The Abbott scrubbing brush will soon draw blood

Labor’s implosion was partly fuelled by ‘carbon tax’ zealotry that overstepped the electorate’s mood. The Coalition’s gung-ho approach to free-market ideology is just as likely to backfire.

Prime Minister Tony Abbott and Treasurer Joe Hockey seem determined to do what’s right, regardless of the political cost to themselves. How noble. How brave. How short-sighted.

One is reminded of the Greens’ zealotry in the design of the carbon tax in 2010-11. Though economists had long argued that a fixed-price period was necessary to get an emissions trading system up and running, it wasn’t Labor’s desire to start with a price so high (then $23 a tonne) and lasting so long (three years).

But the Greens, who are absolutely right when they argue that global cuts to greenhouse gas emissions 'should' be swift and deep, made the mistake of thinking Australia’s role was more important than it was, and that the electorate would go along with ‘doing the right thing’.

And what happened? Tony Abbott was handed something that, in Julia Gillard’s words, “functioned a bit like a tax” – and he beat Labor with it daily right up until the 2013 election.

Labor would have been happy – based on the weaker Carbon Pollution Reduction Scheme agreed on by Kevin Rudd and Malcolm Turnbull – with fixing the price far lower, and allowing the price to float after a year.

But the Greens saw a renewables utopia: half the money raised was used to give tax cuts or pension increases to the less well-off, and half was channelled through various schemes to bulk up renewables energy assets and increase the efficiency of the nation’s power consumption.

How noble. How brave. How short-sighted.

By going too far ahead of the political mood of the time, the Greens gave massive political capital to the arch-enemy of a carbon trading system – Tony Abbott, whose unexpected rise to power in 2009 was precipitated by Turnbull’s support for a trading scheme. The Greens’ political naivety was matched only by Labor’s weakness in capitulating to their demands.

By formulating policy that was too pure in its expected outcomes, the Greens pushed Labor into the crazy-brave stance that ruined the Gillard government and put emissions reduction policy back a decade.

Just yesterday, renowned global economics commentator David Hale was on ABC’s Lateline observing, with some bemusement, that China was continuing to roll out ‘cap and trade’ emissions reductions plans, while Australia was soon to repeal its own.

What has any of this to do with Abbott and Hockey? Well, quite a lot, actually.

The stiff brush with which the pair is scrubbing the impurities from our free-market economy will soon start to draw blood.

The clean, clear lines of a small-government, private-sector-driven society are beautiful in the text books, but not so easy to achieve in a country that has always had a strong element of social democracy in its political DNA (even Abbott, with his expensive paid parental leave scheme, likes a bit of state intervention).

That’s the difficult thing about politics. All sides know what their utopia looks like, but not all governments have the political smarts to get there. Those that go too far end up harming their own cause.

The Coalition should have learned that lesson with WorkChoices in 2006-07 – until the final version of that policy, they had successfully carried the electorate with them with into a largely flexible, contract-based industrial relations regime.

It is with some horror, then, that I read the daily news suggesting that Abbott is hell bent on making the same mistakes.

The current zealotry is to root out the market imperfections that characterised the ‘age of entitlement’: SPC won’t get a grant to help refresh its ageing plant; Holden and Toyota have been encouraged to leave; the unions are to be scrubbed clean by a Royal Commission; and the budget will be brought back into balance far more quickly than most economists argue is necessary.

Small government, no more handouts, wages where they should be etcetera, etcetera. The policy moves tumble straight from the economics text book into parliament, and to hell with the consequences!

But there will be consequences, and they will set those self-same objectives back.

If SPC closes its factory, the cost to the federal budget in lost tax revenues and welfare costs will be three or four times the $25 million grant agreed to by federal Labor and the Coalition government in Victoria last year. And the political anger will be fierce.

With Toyota ceasing production in Australia, the federal government is now under pressure to scrap car import tariffs – including the luxury car tax – seeing as there is now nothing to ‘protect’.

If they scrub away that imperfection, consumers will benefit, with a normal car costing a couple of grand less and a luxury car costing tens of thousands less. But the budget will suffer revenue losses of close to $1 billion a year from scrapping the 5 per cent import tariff, and around $400 million from scrapping luxury car tariffs.

The government has already foregone $1.8 billion over the forward estimates by allowing the tax perk of salary-packaged cars to continue, despite clear evidence it is little more than a rort.

There are exceptions to the purity of the free-market purges: paid parental leave is Abbott’s own special monster policy, and virtually everyone else in the party room hates it. And Qantas, says Hockey, is special and will most likely get a leg-up by borrowing the government’s debt-rating to raise funding more cheaply.

But overall, the push for a purer, cleaner market is being done too forcefully, too quickly.

The danger couldn’t be clearer. Jobs are falling away before enough seeds have been planted in other industries to take up the slack, so unemployment and discontent will keep rising – most likely right up to the 2016 election.

And massive political capital is being handed to Labor. That means it is likely to come back with a vengeance and do the wrong thing. Abbott is almost goading Bill Shorten to lead Australia back to a socialist, turgid, inefficient economy when the Coalition’s scrubbing brush has got the entire nation off-side.

That’s neither noble nor brave. Just politically short-sighted.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles