Why is economic reform so difficult to achieve nowadays?

Dr Peter Hendy’s speech to the University of Sydney Conservative Club

28 September 2017

I was very pleased when I received an invitation from Ed to speak to your club.

In his email he said:

It has become increasingly clear that unfortunately the battle for economic rationalism has not been won, evidenced by the growing popularity of protectionist policies across the globe. Hearing from you would then be of great benefit to many of our members who have expressed considerable disappointment with this growing and regressive behavior.

It’s a while since I heard someone else use the term economic rationalism.

It has certainly gone out of fashion, although I still use it a lot.

In recent years people, especially in Liberal Party circles, often ask me whether I’m a moderate or a conservative.

It appears you can only be one or the other.

However, maybe it’s my libertarian streak, or possibly my conservative tendencies, but I don’t like to be boxed-in and typecast by other people and I don’t generally use either term.

What I answer is that I’m an old fashioned economic rationalist and to use another ancient phrase – I’m an economic “Dry”.

That’s how I principally classify myself.

And if you go back to some of the champions of the past who I used to work with, like Peter Costello and Peter Reith, that is how they described themselves and I’m pretty sure still do.

Others like John Hewson, who I still hold affection for, was definitely an economic rationalist in his day.

What he is now I sometimes wonder.

I see flashes of his old brilliance and then I’ll read one of his Sydney Morning Herald columns and I begin to shake my head.

The Left has taken to calling people who believe in markets and the importance of liberty in economic matters as neo-liberals.

They, amazingly, use it as a term of abuse.

Personally I like it and I note that in the last year or so the Adam Smith Institute have decided to appropriate the term from the Left and embrace it.

I like that.

It is smart thinking.

Keep your enemies guessing.

And why not use it when it is a positive descriptor.

Reform in the past

A little later I will go through some of the policy issues that are currently on the national agenda.

But before I do so I want to address the issue of why reform has apparently stalled in recent years.

And when I say reform I mean “improvement”.

The word reform is a heavily abused term.

It would seem everything a government does nowadays is reform, whether it is a Liberal or Labor government.

But that is simply not true.

The Gillard Government called the carbon tax an economic reform.

They called the turning back of the Howard Government’s industrial relations policies an economic reform.

Some people call massively raising taxes, to spend more on welfare, economic reform.

Both sides of politics are guilty of that one.

It’s probably really only economic reform if the change boosts productivity – that is producing more of whatever with the same effort (of labour or capital) or less.

That’s a bit of boring economics but it’s the simple proposition behind what a lot of good policy is about.

You don’t need to be a rocket scientist to generally know what you should do to run the country.

Unfortunately it is the “doing” that is very difficult, and yes, I agree it has become increasingly difficult.

People say that Hawke and Keating and Howard were able to implement reform, but that since 2007 it’s been a drought.

They say that these Prime Minister’s had courage and vision and simply got things done.

They say that except for the short period 2005 to 2007 none of these Prime Minister’s had a majority in the Senate but still got things done.

So why not now?

Why are politicians now so hopeless, goes up the cry.

But let’s unpack this a bit and actually explore some real as opposed to fake history.

Senate obstructionism

Firstly, let’s go back to Hawke and Keating.

Their genuinely big reforms were to float the dollar; end an 80 year policy of high tariff protection (probably the most important); and start the implementation of competition policy or as it was called in those days the Hilmer reforms.

They are extremely important reforms and Hawke and Keating deserve credit for arguing for them and leading the charge.

As far as implementation goes the important thing is all three reforms were supported by the Liberal Party opposition.

So they were not blocked in the Senate by a bloody minded opposition.

And the key figure throughout this period was John Howard, whether as leader or just a shadow cabinet member.

He convinced his own side to support the reforms and not take the populist position of opposing for easy votes.

In fact you could argue John Howard’s best work was in those opposition years, where indeed it did take great courage to argue for reform from the opposition benches.

He even convinced then leader Andrew Peacock not to oppose Keating’s quest for a GST in 1985.

That was actually torpedoed by Hawke and his own side.

To his utter disgrace Keating did not reciprocate Peacock’s bravery when Hewson proposed exactly the same policy in the 1991 Fightback! Package.

When it came to the Howard Government they were able to get their two really big policy reforms through with the help of the Australian Democrats.

Those two policies were the introduction of the GST and the 1997 workplace relations reforms.

The Australian Democrats in those years were a bit like today’s Nick Xenophon Team.

They were in fact originally a splinter group from the Liberal Party created by former Liberal Minister Don Chipp.

However as the years proceeded they became increasingly left wing as they battled and eventually lost to the rise of the Greens.

The other big economic reform of the Howard years was Peter Costello’s magnificent job in rapidly getting the Budget back into surplus and keeping it there (aided by Finance Ministers Fahey and Minchin).

That was crucial to that Governments political success and it gave them the ability for the best part of 12 years to “buy” other reforms with electoral “sweeteners”.

However there is an important point to make about spending cuts.

Over the years an increasingly smaller proportion of spending has occurred through what is called the annual Appropriation Bills, or the Supply Bills, or sometimes called the Budget Bills.

During the Gillard Government, in particular, almost all the massive increase in spending was legislated through the special appropriation Bills for say health, welfare or education.

Although I should add that this was spurred on by a Constitutional decision of the High Court in the School Chaplaincy Case of 2012.

The crucial point here is that previous Treasurers were able to actually cut spending much easier because both major parties have hesitated to block the annual Appropriation or Budget Bills, particularly since the 1975 Constitutional crisis.

So that means that past Treasurers did not have as great a problem with the Senate that the Abbott and Turnbull Governments have had in cutting spending.

In the last 20 years alone the Parliamentary Library has estimated that the proportion of expenditure coming through the annual appropriation Budget bills may have fallen from around 30% to less than 20% of total Federal spending.

Having said this I do want to put on record the actual success of the present Government in getting spending cuts through a hostile Senate.

The situation is not as completely hopeless as the media reporting would suggest.

The Government’s recent score sheet for getting expenditure savings through the Senate has been remarkably good.

For example, the Treasurer noted on Budget Night this year that “since the 2016 election the Government has legislated around $25 billion in measures to help repair the Budget.  This takes to more than $100 billion the budget repair measures implemented since the 2013 election”.

It must be said however, that despite this rhetorical flourish, a significant part of this has been revenue increases and the Government has not returned to the huge spending cuts originally proposed in the 2014 Budget and they have been dropped as Government policy.

Nonetheless, the Government forecasts it will return the Budget to a surplus of $7.4 billion in 2020-21.

As I said the Government has had to abandon a number of worthy proposals that were in the 2014 Budget – but can I say as someone who was a member of the Government during those years there was an utter failure of smart governance by the leadership at the time in selling these reforms.

The argument for reform was conducted in the most halfhearted and chaotic way and was despairing to me sitting on the far backbench.

The changing media environment

However moving on from this area of commentary I want to also talk about how the changing media market has made it so much harder to conduct reform.

Things were very different back in the Hawke, Keating and Howard years in terms of media.

This audience here today was basically born at the time or after John Howard won his victory in 1996.

At the time I was a senior executive in the NSW Cabinet Office – today’s Premier’s Department – in charge of the intergovernmental relations unit and the regulation review unit for NSW.

You may be shocked to learn that it was around the time of the election of the Howard Government that my area of the Cabinet Office first got an internet connection.

Only one officer had it on their personal desk computer and they were responsible for being trained up to use the World Wide Web for the benefit of all the staff in my division.

Different days indeed.

However things moved fast and within a year everybody had an internet connection on their PC.

So during the Howard Government, let alone Hawke and Keating, there simply wasn’t the social media environment of today.

Nor was there 24 hour news channels and continual television news updates.

Why is this relevant?

I think it is crucial to understanding how much more difficult it is to do reform today.

Basically social media makes it exceptionally hard to build and prosecute an argument.

Ten or fifteen years ago and earlier politicians and others could develop the arguments and lay the groundwork for reforms over a period of months or even years.

Today ideas can be hijacked by social media within hours and the turbo charged negativity that comes with that social media can kill decent ideas for reform in as quickly as a 12 hours news cycle let alone 24, 36 or 48 hours.

The mainstream media, which is being eaten alive by social media, has perversely reacted to this challenge by embracing it.

In my view the thing that the mainstream media have developed and sold over the years is quality control – even the Sydney Morning Herald and the ABC.

Social media has no quality control and is massively biased toward political correctness and groupthink.

As we have heard often in recent times, from all parts of the political spectrum, social media propagates fake news and scare campaigns.

And the mainstream media has exacerbated this by giving it an elevated platform.

So today we may see a policy idea propounded by a politician featured on the nightly news broadcast of say Channels 7 or 9, and then it is accompanied by the reporting of a tweet from no-name person in say Parramatta who expresses a total opposition to the idea – often in vulgar terms.

A flood tide of this then quickly leads to the end of the debate.

Unfortunately our ideological opponents who run groups like GetUp! are experts in this.

Hopefully main stream media will come to its collective senses and stop promoting this and focus on their comparative market strength which is quality control.

If they don’t then it’s eventually goodbye to the news services that we have seen in the past as they simply will no longer be commercial.

And what I have described is not obviously an Australian phenomenon.

We are seeing it in the US and in Europe.

Last week I attended the World Chambers Congress that is held every two years by the International Chamber of Commerce.

I was speaking to a senior executive at the German Chamber based in Berlin and he said that exactly the same thing was happening in Germany and was effecting their current election campaign.

All this leads to something I have been thinking about for a few years which is the identification of what I call a Democracy Paradox.

Democracy is the best form of government bar none.

However, our forefathers and mothers knew there were limits.

My Democracy Paradox states that: “not everything that gives people a bigger voice actually improves the state of the nation or improves our democracy”.

You would think that giving individuals a bigger voice is inherently more democratic, but is it better for the governance of the state?

Thus social media highlights a modern dilemma.

It is that social media which apparently increases people’s say, can have a very destructive effect.

It reinforces the reason we have over the centuries created a representative democracy where we put faith in elected representatives to argue through and legislate on our behalf but checked by the rule of law and periodic elections.

It is the same Paradox that we have lived with for centuries where we cherish freedom of speech but we also believe it is important to limit it to stop libel and slander – ie a paradox.

I am not calling for an end to social media.

In fact exactly the opposite.

It’s positives in my view do definitely outweigh its negatives.

However we do face a dilemma.

Often in history identifying a problem allows us to develop new ways of doing and marketing things and I hope that what I call – for want of a better term – the Quality Press is able to reassert its importance as a bulwark of democracy.

Taxation reform

Let’s turn our attention to one of the main agenda items for future reform and that is tax reform.

Although the Federal Government maintains its policy to fully implement the 10 Year Enterprise Tax Plan – that would see corporate tax rates fall from 30% to 25% for all businesses – it would be fair to say that the potential for implementing the second half of the package for firms with turnovers above $50 million has lost momentum.

The Government has expressed unhappiness with the business community for its lack of support in seeking to implement this policy.

Whether this is true in fact or not, that is the perception of most of the senior members of the Cabinet.

It is reasonable to assume that the Government will look at options for delivering further tax reform in the lead-up to the next Federal Election.

It is interesting to note the growth in tax revenues as a share of GDP in the Government’s Budget forward estimates from 21.5% of GDP in 2016-17 to 23.7% in 2020-21.

It is not acceptable for this growth to continue indefinitely.

Personal income tax reform is of vital importance.

As the OECD noted in its Taxing Wages 2017 report “tax cuts to low and middle income earners, in particular, can be an important way of supporting increased labour market participation and stronger growth”.

There is a lot more I could say but the case is strong.

However, in times of Budget deficits ($29.4 billion in 2017-18) good economic management demands that any such reform would need to be paid for.

Recent history shows that further expenditure savings are difficult to get through the Senate.

GST reform

The obvious source of funds for funding really substantial personal income tax reform would be to raise the rate or expand the base of the GST.

It is a simple case of mathematics that an increase in the rate or base of the GST would fund substantive tax reform.

In recent years commentary has centred around two broad options.  They are:

  1. to increase the rate of the GST from 10%; and
  2. to broaden the base of the GST, thus raising more revenue.

Indeed the Federal Government seriously considered these options in late 2015 and early 2016 and held preliminary discussions with State governments on the matter.

In the end the Federal Government decided not to proceed in February 2016.

Increasing the rate from 10% to say 15% would raise large amounts of money.

A sense of the magnitude can be given here.

An increase in the GST to 15% would raise in the order of $35 billion.

Such a change would be relatively straight forward to implement.

There would be an increase in the rate on existing categories.

Businesses, if they are GST registered (and they need to be if they earn more than $75,000) would be largely exempt from any direct impact as they receive credits for GST on business inputs.

Of course there will be indirect impacts depending on the overall package.

Thus if GST was raised to 15% and no other changes were made this would have a large dampening effect on consumer spending and therefore business profits.

An expansion of the GST base to cover all food, water and sewerage would raise in the order of $15 billion.

Of this the food change would probably be around $7 billion.

A GST tax mix package would potentially fund sizeable personal income tax changes given potential increased revenues of $42 billion per annum.

Of course any pragmatic government would have to ensure that social welfare recipients were not adversely effected and so a large amount of money would be absorbed in a “compensation package”.

The nature of that and its extent would necessarily depend on what the new rate and the new base was.

In addition there have been calls by State governments to use the revenue for any such increase in the GST to fund their activities, such as in health and education.

This would also need to be weighed-up.

Which leads to an important point.

For a GST tax mix switch to be implemented by the Federal Government the starting point would have to be that not all GST revenues go to the States, as they do today.

Indeed new arrangements would need to be put in place so that any increase in GST collections were identified as Federal revenue not State.

It was on this basis that the tentative discussions between the Federal and State governments were undertaken during 2015 and early 2016.

It is understood that States would be in-principle prepared to accept these new arrangements.

Of course it should be noted that the large revenues from a GST increase would almost certainly fund more economic reform than just a lower personal income tax.

In addition it could fund the abolition of some inefficient state taxes (such as stamp duties on conveyancing), fund economic infrastructure and even pay for further corporate tax relief.

The possibilities are numerous.

Long term GDP boosts could range as high as 2.5 percentage points in the long term.

Such a reform is already supported by the Australian Chamber of Commerce and Industry (ACCI), the Business Council of Australia (BCA), the Australian Industry Group (AiG), the Financial Services Council (FSC) to name a few.

And here in NSW Premier Berejiklian and former Premier Baird have both called for an increase in the GST rate.

So maybe we need to return to that debate.

In the past I have been dead against it.  However, we are running out of solutions.

Maybe we should adopt it.

If it were to be adopted as policy it would be an almighty fight.

State income tax

In early 2016 Prime Minister Turnbull raised the prospect of a state income tax option to deal with the problematic federal issues around taxation.

This was rejected by an overwhelming majority of Premiers and was dropped by the Federal Government.

I was “a” if not “the” major internal voice in the Government at the time urging this policy.

I am very disappointed it was ditched so quickly.

The basic problem that needed to be addressed is clearly stated in the Government’s September 2014 issues paper on Federation Reform that notes that the States revenue base is inadequate to fund their spending growth responsibilities in areas such as health and education.

Demand is outstripping supply.

A brief history of income tax is relevant here.

Up until 1942 States levied income taxes.

Then due to World War II’s funding demands it was mutually agreed to hand the tax to the Federal Government.

After the emergency passed it refused to hand it back.

An income tax surcharge was recommended by the National Commission of Audit (NCA) in its February 2014 report.

The NCA had the Federal Treasury do some economic modelling on the proposal.

As an option the NCA proposed that 10 percentage points of the tax bracket base between incomes of $37,000 and $80,000 be allocated to the States.

Currently that tax bracket attracts a tax rate of 32.5%.

So a change would mean that for taxpayers in that bracket they would actually have a 22.5% federal income tax and a 10% NSW (insert other State names depending where you live) income tax.

The Treasury calculated that this 10% state income tax would raise $25 billion.

The NCA shows that this would allow the federal government to completely withdraw from all education funding, public housing projects and a large number of National Partnership Agreements.

The NCA argues that the structural reform would be worth it.

So the end result would be to address the States revenue problem, remove the federal government from a very large proportion of expenditure, and do it without increasing total revenues.

While in itself a legitimate reform proposal the recent history would suggest that the current government would not return to it.


But in conclusion we have to ask ourselves whether such policies can still be sold.

Well I think yes.

We saw only a few days ago what looks like the reelection of the New Zealand Government although there is some horse-trading to go.

The current Prime Minister is Bill English.

He took over from John Key, who retired in December 2016.

Bill English had been Treasurer or as the Kiwis name them Minister for Finance since the Nationals came to office in November 2008.

These two people led a reform of the GST and major overhaul of the tax system

In 2010 they increased the GST rate from 12.5% to 15% so as to fund major personal income tax reform.

The top rate of personal tax in NZ is 33% compared to our 47%.

They were able to sell that proposition.

They then went on to the win the subsequent election in 2014 (and maybe also this year) due, in no small measure, to shepherding a strong New Zealand economy.

That’s all food for thought.

In Australia Mike Baird won an election arguing for the privatisation of electricity poles and wires to fund a massive infrastructure spend and the Federal Government has reformed superannuation and other hard policy nuts to crack in the current media environment.

I remain an optimist that while it may be harder than in days gone by to implement reform it can still be done with resolution and hard work.