Pearls and Irritations

 After failing with his National Energy Guarantee, Josh Frydenberg rushed to Melbourne to get some tips from Peter Costello about handling his new Treasury portfolio. In fawning style over coffee, Frydenberg described Costello as ‘the greatest living Treasurer’. It is part of the Liberal Party myth that conservatives are better economic managers. But it is just not so and for Peter Costello in particular.

The facts tell a very different story

On an article in The Guardian on 19 March 2018,  Stephen Koukoulas, a research economist, after examining economic data, concluded ‘On both the level of economic growth and growth relative to the US, Labor is a better performer than the Coalition. One of the weakest economic managers since the early 1970s is the Turnbull/Morrison administration where GDP growth has averaged a mere 0.60% per quarter which is just 0.04 percentage points above the US performance.’

Only two Australian treasurers have been awarded the coveted Euromoney ‘Finance Minister of the Year’ award. Paul Keating won it in 1984 in recognition of the government’s role in structural reform. Wayne Swan won the award in 2011 in recognition of the government’s successful response to the Global Financial Crisis. No mention of Peter Costello, Josh Ftydenberg’s hero.

It is also unlikely that recent treasurers, Joe Hockey or Scott Morrison, would make the shortlist for this award.

Peter Costello was a very lucky treasurer. He inherited a booming world economy and a mining boom. As Paul Keating once put it, Peter Costello was ‘Hit in the arse by a rainbow’.

But with record revenues in boom times, Peter Costello introduced measures which have left a very serious and damaging legacy. Continuing chronic budget deficits are very much due to Peter Costello. Despite short term budget surpluses the Howard and Costello government wasted the buoyant revenues of the mining boom.

The parliamentary budget office put this problem in the following terms.

‘Over two-thirds of the five percentage points of GDP decline in structural receipts over the period 2002/3 to 2011/12, was due to the cumulative effects of the successive personal income tax cuts granted between 2003/4 and 2008/9. A further quarter was the result of a decline in excise and customs duties as a proportion of GDP. Significant factors driving this trend included the abolition of petroleum fuels excise indexation in the 2001/2 Budget and the decline in the consumption of cigarettes and tobacco over the period.’ 

The IMF came to much the same conclusion. It identified two periods of Australian ‘fiscal profligacy’ in recent years, both during the Howard turn in office – in 2003 at the start of the mining boom and during his final years in office between 2005 and 2007. (SMH Jan 11, 2013).

In short, our continuing structural budget deficit is due in substantial part to the Howard/Costello government’s laxity with government spending and tax reductions during the mining boom. We blew the benefits of the boom when we should have been doing more to improve the underlying budget position.

The Howard/Costello years locked in negative gearing concessions and generous treatment of capital gains which have been at great cost to the government in lost revenue and priced many young Australians out of the housing market. There were tax-free superannuation benefits, franking credit rebates and a whole series of decisions on spending and tax that have caused continuing budget difficulties and the skewing of the tax system and the economy in favour of older generations. There really has been generational theft.

It is estimated by the Australian Institute and the National Centre for Social and Economic Modelling that these tax lurks introduced by Howard/Costello will cost the budget over $50 billion a year. We are paying a very heavy price for the budget damage that Peter Costello inflicted over a decade ago.

We should have ‘banked’ the revenues from the mining boom in a sovereign fund like the Norwegians.

Whilst Peter Costello must bear a heavy responsibility for our continuing budget deficit problems, Wayne Swan did not help either.

The other major cause of the structural deficit is that the Rudd government spent heavily to counter the global financial crisis. It was more successful than almost any other government in the world in avoiding a major recession and unemployment, but when the recovery took hold, the Rudd and Gillard governments did not focus on the structural deficit problem particularly as identified by the Henry tax review. Some improvements were made to reduce middle-class welfare like the subsidy to private health insurance and the over-generous concessions that Peter Costello had given to superannuants. But the improvements were nowhere near enough.

On balance, the ALP has had a better record in economic management. But the Coalition will assert otherwise, despite the facts.

Josh Frydenberg left energy policy in smoking ruins.  Even if introduced the NEG would not have delivered much investor certainty. It ignored our international commitments on climate change. Frydenberg couldn’t get up even his highly compromised NEG.

Yet the media are now describing his ‘promotion’. as the new Treasurer. But what for? It could not have been for the failed NEG which turned out a ‘fizzer’. And for his efforts he becomes Treasurer!!  It is all very strange. Fail with energy policy and then get promoted.!

He will need more than Peter Costello to help him!

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