Showing posts with label election costings. Show all posts
Showing posts with label election costings. Show all posts

Monday, May 27, 2019

Without decent policies, Labor would get fewer votes, not more

The main reason so many voters have given up on politics and politicians is their belief that modern pollies care more about advancing their careers than advancing the wellbeing of the nation.

So, were Labor to decide that it lost the election – which dodgy polling encouraged it and everyone else to believe it was sure to win - because it made itself a "big target" by having lots of policies to fix things, rather than "small target" with few policies of any consequence, it would risk confirming voters’ suspicions that it cared more about getting back to power than improving voters’ lives.

Not a great way to garner votes. Particularly because, for reasons I’ll get to, the small-target strategy works better for the party of the business establishment and the status quo than for the party representing those who think the status quo needs reforming.

When you decide that having too many policies was the main reason you lost, it’s only human nature to flip to the opposite extreme of having none. Human, but not smart.

Economics teaches that success in life comes from seeking out the best “trade-off” between conflicting but equally desirable objectives. It involves using your brain to nut out the best answer, not turning it off.

As political scientist Rod Tiffen has reminded us, the no-brain response after elections is that “everything the winning party did is treated as a stroke of genius, and all the loser’s moves were foolish”.

If Labor wants to draw the right conclusions about the various reasons for its failure it will need to put a lot more mental effort into answering the eternal policy question: “what works and what doesn’t?”.

One obvious possibility is that Labor lost partly because it “did a Hillary Clinton,” focusing on the well-educated, socially progressive (and often public-sector employed) section of the party’s base and forgetting about the less educated, less progressive section in outer suburbs and the regions.

Labor’s had the tricky job of straddling these two, very different parts of its heartland for decades. When John Howard perfected the technique of “wedging” your political opponent, the original application involved driving a wedge between the well-educated and the blue-collar parts of Labor’s base. The classic case is the treatment of asylum seekers.

The no-brain response would be for Labor to “go back to” its blue-collar base. Labor can’t win without both ends. But it certainly needs to put a lot more effort into satisfying both ends. What can it do to help the regions than isn’t too blatantly wasteful? How can it look after victims of the inevitable shift from fossil fuels to renewable energy?

With every summer getting hotter, it’s not surprising the Greens had a good election. And the best explanation for the swing to Labor or independents in many well-heeled Liberal electorates is Liberal voters’ growing recognition that we need a government that’s genuine about combating global warming.

It’s quite possible this is of less concern to the blue-collar end of Labor’s heartland, particularly if it can be (falsely) convinced the immediate cost to household budgets would be high. But for Labor to tone-down its climate policy would risk it getting an even lower primary vote as more of its progressive base shifted to the Greens and, in the case of the Senate, didn’t flow back.

Labor needs reminding that life wasn’t meant to be easy for reformist parties. The party of the business establishment and the status quo always starts with a built-in advantage. They’re the people who surely must be better at running the economy and who stand for minimal change – the thing we all fear.

That’s why the Libs can get elected with no policy other than blocking the rise of all those Labor trouble-makers, and why Labor gets elected only by making the case for change. Why vote for a Labor status quo when you can vote for the original and best?

One of the Libs’ most effective lines was “Labor can’t manage money so they’ll come after yours.” Labor’s eternal vulnerability on the money question is why it would be folly for it to lay most of the blame for its failure at the feet of its one money man who does command the respect of econocrats, economists and business people, Chris Bowen. All the people who wanted to win votes by promising to spend big on education and health, scapegoating the poor blighter who had to find ways to pay for it all.

Similarly, when Labor relegates to a junior role a highly regarded former economics professor, Andrew Leigh, simply because he’s not a member of any faction, it reinforces voters’ suspicion that Labor members put their own careers ahead of the country’s good governance.

Saturday, May 18, 2019

Where’s the money coming from? Ask me after the election

A key issue in this campaign has been whether government should be bigger or smaller. But that’s not the way either side has wanted to frame it. As usual, both sides prefer to be seen as offering more government spending and tax cuts and a return to big budget surpluses. In election campaigns, the rules of arithmetic are flexible.

A twist this time is that Scott Morrison is using his promised super-mega $300-billion tax cuts to support his claim that the Libs are always the lower-taxing party, whereas Labor is invariably the party of higher taxes.

But such massive tax cuts surely require big cuts in government spending? Oh, gosh no. Where did you get that idea? As he and Treasurer Josh Frydenberg have repeatedly said, they’re willing to "guarantee the essential services that Australians need and deserve".

For their part, Bill Shorten and Chris Bowen are promising to reverse a lot of the government’s previous alleged spending cuts in health and education, while more than matching the first stage of the government’s tax cuts and achieving bigger budget surpluses than it would. They would square this circle by "paying for our commitments by closing loopholes for the top end of town".

Only this week did Labor produce its detailed costings and figurings. We’ll come to that.

Apart from this week’s last-minute additions, all the government’s costings and figurings were outlined in the April budget, of course, and confirmed a few days later in the pre-election update.

Actually, this government has a rather chequered history on the unmentionable subject of whether government should be bigger or smaller. The obvious advantage of a bigger government is that it provides more of the services we love, and doesn’t skimp on their quality. The obvious advantage of a smaller government is less tax to pay.

When Tony Abbott came to government in 2013 determined to end debt and deficit ASAP, he pledged to do so solely by cutting government spending and avoiding any tax increases (apart from his temporary budget repair levy on high income-earners).

Trouble is, voters were so appalled by the sweeping cuts to health and education he proposed that his government’s standing in the opinion polls plunged, never to recover. The Senate blocked many of his cuts.

The episode revealed what economists call the "revealed preference" of voters (not what they say, but what they do). They may like tax cuts and hate the idea of new or increased taxes, what they really don’t want is smaller government.

In subsequent budgets, the Coalition pretty much abandoned the notion of cutting its way back to surplus (apart, of course, for its regular cuts in things most voters didn’t worry about – public servant numbers and payments to people on welfare).

It tried to limit the growth in government spending by following a rule that any new spending proposals had to be offset by equivalent cuts. Apart from that, it sat back and waited for "bracket creep" to raise tax collections to the point where the deficit disappeared.

Except for Malcolm Turnbull’s first budget, in 2016. Here he proposed to phase in a cut to the rate of company tax, and covered part of its cost by pinching Labor’s plan for huge increases in the tax on tobacco, and doing his own versions of Labor’s plans to tax multinational companies and reduce superannuation tax concessions.

In the end, most of the plan to cut company tax was abandoned, but the tax raising measures stayed – a point to remember when Morrison and Frydenberg try to give you the impression it’s only Labor that increases taxes or cuts back tax concessions (or increases taxes via bracket creep).

When Danielle Wood, of the Grattan Institute, looked more closely at Frydenberg’s budget, she found the government had fiddled the figures to exaggerate the extent to which it had limited the growth in government spending so far, and now was claiming to be able to limit its average real growth to just 1.3 per cent a year over the next four years – something no government has ever come close to achieving.

The ageing of the population and the huge demands this will make on the budget make it even harder to credit.

Now Dr Peter Davidson, principal adviser to the Australian Council of Social Service, has taken Grattan’s work and dug even deeper. He finds that, after you allow for expected population growth, real spending growth per person would be zero.

We’re told that, still in real terms, spending on tertiary education is expected to fall by 0.6 per cent each year, while spending on dental health, and on family payments, are each expected to fall by 0.7 per cent.

Spending on employment services is expected to fall by 2.5 per cent a year and on social housing by 2.7 per cent.

You may believe that would happen should the Coalition be re-elected, but I don’t. It’s possible Morrison has a dastardly secret plan to "do another Abbott" after the election, but it’s much easier to believe the government was just fudging the figures to make it seem it could afford big tax cuts as well as achieve big surpluses.

Meanwhile, Labor’s costings reveal that "closing loopholes for the top end of town" is a misleading way to describe its various cutbacks of tax breaks affecting high-income earners and plan to restore the Coalition’s budget repair levy for another five years.

But the costings are just that – costings of individual promises. Nowhere are we told what the various tax-raising measures add up to, nor what the various spending measures add up to.

We are, however, told that the former would exceed the latter by $17 billion over the next four years. Oh, well that’s OK then.

Bit too tricky for my liking. When it comes to the size of government, neither side wants to spell it out truthfully before the election. Thanks, guys.

Saturday, May 4, 2019

Only the stupid think the cost of climate change is simple

You know an election campaign has run off the rails when the pollies start hurling the results of economic modelling at each other. Voters find it incomprehensible and cover their ears, and the only people who think it proves something are the pollies themselves and the journalists silly enough to imagine their incessant demands to “show us your modelling” will expose the truth.

The more you know about modelling, the less it impresses you. There’s a place for economic modelling, but it’s in a seminar room, being pulled apart by experts, not in the argy-bargy of politicians seeking election, vested interests seeking more bucks, and journos who think their customers will just love a bit more meaningless conflict.

Thinking people know and accept that the future is unknowable. Unthinking people delude themselves that somewhere out there is an expert with a magic box – or maybe a crystal ball - who can give them a sneak peek at what only God knows in advance.

The only truly honest thing a modeller could tell you (which their need to earn a living invariably stops them doing) is: What on earth makes you think I’d know?

In the public debate, modelling is about misleading people – unknowingly or, more often, knowingly. It’s used like a drunk uses a lamppost: more for support than illumination.

There are two approaches you can take to modelling results. One, believe all results that fit with your prejudices and ignore all those that don’t. Two, be sceptical of them all and don’t accept any results where you haven’t been told which assumptions are the main drivers of those results.

Although Prime Minister Scott Morrison has only an unconvincing policy to achieve the 26 to 28 per cent reduction in greenhouse gas emissions by 2030, to which Australia has committed itself, the media is pounding Opposition Leader Bill Shorten to reveal the “cost” of his promise to reduce emissions by 45 per cent by 2030.

For reasons I don’t understand, Shorten is displaying a degree of honesty rarely seen in Canberra and claiming he doesn’t know the cost. The media can tell a lie when they see one, and are almost apoplectic in their efforts to extract the truth from him.

To the media, it’s a simple question, so it must have a simple answer and Shorten must know it. If he knows but won’t tell us, this can only be because the cost is absolutely horrendous. His climate change spokesman, Mark Butler, says it’s impossible to know the cost – but that’s obviously another lie.

Which, in a way, it is. It’s not possible to know the cost with the remotest degree of accuracy, but it’s perfectly possible to fudge something up and say it’s the cost.

What cost is that? The cost of whatever suits. Cost to the budget? Cost to the economy? Cost to the economy that ignores any benefit to the economy? Cost to the economy that ignores the cost of not doing anything?

Shorten’s in trouble because - for once – he isn’t playing the game the way the denizens of the House with the Flag on Top expect it to be played. Why won’t the man do the honourable thing and pay some “independent” economic consultancy to do some modelling that proves the cost would be minor?

An old political rule says that, whenever you leave a vacuum, your opponent will be happy to fill it for you. Enter Morrison, waving modelling carried out by Dr Brian Fisher, a former head of the Australian Bureau of Agricultural and Resource Economics, and now a consultant to the mining industry.

Fisher denies being a climate change sceptic and says the government didn’t sponsor his modelling. He’s been modelling the cost of acting against climate change since his time at ABARE in the 1990s and invariably finds it to be surprisingly high (I can remember decades ago writing to explain why his results weren’t as bad they could be made to sound).

His latest modelling finds that Labor’s policy would cause gross national product to be at least $264 billion, and as much as $542 billion, lower than it would otherwise be in 2030. By then the wholesale price of electricity would be up to 67 per cent higher than otherwise. Real wages would be up to 10 per cent lower than otherwise, and employment would be up to 300,000 lower than otherwise.

For what it’s worth, other economists who are experts on climate change have said these estimates of the costs are (to put it politely) far too high.

What’s more important to understand is that econometric models are built on a heap of assumptions – assumptions about how the economy works, and assumptions about what will happen in the future.

Dr Richard Denniss, of the Australia Institute, offers this list of things no one knows, but modellers have to make assumptions about if they want to claim they know what some policy change will cost: how far and how fast the cost of renewable energy and battery storage will fall; how far and how fast the cost of electric cars will fall; how quickly firms that face higher energy prices will adapt by increasing their efficiency; how the introduction of new sources of electricity generation and storage will disrupt the business models of today’s highly profitable electricity retailers; how regulation of energy prices will increase or decrease the monopoly profits of energy and petrol companies; how much the trend to household electricity generation and storage will increase the efficiency of the national grid by reducing problems with seasonal peaks in demand; whether the batteries of electric cars will be a form of free storage for the national grid; and how long it will take for autonomous vehicles to transform car ownership and use.

Still think the cost of Labor’s emissions policy is a simple question with a simple answer - that’s believable?

Wednesday, May 23, 2018

We'll get a very clear choice at the election

The federal election campaign could be as soon as August and no later than May. So which side is shaping as better at managing the economy?

Sorry, I won’t be answering that question. If you’re smart enough to choose to read this august organ, you’re smart enough to make up your own mind – which you probably already have.

The partisan or tribal approach to politics – if my side’s proposing it, it’s what I prefer – is a common way of economising on thinking time.

But I’m paid to scrutinise the propositions coming from both sides, so let me offer some pointers to help those who do want a better understanding of the choice available.

The first point is one that will be forgotten from the moment the election’s called: the main instrument used to manage the economy through the ups and downs of the business cycle is interest rates (“monetary policy”).

So the day-to-day management of the economy is done not by the politicians in Canberra, but by the econocrats at the Reserve Bank in Sydney. Neither side has shown the least indication of wanting to change this.

It means that, apart from making decisions affecting the activities of particular industries (the banks, the live meat export trade) or such minor concerns as the natural environment, the elected government’s main means of influencing the broader economy is via its budget: the taxes it raises, the things it chooses to spend on, and the gap – the deficit or surplus – it leaves between the two (“fiscal policy”).

It’s now clear the election campaign will focus on taxes and government spending. Rather than sticking to the usual approach of making itself a small target against an unpopular government by saying “me too” to most of the government’s policies, Labor is making itself a big target, with various policies the Coalition has opposed.

So in this campaign we’ll be given a wider choice than usual, with each side conforming more than usually to their left versus right stereotypes. Labor will be promising to spend more on health and education than the Coalition, offering bigger tax cuts than the Coalition (in the first few years, anyway), and promising to reduce deficit and debt faster than the Coalition.

Against this, Malcolm Turnbull has used the big tax cuts announced in the budget to position the Coalition as the low spending, low taxing side, compared to Labor’s big spending, big taxing alternative.

This glosses over the Coalition’s own record on tax and spending, but there is some truth to the characterisation.

Remember, however, that neither side is promising anything but a temporary fix to bracket creep, because neither side is confident of its ability to contain the growth in government spending. So it’s probably closer to the truth to say that, however much Labor taxes and spends, the Coalition will do a bit less.

But how on earth can Labor promise to spend more, tax less and improve the budget balance faster?

Thankfully, we won’t be hearing much of the “Where’s the money coming from?” cry because Labor has a not-so-secret weapon: it has already announced policies to increase tax collections by reducing negative gearing and the capital gains tax discount, further reducing superannuation tax
concessions, taxing family trusts, ending cash refunds of unused franking credits, raising the top income tax rate by 2 percentage points to 49 per cent, and abandoning the cut in the rate of company tax for big businesses.

These measures should increase taxes by about $30 billion over four years and almost $200 billion over 10 years. They’ve been costed by the Parliamentary Budget Office, so there’s also likely to be less campaign argy-bargy over the costing of promises.

Labor has matched the government’s $530-a-year tax cut for middle and above-middle income-earners and raised it to $928. But it’s still considering whether to match the second step of lifting the 32.5 per cent tax upper bracket limit from $90,000 a year to $120,000 in July 2022. It’s unlikely to match the third step of lifting that limit to $200,000 in July 2024.

This tells us that neither side is particularly generous to genuinely low income-earners, and both have an exaggerated impression of where the middle is.

The big difference between the sides emerges for people earning more than $90,000 a year (which is almost 60 per cent higher than the median income), to whom the Coalition is offering much bigger tax cuts – while Labor would actually raise the tax rate on incomes above $180,000, as well as aiming most of its reductions in tax breaks at high income-earners.

So Labor would make income tax more redistributive, whereas the Coalition would make it less so. If that doesn’t offer voters a real choice, I don’t know what would.

But all is not as clear-cut as it sounds. For a start, both sides are engaged in a tax-cut bidding war while the budget is still in deficit with a rising debt. Both sides are relying on the government’s quite optimistic forecasts and projections in the budget. What if they don’t come to pass?

Also, what politicians promise and what they can get passed by Parliament are two different things. As Phillip Coorey of the Financial Review has revealed, the likely composition of the Senate after the election – fewer, but more conservative cross-benchers - should make it easier for the Coalition than for Labor to get its policies into law.

Monday, September 9, 2013

Big change in party, little in policy

Coalition supporters rejoice! The evil incompetents have been banished and the good guys are back in charge. But don't get too excited because by the time we reached polling day many illusions about the difference a change of government would make had been shattered.

A standard delusion of election campaigns is that the Coalition portrays itself as standing for lower taxes, higher spending and lower budget deficits.

And Tony Abbott seemed to be cutting taxes big time, abolishing the carbon tax and the mining tax and cutting the company tax rate to 28.5 per cent.

But now we finally have the Coalition's full costings we see how far the reality falls short of the headline.

Its tax cuts will cost about $20 billion over four years (in cash terms), but its offsetting levy on big companies and reversal of Labor tax breaks - mainly on superannuation and small business - will claw back about $14 billion over four years.

And that's before you count the unlegislated Labor tax increases Abbott will put into law - including the increases in the Medicare levy and cigarette duty, and the new tax on bank accounts - worth about $28 million over four years.

Don't sound like lower taxes to me.

But surely the most disillusioning thing for Liberal true believers is the way five years of railing against Labor's utterly wasteful spending, never-ending budget deficits and soaring debt levels was simply cast aside over the course of a five-week campaign.

When, just before the campaign began, Labor was forced to reveal the deficit would be worse before we returned to surplus in another four years' time, the Libs proclaimed this a ''budget emergency''.

But then, just two days before polling day, they revealed their response to this emergency, which turned out to involve a net reduction in the cash deficit of just $6 billion over four years. On Treasury's projections, cumulative future deficits of a further $55 billion will now be a mere $49 billion and the return to surplus not a day earlier. Yippee.

Let me be clear: I wholeheartedly agree with the Liberals' last minute pull-back from resort to fiscal austerity. But then I was never taken in by their five years of frightening the fiscally illiterate.

What's supposed to be next on the agenda of a new government is a first look at the books, the amazed discovery it's all much worse than their predecessors let on, and the regretful announcement that this fiscal crisis necessitates a huge round of cost-cutting and the breaking of ''non-core'' promises.

Sorry, this ain't gunna happen, either. Why not? Mainly because Peter Costello's charter of budget honesty and, in particular, his instigation of the econocrats' pre-election economic and fiscal outlook statement was specifically designed to ensure he was the last treasurer able to pull that stunt.

If you've read the PEFO you've already seen the books.

But Abbott is further locked in by his repeated resolutions not to break his promises. He's even promised to let the deficit blow out rather than break a spending promise.

Labor claimed the planned ''commission of audit'' will be used as the vehicle for big spending cuts, but this was just its retaliatory scare campaign.

All past Coalition audits have been performed by purist economic rationalists who make radical recommendations no government would dream of accepting.

These and other promised inquiries (44 in Abbott's case) are just a device to get party hard-liners off a Coalition leader's back before elections.

There are just three main respects in which Abbott's policies are significantly different to Labor's.

First, the redistribution of the burden of taxation and the benefit of government spending against the Labor (and, for that matter, National Party) heartland and in favour of the Liberal heartland.

Second, the move from a market-based response to climate change to a pretend response. The campaign revealed a cap on ''direct action'' spending that means Abbott's professed bipartisan commitment to a 5 per cent reduction in emissions by 2020 is a sham.

Third, a marked improvement in business confidence now the socialist hordes have been vanquished.

This is the one delusion that remains from the rubble of an election campaign by the Liberals' most populist and least rationalist leader in a generation.

Fortunately, its delusory nature shouldn't stop it giving the economy a genuine boost as business ends its three-year-long dummy spit.

Today's return to real life will end one more illusion that accompanies every campaign: that it's governments who do most to manage the economy not the unchanging econocrats of the Reserve Bank.

There could be no more powerful reason why the change of government will change surprisingly little.

Wednesday, September 4, 2013

Why Abbott wouldn't be a great cost cutter

If Tony Abbott wins the election would he "cut, cut, cut" to fill the "$70 billion black hole" needed to cover the cost of his election promises, as Labor repeatedly claims? Would he follow the Europeans in adopting austerity policies, as others claim?

No. Why not? Because the man who'd be his treasurer, Joe Hockey, isn't that stupid and Abbott isn't that committed.

Let me make a fearless prediction: should the Coalition win the election, we'll hear precious little more about the evils of "debt and deficit".

While Labor was in power, Abbott and his colleagues exaggerated the significance of the size of the budget deficit and the level of the public debt because this was the only way to disparage the economic record of a government that had - with much help from the Reserve Bank - done surprisingly well.

But once the Coalition was back in power its need for fear-mongering about debt and deficit would disappear and it would face the same struggle to get the budget back to surplus that Labor faced.

Whenever it was challenged about its slow progress it would blame Labor but, apart from that, it would prefer to talk of other things.

How can I be sure? Mainly because Abbott's been backing off already. He used to say he'd get the budget back to surplus in "year one". Now his promise is merely that "by the end of a Coalition government's first term, the budget will be on track to a believable surplus" and "within a decade" the budget surplus will be 1 per cent of gross domestic product.

Only "on track" after three years? And "within a decade"? That's three elections away.

But also because the Libs have form on this sort of scare campaign. While John Howard and Peter Costello were in opposition in 1996, they drove a "debt truck" around Australia to ensure every "man, woman and child" knew how much they owed as their share of the nation's foreign debt. In government, however, they never mentioned the foreign debt again.

But can they get away with going cold after having made so much fuss? Well, the Republicans in America have been doing it for years. Their attitude is simple: budget deficits aren't a worry when they're being incurred by Ronald Reagan or the George Bushes, but they're a terrible worry when they're being racked up by Democrats like Barack Obama.

My guess is that, for the most part, those who've been most concerned about our supposedly soaring debt are those who'd naturally vote Liberal. They're really saying: "I'd feel a lot more comfortable about the budget if only the Libs were in charge of it."

Well, if Abbott wins, they would be. And that would be a signal to many people to stop worrying and leave everything to that nice Mr Hockey.

Hockey, by the way, has said several times that they wouldn't risk worsening unemployment at a time when the economy is fragile by pursuing policies of austerity - that is, by cutting spending or raising taxes by a lot more than is needed to cover the cost of their promises, in an attempt to reduce the budget deficit faster than would happen automatically as the economy strengthens.

As the Europeans have demonstrated, trying to force the pace while the economy is weak is counterproductive. It pushes the economy back into recession, actually making the deficit worse rather than better. So I don't have any trouble believing Hockey when he says he wouldn't be so foolish as to try it here.

Labor's claim that Abbott's election promises have created a $70 billion black hole he will need to fill with spending cuts is a wild exaggeration. It's been debunked by several fact-checking outfits.

But Kevin Rudd, Penny Wong and Chris Bowen haven't skipped a beat in repeating this false claim.

So don't for a minute imagine all the scare campaigns, dishonesty and dissembling is limited to one side. If you're tempted by such thoughts you've allowed partisanship to cloud your thinking.

The fact remains, however, that the Coalition is delaying until almost the last moment before revealing the full list of spending cuts needed to pay for its promises.

What's it got to hide? Well, maybe it has a few nasties it's hoping won't get too much attention before the poll, but it's just as likely it's worried about making some mistake in its figuring - in this area oppositions are at a huge disadvantage relative to governments - that Labor could use to damage its credibility.

An Abbott government would be looking for budget savings - just as Labor has been for several years - and would probably be more inclined to cut spending than end tax breaks.

Its first budget, in particular, would be a tough one, including various unpleasant measures that weren't contrary to its promises but many people weren't expecting. Its primary purpose would be to replace Labor's pet programs with the Coalition's pet programs.

But Abbott has made so much fuss about restoring our trust in politicians that I don't expect he'd follow Howard in using his first budget to break a lot of "non-core" promises.

He'd end up breaking many promises, of course - because "no surprises, no excuses" is a promise no honest politician would make - but not at first. And, like Howard, he doesn't have the stomach for genuinely smaller government.

Monday, March 25, 2013

Labor and Liberals must end budget dishonesty

An immediate federal election is the last thing we need unless we're happy for it to be a fiscal lucky dip. Both sides have much work to do yet to provide voters with adequate information on the cost of their policies and election promises and how they'll be paid for.

Labor must deliver this mainly in the budget; the Coalition must release its facts and figuring no later than early in the election campaign proper. And don't be in any doubt: it's a tall order for each of them.

There are three reasons why this is so.

First, both sides say they're committed to returning the budget to surplus during the next term of Parliament, with the Libs claiming to be able to do it earlier and better than Labor.

Second, the relatively recently discovered structural weakness on the revenue side of the budget is a problem for either side.

It will be a particular problem for the side that wins the election, of course. But, to the extent Treasury takes account of this weakness in its revenue forecasts and projections in the budget and the pre-election update, it will be a problem for both sides during the campaign.

Third, in their very different ways, both sides have made some very expensive promises. So, at a time when revenue growth is likely to be unusually weak, both sides are promising to be particularly generous in increasing spending or cutting taxes, while also losing little time in returning the budget to surplus.

To remind you, company tax, the mining tax and other taxes on profits are being hit by the fall in export prices, plus the dollar's failure to drop down as expected. Income tax collections are being hit by the way eight tax cuts in a row have reduced the extent of bracket creep.

And collections from the GST are being hit by the end of the era where consumer spending grew much faster than household incomes and by the shift in spending towards those items excluded from the tax, particularly private health and education spending.

In theory, this is a problem for the states, not the feds. In reality, all major revenue problems common to the states end up on the feds' plate.

Because Labor's in government, and because most of its big promises are already enshrined in legislation, its moment of truth will come in the budget. In particular, it will have to demonstrate convincingly how it will cover the cost of the twin centrepieces of Julia Gillard's re-election pitch: the National Disability Insurance Scheme (costing about $8 billion a year by 2018) and the Gonski education-funding reforms (costing about $6.5 billion a year by the end of the decade).

Gillard and Wayne Swan have promised to spell out in the budget the "structural savings" they will make to fully fund this additional spending. "Savings" may include reductions in tax concessions ("tax expenditures") as well as cuts in conventional expenditure, but "structural" means the savings must continue - and grow - over many years.

Rest assured, the opposition and the commentariat will hold Labor to account on this score. And one thing this means is that it won't be nearly sufficient for Swan to show how these two ever-more-expensive policies will be funded merely for the coming four years. If it takes up to six years for them to reach their full yearly cost, that's how far into the future Swan's figures must go to show he has that cost covered.

Further, credibility will be attained only if, unlike the past two or three budgets, this one involves no resort to creative accounting: no shifting of spending from the budget year back to the previous, almost-ended year, no use of Swan's "fiscal bulldozer" to push spending commitments off beyond the forward estimates where they can't be seen, and no exploitation of loopholes in the definition of the underlying cash balance, including funding spending on the national broadband network off-budget.

As for the Coalition, if it is to come clean with voters there must be no repetition of its utterly dishonest performance in the 2010 election campaign, where it refused to have any of its promises properly costed by the econocrats, claimed its costings had been "audited" by an accounting firm when it had done little more than check the arithmetic, and only after the election was revealed to have published costings that were wrong by up to $11 billion.

This time, there will be no excuse if the Coalition fails to use the services of the Parliamentary Budget Office. And with all the provisions of its own charter of budget honesty in operation, should it try the old stunt about being shocked to discover a big black hole when it saw the books, we'll know it is fudging. It won't be Ju-liar, it will be Tony-liar.

Monday, March 4, 2013

Hockey would be no soft touch as treasurer

If the Liberals take over the management of the economy in September - as seems likely - one advantage should be that big business becomes more realistic about the extent to which it imagines the government can solve its problems. And just to make sure, Joe Hockey, the opposition's treasury spokesman, gave business his first pep talk along those lines last week.

Hockey is much underestimated. If you've been watching you've seen him progressively donning the onerous responsibilities of the treasurership, the greatest of which is making it all add up.

He has used his - now less considerable - weight to avoid raising unrealistic expectations and to tone down overly generous promises. You can see him thinking: "I'm the guy who'll have to find a way to pay for all these commitments. We've made a huge fuss about the need to get the budget back to surplus and it'll be down to me to ensure it happens."

In opposition the temptation is to espouse populist solutions that sound good but don't work. As a former cabinet minister, Hockey knows it's hard for governments to get away with such wishful thinking. If you've been listening carefully you'll have noticed Hockey quietly taking an economic rationalist approach while others demonstrated their lack of economic nous.

Those who doubt the strength of Tony Abbott's economics team should note that Hockey would be backed by Senator Arthur Sinodinos, a former senior Treasury officer. I believe Sinodinos played a key part in formulating the "medium-term fiscal strategy" - "to maintain budget balance, on average, over the course of the economic cycle" - which the Libs developed when last in opposition.

If so, Sinodinos deserves induction to the fiscal hall of fame. There have been few more important or wiser contributions to good macro-management of our economy.

One of the greatest failings of the Rudd-Gillard government was the way, in an attempt to keep in with big business, it yielded to the temptation to modify its policies in response to lobbying from particular industries. The consequence was to annoy other industries and incite them to get in for their cut. But the more concessions business extracted from Labor, the more business lost respect for its judgment and self-discipline.

This generation of Labor doesn't seem to have learnt from its Hawke-Keating predecessor which, with some lapses, stuck to the line that the days of industry rent-seeking were over and that, in a well-functioning market economy, the main responsibility for solving an industry's problems rests with the industry.

Judging by his speech to a business audience last week, I suspect Hockey has learnt the lesson. He outlined the many ways in which he believed the Coalition's policies would be better for business than Labor's, but stopped well short of promising business everything its heart desired.

For instance, he discussed the case of "a significant manufacturer with similar operations in Australia and the United States", who complained that labour costs were much higher in Australia.

"Australian labour is expensive," Hockey said. "Is that a bad thing? No, not at all. We can compete with higher wages provided our output per worker is globally competitive.

"Higher household income means that our people have higher spending power. That provides a high standard of living and facilitates strong household consumption. And it benefits businesses because it provides a strong and expanding domestic market."

Australia's standard of living must not go backwards, he said. There was no national benefit in cutting wages. "What we do need to do is to ensure that our workers have the skills and knowledge that our industry needs. Education, training and retraining is a key step to unlock labour productivity gains. And we need to ensure that employment conditions can meet the varied and changing requirements of Australian workers and Australian businesses."

This was why, within the framework of the Fair Work Act, a Coalition government would look at "cautious, careful and responsible improvements to labour market regulation".

Hockey noted that part of the reason Australian wages seemed high relative to US wages was our high dollar, which "is impeding the competitiveness of Australian exporters and making life difficult for Australian producers.

"But on the other side of the coin," he said, "the high Australian dollar brings benefits for businesses which rely on imported goods, and for consumers who purchase cheaper imported products. So what could or should be done?"

He made two points in reply. First, there's no "correct" value for the dollar. Second, all movements in the currency create losers as well as winners. "Those who argue for a lower dollar are effectively arguing in favour of higher prices for consumers," he said.

A Coalition government "would need to be extremely cautious in tinkering with such a successful policy measure" as the freely floating dollar. "We would encourage businesses to view the high dollar as an opportunity. A high dollar means imports are cheap. Business should be utilising this period to import cutting-edge equipment and world-class technology."

Hockey is already sounding like a more forthright treasurer than the incumbent.

Monday, September 19, 2011

New budget office must clarify, not confuse

Economists believe people should be judged by their ''revealed preference'' - by what they do, not what they say. If so, Wayne Swan is supremely confident Labor will romp home at the next election, whereas Joe Hockey is not at all sure the Liberals will win this time round.

You can deduce this from the different positions the two men take on the legislation to establish a parliamentary budget office. Swan has presented a bill that offers tightly defined benefits to the opposition of the day, whereas Hockey wants to give oppositions a much wider licence to argue the toss with the government. Both seem to be ''taking no thought for the morrow''.

The idea of a parliamentary budget office - roughly modelled on the independent US Congressional Budget Office - has potential to greatly improve the quality of the debate about how much election promises would cost and how they'd be paid for, imposing greater discipline on the parties.

Peter Costello's charter of budget honesty was intended to bring this about by giving both sides the ability to have their policies costed by Treasury and the Department of Finance during the election campaign. But Costello biased the rules against the opposition of the day, meaning they have proved unworkable. The present arrangements require the heads of Treasury and Finance to publish in their own name a pre-election economic and fiscal outlook - giving revised forecasts for the economy and the budget balance - soon after each election is called. No problem there.

It also allows both sides to submit their announced policies to Treasury and Finance for costing. These costing are published by the two departments as soon as they are done. This is fine for governments, which are able to privately bombard the departments with requests to cost a host of possible policies before the election is called. In a process of iteration, treasurers are able to refine their proposals in the light of advice about what things will cost and alternative ways of skinning the cat.

Then, once the election's called, they announce their policies and bowl them up to be ticked by the same people who costed them in the first place.

But oppositions get no pre-election access to the econocrats to try out different proposals. They have to painstakingly gather facts about the cost of this and that, or spend a fortune paying Canberra consultants to cost their policies, knowing those consultants can't necessarily do it the way Treasury does it - especially so after Access Economics retired hurt from the game, having been monstered once too often by the lovely Costello.

The problem is that if Treasury and Finance judge the opposition's costing to be wrong - as there's a high chance they are - this is announced during the campaign and the treasurer carries on about the incompetence and irresponsibility of his opponents.

Swan's bill follows the unanimously agreed recommendations of a multi-party committee. The office would be established as a department of the Parliament, independent of the government. It would give all non-government members the ability to have policy proposals costed in a private, iterative process until the start of the campaign.

The costings for policies submitted during the campaign would be automatically made public. This would put the opposition on the same basis as the government, provided the office had adequate access to the unique information base and costing models used by Treasury and Finance.

It would give the Greens and independents access to accurate costing for the first time, a big step forward. The office would be required to use the same economic forecasts, budget parameters and costing conventions as Treasury and Finance, which would put all costings on a comparable basis and mean the costings used by an opposition during a campaign were essentially the same as those Treasury would incorporate into the budget should the opposition become government.

The office would not have the power do its own forecasts, nor undertake modelling of the economic (as opposed to budgetary) consequences of possible policy reforms.

But Hockey has proposed amendments to the government's bill to give the office a wider range of powers. It would have the same powers as the Auditor-General to demand information of government departments. It would be able to use different forecasts and costing conventions to those in the budget.

Non-government members would be able to have confidential dealings with the office even during election campaigns, making their own decisions about whether and when to make costings public. The Gillard government's funding allocation for the office - about $6 million a year for four years - would be indexed to Treasury's funding.

These Liberal counter-proposals demonstrate a degree of mistrust of governments - and governments' ability to interfere with Treasury forecasts and budget estimates - that seems common among oppositions but is unwarranted.

Not since the Hawke-Keating government have governments interfered in Treasury's economic forecasts and budget figurings. Treasury's forecasts are often wrong and even its costings can prove astray, but there's no reason to believe any other outfit could do better. I think it fair enough to require oppositions to get their policies decided and costed before the campaign starts, just as the caretaker convention requires governments to.

If the taxpayer has to pay for an additional costing body it's vitally important the work of this body helps to clarify the debate not make it even more confusing than it already is.

It's infinitely preferable that all parties' costings be prepared on the same basis, rather than allowing oppositions to chose different economic forecasts or different budget parameters and costing conventions.

If we can avoid that tower of Babel the parliamentary budget office will be a big improvement.


Wednesday, August 18, 2010

Labor deserves credit, not death at ballot box

We may live in a globalised world but it hasn't made our election campaigns any less parochial and inward-looking. Perhaps in an effort to raise Australians' economic literacy, the Economic Society recently sponsored a national tour by Professor Joe Stiglitz, a Nobel prize winner and one of the world's most illustrious economists.

Some brave soul asked him if he'd learnt anything while he was here. Well, he said politely, there were a few things that had puzzled him. He couldn't understand why we didn't know the success of the Rudd government's budgetary stimulus - explained by its size, timing and design - was the envy of the other G20 countries.

He couldn't understand why we were so worried about budget deficits and debt when our accumulated federal government debt was about 5 per cent of gross domestic product, whereas just one year's budget deficit in the US was 10 per cent of its GDP. And he couldn't understand why so many people were opposed to requiring the mining companies to pay a fair price for the use of our resources.

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Now more than 50 Australian economists have issued a statement saying they're ''convinced by the evidence that the co-ordinated policies of the Australian Labor government have prevented the Australian economy from a deep recession and prevented a massive increase in unemployment''.

Economic management is the dominant issue in almost every election campaign and I don't imagine it's much different in other countries. But that Labor could be in danger of losing the election after doing such a good job of guiding the economy through the worst global recession in 70 years is remarkable.

The usual pattern is for governments to be re-elected until finally they preside over a recession, when they're promptly tossed out. That's true of the Whitlam government (recession of the mid-1970s) and the Fraser government (recession of the early '80s). It's also true of the Hawke-Keating government (recession of the early '90s) although, thanks to the miscalculations of John Hewson, Paul Keating's execution was delayed until 1996.

The exception to the rule is John Howard. After more than 11 years he was tossed out without presiding over a recession. Indeed, the economy was booming at the time.

I have to admit that, back in 2007, I thought this wasn't a good election for Kevin Rudd to win. A recession was overdue, it was bound to occur within his first term, he'd get the blame and be tossed out after only three years. Right risk; wrong logic.

Much more than in the past, this downturn was very much the cause of external factors, in the form of the global financial crisis. But to the surprise of close observers, including the government and its econocrats, the recession proved to be so mild and short-lived many people have concluded there wasn't one. I'm sure many people who don't follow these things closely have since concluded the whole thing was a media beat-up.

(The media didn't invent the collapse of various local fringe financial institutions, nor the 0.8 per cent fall in real gross domestic product in the December quarter of 2008 and the weak growth in later quarters, nor the 230,000 rise in unemployment and the bigger rise in underemployment, nor the much tougher borrowing conditions for small business, nor the present weakness in retail sales and home building as the effects of budgetary stimulus have worn off.)

Many factors contributed to the mildness of our recession: the absence of serious banking problems, the strong growth in immigration, China's rapid bounce-back following its own massive stimulus, and the Reserve Bank's 4.25 percentage point cut in the official interest rate.

But like most (although, of course, never all) economists, I have no doubt about the central role of the Rudd government's large, early and carefully targeted budgetary stimulus. Its impact is clear from the statistics, including the remarkably early recovery in business and consumer confidence.

Most voters aren't interested in that kind of causal detail, of course. By their usual simple standard - did you or didn't you preside over a noticeable recession? - the government has passed with flying colours. So why isn't it coasting to an easy election win?

Partly because of its chronic inability to explain and defend its policies. But also because, if anything, the government has been too successful at staving off the usual symptoms of recession. There's little sense of gratitude, or even relief, because the period of fear - of losing your job, of wondering whether you might lose your home, of watching your kids spend months seeking a job - was too brief.

Our adversarial political system means the opposition always needs to find fault with the government's performance. It would dearly love to have been able to berate the government for its failure to hold off recession and prevent a huge rise in unemployment.

In the absence of that, however, the Liberals have switched to the claim that Labor has been on an unnecessary spending spree. It has racked up a frightening level of government debt to be left to our grandchildren and, if that wasn't bad enough, most of the money has been wasted.

There has been waste. Trying to spend money quickly means a degree of waste is inevitable. But with the willing help of sections of the media, the Libs have left voters with a quite exaggerated impression of the extent of that waste.

We're being asked to believe Rudd and Julia Gillard invented government waste. It never occurred under Howard and would never occur under an Abbott government.

But in all the hypocritical talk of waste, a far more important form of waste has been forgotten: the waste of material production and the waste of human well-being had the rise in unemployment not been stopped at 675,000 souls and been allowed to reach the 1 million originally feared.


Monday, August 16, 2010

Blowing the whistle on unfair costings game

I refuse to dignify the parties' predictable squabbling over the cost of each other's promises by taking it seriously. I don't know who's right and I don't much care. There are more important things to worry about. It's a three-yearly farce that drips with hypocrisy and fake importance.

I'm not sure why the parties always fall to furious arguing about Costing Blunders. Perhaps it's always started by the government of the day - because it's seeking to exploit the advantage of incumbency - and whoever's in opposition feels obliged to muddy the water by sniping back at the government.

These arguments are so arcane I'm sure the swinging voters at whom election campaigns are aimed take zero interest. So perhaps the pollies carry on about costs because it makes them look active and responsible, while distracting journalists from inquiring into more important matters.

It's the gross unfairness of the game that turns me off. Governments have year-round access to Treasury and the Department of Finance to get their costings done by the experts, using a process of iteration: "If you do it that way, minister, it will cost you 2X, but if you change this detail here the cost falls to X."

Governments pepper the econocrats with what-if questions in the weeks before the start of the election campaign. So only if they really cock things up are their costings ever found wanting when their promises are submitted to the people who costed them in the first place.

Oppositions, on the other hand, get no access to such official advice. They have to hunt for clues as to what things cost or pay an accounting firm big bucks to do their costings and, likely as not, get them wrong because the relevant information is so closely held by the econocrats.

This game of both sides submitting their promises to the econocrats for costing arose from Peter Costello's Charter of Budget Honesty. He knew it was stacked in the government's favour. Labor whinged repeatedly about the unfairness of it all and sought to minimise the (high) risk of embarrassment by submitting its costs at the very last minute.

In power, however, Labor's reforming zeal evaporated and it has delighted in turning the screws on the Libs as they did on it. And these guys wonder why they have lost so many supporters and are struggling to win what should have been their easiest-ever election.

Lemme give you a tip, Wayne: "We're no worse than the other lot" isn't a great rallying cry.

In opposition Labor lacked the courage to challenge this unfair arrangement but, fortunately, the Natural Party of Government had no such inhibitions. It has used the occasion of the leak of a flaw in its costings (more likely to have come from Labor than the econocrats) to refuse to submit further promises.

Good. If oppositions refuse to play ball, some government will be obliged to introduce a fairer system if it wants to stay in this silly game.

Because they're not in government with the econocrats' advice on tap, all oppositions have difficulty saying how they would pay for their promises. They are never game to give the honest - and quite satisfactory - answer: if we win, Treasury will tell us how - that's what it's paid to do.

Treasury and Finance know where all the waste is. They also know how to tweak promises in ways that greatly reduce their cost.

So great is the pollies' proclivity for solving problems with a chequebook, however, that neither side has been able to stick to its vow to find savings to cover all the cost of its promises over the "forward estimates" (that is, until June 2014).

They searched out a loophole: promise to spend money beyond the forward estimates. According to my colleague Jessica Irvine's estimates, by last Wednesday Labor had made promises worth $6.6 billion in this never-never land, while the Libs had IOUs worth $6 billion.

No doubt both figures are higher by now. It's remarkable to think the punters' votes are being bought with promises to spend money after the next election.

While we're on the subject of government spending - when have we been off it ? - I trust you noted Tony Abbott giving notice at his campaign launch that, should he win, he'll pull the standard trick of incoming governments: declare a fiscal crisis and introduce a horror budget.

He said he would set up a "debt reduction taskforce" in his first week to "get to the bottom of Labor's waste and mismanagement, to see the real state of the government's books and to prepare a comprehensive plan to start repaying Australia's $90 billion debt". In one month an economic statement would be issued "outlining Australia's risks and opportunities and the new government's response to them".

It's known in the trade as Doing a Mother Hubbard. You come to office, discover to your horror the cupboard is bare, and say you have no choice but to break promises and make emergency spending cuts you didn't mention in the campaign.

It's a harder trick to pull off these days because the Charter of Budget Honesty's "pre-election economic and fiscal outlook" statement, signed off by the econocrats early in every campaign, is designed to ensure everyone knows the latest state of the books.

But Abbott would claim the extent of wasteful spending was far worse than expected. In politics, a wasteful program is one your heartland supporters have no interest in.

That's the point. Though some effort would be made to reduce net spending, the objective is to cut out your predecessors' pet programs and replace them with your own.

Should Abbott win, he's already taken out fiscal insurance.