BACKGROUND

TAX REFORM is an on-going debate and it has now been re-ignited (GST, payroll tax, MRRT, carbon tax etc). Tax is always the most serious of debates as governments never spend or invest their own money, only that of their citizen taxpayers. Money spent or invested unwisely becomes ‘misallocated resources’. The result of misallocation of resources become ‘unintended consequences’. The greater the folly, the slower the recovery, or the deeper the recession.

Why is taxation now at the forefront of today’s debate? The simple reason is that actual government spending is increasing exponentially. Aspirational spending plans are increasing exponentially. With declining tax revenues, Federal and State debts are increasing rapidly. We have moved from surplus cash to deficit cash. And all of this is after a mining boom that seemingly has propelled Australia into the category of being ‘a rich nation’.

Our underlying structural budget deficit is a significant problem which Dr Stephen Anthony of Macroeconomics estimating that it will reach $120 billion by the end of the decade given current spending pledges.

A counter-argument to spending beyond your means that is trotted out on a daily basis is that our debt levels are low relative to GDP (gross domestic product), but that ignores the fact that our export base is deep and narrow, and our import base is deep and broad. Australia is hostage to world growth, particularly Asian growth, exacerbated by a small manufacturing base, declining productivity and the need to import capital which will demand a return over time.

Serious debates in Australia, particularly at the parliamentary level, cannot take place unless we address two important structural issues which appear to have fallen from the agenda.

They are –

• The need for an extended Federal parliamentary term
• Election funding reform.

 

 

EXTENDED FEDERAL PARLIAMENTARY TERM

It seems that modern Australia has been shaped by two governments that built upon the post-war foundations established by the long Liberal stewardship of Sir Robert Menzie (17 years) and briefly interupted by two outstandingly bad Prime Ministers in Gough Whitlam (3 years) and Malcolm Fraser (7 years). These two reforming and progressive governments were the Hawke-Keating- Walsh governments (9 years) and the Howard-Costello governments (almost 12 years).

Thus the Hawke to Howard era lasted for 20 years and the dominant thinkers and actors in this period were undoubtedly John Winston Howard and Paul John Keating. When Keating replaced Hawke in an internal coup the magic was gone and Mr Keating failed as a solo act, but without doing too much damage. Keating was lead violin with Hawke as conductor much akin to the Costello-Howard relationship.

Howard and Keating were the subject Paul Kelly’s excellent book, "The March of Patriots" published in 2009 embracing the theme that Keating and Howard were both rivals and unrecognised collaborators and seen together left an impressive legacy, but their work was incomplete and a little contradictory.

Modern politics and the emergence of less dominant, forceful, consistent, compelling and persuasive figures compared with the likes of Menzies, Hawke , Keating, Howard and Walsh means that period of constructive continuity may be a thing of the past. Both parties seem to be driven by poll results and hence expediency, and leaders are regularly turfed out by what appears to be relatively minor blemishes. Examples are Turnbull on climate change exacerbated by utegate; Rudd and his narcissism.

Ecinya’s structural pathway to better outcomes is that the Federal parliamentary term should be extended to 4 years with a minimum term of 42 months (3.5 years), or 5 years with a minimum term of 4 years., preferably the latter. The current 3 year term is too short and too often results in good policy badly implemented, or bad policy well implemented or, worse still, bad policy badly implemented. We are intuitively opposed to fixed terms believing that the government of the day deserves some flexibility in calling an election. The normal safeguard of an election brought about by a no-confidence vote, of course, would continue to exist.

 

ELECTION FUNDING REFORM

The paper we wrote on 11 August 2009 is reproduced below. We fully realise that it is imperfect and requires significant fine-tuning. But the danger is that if crony capitalism and crony socialism is not addressed then the malaise that is America will be inflicted upon us at some point in history.

 

‘Crony’: A friend or companion

Collins Dictionary

It is a mixture of money and politics that Australians have become accustomed to over the last decade. But this culture of paying for access has become increasingly problematic in recent weeks as lobbying scandals make headlines nationwide……….

Dick Warburton, a former Reserve Bank director and prominent company director, has had enough. He is scathing about the fund-raising culture that has developed in Australia. The former chairman of David Jones and Caltex says "it has become a racket"……………….

Warburton, as an elder statesman pulling back from corporate life, can be frank. For most others it would be a poor business decision to speak out against a system that both major parties rely on to fill their election coffers……………..

"Access can now be purchased, patronage is dispensed, mates and supporters are appointed and retired politicians exploit their connections to obtain ‘success fees’ for deals between business and government," Fitzgerald told an audience in Brisbane last month.

Australian Financial Review 8/8/2009 "Democracy For Sale."

With Labor governments mired in cronyism as established fact all up and down the eastern seaboard, the emerging irony is this: it may yet be the Liberal Party that emerges to save what reputation for decency these shabby outfits have left.

The man most likely to restore Labor’s moral compass at both the state and federal level is Michael Ronaldson. Ronaldson is well known in Victoria, but less so outside that state. He was Malcolm Turnbull’s numbers man against Brendan Nelson. He remains part of the Opposition Leader’s inner coterie. Which means he’ll be a busy man this week.

He’s survived cancer and still smokes. That makes him a mug when it comes to his health and I’ve told him so. But he’s no political mug. A direct talker in the Australian tradition, he’s known almost universally on both sides of politics as "Ronno". He’s determined; when cancer felled him he was forced to retire from his seat of Ballarat. That was in 2001. He came back to Canberra via the Senate in 2005.

And he knows a crooked system when he sees one.

The "crooked system" I refer to is campaign financing. And as it turns out, as shadow special minister of state, it’s the system Ronaldson has responsibility for. When Labor’s moral warhorse John Faulkner asked for and was given the Special Minister of State portfolio by Kevin Rudd after Labor’s 2007 election victory, he was on a mission to clean up political funding in Australia.

Because, like Ronaldson, Faulkner recognises that all those rent seekers in suits, sitting sleekly around the likes of Joe Tripodi in Jordan’s Seafood Restaurant outside the ALP conference at Darling Harbour a fortnight ago, are bad news for the democratic process.

Glenn Milne writing in The Australian 10/8/2009

To talk about economics requires more and more, that one write about politics.

Paul Krugman "The Great Unravelling" 2003.

ECINYA TEXT

ECINYA has long believed that Australia had the opportunity to adopt the best of Britain and the best that America has to offer. Though we are fighting the ‘good fight’ and generally winning, the opportunity to adopt the worst of both of these countries’ cultures is alive and well. One of Ecinya’s enduring obsessions is that the 3 year Federal parliamentary term leads to poor policy formulation and, too often, poor execution. The daily battle between scarce resources and unlimited wants and needs in context of tight political deadlines all too often leads to poor outcomes. The formal expression of this is ‘misallocation of resources.’ In a parliament as dysfunctional as our current parliament, with a Leader of the Opposition on training wheels, and a Prime Minister full of bellicose bluster sprouting economic hog-wash in local and global forums and writing convoluted essays, the problem of misallocation of resources looms as potential policy failure.

Towards a solution

Crony capitalism is one of the factors that has brought the United States of America to its economic knees. We should be consciously aware of the American model.

The recent debate surrounding alco-pops demonstrates the dilemma faced by politicians. We assume the alcohol, pubs, gaming industry are keen supporters of democracy and offending them might be dangerous for many, although we doubt that sports sponsorship leads to binge drinking, except for the highly paid sports stars themselves, and that might be a function of their income rather than advertising sponsorship. The recent revelations of connected and vested interests in Queensland is but another example of a system veering towards the American model.

How about Australia leads the world in electoral reform, and its hand-maiden, electoral funding transparency

Australia creates The Electoral Bank Fund ….. it collects donations made by interested parties, corporations and individuals, which are tax deductible, and also the Treasury makes a contribution as well. The funds are invested and earn a return between elections.

Once the election is announced, sitting members receive an allocation of funds on some formula basis, and pre-selected candidates do as well.

Any such candidate can ask for extra funds provided he/ she puts up some adequate security. Moneys spent on winning or losing an election that are not reimbursed become tax deductible.

An independent candidate can also borrow funds on a secured basis and contest the election. They will have a portion of his/her loan dissolved, provided they win a certain number of votes. Perhaps they have to win say 5% of the votes to qualify for dissolution of portion of their loan. If they were to win outright, or to win say 25% of the votes, their loan would be extinguished in its entirety, subject to some defined limits. Bribing voters by cash payments would not constitute ‘allowable expenditure’. ‘Allowable expenditures’ would have to be subject to adequate audit and verification.

Candidates would not be able to use funds provided from any source, be it union, corporate or otherwise.

All fund raising activities would have to be accredited and the funds remitted to the Electoral Bank. Fund raisers could nominate a beneficiary of their efforts, but it would not necessarily be binding upon the Bank Trustees, except in the case of an independent where, subject to source, extra funding might be allocated irrespective of win or loss.

For relatively safe seats funding might be scaled to reflect the realities that a loss is unlikely so that contestable seats are ‘over-allocated’ funds wise.

Obviously, we at Ecinya, do not have the experience or the information to know how to design the system in its entirety to make it workable BUT this brief essay may contain the germ of an idea that might just work to keep our democracy healthy.

In passing, we note that the major candidates in the last American election spent over $1 billion: circa $730 million from Obama, about $330 million from the McCain camp and about 4 independents spent another $60 or so million.

In Australia, the last election was our most expensive ever, according to Google, and some $163 million found its way from the private sector back to the private sector.

Resources are scarce; if they are allocated according to patronage the outcomes will be sub-optimal. State governments are struggling for revenues and the Federal government has become significantly interventionist, ostensibly sanctioned by a dead prophet in John Maynard Keynes. It is relatively clear that the Federal government is keen to get to the polls on an exaggerated debate about climate change after winning the second-hand Toyota utility truck debate. Additionally, we are going to soon have a limited debate about the meaning of tax reform as the Henry report arrives before the next election, which will presumably be aimed at replenishing public coffers. Electoral funding and favours asked for and given, seems an important issue for taxpayer scrutiny, for in the end they pay the piper for his tune. The ‘tune’ is estimated to be something above $200 billion of public debt. If this debt achieves little because a lot of it goes to cronies, then that would be a monumental waste of resources.

The success of the exceptional Hawke-Keating policy, compulsory superannuation, demands corporate transparency. If we do not have transparency at the top of our political system, it is hard to imagine that it will exist in sufficient quality in the middle and at the bottom. Electoral reform and an extended federal term is long overdue.