Author: Chris Berg

Earlier this year, Tony Abbott promised there would be no “night of the long knives” if he won the election.

Back in 1996, John Howard dumped six departmental heads – one third of the total – immediately on taking his position as prime minister. It was the biggest overhaul of the public service since federation.

Howard’s one fell swoop is now legend. With this act, he took absolute political control of the public service immediately – a public service that had worked for Labor for 13 years.

But his critics claimed the night of the long knives was destabilising. Subsequent opposition leaders have rejected doing anything of the sort. Mark Latham promised no public service upheaval on the eve of the 2004 election. In 2007, Kevin Rudd left things as they were.

Abbott’s promise no doubt was to reinforce that there would be nothing controversial about returning the Coalition to government. Yet the new Prime Minister may end up regretting this promise more than any others.

Like it or not, the Westminster tradition – of a frank and fearless public service dispensing objective and politically neutral advice while unflinchingly obeying the elected government – has always been a self-serving fiction.

The tradition dates back to the British Northcote-Trevelyan Report in 1854. Essentially, the idea is that public servants serve at the pleasure of the monarch, not the elected government. Yet, at the same time, they are supposed to be nothing more than servants of their ministers.

No surprise then that there have been constant complaints throughout Australian history that the public service has pushed its own agenda.

The new government will be deluding itself if it thinks it can just seamlessly slot itself straight into the bureaucratic institutions of the previous government.

John Howard knew this better than any other new prime minister. Howard had been treasurer in Malcolm Fraser’s government two decades before he formed his own government.

Treasury has always been the most powerful department of state. And Treasury has always been the most capable of wielding independent influence over politicians.

The new Treasurer Joe Hockey has been waging a Cold War against his now-department for the last year or so. He is even going to bring in external auditors to scrutinise the methodology behind Treasury forecasts.

But once the political heat dies down, and the government gets on with the tedious job of governing, Hockey is going to come face to face with the “Treasury view”.

The Treasury view is the institutional economic philosophy that governs Treasury advice. For the first half of the twentieth century, the Treasury view consisted of unflinching support for balanced budgets and low inflation.

After World War II, Treasury was converted to Keynesianism, and the goal of preventing inflation was pushed aside for greater public spending.

The disastrous stagflation that resulted in the 1970s saw Treasury move towards free market economics, with an emphasis on privatisation and market reform. In the 1980s and 1990s, academics were complaining that the public service had been captured by “economic rationalists”.

But there were changes still to come. In their book Shitstorm, Lenore Taylor and David Uren recount how at the end of the Howard years, senior Treasury figures secretly brainstormed a change in how the Australian government should deal with economic downturns. Rather than relying on monetary policy to keep the economy above water, it would immediately enact massive Keynesian stimulus.

When Labor took over in 2007 just before the Global Financial Crisis, this policy revolution had its moment to shine. Treasury’s revived interest in Keynesian activism lined up with the interventionist instincts of Kevin Rudd and Wayne Swan.

Yet the interests of the bureaucracy and the interests of their political masters don’t always line up so neatly.

David Kemp tells a dramatic story about Treasury’s opposition to the decision to devalue the Australian dollar by 17.5 per cent in 1976.

Malcolm Fraser requested Treasury write an economic statement in support of devaluation that he could read in Parliament. Yet the department sent back, churlishly, a bare, useless paragraph. As Kemp says, this was extraordinary. When asked to defend a policy it did not support, Treasury essentially went on strike.

So much for the Westminster ideal.

Still, such a public service strike could not happen today. One reason is introduction of New Public Management – the reorganisation of the public service since the 1980s to make it more efficient, more corporate, and more responsive to its political masters.

Another reason is Howard’s dramatic demonstration of political control in 1996.

The last reason is the rise of ministerial advisors. This dates back from the Whitlam years. Gough Whitlam wanted to avoid being controlled by conservative public sector mandarins, so he brought in his own people as an alternative source of advice.

Political advisors will be particularly important for the Coalition because new ministers – especially those without any previous experience – are vulnerable to capture by their departments.

Neil Brown’s book On the Other Hand ought to be compulsory reading for new Coalition ministers. Brown joined Malcolm Fraser’s ministry at the tail end of the government, and in his book he amusingly documents the experience of being a ministerial trainee up against the permanent, experienced public service.

Brown says the public service divides ministers into good and bad categories. The good ones act on behalf of their department, approve their proposals, and fight for their department to get more money at budget time.

The bad ones are those who believe they are there to control their department, to scrutinise and sometimes reject its policy recommendations, and to do their own reading and thinking.

As Brown wrote, “If a minister is regarded by the public service as bad, he might just be coming close to being what ministers should be.”

Tony Abbott will probably not renovate the upper stories of the public service as his mentor John Howard did. But the first few months of a new government are critical.

If ministers like Joe Hockey don’t push back against the institutional orthodoxies of the public service early on, they may find themselves unable to do so when it counts.

Tony Abbott promised the Liberal Party faithful last week that “By the end of a Coalition government’s first term, the budget will be on track to a believable surplus.”

Got that? Not in surplus. On track to surplus.

Given the Coalition’s near-certain victory, Abbott’s surplus expectations management may be the most significant promise of the whole campaign.

Significant not just for this government or the next, but for Australian governments far into the future.

First, the obvious. This is quite a backtrack. As recently as January, Joe Hockey was promising a budget surplus in the first year of government. By April, the promise had been downgraded into a surplus in the first term.

Here’s the new promise: “Within a decade, the budget surplus will be 1 per cent of GDP.” The Coalition is only willing to guarantee a budget surplus by 2023.

Abbott fudged it a few days later by saying “the Government is proposing to bring us back to surplus in 2016/17 and we will do at least as well as the Government”. But there’s a catch. Abbott doesn’t think the government is able to achieve a surplus in 2016-17.

OK, sometimes public finances change. Tax receipts are unpredictable. (Just ask Treasury.) And promises are easy to regret. (Just ask Julia Gillard.)

But the upshot of the revised promise is the Commonwealth budget will have been in deficit for 15 years – more than half of that time under a Coalition government.

This would be the longest stretch of deficits in Australian history. It would be twice the previous record of seven years, incurred after the Recession We Had To Have.

In their classic 1977 book, Democracy in Deficit: the Political Legacy of Lord Keynes, the Nobel laureate James Buchanan and his co-author Richard Wagner argued that democracy systemically favours deficits.

Politicians want to be loved. And voters love services and infrastructure and big bold plans for the future.

But all these things are costly. Politicians have just three unpleasant ways to increase expenditure. They can increase taxes, they can print more money, or they can borrow.

The first is unpopular. The second increases inflation, also unpopular, and hard to do now our central bank is independent. That leaves borrowing.

The great advantage of borrowing is that by the time debt has to be repaid, the government will have changed. The year 2023 would be the Coalition’s fourth consecutive term of government. Even if the Coalition holds power, odds are Prime Minister Abbott and Treasurer Hockey will be on the book tour circuit by then.

Of course, temporary deficits are natural. In any economic downturn, the government’s budget will go into the red. On one side, taxation revenues fall. On the other side, calls on the public dollar increase as workers drop onto unemployment rolls. It would take hasty, herculean cuts to avoid a deficit in those circumstances.

The Keynesian revolution convinced politicians that they should use the government’s budget as a tool to manage the broader economy; that they ought to spend their way out of a recession by propping up aggregate demand.

Hence Kevin Rudd’s stimulus packages of 2008 and 2009.

The adoption of Keynes’ doctrine, Buchanan and Wagner argue, blew a hole through the classical belief that deficits are something to be ashamed of, and ought to be avoided.

To be fair, John Maynard Keynes himself believed that deficits, once incurred, must be quickly repaid. Preparing the British government’s 1944 policy on full employment, Keynes wrote that “the ordinary budget should be balanced at all times”.

Yet enticed by Keynes’ spending recommendations, the norm that budgets need to be quickly returned to balance was thrown away.

In a way, we should be thankful the Coalition made such a song and dance about the deficit over the last few years. Budgets are only balanced when there is political pressure for them to do so.

That’s what makes Tony Abbott’s backtrack so concerning.

Demoralised and in opposition, Labor will hardly be able to criticise the Coalition for the deficit. And economics commentators have spent the last few years trying to convince us that debt is nothing to worry about. The surplus pressure will be off.

If the global economy stays slow for the next few years, as most indicators suggest it will, Joe Hockey won’t be able to rely on growth alone to rebalance the budget.

And if the global economy takes a turn for the worse, a Coalition government is just as likely to try to spend its way out. It’s often forgotten that the Coalition supported the first tranche of Kevin Rudd’s stimulus package. It still supports Keynesian countercyclical spending.

If deficits are not flushed out early, they fester. When George W Bush dropped his government into deficit with tax cuts in 2001, his defenders said it was a temporary measure to simulate the economy. The US would be back into the black once the crisis was over.

Twelve years later and there’s still no light at the end of the tunnel for the United States.

If the Coalition doesn’t return to surplus soon, these may be the economic consequences of Mr Abbott.

On Sunday Tony Abbott announced his government would provide $10 million to upgrade the Brookvale Oval in New South Wales.

As the Coalition’s press release puts it, “Brookvale Oval is the only ground between Sydney Harbour and Gosford that meets NRL standards.” Furthermore, “Only the Coalition can be trusted to deliver the Brookvale Oval upgrade and better sporting facilities for the Northern Beaches.”

Such is the high stakes of federal politics.

Every election carnival has its major attractions – the set-piece debates and the big announcements that consume half a week’s worth of media coverage. Think of Tony Abbott’s corporate tax cut. Or Kevin Rudd’s northern Australia policy.

But in between these major announcements, there’s a whole lot of filler. Stadium revamps. Road extensions. Oval upgrades.

We’ve grown so accustomed to the stream of spending promises that accompany elections, we rarely reflect on how absurd they are.

For these critical few weeks, when Australians decide who is best to lead, the election campaign subordinates the serious task of distributing public revenue to theatrical opportunism.

We hope for the clash of political visions. But we get rival groups of travelling salesmen, each trying to one-up the others’ offer.

The Brookvale Oval promise has received a bit more scrutiny because the ground is already getting its upgrade – Labor’s Anthony Albanese committed to it a few weeks ago. And the money was already allocated in the May budget.

Few of the usual handouts get that sort of attention.

Over the past two weeks, Abbott has announced he would, if elected, provide money for an Antarctic research centre, a Hobart Airport upgrade, a netball centre in Queensland, a sports centre in Penrith (also announced by Albanese earlier), and a recreation centre in Victoria.

Kevin Rudd would like to be elected so he can hand taxpayer cash to a discovery centre in Melbourne’s east, a sports complex in Launceston, a refurbishment of the Hobart Showground, a gymnastics centre in Mackay, and a natural gas research centre.

There’s clear no rhyme or reason to any of these promises. From the outside they seem completely arbitrary; a scatter plot of spending. They’re sometimes handed to marginal seats, but not always. Hopefully they have some internal logic.

But it’s hard to imagine a single vote being swung on whether the Brookvale Oval or Hobart Showground gets federal funding.

We should distinguish these promises from another group of similarly forgettable announcements meant to reinforce specific messages. Does anybody remember Abbott’s pledge in 2010 to set up an “Office of Due Diligence” in the prime ministers’ department, to vet new spending programs? Of course not. It wasn’t a serious policy suggestion: it was promised solely to remind voters that Labor was wasting taxpayers’ money.

The challenge for any opposition is to convert their core argument – the government is terrible – into deliverable policy. Much policy devised during an election campaign is like this.

Different again are the big, headline-grabbing infrastructure spends. Take Abbott’s promise to put $7 billion into the Bruce Highway in Queensland or $1.5 billion into the East West Link in Melbourne. At least these are subjected to some public debate, and even – occasionally – a cost-benefit analysis to demonstrate they are actually worth doing.

In 2008 the Labor government created an independent body, Infrastructure Australia, to scrutinise such spending. The idea was to avoid pork barrelling. A lovely thought. But the Coalition feels no need to abide by the body’s recommendations. And Labor ignores them when convenient. (The Parramatta to Epping Rail Link in Sydney, a last minute pledge of Julia Gillard in the 2010 election, was never favoured by Infrastructure Australia.)

Anyway, minor showground renovations are well below the threshold for Infrastructure Australia, which only looks at “projects of national significance”.

That is, it only looks at things the federal government should be doing.

If upgrading the only ground between Sydney Harbour and Gosford that meets NRL standards is a desirable use taxpayers’ money, perhaps it could be paid for by state or local governments, whose citizens will directly benefit.

But then federal politicians wouldn’t be able to claim credit.

The purpose of the pork barrel road show is impressionistic rather than specific. It is spending as white noise – designed to give a potential voters a feeling that a Labor or Coalition government will be generous with federal funding. Not generous anywhere particular, but everywhere.

Tony Abbott says he would like to be considered an “infrastructure prime minister”. He’s promising “cranes over cities” like so many storks around a watering hole.

The sociologist Thorstein Veblen coined the term “conspicuous consumption” to describe consumption that was valued for the impression it left on others, rather than the utility it bought the consumer.

So much of what passes for policy during an election campaign is conspicuous investment – not important for its own sake, but to demonstrate how freely money would flow under the next government.

After all, if Brookvale Oval gets its funding, who knows? Maybe your pet project could be next.

What a terrible time to call an election.

Kevin Rudd went to the Governor-General just 48 hours after his government released the appalling Economic Statement on Friday.

The media cycle moves along quickly in an election, so let’s recap. Turns out, since the May Budget, this year’s deficit has leapt from $18 billion to $30 billion. And projected unemployment has gone from 5.75 per cent to 6.25 per cent.

Those are major revisions. May wasn’t very long ago. (You can read the Economic Statement for yourself here.)

Some of the budget shortfall will be bridged by new taxes. If the revised projections are accurate, unemployment will be higher than it was during the Global Financial Crisis, which peaked at 6.1 per cent in March 2009.

Rudd didn’t deliver the bad news himself. His Treasurer Chris Bowen and his Finance Minister Penny Wong were left to carry the can.

Every election is about the economy. Even the 2001 election – after both Tampa and September 11 – Howard spent the most time in his official policy speech talking about economic issues. (This wasn’t as strange as it seems in retrospect: recall a great worry around the world about the economic consequences of the terrorist attack.)

Rudd knows this. A focus on the economy is his master plan. He wants to make Tony Abbott look like an economic lightweight. He’d like to be known as the smartest, most serious person in the room. In his National Press Club address, he joked about wanting to show more graphs. He probably planned the jokes well in advance. Where Julia Gillard talked about moving forward, he talks about Chinese demand for resources.

So why did he leave the dire Economic Statement hanging? After all, it’s not the only bad news. Economic data released yesterday means there could be as many as two interest rate cuts during the election campaign.

I argued in the Drum last month that while Rudd enjoys talking about future challenges, he hasn’t come up with any policy solutions.

All we have heard from Rudd is a half-hearted imitation of some of the themes of 2007 – he wants Australia to be a country that makes things, and the car industry can look forward to a few hundred million more in subsidies.

It’s hard not to conclude that the Prime Minister’s economic seriousness is purely for show – it is a marketing pitch rather than a strategic plan.

Rudd is no cleanskin. It was his spending decisions in late 2008 and early 2009 that made the budget as grim as it is in 2013. Those decisions are why he is introducing an “efficiency dividend” on the public service. They are why he’s introducing a tax for the bank deposit guarantee – a guarantee he himself introduced.

With the surplus further out of reach, and the national economy looking more stagnant by the day, Rudd has started to rely on some of the old talking points of the previous leadership team.

We even heard that hackneyed Gillard catchphrase “cuts to the bone” in his election announcement speech on Sunday.

Easily the most inept regurgitated talking point is the boast is that Australia has a triple-A credit ratings from all three major credit agencies. We hear it all the time. The triple-A rating is presented as the definitive proof of the government’s economic prowess.

Of course, a triple-A rating is better than the opposite. But if you find the ratings agency argument compelling, well, I’ve got some subprime mortgages I’d like to sell you.

This legally protected trio of ratings agencies must take a big part of the responsibility for the Global Financial Crisis.

Happily for Australia, most of the academic evidence suggests the agencies are better at rating countries than they were at rating mortgage backed securities. Yet few industries have had their reputation as battered in the last few years as the ratings agencies. Labor couldn’t have found a less convincing talking point if they tried. No surprise it was originally Wayne Swan’s.

This is odd because in many ways Rudd wants to be less the anti-Gillard as the anti-Swan. The new prime minister is determined to level with voters about the economic challenges Australia faces, rather than rely on the sort of hands-over-the-ears optimism that characterised the former Treasurer’s tenure.

But the Prime Minister has spent so much time rushing from issue to issue – boats, Eddie Obeid, carbon tax – that he hasn’t put enough work into his basic economic credibility.

One National Press Club speech and a few graphs won’t do it. And an election campaign is not a great time to try to prove you can control the nation’s finances.

Australia is a very small country with a very open economy. These facts are sometimes easy to forget.

No matter what they say during the upcoming election campaign, neither Kevin Rudd nor Tony Abbott will have much control over Australia’s economic fortunes in the next term of government.

Wrapping up his National Press Club address earlier this month, Kevin Rudd said Labor governments “manage transitions … sketch the future … harness the energy and ambition of our people” and “put the changes in place that best secures our future.”

Tony Abbott has used the same sort of hyperbole. A Coalition victory would immediately trigger prosperity.

Such boldness is par for the course at election time. But it is a confidence trick.

The fate of the Australian economy – the big ups and downs of the economic cycle – will be determined by global conditions, not domestic ones.

No-one knows this better than the workers at Holden and Ford, for whom global exchange rates are more important than any subsidy or tariff our elected representatives can devise.

This has always been so.

A sudden increase in the cost of bank lending in London caused our first true depression – the largely forgotten Depression of the 1840s. We suffered along with the rest of the British Empire.

Our better-remembered second depression occurred in the 1890s. What little modern Australians know of the Depression of the 1890s is perhaps the housing boom in Melbourne which preceded bank failures and unemployment.

But the Australian episode is only part of a story that encompasses the near collapse of the London-based Barings Bank, sovereign debt crises in Latin America and the Mediterranean, a gold panic in New York, and a mining market collapse in South Africa. Our trouble – as traumatic as it was – was just one crisis among many.

The Great Depression was even more clearly imported. No way were we going to avoid suffering from the stock market crash of October 1929 or the collapse of world trade.

Historically our good times correspond with good times in the global economy too.

We boomed in the 1950s and 1960s along with everyone else. We suffered stagflation in the 1970s along with everyone else.

And the recession we had to have?

Well, that recession had to be had by the United States, Canada, New Zealand, the United Kingdom, and Japan as well.

This all makes sense. Australia is tiny. Overseas there are cities with more people than our entire country. We’re almost entirely dependent on imports for consumption and exports for economic growth. And we need foreign capital for investment. A small country highly integrated into the global economy is going to be very sensitive to international crises.

Yet for each of these historical episodes there exists a cottage industry trying to explain the unique Australian factors that caused them. The 1840s Depression is blamed on problems in the Australian wool industry. The 1890s Depression is blamed on reckless Australian banks. The depth of the Great Depression in Australia is blamed on our obsession with balanced budgets.

It goes on. We’ve all heard Paul Keating blamed for the recession of the early 1990s and John Howard credited for the subsequent growth.

If there is growth or recession in the next term Abbott or Rudd will take the blame or credit. They probably won’t deserve either.

In the past I’ve mentioned research that suggests political success is more about dumb luck than virtue or competence. In truth Rudd or Abbott will win government then cross their fingers.

But political debate struggles with powerlessness. Voters like to assign blame and give credit for things that are actually outside any domestic politicians’ control.

Kevin Rudd rightly points out the global financial crisis dumped a bucket on Labor’s first term. The policy agenda of any party would have been drowned out by the global consequences of America’s subprime collapse.

But then he claims his decision to artificially stimulate the economy was responsible for Australia’s relative endurance.

Not, for instance, Chinese demand for West Australian minerals.

In other words, Rudd believes the disease was entirely foreign, but the cure was entirely domestic.

Yet even if you are a card-carrying Keynesian – that is, you believe the government can and should spend more to boost the economy in a downturn – it is just as plausible that China’s enormous stimulus package in 2008 is responsible for our prosperity, rather than Labor’s smattering of insulation and community projects.

Australia spent around $90 billion to stimulate its economy. Sounds like a lot? Well, China spent over half a trillion dollars. And nearly three quarters of that spending went towards the infrastructure whose raw materials we supply.

Our politicians pretend they can steer the economy like a ship. But we have a very small ship and it’s a very big ocean. During an election, it pays to remember our economic future is determined by the wind, not the sails.