THE ABBOTT GOVERNMENT – A MID-TERM REPORT

With reaction to the Abbott Government’s second budget a great deal more favourable that that which greeted the budget for 2014, The Sydney Institute brought together four political commentators to assess how the government could be seen to be doing. Jennifer Hewitt, National Affairs columnist, for The Australian Financial Review, Chris Kenny, columnist with The Australian and Sky News presenter, Rebecca Huntley, social researcher and writer and Dimitri Burshtein from the financial services industry and former NSW Treasury official addressed The Sydney Institute on Monday 22 June 2015.

THE ABBOTT GOVERNMENT – A MID-TERM REPORT

DIMITRI BURSHTEIN

Good evening everyone and thank you for your audience.  Before I go any further, I should offer the standard health warning that any views I express here are my own and not those of any organisation I am associated with.

In my preparations for tonight, I went back to the last Sydney Institute discussion on the performance of the Abbott Government. Back in May last year, Jennifer Hewitt, Patricia Karvelas and Gerard Henderson discussed the Abbott Government’s first 100 days. Interestingly, at that time, the key issues were the composition and state of the Senate and the then coming budget. Some 400 odd days later, the budget is still a key matter for discussion, but there are no longer any suggestions that Clive Palmer might become the most important politician in Australian or that PUP could hold the balance of power in the Senate.

“May you live in interesting times” is an old Chinese saying. It is actually not a blessing or greeting, but rather the first leg of a 3-part curse. The second leg of this curse is “may you come to the attention of those in authority”.

Well, we are clearly living in interesting times, and given the subject matter for this evening may bring my co-panellists and myself to the attention of those in authority, I would like to thank Gerard and Anne for the kind invitation to speak here this evening.

The subject of this function is The Abbott Government – a Mid-Term Report.  Given that rubric, there are many areas to make an assessment, whether political, economic, social, national security or foreign policy.  I will try to avoid stepping on the toes of those who came before me and try to focus on my area of knowledge, economic.  But, as I will describe, assessing the Abbott Government’s performance from an economic perspective is like trying to read a book in the dark with broken glasses.  It’s not the book that is the problem.

I would argue that it difficult to assess performance of any Australian government because we have no overarching statement of government purpose or scope that is independent of who is in office.  For example, unlike our friends in the US, we don’t have an objective to form a more perfect union or to secure the blessings of liberty to ourselves and our posterity.  And, from an economic or financial perspective, unlike a business, there is no obligation to make a profit or maximise return on equity.  However, perhaps the closest thing we have from an economic objective is the unstated Burkean social contract creating a partnership between the dead, the living and the yet to be born.

In this light, our frequent debates about economic fairness and social justice seem incomplete in that they are almost entirely focused only upon the perception of fairness between the living, with token reference to intergenerational fairness. Discussions of debt, infrastructure and institutions, whilst vocal, seem tangential to the main game.  Given a choice between tightened spending today versus debt reduction, we have all seen the decisions that have been made.  Last week’s legislation to tilt the pension benefit curve by transferring some benefits from more affluent pensioners to less affluent pensioners required an unexpected deal between the government and the Greens at the strong opposition of the ALP.

If there is to be a discussion on the greatest moral, economic and social challenge of our time, we should be discussing the economic legacy we are on track to leave to those who follow us.  A legacy of significant public debt, a demographic bubble with an insatiable expectation of government assisted retirement and healthcare, and a regulatory state suffocating business, innovation and productivity.

To me, this is a symptom of a deeper problem. My belief is that the economic framework we are operating in is flawed resulting in otherwise smart people doing otherwise dumb things.  To illustrate, let me tell you a story of two economists, Paul Robin and John Maynard.

One day as Paul Robin and John Maynard were out for their daily walk, they came across a recent canine dropping.  The economists paused when John Maynard turned to Paul Robin and offered him $50,000 to taste the droppings.  Paul Robin considered the risks, rewards, cost and benefits and decided that he would do it.  So he tasted the droppings, money was exchanged and they keep walking.

Some 100 meters further down the road, the economists encountered another canine dropping.  This time, Paul Robin offered John Maynard $50,000 to taste the droppings.  John Maynard considered the risks, rewards, cost and benefits and decided that he would do it.  So he tasted the droppings, money was exchanged and they keep walking.

As they walked further, the economists paused.  John Maynard turned to Paul Robin and said – Paul, we have both just tasted dog droppings, but neither of us is any better off.  To which Paul Robin briskly replied, perhaps, but the economy has just grown by $100,000.

Now, I like to tell this story not just to make fun of economists, but to highlight my point about our economic framework. Our key measure of national economic health is GDP or gross domestic product. GDP is calculated from the sum of net household, business and government expenditure less net imports. Economic growth is measured by the change in GDP from one period to the next.  So basically, we are assessing how well we are going economically by how much we are spending; and we have been led to believe that, as a country, we are doing better year after year only if we are spending more year after year.

There is little consideration of quality of spending, whether we eat a steak or big macs, whether we build roads or how cost effectively such roads are built.

• Increased spending on national security, criminal justice, law and order is presented as being considered sound investing.
• Spending on rebuilding and reconstruction following a natural disaster is good for economic growth.
• Saving and thrift is presented as bad for the economy.

There seems also limited consideration of the sources of funds for the spending, whether from income or savings or borrowings and there is negligible consideration of the state of our national balance sheet.  As long as we are spending more period to period, everything is perceived to be going well.  Why are the principles of household budgeting not applicable for government budgeting?  Would you believe that, in your own domestic situation, you were better off just because you were spending more, despite it all being funded by debt?

In this economic framework, if domestic or business spending falls, as is referred to as a decline in aggregate demand, the standard remedy is for the government to spend an equal or greater amount to counteract.  It does not matter on what – just spend.  Dare I say, go early, go hard, go household. Does anyone here think this is a sound way to manage a budget?  Well this is what governments of all stripes have been doing for over 50 years.

Consider a company in which you are a shareholder behaving this way.  Every year, the CEO of the company would announce at the annual results briefing that, last year they spent $10 last year and next year they would spend $11.

• When asked about profit, the answer would be that it does not matter because more would be spent next year.
• When asked about employee safety, the answer would be that it does not matter because more would be spent next year.
• When asked about investment performance, the answer would be that it does not matter because more would be spent next year.

We would not accept such behaviour from the managers of our investments, but we not only expect such behaviour from our governments, but we demand it.  Imagine if a Minister got up at budget time and said next year there would be less spent on their portfolio area.

I refer to the most recent Commonwealth budget, a budget that has been better received politically than last year’s.  In the budget papers, over the four year forward estimates, revenues were projected to be $1.81 trillion and expenses projected to be $1.85 trillion – an average of approximately $21,000 for every man, woman and child – and this is just at the Commonwealth level

The spending initiatives the government announced as part of the budget, such as the child care reforms, amounted to perhaps, $50 billion dollars over the forward estimates or around 3 per cent of estimated outlays.  Would you not think a conversation on the other 97 per cent of funds spent is warranted? Yet last month, journalists and analysts trekked to Canberra to look over the budget. Yes, certain expense lines such as pensions were noted as being unsustainable. But there seemed limited discussion on what objectives the government was trying to achieve for the bulk of the $1.85 trillion projected to be spent. And whilst a significant fuss is made every year on the budget, a document that is the government’s financial plan for the year, there is little attention paid to whether the plan was actually delivered and what it achieved. When was the last time a Treasurer spoke on the results for the financial year and what was achieved?

There is also little current attention paid to the key driver of real economic growth – productivity.  Unlike the construct I described earlier, true economic growth is not a measure of consumption but rather a measure of production; which is why famous economist Jean-Baptiste Say said, “It is the aim of good government to stimulate production and of bad government to encourage consumption.”

The main driver of economic growth in developed countries is productivity and Australia’s productivity challenge has been continuously highlighted but there seems negligible attention from the government or opposition.  To illustrate, I refer to the World Economic Forum’s Global Competitiveness Report, which provides an overview of the competitiveness performance of 144 countries and has been produced for 35 years. In this latest report, Australia received an overall competitiveness ranking of 22 out of 144 nations, down from 21 the prior year.  New Zealand rated 17, up from 18 the prior year.  The top 3 were Switzerland, Singapore and the United States respectively.

The report highlighted that Australia’s top 5 “most problematic factors for doing business” were in order:

• restrictive labour regulations;
• tax rates;
• inefficient government bureaucracy;
• inadequate supply of infrastructure; and
• tax regulations.

These are all items within the purview of the Commonwealth government.  Yet, whilst there is frequent discussion on infrastructure and tax rates, generally with a bias to increase, there seems no substantial current discussion on labour regulations, government bureaucracy or tax regulations. On the ranking of “Burden of government regulation”, Australia came 124 out of 144 countries.  New Zealand came in at number 17.

Now consider the UK.  A recent report from the UK Institute of Economic Affairs showed that in 1980 there was one regulator for every 11,000 UK financial sector employees.  In 2011, there was one regulator for every 300 employees. On this trajectory, it is estimated that by 2070 there would be one regulator for every financial sector employee.  Now, the United Kingdom ranked 37 out of 144 countries while Australia ranked 124 on this ranking – one spot ahead of Iran and 5 spots ahead of Zimbabwe.

On the ranking of “Flexibility of wage determination”, Australia came 132 out of 144 countries – one spot behind Venezuela and two spots behind Iran.  New Zealand came in 14^th. On the ranking of “Hiring and firing practices”, Australia came 136 out of 144 countries – 16 spots behind Iran and two spots behind France.

Given these economic challenges, there seems little from the government or the opposition on these issues. As a community, we seem to have lost focus on what we want our government to achieve and seem to focus on how government operates.  This seems a problem across the Australian political spectrum.  To quote Dr Yuval Levin, former domestic policy adviser to President George W. Bush:

The means of the liberal welfare state are centralizing and consolidating mechanisms intended to bring order to chaos.  However, the means are confused for the ends.  The welfare state is assumed the same as the social objectives it seeks to advance.  Thus any attempt to alter liberal programs is treated as an attempt to abandon the general objectives of those programs – to provide a safety net for the poor or a foundation of economic security for the elderly and the vulnerable.  Even alternatives that would achieve those goals in a less heavy-handed way or at a lower cost are assumed to be less committed to the goal, and so are treated as an attack on the goal.

A classic example of means over ends is the policy response to Climate Change. Let me say categorically that I believe the climate is changing.  However,

 But it has become a political requirement, a litmus test, for Australian governments to be seen to try to reduce Australia’s domestic emissions irrespective that Australia’s emissions are irrelevant from a global perspective. Billions of dollars must be spent for questionable tangible outcomes lest there be criticism that a government is anti-science or anti-climate change. Billions of dollars that might otherwise be spent on actions such as debt reduction, infrastructure investment or education.

This is why I believe it is difficult to make a proper assessment on the economic performance of the Abbott Government. The Abbott Government, like many governments prior, is trapped in a flawed framework.

Over many years, not just the life of the Abbott or Gillard or Rudd governments or earlier, a simplistic correlation has emerged between quantity of government and quality of government. It is as if the more government spends, the better the outcome we expect. This, in my opinion, is a flawed correlation. Our econo-political debates reflect not questions of good government versus bad government but rather big government versus even bigger government. I also note the prescient words of Thomas Jefferson who said that a government big enough to supply everything you need is big enough to take everything you have.

Even our language and analysis of public finance issues is biased towards government of an increasing size but not necessarily increasing effectiveness.  For example, Treasury’s “Tax Expenditures Statement” offers an analysis of how much taxation income is theoretically foregone because some activities are taxed at a lower rate to the benchmark, usually the personal income tax rate. This analysis is often wheeled out to suggest that there is up to an extra $100 billion per annum hanging on the revenue tree waiting to be picked from things like negative gearing and capital gains tax – basically an extra 25 per cent more revenue than currently collected.

Please let me draw your attention to the work of Daniel Kahneman. Kahneman is a psychologist who won the Nobel Prize for economics in 2002. He is considered one of the fathers of behavioural economics and he developed what is known as prospect theory which provides a model of how people choose between alternatives. I won’t go into the detail of Kahneman’s work, but I would suggest to you that it is Kahneman’s work that explains why food companies advertise items as being 90 per cent fat free rather than 10 per cent fat.

Can I also suggest that the nature of our budget discourse might be different if, for example, we referred to income tax rates being a premium on superannuation tax rates rather than superannuation tax rates being at a concession to income tax rates. At the moment we are spending large amounts of political energy on discussions of government revenue but, in my opinion, insufficient energy on how and on what the bulk of government money is spent.  And I highlight my earlier point about how greater than 95 per cent of budget expenses receive negligible discussion.

Earlier in my career, I worked for the ASX where I was a part of the team that prepared and presented the annual budget and business plan to the ASX Board. It was always a challenge to get the budget through the Board, especially through one very hard-nosed and shrewd director who often asked whether particular activities and initiatives were busy-ness rather than business. That director was John Fraser, the current Secretary of the Treasury. I am hopeful that some of that kind of critical thinking will be weaved into future budgets and program assessments.

The choices our governments make today are felt for a very long time.  There is a cost of inaction as much as there is a cost of wrong action.  But as long as there is a belief that the bigger the government, the better the outcome, we will travel in the wrong direction. No country has ever taxed and spent itself to prosperity and I don’t believe Australia will be the first.