The area of economic reform where the government’s performance has been most egregious is on policy to ease our transition to a low-carbon economy and honour our commitments at the Paris conference. Leaving aside Abbott’s role in our policy regression, Turnbull’s disservice to the nation was to swear off introducing a carbon intensity scheme.
Talk to Australian Business Economists Annual Forecasting Conference
Sydney, February 15, 2017
Ross Gittins, Economics Editor, The Sydney Morning Herald
As a confirmed optimist who almost always obeys Monty Python’s injunction to always look on the bright side, I’m sorry to say I can’t think of many cheery things to say about the outlook for politics and government in Australia in 2017. Our political leadership has been in a bad way for the six or seven years since Labor decided it couldn’t stomach Kevin Rudd for a moment longer, and I don’t foresee it getting much better over the “forecasting horizon”.
The most hopeful prediction I can think to make is that federal parliament is likely to run most of its term (probably to late 2018, to get the Reps and Senate back into sync after the double dissolution, but May 2019 at the latest), with the next election being fought between Malcolm Turnbull and Bill Shorten. This would be the first time two leaders had faced each other for two elections in succession since 2001. This ought to be a sign of returning stability in federal politics – an end to the disposable leader syndrome – except that I’d also be expecting Shorten to beat Turnbull and thus give us yet another new prime minister.
I’m going to start by discussing Turnbull’s performance and prospects before I turn to Shorten’s and then look at the record and prospects for economic management and reform.
Turnbull the disappointing
I’m not telling you anything you don’t know when I say that, as prime minister, Turnbull has been surprisingly disappointing to all those – myself included – who held such hopes for him after the erratic and disturbing performance of Tony Abbott. And even to those who didn’t have high hopes for him. Apart from his pointing out that Abbott had been behind in the polls almost continuously since the disaster of the government’s first budget in 2014, Turnbull’s justification for overthrowing Abbott was the need to get on with reforms – particularly tax reform – and to have an articulate leader capable of explaining and justifying politically controversial changes with more than three-word slogans.
It hasn’t worked out like that. He’s turned out not to be particularly brave on the reform front, nor particularly good at explaining counter-intuitive policy proposals. I can’t think of any modern politician who’s smarter intellectually than Turnbull. Economists tell me he asks the most informed and penetrating questions when he turns his mind to a particular policy proposal. But he’s always had an EQ problem – suffering fools gladly (a key character trait of successful politicians), making other people like him and want to do his bidding. I think he’s a lot better at this than he was – concealing his temper tantrums, for instance; turning on the charm – but it turns out he lacks a good feel for politics. The most obvious example was his decision to deal with the problem of the micro-party preference whisperers in the Senate by changing the voting procedures and then cleaning out the micro-party ragtag by holding a double dissolution. He ended up with a much bigger and better organised number of minor-party Senators holding the balance of power.
Turnbull is always having “a bad week” in politics. Only some of the things that spoil his weeks are of his own making. But if you have too many such weeks, after a while the causes don’t matter. You’re expected to have more, and the media’s expectations tend to be self-fulfilling. I often bemoan the advent of politics as a life-long career, where people become political flag-carriers straight out of uni, and never have a career in the world outside politics. But Turnbull’s case – along with that of his father-in-law, Tom Hughes, and with John Hewson’s – makes me wonder whether it’s still possible for people to enter politics after a successful career elsewhere and be just as successful.
A lot of people explain Turnbull’s poor performance as happening because he’s allowed himself to become captive to his party’s hard Right. I think it’s more complicated than that. It’s true that, to get the votes he needed to defeat Abbott, Turnbull had to promise the Right in his party to persist with the most extreme of Abbott’s policies, particularly on climate change and the same-sex marriage plebiscite. Unusually, the National Party made him write those promises into its renewed Coalition agreement with the Libs.
Turnbull’s hope was that if he won the 2016 election convincingly – which looked quite plausible in the first months after he became prime minister – this would give him greater authority within the party, allowing him to mould it more to his liking and find ways of quietly softening policies such as the scepticism on climate change. But, as we know, it didn’t happen. He squeaked back with a one-seat majority and a worsened position in the Senate.
You’d usually expect greater discipline in a party teetering so close to defeat on the floor of the Parliament, but in Turnbull’s case it’s led to greater in-discipline. Apart from the Rudd-like behaviour of Abbott, supported by the two old fogeys Turnbull dropped from the cabinet, the hard Right has felt free to speak out whenever it thought Turnbull was in danger of going soft. The more Turnbull has pandered to these people, the more demanding they’ve become. And the more pressure Turnbull has felt under, the more he’s behaved like other politicians do, sticking to the day’s “talking points”, resorting to scare campaigns, criticising his political opponents rather than explaining his policies, and mouthing empty three-word slogans, such as Jobs and Growth.
But why is he being so indulgent? Why doesn’t he assert himself and be more like the leader he promised to be and many of us were hoping we’d get? Short answer: because he wants to stay prime minister. You need to remember that Turnbull’s party trick as a precocious youth was to introduce himself to people he met as a future prime minister. More significantly, you need to remember that when Turnbull was ousted by Abbott as opposition leader in 2009, he took his colleagues’ censure very hard and, for a time, contemplated quitting politics altogether. Although climate change and Turnbull’s support for Rudd’s carbon pollution reduction scheme where the advertised reason for Turnbull’s overthrow, the underlying reason was his arrogant treatment of his colleagues and failure to consult them. Today Turnbull is obsessed by ensuring his colleagues never creep up on him again. His government is highly consultative, and the policies it pursues are those the parliamentary party is comfortable with.
Like Rudd, Turnbull may have allies of convenience in the party, but he has no factional base nor any mates. The great majority of those sitting behind him neither like him nor trust him. This is what makes Turnbull so susceptible to discontent on the part of his followers. Having stayed on in politics and finally triumphed over the man who triumphed over him, he has one all-consuming desire: to stay on as prime minister. Is he willing to abandon his own long-held policy positions in favour of those his party is more comfortable with if that will prolong its willingness to retain him as leader? Yes.
That willingness, combined with the lack of an obvious replacement, is likely to keep him in the job until the next scheduled election in 2018-19. The qualification to that is the politicians’ obsession with the opinion polls, which come fortnightly. If Turnbull stays well behind in the polls for long enough, his followers will get restive and start talking about alternatives. If he’s still behind as the election approaches, those in seats with low margins will get panicky and – as was the case with the second coming of Rudd in 2013 – will switch from wondering who’s more likely to get them back to office to who’s likely to lose fewer seats (including their own).
If they reach that point, the man they’re most likely to turn to is Abbott – which would be yet another parallel with Rudd. Abbott is not popular with his colleagues, who see his regular interjections in the political debate as self-indulgent and contrary to the government’s interests. Nor is there ever in politics, or anywhere else, much enthusiasm for recycling failed leaders. Nevertheless, in recent times we’ve seen them recycle Rudd (a man I’m sure they all hated with a passion) and Turnbull (ditto). They do so when the polls make them desperate enough, and those are the only circumstances in which the Libs would turn back to Abbott. One factor counting against Abbott is that his personal popularity in polls has never been high. He became prime minister not because anyone much liked him, but because voters were so anxious to get rid of Labor, with its unending internal brawling.
But what makes me so sure Turnbull will lose the next election? Turnbull’s appeasement of his hard Right is the right strategy to hang on as leader of the party, but the wrong strategy to get it re-elected. There are a least two certainties about the Australian electorate’s preferences: its aversions to party disunity and to extremism. Turnbull has a problem with both. First, backbenchers going public to put pressure on him and, second, the hard Right’s obsession with fringe issues of little importance to the public, such as using any means to delay recognition of same-sex marriage and reform of section 18C of the Racial Discrimination Act.
The plan truth is that, over the past decade or two, the Liberal Party rank and file and its parliamentary party have drifted to the Right, away from the centre ground where elections are won or lost. There are a lot of quite Right wing members of the parliamentary party and, if there are many moderates, they keep very quiet and seem to have done nothing to exert a countervailing influence against the hard-liners.
The hard Right is a mixed bag of often conflicting values: social conservatism, libertarianism and populism – combining xenophobia and a desire to return to our glorious manufacturing past. For as long as it takes most Americans to become thoroughly ashamed of their spoilt-child president, Trump’s triumph will encourage the Australian Right to be more outspoken about their extreme views and racial hatreds. The Coalition’s (correct) belief that One Nation is attracting more of its voters than Labor’s will add to its nervousness and drift towards more extreme policies. Many on the Libs’ hard Right have convinced themselves the party is out of touch with voters, but this just serves to demonstrate how out of touch they themselves are with mainstream voters.
I’ll be surprised if this rightward drift is rewarded at the ballot boxes. The more the Coalition sees its task as preventing regional voters drifting to One Nation, the more it risks losing moderate voters in the cities. After all, polling shows a majority of Liberal voters support such things as same-sex marriage and climate action. Another problem is that the Coalition is turning itself into the party of the elderly, of little attraction to younger voters, with its resistance to same-sex marriage, its defence of fossil fuels and hostility towards renewable energy, its defence of negative gearing and unwillingness to tackle housing affordability, its desire to raise university fees and its ever-harsher treatment of the young unemployed, not to mention the income tax system’s continuing biases on the basis of age rather than income level.
The public is too alienated by the way the modern political game is played for many people to take much interest in the detail of policy arguments. They have little interest in fact-checking. What they do is gain general impressions from the totality of events going down. They rely on their assessments of the rival politicians’ character – whether they seem competent, sincere and genuine. They like to feel they know what a leader and his party stand for. And that is Turnbull’s big problem. He’s been in politics a long time, everyone knows what he believes in and everyone knows he doesn’t actually believe many of the things he’s now saying. What’s more, he’s not a good liar. This is the sort of man Australians want as their leader? I doubt it.
Shorten the overachiever
Bill Shorten is not a particularly attractive figure. He’s not particularly tall or good looking, nor is he obviously likeable. His union background doesn’t help – though it hasn’t damned him the way the Coalition hoped it would. His personal popularity in the polls has never been high, making him – like Abbott – someone who’ll win government only when the electorate is desperate to toss the incumbents out.
At the last election Labor knew it was unlikely to be returned to office after just one term in the wilderness, the more so after Turnbull won the Liberal leadership and was initially riding so high in the polls. Labor also knew that, unlike the Abbott opposition facing the unpopular Gillard government, it wouldn’t be able to get away with the degree of obstructionism and negativity Abbott resorted to. So, with so little to lose, Labor did something unusual, even laudatory: rather than make itself a small target, it made itself a big one, going into the election with some big and controversial “positive policies” – such as its superannuation reforms, crackdown on tax-dodging multinationals, and reform of negative gearing and the capital gains tax discount.
So, although neither side could resist the temptation to resort to scare campaigns, last year’s election campaign was about rival policy issues. That Shorten, against all expectations, went within a whisker of winning, shows two things. First, how politically inept both Abbott and Turnbull turned out to be in government. Second, how dogged Shorten provide to be in opposition. He’s an overachiever – he never gets disheartened, just keeps plugging away.
Politicians react to past failures, either their own or their opponents’. They’ll learn a surprising number of lessons from Turnbull’s surprisingly poor showing. It will be a long time before a government is tempted to think it could improve its position by holding a double dissolution. Similarly, it will be a long time before it’s tempted to hold a long campaign – or assume a “boring” campaign would work in the incumbent’s favour. The supposed potency of two favourite bogeymen was disproved – the union bogeyman and the negative-gearing bogeyman. The government’s tough proposals to curb the superannuation concessions of high income earners annoyed the richest part of its support base (and the hard Right of the parliamentary party) but didn’t seem to cost it many votes. And the high voter disapproval of company tax cuts suggests Turnbull’s Jobs and Growth package would have cost him more votes than it won. Finally, the effectiveness of Labor’s Mediscare means it will be a long time before the Coalition again proposes any health spending reforms that involve reducing bulk-billing or other cost-shifting to patients. This is a pity because, as a careful reading of any federal or state intergenerational report makes clear, the growing cost of hospitals, doctors and drugs is by far the greatest single threat to balanced budgets in coming years.
Shorten’s surprisingly good performance at the last election is my first reason for expecting him to stay as Labor leader until the next election. My second is that Labor’s new practice of giving its rank and file a say in the leadership vote makes the hiatus involved in changing leader mid-term a high price to pay. My third reason is there’s no obvious alternative leader. Tanya Plibersek may look a good prospect, but she hasn’t yet had the blowtorch on the belly. But, again, the qualification: should Turnbull’s Coalition get ahead in the fortnightly polls and stay there for months, the mutterings against Shorten would start up. The days of gratitude or loyalty in politics are long gone.
Prospects for economic management and reform
It’s a good thing that primary responsibility for day-to-day management of the macro economy long ago passed to the central bank and monetary policy, because the Abbott-Turnbull government has shown little enthusiasm for taking up the challenge. This is despite regular public requests from Glenn Stevens and now Phil Lowe that fiscal policy take more of the burden at a time when monetary policy’s potency has been greatly reduced by high household indebtedness. What they – and the IMF and the OECD – want is for the government to get on with balancing the recurrent budget while increasing its spending on worthwhile infrastructure projects.
Abbott and Hockey did have a red hot go at getting the budget back on track in their first budget of 2014. Had all its measures been implemented and persisted with, it would have got us back to surplus in time, mainly because of all the fiddling with indexation arrangements, no doubt at Treasury’s instigation, which would really have built up over 10 years. But little thought was given to the fairness with which the pain was shared between high and low income-earners and this, combined with the blatant breaking of election promises, caused the budget to be summarily rejected by the public and the Senate. The new government’s high standing in the polls collapsed and never recovered until Abbott was overthrown by Turnbull.
After than setback in the polls, the government lost interest in budget repair. Abbott’s second budget, in 2015, was devoted almost wholly to attempting to restore the government’s popularity, with reform of childcare payments, paid parental leave and tax breaks for small business. Its next budget, Turnbull’s first, was devoted to letting down gently the government-created expectation of major tax reform. It contained various tax measures, the most notable of which was the largely unfunded 10 year phase-down of the company tax rate. This is certain to get through the Senate to the extent that it goes to small and medium businesses, but I think a flow-through to big business is unlikely.
The government has essentially given up on speeding the budget’s return to surplus. Though last year’s budget did contain various measures to increase tax collections, these seem to have been intended to partially cover the cost of its proposed company tax cut, not positively improve the bottom line. And, despite all the fuss it makes about getting spending cuts through the Senate, these are intended only to offset the cost of new spending measures, not make more than a nominal dent in the bottom line. Its only policy to reduce the budget’s structural deficit is to rely on bracket creep by delaying across-the-board tax cuts. But this hasn’t worked because price and wage inflation have been so weak.
Sorry to be the bearer of bad tidings, but the era of major microeconomic reform is over. That’s, first, because the electorate has no stomach for it. Polling shows strong majorities against company tax cuts, higher GST, reduced penalty rates, reduced protection and all privatisation. And, second, because no party or politician of either side shows the desire or the ability to carry major reform to fruition. The era of explaining and defending controversial policy proposals ended with the departure of Keating and Howard. The third reason times have changed is that the reform push has degenerated into rent-seeking by big business. All the reforms business pushes involve direct benefits to them, plus the assurance that this will do wonders for the wider economy, including workers. Sorry, people are too cynical to believe in trickle-down economics.
What we will continue to see, however, is occasional instances of limited, specific reforms, most of them motivated by budget pressures. If the company tax cut for big business fails to go through this time, but Trump’s big cuts in America’s corporate tax rate do become a reality, the pressure on us to reciprocate may intensify, but even that I wouldn’t regard as a certainty.
I believe we have seen a few worthwhile reforms from the Turnbull government: the new diverted profits tax trying to extract more revenue from multinationals, and the reduction in superannuation tax concession to high income-earners. An important point to note here is that they happened because Labor had made the first move in proposing similar measures (plus the further big hikes in tobacco excise, which the government simply copied). Once Labor had committed itself, the government became confident it could adopt similar measures without its opponents rallying any losers against it. The government also went close to doing something on negative gearing, but in the end decided not to, to give it some product differentiation with Labor. It’s easy for outside observers to underestimate how much the behaviour of governments is influenced by the behaviour of the opposition.
Let me finish by saying that the area of economic reform where the government’s performance has been most egregious is on policy to ease our transition to a low-carbon economy and honour our commitments at the Paris conference. Leaving aside Abbott’s role in our policy regression, Turnbull’s disservice to the nation was to swear off introducing a carbon intensity scheme the moment his hard Right party members, led by the now departed Cory Bernardi, expressed their disapproval. This scheme had been carefully worked up by people of goodwill hoping to provide Turnbull with a face-saving way of returning to a form of carbon pricing, which would help ease the transition from coal power to renewables and do it with only a small increase in retail electricity prices. Since then, Turnbull has done nothing but dig himself in deeper, in the process creating great uncertainty in the power industry, something that could easily end up adding to blackouts and price rises.