Tuesday, 25 November 2014

Looming Poll Victoria

The possibility that Labor might win next weekend's Victorian election is more worrisome than usual. There are two aspects which could set an unhealthy precedent for Victoria and maybe later for NSW Labor – which has a former union boss as its leader who will be contesting next year's NSW election.

The first is the CFMEU's control over Victorian Labor and its record of intimidation, thuggery and links to unsavoury individuals. With Labor using its numbers in the Senate to protect the unions and the CFMEU running Victoria, no one should be in any doubt that union militancy could be difficult to handle. We have had this problem before in the 1970s and 1980s when militant union behaviour was a major concern of key trading partners like the Japanese and Koreans.

The second is the declared policy of Victorian Labor leader Daniel Andrews to tear up large infrastructure contracts. A government decision to refuse to honour legally enforceable contracts is clearly a case of sovereign risk.

Regardless of the fact that polls suggest Labor is just ahead I still find it hard to believe that the Victorian Coalition will lose. The idea that Labor is going to win seems contrary to common sense. Then again, I never thought that Jeff Kennett was going to lose either back in 1999.

Premier Denis Napthine is a good man: the polls show he is well liked by the electorate; he has been a solid and dedicated Premier. There have been no real scandals despite the determination of many in the media to find some; he has sensibly managed the State's finances and wisely promoted Michael O'Brien as Treasurer; his infrastructure proposals will be good for Victoria and his key Ministers are streets ahead of Labor's union hacks.

In contrast, it's hard to see what Labor offers and its record when last in office was poor. Victorian taxpayers will be paying for Labor's mothballed desalination plant for decades, Labor's main policy seems to be 50 railway crossings to improve traffic and Andrews is the most left wing leader Labor has ever put up in Victoria. Andrews was anointed by the hard line CFMEU and he now turns a blind eye to the ongoing thuggery and intimidation which is the well-known trade mark of his CFMEU sponsors. The CFMEU is an embarrassment to Andrews but he can't do anything about it. And CFMEU supporters are becoming more brazen than ever; so much so that only a few days ago, the Melbourne Herald Sun reported that "Underworld figure Mick Gatto has told Opposition Leader Daniel Andrews not to break links with controversial CFMEU John Setka". When a political figure is getting advice from people like Gatto it's obvious Labor has a big problem with its choice of mates.

Andrews has said that a CFMEU member will be the new Planning, Major Projects and Infrastructure Minister. Mr Andrews sees no conflict of interest in his Minister's close association with the CFMEU despite the fact that the CFMEU is inextricably involved in his portfolio. Or maybe he has been told to turn a blind eye. Or maybe he is too weak to stand up to the CFMEU. Either way his position is scandalous.

In addition, Labor has publicly confirmed that it will break existing contracts for the East West road project despite the fact that the proposal has strong public support (around 60 per cent in recent polls). The combination of CFMEU cabinet influence and a diminution of Victoria's reputation on sovereign risk will be a blow to Victoria.

The third risk of a Labor government is that it would be a big spender as were the recent Labor governments of Steve Bracks and John Brumby. The facts speak for themselves, as reported by the Menzies Research Centre using ABS and other publicly available data.

Under Bracks and Brumby, the number of public sector employees grew by 52.4 per cent compared to the population increase of 16.7 per cent. By comparison, Labor governments in NSW from Carr to Keneally increased the public sector by 25.69 per cent.

Over the same Labor period, the average annual increases in wages were 7.7 per cent for Victoria and 6.2 per cent for NSW under Labor. By comparison, wage growth with Coalition governments was 3.3 per cent under Greiner, Kennett wages expenditure actually fell by 1.7 per cent and the John Howard increase was a mere 0.6 per cent.

And if you thought that the extra public sector workers were there to boost front line services, you would be wrong. From 2001 to 2007, when Labor was running nearly all the state governments, the ABS classification of "government administration" increased by 8.5 per cent compared to education (2.5 per cent) and 2.3 per cent for health and community services.

Victorian Labor has become too close to the CFMEU and tearing up contracts cannot be acceptable for either Liberal or Labor voters in NSW or Victoria. If Victorian Labor loses, on these two issues particularly, they will deserve what they get.

Tuesday, 18 November 2014

G20

Well done to everybody for the G20 show. Tony Abbott did a good job showcasing Australia to the biggest gathering of world leaders most of us will ever see. I don't want to be a wet blanket, but while the G20 is important it's also a lot of huff and puff.

It won't win many votes in the next election. And it won't fix our budget problems.

The trade deal with China is altogether a different matter. It will create more jobs and investments. It will ensure Andrew Robb is credited as one of the best  trade ministers and put a damper on protectionist elements within the coalition.  And Tony Abbott deserves credit for giving the trade portfolio to an urban, economically literate Liberal.

More sales of cattle and dairy products will be a boost to rural Australia and the enhanced access for the service sector could end up as being a bonanza for our economy.  And the extra trade will be a shot in the arm economically just as the 2016 election comes onto the political horizon.

Meanwhile, back at home the prospects of securing significant expenditure restraint are gloomy. For various reasons, cutting expenditure was not John Howard's forte but nor was it for Margaret Thatcher or Ronald Reagan.  In all three cases they were at their best in making the economic cake bigger.

For the Commonwealth and the states, two areas of spending that can produce savings without too much political angst can be found in contracting out  services and removing duplication of government functions.

Contracting out is not new and readily available to federal and state governments acting unilaterally. The difference with removing duplication is that both levels of government need to work together. All you need is a minister who wants to get things done. I found one such minister last Friday at the launch of the Hawkesbury campaign for Dom Perrottet, the NSW Minister for Finance.

Perrottet spoke with commitment and conviction about his reform agenda in NSW. Aged 32, Dom has been a minister for only six months and already he is one MP to watch in the future. You only have to hear him speak to realise that he is clearly every bit as good as some of the better federal MPs.

The only difference is that federal MPs start their federal career certain that the federal parliament is superior to state politics. More often than not, candidates see the federal parliament as more exciting, more interesting and more important. And that attitude becomes a barrier to removing state and federal duplication because federal MPs are too inclined to hang on to state functions because federal MPs think they are better government managers than their state colleagues. The consequent  reluctance to give up  control is the reason I fear that the Abbott government's proposed White Paper will not lead to the cuts in duplication that are needed not just for efficiency but for savings.

Having first been a councillor in rural Victoria, I then stood for office in a state seat and would have been very happy if I'd won preselection. My experience is that state and federal governments are more different as a result of their differing functions as much as anything else. I was very involved in starting a private community school. Who is more important; the federal minister who helped fund the school or the state minister who gave us a spare class room? The answer is that it is nonsense to say one is more important than the other.

There is no question that the reform of federal state relations is well overdue. But if the Commonwealth Government is fair dinkum, rather than waiting for its white paper, it should start with some decisive action to demonstrate that it is determined to reform federal state relations. Why wait when there are some obvious reforms needed now? Two issues come to mind: cutting duplication and fixing the GST split.

The current GST arrangement rewards states that are doing poorly and punishes the more economically successful states. Instead, the GST should be split equally and if the Commonwealth wants to top up the mendicant states of Tasmania and South Australia then that should be a federal responsibility. This measure alone would galvanise federal/state relations.

The Commonwealth does not run any schools so the current bureaucracy in the federal education department should be closed  altogether. Additionally, the government should reconsider its position on the national curriculum which is a recent addition of Commonwealth meddling and duplicating. The states run education and the feds are cutting funds anyway so why have the federal minister calling the shots?

It has been a good week for Australia but the government needs to build its momentum with a lot more reform, including federal state relations.

Monday, 10 November 2014

China's Bank proposal

There is little reason for Australia to fund a new multinational government-owned bank. Not only would the Asian Infrastructure Investment Bank (AIIB), proposed by China, be expensive at a time when budget funds are limited, but it would be contrary to our basic policy of supporting the private banking sector.

So far, 21 Asian region countries have signed a Memorandum of Understanding to establish the AIIB but no one knows the details except that the Chinese like the European Investment Bank (EIB) model. The Chinese should think again about their model. Having spent six years as the Australian representative at the European Bank for Reconstruction and Development (EBRD) and having watched the EIB at close range, Australia should not be involved of either of them.

Apparently, Australia was about to agree to our involvement in the AIIB but the Cabinet decided against the proposal  after pressure from the US. But that may not be the end of the matter.

Australia is already a member of the Asian Development Bank and the EBRD. At one point, I persuaded Treasurer Wayne Swan to sell our shares in the EBRD because the bank had done its job.  However, he was overruled by Kevin Rudd, who thought we needed to keep our shareholding to help us win a seat on the UN Security Council. Rudd also wanted Australia to join the African Development Bank (AfDB) but eventually the Coalition wisely dropped that idea. Needless to say, Australia got onto the Security Council regardless of the AfDB, which proved that retaining our shares in the EBRD was also unnecessary.

The EIB is a classic example of how multinational banks are run by the staff for the staff, with very generous remuneration, minimal accountability to taxpayers and a determination to build its own empire.

Originally the EIB was established to fund projects in poor countries like Italy as a quid pro quo for the Italians and others to join the European Union. However, contrary to the original intentions, bigger economies like Germany and the UK gained more and more of the funds. EIB funding in the UK economy in 2013 was €5.8 billion($8.4 billion), with €7.8 billion for France and €7.45 billion for Germany.

The EIB is also not alone in breaching its mandate.

The EBRD was established to support those countries previously behind the iron curtain. The mandate was to promote the private sector and democracy, and not to compete with private banks. Today, the EBRD regularly lends money to Russia.Russia is not democratic, it has no qualms in funding oligarchs, it does not run a free market economy, and to add insult to injury it waged war against Ukraine and its actions  led to the loss of many Australian lives. Egypt is another example of a broken mandate. Egypt was never behind the iron curtain, but it is now a beneficiary of the EBRD, it's not democratic either and it has an Australian journalist in  jail on trumped up charges.

I spent six years with the EBRD. The bank was largely run by the French and the Germans, who had about 8 per cent each. The biggest shareholder was the United States with 10 per cent, but even the Americans were regularly ignored by the Europeans. The Board of the EBRD is more like a meeting of the United Nations than a meeting of a bank: it has  more than 40 directors and alternates.  Many of the directors are on a tax-free merry go round with pensions from the bank as well as their ministry. For many, the gravy train starts at the EBRD for three years, then a few years at the EIB, then one or two of the other banks and then return to the EBRD as an executive director. Accountability is weak:  too often decisions are made by political compromise and in breach of the mandate. In my six years at the EBRD, there was not one case where the board was able to overrule a staff recommendation.

The AIIB would be capitalised at about $US50 billion ($58 billion). I surmise that participants would put in about $US10 billion; we would get about 5 per cent of the shares and would be liable to be called for the rest. Our upfront cost would therefore be about $500 million.  

I hope that the government does not change its mind on the AIIB. But if it does change, it should ensure that our money is not just gobbled up and never seen again and never acknowledged. To achieve at least something, the government should demand that the AIIB pay an annual dividend, demand commercial rates on loans, commit to not competing with private banks and provide that any government can sell its shares at any time on the open market.

Tuesday, 4 November 2014

Benefits of raising GST are not worth the political cost

A good speech might lift expectations of reform but expectations not fulfilled are always a letdown. Remember Kevin Rudd? And given that there is no suggestion that Prime Minister Tony Abbott yet knows what reforms he wants to take to the next election, his Tenterfield speech is more likely to be a disappointment than anything else.

Big reform does not start with just one speech. It should start with strategy, policy, consultation, tactics, advice and many late nights, all behind closed doors and over time. Looking back on Fightback, I suppose Hewson and I had a touch of "crazy brave" but heck, why be in politics if you don't do what's worth doing? So in that sense, good luck to Tony Abbott. But is a bigger GST worth the trouble?

We are now encouraged to think that the formerly risk averse Abbott agenda will soon have a touch of the "crazy brave" and will include reform of the federation, tax reform, more budget cuts, pension reforms and labour market reform. It sounds ambitious but so far his economic reform agenda is limited.

Let's start with the politics.

No PM should start a big debate like the GST without lining up the support of his colleagues.

I sense that Abbott lit the match on the GST without a Cabinet meeting. Unfortunately Abbott has a penchant for unilateral decision making. It is true that Howard went solo on opening the 1998 GST debate but Howard did not act unilaterally. The GST was discussed many times in the cabinet and beyond well before Howard raised the issue and Howard had key ministers urging him on.

And a big issue like this is not just for the front bench.

In the days after the Abbott speech, MPs I spoke to knew nothing of the GST except what they read in the paper. Abbott owes it to his backbenchers and especially the marginal seat holders to talk to them before he goes to the media and puts their seats at risk. Abbott obviously thinks he could win a GST election because the Coalition won the GST election in 1998. But in 1993 we failed to win government and in 1998 the Coalition lost many seats because of the GST. We offered income tax cuts on both occasions and still we lost votes. The New Zealand experience (very similar to what Abbott may propose) was that the Kiwis were much angrier with their first small increase of the GST than they were with the initial introduction of their 10 per cent.

The political circumstances surrounding the GST are not as good as 1998. The 1998 campaign had the benefit that many of the 1998 campaigners were also in the 1993 campaign. The 1998 campaign also had a strong team. Howard and Costello were good salesmen, their first budget was a success and by the time of the 1998 election the government had proven its reform credentials through big items like fixing the waterfront. Howard also had a lot of political momentum from business, including small business, in support of abolishing the wholesale sales tax. Business collected the GST but they got the money back thereby reducing the cost of doing business. The narrative in 1998 was crystal clear. What would be the message for 2016? Of course, the abolition of payroll tax would be a good selling point but it would reduce revenues for the states and the GST would have to be pretty high. Sadly, I doubt it will have many supporters.

The 1998 reforms gathered most of the benefits of a value added tax. A few extra percentage points would not be that significant. Without a clear justification for a tax increase, the public would quickly see the GST as just another revenue increase.

Even if reduced income tax rates were persuasive (which I doubt), the broadening of the GST base could be pretty lethal in an election campaign.

Adding health and education would be problematic. The result would be a lot of churning rather than a lot more revenue. An anti-GST campaign would be unhelpful just as the new tertiary funding arrangements are implemented. Food could be taxed but the two previous attempts to include food have been thrown out in the Senate.

In reality, the rationale to change the GST base is limited. Australia has an internationally, efficient, modern GST. The GST's 58 per cent coverage of household consumption is similar to other advanced economies. Yes, New Zealand has the purest GST of any country but they ended up with a voter backlash that produced proportional representation in their unilateral parliament.

Any increase of the GST would be a huge fight; it is just about certain it would lose seats for the Coalition and be a major barrier for the return of the Abbott government.