Back in the 1980s, there was a constant stream of international delegations to Wellington, seeking to learn from the “New Zealand miracle”, in which a group of radical free-market reformers turned around a sclerotic welfare state. While the results had yet to show themselves, everyone was confident that NZ would soon surpass Australia, where the political system threw up many more obstacles to reform. Everyone knows how that turned out. After 100 years of economic parity, NZ GDP per person has fallen to around 60 per cent of the Australian level. The gap closed a little when NZ abandoned radical reform (from the first MMP election to the end of the Clark Labor government) but is now widening again.

And, just in the last week, the intellectual foundations of austerity polices have been cut away with the discovery that the influential paper of Reinhart and Rogoff, predicting disaster when public debt levels exceed 90 per cent of GDP, was based on a coding error (not to mention some dubious statistical choices). That follows the demolition of the even more influential work of Alesina, Ardagna and other co-authors, some of which I criticised in Zombie Economics

Against this background, it’s truly bizarre to see the Australian right (IPA, CIS and Tony Abbott) presenting New Zealand as a model, on the basis that the budget has been returned to surplus. Apparently, it doesn’t matter that the economic outcomes have been consistently appalling, as long as the ideology is right.

I have a simple suggestion which I hope will appeal to everyone. Since the new NZ government came in, deluded Kiwis have been voting with their feet in large numbers. The resulting imbalance could be addressed if the CIS, IPA, Parliamentary Liberal Party and their keenest supporters moved across the Tasman to try out the marvels of free-market reform for themselves.

There’s an important new report out from the Grattan Institute, which has received a fair bit of press (some of it rather off-point) for its prediction that, under current policies, Australian governments will need to find an additional 4 per cent of GDP (about $60 billion a year) over the next decade if they are going to meet new expenditure needs for health and education services and maintain a prudent fiscal surplus.

The options aren’t explored in much detail, but it seems clear that expenditure cuts (particularly the usual suspects like duplication and waste, “middle class welfare” and so on) won’t be enough, so more tax effort will be needed. The top priorities ought to be tightening up the income tax system and increasing income tax rates at the top. If that’s not enough, the next option (tough, but maybe necessary) is an increase in the rate of GST.

I’ll try to post in more detail soon, but I think Grattan gets the story right on most points, and their analysis will certainly help anyone who wants to take a serious look at Australain fiscal policy

… for the announcement that the Commonwealth government is spending $20 million to support the production in Australia of a Disney film of the Jules Verne novel 20000 Leagues Under the Sea. I was interviewed by Gary Maddox who wrote an opinion piece supporting the subsidy, but mentioning my opposition.

For dogmatic free-market advocates, there’s not much need to explain why the subsidy is a bad idea – it follows from the general claim that all subsidies are bad, and for the real dogmatists, that any kind of government expenditure is bad. But I’m happy to support subsidies to film production under some circumstances so I need to explain my position a bit further, and the Maddox piece provides a handy foil

Read More »

The Crime and Misconduct Commission has announced that it does not have jurisdiction to investigate allegations of an undeclared conflict of interest against Peter Costello in relation to the Queensland Commission of Audit. This is an unsatisfactory outcome: the allegations remain neither proven nor refuted, adding to the general miasma of nepotism and jobbery that surrounds the Newman government, and leaving Costello without an opportunity to defend himself against what remain merely anonymous leaks. If the CMC has no jurisdiction on allegations that policy recommendations involving state assets worth billions of dollars are being made by someone with a vested interest, something is seriously wrong. The fact that the Newman government has attacked the CMC (set up because of pervasive corruption under an earlier LNP government) from day one makes this seem even worse.

The Newman’s government’s response to the Audit Commission’s Final report has been similarly inappropriate. It’s not uncommon for a government to sit on a report while it makes up its mind how to deal with the recommendations. I can’t recall, though, a case when the recommendations have been made public, but the report itself remains secret. That suggests a lack of confidence in the quality of the analysis. Given the weakness of the Commission’s Interim Report, and the Commission’s inability to respond effectively to criticism (as an example, my lengthy critique received a one-sentence reply), this lack of confidence is probably wise.

I’ve just released a report I prepared on electricity privatisation in Queensland[1] This was a bit difficult given that the Costello Commission’s proposals have been announced with great fanfare, but the supporting analysis is so secret that even Campbell Newman claims not to have seen a copy. This Courier-Mail story by Paul Syvret gives the basic points

The report is online here.

fn1. It’s partly a followup from my previous response to Costello’s Interim Report. As in that case, I’m not getting paid for this, and it’s entirely my own work. So, it’s not as polished as the Costello report will doubtless be when it comes out, but I can confidently say it’s better value for money for the Queensland public.

I’ve been thinking quite a bit about Commissions of Audit lately[1]. Although the Costello report has not yet been released, I happened to find, on my bookshelf, a document entitled “Report of Queensland Commission of Audit”. It’s not a back-of-the-truck pre-release copy, but the report of the 1996 Commission of Audit, commission by the newly-elected Borbidge (Nat-Lib coalition) government[2], and led by Vince Fitzgerald (a credible, though conservative economist).

The Report makes interesting reading. Its key conclusions are

(a) Queensland’s balance sheet is strong. The state’s net worth is $51 billion
(b) There is an inbuilt negative trend in the state’s operating position, which if unchecked will reach a deficit of $2.7 billion in 10 years

Point (a) sounds pretty positive given that both the Newman government and the interim Costello report paint a picture of a state on the verge of bankruptcy. So, what’s happened to our net worth over the 16 years from Fitzgeral to (interim) Costello. Readers might expect that it’s fallen a lot, or even become negative. In reality, it’s more than tripled, to $171 billion.

Of course, the Costello report has switched attention from net worth to gross debt. While this makes little economic sense in ordinary terms (if you were buying a company, would you care more about its net value, or its debt level), it might be important if the ratio of debt to net worth had risen a lot. Actually, gross debt was $24 billion in 1996, and is $64 billion now. The ratio of gross debt to net worth has actually fallen.

To sum up, the big difference between Fitzgerald and Costello is that Fitzgerald is a serious look at the state’s finances, while Costello (in common with the majority of Commission of Audit reports) is a propaganda stunt. The state’s underlying position is strong, just as it was in the 1990s.

The second point reported by Fitzgerald is also interesting. Borbidge only had one term and didn’t do much, so the problem of dealing with the adverse trend identified in the report fell to the Beattie Labor government. Beattie kept the budget in surplus, and it remained in good shape until we were hit by the GFC and climate disasters of the last few years.

fn1. Of course, we’ve been treated to a peek at the conclusions. This is not calculated to inspire confidence in the analysis, but it certainly makes criticism more difficult.
fn2. Although the Costello Commission is often presented as if it’s something new, appointing a Commission of Audit has been routine piece of political theatre for incoming conservative governments since the early 1990s. The recommendations almost invariably involve spending cuts, and usually asset sales.

In the course of raillery with the famously scabrous Thames watermen, Boswell reports that Dr Samuel Johnson triumphed with the line “Sir, your wife, under pretence of keeping a bawdy-house, is a receiver of stolen goods”‘

That insult is applicable, with minimal modification to the Institute of Public Affairs. The IPA advocacy of dams in Northern Australia, long notorious among economists as the worst kind of boondoggle is the kind of scandalous behavior analogous to running a house of pleasure. But, as various interactions on Twitter and elsewhere have made clear, the IPA isn’t really keen on dams – that’s just bait to bring in the nostalgic believers in what Bruce Davidson famously called “The Northern Myth”

The real agenda is the creation of a special economic zone in Northern Australia, with lower taxes and less regulation, but apparently still receiving the same flow of public funds from the national government as at present[1]

Proposals for dams are mostly harmless since so few of them are likely to stack up, even with subsidies. But the suggestion of special tax treatment for businesses located in one part of the country rather than another is the worst kind of distortion[2], the public policy equivalent of receiving stolen goods.

And we don’t have to look further than the front page of the IPA website to see the promoter and biggest single beneficiary of this proposed ripoff – none other than Gina Rinehart, Australia’s richest woman and one who has done nothing to earn her wealth except to be very successful in Family Court.[3]

It’s a tough call whether the IPA has reached its lowest possible point in proposing that ordinary Australians should pay more taxes and get less services, in order to provide a targeted tax handout to Rinehart. That’s low, but arguably not as bad as lying in the service of the tobacco industry.

fn1. The NT government is easily the biggest per capita mendicant in the country, as can be seen from its massively oversized Parliament, more suitable to a medium-sized country than a population of 200 000. http://en.wikipedia.org/wiki/File:Legislative_Assembly_at_Night.jpg

fn2. Individual taxpayers already get a concessional “zone allowance”, but it’s small enough not to constitute a serious distortion. By contrast, the corporate handouts being pushed by the IPA could be huge.

fn3 As pointed out in comments, it was actually in the Supreme Court which deals with inheritance disputes, such as those between Rinehart, her stepmother and her children. The Family Court is only for divorces.