The hoarded tax Labor won’t touch

The $5 billion Higher Education Endowment Fund announced in last night’s Budget has given the government what it has long lacked in higher education – an iconic policy. University leaders have been fulsome in their praise, and the media coverage has been overwhelmingly positive.

It fits into a pattern I noted last month of some of the most attention-grabbing things in higher education happening almost by accident. I can’t now find his analysis on Crikey’s hard-to-navigate site, but I think Sinclair Davidson had it right this morning – the Higher Education Endowment Fund is less about a government change of heart on higher education than their desire to stash the proceeds of excessive taxation somewhere Labor won’t be able to get it without significant risk. Like an evacuating army, the Coalition is setting political booby traps in the edifices it might leave behind.
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Tax and don’t spend

Last week we had an extensive debate on whether tax cuts would be inflationary or not. Over the weekend Newspoll was finding out how many voters buy this line, and the answer seems to be at least 30%. Though both ACNielsen last week and Newspoll this week find 66% of their respondents want a tax cut, Newspoll followed up with this question:

Some economists believe that giving personal income tax cuts in the budget may lead to a rise in interest rates. Given this possibility, would you personally be in favour or against income tax cuts being given in the federal budget?

At which point support for tax cuts dropped to 36%. It seems that Australian public opinion has moved from tax and spend to tax and don’t spend, which is possibly even worse. Winning obscure macroeconomic disputes may be important to attempts to stall Australia’s ever-expanding state.

Taxpayers want their money back

This morning’s Age has the first of the Budget polls on what the government should do with one river that certainly isn’t drying up – the river of taxpayers’ cash flowing into Treasury. For some reason, unlike previous years, they have not asked about a choice between more services or less tax, but simply asked ‘Do you support or oppose cuts to income tax as part of this year’s federal budget?’

Two-thirds of the poll’s respondents think that income tax cuts should be part of this year’s Budget, and a little under a quarter oppose cuts. Taken in isolation from the missing services alternative, that roughly transposes the figures from last year, in which 29% wanted tax cuts and 68% more spending on services and infrastructure.

Though it would be interesting to see a repeat of the tax cuts versus services question, the insertion of the phrase ‘as part of’ into the question does highlight that the question in earlier years at least partly created a trade-off that did not need to be made – the government could (and did) cut tax rates while also increasing spending. Indeed, as the tax revenue statistics released earlier in the month showed despite the cuts to tax rates for 2005-6 tax revenues increased by more than 5% per person on the previous year.

Perhaps also voters are wising up to the realistic alternatives available. If we don’t get tax cuts, where will the money go? As the AFR reports this morning, the government is sitting on more than $2 billion in discretionary programs even before it dips into the surplus to finance its election promises. If you don’t live in a marginal seat, you’d be mad to prefer this pork barrelling to tax cuts. Or if the money isn’t being spent on marginal seats, it will be stashed away in the Future Fund to provide a comfortable retirement for public servants. Again, I can’t think of a strong reason to prefer that to tax cuts now. I’m in the 24% of voters who ‘strongly support’ tax cuts.

The slowing of big government conservatism

Last December I was complaining, at length, about the rise of big government conservatism. But the release this week of the ABS’s Government Finance Statistics for 2005-06 shows some welcome spending constraint.

Overall, spending was up 5.5% on 2004-05. But inflation of 3.2% accounts for some of that (directly relevant because of the indexation of benefits). Also, as I did before, I calculated spending on a per person basis, as the approximately quarter of a million extra Australians would have added to expenditure regardless of spending policy decisions. This brings the increase down to 3.8%, .6% above inflation. It’s not a great record, but by the standards of the current government it is not bad.

The pattern of spending increases also looked a little more like we would expect of a conservative government than previous years, with ‘defence’ and ‘public order and safety’ receiving larger percentage increases than health or social security. However, education enjoyed strong growth (8.5% per capita), and unusually this was driven more by universities than schools. The most spectacular increase was the 1,973% lift in per capita spending on ‘water supply’. But as spending was only $1 per person per year previously this still left water as one of the cheapest items in the federal Budget (at least before the $10 billion Murray-Darling plan that failed to impress Treasury Secretary Ken Henry).

Alas, the ABS Tax Revenue publication, also released this week, shows that per capita Commonwealth taxes continued their steady rise, up 5.6% per person between 2004-05 and 2005-06. As Stephen Kirchner and others have pointed out, it’s far from clear that the government should be stashing the difference between per capita tax increases and per capita spending increases away for the benefit of future taxpayers (or, if Labor wins, future broadband users) rather than reforming the tax system now. Despite tax cuts in the last couple of Budgets, the government remains rather reluctant to let Australians keep their money.

The fiscal burden of Family Tax Benefits

In the executive summary of the second Intergenerational Report, released today, it says after noting various fiscal pressures that will build over the next 40 years:

It will be important to focus on the efficiency and effectiveness of government spending

I couldn’t agree more. Unfortunately, the government isn’t heeding its own advice, as the Integenerational Report itself shows. In an appendix on spending projections the Report compares spending forecasts made in the first report five years ago with those Treasury makes now. Back then, they thought that Family Tax Benefits A and B would consume 1.3% of GDP in 2006-07. In the second Report they say FTB spending will be 1.6% of GDP in 2006-07. In a trillion dollar economy – as various government Ministers for some reason keep telling us – that 0.3% is a lot of money. In real per person terms, it’s gone from $613 per person to $790 per person, or about a 29% increase.

Now what do we have for all this money? According to the Report:

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Taxpayers ripped off again

Victorian universities are predictably complaining about their failure to secure many of the handouts from the federal government’s Voluntary Student Unionism Transition Fund.

But the people who really should be complaining, yet again, are Australia’s taxpayers. They must pay the $80 million used to swing National Party support behind the government’s plan to abolish the ‘compulsory’ student amenities fee at universities. But which is the more obnoxious compulsory fee, taxes or fees paid by people who choose to attend university? The policy was another example of Brendan Nelson’s considerable ability to suppress cognitive dissonance and implement policies that contradicted his rhetoric.

Minchin on big government conservatism

I had been worried that the ‘big government conservatism’ critique of the Howard government may actually please its Ministers, helping to fend off attacks from the left and claim the much fought over middle-of-the road voters. And that seems to be the case. In his quasi-rebuttal of CIS criticism in this morning’s Australian, Finance Minister Nick Minchin says:

IN politics, fighting battles on two fronts is an unavoidable obligation for parties aspiring to hold the middle ground. ….
Such criticisms delineated a bizarre dichotomy between the Government’s critics on the Right, deriding us for creating a nanny state, and the more predictable Labor attacks that the Government was heartless and meanspirited.

Rudd says the Government spends too little on education, while the CIS bemoans that real per-capita education spending has grown faster under the Coalition than Labor. Rudd attempts to portray the Government as attacking working families, while the CIS has the Government showering these same families with undeserved largesse.

Ah yes, and the Coalition is in the sensible centre. But Minchin is still sensitive to the claim that his is a big-spending government. Though conceding that

It is true that spending on health, education and social security has risen under the Howard Government. It is true that in real terms the Howard Government spends more in these areas than Labor did.

He goes on:
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The political case against big-government conservatism

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:

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The rise of political familism

As a single and childless male I know an election year won’t be good for me. On both right and left, the trend is toward political familism, with the interests of people with kids put above those without.

On the right, the main trend has been toward income transfers. This year the Howard government plans to spend a staggering $28 billion on financial assistance to families with children. It’s the second-largest item in the federal budget after the aged pension, and does not include indirect benefits such as schools and health care. This largesse has helped make the Howard years exceptionally good for people with kids. In the latest NATSEM study Ann Harding calculates that real disposable income has increased by 29% for couples with kids over the last decade, for single parent families by 26%, for couples without kids by 23%, and for single households by 15%. This of course isn’t just government benefits; rising real wages and increased labour force participation are important too. But family benefits payments have undoubtedly skewed the income distribution further away from the childless. Everyone pays unnecessarily high taxes, but only those with kids get money back.

On the left, the main trend is toward advocating further intervention in the labour market in the interests of families. Kevin Rudd has enthusiastically embraced this agenda. In his first speech to Parliament as Labor leader, he said: [restored from NLA website]

…families are such a basic social institution that they deserve special protections. When you instead have a set of laws which says that you can be told to work at any time of the day, at any place and for virtually whatever rate of pay, that it can include weekends or whatever and that you can have your shifts and rosters changed at a moment’s notice, just pause for a moment. Let us think through where that all goes in terms of the impact on working families.

As yet, it is unclear exactly how this might translate into policy. Late last week, Julia Gillard floated the idea of pressuring employers of people with kids under six years of age to permit part-time work without the disadvantages often associated with it, such as less training. Barbara Pocock’s book The Labour Market Ate My Babies, cited by Rudd in his CIS speech, proposes that:

…Australian labour law should be amended to increase the time autonomy of workers, especially those with care responsibilities. …within a framework that restricts long working hours … [including] new capacities for changes in working hours that are initiated by employees…all parents [to have] an opportunity to take up to two years out of paid work with income support on the birth of a child.

Obviously making half a million people a year eligible for income support (250,000 births times two parents) has fiscal implications, and means higher taxes for others or less spending on other things. But this kind of labour market intervention also has significant implications for other workers, who must fill the gaps left by people who decide, without reference to others, to vary their hours of work. Inevitably, the childless or empty nesters will pick up most of the slack, lacking the ‘childcare centre shuts at 5.30pm’ and other excuses of workers with kids.

The basic concerns behind political familism have been widely accepted, even if the major political parties do not have the same policy responses. But these concerns do not seem to me to be compelling enough to warrant the redistributions of time and money occurring or being proposed.

As the NATSEM research shows, families with kids have higher incomes than other kinds of households, receiving about $250 a week more on average than the next most affluent household type, couples without kids. In my article on ‘big government conservatism’ I report research from the mid-1990s showing that at that time people with kids had above average satisfaction with their financial situation. Yet for all the spending, it is hard to see any significant trends in the basic family statistics except for increased use of formal childcare.

Obviously parents need time to look after their kids, and many surveys have shown at least a large minority of people perceive some conflict between work and family. But this in itself is not a policy, as opposed to personal, problem. For most people, there are more things they could do with their time than there are hours in the day or days in the year. Inevitably, trade-offs need to be made between competing uses of time. But the ‘right’ trade-offs cannot be set in Canberra or by academics. They depend on a wide range of personal, family, and work circumstances, which will vary greatly from household to household and within households over time.

For example, in the 2005 Australian Survey of Social Attitudes about a third of respondents said they would like to spend less time in their paid job and 70% said they would like to spend more time with their families (implying some other activity ought to be reduced). But only 10% agreed that they would rather ‘work fewer hours and earn less money’, with twice as many saying they would rather ‘work longer hours and earn more money’. So while in a constraint-free world we would have more of everything, in the real world of trade-offs work is more preferred than it might appear if we just looked at questions about work and family. In the kids interviewed for Pocock’s book about their parents’ work hours the same pragmatism is on display. Many would like to spend more time with their parents (particularly boys with their fathers), but they also accept that their parents need to work, often for money but also because they enjoy it.

People also adjust without intervention from above. In an analysis based on HILDA data, between Wave 1 and Wave 2 (about a year) about 30% of those described as ‘conscripts’ to long hours (50 hours a week or more) went to shorter hours, along with about a quarter of those described as long hours ‘volunteers’. There are several ways this can occur: the long hours were just a spike in work which went away, employers take on more people to reduce hours (when demand increases, employers often work existing staff harder and take on more workers only when they are confident the higher demand will last), or workers change jobs. There is also considerable movement (about a fifth of each group) moving between ‘volunteer’ and ‘conscript’, showing changing preferences for hours worked but not the fact of long hours.

It’s far from clear to me that blunt rules imposed by policymakers can improve on this dynamic process of trade-off and adjustment. Prohibiting long hours might help ‘conscripts’ to reduce work. But it would be bad for those who enjoy their work, or need the money, or both. There would also be flow-on effects for those who rely on the work done by long-hours employees. These will be worst in occupations where there are existing labour market shortages, and no spare workers to make up for the hours not worked. With such shortages widespread in health professions, much longer waits to see medical professionals may not seem so ‘family friendly’.

Political familism doesn’t just disadvantage single people to provide added assistance to families who do not necessarily have greater needs. It is an attempt to replace individual judgments made by people in and out of families with collective judgments made by social critics and politicians. Liberals – small ‘l’ and large, welfare and classical – should resist these intrusions into the private sphere.

Some Whitlam nostalgia of my own

Though Whitlamite nostalgia can be a poor guide for contemporary public policy, it is at least understandable that Labor’s true believers remember those years fondly. But when they start indulging in Menzies nostalgia something very odd is going on. In his first speech to Parliament after becoming leader, Kevin Rudd said:

…this modern Liberal Party, is that it is not the Liberal Party of old. If you go back and read what Bob Menzies had to say about social responsibility and social justice, there is no way that Bob Menzies would fit into the world view that we are now being offered. You see, the member for Kooyong recently delivered a speech on Bob Menzies?? legacy within the Liberal Party on these questions of social responsibility. It is quite clear when you read that clearly that there has been an ocean of change between that Liberal Party and what it stood for, despite our criticisms of it and our disagreements with it at the time, and the market fundamentalism which has overtaken the current Liberal Party.

It’s another example of the strange meme that recontructs the conservative Robert Menzies as some kind of left-leaning social democrat. In a fiscal fact-checking exercise sadly lacking among those making this claim about Menzies, today I visited the economics library at Melbourne University to see just how the Menzies government’s spending levels compared with that of John Howard’s government.
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