Peter Costello warns Tony Abbott that proposed budget debt levy has 'no economic benefit'

Updated

Peter Costello is warning Prime Minister Tony Abbott against breaking his promise not to introduce new taxes, saying the proposed debt levy has "no economic benefit".

The former treasurer's concerns are being echoed by the Government's Commission of Audit head, Tony Shepherd, who says fiscal "overcorrection" could hurt business and consumer confidence.

But Government sources are pointing to Mr Costello's own reasoning when he introduced the surcharge on the superannuation contributions of higher income earners as proof a deficit tax is fair.

Federal Cabinet is expected to approve a deficit levy to be included in next week's budget.

It is understood the tax could apply to those on incomes above $180,000 per year or possibly lower, but above $100,000 per annum.

The Government says it is the only way of ensuring the rich, who do not receive taxpayer benefits, do their fair share of helping to repair the budget.

Bur Mr Costello, who the Prime Minister named head of the Future Fund earlier this year, said the Government's rationale was "political" and not economic.

"The argument for increasing income taxes through some kind of levy is all about the politics," he wrote in his regular column for News Corp.

"The proposed tax levy has no economic benefit; it will detract from growth by reducing consumption."

Mr Costello also predicted the Government was preparing to retreat from the levy.

He said if the Government was intent on raising income taxes, it would have waited until budget night to announce the change.

But he said the political backlash against the tax should alert the Government to the realisation that the "levy would just make things [the public relations battle] harder".

But several Government sources have pointed to Mr Costello's own words as treasurer, when he introduced the superannuation surcharge for higher earners, as a template for how to justify the debt levy.

"The tightening measures have to be fairly shared. We cannot expect those who rely on pensions and allowances - low income earners - to bear the cost,” the former treasurer said in 1996.

"So we are asking high-income earners to make a contribution and business to make its contribution too."

Mr Costello wrote in his column that the superannuation surcharge was "one of the worst decisions" he made, and lamented that Labor reintroduced it following the Howard government’s defeat.

He said broken promises on tax could come back to haunt governments.

"Long after this budget has been forgotten, the press and the Opposition would still be attacking the Prime Minister's credibility, and attacks over tax promises can be devastatingly effective – just ask Julia Gillard," he said.

The deficit levy is also being met with fierce criticism by some Liberal MPs and senators, including Senators Zed Seselja, Cory Bernardi, and John Cobb.

Queensland Liberal National MP Warren Entsch has told The Conversation his Government's tactics, focusing on restoring knights and dames and changing the Racial Discrimination Act, had already "squandered a lot of credibility".

He said leaving it so close to the budget to release the Commission of Audit had "scared the bejesus" out of voters, including his 83-year-old pensioner mother.

Mr Entsch is also flagging "very major issues" with the planned debt levy, arguing it would damage the Coalition's credibility.

However, Liberal NSW MP Bob Baldwin told the ABC he backs the levy because the debt has to be repaid somehow.

"Wishful thinking is not going to solve the deficit," he said.

A second poll has confirmed a slump in support for the Government since its plan to introduce a debt tax was leaked.

The Newspoll, published by News Corp, shows primary support for the Coalition has fallen five points to 38 per cent, with Labor unchanged on 34 per cent.

The ALP leads the Coalition on a two-party preferred basis 53 to 47. The poll has a 3 per cent margin of error.

Tony Abbott's personal satisfaction level has declined to 35 per cent, but he leads Opposition Leader Bill Shorten as preferred prime minister 40 to 38 per cent.

Mr Shorten says people are right to be fearful of the Abbott Government's first budget.

"There will be no just mere passing phase if Tony Abbott breaks his promises to the Australian people, this budget is scaring the daylights out of carers, it's scaring the daylights out of pensioners," he said in Adelaide.

Vanstone urges long-term changes, not short-term levy

Amanda Vanstone, a former Howard government minister and member of the Commission of Audit, told the ABC's PM program a debt levy would not constitute needed structural reform.

"It will of course help bring the budget back into black sooner, and that's a decision for the Government to make," she said.

"But what I'm interested in and I think want the commissioners were interested in was long-term structural change."

Ms Vanstone says levies may be necessary on occasions where a problem suddenly arises.

"But this is a circumstance that hasn't suddenly come upon us, and it's one that does require long-term change," she said.

Ms Vanstone says long-term measures would be "a sounder basis for proceeding".

Shepherd warns against 'shock for the system'

Speaking to Lateline and before the publication of Mr Costello's criticisms, Mr Shepherd also raised concerns about the economic effects of any debt tax.

The former business council chief said the Government needed to be cautious about introducing a new tax.

"There's two issues there: One is, to get back to surplus more quickly is an advantage - we save the interest cost and it means we're in a more secure position earlier," he said.

"The other side of it though is, what is the impact on confidence - consumer and business?

"I would certainly say, and it's not something that we looked at in the commission, but I'd say that if they were to bring in something like that, they'd need to be very careful about implementing any of our recommendations which have an immediate impact on the individual.

"So things like Family Tax Benefit B and that sort of thing. I think you wouldn't want to run that in parallel with a debt tax or levy, or whatever you want to call it, because that might just be too much of a shock for the system."

He says he would recommend choosing either a debt tax or cutting back on family tax benefits.

"Again, I haven't done a deep study on either at the moment or on the debt tax, debt levy or what level it's going to be and on who it's going to impact," he said.

"But I'd say have a good look at that because you wouldn't want to overcorrect at the present time."

On Monday Mr Shepherd offered qualified support for the Government's mooted deficit tax.

Mr Shepherd said the call on whether a deficit levy would be useful in returning the budget to surplus is one for the Government, but that such a levy would help the budget to return to surplus faster.

"My personal feeling on that is a debt tax will have the impact of bringing us back to surplus more quickly, which is a good thing because if anything happens in the meantime it will give us the reserve capacity to do something about it," he said.

Former federal Liberal leader John Hewson has also warned against introducing a deficit tax, saying there are better ways for the Government to get the budget back into surplus.

"You've got tax concessions, for example, in superannuation from which you can raise a substantial amount of money," he said.

"They are heavily biased in favour of the wealthy, they don't impact on immediate economic activity, they impact on savings behaviour down the track."

Topics: budget, tax, government-and-politics, welfare, community-and-society, abbott-tony, australia

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