Date created: 7/11/04
Last modified:7/11/04
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John Quiggin

'Tax and spend' is back

Australian Financial Review

7 October 2004

With the election only days away, the result is still too close to call, according to the opinion polls. But if the electoral outcome is unclear, the policy debate has been decisive. A new bipartisan consensus has emerged, in favor of the social-democratic policies that have, until recently, been derisively described as ‘tax and spend’.

The most significant statement of the campaign was made by John Howard, in an interview with the AFR (Sep 22) when he observed ‘There is a desire on the part of the community for an investment in infrastructure and human resources and I think there has been a shift in attitude in the community on this, even among the most ardent economic rationalists.’

Howard’s explicit reference to ‘economic rationalists’ shows that he is well aware of the significance of his statement. The idea that the growth in public expenditure and tax revenue, should be tightly constrained, and, if possible, rolled back, was a central element of the consensus that dominated Australian politics in the 1980s and 1990s, variously referred to as ‘economic rationalism’, ‘economic liberalism’ or simply ‘reform’.

Initially, the desire to cut taxes was a response to popular pressure, reflected in the tax revolt of the 1970s, and some of those who regarded themselves as economic rationalists supported a strong public sector. By the 1980s, however, with the Hawke government’s Trilogy commitment and its embrace of privatisation, cuts in taxes and public expenditure became a central part of the economic rationalist orthodoxy imposed on an increasingly sceptical public.

From the mid-1990s, it became evident that the Australian public preferred improvements in services to reductions in taxes. Opinion polls showed a steady increase in the proportion favoring improved services, and a steady decline in the proportion nominating tax as a major political concern. At the state-level budget-cutting reformers like Kennett and Greiner were dumped in favour of pragmatists who promised (with varying degrees of success) to deliver better schools and shorter hospital waiting lists.

At the Commonwealth level, Labor has distanced itself from the Keating era, but still tried to have a bet each way on tax. Labor’s 1998 campaign was based on opposition to the GST, and this was repeated in 2001 with ‘rollback’. This line continued under Simon Crean, who repeatedly labelled the Howard government ‘the highest-taxing in history’.

Latham has used the same line, with a subtle, but crucial change. In his policy speech, he observed “The Howard-Costello Government is the highest-taxing government in Australia’s history. There is no shortage of funds flowing into Canberra. Our task is to make better use of this money: to cut waste and mismanagement, to reorder priorities.”

The implication is clearly that Labor would not reduce taxes relative to GDP (though this remains the official policy line) but would target expenditure more effectively.

The Howard government’s shift in position has been more rapid and is, in the long run, more significant. Howard has displayed the zeal of a convert. In some respects has behaved like the rationalist caricature of a social democrat, eagerly seeking out interest groups at which to throw government money. Many of the new spending proposals are poorly targeted, except in purely electoral terms.

It is possible however, to discern a more coherent pattern emerging. Until recently, the best description of the government position on public spending was ‘creeping residualism’. Until recently, Howard has been hostile to systems of universal provision such as Medicare and public schools. The preferred option was to replace them with a “safety net” for the poor while everyone else got subsidies for private provision.

The new position, most evident with Medicare, might be called “Universalism Plus Choice”. In relation to health, this means ensuring universal access to bulk billing and public hospitals while also encouraging private health insurance. The shift in emphasis has been evident ever since the appointment of Tony Abbott as Health Minister, and is particularly marked by contrast with the policies pursued by Michael Wooldridge, before his departure for greener pastures.

Similarly, while maintaining increased funding for the richest private school, Howard has restored funding for public schools and the poorer private schools. Again there’s a significant contrast between Brendan Nelson and David Kemp.

Universalism Plus Choice has some appeal. But, done properly, it’s going to be expensive. Unless the promises made at this election turn out to be noncore, it’s unlikely we’ll see significant tax cuts any time soon under a re-elected Liberal government. The days of economic rationalism are now well and truly behind us.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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