The Role of Government in the Economy & the Federal Election - Policy Analysis Working Group #6

Australia is a country in transition, and it is a major economic transition at that. Both major parties have accepted this understanding as the foundation for arguments about their economic credentials in the 2016 election. This provides an opportunity for Australians to have a policy-based conversation about the future of the country.

George Megalogenis argues persuasively in the current Quarterly Essay that this opportunity urgently needs to be taken up, since the big questions that center on the role of government in the economy can actually be voiced instead of silenced as they have been in recent times. In the aftermath of the 2009 Global Financial Crisis, neoliberal economic arguments based on the open market model have lost their position of dominance amongst policymakers, and this has opened up space for policy debate.

Economic management is always a major election issue, but this election provides the opportunity for a more complex debate which is focused on the long-term rather than the short-term as defined by the electoral cycle. But will this opportunity be taken up? The 2016/17 Budget was handed down in the shadow of the looming election, and gives insight into the sort of economic debate the parties want to have during the campaign.

On the part of the Government, the “budget emergency” rhetoric of 2014- which justified the deeply unpopular spending cuts of the Abbott Government- was missing. Similarly, the intense focus on the time frame for the budget deficit was also lost, as the path to surplus was extended yet again. This re-framing of the budget conversation on the eve of the election can only assist the development of a policy debate focused on the longer-term.

There are four broad policy responses to the fiscal issue of the budget deficit. The first response is to reform the tax concessions which built up during the mining boom, including the concessions on superannuation, capital gains and negative gearing in the housing market. The second option is to allow our government debt to increase, and the third response is to increase taxation. The fourth response is to cut spending and therefore the provision of government services. It is an indication of the new policy environment that more of these options are being seriously presented for debate.

Government spending as a percentage of Gross Domestic Product (GDP) remains at historically high levels after the Budget, with a relatively small reduction due to Government policies. This is despite the pre-Budget rhetoric of the Government advocating “living within our means”, and repairing the budget deficit through spending cuts rather than increasing tax. The approach to deficit reduction is therefore at odds with the Government’s rhetoric, as the majority of the reduction is based on optimistic economic forecasting that predicts increasing revenues as a share of GDP. This forecasting is uncertain, as all economic predictions are, but particularly given the Reserve Bank of Australia recently responded to signs of disinflation and a weakening domestic economy by cutting interest rates.

This small target Budget emphasised stability – “an economic plan”- rather than reform. In response, the Opposition provided clear alternative policy positions which were developed in 2015- “the year of big ideas”. This has further allowed the space for Australians to conduct a real policy debate this election. Despite this, the overly simplistic “class warfare” narrative has been encouraged by both parties since the budget, limiting complex debate. The traditional party stereotypes have been employed- with the Liberals criticizing Labor on the basis of high taxation to achieve the high spending, and Labor claiming the Liberal policies are unfair.

Is this “billionaires vs battlers” rhetoric justified? The most significant, and representative, item in the Government’s plan for “jobs and growth” is a cut to the corporate tax rate. This item on the face of it lends itself to the “billionaires” inequity critique (while noting that it is particularly targeted towards small-to-medium businesses). Additionally, the actual effectiveness of such a policy in increasing economic growth is disputed, particularly given the claim of growth is based on a long-term forecast in the budget, and the current weakening economic climate.

While it is easy for political opponents and media commentators to highlight individual policy items in isolation, analysis of the Government’s broad economic vision must take into account a major policy previously considered unthinkable for the Liberal Party. The Liberals have adopted a policy which is substantively the same as Labor’s idea to reform the superannuation system. This is a clearly historic moment of bipartisan support for a policy aimed at reducing inequality, and is an indication of a new policy environment where the old rules do not necessarily apply.

Labor goes further than the Liberal party in reforming tax concessions, with its policies regarding negative gearing and capital gains tax. These reforms aim to reduce the market distortion caused by the current policy regime. This is another notable moment in Australian political history, as these policies have been virtually untouchable since the re-introduction of negative gearing by Prime Minister Keating, and the combination with the capital gains policy by Prime Minister Howard. There is a significant shift in the space for debate this election as the Labor party accepts the Liberal criticism of their economic policies as higher spending, and higher taxing, and argues that this is what Australians want from government.

The latest ANUpoll canvassed Australians’ attitude towards tax reform, and its findings support the idea that this election, Australians deserve to have a more complex conversation about the role of government in the economy. The poll’s author, Dr Jill Sheppard from the ANU Centre for Social Research and Methods, says “Australians are showing the highest rates of support for spending on social services, when compared with cutting tax rates, since this question was first asked in 1987. It seems that Australians are moving on from the idea of ‘election-winning tax cuts’, and so far in this campaign the major parties appear to have agreed.”

In the context of a lengthy campaign period, there are more policy proposals to be announced by both major parties. The economic debate may shift from simplistic political narratives to more substantive policy issues affecting the transition to a new-look Australian economy. Currently there is a lack of political debate on the scale demanded by the challenge of the economic transition. However, it is clear that the policies outlined by both major parties so far have taken the 2016 election to a new place- where Australians are actually able to have a national conversation about the role of government in the economy.