The problem with major economic reform, a senior government member complained, is that the government has no 'political capital' upon which it can draw.
Political capital is a readily understandable and yet elusive concept. There is a level of support for the government it can tap to implement unpopular measures. It is not exactly the same as a lead in the polls — it captures a sense of the public faith that the government will act in its best interests — but the polls are a good proxy.
Paul Keating, in his ABC interviews with Kerry O’Brien, said that he would spend political capital as fast as Bob Hawke accumulated it. “I always believed in burning up the government’s political capital, not being Mr 'Safe Guy',” he said.
The idea that the Abbott government is devoid of political capital is underscored by the dismal response to the series of economic reforms contained in its first budget. The government dropped behind Labor in the polls within two months of its election in September 2013 with Labor’s lead blowing out to 10 percentage points following the budget. It has bounced about, but the Coalition ended the year still a nasty 8 percentage points behind.
There was debate about the extent to which federal issues and the unpopularity of the Prime Minister contributed to the Coalition’s election losses in South Australia and Victoria last year. The thumping Coalition loss in the recent South Australian state by-election was readily attributed to the reneging of a promise to build submarines in the state.
Labor is determined to draw Queensland voters’ attention to the similar budget approaches of the Abbott and Newman governments. The budget’s planned cuts to family tax benefits, pensions, higher education and unemployment benefits all have significant impacts in vulnerable Queensland electorates.
Yet the idea that the government has exhausted its political capital in its first year is dangerous. Problems left untended will not get better of their own accord on either the tax and spending sides of the budget.
The drift in the budget has allowed spending to rise in the Coalition’s first year to within a whisker of the peak touched in 2009, when the suburbs were filled with roof insulators and every school was getting a new hall. Everyone knows there is a blowout coming in 2018 as the national disability scheme cranks up, Tony Abbott’s paid parental leave scheme (in whatever form) starts, and we start having to pay for big defence purchases (even before the submarine program gets going). The government has yet to say how it will replace the expensive Gonski school funding program from that year.
Tax is meanwhile struggling to gain ground. The company tax share of GDP has fallen by a quarter since the last heady years of the Howard government, while capital gains receipts have halved. The budget’s return to surplus is predicated on very optimistic economic assumptions and a massive dose of bracket creep.
This is the heart of the tax reform problem. Simply allowing inflation to push more income into higher tax brackets would, on Deloitte Access Economics figuring, result in someone on the minimum wage losing a third of their additional income to tax by 2017-18, while someone on average wages would be paying 37 per cent. The burden will fall overwhelmingly on people on lower incomes. High-income earners, who are already paying 47 cents in the dollar including their budget repair levy, will be relieved of the 2 percentage point deficit levy by 2017-18.
Spending cuts and shifting the burden from direct to indirect taxes are the only way of undoing this knot. The world economy is full of pitfalls for those who fail to confront their budget problems.
Not only is the idea that there is a necessary stock of political capital you must have in order to undertake reform dangerous, it is also wrong.
It is true that Keating’s reforms were aided by the Hawke government’s consistently high poll ratings during its first six years. But from 1990 through to the end of the Keating government in 1996, Labor was consistently behind the Coalition in the polls with only two brief bursts where it crept ahead. And yet, during this time, Labor pressed ahead with controversial reforms, including the introduction of enterprise bar-gaining (initially opposed by the Coalition), the breaking of inflation with record interest rates, the legislation for native title and, most courageously of all, sharp tariff cuts in the depths of the 1991 recession.
The Howard government too was mostly behind in the polls from late 1997 through to 2001, yet it attempted bold reform on the waterfront while successfully pushing through major reforms to company taxation and the introduction of the GST.
Yes, it would make life easier for the government if it had a higher poll rating, but the fact that it doesn’t is no excuse to conclude that reform is too hard. It just redoubles the need to make the case for reform clearly, consistently and persuasively.
This article was first published in The Australian. Reproduced with permission.