Tuesday, 24 April 2012

Gillard derailed yet again by poor judgement

Last week Julia Gillard was following a political script which was intended to culminate in a successful budget in early May.

First there was the statement about interest rates, and then the aged care announcement. A lot of work would have gone into both statements, but both issues were blown away by Saturday's allegations about Peter Slipper.

The truth is that the elevation of Peter Slipper to be Speaker was widely expected to be a problem for Julia Gillard.

She can't blame the Coalition; she knew when she anointed Slipper that the Coalition was trying to get him out of the Parliament altogether.

Julia Gillard makes so many bad decisions, it makes you wonder what she is thinking. Surely she must realise that hanging on to Peter Slipper and Craig Thomson is consigning her government to oblivion?

And it makes you wonder who is making the decisions. Are her gaffes the work of the real Julia or is she captive to the political judgement of her staff?

Obviously, the more serious the allegation, the more likely an MP or minister will have to stand down or resign. But the real rule in these situations is that if the furore over the alleged misdemeanour is doing damage to the government, then the alleged sinner has to go.

This issue is not going to go away. The ruse of standing aside will not last. It is unlikely the police will finalise their investigations before the budget. The public will soon work out that Slipper is now doing nothing for his continuing $275,000 salary.

There was also a lack of political savvy in the Prime Minister's speech last Thursday in Perth on interest rates. They undermined her position in one regard and opened the prospect of other trouble in the future.

The claim that interest rates could fall as a result of the forthcoming budget was just too smart by half. As many commentators observed, the claim made last week on the effect of fiscal policy on interest rates was an own goal because Gillard contradicted Labor's position in the stimulus debate in 2008 and since.

The second matter is more important. Although Gillard skated close to undermining the independence of the Reserve Bank of Australia (RBA), I would say for now she got away with it. It was very carefully worded and undoubtedly coordinated with the Treasurer and Treasury advisers.

The Treasurer has not given any suggestion or even a whiff that he would entertain any change to the McFarlane/Costello agreement that was established on the initiative of treasurer Peter Costello in 1996.

That is the right approach.

But the tone of the speech may encourage others to press the Government to think more about the role of the RBA. This could be difficult for the PM because the unions are pushing for change and they installed her in the first place.

The likes of Paul Howes of the Australian Workers Union and Garry Weaven would scrap the conventions and provisions that protect the independence of the RBA.

Weaven was formerly an ACTU apparatchik and obviously still thinks like one. Paul Howes is a young union boss with a high opinion of himself who plans to enter Federal Parliament and has already done a lot of damage to manufacturing by supporting the carbon tax.

Before further questioning the role of the RBA and its relationship with the Government, they should revisit the debates in the late '80s and early 1990s in Australia, NZ and elsewhere.

There is plenty of literature from both the right and left of politics that demonstrate the benefits of independence for central banks.

At this stage there is little reason for concern. But if the RBA does not lower rates and if the union movement pushes a populist line, then a desperate Gillard Government could do or say anything.

And some of its key supporters are interventionists and like to push their weight around.

Australia has had this debate in the past but we now have a bipartisan approach. Any tampering with the independence of the RBA would be a major blow to good economic management.

Under Gillard and Rudd, Australia has already gone backwards in workplace reform. Australia does not now want to go backwards on monetary policy as well.

The conduct of monetary policy between 1983 and 1991 was one of Labor's greatest failures under Keating, according to an independent analysis conducted by well known economist Dr Michael Porter and Mr Peter Hartley. Their comments are still relevant:

... the major explanation for the extremely high real interest rates was the variable and unpredictable nature of monetary policy. This, in turn, can be traced to two factors. One was the interventionist policies of the Treasurer. Mr Keating took pains to assure the financial community that he had his hands continuously on the 'economic policy levers'. Such intervention greatly raised the risk of investing in Australian assets, and raised interest rates relative to those in the rest of the world. The other was the official appearance of the Reserve Bank to a vague 'checklist' approach to monitoring policy ('Treasurer Keating's Legacy', Tasman Institute, July 1991)

Tuesday, 17 April 2012

Get ready for a taxing, not axing, budget

This year's budget will be more about politics than economics. That is not my prediction. It is what the PM's office has been privately saying for weeks. On the day that Julia Gillard defeated Kevin Rudd for the leadership on February 27, 2012 her advisers told the press that they were working on a "post trauma" recovery plan.
Geoff Kitney, writing on the front page of the Australian Financial Review on the same day, stated:
"Sources said that the May federal budget would be a critical part of the Government's revival strategy, with the return to a budget surplus in 2012/13 as the centerpiece of a political strategy aimed at rebuilding Labor's credibility and regaining its standing as the party best able to manage the economy."
Government should have political strategies, but not at the expense of good economic management. I suspect that the best thing in this budget will be a surplus. Treasurer Wayne Swan has said so many times that he is aiming for a budget surplus that I can't believe he will not fulfil his own commitment.
If he fails to produce a surplus he should resign.
To reach a surplus Swan will need to cut spending and increase revenue. Labor has not produced a surplus since before Wyatt Roy MP was born. I don't know how Swan will pull this rabbit out of the hat. He has already tried to put some of next year's spending into the current year. He might also shift some of next year's into the year after.
But tricky accounting dodges will not be enough this year.
I expect he will cut some spending; he has no choice otherwise his budget will have no credibility. The public will say if the government is not cutting its spending then clearly taxpayers are going to be paying more. Labor has such a record as a big and wasteful spender on everything from school halls, pink batts, TV set top boxes and Rudd's pursuit of a seat on the Security Council, Swan needs to be seen as tackling the issue.
But despite my expectation that there will be some cuts in programs like foreign aid, my prediction is that a key part of the budget will be increased taxes.
Business will be slugged. Top of that list will be the miners. Julia Gillard negotiated with the big miners to slash the mining tax. Contrary to the claims of her sycophantic supporters, she is a hopeless negotiator and gave away a lot more revenue than she intended. Now Swan is going to get it back.
But it will not be just business. Anyone that Swan can call 'rich' will be in their sights. Labor loves to play the envy card and it will be on the table in this budget. Watch out Gina, Twiggy and Clive and anyone on $90,000 p.a. or more.
The emphasis on raising more tax will mean that the budget will not be an axing budget: it will be a taxing budget.
Labor should have slashed last year, in the first budget after the 2010 election, but instead has been on a spending spree. Their hope is that the economy will give them a lift in the next 12 months so they can resume spending in the May 2013 budget and then head for an election in July or August 2013.
It would also help if the 2013 election is held before anyone knows that the projections for 2012/2013 were not met.
But a budget should not just be about balancing the federal books. It should start with a realistic assessment of the state of Australia's economy and then provide an outline of the government's economic strategies.
The strategies should include cutting debt, improving productivity, improving business competitiveness, protecting jobs, and reform of the labour market.
None of these strategies involve a radical departure from sensible, mainstream economic policy. The question confronting Australian politicians is not what to do but who is prepared to make the reform happen.
Australia must improve its productivity performance and thus ensure continued improvements in living standards. A realistic assessment would note that living standards are under threat for many Australians. And a government that is concerned about its political prospects would appreciate that cost of living concerns have had a major impact in the recent Victorian, New South Wales and Queensland election results .
To really protect jobs in a meaningful way, governments could do a lot more to reduce the costs of doing business. Phoney exercises about cutting red and green tape and other similar gimmicks in recent weeks will not make any real difference.
A fair dinkum strategy should not only give some objective assessments of what is happening in manufacturing but also what will happen when the resources sector finds that demand for its products starts to plateau.
I appreciate that this suggestion will not be embraced any time soon because the budget is likely to increase costs on business, not reduce costs, but it is still the approach that needs to be taken.
And Labor will certainly not include a strategy to improve the operation of the labour market. This is a glaringly obvious problem but clearly beyond Gillard's leadership capability. She can't even distance herself from Craig Thomson, even though the ACTU abandoned the HSU because of the stench of corruption.
Labor has no one on its frontbench that could muster the political will to confront the ACTU and the unions on labour market reform because of the "corrosive impact of Labor factional politics," as Mark Latham wrote in the AFR on April 11, 2012.
It is hard to understand why a government that is floundering in the polls should think that what it needs now is a political strategy. The one thing that Julia Gillard is not good at is politics.
If the PM and her Treasurer could only focus on better economic management then maybe, only just maybe, the Labor Party might do better politically than they are doing now.

Tuesday, 10 April 2012

Ball is in Gillard's court on mandatory sentencing

The weekend press reports say that our troops in Afghanistan will soon be transitioning to a mentoring role.

The claim is that we will leave when the people of Afghanistan can manage for themselves and so naturally Defence Minister Stephen Smith says there have been 'substantial' improvements in security and performance of the Afghan military.

But regardless of security improvements or the performance of the Afghan forces, when the US leaves, then we will leave.

The Afghans might manage but it is just as likely that Afghanistan will struggle. The Taliban will grow in strength and they will end up playing a part in government. Women will continue to be treated like second-class citizens. The pressures on ethnic groups like the Hazaras will not diminish. The Hazara are Shiite Muslims but the dominant group in Afghanistan are Sunni Muslims including the ruling Pashtuns and the Taliban. Dreadful acts of violence and discrimination against the Hazaras have not been uncommon. If the situation in Afghanistan does not improve but instead worsens, then more Hazara Afghans will be heading towards Australia. There are somewhere between five and eight million Hazaras in Afghanistan. Australia will continue to be a good international citizen and give refuge to some of these people.

The Howard policy could be summed up as 'if you try to get to Australia' you will not make it. The current policy of the Gillard Government is the opposite. The policy now is to pick up asylum seekers, take them to the detention centre in Christmas Island and then move them to the mainland. So the policy is to help people arrive even though these people have (as described last week by Senator Hanson-Young, Dissenting Report April 4, 2012) "no lawful right to come" to Australia and are "unauthorised boat arrivals". There are limits on the number of people Australia is prepared to take as refugees and so the Australian Government decides that limit. Therefore, everyone who comes by boat will supplant the refugee who can't afford to get to Indonesia or is not prepared to risk themselves or their family.

Some of the consequences of more boat arrivals will include rising disquiet among the Australian public at the loss of control of our borders; more generally, the undermining of confidence in Australia's migration program; the denial of refugee status to asylum seekers who will not risk the boat trip; growing numbers of detainees; and more Indonesian fishermen drowning or ending up in Australian jails.

The plight of these fishermen was highlighted in last week's publication of the Senate Committee Report on mandatory sentencing. The report has some interesting facts.

As at February 2012 there were 208 people before the courts and of those 'three were regarded as organisers' - the rest were crew.

Prosecutions are increasing; as at June 2009 there were 30 cases pending; in 2010, 102 cases pending; and in 2011, 304 pending cases.

The wages for crew are between $300 and $1,200.

The recent Gillard amendments have toughened up the penalties so that now, a second offence, considered at the same time as the first offence, qualifies as a repeat offence and so the higher mandatory term of eight years applies.

The costs of imprisonment are about $170,000 per prisoner for 2.5 years.

The costs of prosecution are increasing from $1.52 million in 2009 to $6.24 million in 2010 and forecast of $13.99 million for the current financial year.

There seems little doubt that the crew are generally illiterate, have little or no idea of the purpose of their journey, and they are not aware that they are in breach of Australian law. They are basically pawns in a criminal racket.

I understand why governments have supported mandatory sentencing; it reflects in part a lack of confidence that the judiciary will treat people smuggling as seriously as the Parliament expected. Also, when mandatory sentencing was introduced in 2002 it was at a time when the government was doing everything it thought might stop the boats. The policy worked, the boats stopped coming and so there was no reason for the issue to be addressed. Years later with the experience that comes from increasing boat numbers under Rudd/Gillard, it now seems that the mandatory sentencing was not the deterrent that might then have been thought.

The evidence to the Senate was that illiterate Indonesian fishermen have little idea of their offence. Some of them are underage. Some barely know their own age. The law now says if they seem to be over age on the 'balance of probabilities' then they go to jail for five years or eight years under Gillard's 'get tough' approach. In my view, if there is any doubt that defendant crew are under age the judge or magistrate should not have to impose a mandatory sentence.

Australia should not 'on balance' be putting minors in jail.

The committee has recommended that the Government review the 'options for differentiating between the organisers of people smuggling operations and boat crew'. The ball is now in Gillard's court. She has made such a mess of this whole issue, I am not holding my breath that she will take up this recommendation but we live in hope. Even better, the lives of asylum seekers and children crew would be saved, if Gillard could do something to stop the boats which she says is her preferred outcome.

Tuesday, 3 April 2012

Labor's 'reform' agenda

Bill Hayden is not just a former Labor leader and former Governor-General; he was also one of the few economically sensible people in Gough Whitlam's team that lost the 1975 election.

Bill knows about the importance of economic policy. He brought down Whitlam's last budget – the only one that was not condemned for the excesses that marked the economically disastrous Whitlam years.

After three tumultuous and controversial years, the Whitlam government was removed by the Governor-General and annihilated by the electorate. It is no surprise that Bill can see electoral carnage coming again – he has seen it before.

He said, "It may not be the case that it's time for Labor," and on the next election, "Unless this party gets out of this suffocating thing we have created, I fear we might have had it".

Bob Hawke distanced Labor from the Whitlam approach. Hawke was a better economic manager than expected and enjoyed a long stint at The Lodge. Hawke and Paul Keating were generally pro-reform. During their time in office in the 1980s and '90s the general Coalition position was that we supported Labor's reforms, but we wanted them to go further.

Last week Paul Keating talked about Labor's loss of support of its support base. He said, "The loss of this started from 1996 onwards really, when a lot of the Labor party didn't really like the reform agenda that Bob Hawke and I presided over…"

Keating's comment has hit the nail on the head.

After losing the 1996 election, Labor repudiated much of the Hawke agenda. Labor had weak leadership and they quickly abandoned the mainstream positioning of Labor in government. To give one example, when I introduced the Coalition's labour market reforms in May 1996, Labor not only opposed our reforms but they moved amendments to overturn some of the Keating/Laurie Brereton reforms.

Ever since 1996, Labor has lacked effective leadership, failed to develop a coherent policy approach, and squandered billions of dollars on madcap schemes. When back in government, Labor was soon reregulating the labour market. This was the opposite of Tony Blair's approach in the UK; he kept the Thatcher labour market reforms.

Then in 2010 Labor wandered into an alliance with the Greens. The Greens only want to take votes from Labor so that they can pursue their whacky policies like closing down the coal industry and abandoning Australia's national democracy for a world government.

With friends like that it is no wonder Labor is down in the polls. They will stay there.

The constant flow of polls is getting monotonous, if not yet boring. For at least six months, Labor's primary vote has been hovering around 30 per cent. The latest Nielsen poll shows the Labor vote at 27 per cent. Federal Labor's political position looks very much like Labor in NSW last year and last month in Queensland. In both those cases, well in advance of the election, the polls accurately predicted huge swings against Labor.

Labor's big problems are policy problems.

If Labor had been a competent economic manager then the 'drover's dog' could secure a better primary vote. For competent economic management to politically support the government, that management needs to produce tangible results. You don't need to be an economist to feel the hip pocket impact of poor management. And you don't need to be a scientist to realise that closing down the coal industry is going to push up electricity prices.

Until recently the idea of economic reform included the rather obvious idea that reform would improve per capita living standards. That idea has been abandoned. Labor's claim to be a reformist economic manager is meaningless because their idea of reform does not require that it provide economic benefit.

When David Murray, a well respected businessman, said that the carbon tax was the worst reform he had ever seen, he could have alternately said it was not even reform. Treasury modelling shows that the economy will be worse off as a result of the carbon tax. Therefore, in my view, it is not economic reform. It lowers GDP relative to what it would be without the tax.

Whether you support the carbon tax or not is not the point. Whether you believe in climate change or otherwise is not the point. Labor's tax has adverse consequences for GDP. The public don't like the idea of cuts to living standards. But the public will support reform if there is a clear objective of improved economic performance.

This was the situation with the introduction of the value added tax (the GST) because the abolition of the wholesale sales tax and its replacement with the GST provided quantifiable benefits for Australian businesses, especially manufacturers and exporters. Full compensation for pensioners and others ensured it was a win-win outcome. With the carbon tax, it is more of a loss-loss, like a tax imposed by the local council to collect rubbish; necessary but hardly great economic reform.

Labor also calls the mining tax an economic reform. But the first proposal for a mining tax was drafted by Ken Henry and then ditched. The design of this tax breaches many of the standard criteria for good tax policy. The truth is that it is a poorly executed grab for cash. If it does anything, it will undermine investment in the industry and so advantage our competitors. This is not reform by its ordinary meaning.

Labor is not reformist. It is a bit like the Fraser government. It was not so good on economic reform either although it cleaned up the mess left by Whitlam. I do not see any prospect for an early election. Incumbent MPs like the independents will be hanging on as long as possible. So Labor's term will end up about the same length of time as Fraser. Maybe there is a lesson here about the political power of economic reform. Reformists like Howard and Hawke get 10 or 11 years but non-reformists are lucky to last more than six, all other things being equal which they never are!

PS: It was interesting to see Nikki Savva go over to the Bolt Report last Sunday. She also appears on the ABC's Insiders. I thought the ABC suffered a loss when Bolt left. Andrew was great for Insiders because single-handedly, in his own inimitable style, he gave the program a sense of political balance. Despite the good efforts of Piers Akerman and Gerard Henderson and others, the Bolt gap at the ABC has never been filled. Bolt rates very well, so it will be interesting to see if Insiders can enliven its offering.