Floods Of Fiscal Nonsense


As the rain beats down on Queensland, Australia’s politicians are again struggling with the basic arithmetic of government.

Natural disasters are expensive. By definition, they require a collective response. As we observed after the floods of 2011, natural disaster responses are by their nature a public good. No individual, no matter how wealthy or well-insured, can adequately prepare for a category 5 cyclone or a devastating bushfire. To prepare, respond and rebuild from such catastrophes takes the pooled resources of the entire community.

To do all this requires money. Lots of money. In 2011, Julia Gillard’s government decided to raise extra funds for flood reconstruction with a special flood levy, which helped to offset the estimated $5.6 billion cost of that year’s floods and cyclones. At the time, both Tony Abbott and Campbell Newman opposed the levy, arguing that the government should fund reconstruction efforts by cutting government spending in other areas.

Now that he is premier of a state again ravaged by floods and cyclones, Newman has changed his tune. Over the weekend he was telling reporters that Queensland would need a lot of help from Canberra to rebuild.

The damage that Tropical Cyclone Oswald has wreaked on Queensland and New South Wales doesn’t seem to have effected any change in the increasingly illogical national debate on government taxing and spending. Somehow, the reconstruction has to be paid for. But such is the tax-aversion of many politicians, no-one is prepared to say where the money should be found.

Australians are a naturally parsimonious bunch. Very few of us like higher taxes. But we do like government services, such as swift-water rescue teams and emergency coordination centres. And that’s an increasingly dangerous fault-line for the Australian polity.

As far as the surplus goes, Labor has at least abandoned its pledge to keep the federal budget in the black no matter what. The Government has hardly loosened the purse strings — indeed, whatever the Opposition says, it’s been one of the most restrained governments in modern history. But it has finally acknowledged the reality of Australia’s highly cyclical tax system, which has become increasingly tied to the ups and down of commodity prices.

Sensible tax reform would address this boom and bust tendency in federal revenues, but as the mining and carbon tax debates have shown, sensible discussions about tax reform are rare.

In contrast with the government, since losing office, the Opposition has seldom bothered with the niceties of arithmetic. In general, it has liked to promise lower taxes and a budget surplus, in its own uniquely antipodean version of voodoo economics. Given how little attention anyone paid to the gaping holes in their 2010 election costings, the political calculation appears to be that voters simply don’t worry about whether the promises can be paid for.

The Coalition’s latest policy pamphlet continues the tactic. Entitled "Our Plan: Real Solutions for all Australians", the mini-election platform has been released as part of what Tony Abbott has been calling a "mini-campaign" to kick off the election year.

"Our Plan" is dominated by deficit hawkishness. It makes much of Labor’s supposedly poor economic management. It constantly invokes the supposedly vast government debt that Labor has racked up in office. An Abbott government, the pamphlet proclaims, will be able to both cut taxes and deliver a surplus. It will do this by "cutting waste". Despite this pledge, the pamphlet also promises to build more infrastructure.

As Rob Burgess points out today, it’s magic pudding stuff. "[This] is yet more conformation that the Coalition’s cost cutting plans will be so aggressive as to be very difficult to sell at election time," he writes.

The melancholy truth is that voters like to have it both ways on the size of government. Public service cuts can be quite popular in the abstract, as Campbell Newman’s successful campaign in Queensland against Anna Bligh’s deficit-spending government demonstrated. It’s only when the pink slips start to arrive and the schools and hospital wards start to close that voters take stock of their real views about government services.

Everyone hates a public service "fat-cat". But when nurses and teachers start to get laid off in big numbers, public perceptions can change, as we’ve already seen in Queensland.

The dominant policy narrative of this year’s election campaign looks like it will be the age-old question of "how are you going to pay for it?" For the Coalition, the challenge is a serious one. Joe Hockey has already pledged that he will deliver a surplus in every year of a future Abbott government.

To do that while cutting taxes will mean very deep spending cuts indeed. Such cuts will have to come not just from the sorts of programs that conservatives hate, like climate change programs and government benefits, but also from areas where conservatives generally like to spend up, such as defence and border protection. As Fairfax’s Peter Hartcher rightly observes today, the cuts made to the Australian Defence Force since 2010 mean that the big arms purchases envisaged by he 2009 Defence White Paper are now off the table.

What’s likely to happen, therefore, is more obfuscation, because many voters don’t really want to hear the hard truth. Under Labor, the budget will only slowly climb back into the black, because tax revenues are still anaemic and Labor wants to spend up on new social programs like the National Disability Insurance Scheme. Taxes will rise, but Australia will maintain a small government by world standards.

Under the Coalition, more or less the same thing will occur. Government services will be slashed, and some taxes will be abolished or reduced. But the overall size of government is not likely to be much smaller than under Labor, for the simple reason that there isn’t much waste and inefficiency left to slash. As Campbell Newman is discovering, voters like public hospitals and schools. And if tax revenues do recover, the later years of the Howard government show that conservative politicians are just as capable of splurging on pet projects if they get the chance. This is one reason why the current federal budget is smaller as a share of the economy than it was under John Howard.

In a nutshell, the Coalition’s budget plans are not credible. Labor’s are, in the sense that it has finally admitted it can’t balance the budget. But both parties are being dishonest, in that the arguments they make about low taxes are likely to be eclipsed by fiscal necessity.

The big-picture trends are all running against those who wish for smaller public sector and lower taxes. Australia has an ageing population and an economy that will require big investments in infrastructure and education if we want to keep enjoying our astonishing two-decade run of economic growth. The best way to increase Australia’s supposedly-lagging productivity levels, for instance, would be to invest in the human capital of our workforce through education, training and research.

To do all this takes money, money which has to come from either taxpayers or borrowing. Given that both parties want to pay back Australia’s tiny levels of public debt, more spending really requires tax reform, ideally the introduction of new broad-based taxes like a national land tax. The sooner we can have a rational discussion about this, the sooner we can get on with the job of investing in Australia’s future, whether it be preparing for natural disasters, investing in schools and hospitals, or purchasing Joint Strike Fighters. But the fate of the Henry Tax Review does not augur well.

Compared to the budget woes in much of the rest of the rich world, Australia’s money problems are small and easily solved. We just have to pay slightly higher taxes. This is the bald truth that neither major party is prepared to tell us.

Ben Eltham is New Matilda's National Affairs Correspondent.