Time to reduce government

Classical liberals often convince themselves that a small government agenda could never be politically popular in Australia.  Two new polls suggest they're wrong.

It's an all too common lament that Australians are quite happy with big government.  Frustrated and sometimes even cynical believers in individual freedom see middle class welfare, subsidies for business and programs for special interests as yet more evidence that Aussie voters just love government spending.

There's some truth to these fears.  The howls of protest in the media and elsewhere whenever someone proposes cutting an entitlement program — think the federal government's recent tiny cuts to the baby bonus — seem to bear this out.  Aussies apparent attachment to Howard government era handouts like ''Family Tax Benefits'' are hardly encouraging.  And UK commentator Christopher Snowden has famously dubbed Australia the Nanny State capital of the world, thanks to our draconian limits on cigarette packaging and other government bans.

But new evidence suggests that Australians are more likely to reject government intervention than citizens of other countries.  Whereas 62% of people worldwide supported a ban on unhealthy food, polling company Ipsos found only one-third of Australians agreed with such an illiberal proposal.  Also encouragingly, 57% of Australians were found to be opposed to a tax on fatty foods in the name of fighting obesity.  Last year Galaxy conducted a poll on Australian attitudes to the Nanny State which found 55% of agreed there is too much government intervention and control in people's lives.  The same poll found the clear majority thought plain packaging for alcohol, fast food and cigarettes were unlikely to be effective.

Perhaps Australians are less enamoured with the Nanny State than many thought.

Essential Research, a left-leaning Australian polling firm, also recently conducted a poll which offers some signs of hope.  They asked voters whether government is too large and tries to do too much — and a plurality, 44% agreed.  Just 28% disagreed with the proposition.

But Essential also asked sector-by-sector questions, for example, whether government does too much or too little to provide quality health care and education services.  Predictably, in these politically-popular areas of spending, most voters were happy for the government to do more.  Tellingly, Essential didn't ask voters whether they thought government employed too many or too few public servants, whether they spent too much on ineffective climate change schemes or whether the welfare system was too costly.  They might have got very different answers if they did.

Nevertheless, it would be fair to say that slashing spending on schools and hospitals is highly unlikely to ever be popular in Australia.  But that doesn't mean that a small-government political agenda can't be sold to voters.

For a start, there are many ways to reduce government involvement in sensitive areas like education or health without being seen to be cutting public services.  Abolishing the badly-drafted and poorly-conceived national education curriculum in favour of competitive curriculums is unlikely to offend many voters.  Introducing a voucher system for delivering existing education spending has the potential to be very popular.  And lightly-taxed health savings accounts to replace Medicare for those who can afford to pay for their own healthcare could be done with minimal political pain.  Australians might view the size of the federal public service differently if politicians were able to effectively convey that while the federal departments of education and health employ thousands of public servants, not one principal, teacher, doctor or nurse is among them.

More broadly, the key to advancing a small government agenda in Australia is to seize on the general perception that government nannies us too much.  An effective political narrative that speaks in general terms about individual liberty versus state control is occasionally put forward by some Liberal MPs.  But there is fertile ground for much more of it.

And while the left is great at cataloguing examples of where reduced government involvement hurts some people — say workers who lose out from tariff cuts — supporters of small government can respond.  The carbon tax will be a great political opportunity to highlight the very real damage government intervention can do to peoples' lives and businesses.  But every single instance where big government hurts individuals needs to be highlighted by politicians who value liberty.  Sometimes a personal story can have far more impact than even the most persuasive facts and figures.

Of course, they need good allies who help them make the case.  Too often supporters of small government are not consistent in their advocacy for individual liberty over state control.  Business groups, for example, ultimately only harm their own cause when they decry wasteful and inefficient welfare spending for people, but go missing in action when government gives welfare to business.  A handout to a business has the same corrosive potential as a handout to individuals, and a welfare-dependent business is no better than a welfare-dependent person or family.

Granted, it is often tempting for politicians to pretend their new spending scheme will ''fix'' whatever problem is currently on the political agenda.  It is harder to point out the risks and pitfalls of big government.  But a small government agenda is much more politically feasible than some suggest.

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Not such a super idea

The Federal Government's plan to increase compulsory superannuation contributions from 9% to 12% is economically dubious and morally questionable.  Superannuation is one of the sacred cows of Australian politics.  Both major parties — and indeed all minor parties fall over each other to lavish praise on the scheme.  And there are some good reasons for this.  We only need to look to the fiscal crisis which currently besets Europe — and has been exacerbated by absurdly generous government-funded pension schemes — to see the value in citizens providing for their own retirement.

If superannuation means that future Australian governments will have to pay fewer people aged pensions, then many will argue it was a valuable reform.

But it is far from clear that this will actually be the case.  We simply do not know — as superannuation is actually a radical policy experiment which will take decades to assess its success or failure.  But many experts are already predicting that for many people, superannuation will not be sufficient to sustain them in their retirement, and they will have to continue to rely on some level of government assistance to survive.

The government's response to these predictions has been to legislate an increase in the mandatory contribution from 9% of employees' wages to 12%.  There are many problems with this approach.

But firstly let's deal with the biggest furphy in this debate:  that workers will not pay for the cost of this increase.  This is blatant political spin that does not withstand any serious economic analysis.  Employees will ultimately pay this cost no matter how it is implemented.

Increasing the amount employers must pay for their employees' superannuation can only have one of two effects:  reduced employment or reduced wages.  A higher compulsory superannuation contribution makes an employee more expensive for a business to take on.  They can overcome this with lower wages, or by employing fewer staff.  Even assuming the business has strong market power and can pass this increased cost on to its customers hardly seems any more comforting, because consumers will simply pick up the tab.

The performance of Australian super funds over the past few decades does not suggest that superannuation is the best form of investment for most Australians.  Even before the Global Financial Crisis, most funds' annual returns rarely exceeded the market average.  And as economist and Sydney Morning Herald journalist Peter Martin has pointed out, anyone who has a mortgage (with an annual interest rate of approximately 7%) would be far better off financially if they were allowed to pay it off instead of being forced to park it in a fund they will not be able to access until they are 65.

For people who work part time, or are casually employed in a variety of jobs, superannuation can be a major hassle with little obvious benefits.  For example, by my 24th birthday, I had acquired four different super funds, picked up at the variety of casual jobs I held while studying at university.  It was hardly worth my while to go through the effort of choosing my own super fund making each employer pay into it, because the annual payments rarely exceeded a few hundred dollars.  And what little they did actually accumulate was often substantially reduced by management fees.

It also seems absurd to take a large chunk of a young person's meagre salary when they are trying to cover the costs of study, rent and food, for them to spend in 40 years' time when they are likely to be far wealthier and to have accumulated assets like a home.

Perhaps this system makes sense for some people.  But there's no doubt that for many others it is not the best investment they could make.  What if I decided that the best financial investment I could make in my future is to enrol in a Masters degree to increase my earning capacity?  The money locked away in my super fund could pay for that.  But instead I might have to take out a high-interest personal loan to cover my tuition fees.

An inflexible, one-size-fits-all system that presumes that government knows best about the individual financial situations of every Australian is guaranteed to not work for many people.  That was bad enough when we were forced to lock away 9% of our income.  Increasing it to 12% (and some advocates suggest they won't stop there) makes it even less so.

A radical alternative could be to allow Australians to opt-out of superannuation.  Instead of forcing them to save for their retirement through super, we could trust those who think they can make better investments for themselves to do so.  To ensure this doesn't result in a higher burden for the pension in the future, they would also have to opt out of receiving that too.  In exchange, they could be rewarded with lower tax rates on their investments.  This system would still leave anyone who was content with superannuation under that system, but would provide freedom — and entrust personal responsibility — with those who choose it.

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Liberal Labour reform

One of the first acts of an Abbott government should be to repeal the Labor Party's Fair Work Act.  Industrial relations reform has a strong political rationale and serious policy merit.

Following the 2007 federal election it became conventional political wisdom that industrial relations policy was a no-go zone for the Liberal Party.  After all, the much-loathed WorkChoices legislation had contributed in a significant way to the party's loss of office after 11 years in power.

While it is certainly true that WorkChoices hastened the Liberal Party's demise in 2007, it is far from clear that the political response in 2011 should be to abandon the field of workplace relations reform.

In the 2010 federal election, opposition leader Tony Abbott was forced into an awkward promise to do precisely nothing in the field of labour market reform under pressure from Labor Party scare tactics and grilling from journalists.  From this came his now infamous pledge that WorkChoices was ''dead, buried and cremated''.

But surrendering the battle before the industrial relations war even began in the last election had two serious consequences that Abbott must avoid before the next election, due in 2013.  Firstly, by declining to prosecute the obvious failings of the Fair Work regime, the Liberal Party allowed the ALP to escape reasonable criticism of their workplace policies, and gave voters the impression that they were not causing major headaches for business and impacting on economic efficiency.

Secondly, in the minds of many voters, the Liberal Party has a deep-seated commitment to labour market liberalisation, so a promise to do nothing in this area has little credibility.  Voters who doubted the opposition leader's sincerity had only Labor Party talking points about a return to WorkChoices as a guide to what the Liberal Party would do if it won office.  By contrast, had Abbott outlined a sensible and moderate reform package, he would have been able to more credibly deny charges of a resurrection of John Howard's laws.

The economic case for industrial relations reform is strong.  Productivity is the single most reliable measure for predicting increases in living standards.  If productivity is rising, incomes soon follow.  In fact, there's no other sustainable way of increasing national wealth.  But after strong growth in the 1990s, productivity growth has been lagging for the best part of 10 years, and has slowed to a crawl in last few years.  It would be fanciful to attribute all of this slowdown to stagnant industrial relations laws, as productivity is affected by many economic factors.  But it would be equally foolish to argue that substantially re-regulating the labour market has absolutely no impact on productivity.

After all, the Fair Work Act not only overturned the 2005 WorkChoices laws, but also features of much earlier — and less controversial reforms.  For example, Fair Work eliminated statutory individual agreements, a policy introduced by industrial relations minister Peter Reith in 1997, which were obviously not egregious enough to prevent the Liberal Party winning elections in 1998, 2001 and 2004.  In effect, Labor has returned Australia to an industrial relations era of the early 1990s.

The signs of strain from this system are now becoming apparent.  High profile disputes such as the battle between unions and management at Qantas highlight the way in which the union movement has been emboldened by laws which tilt the system substantially in their favour.  Appalling stories of over the top salaries and ridiculously generous conditions at worksites like Victoria's Wonthaggi desalination plant demonstrate that taxpayers are bearing the cost of a system that pays little heed to economic reality.  We know from cases like that of students employed at a hardware store in rural Victoria — who were denied the chance to work two hour shifts under the laws — that the system is costing jobs.

And the business community is becoming more vocal every day of the increased compliance costs, the embedded disincentives to hire and the inflexibility that characterises the Fair Work Act.

Let's not lose sight of the moral component here either.  Why shouldn't employees and their employers be able to negotiate agreements that they believe are mutually beneficial?  Why should a third party like a union, or a tribunal of Fair Work Australia, be able to tell a small business how they should spend their money and who they should employ?

Australians should be grateful that we don't suffer under the perennially high unemployment that besets Europe.  Even in good economic times, countries like France and Germany have belaboured under the strain of unemployment rates of almost 10%.  This isn't just economically inefficient and expensive for taxpayers, but has a very real personal cost.  We know that unemployment is associated with a whole range of social ills and that the dignity of work is an extremely effective tool for combating them.  One of the reasons Australia has traditionally enjoyed lower unemployment and less of its associated costs is because of our relatively liberal labour markets.  But the current rigid system puts that at risk, particularly if we see the second global economic slump that many predict.

Ultimately, you can't shackle a 21st century economy with a 20th century industrial relations system without negative economic consequences.  If Labor won't reform Fair Work, it falls for Tony Abbott to do so.  The only question is, is he up to the task?

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It's time for tax reform

Australians are over-taxed.  And, to paraphrase Kerry Packer's immortal phrase, governments don't spend our money well enough to deserve any more of it.

Australia is generally a very business-friendly country.  Indeed, we routinely rank at the top of free-market indices.  This year's ''Economic Freedom Index'' ranked Australia as the third most free market country in the world, behind only the hyper-capitalist city-states of Hong Kong and Singapore.  We even outranked the former bastion of capitalism, the United States, and other well-credentialed pro-market countries like New Zealand, Canada and Chile.

As the index argues, there is an overwhelmingly strong correlation between economic freedom and prosperity.  The world's richest countries dominate its upper ranks.  This observation is supported by reams of academic literature, and basic economic theory -- free markets create wealth, and government regulation hampers it.

It makes intuitive sense too.  We all know that it is the entrepreneurs who take risks and have great ideas that are the growth engines of successful economies.  The best thing that government can do is get out of their way and let them concentrate on running their businesses.

Yet there is one area of economic freedom that Australia sadly lags behind in:  tax.

Despite ranking third overall, Australia doesn't even make it into the top 100 in terms of freedom from taxation.  With a top personal income tax rate of 45% and a company tax rate of 30%, that's hardly surprising.

It's not just tax-havens and developing nations (who struggle to levy high taxes on their poorer citizens) who offer more attractive taxation arrangements to businesses and entrepreneurs.  Australia's major competitors in natural resources, such as Canada, much of South America and the resource-rich chunks of Africa all offer lower tax rates to individuals and investors.

Low taxes are good for three main reasons.

Firstly:  both capital and, increasingly, labour are internationally mobile, and therefore it is important to offer better tax arrangements than our competitors.  Failing to offer competitive tax arrangements will mean that talent, ideas and investment will go elsewhere.

Secondly:  high taxes don't just risk losing people and capital overseas.  They also depress economic activity in their own right.  People respond to incentives, particularly those who are willing to take big risks to generate wealth.

Thirdly:  taxes can distort economic activity away from productive sectors.  Punitive taxes on the mining industry, for example, could lead to less investment there and more investment in lower-taxed but much less efficient industries elsewhere in the economy.

Of course, there is a moral element here too.  Why should government take a massive proportion of your money?  By definition that assumes that you can't be trusted to spend your own money wisely, and that a group of experts could put it to much better use.  Recent examples of appalling government waste and mismanagement at every level persuasively suggest that is not the case.

But while lower taxes are good, tax reform is also important too, because not all taxes are created equal.  Some are much more ''efficient'' at raising revenue than others -- that is, they cause fewer distortions in the economy.  Some taxes, particularly those at the state level such as stamp duty, are very inefficient.  Taxes which discourage work and investment should be avoided, where possible.

But good tax reform is not just about collecting revenue efficiently, and it certainly shouldn't be about collecting more revenue.  For example, imposing a carbon tax and then allocating the revenue to politically favoured groups is not tax reform, despite the audacious spin put on it by some government ministers.

That's why the report by Treasury Secretary Ken Henry into Australia's tax system in 2010 was so disappointing.

The few good ideas contained in the report, such as minor reductions in company tax rates, were bizarrely linked to increasing taxes elsewhere.  It's as if the report was written from the perspective that government revenue must be preserved at all costs.

It was a missed opportunity to cut taxes, and also to reform them.

And yet there is much to do.  For a start, our high company tax rates must be reduced to internationally competitive levels.  Next, our high personal tax rates should be cut.  Some have even suggested that the current multiple rates be consolidated into just two or three, to flatten the system out and remove the current disincentive to earn more.

It is reasonable to ask how this should be paid for.  After all, government does perform some functions, such as national defence, that must be funded somehow.  Personally, I'd like to see government doing far less, and playing a much smaller role in our lives and the economy.  But even if you think the current size of government is the right one, tax reform is still possible.

Government subsidies to private businesses, for instance, could easily be removed to help fund business tax cuts.  After all, corporate welfare is just as distorting as welfare for individuals.  Loopholes in the personal income tax system could also be eliminated to help pay for lower rates.  Income spent on accountants to help navigate complex deductions and avoid a higher tax bracket is not an efficient use of capital.

Tax reform is not politically easy, as the former Treasurer Peter Costello discovered with the GST.  But it is important.  Too important, in fact, to be cast into the too hard basket, particularly amid fears of a second global financial crisis.  Some are already suggesting that additional fiscal stimulus will be necessary to avoid recession.  While the failure of stimulus to kickstart the global economy following the GFC should be a salutary lesson, if we do have to have it, there's a much more efficient way of doing it than $900 cheques, pink batts and school halls:  tax reform.

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