Tuesday, 8 May 2012

No reforme, no future

Tonight's budget should be interesting although I generally prefer to read it than to speculate about it.

However, what we can say about this year's Australian budget is that it will not be worse than previous Labor budgets. It would have been a lot tighter, but for the prudent Howard years. And our finances are certainly not as bad as the French.

The French are socialists. So it is hardly surprising that the socialists should once again succeed in electing a socialist president. France is run by socialist elites and the labour movement. Nicolas Sarkozy was never going to emulate great economic reformers like Margaret Thatcher (Conservative UK) or Roger Douglas (Labor NZ). His presidency was doomed from the start because he never introduced the economic reforms that are desperately needed in France and elsewhere in Europe.

Sadly the best you could say about Sarkozy is that his departure will be as irrelevant as his arrival. France still needs a leader and now she has Fran├žois Hollande; how sad for France and Europe.

And it's a disappointment for Australia as well because although the US, UK, Canada and a few other countries are reasonably well run and provide the leadership and civilising standards for the international community, a stronger, liberal, free market Europe is in Australia's long-term interests. A weak and fractious Europe ultimately undermines our security and the common values that underpin our society.

The last socialist president, Fran├žois Mitterrand started his term with a series of disastrous economic measures. Fortunately when confronted with the consequences of his policy he retreated, but the damage was done. He left France economically weaker. His successor promised pro-market reform, but failed to implement significant reforms partly due to his inability to overcome vested interests.

The president Hollande might get lucky. If the Sarkozy party in the Parliament can retain its majority in the forthcoming elections then they may provide a good excuse for Hollande to not pursue his announced policies. In this event he will end up a one-term president, like Sarkozy. Maybe then the French people might finally realise that the true path to equality and liberty is a free market; not more government but a lot less government.

Conventional wisdom is that the European economies will muddle through the continuing crisis. The alternative scenario is further economic turmoil. This scenario can't be dismissed. One reason Sarkozy was defeated was because he had no plan for France to confront her economic woes. The economic vacuum he left behind has now helped to open the door to more extreme politics.

Europe has a history of extremists, both left and right wing. If the socialist experiment with Hollande fails, as it is certainly doomed to, then there is every chance of a right wing resurgence. That resurgence was already in evidence in the first round of the Sarkozy/Hollande contest when the Le Pen party attracted more than six million votes. It was also apparent in Sarkozy's anti-immigration stance. The problem is that populist right-wingers will be just as bad as socialists; neither will advance sensible pro-market reforms.

The same could happen in Greece and elsewhere in Europe. The public do not like austerity measures and, more than ever in difficult times, they are itching to hear politicians who will tell them what they want to hear. It is a dangerous development. And so, instead of encouraging politicians who will lead, you get populists who think getting into government is everything.

Of course, Australia and Europe are very different. But there are many similar issues in how to manage a free enterprise economy within a democratic society. Topics like taxation, privatisation, labour market flexibility, free trade, provision of basic services (such as health and education), free speech and monetary policy are common to all the leading economies.

Modern societies now have a lot of knowledge to know how to manage an advanced economy. In many cases the path of reform is clear; the only issue is who has the determination and the leadership to make the reforms a reality. This is as much the situation in Australia as it is in France.

In Australia, we know that a flexible labour market will increase wages and we have recently had real time experience of the benefits of flexibility. This idea is not in vogue now within Labor, but it was championed by Labor in the early 1990s.

We know that governments have to live within their means; today, this is the mantra for the Swan budget. We know that the public do not like privatisation, but it is a good idea and works (ask Anna Bligh, ex-Premier of Queensland and the shareholders in Queensland Rail). We know competition is a great driver of higher living standards and is the best known way to ensure that consumers get what they want. We know that high tax rates kill incentive and too much welfare has the same effect. We also know that if you impose too many costs on business then they lose sales and that costs jobs. So we know that the carbon tax, especially one that imposes higher costs than those on competitors, will cost jobs in Australia.

And we know that president Hollande's policy to lower the working age to 60 will force people out of work and so reduce productivity and living standards. And we also know that more taxes on business, like the mining tax, will only give the Canadians the chance to take investment from Australia and that will lessen work opportunities for Indigenous Australians.

Last year, the budget deficit was about $20 billion but will end up around $40 billion. So do not get excited about a projected surplus of $2 billion knowing it could end up as a deficit. It would be better if the Government announced some long-term reforms that we know would really make a difference. As things stand today, and despite all of our differences, there is little chance of that in either Australia or France. For that reason, the chances are that no-one will be talking about the Aussie budget by this time next week.

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