16 March 2016
by Alan Mitchell
Why Malcolm Turnbull needs to spell out a reform agenda before the election
Scott Morrison says the government will not commit to a schedule of future tax cuts in the budget. At some stage the government will have to spell out a detailed reform program.
Ideally it should do it before the election.
The Treasurer told The Australian Financial Review Business Summit in Melbourne that it was unrealistic to expect that "every single one of those boxes" should be ticked in one budget.
However, that won't have fooled anyone in his audience, which includes some of the most influential custodians of the government's reputation as an economic manager.
The Turnbull government doesn't want to commit to a specific schedule of future cuts in company and personal income tax before the election because it doesn't want to disclose how it will replace the revenue. Yet, of course, nor will it rule out future cuts in the company tax rate, since they are among the most economically beneficial reforms canvassed in the Henry tax review.
It, therefore will be leaving a barely disguised hole in its fiscal outlook, which its political opponents will happily fill with scare stories.
The Prime Minister may panic
That might seem like the least politically dangerous option now, but it runs the risk of a panic stricken Malcolm Turnbull spending the latter part of the election campaign ruling out the reforms he will need to support economic growth and his prime ministership in the decade ahead.
Why do I think the prime minister might panic? Because prime ministers often do. Even Malcolm Fraser, the toughest prime minister in living memory, panicked in the unlosable 1977 election campaign against Gough Whitlam. He promised a "fist full of dollars" in tax cuts that he could not afford and had to take the money back in the 1978 budget at great cost to his government's reputation.
For Fraser the probability of losing the election might have been small, but the personal consequences of losing were so appalling that taking any unnecessary risk was unthinkable.
The 2016 election is not unlosable, but Turnbull's popularity was highest when he presented himself as the agent for reform, and it fell when he shrank from the reform of the GST.
The Australian public knows the economy's performance is slipping after years of governments neglecting the need for ongoing economic reform. It has heard the warnings from the International Monetary Fund and from current and former economic advisers to Coalition and Labor governments.
Turnbull's best way forward is to assemble a broad program of specific reform from the tax, federal-state relations, industrial relations, competition policy, and fiscal reviews and programs inherited from the Abbott government.
There will have to be a substantial number of reforms to make an impressive difference to the economy's long-term growth, but a sizeable program could have an important additional benefit: the more reform there is across the economy, the more likely it is that the losers from one reform will benefit from the others.
Independent assessment needed
The Productivity Commission should provide an independent assessment of the likely economic benefits, as it did for the Hilmer reforms.
The commission's growth estimate would play an important part in galvanising public support for the program, just as the Industry Assistance Commission's independent estimate of the cost of import protection helped galvanise support for difficult tariff reform in the 1980s and 1990s.
The program would create a clearer and sharper sense of the government's direction and add further substance to Turnbull's efforts to encourage innovation.
The hard reality is that innovation and productivity growth generally arise from the struggle for survival in competitive markets. In many cases, productivity gains come as a result of the failure of one enterprise, which releases labour and capital for more productive activities.
Turnbull needs to be working on a big and fairly detailed project, not least to convince the public that he is different to the politicians that preceded him.
Selling reform to the public – which, according to the opinion polls, was already surprisingly receptive to the idea of increasing the GST – is Turnbull's best defence against his opponents in both the Labor and Liberal parties.