Costello and his legacy

When Howard biographer Peter van Onselen interviewed Peter Costello last year, the Treasurer was doing more than just going over old issues like the 1994 leadership agreement or the 2001 Shane Stone memo leak reported in this morning’s papers. He also had an eye to how his term as Treasurer would be seen, in light of criticisms of the Howard government’s spending record:

Mr Costello, frustrated at being overruled by the free-spending Mr Howard in expenditure review committee meetings before the 2001 election, would throw his hands in the air and exclaim: “What is the point of these meetings?”

This is a theme he returned to at a speech to a Liberal student function a couple of weeks ago, when he wryly noted that very few Ministers ever bring proposals for exepnditure reductions to the Budget process. Ministers get blamed for results their Departments announce, and so the Treasurer has received flak for a lack of spending discipline by the Commonwealth government.

His sensitivity on this point was such that he replied to my Policy article on ‘big government conservatism’, with his article in the current issue of Policy arguing for the government’s record on spending as a proportion of GDP (see also my reply and Robert Carling’s response).

Though I disagree that the government’s spending record is good (though as with economic conditions generally, it is important to acknowledge that it could have been a lot worse), I haven’t been allocating blame to Costello personally. I avoided even mentioning him in my big government conservatism piece. It is very unlikely that he dreamt up many if any of the government’s big-spending programmes, and FTB in particular has the Prime Minister’s fingerprints all over it. Unfortunately for the Treasurer, though, he is the one who has to go out and impose taxes, and he is the one who may well be seen, at least in the right-of-centre version of history, as the man who did not, or could not, take advantage of very favourable economic conditions to reduce taxes futher.

19 thoughts on “Costello and his legacy

  1. I suspect that the very expernsive superannuation bonanza for high income earners was all Costello’s idea! And frankly, like the Melbourne Institue’s John Freebairn, I cannot see any redeming economic merits.

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  2. Fred:

    Are savings now part of the P&L account instead of the asset side of the balance sheet?

    How does one equate expense and savings?

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  3. Fred:

    “And frankly, like the Melbourne Institue’s John Freebairn, I cannot see any redeming economic merits.”

    Well both you and John are clearly wrong. Savings fuels capital investment and capital investment raises the standard of living for all of us.

    Depsite the current distortions to our tax system such as capital gains taxes and high income taxes any…. any vehicle that promotes savings is a good thing. as it raises living standards.
    I’m sure your not against rising living standards are you, Fred?

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  4. Fred, it’s interesting you say that and I can readily imagine other tax cuts that could have had more beenficial incentive effects. However, what struck me about the leaked Ken Henry speech in March was that he referred to the super reforms as equal to the best reform he had been associated with in his years at Treasury. Yet Henry’s speech was meant to be a dmaning indictment of the Government’s policies on water, climate change etc. (http://www.treasury.gov.au/documents/1249/RTF/speech_14_march_2007.rtf).

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  5. Rajat and JC:

    I believe Ken Henry, was far too kind to the Government and to his department when he described the Howard Government’s decision, in its 2006-7 Budget, to remove altogether the tax on superannuation benefits when people turn 60 (including full exemption from the Medicare levy) as one of Treasury’s “achievements”.

    Sure, it will do much to “simplify and streamline superannuation”. But is that alone worth over $7 billion of revenue erosion (in the first three years) – virtually all of it captured by the richer half of retirees?

    The test of a sound superannuation policy must be judged on what it will do to national saving, workforce participation, future age dependency ratios and the future reliance of the population on the age pension. In my view, and that of many other economists, the 2006-7 reform has little or nothing to offer on any of these four criteria. Indeed it is possible that the high income people it targets will save and work less overall (since they need less to attain their retirement income target), that the fiscal burden on the young will increase and that lower income people (who gain nothing from the 2006-7 reform) will remain as welfare dependent as ever in the future. [There are conflicting forces at work – with the income effect pointing in one direction and the substitution effect pulling in the other.]

    If governments had $7 billion to spend,, they could have spent it on targeted improvements in education and health which, as the Productivity Commission said in its latest report, “can result in greater labour force participation”, as well as levelling opportunities. Or they could have spent more on the superannuation co-contribution scheme which is both equitable and likely to improve savings – although it needs to be better targeted.

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  6. “I believe Ken Henry, was far too kind to the Government and to his department when he describe …………………….as (sic) “achievements”.

    So would I, Fred. Allowing people to keep their money instead of it being taxed away isn’t what I would describe as any form of achievement. It ought to be the natural fall back position.
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    “But is that alone worth over $7 billion of revenue erosion (in the first three years) – virtually all of it captured by the richer half of retirees?”

    I see it differently. I would see it as the government not getting its hands on people’s wealth. It’s not eroding anything. It’s simply allowing people to keep their own money.

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    The test of a sound superannuation policy must be judged on what it will do to national saving, workforce participation, future age dependency ratios and the future reliance of the population on the age pension.

    I don’t agree. The government should be only concerned with providing the bare minimum of necessities and then allow people to arrange for their own welfare. It’s amazing what we can do when left alone. The private market could provide superior outcomes for all those points and at a much cheaper rate seeing the churn rate is now about 40%
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    In my view, and that of many other economists, the 2006-7 reform has little or nothing to offer on any of these four criteria.

    It fuels savings and directs the money into investment, which eventually leads to higher living standards.
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    Indeed it is possible that the high income people it targets will save and work less overall (since they need less to attain their retirement income target), that the fiscal burden on the young will increase and that lower income people (who gain nothing from the 2006-7 reform) will remain as welfare dependent as ever in the future.

    It may, but I think for most people, work is part of their lives. Rich people work to retirement age too, fred. I have an 84 mother who still gets up at dawn and puts in a 12 hours day at her business much to my anger she hasn’t retired. Work defines our lives to some extent and money eventually becomes a secondary component.

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    If governments had $7 billion to spend,, they could have spent it on targeted improvements in education and health which, as the Productivity Commission said in its latest report, “can result in greater labour force participation”, as well as levelling opportunities.

    I’m not so sure that forcibly graduating more doctors and lawyers adds to our productive capacity. Done badly it simply distorts the process. I am sure the private market would be better attuned to figuring out the demand for graduates. Similarly I’m not sure that it is graduates that fuel productivity. Savings and capital investment fuels productivity, not the number of doctors graduating each year. The market has to signal increased demand for tertiary ed, not the other way round. Simply increasing the number of graduates distorts the process and allows for many unhappy people when they can’t find jobs…. Media studies is one example.

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    Or they could have spent more on the superannuation co-contribution scheme which is both equitable and likely to improve savings – although it needs to be better targeted.

    Fred, allowing us to keep our money untouched by the taxman is not spending. I think you have this whole concept backwards.

    I would also argue it was badly targeted too. They placed a cap on the entire amount that could go into super when they shouldn’t have. The cap alone is a signal that they were simply showing personal preferences. There should not have been a cap.

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  7. Fred, I’m not saying I disagree. Quite the opposite. I’m really just making the comment that the Henry speech was treated by the media as an authoritative critique of the Government’s climate change and water policies from a distinguished public sector economist but the media didn’t question the wisdom of Henry’s views on the super policy. In other words, why are we treating this guy’s word as gospel on some policies when his comments lack credibility on other policies.

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  8. One really has to wonder what planet you live on JC. A salad roll is more economically literate.
    China has a high level of savings. Australia has a very high level of consumer credit.
    Which has the higher living standard? Which has the longer average life span?

    Go and get a refund on your degrees.
    The Norton boy knows the proceedure, and has the cashbox under his desk.

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  9. This Government has made a complete hash of Superannuation.
    IF it had stayed the course with the tax cuts being 3% in SGC and then with wages adding another 3% as they promised in 96 we would have 15% SGC and we wouldn’t have to worry about future health costs at all.
    It makes no sense to get rid of benefit taxes when you have an aging population.

    you get rid of contribution taxes and earnings taxes and simply align benefits with income tax

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  10. Parkos says:

    China has a high level of savings. Australia has a very high level of consumer credit.
    Which has the higher living standard?

    ——————

    This is a trick question isn’t it parkos? Let me think about this for a while……. Ummmmmm I just thought about it.

    I’d say out of the two Morocco has the higher standard of living. France doesn’t come close to Morocco or Tunisia.

    Now , can I have my degree back. I find it very useful these days.

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  11. Andrew,

    Do you think any of this is contributing to the fact the swing against the Government at present is GYNormous in safe liberal seats?

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  12. Homer – I doubt it, as I suspect very few people know what has been happening in the Budget and even if they did does anyone seriously believe Labor would be better overall? That they would be differently bad – wasting money on slightly different things – looks to be the most optimistic scenario.

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  13. Thanks and I do like your and Robert’s article.

    I wonder if any conservative will ever write on what a Government could have done at the height of a once in a generation commodities boom.

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  14. I’ve always been a critic of superannuation – highly regressive, adding to the cost of employing someone, distorting savings and investment patterns, generating a massively funded political lobby for further transferring our money into the pcokets of fund mangers, and most unlikely to achieve its stated aims (in particular, it hasn’t and won’t increase national saving). The whole approach has been given a ridiculously easy ride from economists who should know better.

    JC is obstinately missing the point. Fred is rightly criticising the recent Budget changes because it is more likely to reduce than increase individual savings. That’s even before you take account of the reduced government savings that the tax expenditure represents (alternatively, if you think the counterfactual is an unchanged Budget surplus, it substituted for lower income tax on low income workers).

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  15. I wonder if any conservative will ever write on what a Government could have done at the height of a once in a generation commodities boom.

    If? Look at all those studies that came out about the Liberals in the period 1983-96, and how useful they were at predicting the reality of what the party would do in government 1996-2007. Not only will conservatives leap into print about this very subject, they will go the full cant of they weren’t conservative enough, if only they had been more conservative …

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  16. “how useful they were at predicting the reality of what the party would do in government 1996-2007”

    For the most part, fairly useful. The stuff about more professional compaigning was successfully implemented. Howard pushed his patriotism against the alienated left, which didn’t cause him any real trouble, as we might have expected back in the 1980s. The backing the family stuff was realised, to the tune of tens of billions of dollars. The industrial relations and privatisation reforms occurred. More choice was introduced into education, though it never reached higher ed. There were some surprises – nobody picked the centralising trend or the scale of spending increases or the greatly increased migration, but all can be put down in part at least to unanticipated circumstances.

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