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Government’s tax plan is as easy as A,B,C

Malcolm Turnbull’s Plan B has become Scott Morrison’s Plan A.

The option of an expedited rollout of the small and medium-size business tax cuts was sitting in Turnbull’s bottom drawer when he was turfed from office. It had run the gauntlet of the Government’s expenditure review committee.

It had been through Cabinet with the full backing of the Government’s then-economic team, including the now Prime Minister, and the Finance Minister, Mathias Cormann.

It was locked and loaded and ready to go. It was just a question of timing. But unfortunately for Turnbull, his time ran out. We know this, because Morrison’s big announcement this week — and the confidential Treasury advice preceding it — was comprehensively leaked in the flood of Cabinet measures that found their way into the nation’s newspapers in the days following the leadership coup.

Turnbull had flagged the plan just two days before the spill. It was one of the key economic measures his government was contemplating to help make business more competitive in an increasingly volatile international marketplace.

It would also provide targeted stimulus to generate jobs and inspire wages growth. Or so he said then, and Morrison says now. Small business operators interviewed this week, though, all suggested the tax savings would more likely be used to give existing employees more working hours, buy a bit of new kit and go some way towards improving their emaciated profits.

The coalition regards small business as the true engine room of the economy.

There are something like two million small businesses across the country, employing seven million Australians. That is a lot of votes. But bringing those tax cuts forward wasn’t Turnbull’s first choice. His Plan A was to pass his tax cuts for big businesses — those with turnovers above $50 million, right up to the multibillion-dollar banks.

At a time of record-low wages growth, though, the plan to give the big boys tax breaks proved to be about as popular as a case of boils among average voters.

Labor, the Greens and the Senate crossbench did Turnbull a favour by knocking them back a second time. That forced him to shelve them and set the money aside for a more electorally popular purpose.

His Plan B, again approved by Cabinet in the final weeks of his prime ministership, was to redirect those funds to bring forward the already legislated small business tax cuts. He wanted to do that in the mid-year economic update, just before Christmas.

Turnbull’s objective was twofold. First, he was hoping to build some momentum going into the holidays and improve the possibility of an earlier than expected election in March, getting in before the NSW poll.

Second, he was hoping to wedge Labor. Bill Shorten had agreed to back the reduction in small business taxes from 30 to 27.5 per cent, but had indicated that Labor was unlikely to support the second-phase reduction to 25 per cent.

That presented Turnbull with the delicious prospect of a small business tax fight at the election.

Morrison now owns all these possibilities. But he has also inherited the risks. And they are many. Bringing forward the small business tax cuts will cost about $3.2 billion over the forward estimates. Dumping the big business cuts saved the Government $1.3 billion. This would seem to suggest that Morrison has to find an additional $2 billion under a big rock somewhere in the Budget.

Morrison, though, insists the plan can be easily funded through the so-called “growth dividend” from an economy growing faster than official Budget predictions. But we’ve heard that one before.

The greatest economic virtue of the three coalition governments of the past five years is that they haven’t fallen into the Labor trap of over-promising and under-delivering.

Instead, they have done the opposite — under-promising and over-delivering. It is the smartest thing they have done and this risks destroying that.

The convergence of several major international factors is creating a new and dangerous volatility in the global economic climate that makes bullish predictions of rich growth dividends appear hopeful at best.

This week’s wild ride on equity markets, fuelled by fears of creeping inflation and rising interest rates in the US, Donald Trump’s orchestrated trade war with China and the US Federal Reserve’s steady withdrawal of its post-GFC stimulus at a rate of about $US40 billion a month have some market analysts muttering darkly about a looming major correction.

Such an event would smash growth in the teeth. Let’s hope that doesn’t happen.

The leaked Treasury advice on fast-tracking the small business tax cuts also raised another problem for Morrison. Doing it would almost certainly ensure he would break his own inviolable fiscal rules. As treasurer, Morrison made a virtue of keeping tax revenue below a cap of 23.9 per cent of gross domestic product.

Shelving the big business tax cuts and replacing them with the new timetable for small and medium-size businesses meant the Government would breach that cap as soon as 2020-21, the Treasury documents warned.

The Government could avoid that by offering another round of personal income tax cuts.

But where would the money for that come from?

Labor’s response has been a mixed bag. Shorten yesterday took the safe option of declaring a unity ticket on the small business plan but it came after he had slapped the Government on Thursday for forgoing an additional $3.2 billion in revenue while “cutting” $14 billion from public school education. Like most Labor claims of cuts, this is a highly questionable assertion based on a comparison with Labor funding that has been promised but has never actually appeared in a Budget.

Shorten also claimed that Morrison’s passionate defence of the big business tax cuts in the past proved that he secretly harboured a burning desire to resurrect them at the first opportunity and deliver tax relief to the big end of town, including the big banks.

It is of more than passing interest that Shorten unleashed these plutonium-enriched polemics only moments after lamenting the viciously binary nature of the current political debate. Pot, kettle, black.

And, so, we have a new tax consensus when Parliament returns next week. Labor’s agreement will see Turnbull’s Plan B passed in both Houses as Morrison’s Plan A and the coalition’s desire for a full-frontal election battle over small business will be unsated.

All this means that Morrison is going to have to find himself a Plan C.

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