Those terrible “d” words

There is no denying that the rhetoric that the Prime Minister has employed to describe the current global economic situation is strong, and the Rudd Government’s actions so far have been tailored accordingly. Over a month ago, when announcing his government’s $10 billion package of stimulus handouts, Rudd described the current crisis as “the greatest global financial crisis since the Great Depression”. This assertion is not entirely unjustified when one considers the extraordinary ramifications we have observed so far, but on the other hand, the Prime Minister was walking on shaky ground by linking the current financial crisis to the word “depression”. It’s something like rhetorical guilt by association. Depression? Did he really say depression? As in, the Great Depression? And, so on.

In short, Kevin Rudd’s personal approach to the economic situation as Prime Minister seems to revolve around straight talking, with a cautiously pessimistic bent. If things could get worse, then the Prime Minister seems to want to make it clear to everyone that they should be prepared for things getting worse. Rather than trying to create an oasis of blissfully ignorant confidence at the head of government – something the Howard Government probably would have done in the same position – the Rudd Government seems hellbent on highlighting the uncertainty that does exist. Nobody really knows just how events are going to play out. Just like other governments and indeed commentators, Federal Labor does not really know if the current crisis is going to take several months or several years to peter out.

It is in this sort of environment that the Prime Minister has elected to finally entertain that great Australian shibboleth for economic “incompetents” – the dreaded budget deficit. Samantha Maiden has the details in The Australian, and the full statement delivered by Rudd to parliament is here:

Kevin Rudd has conceded for the first time that Australia’s budget may have to go into “temporary deficit” if the global financial crisis worsens.

“If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that Australian revenues will reduce further,” Mr Rudd said.

“Under those circumstances, it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband.”

“In fact, failing to do so would irresponsible – and would sacrifice growth and jobs. But any such action would need to be consistent with the discipline of maintaining a surplus across the economic cycle.”

It is probably well past time for one of the most misguided economic conventions of the modern era to be buried. Anybody who owns a home or invests in property will be able to tell you that it often makes sense to borrow money in order to invest for the future. Anybody who runs a business can tell you that it sometimes make sense to borrow in order to grow the business, even if the current bottom line is not healthy enough to support such a step. The doctrine that suggests that budgets deficits are always “bad” effectively is also suggesting that investment for the future should be mercilessly limited, and that important projects too big to be funded by governments should be dumped.

As long as the Rudd Government takes care to ensure that any funds borrowed are spent wisely and on measures that are effectively certain to benefit the national economic situation, I personally see no problem with the government going into deficit. It would obviously amount to poor governance to consistently deliver budget deficits, but the odd one, if put to proper use, can definitely work to the greater benefit of the nation.

Impartiality and economic pick-up lines

From a blatantly partisan perspective I guess I am somewhat pleased that the RBA has deigned to stick its neck out and suggest that the Rudd Labor Government’s first budget is “mildly contractionary” overall. As Scott Murdoch notes for the SMH, this is manna from heaven with respect to economic credibility for the government. Certainly what we have seen over the last few months is that different economic commentators have interpreted the budget differently, with the result that the mainstream media outlets have been polluted with mixed messages. Inherently this sort of environment benefits the Federal Opposition, with Shadow Treasurer Malcolm Turnbull needing only to reference the expert opinion of some of the commentators who heavily criticised the budget to score some points. The government can of course reference the expert opinion of other commentators who offered begrudging approval, but the result of such a rebuttal is that the average observer is left feeling unsure of who they should really believe.

In this modern era of economic conservatism, of course, the opinion of the RBA board is held in markedly higher esteem than your average economist, and it is likely that Federal Labor is going to be able to dine out on this little “mildly contractionary” comment for some time. The “is not”, “is too” squabble between those two argumentative siblings in parliament (Wayne and Malcolm) has arguably just been settled for the time being; settled by the booming voice of an angry father that leaves Malcolm somewhat chastened and Wayne quiet, but vindicated.

Part of me can’t help wondering, though, whether the RBA board has gone too far by including an explicit summary interpretation of effect of Labor’s budget policies in its public minutes. The crucial line from the minutes is as follows:

Measured in terms of the change in the surplus, fiscal policy was expected to impart a mildly contractionary effect on the economy in 2008/09.

It is one thing to suggest that a certain policy measure is likely to be on balance inflationary or inflationary, and quite another to suggest without rigorous and public explanation that fiscal policy is on the whole inflationary or not inflationary. To be honest, I would have thought it was bordering on misleading to attempt to interpret fiscal policy based solely on the state of the surplus, without at all considering the associated policy measures that the government has implemented.

It’s likely that this little observation from the board was included flippantly rather than because the board’s impartiality is in question, but either way on the whole I don’t think it is particularly helpful – except for making the government feel a little good about itself.

A tax loophole by any other name

I tend to agree with Jennifer Hewitt when she suggests that it says something about the Rudd Government’s first budget when perhaps the most publicly contentious issue is an increase in the level of tax on “ready-to-drink” pre-mixed alcoholic beverages – beverages the mainstream media have cutely termed “alcopops”. Brendan Nelson even took the time to target the initiative in his reply speech in parliament:

Labor is giving with one hand and taking back with the other – and not just through kneejerk measures, such as a new Tarago tax on cars or the $1 slug on responsible Australians who happen to enjoy a pre-mixed Bundy and Coke or Scotch and Dry.

According to the Government, the principal cause and the source of binge drinking is the so-called ‘alco-pops’ and pre-mixed drinks.

A whopping 70 per cent increase in excise, we have been told, would make significant inroads into binge drinking.

The evidence does not support the Government’s deception.

I am not sure that the government is being deceptive, but what is certainly true is that Federal Labor has not done itself any favours by selling the policy in the way that it has. The government’s own budget overview describes the policy as a “price signal” designed to target binge drinking. While this is no doubt one potential justification, I think realistically speaking we need to consider the two other obvious incentives the government had for proposing this tax increase:

1) Alcohol in ready to drink alcoholic beverages is taxed at a lower rate than alcohol in standard beverages. This represents a tax loophole in anybody’s language.

2) The fiscal environment that the government is operating in has no doubt made it a challenge to fund all its desired spending commitments whilst still attaining the desired level of surplus.

Needless to say the Opposition will be bolstered by the usual blinkered suspects who doggedly oppose any measure that will result in an increase in taxation. However, even if it is true that the evidence suggests that the increase will have no impact on “binge” behaviour, it remains true that a tax loophole is being closed. In a period when constraints on spending are called for and there is a strong incentive to have a sizable surplus, it is in unequivocal terms economically responsible for the government to seek to close any taxation loopholes that exist.

Some may not like it, but the current excise arrangements for “ready to drink” pre-mixed alcoholic beverages represent just such a loophole.

ELSEWHERE: Christian Kerr comes in a very juddering way to the same conclusion, but portrays it all as a piece of spin and a “cover up”. When the realpolitik here is so obvious I am not sure that his breathlessness is warranted.

A moderate budget from the new moderate Labor

Even without delving into the details, you can get a reasonable feel for what sort of federal budget Labor has just delivered by considering the published reaction to it. The Federal Opposition has predictably “slammed” the budget, describing it as a “typical Labor high-taxing, high-spending budget, which targets people that it doesn’t like”. I wasn’t aware that budgets could “like” or “dislike” people, but I guess that’s just Doctor Nelson not letting his use of grammar get in the way of his spittle-flying (and self-serving) rage. This budget is not adventurous enough to give Nelson the fillip he needs. Bob Brown has declared that the Federal Government has failed the country on climate change with its budget, without really highlighting why this is so. He does inform us, however, that this budget confirms that Kevin Rudd is no “Robin Hood” and that rather he is actually a “Little John”. What this means precisely is not particularly clear. Perhaps Brown has determined that Rudd is a kindly, overweight bear.

Other commentators are divided, although on balance opinion seems to be positive. Scott Murdoch has described the budget as “laden with common sense”. Business groups are positive about the message of fiscal responsibility that the budget has sent, with the opinion of prominent economists seeming to tend towards begrudging approval. Notorious but generally reliable economics grump Ross Gittins is a bit more negative, rating the budget as merely “ok” and highlighting some areas where he feels the government should have done better. Peter Hartcher in the SMH is quite uncharacteristically critical, questioning whether the budget will really serve to fight inflation, and making this fairly strong accusation about Kevin Rudd’s leadership and his priorities:

Kevin Rudd seems to think the election campaign is still under way. He seems to have trouble realising that the campaign is over. He is now supposed to be governing.

Tonight’s budget set out to please many and to upset few.

Hartcher is being just a little unfair on that last point. I am sure that every former Federal Treasurer in living memory has sought to please many and upset few with their respective budgets; let’s not delude ourselves that this is not the nature of the game. If, in the current troubled economic climate, the government has managed to tick most of the important boxes from a fiscal management perspective and keep most people happy, it has probably achieved something quite worthwhile.

Indeed, from what I can gather from Swan’s speech [PDF], this budget has delivered pretty much everything that has been foreshadowed and promised, with no big surprises or as the Treasurer describes then, rabbits. As much as the media may have become accustomed to budget night rabbits, the character of the new administration and the prevailing economic conditions have served to end the budget night rabbit season bonanza entrenched by the Howard Government over the last decade.

Budget night may be drabber as a result, but the country is better for it.

The Prime Minister tips his hat to the Opposition Leader

In his short stint as Opposition Leader, Brendan Nelson has proved himself to be quite the policy acrobat, reversing his previous position on a number of high profile issues over the course of only a few months. It’s not difficult to suggest that this to-ing and fro-ing has not exactly done wonders for his public standing, at least if polling figures are anything to go by. Thus far, the Prime Minister has been free politically speaking to play the cleanskin; free to step to one side and (diplomatically, of course) laugh and point from the government’s side of the chamber. I am not so sure that is going to necessarily be the case anymore, as Matthew Franklin reports for The Australian:

Kevin Rudd has guaranteed one-off bonuses to carers and seniors in this year’s budget, completing a stunning reversal of his Government’s previous plan to scrap the payments.

While Mr Rudd started the day promising no carers and seniors would be worse off under his budget, he ended it by guaranteeing upfront payments this year, protecting them from his Government’s search for budget savings to reduce the pressure on inflation and interest rates.

Let’s be frank for just a second. These particular bulk payment handouts and a number of other similar schemes bequeathed to the country from the Howard Government are and always have been thinly disguised bribes. They were not written into Budget formal estimates because, in reality, they were discretionary payments aimed at buying the votes of certain sub-sectors of the electorate. They are also economically illogical; by making bulk payments of this nature, the government is effectively encouraging people to go and blow it on something expensive. It’s free money – no responsibility attached. Don’t get me wrong, I think there is a very good case for increasing support for pensioners and especially carers, but I firmly believe this is an irresponsible and somewhat morally dubious way of going about it.

The sad thing, in general, is that I think that the Rudd Government probably for the most part feels the same way. However, following on from the Opposition’s fairly high volume but low impact attacks on the issue, it seems that the Prime Minister has caved in response to the media cacophony and committed to effectively maintaining the former government’s position on the payments – albeit with a bit more certainty for the recipients involved. It is the latest little plot point on a somewhat disturbing trend that started when Federal Labor was still in Opposition. Certain issues (e.g. see schools funding) deemed politically sensitive and likely to cause a furore in the press were bedded down by Labor by simply vowing to maintain the Coalition’s position on the matter. I can accept pragmatically speaking that for the occasional troublesome issue, particularly while Labor was in Opposition, this was an approach not without its uses. On the other hand, the line must be drawn somewhere: either you think the results of public policy is what really counts or the politics of a policy is is what really counts. While the politics of any given policy can not simply be ignored, there is only one right answer here.

There must have been a fistful of ways that the Rudd Government could have turned this negative story into a positive. Although we will have to wait for the Budget to be sure of the approach that will be taken, adopting the previous government’s position on these payments would have to be just about the dumbest one.

ELSEWHERE: More from Peter Martin and at Larvatus Prodeo.

Moral dilemmas on tax and welfare

I read with interest today that the Rudd Government’s Human Services Minister, Joe Ludwig, is planning to heighten federal government efforts to crack down on welfare fraud. With global economic conditions as tumultuous as they are and the national level of inflation seemingly on an unstoppable upward spiral, the government is afforded the opportunity of cloaking this latest step in a veil of fiscal prudence. I suspect such an approach will be viewed in a favourable light by most people (particularly those not receiving welfare), given that it serves as something of an attack on one of tabloid Australia’s most despised constituencies, throwing in for good measure a dash of aggressive penny-pinching.

In terms of message framing, I daresay that the Prime Minister could not really hope for a better headline than the one provided by the story linked to above: Welfare fraud on Rudd’s hit list. The “economic conservatism” message is one that was repeated ad nauseam throughout the latter stages of 2007, to the point where even the most sceptical of folk probably started believing it towards the end. So far, the government has been careful to continue pushing the message, and to their credit, they have actually bolstered their rhetoric through their actions so far. “Dog-whistling” has probably become something of a misused term, but I don’t really think there is any doubting that stories like the one above are music to the ears of the sorts of conservative, middle-class folk that we once described as “Howard’s battlers”.

Although his message probably tanks with “Howard’s battlers”, I think Michael Raper raises a very good point when it comes to the question of where the government should be looking for savings:

National Welfare Rights Network president Michael Raper said tax fraud was a bigger problem than welfare fraud.

“If they want to chase tax fraud, that’s where the dollars are,” he said. “There’s some in social security but it’s pretty tight and hard already. Less than half of 1 per cent of social security debt is fraud.”

I find it interesting that it is deemed morally wrong to receive welfare money you are not entitled to, but it is apparently morally acceptable to pay as little tax as possible through tax evasion schemes and clever accounting. One wonders how many of those who are strongly in favour of cracking down on people receiving welfare illegitimately bend every letter of the law around the corner when it comes time to completing their own tax returns. Part of the problem, of course, is the vicious nexus between welfare payments and actual job income. Folks on welfare either can’t find work, or can’t find enough work, and so received welfare payments. Then a job comes along, they get something of a break, and they earn a bit more money. Because they are busy, ignorant, or figure it’s going to be two hours in a Centrelink queue that could be better spent doing just about anything else, they don’t bother reporting it. Are people in this situation really “criminals”? According to the letter of the law, yes, but in my view, people facing this scenario are more accurately just suffering the symptoms of a welfare system that is desperately in need of a boot into the twenty-first century.

With reference to the Rudd Government’s increased vigilance when it comes to welfare fraud, I can only agree that if done properly, it will be good for the country. In ensuring that welfare recipients are not abusing their allowances, however, the government must make certain it does not lose sight of the bigger picture. Millions of dollars of taxpayers money each year is wasted in the tax evasion and return cycle, with those earning the most and with access to the best and most unscrupulous accountants stand to gain the most. A progressive stance on this issue demands that the government considers both those rorting the system at the top end of the income scale, as well as those who may be not playing entirely within the rules at the bottom end.