Treasurer Chalmers is floating tax reform balloons ahead of the May budget but Michael Pascoe warns he’s fighting the last war. The next one is nuclear.
If a week is a long time in politics, two months before the May budget is an eternity, plenty of time to float balloons to see what gets shot down, or what a timid Prime Minister might be game to risk.
Most of the attention paid to Jim Chalmers’ tax floaters is about how much the capital gains tax discount might be safely pared and whether – be still our beating hearts – the government might touch negative gearing.
CGT reform chorus in fine voice
A Senate committee hearing has been doing a fine job building the case for reducing the CGT discount, enticing a chorus of the great and good to approve the idea and discount the Liberals’ immediate scare campaign about “a tax on housing”.
Too bad it’s a sideshow, a fiddle around the edges of a bigger problem everyone knows about and a much bigger problem again that’s yet to break the surface. I’ll get to that.
The CGT and maybe-NG show is primarily being sold to punters as being about the cost of housing, our key political, social and monetary problem. Every little bit helps but halving the CGT discount or, more likely, trimming it by less than that won’t solve the housing crisis and is not what really interests Treasury.
It’s about the budget not housing
For those with responsibility for what happens to government deficits and debt, trimming the ridiculously generous CGT is about raising more money, cutting back on a massive “tax expenditure”, not making housing more affordable.
To stretch a metaphor, Chalmers’ arms-length CGT fishing expedition is being portrayed as going after tasty reef fish when the boat is really after a shark that might scare people if they knew.
Yes, the government does want to raise more money.
Serious people know we need to tax more and smarter if we want to maintain our present level of nice things, let alone realise this nation’s potential. For the ALP (Albanese Labor Party) forever scarred by Bill Shorten’s 2019 election loss, that’s a can they’d like to keep kicking down the freeway, road and bush track.
Ditto any alternative government, if there was one.
Need bigger fish
That there’s a demographic shark circling the fiscal boat is known. Yes, we really do need broad tax reform that would offend just about everyone, reform that ranges from taxing wealth to at least broadening the GST if not increasing the rate as well.
But here’s where we cut to Roy Scheider:
“We’re going to need a bigger boat.”
There is a very strong probability that the problem we’re about to have is much bigger than the problem we know we have.
What has kept our deficit relatively small is collecting more income tax than expected, mainly thanks to strong employment growth and low unemployment. Our reliance on personal income tax for a high percentage of government revenue is one of the usual criticisms of our tax system.
The various projections of the trouble ahead rely on unemployment remaining relatively low and employment strong. There are trillions of dollars being bet on that not being the case.
AI and unemployment
As usual with major technological change, nobody knows how it will eventually pan out for society. The early signs are that AI will be very profitable for some who make use of it but very costly for many who are no longer of use.
If unemployment doubles, not only does the ATO collect less tax, the government has to pay out more in social services. Consumption, the biggest part of the economy, is hit. Present budget projections go down a very dark hole with an economy needing more government spending, not less.
There are already a few companies catching headlines by saying AI is allowing them to reduce their (probably badly managed) headcount. Of itself, that’s not too scary, companies go through such cycles. So far, they are anecdotes, though statistics are compilations of anecdotes.
Worst case scenario
What is scary of itself for me is a South China Morning Post report that the number of available jobs for Hong Kong university graduates has plunged by 55 per cent.
“According to data from the Joint Institution Job Information System, an online job information system run by the city’s eight public universities, job vacancies in 2025 numbered only 30,798 – 55 per cent fewer than the 68,728 recorded the previous year,” the Post reported.
“A veteran human resources consultant attributed the sharp fall in entry-level jobs, which require significant investment and mentorship, to the rise of artificial intelligence and the uncertain economic outlook.”
Entry-level white-collar jobs tend to be the simpler ones, the ones you’d expect AI to first take and, as the anonymous consultant notes, they otherwise require investment.
Of itself, the SCMP report is an anecdote, a story about one unusual city, but businesses in the Hong Kong hothouse tend to be early adopters. It’s not hard to see that experience being repeated.
It’s what the fortunes being invested in AI are betting on with the promised surge in productivity being a
euphemism for the wholesale shedding of labour.
It’s what Trump’s pick as the next US Federal Reserve chairman, Kevin Warsh, is betting on, a surge in productivity from AI making it possible to have lower interest rates. Or that at least is the pitch that landed the job for the former monetary hawk.
Warsh’s line is that the AI productivity jump will mean higher take-home pay won’t spark inflation.
Alternatively, a surge in AI-caused job losses will suppress wages demands anyway. The SCMP story is a case in point. Hong Kong starting salaries are only up by 0.5 per cent on the previous year.
Despite healthy GDP growth, the US employment story over recent months is a freeze outside the health and care sectors.
White collar blue collar
If the AI bets pay off, the white-collar workforce is facing what blue-collar workers copped from the combination of automation and globalisation. The phenomenon of mass dislocation that infamously delivered the US and UK rust belts is set to roll through again but not on the factory floor.
Governments were not prepared for the social disaster of that earlier wave, the support wasn’t there to handle the change, broad regions were devastated, a tide of resentment washed through and has not receded.
Governments aren’t prepared for the threatened new wave and its cost either.
And it will cost. We can be sure of that.
That cost comes on top of the demographic challenge of a deteriorating dependency ratio, the urgent need for much more government-funded housing and blowing half-a-trillion on AUKUS. Fiddling around the edges of tax reform won’t pay for it.
The May budget is Jim Chalmers’ chance to be brutally honest with Australians, to deliver the equivalent of Paul Keating’s banana republic warning.
We need a bigger, smarter boat.
Housing affordability. The crisis the major parties are too scared to fix
Michael Pascoe is an independent journalist and commentator with five decades of experience here and abroad in print, broadcast and online journalism. His book, The Summertime of Our Dreams, is published by Ultimo Press.