AFR: Australia, the Confused Country

As Paul Keating famously observed, when the government changes, the country changes. After Labor’s internal instability gifted government to the Coalition the nation would inevitably change. But from what and into what? As the country looks to the Abbott government’s economic policy pronouncements it sees not direction but confusion.

It seems the government genuinely believed that scrapping the mining tax and carbon pricing would lead to more investment in mining and elsewhere. Neither is happening.

Bob Hawke wanted a clever country. Paul Keating wanted reconciliation between indigenous and non-indigenous Australians. John Howard wanted a relaxed and comfortable country. Kim Beazley wanted a knowledge nation. Mark Latham wanted to erect the ladder of opportunity. Kevin Rudd wanted to tackle the great moral challenge of our time. Julia Gillard wanted a nation fully engaged with Asia offering a quality education to all children.

What does the Abbott government want for Australia? If it doesn’t know, the people can’t follow. After six years of Labor rule during which investment reached 50-year highs, the Abbott government declared it wanted Australia to be open for business. Yet its first foreign investment decision was to block a major American investment proposal.

Most of the investment in the Labor years was in mining and gas development, as a high Australian dollar rendered non-mining investment proposals economically infeasible. But Australia is in big trouble if the government’s strategy is to rely on a resurgence of iron ore and coal prices to resuscitate mining investment. Any new investment in the globally over-supplied iron ore market will simply cause closures of existing higher-cost mines, many of them in Australia. And the government need only join the 175 million viewers of the documentary, Under the Dome, about China’s choking air pollution to realise that without new breakthrough technologies coal will not be king for the next half-century after all.

Within days of releasing an Intergenerational Report whose budget projections the Treasurer warned would knock us of our chairs, the government was announcing new spending in South Australia. Or was it new spending? Figures ranging up to $900 million were used while ministers backgrounded that no more than $100 million would actually be spent. More confusion.

And while the Intergenerational Report points to the fiscal challenge of catering for an ageing population, the Treasurer is toying with the 20 year-old idea of allowing young people to dip into their superannuation accounts to help fund their first homes.

Compounding the confusion, the Prime Minister has told the nation that there is no revenue problem, only a spending problem. A chorus of opinion leaders from across the political spectrum is warning of the unsustainability of generous superannuation tax concessions for high-income earners and the unaffordability of retirees with $10 million homes receiving the age pension and associated health card concessions. Yet the government considers it unnecessary to do anything that upsets its political support base. Why not legislate that the family home will be included in the age pension assets test in respect of all people who at present are under the age of 45 years of age?

To sum up the government’s  story  since coming to office: a GP co-payment is necessary but superannuation tax concessions for the wealthy are affordable; lifting the pension eligibility age to 70 years is essential but a lax pension assets test is not a problem; the age of entitlement is over except for the government’s  support base.

Australia has a budget problem. It has an intergenerational problem. It has an investment problem. And it has a job creation problem. If the Prime Minister and the Treasurer  told this story, stuck to it, offered solutions that passed the fairness test and avoided contradictions, the country would follow. Without a clear story and the policies to back it in, Australia will be neither the lucky country nor the clever country, but stuck in the slow lane of a confused country.

Craig Emerson, Managing Director of Craig Emerson Economics, is Adjunct Professor at Victoria University’s Business College.