Should small government liberals abandon the Liberals?

Sinclair Davidson’s suggestion that the most formidable opponents of small government are conservatives rather than social democrats is interesting. I wonder whether this could lead to a realignment of Australian politics.

commenter Winton Bates, in a comments thread prompted by a post on how the rich paid an increasing share of net income tax under the Howard government.

As I argued in my big government conservatism article, the Howard government turned into a conservative social democratic government. Like Labor before them, the Liberals under Howard used the proceeds of a broadly market economy to finance a large welfare state. Under Howard, welfare spread up the socioeconomic ladder, towards the universalism that social democrats have long wanted to create wider support for the welfare state. And by boosting the not-poor but not-rich middle class from taxes on the top 25% of earners, Howard helped keep overall income inequality fairly constant under his watch, despite growing inequality in market income.

It remains to be seen whether this is a medium or long-term ideological shift. At one level, Howard’s policies can be explained (though not explained away) by factors that are unlikely to be permanent. Politically, periods of prosperity are accompanied by greater pressure to spend more on government-provided services, so we are in the spend part of the tax-and-spend public opinion cycle. It is hard for governments without massive public opinion support for other reasons to resist such political pressures – especially when the necessary money is just flowing in on existing tax arrangements with no need to raise tax rates.

In that sense, the Howard spendathon was an ideological crime of opportunity – if you leave lots of cash lying around somebody is going to walk off with it. It would have been much less likely to happen in a tighter budgetary situation, coming in the medium term. Economic growth is likely to slow, and demography is about to turn against us as the boomers retire.

Nevertheless, as my big government conservatism article argued Howard’s policies did pick up on themes in Liberal ideology, and that could give it an enduring ideological attractiveness to many within the Liberal Party. Ideas like family and choice – even state-sponsored choice such as private health insurance rebates – go down well in Liberal circles. Few in the party are on the record opposing the family handouts of the Howard era. The budgetary consequences of these tendencies will expand and contract with the economic cycle, but they are on-going.

Despite this, given the realistic choice between the Liberals and the ALP the case for abandoning the Liberals weakens. I was sceptical last year of Labor’s ‘economic conservatism’, and while we should reserve judgment until budget night the signs aren’t good for Labor as a party of smaller government. The savings announced or hinted out so far are worthy but small in the context of the total budget. If they can’t cut now – six months into their term, the Opposition weak, and with attacking inflation as a cover – it is hard to imagine that they will cut in future.

This is especially so as the basic instinct of Labor’s constituency is to favour spending. In the 2005 Australian Survey of Social Attitudes, in response to a standard question asking if respondents prefer more spending or less tax, Labor supporters were 54% to 30% in choosing more spending over less taxing. Liberal supporters marginally preferred less tax – 41% compared to 38% for more spending. And Labor also has to keep an eye on the Greens, who it seems like taxing and spending almost as much as they like trees, with 73% in favour of more spending, and only 16% for less tax.

The Liberals then are likely, over the medium to long term, to be the more promising party for lower taxes and spending. I don’t think there are grounds for Winton’s suggested ‘realignment’ of politics – even setting aside the stickiness of party allegiances and difficulties in setting up alternative party structures that make realignment improbable in practice, whatever the theoretical arguments in favour.

18 thoughts on “Should small government liberals abandon the Liberals?

  1. Andrew – how do you calculate or sum up the cost of the damage from the Liberals cuts and lack of investment ?
    Pensioners can’t afford dental care? Does it matter?
    CSIRO, ABC, universities etc, budgets cut? So what?
    Lack of investment in sustainable technologies? Why worry?
    Thanks to Howard we are, in so many areas, 12 years behind where we should be.
    Plus, I know you said something like this before – “Howard helped keep overall income inequality fairly constant under his watch, despite growing inequality in market income” but I don’t believe it, not in boomtown Perth at least. Too many Maseratis and mansions – I mean stupendous wealth (and ostentation): one of Perth’s most pressing problems, apparently, is a lack of boat pens and no room for any more.
    The gap, in wealth, between the rich and the battlers has visibly widened over the last miserable 12 years – and if we have a real biting recession I suspect we’ll find that what comforts the battlers do have is based on debt – Howard’s legacy might not be fully apparent yet.


  2. Underinvestment in infrastructure is a nice political story, yet is not really sustained by the evidence. A nice analysis is shown here.


  3. SD. I flipped through that analysis, but I don’t really see how a cross country comparison is relevant, especially when taking into account things like population growth and so on. Its pretty clear, for example, that if I built no new roads in population depleting Japan, then I am going forward versus building a small amount in population increasing Australia.

    Of course, if there are infrastructure bottlenecks, then why they are there is worth thinking. I’m surprised, for example, people arn’t willing to pay more for their education at the primary/high school level, and the reason things have deteriated at the university level is obvious (government restrictions and people not willing to pay). The same is true for things like health, transport, housing and so on. If you have both government restrictions and people to cheap to pay for what they use, its no real surprise you get a poor service as a result. I don’t see what’s wrong with calling these underinvestment in infrastructure, and it probably serves Australians right for being to corrupt and cheap to spend the money to fix them.


  4. Conrad – the analysis isn’t all cross-country. The argument that there has been little investment in infrastructure isn’t correct. We might quibble over the type of investment that has occured but not that it hasn’t occured. Most of the bottlenecks we hear about are furphies. For example, the port at Newcastle. Why would government build another port when the only user would be coal exporters – let them build it, there is little public good to subsidising a private cost. Similarly a whole host of ‘public’ infrastructure would only be used by people who have incentives to build it themselves. By and large this is a debate about socialising private costs. If the government (both sides) where to rein in the ACCC and change access laws to private infrastructure we’d be up to our eyeballs with private roads, rail and ports and the like.

    I don’t accept at all the arguments about universities not having funds. Universities are drowning in free cash flow, but have bad management. True, there are regulatory reasons for that but the solution isn’t giving them even more money, the solution is to starve the beast. I too am appalled that people won’t pay for their own childrens’ education.


  5. Andrew, as you indicate, ‘small government’ is not only about government spending as a share of GDP, but about the degree to which the state directs our decisions. So in that sense, universality of benefits helps keep paternalism at bay. It can also have the spinoff of reducing EMTRs compared to means-testing. That’s not to say it isn’t expensive. But after all, the dream of many liberals is a negative income tax, which would be very expensive (if it were to leave most people no worse off), but would improve work incentives and minimise administration. As for the tax take, I still maintain that the super tax changes imply a massive long-term reduction in the progressivity of the income tax system that will be very hard to reverse and should help reduce the scope for future ‘crimes of opportunity’ (and I agree with you that that’s what Howard’s spending was about). And none of this of course mentions the reduction in trade union power that Howard helped bring about, albeit some of it ham-fistedly.

    Incidentally, I wouldn’t mind if they got rid of the 30% PHI rebate, so long as they also got rid of the Medicare surcharge which was introduced around the same time. Almost everyone I know who has PHI does so because of the surcharge and hence sees PHI as a form of tax. So to my mind, calling the PHI rebate a ‘subsidy to the rich’ or whatever is an Orwellian distortion.


  6. SD: I agree with you that a fair chunk of infrastructure funding is basically businesses trying to get freebies (including extremely rich mining companies — almost the first groups to complain), and that a fair bit has been spent on infrastructure. Its just the difference between well spent versus spent on meaningless crap (i.e., corruption).
    The simple solution for universities would be to privatize them (there isn’t exactly a whole left about them that is public anymore), but its off the political agenda because people’s kids won’t be able to get their cheap and ever more poor quality undergraduate education anymore. In addition, I think lots of whining goes on here too, and not just universities — If some things are expensive but industry (like mining engineers) or the government (like teachers) want them, I don’t see why industry shouldn’t contribute or nor why universities should offer cut-price courses. If universities chop those courses because they don’t have the money, I don’t see why we should blame them.
    The problem with primary/high school is that if it is a market failure because people are too cheap, then you are basically breeding a generation of crime and low productivity workers, which is no-one’s interest. In addition, since the lag-time is huge, doing nothing now basically means it is really the next generation’s problem (it will be interesting to see the consequence of having a whole generation of primary school teachers that averaged around 60% for their Year 12, for example), so trying to wait people out and mop up the consequences in a decade or two is a bit of risk. Of course, I’m not suggesting the government just pump more money into the system — I think there are other things that could done to get more money into the system.


  7. Most people would desire minimal government and minimal interference from government but we all differ on where that interference should be minimal leading to all the different schools of thought.

    The only place Conservatism and Liberalism meets is on the economy. The rest they couldn’t be more different. Now that Conservatives, Liberals, Social Democrats and Social Liberals all agree how the economy should be managed, its time for the members of alliances to go their separate ways. Failing that, it just shows that they’re all Conservatives to start with and don’t have the courage of their convictions.

    I am of course keeping to the idea that the anarchist and socialists will remain isolated because of their extremism and wont be taken seriously.

    As for Infrastructure investment, there is no under-investment in it if we are to refer to the infrastructure that services the urban population but it is overly complained about.


  8. Sinclair – your evidence doesn’t look like much to be proud of – I particularly noted the lackluster performance in bridges, water and sewerage because Perth has a bridge (‘The Narrows’) across the Swan River but then you have to go right down to the port at Fremantle before you’ll find another bridge. Ridiculous. As for sewerage – my parents moved to City Beach (the closest beach to the Perth CBD) in the 50s and recently had to have the septic tanks cleaned out, again.
    But by infrastructure I was actually thinking of hospitals, schools etc. We have some pretty shabby old buildings which need replacing. I think it’s irrelevant whether this is state or federal government responsibility – it’s absurd to have the federal government producing ‘surpluses’ to stuff into future funds when we need this infrastructure now.

    I guess my question to Andrew is – why only look at the amount of spending and say Liberal spending is better because it’s less? If that spending is on the wrong things, and the necessary things are neglected, you might be better off voting for Labor.


  9. Russell, surely in terms of hospitals and schools, it’s at least in part the individuals responsibility. I don’t see why the government should be coughing up all the money to fix, for example “shabby buildings”, especially when most people are living in what most of the world (including rich countries) consider mansions and driving around in expensive cars.
    On this note, I don’t see why I should have any sympathy for rich people (most of Australia) complaining about a shabby school system. If they want a decent school system, then they should cough up the bucks, which a fair proportion now do. If enough of those that could afford it (and thats _before_ buying other luxuries, like huge houses) were willing to cough up the bucks, the amount left might actually be used usefully on those that really don’t have the money versus the freeriders.


  10. Russell – Infrastructure is largely a state responsibility, so any failings there are mainly of the centre-left social democrats that run all the states rather than the conservative social democrats who used to rule in Canberra, though I take Sinclair’s point that federal regulatory factors may have obstructed private investment in some cases.

    It’s pretty easy to point to areas where significant savings could be made federally, with family benefits (the second largest line item in the budget) top of my list. Overly generous handouts to seniors (the largest budget line item) could also be hauled back. The HELP loans scheme and tuition subsidies could also generate savings, plus all the pork and waste that Labor has identified.


  11. Conrad – yes it is in part the individual’s responsibility and most people expect to meet that responsibility via the tax system. And to pay enough to provide a certain standard. Example – a few weeks ago the temperature in the classrooms at my local primary state school was 44 C. The Education Department said it was up to P&Cs to provide things like air-conditioning. The schools in the rich areas can raise the money, the ones in poor areas can’t. Is that fair, that some kids swelter in classrooms while others can comfortably concentrate on their work?

    Andrew – this state-federal blaming thing is silly, the set-up (one raises the money, the other provides the services) is broken.
    How come you only identify expenditure to be cut and not tax ‘exemptions’ that should be abolished? Some examples from my limited social circle – a brother who is always buying almond or olive or some other sort of trees, not for any purpose but to avoid tax; a colleague who is fairly well off with property and shares who salary sacrifices half her income into super, to avoid tax; a friend who has investment properties, and benefits from negative gearing. Trusts might be worth investigating.


  12. Russell,

    a different way to think about this is what proportion of people really couldn’t afford to pay for a decent education for their children in Australia (or at least part of) ? Obviously there are unemployed people, and single parents on minimum wages and so on, but these are only a small percentage of the population. If the rest would pay, I’m sure there would be enough money to buy the really poor schools an AC unit. But that isn’t what happens now. You can compare my school if you like for the opposite anecdote. I live in a neighborhood where I’m sure house prices are now over 600K on average. But everyone wants their kids to go to the basically free public school. Is that fair?


  13. Russell – I am happy to have the exemptions cleaned up as well, though legitimate business expenses should be deductible. The problem with negative gearing of rental properties is not the deductibility as such, it is deducting the losses at high progressive rates of income tax while claiming the profits at lower rates of capital gains tax. Provided superannuation avoids people taking the aged pension later on it makes fiscal sense, but clearly some people are using it well beyond that. The effect of these distortions is to make marginal tax rates much higher than average tax paid in order to finance government expenditure. But cutting expenditure is also worthwhile.


  14. I suppose there is a possibility that once the Libs get over their election defeat they might rediscover the merits of small governmnent.
    I would like to think they were punished by the electorate for appearing too desperate to stay in power at any cost (to taxpayers). A prime example of what I have in mind is the ad hoc decision of the Commonweath to fund the Mersey hospital in Tasmania not long before the election.
    It would be interesting to know whether there was a widespread view among voters prior to the election that the government had become unprincipled in its spending of public funds.


  15. OT, Andrew, on superannuation you should know that Treasury projections are for it to save remarkably little in aged pensions – of the order of 10-15% of age pension expenditure in 2040. Saving age pension outlays is a very weak justification for super tax concessions – they are already costing more than a universal (non-means tested) age pension would and the relativity will only worsen over time.

    Oh, and BTW congrats on scoring a well-deserved invite to the great 2020 talkfest.


  16. Winton, I dunno about “a widespread view … that the [previous] government had become unprincipled in its spending of public funds” so much as a widespread view that it was unprincipled full stop. “Mean and tricky” is the phrase that comes to mind.


  17. Ross Douthat the American soft neo-conservative has argued that now that the Republicans rely so heavily on lower-income conservative votes their economic policy will have to accomodate their needs:
    Maybe Howard led the way here?
    Infrastructure: state Labor govts are doing their best to prove public choice theory correct by borrowing from the future by not investing in physical and human capital
    If academic critics of university management are so confident that they could do a better job why don’t they leave universities and apply their unrecognised managerial talent elsewhere and make buckets of $$: if you’re so smart why aren’t you so rich as Deirdre McClosley argues?


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