In Summary

  • Analysis for Inside Story by Peter Brent, Adjunct Research Fellow, Swinburne University of Technology

Former prime minister and treasurer Paul Keating penned an article for Fairfax papers on Wednesday this week, a spirited polemic against raising the GST from 10 to 15 per cent. Opposition to such a hike being a central plank of Labor’s 2016 election strategy (regardless of whether it is part of the Turnbull government’s plans), Bill Shorten and his team gleefully threw snippets of the column at the Treasury benches in parliament on the same day.

Keating was the dominant political figure of his time, and as treasurer and prime minister he achieved many good things. When today’s leaders are found wanting in comparison, that’s not just because of rosy views of the past. But Keating, even more than most politicians, could also skilfully purvey snake oil, and this week’s effort dripped with it. He described the GST as a “socialist tax” and a “bang you over the head tax [which puts] the tax weight onto the wrong people.”

Given his own attempt as treasurer to introduce just such a thing in 1985, and given his fury when his boss Bob Hawke pulled the plug on it and his qualified praise for John Howard and Peter Costello when they introduced one in 2000, the chutzpah positively reverberates – and is reminiscent of his ferocious, highly successful campaign against John Hewson’s consumption tax plan in 1992 and 1993.

At its core, Keating’s intervention was a call from a Past Great to today’s political leaders not to choose the lazy route of higher taxes to bring the budget back to balance, but instead to embrace serious cuts in outlays – to make difficult decisions, as he used to. Again (the thesaurus can’t help me here) “chutzpah” comes to mind.

Much of Keating’s reasoning involved peas and thimbles. He described an increase to 15 per cent as simply a means to give the government “another $30 billion to spend at its discretion,” when we know that compensation measures, including cuts in direct tax, would eat up most, or all, or even more than all of the extra revenue. Just like his own plan, and Hewson’s and Howard’s, needed to.

He added together the marginal income tax rate and the consumption tax rate to give a total percentage of tax “on income and consumption.” That’s just wacky. And, bizarrely, he suggested we “hypothecate a modest increase in the GST to hospitals – and only to hospitals.”

Under another hat, Keating would have demolished such a flaky proposal in quick order: it would generate only a fraction of money required and so enable governments to reallocate spending from the remainder, rendering the hypothecation illusory. In other words, it would be like the Medicare levy. It’s difficult to believe he actually wrote that.

Keating’s final paragraph contained this call to arms:

The big falls in commodity prices mean that Australia’s income has been cut. We cannot pretend we can go on spending as though nothing has happened. The world has trimmed us down – we now have to trim ourselves down. Trim our spending and not accommodate more of it by ever more taxation.

Now he’s sounding a lot like 1986 and his famous “banana republic” chat with John Laws in response to the “current account crisis.” Back then, the construct was that the country as a whole – businesses and individuals – rather than the government, was living beyond its means and required bitter medicine. This took the form of a tightening of fiscal policy, designed to impress the money markets and to stop us all from consuming so much from overseas. It failed miserably at slowing imports, but it did produce several budget surpluses.

One of the ways Hawke and Keating reached surplus in the late 1980s was by increasing the tax take. As a proportion of GDP, taxes went to what was then their highest-ever level, 23.3 per cent, in 1986–87. By way of comparison, the figure for 2014–15, the most recent for which exact data exists, was just 22 per cent – and that was exceeded in each of Keating’s years as treasurer except his first.

It’s true that Keating and his colleagues also seriously cut spending beginning in 1986, but that was from their own record high levels. Commonwealth outlays as a proportion of GDP in the first four years of the Hawke government ranged from 26.7 to 27.4 per cent and have never been beaten, before or since, not even when Kevin Rudd and Wayne Swan were stimulating against the global financial crisis.

The fact is that every treasurer over the past eight years would have given his eye teeth to enjoy the revenues Keating had during the 1980s boom, despite the other challenges that period presented. That’s as treasurer; by the time Keating became prime minister in December 1991 the global recession (which he foolishly took ownership of) had clobbered the economy, revenue was back down and spending was up again.

In every year when Keating was leader the Labor government outlaid at least 25.6 per cent of GDP. That figure, by coincidence, was matched in 2013–14 and 2014–15. Yet he lectures his successors about spending.

Another preening former treasurer who regularly enters the fray to mount similar arguments – no to tax hikes, yes to spending cuts – is the longest-serving occupant of the position, Peter Costello. Keating’s 1986–87 tax take remained the historical peak until Costello came along: in seven of his last eight financial years as treasurer Commonwealth receipts exceeded that 23.3, peaking at 24.3 per cent in 2004–05.

Yet both of them begrudge their successors’ efforts to make modest attempts to return to the levels they enjoyed as treasurers by plugging revenue holes in this more challenging economic climate, shortfalls partly bequeathed by their (and particularly Costello’s) policy settings.

The glorification of past politicians is a damaging tendency in modern Australian politics. We can’t blame those individuals for indulging; it’s up to the rest of us to stop encouraging them.

Let us give these former treasurers, and politicians in general, credit where due for the fine things they achieved. Let us overpraise them somewhat – but not too much. Like all political players deemed successful, they enjoyed much luck – in the case of these two, the luck to be treasurer at times of bountifully growing national income flowing largely not from things they did, but from policies they inherited and events beyond our shores. Wayne Swan (whose miserable tax take ranged from 20.0 to 21.7 per cent of GDP), Joe Hockey and now Scott Morrison had to labour in a sputtering, stop–start environment.

The path back to fiscal sustainability involves addressing both spending and revenue and is more important than the voracious cravings of superannuated politicians’ egos.

Written by Peter Brent, Adjunct Research Fellow, Swinburne University of Technology. This article was originally published for Inside Story.