Monday, November 05, 2007

Fred Argy: Rudd takes the bait

One of Canberra’s most venerable economic advisors has accused Labor of uncritically swallowing Coalition myths and enthusiastically donning a economic straightjacket.

Dr Fred Argy, now a visiting fellow at the Australian National University and a former advisor of governments from Menzies to Keating has prepared a paper for the Centre for Policy Development, detailing what he says are “eight myths about tax and public debt which are holding us back.”

It says Kevin Rudd has embraced each of the myths referring to them as “fiscal orthodoxy”.

The first, that higher taxes are bad for economic growth, was on display at the start of the campaign...

...when the Prime Minister announced details of Australia’s biggest-ever collection of election tax cuts in front of sign that read “Go for Growth.”

In fact according to Dr Argy, few economists accept the proposition that higher taxes hurt growth. The effect of taxes depends on how they are raised and how they are spent.

The second myth, that a freeze on debt is the key to sound finance, “simply doesn’t make sense”. Just as with private businesses, what matters is net worth which can often be enhanced if money is borrowed for productive purposes.

The third myth, that the private sector is always as more efficient owner-manager of infrastructure than the government, is supported by “scant evidence”.

While the private sector generally is better than the public sector at designing, constructing and operating infrastructure, private ownership is likely to result in overcharging “as the users of many of Australia’s toll roads and tunnels have found”.

The forth myth is that a shift from government debt to private ownership, as happened with the sale of Telstra, helps ease pressure on inflation and interest rates.

The paper says although the view is widely held “even by people who should know better” the fact is that the pressures on demand, inflation and interest rates are the same however new infrastructure is financed.

The fifth myth, that if the private sector can’t finance something it has to be paid for out of government taxation revenue rather than borrowing, would if acted on lead to higher taxes than were necessary and result in the current generation unfairly shouldering the burden for facilities that will be enjoyed by the next.

Among the other myths are that running budget surpluses is good for national productivity (in fact, wisely-directed government spending can boost productivity) and that the community wants low tax and hates government borrowing. (In fact according to Dr Argy the community does not prefer lower tax to spending on things such as health, education and the environment and is only uneasy about large-scale borrowing because “voters have been told that it is financially irresponsible by both major parties for so long.)

The Centre for Policy Development describes itself as a new independent public interest think tank. Its board of directors includes Melbourne barrister Julian Burnside QC, John Menadue AO who headed the Department of Prime Minister and Cabinet under Prime Ministers Whitlam and Fraser, and Kate Walsh, the National Campaign Director of GetUp.