The budget and the election

Dear ,

There are two ways of tackling most organisational problems – evolution or revolution.

I’ve been reading the Menzies Centre’s excellent Menzies: the Shaping of Modern Australia, and Menzies was in the first school – gently nudging Australia away from its romance with socialism.

Jeff Kennett, and Paul Keating, were in the second school.

You need the right conditions to do a Kennett or Keating. Victoria was completely broke under Labor with the Pyramid Building Society collapse and the virtual collapse of the State Bank of Victoria. There was a feeling of panic.

Keating took control of the economy in 1983. This was the worst recession since the Great Depression. Again, there was a clear understanding that BAU was not an option, especially when the dollar dropped to “banana republic” levels.

The 2014 Budget used the Kennett/Keating rhetoric, but actually delivered little substantial reform, and increased budget outlays. Ironically it was branded in the public mind as being unfair and draconian.

After 23 years of uninterrupted growth, most voters don't feel we are in crisis, so they are not looking for a revolution, which is unfortunate, because crisis is on the way and it makes it very difficult to avoid.

Scott Morrison’s budget is one partially written by Labor. The government is facing an election, and after the election it will face the Senate as well. Unless it controls the Senate it cannot get a Kennett style agenda adopted, so it needs to go for a more Menzian approach.

Menzies was never above stealing his opponents’ policies, and Scott Morrison’s changes to superannuation, down to elements of retrospectivity, are of the same ilk. Menzies took a long view, and achieved some amazing things, such as reducing government borrowing from 150% of GDP to 50%, but it took 17 years.

Will there be a succession of Liberal governments lasting another 14 years from here?

There were a number of good things in the budget. Dropping the company tax rate is one of them. Another was adjusting the cut-in point for the 37% tax threshold from $80,000 to $87,000. The first will make Australia more internationally competitive and increase investment in the economy. The second is a recognition of the effect of inflation on progressive tax thresholds and is much less than the adjustment made to the 32.5% tax threshold in 2014.

The PaTH program of internships may make it easier for young people to join the jobs market, but may also be spectacularly unsuccessful, and insofar as it is successful have displacement effects on other workers.

$50bn spent on infrastructure also should be a benefit, as long as there is a proper business case for it.

Other measures may appear good on the surface, but not to such a degree on closer inspection. Smokers are now paying more for their habit than the health benefits would warrant, both in terms of discouraging smoking and the cost to the health system. What’s more they tend to be less well-off than the rest of us, and insomuch as it reduces smoking rates, the tax will be self-limiting.

The Google tax also sounds reasonable, but one reason companies route their profits to the countries with the lowest tax rates is so they can grow more quickly. Profit is a very slippery concept, so it is likely that under the changes very little additional tax will be tapped. Better to have a competitive tax rate and shift your tax mix away from taxing income so companies want to pay taxes within your borders, not someone else's.

In the same vein the changes to superannuation should raise a question as to how we tax investment and savings, and why a compulsory savings program, at the mercy of capricious government edicts, is such a large part of our investment planning. After all, this program hasn’t done much to reduce reliance on the age pension, its purpose, and it appears that more than most countries, Australia is reliant on foreign savings. (Check out this graph from today’s Australian to see how bad the situation is.)

The role of think tanks is not to follow the Menzies methodology. Our role is to be much purer on principle and to open up the debate, not close it down.

The AIP is not happy with the budget. Australia needs structural change in their government finances. We don’t have a revenue problem, we have a spending problem, and much of our spending problem was cemented into place by the Rudd/Gillard/Rudd Labor governments.

The current government has more or less followed that trajectory with some minor adjustments because they have failed to win the ideological debate.

Our economic debate has now been framed by the concept of “fairness” which the ALP has successfully defined as a question of contemporary distribution of existing assets, otherwise known as “slicing the pie”.

There is no thought to growing the pie, or how this distribution might operate against future generations, rather than just the current one.

And by reducing economics to a crude utilitarian calculus it marginalises concepts like personal responsibility and property rights. The public is encouraged to think that no matter how much they might eat and drink, they will never have to shout, it will always be the responsibility of that rich bloke or sheila at the other end of the bar to pick up the tab.

What’s more payments are never to be adjusted down when circumstances change, but always up.

The end result of this will be rapidly escalating transfers of income and wealth to the government sector where it will be spent to buy services for us citizens that we could have bought more cheaply ourselves, or decided not to buy at all, at the same time robbing the producing economy of funds to invest, innovate and grow.

Rather than aggressively take on this concept of fairness the government has resorted to subterfuge. It tries to surreptitiously push the budget in the right direction, while relying on culture war issues like illegal immigration, where they hold high ground, to engage voters. It borrows policy from the ALP knowing they can't effectively criticise it, and picks fights with the rich benefactor at the end of the bar on issues like superannuation, knowing it can winkle some more dollars out of their pockets at the same time saying, “Look, we care for the underdog too”.

Over the course of this election campaign we will concentrate on a few issues where we think we can have an impact on the debate.

These will be largely economic, being negative gearing and company tax. As a fledgling think tank we don’t have the luxury of tens of fellows, researchers and interns to punch out papers and op-eds, on a wide range of issues, but if any of you think you can help out, please let me know.

And if you want a really good run down on the nuts and bolts of the budget, this from The Marcus Review, is the best I have seen yet. (H/T Catallaxy)

Kind regards,