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Summer 2005 cover

National Observer Home > No. 63 - Summer 2005 > Articles

What Mr. Howard's Government Needs to Do

John Stone

Writing here three months ago during the federal election campaign, I said that, despite its imperfections, I nevertheless proposed to vote for the Coalition in both the House of Representatives and the Senate. In the end, 52.7 per cent of the electorate (on a two-party preferred basis) did likewise. The Howard Government was not only returned on this fourth successive occasion, but it will also have, from 1 July next, a Senate majority in its own right.

Literally millions of words have since been spoken or written about this outcome, and I shall not add unnecessarily to their number. I propose, rather, to focus on the opportunity, and the key tasks, now facing the new government. First, I shall sketch the extent of that opportunity, which is greater than that of any Australian government since Malcolm Fraser's election in 1975. Second, while acknowledging that everyone will doubtless have their own areas on which they believe the government should concentrate its energies for reform, I shall focus on the need to maintain and strengthen our recent outstanding record of economic growth. Finally, I shall say something about two aspects of economic (but not only economic) policy which are central to achieving that objective: the reform of our still highly regulated labour market, and the reform of our personal income tax system.

John Howard's Window of Political Opportunity

The extent of John Howard's victory on 9 October last is extraordinary. Eight and a half years after first becoming Prime Minister, his government was returned to office with an absolute Coalition majority of 24 in the House of Representatives, compared to that of 14 which he gained in 2001 (although also compared to that of 40 which he first enjoyed in 1996 in the wake of that anti-Paul Keating landslide).

I have written elsewhere that this outcome was, above all, a victory for John Howard personally, and that such has been its extent that:1

"[S]ubject to his not succumbing to hubris, and to the usual health considerations, I venture the suggestion that, nine years hence, Howard could still be Prime Minister and the Labor Party (if it then remains in its present dysfunctional state) could still be eating his dust".

Since then the extent of Labor's dysfunctionality under Mark Latham's leadership (sic) has been much more fully revealed. In politics, of course, a week (let alone nine years) is a long time. Out of the wings of the Labor Party there may yet emerge some political conjuror who, by remaking the party, will restore it to the point where it can again realistically aspire to federal office. Nevertheless, I think it clear that, so long as John Howard feels able to remain Prime Minister, he is likely to be able to do so. As usual, the chief threats to the Coalition's position during that time will almost certainly come from within its own less than disciplined ranks (the so-called "Costello camp" in particular, and perhaps also the Malcolm Turnbull glitterati).

While however the Coalition's House of Representatives victory was remarkable, its prospective Senate position constitutes an even more important election outcome. Since 1 July 1999, when the Senators elected at the 1998 "Goods and Services Tax" election took office, the government has laboured under the heavily adverse Senate consequences of that ill-fated venture.2 Those consequences will expire on 30 June 2005 when the terms of those Senators elected in 1998 (and who took office on 1 July 1999) come to an end. If we leave aside the four Senators elected in the Northern Territory and the A.C.T. (whose terms coincide with those of Members of the House of Representatives), the 36 Senators elected in the States, including 19 Coalition ones, who take office next July will remain in place until 30 June 2011. Thus, at the next half-Senate election (2007?), the Coalition parties have only to obtain 42.86 per cent (3/ 7) of the Senate vote in each State to win 18 State Senatorial positions (as they did in 2001) and hence retain their Senate majority for a further term. In short, once the new Senate takes its place next July, it is highly probable that the Coalition will continue to enjoy a Senate majority for the next six years. 3 That is the true measure of John Howard's window of political opportunity.

Maximising Economic Growth

In analysing, three months ago, why an imperfect Coalition government was still preferable to an even more imperfect Labor one, I said that one major judgment in that choice would be which side better possessed "the capacity to maintain and strengthen our continuing record of economic growth and rising real living standards". Noting that "since 1995-96 the Australian economy has grown in real (inflation adjusted) terms by 34 per cent, and average real incomes have risen accordingly", I said that "if this continually rising tide of economic progress has not lifted every single boat in our society, it has certainly not left many behind".

The Coalition Government, naturally enough, claims credit for all that. Yet the truth is (as its more intelligent members will privately acknowledge) that some part of our remarkable economic performance during the past nine years derives from decisions made by its Labor predecessors. In particular, the Hawke Government's strong programme of reducing tariff protection, together with the Keating Government's modest, but still valuable, moves to reform the industrial relations system, have contributed their legacies to our latter-day sparkling economic performance.

To acknowledge that is not to detract from the Coalition's achievements. On the contrary, only by acknowledging the positive nature of those earlier contributions (while noting also, of course, the factors working in the opposite direction, such as the Beazley budgetary "black hole") can we single out those areas where the present government should now focus its reforming energies.

Where the economy is concerned, two such areas stand out, namely:

(1) the need to achieve, in the market for labour, the same enhancement of flexibility and personal choice which the Hawke Government initiated in the market for traded goods, and which has been subsequently furthered by the Howard Government, most notably via the agency of the U.S.-Australia Free Trade Area Agreement coming into force this New Year's Day; and

(2) the need to reduce the crushing levels of personal income tax, and particularly the top marginal rates of that tax, which increasingly are out of line with the needs of a nation competing with others for the internationally mobile resource of skilled labour.

Deregulating the Labour Market

In a conversation with Prime Minister Hawke in September 1984, a few days before my resignation as Secretary to the Commonwealth Treasury was to take effect, we touched on some highly critical remarks in my Shann Memorial Lecture a few days earlier about the terrible state of unemployment, and particularly youth unemployment, in Australia at that time, and the major responsibility (in my opinion) of trade union monopoly power for that situation.

Congratulating Mr Hawke on his government's moves to reduce tariff protection — for which, twenty years earlier, the Treasury among others had begun to agitate at a time when that objective had seemed almost unachievable — I said that I hoped to see a similar transformation of attitudes towards the protection of trade union privilege, which lay at the heart of labour market regulation. Mr. Hawke, not surprisingly given his route to the Prime Ministership via the Presidency of the Australian Council of Trade Unions (A.C.T.U.), doubted that would come to pass. Nor indeed did much change in this area during his time in office.

Ideas, however, are powerful things. On 21 April 1993, immediately following Prime Minister Keating's sweetest electoral victory of all, he laid out, in a speech in Melbourne to the Institute of Company Directors, a comprehensive programme of labour market deregulation. According to Mr. Keating's official biographer, John Edwards, who was closely involved in drafting that speech, Mr. Keating recognised that: 4

"The industrial relations system needed to be reformed, principally because wage agreements were not made at an enterprise level between employers and employees. But as long as Australia was to have a system of collective bargaining underpinned by minimum awards, rather than the alternative of individual contracts, the reform Keating proposed was as far as he wished to go . . . or would be allowed by his colleagues to go". [Italics added]

In the event, the ensuing trade union backlash resulted in the A.C.T.U.'s public humiliation of Labor's then Minister for Industrial Relations, Mr. Laurie Brereton, and a major watering down of Mr. Keating's original proposals. Even so, the outcome (principally, the introduction of Enterprise Bargaining Agreements) still represented progress. So, in turn, did the Howard Government's Workplace Relations Act 1996 — the so-called Reith/Kernot Act. For the past eight years, however, almost all further progress in this area has been stalled by the Labor/Australian Democrats alliance in the Senate.

The immediately post-Federation "Deakinite settlement" has been defined as comprising five pillars: industry protection, wage arbitration, White Australia, state paternalism and defence through Imperial alliances. As to those pillars, let me quote from the letter sent to the Prime Minister (with copies to the Treasurer and the Minister for Workplace Relations) on 9 November last over some 20 signatures, including my own:

"Protectionism has gone, White Australia likewise, and our defence strategy is based on the U.S. alliance rather than on the United Kingdom. State paternalism is a continuing issue, but it is the system of detailed labour market regulation which raises the most serious concerns about our capacity to compete as a prosperous, sovereign and influential nation in the world at large, and within our own region particularly.

Over the last twenty years the phasing out of protection by both Labor and the Coalition has transformed our economy, and our business culture, beyond recognition. During that period there has also been a degree of bipartisan support, albeit in the face of opposition from the trade union movement, for reducing the degree of regulation of employer-employee relations. Given the close and symbiotic relationship from the outset between protectionism and wage regulation, that was no more than logical. Today however the anachronistic and employment-deterring nature of our labour market regulatory apparatus has become increasingly manifest.

Successful reform of the law governing our labour market therefore has the potential to lift our economic performance as a nation, and the prosperity of all Australians, very significantly." [Italics added]

This is the nub of the matter. We live in a world in process of being transformed by China's economic take-off, and the potentially equally important economic take-off of India. It is a world changing even faster than it was twenty years ago, when the Hawke Government's measures of financial deregulation, followed more gradually by its measures to deregulate the markets in traded goods, set in train economically beneficial processes which are still at work today. It is, above all, a world in which to stand still is to be overtaken, and relegated to a lesser place.

This is not the place to list all the economic arguments for a major process of labour market reform. That would have been the task to be undertaken by the major inquiry sought by the aforementioned letter writers, but which the government has indicated it is not disposed to pursue. In any case, while the economic arguments for labour market reform are extremely strong, the moral arguments are even stronger.

Those moral arguments stem from the manner in which our present industrial arbitration system, and its associated award system governing wages and other conditions of employment, lock so many less educated or less skilled Australians out of gaining jobs. As I said in an Institute of Public Affairs paper nearly twenty years ago:5

"Australia still likes to think of itself . . . as a free country. It is therefore a remarkable fact that the one saleable asset which all Australians possess and of which . . . they cannot be deprived — namely their labour — they are forbidden by law (not to mention trade union muscle!) from selling freely."

Since the Howard Government came to office the official unemployment rate (seasonally adjusted) has been reduced from 8.5 to 5.3 per cent of the work-force. Yet, admirable though that is, the official unemployment rate is a figure which, in Australia, conceals at least as much as it reveals.

In compiling the monthly Labour Force Survey for the official employment and unemployment figures, a person is classified as officially unemployed (and hence part of the labour force) if (broadly) he or she has not worked in paid employment for more than one hour during the survey week, but is seeking employment and is available to start work during that week. In September each year, however, the Commonwealth Statistician undertakes a broader survey of the labour force characteristics of the whole population, the results of which appear in the Bureau of Statistics publication Persons not in the Labour Force (Catalogue No. 6220.0).

Essentially, this survey covers all persons aged 15-69 years who are not, at the time in question, in the labour force — that is, neither employed nor officially unemployed. As the Statistician says, the data "measure the potential supply of labour not reflected in employment and unemployment statistics".

The results of the 2004 survey are not yet available, but consider the following data from its September, 2003 predecessor:

• Of those persons not in the labour force, some 1,213,000 said that they wanted to work.

• Of these, 59,200 were actively looking for work, although they were not available to start work immediately.

• Of these, 39,400 were however available to start work within four weeks.

• The balance of those saying that they wanted to work (1,153,900 persons) were not actively looking for work on the survey date.

• Nevertheless, of these no less than 775,500 persons said that they would be available to start work within four weeks if a suitable job became available.

What these figures illustrate is the sheer magnitude of that "potential supply of labour not reflected in employment and unemployment statistics" to which the Statistician refers. If we also note the large number of employed persons, particularly those in part-time jobs, who would like to work longer hours, it is clear that there is a huge untapped reservoir of potential man-hours (including also woman-hours) available to add to the national product.

There are many obstacles to tapping this reservoir, most notably the lack of jobs. But the lack of jobs is best regarded as a symptom, not a cause. The causes for a lack of jobs include unfair dismissal provisions (largely a device for blackmailing employers); occupational health and safety provisions (also used, apart from their legitimate purposes, for blackmailing ends); barriers to the employment of independent contractors and sub-contractors; and so on. The Howard Government will be moving on a number of such fronts where it has been previously frustrated in the Senate. But, without diminishing the importance of such moves, the truth is that they will only be scratching the surface of the problem.

The much more important barriers to the greater provision of jobs for all those people wanting to work lie in the arbitration system itself, and in the apparatus of minimum wages and conditions legally imposed via that system, which effectively lock out all those whose lack of skills or other handicaps render them too expensive to employ at such bureaucratically determined cost levels. As the italicised passage in that quote above from John Edwards's book spells out, it is the "system of collective bargaining underpinned by minimum awards" which constitutes the fundamental road block. Until that road block is dismantled (for example, through "the alternative of individual contracts"), Australia's competitive position will remain severely handicapped. This is particularly true within an area of the world where such restrictions on the free workings of the labour market are either virtually unknown or, if they do exist at all, are ignored with impunity by all concerned.

Reforming the Personal Income Tax System

It may seem strange to say so, but there is a strong resemblance between the objections to our anachronistic labour market regulatory apparatus and the objections to our increasingly anachronistic system of personal income tax. Just as the activities of the Industrial Relations Commission and its State counterparts bear most adversely upon the least educated, least skilled and otherwise most disadvantaged in our population, so ultimately do the workings of our personal income tax system.

The present government, challenged with that statement, would no doubt claim that it has cut personal income taxes in both the 2003-04 and the 2004-05 Budgets; and so, to a limited extent, it has. Yet the ad hoc measures involved have wholly failed to address the fundamental problems of the system and have in fact merely tinkered with them. Those fundamental problems are many-fold, but let me mention a few.

First and foremost, the overall level of taxation is far too high. That is merely another way of saying that the overall level of government spending is far too high. Until that fundamental is addressed, progress on dealing with the personal income tax problem will be heavily constrained.

Second, although there is great, and justified, concern about the extraordinarily low taxable income thresholds at which the top marginal rates (48.5 per cent and 43.5 per cent, including in both cases the Medicare levy) of personal income tax cut in, the greater problem is not those thresholds, but the height of those rates themselves. Thus, although the 2004-05 Budget decisions to increase the thresholds were naturally welcome, the revenue resources involved would have been better devoted to shaving the rates themselves while leaving the thresholds (for the present) unchanged.

Third, the single most important reason why those top marginal rates are so high, and cut in at such low taxable income levels, is that all taxable income up to a level of $6,000 is free of tax (zero-rated). Contrary to what most people doubtless believe, the primary beneficiaries of this are not "low income earners" in the normal sense of that term, but people who are able to take advantage of that threshold for perfectly legal tax avoidance. The most obvious example is to avoid paying any tax, or to pay a much lower rate of tax, on investment income; and by definition that avenue for tax avoidance is only available to people with income-earning assets (shares, investment properties, and so on), and not to genuinely "low income" recipients. So long as nothing is done to redress this huge revenue "black hole", progress in improving the upper end of the rate scale will remain difficult.

Fourth, the wide disparity between the 48.5 per cent top marginal personal tax rate (or even the 43.5 per cent rate) and the 30 per cent company tax rate has led to an explosion of perfectly legal tax avoidance through higher income earners incorporating. While this has been a bonanza for the accountants and the tax lawyers, the resources employed in those processes are an unproductive dead weight upon the economy, as well as tending (again) to disadvantage ordinary wage and salary earners.

Fifth, and more generally, in an age when every man and his dog seems to be seeking redress of some alleged "discrimination" or other against them, how does it come about that our governments (of all political complexions) so blithely discriminate by taxing people with different incomes at different rates? Adding insult to injury, that discrimination is even rendered more objectionable by being termed "progressive". 6

Conclusion: It has been no part of my thesis to suggest that, simply because the Howard Government will shortly enjoy a Senate majority for probably six years, it should embark on a programme of revolutionary change finding no "mandate" in any of its pre-election rhetoric. That would be neither justified nor democratically appropriate, and John Howard, quite rightly, has been quick to indicate that he will do nothing of the kind.

It is however the thesis of this article that:

• More than any other single element, it was the government's record on economic growth and generally rising living standards (including the implicit promise to continue that record) which was responsible for its election victory.

• While the economic fruits of past actions to increase the freedom and flexibility of our markets are still being gathered, there is a need to address new policy areas if, over the period ahead, Australia is to maintain its recent outstanding economic performance.

• The urgency of that need is underlined by the speed with which the world economy, and particularly that part of it within our near neighbourhood, is changing around us.

• Two areas which clearly suggest themselves as prime candidates for major reform are our industrial relations system, and our system of personal income tax.

• The "system of collective bargaining underpinned by minimum awards" is not merely holding us back economically as a nation, but is also acting as the greatest single barrier to entry into the labour force of those hundreds of thousands of Australians who would welcome employment if employers were permitted to offer them jobs at costs which the latter could afford.

• Our so-called "progressive" taxation system is not only deeply discriminatory, but is also extensively avoided (as well as, at a different level, evaded). In the end, we cannot prevent our most highly productive people from moving overseas to jurisdictions where they will be allowed to keep a much higher proportion of their incomes. Their departure represents not only a loss to the nation, but also to those less able Australians whose own jobs and incomes ultimately depend upon the leadership and initiative of those people.

• In short, to suggest major change in both these areas is in no way revolutionary. It is simply a commonsense approach for the government "to maintain and strengthen our continuing record of economic growth and rising real living standards".

NOTES

1. "Grow up and change jobs, Mr Costello", in The Australian, 15 October 2004.

2. For a clear-eyed analysis of the self-inflicted problems of the Coalition consequent upon its abysmal Senate vote in 1988, see the paper by Professor Malcolm Mackerras, Prime Ministers and Reform of the Senate, in Upholding the Australian Constitution, Proceedings of The Samuel Griffith Society, Volume 16(2004), pages 17-50 at www.samuelgriffith.org.au.

3. On all this, see Mackerras, loc. cit.

4. John Edwards, Keating: The Inside Story, page 513.

5. Deregulate or Perish, Institute of Public Affairs States’ Policy Unit (W.A.), 1985. A copy of that paper is to be found at www.the-rathouse.com/guestroom.html

6. For an excellent exposition of the philosophical poverty of the arguments for so-called "progressive" tax regimes, and the consequent case for single-rate tax systems, see Lauchlan Chipman, The Very Idea of a Flat Tax, Centre for Independent Studies, November, 2004.

National Observer No. 63 - Summer 2005