This post is a quick summary of the economics and politics of Latham’s tax and family package.

The Economics

According to today’s papers Latham’s tax policy is an $11 B pitch for battlers which will return an average $8 per week. This will be funded by changes to the superannuation system, slugging smokers and people leaving the country, making sure that big business actually pays its tax, slowing the rate of decrease in selected tariffs, and a “participation dividend” through getting 51,000 off welfare and into work.
My take is that in reality it is a $3.6 B package that extends the Costello tax cuts to the people that Costello neglected – those earning under $52,000 – which also tackles the structural taxation disincentives to those on welfare who might want to return to work – another area Costello neglected. At the same time it makes the family benefit even more generous than at present. This is partially funded by changes to superannuation, slugging smokers, and a tax on consumers who buy cars and clothing. My take is also that it is a reasonable economic package with some minor problems.
The tax cuts are to be applauded, as are the measures to ameliorate the welfare trap for those wanting to return to work. I pointed out last election that if Labor could find ways to put more people into work than the government, then there would be a “participation dividend” although I didn’t call it that, so I am not about to criticise that part of the package.
Superannuation is a rort for the higher paid and a necessity for the lower paid, so paring back the benefits is in my view responsible, although the abolition of the co-contribution scheme, at least in so far as it can be used by lower income earners, is probably not a good idea. Superannuation needs a good over-haul, but that is a task for government, not opposition, so I’ll forgive Mark for tinkering around the edges.
Why do I say it is a $3.6 B programme? For consistency. Costing programs on the basis of the money spent over their projected duration is confusing and makes it difficult to compare promises. Better to use an annualised figure. The total project cost also tends to be used to inflate perceptions of the size of the package. The $11 B headline suggests a revolutionary package when in fact it is a modest one.
There appears to be some fudging in the package. Everyone promises to pay for promises by cracking down on corporate tax, but the estimates of what can be gained are rarely met. I suspect that the savings from the superannuation co-contribution scheme are calculated on the basis of the amount of revenue foregone at the moment but probably don’t take into account substitution effects, such as people redirecting that money into negative gearing or tax effective investments. The slowing down of tariff reductions is also bad policy, and represents a tax on all consumers.
It doesn’t represent a threat to interest rates.

The political objectives

Politicall Latham’s package achieves a few things. He can argue that he is more inclusive than the Prime Minister (and my tentative analysis of our qualitative research suggests voters are negative about Howard because they see him as divisive) because those who missed out on tax cuts in the budget get one. It also looks like a massive program, and can be sold as such, in that case contrasting a “worn out” Howard with a young and aggressive Latham brimming with ideas.
It is targetted at the same families that Howard targetted with the budget family benefits, but appears to give seventy percent of them even more, so it could sway crucial marginal seat votes. True, some families will be worse off, but it would appear that they are the poorer ones, so they are more likely to be in safe Labor seats, so no harm done, even if they did change their vote.
The tariff changes are clever South Australian and Victorian politicking. The workers in these industries will gain a benefit – at the cost of the rest of us – but Latham will probably escape adverse scrutiny from the press who will have many other things to concentrate on.

The political problems

By spruiking a big headline number, Latham risks fuelling the perception that he is dangerous, which plays into Howard’s hands when Howard plays the interest rate bogey. There is also a dissonance between the apparent size of the package and the small benefit that some of us will get – $8 per week. As a talk-back caller said yesterday, if Howard’s tax cuts were a hamburger and milkshake, this one is the same, but with a side order of fries.
Our research suggests that it is best for politicians to “underpromise” in the current climate. The headline figure risks being an “overpromise” and the problem with that is that electors don’t believe that politicians will deliver on big promises. So, the selling of this policy could give Latham credibility problems.
Latham also could have credibility problems on his actual figures, once they are properly analysed. It was a mistake to try and mislead about the $600 child payment. Recent polls suggest that voters see Latham and Howard as being similarly dishonest, gaffes like this will only reinforce that. Latham says the government’s payments aren’t real – tell that to anyone taking them out of an envelope this morning. You can’t say that a policy that has taken you months to craft will benefit 90% of families and then change your story hours later and say it is 70%.
The 70% of families claim is also another rhetorical technique. Say it to yourself and don’t listen too hard. It sounds like 70% of us will be better off, but I don’t think that the definition of family used is that universal. The fact that some people will actually be worse off also gives Latham political problems and undermines his potential argument that Howard is more divisive than him.
There were benefits to Howard in having a longer election campaign. One of those benefits was that Latham would have to introduce his tax policy further away from election day than he would in a shorter campaign. That gives Howard more time to pull the policy down. To date Howard has done a good job on keeping the focus on Labor, without a lot to shoot at. Now that Latham has a policy out, it is going to become the focus of the election campaign for some time.
We will be talking to electors tonight in a focus group about this policy, amongst other things, so it will be interesting to see what they say. My hunch is that it will give Latham a short-term rise so that on balance they will be more positive than negative about it. If that rise were to occur two weeks out from election day, Howard would be in trouble. Four and a half weeks out, he has plenty of time to pull it back. The policy may even end up being a negative for Labor.