Herewith this week’s column which tries to sum up my own view of John Howard’s economic stewardship. Obviously the piece has to have focus and leaves lots out. My editor said he thought I was a hard marker, but that it was an interesting view.
Left out is the fact that Howard’s commitment to running a balanced budget (which has turned into a small and occasionally larger than expected surplus) is a big deal in my book, though to be fair he’s had a dream run. If the country had an economic run like it had when Howard was Treasurer I wonder how much of a surplus would have been run up. Still it’s not the madness of ‘starve the beast’ a la the American Republicans.
The Prime Minister’s Ten Year Anniversary
It’s little remarked but, like his giant forbears, Whitlam and Fraser, Howard is more interested in social values than economics. Inevitably in the ten years at the top he’ll be celebrating tomorrow, Howard has many economic changes to his credit (or blame).
But although he’s avoided any major economic mistakes, he’s been curiously directionlessness on economic reform.
That’s meant that, apart from the two icons for which he’s shown genuine passion the GST and labour market liberalisation others have set the agenda. By contrast, Howard has led on social and cultural issues (whether you like his leadership or not).
Adopting the GST two elections after it had doomed John Hewson was the most politically courageous act of any Prime Minister in my lifetime.
Still, Howard announced his great tax adventure when his leadership was drifting dangerously. If angst ridden business leaders hadn’t been publicly denouncing him for his lack of ‘vision’ he wouldn’t have had to take such risks to rescue his economic bona fides.
But he survived. And then . . . more economic lethargy.
Both the GST and labour market reform were announced in Howard’s first term, though they took till the second and fourth term to implement. And both reforms were compromised, improvised and ultimately disappointing affairs.
Though I’m in a minority amongst economists, I think Howard’s GST tax reforms are overrated:
First, the capital gains tax concessions introduced with the GST distort investment, reduce growth and encourage tax avoidance.
Second, remember how the old sales tax system was ‘broke’ (just like we’re hearing about income tax now)? Well here’s some news. While some are definitely better than others, no tax system is without major inefficiencies, complexities and frustrations. That’s the nature of the beast the result of governments’ need for tax and our own ingenuity in not paying it.
So, while broadening the indirect tax base was worthwhile, the GST’s exemptions introduce distortions just like those caused by the narrowness of the old sales tax base. That’s not just because the Democrats forced Howard to exempt fresh food. It was inevitable because, for political and practical reasons, all the world’s consumption taxes exempt health, education and finance.
Third, and most importantly, where sales tax was levied on the small number of businesses producing or importing goods, over ten times that many businesses pay GST. And they account for it incredibly in every invoice they write and receive.
Perhaps that’s what Treasurer John Howard had in mind in March 1981 when he said this.
A multi-stage value added tax [ie a GST] was rejected fairly quickly because it would have imposed an enormous paper work burden on both taxpayers and collecting authorities.
I guess that the GST increases the number of times indirect tax is accounted for, a hundred, perhaps even a thousand fold, over the old sales tax as it’s tracked through each step in the production chain. Does that sound efficient to you? It doesn’t to me as I file my BAS.
What of labour market reform? Howard argues rightly that greater flexibility lowers costs and encourages firms to hire. But to do this properly you must also lower the minimum wage. And you can’t do this without minimum wages falling below the dole, annihilating incentives to work.
To address that problem you can cut welfare as they did in New Zealand. If you don’t fancy the ethics or the politics of that, you can try a wage-tax tradeoff as proposed by the Business Council of Australia in 1999 freezing minimum wages so they fall against inflation, with new tax credits compensating low wage families.
In 1999 the Government said it didn’t have the money. But it didn’t build it into its forward agenda. So when revenue later surged beyond the Government’s wildest imaginings, rather than spend the money buying reform, it simply improvised giveaways. Year after year.
Now, with IR changes legislated, Howard has returned to form stasis. And he’s got himself into the same position on tax reform again!
They say nature abhors a vacuum. Well Malcolm Turnbull doesn’t. While Howard would prefer to keep muddling on, cutting taxes and lifting benefits for middle Australia, Turnbull and others are now dictating the agenda.
And after all these years, the Government is still improvising on tax reform. Last Sunday it cobbled together a one month review. It will propose spending the budget surplus on cutting top marginal rates, even though, (as I’ve argued elsewhere) tax relief is more efficiently delivered by lifting tax thresholds.
Despite the commentariat’s confidence in his political ascendancy, I expect Howard’s more modest view is wiser that his position is not impregnable to political or economic misfortune.
But, as was the case when he announced his last tax adventure, Howard’s position would be securer if he were in better charge of the agenda on economic reform but that would entail his having one.