National Observer Home > No. 65 - Winter 2005 > Articles
The Future of Mr. Peter Costello
John Stone
The past three months have seen two
major political developments — the
Prime Minister’s so-called “Athens
declaration” and associated political
brouhaha, and the federal Budget for
2005-06. Common to both are the
personality and performance of the
Treasurer, Peter Costello.
In what follows I propose first to
assess the quality of Mr. Costello’s
tenth Budget and comment upon his
performance more generally in the
Treasury portfolio. I shall then note
some lessons from the “Athens declaration”
incident regarding the behaviour
of the Treasurer. Finally, I shall
pose some suggestions for appropriately
disposing of the now too-longrunning
“Costello for P.M.” saga.
THE 2005-06 BUDGET
OPPORTUNITY
The Budget for 2005-06 is an extraordinary
document. To see just how extraordinary
it is, we need to look back
to its predecessor. The 2004-05
Budget, after providing for spending
increases totaling $37.8 billion over
the four-year forward estimates period
(2004-05 to 2007-08), and personal income tax cuts totaling $14.7 billion
over the same period, nevertheless
projected underlying cash surpluses
totaling $11.9 billion.
With the ink hardly dry on that
Budget, the Government embarked on
a spending spree leading up to October’s
federal election. The Pre-Election
Economic and Fiscal Outlook
(P.E.F.O.) document, a report by the
Secretary to the Treasury and the Secretary
to the Department of Finance
issued on 8 September 2004 under the
Charter of Budget Honesty Act 1998,
costed these spending policy decisions
at $4.2 billion over the forward estimates
period. As against that, upward
revisions to the estimates (so-called
“parameter and other variations”)
amounted to a massive $19.6 billion,
more than wholly because of upward
revenue estimates revisions of $21.5
billion.
Projected underlying cash surpluses
over the forward estimates period
now totaled $25.2 billion — more
than double the Budget figure.
The government was quick to take
advantage of this revenue cornucopia
in its election campaign promises. T
published in December, 2004 in accordance
with the Charter of Budget
Honesty Act, provides the figures. In
the three months between the P.E.F.O.
and the M.Y.E.F.O., new spending
policy decisions — almost all of them
election campaign promises — were
estimated to cost $7.0 billion over the
forward estimates period. Again, however,
upward “parameter and other
variations” to the revenue estimates
saw the underlying cash surpluses of
$24.0 billion for the forward estimates
period, in aggregate, barely dented.
In the months thereafter leading up
to the Budget on 10 May 2005 there
were persistent suggestions from independent
sources that, so far from
peaking in the M.Y.E.F.O. figures, the
revenue estimates (and associated underlying
cash surpluses) were being
revised even further upwards. Probably
the most respected of these independent
sources is the Canberra consultancy
Access Economics.1 Its
Budget Monitor document, finalised
on 20 April, 2005, predicted a huge
further jump in revenue growth, with
the underlying cash surpluses over the
forward estimates period forecast to
soar by no less than $21.6 billion over and above the M.Y.E.F.O. figures, to
an aggregate $45.5 billion.
Astonishing though the prospective
Budget outlook painted by Access Economics
was, in the event it proves to
have understated, not overstated, the
prospective surplus situation. The
Budget papers indicate that, when
Ministers sat down to finalise the
Budget, Treasury figuring would have
been providing for underlying cash
surpluses, over the four years to 2007-
08,2 totaling more than $60 billion!
Again, as in September and December
last, and as Access Economics had
suggested, the huge upward revisions
derived principally from some $37.5
billion of “parameter and other variations”
between the M.Y.E.F.O. and the
Budget.
To those who have borne with me
thus far in this heavily figure-laden
recitation, I should now proffer some
explanation for having inflicted it
upon them. I have done so to underline
the sheer magnitude of the taxation
reform opportunity the Government
had available to it in the lead up
to the Budget. Not only was it an opportunity
unprecedented in magnitude,
but it was also one of whose surging build-up the Government clearly
had more than ample warning. The
large upward revisions to the surplus
outlook portrayed first (publicly) in
the P.E.F.O. were maintained (the cost
of election campaign promises notwithstanding)
in the M.Y.E.F.O., and
must undoubtedly have been further
reinforced in the New Year by the (unpublished)
budgetary position review
normally undertaken then by the
Treasury. Key Ministers, at least, must
have been well and truly aware, in
good time, of the bountiful prospect
before them.
It is one thing to have to frame a
Budget in conditions of adversity — as
this Government had to do in its first
Budget in 1996, when it inherited the
$10 billion “Beazley black hole” from
the outgoing Keating Government. It
is altogether another thing to be sitting
down to frame the 2005-06
Budget in circumstances where not
only have you paid off almost the
whole of the Commonwealth’s government
debt, but you also see prospective
surpluses running at $10-$15 billion
each year for the next four years.
Blessed with this once-in-a-lifetime
opportunity, how did the Government
handle it? THE BUDGET OUTCOME
Details aside, four features of the
Budget stand out, namely:
(1) Despite the fact that (for understandable
reasons) a government’s
first post-election Budget is traditionally
one in which it seeks to
tighten spending by cutting or abolishing
some existing spending programs,
little or no such effort seems
to have been made this year in Cabinet’s
Expenditure Review Committee,
chaired by the Treasurer.
(2) The Welfare to Work program
purports to begin the long overdue
task of shifting off the welfare rolls
those many people who not only
should never have been on them in
the first place, but whose own lives
are impoverished by being so. This
comprehends a host of new and increased
spending programs on such
things as training, childcare facilities,
and so on to aid that transition.
For what the estimates are worth,
any results are likely to be modest
in magnitude, glacial in their pace
of occurrence, and expenditure-increasing
(net) for at least the next
four or five years.
(3) Personal income tax cuts, which
appeared to be cobbled together in
the last week before the Budget, are
estimated to cost $21.7 billion over
the new four-year forward estimates
period (to 2008-09).
(4) A so-called Future Fund is to be
set up, to which will be devoted the
proceeds of the surplus for 2004-05
(estimated at $8.9 billion); an
amount of roughly $7 billion of
Commonwealth funds currently on
deposit with the Reserve Bank;
probably, most of the proceeds from
the proposed sale of the Government’s remaining shareholding in
Telstra; and such budgetary surpluses
as, over future years, governments
of the day manage to accumulate.
These sums, plus the earnings
from their investment, will finance
what would otherwise be the
call on future budgets to meet the
unfunded liabilities of past Commonwealth
public service superannuation
schemes,3 currently estimated
at about $91 billion.
Before proceeding to my own less
rosy assessment, it is fair to note that
the Budget appears to have been initially
well-received. A Newspoll conducted
in its immediate aftermath
ranked it as “the best-received on
record” (during the past 15 years) in
terms of people’s reaction to the question
whether they felt they would be
better off, or worse off, as a result.4
Even Labor-voting respondents were
almost equally divided between those
who thought the Budget would be
“good for the Australian economy” (35
per cent) and those who thought it
would be bad (41 per cent). (A later
Westpac-Melbourne Institute poll also
showed a sharp jump in consumer
confidence post-Budget compared to
the April figure.) Interestingly, however,
the same Newspoll did not
record any improvement in voter attitudes
towards the Coalition, which actually slipped two percentage points
versus Labor in two-party preferred
terms.
THE PERSONAL INCOME TAX
SYSTEM AND THE LOST
OPPORTUNITY FOR REAL REFORM
In the January issue of this journal I
argued that the window of political
opportunity with which the new Senate
will provide the Government from
1 July, 2005 should be used “to maintain
and strengthen our recent outstanding
record of economic growth”,
and that one of the two key aspects “of
economic (but not only economic)
policy which are central to achieving
that objective” is “the reform of our
personal income tax system”.5
I was aware that a great obstacle, always
raised against past calls for real
personal income tax reform, has been
the heavy cost to revenue involved,
and the danger of thereby driving the
federal Budget back into deficit. I
therefore did not argue that my reforms
could be effected overnight in a
single Budget (although, had I then
known the extent of the mounting prospective
surplus situation, I may well
have done!).
Four months later I called in The
Australian for the government to lay
out, and begin to implement, a tax reform
plan:6 “Of course, no reasonable person
has expected the government to do
so [reform our personal income tax
system] overnight in next week’s
Budget. What reasonable people
have had every right to expect, however,
are four things.
First, the Government next week
should clearly and unequivocally
commit to a significant reform. Second,
it should clearly set out that
reform’s key objectives, including a
broad timetable. Third, it should
take the first steps towards those
objectives, using the huge surpluses
now available and in prospect.
Fourth, it should stop talking nonsense
about hoarding those surpluses
for the benefit of some future
generation much richer than us”.
Given the main features of the
Budget noted earlier, it is clear that,
on almost all counts, it fails to meet
those ”reasonable expectations”. It is,
in fact, a lazy Budget from a Government
showing increasing signs of
complacency, and as such it represents
a hugely wasted opportunity. How, we
may ask, has this come about?
A LAZY BUDGET FROM A LAZY
TREASURER
The outstanding hallmark of this
Budget is its sheer laziness. First, as
noted earlier, the Expenditure Review
Committee, chaired by the Treasurer,
seems to have made no significant effort
to peg back (or better still, abolish)
the hundreds of departmental
programs via which it spends, and in many cases wastes, our money.
Second, there is the proposed Future
Fund, into which a lazy Treasurer
proposes to stuff tens of billions of our
dollars because he can think of nothing
better to do with them. Space does
not permit a more thorough assessment
of this fiscal confidence trick.
Third, the Welfare to Work program,
although ostensibly well enough
intentioned, is almost entirely lacking
in either courage or genuine philosophical
conviction, and is destined to
have next to no effect on the problem
to which it claims to be directed.
Over and above all these, however,
is the failure on tax reform.
Now it may seem ungenerous to
thus describe personal income tax cuts
totaling $21.7 billion over the next four
years, plus abolition of the vexatious
superannuation surcharge (a crazy tax
introduced in 1996 by the same Treasurer
now taking credit for abolishing
it). The fact is, however, that the personal
income tax changes fall into essentially
the same error as those in
2003-04 and 2004-05 — that is, fiddling
at the income threshold fringes
rather than tackling the rate scale fundamentals.
As on those earlier occasions,
the Government has sought to
ease the pain for taxpayers without
addressing its real cause — namely,
those high marginal tax rates of 43.5
per cent and 48.5 per cent (including
the Medicare levy).
As noted in that aforementioned
article in The Australian, so long as those rates exist, and diverge so widely
from the 30 per cent corporate tax
rate, “taxpayers will move heaven and
earth to (legally) avoid them. In Kerry
Packer’s famous words to a parliamentary
committee [which Mr. Costello
should recall because Mr. Packer
made a monkey of him personally on
that occasion], they will do so because
they rightly object to handing over
their incomes ‘to be spent by people
like you’ ”.
It is remarkable that, after nine
years in the Treasury portfolio, Mr
Costello seems to have not even an
inkling of this basic truth. Indeed, in
defending his decision to increase the
income thresholds at which these high
marginal rates cut in, rather than beginning
to cut the rates themselves, Mr
Costello has employed precisely the
same “politics of envy” arguments that
one would expect from some Labor
Party spokesman. Cutting those rates,
he says, would have given too much
to top taxpayers “like Kerry Packer”.
How he reconciles such an argument
with the Government’s own defence of
its decision to lift the top rate thresholds
(namely, that it is not surprising
that tax cuts should appear to favour
those who are actually paying the
heaviest taxes), is beyond me.
The Budget betrays no evidence
whatsoever that the Treasurer has
even contemplated a program of genuine tax reform. Instead, after a lazy
Expenditure Review Committee process,
a lazy Treasurer, confronted with
a huge and still upwardly spiraling
budgetary surplus outlook, has reacted,
first, by cobbling together some
hastily assembled tax cuts having little
or no genuine reform component;
and second, by conjuring up a newlydevised
Future Fund into which the
remaining embarrassing surpluses
might be stuffed, ostensibly to deal
with a suddenly recognized problem
which has existed long before this
Government took office and which, for
the past nine years, it has studiously
managed to ignore.
I am not the only observer to be
critical of the Budget’s lack of focus,
not to mention imagination, on these
scores. Its generally favourable media
(and public) reception notwithstanding,
the more thoughtful journalists
have expressed similar concerns, generally
along the lines of it being “a
wasted opportunity”.7
My own criticisms, however, go further,
to the personality and performance
of the Treasurer himself; and to
these, as illustrated by the so-called
“Athens declaration” affair, I now
turn.
THE “ATHENS DECLARATION”
The key elements of this affair are well
known. On 29 April 2005 the Prime Minister, towards the end of a whirlwind
overseas tour embracing China,
Japan, Anzac Cove, Turkey and
Greece, granted an interview to two
journalists, Malcolm Farr from the
Daily Telegraph and Steve Lewis from
The Australian. Pressed repeatedly as
to his future career intentions, he said,
“I’m not planning going anywhere”;
and when then asked whether he
thought he could again defeat Labor’s
Kim Beazley at the next federal poll,
he responded in the affirmative.
On 30 April these remarks — more
precisely, the screaming headlines
which both journalists put on them –
burst like a thunderclap back in Australia.
Throughout the following week
their reverberations continued to roll
as the Canberra press gallery panted
in pursuit of what it loves best, namely
stories that might hurt the Coalition
in general, and their real bête noire,
John Howard, in particular. Underneath
all this media froth, however, a
real story was emerging, namely the
further confirmation of Mr. Costello’s
political immaturity.
In speaking of “confirmation”, I am
referring to the whole series now of
instances in which, confronted with
serious tests of his political maturity,
Mr. Costello has failed to measure up.
Perhaps most notably, in June 2003,
when John Howard finally said that
he would not be retiring on his impending
64th birthday, but proposed
to contest the next election, Mr.Costello’s response was extraordinary.
At a press conference twenty-four
hours later, having first expressed his
(understandable) disappointment, he
went on to behave like a sulky schoolboy.
Anyone watching that self-indulgent,
narcissistic performance with
the future interests of the Liberal Party
in mind must have done so with a sinking
heart. This was not the behaviour
of a leader, but of an immature man
unable to handle the revelation that
his reach had clearly far exceeded his
grasp.
In an article in The Australian on
15 October 2004 I listed several more
instances, all drawn from the recent
federal election campaign, casting
doubts on Mr Costello’s future claim
to the leadership. For example:8
“How could the Liberals’ deputy
leader, on the first day of the campaign,
petulantly refuse to rule out
a possible future challenge to his
Prime Minister? Not once, but several
times; until, a few hours later,
he was finally dragged into a joint
press conference with Howard to do
so!”
In the week or so following “the Athens
declaration” Mr. Costello’s behaviour
fully lived down to these (and
other such) previous standards. On
the very night of Mr. Howard’s remarks
in Athens, the Treasurer was
rumbled dining in Melbourne with
four journalists from The Age, who,
judging by the front page story they then wrote for the later editions of that
newspaper, went straight from the restaurant
to Spencer Street to file the
story he had clearly given them. Consistent
with past precedent, it was a
story of well-founded ambition perversely
denied by a man (John
Howard) who simply refuses to make
way for his logical, and wholly deserving,
successor.
And so it went on throughout the
following week, with journalists
clearly being briefed by both Mr
Costello himself and, even more damagingly
on several occasions, by various
members of the small coterie of
third-rate Liberal parliamentarians
with whom he has almost entirely surrounded
himself. As a Sydney Morning
Herald editorial remarked:9
“Exclusive interview after exclusive
interview with Peter Costello has
been published this week. The excuse
is the budget next Tuesday, but
that is not what the questioners or
the subject want to talk about”. [My
italics].
We were told that this would be Mr.
Costello’s last Budget, or alternatively,
his last term as Treasurer. We were
darkly warned that his talents were
such that he didn’t have to confine
their use to a parliamentary career; he
could readily find employment for
them as Chief Executive of a major
public company, at a salary of (say)
$1.5 million a year. (If all of this sounds eerily reminiscent of some
similar past performances by then
Treasurer Paul Keating, I should however
note that in Mr Costello’s case
there was no mention of “the Paris
option”.) The Minister for Foreign Affairs,
Alexander Downer, was being
“sounded out” to assist in dislodging
Mr Howard, on the understanding
that he would then succeed to the
Treasury portfolio. And on it presumptuously
went, as though the only
people concerned in this matter were
the small band of Liberal parliamentarians
in Canberra — and (as with all
such elites) to hell with the Australian
electorate!
Then, after ten days of Costellocamp-
generated political mayhem, the
popguns fell silent when, on Monday,
9 May The Australian published the
results of a special Newspoll on the
leadership question.10 Asked to choose
“the best candidate to lead the Liberal
Party”, 61 per cent chose Howard and
only 23 per cent Costello. Even more
damaging to the claims of the Young
Pretender was the 84 per cent (to only
12 per cent) preference for Mr.
Howard among Coalition voters.
There should not, incidentally, have
been anything surprising about this,
or about the fact that, asked in that
same Newspoll to choose between Mr.
Costello and Mr. Beazley as to who
“you think would make the better
Prime Minister”, 45 per cent (including, notably, 25 per cent of Coalition
voters) chose Mr. Beazley, while only
34 per cent chose Mr. Costello. For
years now, every poll I have ever seen
has shown similar results.
The inescapable truth is that Mr.
Costello is unsaleable to that element
of the electorate on which, for some
time now, the political fortunes of the
Coalition have come to rest.
So, after all this sound and self-regarding
fury, just what had the
Costello camp achieved? One thing
only, namely that in that post-Budget
Newspoll referred to earlier, and notwithstanding
the “best-received
Budget” in the past 15 years, the Coalition
had actually lost ground slightly,
by two percentage points in the twoparty
preferred rating. Well done, Mr.
Costello!
All of which leads to the question,
what is to be done with the gentleman
in question?
THE FUTURE OF MR. COSTELLO
In addressing that question I start
from the position, inherent in what is
said above, and consistent with what
I have said for some years now,11 that
the future of the Liberal Party, of the
Coalition, and of political conservatism
in Australia, now depends upon
John Howard remaining Prime Minister.
Subject always to those twin threats of personal health and hubris,
I believe he can do so for at least another
two federal elections. However,
the “Athens declaration” uproar
makes it clear that Mr Costello and his
supporters continue to harbour the
delusion that it is now “his turn”. This
boil must be lanced.
After the autumn session of the Parliament
has concluded, and the Government
has enacted most of its more
immediately important legislation,
John Howard should therefore invite
Mr. Costello to discuss how best, in the
interests of their party, to resolve the
issue. He should, I suggest, inform his
deputy that, in a Cabinet reshuffle before
Christmas, he proposes to recommend
to the Governor-General a new
ministry, in which Mr. Costello can
choose any portfolio he wishes other
than the Treasury.
In doing so, the Prime Minister
should put it to Mr Costello that, since
he (Howard) is still “not planning going
anywhere”, it is no longer in the
interests of the Government, or in Mr
Costello’s personal interest, for him to
go on doing a job which he will then
already have done for almost ten years
and of which he has clearly grown
tired. The Prime Minister should
therefore say that he proposes to invite
Mr Downer to take the Treasury
portfolio (in part, though Mr. Howard will not say so, because in no way can
Mr. Downer be seen as possibly supplanting
him!). He should give Mr.
Costello 24 hours to decide.
The choice would then be up to Mr.
Costello. He could either choose another
portfolio (Foreign Affairs? Defence?
Attorney-General’s?), retire to
the backbench to sulk, or leave the
Parliament to pursue one of those
many alternative options which his
supporters say would be readily open
to him.
Of these choices, the manly course
would be the first one, namely to
choose another portfolio and, by buckling
down and actually performing in
it for some years, demonstrate that he
does, after all, have leadership potential.
The next most manly course
would be to accept that his game is up,
and make a clean break by leaving the
Parliament.. The least worthy course
would be to retire sulkily to the
backbench, with a view to creating
trouble for Mr. Howard. That, natunaturally,
would be the course that would
endear him most to the Canberra press
gallery.
If we make the most pessimistic assumption,
namely that Mr. Costello
chooses the least worthy course, the
question then becomes, how much
trouble would such a situation in fact
portend for the Howard Government?
In the short term at least, there would
be some. Nevertheless, my own belief
is that, the efforts of the journalists
notwithstanding, it would not be longlasting,
and that the obvious petulance
of such behaviour would rather
quickly lose Mr. Costello such political
friends as he has. As to the electorate,
while it never likes to see a political
house divided against itself, my
judgment is that it would fairly quickly
consign Mr. Costello to the graveyard
to which it normally relegates failed
politicians, particularly those who
have proven too big for their boots. Mr
Howard, in the aftermath, could then
proceed calmly towards winning the
2007 election.
1. Although I have no connection with Access Economics, in the interests of full disclosure
I should perhaps note that not only was the firm founded by a number of my
former employees in the Treasury for whom I maintain a high regard, but also retains
a high proportion of them to this day.
2. The “forward estimates period” referred to here is that laid out originally in the
2004-05 Budget, covering the four years 2004-05 to 2007-08 inclusive. The 2005-
06 Budget, naturally, rolls that period forward by a year so that it now covers the four
years 2005-06 to 2008-09.
3. Of one of which I am of course a beneficiary.
4. “Budget earns a record welcome”, Denis Shanahan, The Australian, 17 May 2005.
5. “What Mr Howard’s Government Needs To Do”, National Observer, Issue 63, Summer
2005.
6. “Unjust, unimaginative gall of withholding cuts”, in The Australian, 2 May 2005.
7. See, for example, “Wasted opportunity for fundamental reform”, Alan Wood, The
Australian, 11 May 2005; “Howard tax legacy a wasted opportunity”, Neil Warren,
The Australian Financial Review, 17 May 2005; “Stuck in a three-dollar mindset”,
Greg Sheridan, The Australian, 12 May 2005.
8. “Grow up and change jobs, Mr. Costello”, in The Australian, 15 October, 2004.
9. “A question of ambition”, Editorial , The Sydney Morning Herald, 6 May 2005.
10. “Costello fails to win over voters, Steve Lewis, The Australian, 9 May 2005.
11. See, for example, “Peter Costello would ruin the Coalition”, in The Australian
Financial Review, 16 August 2001; “A death-blow for cultural conservatism?”, in The
Adelaide Review, September 2002; “Costello as P.M. just won’t do”, in The Australian,
3 January 2003.tional Observer No. 65 - Winter 2005
