As Tim Dunlop notes, the government has already started the process of repudiating its election commitments. This Age report quotes Costello casting doubt on the forecasts used to justify the spending spree, and the Fin (subscription required) gives an even clearer indication that election commitments are likely to be broken, yet again, saying
His comments raise the possibility the coalition may seek to rethink some of its election campaign promises, and the $65 billion of promises since the May budget.
Mr Costello’s warning comes after The Australian Financial Review revealed that without consultation with him, Prime Minister John Howard had opted to announce at his campaign launch all of the $6 billion in spending promises that had been proposed by the Liberal Party campaign office, rather than just one or two as was expected.
it’s safe to say that this leak could only have come from Costello or his office.
I’ll be very interested to see what government supporters have to say about this, and what it implies with respect to the swinging voters who (presumably) took the government on trust as it asked them to, and voted for them on the basis of their stated policies.
Note: Post updated to include AFR quote
John Quiggin 
Well one thing’s for sure, the punters can rule out any of Labor’s promises straight away. Now to start on the rest of the pie in the sky, fistful of dollars, the punters always knew was not going to be their lot. Democracy is like a box of chocolates. You never know what you’re gonna get, but one thing you know for sure, there’ll be a lot of empty wrappers before it’s your turn to pick up a choccy.
One fact they did have confirmed to them in this morning’s news, was their nett wealth had doubled since 1997. Very Happy John and they can be thankful for small mercies.
I think that should read, “Peter Costello has started the process of attempting to repudiate John Howard’s election commitments”.
Whether Howard is of a mind to repudiate them remains to be seen.
No doubt Costello, who never seemed during the campaign about these spending promises, has had his spine stiffened by his briefing this week from Treasury, which always, but always, is the harbinger of coming doom, to try to hose down government spending.
The coming three years should see some interesting wrangling between Prime Minister Howard and Treasurer Costello.
John,
As far as I can see from the article you’re quoting there is nothing from Costello to say that election promises are likely to broken (although a number of them probably should be!). On the 7:30 report he simply stated that the treasury’s forecast of the budget surplus is optimistic, particularly if oil prices stay as high as they are. Seems a sensible comment to me.
Hopefully a number of the campaign promises are broken – the amount of money being thrown around during the campaign on middle class welfare was appalling. I’d expect that from the ALP but not the Coalition. To me it really doesn’t make much sense for the government to tax people only to hand it back to them in payments like the family bonus.
I think there are two urgent priorities for the government to address now that it can get things done without an obstructionist Senate –
1) Fix up the tax shambles for low income earners where effective marginal tax rates are often well above 50%
2) Bring back the tax rates at the upper income levels to something more in line with the corporate tax rate – or at least not 18% higher.
Interesting to note that government’s corporate tax take has gone up since the tax rate was lowered – not down!
As a Liberal voter, I have nothing to say about this, because there is nothing to say. I am not even sure what the point is. Yes there are issues in relation to world oil prices etc. Costello said that we could ride the current highs for 6 months, but longer would be a problem. He talked about the need to position for such an eventuality. The dour Treasurer re-establishing his authority. Adapting would be a necessity whoever won. The voters of Australia decided that the hand they wanted on the tiller was not Latham’s. To equate what Costello was saying, to a thouroughly unhappy Kerry determined to pay some one back, with broken promises is probably more wishful thinking than predictive. Why is the Fin Reviews understanding, or the Age’s suddenly improved now the election is over.
Surely there are no linear thinkers left amongst economists. The tone of the post seems to be that bad is coming, but on what grounds do you predict that. Fundamentally a year is a very long time in a global and chaotic world. We may have a period of equilibrium or there may be currently a butterfly flapping that might deliver good outcomes for Australia.
Reminding us of the hysterical O’Brien on election night is a little tragic.
Gimme a break and read between the lines. If the budget forecasts are optimistic, in the name of “prudent economic management” the government will “reluctantly” have to change some of its policies in response to “unforeseen global circumstances”. This is standard spadework for that.
In any case, as far as the swinging voters are concerned, I’m getting to the point where I’m convinced you could sell their parents to the meatworks as long as interest rates (and oil prices) don’t rise because of it.
And, by the way, my take on observa’s statistics on househole wealth is that much of the increase is illusory as it’s just the result of the increased value of the family home. Prof. Q., would you care to comment?
I, for one, would like to see more expenses being made deductible. It simply doesn’t make sense how travelling from home to work is not an expense related to generating income, and child-care as well. This creates all sort of disincentives to work.
For those on welfare it is even worse. If you make a dollar, your welfare is cut by 50 cents. But that’s before expenses. And then on top of that you get cut out of a health-care card. Might as well stay in bed.
I am no longer an electoral supporter of the Howard govt., although I do have ideological sympathies with the PM ie cultural identity and national security matters.
Howard was trusted to be duplicitous in these areas since certain acts of bastardry had to be done to keep the system on an even keel. Thus machiavellianism is acceptable on limited and temporary basis on exogenous matters.
Economic efficiency and social equity policies are all endogenous and should be subject to strict accountability process.
Latham should attack like a pit bull terrier on this and not stop until Howard backs down.
I am familiar with the routine of oppositions getting into power and the being *shocked* as to how bad things really were but for a returning government… well that’s quite something.
Attack what Jack. Like a bull terrier is a good analogy though.
I am inclined to believe that we are seeing a great Australian tradition being played out of “there’s one born every minute”.
Have we been conned? We shall soon see.
Latham should attack Howard for back-tracking on his the statist hand-outs he promised to middle class people.
Costello wants to cut the top marginal tax rate to 30%, roughly equal with the company and capital gainst tax rate.
Maybe this is a good thing, if it increases work incentives for creative people.
But work incentives for non-creative people are also needed, to get marginal workers into productive employement.
this reminds me of post 93 election.
Keating treated us as mugs when he hiked up indirect taxes more than envisaged by fightback and with no compensation.
This time round it has taken one day for the Treasurer to discover the Treasury PROJECTIONS ( they are not forecasts) are optimistic.
costello knows just how susceptible the budget figures are to the economy slightly slipping away.
By the way the highlight of the campaign for me was the Treasurer minus treasury being unable to comprehend simple budgetary costing.
If the ALP don’t get a raise out of this in Parliament then they are hopeless.
I hope that costello’s office have advised the guiness book of records of this backflip-surely it is a record?
I mean,everything in that economy thing was going flat out until last friday….
Now we are hearing about latham style interest rate rises and a slowing economy….
Crikey,strewth!
I trusted john howard,and now this!
Ros: The point is that a competent treasurer would have seen this coming six weeks ago. Why is Peter Costello suddenly playing a different tune? I can only imagine a scenario like these:
(a) Costello is incompetent reading the current situation,
(b) Treasury were incompetent with their forecasts,
(c) Treasury were pressured to give optimistic forecasts in the lead-up to the election, and now the Government wants to distance itself from commitments made on the basis of those optimistic forecasts.
I’m most inclined to believe (c), and agree with Prof Quiggin that Costello is taking the first steps to relieve the government from the burden of their rash promises.
John, You still feel bad about Labor losing the election and, in your last sentence, want to punish the gloaters. Its a natural response and, in my view, it is quite OK to show your feelings on this matter. Indeed I felt much the same sort of disapointment when Britney Spears rejected my recent marriage proposal.
But, in the tail of this posting, you are still implying that the electorate are stupid. Contracts drawn up at election time are decidedly incomplete. As someone once said, ‘verbal contracts are not worth the paper they are written on’ and to compound the incentive issues this is politics and Howard will almost certainly exit during this term.
So use backward induction. Stage 2: The economy might turn bad and, if so, Howard might backtrack on policies — he has his longer-term ‘position in history in relation to the great Ming’ to think of. Stage 1: A rational electorate knows all this and that pollies tell porkies at election time and understand the dynamics confronting Howard.
What have they done? Well despite the anticipated porkies they vote for Mr Howard because they think his lies and his program are better than Mr. Latham’s lies and his program. Its a package deal argument analogous to the argument that the electorate vote on a mix of policies.
The only way out is to suppose the electors are not rational and haven’t had the chance to study game theory.
You’ve missed my point, Harry. Until now, any suggestion that the government won on the basis of lies (even accompanied by the observation that Labor also lied) has brought done wrath from the victors.
But within a week after the campaign is over, we have you saying “they vote for Mr Howard because they think his lies and his program are better than Mr. Latham’s lies and his program”.
A further observation, Harry. No one expects scrupulous honesty from politicians, and newly elected governments have regularly made use of the “discovery” that the budget situation is far worse than they expected.
But occasions on which re-elected governments have dumped their promises on this basis have been quite rare. At the Federal level, I can think only of the original fistful of dollars (Fraser and Howard) and the L-A-W tax cuts (Keating) both of which were the subject of vigorous condemnation, and not only from partisan opponents of the government.
OTOH perhaps Costello is saying he probably has 6 years to implement all this stuff and he doesn’t want you all to get too impatient.
Small exogenous threats to the well being of the citizenry, like a giant asteroid heading toward earth, should of course excuse the govt from culpability in any rapid decline in their nett wealth, that has been so carefully nurtured on Howard’s watch.
The attitude of some govermnent supporters about the government reneging on its promises is breathtaking in its arrogance. And they were accusing Labor of irrelevance in attacking Howard as a liar!
On another topic, anyone who thinks their net worth has increased because their house has doubled in value along with similar houses should take a cold shower. They used to have a house and they still have a house – with pretty much identical value in use. If they want to move, they have to use all their new found weatlh just to get comparable accomodation. Anything extra they have borrowed against the increased value is a liability, not an increase in their wealth.
While these spending promises should be broken, I doubt they will be. After the ’98 election when I was working for the government there was pressure to give priority to election promises, whether or not they were in fact the most important or urgent things the government should have been working on. The PM was, I think, stung by the core/non-core controversy. With the ‘Howard lies’ campaign fresh in his mind I think he will again be determined to prove that he keeps his word.
I had one of those “you read it here first…” moments – the Tuesday before the election I wrote a piece in the Public Sector Informant (a monthly liftout magazine in the Canberra Times which I expect nobody reading this log to have ever seen!) on the assumptions underlying the growth figure in the PEFO – especially oil at $US43/barrel. Growth may well hold up reasonably this year (where the forecast is a forecast – Homer, they are only projections in the out years) but IMHO will fall well below the projections in the forward years. This makes it hard for government to keep its election promises of both more spending, AND keeping the budget in surplus. Unlike Harry I think that democracy is best served by promises being kept, and voters actually expect that and dislike obvious breaches of faith. I also think Howard is now of the same view (something – please note Harry! – for which I give him credit). So expect to see some savings being made in those areas of government that weren’t in the campaigning arena.
Stephen,
you are indeed correct and indeed that is what I was trying to say.
I seem to recall Access Economics saying some of the assumptions behind Treasury’s thinking were ‘courageous’ and therefore the ongoing surplueses maybe lower than thought.
My money is howard will go with his promises.
1) Andrew Norton’s argument rings very true
2) I think Keating like Howard believes he will get away with budget deficits in spite of his previous economic illiterate comments.
I’ve seen it, stephen. I don’t actually read it, but, y’know, I’ve had it fall out of the damn paper a few times…
Alan, if any value can be placed on newspaper articles the Australian today sort of supports both our contentions.
The article by David Uren reports economists interpreting Costello’s comments as an effort to regain control over the budget after the free spending election promises. HSBC’s John Edwards thinks he was deliberately trying to create uncertainty about forecast growth rates but not because they were optimistic forecasts obtained under pressure. Rather positioning himself for credit if reached and distance if not. The report states however that the forecasts are still in line with market consensus quoting reuter’s survey.
Chris Caton quoted as saying shouldn’t take comments about growth 3 or 4 years away too literally becasue no one can project several years in advance.
Bill Evans believes focus of growth would shift from domestic consumption to exports which I assume could be a posiotive development for Australia.
I am still quite comfortable with the view that there is not an issue and no sight of one. Emotion seems to have got in the way, it is too early to be calling gotcha.
I agree with Pr Q on the subject of politicians lies in domestic matters regarding economic efficiency and social equity policies.
I take the “fake but true” line on Howards lies in regard to AUS border-protection and US alliance-consolidation matters. Howard’s lies, in cultural identity and national security, were dog whistling truths that catered to deeper needs of the electorate.
Howard should be relentlessly and ruthlessly attacked if he lays a single finger on the magnificent and sprawling structure that is our middle class welfare state appartus.
Moreover, as per the Great Convergence thesis, Howard has stitched together a political coaltion that includes ex-LIBs (agrarian One Nats, bourgeois Aus. Dems) and ex-LABs (proleterian “battlers”) who have no great personal affection for him. They appreciate Howard’s moderate cultural conservatism. But they will have to be bought of with economic statism in provicial and municipal jurisdictions.
Howard also realises that his HoR majority rests on the rather shaky foundation of a housing bubble which has certainly plateaued for the next few years, and may well burst. Gratitude for this is unlikely to persist.
Finally, Howard will be ultra-sensitive to accusations of back-pedalling or breaking promises.
I therefore predict that Howard will keep most of his core promises on health and education. He may lay the axe about in other areas, and so he should if bureaucracy is getting bloated.
Once again I’m amused to see people who I thought would know better decry “middle class welfare” in one sentence and call for a lowering of effective marginal tax rates in the next. Andrew, if you lower tapers, increase free areas or whatever on family payments to lower EMTRS you must extend payments to middle-class people; it’s simple arithmetic.
Decide what you want – a tightly targeted system that creates poverty traps or a large quasi-universal one that requires lots of churning. Unless you’re willing to take an axe to the rates (with severe consequences for child poverty and for incentives to have children) you can’t get around this.
DD, yes, you can get around the either/or, churning/targeting dilemma. You simply don’t use that system of taxes with that point of impact. It’s the offsets on GST approach that Professor Kim Swales of Strathclyde University came up with.
If you go to my publications page (http://member.netlink.au/~peterl/publicns.html) you will find a fair bit on all this, including my own independent derivation using games theory.
PM –
I haven’t read it yet, but I’m deeply sceptical – I reckon if you can get out of this dilemma then building a perpetual motion machine will be a breeze. Every attempt I’ve seen to do it relies upon something not being included in the accounts – in this case I suspect its the incentive and/or distributional effects of the GST.
But I’ll comment further after I’ve read it. BTW your URL is incorrect – it should be http://users.netlink.au/~peterl/publicns.html .
DD, I’ll take your word for it about the page. My ISP keeps chopping and changing without notifying us.
As to the perpetual motion thing, you’re 100% right to be sceptical. You really cannot get something for nothing. But as you will see on going through all that material, it’s not so much a case of getting something for nothing as of undoing a nothing for something that we got inadvertently as a result of harmful externalities. The result in absolute terms is to get something for something, but in relative terms it appears as if it were a free ride when it is merely undoing a free ride the other way. (“Free ride” or “spillover” is how externalities are often described.)
In the end it is merely restoring the ideal that theory used to predict, that employment markets ought to clear themselves naturally. And so they would, if there weren’t the externality of Social Security costs as funded from General Revenue (compounding for another externality, Vagrancy Costs).
Oh, and I should add that the role of GST is not essential. What counts is using a broad based tax with point of impact on producers, and those incentive effects (and the burden on capital) do indeed make a GST undesirable. But it’s the only tax of that sort that we’ve got, and those very effects are why I personally would prefer to see other taxes in a package being used to head off revenue shortfalls and not use the straight Kim Swales recommendation.