Monday, May 15, 2017

Liberals paying for Labor’s bigger government, as usual

The Liberals have always been right to portray themselves as the party of smaller government and Labor as the party of tax and spend. If you think that changed with last week's budget, you don't remember Australia's fiscal history.

But two qualifications. One, Labor often stands more for spending first and reluctantly thinking about higher taxes only when the bills start coming it.

That’s after it has carefully structured some new scheme so its true cost isn’t apparent for several years, after it’s too late to pull back.

Two, the Libs have never had any success at shrinking the size of government after Labor's latest spending spree. Their role when in office has been to keep the lid on further demands for bigger government.

But they've always reluctantly submitted to the reality of the "spending ratchet": once some new spending program has become established, there's no way the electorate will let you chop it back.

That's what last week's budget was about: not the Libs becoming big spenders, but Malcolm Turnbull's recognition that it was his responsibility to find a way to pay for Labor's national disability insurance scheme and shift to needs-based school funding, not to mention the ever-growing cost of Labor's most popular government expansion, Medicare.

The spending ratchet is seen in every developed economy. It's what's stopping Donald Trump abolishing Obamacare. What do you replace it with that's just as good?

The two main parties have played these complementary roles at least since the end of World War II.

Bob Menzies and his successors spent two decades resisting, or fending off for as long as possible, all demands for widening the government's responsibilities.

He even delayed the introduction of television until the looming Melbourne Olympics in 1956 forced his hand.

Leaving aside its ministers' utter inexperience, this does much to explain the excesses of the Whitlam government.

Labor felt it had 23 years of catching up to do, and tried to do all its modernising in three years, more than doubling government spending.

Gough had no worries about how he'd pay for it all: he wouldn't need to raise taxes because rampant inflation meant bracket creep would cover everything. Oh, no probs then.

Malcolm Fraser's government stopped the growth in spending, but did nothing to diminish it. It did, however, manage to dismantle Medibank, deeply hated by the Libs.

The Hawke-Keating government focused more on macro-economic management and micro-economic reform than bigger government, but it did restore Medibank as Medicare, and institute compulsory employee superannuation.

For once it did pay its bills, achieving big budget surpluses before the onset of the next recession.

By the time John Howard won government in 1996, he'd learnt his lesson and pledged not to touch Medicare. He hated compulsory super – which he saw as giving his union class enemies influence in the halls of capitalism – but didn't dare to dismantle it.

Howard did much to undermine our ultra-low-cost, means-tested welfare state – the main reason our tax level remains among the lowest in the developed world – by introducing middle-class welfare in the form handouts for self-proclaimed self-funded retirees, tax subsidies for private health insurance and greatly increased grants to private schools.

Peter Costello's later mania for tax cuts – from which the budget is still recovering – was explained by his still-unchallenged record as our highest taxing treasurer: 24.2 per cent of GDP in the mid noughties. And Turnbull was left to rein in Costello's unsustainably generous super tax breaks for high-income earners.

Kevin Rudd thought every problem could be fixed by spending a lot more money. For instance, he mortgaged the budget's future by increasing the base rate of the age pension, something Howard wouldn't have dreamt of doing.

It was our good fortune to have a spendthrift like Rudd in charge of the national chequebook when the global financial crisis hit and a generous cash splash was exactly the right response.

In the end, however, it was Julia Gillard who moved government responsibility and spending to a new plane with her cowardly no-losers version of needs-based school funding and the hugely expensive NDIS, not to mention higher pay for female childcare workers.

Be clear on this: most of the costly expansions of government responsibility introduced almost exclusively by Labor involved long overdue recognition that a country as rich as ours need not suffer under a third-rate public sector – private affluence but public squalor.

It's just a pity that the party so willing to bring us decent provision of public goods, so often leaves to the other, "smaller government" party the dirty work of finding ways to pay the bill.