Tuesday, November 27, 2007

TUESDAY COLUMN: Memo to Rudd

Kevin Rudd was never an economic conservative. Not until he took on the Labor leadership in December. A search of parliamentary Hansard and newspaper files reveals no mention of the term in Australia, by anyone, until then.

Overseas it was a label worn by Stephen Harper, Canada’s Prime Minister and the leader of its Conservative Party.

Kevin Rudd is about to learn what it really means...

At a photo opportunity at a Brisbane school yesterday he spelt out his first three priorities - installing a computer on the desk of every secondary student in years 9 to 12; ratifying Kyoto and introducing Labor’s industrial relations changes.

They are straightforward moves and none of them are economically risky.

As it happens a US study of 9,500 students in years 1, 4 and 6 has found that they do little better with computers than without.

In Singapore a study of 657 university students found that that in aggregate those using on-line learning tools do no better than those that do not. The on-line tools helped the students who were already ahead but were “more of an added burden” to those falling behind.

Ratifying Kyoto gets Australia a seat at the table for the world’s most important international negotiation and costs us nothing.

The industrial relations changes outlined in the campaign won’t damage the economy at all, despite the horror scenarios peddled by the Coalition. Business appears not to be worried (the Australian share market surged two per cent yesterday) and the economic studies forecasting doom and gloom look sillier by the week.

(The most outrageous claim made by the outgoing Prime Minister during the campaign was that abolishing WorkChoices would destroy 200,000 to 400,000 jobs. He based it on a simple piece of analysis that accredited all of the increase in jobs not linked to Australia’s trade weighted index to the start of WorkChoices on March 27, 2006. As a lark the ANU’s Professor Adrian redid the analysis to find out how many new jobs it would ascribe to the ascension of Kevin Rudd to the Labor leadership on Monday December 4, 2006. It ascribed more than WorkChoices.)

It is likely that Kevin Rudd’s weekend briefing from Treasury officials in Brisbane didn’t deal with any of these top three priorities.

Instead it will have told him that the budget forecasts around which both sides built their campaigns are obsolete.

Shortly after every election is called the Treasury releases a sort-of guidebook for campaign promises. Its proper title is the Pre-election Economic and Fiscal Outlook. The idea is to give both sides the latest official information with which to work.

This one said that inflation was on track to remain steady at around 2.75 per cent for the foreseeable future.

Importantly for the campaign the forecast was made after budgeting for the Howard government’s two biggest promises: $34 billion of tax cuts and $4 billion in assorted payments to pensioners, carers and retirees.

The implicit message – delivered to each side on Monday October 22 – was that as far as the Treasury could tell even big election bribes wouldn’t push inflation into the Reserve Bank’s danger zone.

Two days later on Wednesday October 24 inflation figures came out that rendered those forecasts obsolete.

The Reserve Bank wacked up interest rates at its next opportunity and then released much more alarming updated forecasts in its regularly-scheduled Quarterly Statement released just hours before John Howard delivered his campaign speech.

(The Treasury hasn’t had a chance to make public its replacement forecasts public, but it will have been delivering them to Kevin Rudd and Wayne Swan in Brisbane over the last two days.)

The Bank’s new forecasts show inflation climbing beyond the top of its target band to 3.25 per cent and staying there for at least a year.

Even by the end of the year after that, more than half way through the new government’s term, the Bank says it can’t be sure that inflation will be comfortably back within its comfort zone.

The forecasts suggest that inflation could spiral out of control.

Even with things as they are it is heading up and will require at least one more hike in interest rates to bring down.

Add in tens of billions of dollars in tax cuts and associated promises and still more interest rate hikes look certain.

A true economic conservative presented with such a scenario would ditch the tax cuts.

Completely ditching them isn’t politically possible. But right now the consequences of delivering the tax cuts as promised look worse. Does Kevin Rudd really want to be remembered as the Prime Minister who brought on three or more interest rate hikes during his first term and pushed mortgage rates up towards 10 per cent?

If he doesn’t, he might have to consider adjusting or staggering the delivery of the promise. He might be being told that in Brisbane right now.

Breaking tax promises in the light of new information has an impressive history. Dr Barry Hughes, a former advisor to Paul Keating makes the point that John Howard himself did it.

Days into his new job as Treasurer in the Fraser government in 1977 John Howard let his name to a campaign that promised a “fistful of dollars”. He failed to follow through after the election declaring the cuts unwise. Bob Hawke cancelled promised tax cuts on gaining office in 1983 and Peter Costello failed to deliver on a 1996 promise that if he became Treasurer he wouldn’t never increase taxes. He introduced several new taxes which labeled “levies” instead.

Paul Keating did it in perhaps the most honorable and economically responsible way in 1993, replacing his promised “L-A-W law” tax cuts with non-inflationary superannuation contributions.

It is not beyond the wit of Kevin Rudd to come up with something similar. Dr Hughes says the obvious solution is to “imitate airlines and railways by arriving late.”

The new Prime Minister would take us into his confidence and say something along the lines of: “I have promised to deliver these tax cuts and I will. But to do so right now would mean higher rates. As a true economic conservative I don’t want to do that. Instead I will deliver the tax cuts later when the pressure is off inflation and things have turned down. That’s when you’ll need them.”

1 comments:

Peter said...

LETTER TO EDITOR nOVEMBER 27, 2007

Tax cuts as savings

Peter Martin (''Ditch the tax cuts, Kevin'', November 27, p15) suggests that the new Government will have to somehow delay tax cuts or find some other way to reduce demand. Here is one suggestion. Give all the tax cuts but ensure that the tax cuts are spent on something that would be purchased anyway.

For example, give the tax cuts as money in a special health-care bank account owned by the taxpayer.Money from these bank accounts can only be spent on approved health care such as gap cover for the individualor their immediate family.If it is not spent then it remains in the bank account earning interest for spending in later years.
A high percentage of people will not need it immediately and so spending will be delayed.

It will reduce the need for the safety net provision on health costs and it will satisfy the promise to give tax cuts.

Kevin Cox, Ngunnawal

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