The Liberal Democrat Budget

Image (L) Senator elect, David Leyonhjelm. 
With less than a day left until the release of the Abbott government’s first budget, we are hearing plenty of horror scenarios as to what it will contain.  It appears certain though that it will include tax and excise increases as well as cutbacks in services.

In something of a first for minor parties, the Liberal Democrat Party (Australia’s libertarians) has bitten the bullet and released its own budget, proving that it is a serious player in the nation’s political spectrum.  Significantly, rather than the Liberals continuing deficits, the LDP has come up with a surplus without raising taxes.

This surplus may be a modest $3.1 billion, but it is a lot better than the government is expected to do, and actually lowers taxes on the upper end of the tax scale: 

DAVID LEYONHJELMThe Coalition government will release its first budget on Tuesday which will set the tone for the rest of the time in office. There is speculation that the government will make some difficult decisions to get the budget back on track. I hope those predictions are correct, but I fear they will be wrong. 

The commission of audit was a good start, but it didn’t go far enough in cutting back on government over-spending. Unfortunately, the government is probably going to water down the recommendations even further, announcing yet another budget deficit and (like Labor) making vague promises about a surplus somewhere in the future. 

The budget should be in surplus in 2014-15 and that is what the Liberal ­Democrats’ proposed budget would achieve. Anything less should be considered failure. It is easy (and accurate) to blame our current budget problems on the waste of the previous government, but that does not mean the new government should shirk its responsibility. 

The first budget of a new government speaks volumes about whether it is serious, and if the Liberal/National government does not make the tough decisions now, they never will. …… The current government has spoken at length about the need for economic reform, but has so far been silent on the two most obvious areas where reform would boost economic prosperity – income tax cuts and labour market deregulation. 

Instead, the government is now considering income tax increases, which is not only contrary to previous undertakings but also economic folly since it will raise nearly no revenue while slowing the economy. Tax increases are a step in the wrong direction; we need income tax cuts. 

Tax cuts must be linked with spending cuts. In Australia every year, nearly $200 billion is taken from workers and then given back to the same families in the form of ­government handouts or subsidies. This is wasteful, inefficient and unnecessary. Below I outline various ways to reduce middle class access to government handouts, but the quid pro quo of that must be income tax cuts so that productive people can keep the rewards of their hard work. 

Not only will tax cuts reduce the wasteful tax-welfare churn, but lower income tax rates will encourage investment and innovation, reduce tax avoidance and boost economic growth, resulting in more jobs and higher wages for all Australians. 

The top marginal tax rates in Australia exist mostly because of the politics of envy. It is well known that the top tax rate raises very little revenue while causing significant economic costs, and that the main reason it is retained is to pander to the tall poppy syndrome. We can no longer afford such petty indulgences if we wish to encourage our highly skilled people to direct themselves toward the productive economic service of others, and to reward those efforts. 

The top marginal tax rate (45 per cent) should be abolished, which would mean the second top rate (37 per cent) became the top rate. Going further, a top tax rate of 37 per cent is still too high and causes significant economic damage. This should be cut down to 33 per cent. Once we factor in the falsely named “Medicare levy” this would bring it to 35 per cent. While this is still too high, further cuts should perhaps wait until they can be part of more fundamental tax reform as budgetary circumstances improve. 

These tax cuts will not change revenue by very much, since the lower rates will be offset with a larger tax base . Using mainstream estimates of the “elasticity of taxable income” and measures of income dispersion calculated from ATO statistics, the proposed reform will lead to a relatively modest loss of only $3 billion. The full consequences of the tax changes are shown in the below chart. …

… The relationship between the minimum wage and employment is measured by the “minimum wage elasticity of labour demand”, for which the best estimates in Australia comes from a study done by Andrew Leigh (now a Labor MP) in which he found an elasticity of minus 0.29. 

Using the estimates from Leigh and current inflation figures, it is simple to calculate that a minimum wage freeze would result in about 100,000 new jobs for low-skilled workers, reducing the unemployment rate from 6 per cent down to about 5.5 per cent (depending on participation rate changes). 

While the economic benefits from more work and less welfare are significant, the social consequences of helping people avoid welfare dependence is a potentially larger (though unquantifiable) benefit. The main cause of poverty in Australia is unemployment and anybody who truly cares about combating poverty must celebrate any policy that helps people find a job. … 

… The biggest single cost for the government is direct welfare spending, in particular family payments and pensions. While some people like to complain about so-called “dole bludgers”, the truth is that unemployment allowances are relatively modest ($11 billion) compared with the cost of family payments ($36 billion) and assistance for the aged ($58 billion). In particular, family payments are often not well targeted and amount to middle-class welfare. Both the Centre for Independent Studies and the Commission of Audit suggested removing Family Tax Benefit (part B) and the Schoolkids Bonus, saving about $6 billion. 

Pension reform is necessary, but this is not an area where costs can be decreased quickly. In the short term, the government should introduce a one-year freeze on all increases in welfare payments. This would save about $4 billion a year. …

Read the whole thing at the link above.