Monday, February 23, 2015

One bad budget doesn’t kill all reform

If Tony Abbott and Joe Hockey fail to keep their jobs, and the more so if their successors fail to pull the government out of its dive, the 2014 budget will go down as the most fateful budget in Australia's history, worse even than Artie Fadden's original horror budget of 1951.

Should Abbott's prime ministership or his first-term government come to an early end, all the denizens of the House with the Flag on Top will conclude it was the budget wot dunnit.

And they'd be right. Whatever Abbott's other failings, it was the unpopularity of his first budget – one over which he kept tight control – that started the slide in popularity that has continued to now.

The point is that perceptions about what caused the 2014 budget to be such a government-wrecker are forming as we speak. Those perceptions will affect the attitudes of a generation of politicians and econocrats towards the politics of budgeting and economic reform.

It doesn't take long for such perceptions to set like concrete. Once they have, they become impervious to contrary evidence. So it's important the popular wisdom about why the budget went over so badly with the electorate – and, hence, the Senate – be soundly based.

One common conclusion is that this budget heralds the end of the era of reform: the punters simply won't cop anything that imposes any kind of cost on them. This is defeatist, an attitude that condemns us to ever worsening debt and a set of economic arrangements that become ever more inappropriate to our ever changing circumstances.

Fortunately, it's an unwarranted conclusion. It's actually self-serving: we did nothing wrong except ask our fellow Australians to accept a small amount of sacrifice in the interests of getting the budget back on track, but they rejected us.

Rubbish. As everyone knows, Abbott and Hockey did a host of things wrong. Another self-serving line is: there was nothing wrong with the measures we proposed, we just failed to "sell" them effectively.

That's half true: Abbott and Hockey have proved to be even worse at explaining and justifying their policies than their Labor predecessors. But to pretend that was the only thing they got wrong is laughable.

Yet another excuse – all the blame lies with an unprincipled opposition and a few crazies in the Senate – is also too easy. We've long lived in an era where oppositions play hardball in the Senate.

It's rare for governments to have the numbers in the Senate, so an essential skill for governments hoping for a long reign is an ability to negotiate with the minor parties, plus the foresight to ensure any controversial measures bowled up in a budget have built-in wriggle room.

What was outstanding about this episode was Abbott's lack of foresight. To get into government I'm going to be utterly ruthless in my treatment of Labor, but once the tables are turned Labor won't do the same to me.

I'm going to exaggerate the deficits and debt problem, and boast about our superior ability to fix it, but that doesn't mean I should tread carefully in the promises I make to exempt particular areas of spending from the knife.

Anyone who knows anything about "fiscal consolidation" (getting deficits down) knows that pretty much every successful attempt has involved a combination of spending cuts and tax measures. Abbott tried to do it just with spending cuts and came badly unstuck.

It was a recipe for being seen as unfair. Our system of means-tested benefits means the spending side of the budget is aimed mainly at the bottom half, whereas our array of special concessions on the revenue side are of most benefit to the top half.

I'm confident most pollies will have got the message that tough budgets must be perceived to be reasonably fair. You need at least one big measure the rich really whinge about, such as John Howard's 15 per cent superannuation surcharge.

The message for the business lobbies is that even if, as happened this time, you con a naive Coalition government into exempting you from the nasties, it will come unstuck and you'll be left with nothing.

The message for econocrats and economists, trained to regard "distributional" considerations as not their department, is that you ignore fairness at your peril. They ought to have learnt by now that anyone lacking their training is utterly incapable of keeping "efficiency" and "equity" in separate boxes.

Reform is still possible, provided you haven't sworn not to do it, provided it's seen to be reasonably fair and provided you spend a lot of time explaining why it's needed.