Denis Bright invites readers to deconstruct the flawed foundations of public finances in Australia’s Centre-Right LNP Government.
Despite the futuristic rhetoric in The Intergenerational Report, the government of Prime Minister Abbott is still reading from a very dated policy script.
The article has been prepared to promote debate prior to the 2015 budget and the manner in which harsh fiscal measures are being justified by a commitment to intergenerational dialogues.
Eyewitness reporting of leadership challenges to Prime Minister Abbott is rarely accompanied by scrutiny of the flawed short-term foundations of the Australia’s public finances.
While differences do exist within the Liberal National Party (LNP) on some social policies, loyalty to globalized capitalism is the predominant ideology across the Coalition.
The politically conservative public finance and foreign policy priorities of the LNP hold fast to a by-gone era of early financial globalization from the early 1970s.
Ironically, it was Sir Robert Menzies who had been prepared to maintain this national consensus during sixteen continuous years as leader to January 1966.
After a near defeat for the Menzies Government during the credit squeeze of 1961, the LNP actually strengthened the role of the public sector in the national economy in response to recommendations from the Vernon Committee of Inquiry into the Australian economy.
LNP initiatives included rail standardization from Brisbane to Perth, an expansion of the Australian Shipping Line (ANL), research initiatives of the Commonwealth Serum Laboratories (CSL), development of the Ord River Scheme, completion of Snowy Mountains Projects, Commonwealth science blocks in major high schools and free university education for Commonwealth Scholarship recipients.
Decades later, the Australian electorate is waiting for more similar initiatives through a new spark of independence in public finances.
Graphs from the McKinsey Global Institute show the folly of waiting for world-wide corporate-led recovery from the effects of the Global Financial Crisis (GFC) to deliver prosperity to Australia with a lower level government intervention.
Partial Recovery in Global Capital Flows since the Global Financial Crisis (GFC)
Current estimates for global capital flows from the McKinsey Institute are approximately $US 4 trillion for 2014.
Global recovery of trade in goods and services is much healthier state.
Trend-lines in Financial Globalization to 2012
Australia certainly benefits from this recovery but should not wait until market forces prevail to restore global capital flows with some trickle-down benefits for international investment.
With government support, Australia can diversify its own financial sector as a hub for capital flows from the Asia Pacific Basin and vast accumulated local savings, particularly from long-term superannuation contributions.
Just cutting back on the proactive role of the public sector in a middle-sized developed Australian economy is a gamble within Casino Capitalism, rather than a strategy for intergenerational change.
Despite all the glib slogans from the LNP, Australia has one of the leanest public sectors within the developed OECD countries. Opportunities exist for a more proactive role for government in fostering the growth and diversification of the Australian economy.
Scant evidence of excessive government spending in Australia
Clinging to the remnants of the mining boom, rural exports, selling educational services and tourism simply make Australia too dependent on the volatility of global business cycles.
The LNP benign faith in global capitalism simply ignores the instability which has been apparent for the last 25 years since the fall of the Berlin Wall.
As a middle-sized economy that generates about one per cent of global output, Australia needs greater protection from this volatility.
National, state and territory governments should be more interventionist during recurrent economic down-turns whilst making a permanent contribution to greater productivity through public investment in research and training programmes as well as ongoing infrastructure needs of a projected population of 50 million by 2060.
LNP Failures in Real Deficit Reduction
The current LNP Government came to office with an inspirational commitment to building a stronger economy.
The emphasis had turned to the ideological negativity in the first LNP Budget.
As Prime Minster Abbott’s first term ambled on, the Mid-year Economic and Fiscal Outlook (MYEFO) in December 2014 showed little progress in reducing the LNP’s perceived deficit problem.
It remained stuck at $40.4 billion or 2.5 per cent of GDP.
Even the Business Council of Australia (BCA) is now calling for a more bipartisan approach to economic diversification and debt reduction.
Regrettably, the Australian print and talk-back media networks have a compulsive commitment to deficit reduction in isolation from other fiscal governance variables.
The value of the stimulus package implemented during the worst days of the GFC in the first term of the Rudd Government is completely forgotten.
As OXFAM has explained, reliance on market forces alone to deliver higher living standards is a recipe for a more unequal society, wherever it is applied.
The Return of the Wealth Divide
Instead of protecting the rights of Australians from this social divide, the LNP is even more proactive in its commitment to big corporations as the major agencies for development.
The LNP’s negotiations to seal the Trans Pacific Partnership (TPP) Agreement are a recipe for more social inequality as big corporations implement more daring pricing agendas.
More legal rights for corporations weaken the negotiating power of the national government in relation to a range of progressive measures which are still part of the remnants of a Progressive Australian Settlement.
These essential interventions include protection of the Pharmaceutical Benefits Scheme (PBS), preventative health programmes to contain the influence of the tobacco, alcohol and junk food lobbies, initiatives to combat the effects of global warming as well as urban and environmental planning priorities.
The prospects for public housing projects may indeed be compromised by budgetary restraints as well as legal barriers to low-cost government housing initiatives.
The LNP is reading from a very old policy script.
It is almost 44 years since President Nixon unilaterally floated the American Dollar on 17 August 1971, revitalized Wall Street as the global financial hub and steered multinational corporations into current hegemony position in global development.
Henceforth, Australia’s assigned role was to be the loyal servant of this Brand New World in both its domestic and foreign policies.
When the government of Prime Minister Whitlam demanded a spark of independence in the implementation of this agenda, the LNP conspired with the Governor-General to topple the national government on 11 November 1975.
Now, such antics continue in the negotiations of the TPP Agreement. It is the latest big trade-off against Australian sovereignty.
A Wikileak’s interpretation negotiations for the TPP
The best protection for Australian sovereignty in a globalizing era is a proactive national government with a capacity to ensure that big business makes a real contribution to the Social Democratic Market as the foundation of national political consensus in a New Progressive Australian Settlement.
In the League Table for Debt-to-GDP Ratio, there is scant evidence that Australia is burdened by unmanageable public sector debt as chanted by LNP leaders.
The League Table of Changes in Debt-to-GDP Ratios 2007-2014
This does not mean that Australia should be complacent about its Debt-to-GDP ratio in any sector.
The best positions on the League Table are held by developed economies which have contained both government debt as well as compulsive involvement in foreign wars.
Norway and Sweden have their achievements on the fiscal score-board.
Cut-backs by the LNP to the regulatory roles of Australian governments will increase debt problems in the long-term.
Public debt is being recycled to households and businesses as shown by the data from the McKinsey Global Institute for selected countries.
Customers in deregulated sectors like rents, housing prices, electricity, gas, water and other infrastructure services must pay for the real commercial costs demanded by commercial providers, in The Brand New World of more open profit-taking.
Some National Debt Comparisons of Debt-to-GDP Ratios
(Percentage Changes in Debt-to-GDP Ratios)
A political illusion has been promoted to anticipate new corporate investments as soon as hardliners in the LNP complete their slash and burn strategies against the remnants of a Progressive Australian Settlement.
Australia’s national public finances need a paradigm shift to maintain a more proactive role for government during the current partial recovery of the global economy from the GFC.
The current down-turns in global energy prices contributes to these recovery problems by eroding Australia’s own terms of trade as well as international equity flows from energy rich countries into global financial systems.
The US under the Obama Administration has led the developed world in financial deleveraging.
The Tea Party Agenda in the US Republican Party wants global financial markets roar again so that the current shallow recovery can be talked-up more with the support of the TPP on investment across the Pacific Basin.
However, with energy resources now available at home, the US is less likely to need to pursue another G. W. Bush agenda of spreading democracy abroad by military intervention.
If the LNP is still in government in 2017, it might have to contend with a more isolationist Democratic President and a US that is committed to consensus-building abroad and New Deal Strategies at home.
The LNP was caught napping in the past by macro-changes in US domestic politics.
Prime Minister McMahon was still arguing for recognition of Taiwan in 1971 whilst US envoys were negotiating with Beijing.
So how should the LNP respond to the challenges and opportunities posed by globalization and the contemporary rise of China as the world’s largest economy in the foreseeable future?
Pragmatic Alternatives to Slash and Burn Economics
– Tighten Existing Tax Loopholes
The federal LNP continues to overlook tax loop-holes for privileged families, companies and entrepreneurs which contribute to the current budget deficit.
Best estimates of the extent of these taxation leakages should be extracted through parliamentary committee hearings or a Senate Inquiry.
The wider electorate is intuitively aware of the beneficiaries of these taxation loop-holes but the estimates of the extent of the tax leakages need to be quantified.
In every large regional city and metropolitan community, there are both subtle and conspicuous displays of wealth by elite families who make routine use of family trusts, dubious quasi-legal financial management funds, negative gearing investments and excessive work related deductions to minimise taxable incomes.
The old rort of payment of cash wages is alive and well to the detriment of both casual workers and the minimization of taxable incomes.
In superannuation policies, the LNP maintains a regressive taxation regime with a flat tax on superannuation contributions of 15 per cent and a winding back of support for lower income superannuants.
Now, the LNP dares to contemplate more taxation deductions for nannies to herald the return of the Upstairs Downstairs Mentality.
LNP Nostalgia for Grand Houses with Nannies and Servants: The Upstairs Downstairs Mentality
There is even less sympathy in the electorate for major corporations and entrepreneurs who make use of overseas tax havens for profit minimization and remain major recipients of fuel subsidies and trainee allowances for new employees, particularly in remote areas.
Strengthen Australian Sovereign Wealth Funds at Federal, State and Territory Levels
A truly liberal party would talk-up inspirational financial governance policies to expand the profile of sovereign wealth funds in a resource rich country.
Australia has moved to the right politically since Prime Minister John Howard established the Future Fund in 2006.
The Annual Report for 2013-14 shows the short-term performance of the Future Fund even within the current legislative restraints on its revenue sources and outreach.
As shown in the Annual Report, the Future Fund generated $12.74 billion in net income during 2013-14.
The Fund has generated almost $50 billion in net income since 2006 from a government contribution of approximately $60 billion.
Asset accumulation in the Future Fund had since reached $109.21 billion by 31 December 2014.
The National Building Act 2008 enabled dividends from the Future Fund to be invested in transport infrastructure, national broadband networks, health, education, disability support and vocational training.
Opened up to overseas capital flows, the Fund should be a stable hedge-fund in highly volatile global financial markets and this would contribute to the strength of the entire Australian financial sector.
The longer-term performance of the Fund to 30 June 2014 is shown in the latest Annual Report. The use of the Future Fund by the Rudd-Gillard Governments made little no real dint in its performance.
Impressive record of the Future Fund since 2006
The growth in the value of the Future Fund from investments since 2006 actually exceeds the current projected federal government deficit $40.4 billion for 2014-15.
However, some overseas sovereign wealth funds dwarf the Future Fund of Australia in the magnitude and performance of their investment undertakings. Fortunately, the scope of the Future Fund in Australia is not confined to support of pension schemes.
From comparable middle-ranking developed economies, it is the Norwegian Government Pension Fund which is expected to reach equities of $Aus 1,000 billion in 2016.
Participation in the Norwegian Pension Fund is denied to corporations with a record of human rights abuses, tobacco promotion, inappropriate levels of environmental impact, production of weapons of mass destruction and labour law abuses.
Despite these ethical restraints, the performance of the Norwegian Pension Fund has been impressive but only marginally better than the smaller Future Fund of Australia.
Growth of the Norwegian Government Pension Fund
Implications of Alternative Strategies for Commonwealth State Financial relations in Australia
Equitable taxation reforms with the assistance of dividends from an expanded Future Fund can make far-reaching improvements to the capacity of Australian states and territories to deliver essential services and infrastructure without more privatization of public assets.
Dividends to the states and territories from the Future Fund could also be supplemented by the formation of additional future funds at state and territory levels.
In Queensland, the investment arm of the state government through the Queensland Investment Corporation (QIC) has accumulated net equities of $118.9 billion to 30 June 2014 from both State Superannuation Payments and retained earnings of $81.3 billion since its formation by the Goss Labor Government in the early 1990s.
While these operations must continue on a thoroughly commercial basis, there is scope for the formation of a Queensland Development Authority (QDA) to invest the new equities generated from mining royalties and environmental levies.
A QDA as well as its equivalents in other states and territories should also be opened to both Australian and overseas investors as a safe hedge-fund in volatile global markets.
In a twist of irony, the Australian Business Review noted on 13 January 2015 that the QIC was in fact a possible agency for the Future Fund of Australia in the sale of electricity generating assets and distribution networks in both Queensland and NSW to the public sector Canadian Pension Plan Investment Board.
A QDA and its state and territory equivalents would have acquired financial assets during the mining boom of a decade ago to actively service Australia’s ageing public sector infrastructures.
The capacity of state sanctioned funds to handle pensions and infrastructure projects is demonstrated by the ongoing success of the Quebec Caisse whose asset accumulation is comparable to the entire Canadian Pension Plan Investment Board.
Contribution of the Quebec Caisse
Unlike the Future Fund of Australia, the Quebec Caisse is predominantly a pension fund.
The Rudd-Gillard Government took the initiative under the Nation Building Funds Act 2008 to enable the Future Fund to support other government priorities whilst still protecting its wholly commercial investment undertakings.
LNP commitments to the Corporate Market as the foundation of structural changes in The Intergenerational Report have eroded national political consensus and generated an enormous potential wealth divide in Australia.
This commitment to the alternative Social Democratic Market can be communicated with both populist zeal as well as theoretical justification from eminent economists.
The Australian electorate is waiting for some real alternatives and will offer an overwhelming mandate to the political party which is brave enough to take Australia out of the current policy amateurism from all sections of the federal LNP.
Denis Bright is a registered teacher and a member of the Media, Entertainment and Arts Alliance (MEAA). He has recent postgraduate qualifications in journalism, public policy and international relations.