"Strategic deficits" from Australia

Image credit: The Australian

The Australian Parliamentary Budget Office (or PBO), a non-partisan, government agency tasked with evaluating election promises, this week released a very interesting set of numbers in which it estimated the structural budget balance from the last two terms of the conservative government under PM Howard up to the subsequent two terms of the Labor government under PMs Rudd and Gillard.

The PBO shows that prior to the 2007 elections in which the conservatives were defeated, the Howard government was structurally in the red. Structural is the word used because if it had not been for the mining boom which had yielded a large tax bonanza, the government's expenses would have exceeded its revenues.

The reason for this deficit was Mr Howard's propensity to engage in "middle class welfare" through tax cuts and benefits such as the "baby bonus" which were not means-tested but applied to all. This was his secret to political longevity. The minerals price boom gave him the means to do it. The IMF earlier this year had called this tendency an act of "fiscal profligacy".

During the 2007 election, the conservative treasurer Peter Costello sought to lock-in the next government into a new round of tax cuts. The then opposition leader Kevin Rudd supported the tax cuts but said, "this reckless spending must stop," signalling his intention to take the mantle of fiscal responsibility from Mr Howard.

A little over a year into office though and Mr Rudd's government faced the daunting task of dealing with the effects of the global financial crisis. This forced him to commit to a large fiscal stimulus program to counter the economic downturn and guarantee the financial system. It worked. Australia avoided a recession, but something else changed. Tax revenues took a hit due to lower corporate income and consumer spending.

Mr Rudd's successor Ms Gillard succeeded in passing a carbon and minerals resource rent tax after a very contentious transition in 2010, but in order to gain the required number of votes in parliament, she had to "overcompensate" the various stakeholders affected, and as commodity prices declined, the revenues which these taxes were meant to generate failed to materialise.

This has left her government scrambling to fill this budget hole not only to regain some economic credibility but to pay for some of her government's signature programs such as school reform and disability insurance. She has sought to unwind some of the so called "middle class welfare" entitlements of the Howard era.

As polls indicate a turnover back to the conservatives in the September election this year, her treasurer Mr Swan in his latest budget sought to tie the hands of the incoming government to fund its social programs in its first term of office out to 2016-17.

This behaviour by incumbent governments to reduce the fiscal space of their successors to either increase spending for social programs (if the incumbents are conservative) or reduce the size of government (if they are progressive) is consistent with strategic budget theory which has been used to explain why governments of advanced economies have been chronically in deficit since the 1970s.

What is clear in all this is that while both sides of politics often talk of being fiscally responsible, neither one is really serious based on the evidence. Both sides play the game; and unfortunately, it is the taxpayer that eventually has to deal with the consequences.

Mind the (Gender) Gap

This week, as the second presidential debate unfolded, as Republican standard bearer Mitt Romney sought to close the lead of President Barrack Obama among women, an unfortunate choice of words used in relating a story about his search for women to fill his cabinet as governor of Massachusetts set off an internet frenzy around the phrase "binders full of women".

Despite that, it appears Mr Romney has been able to narrow the gap with women in the key battleground states that will decide the election, although nationally, the gap remains sizeable. Around 1980 was when the women's vote swung in favour of the Democrat Party, and vice versa for men according to Ronald Ingleheart and Pippa Norris. They pointed out that

The emergence of the modern gender gap in America is due to the way that women moved towards the Democrats since 1980 while men moved towards the Republicans on a stable, long-term and consistent basis, thereby reversing the pattern of voting and partisanship common in the 1950s. 

They theorised that as women grew more educated, career-oriented and independent, they began to abandon their conservative leanings in favour of a more progressive message from the liberally-minded Democrats. In  every US presidential race since 1988, every single Democratic candidate has been supported by a majority of women voters up until Barrack Obama's election in 2008.

Meanwhile in the eight presidential elections since and including 1980, the Democrats have only twice secured a majority of male voters--in the 1992 and 2008 elections when the US economy was in bad shape.

Using the World Values Surveys, Ingleheart and Norris show how that the women's vote has consistently shifted more and more towards the more progressive parties in most advanced countries, some post-communist countries and a few developing nations.

By 1995, a solid pattern had emerged. The key to George W. Bush's victories in 2000 and 2004 was in narrowing this gender gap, which Romney is emulating.

Meanwhile in Australia, PM Julia Gillard has changed the definition of misogyny by branding the leader of the opposition as such in parliament.

Her 15-minute speech which went viral worldwide helped to convince the Macquarie and Merriam-Webster dictionaries to adopt her usage of the word and define misogyny as "an intense prejudice against women" instead of merely "hatred towards women".

As the head of a Labor government, Ms Gillard has enjoyed a substantial advantage among women voters as the preferred prime minister of Australia, while here rival, Mr Abbott has enjoyed a similar advantage among men.

It was at the end of the 1990s that Australian voting patterns followed America in developing this gender gap, based on the analysis of Ingleheart and Norris back in 1999. This seems to have continued.

Reframing the Climate Debate

The Climate debate has proven to be a diabolical policy problem for politicians in Australia, a country with one of the highest carbon dioxide emissions per capita in the world having an economy heavily dependent on the export of coal and other carbon intensive commodities.

It was partly responsible for the sacking of a once popular PM by members of his own party during his first term. It was dragging down the popularity of the lady that replaced him. Even a coalition between the Greens, Labor and a few independents representing country-based electorates could not provide a consensus in the debate.

Then came the proposal of an economist to offset a carbon tax with an income tax cut. The idea is hardly new. Even the Prophet of an Inconvenient Truth advised the scrapping of payroll taxes in lieu of a carbon tax a few years ago. The idea was to lighten the burden of productive activity (labor) while increasing it for environmentally destructive ones (pollution).

The advocacy of this tax cut approach as part of an overall principle of making the polluter pay while compensating vulnerable members of the community has stemmed the bleeding of support as expressed in the poll numbers and restored this government's legitimacy at least for now.

The re-framing of the debate is something that has eluded previous proposals for a carbon pollution reduction scheme. The use of a tax to price carbon rather than a synthetic market (read: emissions trading scheme) is much simpler and straight-forward. It also avoids much of the costly transactions costs involved in setting a complex trading system.

The use of tax cuts to offset additional living costs on households to whom polluting energy firms would pass on any tax burden does away with the notion that the "little man" would be the hardest hit by the tax. It also reduces the disincentive to work without creating budget pressures.

Indeed the Opposition will wish that it had proposed the Carbon tax with the accompanying income tax cuts ahead of the government as what a conservative think tank had earlier done. Having been outflanked by Labor on this issue, it now has to reconcile its carbon abatement policies which opts to use government regulation rather than a market mechanism something that economic liberals are not known for. Being the party that invented "middle class welfare" it will now find it difficult to counteract the middle and lower income tax cuts now being considered.