Brutal Honesty is the Best Policy

A war of words erupted last week in response to an announcement that the federal government's carbon price will add 8.9 per cent to the average household electricity bill in NSW next year.

Greg Combet responded to the news with a certain degree of smug satisfaction, claiming that the finding vindicated his long-running critique of Tony Abbott as an overblown fear-monger.

"The facts are now coming in, demonstrating the dishonest claims of Mr Abbott," Mr Combet said.

"He should apologise to the people of NSW for this deceitful scare campaign."

As heartwarming as it is to witness such an enthusiastic defence of political honesty from a minister of the crown, perhaps it would be prudent to check the government's own facts.

Mr Combet was claiming that an 8.9 per cent rise in electricity prices would be "below the national average impact predicted by Treasury of a 10 per cent price increase".

He rather conveniently failed to mention that, according to Treasury's figures, the 10 per cent increase in prices would occur over the first five years of the scheme.

This means that according to Mr Combet's favoured source, almost all of the predicted rise in prices has been swallowed up with four years still to go.

It is going to be extremely difficult for the government to put a positive spin on the consequences of its new tax.  Mr Combet will undoubtedly be forced to stretch the truth on many more occasions over the coming months.

The minister is boxed in by his government's ongoing refusal to acknowledge that the carbon price will involve significant pain for ordinary Australians.  The consistent refrain has been that only the "big polluters" will pay, while everyone else will be compensated.

Such an idealised situation is simply unworkable, particularly in the long run.  If the tax is successful in driving down carbon emissions and boosting green power, the number of "big polluters" will inevitably dwindle.

That scenario would lead to a reduction in the revenue sourced from the tax.  Revenue which has been earmarked to fund permanent compensation for consumers.

So if the carbon price is proven to be effective, as Mr Combet claims it will be, it will either force the government to decrease its compensation payments or leave a glaring black hole in the budget.

If, on the other hand, the tax fails to reduce emissions, we will be stuck with a colossal money-go-round that serves no conceivable purpose.

Money will be removed from the private economy to line the pockets of government bureaucrats, before being redistributed to some low income families.  Power prices will rise as a result, along with the cost of all goods and services whose production requires power.

All of this for no environmental benefit.

Those families who have been deemed "too rich" to receive compensation would undoubtedly be very impressed.

The simple fact of the matter is that the carbon tax will cause significant financial pain for a lot of people.  By denying this reality, the government is only going to alienate itself further from its constituents, many of whom are already waiting for the next election with baseball bats in hand.

Mr Combet and his colleagues would earn more respect from voters by approaching the issue with a refreshingly up-front attitude.

Yes, this tax will raise the cost of living.  Yes, it will hurt the economy.  Yes, it will cause pain for ordinary Australians.

The government should acknowledge these facts, and then tell us why it is determined to pursue the policy anyway.  There could be any number of plausible reasons.

Perhaps climate change truly is the greatest moral challenge of our time.  Maybe Julia Gillard believes that the development of green energy is crucial to our future economic success.

Then again, it could be that Labor only agreed to go down this path in an effort to woo the Greens and retain power.

Whatever the reasons may be, the Australian people need to understand why they are being asked to bear the pain that comes with carbon pricing.  Perhaps they can be convinced that it is all worth doing, for the greater good.

But this government will never be able to explain itself satisfactorily while it refuses to even acknowledge the pain it is causing.

Debt

Former Howard Government Minister Amanda Vanstone has written an excellent op-ed piece for the Age on the state of government debt in Australia.

Forget about the Treasurer's pea-and-thimble surplus.  It is a farce and everyone, probably including him, knows it.  With a bit of paper shuffling he is promising to spend a bit less than he receives next year.  The real issue in Swan's budget is net government debt.

In 2009 Labor sought to lift the Commonwealth statutory borrowing limit from $75 billion to $200 billion - a 133 per cent increase.  With the global financial crisis looming, the Australian economy needed a cash injection.  Whether it needed quite as much is a moot point.  That billions of it was wasted in lousy programs and lousy management is undeniable.

One of the practical problems with stimulus spending is the task of retracting the extra funds from the economy when they are no longer required.  Theoretically, there should be a sharp short term boost in government spending to stabilise the situation, followed by a consolidation to pre-stimulus spending levels.

To implement such a strategy in practice requires a combination of political mettle and willpower.  It means prioritising some expenditures over others, and having the mental fortitude to reject many worthy but unaffordable spending initiatives.  On top of this, it requires deep cuts to the very programs that received significant funding increases as a part of the stimulus.

Unsurprisingly, many governments struggle to achieve this - they find it very easy to splash the cash around in response to a crisis, but very difficult to cut back afterwards.  Thus many 'temporary' stimuli are never properly withdrawn.

The Treasurer has often highlighted his two per cent cap on real annual spending growth as a mark of amazing fiscal rectitude.  But he uses as his baseline post-stimulus spending levels.  His idea of fiscal conservatism is to inject a huge stimulus into the economy, then limit further spending increases from those already meteoric levels and hope that revenues will eventually catch up.  True discipline would demand real cuts to nominal spending, returning the budget to something approaching pre-crisis levels.

The year that then-Opposition Leader Kevin Rudd declared "this reckless spending must stop", government expenditures were forecast at $235.6 billion.  Labor was elected just weeks after that famous speech.  In Wayne Swan's latest budget, spending was predicted to reach $376.3 billion. The debt continues to pile up, and the government continues to raise its own borrowing limit.

Last year Swan decided that rather than put our house back in order it would be a good idea to borrow more again.  He went for another $50 billion.  Now, he wants us to borrow more again.  Another $50 billion!  That will take the Commonwealth borrowing limit to $300 billion.  Swan wants to borrow four times what the Howard government was allowed to borrow.

The interest bill is more than $7 billion a year.  Let's put that in perspective.  When Swan was asked just last month why last year's bottom line forecast was out by more than $20 billion, he replied: "Six billion dollars for the reconstruction of Queensland was a pretty big hit."

So there you have it.  Every year we throw down the drain in interest "an unexpected disaster", more than the cost of rebuilding Brisbane after the floods.

Many commentators have argued that the current weakness of certain economic sectors demands continued deficit spending.  They assert that, compared to the rest of the world, our level of debt is relatively small.

By that logic, we will continue to be in fantastic fiscal shape until our debt to GDP ratio hits eighty per cent.  It took the Howard Government a decade to repay the $96 billion of net debt bequeathed to it by Paul Keating.  How long will it take to cancel out Wayne Swan's deficits?  How many billions of dollars will be squandered on interest payments?

The longer the government waits to begin paying down the debt, the more difficult and painful the task will become.  It is far too easy to become complacent about debt, particularly if you are leaving the hard decisions to the next government.

Affirmative Action

The subject of affirmative action is inevitably a touchy one, as any substantive discussion inevitably invites charges of sexism and racism.  The successful racial vilification case against conservative commentator Andrew Bolt has warped the parameters of the debate in Australia, leaving many individuals wondering where exactly the boundaries of acceptable discourse lie.

Just how Mr. Bolt's offending articles qualified as 'racial vilification' is difficult to ascertain.  He was using his public platform to question the appropriateness of so-called 'white' indigenous Australians, who were relatively well off, benefiting from affirmative action which was originally intended to help their more disadvantaged brethren.

The plaintiffs took issue with a number of factual errors in the articles, and fair enough.  There were certainly sufficient grounds for a defamation action.  But racial vilification?  Apparently it is now racist to argue that government benefits for the disadvantaged should actually reach the genuinely disadvantaged.

This issue has recently exploded in the American media, as it has been revealed that the Democrat challenger for Scott Brown's Massachusetts senate seat, Elizabeth Warren, may have benefitted from affirmative action throughout her career.  The blonde, blue-eyed former Harvard professor claims to be 1/32nd Cherokee, though she has been unable to provide much evidence when pressed by the media.

There is currently not enough information available to make a judgement in this case, and Mrs. Warren may not have benefited from her alleged heritage at all.  But the episode does highlight a particular dilemma, the same one that Andrew Bolt was silenced for raising in Australia.

There is an inherent problem with any race-based policy of affirmative action - to put it bluntly, how black must you be?  Should you qualify for benefits if, for instance, you have just one black grandmother?

Or to raise another issue, what if your entire family is black, but is also extremely wealthy?  Should you still qualify for affirmative action based solely upon your race?  Should a privileged indigenous Australian receive preferential treatment over a poor, disadvantaged white man?

James Taranto of the WSJ, considering the question of affirmative action, quotes Ann Althouse:

In the 1960s, she observes, "there was an opportunity, as a culture, to adopt the mental discipline that is colour-blindness."  Everyone agreed "that discriminating against black people was terribly wrong."  But some believed it was necessary to discriminate in favour of blacks in order to overcome the legacy of the past.

"We went down the affirmative action road," Althouse writes.  "We are very far down that road.  To say 'let's start being colour blind now' feels completely different.  Many, many people who think of themselves as good people, certainly decent people, think they've been doing the right thing and worry that those who are pushing for colour blindness are not the good people.  It's at least terribly complex."

This entire conversation is fraught with racial tension, so much so that in Australia one must apparently weigh up the legality of certain arguments.  The status quo is firmly entrenched.

Surely a more sensible policy, however, would be to provide benefits based purely upon need, rather than race.  By all means, develop policy to help the millions of Americans living in poverty - including the tragic number of African Americans.  Do everything humanly possible to boost the chances of those Australians who are fundamentally disadvantaged - particularly Aboriginals living in remote areas.  But base any policy response on need, not race.

Racial divisions will continue to exist until our society becomes completely colour blind, something that demands neither abuse nor preferential treatment based purely upon the colour of one's skin.

Noisy Chickens

Paul Sheehan has an article in the SMH today which ably summarises the series of economic challenges currently facing Australia.

Here's six noisy chickens, each worthy of a column.  General confidence in the federal government is low.  The non-mining economy is slowing.  Retail is flat.  Job creation is contracting, especially full-time jobs.  Industrial and workplace disputation is rising. Small business formation has fallen off a cliff.

All of these problems are interrelated to some extent, and few are being addressed by anyone in Canberra.  The government is preoccupied with the imposition of new taxes and regulations, which will undoubtedly exacerbate these issues.  Meanwhile, the opposition is focused more on winning the next election than on the articulation of a bold agenda.

The Treasurer rather comically responded to the Reserve Bank's recent interest rate cut as though it were a testament to the strength of his economic management.  In actual fact, the RBA's decision was a direct response to the alarming weakness of Australia's economy beyond the mining sector. Mr. Swan has failed to properly address the yawning gap in performance between the different segments of our economy.

The Liberals have been equally disappointing in this regard, limiting their policy proposals in order to provide a small electoral target.  In fact, the Coalition seems to be almost as complacent as the government when it comes to the health of Australia's economy.

Mr. Sheehan berates Labor for attempting to 'take credit for the hard work done before it ever came to power', referring to the remarkable position bequeathed to Mr. Swan by the previous government.  Indeed the strength of Australia's banking sector, a direct consequence of some Costello-era reforms, is often a forgotten reason behind our insulation from the Global Financial Crisis.  Labour market flexibility, an enviably low unemployment rate and the substantial budget surplus also made Labor's job much easier.

But it is no longer good enough for the Liberals to cite the Howard Government's record as sufficient evidence that they are superior economic managers.  Mr. Abbott's front bench needs to develop a policy platform to address all of the issues listed above, before trouble inevitably strikes.

An incoming Coalition government could begin by dismantling the institutionally biased and dysfunctional Fair Work Australia system and reintroducing much needed flexibility to the labour market.

The drop in small business formation is at least partly rooted in government debt, which is making it more difficult to procure startup loans.  A return to surplus and a focus on freeing up the loan market would certainly yield benefits, and a business-friendly tax reform package would further energise the lagging retail sector.

But perhaps the most urgent question confronting us is barely mentioned by the political class. What happens when the mining boom ends?  Mr. Sheehan quotes Albert Edwards, an employee of Societe Generale:

"We see a credit bubble built on a commodity bull market, which is based on a much bigger Chinese credit bubble."

Bubbles always burst.  Demand from China will inevitably slow, leading to a collapse in commodity prices and wiping out the one factor that currently keeps us from flirting with recession.

How would a Liberal government insulate the Australian economy from this eventuality?  The Coalition's economic team needs to seriously consider this specific question.  But any policy response must begin with measures designed to wake the conventional sectors of our economy from their slumber.

Labor's tax policies may actually narrow the gap between mining and non-mining performance by dragging the former back into the field.  A conservative agenda would contrastingly seek to lift the other sectors to a higher standard, improving their ability to compete.

Disappointing Jobs Figures

It was slightly bemusing to witness the American media's rather complacent assumption over recent months that the economy was on a path to permanent recovery.  Over the last several years, the jobs market has warmed noticeably during the Christmas season only to weaken again in the following months.

Unfortunately, the most recent jobs report suggests that history may be about to repeat.  Only 115,000 net jobs were created last month, continuing a downward trend that began in March.  That is an awful number.

The official U-3 unemployment rate has dropped to 8.1% - because 342,000 more people dropped out of the labour force.  The participation rate now stands at 63.6%, down from the 65.7% figure that President Obama inherited.  If those who have simply given up on finding work are counted, the actual unemployment rate reaches a diabolical 11.1%.

Republican challenger Mitt Romney recently claimed that the American economy should be adding 500,000 jobs per month, a number that seems rather outlandish when juxtaposed with the current recovery.  Historically however, his claim is justifiable.  In April of 1984, the corresponding month of the Reagan presidency, 480,000 jobs were created.

The current numbers are simply not good enough, and there is little hope of a renewed policy response emerging prior to election day.  The end of the year, regardless of November's victor, will see the implementation of a series of tax increases that could even threaten to push the economy back into recession.

It matters not what Republicans pass in the Congress.  Democrats still paralyse the Senate, and Mr. Obama will remain in the White House until at least January of next year, with the power to veto any conservative proposals.

America needs a decisive change of course, and the President is the only man who can deliver it. The status quo is not working.

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.

Incentivising Super

A report in the Australian yesterday detailed looming government plans to weaken superannuation related tax breaks in next month's federal budget.  The existing arrangements were designed to incentivise voluntary saving, particularly among higher earners, so as to reduce the pressure on government finances in future decades.

The finance sector has reacted swiftly to the news, with a number of industry leaders warning of potential damage to the budget bottom line in the future.  The measures currently under consideration by the expenditure review committee would aim to increase revenue by several billion dollars in the short term, undoubtedly in an effort to achieve Labor's promised budget surplus for the coming financial year.

Financial Services Council chief executive John Brogden had this to say:

"It would be very short-sighted for the government to try and pull out more tax now," Mr. Brogden said last night.  "All they'd be doing is leaving future governments with a bigger bill for pensions, healthcare and aged care."

Mr. Brogden has hit the nail on the head.  The objective of these tax breaks has always been to increase the number of self-funded retirees, thereby lowering the financial burden on future governments as the population ages.

Without unambiguous incentives to contribute voluntarily to their super, more Australians will elect to keep their wages in full.  This will inevitably mean more retired individuals on the pension, unable to fund their own care and draining money from other government services.

One could even make the argument that existing incentives for super contributions should be boosted, rather than weakened.  For example, the current system includes a cap on annual concessional contributions - the lower tax rate for voluntary super only applies until a certain point.

If you are fifty years or older, the current cap on annual concessional contributions is $50,000 ($25,000 for younger workers).  It had previously been double that, prior to changes enacted by the current government in the 2009-10 financial year.  So once you have invested $50,000 in your super for the year, the tax incentive disappears and any further contributions are taxed at the regular wage rate.

Why is this?  Surely a government with true foresight would implement policy settings with the intention of maximising voluntary superannuation investment.  All politicians seem to enjoy a good whinge about the difficulties of Australia's ageing population - well, here is a chance to do something intelligent about the situation.

This government has previously demonstrated that it does not quite understand the power of tax incentives, particularly as they apply to wealthier individuals - think of the private health insurance rebate.

David Crowe reports:

Shaping the government strategy is the belief that the investment industry will gain greatly from the increase in the super guarantee levy from 9 per cent to 12 per cent by 2020, letting all workers save more for retirement.

The increase in the levy, incidentally, is funded by employers, which means that it will be subtracted from workers' future wage growth.  But leaving that aside, this increase in the guarantee, coupled with decreased tax incentives, can only lead to greater complacency and a reduction in voluntary contributions.

In reality, the compulsory level of super investment is vastly insufficient to fund anyone's retirement, particularly as the average life expectancy continues to increase.  It is of crucial importance that workers take the initiative and save aggressively for their autumn years, even as that means sacrificing some of their take home pay in the present.

This will not happen if they see no clear, unambiguous incentive.  The tax system should therefore prompt individuals to contribute as much to their own retirement as possible.

Governments should remain eternally mindful of the fact that when they tax super contributions, they are effectively taking money from future retirees.  The less they take now, the less they will be required to fork out in the future.