Turnbull’s much needed economic reform plan
It now seems that early hopes newly installed Prime Minister Malcolm Turnbull would thrust Australian into a bold new era of economic reform have been bitterly crushed. If there’s one word that seems to describe voter feelings toward our PM it is, at least according to the pollsters, that of “disappointment.”
That feeling hints at what I suspect were hidden hopes held by many Australians: that someone would finally end the banality of recent politics and help transform our economy in the way Keating and Hawke did thirty (yes thirty!) years ago. We know we’ve had a lucky run and have let our economy get a little tired and sloppy. We need sharpening up.
The coming Federal election risks being as uninspiring for voters as that between Tony Abbott and Julia Gillard in 2010.
Turnbull and Treasurer Scott Morrison now have a last minute chance to inject some real economic reform into next week’s Budget. And it’s in an area where the Labor party would struggle to mount a convincing counter argument.
Although I clearly don’t know what the government is planning, at this stage at least, the media reports suggest there’s little on offer other than another sandwich and milkshake tax cut for a narrow slice of middle income Australians edging toward the top income tax bracket – funded by yet more magical “public sector efficiency dividends”.
At the same time we’re likely to see a good dose of union bashing and a scare campaign against any changes to negative gearing provisions.
If that’s all we get, Turnbull’s pledge of strong economic management will look as shallow as Kevin Rudd’s previous promise to tackle climate change, or what he once dubbed the “the great moral challenge of our generation.”
So how could the Prime Minister help reform the economy, bolster economic growth and all without deviating from the need to restore the underlying soundness of public finances?
By introducing a much needed reform to the public accounts – that of more clearly separating the “capital” and “operating” parts of the budget. As it stands, were the Government to allocate a billion dollars to a new public infrastructure program, the cost would go straight to the budget bottom line and show up as a widening in the underlying budget deficit.
Given the parlous state of the nation’s finances (at least in terms of recurrent taxation not meeting recurrent spending needs), Government’s are naturally reticent to splurge much more on capital projects, irrespective of national need.
Yet arguably more infrastructure spending is precisely what would be needed to support the economy if the mining downturn deepened – and it would result in a better balanced economy compared to simply relying on even lower interest rates to pump up house prices and household debt.
Indeed, a switch in the levers of economic policy is exactly what Reserve Bank Governor Glenn Stevens campaigned for in a speech last week. Speaking about the global economy in general, Stevens argued that “surely diminishing returns are setting in” with regard to the ability of low interest rates and central bank money printing to boost economic growth.
Along with structural reform to boost productivity, Stevens also saw a role for fiscal policy, arguing “for many governments today there must still be projects of an infrastructure kind that would, through conventional fiscal operations at current bond rates, offer returns comfortably above their cost of funding.”
Note, interest rates are lower in many parts of the world, but even our own Federal Government today can today borrow money for 10-year’s at an interest rate of only 2.6%.
Note in a clever accounting trick, the National Broadband Network is already being effectively financed through debt – as it has been set up through a separate public corporation in which the Government has made an “equity” investment. This investment is not counted as spending that contributes to the underlying deficit.
If need be, the government could simply expand the use of such a trick, by funding more public projects in this way – though this would be restricted to only projects which could generate some revenue down the track and become a saleable public asset.
Of course, at a time when public debt is already relatively high (at least by our own historic standards) adding to the debt burden in this way might seem profligate. But this is why it could only really be introduced in a serious way by a conservative Liberal-National Party Government, led by the “great communicator” Malcolm Turnbull.
Critically, moreover, the choice of infrastructure projects should also need to meet much more rigorous independent cost-benefit analysis than we’ve seen to date.
Separate capital spending in this way would also then allow the debate over the budget deficit not to be conflated between the problems of unfunded recurrent spending promises and longer-term nation building projects. Under this separation, the need to strive for an operating budget balance (i.e. recurrent spending less taxation) over time would be much less ambiguous.
Of course, I may hope, but I doubt the government will complicate its re-election strategy by introducing such a reform next week. Sadly, the least risky strategy seems to be a scare campaign against unions and negative gearing.
But I do hope that should the government be returned, reform of Budget accounting practises might form part of a newly emboldened Prime Minister’s second term agenda.
Published: Wednesday, April 27, 2016
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