Markets 
Opinion
A quarter-century after Australia’s era of serious reform had been declared dead, a pulse has been detected. The Labor government and the Liberal opposition proposed major reforms this week. Suddenly, a battle of ideas is under way.
This has raised the tantalising prospect that Australia is not necessarily fated to continue its fall in living standards, a fall perhaps twinned in a downward double helix with populist recrimination. National renewal may be possible.
In the same week, we noted the 40th anniversary of Paul Keating’s “banana republic” alarm. That dismal fate was averted by nearly 20 years of difficult, unpopular reform by Labor and Liberal governments. It was a reminder that national revival is in our hands.
“We are giving hope to younger generations,” Treasurer Jim Chalmers said this week, speaking of the government’s plan to curb the privileges that the tax system gives investors over first-home buyers. “That’s what this budget is all about.”
But, with both government and opposition pitching serious proposals for change, it’s bigger than that. Our political system is actually offering hope to Australia.
Can Pauline Hanson’s rampaging campaign of populist anger take some of the credit for the new activism of the major parties? Yes. Labor has been nudged into action partly by an unspoken frisson of fear.
The Liberals are running in sheer terror. To the point where every one of Angus Taylor’s big announcements this week came straight out of One Nation’s playbook. As Barnaby Joyce has teased: “The Liberals acknowledge One Nation policies past, present and emerging.” But not every one of One Nation’s ideas is bad.
Prime Minister Anthony Albanese reminded the House this week of something that the Liberals’ Andrew Hastie said recently: “I just think we need to overhaul the whole system. We either fix the system or it’s torn down by people like Pauline Hanson.”
The political sound and fury in the months ahead sometimes will not seem terribly hopeful. But it is the sound of democracy at work.
Serious reform in Australia ended with the Howard-Costello tax reforms that were headlined by the introduction of the GST in 2000. Every major reform attempted since has failed, sometimes destroying the government that attempted it.
The Grattan Institute published a report on the problem titled “Gridlock”. Ross Garnaut wrote a book labelling these the Dog Days of Australia.
A graph – created by AlphaBeta Consulting – illustrating momentum in structural reform shows mountainous peaks of the 1980s and ’90s shrinking to molehills in the past decade. It even allocated a point score for each year’s reform effort. The 2020 index – compiled by economist Andrew Charlton, who’s since entered parliament as a Labor MP – showed a peak in the 1980s at 76 per cent and trailed off to end at just 16 per cent in 2020.
The Australian parliament went from being a maternity ward for national progress to its graveyard. Inept politicians and ferocious vested interests took most of the blame but former Labor minister Lindsay Tanner wrote an entire book – Sideshow – blaming the media.
Ken Henry, the Treasury economist who helped midwife all the big reforms of the Hawke-Keating and the Howard-Costello governments, was also the last person to conduct a comprehensive review of the tax system. He issued 138 recommendations for reform in 2009.
Ten years later, he said that he was “absolutely stunned that so little has actually been implemented”. He, like other champions of reform, declared Australian economic rejuvenation to have died in 2000.
But this week gave him cause for hope: “I think Jim Chalmers was saying, ‘It’s not true that the reform era is dead’. I think he’s trying to demonstrate that it’s a false narrative. Good on him.”
Henry is delighted to detect the newfound reform ambition in the government and the opposition. But he’s not entirely impressed with the Chalmers budget. The former Treasury secretary set three tests for it, as set out in this column last week.
First, he stipulated that it “achieve some measure of fiscal consolidation”. In other words, cut spending. But Chalmers failed this test. Despite his rhetoric of heroic savings, the budget papers show an increase in government spending from the equivalent of 26.6 per cent of GDP in 2025-26 to 26.8 per cent in the year ahead.
“This budget should actually be in surplus given the low rate of unemployment and the buoyancy of prices” of commodity exports, Henry tells me. Instead of surplus, the budget is projected to be in deficit by $31.5 billion, or 1 per cent of GDP.
“There seems to be a sense of complacency about the state of the budget. When you get hit with another global financial crisis, you will know that it really matters. We are not prepared for a shock like that, and we should be, just as we were in 2008-09.”
Henry’s second test for the government was to address what he’s called “intergenerational bastardry”. The proposal to improve the bargaining position of first-home buyers compared with investors is, according to Henry, “very important”. So the budget satisfies that test. “My hope is they get through this budget and that gives them confidence to do bigger and bolder things.”
Henry wants the government to go further by taxing the windfall profits of gas exporters, but he concedes that the timing of the global fuel crisis meant that this was not the optimal year for such a measure.
The third test was for the budget to lift productivity and resilience. Henry welcomes the productivity measures that Chalmers tabled, notably deregulation policies and the funding to overhaul environmental approvals: “They will lift the shackles off.”
But he wants the government to go much further. “The fundamental problem is that we don’t have a business tax system that provides the right environment for innovation so that businesses can say, ‘Australia is the best place in the world for internationally mobile, business-building capital’. Look at the rest of the world; it’s not that impressive. Why the hell can’t we be the leader?”
Overall, the budget rates 1.5 points out of three on the Henry index.
The government now pits the quality of its reforms against those of the Coalition. Albanese proudly declares the political risk he’s taken on behalf of younger, aspirational voters against prosperous older ones.
“At the moment, if you are a young nurse or a young police officer, you are going along to an auction before last Tuesday night and competing with an investor who has the bank of taxpayers assisting them,” the prime minister told the House. “So it’s not an even system. What we’re about is recognising that and doing something about it … even if that does carry a political risk.”
It’s true that the campaign against the changes will be deafening. But Labor knows it has the advantage over the Coalition. Labor, of course, tested its plans extensively with focus groups and knows that it’s pushing on an open door of public opinion, on the proviso that the government explains itself persuasively.
The Coalition, on the other hand, knows that it is on the wrong side of a popular cause. But it feels it has no choice but to defend a dying demographic of older people, men in particular, who think that tax concessions are their God-given right rather than, as the name implies, concessions from the Commonwealth.
Why does the Coalition feel compelled? “They’re the last demographic we have, and we can’t afford to lose them to One Nation,” says one member of the Coalition leadership.
This is desperate stuff. It explains the panicked resort to One Nation policies this week. All three of Angus Taylor’s big ideas are second-hand Hanson: indexing tax brackets, limiting immigration flows to the infrastructure available to accommodate them, and denying welfare payments to non-citizens.
Nonetheless, the indexation of tax brackets could be a sound idea. Ken Henry gives it qualified support: “It’s what you do if you are convinced it’s the only way you can discipline governments on over-reliance on bracket creep [the stealth tax increase imposed when wages rise into higher tax brackets].”
Though it’s not his recommended option for today’s circumstances: “I’d prefer that government shifts the burden from the shoulders of younger workers and onto less damaging tax bases.”
The parties now compete, but the stakes are much higher than political ones. US political scientist Francis Fukuyama recently conceded that “the Chinese have created a pretty impressive system” and “conversely, democracy, especially American democracy, looks like it’s falling apart”.
In this moment, the stakes are civilisational, and democracy itself is on trial. “If we don’t start to turn things around, younger people will start giving up on our political system,” says Henry. “That’s the really terrifying thing here.”
The onus is on Australia to show that democracy is capable of rejuvenation in the interests of fairness and prosperity. Reform in Australia now has a pulse, at least. Can it thrive?
Peter Hartcher is political and international editor. He writes a world column each Tuesday.
Get a weekly wrap of views that will challenge, champion and inform your own. Sign up for our Opinion newsletter.
Peter Hartcher is political editor and international editor of The Sydney Morning Herald and The Age.Connect via email.From our partners
Read the full article here
