Friday, July 23, 2010

Why Abbott is Gillard-lite; Why Gillard is Abbott-Lite

Think of ice cream vendors:

Twelve years ago Australia's two great political machines marched into an election with sharply different economic programs. The Coalition would introduce a Goods and Services Tax, Labor would fight it the death. Australia voted for the GST.

Five years earlier there had been another stark choice, on that occasion between a GST with an unprecedented cut in government spending - literally a decimation, with 1 in every 10 dollars removed - and business as usual. On that occasion we chose business as usual.

But since then not a single important economic decision has been laid before us at an election.

WorkChoices received not a mentioned in the 2004 campaign. The November 2007 campaign contained not a hint of the nation's biggest-ever economic stimulus program unveiled just twelve months later.

One reason we are no longer being presented with stark choices is because good economic management is about responding to events as they come up.

Peter Costello demonstrated that clearly when months after promised continuing surpluses in the 2001 election he threw the switch to deficit in order to escape a global recession.

Tony Abbott, Malcolm Turnbull et al. would have done the same, whatever they say. We would have wanted them to.

Another reason we are now denied stark choices is that the rules have been rigged...

The so-called Charter of Budget Honesty includes one very odd provision. The resources of the Treasury and Finance are available to the Opposition to cost its policies, but only after the election has been called and only if the opposition policies are delivered to the Prime Minister. That's right - if Abbott wants to get to something costed quietly before announcing it he has to show it to the Prime Minister. If he wants to get it costed in public after it is announced it is as good as certain Finance and Treasury will come up with a different cost and he will be seen to have made a "gaffe".

The government faces no such problems. It can quietly submit proposals for official costings before the campaign and is under no obligation to let its opponents in on what it is planning.

In opposition Labor's Lindsay Tanner campaigned against the rule and introduced a private members bill to overturn it. In government he let it stand.

Wayne Swan's way out of the trap last time was to create a "Labor" tax policy that was identical to the government's in all but one minor respect. He knew the original had been officially costed and so knew the costing of his carbon-copy would be almost the same.

Tony Abbott tried the same trick Wednesday. He thought that by making only a few small changes to Labor's pre-existing Education Tax Rebate his figures would be safe from criticism. He was wrong.

But even if the rules were unrigged, Abbott would still face pressure to become Gillard-lite and Gillard to become Abbott-lite.

As long ago as 1929 economist Harold Hotelling came up with Hotelling’s Law which he used to describe the behaviour of two icecream sellers on a beach.

If the potential customers are evenly distributed along the beach, the best way to serve them is to have one icecream cart a third to a quarter along from one end of the beach and the other a third to a quarter form the other end.

But Hotelling said that even if that's where each vendor starts, each would face pressure to move toward the centre of the beach in order to grab extra customers. Their existing customers would grumble, but would continue to walk toward the centre in order to be served.

Eventually the two carts would be next to each other in the middle, each serving most of its customers badly.

If the ice cream vendors were politicians they would end up almost aping each other.

On Tuesday Abbott was pressed on Melbourne radio to put a figure on how big he thought Australia's population target should be. His answer? "Well, probably significantly less than it is now."

Later that day he and Joe Hockey trumpeted $46 billion in spending cuts. Their mantra was "reduce the deficit, get rid of the debt".

But $46 billion is so small in the overall scheme of government spending over four years that Hockey was unable to say that they would push the budget into surplus materially earlier or pay off government debt materially faster. With or without the Coalition's cuts the surplus should arrive in 2012-13, and and debt be paid off by 2017-18.

And the $46 billion savings figure is subject to shrinkage. The Coalition spent some of it Wednesday boosting the Education Tax Rebate. It would lose another $10.5 billion if it went ahead with its plan to drop the proposed new mining tax.

In budgetary terms there is surprisingly little difference between the two programs.

In Sydney the same day after Reserve Bank Governor had addressed an audience of 370, most of them market economists, one suggested a spot of "audience participation".

"Please raise your hand if you believe one side of politics will apply more downward pressure on interest rates than the other," he asked.

After silence and then nervous laughter not a single hand was raised.

Some of the differences between the two sides do have meaning, even if they lack economic significance.

Labor proposes to build a national broadband network to replicate existing systems that serve most of Australia quite well. The Coalition would not.

Labor plans to increase compulsory super contributions from 9 per cent to 12 per cent of salary. The Coalition would let us get that 3 per cent in future pay rises allowing us to decide when we spent and when we saved it.

And Labor's decision to consign most of the Henry Review to the too-hard basket opens up a really big opportunity for the Opposition should it choose to take it.

Abbott and Hockey are yet to release their tax plan.

One of the 100-plus proposals ignored by the government would tax the working income of all but a tiny proportion of Australians at one simple flat rate.

No worker would pay tax on their first $25,000 earned. Then right up until an income of $180,000 tax the flat tax rate would be 35 cents in the dollar.

There would be an instant big reward for taking a job and no need to mess around overlapping tax and welfare systems.

Adopting it as an aspirational goal could be a game-changer, for a party that wants a policy.


. Budget surplus by 2012-13
. Government debt paid off by 2017-18
. $10.5 billion mining tax
. $43 billion National Broadband Network
. Phase in of 12 per cent compulsory superannuatio


. $46 billion in spending cuts.
. Two-year partial public service hiring freeze
. Axing Broadband Network, Selling Medibank Private
. 760 million expanded Education Tax Rebate
. Unspecified commitment to lower, simpler, fairer taxes

Published in today's SMH and The Age, Monday July 26

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