Tuesday, September 10, 2013


Government is largely about money. Dividing the spoils. Sharing out the bounty.

Which is fine when there's more coming in than you need.

Another great News Ltd Image

The problem faced by the new government, however, is rather the reverse.

Its success (or failure) is likely going to rest on its ability to keep different constituencies happy, as this article for the Canberra Times points out . . .

Government finances

The critical element in Labor’s fall was the way it lost control of the economic narrative. This was all its own doing.

When the party came to power it inherited a surplus but significant problems were lurking. This was the moment to shout of the danger: the structural deterioration of public finances. Recurrent expenses had increased, dramatically, as a proportion of the budget. The mining boom masked this. There was always enough money to make it look as if the Liberals were doing a fantastic job managing the economy. But the vulnerability was there.

When the GFC hit, Kevin Rudd and Wayne Swan famously went in hard, early and directing money at households. As a result, Australia barely felt the effects of the downturn. Critically, though, Rudd failed to use this opportunity to explain the danger. He was too busy basking in the glory. Later, when it became obvious that money had been squandered on school halls and other poor infrastructure choices, Swan simply promised a surplus as if this would make the bad things disappear.

The opportunities of the Tax review were frittered away as Rudd picked a fight with the mining industry, before losing it. After that disaster Labor didn't have the stomach (or the salesmanship) to do anything much. For most of his time as Treasurer Swan seemed to be impersonating a cork, bobbing on the ocean.

And this is why the economy will be Tony Abbott's biggest challenge. It demands urgent attention. Solving problems will be critical to his re-election chances. The opportunity to score goals is there because Labor’s abandoned the field; his challenge will be to find the right policies. Then introduce them in a way that engenders support, rather than angst.

One hint of the way this could be done comes from a couple of election campaign speeches. They represent, presumably, his most recent thinking. They also offer a way to cut through the Gordian knot of matching grand political commitments to mundane economic reality.

Take, for example, the commitment to return defence spending to two percent of GDP. The minute you hear this any sensible person should have the desire to shout, “rubbish!" It is obviously ridiculous to fix spending to an arbitrary figure. The amount allocated to defence should be the amount that's needed to maintain an appropriate number of ships, tanks and planes. So who decides what’s appropriate?

The problem is that the military can always swallow more money. It will cut its force structure to fit the money allocated. At some point it becomes necessary to fix on a figure and insist, “that's it, this is all the money you're getting’. Today, for example, defence receives eight percent of commonwealth spending and if it wants more the money has to come from somewhere else. The secret to governing well is to get the departments to squabble amongst themselves. And the way to do this is by dividing to rule.

By arbitrarily allocating a certain percentage (and only that percentage) to expenditure in a particular area, the focus shifts to how the money is being spent, rather than looking for ever larger handouts. Lobby groups can be told if they want more money spent on their pet project, they've got to find savings elsewhere. This has the advantage (for the government) of shutting down political debate.

That's because another of Abbott's key commitments has been to shrink, or at least contain, the government’s tax ‘take’ as a proportion of GDP (recently 30.8 percent). The advantage of putting out ridiculous, no unattainable, statements like this is that it demonstrates the complete and utter impossibility of reconciling the many and varied demands that are being made on the government. It's not possible to simultaneously both boost the amount spent on defence and health, for example, and reduce taxes. Something has to go.

Swan made the disastrous mistake of not recoiling in horror and alarm after he first examined the government finances. Instead he accepted them and later pretended it was responsible to splurge massive sums to enable us to avoid the GFC. Politically, it was an opportunity lost.

This time the government won't be so stupid. Joe Hockey is, I suspect, quite capable of feigning whatever particular emotion it is that will suit his needs best (and I mean this as a compliment). The new Treasurer will address the real problem; not in the way Labor predicted prior to the election by slashing and burning indiscriminately, but rather by attempting to create a framework that can be used to effectively arbitrate between competing demands for government spending.

Disability care (1.5 percent of spending) is one of these areas. How many times a week, for example, should a disabled person be eligible for hydrotherapy? Or a shower? Where do you draw the line?

You can go about this in one of two ways – either by arbitrarily allocating certain amount of money on a case-by-case basis (with all the uncertainty and unpredictability involved) or rather, and equally arbitrarily, deciding proportionately how much of the budget should be devoted to such care. See the political difference?

Our current model allows lobby groups to noisily demand more from the government. It looks stingy and miserly by saying “no". The second model allows the politicians to deflect the attack and pit interest group against interest group. If the school education sector believes class sizes are still too large, get them to make their case for the cutting of university tutorials.

This idea was all too much for Labor. Swan liked to pretend that he was capable of balancing the rival spending requirements up against one another and determining the right allocations. If Hockey's clever he'll steer clear of that.

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