In acknowledging the case for further economic reform, government ministers have emphasised labour market and tax reform. These are what the Americans would call the centre rails (as in “touch it and you die”) of Australian politics.
Those necessary reforms make up a formidable menu. And yet it is almost possible to imagine how the two might fit together politically as well as economically.
When the Treasury warned the incoming Gillard government that governments no longer could afford to generously compensate the losers from reform it was both right and wrong. It was right given the current tax regime. But now, in the light of the rise of populist politics - particularly in the United States - it missed a critical point. Sustainable reform demands careful management of its impact on equity and that takes money.
These issues were raised by the Fair Work Commission’s (FWC) decision to increase minimum award wages despite the COVID-19 crisis.
The ruling was criticised by business because of its likely impact on business and employment and applauded by those who saw it as striking a blow for equity as well as being a useful support for consumer spending.
In truth, increasing the cost of labour as the economy is plummeting into recession is a bad idea. However, increasing the spending capacity of cash-constrained households in a recession is a good idea.
Given Australia’s relatively low public debt, a more efficient solution would have been for the FWC to leave award wages unchanged and for the government to provide additional transfer payments to low-income households. A Rudd Government-style “cash splash” if you like.
Ideally, from the productivity perspective, wages should reflect supply and demand conditions in the labour market - and the social safety net should be financed through the budget. The result would be a bigger economy with less unemployment.
But there is a catch: a permanently larger role for the budget in funding the social safety net requires more tax revenue. That would mean controversial tax reform with broader-based taxes such as the national business cashflow tax proposed by the Henry review, a more comprehensive goods and services tax, a properly restored capital gains tax, the closure of unjustified tax breaks, and an extension of land tax to high-end residential land.
Of course, the tax-base broadening could be partly offset by cuts in tax rates and the phasing out of really inefficient taxes like the state stamp duties on real estate transactions. But it would inflict a lot of pain.
Still, if crises create the opportunity for reform, it is hard to think of a better opportunity than the one at hand.
The overall system of taxation and transfer payments could be kept within the constraints of the widely accepted distribution of income and wealth.
This could be achieved by a combination of efficient (but not necessarily progressive) revenue-raising taxes and highly “progressive” transfer payments.
Perhaps equity, as measured by a range of widely accepted statistical measures, should be made an explicit target of economic policy, like full employment and low inflation. At heart, it is equity the critics of Thatcher and Reagan are focussed upon.
That might allow tax reform to break free of the current political constraint that every new tax must be progressive to avoid the charge that equity is being sacrificed for political gain.
Alan Mitchell is a bluenotes columnist and former economics editor of the Australian Financial Review