Date created:6 August 2001 Last modified: 6 August 2001 Maintained by: John Quiggin John Quiggin
24 May 2001
A few months ago, Finance Minister John Fahey (Letters 10/1/01) indignantly repudiated my suggestion that he adhered to the views of Nobel Laureate James Buchanan, who has argued that market-oriented governments should do as much damage as possible to public finances, in order to constrain the spending options of their interventionist successors. It now appears that I may have attributed this view to the wrong minister.
A consistent theme in the spin being placed on Tuesday's Budget, apparently with at least tacit approval from the Treasurer's office, is that the disappearance of the surplus is a political masterstroke because of the difficulties it will create for Labor's election campaign. However, a review of the way in which the surplus disappeared reaffirms the ancient maxim 'when faced with a choice between a conspiracy and a stuffup, go for the stuffup every time'.
The surplus was doomed from the start because it was built on lies. Having promised before the 1996 election to adhere to his expenditure commitments regardless of what might be found when Labor's books were opened, John Howard broke that promise within a week of taking office, and later invented the new category of 'non-core promises'.
The cuts that followed won the applause of the financial markets, but they also laid the basis for the government's well-deserved reputation as 'mean and tricky'. After Howard's reversal of his commitment to 'never ever' revive the GST, the government's credibility was doomed.
Public perceptions did not change overnight, but the government never again received the benefit of the doubt in matters of taxation and public expenditure. So, for example, when it was asserted that Howard's promise of no change in the price of 'ordinary beer' was just a restatement of existing policy regarding bottled beer, the public believed the brewing industry and not the government. The result has been a continuing series of backflips and boondoggles in which the government has been forced to accept, and pay for, the most generous possible interpretation of its policy commitments.
Even worse, having used the cuts of 1996 to finance large reductions in the tax bills of upper-income earners, the government belatedly realised that the cuts were unsustainable. The employment and training programs scrapped in 1996 have been reintroduced, in a mean and tricky form, under the banner of 'work for the dole'. Cuts to research expenditure were largely reversed in the January Innovation statement. Even ATSIC has received some more money.
The cumulative impact is sobering. If the rosy economic predictions of the Budget Papers turn out to be correct, by 2003-4 Australia will have enjoyed easily its longest-ever economic expansion. Yet the Budget will still be in a state of precarious balance, even assuming there are no surprises like Timor or HIH.
Whatever the cause of the government's poor fiscal position, the problem facing Labor is real. Despite the unpopularity of the government, and the success thus far of the 'small target' strategy, Labor can scarcely count on gaining office by default.
Labor could plan for a repetition of the strategy pursued after the last two changes of government, announcing, correctly enough, that the Budget situation is worse than has been admitted and that all election commitments are null and void. But in the current mood of the electorate, that would surely be a recipe for a one-term government,
The best strategy is to announce immediately that, regardless of any previous acquiescence on Labor's part, all the present government's expenditure and tax initiatives are up for review. On the revenue side, there are plenty of options to fund both a rollback of the GST and substantial new expenditure. First, Labor could repudiate the government's absurd and unsustainable policy of not indexing petrol taxes. Second, the anti-avoidance measures abandoned by the government could be revived and strengthened. Finally, the disgraceful gutting of the capital gains tax, justified at the time by the need to get on the New Economy bandwagon, should be reversed.
There are also plenty of dubious expenditure items and tax expenditures to be looked at. The $2 billion subsidy to private health insurance is at the top of the list. The money allocated to various sweeteners for privatisation, such as the National Heritage Trust, should be returned to the general budget for the relevant policy areas, such as the environment. The necessity for increases in defence expenditure should be reviewed in the light of the admitted fact that we have no enemies capable of mounting a serious attack on us.
If the government's fiscal mismanagement forces its successors to be honest about their tax and expenditure plans, it will have done us a service at last.
Professor John Quiggin is an Australian Research Council Senior Fellow based at the Australian National University and Queensland University of Technology. Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.Read more articles from John Quiggin's home page
