Malcolm Turnbull can save by cutting John Howard's middle-class welfare state

In embarking upon the twin tasks of tax reform and budget repair, the Turnbull government’s insistence that tax revenue cannot rise from its current proportion of GDP has placed it into a straightjacket from which there is no escape. In a clash between ideology and the laws of arithmetic, the latter will win every time.

Tax as a percentage of GDP is higher than at any time during the previous Labor government but below the record levels set by the Howard government. By setting an arbitrary ceiling for tax as a proportion of GDP, the government is committing itself to handing back bracket creep funded by modest reductions in tax concessions for superannuation and possibly, negative gearing. When the Coalition party room realises that cabinet’s proposal to cap negative gearing is retrospective while Labor’s is not, it will not be amused; yet if it is prospective only it will raise very little revenue for personal tax cuts.

By throwing the little available revenue from tax reform at tax cuts instead of budget repair, the government will be abrogating its responsibility to rein in the structural deficit. The Coalition’s hard right wing claims it has the solution – heavy cuts to government spending. They tried that in the disastrous 2014 budget that Tony Abbott says he wears like a badge of honour. Replicating it in 2016 would result in the same outcome in the Senate. In fact, the Turnbull government is in discussions with the states to put in place interim arrangements to wind back the savagery of the $80 billion cuts to health and education that are already counted as savings in the budget papers.

Australia’s population is ageing and marvellous new drugs and medical technologies are improving our quality of life and longevity – exactly what people expect in an advanced democratic society. No Liberal government will be telling a mother she can’t have access to a life-saving drug or procedure for her child because the party room has set an ideological limit on tax receipts as a proportion of GDP. The reality is that health spending will continue to rise as a percentage of GDP regardless of how efficient the system is made.

If not in health, where are the other savings options? In the defence white paper released last week the government reaffirmed its commitment to lifting defence spending to 2 per cent of GDP. This has bipartisan support. Two large areas of spending that Liberal governments insist on quarantining from cuts are the private health insurance rebate and the fuel tax credits scheme that provides excise exemptions for the mining industry and other off-road users.

Moving down the money tree, the pickings become much slimmer. Denying young unemployed people income support for six months while they look for a job excites the Coalition’s hard right but it doesn’t save much money and even the Abbott government eventually abandoned it. Similarly, right-wing ideological warriors are convinced that a large proportion of disability support beneficiaries are malingerers, yet they haven’t been able to identify savings measures that would prevent genuinely disabled people being thrown onto the street.

Now we are getting to the Holy Grail – the middle-class welfare that has been sacred writ for the Howard and Abbott governments. At the height of the first mining boom in 2006-07 the Howard government used the rivers of gold flowing from China to extend family payments well up the income scale. In a giant recycling machine, tax was taken out of pay packets to fund government transfers directly into the bank accounts of mothers.

The previous Labor government made inroads into middle-class welfare, but to this day, despite the rivers of gold flowing to a trickle, some households still receive family payments when their incomes are $100,000 per annum and up to $140,000 per annum. What’s more, successive governments have indexed these upper eligibility thresholds for inflation, pausing the inflation adjustments from time to time but not abandoning them.

If the Turnbull government is serious about reducing government spending it need look no further than the middle-class welfare state constructed by the Howard government. But even then, rising health costs in an ageing population will dictate arithmetically that spending as a share of GDP must rise. Rather than promising tax cuts all round, the government must seriously repair the personal and company income tax bases and dedicate most of the proceeds to reducing the structural deficit.