Inside Story

Ground-level casualties of the media campaign

Budget issues took control of the coverage this week, says Tim Colebatch. And there were casualties on both sides

Tim Colebatch 10 June 2016 2288 words

Ambitious tactic: opposition leader Bill Shorten at Friday’s press conference on Labor’s budget plans. Mick Tsikas/AAP Image

This election is being fought out in the media primarily on fiscal issues, even though most voters have little interest in them. But it suits the Coalition to do so, because it allows it to revive memories of Labor as fiscally irresponsible, and forces Labor onto the back foot.

On Friday Labor backed down to accept four of the twenty-two “zombie measures” it has been opposing, mostly since the 2014–15 budget. It included two of the big ones – no real growth in university funding, and cuts to tax breaks for research and development. Labor also announced its own plans to freeze rebates for private health insurance claims until 2026, and to halve family payment supplements for families earning more than $100,000 – and challenged the government to join it.

The point, of course, is to try to prove that Labor would be fiscally tough in government, despite its confession this week that it will run bigger deficits than the Coalition plans to over the next four years.

Opposition leader Bill Shorten quoted Parliamentary Budget Office estimates that Labor’s revenue policies – opposing the company tax cut, reforming negative gearing and so on – would save $122 billion over the next decade. Friday’s spending cuts would add another $13 billion in savings, although only $2 billion of it would come in the next four years.

But these proposed cuts will hurt Labor politically because, at ground level, the battle is strictly down to earth. It’s about hip-pocket issues – fear of higher taxes versus fear of lower benefits or services – it’s about attempts to undermine each other’s credibility, and it’s about offering scores of pork-barrel projects in the marginal seats. After all, that’s where elections are decided.

So far we’ve been finding it hard to get enthused. The polls are still 50–50, but the betting markets report finding it hard to get anyone to bet on Labor winning. The TAB is now offering a $4 return on a $1 bet for Labor, it’s so desperate to balance its books. But pre-poll voting begins on Tuesday, so the campaign should heat up from here on.

It’ll certainly warm up this weekend, for one crucial reason. When pre-poll centres open on Tuesday, the parties will have to have their how-to-vote cards ready. That means decisions on preferences must be made this weekend, for both the House and the Senate. It is no exaggeration to say that they will decide the outcome in a number of seats.

In inner Melbourne, for example, the direction of Liberal preferences will probably decide whether Labor or the Greens win Wills and Batman. In 2013, Labor won both seats easily with Liberal preferences. But had Liberal preferences flowed in 2013 as they did in 2010, when they were directed to the Greens, the Greens would have won Batman by 0.4 per cent and lost Wills by 3 per cent.

It’s possible that the Greens could win Batman without official Liberal support. The Victorian Electoral Commission has found that inner-city Liberals are a disobedient bunch – only 35 per cent followed the party’s how-to-vote card precisely in 2010, and in 2014 one in three gave preferences to the Greens, when the party told them to preference Labor. Even so, the Liberal card will control around 10 per cent of the vote in those two seats, which makes it crucial.

In Sydney, one suspects, it might be a different matter. The NSW Greens are a different species from their Victorian namesakes. Whatever schadenfreude the Liberals would gain from putting a bomb under Anthony Albanese in Grayndler, or Tanya Plibersek in Sydney, it is hard to believe it would outweigh the damage to their own reputation if they direct preferences to a hard-left Green like Jim Casey.

Preferences will also be vital in the Senate. In 2013, it was micro-party preferences, and their aggregation behind one candidate, that really mattered. But under the new Senate voting system, it would take serious organisation, money and unity for the micro parties to make their preferences count, and there’s no sign that they are likely to negotiate an effective deal.

Rather, it will be the Labor, Liberal and Green preferences that matter. They will be the only ones with enough supporters to staff a critical mass of the 7500 polling booths. Will Labor and the Greens swap preferences again in the Senate? Will the Liberals direct preferences to smaller like-minded parties, or tell their supporters to “just vote 1,” as they have in NSW and Queensland state elections? This weekend’s decisions will help shape the next parliament.

But this week the fiscal debate took control. It was sparked by Labor’s very ambitious tactic of heading off damage closer to polling day by announcing that its plans will mean bigger deficits over the next four years than those forecast in the budget – but will then, it says, save the budget more than they cost over the next ten years.

After Chris Bowen’s dire warnings about the risk of Australia losing its AAA credit rating, this came as some surprise. Respected budget watchers Stephen Anthony, John Daley and Saul Eslake, all of them politically independent, warned that Labor’s relaxed stance could only increase the risk its shadow treasurer had warned us of.

Naturally, the Coalition quickly jumped on Shorten’s admission to argue that Labor could not be trusted with the nation’s finances. Finance minister Mathias Cormann – unabashed at having himself presided over three years of budget blowouts – told us it proved Labor never delivered what it promised. For the Murdoch press, it was a new carcass to feast on, and by Friday Labor was announcing savings measures to try to stem the damage. What had it been thinking?

The issue cuts to the core of the campaign. If you listen to Bill Shorten, it is remarkable that his core message is hardly ever about the economy. It’s almost entirely about government services and entitlements: health, education and penalty rates, seen only from the viewpoint of their beneficiaries. It’s a conservative message about protecting people from changes that might make them worse off.

This is no accident: it’s what Labor’s research has told it that voters want to hear. (The Coalition says its polling suggests it’s more what voters in Labor’s safe seats want to hear, and it’s not going down so well in the marginal seats that will decide the outcome.) And in making a big cut in company tax the centrepiece of its campaign, the Coalition has set itself up perfectly for that sort of populist response.

In fairness, Labor is also proposing some important structural reforms – reforms to negative gearing and capital gains tax, for starters. But we’re not hearing much about them, even from the Coalition, presumably because its focus groups have given them the thumbs up (unless the Coalition’s saving them up for negative ads in the final days of the campaign.)

But Labor’s decision to run bigger deficits than the Coalition is planning assumes that, in the end, voters don’t really care about deficits any more. Both sides have pledged to tackle the deficit and failed. Two years ago, the Coalition’s 2014 budget forecast a deficit of $10.6 billion for 2016–17. Its latest budget predicts it’ll be $37 billion. The reality is that neither side has a credible record on fiscal issues.

The Coalition’s own budget papers show that in the three years it has been in government, its own policy decisions have added a net $16.3 billion in new spending from it taking office until mid 2016. Those decisions have also reduced revenue in that time by a further $1.7 billion, adding a net $18 billion to the deficit. Some of that would have been paid for by the budget’s contingency fund, but the lack of transparency in the budget papers makes that impossible to verify.

Labor’s case has its strong points. First, Bowen and shadow finance minister Tony Burke tell us the additional deficit they would add in the short term would be minor, and outweighed by the gains made over the longer term. On the current budget figuring, assuming no other changes, they would be back in the black in 2020–21, the same year as the Coalition.

But there are problems with that argument. Labor itself has depicted the budget estimates as over-optimistic, and Bowen has promised a more realistic update within one hundred days of taking office. Burke told the National Press Club on Wednesday that even if the revised budget numbers are worse than they are now, Labor will not use them to make further spending cuts. That clearly implies he envisages further blowouts.

Second, Bowen and Burke argue that the Coalition itself will not be able to deliver its deficit projections. Even after Labor’s backdown on Friday to wave through four measures it had opposed, there will still be eighteen measures and $5.5 billion of “zombie” four-year savings that the Coalition has counted to its credit but, Burke claims, have no chance of getting through the Senate. The big ones are reductions in university funding, cuts to family payments, cuts to parental leave, higher co-payments for pharmaceutical benefits, a rise in the pension age to seventy, and reduced access to Newstart and the sickness allowance. If they can’t pass the Senate, the Coalition will never make those savings.

During the campaign, moreover, the Coalition has hinted at changes to its superannuation crackdown, the backpacker tax and possibly its childcare cahnges, and has been pork-barrelling freely to shore up marginal seats. Finance minister and campaign spokesman Mathias Cormann says the Coalition will make additional savings if needed to protect the bottom line in the wake of policy changes.

Third, Labor argues that in backloading its budget savings, it is doing precisely what the OECD advocated just last week in its latest Economic Outlook. Indeed, the key elements of the OECD’s advice to Australia – focus on tax reform, medium-term budget savings, innovation, the NBN and education reform aimed at “stronger low-end skills” – clearly resemble Labor’s policies more than they do the Coalition’s.

The OECD, however, did not explain why it thinks budget savings should be backloaded. This is not Europe. Australia is growing at around trend rates, and likely to continue to do so unless some outside shock intervenes. The International Monetary Fund estimates that, excluding interest bills, Australia is now running the sixth-highest budget deficit in the Western world. Adjust for the business cycle, and its deficit is the third-highest in the Western world.

The idea that we should put off getting our house in order because the economy is too fragile is hard to swallow. As I have argued here before, the three main risks to Australia are a sharp slowdown in China’s growth, a new shock erupting in global financial markets, and the bursting of the house price bubble. Fixing the deficit would not raise any of those risks, and would give us more freedom to respond if any of them should become a reality.

Labor’s fourth point, however, is its most important one. The long term matters. Sure, as many have pointed out, ten-year forecasts are much more speculative than four-year ones (which hasn’t stopped the Coalition using them whenever it suits it). But it is foolish complacency for anyone to talk down the long-term consequences of budget decisions on that score.

Bowen and Burke quote Parliamentary Budget Office estimates that when the Coalition’s company tax cut finally takes full effect in 2026–27, it will cost the budget $13 billion a year, whereas Labor’s negative gearing and capital gains tax reforms would be saving the budget $8 billion a year by then. You won’t find that headlined in the Australian or the Financial Review, because it doesn’t suit their agendas, but it is hugely important.

And that’s where the Coalition has dropped the ball. It is bizarre that after all the problems Labor created by designing the Gonski reforms and the National Disability Insurance Scheme so that the big costs fell outside the forward estimates, we have now seen the Coalition do exactly the same with its company tax cuts. They cost less than $1 billion a year in the short term, but on the PBO estimates, $13 billion a year in the long term.

Even on benign assumptions, the budget papers foreshadow that in this cycle we will have seen twelve years of big deficits averaging 2.4 per cent of GDP, followed by six years of skinny surpluses averaging just 0.2 per cent of GDP. That is virtually nothing.

And even with these surpluses, Treasury projects that gross government debt will keep rising. As we have previously noted, when bond rates eventually head back to normal levels, as they will, the cost of servicing that debt will rise steeply, and those skinny surpluses will morph into deficits.

Peter Costello was lucky to be treasurer when the world economy was booming, but nonetheless he laid down a good fiscal rule: the budget should be balanced over the business cycle. It’s okay to run deficits in bad times, but they must be balanced by surpluses in good times. Both sides now appear to have abandoned that rule. •