Michael Keating

  • An Alternative Budget Strategy by Michael Keating

    In this blog in May this year I posted a five-part series by Michael Keating on the government’s May budget and the economic and social consequences.  There has been a great deal of discussion and confusion, particularly in the senate, over this budget. This has caused Joe Hockey only a few days ago to warn that he is ready to bypass parliament and force through new spending cuts if Labor and the Greens do not come to the table on millions of dollars of budget savings.

    Next week I will be posting three-part series by Michael Keating on an alternative budget strategy. In that series, Michael Keating says ‘there is an alternative to the government’s budget strategy – contrary to the assertion by the government and its supporters that in fact “there is no alternative”.’

    This three-part alternative will be posted on Monday, Tuesday and Wednesday next week.  John Menadue

  • Michael Keating. Part 5. Federalism

    The Government’s Commission of Audit, which preceded this Budget, recommended that policy and service delivery should as far as practicable be the responsibility of the level of government closest to the people receiving those services, and that each level of government should be sovereign in its own sphere, with minimal duplication between the Commonwealth and the States. The Government for its part has insisted that it does not run schools or hospitals and that the States are ultimately responsible for them and what happens to them.

    This conception of the Australian Federation with its emphasis on States’ rights and separate roles and responsibilities is of course not new. Malcolm Fraser enunciated it before he became Prime Minister, and its supporters insist that it was what the framers of our Constitution intended.

    Furthermore, there is considerable intellectual attraction in separate roles and responsibilities for each sovereign government. It should enhance democratic accountability and help improve efficiency if the buck can no longer be passed backwards and forwards between the two levels of government. But why then has our Federation evolved in favour of greater national involvement in the provision of services that were originally the sole responsibilities of the States? The Commission of Audit seems to believe that centralism can and should be reversed, but I will argue below that there are good reasons why the national government has become more engaged in what were originally the prerogatives of the States.  Consequently, although there is probably some modest scope for redefining governments’ respective roles and responsibilities and reducing duplication, we will be best served by preserving the core features of our national system.

    In my view there are three key reasons for the pre-eminence of the national government. First, a fundamental reason why the States agreed to federate was to remove tariffs as a first step towards the creation of a national market. But now that we have a national market and indeed are facing global competition, businesses want common standards and licensing across a wide variety of fields; for example, everything from rail gauges, regulation of heavy road transport, company law and national competition, to food standards and the recognition of qualifications.

    Second, the responsibilities of government have grown. At the time of Federation pensions did not exist, but the Australian government now has constitutional responsibility for income support, including subsidising critical needs such as medical services, pharmaceuticals, and rental housing. Equally since World War II the Australian government has been expected to manage the macro-economy to ensure full employment and reasonable price stability.  Allied to this the Australian government also has responsibility for population policy, especially through migration, and for the growth in productivity and workforce participation which together determine the overall growth of the economy.

    However, these various national functions and responsibilities are not self contained. Today the various functions of government are heavily inter-related in a way that was much less true one hundred years ago, when we were all much less closely connected. For example, productivity is heavily dependent on the skills of the workforce, but these skills are in turn dependent on the quality of the education and training systems of the States. It is simply not possible for the Australian government to meet its responsibilities while being unconcerned about the effectiveness of various State government services.

    The third and final reason for national government pre-eminence is of course the national government’s domination of taxation, widely described as ‘vertical fiscal imbalance’ or VFI. Paul Keating called VFI the glue that holds our nation together, but for the States and the champions of States’ Rights, VFI is regularly trotted out as the root cause of centraliam. In the past the national government has passed payroll tax back to the States, and more recently they receive all the proceeds of the GST, but it seems unlikely that either of these taxes will ever be changed by so much as to make the States financially self-sufficient.

    In that case the removal of VFI would require that the States have access to the income tax. Legally there is nothing to stop them doing that now, but they have never taken up the opportunity, and indeed there are very important efficiency gains in only one government being responsible for administering any particular tax.  So the alternative is for the Australian government to raise the income tax and then to share the proceeds with the States. But why would sharing a tax result in clearer lines of responsibility than sharing responsibility for other functions of government which require expenditures? There would still be the same arguments about who should get how much and whether the States have adequate revenue. Alternatively if the States were allowed to add a surcharge to the Commonwealth tax, then there is the risk that the Commonwealth’s independent use of taxation policy for macro-economic policy would be compromised.

    In short it is not surprising that proposals to return to the past and increase State rights have got nowhere over a very long time. The truth is that a form of power sharing which we call ‘cooperative federalism’ is the only realistic way of managing inter-governmental relations. In Australia, for good or for ill, we have these two levels of government (plus local government), and power will inevitably need to be shared for a variety of functions where both have a legitimate interest. By contrast one cannot help being suspicious about the Commission of Audit proposals and whether their real intention is to provide a fig-leaf for the Commission’s smaller government agenda, with little or no concern for the impact on the availability and quality of publicly funded services.

    Instead a more productive discussion, than endless repetition of State’s Rights, would be to formulate better arrangements to guide the necessary future power sharing between the Australian Government and the States. To their credit that was what the Hawke, Keating and Rudd Governments were attempting to do with some success through COAG.

     

  • Michael Keating. Part 4. Long-term Fiscal and Social Sustainability and Taxation

    Fundamentally there is a problem with the rhetoric from the government and its cohorts such as the Commission of Audit. They insist on describing taxation as a ‘burden’ that should be lightened at every opportunity; thus implying that taxation is somehow illegitimate. On the contrary, however, taxation represents our mutual obligation to one another as citizens. Instead of being a ‘burden’, taxation is what we should pay to ensure the sort of society that we want.

    It is only by changing the rhetoric and accepting the legitimacy of taxation that we can hope to match the community’s expectations for publicly funded services and assistance with our willingness to pay for them. This inconsistency between our expectations and willingness to pay is the fundamental budget problem that I highlighted in my initial comment. Furthermore, the longer we delay the worse that problem risks becoming because there are good reasons why the public’s expectations will rise further and even faster over the next decade or more.

    Future Expectations for Expenditure

    The Government itself often refers to the impact on demands for public expenditure as a result of the population ageing; indeed the Treasury has documented these demands in its Intergenerational Reports. But the evidence is that population ageing is relatively unimportant as a source of future expenditure growth.

    More important factors influencing the demand for publicly funded services are

    • rising living standards which tend to translate into a switch in consumer demand in favour of services such as education and health that are largely publicly funded, and
    • technological change that has improved the quality of health care and to some extent education, but at increasing costs.

    Beyond these factors, and more generally, Thomas Picketty has recently provided comprehensive evidence that over the last forty years the distribution of private incomes in capitalist economies, including Australia, has become increasingly unequal and that there are good theoretical reasons to expect that this trend towards greater inequality will continue. On the other hand, the evidence also shows that governments can intervene to maintain equality if they are willing to use the tax-transfer system pro-actively.

    In addition, in Australia’s case over the last three decades we have significantly de-regulated the economy, and while the additional competition did increase productivity and living standards of the “winners’, the quid pro quo should have been a willingness to assist the “losers” to adapt. So those “parrots” calling for more economic reform need to also accept that not everyone will benefit and successful reform may well depend upon a willingness to support and assist those who are disadvantaged to adapt to the changes being imposed upon them.

    Taxation and the risks to economic growth

    Of course, those who are calling for lower taxes always claim that it will be in the public interest because it will lead to higher economic growth. But frankly where is the evidence?

    Internationally the advanced OECD countries with the fastest rate of growth in per capita GDP, like the Scandinavian countries and Germany and the Netherlands, are not the countries with low rates of taxation revenue relative to GDP, while the US with a low ratio of taxation has had very low growth in productivity and participation over the last thirty years. In addition, the econometric evidence regarding individual behaviour does not support much impact from lower taxation on work or saving effort. Indeed some of us can remember when the top marginal rate of income tax in Australia was 60 per cent compared to 46.5 per cent now, but nothing much has changed in the savings or work patterns of the people concerned. In short any objective analysis shows that there is plenty of scope to increase taxation without damaging economic growth.

    Taxation opportunities

    So how should taxation be increased over time to achieve a sustainable budget? Fundamentally there is a choice between:

    • Introducing more effective anti-avoidance measures,
    • broadening a tax base, by removing a variety of concessions, or
    • increasing tax rates.

    It is to the discredit of the Coalition Government that they immediately scrapped the legislation introduced by the previous Labor Government to tighten up on avoidance where in particular many major foreign owned companies pay a ridiculously small amount of tax in Australia. But even strict anti-avoidance measures are unlikely to be sufficient, and more substantial action will be needed over time. In that case, many of the present income tax concessions operate like subsidies on the expenditure side of the budget, but they are subject to far less scrutiny, should be reviewed. So in the same way as expenditure should be closely examined for its effectiveness before resorting to increased taxes, the same is true of taxation concessions. Nevertheless, in the end some increase in tax rates may also be necessary.

    Second, the two biggest sources of revenue are the taxation of incomes (company and personal income taxes) and expenditure (GST).  Given that all the GST revenue goes to the states, the balance between increasing the two may partly depend upon which level of government most needs assistance. But looking ahead both taxes will need to be increased over time.

    This Budget and future revenue needs

    This Budget projects a return to a budget balance in 2018-19, building to a surplus equivalent to at least 1 per cent of GDP by 2023-24, assuming that taxation revenue is capped at an average of 23.9 per cent of GDP. In other words the Government’s future fiscal strategy does not allow for any increase in revenue relative to GDP and expenditure will need to be further reduced relative to GDP despite the future demands identified above. Equally it also means that, like all previous governments, this government envisages that ‘tax reform’ will be revenue neutral, and will instead be limited to changing the tax mix.

    Furthermore, considering what we know so far, this future change in the tax mix is likely to further re-enforce the trend to greater inequality. Already the Government’s first priority has been to cut the rate of company tax which principally favours the rich. The alleged justification is that we have to remain competitive with the rates of company tax in other countries, but this sort of simplistic comparison is not really justified. It takes no account of the fact that Australia is the only country that offers dividend imputation, so that effectively Australian residents pay no company tax on the majority of corporate profits because more than half are typically distributed as dividends. Quite frankly if the foreign shareholders are not benefiting from dividend imputation does that really matter, especially if as I have argued in a previous comment we should be saving more and relying less on foreign investment.

    The two taxes that are actually increased in this Budget are

    • the so-called “temporary Budget repair levy”, but this is temporary and thus provides no help in resolving our longer-term and more fundamental fiscal problems. And most importantly it is far too small an adjustment to income tax rates and consequently raises far too little extra revenue.
    • a long over-due increase in petrol excise, which on scarcity and environmental grounds should never have been de-indexed in the first place. In addition, what revenue it does raise is to be hypothecated for investment in roads, much of which will not provide an economic rate of return, is therefore unproductive, and makes no contribution to ensuring fiscal sustainability.

    Finally, the Government has given every indication in this Budget that it is contemplating increasing the revenue from the GST, but wants the States to wear the blame. Again, whatever, the merits of such an increase, and there are some, the fact is that it will further lead to a redistribution of spending power from the poor in favour of the rich.

    In sum we do need tax reform, but any such reform should start from a consideration of the revenue needed to meet Australia’s long-term fiscal needs. At present we are trying to provide an adequate social safety net and a decent cohesive society with just about the lowest amount of taxation in the OECD – for example, according to the latest OECD statistics, in 2011 total tax revenue in Australia was 26.5 per cent of GDP, compared to an average of 34.1 per cent for the OECD as a whole, and 30.4 per cent in Canada, 31.5 per cent in New Zealand, 35.7 per cent in the UK; all countries with similar traditions to us and with whom we readily identify. And while this ratio of revenue to GDP was only 24.0 per cent in the US, if allowance is made for the much larger Budget deficits in the US, our taxation is effectively lower than there as well. So in effect, and unlike the US, we are trying to maintain a decent social safety net with extremely low levels of taxation. We have been getting away with this because, as I explained in my second comment on Tuesday, we have the most efficient income support system in the world. But there is little more that can be extracted by efficiency of the welfare system, and looking further ahead into the future, it seems pretty certain that unless we increase our revenue we risk finishing up with the sort of inequality and rundown in social infrastructure that is too often experienced in the US.

    It is therefore a matter for considerable regret that this Budget gives us little hope that the Government understands the risks to society that it presents, and the associated doubts about whether this government is capable of delivering the tax reform that we actually need.

  • Michael Keating. Part 3. An Alternative and Better Budget Structure

    In two previous blogs I have argued that the Government’s Budget broadly got the economics right, but it failed the test of fairness and it attacks our traditional values. In that case, however, what would the alternative Budget structure look like?

    Fundamentally the Budget should have relied much more on taxation and less on expenditure cutting. As I have already shown it is low revenue that created our fiscal problem and not excessive expenditure.  However, increasing taxation will be easier if it can be shown that expenditure has been properly reviewed and screwed down tightly, and so I will first consider the opportunities for expenditure reduction using a different approach to the Government’s Budget and its Commission of Audit.

    Expenditure reduction choices

    There are three broad strategies for expenditure reduction:

    • Tightening eligibility for payments or services
    • More user pays
    • Improving the cost efficiency and effectiveness of services

    In my view the Budget relies too heavily on the first two strategies and not enough on the third. The difficulty is that the Hawke/Keating governments relied heavily on tighter targeting of welfare payments and increased use of user pays, and that cupboard is now bare or nearly bare.

    Indeed Australia now has by far the most efficient income support system in the world. Along with Denmark, Australia redistributes more than any other country to the poorest 20 per cent of the population, but because the Danish tax-transfer system is much less tightly targeted than ours, Denmark taxes and spends 80 per cent more relative to average household pre-tax income than Australia does to achieve the same amount of redistribution. It is ironic that further tightening in Australia now risks increasing the already very high effective marginal tax payments for those people receiving income support, but this is what is advocated by people who argue for greater targeting and then want to use the savings to further reduce the already much lower marginal tax rates for high income people.

    A similar situation applies for user charging. The present level of university fees supported by the delayed payment arrangements under HECS were carefully calibrated to ensure that there was not much impact on student enrolments. The overall rate of return on a university degree prior to this budget was sufficient to make it worth having. By comparison a recent study of universities across the US found that the life-time return on an Arts/Humanities degree from about  a third of the US universities was insufficient to justify the cost of studying. The students would have been better off if they had started working at age 18 and invested in Treasury Bills. In another instance the salary for a Science graduate teaching in a public high school in the US was similarly insufficient for him to repay his student loan from the bank several years after graduating.

    In the case of health, consumer co-payments already account for 12 per cent of the cost of medical services, 16 per cent of PBS medicines, 56 per cent for dental services, and 69 per cent for aids and appliances. Recent OECD data show that among the rich countries the only countries where consumer co-payments are higher are Switzerland and the US. So given our already high level of co-payments, it might be doubted that the further increases proposed by the Budget will achieve any reduction in unnecessary visits to the doctor; rather the risk is of Australia deteriorating towards a US style standard of access to health care.

    On the other hand, and notwithstanding the familiar bleating from the State Premiers, I consider that there are still opportunities for improving the cost effectiveness of publicly funded services, such as school education, health care, and infrastructure, and achieving significant savings. First, according to the latest available data, the real public funding per student in primary government schools increased by 31 per cent between 1999 and 2011, while there was a 20 per cent increase for government high schools. There is no evidence that this increase in funding (and the further increase since 2011) has led to improved student results. Instead the key objectives of the Gonski reforms should be capable of being realised by redeployment of funding within the education system. Indeed the priority should be to transfer funding from schools to vocational education and training (VET) which experienced a 25 per cent reduction in real funding per annual hour between 1999 and 2011, and has now had its funding further cut in this Budget. It is VET which gives people a second chance, often after the school system has failed them, and despite all the additional funds lavished on schools.

    Second, in the case of the health system there are huge differences between hospitals and even within hospitals in the cost of providing the same forms of care and treatment. The introduction of case-mix funding so that funding is based on the average efficient cost of each service is meant to enable hospitals to realise savings. Beyond hospitals more investment in prevention through better public health measures would help lower the costs in the long run, and new approaches to funding and coordinating the care of chronically ill people would improve their quality of life and help keep them out of hospital and lower costs. The Rudd Labor Government had started these types of reforms, but their future is now most uncertain.

    Third, Australia has a long history of over-investment in infrastructure with the costs exceeding the benefits, and under-charging the beneficiaries so that they demand more and more. It is therefore most reprehensible that this Budget prides itself that new spending decisions will add $58 billion to total infrastructure investment, when none of the projects announced have been ticked off by Infrastructure Australia as having completed proper cost-benefit appraisals; probably because a great deal of this investment never could pass any proper evaluation. And this from a Government that was properly critical of the former government and its approach to the NBN.  Clearly this improper use of the nation’s savings is not an acceptable reason for the other Budget cuts, and the increase in petrol excise should not be tied to an increase in uneconomic road funding.

    Clearly the opportunities for savings in major spending areas such as these should be pursued by the States before they all line up to increase the GST. But in the long run a sustainable fiscal strategy for Australia is bound to require an increase in taxation if we want to preserve those aspects of our society and social system that we value. The scope for increasing taxation is discussed in the next blog.

  • 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.