Category: Economy

Sensing concern about the government’s performance in the first 100 days, Tony Abbott reportedly told the Liberal Party caucus to ‘prepare for trench warfare’ when parliament resumes in 2014.

I would have thought that the last thing that Australia needs is for the government to embark on trench warfare. I sense that the public is looking for considered and conciliatory leadership.

Defenders of Tony Abbott’s 100 day performance point out that John Howard had a rocky start, but that he then recovered. That is true, but Tony Abbott needs to learn quickly or the pattern set in the first 100 days will become entrenched. And the polls are certainly showing an early disquiet with the government. I suggest that the disquiet about Tony Abbott was always there, but the divisions with the ALP leadership took focus away from that concern. The last election showed that oppositions don’t win election. Governments lose them.

There are several reasons for the disquiet.

The first is that the  lack of a considered policy agenda was disguised by one-line media grabs – ‘stop the boats’, ‘axe the tax’, ‘pay down the debt’ and ‘eliminate the deficit’. Not surprisingly in almost every respect the government’s performance in these areas falls a long way short of what the one-liners suggested. The care and consideration which goes into good policy development was just not there.

Secondly, it is clear that there is no clear ideological framework. Conservatives traditionally believe in markets, choice and enterprise. But it was clear in the GrainCorp decision for example, that the government had retreated from its traditional free-market approach. Tony Abbott says that private health insurance is part of the Liberal Party’s DNA, yet he supports continued massive government subsidies to PHI. I have also drawn attention to Tony Abbott’s policy of Direct Action to reduce carbon pollution. This policy is the antithesis of a market approach. Malcolm Turnbull described Direct Action as a fig leaf when you don’t have a coherent market-based policy.

A third problem is the failure of the government to manage the transition from opposition to government. I wrote about this in my post of December 6 ‘Being in government is different to being in opposition’. The NSW Premier put the problem succinctly when education policy was being emasculated by Christopher Pyne. The Premier said that the Abbott Government should start governing and stop acting as if it were still in opposition.

Another issue which the government must address is the competence of its cabinet and ministry. I drew attention to this problem when the Coalition was in Opposition. See my blog of July 3 ‘The C team versus the Shadow Cabinet’.  The former NSW Liberal Premier and Commonwealth Finance Minister, John Fahey, commented only last week ‘Tony has picked the team that got him over the line as Opposition leader. A number of them were never going to make him look good in Government.’

A former Conservative Prime Minister in the UK, Harold Macmillan, when asked what he feared most as Prime Minister, allegedly said ‘it is events, my dear boy, events!’. Tony Abbott is not showing that he has the policy or ideological framework – or perhaps temperament – to handle ‘events”

Instead of facing up to these glaring problems, Tony Abbott says that there is more trench warfare ahead. A good example of this is the decision to appoint a royal commission on pink batts. It will be to attack and settle old scores with the Rudd Government. Should a victorious Prime Minister really be doing that? Where does it stop?

But the government has 1,000 days to prove itself. It may yet do that but the first 100 days have not been promising. The last thing we want is more trench warfare.

A vision for the future would be much more appealing.

The government is announcing today an update of this year’s budget. This is the government’s first major economic statement since the election. It will focus particularly on the budget deficit. It will attempt to blame the previous government as much as possible. I addressed this issue of the budget deficit and how it has come about. 

What is important is the performance of the economy. The budget is a means to that end. The budget deficit is important, but it is important not to over-react. The Europeans did this with very serious consequences for slower economic growth and large increases in unemployment particularly in southern Europe. 

Consumer and business confidence is fragile. The government’s performance and exaggeration of our economic and financial problems will not help.,

The following was posted on 29 November 2013.  Repost below.

I have written extensively in this blog about the phoney outrage of Tony Abbott and Joe Hockey about the budget deficit and the debt. How ironic it is now that the government wants to lift the debt ceiling when only a few months ago it said that it would better manage the economy and quickly lower the level of debt.

Our deficit is not a cause for panic. We have a well-performing economy. And our deficits and debt are in far better shape than most countries in the world. But we do have a longer term budget deficit problem that we need to address.  Economists call this our structural deficit problem, the long-term deficit that we have in government accounts regardless of the fluctuations in revenue and expenditure over the ups and downs of the business cycle.

It is estimated that with existing federal and state policies at the present time, we face a structural budget deficit of about $60 billion in today’s currency.

How did this happen?

The primary and major cause was the way the Howard Government wasted the tax returns from the mining boom. The parliamentary budget office put this problem in the following terms.

‘Over two thirds of the five percentage points of GDP decline in structural receipts over the period 2002/3 to 2011/12, was due to the cumulative effects of the successive personal income tax cuts granted between 2003/4 and 2008/9. A further quarter was the result of a decline in excise and customs duties as a proportion of GDP. Significant factors driving this trend included the abolition of petroleum fuels excise indexation in the 2001/2 Budget and the decline in the consumption of cigarettes and tobacco over the period.’

The IMF came to much the same conclusion. It identified two periods of Australian ‘fiscal profligacy’ in recent years, both during the Howard turn in office – in 2003 at the start of the mining boom and during his final years in office between 2005 and 2007. (SMH Jan 11, 2013)

In short, our structural budget deficit is due in substantial part to the Howard Government’s laxity with government spending and tax reductions during the mining boom. We blew the benefits of the mining boom when we should have been doing more to improve the budget surplus.

The second cause of the structural deficit is that the Rudd Government spent heavily to counter the global financial crisis. It was more successful than almost any other government in the world in avoiding a major recession and unemployment, but when the recovery took hold, the Rudd and Gillard Governments did not focus on the structural deficit problem particularly as identified by the Henry tax review. Some improvements were made to reduce middle-class welfare like the subsidy to private health insurance and the over-generous concessions that Peter Costello had given to superannuants. But the improvements were nowhere near enough.

The Abbott Government has established a Commission of Audit to address this structural deficit and other problems. But I am doubtful if it will address the big ticket items and the hard political decisions that will be required.

Despite the public perception that we are highly taxed, the fact is that Australia has one of the lowest ratios of tax to GDP amongst the 34 OECD countries. In 2010, Australian taxes were about 26% of our GDP. This compared with the OECD average of 34%.

A major contributor to our lower taxes is the large number of ‘tax expenditures’. These are tax breaks, rebates and other loop-holes which reduce tax revenue. Australia has a much higher level of these ‘tax expenditures’ than countries such as Canada, US, Korea, Netherlands and Germany.

Some examples of these ‘tax expenditures’ that reduce tax revenue are as follows:

• Ian McAuley and I have estimated that the subsidies to the private health insurance industry via policy holders cost about $7 billion per annum.
• According to Treasury, tax revenue is reduced by about $30 billion per annum as a result of the superannuation tax concessions.
• According to the Grattan Institute, governments provide benefits of about $36 billion per annum to home-owners through exemptions from land and capital gains taxes, and age pension entitlements. These very large tax expenditures work to disadvantage many young people who are unable to enter the housing market or people who prefer or are forced to rent accommodation.
• The Grattan Institute also estimates that property investors get a benefit of about $7 billion per annum through negative gearing and the capital gains discount.

The Grattan Institute also suggests that Australian government budgets could be improved by about $37 billion per annum through broadening the GST to include food and private spending on health and education, as well as lifting the pension and superannuation at retirement age to 70.

To the above possible reform measures, could be added a reformed mining tax that really raises money. If the Minerals Resources Rent Tax was raised to 40% as proposed by the Henry Review, it would raise an additional $5 billion per annum.

All the above are big ticket items that cost the budget large sums of money. These benefits and tax expenditures also heavily favour high income earners. Vested interests and rent-seekers will fight doggedly to maintain their privileged positions.

These are hard political issues, but if we are to address our structural budget deficit problem, they will need to be examined carefully and introduced progressively, or at least partially-like limiting negative gearing to new homes.

Worthwhile reform is likely to antagonise strong vested interests. That is why I am afraid that the Abbott Government is likely to direct our attention onto quite secondary issues such as ‘government waste’ which are really chicken-feed alongside the big ticket items mentioned above.

The Hawke/Keating governments showed that bold reform is possible. John Howard showed it with the GST

We can achieve necessary reform if we all stopped talking exclusively about politics and engaged in sensible policy debates.

The Abbott Government’s confusion over Holden’s withdrawal from Australia reflects a much deeper hostility to the car industry. The main reason for this is that the car industry is highly unionised, pays good wages and has a high degree of alignment of interests between labour and capital. The right-wing finds that all quite offensive.

Yet the right-wing supports subsidies in other industries that have little merit. The subsidies to these other industries put the support of the car industry in the shade.

As I mentioned in a recent blog on 12 December, the government provides enormous subsidies to parts of the services sector.

• We provide $7 billion p.a. for the private health insurance industry – a very high cost and parasitic industry which Labor failed to properly tackle. Warren Buffett described PHI as the tape worm in the US health system. It is the same in Australia and we subsidize it!!
• We will provide $1.8 billion over four years to the tax-avoidance industry with salary packages for executive cars. The coalition reversed a Labor Government decision to stop this rort.
• We provide over $30 billion p.a. in subsidies to the superannuation sector. The wealthy receive highly subsidised tax treatment of their superannuation contributions? On top of that they do not pay tax on superannuation repayments from the time they reach 60 years of age.  This subsidy for superannuation holders is in addition to the enormous $20b annual fees that financial advisers extract from policy holders. Both major parties are culpable on this but Labor marginally less so.

What is the sense or decency in decrying the car industry which has a well-paid and efficient workforce but we provide enormous individual and corporate welfare for the rent-seekers in the three areas mentioned above? Holden claim that they were seeking an additional subsidy of $80 m per year for 7 years.

Conservatives decry welfare spending but have supported a major shift in welfare payments over the years. Because of under-investment in human capital like education and physical infrastructure and neglect of steady economic adjustment, conservative governments have spent very strongly on distributive welfare to compensate for inequalities rising from our weakened economic structure. Over the last 50 years, social security assistance has risen from 5% of Australians’ household disposable income to 12%. Examples of this expanded social security assistance are baby bonuses, family allowances and superannuation concessions for the wealthy. The previous Labor governments did move to some degree to wind back some of this middle-class welfare – subsidies to private health insurance and the second baby-bonus – but the justification was more about immediate budgetary management than an expression of the principle that it is better to have a strong and productive economy with good wages. We need to become less reliant on distributive welfare both for individuals and corporations.

The path to growing incomes and fairness is through productivity and well-paid employment rather than government welfare handouts that have risen dramatically because of a failure of all governments in human capital and physical infrastructure development.

As the Scandinavians have shown, well-paid jobs with high levels of skill rather than welfare are the way to long-term prosperity. We need to be more productive and in the process of adjustment our attention should be directed first to the rent-seekers in industries such as private health insurance and superannuation. The motor vehicle industry should be a much lower priority.

The right-wing commentators show their political colours in supporting subsidies to the superannuation sector but are beside themselves in hostility to the well-paid and highly-unionised workers in the car industry. Australia needs more productivity and well-paid jobs and less individual and corporate welfare. We need a well-paid and productive workforce for good economic reasons but more importantly for the dignity that goes with meaningful work.

Yesterday I posted a blog ‘Taunting Holden to Leave’.

Let me add to the continuing story of this major stuff-up.

The Abbott Government, through Industry Minister Macfarlane asked the Productivity Commission to advise on assistance to the car industry. He asked for a report by March next year. On Monday this week, Minister Macfarlane was asked if he supported Holden remaining in Australia. He replied ‘Absolutely! Are we doing something about it? Absolutely!’ But this attempt by the Minister for due process and proper consideration was saboutaged by Joe Hockey. Holden was put to the sword by the Abbott Government long before the Productivity Commission could report.

In acting ahead of the Productivity Commission report, Joe Hockey bullied, taunted and threatened Holden. Leaks poured out from ministers to make Holden’s position almost intolerable. The leaking was supported by Rupert Murdoch’s Wall Street Journal that said that General Motors had already decided to stop manufacturing in Australia. With all this hectoring, Holden decided that it had had enough and would exit manufacturing in Australia. If Holden was looking for an exit strategy the Abbott Government gave it one. It is hard to recall such a mess in decision-making.

Another important factor is that the Abbott Government decided to retain the Fringe Benefit Tax salary packaging rorts for executive cars. The Labor Government said it would abolish these rorts and save $1.8 billion over four years. But the Abbott Government decided to reverse this decision. That $1.8b is almost the same amount as the cost of additional assistance that Joe Hockey said the car industry needed – $2 billion over four years.

Furthermore, the Fringe Benefit rort had been used in executive salary packaging to buy almost exclusively foreign-made cars, whereas the $2 billion in industry assistance that was necessary would go directly to help Australian manufacturing of cars. So the Abbott Government was prepared to turn a blind eye to tax avoidance over executive cars. But it refused very nearly the same amount over four years to keep companies such as Holden manufacturing. In Australia. The Abbott Government decided that it would give preference to the tax avoidance industry rather than the auto manufacturing industry.

What a disgrace. What a shambles.

It has been quite remarkable to see Joe Hockey daring and taunting Holden to close. He apparently chose to take advantage of Tony Abbott’s absence in South Africa to show off his “dry” credentials and burnish his leadership aspirations. Having lost the argument over Graincorp, Joe Hockey talked tough on Holden. He dared Holden to either put up or shut up. He then escalated the rhetoric against Holden by shouting in parliament ‘There is a hell of a lot of industries in Australia that would love to get the assistance that the motor vehicle industry is getting’.

In fact there are a lot of industries that do get a level of assistance and protection that far exceeds the $500 million p.a. which Joe Hockey tells us the motor industry receives.

Who are some of these beneficiaries of this corporate welfare?

My first exhibit is the $7 billion p.a. taxpayer subsidy to the private health insurance industry. That corporate welfare alone is about 14 times more p.a. than goes to the motor vehicle industry. PHI has operating costs about three times higher than Medicare. Through gap insurance PHI has facilitated the largest increase in specialist fees in 25 years. PHI weakens Medicare’s ability to control costs. It favours the wealthy. It offers look-alike policies with very little real choice. It churns money rather than making things. Yet companies like BUPA, Medibank Pte and others attract a $7b pa subsidy

Through restricted competition and political lobbying power our chemists impose excessive prices of over $1b per annum.

Taxpayer provide a $30 billion p.a. subsidy to the superannuation sector.

And there is a lot more in such areas as subsidies to fund negative gearing and capital gains discounts.  (See my blog of November 29).

By contrast the motor vehicle industry does provide substantial benefits to the Australian economy and community. It is at the core of our manufacturing industry.

The motor vehicle industry is far more important to our future than the industries that receive the enormous subsidies that I mentioned. We have got the issue seriously out of proportion.

Why is it that our corporate economists have an ideological set against the manufacturing sector but ignore the enormous corporate welfare that goes to the rent seekers in our services sector?

Tony Abbott and Joe Hockey have decided that there wasn’t really a budget emergency or a debt crisis that they have warned us about for many years. Perhaps they may have also privately conceded, as they should, that the Australian economy was one of the best performing and best managed economies in the world during the years of the Rudd and Gillard Governments particularly through the Global Financial Crisis.

Tony Abbott and Joe Hockey however have now decided on another tack – cooking the books by announcing budget changes in the current year that hopefully can be attributed to the Labor Government. They hope that in the confusion the electorate will forget who is responsible for what.  In this attempt to change the subject Joe Hockey is now suggesting that this year’s final outcome for the budget will be a deficit of $45 billion to $50 billion compared with the $30 billion announced by the Labor Government in August this year.

Let’s look at some of this sleight of hand that so far the government is taking to deliberately blow out the budget deficit that can be blamed on the previous governments.

• An extra $8.8 billion is to be provided to the Reserve Bank to top up its reserve fund. The Reserve Bank never asked for it, but who knows, they might need it! It is better to be safe, particularly if you can blame the previous government. On bank reserves, the four big banks might have done more to top up their reserve funds for the future given their large profits, generous dividends and high executive salaries.
• The Government will not proceed with Labor’s change in the fringe benefits tax treatment of executive cars at a cost of $1.8 billion over four years.
•  Joe Hockey will ditch the tax on superannuants who earn over $100,000 a year from their super funds, at a cost of $313 million over four years.
• He will dump the cap on self-education expenses at a cost of $266 million over four years.
• The government will review loans that permitted global companies shifting their profits from Australia to lower tax-paying countries abroad.

These changes are just the beginning. There will be more of this in the future – the object being to worsen the budget deficit this year so that it can be attributed to the previous government.

This is the same well-tried policy of almost all new CEOs – fix the books to attribute as much opprobrium as possible to your predecessor.

Joe Hockey is in for a lot more long nights with his desk lamp and eye shades, to get the best political results he can from this year’s budget.

At the G20 Summit in Washington a week ago Joe Hockey said ‘People find it refreshing to hear that Aussie honesty’. It is nice to think that other people see us that way but I wonder what Treasurers at the G20 would make of it if they had been listening to what Joe Hockey had been saying about the Australian economy over the last six years.

For years Joe Hockey and Tony Abbott have been warning us in quite shrill terms about our deficit and debts. We faced a budget ‘emergency’. It turned out to be phoney. Together with Tony Abbott, one could be excused for believing that the Australian economy was a smoking ruin.

We were told for a long time that the Coalition would provide a budget surplus in year one and get the deficit down from day one. Then as the election rolled on the retreat began and the Coalition finished its election campaign by telling us that the Coalition Government would ‘deliver a surplus as soon as we can’.

Actions speak louder than words  but the windy words continue.  If there was a real emergency we would be well on the way to a mini budget. We would have been told that nothing else would save the day. We can now see that the rhetoric of the Coalition has been reckless, inflammatory and fraudulent. There is a lot of huffing and puffing but no real action. Is that Aussie honesty?

Unfortunately it seems that the Reserve Bank of Australia has now been drawn in to the political games of the Coalition. Joe Hockey has agreed to an $8.8 billion taxpayer capital injection into the bank. That is amazing. It helps serve Joe Hockey’s political agenda in highlighting a possible emergency. It is also an old trick in politics as in business to load as many problems as possible onto the previous regime. Saul Eslake has described it as “a ridiculous piece of theatre”  According to both  former Labor Treasurers, Wayne Swann and Chris Bowen the Reserve Bank never approached the Labor Government for such a capital injection.  Wayne Swann said yesterday that if he had been approached he would have agreed. But he was not approached. Furthermore on 10th April this year Treasury advised  the Treasurer against  boosting the Reserve Bank’s reserve fund. Very strange! Why is it happening now? And why does it have to be in one hit? Surely it could have been over two to three years. But by providing the injection in one hit this year it can all be attributed to the failures of the previous government. This looks a dodgy exercise? It is claimed that the Reserve was reluctant to pay large dividends to the government and so deplete its funds. But it is not at all surprising for the government to maximize dividends from the Reserve Bank. Governments do it all the time with statutory authorities.

Some facts keep getting in the way of Joe Hockey’s bluster.

• Australia has one of the lowest levels of government debt to GDP in the world. The major money manager, Blackrock, measures sovereign risk. It reports that Australia is amongst the ten lowest sovereign risk countries in the world along with Norway, Singapore, Switzerland, Sweden, Finland, Denmark, Canada and New Zealand.
• The Australian Parliamentary Library has just released a report comparing the performance of Australian governments since the 1980s. The Commonwealth net debt fell from 5.6% of GDP under Howard to 2.4% under Rudd/Gillard Governments.
• The IMF has told us that most of our structural deficit problem in Australia can be traced to the profligate policies of the Howard/Costello period- lowering the personal tax scales as the mining tax boom filled the tax coffers
• Credit agencies continue to issue triple AAA credit ratings for Australian Government finance.
• In 2012-13, we had the largest year to year fall in the Commonwealth budget deficit ever recorded. Government spending fell a record 3.2% in real terms.

With the help of the China boom, The Rudd/Gillard Governments managed one of the best performing economies in the world, even through the Global Financial Crisis. But a failure of the Rudd/Gillard Governments was that they did not take up seriously the taxation review by Treasury – the Henry Review. This review carried a large number of recommendations to make our tax system more sustainable, more efficient, more equitable and simpler.

Will Joe Hockey’s Commission of Audit really deliver on government finances? I hope it will succeed and that the Coalition will not dodge real tax reform as the Rudd/Gillard Governments did. It is particularly important that the Commission does not fall for the siren voices of big business. .

It is concerning however that the Chair of the Commission of Audit, Mr Tony Shepherd, is also the Chair of the Business Council of Australia. The BCA is one of the most highly influential special interest groups in the country. It wants to roll back the Fair Work Act, amongst many other things, not to ensure that the market works better but to advantage capital. The Head of the Commission of Audit Secretariat is Peter Crone from the BCA. Just imagine if a Labor Government had appointed the President and Secretary of the ACTU to head a review of government finances.   The Murdoch media would have had a fit.

There is no doubt that Joe Hockey and Tony Abbott succeeded in persuading the Australian electorate that the economy was in a mess and that the debt and deficit was out of control. None of it was true. My concern is that they are now reverting to their political ways that were so successful over the last six years.

Tony Abbott and his colleagues are addicted to criticism and attack, attack and more attack. Can they transition to responsible and inclusive leaders concerned about good policy rather than aggressive politics and photo opportunities? We have not seen it yet from Tony Abbott, Joe Hockey, Scott Morrison and Greg Hunt. Some honesty would be a good start.

Last year in London Joe Hockey said that we had to break free of our culture of entitlement. He said. “The problem arises…when there is a belief that one person has a right to a good or service that someone else will pay for. It is this sense of entitlement that affects not just individuals but also entire societies. And governments are to blame for portraying taxpayer’s money as something removed from the labour of another person” He repeated much the same last week in his first visit as Treasurer to Washington. He made it clear that all Australians had to make hard choices and that we couldn’t have everything that we wanted.

This is a problem for all of us but Joe Hockey should start with his own leader. Tony Abbott has been leading the peloton in dodgy claims at the expense of the taxpayer.

Aside from politicians some of the worst examples of this culture of entitlement are in the business sector. Professor Ross Garnaut has commented that the long period of prosperity has provided a congenial environment for the entrenchment of a new political culture that elevates private demands over the public interest. This is reflected in the lobbying by many business people for special privileges. The Secretary of the Treasury has warned us that we will not be able to maintain our health and education services unless we pay more in taxes. In the public debate it is assumed that we can all have benefits of public spending without cost. The previous Secretary of Treasury, Ken Henry, has said that he has never seen such a poor standard of public debate about the need for hard choices in Australia.

The fact is that any significant and worthwhile changes in the economy and society will mean that there will be losses by some. We need to face that fact.

There are many examples of ‘what’s in it for me?’ in public discussion.

In the reform of education, we have been consistently told that Commonwealth Government funding will ensure that no schools will be worse off. That implies that many wealthy private schools will continue to be funded at high levels at the expense of facilities for the disadvantaged in public schools- indigenous, non-English-speaking, and socially impoverished students. The fact is if we are going to have serious reform in education, that promotes equality of opportunity, there will have to be some schools that will be worse off. That may be politically difficult but we see particularly in the Nordic countries, that increased education spending which is directed to areas of greatest need provides enormous economic as well as social benefits. Maintaining existing levels of funding for many wealthy private schools will be at the cost of the disadvantaged.

Kevin Rudd told us that climate change was the greatest moral challenge of our generation. He was right. But the ‘debate ‘quickly became mired in issues of compensation. Making sure that no-one was worth off, including the polluters, meant that we lost focus on the objective of the policy – reducing carbon pollution.

The Business Council of Australia wants to increase the productivity of our economy, but is silent about the rent-seekers amongst its membership who want to retain their privileges whether they be in the hospitality, gambling or mining sectors. The BCA wants labour market flexibility for most of the workforce, but says nothing about the rigged system of executive remuneration.

In reporting of Commonwealth and State budgets, the media almost always reduces the debate to tables showing who would be better off or who will be worse off regardless of the policy objective of the reform.

The health ‘debate’ is invariably dominated by ‘what is in it for me?’ for the private health insurance funds, the pharmacists or medical specialists. Very quickly their public demands and self-interest dominate what should be a debate about necessary reform.

In a global and changing world, we are indulging ourselves. As a community our individual expectations cannot all be fulfilled. We can’t have everything we want. The culture of ‘what is in it for me?’ will inevitably bring us undone. In any worthwhile reform, there will be inevitable losers. Those who need to loose most are the rent seekers for example in the mining and private schools sectors who work so desperately to maintain their privileged positions. Joe Hockey should start by talking to these sectors about their ingrained sense of entitlement.. and of course Tony Abbott

It depends on your point of view. Conservatives and the wealthy often see attacks on their privileged position as class war. Others see it as the pursuit of justice and fairness.

Let’s look at some who have recently spoken about class warfare.

• Andrew Forrest said that the Mining Super Profits Tax was class warfare.
• Christopher Pyne said that asking privately funded schools to reveal financial details was class warfare.
• The education activist, Kevin Donnelly said that the Gonski Report was class warfare.
• Some business representatives have described the new Fair Work Act as class warfare.
• Both Mathias Cormann,  and journalist Robert Gottliebsen, described government reforms to reduce tax concessions for high income earners as class warfare.
• Peter Dutton, the new Minister for Health said that reducing the tax concessions for high income earners in private health insurance was class warfare.
• Piers Akerman said that the government’s attempt to reduce abuse under the Medicare Chronic Disease Dental Scheme was class warfare.

But some senior ALP members have also joined in the fray.

• Martin Ferguson warned his colleagues that ‘the class warfare rhetoric that started with the mining dispute of 2010 must cease’. The mining industry admited Martin Ferguson.
• Simon Crean said that the Gillard Government’s continual amendments to superannuation were class war.

I have no doubt that the slogan ‘class warfare’ is designed to divert attention from privilege, particularly inherited privilege and middle-class welfare in Australia.

• The tax concessions for superannuation contributions and tax-free payouts for those over 60 massively favours the wealthy. It is estimated that the cost to revenue is about $5 billion p.a. At every step attempts to chip away at these benefits for high income groups has been greeted with shrillness by the banking and superannuation industry. Tony Abbott has said that he will not change superannuation arrangements for three years. Chris Bowen from the western suburbs  topped this by proposing not to do anything about this middle-class welfare for the next five years.
• Tony Abbott’s paid maternity leave scheme will massively benefit high income mothers.
• Tony Abbott has promised to remove the means testing on the private health insurance rebate which will again overwhelmingly benefit high income earners.
• The CEO of Telstra has a salary of $8 million p.a. The CEO of the Commonwealth Bank gets $7.8 million. The US citizen with disproportionate media power in Australia Rupert Murdoch gets $30 million p.a. plus dividends. A high school principal receives $150,000 p.a., a senior nurse $72,500 and a receptionist $47,000 p.a.
• Andrew Leigh has pointed out that since 1980 Australian inequality has risen. The income share of the richest 1% (those today with incomes over $200,000) has doubled while the share of the top 0.1% (incomes above $700,000) has tripled. The ratio of CEO pay to the pay of an average worker has quadrupled. Ten people on the latest BRW rich list would qualify for the all-time Australian rich list.
• Yet income support for people who can’t find work, Newstart, has fallen from 54% to 40% of the minimum wage since 1996. Australia has the fifth lowest unemployment benefit rate among OECD countries.

Whilst the economy has been growing strongly and most Australians have improved their standard of living, there is not much doubt who has been winning the class warfare. Warren Buffett, the mega-rich US investor, put it recently ‘There’s class warfare all right, but it’s my class, the rich class, that’s making war and we’re winning’. It’s not as bad in Australia as the US but the trend is the same.

The rich and the powerful are winning the class warfare in Australia, but they do their level best to divert attention and suggest that their critics are jealous.

We should not be diverted by the defenders of wealth and privilege attacking those who criticize them. What is important is the common good – that fairness and equal opportunities are important for economic, social and personal reasons.

​In justifying the Coalition’s cuts in foreign aid, Julie Bishop said that borrowing from overseas only to hand it back overseas was unsustainable in light of our mounting debt.

That statement has glib appeal, but it’s a serious misrepresentation.

For a start the Government does not borrow from overseas. Rather, almost all the Commonwealth’s revenue is sourced from taxation and other charges. The balance, used to finance counter-cyclical deficit spending or to make funds available for capital projects, is funded by Commonwealth bonds issued on the domestic market.

Second, much of what Australia spends on foreign aid is spent on domestically-produced goods and services, particularly consultancy services.  That part stays here.

The Coalition may have a point in that while the Budget is in deficit, any cut which reduces the deficit reduces Commonwealth borrowing. It could also validly point out that while that borrowing is on the domestic market, many Government bonds will be taken up by foreigners, in recognition of Australia’s low sovereign risk, and some of those bonds taken up by financial institutions will ultimately be financed by borrowing from overseas. That’s the benefit of having a well-earned AAA credit rating, a point which the Coalition is reluctant to acknowledge because it does not align with their story about the situation they inherited from a fiscally irresponsible Labor Government.

That is really a stretch. It can no more be called “borrowing from overseas” than my use of a credit card to buy a meal or an airline ticket. Let’s concede this to the Coalition, however, so we can take the money trail all the way through.

Australian financial institutions are net borrowers from overseas. That’s been so for a long time, because we almost always run a deficit on our current account. That is the difference between our exports and imports, and as a mathematical reality that deficit has to be financed. (It’s the private deficit we don’t hear much about, but it’s many times bigger than our small government deficit.)

When our financial institutions borrow from overseas they do so at very favourable interest rates – much more favourable than those at which governments and private investors in poor countries can borrow. Most aid-recipient countries are lucky if they get a BB credit rating. Their own borrowing has to be for projects with short-term returns, a constraint which does not hinder some commercial projects and government projects with a strong early revenue streams, but which is highly unfavourable for longer-term investments in areas such as health and education, where the benefits are slow to be realized and are diffused through the economy.

And, of course, there is a financial market at work to ration our borrowing. When we borrow $100 000 to finance foreign aid, ultimately that is $100 000 that isn’t available to finance domestic purchases. It may mean a few Australians decide to downgrade from a BMW to a Volkswagen, or to make their next overseas trip in four star rather than five star accommodation.

It all comes down to simple economics.  Whichever way we fund foreign aid, we’re putting aside a little of our consumption in order to finance investment for those who are far less fortunate.  Does Julie Bishop really not understand this?

Late last year I was approached by a friend who is very politically active about what I thought the ALP could do to renovate its policy platform.

I discussed this request with an old friend, Ian McAuley.  Together we prepared a paper ‘Principles to drive policies and programs – or – What does Labor stand for?’ It is dated 18 December 2012. Quite deliberately, this paper was not widely distributed. It can now be found on my website .  It is on the home page and also in the folder ‘democratic renewal’. It is also reproduced at the end of this blog.

The paper can also be found on Ian McAuley’s web site ianmcauley.com/academic/othpubs/laborprinciples.pdf.

Ian and I believe that this paper is still relevant to the reform process that the ALP must undergo in light of the defeat on 7 September 2013.

One concern expressed to me by many ALP voters was that the ALP campaign at the last election lacked an over-riding narrative or framework.

In the political process, I think there is general agreement that political compromises have to be made but they should only be made against a framework of generally agreed values. We like to know what our party and our leaders stand for, even if a few corners have to be cut.

We open our paper by drawing attention to the decline of the ALP primary vote from 45% to 50% fifty years ago to 35% to 40% today. In fact in the September 7 election, the ALP primary vote fell disastrously to 34%. In Queensland it was 30% and in WA 29%.  Tony Abbott on election night gloatingly described this primary vote for the ALP as the lowest for 100 years.

The current debate on the carbon tax illustrates how an approach based on principles can overcome a political problem. It is important that Labor is firm on principles but not positions. Unfortunately, politicians keep getting sucked into positions. Tony Abbott’s position is to ‘scrap the tax’. Labor’s is either ‘keep the tax’ or ‘move now to a European emissions trading system’. It would be better for Labor to stand for a more general principle such as ‘a strong market-based mechanism to reduce emissions’. It gives Labor more room to move. It reveals a flexibility in contrast to Abbott’s ‘position’.

In addition to the policy renewal, there must of course be major renovation of the ALP organisation and structure. Major issues in this area which need reform are.

• Building a national party from the long established confederation of six state-based parties.
• Widespread participation by ALP members from federal electorates in policy formation, selection of the parliamentary leader and selection of federal candidates.
• A reduced but fraternal link between trade unions and the ALP.

I hope you find the paper (below) ‘What does Labor stand for’ challenging.

1. Labor’s constituency

The Labor primary vote has declined from about 45-50% fifty years ago to 35-40% today. The Coalition vote is virtually unchanged. Labor has lost its clear identity with the ‘working class’ and what it stands for. Its natural constituency and membership has declined. To contain the loss, Labor has increasingly committed itself to focus groups, marginal seat strategies and ‘whatever it takes’. Values, principles and ideas have given way to marketing of products .Money has replaced membership as the driving force of campaigns. The trade unions remain the most important institutional Labor supporter but trade union influence is out of proportion to its role in the community and the ‘Labor constituency’.

1. Principles as the basis for policy
   If Labor is to differentiate itself from conservative parties, it needs to express that difference in a clear set of principles which accord with the best of Australians’ values. Otherwise the political contest is reduced to satisfying short-term materialist ‘aspirations’, appeasing vested interests and managing the media cycle. In such a contest, Labor is engaged in a futile struggle, for the Coalition is adept at conveying the misleading impression that it is the ‘natural party of government’, particularly because of its supposed competence in economic management.

   From community values a set of principles of public policy can be developed – principles which define Labor in contrast to other parties. Those principles can underpin a coherent set of policies and programs which implement those policies.
   Values > principles > policies > programs.

   Moving to the ‘right’ on issues such as refugee policy and health care simply legitimises the conservative position – a position from where exploitation of people’s fear is likely to drive out sensible and reasonable political debate. Selectively compromising – a little socialism here, a little free market there – as was the strategy of Britain’s New Labour – only confuses Labor supporters and the electorate because it presents inconsistent values.

   Social democrat parties, including Labor, were founded on an optimistic view of human nature and on recognition of the public sphere where people realise their full capabilities. These ideas can be expressed in consistent and coherent principles such as stewardship, the common wealth, including enhancement of social, environmental and institutional capital and protection of natural resources.

   In his emphasis on the ‘social question’, John Curtin gave effect to these principles, acknowledging that only a strong society, including a strong and respected government, can support a strong economy. And of course there is no point in an economy that does not serve social ends.

2. Curtin’s vision – ‘the social question’
   Curtin’s social democratic vision contrasts sharply with the Liberal Party platform ‘that only businesses and individuals are the creators of wealth and employment’, a view that reduces government to a burden rather than a contributor to the common wealth. Curtin’s vision contrasts with the notion that ‘a rising tide lifts all boats’, which legitimises destructive social divisions, which encourages people to separate themselves from society in physical or metaphorical gated communities (private schools, private health insurance), which allows the connection between contribution and reward to be severed, which encourages rent-seeking, speculation and protection of privilege rather than productive investment and which compensates the ‘losers’ with social security handouts.
3. Labor – the Party of strong leadership and values
   Just as Labor governments provided leadership to face greater challenges in the 1980s, so too today Australia faces even greater challenges – climate change, population ageing, dilapidated infrastructure, commodity based exports, deficits in human capital and a weak base for public revenue. The politics of ‘what’s in it for me’ discourages us from facing these challenges, for there will have to be trade-offs: some will have to pay more than others and some will have to forego benefits now for the sake of longer term benefits. Such transitions can be painful, but are more likely to gain support when people understand the principles underpinning public policy.

   When the Party is unified around a set of principles it can still have a robust debate about how to give effect to those principles. But it would be in  control of its message because its parliamentary representatives can engage with the electorate in a consistent and sincere voice, with less reliance on ‘talking points’ and spin and with less concern with the immediate reaction of focus groups. Labor supporters would be much more prepared to accept political compromise if they know that there is strong leadership and there is broad agreement on key values and principles. Labor leadership has to be patient and consistent around these values and principles – and never go backwards.  Authenticity and sincerity are then easily recognised.

4. Democratic Renewal
   At the same time as addressing overarching ‘Labor’ principles that could guide Labor policies and programs, there are two immediate issues which must be given high priority.

   The first is democratic renewal in our public institutions, including the ALP. We are increasingly alienated from our institutions. This suits the conservatives who implicitly seek to protect private corporate interests from public intervention. Loss of faith in parliament inevitably leads on to denigration and a loss of faith in government. Those that Labor has traditionally represented and the wider community are the losers. The Coalition has deliberately set out to destroy faith in our public institutions, public policy and politics. The government is ‘corrupt’. It is ‘illegitimate’. Mayhem is promoted in the parliament. The signs of democratic decay and lack of respect for politicians are everywhere. For example:

   1. Through domination of parliament, executive governments monopolise information flows and policy advice. Policy advice is increasingly given by ministerial advisers while the public service is co-opted  into providing political support to government.
   2. Governments are overly-influenced by powerful lobby groups and donors, e.g. miners, developers, licensed clubs and hotels
   3. The health ‘debate’ is not with the public, but between insiders – the Minister and the AMA/pharmacists/private health insurance companies.
   4. Because Labor does not have a consistent principle-based set of policies – some would say a ‘narrative’ – it has little capacity for defence or explanation when its policies are misrepresented or misinterpreted in the media.
   5. Labor is no longer representative of those that vote for it or have empathy with it.

The concentrated media does not properly expose abuse of power and directly skews the public debate towards personalities, the whims of proprietors, conflict and celebrities, rather than serious policies. We had an enquiry about the failure of our intelligence agencies over Iraq, but the greater failure was in the media.

Democratic renewal is urgent – reform of the parliament, political parties, party factions, lobbyists, donors and the media.

1. The economic role of government
   The second immediate issue is the economic role of government. Those who would benefit from weak and distrusted government have undermined the legitimacy of the public sector.
   Australians have been encouraged to forget that their prosperity is based on both public and private goods. To many people government has become ‘invisible’, except as a vehicle for distributive welfare. Australians have lost sight of the contribution of the mixed economy, not only in providing public goods, but also in ensuring that the forces of greed and short-sightedness don’t lead to economic and social collapse. It is noteworthy that despite the continued denigration of government and the public sector, the three most trusted institutions in Australia are public institutions – the High Court, the ABC and the Reserve Bank. In this survey by Essential Research (22.10.2012) there was not a private group in the top eight most trusted groups and institutions in Australia. The three least trusted groups were business, trade unions and political parties.

   Even conservatives acknowledge that only the public sector can provide some services such as national defence and management of the money supply. In addition, however there are economic functions where private funding or provision is possible but only at high economic cost, with distorted incentives and with serious consequences for equity. These include education, health insurance, energy and water utilities and communication and transport infrastructure. In these and other areas there are market failures for which prudent economic principles require a strong government role in funding or provision. Unless Labor articulates and defends the proper economic role of government – a pre-requisite to improving Australia’s weak taxation base – economic growth will be restrained by inadequate public spending and investment.

   Of these investments, the most important is human capital to ensure that people can develop their capabilities so that they can contribute to their full potential through employment, business or unpaid work. In the competitive global economy of this century, human capital is a nation’s only secure asset. Scandinavian countries demonstrate this. A population with skills and with incentives which match rewards to contribution will draw less on distributive welfare, preserving public revenue for needed social insurance and public goods. The best antidote to disadvantage and low self esteem is not welfare but well paid and meaningful employment.

   Labor will find it hard to make these investments if it allows itself to be depicted as the party of big welfare spending. In fact conservative governments, because of under-investment in human capital and physical infrastructure, and neglect of economic adjustment, have spent strongly on distributive welfare to compensate for inequalities rising from a weakened economic structure. Over the last 50 years, social security assistance has risen from 5% of Australians’ household disposable income to 12%. Examples of this expanded social security assistance are baby-bonuses, family allowances and superannuation concessions for the wealthy. The government is moving to wind back some middle class welfare – subsidies to private health insurance and the second baby bonus – but the justification is more about immediate budgetary management rather than an expression of principles. Rather, Labor should be the party which ensures that Australia becomes less reliant on distributive welfare. Instead of referring to ‘the education revolution’ in isolation, it should present its human capital policies in the context of a unified set of principles in infrastructure, education, health, environmental and protection, underpinned by principles of investing in capabilities, nurturing individual freedom and autonomy and supporting social inclusion.

   There is an opportunity to differentiate Labor from what has emerged as continuity between Howard and Abbott in that both are strong on distributive welfare while ready to sacrifice other aspects of government which would strengthen the economy’s capacity to provide well-paid and productive employment with less need for social transfers.

A reframing of policy in terms of strengthening the economy in order to reduce the need for distributive welfare would not only neutralise the ‘right’s’ attack on Labor as the party of the welfare state but would also give a unifying theme to many policies. It would link policies in industry adjustment, infrastructure, education, health and social inclusion. It would overcome the false framing of a trade-off between equity and efficiency. It would give Labor parliamentarians an opportunity to engage more openly with the public without the need for spin and carefully prepared texts.

1. From values to principles
   The purpose and role of a Labor Government could be to give expression to the values set out below – to achieve as far as possible the ‘common good’.

   Values such as freedom, citizenship, ethical responsibility, fairness and stewardship would be generally accepted by most people. As the values are translated into practices Labor makes a choice that can be further defined as principles that then lead to policies, e.g. the value of fairness can be expressed in the principle of a stronger link between contribution and reward- a link which has become severed by hugely disproportionate executive pay, high returns to rent seekers and financial speculators and the long head-start of inherited wealth.

The following is indicative of a set of values and their expressions in principles which could underpin a Labor platform/policy statement.

Fairness/equity

1. A ‘fair go’ is primarily about economic opportunity.
2. People should be provided with a good education and those who put it to socially useful ends should be rewarded. Governor Lachlan Macquarie was no socialist but his ‘tickets of leave’ gave the outcasts and underprivileged of this country another chance. We built a nation from the underclass. We must give a chance for newcomers and all people to have another opportunity.
3. Fairness promotes social mobility and limits division and resentment.
4. Fairness should not be restricted to education.
5. The path to prosperity with fairness is through productivity and well-paid employment rather than government handouts. The Scandinavians have demonstrated that education and incentives for participation do produce fairness and economic prosperity.
6. Fairness implies that we are tough towards ‘bludgers’, whether they be tax-dodgers, the vulgarity and indulgence of  those with inherited wealth, protection from competition, government hand-outs and favouritism or cheating on social services.
7. Fairness implies full employment as a macro-economic goal to ensure human capabilities are not wasted.

Areas where we fall short in fairness include neglect of early childhood education, treatment of the needs of indigenous people and refugees, diversion of education funding to wealthy schools, neglect of public infrastructure and inadequate ODA.

Stewardship

1. We have inherited a stock of assets or capital; environmental (forests/water), public and private physical capital (roads/ports), human capital (education), family capital (family and friendship bonds), social capital (trust), cultural capital and institutional capital (government and non-government institutions). That stock of assets must be retained and where possible enhanced.
2. We must use our resources as efficiently and productively as possible.

Areas where we fall short in stewardship include placing a heavy strain on the planet which prejudices our future. Despite the overwhelming scientific evidence on climate change we are still influenced by the sceptics who ignore the facts and cling instead to ideology.  Many super funds and fund managers ignore climate change risk. We waste water and degrade the land. We are not skilling ourselves for Asia.
Freedom

1. We all have rights to the extent that they do not lessen the rights of others.
2. Except where the rights of the vulnerable are at stake, the government should not intrude into the private realm.
3. The potential abuse of power should be minimized by the separation of powers and the separation of church and state.

Areas where we fall short in freedom include the growing power of cabinet and executive which is not adequately balanced by parliament and the judiciary. We have an ‘elected monarchy’. We have no Human Rights Act. We have reduced freedom as a result of counter-terrorism legislation. The media increasingly fails to protect our freedoms and often facilitates abuse of power by lobbyists e.g. miners.

Citizenship

1. We are more than individuals linked by market transactions.
2. Our life in the public sphere is no less necessary than our private lives. As citizens we enjoy and contribute to the public good. It is where we show and learn respect for others, particularly people who are different. It is where we abide by shared rules of civic conduct. It is where we build social capital – networks of trust. We need to behave in ways that make each of us trusted members of the community. ‘Do no harm’ is not sufficient.
3. Citizenship brings responsibilities – political participation, vigilance against abuse of power and paying taxes.

Areas where we fall short in citizenship include our withdrawal into the private realm –There are growing gated communities, private entertainment, private rather than public transport, disregard of neighbours, opting out of community through ‘vouchers’, government subsidies, private health insurance and private schools that discourage the coalescence of socially mixed communities around shared public schools.. The discussion about health is reduced to managing the system rather than the principles which should drive a health service. There is a lack of respect in the language of denigration – ‘bogans’ and ‘losers’.

Ethical responsibility

1. Those in prominent office should promote those qualities which draw on the best of our traditions and the noblest of our instincts.
2. The duty of those with public influence is to encourage hope and redemption rather than despair and condemnation, confidence rather than fear. It is to promote the common good – to encourage us to use our talents. It is to respect truth and strengthen learning to withstand the powers of populism and vested or sectional interests. This would set a tone of public discourse which nurtures public institutions

Areas where we fall short in ethical responsibility include leaders who appeal to our worst instincts, e.g. dog whistling on refugees, ‘media-drenched commercialism’, executive salaries, undue influence of vested interests and corporate lobbyists. Those in public office should help the community to deal with difficult problems which may require painful adaptive change, such as climate change, rather than provide the false comfort of ignoring or downplaying them.

John Menadue (former Secretary, Department of Prime Minister and Cabinet)

Ian McAuley (Adjunct Lecturer, University of Canberra)

December 18, 2012

The election campaign by the Murdoch media and the Coalition suggests that the Australian economy is in a mess. But almost all the facts suggest that we have one of the best performing economies in the world whether we measure it by economic growth, debt, inflation or employment.

Now a survey just released by the University of Canberra’s highly regarded National Centre for Social and Economic Modelling (NATSEM) tells us that Australian households have never been better off. The NATSEM report tells us:

• Australian households are 15% better off since 2008 when the Rudd Government was elected.
• ‘The gain in the last five years is a remarkable outcome, given the weakness of the global economy through the global financial crisis.’
• ‘The strongest contributor to the cost of living increases in the last year were utilities (+14%), health (+6.2%) and education (+5.5%) whilst costs were eased by mortgage interest (-14.5%) and audio-visual (-5.1%).
• The standard of living (disposable income less cost of living) has risen by 2.6% p.a. under both the Rudd and Gillard Governments, the same as under the Howard Government.

Whilst the ‘average’ household has been a lot better off, economic prosperity has favoured high income households. NATSEM said ‘The strong gains in the standard of living have not been equally spread across income levels.’ A particular reason for this is that the cost of living changes for the lowest quintile level over five years was 2.4% because of relatively high expenditures on rent and utilities. The highest quintile income group had cost of living increases of only 1.5% because it was particularly assisted by low mortgage payments.

This story of quite ‘remarkable’ increases in the standard of living of Australian households over the last five years is in stark contrast to the campaign of the Murdoch media, the Coalition and business interests.

Our economy is very strong. Our standard of living is rising steadily. But the government seems unable to make the case about its performance.

Its failure is overwhelmingly political.

For almost five years, Tony Abbott, Joe Hockey, Andrew Robb and Barnaby Joyce, have been giving us dire warnings about deficits and debt. You would think the Australian economy was a smoking ruin.

But the politicking over deficits and debt has changed remarkably in the last few weeks. Early this year Tony Abbott told us that he would provide a budget surplus in ‘year 1’ of an Abbott Government. Earlier this month, he said that his government would return the budget to surplus within his first three year term. Then he said that he would return the budget to surplus ‘some time over the next four years’.

He has now pushed it back even further by telling us at the Liberal Party launch in Brisbane on Sunday  that ‘we will deliver a surplus as soon as soon as we humanly can’ but he refused to give a  guarantee. But there is even more. .Joe Hockey has now told us that he will not commit to any deadline on delivering a surplus.

All the signs are that a Coalition Government will not deliver a budget surplus any earlier than the Labor Government promised for 2016-17. If anything, it is likely, on the basis of Tony Abbott’s and Joe Hockey’s comments, that the coalition would return the budget to surplus later than the Labor Government has promised. That is because we must take into account the increased expenditures that he has recently announced.

• A $5.5 billion a year parental leave scheme to be introduced in July 2015.
• An increase in defence spending from $24 billion p.a. currently, to $50 billion p.a. within ten years.
• Abolish the means test on private health insurance which would cost about $1 billion p.a.
• Additional funding for self-funded retirees via the Commonwealth Senior Health Card and more and more on roads on bridges for the National Party.

The consequences of all this is that he will not only be pushing back the time to realise his budget surplus pledge but he will be increasing public debt in the meantime which he told us was ruining the country.

The Coalition has been telling us for years that there is a deficit and debt crisis. The attacks never stopped. The language was reckless, inflammatory and fraudulent There was a budget “emergency” that had to be urgently addressed. Barnaby Joyce, who may be our next Deputy Prime Minister, suggested that the gnomes of Zurich would soon be arriving in Australia to take over our financial management because of the debt that we could not repay. The Coalition effectively frightened the community about the state of the economy. If we listened to the Coalition and the Murdoch media, one would think that the Australian economy was a basket case. Yet it is one of the best performing economies in the world and admired by well-informed commentators across the globe, including the International Monetary Fund. We have had steady growth even through the global financial crisis, low unemployment, low inflation, rising productivity, very low debt and an AAA credit rating.

Yet despite the quite remarkable performance by the Australian economy, the coalition has succeeded in persuading many that the economy is in a mess. The reverse is true.

The government facilitated this absurd focus on deficit and debt.  The government has been unable to successfully make the case that the economy is sound.

The Government has performed well on the economy. But it has two glaring problems .The first is its failure to project a compelling narrative grounded in values such as equity and fairness, freedom, citizenship and stewardship. Second it has shown political incompetence and division

All this about the phoney war on deficits and debts is not to say that we don’t need to address our long-term structural t problems. This should be addressed by taking action on middle-class welfare like the subsidies to the wealthy in superannuation and private health insurance and increasing some taxes.

But it is very clear that the coalition’s phoney war over deficits and debts was political nonsense. It is now asking us to forget that nonsense. By pushing back resolution of the deficit/ debt problem the Coalition is telling us that it was never regarded as a serious problem in the first place.

In the run-up to the September 7 elections, we will hear a lot of misleading stories about the economy and deficits.

My contention is that with the good luck of the China boom, the government has managed the Australian economy well. Our economic performance is amongst the best in the world. But the public debate has been side-tracked by nonsense about debt and deficits.

Despite the political rhetoric and the flak from News Limited, the evidence on the economy is very clear.

• Australia has had six years of uninterrupted growth even through the global financial crisis. Few countries achieved that.
• Inflation is low, unemployment is low and economic growth has been above world levels.
• In May this year John Howard said ‘when the Australian Prime Minister and Treasurer and others tell you that the Australian economy is doing better than most, they are right.’
• The three major credit rating agencies have all retained Australia at a AAA rating.
• In April this year the IMF said that ‘Australia has the strongest economy in the developed world … we expect the Australian economy will outstrip growth over all other advanced economies over the next two years’.

But the government has allowed itself to be side-tracked over the populist nonsense that debt and deficit are the important measures on the economy. The previous Treasurer, Wayne Swann, contributed to these misleading stories by continually making pledges to get the budget back into surplus when it was neither possible nor desirable. In fact, debt and deficits, whilst not unimportant, are secondary issues. Sometimes debt and deficits are appropriate, as in a recession. Sometimes they are not, as in an economic boom.

Have we got a debt and deficit problem?

• In world terms our debt problem is very small. Total net government debt as a percentage of GDP has remained very low at 12%. This compares with such countries as Japan 134%, US 88%, France 84%, UK 83%, Euro area 72%, Germany 57% and Canada 35%.
• The CEO of the National Australia Bank told us only last week that we do have a debt problem but that the problem is that we don’t have enough debt. He contended that a country such as Australia needed to borrow more for infrastructure.
• With a mistaken mindset about debt, Europe has embarked on savage budget cuts that have caused great hardship particularly for young people and encouraged nascent right-wing, anti-immigration and racist parties. Europe is rightly now regretting its obsession with debt at the expense of other important issues.

There is a long-term and structural debt issue for Australia, even if it is a minor one. That problem was largely inherited by the government from the Howard and Costello years. The Howard government locked in tax cuts over eight years from 2004. The IMF in January this year reported that Australia’s most wasteful spending came in the Howard era. Without those tax reductions in the Howard era, budget revenue would now be about $26 billion p.a. higher after adjusting for inflation.

The Rudd and Gillard  governments should have done more to reduce the relatively small structural deficits. It did not address some key areas of wasteful and inequitable spending – negative gearing on property, tax-free superannuation income for those over 60 (like me!) and the subsidy to the private health insurance industry. Taken together, reform in these areas would quickly fix the small structural deficit we have.

In short, the economy is performing well. We do not have an unmanageable deft and deficit problem.

Unfortunately the Treasurer Chris Bowen has now confused the issue by promising a wafer-thin budget surplus of $4 billion in 2016-17. Revenues are too volatile for a promise like that in three years’ time to have any credibility. That promise will play into the hands of the economically illiterate in the media who have persuaded themselves and others that the budget is the same as the economy. It is not.

The Europeans may at last be breaking free of the debt and deficit trap that has caused so much social and economic damage across Europe. Even the IMF is at last challenging the austerity mindset that took hold in Europe. There is a lesson for Australia in this.

The Australian Government has allowed itself to be manipulated into a debt and deficit trap set by the Coalition. To head off Coalition and media criticism, it foolishly decided that it must get the budget into surplus this financial year. It succumbed to this pressure despite the fact that Australia does not have a serious debt and deficit problem.

There is a risk that if the Coalition becomes the Government in September we will have established a mindset that favours austerity. That same austerity mindset has got Europe into a terrible bind with unemployment across Europe at over 11%. Youth unemployment, for people under 25 years of age, is double that general rate. In some countries youth unemployment is appalling – Spain 56%, Portugal 38%, Italy 38% and Cyprus 32%. These levels of unemployment amongst young people not only bring great personal hardship but also present the possibility of major social and political upheaval. At this stage, most of that social and political resentment has been directed against foreign workers, Muslims and outsiders. We have seen it particularly in the UK in recent days with anti Muslim clashes.

The austerity drive, bringing with it the disillusement of the young is undermining liberal democracy and spawning a whole range of populist, nationalist and neo fascist parties across Europe; the Golden Dawn in Greece, the anarchist Five Star movement in Italy, the anti Arab National Front in France and the europhobic United Kingdom Independence Party.

A great deal of this push for austerity in Europe has been supported and underwritten by conservative economists.  Rogoff and Reinhart, American economists sold us a bill of goods that once debt exceeded 90% it would trigger major economic collapse. It turned out that Rogoff and Reinhart made some major errors in their methodology, but conservative economists supported them and indulged their political ideology to try and rebut the Keynesian thesis that the boom is the time for austerity and not recession.

The right wing of the Republican Party in the US joined in the clamour for austerity. Their argument was supported by ideologues who asserted that booms encouraged moral laxity and that it was necessary to ‘purge the rottenness from the system’ as President Herbert Hoover was advised in the lead-up to the Great Depression in the US. That moral judgement is fine for people who have little to lose. But many people suffer badly..

Tony Abbott and the Coalition have been continually telling us about the perils of debt and deficits. With the Australian economy weakening as the OECD has just warned there is a risk that the Coalition will seek to imitate the austerity drive of the Europeans. That austerity drive has not reduced deficits and it has caused untold personal and social harm.

There is a clear lesson to be learned from Europe about obsessions with debt and deficits in times of recession or a weakening economy. Beware on the austerity mindset.