Image by GFDL 1.2, [via Wikimedia Commons]

“The government failed to effectively sell its superannuation changes, particularly to its own back bench.” Virginia Star

“Don’t ever put up income tax, mate. Take it off them anyhow you please, but do that and they’ll rip your f**king guts out.” So Tony Blair says he was advised by Paul Keating back in 1995, in response to the idea floated by Blair’s deputy, Gordon Brown, to raise British income tax.

No modern Australian government of either persuasion wants to raise tax; they do so because they have to. If a government does so in the absence of any convincing explanation or narrative about the reasons for increasing taxation, they can expect a disembowelling. This is the lesson the Turnbull government is learning now with its proposed superannuation changes.

In superannuation, we have a $3 trillion pot of gold that no one is giving up their part of without a fight. With all the vested interests in superannuation, including many wealthy and powerful groups, it is one of the hardest areas of tax to reform.

A branch of public policy literature known as historical institutionalism says that the policy choices made when an institution is formed, or when a policy is initiated, will have a large influence on the policy far into the future. Dropping a whole suite of changes on a budget night, which also happened to be election eve, was not smart politics. We then watched the unedifying spectacle of frontbenchers struggling to articulate, for example, what a “Transition to Retirement” pension is, let alone what the government proposed to do with it.

Increasing tax on areas of superannuation means taking away benefits from taxpayers, often benefits which come to be perceived as entitlements. Introducing a 15 per cent tax on formerly tax-free pensions is arguably the biggest example of this. This very generous benefit has been in place for 10 years, and people are not letting go of it without a fight.

Donor base

The government’s battle for superannuation reform will not be primarily against the Labor Party or the menagerie of the 45th parliament, but from within its own ranks and among its donor base.

Senator Eric Abetz has opined that the certainty of superannuation was compromised by the government, sending shockwaves through core Liberal supporters. He “got very strong feedback” that the proposals in the 2016 budget were not the way to go forth. Abetz trusts that “we will revisit aspects of that policy”. There have been reports this week that Julie Bishop and other senior ministers warned of a backlash, one which Bishop experienced personally through fewer donations and volunteers on the ground for the election. These rumblings are only just the beginning.

Remember, the superannuation package has not been introduced into parliament. So far, it appears that the strategy by Turnbull and Morrison is to hold firm, citing the $2.9 billion worth of savings if all the reforms go through.

Here are some salient points about the superannuation package that the government fudged.

First, the changes are modest. Industry superannuation groups have modelled them and find the proportion of people affected is close to Treasury’s estimate of 4 per cent of taxpayers. You will notice, for example, that Labor’s primary concern has been with the implementation rather than the substance of the reforms. The government was not confident in its figures and it showed, especially through their inability to convincingly refute claims like the Association of Superannuation Funds of Australia’s that up to 550,000 people would be affected by the Transition to Retirement changes, around five times the government’s estimate.

Second, the changes pass the fairness test. We know, for example, that the majority of people approaching retirement who are making non-concessional contributions in excess of the current yearly caps have superannuation balances approaching $1 million. Nonetheless, we will still hear from various peak bodies about the issues with the lower caps. For example, the SMSF Association has said that they “look forward to working with all parliamentarians to either change or ameliorate” the reduction in concessional contributions caps to $25,000 per annum.

Policy settings

Third, the government made a mess of the proposed implementation of the changes, raising the ire of people who had arranged their affairs based on current policy settings. Labor has been able to capitalise on this. What opposition wouldn’t?

Fourth, there was not enough of an attempt to build consensus around the changes. The government was in budget mode and then, seconds later, they were in campaign mode. If they did give it much thought, the strategy was likely based on a prediction, or a hope, that the company tax cut would drown out talk of a few changes to superannuation.

You need more than hope to have any hope of successful tax reform. There are many moving parts to be marshalled, including the need to build a convincing narrative of which disparate sections of the government are internally convinced. The government grossly underestimated the complexity of the politics involved.

This article was originally published by AFR on 14 July 2016.

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