"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.

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.

Institutionalising People Power through an Ideas Summit

The challenge for him (Mr Aquino) will be to consolidate the movement ... "to ensure that the pattern of his mother’s administration – a non-corrupt president surrounded by a host of sometimes dodgy relatives and advisers – is not repeated."

For the soon to be proclaimed presidential frontrunner Sen Benigno "Noynoy" Aquino III of the Philippines whose ambition only began 9 months ago with the passing away of his mother, democracy icon Corazon C Aquino, the problem now is consolidating the different messages of his campaign into a coherent narrative to govern his administration over the coming six years.

Many political analysts including Paul D Hutchcroft of the Australian National University have said that the election of Mr Aquino was a "vote for change". Manolo Quezon blogs in the Daily Dose that "The Philippines is OK" after its successfully held elections. With the settling of the political environment, the prospects for future economic growth seem sound. The country posted a 7.3% growth in the first quarter, leading many analysts to believe a recovery from the global recession is on its way.

It is under such auspicious conditions that Senator Aquino is poised to take charge of a country of 90 million filipinos. The challenge for him will be to consolidate the movement that ushered him into the "limelight" as Hutchcroft calls it "to ensure that the pattern of his mother’s administration – a non-corrupt president surrounded by a host of sometimes dodgy relatives and advisers – is not repeated."

It will be quite easy for Mr Aquino to slip into the malaise of incumbency where the true voice of the people that he promised to champion seldon gets passed through the cordon of protocol.

Already there are numerous rumours circulating of infighting within his inner circle. Several unofficial cabinet line ups have been leaked. Amando Doronilla opines that rather than change, the supposed appointments signal more of the same and "bode ill" for the incoming administration. Alongside these developments are the midnight appointments of the outgoing president Gloria Arroyo which include the Chief Justice and Ombudsman. Her coalition also retains the largest number of seats in the lower house of Congress. These represent serious obstacles to Mr Aquino's pledge of prosecuting her for the many scandals that plagued her administration and to run an anti-corruption drive.

Pieces of unsolicited advice keep hugging the headlines which include everything from fulfilling his promise to quit smoking to imposing a permanent gun ban, to surrendering the lands of the Cojuangco-Aquino sugar estate to land distribution. Having had only 90 days to prepare his platform of government which was conducted by an inner circle of seasoned policy advisors behind closed doors, Aquino runs the risk of overinterpreting his mandate for change. The media driven campaign and the numerous debates with eight different candidates did not provide a proper platform for the discussion of serious policy challenges in detail.

In the Philippines, such a tradition of participative consultative coalition building is vigorously espoused by non-governmental sector organisations that have comprised the "parliament of the streets" since the days of the Marcos dictatorship.

It will be quite easy for Mr Aquino to slip into the malaise of incumbency where the true voice of the people that he promised to champion seldon gets passed through the cordon of protocol. In order to arrest such a slide, as a way of institutionalising "people power" that brand of democracy his family legacy made famous, it might serve his administration well to call for a people's summit to consult with various stakeholders and create a bottom-up approach to his governance style.

Such an attempt to frame a policy agenda for an incoming administration was made in Australia by the Federal Labor government of PM Kevin Rudd back in 2008. It drew from the ideas of 1 000 participants hailing from different sectors of society. Participants to the 2020 Summit as it was dubbed were selected by a 10 man steering committee. The summit was co-chaired by the prime minister and a leading policy expert from Melbourne University.

In the Philippines, such a tradition of participative consultative coalition building is vigorously espoused by non-governmental sector organisations that have comprised the "parliament of the streets" since the days of the Marcos dictatorship. Such a summit early in his administration could help keep Mr Aquino's change credentials healthy and provide a more rational systematic approach to dealing with the disparate ideas that are floating around.

The Rising Tide

If the global recession was the gift that kept giving, then the asylum seekers represent the problem that just won't go away for PM Kevin Rudd and his government. Having staunchly defended Australia's reputation as a tolerant society in India against the perception there that violent assualts on overseas students from that country were race related, he had to defend his government's policy with respect to asylum seekers back home in Parliament.

The heated debate over asylum seekers is an ongoing saga that has played out this year and one where the hapless Opposition has been able to gain some traction in the opinion polls. The policy being the removal of the temporary protection visas being issued to asylum seekers which was the Howard governments solution to the so-called "boatpeople" phenomenon. The allegation is that the reversal of this policy has resulted in a rising tide of asylum seekers being channelled into Australia by "people smugglers".

We can see from the chart below produced using data compiled by the OECD what the flow of asylum seekers into Australia has been through the years. It clearly shows that the flow during the past few years is no where near the highs that were recorded in 1990-91 and 2000-01 both in absolute terms or as a proportion of the overall intake of OECD countries.

Clair Harvey wrote in the Sunday Telegraph back in October:

A total of 4768 "plane people" - more than 96 per cent of applicants for refugee status - arrived by aircraft in 2008 on legitimate tourist, business and other visas compared with 161 who arrived by boat during the same period [...] And plane people are much less likely than boat people to be genuine refugees, with only about 40-60 per cent granted protection visas, compared with 85-90 per cent of boat people who are found to be genuine refugees. In 2007-08, 3987 claims were received and 1930 of these were approved. But whereas boat people are detained on Christmas Island while their claims are processed, plane people live in the community and they are allowed to work under policy changes introduced by the Rudd government.

When taken together with the numbers of foreign-born workers moving to Australia which have doubled in the last five years as shown in the chart below, one gets a sense of how overblown the issue has become. One also gets a sense of the exploitation for political mileage and media ratings the asylum seeker issue has been subjected to.

Preaching to the Choir

This week saw Joe Hockey the Federal Opposition’s treasury spokesman present his views on god and politics before the Sydney Institute. The talk entitled “In Defense of God” was a discussion of religion’s place within a secular society. Mr Hockey argues in favour of a pluralist society that maintains the free and open competition for adherents of different religious faiths (in keeping with the Liberal Party’s own tradition of unfettered markets no doubt).

This was touted in the media as his first outing as an aspiring leader of the Federal Liberal Party. As the clouds of economic crisis began to recede into the distance and with it the dour predictions regarding the Government’s fiscal position, this was seen as the treasury spokesman’s way of canvassing a wider policy arena, and what better way of doing this than to discuss his own personal history as an Australian of mixed ancestry and cultural heritage?

The actual text of the speech is quite lucid and credible, but when asked regarding his motivation for giving it, Joe could not provide a credible response. Neither could he prevent speculation regarding his higher ambitions from occurring, his smiley face betraying his inner most thoughts (as if he got a warm fuzzy feeling from the mere notion that he might wrest the Liberal Party’s helm from its currently unpopular leader Malcom Turnbull).

Had he intended to showcase his command of matters pertaining to his treasury portfolio, he could have offered to speak on a topic made popular by the GFC, that of religion and economics. After all, his party adheres most closely to the orthodoxy of neoliberalism. This tradition has taken the outer trappings of a religion according to one author and advocates for the total separation of Markets and State. It is this belief system that Kevin Rudd’s “heretical” teachings on social democracy seek to overturn.

Given the unpopularity in recent years of this view among voters and policymakers alike, it is not difficult to see why he opted not to be the apologist for it in this occasion. But to see what shape and form a speech on this topic might have looked like, check out the beautifully written essay by a theologian posted this week and found here.

(Image taken from the Sydney Institute podcast)