AFR: Learning From the Baird Effect

Reform is not dead. That is the lesson from the NSW election. Supporters and opponents of electricity privatisation agree on this: privatisation is electorally unpopular. Yet a Premier who levelled with the people, persuading them that he considered privatisation to be in the state’s interest, received a strong electoral endorsement. Canberra politicians, pundits and party pollsters who have given up on reform should take note of Mike Baird’s approach.

Labor Party machines, leaders and members need also accept that xenophobia is an immoral political tactic that has no place in a modern party that claims tolerance among its immutable human values.

But back to economic reform, Prime Minister Abbott, having labelled the previous government’s debt “a disaster” at 13 per cent of GDP is now describing projected debt at 50-60 per cent of GDP as “a pretty good result.” Debt at those levels would trigger a serious review of Australia’s AAA credit rating. But instead of driving for fiscal sustainability the Prime Minister is pledging to bring down a dull and boring budget.

The smartest course for the Coalition is to work with Labor to achieve fiscal sustainability. Not only is this in the national interest, it is in the interests of both parties, since Labor will return to government sooner or later. Yet to date the government’s tactics have been to demand that Labor help it break its pre-election promises and implement unfair savings measures.

Numerous suggestions have been made for long-term fiscal repair, including reducing the generosity of superannuation tax concessions for the wealthy, tightening the means tests on the age pension, de-indexing the upper eligibility thresholds for family payments and ensuring fringe benefits tax concessions for motor vehicle leasing apply only to business usage.

Blaming the Labor Opposition and minor parties in the Senate for blocking a range of 2014 budget savings measures might seem the easy way out, but it won’t work. Yet the government persists. On Sunday, Treasurer Hockey pointed out that the government had gotten rid of carbon pricing and the mining tax but “kept all the tax cuts that were meant to be compensation for those taxes,” clearly worsening the budget deficit. Why, then, does Hockey claim that the projections in the Intergenerational Report of debt reaching 120 per cent of GDP in 40 years’ time are the outcome of the previous government’s policies when, as the report itself indicates, they also reflect the Abbott government’s abolition of these and other revenue measures?

Both major parties understand that Australia needs a new round of economic reform: fiscal repair, tax reform in a modern federation, productivity-enhancing reforms and a sustainable, fair policy for retirement incomes. Hockey’s release yesterday of the tax discussion paper is a promising sign. It acknowledges, for example, that the superannuation tax concessions for high-income earners are overly generous, something the Coalition refused to do when last in government and in opposition.

Yet the discussion paper contains the usual contradictions: pointing out that Australia’s overall tax burden is low compared with other developed countries but pledging to reduce it further. Creating an impression that everyone will be a winner from tax reform through use of a “lower, simpler, fairer” slogan would be misleading and, in an ageing population, would ignore the cuts to federal and state health, education, aged care and social security budgets required to achieve a reduction in the total tax burden.

Bob Hawke and Paul Keating didn’t promise everyone would be better off as a result of their reforms. They openly acknowledged that many workers in affected industries would likely lose their jobs and sought to cushion the blow through adjustment assistance. The Australian people were strongly against the major Hawke-Keating reforms: tariff cuts, financial market liberalisation, privatisation and national competition policy. But they voted in Labor governments five times, convinced Hawke and Keating had the nation’s best interests at heart.

An Australian government or opposition that explains the case for reform, takes the community with it and repudiates opportunism would reap electoral rewards. Just ask Bob Hawke, Paul Keating and now Mike Baird.

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