No. 116

Why Australians love Keynes’ General Theory of Magic Puddings

STONE the crows! What whingers we are.

The Crows listened to part of Linda Mottram’s ABC Radio 702 program on Friday morning. She is certainly an improvement on her predecessor, what with her not imposing her opinions on the audience absolutely all the time.[i]

But, other than that, her program is mostly the same old whine-back, populated by people complaining that the state is not spending enough on important causes, generally theirs.

Some listeners who text, tweet and phone in responses are especially liberal with the public’s money. The Crows’ Friday fave was the texter who wrote that a continuation of the supporting parents benefit after children turn six or eight was more important than budgeting a replacement for the Collins submarines.

Gosh, now where does this remind you of? Try Europe, where public opinion demands governments abolish reality. A bloke in Greece who killed himself last week in protest at austerity had a banner in his home which read “can’t pay, won’t pay”.[ii] For readers under 120, it’s the title of a play by Italian author Darius Fo, who won the 1997 Nobel Prize for ratbaggery, unless it was literature.[iii]

Fo was the go in the age of Euro-communism, but his title still applies. The reason Greece can’t pay its debts, let alone live within its means, is because its people won’t pay taxes, won’t work much past 60, won’t take responsibility for their own health and won’t elect governments with the balls to end rent-seeking by special interest groups.

The orthodoxy is that austerity is to blame for the mess that Greece is in and that all would be well if it defaulted on its debts. But, apart from the damage this would do to the EU, it would leave Greece unreformed and ready to go broke on an even more impoverished plane, a fate the weekend election is expected to bring closer.[iv]

Like Greece, other protectionist, profligate European governments are running welfare states they cannot pay for because the electorate will not accept cuts.

In France, neither presidential candidate talked about shrinking the state.[v] Yet the economy has not recovered from the GFC and the country’s welfare system requires a tax ratio of 42.8 per cent of GDP, over 3 per cent above the EU average.[vi]

Even the sensible Dutch are ducking the need to live within their means. The brief coalition government fell at the end of last month when one party refused to back spending cuts. They did a deal, but nobody wants to be the architect of austerity at the September election.[vii]

The Europeans, with their ageing populations, generous welfare systems and generally not overly productive workforces, have public sectors they can’t afford. Greece’s general government debt is 150 per cent of GDP, France’s debt is just under 100 per cent (admittedly the US public debt is the same) and Germany’s is around 80 per cent. [viii]

It seems the Europeans prefer to keep spending money even as they slide into recessions which will make it even harder to pay debts they continue to increase. The British and French are again in recession and, Lord preserve the Europeans, Germany seems set to follow.[ix]

We are in nowhere near as much strife. The fact that such an unpopular government as ours is determined to return the budget to surplus demonstrates a level of political maturity absent in Europe.

And, for all the complaints that the mass of us have done it tough for decades, we haven’t – as NATSEM demonstrated during the week with stats showing our standard of living has risen for decades. [x]

But we do share two problems with the Europeans – an ageing population with an endless appetite for health and welfare spending and a belief that somebody should do something about it.

We cannot know what is coming, with immigration and fertility levels 20 years in the future being impossible to predict. But, on the basis of hard numbers now, Treasury predicts spending on ageing Australians will rise by 4.75 per cent of GDP between 2015 and 2060 – $60 billion current dollars. [xi]

On present form it seems certain that future beneficiaries will not want to take any of the cuts.

We saw the shape of things to come last month with the government’s aged care report, which was generally well regarded for balancing needs-based public subsidies with limited user pays. [xii]

But, and it is a bloody big but, “the family home” is excluded from asset tests.[xiii] Aged care advocates argue this is what the elderly want. “The family home lies at the very heart of the Australian way of life, it’s sacred,” Michael O’Neill, head of Seniors Australia said in endorsing the decision. [xiv]

Well, sacred to the real beneficiaries, baby boomers who believe the state should protect both their own inheritance.

If there is an excellent example of Australia’s European attitude to welfare this is it. As George Megalogenis puts it, “an entitlement mentality took hold during the mining boom” and, now, attempts to cut back welfare payments to higher income earners are considered as “an unfair attack on hard-pressed families”. [xv]

In fact, the people who are really hard-pressed at present, the unemployed, are left to rot. The government resolutely refuses to increase the ludicrously low dole while not touching health and welfare spending for the retired and middle–income earners with children.

Treasurer Wayne Swan explained who he thought the most appropriate beneficiaries of government assistance were on the weekend: “We are a Labor government first and foremost, our concerns are always for low and middle income earners.” [xvi] That is to say the majority of Australians.

Joe Hockey nailed the problem afflicting, not just Europe but western democracies in general last month.

Government spending on a range of social programs including education, health, housing, subsidised transport, social safety nets and retirement benefits has reached extraordinary levels as a percentage of GDP.

However, an inadequate level of revenue has forced nations into levels of indebtedness that, in an age of slowing growth and ageing population, are simply unsustainable.

The social contract between government and its citizens needs to be urgently and significantly redefined. The reality is that we cannot have greater government services and more government involvement in our lives coupled with significantly lower taxation.[xvii]

While residents of Linda Mottram land and the neighbouring People’s Republic of the Sydney Morning Herald often say they are happy to pay more tax, the Greek experience demonstrates that people prefer their welfare to be free.

But while most Australians seem to think the General Theory of Magic Puddings is the name of Lord Keynes’ big book, profligate pensioners are not to blame for the way we are following the European lead.

The inability to understand how much strife we shall be in if we stay on the Athenian road is due to the absolute failure of the political-policy caste to explain why we need to prepare for a future where ever-more older Australians will make more tightly targeted welfare essential.

As Joe Hockey put it; Governments are to blame for portraying taxpayers’ money as something removed from the labour of another person.” The Crows think he meant “removed” in the sense of not connected, but “taken from” works just as well.

So what to do?

Tell voters the truth – the Australian electors are not idiots. They accepted the need for reform in the 1980s when Paul Keating warned against a banana republic future and the Liberals, largely thanks to John Howard, did not oppose him on structural change. Voters will do so again if the risks are regularly explained.

There is a small example of what can be done in the way governments have moved to reduce the numbers of people on the Disability Support Pension, well regarded by people of working age who cannot find work because it pays more than the dole. The Howard Government tried to cut numbers of recipients and now Labor is doing the same. The success rate for DSP applications fell by 20 per cent to just over 40 per cent between July 2011 and April.[xviii] And no one is screaming.

Granted reforms to welfare that will make a difference, including all assets in determining who gets old age pension payments and free health care for example, are going to be much harder to push through as the population ages over the next 20 years, which is why government should start doing more now. If only to get us used to the idea.

The only way to avoid the Athenian road is to explain how quickly we could find ourselves on that perilous apparently one-path to perdition.

Which is what the Gillard Government did not do over the weekend – announcing new cash giveaways to parents to “cover rising education costs” without the bother for accounting for their expenditure. [xix]

The Crows are now looking for a road map app of Greece.

ENDNOTES

[ii] James Bone, “Suicides soar in austerity protest,” The Australian May 4

[iii] Nobel Prize.org, “The Nobel Prize in Literature, 1997: Dario Fo @

[iv] “What to about Greece,” The Economist, January 28 www.nobelprize.org/nobel_prizes/literature/laureates/1997/fo-bio.html recovered on May 5

[v] Hugh Carnegy, “French election: A tale of two presidencies,” Financial Times, April 11, “The rather dangerous Monsieur Hollande,” The Economist, April 28

[vi] International Monetary Fund, IMF Country Report 11/212. France: selected issues, (2011) 19 @ www.imf.org/external/pubs/ft/scr/2011/cr11212.pdf

[vii] Robin van Daalen, “Dutch save reputation, but real test lies ahead,” The Wall Street Journal, May 1

[viii] “Europe’s phony growth debate,” The Wall Street Journal,” April 24

[ix] Ben Rooney, “Europe’s next recession risk: Germany,” CNN Money, May 2 @ http://money.cnn.com/2012/05/02/markets/germany-recession/index.htm recovered on May 4

[x] Michael Janda, “Cost of living down 20 per cent since 1984,” The World Today, ABC Radio May 2 @ http://www.abc.net.au/worldtoday/content/2012/s3493679.htm

[xi] Australian Government, The Treasury, The 2010m Generational Report, http://archive.treasury.gov.au/igr/igr2010/report/html/05_Chapter_4_Ageing_pressures_and_spending.asp recovered on May 4

[xii] Prime Minister, Minister for Mental Health and Ageing, “More choice, easier access and better care for older Australians” April 20 @ www.health.gov.au/internet/ministers/publishing.nsf/Content/DC0272DB25035E52CA2579E60001C772/$File/MB032.pdf recovered on May 5.

[xiii] Commonwealth of Australia Parliamentary Library, “Reform of aged care: a small step,” April 30 @ http://parliamentflagpost.blogspot.com.au/2012/04/reform-of-aged-care-small-step.html recovered on May 5

[xiv] National Seniors Australia, “Aged care package win,” April 26 @ http://www.nationalseniors.com.au/page/Driving_Change/News/Press_Releases/2012_Media_Releases/Aged_care_package_win/ recovered on May 5

[xv] George Megalogenis, “Budgets and hard truths,” The Australian May 5

[xvi] Patricia Karvelas, “Welfare overhaul to put ‘education out of reach’ for single parents.” The Australian, May 5

[xvii] Joe Hockey, “The end of the age of entitlement; speech notes for an address to the Institute of Economic Affairs,” April 17 @ http://joehockey.com/mediahub/speechDetail.aspx?prID=1404 recovered on May 5

[xviii] Laura Tingle, “Disability blows hole in budget,” The Australian Financial Review, May 5

[xix] “Cash bonus for parents starting from next month,” Herald Sun May 6