I’ve posted regularly on the Howard government’s big spending habits. While I think much of this spending is unwarranted on policy grounds, it’s going to be hard to resist while Liberals still believe that it works politically. In this morning’s Weekend Australian I outline an argument as to why big-government conservatism isn’t a viable long-term strategy for the centre-right (there’s more detail in my Policy article).
The argument has parallels with the mummy party/daddy party thesis. Voters view political parties in stereotypical terms, seeing Labor as stronger on ‘welfare’ issues such as health, education and social security, and the Liberals as stronger on tax, defence and immigration (Newspoll’s list is the most accessible). Like most stereotyped views they are not completely immune to reality, but as the general public often has a poor grasp of actual trends they tend to form judgments based on their general perceptions of the parties, rather than their real record or (for Oppositions) their alternative policies.
This is one reason why despite increasing spending more quickly than the Keating government on education, health and social security over the last few years, and at a considerable rate by any standard, the Coalition still trails Labor as the better party on these issues. Using the Australian Election Study measure, the Coalition has recovered some of the ground lost as they cut the Budget deficit in the mid-1990s, but they are not back to their 1996 position. And as I say in the Weekend Oz:
Even on family issues, Howard’s signature theme, the Coalition has dropped from equalling Labor in early 1996 to being behind in all but one poll since 1997. If $27 billion a year in family assistance doesn’t change people’s views on which party handles family issues best, then it is hard to imagine what might.
The problem here is not just the difficulty in trying to out-Labor the Labor Party. It is that in trying to do so the Liberal Party risks undermining its real areas of political strength. High spending has to be financed with high taxes, which risks the stereotype of the Liberals as the lower tax party. Howard has largely escaped this political cost because the strong economy has produced so much tax revenue that he was able to reduce tax rates in the 2005 and 2006 Budgets. But when the economy slows, this escape hatch will be super-glued shut while the government faces millions of people determined to defend their ‘entitlements’ at the ballot box.
Howard has also mixed messages on welfare. As I argued during the week, there is a healthy scepticism about welfare’s effects in the electorate, which has helped create a needs-focused system: you don’t get it unless you need it, and you don’t get more than you need. Yet Family Tax Benefit B has no means test at all, and Family Tax Benefit A can still be claimed by families bringing in more than $100K a year. Howard tries to spin this by playing up the ‘tax’ element of ‘tax benefit’ (ie it’s your own money we are giving back to you) but this is a rather subtle point – and leads to the objection that if it is their money anyway why don’t we just let them keep it in the first place?
If the good economic times keep going the Coalition may scrape back into power late this year. But when the Liberals finally do return to Opposition, what will they stand for that Labor can’t make an equal or better claim to represent?
Andrew Norton 
Great article, Andrew.
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I saw the article. Very well done. My only editorial view – not academic – was the name of the article – I thought it could potentially be something more punchy or hard hitting like ‘Howard’s Big mistake’ ……….. Still you might have no friends in the Liberal party if you hit them hard between the eyes.
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Corin – The newspaper writes the title. I gave up even suggesting them very early in my writing-for-newsapers days. I think it is partly to add their own interpretation, but probably more importantly because of space considerations (perhaps the same factor that saw a paragraph added from the original article that had not been in the version I sent them).
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When you say the Libs have become big spenders on welfare, health and education, is the spending in those areas still being done in a way that wouldn’t surprise anybody – subsidising private health insurance, spending more on private schools etc ? If it is, then that still distinguishes the two parties, because that spending will benefit the more affluent, traditional Liberal supporters. Don’t know how a future Labor government could undo it though – imagine the accusations of “the politics of envy”.
“despite increasing spending more quickly than the Keating government on education, health and social security … the Coalition still trails Labor as the better party on these issues” – this might help prove my point about the symbolic importance of political initiatives (free universities – see, people never forget !); voters of my age remember who brought in Medicare, who scrapped it, and who brought it back – – it’s going to take a long time before the hoi polloi think the Libs could be as good as Labor on those issues.
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Russell – I don’t have my spreadsheets with me, but doing the sums from what is in my article with health 80% of the increase would still be there if you eliminated the private health insurance rebate. On the measure I used (per capita real spending) expenditure on universities decreased and spending on schools increased significantly, driven partly by real increases to both public and private sectors, but heavily by the large increase in the number of students at private schools (about 170,000). With social security, the increase is driven by the aged pension and family benefits. As my article argues, there are differences between Labor and Liberal in the way they spend, but even where the money has been spread very widely (health and social security) it’s still not showing in the polls.
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I think you can overstate the significance of Newspolls on this sort of thing.
They are asking ‘who do you think would be better’, not ‘are you unhappy with the Howard approach’. Howard can be behind Labor on these issues, but his methods keep people who might change their vote content – i.e., on Medicare, he spent up big to fix the problems with bulk-billing last term, thereby taking the heat out of the issue as a vote-changer. People might still prefer Labors approach, but theres an ‘I’m angry about bulk-billing and going to change my vote’ attitude and an ‘I guess Labor would do a better job on Health, but it’s alright Jack’ attitude.
Not sure I’ve explained my point very well, but hopefully the gist is clear.
Your longer term analysis is interesting though. There could come a time, if Labor shook off the unions, when we might in philosophical terms have a conservative party (the Libs) and a liberal party (Labor), and the former will be more inclined to big government than the latter.
Oh – and I believe you’re wrong to say the British Conservatives are behind in the polls. Fairly sure Dave Cameron has been in front for a while now.
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Leopold – I think it’s a fair point that to say that if you prefer one party on a particular issue it does not necessarily mean that you are greatly dissatisfied with the other party. If people were asked to rate the parties one to ten, they might give Labor 7/10 on health and the Liberals 6/10. So a question with an either-or choice exaggerates the difference. As we don’t have (so far as I am aware) a series that does this, I can’t tell whether the Liberals have improved their position on these issues without winning an either-or contest. On the other hand, elections are either-or choices, and in Australia usually won on smallish margins – less than 5% of the total vote in two-party preferred terms.
On the British polls issue, when I looked into this (I actually wrote most of that article in mid-December) the Tories were leading in the polls the Guardian (I think) was doing, and in another poll they were behind when the general public was asked, but one point ahead among those who definitely going to vote in the next election. I used the word ‘struggling’ rather than ‘behind’ because despite Blair being unpopular and the government on the nose the Tories had no large or consistent lead. And if the Australian pattern holds for Britain, governments tend to improve in the polls as elections loom, so Oppositions need to go into the election period in a strong position to be confident of victory. (Voluntary voting in the UK may mean things are different there.)
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Andrew, although I sit on mainly the other side of the fence, I too found your article in the Australian interesting without accepting the main policy thrust.
But you raise two issues that really puzzle me and you might be able to help me resolve them. You say that
(a) under Howard, “household income inequality, after taking into account taxes paid and transfers received, has been trending down” and
(b) Howard’s welfare state targets favoured institutions, especially households with children…this redistribution is regressive in a conventional social democratic sense”.
Is (a) completely accurate? If you take 1995/6 as the base year, there is hardly any change in P90/P10 or in the percentage share of income received by persons with low income between 1995/6 and 2003/4. Furthermore, until 2003/4, inequality was trending UP – but everything changed in 2003/4, when the ABS records a HUGE decrease in inequality, no matter what measure it uses. It attributes this overwhelmingly to “the introduction of one-off payments to families and carers in 2003-4”.
This brings me to your statement (b). I suspect the odd 2003/4 figures will be revised but taking them at face value, family payments have been extraordinarily progressive, not regressive.
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Fred – On (a), I was using the Gini but the various other ratios are (unsurprisingly) much the same. All were more equal in 03-04 than 95-96 and there were two years of downward trend, not just everything changing in -3-04. Whatever the one-off effects, that this occurred despite the strong wage growth being largely in the upper-half of the income distribution suggestions major policy effects, principally not adjusting downwards high marginal tax rates and the family payments.
On (b) you are right that their overall effect has been progressive, but it remains that a CEO on a million a year can get FTB B and households on $100K can get some FTB A, while singles get nothing. IMHO, a single on $45K is under more financial strain than a couple family with a couple of kids earning $75K.
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Thanks Andrew but on inequality you must be looking at different fibures from the ones in front of me. ABS 6523.0 April 2006 table S5 shows that the GINI was 0.294 in 2003-4 and 0.296 in 1995/6 – hardly a significant fall. As to the “other” indicators, the low income share was 11.0% in 1996-6 and 10.9% in 2003-4 – again no significant change. Perhaps I am quibbbling but the trend is broadly stable – not “trending down”.
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Fred – I am using 6253 as well, though the excel spreadsheet which is not dated that I can see. I agree, end of Keating and latest of Howard is broadly stable, but it went up in between and in 2003-04 was slightly lower. Unfortunately, it does not give the market gini. As I suggest above, we need that to see the policy effects, which I think are the most important element if we are defining a government (as I have noted before, market outcomes are the result of millions of individual decisions, many of which governments cannot easily control, but which for reasons we probably largely agree on will tend toward inequality). Except for the drop in unemployment I would expect recent trends to have been towards greater market inequality, and therefore Howard could have had a bigger social democratic effect than Keating, even if their final numbers are similar.
Of course from my perspective I am not defending Howard on this – I regard income inequality itself as neither intrinsically good nor bad, but the ways Howard has achieved this result as more bad than good.
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Andrew, your objections to FTB A and FTB B at higher income levels interest me. Obviously, you are too smart to have missed the fact that at high incomes these are horizontal equity measures, not welfare, so why does your objection appear to stem from measures of need?
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Spog – I think these benefits are breaches of horizontal equity, which I would take as people who earn the same amount paying the same taxes, without inquiry into how they might spend it.
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Spog’s is correct that horizontal equity is relevant to the argument. After all, why should a rich person who chooses to spend his or her income on a family lifestyle get a subsidy when an equally rich person who chooses to spend his or her income on other things goes without? That is horizontally inequitable!
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Woops – looks like Andrew beat me to the punch.
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Forgive me Andrew, I must have imagined that I read something from you earlier that you had, albeit reluctantly, accepted the view that as a society we would treat children and other dependents somewhat differently to, say, a personal BMW collection.
That is the crux of the issue. If you take the view that children, etc, are a commodity item, then it is perfectly reasonable to run the line (as per Tom N) that having dependents doesn’t entitle you to an assumption that you have a reduced capacity to pay tax. If you are prepared to treat them differently, then the FTB A/B issue (and other tax offsets) are an attempt at horizontal equity adjustments.
It would be easier if the objections to these payments could be categorised as stemming from the “dependents are just like any other commodity” school, or from the “I accept that dependents are a special case, but the design of [insert scheme name] is crap” school.
Cheers
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Spog – But surely it is the familists who are putting a price on children, ie turning them into commodities? I’m saying that parents are motivated by deep human desires to have children and the love they feel for those children, and the familists are saying no, that’s not enough, you have to give them cash as well?
I’d totally reject any ‘equity’ argument. As with any proposal to spend taxpayers’ money – especially one with such a massive price tag – I want to see what we are going to get for it. Do we get significantly higher fertility or significantly better child rearing as a result? Perhaps – but I am yet to see a convincing argument.
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I think there is a rather significant difference between putting a price on children, and having some regard to what it costs to raise said children – a BMW has a value to a person; it also costs something to run and maintain. It’s the latter that is the point of payments, not the value of the item to the individual. In other words, payments for children, be they horizontal or vertical equity measures, target the cost of raising children, not the “price” of child itself.
If you like, we are debating a subsidy for the “running costs”. As before, whether you think we should subsidise the running costs depends on whether you think children and other dependents are different to BMWs.
What do we get for the money? For horizontal equity measures, we are taking a tilt at equity. Not better child rearing or fertility. We are accepting that dependents are different and that their running costs should mean that a person with said dependents shouldn’t pay as much tax as someone without.
We won’t agree on this – the dependents as commodities debate is longstanding. But at least I think I understand where your objections to FTB A/B are based – in the commodity issue, rather than the design issue.
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Andrew
I don’t think it is so easy to get away from concerns about relative needs. Do you accept that welfare payments, for example, should vary according to the size of the household that they are supporting (ie that a couple should receive more than, if not twice as much as, a single person and that a household with children should receive more than an otherwise similar household without)? Or are you in favour of a flat amount which the unemployed or disabled person can then choose (or not) to share with others who may be dependent upon them?
If you accept that at no or very low private income it is appropriate for larger families to have a higher disposable income than smaller families in order to achieve roughly the same standard of living, why does this logic no longer apply once a person’s income is higher? I presume you would have no problem with allowing some tax concession to a person with dependents to support, but in the end this provides a not dissimilar outcome to family payments (depending of course on exactly how it is designed).
Don’t get me wrong – I would agree with you that the Howard government has gone a lot further in expanding family assistance than can really be justified in public policy terms. One of the problems as I see it is that it has never really spelt out what it is attempting to achieve through all of this largesse, preferring to cloak its policy rationale in vague rhetoric about ‘enabling choice’. You would have to say that, if the baby bonus is meant to increase fertility it hasn’t been an astounding success and if increased family assistance is meant to encourage mothers to work less, that hasn’t happened either.
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Hello BG. I’m sure Andrew will respond to your question – “…I presume you would have no problem with allowing some tax concession to a person with dependents to support…” – but I’m going to second guess it, based on his responses to me earlier. I think he would have a problem with tax concesssions, because children are a private matter, and parents choices to have them are their own to make, etc.
If Andrew doesn’t have a problem with tax concesssions, then I’m back to square one in trying to understand his position.
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BG – Welfare payments do vary according to whether you have kids or not, but this is because they are based on subsistence needs, not on trying to make kids a financially neutral addition to the lives of people who are quite capable of keeping their kids housed, fed and clothed.
I am not, in the comments I am making, opposing assistance to people who are genuinely poor. But I am trying to keep everyone else out of the welfare system.
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Oh, I do have a problem tax concessions, generally and not just for dependents.
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Andrew, I think you are overstating the intent of horizontal equity measures. Properly, they are not about “..trying to make kids a financially neutral addition to the lives of people who are quite capable of keeping their kids housed, fed and clothed…”. Instead, they should, at most, remove the tax liability in respect of the income that is used for that purpose, and usually up to some cap. This means people with kids or other dependents still pay for them, they just don’t pay as much tax. And of course, the lower the tax rate, the less generous is the tax concession.
The fact that Howard (as the current end point in a long line of miscreants) has produced a cash payment (rather than a tax measure) in FTB A that has lost sight of that purpose (instead making it a form of How-To-Vote card) is an issue of design.
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Trackback.
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When my 4 girls were young I found the Famly payments system, started by Labor and continued by Fraser helped me pay for braces etc. It was a tremendrous help. My wife did not work but was involved in Safety House, Meals on Wheels etc. Now Costello has allowed me access to my Super accumulated over the last 30 years, I can refurbish my bathroom after 4 girls caused mould, loose tiles and cracked mirrors. I just fear the young will resent this , now that they might have to pic up the tab for the lost tax revenue taken in Super. I was a low level PS then so could hardly be called a recipiant of Middle Class welfare
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