Two things Abbott has done well

A READER challenged me last week to find just one good thing Tony Abbott and his government has done. I have to confess that it is a big challenge. It came after last week’s column lambasting Abbott for bringing us “Team Australia”.

Well, here goes. Not one, but two good things the Abbott Government has done. First, it has alerted us to the danger of deficit budgets and running up too much debt, and secondly, it has proposed incentives to state governments to sell or lease government-owned assets or business and to recycle the proceeds into new infrastructure.

A standard reply to the debt question has been that Australia’s public debt is very low compared to other countries and as a portion of our GDP so there is nothing to worry about. We are not in the position of Greece or Spain now or Argentina or Mexico a decade ago.

Maybe not. But the significant point is that we are headed that way unless something is done to change the trend. And Tony Abbott has been quite right to flag the danger. The time to act is when you can and before the trend gets out of control.

The big trouble is that government spending (which includes servicing debt) mops up domestic saving or, if there is little domestic saving to mop up, draws on foreign financial investment. So money that might have otherwise gone in to productive investment gets squandered on current government spending.

Now, if one could be assured that the debt being run up by government at quite low interest rates was being used to invest in productive investments that would return in the long run more than the interest being charged on the debt, we could all relax. But, as Abbott and his frontbench have been pointing out for some time, this is not the case.

Among the 25 most developed countries, Australia is one of only eight whose public debt position will worsen between now and 2019. It will increase by about five percent of GDP. Meanwhile, 17 of the richest countries are getting their debt under control. In those countries debt will fall – in Greece, for example, by nearly 40 per cent of GDP.

Of course, Greece was almost a basket case and has taken radical measures to control its debt. True, in 2019 we will still have low debt compared to other countries, but the moral of the story is not to head that way in first place.

In 2005-06 we had no net debt and it stayed that way till 2008-09. The Rudd Government was correct to go into debt to avoid recession. John Maynard Keynes said government should spend money on anything rather than not spend it to avoid recession.

He avoided recession and the inevitable extra debt that would have come with it.

But with recession avoided the trajectory has to be turned around. It is plainly silly and unnecessary to allow new debt to blow out to 60 per cent of government revenue by 2016-17 which is the current projection when it was minus 10 per cent of GDP in 2007-08.

If we are not in recession or not under threat of recession we should be reining in the debt, not blowing it out, so that if another recession looms we will be in the fortunate position we were in 2008 with enough money stashed away to pour it into the economy.

The big trouble is that it is difficult for politicians to do the economically correct thing – spend in tough times and save in good times. It is counter-intuitive. People expect the government to be generous in boom times.

The Howard Government did well to turn around Australia’s debt position, but it still did not save enough in the boom, instead handing out vote-buying tax cuts.

So Abbott has got the right idea to rein in the debt, but he should do it in a more acceptable way – not in hitting the poor with user pays but in reducing middle-class and business welfare. And the Government should have a solid look at the tax rates which are grossly unfair and will be come even more unfair as even two or three per cent inflation takes very modest incomes into higher brackets.

The key income point is $37,000 a year – a very modest income. Income above that is taxed at 34.5 per cent. Meanwhile, people on nice fat incomes of $80,000 to $180,000 pay just 39 per cent on their marginal income.

But the inflation-induced tax rises for those on very modest incomes will happen silently with no political consequences. Inequality will increase with a lot of economic and social cost.

It would also help to increase the GST to raise money to ease the burdens of the less well-off. But again the danger of the politically explosive sound bite will block rational and detailed discussion about overall tax fairness.

The other good Abbott policy has been to encourage the states to privatise existing government assets to raise money for new infrastructure – infrastructure that the private sector cannot initiate because it cannot raise the finance for new projects with no risk profile.

Railways, electricity, water and the post office are good examples of enterprises that became moribund under public ownership – less willing to innovate and take risks than if privatised. Only since some privatisation have the railways even looked liked competing with road transport.

And how many times do people have to come home to a letter-box note on Friday evening telling them there is a parcel for them to pick up at the Post Office – conveniently locked away for the next 60 hours.

And look how state-owned utilities have abused their monopoly powers to engage in outrageous pricing.

So yes, Tony Abbott, address the debt and privatise moribund state-owned enterprise, but do it fairly and do not sell the assets to your business mates too cheaply.
CRISPIN HULL
This article first appeared in The Canberra Times on 30 August 2014.