Liberals must attack the vulnerable areas

AFTER the March 1993 election defeat the Liberal Party made a strategic error:  it wrongly interpreted that defeat as a rejection of giving priority to economic reform.  It was abetted in this by some who refused to acknowledge that, but for the ill-advised proposal for a new tax (the GST), the coalition would have won.

John Hewson was re-elected as leader with a commission to develop a more compassionate and more caring face.  There was nothing wrong with that.  But it was not a substitute for policies.

The coalition now has an opportunity to correct this error and to avoid the adoption of positions that all too often evaded the issue.

For example, while correctly attacking the Government for inadequate progress in reducing the deficit and for increasing the overall burden of taxation, the coalition has given very little indication of what it would do to reduce both.  Yet Commonwealth spending for its own purposes is running almost out of control.

Such evasions not only left an increasing policy vacuum which allowed the Keating Government to even reverse economic reforms with comparative impunity.  They also reinforced the feeling in a community already deeply distrustful of politicians that the coalition would be unlikely to perform any better than the Labor Government.

The coalition must surely now set about more clearly differentiating itself from Labor.  Far from moving to the "middle ground", as some argued, it has been seduced left field as the Prime Minister, Mr Keating, himself moved Labor closer to the left boundary.

Reforming the party structure or emphasising social policies to help the genuinely disadvantaged are not the the solution.  The overriding requirement is for the coalition to operate on the basis that it is opposed by a bunch of tough professionals.  To win it will not be sufficient to be "practical and commonsense" amateurs.

There should be no question of differentiation for the sake of it.

There is a real opportunity -- and a need -- to offer substantively different policy approaches.  To do this successfully, however, the coalition must first get across that there is no contradiction between economic reform and being compassionate.  Indeed, as the lowering of unemployment and the raising of average living standards are dependent on wide-ranging economic reforms, it is absurd for Mr Keating to portray reforms as "mean-spirited".  He should not be allowed to get away with that.  The electorate will support change if backed by a convincing brief.

The coalition should also identify those areas where the Government is vulnerable and then go in hard.  Paul Keating's rather pathetic caricature of the Melbourne Club determining the election of Alexander Downer, for example, exposes his own vulnerability to the (accurate) charge that Labor is beholden to the trade union movement.  The greatest single obstacle to economic reform in Australia is that movement's stonewalling to protect the restrictive practices of its members:  yet Mr Keating's Government can do little about it.  Even the dwindling trade union members are starting to realise that their leaders' actions do not in the end save jobs.

Mr Keating's own attempt to make some progress on industrial relations reform after the election was firmly rejected by the unions and he was forced to step backwards to the recently passed Industrial Relations Reform (sic) Act.  That act, running to more than 200 pages of detailed regulated and inhibition of reform, is one important manifestation of the damaging effect of union power in holding up unemployment.

Union power is also the principal reason why both Commonwealth and state governments are making heavy weather of the privatisation of public enterprises;  and it is preventing much needed reforms in the delivery of education, health and general public services.

The trade union movement's influence over federal Labor provides one basis for the coalition to differentiate itself -- and in a way that would attract support.  This should not involve "union bashing".

Rather, there should be a continual parading of those areas where the Government is unable to implement reform because of its close union associations.

There are many other opportunities for the coalition to differentiate itself in a substantive way.

The dangerous increase in the centralisation of power in Canbera and the ceding of power to international bodies are obvious candidates.  So too are the pursuit of social policies that extend the social welfare safety net beyond the genuinely disadvantaged at a time when overseas countries are identifying that as a major problem;  the charade of a policy that purports to lead Australia into Asia -- but after business has already done it;  the incredibility of a macro-economic policy which is justified on the argument that we did it in the 1983-89 period -- a rationalisation which conveniently "forgets" the high foreign debt, recession and increased unemployment that also eventuated;  and so on.

It is difficult to understand how Paul Keating has managed to build up an image of invincibility when there are so many holes in his armor.

The coalition now has the opportunity to penetrate those holes and to put Australia back on the right track.

How markets led us down the garden path

THE VIEW now advanced in some quarters is that last week's Budget was a non-event because it was accepted by financial markets.  This acceptance allegedly rebuts those critics who suggested that the of $14.2 billion (excluding asset sales) budgeted for 1994-95 is far too high.

However, while the popular view is that financial markets impose a rigid discipline on governments' budgets, one lesson of the 1980s is that they may be prepared to accommodate large government (and private) borrowings for an extended period.

In fact, by the time financial markets demanded that monetary policy be operated in the 1980s to really restrain private-sector borrowings, such borrowings and our external debt had already far exceeded prudent levels.

The end result was the recession we would not have had if more responsible policies had been applied earlier.  The experience of the 1980s thus suggests that acceptance by financial markets can easily lead one down the garden path.

Of course, the Government's case is that it now has a firm anti-inflationary monetary policy and that the forward projects provide a realistic commitment to reducing the deficit to 0.9 per cent of GDP by 1996-97.  Financial markets are prepared to accept that for now because the case will not be tested until the economy is operating closer to capacity.

Yet even in the unlikely event that the projected high levels of economic growth and budget revenue turn out to be consistent with the deficit reduction objective, the credibility of the projected figures for Budget spending (and hence for the projected deficits) remains open to serious question.  There are two main reasons for concern.

First, various comments in the media over recent weeks suggest that Treasury has quietly let it be known that it is seriously worried about Budget strategy.  It appears that this concern relates less to the 1994-95 deficit than to the general approach being adopted by the Prime Minister, Mr Keating, who is reputedly laying down the law in strategy discussions within Government along the lines that "deficits don't matter".  This is worrying indeed, the more so given that the weakened ministry makes Mr Keating an even more dominant figure in his Government.

The second associated concern relates to whether the forward projections of outlays for 1997-98 are likely to be realised.  One test is to examine the changes that have been made in the estimates for 1994-95 over the three Budgets since the last Hawke Government one in August 1991.

These figures show that since taking office, Mr Keating has presided over a large increase of nearly $12 billion in the forward estimate for outlays in 1994-95.  If there were to be a similar "blow-out" in the estimates for 1997-98 in the next three Budgets, outlays would become an even higher proportion of GDP than they are now estimated and the Budget deficit would be about $15 billion, or 2.6 per cent of GDP higher than now projected for 1997-98.

With the Prime Minister riding a "deficits don't matter" horse, pursuing a social policy agenda and providing handouts to a wide range of interest groups, the chances of keeping expenditure anywhere near the current projections are minimal.

Even the most ardent proponents of pro-family policies would surely have to acknowledge that the 1994-95 Budget provisions for assistance to families largely reflect Mr Keating's political strategy of inclusion.  That is a strategy of currying political support, or at least keeping opposition quiet, by providing government handouts for all lobby groups.

In the case of assistance to families with children, the cost is an enormous increase of 16.9 per cent in 1994-95 provision followed by a further massive increase of 33 per cent to reach an estimated $13.9 billion in 1997-98.  In this Year of the Family, and with the Oppositition Leader actually welcoming the social spending initiatives announced in the Budget, it would not be surprising if Mr Keating were to push ahead with even more social spending.

The extent to which monetary policy will need to be tightened to deal with products of the Year of the Family and the like remains to be seen.  However, one other lesson from the 1980s needs to be noted, namely, that once the private sector gathers momentum along with the public sector it becomes very difficult, both politically and in practice, to operate a monetary policy that keeps the economy on a stable path.

That is why the Government needed to take early and substantive action to rain in government spending and borrowing -- and still needs to do so.  That is also why the latest analysis of the Budget by the leading investment bankers Salomon Bros warns that a prolonged delay in tightening monetary policy "could, over time, risk an acceleration approaching the bottom of the six to eight per cent inflation range prevailing during much of the previous expansion".  The financial markets are watching and waiting.

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The same methods will produce the same result

THE CENTRAL controversy about Tuesday's Budget, delivered by Treasurer Ralph Willis but bearing clear prime ministerial trademarks, is less about proposals for 1994-95 than about the strategy implied by the projections for the years to 1997-98.  Many analysts accept (wrongly I believe) that, with the economy operating below capacity, the Federal Government can appropriately run in 1994-95 a relatively high deficit of $14.2 billion (3.1 per cent of GDP) excluding asset sales and increase spending excluding asset sales at a relatively high rate (2.9 per cent).  Their concerns relate to unrealistic forward projections of continued rapid growth in the economy, which imply a "go for growth" strategy that risks over-heating the economy.

So what, it may be asked?  If the projections are wrong then the Government can change its policies but, before it does, hold an early election which, with a by then strongly growing economy and an Opposition short of credible alternative policies, it would be bound to win.  After such an election, the Government could then announce tax increases and even (possibly) spending cuts to reduce the deficit to more appropriate levels.

Mr Keating has proved such a chameleon that it might not be surprising if he were to switch from his present "social conscience" mode to an "economic reform" mode in a year's time.  Last Thursday Mr Keating responded to criticism of the white paper on employment by proclaiming his mission to create a "civilised society" (does anyone want an uncivilised one?) and attacking The Age for ceasing to champion "great social reforms".  Yet as recently as August 1990 Mr Keating lambasted The Age for being "basically into that sort of twilight zone of economics and politics, where they'd like that sort of comfortable world of the '60 and '70s, and social policy slopped on, trowelled on, not directed, targeted".

The question now increasingly being asked is which is the real Mr Keating?  The suspicion is growing that, while he tries to ride two horses at the same time, the economic reform horse has fallen back and cannot now make up the ground it lost at the barrier.

The problem is that, once a leader starts to "slop on" social policy, it is difficult politically to change horses:  the "social conscience" syndrome becomes a pervasive mind-set.  In the early 1980s years of Labor, Budget expenditures and deficits were allowed to blow out to Whitlamesque proportions and, when in 1985-86 and 1986-87 they needed to be heavily reined in, that was not politically possible.  Mr Keating's subsequent four years of Budget surpluses came too late and these were in any event more a result of the over-heated economy than a response to it.

The Whitlamesque tendencies have indeed re-emerged already.

Commonwealth expenditure for its own purposes (that is, excluding payments to the states) is now running almost out of control.  In 1994-95 such expenditures are estimated to be no less than five per cent higher than last year in real terms (excluding asset sales) and to account for 3.2 percentage points more of national resources than five years earlier.  Had these expenditures merely stayed the same proportion of GDP as in 1989-90 they would be $14.7 billion lower in 1994-95.

Mr Keating's recent claim that "we've got a great record as Budget managers" is thus simply laughable.  But, coupled with his suggestion that there is "something wrong" if Australia could not repeat the 1983-89 growth performance, it is extremely worrying.

It was just such a "go for growth" strategy in the 1980s that pushed the economy over the top and then into recession.

The argument is that "this time it will be different" because reforms have so improved productivity that growth at the 1980s pace is sustainable.  However, while there has probably been some structural improvement in productivity, this argument is essentially a smoke-screen to cover up for poor policy.

Other important changes since the 1980s also need to be reckoned with.

Current international best practice on inflation will require demand-restraining action earlier than in the past.  Whereas in the 1980s Australia "got away with" (for a time) much higher inflation rates than the OECD average, we now have less room for manoeuvre.

Also relevant is the increased difficulty in attracting private overseas capital.  In particular, Japanese institutions, which invested heavily in Australian governments' bonds in the 1980s, are now chary about the exchange risk.  More generally, while it remains the only significant net saving country, Japan has virtually ceased to be an exporter of long-term capital.  International investors are currently signalling to the US that it must tighten monetary policy and moderate its (slower) growth.  Unless Australia fairly quickly eliminates its (larger) public-sector deficit (which would require a Commonwealth Budget surplus) our much larger external deficit makes us highly vulnerable to the same pressures.

Mr Keating's 1994-95 Budget thus incorporates a high-risk strategy and it is irrelevant that Australia's Budget deficit stands up well against the OECD average.  Australia has a different structured economy and has two major handicaps -- an antiquated industrial relations system and a large external debt.  These call for a low-risk Budget profile and fast micro-economic reforms.

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Labor schemes are the wrong way to care for the jobless

THE FEDERAL Government's decision to spend large amount over the next few years on various programs which purport to reduce unemployment does not seriously address the underlying situation.  Had the Government done so, it would have announced major industrial relations and other reforms to reduce business costs across-the-board so as to create real jobs on a sustainable basis.

The failure to institute substantive economic reforms reflects to an important extent the continued power of the union movement to resist changes which it perceives as undermining the award system and conditions that were allegedly hard-won in the past.

The union movement is now the bulwark of Australian conservatism, fiercely resistent to the variety of changes that are needed to reduce unemployment.  In particular, its relationship with the Government through the Accord has preserved an industrial relations framework that still protects those who have jobs against competition from those who do not.

Of course, the programs announced may lead to some reduction in unemployment over and above that which will occur naturally in the course of the economy's recovery.  It has always been possible for governments to create jobs, at least for a time, by establishing employment schemes or providing employment subsidies to employers.

The Nordic countries have been the prime exponents of such shemes which, by disguising the real rate of unemployment, have created the impression that they are caring societies.

More recently, those countries have had to face economic reforms and even the official rate of unemployment has risen.  In Sweden, for example, the official rate is up from two per cent in 1990 to more than eight per cent today and the real rate -- that is, inclduing those still on labor market programs -- is around 13 per cent.  Perhaps that is why we now hear less from the ACTU about the Swedish model that formed the basis for its infamous "Australia Reconstructed" proposal in 1987.

The point of mentioning the Nordic experience is that we should not be reduced into thinking that a caring society is one which should avoid further economic reforms and which can instead look after the unemployed with government-funded labor market programs.  This is the real danger that lies behind the political hype accompanying the white paper, and it is the way to the economic stagnation that much of Europe is experiencing today.

The reduction of unemployment requires changes to increase competition and improve economic efficiency.  There is now in existence any number of economic analyses (including some by the Government's own advisers) which demonstrate that such changes would reduce unemployment over time, and by much more than would otherwise occur.  Many predict that unemployment could in due course be brought down to five per cent.

None of these analyses includes any allowance for Government spending on labor market programs.

The problem is not that we don't know what to do or that we lack any plan:  it is, rather, that we lack the federal political leadership and will to tackle union and other conservative forces that are resisting change and to convince people of its merits.  Regrettably, we also now have an Opposition which appears to lack the capacity to put pressure on the Government to improve its performance and to clearly enunciate real policy alternatives.

Some still argue that the experience of the 1980s demonstrates that we have had enough of economic efficiency and that a caring society requires more attention to compassionate measures to help the unemployed.  However, a caring society is surely not one that resists change simply because of the potential for adverse effects on some individuals.  If the change would lead to improved economic and employment prospects for others, and the economy as a whole, it cannot be regarded as compassionate to halt reforms because they may cause some to lose their jobs, perhaps only temporarily.

On the contrary, it is highly inequitable for governments to continue allowing individuals, industries, or unions to maintain inefficient practices when they impose costs on the rest of the community and hold down living standards and employment.  A caring society has an obligation to the present and future generations to rid itself of such practices unless they can be shown to have benefits which more than outweigh the costs of maintaining them.

Naturally, society also has an obligation to help people who are adversely affected by change and who do not have adequate means of support.  But we already have in place a vast social security, health and housing system to deal with such situations.  During the so-called "greedy 1980s", social security and welfare assistance increased from 8.5 per cent of GDP to well over 10 per cent;  and the real value of welfare benefits to individual recipients was also increased.

There can be no doubt, therefore, that the social security system has responded -- perhaps too well -- to the perceived needs of a caring society.  But a genuinely caring society would also now press ahead with the economic reforms that are the only way of achieving a sustained higher level of employment and standard of living.

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