Mal’s Coalition cascades into chaos

When we posted How are the ‘adults’ managing our economy? on The Political Sword in April it seemed as if Turnbull’s administration of his Coalition couldn’t get any worse. We were wide of the mark! Now he sits apprehensively and indecisively on his house of cards, on tenterhooks lest he lose his balance, praying it doesn't collapse.

That piece was written as the 2017 Budget was being prepared. Scott Morrison was warning us about what we might be in for. Knowing that debt would increase, he tried to butter us up with talk of ‘good debt’ (spending on infrastructure) and ‘bad debt’ (recurrent spending on, for example, welfare). With his credibility in the doldrums, it is doubtful if anyone listened, let alone believed him.

The April piece on TPS began:
Who will ever forget the insults, the slurs, and the slander that the Coalition heaped upon Kevin Rudd, Julia Gillard and Wayne Swan as they managed the economy through the Global Financial Crisis and beyond? They were depicted as children playing games in their political sandpit with no idea of what they were doing, making one catastrophic mistake after another.

Remember how the Coalition boasted that the children should get out of the way and let the adults take over, insisting as they did that they were the experts at economic management. So convincing was the rhetoric that the electorate believed them and has consistently rated them as superior to Labor in economic management in opinion polls.

Recall the ‘debt and deficit disaster’, a mantra with which they assailed Labor for years. Remember the ‘intergenerational debt’ they accused Labor of accumulating.

Since their election in 2013 they have had their chance to show their much-vaunted expertise under the skilled management of Tony Abbott and Joe Hockey, and then Malcolm Turnbull and Scott Morrison, with Mathias Cormann a consistent shadowy presence. How have they done?
We know how they have done – appallingly. The Coalition’s incompetence and mal-administration is now legend.

Here are some contemporary facts:

Wages growth is the weakest on record, dating back to the late 1990s. Underemployment remains high with an increasing trend towards part-time work, creating the “gig” economy.

Reserve Bank governor Philip Lowe warns that record high household debt and record low wage rises are constraining consumer spending and hurting the economy.

The economy is under performing and will continue to do so through 2017 and beyond.

Stephen Koukoulas summarized the situation in The Guardian as follows: 
Based on the performance of the economy since the last fiscal update in December 2016, the budget is likely to confirm that this is a big-spending, big-taxing government with a strategy for continuing budget deficits and rising debt as it funds some of its pet projects.

It is all but certain that government debt will remain above 25% of GDP in 2017-18 and the forward estimates, meaning the government will be the first in the last 50 years to have spending at more than a quarter of GDP for eight straight years.

At the same time as spending is entrenched at high levels, the tax to GDP ratio is set to exceed 23% of GDP for only the eleventh time in 50 years. Tax revenue is growing solidly, in part in line with the expansion in the economy.

It is also close to certain that the level of net government debt will be projected to reach 20% of GDP, up from 10% when the Coalition won the 2013 election and the highest since the 1940s when the war effort boosted borrowing to record highs.
At as 30 June 2016, gross Australian government debt was $420 billion. In June 2017 the Turnbull government breached the $500 billion mark, (expressed alarmingly by some economists as half a trillion dollars) thereby doubling the deficit it inherited from Labor. Gross debt is projected to exceed $550 billion this year. Morrison is hoping to recoup some of this in this year’s budget with his $6 billion tax on the banks, but still intends to give a $65 billion of tax cuts to business!

We all know that housing affordability is worsening, locking out of the market young folk who do not have wealthy parents. The Coalition refuses to do anything about this as it sticks to negative gearing and the generous tax concessions around capital gains, thereby perpetuating the advantage moneyed investors enjoy over the young.

And as for the NBN, it continues to be a hybrid, copper-dependent mess that is not delivering what business needs, is rolling out far too slowly, and eventually will cost more than Labor’s superior FTTP design. It has been an Abbott/Turnbull debacle from the moment Abbott instructed Turnbull, then communications spokesman, to ‘Demolish the NBN’. Will it ever recover from that?

Need I give you any more evidence that our nation is steadily going backwards under the mal-administration of our economy by the Turnbull government?

On top of all this financial ineptitude, we have witnessed chaos writ large as Turnbull and the fractious conservative right squabble about how to handle the issue of same-sex marriage.

The chaos intensified when a postal ballot that will cost $122 million, was chosen. Astonishingly, the ballot won’t be carried by the Electoral Commission, but by the Bureau of Statistics, which has shown that it can’t carry out even a routine census proficiently. The High Court will decide if such an arrangement is constitutional. How the ABS will conduct the ballot is a mystery, as it’s a statistics-gathering organization. Long delays are likely before we will know the outcome of yet another Turnbull government stuff-up.

Then, as if that shemozzle wasn’t enough, Turnbull and his ministers have become entangled in the dual citizenship fiasco. They have been quite unsure how to handle it, and woefully inconsistent in their approach. Turnbull was only too ready in his characteristically sarcastic style to lampoon the Greens after Scott Ludlum and Clarissa Waters discovered their dual citizenship and resigned. “It shows incredible sloppiness on their part” bellowed our PM in parliament. Now, with several of his own ministers, no less the Deputy PM, the Deputy Leader of the Nationals, and his Minister for Industry, Innovation and Science all caught up in the saga, Turnbull’s barefaced inconsistency has been exposed. Canavan has been excluded from ministerial duties, while Joyce and Nash are permitted to continue as if nothing had happened!

All the time Turnbull is fighting a guerrilla war with the hard-right agitators in his party room, who threaten him with retribution unless he follows their dictates. He is so shackled, hog tied, clapped in irons – use whatever metaphor you like – that he is rendered impotent strategically, administratively, politically, and as a leader.

The voters continue to be unimpressed. We have now had the eighteenth Newspoll in a row where the Coalition trails Labor, this time by eight points: 54/46. If this trend continues, by February of next year Turnbull will have passed Abbott’s infamous record of thirty bad polls in a row, Turnbull’s raison d'etre for upending him.

Essential poll shows the same result. Turnbull’s satisfaction score continues on its poor trajectory, now minus 20. The Guardian features images from the Essential Report that illustrate Turnbull’s dilemma graphically.

Now that the Coalition sees defeat coming at election time, worried that Shorten’s “inequality” meme is biting, Mathias Cormann was sent out to launch a panicky attack on him in a speech at the Sydney Institute.

Writing in The Age in an article titled: 'Socialist revisionism': Mathias Cormann's doomsday warning of 'success exodus' under Bill Shorten, James Massola says: ‘Finance Minister Mathias Cormann has painted a doomsday scenario of Australia under a Shorten government, claiming a "cocky" Labor leader is relying on the politics of envy to propel him to the Lodge as people forget the failures of socialism. In an extraordinary speech …Cormann charged Shorten with making a "deliberate and cynical political judgement that enough Australians have forgotten the historical failure of socialism" and exploiting the politics of envy’, even describing Labor’s policies as akin to communist East Germany.  

Need I go on further to convince you of the widespread paralysis that is afflicting Mal's Coalition? You may care to remind yourself of what we published in April, just four months ago, in How are the ‘adults’ managing our economy? To do so click here.

The piece concluded:

The unavoidable conclusion is that this ‘adult’ government is economically incompetent, driven by its conservative rump, quite unable to see its way through the nation’s economic difficulties, incapable of analyzing the economic situation, inept at deriving solutions, bereft of planning ability, and hog-tied by ideological constraints. Moreover, it is so unutterably arrogant that it cannot see its ineptitude. And even if it could, would it be capable of doing anything about it?

As a substitute for informed opinions, all we get is self aggrandizement and platitudes from Turnbull, and a torrent of meaningless drivel from the Coalition's two motor-mouthed financial Daleks: Morrison and Cormann.

How has it come to this with the adults in charge?
Has the situation improved? You be the judge. Click here.

What is your opinion?
How do you assess the Coalition's performance?

Can it regain traction before the next election?

Let us know in comments below.

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Who will ever forget the insults, the slurs, and the slander that the Coalition heaped upon Kevin Rudd, Julia Gillard and Wayne Swan as they managed the economy through the Global Financial Crisis and beyond? They were depicted as incompetent children playing games in an economic sandpit with no idea of what they were doing, making one catastrophic mistake after another. Remember how the Coalition boasted that the children should get out of the way and let the adults take over, insisting as they did that they were the experts at economic management. More…

How are the ‘adults’ managing our economy?



Who will ever forget the insults, the slurs, and the slander that the Coalition heaped upon Kevin Rudd, Julia Gillard and Wayne Swan as they managed the economy through the Global Financial Crisis and beyond? They were depicted as children playing games in their political sandpit with no idea of what they were doing, making one catastrophic mistake after another.

Remember how the Coalition boasted that the children should get out of the way and let the adults take over, insisting as they did that they were the experts at economic management. So convincing was the rhetoric that the electorate believed them and has consistently rated them as superior to Labor in economic management in opinion polls.

Recall the ‘debt and deficit disaster’, a mantra with which they assailed Labor for years. Remember the ‘intergenerational debt’ they accused Labor of accumulating.



Since their election in 2013 they have had their chance to show their much-vaunted expertise under the skilled management of Tony Abbott and Joe Hockey, and then Malcolm Turnbull and Scott Morrison, with Mathias Cormann a consistent shadowy presence. How have they done?

I am indebted to one of our most astute political commentators, Bernard Keane, Crikey politics editor, for the best analysis I have read of the Coalition’s economic performance over the last four years. You can read it in its entirety in his article in the April 3 edition of Crikey: How the deficit was blown: The Coalition’s $100 billion bill.

I have drawn heavily on Keane’s analysis and have quoted from it substantially. Here is an abbreviated version of it. Sit down before you read it, and have a tranquillizer handy.

Keane begins:
”Since its election in 2013, the Coalition has given away $46 billion in political decisions, and signed the Commonwealth up to $50-60 billion in long-term spending that will hammer the federal budget for decades to come. (My emphasis.)

“The 2013 Pre-Election Fiscal Outlook, produced independently by Treasury and Finance, forecast a return to surplus this financial year and net debt peaking last year at $219 billion.

“The Coalition’s first budget forecast a return to surplus in 2018-19 and net debt peaking at $264 billion.

In MYEFO at the end of 2016, the budget was forecast to be still $10 billion in deficit in 2019-20, when net debt would be $364 billion.
Can you believe that after their promise to return the budget to surplus this year, and their assurance that net debt would be confined to $219 billion last year, the ‘adults’ subsequently told us that the budget would not return to surplus until 2018/19, and later that in 2019/20 we would still have a $10 billion deficit and that net debt would balloon to $364 billion, twice as high as Labor’s deficit ever was! No wonder the ratings agencies are breathing down their necks! And they still claim that the situation would have been much worse had Labor still been in government!

While Keane acknowledges that much of the spectacular deterioration of the budget under the Coalition is due to revenue write-downs, he asserts that “the government has worsened its own position through a series of political and ideological decisions that give the lie to its claims to be the victim of an irresponsible Senate”. He details the substance of those decisions as follows:
  • an $8.8 billion gift to the Reserve Bank to make the 2013-14 budget deficit look worse, and earn future dividends for the government.
  • Repeal of the carbon price cost the Commonwealth around $12.5 billion in lost revenue over the forward estimates and at least $1.8 billion per annum beyond that (based on a conservative estimate by the Climate Institute, lower than the government’s own estimate)
  • The government’s company tax cuts agreed last week will cost $5.2 billion over the forward estimates.
  • Repeal of the mining tax – despite the government’s claims that it raised no money – cost it $3.5 billion over the forward estimates, according to budget papers.
  • The reversal of Labor’s changes to Fringe Benefits Tax reporting requirements to end the rorting of novated leases cost, by its own admission, $1.8 billion over the forward estimates.
  • Income tax cuts for middle- and high-income earners cost $3.8 billion.
  • The ineffective Emissions Reduction Fund so far is costing $2.55 billion, although the government has decided no further funding will be wasted on it.
  • A Northern Australia Infrastructure Fund, established with no effective oversight, assessment or evaluation mechanisms and flagged as a funding source for unviable coal mining projects, will cost $5 billion.
  • A National Water Infrastructure Development Fund established as a funding source for Barnaby Joyce’s obsession with building more dams, is costing $0.5 billion.
  • A scheme to prop up dairy farmers threatening to desert the National Party, via the discredited means of concessional loans, is costing $0.55 billion.
  • Australia’s continuing participation in Middle East military ventures has so far cost $0.72 billion since Tony Abbott sent Australian forces back to Iraq in the name of fighting the “existential threat” of ISIS.
  • The government is spending $0.24 billion on a school chaplains program, although further funding has been halted for now.
  • Nick Xenophon extracted an additional $0.37 billion worth of conditions as price for his support for company tax cuts last week.
Keane lists several significant costs beyond the forward estimates from a number of other government measures:
  • The disastrous F-35 joint strike fighter program will cost taxpayers at least $17 billion over the period to 2023. There are new problems with the aircraft that are not being addressed or are worsening, and with no guarantees the cost will not escalate further.
  • The government’s decision to reverse the Abbott government’s approach and construct the new generation of Royal Australian Navy submarines in Australia is expected to add up to 30% to the $50 billion cost of the program in order to provide less than 3000 jobs in South Australia.
  • The company tax cuts agreed last week will cost $25 billion over ten years, although the government remains hopeful it can increase that cost to $50 billion! although there remains no evidence from anywhere in the world of any economic benefit from company tax cuts. (My emphasis)
  • The continuing fiscal impact of some of the above measures beyond the forward estimates will cost the budget, on a conservative estimate, $6 billion per annum (unindexed)
  • .
Although some of the decisions were backed by Labor such as the submarines decision, which will cost the taxpayers many billions of dollars, the F-35 purchase, and the income tax cuts, “these decisions are in defiance of evidence, represent the triumph of ideology over reason, and in many cases were rankly political." (My emphasis)

Worse, some of them are likely to generate new waves of spending: the removal of an effective, cheap carbon price in 2014 created an energy policy vacuum that led directly to the current energy crisis and proposals from the government to spend billions of dollars re-entering the power generation industry.

Our military involvement in the Middle East looks set to increase, not decrease, in coming years.

The cost of poor decision-making will be borne by taxpayers for years, even decades, to come.” (My emphasis)
It would be hard to imagine a more condemnatory account of the Coalition’s ‘adult’ management of the nation’s economy in the four years since 2013. Its predictions have all been wrong. The ‘adults’ have steadily worsened the nation’s fiscal situation. The 2019-20 budget is projected to still be $10 billion in deficit, the promised surplus is nowhere in sight, and the nation’s net debt is projected to be $364 billion, twice as high as it ever was under Labor!

In an update in Crikey Weekender: Seven new terrible economic records ScoMo set in March - Scott Morrison has some new records to add to his quest to be known as Australia's worst treasurer reads: "The Office of Financial Management released figures last week showing gross borrowings at $484.6 billion. Of this, $58 billion is residue from the Howard government or its predecessors. Labor increased it by $212 billion. Another $214.6 billion has been added since the 2013 election. Hence the Coalition has now more than doubled Labor’s gross debt, in three years and six months. It doubled Labor’s net debt in January."



The unavoidable conclusion is that this ‘adult’ government is economically incompetent, driven by its conservative rump, quite unable to see its way through the nation’s economic difficulties, incapable of analyzing the economic situation, inept at deriving solutions, bereft of planning ability, and hog-tied by ideological constraints. Moreover, it is so unutterably arrogant that it cannot see its ineptitude. And even if it could, would it be capable of doing anything about it?

As a substitute for informed opinions, all we get is self aggrandizement and platitudes from Turnbull, and a torrent of meaningless drivel from the Coalition's two motor-mouthed financial Daleks: Morrison and Cormann.

How has it come to this with the adults in charge?


What do you think?
What is your assessment of Scott Morrison as Treasurer?

Should he be replaced?

If he needs to be replaced because of incompetence, who should replace him?

Let us know in comments below.

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Watch this space in 2017


As with most political issues, the following few questions are inter-related: Turnbull’s future may well depend on the economy, on whether or not a new conservative party forms and whether there is a Trump-inspired trade or currency war between China and the US; our economy may well depend on what Trump does in relation to China, let alone whether Morrison displays any understanding of economics; and so on.

Will the Australian economy improve or continue to stagnate?

In December we had the news that the Australian economy had contracted by 0.5% in the September quarter. Most of the pundits do not expect that to be repeated in the December quarter, which means we would avoid a recession (which requires two consecutive quarters of contraction).

On the other hand, commodity prices are still weak, although better than they were, and if a US/China trade war erupts may weaken again. Every reduction in commodity prices flows through a large segment of our economy, affecting the supporting businesses and often, through reductions in the workforce, local businesses, and the impact then multiplies ultimately affecting government revenue. The Christmas season may help us avoid a ‘technical recession’ (that magical six months) but will we see another quarter or two of contraction during 2017?

This year will also see the end of car manufacturing in Australia. That has implications across a number of industries and, as some commentators have noted, it has been car manufacturing that has driven much of the technological innovation in the manufacturing sector. Turnbull’s ‘innovative and agile’ economy may become a little more wobbly as a result.

The end of car manufacturing will lead to increased unemployment, not only in the car industry but in the companies that previously relied on providing parts to that industry. Couple that with the lack of wages growth (the lowest since records have been kept) and the government will be losing more in income tax revenue and paying more in unemployment benefit, making it that much more difficult to achieve its stated aim of bringing the budget back to surplus.

The economy did not go well in 2016 and the prospect for 2017 isn’t all that good. Even in his MYEFO in December, Morrison lowered the estimated rate of economic growth for both financial year 2016‒17 and 2017‒18. The new forecast rate of growth isn’t even enough to absorb new entrants into the workforce (usually accepted as about 3%) and that is without considering that the economic growth forecasts for the past few years have proven optimistic. Certainly don’t expect a boom year but how bad it may be we will have to wait and see.

Will Scott Morrison ever understand the budget?

Ever since the Abbott/Turnbull government was elected, and returned last year, the government’s budget deficit has continued to grow. Low commodity prices, over which the government has no control, and slow wages growth, which government policies have actually promoted, have not helped.

Morrison, however, continues to focus on government spending rather than revenue raising. Although he has backed away somewhat from his earlier statement that the government had a spending problem not a revenue problem, his actions have remained focused on reducing spending. (I won’t get into the MMT argument here.)

The government has ignored the opportunity to borrow money at historically low interest rates to fund infrastructure. Although it is now talking more about infrastructure, it appears it may be at a time when interest rates could be on the rise again — US interest rates are certainly likely to rise during 2017 which may force some other countries to raise theirs in order to maintain their currency.

Our Reserve Bank still has capacity to reduce interest rates (although such reductions have done nothing to stimulate the economy so far). If it does reduce interest rates, and the US increases rates, the Australian dollar is likely to drop in value. The government will claim that helps exporters but it will increase the price of imports which may not help our ‘terms of trade’ and will also potentially lower our living standards by making imported consumer goods more expensive at a time when wages are barely growing — not something that would enhance the government’s electoral appeal.

Turnbull’s ‘innovative and agile’ economy and the promise of company tax cuts — which he continues to espouse despite it being unlikely to pass the Senate — are not issues that inspire the average voter. If any benefits are to flow to the economy from such ‘policies’, they will be well beyond the next election, so Turnbull and Morrison can’t look there for short term budget improvements but they seem to have no other plans to help the economy and by implication the average voter.

Will Morrison and Turnbull finally concede that they also need to raise revenue in the next budget? That will be one to watch although I expect that, if so, they will do their best to obscure the fact.

Will there be a new conservative party?

Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.

The Liberal party will no doubt do its best to stop it happening as it would further split the conservative vote, although that may not be an issue until the next federal election. If such a party comes into being during 2017, it could have serious implications for the government because it has only a one seat majority in the House of Representatives. Even if only one or two Liberal or National members in the House were attracted to the new party that would create a situation where not only does the government have to negotiate with crossbenchers in the Senate but also in the House to have legislation passed. Although the conservatives already seem to wield considerable influence in the Liberal party room, if they held the balance of power in the House, that could actually increase their influence. That may even be a consideration in the formation of such a party: if they wish to create Australia in their conservative image, having a couple of members in the current House could help them achieve that, or force Turnbull to another election earlier than he would wish.

The electoral implications are that the conservative vote could be split between the Liberals, One Nation, the Nationals and the new party, leaving open the possibility that Labor would lead on first preference votes in more House of Representative seats and have an improved chance of winning them. And it is likely that a proportion of the preferences for a new conservative party would flow to One Nation (and vice versa) before they flowed to the Liberals, so it would be very interesting.

The timing of the creation of such a party could be determined by the election timetable. The earliest a federal election can be called, other than another double dissolution, is August 2018 but such a party may like to test its electoral appeal at a state election. WA has an election in March which now seems too soon to establish the party and create an organisation geared for an election. SA goes in March 2018 and the earliest Queensland and Tasmania can go to an election is April 2018 and May 2018 respectively: so to be ready to contest one of those the new party would have to be created no later than the latter half of this year.

Will Turnbull remain prime minister?

Personally I think he will in 2017 but 2018 may be a different story — unless he voluntarily decides to toss in the towel, deciding it is just too difficult to govern his fractious coalition and cope with the constant negotiation with the Senate crossbenchers (and potentially House cross benchers) to have legislation passed.

As indicated above the earliest an election can be called is August 2018. I doubt he would dare have another double dissolution before then as that would not go down well with the electorate (but if he loses members in the House to a new conservative party he may be forced to). But if the economy continues to stagnate, or underperform as a result of a US/China trade war, that will reflect on the government, as economic performance always does even if the government has little real control over many aspects of the economy, and he may well foresee that he cannot win the next election — although he could leave an election as late as possible (May 2019) in hope that things will improve. Much will depend on his own vanity and desire to be prime minister or whether he sees a short stint as having achieved his ambition.

Another key factor will be the possible creation of a new conservative party. For Turnbull that could be both a blessing and a curse. A ‘curse’ for the reasons described above but a ‘blessing’ if it freed him to express more of his liberal philosophy rather than the conservative agenda. A Malcolm Turnbull who again expressed liberal views would probably reignite his support in the electorate but then both he and the Liberal party would need to decide what to do about it. While a more liberal Turnbull may attract votes, it may be just as difficult to form government if a new conservative party also attracts votes: in fact, a more liberal Turnbull may draw some votes from Labor and the Greens while some of the Liberal base goes to the new conservative party — that would really redefine the political landscape in Australia. It could also lead to a minority government and I doubt Turnbull would want to be in that situation.

Turnbull will have much to ponder particularly in the latter half of the year unless there is an unlikely improvement in the economy and unless the Liberal party is able to forestall the formation of a new conservative party or even the growth of conservatism in its own ranks. Will Turnbull want to continue to lead unless those things come to pass? Will the conservatives in the party room decide to move against him for a genuinely committed conservative leader rather than one who panders to them only to keep the job? After all, the result of the 2016 election means Turnbull does not lead from a position of strength.

Abbott has spoken against the rise of a new party and will some in the Liberal party see Tony Abbott as the one who can provide a bulwark against defections to a new conservative party or even its creation? Although perhaps not intended, the pressure created by threats of a new conservative party may well enhance the chance of an Abbott return to counter it.

Will Trump really threaten the world as we know it?

While Trump may cause problems for the US with his apparently contradictory promises to halve the company tax rate, spend billions on infrastructure and improve the US budget bottom line, their impact on Australia will play out indirectly through the international financial system. Of more direct consequence to Australia could be his trade and foreign policies, particularly relating to China.

Trump may wish to be more friendly with Putin and Russia but he will have to remember that China and Russia are still close, if not as close as once they were. He also sees North Korea as a threat but will have little scope to do anything about it without Chinese support although he thinks that using trade as a lever may also force China to act. He may think he is a good negotiator but he and his appointees will run up against expert negotiators and some, like the Chinese, are certainly willing to play the ‘long game’, something which Trump and his ilk seem unable to do.

Australia may continue sitting on the fence and use ‘diplomatic speak’ to suggest that differences should be resolved diplomatically but that may become more difficult under a Trump presidency. Will Australia be forced to side with either the US or China on some key issue? That will be a difficult position for Australia given that they are two of our biggest trading partners.

On trade, Trump is keen to scrap US involvement in the TPP which will effectively be its demise. Turnbull has consistently insisted that the TPP is essential to Australia’s future, so what will its demise mean for that future? It will be another piece of Turnbull’s economic plan that fails to materialise — which in the case of the TPP may not be a bad thing.

The main concern is a potential trade war between China and the US. If the US becomes more protectionist and imposes tariffs on Chinese imports, that may reduce Chinese production which in turn will reduce demand for Australian resources, with all the economic consequences that implies. It could also mean that China sends more cheap goods to Australia that formerly went to the US and that could further undermine what manufacturing we have left unless we also declare that they are ‘dumping’ goods in Australia and impose punitive tariffs which will essentially be biting the hand that feeds us. If this scenario unfolds, Australia will be in a difficult place economically and in how to respond to the challenges it throws up.

In turn, it may also mean that China pays more attention than it already does to developing nations in Africa and the Pacific and that will have foreign policy implications for Australia. We have been cutting our foreign aid budget but if China redirects its effort, we may be forced to do more in that area or accept further growth of Chinese influence in the region — which way will we go?

Conclusion

The above are just a few of the questions that could arise during 2017.

Others include:
  • Will the housing bubble burst and the construction boom come to an end?
  • What will be the effect if we lose our AAA credit rating, not just for government but for our banks?
  • How will Australia deal with Brexit and the need to negotiate separate trade deals with the EU and the UK?
  • How will we address problems meeting our climate change commitments under the Paris agreement?
And of course there are the perennials such as how we handle refugees and Australian Muslims which will be influenced by the rise of the conservative forces.

It may prove to be an interesting year both here in Australia and internationally.

What do you think?
What are your answers to the questions?

What other questions will Australia face in 2017?

Let us know in a comment below. We may use some of your suggestions for future articles.


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Planning - Turnbull’s black hole



Let’s stand back from the daily tumult of federal politics momentarily, hard though it is to ignore, and look into the distance. What do we see? Given that politicians believe their role is to make this nation a better one for us all, where is the evidence of them planning to make it so? Where is the Turnbull Team's much touted 'Plan for a Strong New Economy' that the logo promised?

Let us start with a recent calamity – the electricity blackout in South Australia. The complexities of how this came about will be explained by Chief Scientist Alan Finkel’s enquiry. This is not the place to predict its outcome, but already there is evidence of a lack of planning that has contributed to this disaster.

Although the States and energy generators and providers have responsibility for energy supply, the federal government has overriding responsibility for energy security – indeed Environment and Energy Minister Josh Frydenberg declared the day after the calamity that "Energy security is the federal government’s number one priority." Did anyone hear him uttering these weighty words anytime before it occurred. No. This was a newfound mantra, now so important that it supplanted the Coalition’s top priority – national security. Turnbull concurred.

Which raises the question of exactly how much planning the feds had made to ensure energy security. Had they contemplated the effect that intermittent (or asynchronous) energy generation from renewables might have on the electricity grid and the constancy of supply?

They have known for years that renewable energy generation has been rising steadily. At the end of 2015 there were 77 wind projects, with 2064 turbines generating 4187 MW of power, with a further 365 MW under construction. Almost a year later there are many more. As at March 2015, in addition to household solar panels, there were over one hundred solar projects generating 4,100 MW of photovoltaic solar power.

This is not restricted information – it is freely available on the Internet. Yet there seems no evidence that the federal government and its Energy Minister have undertaken any planning to integrate intermittent power generated by wind or sun into a network that hitherto has been powered by regular base-load power generated from burning fossil fuels. There are complex arrangements already in place to modulate the level of power in the grid, which allow changes to the levels of power occasioned by intermittent power inputs. These arrangements are said to have failed during the fierce SA storm with its gusts of up to 140km an hour and over 80,000 lightening strikes, which took down 22 power transmission pylons and three transmission lines.

The consequent sudden drop in energy frequency in the network triggered an automatic cut at the interconnector with Victoria to protect the national network. SA Premier Jay Wetherill said: "The system behaved as it's meant to behave to protect the national energy market", but the federal Energy Minister and the PM seemed not to understand this reality, nor were they prepared to take any responsibility for this vulnerability despite trumpeting that ‘energy security was their top priority’. What they did do immediately though was to make political capital by castigating State Labor governments for their ‘unrealistic and ideologically-driven targets for wind power’; thereby insinuating that reliance on wind power was a prime cause of the disaster.

Frydenberg then called an urgent meeting with State energy ministers to discuss how the national electricity grid might be better protected in future. Why was this the first such meeting?

If ever there was an example of a gross planning deficit at a federal level, this is it. A Turnbull planning black hole!

Marriage equality
The marriage equality issue is another example of poor planning. Propelled by the promise to his right wing to continue Abbott’s policy, Turnbull has persisted with the plebiscite idea, which will be stone dead once the Senate rejects it.

Turnbull, despite his personal support for marriage equality and his proclaimed confidence that both the people and the parliament would support it strongly, has no Plan B. For him, Plan A, the plebiscite, is all there is. Other leaders have been able to change their mind in the face of an alternative view in the electorate (Mike Baird springs to mind), but so controlled is Turnbull by his conservative rump, which refuses to even consider a Plan B, that he will not to listen to the increasing public clamour for marriage equality and the rising desire for a parliamentary vote rather than an expensive and divisive plebiscite. A sound planner would have anticipated that the long and loudly voiced resistance to a plebiscite by Labor, the Greens and several crossbenchers in the Senate would eventually kill the plebiscite plans, leaving him with nothing.

Bernard Keane of Crikey has this cryptic view: “…there is a Plan B, even if the Prime Minister won’t discuss it. It’s to hope the issue that has hovered over federal politics for more than a year goes away, put off until at least the next election!” 2353NM analyses this issue at length in Turnbull – Abbott from a better postcode.

Turnbull’s lack of an alternative plan for introducing marriage equality is another planning black hole, one that is distressing to the LGBTI community. He ought to have anticipated the outcome now upon him and have planned an alternative approach.

Budget planning
This constitutes another black hole.

How long have we had to endure the ideologically driven budget planning that started with Joe Hockey and was continued by Scott Morrison and Mathias Cormann? We know that it is based on supply-side (trickle down) economics, which benefits the top end of town but penalises those lower down the pecking order. We know that the touted benefits of increased investment, more jobs and better pay for the workers are illusory, unsupported as they are by historical evidence accumulated over many decades. Yet they persist, driven by their ideological disdain for the ‘leaners’ whom they insist depend on the ‘lifters’ who work hard and pay their taxes.

You might be interested to view this You Tube video by economist Robert Reich, former labor secretary to US president Bill Clinton, which addresses this issue:



It goes on still. Only last week the Coalition, backed by Labor, passed a bill that embraces trickle-down economics – the Income Tax Relief Bill – which will drop the marginal tax rate for the $80,000-$87,000 bracket from 37 to 32.5 per cent. This was reported upon comprehensively in The New Daily, an abbreviated version of which follows:

Treasurer Scott Morrison sold it as an income tax cut for “middle income” workers, but The Australia Institute insists it’s not a cut for middle earners because average income earners don’t earn anything like $80,000 a year. Anyone on $80,000 a year is in the top 25 per cent of income earners, and this figure doesn’t include age pensioners, the unemployed, and the disabled. If they were added in, it would push those on $80,000-plus close to the top 10 per cent. While it’s true the average full-time worker earns just over $80,000, that figure is misleading; the Institute’s economist pointed out that when part-time workers are factored in, the average wage drops to $1575 a week, which works out to roughly $60,000 a year.

It’s even worse for women. The average female worker earns only $925 a week, which is about $48,000. Female workers constitute only 39 per cent of those who earn $80,000-plus.

Not only will the tax cut not benefit ‘middle’ Australia, but it will cost the Budget $3.9 billion over the next four financial years.

Giving an extra $315 a year to low-income earners would ensure it was spent immediately, resulting in much-needed economic stimulus, whereas higher earners are likely to bank more of their tax cut – trickle down will not occur.

There are other approaches. Take Mark Dayton, Democrat governor of Minnesota, who won office in 2010. This is what the US blog Mic had to say about his approach: 
“Since 2011, Minnesota has been doing quite well for itself. The state has created more than 170,000 jobs, according to the Huffington Post. Its unemployment rate stands at 3.6% - the fifth lowest in the country, and far below the nationwide rate of 5.7% - and the state government boasts a budget surplus of $1 billion. Forbes considers Minnesota one of the top 10 in the country for business.

“Given that Dayton is a well-connected millionaire whose family controls the Target fortune, one could be forgiven for thinking this was the result of embracing the corporate world. But in fact, over the past four years, the state has undergone a series of policy reforms that most of the corporate world decries: It has imposed higher taxes on the wealthy and raised the minimum wage. (My emphasis)

“When each of these progressive policies was initially proposed, Minnesota Republicans made dire predictions about their effects on the economy, and argued that bleeding-heart concerns about economic fairness would stifle growth. Despite all the warnings, Minnesota's economy hasn't tanked. Instead, it's sailing with greater force than it has in years.”
The Mic article contrasts this with the situation in the adjoining state Wisconsin.
“As Minnesota has enjoyed economic success, observers have often compared the state's situation to that of its neighbor Wisconsin. Republican Scott Walker also won the governor's mansion in Wisconsin in 2010, but pursued a deeply conservative agenda for managing the economy. He made huge spending cuts to vital services ranging from education to health care. He reduced taxes on the wealthy, and got rid of tax credits for low-wage earners. (My emphasis)

By a number of measures, Wisconsin hasn't fared as well as Minnesota. As the Milwaukee Sentinel Journal documents, Wisconsin's job growth has been among the worst in the region, and income growth is one of the worst in the country. It has a higher unemployment rate than Minnesota. And the budget is in bad shape.
This is just one example; there are others. But it illustrates two vastly different approaches to economics: one that increases taxes on the wealthy and increases the minimum wage, and the opposite: one that reduces taxes for the rich and cuts services, and shows that the former is superior.

Why can’t Turnbull, Morrison et al consider approaches other than the traditional conservative one of cutting services and giving tax breaks to the well off? Why haven’t they got a Plan B? The truth is that this is another Turnbull ideologically driven planning black hole. So driven are they by their supply side ideology that believes economies are stimulated by giving tax cuts to the top end of town, that they are unable to consider an alternative approach. The have a Plan A, but no Plan B. This planning black hole leaves them shackled to a discredited economic policy.

In their economic planning, have they ever considered the merits of Modern Monetary Theory as described by Ken Wolff in Modern Monetary Theory and will it help? The answer is: 'almost certainly no'.

What Government planning is evident as we approach an economy where many jobs will be automated, both manual and cognitive, and unemployment and underemployment will rise? Have they thought about and planned for the ‘gig economy’ described by Ken Wolff in Are governments ready for the coming economic and social changes? The short answer is: ‘not that any of us can see!’

Economic planning is among the government’s poorest efforts, leaving us all vulnerable, and many of us worse off.

Inequality
There is now abundant evidence that inequality is a social burden for millions of people in our country and in many others. A large part of the phenomenon we witness day after day as America prepares for its presidential election is the direct result of vast swathes of the nation feeling left behind, while the political establishment does little to elevate them from their impoverished state. Thus people like Bernie Sanders, who press for more equality, excites many followers, and even the arch-capitalist Donald Trump attracts supporters by promising to fix the ‘corrupt’ political establishment that he claims cares little for them.

We know too from the work of Professor Michael Marmot that health inequality runs parallel to economic inequality. Those with the least, those with the poorer jobs, have the worst health.

In The neoliberal execution of democracy, Ken Wolff describes in detail how neoliberal politics promote inequality. He quotes Noam Chomsky: “Neoliberal democracy, instead of citizens, produces consumers…The net result is an atomized society of disengaged individuals who feel demoralized and socially powerless”

Where are the Turnbull government’s plans for decreasing inequality? The Coalition is doing nothing to ameliorate the growing inequality that exists; indeed their neoliberal actions are making it worse.

Climate change
Here is where planning by the Turnbull government is so appalling. We know that its Direct Action Plan, Plan A, is a fraud. At this historic time when the world has crossed the threshold for the Paris agreement to take effect, the United Nations is challenging Australia’s policy. A report in The Age only last week read:
“Australia is facing renewed international pressure to explain what it is doing to tackle climate change, with a United Nations review finding its emissions continue to soar. Several countries are calling for clarity about what it will do after 2020. Countries including China and the US have put more than 30 questions to the Turnbull government, asking for detail about how Australia will meet its 2030 emissions target and raising concerns about a lack of transparency over how the government calculates and reports emissions.

“It comes as the federal government has been facing calls at home - sparked by its own criticism of ambitious state renewable energy targets - to reveal what it would do on climate change and clean energy beyond 2020. An expert review commissioned by the UN found, based on data submitted by Australia, its emissions would be 11.5 per cent higher in 2020 than they were in 1990.”
The Turnbull government has no Plan B for mitigating global warming even although Plan A continues to be ineffective.

GST in WA
Malcolm Turnbull made a big pre-election political play when in Western Australia about its unfair share of GST revenue and promised to fix it. Several months later there is no fix, nor is there any plan to do so. In his quest for a fairer share of GST for WA, and in the absence of any action by Turnbull, Brendon Grylls, (who is also attempting to regain his position as Leader of the WA Nationals), is promoting a mining tax, which would increase WA’s GST take. He is highly critical of Turnbull for having no plan to match his words.

Here’s another planning black hole with which the Turnbull government is riddled!

I could go on and on, but let’s finish with a laughable procedural planning shemozzle.

Procedural non-planning
With just a one-seat majority, it would be reasonable to expect careful planning in the area of parliamentary procedure. But already, in just a couple of months, the Turnbull government has suffered three defeats on the floor of the House because some of its members decided to leave on an early flight home, and last week Kelly O’Dwyer managed to embarrass the government through a procedural bungle by accidentally endorsing a bill amended by Labor, which criticized the Government. Of course she, the Manager of Government Business, Christopher Pyne, and the PM tried to play down the incident, but observers see it as a metaphor for the awful planning of the Turnbull government.

Whichever way we turn, wherever we look, we see either no planning in critically important areas, or faulty planning that imperils the Turnbull government, and of course we the citizens who depend on government to do those things that keep us safe, that enhance our prosperity, that give each of us a fair go, that enable us to be part of an integrated multicultural society which cares for all its citizens, rich and poor, able and disabled, healthy and ill.

The Turnbull government is letting us down badly because of its many planning black holes.
And sadly there is no sign that planning will improve in the time ahead.




What do you think?
Let us know in comments below.

Can you think of Turnbull's other black holes?

What evidence do you have?
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Beware, there is a plan


There is much talk about the ‘chaos’ of the Abbott government but take a close look at what has been done, what it is talking about, and the reports it is gathering together. We need to look beyond the political catch-cries of the ‘debt and deficit disaster’ and ‘Labor’s mess’ and examine what is driving this government.

A simple starting point that helps explain Hockey’s 2014-15 budget is his mantra regarding the ‘end of the age of entitlement’. After obtaining government, and refusing assistance to SPC early in 2014, Hockey rolled it out:

Treasurer Joe Hockey has bluntly warned Australians that the days of governments saving businesses and jobs had passed, telling them, ''the age of entitlement is over, and the age of personal responsibility has begun''.

For Hockey that was not something new but something he brought to government with him. He had spoken about it earlier, while still in opposition, in a speech in London in 2012 and he did not abandon it. (I think many politicians have a rigid agenda about at least one item that they return to in one form or another: just as Peter Reith, even now as a political commentator, continually returns to the need for labour market reform.) The underlying message of Hockey’s ‘end of the age of entitlement’ is that there will be no more ‘socialist’ welfare policies. It is a clear catch-cry that government provided welfare is ‘socialist’ and discourages the independent, self-interested economic spirit which his, and the current Liberal party’s philosophy is based on. As Hockey said in London:

Entitlement is a concept that corrodes the very heart of the process of free enterprise that drives our economies.

In that approach everyone has to pull their weight, that is work, and get ahead by their own effort. It actually follows, in a slightly twisted sort of way, that government support (‘entitlement’) for the top of end of town is ‘good’ because it supposedly promotes economic activity that, in turn, provides the jobs that the otherwise lazy ‘dole bludgers’ require when they no longer have an ‘entitlement’ to socialist welfare. But Hockey did also warn that businesses need to be viable and not expect government assistance — it is just that not every member of the government agrees with him, particularly the Nationals when it comes to supporting farmers.

At the end of March, Hockey released the government’s tax paper. While he claimed everything was ‘on the table’, a number of commentators did suggest that it was primarily about increasing the GST, either in nominal value or the range of goods and services covered, or both. Even if we try to believe that the government will look at issues like ‘negative gearing’ and concessional tax rates for superannuation, we can’t be sure because Abbott continually repeats one of his new three-word slogans that under his government taxes will be ‘lower, simpler, fairer’. And he consistently promises that company tax will be lower: although company tax has provided as much as 25% of government revenue it currently provides about 18% (or about 22% if we take out the GST, which we must remember all goes to the states and territories and adds nothing to funding of commonwealth spending); so lowering the company tax rate requires higher taxes elsewhere or more cuts to government spending — no prize for guessing which way this government will go. Why was the government apparently so keen to increase the GST when it gains nothing from it? (Although the government has currently ruled it out because it cannot get bipartisan support, it has managed to put it in the public arena and it is being discussed, so I think it will raise its head again — read on.)

The answer lies in another White Paper the government is preparing on ‘federation’. Its purpose is described as follows:

Increasing overlap between the roles and responsibilities of all levels of government over recent decades has undermined the efficiency and effectiveness of our Federation. Hence, the Prime Minister and the Premiers and Chief Ministers have agreed that the Reform of the Federation White Paper should focus firmly on clarifying roles and responsibilities between different spheres of government and the need for all levels of government to coordinate action to ensure the best possible results for citizens.

A discussion paper was issued in February this year which raised the problems of vertical fiscal imbalance (VFI):

VFI refers to the mismatch between the expenditure responsibilities of the States and Territories relative to the revenue they raise, making them reliant on transfers from the Commonwealth to finance their activities. Around 45 per cent of total State and Territory revenue now comes from the Commonwealth (including the GST), although this varies across jurisdictions.

The existence of VFI is not necessarily a problem in itself, but a high degree of VFI creates perverse incentives for both levels of government. It allows the Commonwealth to act in ways which can compromise the autonomy of States and Territories in their own sphere, thus creating confusion about democratic accountability. A high degree of VFI also creates incentives for the States and Territories to blame the level of Commonwealth funding for problems in State-delivered services, rather than to make the case to their own electorates for raising more funding from their own revenue sources. [emphasis added]

Now you can see why increasing the GST is important. It is not directly for the federal government but will allow the federal government to pull back from services under the control of the states, particularly in health and education. In March 2012 Abbott told the Victorian Employers’ Chamber of Commerce and Industry, in discussing his plan for a Commission of Audit when in government:

"Other questions that the Commission of Audit might ponder could include: whether the federal Health Department really needs all 6000 of its current staff when the Commonwealth doesn't actually run a single hospital or nursing home, dispense a single prescription or provide a single medical service?

"Whether the Federal Education Department really needs all 5000 of its current staff when the Commonwealth doesn't run a single school?” [emphasis added]

So for Abbott and Hockey the two papers are linked. Abbott can keep his promise to lower commonwealth taxes because his government will be providing less assistance to the states, other than through redistributing the GST (they hope for an increased GST). No need for commonwealth support of hospitals or schools because they are not commonwealth services.

And how many other commonwealth government services can he be rid of? The answer lies partly in deregulation and privatisation. During the Howard years, Peter Reith said that if a service was available in the Yellow Pages, there was no need for government to provide it. They applied that to IT services and outsourced departmental IT services and created a host of problems. Similarly they privatised employment services. While that still costs the government money, it has faith, because it believes in market liberalism, that such services are more efficient and cheaper. I won’t go into the argument as to whether or not that is true but only make the point that it is an underlying belief of recent Liberal governments.

Although ‘post and telegraph’ was specifically mentioned in the constitution as an area of commonwealth responsibility (that is, for which it could legislate), we have seen that power used to privatise most aspects of those services. The same goes for banking which was deregulated and the government-owned Commonwealth Bank sold off.

Now we have this government, with Pyne leading the charge, attempting to deregulate another sector: higher education. If it is successful, it will further reduce federal government funding for the sector and reduce commonwealth revenue requirements — allowing more room for ‘lower’ taxes. Universities were originally established under state legislation and it was not until after WWII that the federal government moved into the area to fund the demand for teachers to meet the needs of the ‘baby boomers’ and also to enhance education for the post-war reconstruction. It was not until 1974 that the commonwealth assumed full responsibility for universities (and the establishment of CAEs under the Whitlam government). Now with that power, introduced by a Labor government, Pyne and Abbott look to dismantle the system and effectively privatise it. Universities are already largely independent and this will make them more so without the constraint of meeting government funding requirements: it will also reduce, if not remove, the capacity for government to influence requirements for the broader economy — as was done with the post-WWII need for teachers — but that also fits the plan as it will be the market determining what professional skills are required and what it will pay for universities to provide them. It’s a shame that there is not a ‘market’ for teachers in the public sector — no, that will be totally up to the states under the Abbott/Hockey plan.

Part of the reason the commonwealth government moved, over the years, into areas like health and education was to ensure some form of national consistency or, as in the case of universities, to meet particular national needs. A prime example was in trade-training (provided largely through TAFE at the state level). For many years there was a ridiculous situation (that almost everyone knew was ridiculous) that a tradesman, say a plumber, in one state could not operate in another state unless he went through a process of registration in that state to recognise his qualifications — and if the plumber moved to yet a third state, he would need to go through the process again. Simple enough one would think but the states demanded more money to make the necessary changes. A similar process occurred in the more recent development of the national curriculum for schools when the states also sought more money to implement it. So, if the commonwealth has moved into such areas, it has often been for good reason and it was the states that demanded commonwealth funding as part of the price of their agreement.

It is true that the federal government does not have specific power to make laws about schools and hospitals, except to the extent that the states agree, but while it controls the purse strings, it obviously can have an influence and, as was done in health, link funding to the achievement of particular outcomes and attempt to ensure that the outcomes are consistent at a national level. And, in some areas, like the environment, it can call on its ‘foreign affairs’ power in terms of meeting international agreements to which it is signatory (which was how the Franklin dam was stopped — a valid commonwealth law over-rides state law to the extent to which the two are inconsistent). But the Abbott plan sees no need for the commonwealth government to exercise such powers and would prefer to leave the environment to the states.

So beware, this government is not as shambolic as it sometimes appears. It wishes to deregulate and privatise and hand as many services as possible to the market; it will hand back as many public services as it can to the states on the pretext that the states should be responsible to their own electorates for the costs of education, health and similar services. Abbott may be able to provide ‘lower, simpler, fairer’ taxes because the federal government will be providing little in the way of services. He can increase the GST and argue it is because the states need the money, not his government, and boast that he can lower taxes but that will only be for the commonwealth: it is likely that state charges will need to rise to meet the additional fiscal responsibility they will have to take on — so individuals may be no better off, perhaps even worse off. But that is consistent with the overall plan, the neo-liberal plan of lower taxes and small government, at least at the commonwealth level where Abbott and Hockey can apply it.

With that approach, perhaps we won’t need a federal government other than for defence, foreign policy, astronomical and meteorological observations, post and telegraph, and lighthouses. That rings a bell — something in our original constitution!

Floating above the economic approach, we have Abbott’s moral view of ‘Team Australia’, a white Australia that was only ‘bush’ before the arrival of the first European settlers, that requires values acknowledging the role of knights and ladies, that considers ‘work’ is the only validation of a person’s worth to society — unless of course you are rich and helping the economy in that way (whatever way that is — perhaps spending money on Qantas flights to travel to the casinos of Monaco!)

There is no room for ‘leaners’ in Abbott and Hockey’s plan; no room for ‘entitlement’ (aka ‘socialist’ welfare); no room for government services that the market can provide; no room for public services that the states can provide. It is the age of ‘personal responsibility’: bugger the ‘fair go’ and government assistance, you have to look after yourself! And as a result, the commonwealth government will proudly offer you lower income and company taxes — even if the states have to raise theirs.

Yes, there is a plan but not one that we can look forward to. Little wonder they don’t spell it out!

What do you think?

About Ken

Ken thinks Abbott and Hockey do have a plan. Perhaps not a good one but at least a plan — or perhaps we should call it a ‘hidden agenda’ since they won’t talk about it. Let us know whether you think Ken is right.

Next week 2353 looks at ‘The saga of Billy Gordon’ and raises important issues about where we should draw the line regarding a politician’s past indiscretions and their use for political purposes.



The ‘trickle-down’ effect


Next time a conservative politician or acquaintance tells you that tax cuts for the better off will help the state or nation’s economy, you might want to have ‘the discussion’.

Tax cuts for the better off is part of a theory of economics known as ‘trickle-down’ that seeks to prove that if the tax cuts are given to the better off, they will spend more, increasing the demand for goods and services to the direct benefit of the economy as well as the government’s tax revenue. So we’re all on the same page — here is a ‘trickle-down theory’ definition:

An economic idea which states that decreasing marginal and capital gains tax rates — especially for corporations, investors and entrepreneurs — can stimulate production in the overall economy. According to trickle-down theory proponents, this stimulus leads to economic growth and wealth creation that benefits everyone, not just those who pay the lower tax rates.

Probably the best known example of this theory around the world has been the Reagan Presidency in the United States. In the early 1980’s, he cut the top tax rate by 20%! Most conservative governments have also implemented similar cuts in the past although, to be fair, not of the same magnitude. Conservatives will also tell you that government spending should be reduced to an absolute minimum and the government’s budget should balance. Forbes (an American business publication) as recently as 2013 has been arguing that while it finds the term ‘trickle-down theory’ objectionable, it is a valid theory that has worked in the past. According to the article, the term was coined —

… by Democrats in the 1980s as a way to attack President Reagan’s economic policy combination of tax rate cuts and some relaxation of federal regulations. They needed a catchy, easy-to-remember zinger to fire at Reagan; a line that would keep their voting base angry.

The article goes through all the usual conservative talking points: small government is less of a drag on the economy; people need work rather than infrastructure such as schools and transportation; the better off are the ones that create wealth; that Obama is to blame and so on. It finishes with this:

What poor people should want is more freedom and more growth, so they will have better opportunities. The deceptive “trickle-down economics” notion was crafted to take advantage of their ignorance about the way the world works. Perhaps one day the pitiable Americans who now cheer when politicians who masquerade as their friends denounce “trickle-down economics” will realize that the massive federal Leviathan is their enemy.

While I take the point that the term ‘trickle-down theory’ may have been coined by a member of the Democratic Party in the US and it does have more ‘zing’ than ‘supply-side economics’, the fact is that the theory is all about those who are better off supporting the economy and the government reducing its influence. The conservatives have their own ‘zinger’ name for the theory as well — ‘Reaganomics’. Regardless of the name you want to give it, the theory suggests that benefits of tax cuts to the better off are supposed to flow to those that are less well off. If that isn’t trickling down, what is?

The other argument is that the reduction in regulation assisted Americans to find jobs — and contribute to the economy. While to an extend it did, the majority of the Reagan era was during a time in the world’s economic history when the economy was chugging along nicely thank you very much. It could also be argued that the seeds for the current social and economic woes in the USA were sown in that era where personal wealth was a far greater concern than the common good.

Seems it’s all cut and dried then, doesn’t it? US and Australian conservatives still call for a return to ‘supply-side’ or ‘trickle-down’ economics (depending on your point of view), citing amongst other justifications, Reagan’s success in 1981 in reversing the US recession.

Reagan’s tax cuts are claimed to be the event that ended the recession of the late 1970’s and early 1980’s in the USA. But what is (conveniently) forgotten is that he increased government spending by 2.5% at the same time. Government spending also stimulates the economy. Therefore the most cited example of the benefits of this economic theory doesn’t stack up, as there were other influences at the time. Despite later increasing taxes for the better off, Regan also tripled the US Federal deficit from 1981 to 1989 — hardly the action of a government reducing influence in the economy. George Bush (the elder) also increased taxes despite a ‘no tax increases’ promise.

Recently the Huffington Post reported on the success on the Governor of the US state of Minnesota (Mark Dayton) and his remarkable turnaround of the state’s economy. The full article is here and the highlights are that when he took office in 2011, he inherited a deficit of US$6.2 billion and 7% unemployment. In 2015, Governor Dayton handed down a budget surplus of $1 billion that he has pledged to spend on transportation and education. Unlike nations, US (and Australian) states do not issue their own currency, so balanced budgets are considerably more important than at the federal level.

Dayton is an interesting person. He has been in politics for some time but considered to be a terrible ‘retail’ politician. According to Mother Jones:

An heir to the Target retail fortune, Dayton, 68, has ploughed tens of millions of his own money into his campaigns, but it still hasn't come easy. He swallows his words in a rush, speaking in almost-unintelligible mumbles and frequently losing track of his point as he rambles on unrelated tangents. "He's not a terribly articulate guy," says Larry Jacobs, chair of the University of Minnesota's public policy school. "He's not a smooth talker; he struggles to give a smooth public speech." At public events, Dayton hunches his shoulders, which makes him appear shorter than his 5-foot-10 frame, and often appears to be trying to disappear into the crowd. No one wonders whether he'll seek national office someday. He's not the leader of the free world — he's your dad, struggling to make small talk with you and your friends after you get home from school.

So how did Dayton do it? Well you could say he threw the ‘supply-side theory’ out the window. Not only did he raise taxes on the highest earners in Minnesota; he increased the basic wage in the state to $9.50 an hour. Mother Jones reports:

Republicans went berserk, warning that businesses would flee the state and take jobs with them.

The disaster Dayton's GOP rivals predicted never happened. Two years after the tax hike, Minnesota's economy is booming. The state added 172,000 jobs during Dayton's first four years in office. Its 3.6 percent unemployment rate is among the lowest in the country (Wisconsin's is 5.2 percent), and the Twin Cities have the lowest unemployment rate of any major metropolitan area. Under Dayton, Minnesota has consistently been in the top tier of states for GDP growth. Median incomes are $8,000 higher than the national average. In 2014, Minnesota led the nation in economic confidence, according to Gallup.

Scott Walker is the Republican Governor of Wisconsin — the neighbouring state to Minnesota — and a potential Republican Presidential Nominee in 2016. For decades, the two states have been comparable in a number of social and economic criteria. In the past few years, it seems that the ‘unlikely politician’ in Minnesota is outperforming his counterpart in Wisconsin according to a number of sources including Minnesota Public Radio and Econbrowser. Walker was also the subject of a ‘recall election’ in 2012, when in excess of 500,000 Wisconsin voters petitioned for Walker’s removal from office. He won the subsequent re-election — only after allegedly receiving considerable financial support from outside the state. CBS News in the US is reporting there are some potential problems with the morals and ethics of how Scott Walker manages his fundraising. Never the less, Walker is seen as a conservative hero by legislating to remove considerable negotiating power from the public service unions in Wisconsin and other US states as detailed in this article from The New York Times . Walker is now claiming that his ‘success’ with unions gives him the experience to deal with Islamic State (when he becomes a Republican President in 2016 you would have to assume). Fighting with unions and reducing public services are not unknown in Australia under the current federal government or its predecessors. Dayton has announced that his current term will be his last — and yes, he did have to wait until the ‘stars aligned’ to actually perform what is considered to be a remarkable recovery.

Australia’s newly appointed (in January 2015) Treasury Secretary, John Fraser, has gone ‘on the record’ claiming that ‘Reaganomics’ had some positive effects. Gareth Hutchens, writing for Fairfax media (link above) suggests that the view of Fraser is somewhat different to Martin Parkinson and Ken Henry — the previous two Treasury Secretaries. Given that Parkinson and Henry demonstrated their credentials during the Global Financial Crisis and its aftermath, Fraser has some large shoes to fill.

It is fair to suggest that there will be economists discussing the benefits of ‘trickle-down economics’ for years to come. However, Governor Dayton has clearly demonstrated that trying to make society more equitable by increasing the basic wage and taxing those that can afford to fund the services will not only improve the state’s bottom line, it will improve the quality of life enjoyed by all its citizens, then when the ‘payoff’ comes, services such as education and transportation can be improved using government funding. It seems there is a better way than the frequent calls for ‘tax cuts for the well-off’.

Minnesota and Wisconsin have seemingly been joined at the hip economically and socially for a considerable period of time. Governor Dayton has improved the living conditions of those in his state, reduced unemployment and is now funding improvements to transportation and education using methods that are certainly not supported by Australia’s Treasury Secretary Fraser or Treasurer Hockey. Governor Walker cannot replicate the success of Dayton (or Reagan for that matter) using ‘traditional’ conservative economic measures in neighbouring Wisconsin; accordingly the citizens of that state are falling behind their ‘long time equals’ who live over the border in Minnesota.

So next time you hear the call for tax cuts, austerity and ‘small government’; why don’t you think about Minnesota’s Mark Dayton and have ‘the discussion’ about a better way instead?

What do you think?

About 2353

Welcome to ‘the discussion’ we have to have. 2353 provides plenty to discuss in this piece on ‘trickle-down’ economics and the alternative approach — that seems to be more successful. The piece is particularly timely as Hockey released the government’s taxation discussion paper last Monday.

Next week, on a similar theme, Ken discusses ‘How the economic rationalists tried to steal our hearts and minds’, which looks at how the economic rationalist approach was trying to change not just our economy but our basic Australian values.



But we’ve done tax reform – haven’t we? (Part 2)


Last week we briefly looked at some of the problems with the current tax system. It seems that a number of those who should have a high level of understanding of the fundamental flaws in the current taxation system agree that the system needs reform.

Price Waterhouse Coopers suggest:

. . . there is a clear need for comprehensive tax reform — done the right way. The ‘right way' means increasing those taxes that have the least effect on investment and employment, and at the same time reducing reliance on taxes that distort incentives to work, invest and transact business. It also means addressing those factors which increase the complexity of the tax system and the cost of compliance.

Business Spectator reports:

Without widespread tax reform, the Australian government faces a prolonged period of sluggish wage growth and poor productivity. That might sound pessimistic but that’s the simple equation laid out by outgoing Australian Treasury secretary Dr Martin Parkinson.

Peter van Onselen wrote in The Australian (pay walled):

To the extent that consensus among tax professionals on the best way to collect revenue can be found, broad-based taxes are preferable to direct taxes. That’s because direct taxes such as income tax fall victim to bracket creep and stifle productivity. They feed into higher wages, too, which can affect inflation and Australia’s international competitiveness adversely.

But broad-based consumption taxes such as the GST can be regressive, in so far as they hurt lower-income families disproportionately to higher-income families given their flat application.

But this is a situation that can be easily overcome, is generally overstated and certainly isn’t a reason to abandon GST reform, which must be tackled boldly by our political leaders. It is always possible for policy decision-makers to make up for regressive GST application on the spending side.

Firstly, lets discuss the difference between ‘broad based’ and ‘direct’ taxes.

A ‘broad based’ tax is something like the Medicare levy. Everyone who pays tax pays a percentage based on their level of income to fund the ‘free universal’ healthcare system supported by the government. Distortions exist to ‘manufacture’ compliance with various social policies such as the surcharge made to those on higher incomes without private health insurance. GST is another ‘broad based’ tax: as the value of the tax is based, however, on the goods or services being purchased, rather than people’s incomes, someone on $40,000 per annum proportionally pays a higher rate of tax than someone on $140,000 per annum should they decide to purchase the same product. This distribution effect can be ‘engineered’ out through use of rebates etc. — as was promised with the Carbon Pollution Reduction Scheme (Carbon Tax).

Direct taxes are charges such as income tax. You pay a certain percentage based on your income. While someone who is in the fortunate position to pay tax on the highest ‘margin’ pays more dollars than someone on the lowest margin, the person on the lower margin usually contributes a greater value of their annual income.

So, according to the experts, the problem is the complexity and ‘side effects’ of the current tax system: to fix the problems, move to broad based taxes based on equitable criteria and simplify the system. Sounds reasonably easy, doesn’t it?

This is where the politics comes in. In 1975, Asprey and Parsons handed over the full report of the Taxation Review Committee. The Asprey Report received little attention from Whitlam or Fraser: it did contain, however, discussion around the major taxation reforms of the 1980’s and 1990’s (capital gains, dividend imputation and GST to name a few).

The Rudd/Gillard government commissioned Ken Henry, former treasury secretary, to perform another review of the taxation system in 2010. Henry’s review (which was told not to look at the GST — one would assume for political reasons) suggested a number of reforms to improve the taxation system. The politics surrounding the review was that ‘a package’ would be recommended. Ken Henry obviously disagreed. The Henry Review advised:

The review has aimed to set strategic directions for the future architecture of the Australian tax and transfer system. It has not produced a one-off tax policy package, and it has not advanced the detailed design or timing of measures. Indeed, it is neither possible nor desirable to make all of these changes (138 recommendations) too quickly.

In the words of John Hewson:

. . .those expectations were there, so when they were thwarted, the Review was all too easily dismissed, politically, as “just another study/review/inquiry”, easily essentially shelved by the media, although [the government] also all too easily “cherry-picked” with attempts to implement just a handful of its recommendations.

Against this background, the [then ALP] government only picked some “high profile” recommendations immediately, such as the mining tax, and when that backfired, it then only did smaller issues, quietly, leaving the bigger issues like savings and State taxes untouched.

Hewson goes on to note that the Rudd/Gillard government implemented 40 of the Henry Review’s recommendations but the Abbott government has since reversed the implementation of all but seven of them — without identifying the recommendations came from the Henry Review.

This piece started with a comment from an accountancy/business services firm (Price Waterhouse Coopers) stating what it believes is necessary. Not to be outdone, others have expressed their opinion as well, including Ernst & Young, The Conversation here and here, the Housing Industry Association, Newscorp’s The Australian (pay walled) and Prosper, an organisation that has been campaigning for a century for a greater reliance on property taxes to replace direct taxes. There are no doubt others as well — time precludes finding them and space from listing them.

Each group that enters the tax reform debate overtly or covertly expresses an opinion that would assist their members or customers — as is their right. It certainly doesn’t help any government in designing a fair and equitable solution for all of society, especially when affected industry groups commission and use selected facts in television advertising that certainly don’t mention that compensation to taxpayers was a part of the deal.

Politically and economically, tax reform is a hard ask. Hawke/Keating and Howard/Costello both were successful to a degree in implementing reforms to the Australian taxation system. There are also those that suggest the whole system should be replaced by ‘flat taxes’.

Of course there are a number of versions of ‘flat tax’ from the ‘pure’ — everyone pays a percentage of their income with no deductions or rebates allowed — through to systems that allow deductions, negative taxes and other arrangements. Wikipedia discusses some of the different versions here.

The economics editor of The Australian argues that ‘flat tax’ is an economic necessity (pay walled). In 2010, Abbott, then opposition leader, suggested a version of flat tax would be beneficial and commented it was recommended by the Henry Review. The ALP disagreed. Greg Jericho, writing on ABC’s The Drum website, suggests that ‘Unless you’re wealthy, you’re not going to like flat taxes’. Jericho makes the point that flat taxes are by their nature regressive, as they are a ‘broad based’ tax.

Remember the disparity in the actual proportion of a person’s income when buying a product we looked at a couple of hundred words ago? Twenty per cent of $140,000 is $28,000 and 20% of $40,000 is $8,000. So the person on $140,000 still has $118,000 per annum to spend while the person on $40,000 only has $32,000. Regardless of the dollar amounts, the person on the lower income is paying more value from their income when a broad based tax (such as a GST or ‘flat income’ tax) is levied. Certainly there can be some ‘engineering’ of the tax system so that the value contributed by both the higher and lower income earner can be made fairer but that is adding to the cost of managing the tax revenue and reduces the ‘purity’ of the revenue collection system.

Hewson, in his paper, suggests that Hawke/Keating achieved some tax reform because they crafted a message supporting the need for change to the then system by way of the ‘Tax Summit’ and demonstrating that change would reduce the level of tax evasion, such as the ‘bottom of the harbour’ scheme that was apparent in the 1970’s and 80’s. He also claims that his “Fightback” package, that was taken to the 1993 election, was the subject of various campaigns to create fear, uncertainty and desperation. To an extent, it is a fair call. Hewson also suggests that 1% of tax revenue is taken by the administration of the tax revenue system — demonstrating its complexity.

It seems that a simplified revenue collection system is a given to make our taxes work harder. Another factor that needs to be considered is the current rhetoric from political parties of all colours that the country’s budget is closely related to a household budget and has to either balance or be in surplus.

To simplify the current revenue collection system, tax reform is needed. If tax reform is discussed, every ‘special interest’ group in the country will have its say in an attempt to protect the interests of their members/customers. While ‘flat taxes’ are superficially attractive, they do have a tendency to favour those earning a higher income unless ‘engineering’ is performed to make the tax impost fairer (in which case what is the point of a nominally one-size-fits-all ‘flat tax’ system?).

Something that recent governments have painted themselves into a corner on is the mythology that the country’s budget is similar to a household budget and must be balanced or in surplus. It doesn’t — as Australia issues it’s own currency. The Conversation recently discussed ‘Why the Federal Budget is not like a household budget’ and noted:

The real calculation faced by government should not be about how much money the government has — it has an infinite amount. The calculation should be about the capacity of the economy to absorb government spending without driving inflation.

Seeking a balanced budget and automatically borrowing any deficit spending (as we currently do) is an effective but unsophisticated way of ensuring government spending doesn’t cause runaway inflation. Taxes and government borrowing remove money from the private sector, creating space for government spending (which injects money into the private sector). Remember, the government does not have to borrow or tax in order to finance spending because they can create money.

The Political Sword has previously looked at the fallacy of the balanced budget debate here and here. Peter Costello (former treasurer) not unsurprisingly has a comment on the difficulty of balancing budgets versus tax reform:

This is harder than balancing a budget and I've done both.

John Hewson’s push to become prime minister in 1993 failed due in part to a lack of understanding of his tax reform measures. John Howard found that he could not pass the GST without diluting the ‘purity’ of the tax to appease the Australian Democrats; Julia Gillard had to negotiate to get a ‘watered-down version’ of the Mining Tax through the Senate. So far, Abbott’s government has not demonstrated that it can negotiate well enough to ensure that the minor parties and independents in the Senate would commit to a package of reasoned and logical tax reform.

During October 2014, Abbott called for a mature debate on inter-governmental relations in general and the GST in particular. It is unlikely to happen until either the current government learns how to build a consensus as Hawke and Howard did or has the numbers and the motivation to do something for the common good. Either way a mature debate cannot be conducted in 30 second sound bites so loved by our current prime minister and the media.

What do you think?

About 2353

This week 2353 completes his ‘Tax reform’ discussion and paints the political difficulties of achieving tax reform. As he writes, almost everyone agrees we need tax reform but we don’t seem able to come to agreement on what should be done. Please tell us your views of tax reform and how we can achieve it.

Come back next week for Ken’s view of "President Abbott: or why prime ministers should be not immune from removal by their party".



Abbott continues to tell porkies


I was surprised during last December (and again in the past week after the unsuccessful spill motion) when Abbott and his ministers reverted to the line that the LNP government had inherited a huge budget deficit from Labor.

Early in December they were claiming that Labor had been deceitful by going into the 2013 election claiming that the deficit was only $18 billion whereas when the Liberals gained the treasury benches it was shown to be $46 billion (and I noticed in Abbott’s appearance at the National Press Club at the beginning of February that he had rounded this up to $50 billion). That attack, in itself, was part of Abbott’s resetting of the agenda after his ‘ragged week’ and was obviously intended to turn attention back on Labor and away from the problems his government was facing: there is no doubt that approach will continue.

The first lie is the $18 billion deficit. That was the figure in the last Wayne Swan budget in May 2013 but Swan also made an ‘Economic Statement’ in August (during the election period) as the terms of trade deteriorated and economic activity slowed, reducing government revenue. By the time of the PEFO (Pre-election Financial Outlook) the deficit was actually $30 billion, which had been revealed slightly earlier in Swan’s ‘Economic Statement’. The $12 billion increase came from slowing GDP growth, and the subsequent decrease in revenue, and only $373 million (about 3% of the increase) arose from policy decisions by Labor. So Abbott’s claim that there was a $28 billion increase in the deficit is a fiction created by adopting a set of figures that had already been superseded before he was elected (although semantically it was the figure ‘going into the election’ — so perhaps Abbott is just playing with words again).

Abbott’s claim, however, was also dealt with at the time and found to be false. In June last year, Chris Bowen said that Joe Hockey had doubled the deficit by changes to government spending and changes to government economic assumptions and parameters: the ABC’s Fact Check found that Bowen’s statement — ‘checks out’. Other economic commentators also pointed to the spending and revenue decisions made by the Abbott government as making a major contribution to the increased budget deficit.

Although it has been done before, I will go through the details of the government’s finances. Please bear with me, as I will have to provide quite a few figures in explaining the situation, using the 2013-14 PEFO and MYEFO (Mid-year Economic and Financial Outlook), with some minor reference to the last two budgets. And it should be noted that the PEFO is the only financial document that is put out by Treasury and the Department of Finance. MYEFO and the budget are products of the government of the day after, of course, taking advice from the financial departments, but the final shape of those documents is always a result of government decisions. PEFO simply sets out the current situation based on the ruling assumptions and existing policies.

Firstly, we do need to understand that treasury forecasts are simply that — they are ‘estimates’ and ‘projections’. As such, they are subject to many qualifications and assumptions. Treasury itself states that:

The forward estimates of revenue and expenses … incorporate assumptions and judgments based on the best available information at the time of publication together with a range of economic assumptions and other forecasts and projections.

Major taxes such as company and individuals’ income taxes fluctuate significantly with economic activity. Capital gains tax is particularly volatile and is affected by both the level of gains in asset markets and the timing of when those gains are realised.

In addition revenue forecasting relies heavily on the observed historical relationships between the economy, tax bases and tax revenues. Such relationships may shift over time as the economy changes, presenting a further risk to the estimates.

(In relation to that last statement, the economy is currently undergoing changes as the mining boom ends and, therefore, there is an increased risk to the surety of the estimates.)

The MYEFO gives examples of the potential impact of certain hypothetical changes. If commodity prices fall, impacting the terms of trade and causing GDP to fall by one per cent, then government revenue could be reduced by $5.5 billion. On the other hand, if there is a 0.5 per cent improvement in both labour productivity and workforce participation, government receipts could increase by $3.7 billion.

Those examples are important because Treasury also explains the ‘confidence levels’ of the economic and fiscal forecasts. For example, although MYEFO forecast GDP growth of 2.5%, the 70% confidence level places growth anywhere between 1.75% and 3.25%, and the 90% confidence level between 1.5% and 3.5%, which means the preceding hypothetical examples actually fall within the range of possible forecasts.

With those provisos in mind, we can consider the actual figures and what went into increasing the budget deficit. If we believe Abbott the increase was $28 billion but only $16 billion if we believe PEFO. Or we can also look at the accumulated deficit over the forward estimates (to 2016-17) which increased from $54.6 billion to $122.7 billion, a difference of $68 billion. I will work on the last figure because that provides the full impact of Abbott government decisions.

Firstly, you will probably recall Hockey’s payment of $8.8 billion to the Reserve Bank, something the economic commentators said was not sought by the bank and was unnecessary. That leaves $59.2 billion to account for.

Abbott’s big ‘policy’ of repealing the carbon ‘tax’ was a major contributor to the loss in government revenue, to the tune of $13.7 billion over the forward estimates. That leaves $45.5 billion.

Repeal of the mining tax saw the loss of another $3.3 billion. That leaves $42.2 billion. (Those three big ‘decisions’ by the Abbott government cost the budgets over the forward estimates a total of $25.8 billion.)

There was another set of significant losses to revenue that many of us would not have heard about. Apparently there were 92 taxation and superannuation changes that had been announced by previous governments but not yet implemented. Abbott and Hockey decided to proceed with only 34 of those changes, foregoing another $3.1 billion in revenue. That leaves $39.1 billion.

The ABC Fact Check explains changes to a couple of the assumptions and parameters better than I can:

  • a change to the terms of trade methodology, reducing the economic growth forecasts, causing a $2 billion hit to the bottom line over the forward estimates
  • a change in the projected unemployment rate, leading to higher benefits payments totalling $3.7 billion extra
That leaves $33.4 billion.

But there was also a projected slowing of the economy: GDP growth figures were lowered. While this is something over which neither the Labor nor Abbott governments have much control, the Treasurer does have a say in selecting which figure to use for the forecasts (see the earlier paragraph on confidence levels). In MYEFO, the slowing economy was projected to reduce taxation receipts by $37 billion over the forward estimates.

So Abbott government decisions had actually increased the potential deficit by $71.6 billion over the forward estimates and it had to juggle the figures even to keep the increase to $68 billion. Even allowing that some of the worsening of the deficit would have happened no matter who was in government, Abbott government decisions directly added about $29 billion to the deficit (and up to $34.6 billion if we add the government influence in changing parameters).

Offsetting those losses, Abbott and Hockey had proposed abolishing the benefits introduced by Julia Gillard that were to be funded from the carbon and mining taxes. That would have decreased spending by $9.5 billion or reduced the deficit by that amount: but, of course, he has not been able to abolish all of those measures, so the deficit remains higher. Even if they had passed the parliament, the deficit would still have increased by $62.1 billion of which at least $20 billion would have arisen from decisions by the current government.

Estimates of government revenue for 2013‒14 were continually revised downward from the 2013‒14 budget through to the 2014‒15 budget:

  • $376 billion in the 2013‒14 budget
  • $369.5 billion in the PEFO
  • $364.9 billion in the MYEFO
  • $363.5 billion in the 2014‒15 budget
Despite that continual revision, the actual figure for the 2013‒14 financial year was lower still at $360.3 billion, $15.7 billion below the original budget estimate in May 2013 and even $3.2 billion below Hockey’s budget estimate in May 2014. So there are clear revenue problems for the government that have nothing to do with decisions by the former Labor government.

(As a postscript, Hockey’s more recent MYEFO in December 2014 also showed that revenue was continuing to decline in 2014-15; down $6.3 billion since his own budget estimate and down almost $21 billion on the forecast in Swan’s last budget.)

You would think that if a government takes decisions that decrease revenue it would also take other measures to increase revenue (not focus solely on cutting costs) but Abbott’s government has locked itself into the neo-liberal position of reducing taxes and so has very little room for manoeuvre. During the election campaign, it could be argued that Abbott lied by omission by not detailing how he would make up the foregone revenue ($17 billion) of his promises to abolish the carbon and mining ‘taxes’. People were left to believe that the ‘taxes’ could be abolished and nothing more need be done. I would suggest that Abbott knew that at the time and, given his promise not to raise taxes, already knew that he would undertake significant spending cuts to make up the shortfall — but of course he wouldn’t discuss that in any detail. And then, to justify the cuts, his government artificially increased the deficit and blamed it on Labor.

If Abbott and Hockey had really wanted to increase revenue to improve the budget position they would have kept Labor’s tax on annual superannuation earnings above $100,000 and the reduction in the fringe benefits tax concession on novated car leases: or have considered similar measures on other ‘tax expenditures’. Tax expenditures are foregone taxes when government provides certain benefits without taxing them or allows concessional tax rates: for example, military personnel receive a number of allowances and benefits that aren’t taxable although legally they are ‘income’. (It is only the tax foregone, not the full cost of the benefit that is counted.) Changing tax expenditures allows governments to increase revenue without increasing income tax, although there would obviously be vested interests who would ‘lose’ from such changes — such as the outcry from vehicle retailers and manufacturers when the change to the taxation of novated car leases was first announced.

In the 2013-14 budget the cost (foregone revenue) to government of tax expenditures was about $120 billion and was projected to rise to $146 billion in 2016-17 (which is the equivalent of 8% of GDP or about a third of projected government revenue in 2016-17).

While many concessions would be considered socially beneficial, there are others that appear to be of most benefit to those on higher incomes — superannuation is the one most commented on in that regard. In 2013-14 it was estimated that the concessional tax applying to superannuation cost the government $35 billion in revenue and that was projected to rise to $51 billion in 2016-17, or a total of $170 billion over the forward estimates. Eliminating the concessional tax rate for the earnings of superannuation funds would raise $65 billion over the forward estimates, and eliminating the concession for employer contributions would raise $62 billion, a total of $127 billion. While it would somewhat defeat the purpose of compulsory superannuation (to reduce old age pension payments) to entirely eliminate concessions, there is certainly scope for changes that could easily raise a few billion dollars: for example, even to raise the concessional tax rate from 15% to 17.5% could potentially raise $4.25 billion over the forward estimates: or $8.5 billion if raised to 20% — that is still a ‘concessional’ rate of tax but just not as generous.

Why isn’t Abbott considering such measures? Instead, he is even scrapping the changes that Labor made that would have helped revenue.

He is blaming the deficit on Labor when it is clear that about half of the increase in the deficit comes from a ‘natural’ fall in taxation receipts as the economy slows and transitions away from the mining boom, and the rest from decisions by Abbott and his government after it came to power. Other commentators, more expert than I, have already shown his claim is false and yet he returned to it in December, and again in the past week, obviously taking the view that because it was disproved six to eight months earlier most voters would not remember. That is probably partly true but it is also pure propaganda, no longer just ‘spin’: ‘spin’ is about putting the best possible light on a bad situation, not about blatant lies. Abbott, as he did in opposition, appears to be operating on the principle that if he tells the same lie often enough, people will believe it.

What do you think?

About Ken Wolff

Ken says that although this is old news he will have to keep returning to it because that is what Abbott and Hockey keep doing.

Next week we will continue the financial theme and how to raise revenue with 2353’s discussion of ‘Tax reform’.