ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
A clear lack of joined-up government
, November 11, 2006
The Federal Government and the Reserve Bank are pulling in opposite directions, says Colin Teese, a former deputy secretary of the Department of Trade.Just what exactly is going on? The Reserve Bank of Australia announces an increase of a quarter of one per cent in the official interest rate because of the risk of overheating in the economy. No sooner has it done so, than the Federal Government brings down a budget characterised by large tax cuts and various other measures which are bound to stoke up price inflation.
Some may attempt to excuse this contradiction by asserting that the budget provisions were decided before the Reserve Bank moved to contain spending, as a result of its concern about price inflation taking hold within the economy. True enough. But the Government has a more ingenious explanation. According to the Finance Minister Senator Nick Minchin, the budget concessions are too small to impact on inflation.
In any event, we are still left with a conundrum. The Reserve Bank is supposed to be independent of government control. And it is part of the bank's charter to keep inflation within a narrow band.Countervailing strategies
Surely we are entitled to question how the bank can meet its obligations - and assert its independence - if our government, at the same time, exercises its right to pursue countervailing economic strategies?
Perhaps the time has come to recognise, when it comes to economic policy making, the essential conflict between the notion of Reserve Bank independence and understandable political imperatives which press upon elected governments.
For all kinds of perfectly plausible political reasons, governments will always find it necessary to intervene in the management of the economy. We might do better to accept this political reality, and revert to the idea that governments assume full responsibility for the management of the economy.
Now for the budget itself. In historical terms there has got to be something strange about a budget outside an election year which has so enthusiastically massaged the hip-pocket nerve. Once it might have been possible to wonder whether there could possibly be anything left to offer voters next year. Not any more. Given the way revenue collections are currently being managed by the Treasury and the Government, that notion can safely be put aside.
The largesse so enthusiastically distributed in this budget has been made possible only because actual revenue collections far exceeded estimates. Revenues collected were greatly in excess of what was needed to run the country. Effectively, the Government did nothing more than return to taxpayers what, rightfully, should never have been taken from them. It is totally misleading to associate what has been done with the generosity or good financial management of either the Government or Mr Costello.
There is another factor. We can establish from published sources that budget revenues, measured as a percentage of national income (GDP), are about the same as they were 20 years ago - this, despite the Government's commitment to the notion of small government and user-pays for services. On that basis, revenue collections as a percentage of GDP should be reduced, as people are required to pay for services once provided by government.
We can assume from the examples of state Labor governments that federal Labor, in office, would behave in exactly the same way. In other words, a commitment to the ideology of small government does nothing to quell the appetite of government for large tax collection.
More recently, governments have discovered the enormous political advantages of budgeting for surpluses - if possible, excessively large ones. Indeed, this now seems to have become established policy in both state and Commonwealth governments. Its corollary has become the practice of distributing the surplus accumulations of taxpayer money at a moment both convenient and timely to the political fortunes of the party in office.
Usually this distribution is harmonised with an election year. At least as far as the Commonwealth is concerned, the present year represents a departure from normal - most likely because the Government has been under pressure, especially from the business community, to deliver what has been called "tax reform".
"Tax reform" for business is shorthand for a reduction in the highest marginal tax rate - at the very least - and, if possible, a reduction of company tax as well.
While this kind of reform is enormously attractive to business, it has rather less appeal to the wider community. So-called middle Australia, which is so important to the Government's political fortunes, wants not so much "tax reform", as tax cuts. And, apparently, on the basis of the Government's political judgement, it wanted them now. The Government was happy to accommodate them. Of course, genuine tax reform, which is sorely needed, has nothing to do with any of the above considerations. Real reform would aim at totally rewriting the tax law in the interests of simplicity, ease of understanding and administrative efficiency. For all kinds of political reasons, nothing of this kind is in the thinking of either Government or Opposition.
Politically, what has been done must be counted as a great success - so much so that the Opposition, which would have followed exactly the same course, has been totally neutralised. After all, Labor's political end - to the extent it has one - is to attract precisely the same voters as the Government's tax cuts are aimed at.
Neither do the tax cuts represent sensible economic policy. Nor, in the kind of context we are talking about, are they fair and equitable. Tax cuts almost never can be fair. There are too many low-income-earners to have them treated with the same relative generosity as those above them on the income scale. That is why, in the past, governments saw as their purpose the need to provide, from taxes, health and education and other basic services which would help families with young children in particular.
These were judged, correctly, to be of greater material benefit to low-income families than tax cuts. Alas, ideology has erased that idea from the agendas of both major political parties.Making matters worse
Apart from equity, the tax cuts, and the associated new arrangements relating to superannuation, won't necessarily be good for the economy either. Since the strongest weight of benefit attaches to those taxpayers with the greater disposable income, we can expect a revived burst of consumption expenditure at the same time as the Reserve Bank prescribes precisely the opposite. The changes to superannuation will make matters worse still.
All of this is even more worrying, given that there is nothing in the budget designed either to provide for any regeneration of manufacturing industry, or to generate additional export income. Indeed, the Treasurer is on recent record as suggesting that a stronger manufacturing sector is a disadvantage.
Accordingly, we must assume that the Government intends that the newly stimulated consumer demand will be satisfied from imports. We can expect to see the consequences of this reflected in the current account deficit, which, as we all know, is already at unsustainable levels.
Tim Colebatch in Melbourne's The Age
newspaper (October 23, 2006) put it most clearly for his readers. Apart from the surpluses of revenue being squirreled away by governments, the nation's savings are now mostly in superannuation. At last count the total was almost $A1trillion (one thousand times one billion) - an almost unimaginable sum. Yet, despite this massive amount of savings, we have had to borrow $A150 billion from overseas in the last three years, and our banks now rely on offshore borrowings to finance their loans.
The spending spree generated by the new tax cuts can only make things worse.
One especially worrying thing about the new superannuation arrangements is that the benefits are ongoing and escalating. Remember when Mark Latham, in his days as federal Labor leader, announced his plan for free medical treatment for over 75-year-olds, and costed it at current rates? The outcry was that, with an ageing population, the cost would escalate beyond affordability.
Surely, the ageing population will have the same effect on the superannuation tax concessions. The budget estimates the cost in the first full year as $A2.3 billion. But, given the ageing population and the encouragement the new incentives provide to retire at 60, some have estimated that the cost in 10 years time might be $A10billion.
With all the other shortfalls of revenue over outlays arising from an ageing population in the coming years - about which the Government has been warning us - it seems astonishing that the same Government is giving up revenues amounting to an extra $A10 billion.
There are good reasons to question the wisdom of the various tax cuts in this budget and what they might imply for prudent economic management. But the wider, and perhaps more important, question we should be asking the Government, and ourselves, is whether the tax cuts are truly sustainable.
The Government can only hope that sustainability is not called into question before the next (pre-election) budget is being framed one year from now.- Colin Teese is a former deputy secretary of the Department of Trade.