see him putting this, or any other new tax policy, forward before the election.

The other option is to allow the budget deficit to expand further. But the scope to do this is limited by the productive capacity of the economy. Unless employment can be increased greatly, additional recurrent public spending must come either at the expense of private spending or through higher imports. Domestic shortages or a fall in the Australian dollar will then cause inflation, reducing the real value of both public and private expenditure.

In this context, it’s worth pointing out the fallacy of claims by some (not all) economists associated with Modern Monetary Theory that tax cuts for “the rich” don’t fuel inflation because rich people don’t respond to changes in their income by spending more. Households with incomes between $200,000 and $400,000 have plenty of ways to spend more money, whether in Australia or overseas. And having paid down debt during the pandemic, many will be eager to spend any government largesse.

Labor is already preparing to be a do-nothing government. Announcing the party’s decision on the stage three tax cuts, shadow treasurer Jim Chalmers said Labor would be more responsible in its spending than the Coalition. “We think we can get better value for money for the Australian people. That means spending it more effectively on some of the priorities that we’ve identified.” In practical terms, this means that any new spending will be financed by cuts to other programs.

Labor will instead campaign on the argument that the Morrison government deserves to be kicked out for its failures in dealing with the pandemic. While that’s a fair judgement and a plausible election strategy, it’s scarcely a basis on which to form an effective government.

What options are open to those who would like to see a genuinely progressive government? The logical alternative is the Greens, a party that has long been closer to traditional social-democratic views than Labor. But it has remained stuck at around 10 per cent of the vote nationally.

There seem to be three main reasons for this ceiling on the Greens vote. First, there is an enduring association with a flaky New Age image. The pandemic ought to have dispelled this to some extent: rather than being dreadlocked Greens-voting hippies, the anti-vaxxers are dominated by the political right, including prominent government backbenchers like Matt Canavan and George Christensen. Labor hasn’t been spectacularly good either, most notably in Anthony Albanese’s attempts to work both sides of the street on AstraZeneca hesitancy. On economic policy, the Greens have been consistent and principled, unlike either of the major parties.

The second problem is that many people, including many political commentators, fail to understand how the preferential voting system works and imagine that a primary vote for Labor is more effective than a first-preference vote for the Greens with Labor ranked second. In the usual case, where the Greens finish behind Labor, the two ways of voting are effectively the same. And in the rare case where the Greens finish ahead of Labor, they are more likely to attract (mainly Labor) preferences and defeat the Coalition candidate.

The final obstacle to a Greens vote is rusted-on identity politics of the kind exemplified by Albanese himself, who regularly appears to equate voting Labor with barracking for the (traditionally working-class) South Sydney Rabbitohs. On this view of politics, Labor’s adoption of right-wing tax and expenditure policies is of no more importance than a decision by the Rabbitohs to poach players from the (traditionally silvertailed) Sydney Roosters. It’s loyalty to the team that matters.

Only the threat of losing seats to the Greens (and particularly seats that can’t be dismissed as being filled with inner-city elites) is likely to divert Labor from its current course. In the absence of that unlikely event, we can look forward to years of right-wing government, alternating between two parties with no higher ambition than to buy votes with tax cuts. •