Money Down the Drain

The Opposition has rather missed the point today with its response to the SchoolKids Bonus policy, set to appear in Tuesday's budget.  Under the means-tested proposal, parents will receive $410 from the government for every primary school student and $820 for every teenager in high school. Shadow Treasurer Joe Hockey sought to link the policy to public dissatisfaction with the carbon tax:

"This has got nothing to do with education and everything to do with a carbon tax and the fact that people are about to be hit with a great big whack on their cost of living expenses," he told ABC TV on Sunday.

"The Labor Party is panicking about the impact of the carbon tax on everyday Australians and they are trying to give people a sugar hit with an upfront payment."

Mr. Hockey is not necessarily incorrect.  This policy is a transparent bribe, designed to pump some life into the government's ailing poll numbers.  But instead of seeking to link this proposal to the carbon tax, the Liberals should have been highlighting the remarkable fiscal irresponsibility of the policy, particularly within the context of an allegedly tough budget.

The SchoolKids Bonus, which will replace a Howard-era tax refund, is nominally designed to assist parents with education costs.  But the money is not targeted, nor is it conditional - the government will essentially just be sending a blank cheque to hundreds of thousands of households.

Consider, as an example, a relatively poor family in Sydney's western suburbs, with two children at high school and one in primary education.  This family would receive $2,050 from the government under Julia Gillard's proposal.  Does the Prime Minister really imagine that every cent will be spent on education costs?

Of course not.  The government has no idea how this money will be spent.  It could pay for the groceries, or new rims for the car, or even a few six packs, and Wayne Swan would be none the wiser.  There are surely many better, more targeted ways to assist parents with the costs of education.

This is yet another example of the sort of egregiously undisciplined fiscal policy that we have come to expect from this government.  The Treasurer will no doubt project a surplus on Tuesday, using all manner of financial trickery.  But if not for schemes such as this one, that surplus could have been real.

The Forgotten Elephant

Percy Allan, president of the Australian Institute of Public Administration and former head of the NSW Treasury, had some choice words to say about the NBN yesterday.  The project seems to have avoided the headlines in recent times, slipping somewhat under the radar.

That is regrettable.  Such a huge investment of taxpayers' money - the biggest single government expenditure in Australian history - should be subject to the most intense of scrutiny.  Mr. Allan would seem to agree:

"That choice might be to spend $36 billion ripping out copper wire and disconnecting Foxtel cables and starting afresh, which is the proposition we are facing.  But had they examined the need, examined options and consulted they might have discovered cheaper ways to fill the need."

"If a lower than expected proportion of people end up subscribing to it because they don't want to pay Rolls-Royce prices for a Rolls-Royce service, this thing is going to be a financial disaster - watch public opinion then."

Mr. Allan suggests that the Labor Party's image is at stake, not just now, but for many years to come.  The party already suffers from the impression that it is profligate - a stigma that has lasted since the Whitlam government of the 1970s.

Mr. Whitlam may be remembered fondly by many people, but his legacy has contributed significantly to the lingering public impression that conservatives are by default better economic managers.  His government continues to haunt the Labor Party even now, four decades after it left office.

Memories fade, and that impression of profligacy will weaken, with time - provided that Labor consistently bucks the stereotype.  The Rudd and Gillard governments have thus far failed in this regard - and if the NBN goes pear shaped, then Labor will struggle for fiscal credibility for decades to come yet.

Swan's Surplus

Wayne Swan has been more prominent in the media lately, as he has begun to lay the rhetorical groundwork for his fifth budget, to be delivered on May 8.  The Treasurer is talking a tough game:

Yesterday, Treasurer Wayne Swan told a Sydney business breakfast that Australia should expect a tough budget in the face of lower-than-expected tax revenues and the need to reach a surplus.

"We will need to cut and cancel existing programs if we are to meet our targets and we'll need to redirect some spending to where it is needed most," he said.

This all seems a little too familiar to me.  Every year, Mr. Swan spends the month in the lead-up to his budget emphasising the need to engage in fiscal restraint.  In the past he has inevitably failed to cut spending in any truly significant way - and any cuts at all in recent years have been entirely neutralised by new expenditures.

The 'lower-than-expected tax revenues' to which Mr. Swan referred yesterday are also a recurring theme, and there is a very simple explanation as to why.  The government has staked so much of its economic credibility on a 2012-13 budget surplus that it has been forced, each year, to manipulate Treasury's forecasts in order to make the promise seem attainable.

Thus we saw some ridiculous assumptions in last year's budget.  Mr. Swan then promised that 500,000 new jobs would be created by mid-2013, yet in the last twelve months we have witnessed the Australian economy add just 10,000 net jobs.

Last year's rosy prediction of GDP growth reaching 4% over 2011-12 has been replaced by actual growth of just 2.5%.

The forecast 2011-12 budget deficit of $22.6 billion has already ballooned out to nearly $40 billion.

Mr. Swan last year predicted that the unemployment rate would drop to under 5% during 2012, and fall further in the following year, but it remains above 5% and is assuming an upward trajectory.

And of course, last year's budget predicted that tax revenue would shoot through the roof just in time to deliver a 2012-13 surplus.

The Treasurer can use 'lower-than-expected tax revenues' as an excuse if he likes, but he and his department must have known, even at the time, that last year's assumptions were wholly unrealistic.

Mr. Swan now finds himself facing a monumental task - a required turnaround of roughly $40 billion in the nation's fiscal condition within a twelve month period.

This is a problem of the Treasurer's own creation - he has consistently put off the tough decisions, choosing instead to manipulate the figures and hope for an unrealistically optimistic scenario.

When he hands down his fifth budget, Mr. Swan will undoubtedly again find a way to predict a razor-thin surplus for the coming financial year.  New taxes, with surprisingly high revenue streams, will be implemented to boost the bottom line.  Revenues will be moved into 2012-13, and expenditures shifted into the forward estimates.  Certain spending will remain off the books - the NBN being the most prominent example - and some programs will need to be cut, if belatedly.

Of course, we can also expect to see one or two overly optimistic assumptions.  The final fiscal outcome for 2012-13 may not be revealed until after the next election - so Mr. Swan's true day of reckoning may never come.

Abbott the Ravager

Prior to the Labor leadership ballot in February, Kevin Rudd said the following:

"And they are the millions of Australians who depend on us to form a Labor government and to prevent Mr. Abbott from inflicting on Australia the ravages of the most extreme right wing government that the country will have ever seen."

It is remarkable how often you hear this sort of thing from Labor frontbenchers - you would think that the government's foremost raison d'être is to prevent Tony Abbott from becoming Prime Minister.  Aside from say, actually governing.

But in any case, for a man who is so often accused of being a rabid right winger, and of secretly harbouring an intense desire to reinstate Work Choices, Tony Abbott really does seem to lack a deeply felt, instinctive sympathy for liberal economics.

Consider the Opposition Leader's pet paid parental leave scheme, which he resolutely clings to despite dissatisfied rumblings from within his party room.

The pure argument, from the perspective of classical liberals, would posit that parents should ensure they are able to support a child financially before deciding to have one.  It would argue that it is unfair on those who make a conscious decision to be childless that they are forced to fund the choices of others.

Is it a nice idea, that a new parent should be granted money without labour, simply by virtue of being a parent?  Certainly.

But is it fair?  Too often the word 'fair' is hijacked so that it may be attached to ideas that are simply 'nice'.

In any case, whether you believe a paid parental leave scheme is necessary or nice, Mr. Abbott has proposed a scheme which is far more generous than the government's.  Which, coming from a leader of the Liberal Party, can only mean one thing - Mr. Abbott is, in this instance, sacrificing liberal economics in order to play politics.

Combine this with the report today by Stephanie Peatling that the Opposition Leader is planning to extend the childcare rebate to cover nannies:

One of Mr. Abbott's first acts in a Coalition government would be to ask the Productivity Commission to examine how much it would cost to extend the childcare rebate for in-home-care, such as nannies, in recognition that existing arrangements do not meet the needs of many families.

The idea that it is the government's job to 'meet the needs' of families does not conform with the spirit of economic liberalism any more than Kevin Rudd's stimulus conformed with the spirit of fiscal conservatism.

Our tax system is already littered with measures which are designed to ease the burden on struggling families - many of which are not even means tested.

It would be easy to accuse Mr. Abbott of using these issues in an attempt to gain political advantage, and such a critique would be fair to a point.  Much has been written about the Liberal leader's supposed problem with female voters - is it any coincidence that his most significant breaks from liberal orthodoxy have been on policies which concern women?

On the other hand however, many of the rebates and credits which are designed to help families are actually relics of the last Coalition government.  Were they proposed largely for the purpose of buying votes?  Perhaps.  But there is more to it than that.

John Howard was a Prime Minister who combined liberal economic views with a broader sense of social conservatism.  His underlying worldview emphasised the family unit as an essential building block of society - everything, in Mr. Howard's view, was rooted in family.

Thus Mr. Howard believed in using the powers of the state to protect and encourage the family unit, and this was reflected in his social spending.  Money was spent not on welfare or social justice, but on childcare rebates and the baby bonus.

Tony Abbott is in the same political family as John Howard - economic liberalism tempered by social conservatism.  The former Prime Minister showed all of us that this can be an electorally potent combination.

But Australia is currently in desperate need of a government with genuine fiscal restraint.  Mr. Abbott, should he one day become Prime Minister himself, needs to assemble a team of economic advisors who will be unafraid to reign in their leader's tendency towards conservative social spending.

Picking Winners

When we talk about wasteful spending by government, the discussion often focuses on explicit discretionary measures - think school halls and pink batts.  We also talk about the growth of the public sector.  You may recall that even Kevin Rudd, back when he was pretending to be John Howard lite, promised to 'take a meat axe' to the public service:

Kevin Rudd will take "a meat axe" to the bloated public service and end what he calls the Government's culture of secrecy and ministerial unaccountability.

There is another category of wasteful spending, however, which often manages to pass under the radar.  The costs and benefits of government subsidies are difficult to catalogue effectively because, quite simply, there are so very many of them.  In general, each individual subsidy uses a relatively small amount of money, so in the wider scheme of the $350 billion plus federal budget these expenditures get lost.

Government subsidies distort the market, which in itself damages economic performance.  But from a purely fiscal perspective, it is important for governments to ensure that for any given subsidy, the benefits outweigh the costs.

Consider the recent news that Holden will receive $275 million in taxpayer subsidies (combining federal and state initiatives) to keep the company's operations here for another ten years.  The car industry has benefited from subsidies for many years, with the support of both political parties.

There are certainly sentimental arguments in favour of such policies:

Holden is an Australian icon.  It's Adelaide plant produces two of the four biggest-selling cars in the nation.  It would be a very brave Prime Minister who pulled the plug on Holden.

There are perfectly valid economic arguments as well - most of our first world competitors also subsidise their car industries, so withdrawing funds for a company such as Holden would place us at a competitive disadvantage.

Then there is the more classically liberal economic worldview:

They argue that if there is no prospect of Australia's car makers being able to survive without government subsidies, we should cut them off now.  In effect, the government will pay almost 20 percent of the cost of Holden's new models: what other industry receives such support?

Both sides, it must be said, have perfectly valid points to make, and thus this is an example of the sort of government subsidy that needs to be aired extensively in open debate.

But what should be made of this next example?

A year on, The Conversation is attracting 20,000 individual readers a day, reading on average 38,000 articles, putting it just in the top 100 most read websites and on par with Crikey.

Now, The Conversation is a website of reasonably high quality.  While it is notoriously slanted towards one end of the political spectrum, the articles are of a generally high standard and the site is well organised.

The site's founder Andrew Jaspan, who has also been chief editor of The Age, argues that there is clearly a market for The Conversation:

There is an appetite for the unexpurgated views of academia.  He argues that as the fortunes and reputations of the traditional media decline more readers will turn to academics for trusted information.

For the record, I think Mr. Jaspan is quite correct, at least up to a point.  There is an online market for the views of academia, and The Conversation does a good job of appealing to that market.

So do tell me - why is The Conversation, a site which employs 26 people, being funded by $6 million in mostly taxpayers' money?  If the market for this product does so clearly exist, why must the government effectively act as a venture capitalist and subsidise the site's early existence?

When Mr. Jaspan wanted to start up The Conversation a year ago, he had every right and every incentive to do so.  Nobody would have stood in his way.  He could have done exactly what other new businesses do - he could have procured capital, from either his own pocket or through private lending, and invested it in his idea.

But he instead held out his hand to government, and our esteemed public representatives happily obliged.  Why?  Because they liked his idea.  It really was that simple.  Some politicians thought that Mr. Jasper's idea of an academic-centric opinion website was just fantastic, so they decided to give him millions of hard earned tax dollars to give it a go.

This, in my view, is both wasteful and downright improper.  Government is not a venture capitalist firm.  Politicians have no right to invest dollars that they have procured from hard working citizens to fund their own pet projects.

I am not picking on The Conversation - you cannot blame Mr. Jaspan for seeking public funds if they were available.  Most of us would do exactly the same, given similar circumstances.  This is but one example within a widespread culture of subsidy which often goes completely unexamined.

Make no mistake.  There is an argument to be made for subsidies, but no such argument is convincing unless it carries economic (rather than purely sentimental) weight.  Too many governments, of all denominations, use subsidies to pick winners.

Taxes should be used to fund essential services, not to hold up irrationally favoured industries or provide money for politicians' pet projects.