Why the super debate is a Liberal flashpoint

Casual observers might be confused why what appears to be a technical legal debate – what counts as retrospectivity for the purposes of superannuation policy – has been so emotive within Liberal circles over the last fortnight.

The answer is historical and philosophical.

For the last two years Labor has been beating the Coalition up on “fairness”, arguing that its economic policy favours the rich. The superannuation changes are intended to counter this attack, hitting the Coalition’s own supporters in their retirement accounts.

But with the retrospectivity debate the Government just dropped itself into another fairness debacle.

Retrospective law changes the legal status of actions that were performed before the law was passed. The issue here is that the new lifetime cap of $500,000 on after-tax concessional superannuation contributions is backdated to 2007.

That means there are Australians who have been planning their retirements on the basis of the law of the day and who have suddenly been informed that the law was, in retrospect, different, and that they were working towards a contributions cap that they never knew existed.

That retrospectivity feels unfair, in the sense that it is unjust to rewrite the past in a way that negatively affects the future.

(Retrospectivity is not inherently unfair or unjust. No one could object to posthumous pardons of men convicted of homosexual offenses in the 20th century. And no one should object to the post-war convictions of Nazi war criminals, even though, given they had not violated German law, their offenses had been retrospectively created and applied. But people planning for retirement are neither of those.)

As much as Bill Shorten has tried to suggest otherwise, fairness is not just a question of how heavily the rich are taxed. It encompasses the feeling that a citizenry acting in good faith will be reciprocated with good faith actions by the state.

Particularly since the Howard government, Australians have been told to put superannuation at the centre of their future planning – to contribute as much and as often as they can. Making superannuation the central pillar of retirement income has been a deliberate policy and political position of government after government.

It is hard to exaggerate how much pushback the Coalition is getting from its own supporters on the unfairness of retrospectivity.

There are a lot of people – and many Liberal Party supporters – who are quietly sceptical about the whole idea of compulsory superannuation.

In part this is because retrospective law has a particularly sensitive history in the Liberal Party. The Fraser government’s 1982 legislative volley against the bottom-of-the-harbour tax minimisation schemes (where companies stripped all their assets just before their tax was liable) included a provision that required these companies to pay all the tax that would have been due between the years 1972 and 1980, when the bottom-of-the-harbour schemes were believed to be legally sound.

This created a firestorm among the business community. The issue wasn’t so much that the loophole was being closed. It was that people who had made decisions under the law as it was were suddenly being told that they had actually been acting unlawfully. It was, fundamentally, a fairness battle fought against the government’s supporters.

In his autobiography, John Howard spends a big chunk of his account of his time as Malcolm Fraser’s treasurer detailing the political havoc that the legislation created. Fourteen Coalition members crossed the floor against the bill. Howard told a radio interview in 2006 that he still carried a few scars from the debate. As prime minister he regularly made hostility to retrospective law a basic liberal value.

Twenty-four years after it was introduced, compulsory superannuation is still a policy experiment vulnerable to tax grabs and policy change. While this has been obvious from a theoretical perspective for a long time, the 2016 budget confirms the uncomfortable fact: superannuation is an unreliable store of our retirement money.

Retirement savings are unique in that they constitute fixed investments made with a time horizon of 40 or 50 years. The Coalition Government seems determined to demonstrate that they can fiddle apparently unhindered and consequence-free with the tax treatment of this long-term asset.

Are we supposed to believe that this will be the last change to superannuation? Under the Turnbull Government’s new policy, the accumulation accounts that are supposed to hold super balances above the $1.6 million lifetime cap will be taxed at 15 per cent. It is virtually certain that here will be a government soon that decides that 15 per cent is too low. That it ought to be equivalent to the company tax rate (30 per cent) or the top marginal income rate (45 per cent). Or decides that the money should be taxed when withdrawn at the equivalent marginal income rate.

If it was any other investment, of course, we would be free to move out of this now provably unreliable asset and put our money elsewhere. But that is against the rules.

There are a lot of people – and many Liberal Party supporters – who are quietly sceptical about the whole idea of compulsory superannuation for this reason. It is fundamentally unfair to prevent people by law from accessing until retirement money they have legitimately earned.

And as Labor knows, once people have it in their mind that a policy is unfair, that impression is hard to budge.

The ghosts of deficits past, present and future haunt this election

Is it impolite, at the very start of the election campaign, to talk about the budget deficit? Impolitic? It’s certainly unfashionable.

Budget night was so long ago. Neither Labor nor the Coalition want to bring up this old chestnut. You can understand why. Each have in turn declared their intention to return the budget to surplus and each have failed, at great political cost.

Yet we must talk about the budget deficit. Steel yourself. It would show great disrespect to the treasurers of our ancestors if we were not to briefly acknowledge the land on which they fought and died, at least before the election carnival marches forward. Anyway, the deficit will be the unspoken theme of the whole campaign – always there, never really acknowledged.

Treasurer Scott Morrison declared in the budget speech that the Government was on a “sustainable path” to surplus. This language has become such a cliché that it’s easy to miss how sad it is.

Last Tuesday’s budget declared that the deficit would be just 0.3 per cent of GDP by 2019-2020 – the last year of the forward estimates. Morrison’s predecessor Joe Hockey declared in May 2015 that the deficit would be almost exactly the same (0.4 per cent of GDP) a year earlier, by 2018-19. And in the 2014 budget Hockey argued we’d hit 0.2 per cent of GDP by 2017-18.

The clear reason for this sustained failure to return to surplus is Treasury’s long-standing belief that economic growth will – very, very, very soon – jump above 2 per cent per year. They’ve been predicting this growth leap for half a decade now. No doubt Wayne Swan was very impressed when he first saw growth forecasts with a three in front of them in Treasury’s 2010 outlook. But Morrison’s heart must have dropped when he saw the same numbers again – still just a few years away.

Yes, the budget has to have forecasts. And treasurers can only accept what Treasury’s models tell them. But waiting for a growth spurt that never seems to come is hardly a comforting economic plan.

I’ll admit to some schadenfreude. The deficit has been a major political issue for nearly a decade. Every commentator has refined their arguments on the topic over and over and over. Here’s the hissy fit I had in The Drum on the eve of the 2013 election, when Hockey changed his promise of a surplus to a promise to be “on track” for a surplus.

But in the latter half of the Labor government it was commonplace to hear that there was no need to rush back to surplus. Take this Australian Financial Review piece, or here in The Drum.

Neither party will want to spoil the fun by talking about their embarrassing deficit. But it will be there, uncomfortably shadowing every minute of the campaign.

Many analysts and interest groups warned that the economy either could not handle the necessary budget cuts, or that the surplus was an irrational obsession cultivated by Peter Costello fan fiction. The budget would balance itself in good time. No need to stress about it.

The argument for a single-minded return to surplus was never that the small deficit – yes, our deficit is relatively small as a percentage of GDP compared to many other rich economies – was causing immediate and direct harm to the economy. It was that unless there was pressure on the government to balance the books the government would never feel the need to do so.

And a long-term budget deficit is harmful. Market economies are cyclical. It might not feel that way – growth is sad and sluggish – but it is very possible that these are the good times. When we face the next downturn the budget balance will plunge. It will plunge even deeper if the government of the day decides to stimulate the economy, believing Kevin Rudd’s program to have been a success.

A small deficit always threatens to be a large deficit. And a large deficit is costly, harms macroeconomic stability, and undermines economic confidence. It might not be much fun to cut spending during the good times, but, as Greece has shown, it’s far worse to be forced to cut spending during the bad times.

No doubt we are tired of talking about debt and deficits. Neither party will make it an issue during the campaign as neither party is confident it has a solution. Where tax increases are proposed – such as the tobacco excise hike – they are proposed in order to fund new promises, not pay back old ones.

And spending cuts? Not a chance. It appears that the government has locked in a permanently higher spending plateau. This year it is estimated the government will spend 25.8 per cent of GDP, just a fraction off the 26 per cent of GDP that Rudd spent on his extraordinary stimulus package. Under the Howard government this figure hovered around 23 and 25 per cent.

Elections are always full of spending promises – gifts of road upgrades and sports fields dropped into struggling marginal electorates. If the budget feels long ago now wait until we’ve had two months of pork barrelling. Neither party will want to spoil the fun by talking about their embarrassing deficit. But it will be there, uncomfortably shadowing every minute of the campaign.

Rejecting A Chinese Bid For Land Is In ‘The National Interest’? Show Me How

If it wasn’t clear that “the national interest” was a pretty hazy criterion on which to deny foreign investment approvals, then Scott Morrison confirmed it last Friday.

The first time the Government rejected a Chinese bid for the S Kidman & Co. estate – Australia’s largest private landholding – it was because part of the property, Anna Creek, was next to a sensitive defence site.

In fact, some of Anna Creek is in the least important green zone of the Woomera Prohibited Area, which is infrequently used by the Woomera Rocket Testing Range. Nevertheless, the Foreign Investment Review Board was skittish about a Chinese company owning property nearby, so the deal was scuttled in November 2015.

The Kidman deal was then restructured to exclude Anna Creek. Last week, Morrison announced that this wasn’t enough – the property is just too large to be sold to a Chinese firm. Kidman and Dakang Australia Holdings have until Tuesday to come to another arrangement, otherwise Morrison’s “preliminary decision” to prevent the sale will become a permanent decision.

It’s easy to present the Kidman sale as a big deal. It is, indeed, an enormous collection of properties, spread across Western Australia, South Australia, the Northern Territory and Queensland. It was put together in the 1890s by Sidney Kidman, to whom the words “baron” and “legendary” are usually affixed.

But the land is in fact some of Australia’s least productive. We’re talking about desert. The Kidman holdings are enormous because they have to be – to run cattle across such stark landscape you need space.

As David Uren pointed out in The Australian over the weekend, S. Kidman & Co wouldn’t even rank in a list of Australia’s largest 2000 companies. It has nowhere near the largest number of head of cattle of Australian companies. Geographic size isn’t everything.

Still, you might object, size does matter. But how? Why? Morrison’s press release announcing his preliminary decision is completely empty on this point. It states simply that the sale of a property of Kidman’s size is not in the national interest.

How so? Is it because, as Morrison points out, there are some Australian companies that are interested in the property? This assumes what needs to be shown – that large scale foreign investment is against the national interest, but domestic investment would not be.

Usually governments feel the need to offer arguments in defence of their position. Morrison’s press release offers no justification – just “the national interest”, an empty signifier with no qualification or clarification.

If Kidman is sold, the land would remain in Australia, obviously. The property’s new foreign owners would be able to do no more or less with it than any Australian owners would.

Some have claimed that the sale might result in the loss of Australian jobs, if the new owners brought in Chinese workers. But any Australian purchaser could do the same. The thing that is stopping them is our strict immigration system, and the heavy regulatory constraints around the 457 skilled worker visa program.

Simply put, land owned by foreign investors continues to be governed by Australian law. It is private land so it can be used for private purposes, within those legal constraints. To be afraid of foreign ownership of land is to be afraid of private ownership of land. And to punish it.

Two things are going to happen if Morrison fails to approve the sale of Kidman. First, Kidman’s owners are going to get less money for their property than otherwise. Less money is less investment in Australia – with its superior bid, we can assume that Dakang believes it can run a more efficient and profitable enterprise than any other bidder. Australia is still desperate for capital investment, particularly in the vast interior. Investment brings jobs. Investment brings growth. Blocking investment harms both.

Second, any failure to approve seriously damages Australia’s reputation for stable and reliable investment, and the marketability of other properties that might be sold in the future. Hence the concern from farming groups – WAFarmers and the Northern Territory Cattlemen’s Association, for instance. All this populist handwringing about foreign investment in agriculture actually harms the real farmers who want to maximise investment and sale prices.

We have a clear national interest in attracting investment; a clear national interest in promoting investment certainty; a clear national interest in developing the interior; a clear national interest forging tighter economic links with China; and a clear national interest in allowing Australian property holders to get the best deal for their property.

All of these things encourage economic development and growth, with flow-on effects that enhance our living standards. The Coalition understood this, when, after the 2013 election, they declared that Australia was open for business. How are potential investors in Australia supposed to see that promise now?

From Markets To Speech, Libertarians Straddle Political Divide

When David Leyonhjelm won a Senate seat for the Liberal Democratic Party at the 2013 federal election, many in the media did not know how to react.

Leyonhjelm described himself as a libertarian or a classical liberal. He subsequently was attacked for being too left-wing on drugs, gay marriage and national security, and too right-wing on guns and economics. Many in the press tried to pigeonhole the plain-speaking agribusiness owner as nothing but a kook: one of the crazies who had been raised above his station merely because of the preferential contortions of that election.

Yet what was so different about Leyonhjelm’s views from those of the other parliamentarians? His most controversial position, backing the right to own guns, would not be unusual in a National Party meeting, and it certainly was common enough before the Howard government moved to limit gun ownership. His views on drugs are not much different from those held by many progressives, and they are in step with an increasing acceptance by the political class that the war on drugs has failed. His support of gay marriage is shared by a sizeable majority of the population. And his views on economic policy are exactly those espoused by the free market wing of Liberal members of parliament – indeed, after the 2013 election, there was a widespread belief within Liberal circles that Leyonhjelm’s vote, at least on economic questions, could be taken for granted in the Senate.

It’s hard not to conclude that what makes libertarians unusual is nothing more than the constellation of views they hold, rather than the specific views themselves. There is a near-infinitesimal number of political positions that any individual may take, but the country’s political culture slots everything into a binary division: you are either with the Left, and therefore vote for Labor or The Greens, or you’re with the Right, and therefore vote for the Liberals or Nationals.

So more libertarian-minded people are buried in their parties, awkwardly lumped in with those who they might vehemently disagree with on social or economic issues.

In the Liberal Party, libertarians are found among the ‘‘hard right”, who strangely share that title with the conservatives who focus on social issues like gay marriage and abortion. Labor libertarians, such as they exist, are scattered on the left and right wings of the party, either hiding their admiration for economic liberalisation or turning a blind eye to the retrograde social views of the conservative unions.

It has been more than 30 years since the Hawke government began to deregulate and liberalise the economy. We’re still not over it.

In December 1983, Bob Hawke and his treasurer, Paul Keating, floated the dollar. Their decision was both inspired and visionary. Governments started to place their faith in markets. In 1985, the government opened the banking sector – one of the most tightly monopolised and anti-competitive industries in the Australian economy – to foreign competition. Throughout the next decade, publicly owned businesses were privatised. Tariffs and other trade barriers were lowered.

The labour market was substantially deregulated. The airline market was opened to competition. Ports were sold and restrictions on shipping liberalised. The final break with the past came with changes to the tax system – the introduction of the goods and services tax in 2000 replaced a sales tax regime that had been instituted by James Scullin’s Labor government in 1930.

‘‘Reform”, of whatever stripe, has become the gold standard of government. For the political class, a successful government is that which reforms; an unsuccessful government squibs on reform. But while one of the most common tropes in the press is the business-leaders-urge-reform genre, in which CEOs and corporate lobbyists complain that politicians are avoiding tough decisions about economic change, rarely do they offer any specific proposals.

The reform mantra has allowed each side of politics to dress up regulatory or legislative change as a great reform no matter what its purpose. For the Australian Labor Party, the minerals resource rent tax and the emissions trading scheme introduced by Julia Gillard’s government were considered great reforms. For the Coalition, abolishing those two schemes constituted great reform. Each harks back to the HawkeKeating era not just as precedents for economic change but as some sort of justification for that change. Reform has become the sine qua non of government.

What made the reforms of the 1980s significant was not their constituent parts but that they added up to an agenda. Governments of the time deliberately shifted the economy from one system of political economy to another. They began to instinctively favour market solutions to policy problems where their predecessors had looked to the state. It was a revolution in philosophy as much as it was a legislative program. Once the full significance of this revolution sank in, there was a host of books published by intellectuals of the old Left who believed that Hawke and Keating had hijacked the grand old Labor Party and its socialist-tinged traditions. The sociologist Michael Pusey argued that the commonwealth bureaucracy had been captured by economic rationalists, a sort of reverse-Fabian takeover of the institutions of government. These economic rationalists had a new idea of what Australia ought to look like and what values public policy should reflect.

But budding reformists have a problem. Since John Hewson’s economic policy package Fightback! died at the hands of voters in 1993, there has been no driving vision of what Australia might look like, no vision of what values ought to underpin political change.

There is scarcely any serious contest of ideas. We can attribute that to a generation of politicians too weak to build and defend a vision. It’s a neurosis that infects the entire political class.

My book, in all modesty, is an attempt to offer a new agenda. Libertarianism is a political philosophy that favours liberty in all its facets. The libertarian agenda is deceptively simple but powerful and ambitious. It wants people to be free to trade across national borders and to move their families across them, too.

It provides a philosophical structure for open markets, unencumbered by excessive regulation and red tape, exposed to and strengthened by engagement with a global marketplace. It views overregulation not simply as a cost to business but as a brake on human progress and innovation.

It takes seriously the choices people make about how they spend their money and sell their labour, without assuming that policymakers and the government know better what values those people are weighing up when they make risky decisions. It views entrepreneurs as the central driver of economic growth, and the key to future living standards. And it says that decisions are better when they are made by the people they affect. Libertarianism offers a new and important perspective on the biggest issues facing Australian society, from human rights to the environment and inequality, from trade to sexuality and gender.

It provides a new way through our moribund political debates. The libertarianism I argue for is a fundamentally practical one. It takes people as they are. It treats human society as an impossibly complex, endlessly diverse and infinitely exciting web of relationships and ideas. It asks what economic and political system suits a world in which people have different preferences and want to lead different lives, form different communities and enjoy different lifestyles, but all have equal rights. Government can only limit our liberties, not enhance them. Markets and civil society, by contrast, facilitate such difference, encourage toleration and co-operation, and take advantage of the natural pluralism of a free people.

Libertarianism exposes old problems to a new light, helping us understand how to tackle them and what’s at stake in doing so. As for the inequality debate, governments should first realise they’re already making the problems of poverty and inequality worse before they try to ‘‘fix” economic inequality. Environmental problems are regarded by libertarians as fundamentally property rights problems. Libertarianism also has a distinctive approach to freedom of speech and privacy, two of the thorniest issues of modern public policy. Some conservatives argue that libertarians can’t handle questions of national security and foreign policy – I make the case for a security policy that respects individual freedoms, and a non-interventionist foreign policy.

Returning to the domestic sphere, I tackle freedom of choice, consumerism, and what the human rights debate tells us about the state of libertarian ideas today. The economist Adam Smith wrote that all that was necessary to allow a nation to thrive was ‘‘peace, easy taxes, and a tolerable administration of justice”. What made sense in 1755 is even more compelling now, as technological change and innovation eliminates many of what our predecessors saw as the necessary limits on the market economy. We’re on the edge of a revolution in the way we work, the way the economy functions, and the way we relate to each other. Exploiting these possibilities to the fullest will mean rethinking what government is for – and recognising its limits.

Libertarianism is a philosophy of optimism. It is a philosophy that understands what institutions can and cannot do.

It embraces change. It embraces difference and diversity and pluralism. It wants government out of your wallet and out of your bedroom. Libertarianism, alone, wants individual freedom in all its dimensions.

The Libertarian Alternative

Melbourne University Publishing, 2016

Libertarianism wants government out of your wallet and out of your bedroom.

Libertarianism—the philosophy of government that pairs free market economics with social liberalism— presents a vigorous challenge and viable political alternative to the old Left-Right partisan shouting match.

Libertarianism offers surprising new solutions to stagnant policy debates over issues such as immigration and civil rights, and provides a framework for tackling contemporary problems like privacy, the environment and technological change.

In The Libertarian Alternative, Chris Berg offers a new agenda for restoring individual liberty in Australia, revitalising politics and strengthening our sagging economy.

Available from Melbourne University Publishing and Amazon.com

Opening statement to Commonwealth Environment and Communications Legislation Committee inquiry into the Broadcasting Legislation Amendment (Media Reform) Bill 2016

The 75 per cent audience reach rule and the two-out-of-three rule are historical anachronisms that should be abolished. They are nonsensical in an age of media plenty rather than scarcity. However, this discussion ought to spur more radical and forward-looking reform. For the last decade we have discussed in more or less theoretical terms the coming technological revolution in media production and consumption. With streaming services like Netflix, Stan and Presto, news sites like Guardian Australian, the Huffington Post Australia and so forth, as well as the shift in media consumption across to social media, which is arguably more important, these predictions have come to fruition; yet ownership restrictions, with their focus on legacy media organisations, assume a world of scarcity where consumers are forced to rely on content produced by just a few outlets. It is important to note, of course, that historically much of the scarcity in the Australian media landscape has been deliberately engineered to protect large media firms from competition, so claims that we have had to protect Australians from monopolists in the broadcast media with ownership controls have always been somewhat disingenuous.

I would like to make a few points, however, about media diversity in this light. The relationship between ownership diversity and content diversity is non-linear. Parliament might act on one without necessarily changing anything about the other. Given the plentiful media choice we enjoy today, there is a more fundamental conceptual issue, however, that the Senate ought to grapple with when it considers questions of ownership and diversity—that is, the distinction between diversity of availability and diversity of choice. There ought to be no disagreement that a plurality of voices is available to Australian media consumers. There is a near-infinite range of news and views distributed via the internet—and, again, the effect of social media should be front of mind here—but it is often claimed that, despite this choice, many Australians still only listen to a few radio stations, read a few newspapers and watch a small slice of mainstream television, uninterested in the amazing media things going on around them. If this is the real problem consuming parliament’s attention then senators should realise that they are adopting an approach which is fundamentally paternalistic, asserting that despite the best efforts of entrepreneurs and independent producers Australians are still watching the wrong things and policy is needed to change that.

I would like to make two final observations: first, it is not the responsibility of the Australian government, nor Australian taxpayers, to find new business models to support legacy media; second, any consideration of regulatory changes should be assessed in the context of the media landscape as a whole, including some consideration of the policy purposes of the more than $1 billion we spend on the ABC. These reforms before parliament are, in our view, very welcome, but the hard work of reforming Australian media regulation to adjust to this new world, which would include things like structural changes to spectrum allocation, the elimination of red tape like antisiphoning laws and content standards, unfortunately has not begun.

Turnbull’s Policies Aren’t Liberal, They’re Incoherent

It’s hard not to conclude that Bill Shorten has the measure of Malcolm Turnbull. Policy after policy the Government is chasing the Opposition, rather than leading it.

For instance, this weekend’s talking point – negative gearing – is only on the table because Labor announced their negative gearing policy in February.

The Government’s reforms to the Australian Securities and Investment Commission are obviously because Labor called for a royal commission into the banks.

The assistant treasurer, Kelly O’Dwyer, announced a new public register of shell companies last week. Does anybody believe the Government would be so keen on this issue if Labor hadn’t made corporate tax avoidance a centrepiece of their economic message?

Labor declared earlier this year that it would hike tobacco taxes. Lo and behold so will the Coalition.

And the mooted superannuation reforms we heard about last week appear to be specifically calibrated to trump Labor’s proposal. Where Labor will increase taxes on those earning more than $250,000 a year, the Coalition will increase taxes on those earning more than $180,000.

These aren’t marginal issues: if the leaked script for the post-budget advertisements is correct, multinationals, tobacco and superannuation are exactly what the Government wants voters to think about.

More damningly, those three budget centrepieces all constitute tax hikes. (Any policy that increases government revenue is a tax hike, no matter how it is dressed up in the language of “loopholes” or “concessions” or “savings”. The Australian commentariat can be embarrassingly gullible when it comes to political euphemisms.)

If the political parties were only ever neutral policy shops freely picking and choosing ideas from across the political spectrum this wouldn’t be remarkable. Simple models of political competition suggest that in a two party system, party policies are likely to converge.

But the Coalition is not supposed to be a neutral policy shop. The Coalition is supposed to be – indeed, professes to be – the low-tax party, reducing the burden of government on the citizenry rather than increasing it.

Shortly after becoming Treasurer, Scott Morrison declared that Australia had a spending problem, not a revenue problem. Language ought to mean something. If our budget problem is not a revenue problem, then why are revenue grabs at the centre of the Government’s economic message?

Messiness in policy formation can always be overlooked … But messiness in policy direction is harder to ignore.

Prime ministers usually set the standards by which they are judged. Tony Abbott was unable to deliver the steady government he promised after the turmoil of the Rudd-Gillard years, and surrendered his “freedom wars” less than a year into office. Turnbull set his standard – to lead a “thoroughly Liberal government” – at the moment of the spill. It is a standard he has yet to live up to.

On the positive side of the ledger, there was the successful effort this month to abolish the Road Safety Remuneration Tribunal. This price-fixing regulator was established by the Gillard government yet left untroubled by the Abbott government.

But on the negative side of the ledger we have tax hikes and new spending promises, the latter amounting to $10 billion of expenditure announced since Turnbull took power. And the bevy of new powers being granted to ASIC will also represent a substantial increase in the regulatory burden – and a substantial empowerment of the regulatory state.

The Turnbull Government’s policy suite isn’t thoroughly Liberal – it’s incoherent.

Messiness in policy formation can always be overlooked. Government is a human enterprise not a divine one. And few voters are engaged enough in political news to identify complication and contradiction before policies are formally announced. But messiness in policy direction is harder to ignore.

This is one reason why Bill Shorten looks more electable by the day. To Labor’s credit, they have announced a suite of policies that fit together nicely and tell a coherent story about the world. It’s not a very pleasant story – banks are ripping off their customers, multinational corporations are ripping off the budget, rich taxpayers with large super balances are ripping off poor taxpayers – but it does give a picture of what Labor stands for and what a Shorten government will mean.

Voters still lack this information about Turnbull. After the entirely-forgettable innovation statement, the Government has been on a constant backfoot – chasing the legacy of decisions made by Tony Abbott’s team, such as the tax reform process, as much as trying to keep up with a stream of Labor announcements.

Some of this dynamic has been forced upon the Government. Leadership changes are disorderly. But not all of Turnbull’s problems have been forced by circumstance.

Turnbull needs to grab the agenda, and grab it in a way that is thoroughly – discernibly – Liberal, rather than an emulation of Labor. After all, if voters want the Labor package, why would they vote for the Coalition?

Why Anti-Bank Populism Is A Fundamental Part Of Australia’s Political Culture

It’s not really a surprise that two-thirds of voters support Labor’s royal commission into banking,as the Fairfax/Ipsos poll found yesterday. Anti-bank populism is a fundamental part of Australia’s political culture.

Back in 2012 Essential asked voters how, specifically, they would like the banks to be controlled. Ninety per cent wanted the government to fix bank fees. Eighty-one per cent wanted the government to fix the salaries of bank CEOs. Seventy-four per cent wanted to forcefully peg interest rates to the Reserve Bank’s monthly interest rate determinations.

It seems likely that voters would welcome a return to the pre-1980s regulatory regime where the government fixed interest rates and micromanaged the products and investments of the banks – where credit was scarce and you had to beg banks for a loan.

So this fortnight’s debate over the royal commission into banks and the government’s alternative – to boost the powers and funding of the Australian Securities and Investment Commission (ASIC) – is not just a minor election year spat.

It’s a revealing window into how the government changed the way it controls business over the last few decades.

The market-oriented reform of the 1980s and 1990s revitalised the Australian economy after the stagflation of the 1970s. But in the wake of that reform grew up a complex regulatory state that pleases no one.

Now control of the economy has been delegated to arms-length independent regulators. They oversee vast regulatory regimes that create uncertainty and impose heavy costs, while at the same time doing nothing to satisfy the anti-corporate populists who imagine that industries like banking have been left up to the “free market”.

We can debate how heavily regulated companies should be, but surely we can agree that the regulation should be transparent.

Take, for instance, the complaint last week in the Sydney Morning Herald by Allan Fels – himself a former regulator – that ASIC has failed to be the “tough cop” on the corporate beat because it has been too eager to sign negotiated settlements with the firms it is supposed to regulate. Fels would rather ASIC take more firms to court.

No doubt many readers nodded in approval, the report further confirming their belief that ASIC is soft and that we need a royal commission.

But the idea that the increasing use of negotiated settlements and so-called “enforceable undertakings” is a sign of regulatory softness is bizarre.

The practice of negotiating enforceable undertakings – essentially promises made by firms to do certain actions which can be enforced in court – was developed to give regulators discretion to be more intrusive, not less.

The idea is this: rather than going to court every time the regulator wants a firm to do something, it can negotiate. Negotiation is cheaper for all involved, but it also gives the regulator more power. With a negotiated settlement, the regulator can persuade firms to do more than the letter of the law would require: do this, and we won’t take you to court.

Enforceable undertakings are a big part of the “responsive regulation” idea that was supposed to strengthen the power of regulatory agencies. ASIC is a big fan of responsive regulation.

Now, in my view, this sort of regulatory practice is bad policy. Firms should know exactly what is lawful and what is unlawful. Regulation shouldn’t be a matter of discretion – it should be clear and unambiguous. Uncertainty is bad for the economy.

But it’s bad politics, too. Recall that old aphorism: not only must justice be done, it must also be seen to be done. Regulatory agencies spend their life negotiating in private with firms rather than publicly enforcing clear rules in court. No wonder voters think those agencies are a bit hopeless.

We can debate how heavily regulated companies should be, but surely we can agree that the regulation should be transparent.

Into that political void has fallen Bill Shorten and his royal commission into banks – an exercise that appears more about adverse publicity rather than a genuine desire for reform.

After all, if Shorten had any grand regulatory dreams for the sector he had ample opportunity to chase them in the three years he spent as Minister for Financial Services and Superannuation.

But it is hard to imagine a royal commission that did not recommend more regulation. They’re structurally designed that way. Lawyers tend to be more sympathetic to legal controls on market transactions than the economists that dominate most other forms of banking inquiry.

The Coalition government has its own policy to strengthen ASIC – with new powers, a new funding model, and some more resources.

None of these options is likely to resolve the deeper problem – that the discretionary, arms-length, ambiguous regulatory state offers nothing but uncertainty to firms and the public.

No wonder voters don’t have confidence in the system. No wonder they like the idea of a populist royal commission.

Are The Panama Papers Really Such A Scandal?

What, exactly, is the scandal with the Panama Papers?

You might have read in Time that it “could lead to capitalism’s great crisis” and the Guardian that it depicts “the corruption of our democracy”.

It’s easy to draw political conclusions from the leak of 11.5 million files from the Panamanian law firm Mossack Fonseca – even take a guess how it will play out in Australian domestic politics, which we will come to shortly – but put aside the hyperbole for a moment.

Is the scandal that Vladimir Putin’s inner circle has extracted billions of dollars of the wealth of the Russian citizenry and state? Or is it that they are trying to avoid paying the Russian statutory income tax rate of 13 per cent?

Is the scandal that you can accumulate incredible wealth as a member of the Chinese government? Or, then again, is the scandal that some of that fortune isn’t being taxed domestically?

Twenty-nine per cent of all active companies represented by Mossack Fonseca were set up by its Chinese offices. But this doesn’t inherently suggest criminality. Wealth in China risks expropriation by the state. Investing offshore is good risk management.

Indeed, most of the foreign leaders named in or connected to the Panama Papers come from countries that are high on corruption and low on the rule of law.

Scan your eyes over the nationalities of the “power players” in the Panama Papers. Georgia, Iraq, Jordan, Qatar, Sudan, Saudi Arabia, the United Arab Emirates, Ukraine, Azerbaijan, Syria, Egypt, Pakistan, Ghana, Morocco, the Palestinian Authority, Cambodia, Kazakhstan. This is not a list of the world’s liberal democracies.

Some are, though. The prime minister of squeaky-clean Iceland, Sigmundur Davíð Gunnlaugsson, stood down last week after he was named in the Panama Papers. When his wife invested the proceeds of a sale of her father’s business offshore, Gunnlaugsson failed to declare his interest in the company. The company also held bonds in the very same Icelandic banks that the government was responsible for winding up after the Global Financial Crisis.

But Gunnlaugsson’s true crime is hypocrisy. Having professed an Iceland-first economic policy of capital controls, retaining businesses in Iceland and protecting the Icelandic króna, it understandably galls to see his own wife utilising global offshoring to – legally – maximise her wealth.

David Cameron is having similar trouble after his father was named in the papers. All evidence suggests that Ian and David Cameron paid all taxes on the dividends they received in Britainfrom this offshore investment. But the British government has spent the last few years trying to whip up a frenzy about complex tax arrangements. Not a great look.

Still, hypocrisy is a moral violation, not a legal one.

Tax havens perform an important function by putting downwards pressure on domestic tax rates. They are the global economy’s escape valve – preventing sclerotic Western welfare states from pushing taxes up and up.

As the Cato Institute’s Dan Mitchell wrote last week, the fact that law firms like Mossack Fonseca create corporate structures is no scandal. Even though what they do is completely legal, they are now being tagged with a vague sense of criminality. But Mossack Fonseca does not acquire the money, hold the money, or invest the money. And it is required to do due-diligence on its clients.

Most importantly, for all the impressive scale of the Panama Papers (11.5 million files comes to 2.6 terabytes of data) it tells us little about the extent to which offshoring erodes the tax base of non-haven countries. It is remarkably hard to identify any serious detriment to the revenue from offshoring, as even the OECD, the multinational body pushing the crackdown on tax avoidance, admits.

This is where the politics of the Panama Papers and their actual policy significance sharply diverge.

In Australia, Bill Shorten has made a crackdown on corporate tax avoidance the pillar of his economic policy. As Lenore Taylor writes in the Guardian, Shorten is relying on the revenue gained from closing tax loopholes to fund new social spending, and close the budget deficit.

Labor thinks it can squeeze another $2 billion in revenue from a crackdown on tax avoidance, but won’t release Parliamentary Budget Office estimates it says shows this. My Institute of Public Affairs colleague Sinclair Davidson has often pointed out that the Australian government is much better at writing press releases announcing how much extra revenue it will collect from a crackdown than actually collecting that revenue.

The Panama Papers helps Shorten keep the Turnbull Government on the back foot. Even though the Coalition has tried to beat up the tax avoidance issue itself, economic populism is not a game that nominally market-oriented parties can win. As the prime ministers of Britain and Iceland have learned, the politics of offshore investments is about impressions not policy.

To be mentioned in the Panama Papers looks bad. That the Panama Papers exist looks bad. It’s the vibe. It’s the optics of the thing.

Every article on the leak has a sentence saying something like, “There are legitimate uses for offshore companies”, but who reads the fine print? And in the middle of a frenzy about the super-rich and what they do in foreign, exotic countries, who would want to?

Federation Reform Is No Political Plaything

Every government dreams of reforming the federation, but dreams usually end in disappointment. Malcolm Turnbull should know this.

Consider his predecessor. Tony Abbott always had a love-hate relationship with federalism. His attitude to the states in Battlelines ranges from ambivalent to hostile. As Howard government health minister he helped orchestrate the “local” takeover of Devonport’s Mersey Hospital from the Tasmanian state government – a takeover underwritten by the Commonwealth government, of course.

But in his 2013 budget reply speech as opposition leader, Abbott suddenly declared that under a Coalition government the states would be “sovereign in their own sphere”.

It was an important moment. That phrase had been used by the Australian founders. During the 1897 federation conference Edmund Barton said the goal was “to create a system of government under which, as to over all the powers they retain, the States will be supreme and sovereign in their own sphere.”

The technical structure of our constitution says that everything not expressly given to the Commonwealth government is to be left to the states. But to say that the states are sovereign is to go further than legalities – it is to assert that the states have fields of control which cannot legitimately be usurped by the Commonwealth.

Of course, in the 21st century the states are anything but sovereign. There is no area of state constitutional responsibility that does not have the federal government slobbering all over it. These days health, education and infrastructure are all, in practice, joint Commonwealth-state endeavours. The Commonwealth dominates the collection of taxation and distributes funds for the states to spend. But funding tends to come with conditions, and the Commonwealth uses the leverage it gains from its revenue to pursue its own goals in the areas of health and education.

It is hard to imagine a system of governance worse for accountability, for transparency, even for democracy than to have one level of government raise funds and the other level spend it.

Abbott commissioned a taskforce in his own department to produce a white paper into federal reform. The taskforce produced a discussion paper and four issues papers but then quietly disappeared – the promised green paper (to be “released in the first half of 2015”) and white paper (“by the end of 2015”) never materialised.

One explanation for the quiet death of Abbott’s federation agenda was the general drift that characterised his last year in office. But part of it was almost certainly because the taskforce had thrown up some very radical solutions to the problems of Australian federalism – like removing the Commonwealth from schooling altogether, or the Commonwealth directly spending more of the money that it raises, or encouraging the states to raise more money themselves – that were a bit too bold for the Government’s taste.

There are fundamental structural problems with Australia’s federal system. Almost any solution is radical. Turnbull is not the first prime minister to propose returning income tax powers to the states, and he’s not the first to abandon it on political grounds.

Political strategists often point out that voters don’t care about which level of government is responsible for what policy area. If a road has a pothole, they just want it fixed. They don’t want to be told by a politician that it is a state or local responsibility. Newbies to federal politics quickly find themselves discussing local traffic lights with constituents rather than foreign policy.

Yes, vertical fiscal imbalance – the term which describes the disjuncture between the Commonwealth’s taxing and the state government’s spending – is an esoteric problem. But then again, the federation is an esoteric topic. Constitutional limitations on government are esoteric. Just because a problem is esoteric does not mean it is unimportant.

Unfortunately no government has successfully made these esoteric issues relevant – outlined the relationship between fixing the federation and practical policy consequences. “Stop the blame game” is a great catchphrase but it’s not quite great enough to justify major reform.

So Turnbull’s failure to win the state income tax argument against a group of self-interested premiers last week should not have been a surprise.

If, as some commentators have argued, Turnbull is playing a long game – by showing that the state governments would rather complain about being underfunded than to take financial responsibility for their own public services – then more power to him. The question is whether the goal of that long game is simply to justify reducing the amount the Commonwealth gives to the states for health and education in the 2016 budget, or to lay the foundation for a deeper reform of the federation itself.

Turnbull has a lawyer’s understanding of how Australia’s federation today looks nothing like the constitution originally prescribed, and he has a politician’s understanding of how to deal with the states. But the federation question is about more than just politics and law. It’s about how we conceive the Australian nation. It’s about whether power should be divided between states and the Commonwealth or whether we should accept the centralisation of power as inevitable. Are states sovereign? Or are they just subservient?