Ross Garnaut's new plan to lift us out of mediocrity

If your greatest wish is for the virus to go away as we all get vaccinated, and then for everything to get back to normal, I have bad news. You’ve been beaten into submission – forced to lower your expectations of what life should be bringing us, and our nation’s leaders should be leading us to.

Without us noticing, we’ve learnt to live in a world where both sides of politics can field only their B teams. Where our politicians are good at dividing us and making us fearful of change, but no good at uniting us, inspiring us and taking us somewhere better for ourselves and our kids.

Scott Morrison hopes that if he can get us vaccinated without major mishap and get the economy almost back to where it was at the end of 2019, that should be enough to get him re-elected. He’s probably right. Even his Labor opponents fear he is.

Fortunately, whenever our elected leaders’ ambition extends little further than to their own survival for another three years, there’s often someone volunteering to fill the vision vacuum, to supply the aspiration the pollies so conspicuously lack. Among the nation’s economists, that person is Professor Ross Garnaut, of the University of Melbourne.

In a book published on Monday, Reset: Restoring Australia after the pandemic recession, Garnaut argues we need to aim much higher than getting back to the “normal” that existed in the seven years between the end of the China resource boom in 2012 and the arrival of the virus early last year.

For a start, that period wasn’t nearly good enough to be accepted as normal. Unemployment and underemployment remained stubbornly high – in the latter years, well above the rates in developed countries that suffered greater damage from the global financial crisis in 2008-09 than us, he says.

“Wages stagnated. Productivity and output per person grew more slowly than in the United States, or Japan, or the developed world as a whole,” he says. (If that weakness comes as a surprise to you, it’s because our population grew much faster than in other rich countries, making it look like we were growing faster than them. We got bigger without living standards getting better.)

So that wasn’t too wonderful, but Garnaut argues if that’s what we go back to, it will be worse this time. Living standards would remain lower, and unemployment and underemployment would linger above the too-high levels of 2019.

We’d have a lot more public debt, business investment would be lower and we’d gain less from our international trade, partly because of slower world growth, partly because of problems in our relations with China.

Continuing high unemployment would devalue the skills of many workers, particularly the young. Many of our most important economic institutions – starting with the universities – have been diminished.

The new normal would be more disrupted than the old one by the accumulating effects of climate change and continuing disputes about how to respond to this.

So Garnaut proposes radical changes to existing economic policies to make the economy stronger, fairer, and to treat climate change as an opportunity to gain rather than a cause of loss.

At the centre of his plan is returning the economy to full employment by 2025. That is, get the rate of unemployment down from 6.5 per cent to 3.5 per cent or lower – the lowest it’s been since the early 1970s.

This would make the economy both richer and fairer, since it’s the jobless who’d benefit most. Returning to full employment would take us back to the old days when wages rose much faster than prices and living standards kept improving.

Returning to full employment, he says, would require a radical change to the way businesses pay company tax and the introduction of a guaranteed minimum income, paid to almost all adults at the present rate of the dole, tax-free and indexed to inflation.

It would involve rolling the present income tax and social security benefits into one system. This would benefit people working in the gig economy and other low-paid and insecure jobs, and greatly reduce the effective tax rates that discourage women and some men from moving from part-time to full-time work.

Changing the basis of company tax would cost the budget a lot in the early years but then raise a lot more in the later years. The guaranteed minimum income would cost a lot but would become more affordable as more people were in jobs and paying tax.

Much of the economic growth Garnaut seeks would come from greater exports. Australia’s natural strengths in renewable energy and our role as the world’s main source of minerals requiring large amounts of energy for processing into metals creates the opportunity for large-scale investment in new export industries. We could produce large exports of zero-emissions chemical manufactures based on biomass, and also sell carbon credits to foreigners.

Of recent years, Australia has fallen into the hands of mediocrities telling us how well they – and we – are doing. Surely we can do better.

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We should get a fair share of foreign investors' profits

Australia has been a recipient of foreign investment in almost every year since the arrival of the First Fleet in 1788. Yet for much of that time the idea of foreigners being allowed to own so much of our businesses, mines, farms and land is one many ordinary Australians have found hard to accept.

For older Australians, the thought of “selling off the farm” to foreigners makes them distinctly uncomfortable. Why can’t we do it ourselves and own it ourselves?

The short answer is, we could. But had we chosen that path we wouldn’t be nearly as prosperous today as we are. As the Productivity Commission reminds us in a paper published this week, you need money to set up a business, let alone a whole industry.

That money has to be saved by spending less than all your income on consumption. And had we been relying solely on our own saving, we’d have been able to develop much less of this vast continent than we have done. So, from the days when we were a British colony and had no say in the matter, we’ve invited foreigners to bring their savings to Australia and join us in exploiting the golden soil and other of nature’s gifts with which our land abounds.

Total foreign direct investment – that is, where the foreigner owns enough of the shares in a company to have some control over its management – is now worth about $1 trillion. The largest sources of direct investment are, in order, the United States, Japan and Britain. In recent years, of course, most of the action – and the angst – comes from China.

The less poetic way to put it is that Australia has been a “net importer of capital” for more than two centuries. It’s thus not so surprising that, despite whatever reservations ordinary Australians may have, the dominant view among our politicians, business people and economists has been that we must keep doing whatever it takes to attract the foreign investment we need to keep the economy expanding strongly.

For many years it was felt that we always run a deficit on our balance of trade in goods and services with the rest of the world, so we always need to attract sufficient net inflow of foreign capital to be sure of financing that trade deficit – as well as covering all the regular payments of dividends and interest we need to make to the foreigners who have invested in local businesses or have lent us money.

This mentality made sense in the days when we had a “fixed exchange rate” – when the government, via the Reserve Bank, set the value of our country’s currency relative to other countries’ currencies – particularly the British pound and, later, the US dollar – and changed that value only very rarely in situations where it couldn’t be maintained.

The point is that when you choose to fix the price of your currency, you do have to worry about getting sufficient net inflow of foreign capital to cover the deficit on the “current account” of the “balance of payments”. Should you fail to attract sufficient inflow, you’re forced into the ignominy of cutting the price you’ve fixed.

Now, this problem went away a long time ago. In 1983, after we’d been having a lot of trouble keeping our exchange rate fixed and our balance of payments in balance, we decided to join most of the other advanced economies in allowing the value (or price) of our currency to float up and down according to the strength of the rest of the world’s demand for the Australian dollar (the Aussie, as it’s called in the foreign exchange market) relative to the supply of it.

From that day, the two sides of our balance of payments – the current account and the capital account – were in balance, the deficit on one matched exactly by the surplus on the other, at all times. How? Because the price of the Aussie adjusted continuously to ensure they were.

The “balance of payments constraint”, which had worried the managers of our economy for so long, just evaporated. But here’s the point: the attitude that we must always be doing as much as we can to attract as much foreign investment as possible continued unabated.

There’s this notion that, in the now highly competitive, globalised financial markets, if poor little Australia doesn’t try really, really hard, we’ll miss out.

This, of course, is the reasoning behind the unending push by big business for us to cut the rate of our company tax. Our system of “dividend imputation” means Australian shareholders have nothing to gain from a lower company tax rate. The only beneficiaries would be foreign shareholders because they aren’t eligible for “franking credits”.

We’re asked to believe that how well the level of the nominal rate of our company tax compares with other countries’ rates is the main factor determining whether we get all the foreign investment we need. Not even how the tax breaks we offer compare matters much, apparently.

I don’t believe it. It’s a try-on. As the Productivity Commission’s paper reminds us: “Foreigners invest in Australia because of our fast-growing and well-educated population, rich natural resource base, and stable cultural and legal environment.”

Just so. Mining companies flock to Australia because we have the high-quality, easily-won minerals and energy they need. The idea that global companies such as Google or Amazon would give Australia a miss because our company tax rate’s too high is laughable. Especially when they’re so adept at minimising the tax they pay in advanced countries.

We should take a more hard-nosed, business-like attitude towards foreign investors such as the miners, which make huge profits but employ very few workers. When state governments fall over themselves building infrastructure for them and offering royalty holidays and other inducements, it matters greatly how much company tax they pay before they ship their profits back home.

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Why did Labor lose? Not because of its tough tax plans

It’s been a week since the election so, naturally, by now a great many of the people who work in the House with the Flag on Top – politicians, staffers, journalists – know exactly why Labor lost and the Coalition won: those hugely controversial dividend franking credits.

There were other reasons, of course, but franking credits is the big one. How do I know they know? Because this is what happens after every election.

The denizens of the House take only a few days to decide on the single most important factor driving the result. Surprisingly, each side of politics – the winners and the losers – almost invariably comes to the same conclusion.

And once they have, the concrete around the notion sets quickly and what started as a theory becomes received wisdom, something any fool knows and part of the building’s corporate memory.

Months later, political scientists will come up with different, much more “evidence-based” explanations, but by then it will be too late. No one listens to them because the die has been cast.

Which is why it may already be too late for research by Dr Richard Denniss and others at the Australia Institute to debunk the quite misguided notion that it was all the people who’d be hurt by the franking credits policy voting against an evil-intentioned Labor Party.

When you see Denniss’ quite startling findings it should also disabuse you of the notion that, particularly in a country as big and varied as ours, a party’s loss of an election could ever be, as the academics say, “mono-causal” rather than “multi-factorial”.

Labor’s performance was disappointing (for its supporters, anyway), not disastrous. The composition of the House of Reps has changed surprisingly little. So it may surprise you, but shouldn’t, that as well as there being lots of electorates that swung to the Coalition (measured on a two-party-preferred basis), there were also lots of electorates than swung to Labor.

Get this: the seats that swung to the Coalition were mainly those whose voters had low incomes, whereas the seats that swung to Labor tended to be those whose voters had high incomes.

Among the seats with the 10 biggest swings to Labor were five from Victoria, three from NSW and one each from WA and the ACT. The swings varied from 3.7 per cent to 6.6 per cent.

In all but two of those seats, they had at least twice the proportion of high income-earners (people in the top 20 per cent) than the national average. Under the Coalition’s three-stage tax plan, voters in the same eight electorates are estimated to get tax cuts in 2024 varying from 49 per cent more to double the national average.

Across Australia, the average value of franking credits per taxpayer is $695 a year. In those eight electorates (five of which are held by the Coalition), the average value ranges from $1213 to $2578 a year.

Now let’s look at the 10 electorates with the biggest swings to the Coalition – six in Queensland and four in NSW. The swings varied from 6 per cent to 11.3 per cent. All of the seats had less than the national average of people with high incomes. And for all but one of them, the average tax cut in 2024 will be below the national average.

How much do they get in franking credits? All 10 seats get less than the $695-a-year national average. Between 83 per cent and 16 per cent of the average, to be precise.

Looking more generally, electorates with more people on low and middle incomes tended to swing to the Coalition, whereas electorates with more people on high incomes tended to swing to Labor.

Next, since it’s the (well-off) retired who would have been hit by the plan to end refunds of unused franking credits, the researchers looked at the voting trend for electorates with a high share of voters over 65.

They found only a very slight tendency for such electorates to move their votes to the Coalition.

So, what should we make of all this? Well, for a start, the figures allow us to rule out some possibilities, but leave others open.

They seem to refute the contention that many well-off retirees (or even prospective well-off retirees) moved their votes away from Labor because they were deeply opposed to the planned changes to franking credits.

They leave open the possibility than many less well-off voters moved their vote away from Labor because they disapproved of the way well-off retirees were to be treated. If so, they were being very magnanimous towards people better off than themselves.

Possible, but not likely. It’s easier to believe they (or, at least, some of them) were renters voting against Labor in response to the real estate agents’ scare campaign claiming Labor’s plan to limit negative gearing would force up rents.

Turning to the higher-income electorates, there’s little sign of many people moving their votes away from Labor because of their opposition to its franking credit plan – or to its move against negative gearing, for that matter.

According to Denniss, it looks like renters voted to help their landlords keep their tax lurks, whereas the landlords voted for Labor’s offer of free childcare and the restoration of penalty rates for their tenants.

Well, maybe. What can be said with more confidence is that it’s hard to see much sign of an outbreak of class warfare.

Moving on from Labor’s controversial tax changes, the success or near success of independents running in Liberal seats such as Warringah and Wentworth in prosperous parts of Sydney, and Indi in rural Victoria, makes it easier to believe the swing to Labor in so many high-income electorates was motivated by a concern that Australia needed a more convincing policy to combat climate change.

As for the swing against Labor in many low-to-middle electorates in Queensland and NSW, my guess is they felt Labor was neglecting their worries about jobs and the cost of living.

It’s never as simple as many workers in Parliament House convince themselves.

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If only the Indigenous had the worries of the well-off aged

One thing I hate about elections is the way politicians on both sides seek to advance their careers by appealing to our own self-centredness. I suppose when they know how little we respect them for their principles, they think bribing us is all that’s left.

The federal election campaign hasn’t started officially, but already the one issue to arouse any passion is the spectacle of the most well-off among our retired screaming to high heaven over the proposal that, though granted the concession of paying no tax on income from superannuation, they should no longer receive tax refunds as though they were paying it.

We teach our children to respect the needs and feelings of others, and to take turns with their toys, but when it comes to politics you just get in there and fight for as much lolly as you can grab. And if my voice is louder and elbows sharper than yours, tough luck.

When someone at one of those rallies of the righteous retired had the bad manners to suggest that the saving would be used to increase spending on health and education (and increase the tax cut going to those middle-income families still required to pay tax on their incomes) they were howled down. Health and education? Don’t ask me to pay.

You gave me this unbelievably good tax deal, I paid the experts to rearrange my share portfolio so as to fully exploit it, and now you tell me you’ve discovered you can’t afford it and other people’s needs take priority. It so unfair.

Meanwhile, at the other end of the income spectrum, Scott Morrison delivered a Closing the Gap report to Parliament last Thursday. It was the 11th report since the practice began, following Kevin Rudd’s National Apology in 2008.

Morrison was the fifth prime minister to have delivered the report. The fifth obliged to admit how little progress has been made in achieving the seven targets we set ourselves.

The original targets were to halve the gap in child mortality by 2018, to have 95 per cent of all Indigenous four-year-olds enrolled in early childhood education by 2025, to close the gap in school attendance by 2018, to halve the gap in reading and numeracy by 2018, to halve the gap in year 12 attainment by 2020, to halve the gap in employment by 2018, and to close the gap in life expectancy by 2031.

As you see, four of the seven targets expired last year. None of them was achieved. They’re being replaced by updated – and more realistic – targets.

In his progress report, Morrison was able to say only that two out of the seven targets were on track to be met.

The first of these is the goal of having 95 per cent of Indigenous children in early childhood education by 2025. This was achieved in the latest figures, for 2017, with NSW, Victoria, South Australia, Western Australia and the ACT now at 95 per cent or more.

The other is halving the gap in year 12 attainment by 2020. Morrison says this is the area of biggest improvement, with the Indigenous proportion jumping by 18 percentage points since 2006.

With the key target of life expectancy, the figures show some improvement for Indigenous people from birth, but associate professor Nicholas Biddle, of the Centre for Aboriginal Economic Policy Research at the Australian National University, warns that the figures are dodgy.

So why have we been doing so badly? Biddle and a colleague argue that the original targets were so ambitious they couldn’t have been achieved without radically different policies, not the business-as-usual policies that transpired.

That’s one way to put it. It’s common for politicians to announce grand targets that make a splash on the day, without wondering too hard about how or whether their successors will achieve them. And no one was more prone to such “hubris” (Morrison’s word) than Kevin07.

A second reason, they say, is that successive governments’ policy actions haven’t always matched their stated policy goals. Their employment target, for instance, hasn’t been helped by the present government’s abolition of its key Indigenous job creation program, the community development employment project.

Then there’s the present government’s soft-target approach to limiting the growth in government spending, which has involved repeated cuts to the Indigenous affairs budget, particularly in Tony Abbott’s first budget.

The most significant Indigenous policy initiative in ages, the Northern Territory Intervention – which preceded Closing the Gap, but has been continued by governments of both colours – may have directly widened health and school attendance gaps.

As well as disempowering Aboriginal people in the territory, the immense amount of money and policy attention devoted to the Intervention “could have been better spent elsewhere”.

Third, they say, measures intended to achieve the targets have rarely been subject to careful evaluation and adjustment.

Morrison professes to have learnt these lessons. But, the authors say, if his “refreshed” approach “does not put resources – and the power to direct them – into Indigenous hands, the prospects for closing socio-economic gaps are likely to remain distant”.

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The truth behind the mid-year budget update

Wow. Under Scott Morrison’s inspired leadership, the budget is almost back to surplus and the economy is ticking over nicely. And having brought home the bacon, Santa ScoMo can deliver our reward, scattering little presents from now until the election.

It’s a lovely thought, but the truth is less heroic. An old saying would assess the position outlined in the midyear budget update as: good things come to those who wait. Or, franker: better late than never.

To be boasting about how much better the budget balance is looking is a bit rich, coming from a government that, five long years ago, talked its way into government by claiming we faced a "budget emergency" of debt and deficit that only the Liberals could fix because they had good economic management in their DNA.

After the disastrous political reception to its first budget in 2014, the government made no further serious attempt to reduce the budget deficit, instead quietly resolving to wait until the passage of time caused the economy to strengthen and tax collections to recover.

That’s where it finds itself now. Tax collections have strengthened in the past year or so because heavy infrastructure spending by the state governments and the rollout of the national disability insurance scheme have boosted employment and the number of people paying income tax.

As well, company tax collections are stronger because export prices have recovered a bit, businesses have finally used up their deductions from accumulated losses incurred during the downturn, and because the crackdown on multinational tax avoidance initiated by the previous government is paying off.

Even so, the government’s net public debt has doubled from the $175 billion it inherited in September 2013 to $355 billion this October.

Initially, the government resolved not to cut taxes until the budget was back to significant surplus. Malcolm Turnbull ditched that in his first budget and the government has proposed tax cuts in every budget since.

Had it held the line it could have been back to actual (rather than foreshadowed) surplus today. And it could have shown us a net debt that had already fallen a little, rather than telling us its projections see the debt peaking in June next year.

The first politician to show us a projected return to surplus in the next few years was Julia Gillard in 2010. Since then, the Coalition has had to revise down its own projections countless times. We’ve learnt the hard way not to believe any budget number that’s not an "actual".

The Coalition’s budgetary performance has been ordinary in all respects bar one: over the five years to June 2017, it limited the average real growth in its spending to 1.5 per cent a year.

Very few governments can better that restraint – certainly not the previous Labor government which, despite all the dodgy figures Wayne Swan showed us at the time, ended up with real spending growth averaging 5 per cent a year.

As for Morrison’s claims about how well the economy’s doing, Josh Frydenberg has had to revise down the budget’s forecasts for growth in wages and the economy.

With luck the economy will keep growing reasonably strongly in the coming year or two, but only if it negotiates the housing downturn without mishap and only if wages return to reasonable growth.

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Sorry, small business has no special sauce for jobs

Scott Morrison is surely on a winner with his decision to step up pursuit of jobs and growth by bringing forward the time when small and medium businesses have their company tax rate cut to 25 per cent.

Certainly, it’s likely to be a popular decision, not just with the owners of the more than 3 million businesses who’ll be paying a bit less tax, but also with a lot of ordinary voters.

After all, as everyone knows, small business is the backbone of the economy and its engine room. It’s where most of the economy’s jobs are.

How does everyone know it? Because that’s what politicians – and the small business lobby – keep telling us.

This is why Morrison is so confident of getting the bring-forward passed by the Senate.

Cutting the smaller-business company tax rate to 25 per cent by 2021-22 rather than 2026-27 will have an additional cost to revenue of $3.2 billion over four years.

Only about $1.3 billion of this would be offset by the government’s abandonment of its plan to cut the tax rate for bigger businesses. The rest would be covered by repaying government debt more slowly than previously projected.

There’s likely to be enough cross-benchers keen to push the fast-tracking through – big business may not be judged worthy of a tax cut, but smaller business is - even if Labor isn’t playing ball.

But it seems Labor will be. Why? Because it, too, professes to believe small business is what the economy revolves around.

According to its official policy: “Small businesses make a huge contribution to national prosperity and supporting Australian jobs. Small businesses play a central role in the economy.”

There’s just one problem with all this stuff. It ain’t true.

When you study the facts and figures, there’s no reason to believe small business has any economic virtue not possessed by businesses of any other size. If anything, the reverse.

I’ve spent my whole career as an economic journalist refuting the delusional claims of this or that part of the private sector to be more worthy than the rest of it.

If it’s not small business claiming to be the economy’s engine room, it’s farmers claiming to be the bedrock on which the rest of the economy is built, or manufacturing claiming that making things is more virtuous than doing things (providing services).

There are all those ads telling us it’s mining the country most depends on. (They’re trying to draw attention away from the truth that mining is hugely profitable, about 80 per cent foreign owned, avoids as much tax as possible and employs surprisingly few workers.)

Then there are the exporters claiming that producing things for sale to foreigners is more important than producing things for sale to locals.

Plus, of course, the common delusion that the private sector is “productive” whereas the public sector is unproductive and even parasitic. Do you really think curing the sick or teaching the young – or even directing the traffic – is unproductive? That people in the private sector pay taxes, but workers in the public sector don’t?

It’s all economically illiterate hype. And it’s used to try to justify demands that the government give my bit of the economy a special deal not available to other bits. Economists’ name for it is “rent-seeking”. (Though, as recent events remind us, no one does rent-seeking better than the Catholic schools.)

But back to measuring against the facts the claims that small business has a special sauce when it comes to jobs. It’s complicated by the fact that the usual way of measuring the size of businesses is according to the number of their employees, whereas eligibility for the lower company tax rate is determine by the size of a business’s turnover (sales, not profits).

Morrison says there are more than 3 million businesses with turnover of less than $50 million a year, employing “nearly 7 million Australians”.

If so, that’s more than half of our total “employed persons” of 12.6 million. But about a third of those 7 million would be in medium-size businesses, not small.

According to the latest figures from the Australian Bureau of Statistics, for 2016-17, small business (defined as firms with fewer than 20 employees) has 4.8 million workers, medium-size business (20 to 199 employees) has 2.6 million workers and large business (200 plus) has 3.5 million.

That means small business employs just 44 per cent of the private sector workforce and about 40 per cent of the total workforce.

But just because a sector employs a lot of workers, that doesn’t necessarily mean it's creating jobs faster than other sectors.

Over the two years to June 2017, small business may have had 44 per cent of the existing private sector jobs, but it accounted for only 18 per cent of the growth in jobs.

Overall, private sector employment grew by 2.3 per cent, but small business employment grew by just 0.9 per cent. Combine small and medium and they grew by 2.3 per cent, about the same rate large-business employment growth.

And this during a period when smaller businesses were paying a lower rate of tax, supposedly to encourage them to create more jobs.

Actually, the lack of apparent response shouldn’t be a surprise. The typical tax saving is small. Morrison himself says that an independent supermarket or a pub that makes a $500,000 annual profit would save $12,500 in 2021-22 “to invest back into the business or staff, or help to manage cash flow”.

That doesn’t buy many jobs, nor many pay rises. And since businesses are free to use their tax saving however they see fit, there’s no reason to think they’ll favour more jobs or higher wages. No more than big businesses would.

If Morrison’s on a winner, it’s a political winner, not an economic one.

But if there’s nothing special about small business, why do politicians on both sides keep spreading the sector’s propaganda that it is special?

Because the many more owners of small businesses have far more votes than the relatively few bosses of big businesses do. It's politics, not economics.

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Turnbull changes tune for a lower-taxes election

Q: When is a move to increase tax collections not a move to increase taxes? A: When it’s an “integrity” measure.

The overwhelming purpose of this year’s budget has been to portray the Turnbull government as committed to lower taxes – not like those appalling Labor Party people, who want to whack up taxes everywhere.

Hence Scott Morrison’s seven-year plan to cut personal income tax at a cumulative cost of $144 billion over 10 years.

The government’s determination to push on with cutting the rate of company tax for big business is further proof of its commitment to lower taxes.

Trouble is, Malcolm Turnbull’s true conversion to the Down, Down Taxes Down party is rather recent.

Go back to his previous pre-election budget, in 2016, and he was busy increasing taxes to help pay for his 10-year phase-down in company tax.

If you remember, that budget copied Labor’s plan for four years of huge increases in tobacco excise, introduced the Coalition’s version of Labor’s major cutbacks in super tax concessions to high-income earners, introduced its own version of a tax on multinational tax avoiders and a “tax integrity package” establishing a tax avoidance taskforce.

Turnbull also explored the possibility of doing something to match Labor’s plan to curtail negative gearing, but finally decided that doing nothing would make easier to portray Labor as the high-taxing party.

Coming to last year’s budget, the government stuck with its company tax cuts, but still needed revenue. ScoMo announced a new tax on the five major banks and, from July 2019, an increase in the Medicare levy from 2 to 2.5 per cent of taxable income, to cover the rapidly rising cost of the National Disability Insurance Scheme.

This budget included another tax integrity package, which extended the special reporting requirements on payments to contractors and improved the “integrity” of GST payments on property transactions.

Now this year’s budget. This time a “black economy package” involving “new and enhanced enforcement” and further extension of reporting requirements on payments to contractors.

That’s not to mention a once-off draw-forward of duty on tobacco, “better targeting” of the research and development tax incentive, “ensuring individuals meet their tax obligations” and “better integrity over deductions for personal super contributions”.

All told, these “integrity measures” are expected to raise almost $10 billion over four years – though remember that when the tax man (or Centrelink) estimates that a new crackdown on the crackdown will raise $X billion, we have no way of knowing whether that guess proved to be too high, too low or spot on. Hmmm.

That $10 billion compares with the first-four-year cost of the personal tax cuts of $13.4 billion. But something the media has judged far too conceptual to adequately report is the decision not to go ahead with the 0.5 percentage point increase in the Medicare levy.

Deciding not to do something you hadn’t yet done adds to zilch, doesn’t it? Not if you’ve ever heard of opportunity cost. Nor if you know how budgets are constructed. The change of tune worsens the budget bottom line by $12.8 billion over four years – almost doubling the budgetary cost of the actual tax cuts.

It’s not hard to see why Turnbull lost his enthusiasm for securing the funding of the disability scheme. Bit hard to claim to be the champion of lower taxes when, with the other hand, you’re putting ’em up. (Just as long as the punters don’t notice your third hand adding to the tax system’s “integrity”.)

Equally debatable is ScoMo’s claim to be the scourge of bracket creep. Since the disaster of its first budget cured the government of any real desire to cut government spending, its main strategy for returning the budget to structural surplus has been to sit back and wait for bracket creep to do the job for it.

Had the government been travelling better in the polls that might still be its budget-repair strategy, rather than throwing the switch to fanciful fiscal forecasts.

But with bracket creep pushing up tax bills every year since the last tax cuts in 2012, beware of ScoMo playing a three-card trick: cuts that should be regarded as the partial restoration of past bracket creep being packaged as protection against future creep.

As ScoMo’s three-step, seven-year tax plan now stands, the huge proportion of taxpayers still earning less than $87,000 a year would get a tax cut of $10 a week to compensate them for all the bracket creep they will have suffered during the 16 years to 2028-29.

Don’t get me wrong. I think we should be paying higher taxes to cover the ever-better public services we unceasingly demand. The actions of both sides of politics say they agree with me. It’s just their words you shouldn’t believe.

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Economic case for cutting company tax rate is weak

Most people don't realise it, but we're on the verge of letting foreign multinationals pay less tax on the profits they earn in Australia because we locals don't mind paying higher tax to make up the difference.

Our almost unique system of "imputing" to Australian shareholders the company tax already paid on their dividends means they have little to gain from Malcolm Turnbull's pressure on the Senate to phase the rate of company tax down from 30 per cent to 25 per cent, over about 10 years, at a cumulative cost to the budget of $65 billion.

So what can we hope to obtain in return for our generosity to foreign businesses? Economic theory (which may or may not prove realistic) assumes it would induce them to increase their investment in Australia which, in turn, would increase the demand for Australian workers relative to their supply, thus bidding up their price (otherwise known as wages).

Note that, contrary to all Turnbull's said about his "plan for jobs and growth", the theory does not promise a significant increase in employment – mainly because the theory assumes the economy is already at full employment before the company tax rate is cut.

As my colleague Peter Martin has written, Treasury's updating of its modelling of the theory finds that, after 10 to 20 years, consumer welfare (arising mainly from higher wages) would be $150 per person higher than it otherwise would be.

Doesn't seem a lot.

Apart from the initial benefits of the company tax cut going pretty much only to foreigners, another reason Treasury's modelling has always shown the ultimate benefits to us as being surprisingly small is Treasury's further assumption that the budgetary cost of the cut would have to be covered by some means.

Treasury's consultant modelled several possibilities: by cutting government spending (don't hold your breath), imposing a lump-sum tax (a textbook fav), increasing the goods and services tax, or by letting bracket creep quietly increase income tax (the most likely).

Trouble is, the model's assumption that increased taxes would harm the economy's performance diminishes the good the lower company tax is assumed to do. As Milton Friedman liked to say, there are no free lunches (you'll end up having to pay, one way or another).

So the impression the government and big business are trying to give us (and naive crossbench senators), that only an economic wrecker would oppose a lower company tax rate, is just spin.

As always, every possible economic policy change has costs as well as benefits, which should be debated. I think the case for cutting company tax is weak.

With the government taking such a propagandist line, the most dispassionate advice we've received has come from evidence Reserve Bank governor Dr Philip Lowe, and an assistant governor, Dr Luci Ellis, gave to a parliamentary committee last year.

Lowe pointed out something no other official has mentioned: the main countries are engaged in a bidding war, in which each moves to a lower company tax rate than the others, hoping to pick up a bigger share of the world's foreign investment - before some other country cuts to an even lower rate.

You can imagine how much the world's chief executives love this game and are urging their own government to put in the lowest, supposedly winning, bid.

But the longer everyone keeps playing, the closer we'll come to the point where no country has any company tax to speak of – and no country has any competitive advantage over the others. All we'll be left with is a distorted tax system.

Lowe's point was that we should think twice before we join this mutually destructive game. Why would a tax war be good, whereas a trade war would be terrible?

The proponents' latest argument is that, now the US is cutting its company tax rate to 21 per cent, we'll get little foreign investment if we don't cut our rate from 30 per cent.

What no one seems to have noticed is that the case for a company tax cut has now turned from positive to negative. It's not that we'll gain anything by cutting, but just that we'll avoid losing if we don't.

But you don't have to accept that argument if you don't want to. Behavioural economics reminds us that the proponents have "framed" our choices in a way that favours their case.

They want us to accept without thinking that foreign companies make their decisions about whether or not to invest in Oz solely by comparing the rate of our company tax with other countries' rates.

That is, foreigners take no account of how our special tax breaks compare with other countries' tax breaks, nor any non-tax factors that make investing in Oz attractive (say, we've got better iron ore than everyone else) nor even that they don't have to worry about our taxes because their lawyers know how to avoid paying them.

As Lowe and Ellis explained to the parliamentary committee, the notion that multinationals focus solely on the rate of our tax is highly implausible.

I think all those other factors mean we're unlikely to attract insufficient foreign investment, even though the US has cut to 21 per cent.

But Treasury's been a great worrier about us attracting enough foreign investment for as long as I've been in the game, without there ever being much sign of a problem.

So, what's eating Treasury? My theory is that it hasn't adjusted its thinking since we moved from a fixed to a floating exchange rate in 1983.

What the proponents of a lower company tax rate don't tell you is that, with a floating dollar (and all else remaining equal), the more successful we are in attracting foreign investment – as we were in the resources boom - the higher our exchange rate will be. Is that what we want?

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