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Don't bet on genuine tax reform in the Budget

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It's possible that Malcolm Turnbull and Scott Morrison are planning a big fiscal surprise in the May budget. They might have a cunning plan to unleash genuine tax reform in line with the Henry review's recommendations, now that fiddling with the GST has been ruled out – but you certainly wouldn't bet on it.

Aside from no GST changes, there's also no white paper to consider, no release of Treasury modelling to inform discussion about the benefits and drawbacks. From what the Prime Minister has said, whatever it is will be dropped on us by the Treasurer on the second Tuesday of May. That leaves plenty of room for speculation about what Morrison might be planning.

What we do know from Morrison is that we're back to the explicit recommendation of the Commission of Audit that was implicit in Joe Hockey's first budget: flick responsibility for revenue growth back onto the states, partly out of political expedience, partly out of ideological faith in the alleged benefits of competitive federalism.

As previously argued, that increases the chances of the states being forced to introduce comprehensive land tax that includes the sacred cow of the family home. And it would mean some actual tax reform, replacing the dumb and damaging stamp duty with a better and less volatile revenue stream.

But that would still leave Treasurer Morrison dissembling on his pledge that the total tax take must not rise. And it does nothing for those discarded slogans about the supposed debt and deficit emergencies.

Tucked away in the Reserve Bank's statement on monetary policy last week was a neat little graph and a bland paragraph:


"The Australian Government's Mid-Year Economic and Fiscal Outlook, together with recent state budget updates, continues to imply fiscal consolidation over coming years, albeit at a slower pace than previously expected. The consolidated budget deficit in 2015/16 is expected to be around 2.6 per cent of GDP. The decline in commodity prices has lowered federal and state revenues while transfer duty receipts are higher in New South Wales and Victoria."

The RBA was being kind about implied further fiscal consolidation as it plays along with Treasury's fairy tale assumption that the economy will magically grow from 2017-18 at just the right speed to solve all our problems.  

The graph tells the real story of the Australian public sector deficit as long as you ignore those fanciful final two bars: fiscal consolidation (that euphemism for deficit reduction) is so far on the backburner, it's icing over. The consolidated federal, state and territory deficit is actually increasing this financial year and isn't forecast to drop much before we see whatever surprises might be in the federal budget.

And the "no increase in the tax take" pledge means the many suggested tightenings and loophole closings would only result in a tax cut somewhere else – with no real dint being made in the debt-formerly-known-as-Evil.

Not that there's anything wrong with gently stimulatory fiscal policy at this stage of the game. The coalition's hypocrisy might rankle with Labor supporters and disappoint their own purist faithful, but letting debt grow a bit more is reasonable given the social costs of the alternative.

What's unfortunate for the nation though is that abandoning tax debate and flicking responsibility for reform back onto the states runs the dual risks of depending on some thin reeds and getting a piecemeal result.

And the "no increase in the tax take" really will ring hollow if it only refers to federal taxes while state taxes and fees rise.

There's also the simple danger of 2016 being an election year. All reform offends somebody, there's always a vested interest or two not wanting change. In election years any change at all is risky if it annoys a party's financial backers or significant numbers of voters in key seats – the latter being the nail in the GST increase's coffin.

 So the chance of a brave surprise for the greater good in three months isn't good. The best that might be hoped for is a little tidying of the most obvious rorts, such as the way FBT is applied to motor vehicles. But given the conspicuous support of the salary packaging industry for the Liberal, even that is difficult to imagine.

A footnote on that: I took the surge in January light commercial vehicle sales and business buyers while private buyers fell as a sign of business confidence despite scary headlines, but readers have pointed out that certain light commercial vehicles, including the dual cab versions of our third and fourth biggest selling vehicles, the Ford Ranger and Toyota Hilux, are exempt from FBT if only used "incidentally" for private purposes. That makes the ordinary novated lease lurk for private buyers appear mild, except that it's on a grand scale. I am awaiting clarification from the Australian Fleet Lessors Association on whether essentially private purchases via novated lease end up in the statistics as business purchases.