How to be a Thoroughly Liberal Government

How to be a Thoroughly Liberal Government

On Saturday 10 April 1954, Robert Menzies gave an after dinner speech to the Institute of Public Affairs.

The event was a private one, held in Melbourne, and Menzies relished what he thought would be the ‘last opportunity’ to speak in ‘a humane and civilised fashion about the issues before this country’ before election day, which had been set for 29 May. (Menzies knew something his audience didn’t: three days later in Canberra he would announce the defection of the Soviet diplomat Vladimir Petrov, and the 1954 election would be consumed by the Petrov Affair).

The full transcript of Menzies’ speech has now been reproduced for the first time on the IPA website and an extract is available in this edition of the IPA Review. It’s a casual but fascinating exploration of his ideas of the relationship between principle and pragmatism in politics. Fascinating for two reasons: first, it gives us a picture of Menzies as a politician and leader, and second, because it offers a guide to help a modern Coalition government navigate what Menzies saw as ‘the greatest problem in politics’.

Menzies told his audience that ‘political principle, a genuine philosophy, a genuine body of doctrine in your own mind’ was ‘the most important thing in public affairs’. People go into politics ‘because they have beliefs, because they have a faith, because they believe there is something that matters for their own country.’

In Menzies’ view, the art of politics was discovering a path through which the principle can be made pragmatic. Expediency and philosophy have to work together.

This was, unfortunately, a political relationship the late Abbott government was unable to forge. On two of its central challenges— fiscal policy and freedom of speech—neither necessary political compromise nor unabashed principle were allowed to flourish. Menzies’ speech gives us a clear reflection of the ethical trials of political decision-making that the new prime minister would be wise to consult.

SPENDING AND THE AUSTRALIAN FISCAL CRISIS

Malcolm Turnbull takes office at a time when the process of budget repair is sclerotic at best. The Commonwealth budget has still not recovered from the Global Financial Crisis and the decisions made by the Rudd government during those years. The Rudd and Gillard government established what seems to be a permanently higher spending pattern.

Commonwealth government payments—that is, spending—as a percentage of GDP is 25.9 per cent in 2015-16, down only 0.1 percentage points from 26 per cent as it was when Kevin Rudd was launching his stimulus package. By the end of the Labor government’s time in power, spending declined to 24.1 per cent in 2012-13—in part due to deliberate effort, in part from the recovery easing welfare rolls, and partly by some creative accounting.

Yet this rollback was hopelessly incomplete. Wayne Swan made much of his belief that ‘If we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again’, as he put it in a 2011 essay for the Fabian Society.

Yet Swan never managed to achieve the ‘Keynesian’ budget balance which he repeatedly promised. Th is was partly because he could not commit to the necessary cuts, and partly because numerous policy decisions increased the spending burden on the Commonwealth budget. Indeed, Labor’s headline budget outlook was a lot worse than it looked on paper—many of their expensive new promises were to bite on the budget over the course of a decade, rather than in the next financial year.

This is why the Institute of Public Affairs repeatedly urged the Rudd and Gillard government to bring the budget back to balance through spending cuts, and quickly. Governments should not assume that budget deficits will resolve themselves. Overspending, once established, is hard to reverse. Special interests protect the privileges that come with new spending programs. Voters respond badly when government programs are taken away. Politicians soon learn that spending cuts are more politically costly than spending increases are politically beneficial.

Australia’s fiscal crisis is one on the spending side, not the revenue side. Of course any imbalance in a budget can be attributed to both income and expenditure, so this is partly a question of competing values—should government be larger, or smaller? But if Commonwealth government spending was at the level it was in the final years of the Howard government in 2006-07 and 2007- 08, the budget would be in surplus today.

Underpinning the arguments that Australia is suffering a revenue shortfall, is one myth that needs to be disposed of: the significance of the end of the mining boom for the budget. For the last few years we’ve been treated to regular news stories reporting the precipitous decline in the price of iron ore and the billions of dollars that decline will strip from government revenue. It is true that iron ore is sharply down from where it was under the Rudd and Gillard governments—in 2011, iron ore was pushing nearly US$200 per dry metricton, whereas in October 2015 that price is now down to US$52.

Yet the Howard government could only dream of such iron ore prices. The highest monthly price iron ore ever reached under Howard was US$36. The minerals market is not to blame for the budget’s problems.

There are other reasons why Malcolm Turnbull and his new treasurer—Scott Morrison—ought to focus on government spending, rather than revenue, as they try to bring the budget back into balance.

First: Australia is not a low taxing country, both relative to other countries and in an absolute sense. As the IPA’s Sinclair Davidson and Mikayla Novak have argued over many years, when the proper comparisons—including the inclusion of superannuation, the health insurance mandate, and workers compensation to ensure comparability with countries that have different enforced retirement savings schemes—are made with other OECD countries, Australia’s tax take at 34.3 per cent is higher than the OECD average of 33.7 per cent.

Second: the government ought to be smaller than it is. A government which spends a third of the country’s GDP is spending that third unproductively. Perhaps by necessity—as public goods like courts and national defence have to be paid for—but we should not imagine that because taxpayer fi nanced programs are necessary that they are well designed. Th e less tax Australians pay then the more Australians will have to spend and invest on things which suit their preferences, rather than the preferences of the political class.

THE PROBLEM OF TAX REFORM

Joe Hockey can take some credit for launching a serious public debate about taxation when he released the tax discussion paper in March 2015. Turnbull and his Treasurer Scott Morrison have now picked up a tax inquiry process driven by Tony Abbott and Joe Hockey, which was in turn an attempt to turn the tax reform agenda away from Labor’s interest in higher taxes and towards the Coalition’s interest in lower taxes.

Yet a budget crisis is a terrible time to conduct tax reform. Every incentive in the public service leads towards tax increases. It’s easy to see the hand of Treasury behind the curtain here. Treasury appears to be convinced that we are an under taxed nation both in relation to our demands for public spending and in relation to our trading partners.

In a report published in October this year. the Productivity Commission became the first Australian government agency to admit that Australia’s tax take is higher than the OECD average once the proper comparisons are made.

SPENDING CUTS ARE MORE POLITICALLY COSTLY THAN SPENDING INCREASES ARE POLITICALLY BENEFICIAL

Yet Treasury still refuses to support this reasoning, allowing them to maintain the fiction that we are a low taxed, and, by implication, an insufficiently taxed, country.

In our IPA Review article ‘Be like Gough’, published in August 2012 with John Roskam, we observed that neophyte ministers are susceptible to capture by their departments, particularly when adequate groundwork for policy development has not been done before a ministerial appointment.

Treasury is both the most important department, and the most intellectually formidable (some high profile errors exposed by Sinclair Davidson notwithstanding). Scott Morrison has gained a reputation as a capable administrator and advocate for conservatism, but maintaining a distinctively free market vision against the prevailing winds of Treasury will be a challenge. It was a challenge that Joe Hockey unfortunately failed to surmount.

Ever since he took the leadership, Malcolm Turnbull has been arguing that tax reform has to be ‘fair’ if it is to be successful. This is an inarguable truism.

But fairness is a matter of perception and perspective. It is not a quantitative criterion. Reducing the top income tax bracket will be characterised as unfair if it is not explained how disproportionate the fiscal burden weighs on the top taxpayers. Corporate tax cuts might be perceived as unfair if it is not explained that the burden of the corporate tax is felt by workers, superannuation portfolios and economic growth more generally.

That fairness is impressionistic rather than empirical should remind us that we’ve been here before. In fact the 2014 budget— on which Bill Shorten and the Labor Party hooked their focus on fairness—was specifically written to counter perceptions of unfairness. Hence the deficit levy—the 2 per cent tax increase levied on those earning $180,000 and above—in order to ‘share the pain’ of an apparently austere budget.

As a concession to expediency, it was a plainly unsuccessful one. It appeared to do nothing to mitigate the charge of unfairness emanating from Labor and the left-wing press, and bumped the top marginal tax rate—when added to the Medicare levy—to 49 per cent. And of course from the perspective principle, it was a clear violation of the Coalition’s support for lower taxes—not just Abbott’s campaign promise to have lower taxes, but the Liberal Party’s fundamental belief in a lower fiscal burden on the economy.

There’s an intriguing detail in the first book published on the Abbott government after its demise, Battleground, by Peter van Onselen and Wayne Errington, that Turnbull, alongside Julie Bishop, opposed the deficit levy in the cabinet when it was proposed by Joe Hockey and Finance Minister Mathias Cormann. Yet since the spill, signs that the fairness debate was to be recontested on liberal— and Liberal—terms have been slim. Turnbull’s communications skills have been much praised. They need to be used to clear the cobwebs around fairness and fiscal policy that have built up since the 2014 budget. This is less a question of policy development and more a question of public philosophy.

THE GST SHOULD NOT BE CHANGED

In this light, it was of real concern that the tax debate under the new Turnbull government so quickly turned to whether the GST should be increased from 10 per cent to 15 per cent. Consumption taxes are theoretically more efficient than many of the taxes which make up Commonwealth revenue.

But efficiency is not the most important principle of taxation. The goal of the tax system in a free country should not be, in the words of Jean Baptiste Colbert (French Minister of Finances during the reign of King Louis XIV) ‘plucking the goose as to get the most feathers with the least hissing’. The government should not try to obscure how much it is extracting from taxpayers.

The more fundamental problem with a GST rise is that there is little reason to believe that the tax system will emerge from any reform with a lower total burden on Australian taxpayers. It is certainly true that the possibility of a GST rise has been mentioned in relation to a possible income tax cut for the top marginal income bracket—a cut which is sorely overdue.

But it is indicative that through leaks and briefings to journalists we have a very concrete idea of what a GST rise could constitute, but very little idea of the tax cuts that would be the reward for this GST bargain. A GST rise with income tax cuts pushed into the never-never would be no victory.

It is possible to imagine a broad tax reform proposal that both reduces taxes and transitions the tax base from income onto less economically harmful consumption taxes. But seven years after the Rudd government established the Henry Review into taxation, that vision looks further away than ever. But politics is about momentum. Any suggestion of raising the GST should be stopped in its tracks as soon as possible.

PRINCIPLE, EXPEDIENCY AND FREE SPEECH

When he took the leadership Turnbull said:

This will be a thoroughly Liberal Government. It will be a thoroughly Liberal Government committed to freedom, the individual and the market.

But it would be hard for a government to be ‘thoroughly liberal’ without reinvigorating the Liberal Party’s ideological disposition towards freedom of speech. The Abbott government’s decision to break its promise to repeal or reform section 18C of the Racial Discrimination Act in August 2014 was a major event, both at a political and policy level.

This—coming so soon after the deficit levy—dashed the optimism that many on the free market right had for the Abbott government’s ability to turn the tide towards individual rights and economic freedom. In public comments, Malcolm Turnbull has indicated that he is personally sympathetic to what has come to be known as the compromise position on section 18C—that is, the removal of the words ‘offend’ and ‘insult’ from section 18C’s prohibition on ‘offend, insult, humiliate and intimidate.’

As Morgan Begg points out in this issue of the IPA Review, this is the compromise position in Senator Bob Day’s Private Members’ Bill, currently before the parliament. Thus, without having to stand in front of the Institute of Public Affairs, as Abbott did, and promise the repeal of section 18C in its current form, Turnbull has already built himself a test on freedom of speech. If a thoroughly liberal government cannot bring itself to repeal two words of a law obviously antithetical to liberal values, then what can it do?

As Menzies reflected back in 1954:

If you stand on the basis of principle you may go wrong but you will never go far wrong. You may go wrong according to the current political judgement, but in the long run somebody will be heard to say, “That was right”.’

 

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