Australia Day & Some of Its Consequences; Budget & Spending Levels

Our Political System

With minimal editorial change, today’s Australian has published a letter of mine praising the virtues of the present Australian political system. The Letters Ed interpreted it more as an attack on the US system (which it is indirectly) but its main intent is to question the merits of the alternatives proposed for us, including the republican one for which our current PM led the charge in the 1999 referendum but is now suggesting that any move should await the death of the Queen. While he knows Prince Charles favours a republic, he is off track even there: as the monarchical head for Australia Charles would have no legal power or influence on policy.

The substantive question is whether a republican President would be likely to improve the workings of our political system. If he or she were to be given any powers, the answer is a clear “No”: the likelihood is that it would make the system harder to operate. Another letter writer below sets out one of the problems and Paul Sheehan in his article in the SMH also identifies potential problems. The fact that five State Premiers indicated support for a republic probably mainly reflects the view that we should not have a Pom as head: but this is almost certainly by-passed by making our real head of state (the GG) an Australian.

Selecting a head of state looms as a PC nightmare

The Australian, January 29, 2016

The idea of a republic and an Australian head of state has strong appeal. However, given the dominance of political correctness in society, the process of selecting a head of state shapes like a nightmare. I can envisage the outcry if a head of state happens not to be of the Left’s liking. Words such as misogynist, Islamophobic, racist, bigot and fascist will be used, even when unfair or inaccurate. Worse, we could end up with a head of state who laments Australia and the majority of its citizens.

Do we really want to put ourselves through that? I can imagine picking up the newspaper or watching television only to be hounded as to why such and such a person is unfit to represent modern Australia. There is nothing the media loves more than polarising a debate into two extremes with no middle ground. It would be a recurring nightmare depending on the length of the term.

If we are to vote in the republic, we must be very careful which system we choose. Selecting a head of state in this climate would be a free kick to the Left who will use all the tools in its bag of tricks to get its way. As much as the notion of a republic resonates, I feel the serpent of political correctness waiting to bite.

Matt Sinclair, Ivanhoe, Vic

Dwindling US leadership

Australia Day always produces suggestions for changes to the Constitution but rarely do these have substantive appeal or recognise the problems. The reality is that we probably have the best political system in the world. This is revealed when we consider the operation of the system under the US republic.

Every four years it produces a president who seems able to determine policies that extend beyond his constitutional powers on foreign and defence policy and to implement policies with minimal debate in congress. One result is that under Barack Obama, the leadership of the US has dwindled significantly and, as Greg Sheridan indicates (“Obama is to blame for the Donald”, 26/1), has produced candidates for the next president such as Donald Trump and Bernie Sanders with apparently simple answers to complex problems.

Australian political parties also produce leaders with simplistic policies but they are subject to extensive debate within and between the relevant parties and in parliament. As such, they are much more alterable. While that could continue under a republic with a leader who has minimal powers, the dangers of having an Obama are all too real when one reads the views of advocates and the candidates in the US.

Des Moore, South Yarra, Vic

The Budget and Expenditure Levels

For Treasury Head, John Fraser, to outline the budget problem we face is timely given the return of Parliament next week. I have highlighted a few sections of his address and repeat some below. PM Turnbull has also been having timely pre-parliament interviews which range across the budget and the economy.  Fraser’s reference to the importance of maintaining our AAA credit rating has attracted attention including from Turnbull who told 3AW Melbourne that the media was exaggerating the risk. But equally Turnbull himself needs to take more of a leadership role in emphasising the need to improve the budget and debt position. Even after the Mid-Year review the outlook for bringing spending under control remains gloomy and a long way short of the “marker” of 25% of GDP suggested by Fraser.

Note also Fraser’s reference to the need for action on policies to improve growth, which Turnbull has also  yet to actively pursue. And Fraser does not mention  industrial relations, on which the government said it would provide a detailed response on the Heydon report in the new year.

On some specifics in Fraser’s address (his comments in bold).

First , he rightly points out that while “the work of fiscal repair during the late 1990s and early to mid 2000s provided an important buffer for when the global economy was hit by the GFC, … a very substantial amount of the revenue windfall was used to lock-in long-term spending commitments. And since then, the rate of Government spending growth has remained high despite considerable savings measures over more recent years”. In short, the Howard/Costello government should not have allowed so much spending of the revenue from the commodities boom.

Second, on present estimates “spending will not get below 25 per cent (of GDP) at any time over the next decade”. And this does not allow for any election promises, of course.

Third, “Generally speaking, our welfare spending is highly targeted and redistributive. After taking into account the low level of tax paid by those on lower incomes, Australia redistributes more to the poorest 20 per cent of the population than any other OECD country except Denmark. As a side note, the OECD recently reported that Australia spent well below the OECD average on pensions. But when other forms of assistance are included, such as non-cash benefits – for example, subsidised health care, and superannuation tax concessions – Australia compares more favourably. But Australia shouldn’t be aiming to compare itself with the high welfare countries in the OECD.

Fourth, with lower than expected growth in working age population and in wages, “in total, we now expect to receive around $39 billion less in tax receipts in 2016-17 than we did at the time of the 2013 PEFO”. And “the expected underlying cash balance has deteriorated by some $37.9 billion, with the most recent estimate being a deficit of 2.0 per cent of GDP for 2016 -17” ie there has been virtually no cut in spending to offset the loss in revenue.

Fifth, “Net debt is approaching levels not seen since the early 1990s recession, which at that time was the highest since World War 2. We are yet to return to pre-GFC net debt levels …It’s important that Australia maintain its top credit ratings, which helps to contain the costs associated with servicing public debt. Australia is one of only ten countries with a triple A credit rating from all three of the major rating agencies, reflecting our reputation for fiscal prudence. But this rating is dependent on credible fiscal consolidation and a smooth transition to a more diverse economy. We should not be complacent about this. I know from personal experience during the financial crisis how important a strong credit rating is to investor confidence. If we are to permanently reduce net debt, we are going to need to achieve sustained ‘structural’ budget improvements”.

Sixth, “Simply increasing the overall tax burden to raise more revenue is not the answer. It runs the real risk of distorting economic incentives and lowering international competitiveness with negative impacts on investment, growth and job creation. Of course, it is always a matter of judgment – but seeking to keep spending below 25 per cent of GDP may be a useful marker. This would mean that we would seek to avoid having spending reach or exceed the levels met in periods of especially adverse circumstances in the past few decades”.

Seventh, “Faced with the same difficult choices that Australia now faces, many developed countries have managed to undertake significant budget repair in a relatively short time. While at the same time, they have seen economic growth prosper”. Fraser gives three examples of countries achieving a recovery in growth while reducing budget deficits (The US, the UK and Ireland).This is an important comment that helps answer the Keynesians who oppose reducing deficits because it risks lower growth.

Eighth, “economic growth will be critical for fiscal sustainability as well as continued improvements in living standards. This will require ongoing productivity-enhancing structural reform … this includes reforming competition policy and implementing the Harper Review recommendations. Improving productivity is a far more sustainable way to boost economic growth than relying unduly on an exchange rate depreciation. These growth-enhancing policies also very much include tax reform. Tax is not just about raising revenue, it is also about helping to shape the economy so that we attract and deploy resources in a manner to promote long term growth. The arguments for a tax mix switch rest heavily on encouraging more jobs through a higher growth path. Tax reform is a complex issue and is very much the focus of the Government at the current time”.