My column in today’s Fin. I should say that I didn’t pick the headline, and am a bit allergic to the use of “flaws” in policy discussion. No policy is flawless, so describing one as “flawed” doesn’t really say anything.
Wayne Swan has a Fabian Essay defending the Keynesian credentials of the Rudd and Gillard government. The central argument is sound enough
if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means a speedy return to surplus.
But there are a couple of big problems. The first is one of timing. The 2009-10 Budget, which included a large deficit as a Keynesian stimulus, proposed a return to surplus by 2015-16. This was seen at the time as quite ambitious – most developed countries have no obvious path back to surplus.
Nevertheless, by May 2010, with economic conditions much stronger than expected, it seemed as if the government had not been ambitious enough and the target date was brought forward to 2012-13.
Over the past year, however, the economic news, both locally and globally, has mostly been bad, with natural disasters producing short-term shocks, and the US and Europe mired in heavy debt and sluggish recovery. The economy has slowed a bit and tax revenue has fallen short of expectations. Unsurprisingly, on the government’s current policy settings, the return to surplus would be delayed, though probably still ahead of the original 2015-16 target.
From a Keynesian point of view, that’s exactly what should happen. Although the slowdown isn’t enough to justify an active fiscal stimulus, the standard Keynesian prescription would be to allow the automatic stabilizers to work, smoothing the path back to full economic recovery. Unfortunately, that’s not what the government is doing.
From my incoming email
Groups across the world are inviting economists who are qualified by post-graduate degree (Master or PhD) to sign a letter in support of a financial transactions tax (see below). The goal is 1000 signers by Friday, April 8th.
Economists can sign the open letter by entering their details in the comments box at this link: or emailing euderzo@oxfam.org.uk.Last year, 350 economists from all over the world signed a letter in support of a financial transactions tax, and over the past year there has been significant political movement towards implementing the FTT in Europe and some other countries. The campaign for the so-called ‘Robin Hood Tax’ is now hugely popular in many countries (www.robinhoodtax.org). The French have made an FTT a priority for their presidency of the G20 and there is a real chance of a breakthrough in the coming six months.
I’ve also had some contact with the organizers who would like some Australian academic economists (I take this to mean having an academic position in an Australian econ department) who would state their support as a group. If any of my readers fall into that category, please email me.
Way back in the 1970s, I spent a couple of short spells as an unemployed layabout, one of which was ended when I took a job as a fruitpicker, making (IIRC) $2 a day, which even then wasn’t food money (I wasn’t very good at it). Fortunately, the job included some basic accommodation and all the blackberries you could eat. And, even then the whinging from employers who claimed to be unable to get enough pickers was an old story.
Now, I see Tony Abbott is pushing the same line, wanting to stop dole payments in any district where there are (claimed to be) vacant fruitpicking jobs. After four decades of this stuff, we ought by now to have some actual evidence. So, I have a few questions
First, has there ever been occasion when significant volumes of fruit have gone unpicked because of a shortage of pickers? [1]
Second, has there been any occasion on which demand for fruitpickers has been enough that a person with no prior experience could make substantially more than the minimum wage (currently about $15/hour). ? [2]
And if, as I strongly suspect, the answer to both questions is No, what does that tell us about the expectations of the whinging employers. (I suggest, a ready supply of below-minimum wage workers, available on demand when needed, and ready to be sacked the moment they are not)
fn1 Not a strike, or some particular farmer so objectionable that all ir workers quit
fn2 I know that experienced pickers can do a bit better than this, but that’s not the relevant issue here.
My son called the other day to say I’d been mentioned in the Fin as a possible candidate for the the Board of the Reserve Bank. If I were a serious contender, this would be the cue for me to adopt a pose of grave silence on all policy issues, interspersed by gnomic observations to be pored over for their inner meaning. I’m not a serious contender (even if it’s nice to be thought of as someone who might be) so this seems to be a good time for unsolicited advice to whoever gets appointed.
In the short term, I’m pretty happy with the settings of macroeconomic policy. The Rudd government and the RBA got the monetary and fiscal stimulus right in 2009, and the move back to fiscal surplus and neutral settings for monetary policy has been paced appropriately (the government’s insistence on relying on spending cuts rather than scrapping the last stage of the tax cuts promised in 2007 was a big mistake in terms of budget policy, but that’s a different issue).
My concern is rather with longer-term issues arising from the GFC. First, it no longer makes sense to separate monetary and fiscal policy as sharply as was done in the pre-2007 period, given that, in any real emergency, the two will have to work together. That doesn’t imply doing away with central bank independence (we’ve had an independent central bank since the RBA was established) but it does imply a degree of co-ordination between RBA and Treasury more like the relationship that prevailed before the 1990s.
Second, the inflation targeting approach, based on Taylor rules, failed globally in the leadup to the crisis and during the crisis. An important lesson (which Stephen Bell and I, among others, pointed out before the crisis) is that low and stable inflation rates do not imply a stable economy. In fact, they may contribute to the growth of asset price bubbles (what Minsky terms the shift from hedge to speculative finance). There’s still a lot of room for discussion about what should replace inflation targeting, but full employment needs to be given more weight than in the past.
Third, the separation between monetary policy and prudential policy needs to be re-examined. Everything went well in Australia, but the problems overseas suggest we need to take another look at this.
As long-term readers here will know, I argued for quite a few years that, of the possible ways of putting a price on carbon, an emissions trading scheme was preferable to a tax (I set out my position here). But following the collapse of the Rudd government’s ETS deal with Malcolm Turnbull, and Rudd’s ultimately disastrous failure to call a double dissolution on the issue, I changed my mind.
This was partly because of changed circumstances, and partly because of a reconsideration of the politics surrounding compensation. In both cases, the driving force was the massively complicated set of free permits, exemptions and cash handouts with which the final ETS was saddled, nearly all of these going to large-scale emitters. I had seen the possibility of a limited issue of free permits as an advantage of an ETS, but now I think it was actually a weakness. And in political terms, the inordinate complexity of the CPRS made a strong case for something simple and comprehensible, where everyone understood that consumers would ultimately pay the price of carbon. Unlike with emissions permits, everyone understands that a tax on producers will be passed on (partially in the short run, and totally in the long run) to consumers, and therefore that any offsets or compensation should be directed primarily at consumers.
So, I now think a carbon tax is the best short-run option. There’s even a case, which a plan to discuss later, for leaving the tax in place when we come to introduce an emissions trading scheme, which is still the desirable outcome in the long run.
While I’ve come to support a carbon tax, John Humphreys, who formerly thought it the best (or perhaps least bad) option, is now vigorously opposing it. His change in position coincides with a change in political alignment, from the libertarian LDP to the Liberal Party, for which he was briefly an endorsed candidate last year. A few observations over the fold
The floods in Queensland and other states have destroyed a lot of public infrastructure that will need to be rebuilt, as well as damaging crops and reducing output in other industries. In most cases, if the infrastructure made sense in the first place, it makes sense to replace it, which raises the question of how to pay for it. The proposals Gillard seems likely to announce, centred on a one-off levy sound about right to me. As I argued a while back, the rebuilding is likely to raise the level of economic activity, as measured by GDP, which is the relevant measure for macroeconomic and fiscal policy. So, if the settings were about right before, it makes sense to pay for the rebuilding now, through a once-off levy, so that the net macroeconomic impact is approximately neutral.
On the other hand, the government should not seek to offset the loss in revenue associated with lost output and profits during the flood, or from flood relief expenditure. This should be concentrated in 2010-2011, and therefore should not affect the timetable for return to surplus very much. I assume (but am not absolutely certain) that the government has accepted this.
Another bonus is that the appalling “cash for clunkers” scheme is dead for good. I won’t count this as an actual saving, since it seemed unlikely ever to happen, but it’s good to have this confirmed.
Looking at the debate over UK protests over the tripling of tuition fees, it seems to me that this is an occasion where realistic utopianism (I’m paraphrasing Erik Olin Wright here) is needed, and is currently in short supply. The present ways in which modern societies determine the life choices available to 20 year olds are unsatisfactory and inequitable, and the British system is (or seems from a distance) to be more inequitable than many, perhaps most. So, defending that system against change, even change that will make things worse, is difficult and problematic. Rather than ask what incremental reforms might make things better, it seems like a good idea to ask how we might design a set of institutions from scratch, and then think about the implications for existing systems.
My UQ colleagues Lynette Molyneaux, John Foster and Liam Wagner have produced a paper arguing for a Tender-Price Allocation Mechanism for reductions in carbon emissions. I haven’t had time to consider the proposal in detail, and I don’t entirely agree with the paper’s characterization of the ETS and carbon tax alternatives (I currently lean to the carbon tax, mainly because the CPRS ended up such a dog’s breakfast that it would be better to restart from scratch). But, I think it’s useful to look at all the alternatives.
Back in 2009, I made a bet with Bryan Caplan, with the winning condition for Caplan being that “the average Eurostat harmonised unemployment rate for the EU-15 over the period 2009-18 inclusive should exceed that for the US by at least 1.5 percentage points”, my interpretation being that the difference offsets the effects of the high US rate of incarceration. The EU-15 average rate was slightly below the US rate for 2009, and slightly above the US in 2010, so, for the first two years, the difference averages out to near zero.
If I were looking only at labor markets, I’d be grimly confident at this point. Although the eurozone encompasses some very different economies, overall, eurozone labor markets dealt with the immediate consequences of the global financial crisis relatively well. Meanwhile, the performance of the US labor market has been disastrous. The employment-population ratio has plummeted, back to the levels of 1970 before the large-scale entry of women into the labor market, while long-term unemployment is far above any previous level. Unsurprisingly, this is the time the Republicans have chosen to throw the long-term unemployed off benefits[1]. Meanwhile, the collapse of the housing market has greatly reduced labor mobility. The adverse effects of these developments are likely to persist for years, and the 2010 election outcome forecloses any hope of active policy response.
Read more…
Michael Stutchbury’s piece a while back supporting the QR asset sale (my critique, his response) turns out to have been the first of many as the Murdoch press tries desperately to talk this flop up. But the punters aren’t buying, and even some of the subeditors appear not to have got the memo. This (unsigned) piece in the Courier-Mail says that, rather than repaying the debt that was the pretext for the sale, Bligh and Fraser plan to spray much of the proceeds on electoral bribes of one kind or another. The text gives the most positive spin possible, but the headline referring to a “desperate push for votes” gives the game away.
And if Bligh and Fraser weren’t feeling desperate, the comments on the story ought to make them so. In 127 comments, I didn’t find one that actively supported the government, although there were a fair few that were also critical of the hopeless LNP. My personal favorite from “Skeptic”
Hands up those who reckon they can be bribed by this behaviour. If so, I have a bridge to sell you. Oh, wait, they’ve sold that too…
Bligh and Fraser are doubtless on the way to well-paid sinecures in the financial sector. But those members of the Labor Caucus who don’t have anything lined up post-politics must soon realise that their only chance of keeping any seats at all next time round is to sack them both.
The QR float came in at the bottom of the indicated price range ($2.55 a share for institutions, $2.45 for individuals) and the government sold only 66 per cent of the shares, implying a return of $4.1 billion. However, the government announced a return of $4.6 billion. Unsurprisingly, these figures are bogus. To get there the government included some extras, picked up in later reports:
Dividends due to the government from the company and cash proceeds from a debt facility make up the difference between the $4.1bn worth of shares issued and the total revenue figure of $4.6bn.
It’s pretty rich, but par for the course for this government, to treat the dividends from an asset you are selling as part of the sales proceeds.
A couple of points
* The sale just scraped in at the government’s minimum. What are the odds that some favours were called in, and future favours promised, the get the float over the line?
* As I mentioned last time , the government took on $4.3 billion of extra debt when it restructured QR for sale. So, in cash terms, this sale actually leaves the government marginally behind.
Update In the original version I used reports that said the government had retained a 40 per cent holding, which created some additional puzzles. I’ve now fixed this.
My column in last week’s Fin was about the communication and policy failures surrounding the release of the draft plan for the Murray Darling Basin. I still hope that a solution can be salvaged, but the release was a fiasco.
Accidents of timing sometimes work out in interesting ways. Early this year, the Risk and Sustainable Management Group at the University of Queensland, which I lead, planned a workshop to review the draft plan for the management of the Murray-Darling Basin, then due for release in July. The rather optimistic title was ‘Water policy in the Murray-Darling Basin: Have we finally got it right?’ and the idea was to allow leading economists and scientists, with the hindsight of a few months, to review the plan and its reception.
Instead, because of delays to the election, the workshop was held only a couple of weeks after the release of the ‘Guide to the Draft Plan’, copies of which were still smouldering on the steps of community halls around the Basin. In this context, the sub-title ‘Have we finally got it right’ took on a tone of sardonic irony.
Surprisingly, though, the consensus of the workshop was that, in substantive terms, the draft plan did mostly get it right. Many of the problems we have seen are the result of poor communication and an excessive bureaucratic reliance on the provisions of the 2007 Water Act, under which the report was required. Others could be addressed with sensible government policy responses to the problems inevitable in dealing with the consequences of decades of largely failed policies.
The big communication problem was the media framing of the plan in terms of ‘cuts’ to water entitlements and allocations, resulting in a string of news stories of farmers saying their businesses would be ruined by cuts of the magnitude envisaged in the plan. The presentation of the draft plan by the Murray Darling Basin Authority did little to challenge this framing. As a result, the Gillard government was left to play catch-up, protesting that it had already committed itself to ensure that water would be acquired only through voluntary participation in purchases or water-saving investments.
The discussion of economic impacts was similarly misleading and similarly poorly handled. Model estimates of changes in employment levels were translated as ‘jobs lost’, when in reality they mean nothing of the kind. The most direct impacts will be on the number of irrigation farm operators. Given reliance on voluntary buybacks, the number of operators who will lose their jobs, or be forced off the land, can be precisely estimated at zero. The reduction in employment will primarily take the form of operators choosing to sell their water entitlements to fund either retirement or a shift into other industries.
For most towns and cities in the region, the ‘job loss’ estimates will be similarly notional. Total population in the Basin is growing, and so is employment. A small change up or down in projected employment growth over a decade or so is little more than a modelling artifact.
These purely notional estimates serve to distract attention from the more important results, focusing on the minority of communities in the Basin where a contraction in irrigated agriculture is likely to produce a reduction in total employment or to exacerbate existing adverse trends.
Communication failures are never the whole story. The government should have had, at the ready, a regional development package that would address both unmet needs in regional Australia as a whole and the specific needs of communities in decline, regardless of the cause of this decline.
Instead, policy responses have been narrowly focused on irrigators and irrigation infrastructure. Billions of dollars have been allocated to projects to improve the efficiency of irrigation, despite evidence that very little water is ultimately lost to the system through processes such as leakage and seepage, which mostly return water to rivers and groundwater systems. If even a fraction of this sum were allocated to improvements in social infrastructure, it could generate enough new jobs and social returns to more than offset the adverse impacts of a contraction in irrigated agriculture.
A solution to the environmental, economic and social problems of the Murray Darling Basin is within our reach. A combination of voluntary repurchase of excess water entitlements and investment in social infrastructure could be funded from the $10 billion already on the table for the Water for the Future initiative. Success or failure will tell us a lot about the capacity of the Gillard government to deliver meaningful reform.
The Bligh government has announced that a substantial amount of money (about $200 million) derived from the sale of QR’s highly profitable coal business will be used to upgrade heavily subsidised passenger rail services between Brisbane and Cairns, correctly described by the Transport Minister as a “luxury” service. In this case the rhetoric of the Premier and Treasurer, spurious when applied to the income-generating coal freight service, is absolutely correct – every dollar spent on new tilt trains is a dollar that can’t be spent on schools and hospitals.
Hat-tip: David Adamson
I discovered this too late to put it in Zombie Economics, but it has to be the sharpest irony of the Queensland privatisation debate. The sale of our public assets is being managed, in part, by the Royal Bank of Scotland which, thanks to the gross incompetence of its private managers, is now a wholly owned subsidiary of the British government.
Michael Stutchbury in the Oz offers a case for the Bligh government’s asset sales, and that of QR in particular. Mostly, he wants to argue that the sales will put an end to the oppression of the bosses by the workers[1], or as he puts it, would allow business to “clean up its anti-management culture”. But he also tries a half-hearted defence of the official case for privatisation, that selling assets will finance non-commercial investments.
Read more…
Chris Bertram’s CT post on the Browne reforms[1] in UK Higher Education has prompted me to write a post I’d half-planned a while ago, after seeing this familiar (to Australian eyes) claim.
Too many universities simply state a desire to “achieve excellence in teaching and research” and appear unable to carve out a market niche, Professor Beer said.
The idea that a pseudo-market system (centralised control but with sharper price incentives) will generate diversity is one of many illusions that were exposed during the Australian reform era of the 1990s. Faced with pressure to find a market niche and select a “flagship” program, 37 Australian universities (out of 37) decided that business education and a multitude of specifically labelled vocational degrees were the right niche and that an MBA would be a good flagship. This is scarcely surprising: given the incentives, business degrees were the obvious profit centre. It’s only as the reform program has faded from memory that we are seeing serious attempts at diversity like the “Melbourne model”
However, similar choices didn’t produce a homogenous outcome. Rather, the historical hierarchy (century-old sandstones at the top, former teachers colleges at the bottom) which had been somewhat muted when funding flowed a little more freely, re-emerged stronger than ever. At the top, there was enough surplus to maintain, more or less, the full range of disciplines as well as the long-established professional schools (law, pharmacy and so on). The further down the scale you went the less of the arts, humanities and sciences survived. This apparently came as a surprise to the Australian equivalents of Professor Beer.
Even more bizarre was the shock expressed by some market advocates when they discovered that, with a customer base consisting of 18-year olds (who understood their own preferences), and parents (who mostly knew very little about units), the market produced very little demand for anything that was hard and didn’t purport to offer training for a well-paid job. Some of them seriously appeared to think that the market would kill off critical theory in favor of good old-fashioned classical education. In fact, provided the pill was sugar-coated with film studies and pop culture, critical theory didn’t do too badly, at least relative to old-style humanities. I myself am affiliated with the QUT Centre for Creative Industries, which derives much more from crit theory than from lit crit.
Australia has a long history of importing policies that have already failed in the UK. It’s a source of mild schadenfreude to see the trade going in the opposite direction for once.
fn1. As always, I use “reform” to mean “change in structure” with no implication of approval or disapproval. Given the history of C20, most reforms consist, in large measure, of undoing some previous reform.
The bailout of the US financial sector through the Troubled Assets Recovery Program (TARP) looks to have been fairly successful on its own terms – the banks have become profitable again and the final estimated loss to the government is relatively small. That doesn’t change the fact that the government took on huge risks for negative returns, without any reason to expect that the future behavior of the banks will change.
But all of that was based on assumptions of an orderly resolution of the mortgage crisis. Those assumptions now look very dubious, as the legal consequences of the practices of the financial sector during the bubble, ranging from sloppiness to outright fraud, manifest themselves.
Read more…
I just did an interview with ABC Radio Lismore about the latest proposal to divert water from the Clarence River to the Murray Darling Basin. Apart from the environmental effects (disastrous according to the studies I’ve seen) proponents of ideas like this seem to be unaware of a crucial fact. Water is heavy. A megalitre of water (worth maybe $200 as bulk supply to irrigators) weighs 1000 tonnes. Pumping that much mass over even a low mountain range is prohibitively expensive. You can overcome that with tunnels if the gradients are steep enough, but the Great Dividing Range is pretty broad in Northern NSW.
And, don’t get me started on the really crazy projects like Colin’s Canal.
Over Fifty Australian Economists Agree Fiscal Stimulus Prevented A Major Recession
Nobel Laureate Professor Joseph Stiglitz has stated publicly that the Australian Fiscal Stimulus was a well designed package that saved the Australian economy from a major recession that has hit almost all the other OECD economies. He argued that the Australian package was a model for other economies facing similar problems.
The attached letter was signed by over fifty academic economists. Several other academics and economists supported this view about the Fiscal Stimulus Package that prevented the Australian economy from a deep recession and prevented a massive increase in unemployment.
The Australian economy has come out of the Global Financial Crisis in surprisingly good shape thanks to this Stimulus Package.
The Australian unemployment rate is amongst the lowest of any of the OECD economies.
Unlike the US and Europe, we are not facing the possibility of a double dip recession.
The current level of government debt (the lowest in the OECD economies) is due to tax revenues falling during a slow-down in the economy, whilst social security payments increase. Most of the increase in the debt would have happened independently of the increased government expenditures associated with the Stimulus Package.
The Stimulus Package has led to an increase in infrastructure investment that would help the long-term development of the Australian Economy.
Julia Gillard has announced an Australian version of the cash for clunkers program of the Obama Administration. Reader Ben Elliston writes
read an article some months ago by Jeffrey Sachs evaluating a
similar policy from the Obama administration:http://www.scientificamerican.com/article.cfm?id=a-clunker-of-a-climate-policy
It turns out that the Gillard proposal is even worse than Obama’s.
Sachs calculated the greenhouse gas abatement value of Obama’s scheme
at US$140 per metric tonne. Gillard’s policy will reduce emissions by
1 million tonnes at a cost of $394 million dollars ($394/tonne).
My only observation is that Ben’s estimate is taken directly from the government’s press release, which is almost certainly overoptimistic. For comparison, at about $25/tonne, brown-coal electricity generation becomes uneconomic compared to gas and black coal. At $100/tonne, just about all the alternatives (including wind, nuclear, CCS, and solar) look pretty good. Cash for clunkers is, as Sachs concludes, a clunker of a policy.
And just in case anyone has forgotten, Abbott’s anti-policies are even more focused on this kind of nonsense/
I’m working on a longish piece on how to pay for the global financial crisis, and it seems like a good idea to deal with some side issues separately. One of the standard post-crisis responses of governments, i has been to increase the age at which people become eligible for public old age pensions. This change is likely to flow through to other policies, for example by shaping the presumptions around the tax treatment of private retirement income.
I want to step away from these financial positions and ask the question: does it make sense, in general, for people to retire at older ages than in the past? For those who want the “shorter” version, my answer, on balance, is “Yes, at least in Australia”.
I’ve been busy for the last few days, working on a statement by a group of economists in support of the principle of a resource rent tax to replace existing royalties. The statement calls for informed debate about the proposal and takes no position on particular design issues, such as the choice between the existing system used for the Petroleum Resource Rent Tax (40 per cent on returns above about 11 per cent) and the government’s proposed Resource Super Profits Tax (40 per cent on returns above the bond rate, with a corresponding offset for returns below the bond rate).
My own view is that the RSPT design would be more efficient, but the losers under this design (those who can confidently expect high profits) have been very vocal, while the potential gainers (smaller miners undertaking riskier projects) have not given the government any support. Add to that the fact that the PRRT design is long-established (making scare campaigns a little bit harder) and simpler and there is a strong political case for a compromise along these lines. The most important thing is that the government cannot and should not back down on the basic principle of a resource rent tax.
Here’s the Press Release and Letter.
I’ve been flat out with final revisions to my book manuscript and various other things. So I didn’t get time to say I would be on Australia Talks this evening talking about the resource rent tax. It went fairly well, I thought. You can judge for yourselves when the podcast becomes available
Not quite sure when I will surface from my current deluge of work. Light posting until then.
* Budget lockup low point: Only instant coffee, had to get my caffeine hit from Diet Coke. High point: Asked for autograph by Treasury officials. Also, a fun dinner with Robert Gottliebsen, Alan Kohler, Natasha Stott-Despoja, the Crikey crew and others. Not quite as lively as some accounts suggested, but a good time was had by all.
* One thing I missed: Got through some of the confusion on the aid budget but wasn’t able to work out if the money for Copenhagen commitments was additional new money (as promised) or old money taken from elsewhere in the aid budget. Unsurprisingly, it was old money
* A bigger thing I missed: What Possum’s Pollytics correctly calls the most important chart in the budget, a graph showing a regression of the size of economic stimulus against economic growth relative to IMF forecasts. The relationship is highly significant, and the coefficient is approximately 1. That is, each dollar of stimulus resulted in (roughly) a dollar of extra output. No doubt this will be subject to reanalysis, but it’s a striking result.
* Tony Abbott’s reply: predictably weak. Freezing public service recruitment is silly symbolism, not a serious way of cutting spending.
Last year’s Commonwealth Budget represented a huge, and, for the most part, successful economic gamble. The gamble last year was that a big budget deficit would yield an economic stimulus sufficient to outweigh the associated increase in public debate and provide a basis for sustainable economic growth in the future.
As the Treasurer’s speech points out, the Australian economy has recovered strongly at a time when the US and European economies are only marginally stronger than at the depths of the recession. Public debt is now projected to peak at 6 per cent of GDP, compared to a developed world average of more than 80 per cent. The government’s claims as strong economic managers have a fair bit of credibility.
This year’s Budget is a political gamble; that the government can win re-election based on that credibility, without offering any significant electoral sweeteners. The government doubled down on this gamble with the series of backflips and repudiated promises in the leadup to the Budget, motivated largely by the desire to achieve an early return to surplus. The political price for these backflips, most notably the indefinite deferral of the CPRS, has been steep, and it’s far from obvious that the Budget will provide any offsetting bounce.
Read more…
I’ve changed this a bit to be clearer on points that I hadn’t sorted out in the lockup. It was a long day
I’m going to post a bunch of pieces I wrote for Crikey during my day at the Budget lockup. Here’s some pre-budget speculation. The reasoning still looks OK, but the government didn’t go for the rabbit from the hat I thought possible: a return to surplus in 2011-12.
Because the government ignored most of the Henry Review, I put off reading it until I had a bit of free time. I expected to find myself in agreement with most of it, and in fact, I agreed with a lot. But I found one big problem, as I discuss below (previously posted at Crikey)
As Ross Gittins observed recently, the Henry Review will set the agenda for taxation reform for a long time to come and most of its recommendations will probably be implemented sooner or later. It’s important therefore, to give it some close and critical scrutiny now, before it acquires the status of holy writ.
There’s a lot of good sense in the Henry Review. In particular, its central recommendation, to get rid of the many inefficient taxes and imposts that have accumulated over the years, and replace them with broad, efficient taxes on four bases: personal income (comprehensively defined), business income, private consumption expenditure and economic rents from natural resources and land. On most points of detail, it’s sensible and well thought out, though there will no doubt be room for disagreement.
There is however, a fundamental flaw in the reasoning of the Review, which undermines its whole approach to the appropriate balance between the four tax bases defined above. That flaw is the assumption that the primary goal of economic policy should be to promote economic growth, as measured by GDP (along with other objectives such as equity and sustainability).
Read more…
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