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Budget 2009 – response by Turnbull

Malcolm Turnbull’s budget response was very political.  The main practical point was to emphasise retaining the health insurance subsidy and substitute a 3 cent extra tax per cigarette to raise the same income.  This is probably sensible in my view but small potatoes.  Otherwise the attack was primarily on the size of the $57 billion deficit and the implied debt which he claims will blow out to close to $300b once Labor’s Ruddbank, Broadband and other proposals are included in official debt forecasts. 

Turnbull’s point that Rudd’s debt as a fraction of GDP compared to other c0untries was low because the Coalition had wiped-out public debt in Australia was sound.  It is a dramatic turn around.

The response of Labor supporters (and standard Keynesians) will be that the debt is necessary to limit the extent to which the economy will falter now and the Coalition will respond that too much is being spent and being spent on projects with a low rate of return such as the Broadband effort.

I don’t know who is correct here – the right sort of stimulus package will necessarily be a stab in the dark – but Labor needs to be positive in its interpretations and the Coalition, if it wishes to regain office, to be cautionary.  The future course of politics – unless there is a short-term double dissolution of parliament is clearly ‘hope’ versus ‘fear’.  I doubt there will be a double dissolution of parliament – the government can do this if the alcopops legislation is defeated a second time but suspect the double dissolution won’t occur.

I thought Turnbull performed well. He can be a future Prime Minister if the Treasury’s optimistic forecasts turn out to be false and if he sticks to his guns of attacking Labor over debt and deficits.  I think Labor’s popularity will now decline in the polls as people start to take seriously the fears expressed by the Coalition.

16 comments to Budget 2009 – response by Turnbull

  • conrad

    I disagree about Turnbull’s peformance. If the best he can do is offer a trade on a tiny little thing, then that’s hopeless. What about some other ideas that matter versus “Labor is bad, but we actually have no ideas ourselves”. I haven’t heard any. Perhaps Rudd can take his idea for cigarettes but keep the roll-back of the health insurance subsidy. Where are they going to be then?

  • Sinclair Davidson

    Sorry, Harry – Turnbull was woeful. Last year the promise of a 5cpl petrol excise reduction was brilliant politics, this years promise of a 3c per stick excise increase just wasn’t. Turnbull’s instincts are exactly wrong.

  • hc

    Generally Turnbull could not be seen to sabotage Rudd’s attempts to ‘rescue’ Australia. The cigarette move was an attempt to make the pretext for a double dissolution weak. When I say Turnbull did well I mean he put the Coalition in a reasonably strong strategic position.

    Sinclair, You always oppose any move to increase taxes and support any move to decrease them. But there are significant health concerns with cigarettes and demand is inelastic. On fuel excises, given that fuel demand price elasticities are around -0.2, moves to cut these taxes don’t make a lot of sense on Ramsey grounds.

  • Uncle Milton

    Turnbull is proposing to put more money in the pockets of people who make >$150K and to pay for it by taxing something that is overwhelmingly consumed by poor people. That may not be smart politics. It is unlikely to have a great appeal in the electorates, in say regional Queensland, that the coalition lost last time and need to win back.

  • derrida derider

    Being an Opposition leader is never easy – you end up always reacting to the government’s moves, rather than making your own. Turnbull, like Beazley, is the sort who’d probably make a better fist of being PM than they would of being Leader of Her Majesty’s Loyal Opposition (Paul Keating is the direct reverse – he’d have destroyed Howard if he’d stayed on after his election loss, in spite of his own failings as PM).

    Even so, I think Turnbull made a mistake in reacting to the government’s crafty propaganda push of the day before – “well what would you do differently?”. He should have criticised the Budget deficit (good politics whether or not it’s good economics), and changed the subject whenever asked what he’d do about it.

  • Uncle Milton

    Turnbull is doing his best to offer a differentiated product, but the problem is everyone knows if he was PM he would offer Pepsi to Rudd’s Coke, as would any other possible Liberal leader, including Peter Costello. There is only one credible game in town, indeed around the world, in response to this crisis, and that is to do what the government has done and let the automatic stablilisers take their course, and have some discretionary stimulus, hence a large budget deficit.

    There is always room for debate over the composition of the spending and taxation, but that is a second order issue at present.

    Longer term the structural deficit will need attention. There is plenty of scope to do this by reducing tax breaks (about $70 billion worth) and wasteful expenditures and programs, of which there are doubtless plenty.

  • Sinclair Davidson

    Harry – yes, I always support lowering taxes. Putting that to one side, Turnbull doesn’t want to stop people smoking, he wants to raise revenue. As Uncle Milton suggests, low-income individuals (who are more likely to smoke) don’t want to substitute their income for private health insurance. The Coalition want to get them on-side; irrespective of the health benefits argument many people don’t want to be told that they can’t have a drink or a smoke.

  • hc

    Over at ALS blog John Humphries makes similar arguments to Uncle milton’s – though with a more extreme viewpoint. ‘

    As I have posted before subsidies for private health insurance make sense if there is free hospital cover in hospitals. I can’t imagine why such charges should be configured to effect distributional objectives when policy-makers have an income tax to do that.

    The demand for smokes is quite inelastic and so it is a prime target for an excise as well as a tax for externality/internality reasons. Again why concern over equity? It is only an individual tax and what matters is the overall impact of the tax system? Nor am I persuaded that giving poor people the same opportunity to contract cancer and emphysema is the sort of equity I’d want to pursue.

  • Sinclair Davidson

    I saw your previous argument – I don’t understand it (my fault entirely I’m sure). An argument that does make sense would be that to subsidize private health is cheaper than having those people in the public system. So the government subsidizes exit.

    The demand for smokes is quite inelastic and so it is a prime target for an excise

    Fair enough – bear in mind that excessive taxes lead to other anti-social behaviour (cheaper more dangerous drugs, smuggling, crime etc.) but the point is accepted.

    as well as a tax for externality/internality reasons.

    John argues that “Taxes on smokers and drinkers already significantly exceed the marginal cost of higher health care”. If true, that undermines your argument. Even if we accept that death from smoking is an externality (it isn’t, death is a very private cost) smokers may already be over-taxed. Unless you believe (and you might) that the optimal amount of smoking is zero there must can a point when smoking taxes are too high. I am not convinced that the optimal of smoking is zero is an economic proposition as opposed to a personal preference. There is no economic solution to that preference; prohibition is a legal solution but not economic.

  • Uncle Milton

    Just to be clear, I was making a point about Turnbull’s political strategy, not about the desirability of tobacco taxes.

    Smokers impose costs on third parties, so there are externalities. These include health costs of inhaled second hand smoke, but most especially the extra public health care cost they cause. So I’ve got no problem with tobacco taxes. In fact I’d increase them up to the point where tobacco heads underground, for then we’d bring criminals and corrupt police into the market, as currently exists for narcotics.

  • Sinclair Davidson

    This is a ‘corruption is efficient’ argument?

  • Uncle Milton

    On the contrary, corruption is bad. That is why tobacco taxes should not be so high as to drive consumption underground. Fortunately we are not at that point and probably not close to it.

  • Sinclair Davidson

    Don’t know if that’s right. The chop-chop market is (was?) alive and well.* Smoking per se is not underground, I agree, but a lot of resources have been expended preventing smuggling, theft etc. Mind you the government’s argument tends to focus on lost revenue and not health.

    * there is a recent PhD grad at ANU who did some great work on this – Sophie something, can’t recall her surname, Harry might remember.

  • conrad

    “bear in mind that excessive taxes lead to other anti-social behaviour (cheaper more dangerous drugs, smuggling, crime etc.)”

    I doubt that’s true of cheap but addictive substances like cigarettes, and I’d like to see the evidence for it (excluding crime based on less money, but the effect would be tiny, and the same argument would be true of any tax). The reason for that is that cigarettes are far cheaper than any other drug to try and get addicted to even with the taxes, and the same must be true of smuggling — surely the costs, once you add distribution, must be higher than legally available cigarettes.

  • Uncle Milton

    The chop chop market flourished a decade ago when responsibility for policing excise collection
    shifted from the states to the feds. Bikie gangs, being very entrepreneurial, were the prime movers and they successfully persuaded some tobacco farmers to do business with them. (There is nothing quite like having the business end of a sawn off shot gun in your face to see the other side’s point of view.)

    But it is not as big a deal any more as I understand it.

  • Sinclair Davidson

    Conrad – my understanding is that cigarette smuggling is a problem in the US (where cigarettes are cheap compared to here and cigarettes on the Indian reservations even cheaper). So I imagine that entrepreurial criminal types will manage to profit out of this in Australia.