Abbott's mother of all fiscal mistakes

Shared sacrifice is needed by everyone, according to Prime Minister Tony Abbott, but how can he square that away with his extravagant paid parental leave scheme?

It is time he sacrificed his pet project.

The Coalition has been talking tough a fortnight ahead of the budget, and while I suspect that the doom and gloom is partially designed to lower expectations, there remains an elephant in the room. If the budget crisis is so dire and so urgently in need of repair, how can Abbott justify his paid parental leave scheme?

The Coalition’s scheme is set to pay women their full wage for 26 weeks, capped at an annual salary of $150,000; the scheme is estimated to cost $5.5 billion per year. By comparison, the Labor scheme would have paid women the minimum wage for a period of 18 weeks.

The hypocrisy, so obvious to the public, is also patently obvious among members of the Coalition government. The Australian Financial Review today reported that “a group of Liberal Senators, including Cory Bernardi, Ian Macdonald and Dean Smith, have told colleagues they either harbour deep reservations or have resolved not to support the scheme when it comes before Parliament later this year.”

Sources within the Greens suggest that support for the policy has declined while Clive Palmer and his followers will need  much convincing to support the scheme. Even former treasurer Peter Costello cautioned against the policy, noting that it was excessively expensive and “silly”.

Beyond the cost of the scheme, which is problematic enough, there is the unfortunate reality that the scheme will do little to boost female participation in the labour force. The Productivity Commission found that a paid parental leave system that provides full replacement wages will have only an incremental effect on the labour supply.

An alternative to paid parental leave is childcare subsides. Research by both the International Monetary Fund and Organisation for Economic Co-operation and Development found that reducing the cost of childcare promotes female participation in the workforce -- to a greater degree than paid parental leave and at a lower cost to boot.

The IMF estimates that a 50 per cent reduction in childcare costs could boost participation by between 6.5 to 10 per cent.

That’s nothing to sneeze at, particularly as our baby boomers head into retirement. Our demographics have begun to work against Australia and the simple fact is that without productivity gains or higher participation, growth will slow.

Compounding the issue is that the declining participation rate has narrowed and will continue to narrow the tax base. This is a leading cause of the significant decline in government tax receipts over the past few years and the resulting deficits. As a result, raising participation among women has the dual benefit of boosting the government’s coffers, while also supporting the broader economy.

So if you were a government that believed it faced a budget emergency, wouldn’t you be better off pursuing the cheaper policy that provides budget benefits in both the near and long-term? Wouldn’t you be better off pursuing the policy that reduces the effect of your country’s greatest economic challenge?

Isn’t that better than providing more middle to upper-class welfare?

When Treasurer Joe Hockey floated the idea of raising the retirement age and reforming pensions, it became clear that he had an appreciation of the challenges facing Australia. It gave the impression that he might be willing to make a tough choice if it was in the best interests of the Australian economy. That was a sign of real economic leadership.

Abbott’s paid parental leave scheme is the exact opposite. It’s a costly policy that will fail to materially increase participation among women. To afford it, the Coalition will need to cut other parts of the budget, which may include support to low-income earners.

If the budget is as tight as Hockey and Abbott suggest, then surely they must prioritise getting bang-for-their-buck. They cannot, in good conscience, cut welfare to poor people and raise taxes while simultaneously supporting their paid parental leave scheme.

Sometimes real political leadership isn’t sticking to your pre-election commitments but admitting that you made a mistake.