Pearls and Irritations

Michael Keating

  • Michael Keating. Part 2. The Budget and our Values

    The Budget is always the clearest guide to a government’s priorities and values. In the present instance, the Coalition Government wants to define this budget as being all about “contribution”.  Their rhetoric is that we should all make a contribution towards restoring the nation’s finances. Spreading the burden would be fair and therefore consistent with Australian values. But nothing could be further from the truth. Disadvantaged and low income people are being asked to make very big sacrifices, while most of us will be little troubled, and a few very rich people will be better off as a result of this Budget.

    In addition, not only is the Budget unfair, but it also represents a deliberate attack on our social capital. Our aspirations for an inclusive society are being trashed, as first the Government demonised refugees, and now has moved on to demonise unemployed people, and tear up the grants to many community based organisations which are critical to maintaining our social capital and an inclusive society.

    As many people recognised immediately, the notion of six months on and six months off unemployment benefit up to the age of 30 is appalling. The Minister for Social Security says that now unemployed people will have to get off their couch and look for work, which shows how little he knows about the circumstances of the people he is meant to be responsible for, and/or just how perverted his values are. Anybody who has worked with long term unemployed people, or who has talked to those who do work with them, would know how much the vast majority of job seekers want a job. The reality is that most often these people are the victims of circumstances beyond their control, and without adequate skills they are simply not suitable for the jobs that are available.

    Furthermore, there is nothing new about a policy of “work or learn”.  It has been the official doctrine for many years, but unemployed people cannot learn or work when their training funds have been slashed by over $1billion in this budget. As a partial offset the Government now proposes a modest increase in job subsidies, but years of experience has shown that such subsidies are relatively ineffective and do not lead to continuing employment.

    The real problem is that many long-term unemployed people lack basic employability skills, so they are not employable in the modern labour market even with a subsidy, or for that matter with a lower minimum wage. They need training to get these skills, preferably training tied to a job, and in addition, they typically need a lot of support services and mentoring; indeed the reason why they are unemployed is because they suffer multiple disadvantages and all their sources of disadvantage need to be addressed in a coordinated manner.   At present this coordination and associated support services are provided most often by community-based organisations, but this Budget has also slashed the funding of many such bodies. In short if this is Joe Hockey’s ladder of opportunity then he has cut the bottom rungs off.

    Other vulnerable groups who will suffer as a result of this budget include some of the world’s poorest people who depend upon the generosity of foreign aid, which was the biggest single cut in the Budget, and indigenous Australians whose funding has also been severely cut. Less tough but still significant is the impost on single income families. An unemployed lone parent will experience a cut in disposable income of 11 per cent. While a single income family living on a near average annual wage of $65,000 will lose almost 10 per cent of their disposable income in 2017-18 because of changes to family benefits and the scrapping of the school kids bonus.

    But if the most disadvantaged people are to be hounded and not supported, what about the rest of us, and what are we contributing under this Budget? The fact is that the majority of Australian households are comprised of healthy people with two incomes, plus a further substantial number of healthy one person households. Essentially this majority could spend a dollar or two more a week on health, another dollar on petrol, and several dollars less on electricity after repeal of the carbon tax. In sum the majority are being asked to contribute next to nothing, and no doubt that was intentional so that this majority of households will not have a financial reason to change their vote.

    And then if you are in the top 4 per cent of income earners you will have to pay the 2 per cent “temporary Budget repair levy”.  But even if you are in the top 1 per cent income bracket, with an annual income of $300,000, this levy will still only cost you around 1 per cent of your income. While if you are a super rich miner you will be laughing with no mining tax, no carbon tax and, despite the call for a ‘contribution’, the diesel fuel rebate continues.

    Other areas of expenditure that have been singled out for cutting are the arts and research other than the always favoured medical research. And of course the War Memorial has had extra funding added to its already very generous base, while all the other national institutions’ funding has been severely cut.

    In short this Budget seems to reflect a very narrow conception of society and our duties to one another as citizens. There is still plenty of ‘entitlement’ for those people and organisations that are favoured by the government, but the basic inequality of sacrifice and the bias in the areas targeted for savings in this budget is deeply disturbing. Indeed this Budget seems to reject;

    1. the traditional Australian notion of a ‘fair go’ where those who suffer from misfortune should be given a helping hand, and be assisted to realise their potential capabilities; and
    2. the state has an obligation to assist community-based organisations and to provide adequately for those things that we enjoy collectively, which enrich our culture, and which are critical elements of our social capital.

     

     

  • Michael Keating. Part 1 The Budget and what it means for Australia’s Future

    Each day this week I will be running a series of blogs by Michael Keating on the Budget and its repercussions. The posts will be 

    • Australia’s Fiscal Challenge
    • The Budget and our Values
    • A Better Alternate Budget Structure
    • Taxation
    • Federalism

    I am sure that these five posts will make a substantial contribution to our understanding of the Budget and its implications for Australia. Mike Keating was formerly Secretary of the Department of Prime Minister and Cabinet. Perhaps more relevant to his comments on the Budget is that he was Secretary of the Department of Finance under the Hawke/Keating governments, during which time real outlays were reduced in three successive Budgets. This has never happened before or since. These reductions in real outlays occurred while still introducing many of Labor’s major reforms of social welfare that led to substantial increases in assistance to the poor. Much of the credit for this of course belongs for the Cabinet, particularly to Paul Keating and Peter Walsh. But I know that quite a few of the ideas that were implemented came from the Department of Finance when Mike Keating was Secretary.  John Menadue

    Mike Keating. Part 1. The Budget and what it means for Australia’s Future

    In the run up to the last election Tony Abbott told us that the nation’s finances were in a mess, but notwithstanding that mess he promised to match all Labour’s new spending initiatives, protect education and health, increase defence spending, and all without any increases in taxation.  Frankly none of us, not even the fawning Murdoch press, should have believed him.

    Understandably Labor is now tempted to harp on about the broken promises. But that would be to miss the real point.  The real point is that for several decades Australia, like many other developed countries, has had a continuing problem of meeting the public’s expectations for publicly funded services and how to pay for them.   Trust in government will not be restored until one or other political party offers a credible way forward that reconciles these conflicting public expectations of government.

    So what is the immediate fiscal challenge that this budget needed to address and how well has it responded to that challenge? In this series of comments I want to consider:

    1. how bad is our fiscal situation and the fiscal strategy required from  here on
    2. the choices before us in terms of the values that we espouse and what the Budget decisions and Audit Commission recommendations imply for the future nature of our society
    3. the consequences and efficacy of many of the specific policy decisions in the Budget

     

    Australia’s fiscal challenge

    Is public debt a problem?

    The Government has talked incessantly about Australia’s debt problem, and government debt is undeniably higher than when the previous Coalition Government lost office in 2007. The Commission of Audit for its part thought that low or even zero debt is such an important objective that the first priority for the fiscal strategy should be the achievement of an arbitrarily chosen debt ceiling.

    Others, however, have noted that Australia has a triple AAA credit rating, whatever that is worth. More pertinently general government net financial liabilities in Australia in 2013 represented only 11.8 per cent of GDP, compared to an average of 69.1 per cent for the OECD as a whole, including 81.2 per cent in the US, 40.4 per cent in Canada, 65.4 per cent in the UK, and as high as 137.5 per cent of GDP in Japan, and all these countries have low interest rates and no particular difficulty in financing their debt. Furthermore, although low debt is properly seen as providing increased scope to intervene in the event of an economic downturn, each of these countries had much higher debt than Australia in 2008 and they were still able to intervene and further increase their debt in response to the Global Financial Crisis (GFC).

    Instead Australia’s problem is not so much the financing of its government debt, but the extent to which we rely on foreign capital to finance total investment in Australia. Essentially our national savings from all sources, both public and private, fall well short of the investment opportunities. In particular, Australian households increased their borrowing very substantially during the Howard Government years up to the onset of the GFC. Consequently by the end of 2013 the amount that Australian households owed was nearly 1.8 times the amount of household disposable income received in that year. Moreover this level of household debt in Australia was not only high by Australian standards, but also by international standards, with household debt in Italy and Germany, for example, being less than a year’s worth of disposable income.

    So on balance the Government’s fiscal target to achieve budget surpluses on average over the course of the economic cycle seems a worthwhile goal, but it is not an absolute imperative and should not be pursued at all costs.

    How quickly should the Budget return to surplus and how?

    The Government acknowledges that at present the economy is soft, although some improvement is expected through the next financial year. Accordingly something close to a neutral budget in terms of its impact on the economy might have been the best strategy, with monetary policy left to fine tune the level of economic activity. By contrast, Treasury project that the structural Budget deficit will decline by about 1 per cent of GDP. On the face of it this is a fairly rapid rate of contraction of government support for the economy, although probably not devastating. Furthermore, the projected rate of fiscal consolidation over the next four years – 0.6 per cent of GDP – is reasonably well paced, so overall in terms of its impact on the economy this Budget seems to have got it broadly right.

    How fair is the fiscal strategy

    In the current financial year, 2012-13, government payments are expected to represent 24.1 per cent of GDP; a bit less than their long term average over the previous twelve years since 2000-01 of 24.5 per cent. By comparison, government revenue represents only 23.1 per cent of GDP compared to an average of 24.3 per cent over the previous twelve years. In other words if we have a fiscal problem it does not seem to have been caused by excessive expenditure, but by a drop in taxation revenue, and the prime cause of that was miscalculations by the Howard/Costello Government when they embarked on their 2001 tax reforms, which have turned out to cost more than expected at the time.

    So in the first instance it might have been expected that restoration of a fiscal surplus would have been sought primarily by way of increases in revenue. But consistent with government rhetoric and the demands of its supporters, 80 per cent of the projected budget consolidation  is from net savings in expenditure, and only 20 per cent from increased taxation. This in itself raises basic questions of fairness, which will be explored in the next comment.

     

     

     

  • More on pink batts. Guest blogger: Dr Michael Keating

    I would like to add a further comment to your post on 3 January on the Pink Batts.

    First, I would further contest the evidence that this scheme was poorly conceived and badly implemented. On this point it should be noted that the Auditor General’s finding that 29 per cent of 13808 completed jobs had minor or serious problems was based on a departmental survey, which suggests that the government was following up. Furthermore the survey was not wholly random and as the Auditor General noted this particular finding constituted only weak evidence. Later evidence showed that of  44,300 inspections, again not randomly chosen, only 3215 led to rectifications being required – a rate of around 7 per cent, which does not seem to me to be particularly high for the building industry.

    The other major concern arose out of the death of four installers. Leaving aside the fact that regulation of health and safety is a responsibility of the States and employers it should be noted that one fatality was caused by a pre-existing electrical fault; another electrocuted installer was employed by an electrician; and a third death occurred when a contractor elected to work in oppressive heat. In addition, the Commonwealth required more of contractors than most States as it required installers to agree to employees holding a nationally recognised occupational health and safety certificate demonstrating that “the holder is competent to work safely in the construction industry”.  To the extent that there was a failure of health and safety it would seem to reflect a general failure of health and safety regulation in the building industry and not a failure of this particular program.

    Second, the other important aspect that I would like to raise is why did the Rudd and Gillard Governments decide to throw in the towel and not defend the program? I suggest that it was their decision to stay silent and not respond to the criticisms that has now given the HIS program such a bad reputation, and has come at a considerable cost to their own reputations. I think that it was this decision to stay silent, when a substantial defence was possible, that is deserving of further exploration by those who are interested in how our political system is working these days.

    Dr Michael Keating AC was formerly Secretary of the Department of Prime Minister and Cabinet 1991-96.