Catallaxy Files

It seems to me that the best response to the GST scare campaign by Labor (which is a repeat of Labor’s campaign in 1998 and 2001) include:

• Labor has had six years to repeal the GST. It promised to rollback the GST and has failed to act on that promise. A Labor promise is worthless.
• The will be no change to the GST  - either in rate or coverage – before the next (2013) election. We will commission a broad study of taxation – local, state and federal – which will inform the Coalition’s tax reform policies to take to the 2013 election.
• In principle such reforms could include changes to the GST. Such changes might increase or decrease the GST rate; or narrow or widen the coverage. It might involve leaving the GST unchanged. But whatever policy is decided by a Coalition Government will be clearly articulated to the electorate providing sufficient time for voters to consider the proposals and cast their vote.
• There is a solemn Coalition pledge: taxation will always and everywhere be lower under a Coalition Government than under a Labor Government. We favour less distorting and more efficient taxes. We are committed to reducing waste and the burden of government spending.

In The Australian today:
“Last week’s budget seems the farewell card Labor had to have. It constrains spending, while funding DisabilityCare and the Gonski reforms; it projects sustained revenue increases, with receipts rising twice as rapidly as payments to 2014-15; it heralds a surplus in 2015-16; and it paints a strong picture of the outlook to 2023-24, at which time net debt will be negative and the government will be accumulating assets on behalf of taxpayers.”

This survey is about the Whitlam Government and Blue Poles.

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Chris Berg, writing in The Age, tears Wayne Swan a new one:

… almost every major problem of the Gillard government can be traced back to the Treasury and its Treasurer.
…
The role of the Treasurer has an oversized place in Australia’s political culture. Australia is obsessed with its economy. In no other country do minor shifts in interest rates dominate the political conversation as they do here. For the past few decades budget surpluses and deficits have been the measure by which we judge our governments.

Perhaps we’re too obsessed with the economy. But the obsession serves us well. If you want to see what a lack of interest in public finance fundamentals leads to, then have a look at the United States … or Greece.

So no surprise the roll-call of prime ministers is filled with former treasurers. John Howard, Paul Keating, Billy McMahon, Harold Holt, Ben Chifley and Joseph Lyons have all occupied the post. Other long-serving treasurers (read Peter Costello) have been prime contenders for leadership.

Then there’s Swan. Among all Labor’s leadership buffoonery, Swan’s name has been missing. He is not just Treasurer but Deputy Prime Minister. He ought to be at the front of the queue. Wayne Swan is the only long-serving Treasurer in living memory who has been diminished, rather than enhanced, by his job.

On the Bolt Report today, in responding to questions about the budget deficit, Anthony Albanese (who at least should receive credit for turning up) said at least two things that are false.

• First, that the difference in the write down of $12 billion claimed by the Prime Minister before the budget and the close to $20 billion at budget is due to timing differences (ie: the former is from MYEFO and the latter from budget).
• Second, that the revenue writedown (misforecasting) was due to the ‘high Australian dollar’.

Let’s examine these claims. The reconciliation table for last week’s budget shows a parameter variation of negative $19.936 billion. This comprises $13.7 billion in overestimated revenue and $5.6 billion in underestimated expenditure. Importantly this is the variation since last year’s MYEFO, not last year’s budget. To compare with last year’s budget we would add the parameter variation between that budget and last year’s MYEFO, which is negative $1.7 billion.

I think that they (Gillard and Albanese) confused revenue write down (since MYEFO) of $13.7 billion with the forecast deficit. With Wayne Swan trying to explain things, I can excuse them for making that mistake.

On the second issue, the writedown due to the ‘high Australian dollar’ we only need to look at the exchange rate assumption used at last year’s budget, MYEFO and this year’s budget. In last year’s budget, the assumption used was for a USD exchange rate of 103 cents. For MYEFO it was 102 cents. For this year’s budget it is 103 cents.

Therefore it cannot be the ‘high Australian dollar’ causing the revenue writedown – the same exchange rate assumption was used in last budget as this budget.

More likely it is the carbon tax revenue estimates. Here the Government backcast the price (clearly way too high) to meet the expected abatement objectives. Then that price was used to estimate the revenue the government would receive. That’s why I think it is a bit rich for the Government to claim that the carbon price wasn’t a forecast – it was intrinsic to its economic forecasts.

Peter Costello is right with his analogy. The government can only jump 4 1/2 feet consistently in high jump. In a fit of ambition it ‘forecasts’ that it will jump 6 feet. When the jump is made, it makes 4 2/3 feet. Rather than celebrating the increase in the height jumped compared with the past, it despairs that it jumped 1 1/3 feet less than expected.

Finally in defending the appalling inaccuracy in the forecasts, Albanese stated

 Treasury figures that are done by the same people who did the figures for the Howard Government.

That’s wrong – I know the people who did the forecasting in Treasury under the Howard Government and they have long since left Treasury.

Hayek spent five weeks in Australia between 3 October and 6 November 1976. The visit was crowded with more than 60 appointments, seminars, informal meetings and formal presentations. He and his wife travelled from Cairns and the Barrier Reef to Melbourne Canberra and Adelaide with excursions to the country in Victoria and Queensland.

These notes come from the draft of a paper for a forthcoming collection of essays on various aspects of Hayek’s life and work, edited by Rob Leeson.

There are sections on the political situation at the Federal level and some aspects of the climate of ideas at the time before terms like deregulation, economic rationalism and the New Right were in common use. For many people now under the age of 50 that is practically ancient history but some of it is essential to appreciate the difficulty of getting any traction for Hayek’s ideas and for changing the direction of economic policy in Australia in the 1970s and 1980s.

The central issue in politics was the willingness and ability of the newly elected conservative Fraser administration to regain control of the economy after the big spending and other initiatives of the Whitlam era from 1972 to 1975. Inflation and unemployment were high and there were major issues to be resolved regarding monetary policy and the exchange rate. The political debate was soured by the resentment of ALP supporters following the Constitutional crisis in 1975 which the Governor General resolved by dismissing the Whitlam government on 11 November and calling upon Fraser as a caretaker pending a general election which the Liberal-Country Party coalition won in a landslide.

Many people had high hopes for Fraser and progressive circles were alarmed by a rumour that he was a reader of Ayn Rand. This was before it became apparent that Fraser was in fact the kind of conservative who Hayek had in mind when he wrote “Why I am not a conservative”, a man more concerned with holding political power than limiting it and more concerned to protect existing industries than to sweep away obstacles to free development. Hayek’s views were not music to the ears of the Prime Minister and the elders of the Coalition government, as indicated by the meeting of Hayek and Fraser.

In the mid-1970s interventionism had all the running in the formation and discussion of public policy. The strength of interventionist tendencies on the both sides of politics can be seen in the tenor of criticism of the so-called New Right a decade later when the Labor administration led by PM Hawke and Treasurer Keating became serious about deregulation. For many years the Institute of Public Affairs (IPA) in Melbourne was the major source of informed economic commentary on the conservative side of politics. Formed in 1943 it pre-dated the Mont Pelerin Society.

The Regulation Nation took a great leap forward during the war when the federal public service doubled in size between 1939 and 1945. The Keynesian “Nugget” Coombs was the most influential advisor to Labor and Liberal governments over many years, driving the new order based on central control of the economy, using the insights of Keynes to deliver sustained economic growth with full employment and other social benefits. Not only ALP supporters who were impressed by Keynes, much the same conversion happened to the remarkable industrialist and organizer Herbert Gepp, who formed the Institute for Public Affairs and charged C. D. Kemp with the task of producing a program for it.

An academic James Walter wrote “By the late 1930s Gepp, like Coombs, had discovered Keynes, and begun to propound a version of neo-Keynesian economic planning. Unlike Coombs, however, he drew the line at anything that looked like collectivism”. The Keynesian synthesis of private ownership and state planning provided a framework of ideas that the social engineers and the business community could share, even while they disagreed on details. This framework included a highly interventionist function for the state, and neglected the microeconomic foundations of productivity. Much of the institutional framework had been put in place by the first Federal Government at the turn of the century with tariff protection for industry and central wage fixing for the workers (in reality for the most militant trade unions and their workers).

Classical liberalism and libertarianism had practically no profile in Australia through the 1950s and 1960s until in 1974 a new party appeared with a libertarian program and aroused a deal of disbelief but little electoral support. First called the Workers Party (heightening disbelief), later the Progress Party and currently the LDP it has yet to garner sufficient support to make an impact in State or Federal elections. In 1976 the pros and cons of economic rationalism or deregulation were not yet significant topics for public discussion, and there was still a serious battle to be fought on the conservative side of politics before the agenda of deregulation achieved full support in the Liberal Party round about 1990. The tour came before the network of academics, the new think tanks and the “backbench Dries” of the Liberal Party achieved some traction. The Centre for Independent Studies started operations in 1976 but was not up and running when Hayek toured, although people like myself, who were not paying attention, later thought that the Hayek tour might have been timed to promote it.

Impact and outcome of Hayek’s visit

The major public record of the tour is an Occasional Paper published by the Centre for Independent Studies containing the the text of his three major speeches. His address to the IPA appeared in the IPA Review in 1976), as did his paper on Socialism and Science. A version of the Whither Democracy paper was published as “Can Democracy be Saved?” in Quadrant, November 1976.

A survey of four daily newspapers, The Australian, The Sydney Morning Herald, The Age and the Financial Review revealed no mention of Hayek and the tour. The SMH (15 October) announced Friedman’s Nobel award on the front page (near the bottom of the page, under the lead story on the five point plan for economic recovery presented by Gough Whitlam, the Leader of the Opposition). That would have been a timely moment to mention that a recent prizewinner was in the country at the time. The Financial Review (5 October) ran a short story on Gunnar Myrdal, who shared the prize with Hayek, reporting that Myrdal still saw socialism as the hope of the future despite a recent setback to the Swedish Socialist Party in the polls.

The impact of the visit is impossible to assess. Later in the decade Hayek would have found many more interested listeners as the forces for reform became better organized and more articulate. There is no doubt that his ideas energised many of the people engaged in the push for reform but it took more than a decade and a change of government to achieve real, and possibly permanent, progress towards a more open and competitive economy.

Budget Statement 4 (in Budget Paper 1) has traditionally been a ‘think piece’ by Treasury looking at contemporary economic concerns principally from a macroeconomic perspective, but also microeconomic.

The practice commenced in the 1997-97 budget as Budget Statement 3 (Structural Change: Recent Developments, Benefits and the Role of Policy)

The various topics since have been:

1998-99: The Current Account Deficit: Structural Improvements

1999-00: Economic Policy Reform and Australia’s Recent Economic Performance

2000-01: Maintaining Low Inflation and Strong Growth

2001-02: (Budget Statement 4): A More Productive Australia: Policy and Technology

2002-03: Australia’s Terms of Trade: Stronger and Less Volatile

2003-04: Sustaining Growth in Australia’s Living Standards

2004-05: Maintaining Low Unemployment in Australia

2005-06: Prosperity and Sustainability

2006-07: Australia in the World Economy

2007-08: Australia’s Labour Force Utilisation

2008-09: Boosting Australia’s Productive Capacity: the Role of Infrastructure and Skills

2009-10: Assessing the Sustainability of the Budget

2010-11: Benefiting from our Mineral Resources: Opportunities, Challenges and Policy Settings

2011-12: Opportunities and Challenges of an Economy in Transition

2012-13: Building Resilience through National Saving

A noticeable change occurred from 2009-10. The statements became far more polemics and political documents. Previous statements, including Swan’s first, were in the traditional analytical mould, eschewing partisan politics.

But starting from Swan’s disgraceful attempt to show faster spending growth under the Coalition in the 2008-09 Budget by using the CPI rather than the accepted non-farm deflator to calculate real growth in spending (which failed), Swan has moved to capture BS4 and turn it into a highly partisan and political document (he of course also started to refer to tax increase as ‘savings’.

So, for example, the 2010-11 BS4 was an attack against the mining sector in pushing for the RSPT. And the 2012-13 BS4 was to push for the increase in the superannuation guarantee from 9 to 12 per cent.

But the latest BS4 takes the cake in gutter politics. Titled “Fiscal Policy in the Current Economic Environment” it is an unashamed defence of Swan and attack on Costello and Howard.

There is no sign of humbleness when it comes to forecasting, or admitting any errors in the policy since the 2007 election.

Take for example

Australia is much better placed to achieve the right balance in setting fiscal policy, due to a track record of prudent fiscal policy, robust financial regulation and strong macroeconomic management and performance, in particular during and since the GFC.

…

In hindsight, while Australia’s fiscal position in 2007-08 was clearly strong by international standards, the structural position was less robust than the headline numbers implied as these were based on economic, commodity and financial market conditions that were not sustained and are unlikely to be repeated in the foreseeable future. Tax cuts and new spending, funded by temporary increases in the terms of trade and capital gains, led to deterioration in the structural budget position in the lead-up to the GFC. Moreover, by not allowing budget surpluses to increase significantly as revenues surged, government decisions prior to the GFC meant that interest rates had to be higher than otherwise to control inflation in an economy that was showing signs of over-heating.

…

Policy changes can also affect the tax-to-GDP ratio. One series of policy changes that is
having a particularly large impact on the tax share is the successive large cuts to
personal income tax rates implemented between 2005-06 and 2009-10. The average
personal income tax rate fell from over 23 per cent of taxable income in the early 2000s
to less than 20 per cent in 2009-10 — which meant that the personal income tax system
delivered around 15 per cent less revenue for each dollar of taxable income.
While personal income tax collections as a share of GDP are expected to return to early
2000s levels by the end of the forward estimates period, revenue forgone in the interim
will have been substantial. For example, tax receipts would have been $14 billion
higher in 2012-13 had the average personal tax rate remained at its 2005-06 level,
abstracting from any impacts the tax cuts may have had on the personal income tax
base.

Most of the statement attempts to justify the deficits and stress how important the present government’s efforts to fiscal sustainability have been – including the many ‘savings’ (ie tax increases such as the increase to the medicare levy).

This is a poorly written document with high-school level research and analysis. It will be a pleasure for Joe Hockey as the new Treasurer to order Treasury to write BS4 for the next budget. A title such as

Correcting five years of policy error

might be appropriate.

I won’t be rushing to buy this diatribe by one of Australia’s worst writers. But the title does lend itself to parody.

There is all this chat that this year’s budget estimates are pretty conservative, lest the government be embarrassed by the Pre-election Economic and Fiscal Outlook to be released by Treasury in August.

Really?  Really?

If we look at all the howlers and bloopers in Australia’s Fiscal Wonderland, the prize must surely go to the 2010 PEFO released prior to the August election.

The Treasury decided to revise down the expected budget deficit for 2011-12 from over $20 billion to $10.4 billion.  Actual outcome: $43.4 billion.

I’m not making this up.  Treasury said $10.4 billion, a figure which suited the government to a tee, and the actual outcome was over $30 billion more in deficit.

Nominal GDP was expected to grow by 9 1/4 per cent and the terms of trade by 17 per cent.  That is Tooth Fairy combined with Santa grade optimism.

And according to the 2010 PEFO, the budget surplus would be $3.5 billion in 2012-13 – again a figure that suited the government.   Actual result: close to $20 billion in deficit.

And to think that we will be expected to believe the numbers in the upcoming PEFO.  I will be treating them with a grain – nay, a tonne – of salt.