HEAD QUOTES TO ASSIST PERSPECTIVE
When the legislative changes for the GST were back in the House of Representatives on 30 June 1999, a little known Queensland Opposition backbencher, Kevin Rudd, told the Parliament: "When the history of this Parliament, this nation and this century is written, 30 June 1999 will be recorded as a day of fundamental injustice – an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians. It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up. It will be recorded as the day when the nation’s taxation system moved from progressivity to regressivity. It will be recorded as the day when the Parliament of the country said to the poor of the country that they could all go and take a running jump."
From "The Costello Memoirs", 2008. Hyperbole in magnificent dimension from our former PM.
This model, not good luck, is the reason Australia has enjoyed a fifteen year expansion…. It is defined by a floating exchange rate that operates as a shock absorber, a credible medium-term inflation target that governs interest rate policy at the discretion of an independent central bank, a shift towards a more decentralised wage-fixing system, and a permanent budget surplus strategy set at about 1 to 1.5 per cent of GDP.
Paul Kelly, The Australian, May 2006.
Tax reform will fail because there is no leadership on the issue.
A sub-optimal Prime Minister carrying a litany of fiscal disasters on his curriculum vitae cannot be trusted to formulate proper tax policy nor to implement his misguided efforts in a near-enough-to-viable way. At Mr Rudd’s current level of fiscal recklessness Australia will gravitate towards the parlous state of fiscal folly currently in view in parts of Europe and the United States of America. You cannot run policy through the prism of a PM’s ego. Australia has tried that before, and failed. All countries that try it fail.
Prosperity is the tide that carries us all to fulfilment of our material and social goals and aspirations. You cannot be anti-business and pro-jobs.
Mr Rudd uses weasel words like "working families" without definition, prefaces his remarks about "long-term sustainability" and "Australia’s national interest while I am Prime Minister" whilst being engaged in short-term waste and misallocation of resources. He was elected, not ordained, yet continues to give interviews outside of his church. Presumably Jesus Christ has given prior approval. He talks in platitudes of ‘stronger, fairer and simpler’ as layers of bureaucracy and complexity are added to an already stressed tax and fiscal expenditure system. In 11 years of absolute and relative prosperity John Howard ‘did not meet the challenges of government’ according to Mr Rudd. Boy oh boy, does this guy have a self-esteem problem.
In terms of primeval salesmanship, immediately upon Mr Rudd becoming Prime Minister, the neo-conservatives were responsible for our manifest fiscal and social folly. Now it is the turn of ‘the greedy miners’ where years of toil, often speculative exploration, overcoming extraction, production and transport difficulties and having to sell into often volatile and cyclical markets. But expertise and positioning over time count for nought. Mining companies re-capitalise themselves in the good times to sustain development in the bad times. Many developments do not produce a viable return for years and years.
In looking at the rhetoric coming from Mr Rudd on the tax "reform" package, the paras immediately above and Kevin’s quoted response to the GST in 1999, it seems certain that even when the PM is putting on his trousers each day it is an historic event. The nonsense never ends!
Ecinya Insight article "Ken’s Crusade" 5/5/2010
This has been written to attempt a brief articulation of a major concern that far from saving Australia from the ‘global financial crisis’ the actions, rhetoric and policies of the current Australian government are going to totally immerse us in it, or delay our recovery from it, or both. We are just 1% of the global economy. Time is needed to see where the stimulus packages of China, America and Europe will lead the world. Current local policy prescriptions seem to be pre-emptive, excessive, and poorly targeted.
Ecinya has suggested that payroll tax relief, personal tax cuts being brought forward, and some relaxation of capital gains taxes for long-term residential property holders upon sale would provide sufficient short-term relief. We are totally opposed to the $950 per person hand-out which apparently will cost about $11 billion and we don’t understand the pre-occupation with direct infusions for commercial property as opposed to working through the banking system. We are strongly in favour of infrastructure spending, but the schools programme is blatantly political and can unfold more slowly than currently envisaged. Some of the ‘green’ programmes seem also to be politically inspired.
Ecinya private article written February 2009, re-produced under Insights 1/9/2009: "A reflection: Australia and the global financial crisis."
Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)
- The GST was a gigantic and productive taxation reform, not just a tax grab. It was both fair and balanced.
- Certain economic reforms under Hawke and Costello underpinned a substantial amount of economic progress. These reforms were real policy.
- From Ecinya’s response to the Rudd government’s response to the Henry tax ‘reform’ package.
- From Ecinya’s response to the Rudd government’s response to the global financial crisis.
A VISIT TO OUR COLLINS DICTIONARY
The dictionary is always a source of wisdom and inspiration. Politicians are as fond of the word ‘fair’ as they are of ‘working families’ , ‘ordinary Australians’ and ‘sustainable outcomes’. ‘Fair’ is defined in our dictionary as "free from discrimination, dishonesty; apparently good or valuable". Just 14 words later ‘fairy tale’ is defined as "a highly improbable account".
In the world of tax reform, that ageless and enduring pursuit of the earnest and aspirational politician, whenever the word ‘fair’ is repeated ad nauseum as if it were irrefutable logic, one invariably realises on closer examination, that it really is a ”fairy tale’…… "a highly improbable account". Such a politician invariably needs the money to pay for his fiscal misdeeds, and propensity for recklessness, wrapped in the cloak of good intentions.
Such is clearly the case with the Resources Super Profits Tax, and prior to this episode, the GFC – the global financial crisis.
Australian and G7 Global Statistics end 2006 and end 2009
BUT THERE IS MUCH MORE TO THIS TAX REFORM FAIRY TALE
A rich and generally unloved father dies after a long illness lasting nearly 12 years. After the funeral and a brief period of false mourning his 4 surviving children begin to criticise their father’s personal legacy that gave rise to his fortune, his cars, drivers, premises, status and his abundant cash. His children inherit the estate after intensive discussions with his executor and subsequently go on a spending spree with not a lot to show for it. Pretty soon they are out of money and have to mortgage assets and future cash-flows to maintain their profligate lifestyle. In their defence a few of their good mates benefited enormously from their good fortune and bountiful generosity. The children are, of course, the gaggle of four – Kevin, Wayne, Julia and Lindsay. They were, with just one exception, decent people that having not earned the fortune themselves, and having not liked their father benefactor, just got too excited at first, then careless. The executor was, of course, Ken Henry, who replaced his old and wise boss, Ted Evans, and Ken was pleased to be able to keep the children happy and fulfilled.
Ecinya is of the opinion (well documented in past Insight articles) that ‘climate change’ and ‘THE global financial crisis’ were convenient episodes for Mr Rudd to demonstrate his capacity to strut the world stage and offer solutions ostensibly beyond most of the capacities and capabilities of the other 19 countries in the G20. Note that Australia bats at about number 17 out of that 20 in absolute terms and at about 8 in per capita terms. The above table demonstrates clearly in our view the need for Australia to be modest when it seeks to be persistently loud on global issues. Hyperbole can easily be counter-productive on the global stage.
A number of background points:
- The last election was decided on 24 November, 2007. At the end of 2006 Australia was in very good shape with a domestic budget surplus, no sovereign debt, comparable growth stats and better-than-average unemployment stats.
- Australia is but 1.2% of gross world product and G7 was 44% of gross world product in 2006, and 41% in 2009. The 3% slippage from 2006 to 2009 is equivalent to circa $2.1 trillion; nothing to really worry about, except if you’re one of the unemployed victims and/or have had your house repossessed.
- All of the G7 countries showed negative growth in 2009 despite fiscal and monetary stimulus, as Australia’s growth was disproportionately stimulated to a positive outcome.
- Big countries can have bigger sovereign debt loads so that an unweighted comparison is often not completely valid.
Our conclusion is clear and fits nicely with the fact that the fifteen year expansion (described by Paul Kelly in our head quotes above) and Australia’s relatively good position resulted from the very compatible policy initiatives pursued by the Hawke-Keating-Walsh- Button government, with external wisdom provided by Lindsay Fox and Bill Kelty, followed by the Howard-Costello government with sound monetary policy provided by Ian Macfarlane at the Reserve Bank plus the Liberal Party’s psychological nexus with small business. The GST which failed under Hawke and Hewson, to become law under Howard, would not have been possible without the support of the Australian small business sector. The trade-off for the GST of course was lower personal tax rates, abolition of wholesale taxes, and a number of other indirect tax offsets.
Messrs Rudd and Swan and Tanner and Gillard and Henry DID NOT save Australia from the global financial crisis. Time will show that they over-reacted by something like $15 billion of direct expenditure and $100 billion of debt. We have plucked these figures from the air, but they will prove to be conservative when intensive analysis is undertaken and becomes available.
A big feature of the GST is that it was presented to all of the members of the Federal Liberal team in great detail prior to release and Treasury Secretary Ted Evans and his deputy Ken Henry, worked assiduously, to push the reform, from behind the scenes, rather than from the public pulpit as good staffers should do. The real job of selling the tax over the 12 months before the 1998 election was done by John Howard and Peter Costello. It was a great pity that food was excluded, but 80% of something was better than 100% of nothing. Our domestic budget surpluses and the reduction of the large sovereign debt inherited from Paul Keating’s brief interlude as PM can be fairly (there’s that word again) attributed to the GST. Ecinya was fond of Mr Keating but when he went solo his voice was never the same
The RSPT is a very bad tax policy, and the manner of its release and presentation was/is badly flawed. With the exception of China, Australia’s major trading partners are barely out of recession and still in a work-out phase in relation to the global financial crisis. With the American consumer slowing some impact can be expected to flow to China, itself grappling with the inflationary pressures, excesses, labor unrest etc evident after three decades of exceptional growth. The question of whether, or not, China is in property-bubble territory is unresolved.
RUBBERY NUMBERS BUT STILL A USEFUL THESIS
It is always difficult to measure the percentage relationship that government has in relation to national GDP as we have a Federal Government plus 7 state governments, partially funded by a federal ‘big brother’. It is interesting that companies have to consolidate in their annual reports and meet accounting standards of general transparency, but governments in Australia do not. In a recent speech Ken Henry gave a figure of about 26%, so adding say 7% for the states (adjusted for double-counting) would give a rubbery number of around 33%. This figure is near enough to correct we believe, and is far too high, adding to pressure on interest rates and, of course, private sector investment activity.
Far too many of our tax dollars are absorbed by government and this is partly due to the fact that food was excluded from the GST and from the circa 1450 pages of the Henry Tax Report. Investment comes from savings and we cannot, under the present tax system afford to tax savings at lower rates. Capital gains taxes also inhibit transferability of property in the residential community pushing up the price by restricting supply. Henry should be asked to write an addendum to his report inclusive of the GST.
Governments all around the world have conveniently adopted Keynesian stimulus dogma: ‘ In bad times government should spend to make up for private sector shortfalls.’ But without having spoken to John Maynard Keynes ever, but having a vague recollection of his theories from university days, Ecinya believes that Keynes would not have been an advocate of undisciplined spending, particularly in a world very different than when he developed his economic theories. The Von Mises school of economics is strongly against ‘misallocation of resources’. Peter Costello is reported as saying in yesterday’s Financial Review that "The Building Education Revolution is a scandal. It’s the insulation batts without the deaths." This seems accurate, and he did not even mention the household fires that have occurred. These programmes are blatant examples of misallocation of scarce resources.
Mr Rudd’s departure will benefit us all, but the Labor party lacked the courage to let him go to the electorate
Paul Krugman in "The Great Unraveling" said: "To talk abour economics, requires more and more, that one write about politics."
We hope that our remarks in this essay are more focused on policy outcomes than politics, but even ‘fair play’ and the ‘fair lady’ ( just two of the words between ‘fair’ and ‘fairy tale’) is in the eyes of the beholder. We are not critical of governments, just bad policy and bad policy outcomes.
In yesterday’s editorial in The Australian it was said: "Things got worse as Mr Rudd backed himself into a corner over the mining tax, alienating voters across the spectrum with his faux class warfare. Spin was no substitute for a lack of understanding of how the nation had changed over 30 years of economic reform. When swinging voters, such as tradies, contractors and other workers worried about the impact of the tax on the economy, began to desert the man they had backed in 2007, it was clear to the grown-ups in the party they were being led by the apprentice. It may be tempting to see in Mr Rudd’s downfall the swords of conspirators determined to destroy him. But the former leader speared himself with his unprofessional handling of politics. His dismissive approach to the "mythical" centre back in 1998 would prove fatal. There is a centre and successful prime ministers find where it is and govern from there. Unsure where his votes lay, and with little understanding of how to secure them anyway, Mr Rudd failed this key test of Australian political life."
We found it strange to reflect on the fact that the proposed resources tax is essentially a tax on coal and iron ore, our major exports, and that coal is said to be the major cause of global warming due its greenhouse gas emissions. So it can fairly be said that the more coal we export to the world, the greater is the proposed tax take. Funny hah hah (?)
Jack Lang, a former NSW Labor premier, once famously said: "Always put your money on self-interest. It’s the best horse in the race because you always know its trying." Mr Rudd was not ousted for policy imperfections, but because his fellow parliamentarians in marginal seats were feeling the heat of unemployment or lesser employments.
TO FINISH
‘Credibility’ is on page 229 of our Collins dictionary and ‘trust’ is far away at page 1075, a journey of some 846 pages. Fortunately we will not have to wait 845 days to consider legitimising the current Julia Gillard government, but that government will be in office for about 1075 days – if Labor wins the election – and each of those days will be important as the challenges have been magnified by errors over the last 1000 days. In the meantime we can easily anticipate that spin will be rampant and smiles and good cheer will be in the air. Ecinya hopes that the election will be sooner rather than later and that a ‘deal’ of dubious merit on the RSPT and a few deals on other matters are transparent for all of us to weigh up the policy implications and hence decide on the political options.