Saturday, April 23, 2011

Budget Austerity and Small Government not the Answer – A response to Wayne Swan

above:  Australian Treasurer and Deputy Prime Minister Wayne Swan

The following essay is a response to Australian Treasurer, Wayne Swan - who has recently written a Fabian Essay - whose obvious significance concerns the coming Australian Federal Budget for 2011-12.  While the author is highly sympathetic with the Treasurer's defence of Labor's record fighting the Global Financial Crisis (GFC), he nonetheless insists that - with the recovery - 'small government' is not the answer.  Tristan Ewins responds that rather, a government committed to human need - and facing the consequences of an expanding and ageing population - should further reform tax, invest in necessary infrastructure and incrementally expand the social wage...

By Tristan Ewins

In a recent Fabian Essay, ‘Keynesians in the Recovery’, Australian Treasurer and Deputy Prime Minister, Wayne Swan, has defended the Labor Federal government’s legacy in preventing recession at home, and contributing to a global recovery in the wake of the Global Financial Crisis. (GFC) It is a crucial narrative for Labor to contest: restoring a practical Keynesian orthodoxy in striving towards an implicit social-democratic consensus, and achieving generational change in perceptions of Labor on economic management.

And it is all the more important in wake of other policy failures and forced back-downs which have harmed the government, and left behind an impression which obscures and detracts from Labor’s very significant achievements.

With the Resource Super Profits Tax (RSPT) Labor had ‘bitten off more than it could chew’: taking on the mining giants close to an election. Combined with Labor’s back-down on its original CPRS (Carbon Pollution Reduction Scheme), these presented an impression of a government in retreat. That on its own shook – and continues to shake - public confidence.

And while compared with the scale of other major initiatives the real level of waste in the government’s home insulation rebate program was minor, nothing can make good the loss of life which followed the lack of sufficient regulatory oversight.

But where would Australia have been had the Conservatives been in government with the onset of the Global Financial Crisis? (GFC) Most likely a Conservative government would have implemented deflationary policies which would have sent the economy into freefall, with an ever-escalating toll of human misery.

In 2008 the world teetered upon the precipice of a potential economic Depression. In his Fabian Essay
Swan refects upon Australia’s position at the time as follows:

“It is too easy to forget just how exposed Australia was to the crisis. Eight out of ten of our major trading partners went into recession. Our banks faced dislocated global capital markets and calls from bank customers flowed into my office. The decline in production, investment and exports affected jobs, with unemployment rising by 175,000 within months. Our economy contracted by almost 1 per cent in the final three months of 2008.” (p 5)

In the face of this looming catastrophe, Swan defends the government’s response:

“Underpinning our policy response were the principles of fiscal and monetary action to boost aggregate demand set out by Keynes in his General Theory and his activist publications of the Great Depression era: immediate stimulus measures to boost consumer spending and confidence; useful public works to create employment; lower interest rates to boost investment and spending; and concerted international action to strengthen the world financial system.” (p 5)

“Labor, guided by Keynes, is driven by a morality that regards unemployment, ruined businesses, foreclosed mortgages and myriad other signs of economic distress not as part of an inevitable and desirable cleansing process for the economy, but as the symptoms of a recession that should and can be avoided with the necessary will. (p 8)

How the government gets this message out to the public is a different matter, though. How can Labor contest and ultimately determine the narrative – that is, ‘popular wisdom’ - on its response to the Global Financial Crisis?

Part of the answer is rebuilding Labor as a social movement; a mass party which promotes the activity and real policy influence of its members; and so remobilising its base, places itself on a permanent campaign footing on a wide variety of fronts.

But there’s another side to the story Swan is trying to sell on the economy. With the 2011-2012 Federal Budget about to be passed, it seems he’s preparing us for austerity.

Swan writes of the importance of being “Keynesians in recovery” as well as in the downturn.

“With private demand strengthening, unemployment falling and our economy pushing towards capacity, we need to restrain public spending, and stay the course back to budget surpluses. Just as it was the right thing to step in and support demand during the GFC, the right thing to do is to take a step back as private activity recovers.” (p 1)

[This means] “making room for the private sector when economic growth is strong.” (p 1)

And he takes the argument further:

“[The very] phrase ‘counter- cyclical’’….implies the opposite of the critics’ claim that Keynesian policies constitute a recipe for ever-increasing rates of public spending as a proportion of GDP. (p 7)

“[While] governments have a responsibility to increase public spending going into a recession, once growth and prosperity have been restored, they have an equal responsibility to restrain public expenditure, budget for surpluses and reduce debt in climbing out.” (p 7)

Finally Swan indicates his preference, now, to promote:

“reforms to strengthen and broaden our economy by cutting business taxes, investing in infrastructure and boosting national savings.” (p 8)

While Swan’s message on counter-cyclical demand management is crucial to Labor’s intellectual armoury, and its credibility on the economy, there are other aspects of his account that need to be challenged. This is regardless of Swan’s (correct) assertion that ‘big government’ is not the necessary or inevitable counterpart to Keynesian counter-cyclical demand management.

Specifically: Swan’s concern to keep taxes low – and hence ‘government’ ‘small’ has real-life consequences. His call to government to ‘make room’ for the private sector seems reminiscent of old Conservative claims that the welfare state and social wage were ‘crowding out’ private economic activity. But the services in the firing line are so often in the realm of social necessity, and are most efficiently provided through the public sector or other forms of collective consumption in any case.

Meanwhile the investment in infrastructure that Swan champions is difficult to achieve except in the context of maintaining and expanding the tax base. A growing population, and an ageing population will mean increased pressures on transport infrastructure, housing and health services now and into the future.

Even considering the current (modest) correction in the housing market, thousands of families experience housing stress, which is a drain upon their incomes and other areas of the economy. The situation is exacerbated by rapidly growing populations – such as in Melbourne – where young families are driven to the urban fringe; but once there have inadequate access to public transport. There is a cost to the economy in terms of transit expenses including petrol. But there is a hidden social cost also, including to families, where transit times detract from time for recreation, including time with spouses and children. Less time for recreation resulting in obesity and ill health could flow on to the Health sector over the long term as well.

More investment in social housing and transport infrastructure – including urban consolidation - is essential for economic and quality of life purposes; but requires a commitment of resources inconsistent with ‘small government’.

The ‘ageing population’ also demands a rethink by policy makers, including by Wayne Swan, on the theme of Aged Care and welfare, and how this relates to restraining the size of government – partly for Ideological purposes.

Social democrats once stood indignantly against demands under capitalism that workers continue in sometimes alienating, monotonous or physically demanding jobs practically until their grave, or to physical and mental ruination. (whichever came first)

A key social-democratic tenet was the placing of real life quality for workers ahead of the abstract-economic; ahead of profits outside the context of real social benefit. Yet now in pursuit of ever lower taxes, less welfare and ‘smaller government’, Labor seems itself resigned to raising the age of retirement, and in so doing denying older Australians the opportunity for fulfilment with cultural participation, civic activism, education for life, and time with family and community. This at a time in people’s lives where ‘every year’ of relative good health can feel precious.

What is worse, the Productivity Commission is promoting a user-pays agenda for the Aged Care sector: a move which Ben Spies-Butcher, a lecturer in sociology at Macquarie University, argues will actually deter the less-wealthy from accessing services for which they may have an acute need. And Charmaine Crowe of the Combined Pensioners and Superannuant’s Association (CPSA) has pointed out that Australia already only spends only 0.8 per cent of GDP on Aged Care compared to 3.5 per cent in the Netherlands and 3.6 per cent in Sweden.

This cannot fail to have a devastating impact on the quality of life of our most vulnerable Australians. We are a wealthy nation and can afford to do better. It is a matter of priorities.

As a basic question of humanity we must make the necessary commitment to ameliorate suffering as much as possible, and provide opportunities for life quality. This must include outings, pleasant surrounds including gardens, opportunities for personal and social interaction; provision for privacy and personal space, access to medical (including dental) care, air conditioning and heating, and into the future access to information technology including internet.

And as this author has argued elsewhere: quality aged care must involve sufficient nurse to patient ratios, and decent conditions for aged care staff. (this dovetails with the Australian Services Union campaign for fair wages – mainly for women – in the sector) Many residents need acute care whether for showering, dressing, eating, being turned regularly to prevent bed sores, or using the toilet. For many such circumstances will continue for years, and it simply is not good enough to ‘let the market sort us out’.

Even for less-robust ‘Third Way’ interpretations of social democracy such standards for inclusion and protection of the vulnerable are core. And by comparison with progressive funding, ‘user pays’ would act like a regressive flat inheritance tax anyway, hitting overwhelmingly low and middle income families, while eschewing a more direct and formal inheritance or wealth tax - which would affect the more affluent.

To improve quality of service – and quality of life – requires a commitment of resources. And to meet the scope of commitment made by the Netherlands and Sweden would require new money (perhaps an extra twenty billion a year) out of an economy valued somewhere over $1.2 Trillion This has to start somewhere.

Meanwhile increased demand upon the Disability Support Pension (DSP) is partly the consequence of a genuine mental health crisis, and also cannot be addressed in the context of small government. And in light of recent debate it is worth noting that extensive and punitive active labour market policies already exist for Newstart recipients. The DSP and other pensions remain in need of extension to meet a rising cost of living without further ‘punishing the victim’.

For the chronically-ill, and for their carers - especially those without any prospect of steady, decent-paying employment – there must be provision for a decent material quality of life. Easing of income/means tests for recipients, and introduction of incentives for employers – without effective discrimination against the disabled themselves on wages and conditions – could be part of a constructive government response. And a National Disability Insurance Scheme (NDIS) which provided significant new money to address these and other areas of concern - could also secure support from a public not only on compassionate grounds - but with the realisation potentially every individual and every family can be vulnerable.

So where should Labor start in addressing these issues in the process of framing the 2011-12 Federal Budget?

As noted at this blog recently - The Greens have already provided research demonstrating “that at 30 per cent, the current company tax rate is still below the Organisation for Economic Co-operation and Development's (OECD's) "weighted average" of 36 per cent.” Where business stands to share in the gain from necessary infrastructure investment (eg: transport) surely it should continue to ‘pay its fair share’. The 1% Company Tax cut has to go.

Apart from this, Gillard Labor could aim to increase social expenditure in the critical fields mentioned in this essay by around 1 per cent to 1.5 per cent of GDP (not including Carbon Tax compensation) over the course of the current term. (the first step of a long-term plan for reform)  In the context of an economy valued at over $1.2 Trillion, this would provide a starting pool of approximately $12-$18 billion annually which could be gained via reform of income tax or dividend imputation, a wealth tax, or a National Disability Insurance Scheme.  (or a mix of these options)

If the government still has to find savings over the relative-short term, with a new Senate it could realistically implement means-testing of the existing private health insurance rebate. This could be combined with means testing child care rebates to exclude families with combined incomes over $150,000 – which despite complaints is a threshold beyond what most families can aspire to.

Meanwhile national savings should be promoted through democratic collective capital formation amongst the great mass of citizens and workers - rather than further ‘incentives’ for the wealthy in Superannuation and elsewhere. Further tax reform could also help fill any void left by removing superannuation concessions for the wealthy, redirecting monies into a public pension fund.

To be competitive at the next Federal election Labor needs to restore its status as a ‘can do’ government after successive retreats on several fronts. National Broadband Network (NBN) rollout and Carbon Tax ‘overcompensation’ could form part of this picture, but funds for social housing, transport, welfare and aged care could finally establish solid credentials for Gillard Labor as a government of genuine reform.

There is a particularly noteworthy quote from Swan’s recent ‘Fabian Essay’ that is worth reproducing here to put in an interesting context.

Swan writes:

“…in contrast to our opponents – we understand that economic policy must bend to the needs of the times, not the other way around.” (p 4)

This could be interpreted in the sense that the economy must serve human interests first: not some abstract logic or goal. In this sense attacking pensioners or neglecting the aged, the mentally ill, or the disabled in pursuit of a surplus reminds the author of the Vietnam War-era statement that it was ‘necessary to destroy the village in order to save it’.

There are political reasons for pursuing a record-fast return to surplus - hence the scepticism of some with regard to the government's amitions here.   Although allowing deficits to consistently spiral out of control over the course of the entire economic cycle will bring ruin in the end.  But if we are pursuing the kind of economy that serves truly human needs and purposes, surely a narrow and timid Ideology of ‘small government’ is not the answer.

Nb: The full version of Wayne Swan’s essay can be found at the URL below:

Tristan Ewins is a freelance writer and grassroots Labor activist based in Melbourne, Australia. He maintains and publishes the 'Left Focus' blog

AND FINALLY: If you found this article interesting PLS join our Facebook group - to link up with other readers, and to receive regular updates on new material.

Sunday, April 3, 2011

Labor and the Greens on the Carbon Tax debate

above: Less tumultuous times for PM Julia Gillard and Greens leader Bob Brown

The following article evaluates the debate on Carbon Tax reform in Australia, but also divisons between the Greens and ALP government on Company Tax and with the Minerals Resource Rent Tax (MRRT).  Starting with a preference for distributive justice and social wage expansion, the author - Tristan Ewins - tries to chart some kind of way forward for the Gillard government and its allies.
Debate on Company Tax cuts is beginning to gain momentum in Canberra with Gillard Labor, independents and the Greens at odds over what comprises the best policy. That debate is more broadly framed in the context of the Minerals Resource Rent Tax (MRRT), and a declared intent by Labor to direct new revenue into corporate tax cuts and infrastructure (especially in the ‘mining states’ of WA and Queensland), and in the process to provide room for an increase in superannuation contributions by business.

Therefore it’s probably best to explain the background of the MRRT before going into the debates that hinge on the treatment of revenue thus gained - and how all this relates to the other crucial debate on Carbon Tax reform.

During the 2010 debate David Richardson – writing for On Line Opinion – explained that the real effective rate paid by the miners in 2010 was 19 per cent, as opposed to 24 per cent for the corporate sector more broadly. To correct this the originally-proposed tax on ‘super profits’ aimed to affect profits above the government bond rate – then at 5.8 per cent.

The aim was to garner a fair share of profits from the sector for ordinary Australians who collectively own the non-renewable resources which the mining companies profit from.

But elements of the mining industry spent an estimated $22 million on advertisements undermining Rudd Labor in an effort that effectively brought down a Prime Minister. Mining concerns would have remained viable and profitable. But the scare campaign: threatening disinvestment and job losses – found its mark.

While the original tax was to be levied at 40 per cent, the heavily diluted version negotiated by Gillard will apply at 30 per cent on profits over the long-term government bond rate plus 7 per cent.

Allowances and concessions will see an “effective statutory tax rate [of] 22.5%.”

And the newer version will also only apply to coal and iron ore, excluding other minerals including gold, nickel and uranium.

The original Resource Super Profits Tax would have raised approximately $12 billion over its first two years.

But the revised Minerals Resource Rent Tax will see a significant reduction in revenue compared to the original proposal.

To be more specific: In 2010 Gillard Labor estimated the compromise would cost $1.5 billion less over the first two years than under the original package.

But Treasury estimates suppose a gap in the vicinity of $60 billion over ten years; with some others projecting that the shortfall could be closer to $100 billion.

It is in this context that Labor has downgraded its original promises to cut Company Tax. Instead of cutting the rate from 30% to 28%, now the government is proposing a cut of only one per cent. (ie: to a rate of 29%)

However Greens leader Bob Brown has argued that even a cut of one per cent would return half of new revenue taken back to the miners. Instead Brown is proposing a ‘two-tiered’ approach to Company Tax which would see only companies enjoying profits of less than $250 million enjoying the tax discount. This would hit ‘the big end of town’: including the major banks and mining giants – while sparing small business. For Brown the money thus saved would be better spent improving wages and conditions for aged care workers, funding national dental health care, or increasing Newstart, the youth allowance, Austudy and Abstudy,"

As against claims lower Company Tax is needed to allow for greater competitiveness, research commissioned by the Greens shows that the current rate of 30 per cent is still very significantly below the OECD “weighted average” of 36 per cent. The same research estimates a 1 per cent cut would cost $18 billion by 2021.

Such a pool of money could also be critical for infrastructure, education, and mental health and aged care services.

But there are potential issues for Labor in drifting away further from the platform it took on these issues to the 2010 Federal election.

To begin: it is important for Labor to honour any agreements in order to retain credibility as a partner for negotiation into the future. This means that if Labor has any kind of ‘agreement’ it is a practical necessity at least that the government ought enter into fresh negotiations if seeking to change its position on resource taxation during the current term. Either that or take such action as to make the consequences ‘neutral’ for those concerned. This could boil down to a choice between either increases in corporate superannuation contributions for low income workers, or abandoning the Company Tax cut, diverting the proceeds to other crucial priorities as Brown suggests.

Further: if the government goes down the path of increasing superannuation contributions for low income earners it would be best to also ease Aged Pension means tests for such groups to enhance any real effective gain.

It is equally compelling as a matter of public interest, however, that the electorate be made aware of the scope of any agreement Gillard made with the big miners, including BHP and Rio Tinto, and corporate Australia more broadly, in the run up to the 2010 poll. Negotiations with the most powerful corporate interests ‘behind closed doors’ is anathema to democracy.

Unfortunately, the political power of the miners, and the corporate sector more broadly, is not going to disappear any time soon, no matter how it skews democratic processes, overshadowing the voices of ordinary citizens. So maintaining credibility in negotiations with those interests is crucial no matter how problematic their power may be.

However it is also most definitely legitimate for Labor to seek a fresh mandate at the next Federal election to effectively increase and widen the scope of the Minerals Resource Rent Tax; and to start canvassing support for any such move now. Given the past defeat, though, Labor would need to adopt a cautious approach.

Yet there could be a difficulty with such a move as well if not handled properly. Labor might not want to ‘muddy the waters’ by pursuing too many distinct major debates on tax reform at once for fear of leaving some voters overwhelmed.

Climate Minister Greg Combet is anticipating a “long debate” suggesting any Carbon Tax will not be implemented until July 2012.

In that context a ‘tax summit’ (Wayne Swan prefers the word ‘forum’) is planned for October this year.

But without putting public fears to rest – as early implementation could achieve – the debate may become a ‘running sore’ distracting from any further reform agenda.

If the Gillard government could resolve the shape of Carbon Tax reform and see the tax implemented late this year (2011), though, fear and scepticism could be put to rest well before the next election. Crucially: this could provide the necessary time and ‘breathing room’ to pursue a debate on further significant progressive tax reform.

Taking that into consideration, the tax ‘summit’ or ‘forum’ could do to be brought forward somewhat – perhaps by a couple of months.

Openness to future reform is also crucial given the scenario of profit levels in the industry waning somewhat - to the point where the government will need to consider additional changes simply to maintain revenue, and fair returns on the natural resources that belong properly to all Australians.

All this considered, what is the best move for Labor in pursuing social justice objectives, while fostering co-operation with its independent and Green partners?

The key could be in the implementation of any Carbon Tax.

In 2010 the Greens were proposing a Carbon Tax of $24/Tonne, including assistance to ‘trade exposed’ industries.

Without some form of assistance exports and import-competing jobs might simply be lost overseas without any real reduction in emissions.

Professor Ross Garnaut, meanwhile (responsible for the Rudd Labor ‘Climate Change Review’), has argued for a tax somewhere in the range of $20-$30 a tonne.

Garnaut has furthermore estimated that a carbon tax at a rate of $26/tonne would bring in $11.5 billion in the first year alone.

Assuming these levels of revenue, it is the structure of compensation that is crucial: and which provides opportunities for fairer wealth distribution.

Firstly, compensation should take the form of direct payments for low and middle income groups, and increases in welfare – including the Aged Pension, Disability Support Pension, Austudy and Newstart. Income tax cuts, by comparison, are a clumsy instrument which would compensate high income groups who do not need the assistance.

Secondly: Compensation should exclude the top 30%-35% income demographic to provide sufficient scope to increase welfare and significantly improve the final financial position of low and middle income groups and individuals.

Thirdly: In this context - by returning all such revenue gained via a carbon tax taxpayers in the form of cash payments to low and middle income groups, including welfare recipients, Labor could actually expand and consolidate its electoral support base. This could very effectively undercut Abbott’s appeal to ‘battlers’ on ‘cost-of-living’ issues.

Fourth: A carbon tax rate at what Labor considers ‘the upper end’ of the scale (including the Garnaut proposal) could actually provide greater scope to assist low and middle income groups via compensation and effective redistribution. Hence it makes electoral sense in shoring up Labor’s support base.

Finally:  The only real problem in this scheme of things is that of what happens when the transition to a lower-emissions economy is actually achieved.  The problem being that at this point carbon tax or ETS revenue may 'dry up'.  For the long term, therefore, an alternative funding mechanism will be necessary to compensate low and middle income groups.  Hopefully, though, innovation in the renewable energy sector will also drive down cost structures.  Solar Paint, developed in Australia, looks particularly promising. See:   and also:

As for right-wing commentators such as Miranda Devine who seem to think distributive justice measures via tax comprise some malign ‘social engineering’: do they suppose the same is true in the case of most tax 'reforms' – including the gradual ‘flattening’ of income tax – which historically have redistributed wealth from low and middle income groups to the wealthy? The double-standards are palpable.

This leaves us with the concerns of Bob Brown and the Greens more broadly that emphasis on Company Tax cuts will leave crucial areas of the welfare state and social wage under-funded and exposed. While Labor cannot be seen to be simply ‘dancing to the Greens’ tune’, minority government necessarily involves compromise. And indeed, given their significant electoral support base, the positions of the Greens ought be considered seriously regardless.

As already alluded to – early implementation of a carbon tax could provide ‘breathing room’ for further debate and further reform before the next election.

In 2009 ‘Lateral Economics’ informed the Henry Tax review that ‘axing’ dividend imputation could save the Federal government $20 billion a year.

Dividend imputation is meant to stop so-called ‘double taxation’ of profits: providing credits to shareholders to compenstate for Company Tax already paid.  This was supposed to provide an incentive for investment. But the reform – first implemented under Keating Labor – provided a windfall for the most wealthy Australians, with a massive cost to the budget bottom line, and less money for crucial social programs and infrastructure.

Without fully removing the measure, shifting to half dividend imputation – as once suggested by progressive economist John Quiggin - would be a substantial equity measure, and provide over $10 billion/year much of which could be directed to crucial social programs in aged care, mental health and education, and for social housing and infrastructure.

Such reform would mainly hit millionaires who own so much invested wealth in this country: but small investors may resent the change as well. The benefit from social investment would need to be clear before the next Federal election. And while a means test could provide fairness to small investors, using some of the money to further improve the Aged Pension could be a smart move in the context of ‘winning over' such people as well.

Furthermore: to maintain investment in the Australian economy in that context, some of the money could be diverted to a public pension fund. (to be invested locally) Not only could this support ongoing job creation: it could also sustain the Aged Pension in the context of an ageing population.

A compromise between the Greens, independents and Labor – with early implementation of a Carbon Tax, and a trade-off for half-dividend imputation in return for agreement on Company Tax – could be in the interests of Labor’s core constituency. Appealing to the material interests of most voters, it would also consolidate Labor’s electoral support base, while being well in keeping with Labor ideals.

Tristan Ewins is a freelance writer and grassroots Labor activist based in Melbourne, Australia. He maintains and publishes the 'Left Focus' blog

AND FINALLY: If you found this article interesting PLS join our Facebook group - to link up with other readers, and to receive regular updates on new material.

tag cloud

aarons (9) according (12) aged (23) ago (13) america (18) argues (14) au (27) australia (20) australian (32) bank (25) based (14) billion (17) blog (17) book (11) budget (25) bush (11) business (13) capital (17) cent (13) change (16) com (25) comments (15) commonwealth (16) competition (18) congress (10) conservative (10) consider (10) country (10) course (15) cpsa (9) create (12) crisis (12) critical (10) cuba (12) deficit (11) democratic (10) different (10) economic (26) economy (24) en (9) ewins (20) federal (14) financial (11) focus (12) full (10) government (41) greens (12) groups (15) hayek (9) housing (10) html (16) http (42) income (13) increase (13) infrastructure (14) interest (10) investment (9) labels (11) labor (64) labour (13) land (32) liberal (15) market (10) matwe (10) money (9) needs (16) news (13) obama (22) office (15) opportunity (12) org (15) parents (13) party (22) pension (23) people (16) per (18) platform (9) political (18) posted (18) poverty (13) power (14) president (19) production (12) progressive (15) provide (10) public (19) raised (9) rate (14) red (14) reform (16) revolution (17) rudd (12) scare (11) services (12) single (14) social (38) socialist (10) sole (13) state (26) strong (10) struggle (11) suggested (10) support (19) tax (33) taxation (12) trade (12) tristan (23) unemployed (13) unemployment (12) values (14) venezuela (9) vulnerable (15) war (13) wealth (12) week (11) welcome (15) working (9) world (15) www (26) years (27)
created at