20 October 2015
by John Kelly

Morrison’s Dilemma

Within a comparatively short space of time, we are starting to see our new Treasurer’s ‘modus operandi’ toward economic reform.

Scott Morrison’s recent claim that eight out of ten income tax payers fund our total welfare payments, is a poor attempt at shock therapy, not well thought through and in that horrible world of political comparisons, a dumb way to get the community onside.

It would seem Scott Morrison only knows one way to approach a difficult problem and that is to fire off a broadside, see what it achieves and then begin the tough work of negotiation and compromise. On this occasion, using the old Joe Hockey style of placing his foot in his mouth, Morrison’s comment was not a good way to start.

Selecting individual elements of revenue raising to match a particular expense item is a lazy way to signal target areas where spending cuts might be on the agenda and is, in the overall analysis, quite useless. In this case Morrison uses the 2015-16 budget to compare spending estimates on welfare of $154 billion with personal income tax revenue estimates of $194 billion to fuel his broadside.

One would think any secondary school student could do something similar; cherry picking and coming up with what are totally useless comparisons. One could use the company and resource rent revenue estimates of $71.2 billion and compare that with the estimated spending of $69.4 billion on health. But what relevance does that have?

It seems pretty clear from Morrison’s statement that he wants to find savings in welfare expenditure. Depicting the poor, long suffering taxpayer from Middle-Income Street, in Plain Town, as the one shouldering the welfare burden, might appeal to the lowest common denominator, but it ignores the reality.

All government revenues go into the Consolidated Revenue Fund. In some cases, specific revenues are raised for specific purposes such as the fuel excise being used for only for roads. But this is rare. Income tax revenues have no such specific purpose and to relate them directly to welfare payments, as if to say this is where your money is going, is wrong.

But what is Morrison really up to? He has earlier told us that we don’t have a revenue problem, only a spending problem. He bases this on the increasing ratio of spending to GDP compared with a lower ratio of revenue to GDP. In doing so he is ignoring 50% of the problem. A higher revenue ratio would also reduce the spending ratio.

If we accept former Treasury Secretary Ken Henry’s assessment that both revenue and spending should, over a given cycle, be 25% of GDP then it is clear both areas need to be addressed. Attacking spending in isolation will lead to a contraction in the cycle which, by a strange coincidence, is exactly what we are experiencing now.

But Liberal ideology limits Morrison’s choices. Raising taxes is anathema to their sense of justice and fair play. They would rather lower taxes, particularly for their corporate friends. They would rather strangle Union power, limit wage growth and cut back on welfare. It is the opposite of what they should be doing.

Higher wages means higher tax revenue, greater demand for goods and services, higher GDP which translates to a higher living standard for all. The one exception is that company margins are lower. So what? Additional demand compensates for that. The present Liberal ideology is framed with blinkers on, unable to see the bigger picture.

This is Scott Morrison’s dilemma. For as long as he maintains this blinkered approach to growing our economy, he will fail to capitalise on the power of demand side economics. And he will continue to preside over a seriously under-utilised workforce and lower than could be realised revenues.

Under Morrison’s management, deficit spending is destined to become the norm, not that there is anything wrong with that, provided it translates to higher employment. At the moment it is not.