14
Apr
2019

Coalition Election Campaign Starts Poorly

Is Coalition Able to Persuade Electorate of Dangers in Labor’s Program?

The campaign for the election on 18 May started officially on11 April although statements of policy had been made prior to that, as had media assessments. Two prominent conservative commentators had in fact already indicated their view that Labor will win.

Terry McCrann wrote on 11 Apr “One thing is absolutely crystal clear about the election. If Labor wins — as to me, seems certain — it will hit the ground running, straight after the election, in June”. He added that “it has a program to dramatically increase taxes on negative gearing, franking credits, capital gains and trusts; it will not cut the company tax on big companies from 30 per cent, which is now very uncompetitive, with the US down to 21 per cent, and will revisit the cut on medium-sized companies; it will also further squeeze especially small and medium-sized businesses with the so-called “living wage”; and then there’s the whole issue of power prices, which will just continue to increase and increase at an accelerating rate under Labor’s so-called climate change policy” (see McCrann Says Coalition Won’t Win).

Andrew Bolt doesn’t rule out the remote possibility of a Coalition win but argues that Morrison must upgrade himself and the Coalition. He asks “Where on earth is your mongrel? Your fight? Your big wake-up-Australia cry? You’re starting behind, remember. Three seats short of a majority already, and with every poll saying you’re headed for a hiding”. Bolt adds that the Coalition also faces a starting point that the “polls show they’ve been itching to do for two and half years – to vote out this brawling, divided Coalition Government that’s given us three different Prime Ministers but next to no wage growth”. Yet, he asks,  “what does Morrison do in his first and most important speech of the election campaign? What a snooze-fest” (see Bolt Says Morrison Must Attack Labor Policies).

The Weekend Australian’s editorial does not predict the likely winner of the election campaign but points out that, while “the Prime Minister is offering to boost incomes through a larger economy, running on his party’s traditional values, such as hard work, enterprise and aspiration”, the Opposition Leader promises to “radically change an economic system … Labor’s method is more spending on services, funded by new taxes on high earners, property owners, retirees and investors. To raise award wages for some workers, Mr Shorten will hand more power to unions and revamp the terms by which the industrial umpire determines the minimum wage. This is old-school Labor, buried in 1983 after Bob Hawke won office: redistribution to promote equality. ‘When everyday Australians are getting a fair go, then this economy hums’, Mr Shorten said on Thursday in a backyard appeal to voters”itorial (see OZ Editorial).

In short, there is a wide view that a win for Labor would likely mean a major change in how the economic system operates, with a bigger role for government services, a major deterrent to private investment and a slower rate of economic growth. Australia would move away from America and towards the European Union (sic) from which some members are trying to escape. This possibility should provide a basis for a Coalition attack.

What is the Likely Effect of Labor’s Proposed Expansion In Government

The extent to which government might expand under Labor is indicated by its proposed increase in the level of taxation to almost 26 per cent of GDP over the next ten years.  At this level Labor would be the highest taxing government ever: the previous highest was 24.3% of GDP in 2005-06 (see AFR Quotes Treasury Estimates Of Australia Being Highest Taxer Under Labor).

By contrast, the Coalition’s 2019/20 budget estimate for taxation is 23.3% of GDP and that is not estimated to increase over the following three years. It also has a self-imposed undertaking to not increase taxation to more than 23.9% of GDP.  Note that if tax levels were at Labor’s 26% of GDP next year that would mean total taxation of about $520bn, or about $60bn or 13% more than estimated by the Coalition ie this would be about an increase in the size of government at the Federal level.

There are precedents for large increases in the size of the Federal government in Australia.

First, when the Labor government was in office under Hawke from March 1982, taxation levels increased in the four years from 1982-83 to 1986-87 by no less than about 60% in real terms. In 1986-87 taxation revenue reached the same level as is estimated next year – 23.3% of GDP – up from 21.7% in 1982-83. At the same time, moreover, the budget deficit increased and ran at a much higher level, which led then Treasurer Keating to warn that Australia was in danger of being regarded as a banana republic. Then, thanks mainly to then Labor Finance Minister Walsh, action was taken to reduce spending for three years in a row (from 27.0 % to  22.9 % of GDP) and a budget surplus also followed for three years. An almost complete reversal of budget policy.

Second, in response to the global financial crisis originating in the US, the first Rudd government (2007-10) moved the budget from a surplus of 1.7% of GDP to a deficit of 2.1% in 2008-09 and deficits and relatively high levels of spending continued into the next few years. Whether this had any substantive effect in “saving” the economy remains in dispute. But Australia’s relatively strong  banking system and high levels of trade with China certainly helped maintain growth and prevent any recession. Then, despite expenditure reductions by the Abbott government in 2014-15, deficits continued at relatively high levels under the Turnbull government (2015-18) until 2017-18 when that government brought the deficit down to  0.5% of GDP. However, expenditures remained at the relatively high level of 24.5% of GDP in that year and have continued at around that level even after the Morrison government took office in August 2018 and produced the 2019-20 budget.

In short, Hawk’s attempt in the 1980s to effect a large increase in the size of government did not succeed and nor can Rudd claim success in his attempt to adopt a Keynesian increase in spending and deficits in response to the global financial crisis which centred in the US. The Australian economy was primarily “saved” by our relatively strong banking system and our trade with China. However, under Labor and Turnbull,  taxation levels have crept up again to over 23% of GDP since 2018-19 and we now face the prospect that Labor would increase that further to 26% of GDP at some time over the next ten years.

Conclusion

Labor’s proposal to increase the level of taxation to 26% of GDP, and to concentrate increases on those on high incomes, is likely to have adverse effects on investment and economic growth (see Uren’s Analysis Shows Labor’s Taxes Increase More Than Spending Plans). Such adverse effects would also come if Labor proceeds with reductions in emissions and increases in renewables at both the Federal and State levels. History also suggests that Labor finds it difficult to, as Morrison has said, “manage money”. Also, while it claims to be aiming for bigger budget surpluses than the Coalition, it is unclear as to how much it will aim to exceed the Coalition’s present estimate of about 0.5% of GDP.

As to the budget overall, we can speculate that with Labor having, say, a 1% GDP budget surplus and 26% of GDP from tax, that leaves 25% of GDP for spending. This is only about 0.5% of GDP higher than the Coalition’s estimates for each of the four years to 2022-23. It suggests that Labor’s additional spending for each of those years might not be much greater than present Coalition estimates. Still the opportunity is there for the Coalition to attack Labor’s proposed increases in levels of taxation and spending, reminding the electorate of Labor’s failures with higher levels of spending in the past and the adverse economic effects of higher levels of taxation.  This requires Morrison to stop announcing “handouts” and concentrate on informing the electorate of the problems with Labor’s proposals.

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