How to be a thoroughly liberal government

With James Paterson

On Saturday 10 April 1954, Robert Menzies gave an after dinner speech to the Institute of Public Affairs.

The event was a private one, held in Melbourne, and Menzies relished what he thought would be the ‘last opportunity’ to speak in ‘a humane and civilised fashion about the issues before this country’ before election day, which had been set for 29 May. (Menzies knew something his audience didn’t: three days later in Canberra he would announce the defection of the Soviet diplomat Vladimir Petrov, and the 1954 election would be consumed by the Petrov Affair).

The full transcript of Menzies’ speech has now been reproduced for the first time on the IPA website and an extract is available in this edition of the IPA Review. It’s a casual but fascinating exploration of his ideas of the relationship between principle and pragmatism in politics. Fascinating for two reasons: first, it gives us a picture of Menzies as a politician and leader, and second, because it offers a guide to help a modern Coalition government navigate what Menzies saw as ‘the greatest problem in politics’.

Menzies told his audience that ‘political principle, a genuine philosophy, a genuine body of doctrine in your own mind’ was ‘the most important thing in public affairs’. People go into politics ‘because they have beliefs, because they have a faith, because they believe there is something that matters for their own country.’

In Menzies’ view, the art of politics was discovering a path through which the principle can be made pragmatic. Expediency and philosophy have to work together. This was, unfortunately, a political relationship the late Abbott government was unable to forge. On two of its central challenges — fiscal policy and freedom of speech — neither necessary political compromise nor unabashed principle were allowed to flourish. Menzies’ speech gives us a clear reflection of the ethical trials of political decision-making that the new prime minister would be wise to consult.

Spending and the Australian fiscal crisis

Malcolm Turnbull takes office at a time when the process of budget repair is sclerotic at best. The Commonwealth budget has still not recovered from the Global Financial Crisis and the decisions made by the Rudd government during those years. The Rudd and Gillard government established what seems to be a permanently higher spending pattern. Commonwealth government payments — that is, spending — as a percentage of GDP is 25.9 per cent in 2015-16, down only 0.1 percentage points from 26 per cent as it was when Kevin Rudd was launching his stimulus package. By the end of the Labor government’s time in power, spending declined to 24.1 per cent in 2012-13 — in part due to deliberate effort, in part from the recovery easing welfare rolls, and partly by some creative accounting.

Yet this rollback was hopelessly incomplete. Wayne Swan made much of his belief that ‘If we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again’, as he put it in a 2011 essay for the Fabian Society. Yet Swan never managed to achieve the ‘Keynesian’ budget balance which he repeatedly promised. This was partly because he could not commit to the necessary cuts, and partly because numerous policy decisions increased the spending burden on the Commonwealth budget. Indeed, Labor’s headline budget outlook was a lot worse than it looked on paper — many of their expensive new promises were to bite on the budget over the course of a decade, rather than in the next financial year. This is why the Institute of Public Affairs repeatedly urged the Rudd and Gillard government to bring the budget back to balance through spending cuts, and quickly.

Governments should not assume that budget deficits will resolve themselves. Overspending, once established, is hard to reverse. Special interests protect the privileges that come with new spending programs. Voters respond badly when government programs are taken away. Politicians soon learn that spending cuts are more politically costly than spending increases are politically beneficial. Australia’s fiscal crisis is one on the spending side, not the revenue side. Of course any imbalance in a budget can be attributed to both income and expenditure, so this is partly a question of competing values — should government be larger, or smaller?

But if Commonwealth government spending was at the level it was in the final years of the Howard government in 2006-07 and 2007-08, the budget would be in surplus today.

Underpinning the arguments that Australia is suffering a revenue shortfall, is one myth that needs to be disposed of: the significance of the end of the mining boom for the budget. For the last few years we’ve been treated to regular news stories reporting the precipitous decline in the price of iron ore and the billions of dollars that decline will strip from government revenue. It is true that iron ore is sharply down from where it was under the Rudd and Gillard governments — in 2011, iron ore was pushing nearly US$200 per dry metric ton, whereas in October 2015 that price is now down to US$52.

Yet the Howard government could only dream of such iron ore prices. The highest monthly price iron ore ever reached under Howard was US$36. The minerals market is not to blame for the budget’s problems. There are other reasons why Malcolm Turnbull and his new treasurer — Scott Morrison — ought to focus on government spending, rather than revenue, as they try to bring the budget back into balance.

First: Australia is not a low taxing country, both relative to other countries and in an absolute sense. As the IPA’s Sinclair Davidson and Mikayla Novak have argued over many years, when the proper comparisons — including the inclusion of superannuation, the health insurance mandate, and workers compensation to ensure comparability with countries that have different enforced retirement savings schemes — are made with other OECD countries, Australia’s tax take at 34.3 per cent is higher than the OECD average of 33.7 per cent.

Second: the government ought to be smaller than it is. A government which spends a third of the country’s GDP is spending that third unproductively. Perhaps by necessity — as public goods like courts and national defence have to be paid for — but we should not imagine that because taxpayer financed programs are necessary that they are well designed. The less tax Australians pay then the more Australians will have to spend and invest on things which suit their preferences, rather than the preferences of the political class.

The problem of tax reform

Joe Hockey can take some credit for launching a serious public debate about taxation when he released the tax discussion paper in March 2015. Turnbull and his Treasurer Scott Morrison have now picked up a tax inquiry process driven by Tony Abbott and Joe Hockey, which was in turn an attempt to turn the tax reform agenda away from Labor’s interest in higher taxes and towards the Coalition’s interest in lower taxes.

Yet a budget crisis is a terrible time to conduct tax reform. Every incentive in the public service leads towards tax increases. It’s easy to see the hand of Treasury behind the curtain here. Treasury appears to be convinced that we are an under taxed nation both in relation to our demands for public spending and in relation to our trading partners.

In a report published in October this year. the Productivity Commission became the first Australian government agency to admit that Australia’s tax take is higher than the OECD average once the proper comparisons are made. Yet Treasury still refuses to support this reasoning, allowing them to maintain the fiction that we are a low taxed, and, by implication, an insufficiently taxed, country.

In our IPA Review article ‘Be like Gough’, published in August 2012 with John Roskam, we observed that neophyte ministers are susceptible to capture by their departments, particularly when adequate groundwork for policy development has not been done before a ministerial appointment.

Treasury is both the most important department, and the most intellectually formidable (some high profile errors exposed by Sinclair Davidson notwithstanding). Scott Morrison has gained a reputation as a capable administrator and advocate for conservatism, but maintaining a distinctively free market vision against the prevailing winds of Treasury will be a challenge. It was a challenge that Joe Hockey unfortunately failed to surmount.

Ever since he took the leadership, Malcolm Turnbull has been arguing that tax reform has to be ‘fair’ if it is to be successful. This is an inarguable truism. But fairness is a matter of perception and perspective. It is not a quantitative criterion. Reducing the top income tax bracket will be characterised as unfair if it is not explained how disproportionate the fiscal burden weighs on the top taxpayers. Corporate tax cuts might be perceived as unfair if it is not explained that the burden of the corporate tax is felt by workers, superannuation portfolios and economic growth more generally.

That fairness is impressionistic rather than empirical should remind us that we’ve been here before. In fact the 2014 budget — on which Bill Shorten and the Labor Party hooked their focus on fairness — was specifically written to counter perceptions of unfairness. Hence the deficit levy—the 2 per cent tax increase levied on those earning $180,000 and above — in order to ‘share the pain’ of an apparently austere budget.

As a concession to expediency, it was a plainly unsuccessful one. It appeared to do nothing to mitigate the charge of unfairness emanating from Labor and the left-wing press, and bumped the top marginal tax rate — when added to the Medicare levy — to 49 per cent. And of course from the perspective of principle, it was a clear violation of the Coalition’s support for lower taxes — not just Abbott’s campaign promise to have lower taxes, but the Liberal Party’s fundamental belief in a lower fiscal burden on the economy.

There’s an intriguing detail in the first book published on the Abbott government after its demise, Battleground, by Peter van Onselen and Wayne Errington, that Turnbull, alongside Julie Bishop, opposed the deficit levy in the cabinet when it was proposed by Joe Hockey and Finance Minister Mathias Cormann. Yet since the spill, signs that the fairness debate was to be recontested on liberal — and Liberal — terms have been slim.

Turnbull’s communications skills have been much praised. They need to be used to clear the cobwebs around fairness and fiscal policy that have built up since the 2014 budget. This is less a question of policy development and more a question of public philosophy.

The GST should not be changed

In this light, it was of real concern that the tax debate under the new Turnbull government so quickly turned to whether the GST should be increased from 10 per cent to 15 per cent. Consumption taxes are theoretically more efficient than many of the taxes which make up Commonwealth revenue. But efficiency is not the most important principle of taxation. The goal of the tax system in a free country should not be, in the words of Jean Baptiste Colbert (French Minister of Finances during the reign of King Louis XIV) ‘plucking the goose as to get the most feathers with the least hissing’. The government should not try to obscure how much it is extracting from taxpayers.

The more fundamental problem with a GST rise is that there is little reason to believe that the tax system will emerge from any reform with a lower total burden on Australian taxpayers. It is certainly true that the possibility of a GST rise has been mentioned in relation to a possible income tax cut for the top marginal income bracket — a cut which is sorely overdue. But it is indicative that through leaks and briefings to journalists we have a very concrete idea of what a GST rise could constitute, but very little idea of the tax cuts that would be the reward for this GST bargain.

A GST rise with income tax cuts pushed into the never-never would be no victory.

It is possible to imagine a broad tax reform proposal that both reduces taxes and transitions the tax base from income onto less economically harmful consumption taxes. But seven years after the Rudd government established the Henry Review into taxation, that vision looks further away than ever. But politics is about momentum. Any suggestion of raising the GST should be stopped in its tracks as soon as possible.

Principle, expediency and free speech

When he took the leadership Turnbull said:

This will be a thoroughly Liberal Government. It will be a thoroughly Liberal Government committed to freedom, the individual and the market.

But it would be hard for a government to be ‘thoroughly liberal’ without reinvigorating the Liberal Party’s ideological disposition towards freedom of speech. The Abbott government’s decision to break its promise to repeal or reform section 18C of the Racial Discrimination Act in August 2014 was a major event, both at a political and policy level. This — coming so soon after the deficit levy — dashed the optimism that many on the free market right had for the Abbott government’s ability to turn the tide towards individual rights and economic freedom.

In public comments, Malcolm Turnbull has indicated that he is personally sympathetic to what has come to be known as the compromise position on section 18C — that is, the removal of the words ‘offend’ and ‘insult’ from section 18C’s prohibition on ‘offend, insult, humiliate and intimidate.’ As Morgan Begg points out in this issue of the IPA Review, this is the compromise position in Senator Bob Day’s Private Members’ Bill, currently before the parliament.

Thus, without having to stand in front of the Institute of Public Affairs, as Abbott did, and promise the repeal of section 18C in its current form, Turnbull has already built himself a test on freedom of speech.

If a thoroughly liberal government cannot bring itself to repeal two words of a law obviously antithetical to liberal values, then what can it do? As Menzies reflected back in 1954:

If you stand on the basis of principle you may go wrong but you will never go far wrong. You may go wrong according to the current political judgement, but in the long run somebody will be heard to say, “That was right”.

Be like Gough: 75 Radical Ideas To Transform Australia

With James Paterson and John Roskam

If Tony Abbott wants to leave a lasting impact – and secure his place in history – he needs to take his inspiration from Australia’s most left-wing prime minister.

No prime minister changed Australia more than Gough Whitlam. The key is that he did it in less than three years. In a flurry of frantic activity, Whitlam established universal healthcare, effectively nationalised higher education with free tuition, and massively increased public sector salaries. He more than doubled the size of cabinet from 12 ministers to 27.

He enacted an ambitious cultural agenda that continues to shape Australia to this day. In just three years, Australia was given a new national anthem, ditched the British honours system, and abolished the death penalty and national service. He was the first Australian prime minister to visit communist China and he granted independence to Papua New Guinea. Whitlam also passed the Racial Discrimination Act. He introduced no-fault divorce.

Perhaps his most lasting legacy has been the increase in the size of government he bequeathed to Australia. When Whitlam took office in 1972, government spending as a percentage of GDP was just 19 per cent. When he left office it had soared to almost 24 per cent.

Virtually none of Whitlam’s signature reforms were repealed by the Fraser government. The size of the federal government never fell back to what it was before Whitlam. Medicare remains. TheRacial Discrimination Act – rightly described by the Liberal Senator Ivor Greenwood in 1975 as ‘repugnant to the rule of law and to freedom of speech’ – remains.

It wasn’t as if this was because they were uncontroversial. The Liberal opposition bitterly fought many of Whitlam’s proposals. And it wasn’t as if the Fraser government lacked a mandate or a majority to repeal them. After the 1975 election, in which he earned a 7.4 per cent two-party preferred swing, Fraser held 91 seats out of 127 in the House of Representatives and a Senate majority.

When Mark Steyn visited Australia recently he described political culture as a pendulum. Left-wing governments swing the pendulum to the left. Right of centre governments swing the pendulum to the right. But left-wing governments do so with greater force. The pendulum always pushes further left.

And the public’s bias towards the status quo has a habit of making even the most radical policy (like Medicare, or restrictions on freedom of speech) seem normal over time. Despite the many obvious problems of socialised health care, no government now would challenge the foundations of Medicare as the Coalition did before it was implemented.

Every single opinion poll says that Tony Abbott will be Australia’s next prime minister. He might not even have to wait until the current term of parliament expires in late 2013. The Gillard government threatens to collapse at any moment. Abbott could well be in the Lodge before Christmas this year.

Abbott could also have a Fraser-esque majority after the next election. Even if he doesn’t control the Senate, the new prime minister is likely to have an intimidating mandate from the Australian people. The conditions will suit a reformer: although Australia’s economy has proven remarkably resilient, global events demonstrate how fragile it is. The global financial crisis, far from proving to be a crisis of capitalism, has instead demonstrated the limits of the state. Europe’s bloated and debt-ridden governments provide ample evidence of the dangers of big government.

Australia’s ageing population means the generous welfare safety net provided to current generations will be simply unsustainable in the future. As the Intergenerational Report produced by the federal Treasury shows, there were 7.5 workers in the economy for every non-worker aged over 65 in 1970. In 2010 that figure was 5. In 2050 it will be 2.7. Government spending that might have made sense in 1970 would cripple the economy in 2050. Change is inevitable.

But if Abbott is going to lead that change he only has a tiny window of opportunity to do so. If he hasn’t changed Australia in his first year as prime minister, he probably never will.

Why just one year? Whitlam’s vigour in government came as a shock to Australian politics. The Coalition was adjusting to the opposition benches. Outside of parliament, the potential opponents of Whitlam reforms had yet to get organised. The general goodwill voters offer new governments gives more than enough cover for radical action. But that cover is only temporary. The support of voters drains. Oppositions organise. Scandals accumulate. The clear air for major reform becomes smoggy.

Worse, governments acclimatise to being in government. A government is full of energy in its first year. By the second year, even very promising ministers can get lazy. The business of government overtakes. MPs start thinking of the next election. But for the Coalition, the purpose of winning office cannot be merely to attain the status of being ‘in government’. It must be to make Australians freer and more prosperous. From his social democratic perspective, Whitlam understood this point well. Labor in the 1970s knew that it wanted to reshape the country and it began doing so immediately.

The time pressure on a new government – if it is to successfully implant its vision – is immense. The vast Commonwealth bureaucracies and the polished and politically-savvy senior public servants have their own agendas, their own list of priorities, and the skill to ensure those priorities become their ministers’ priorities. The recent experience of the state Coalition governments is instructive. Fresh-faced ministers who do not have a fixed idea of what they want to do with their new power are invariably captured by their departments.

Take, for instance, the Gillard government’s National Curriculum. Opposing this policy ought to be a matter of faith for state Liberals. The National Curriculum centralises education power in Canberra, and will push a distinctly left-wing view of the world onto all Australian students. But it has been met with acceptance – even support – by the Coalition’s state education ministers. This is because a single National Curriculum has been an article of faith within the education bureaucracy for decades; an obsession of education unions and academics, who want education to ‘shape’ Australia’s future. (No prize for guessing what that shape might look like.) A small-target election strategy has the unfortunate side-effect of allowing ministerial aspirants to avoid thinking too deeply about major areas in their portfolio. So when, in the first week as minister, they are presented with a list of policy priorities by their department, it is easier to accept what the bureaucracy considers important, rather than what is right. The only way to avoid such departmental capture is to have a clear idea of what to do with government once you have it.

Only radical change that shifts the entire political spectrum, like Gough Whitlam did, has any chance of effecting lasting change. Of course, you don’t have to be from the left of politics to leave lasting change on the political spectrum.

Both Margaret Thatcher and Ronald Reagan proved conservatives can leave a paradigm-shifting legacy. Though Thatcher’s own party strayed from her strongly free-market philosophy, one of the major reasons the British Labour Party finally removed socialism from their party platform under Tony Blair was because of Margaret Thatcher.

Ronald Reagan not only presided over pro-market deregulation and tax cuts during eight years in the White House, but also provided the ideological fuel for the 1994 Republican revolution in the House of Representatives, led by Newt Gingrich, which enacted far-reaching welfare reform.

Here we provide a list of 75 policies that would make Australia richer and more free. It’s a deliberately radical list. There’s no way Tony Abbott could implement all of them, or even a majority. But he doesn’t have to implement them all to dramatically change Australia. If he was able to implement just a handful of these recommendations, Abbott would be a transformative figure in Australian political history. He would do more to shift the political spectrum than any prime minister since Whitlam.

We do not mean for this list to be exhaustive, and in many ways no list could do justice to the challenges the Abbott government would face. Whitlam changed the political culture. We are still feeling the consequences of that change today. So the policies we suggest adopting, the bureaucracies we suggest abolishing, the laws we suggest revoking should be seen as symptoms, rather than the source, of the problem.

Conservative governments have a very narrow idea of what the ‘culture wars’ consists of. The culture of government that threatens our liberty is not just ensconced in the ABC studios, or among a group of well-connected and publicly funded academics. ABC bias is not the only problem. It is the spiralling expansion of bureaucracies and regulators that is the real problem.

We should be more concerned about the Australian National Preventive Health Agency – a new Commonwealth bureaucracy dedicated to lobbying other arms of government to introduce Nanny State measures – than about bias at the ABC. We should be more concerned about the cottage industry of consultancies and grants handed out by the public service to environmental groups. We should be more concerned that senior public servants shape policy more than elected politicians do. And conservative governments should be more concerned than they are at the growth of the state’s interest in every aspect of society.

If he wins government, Abbott faces a clear choice. He could simply overturn one or two symbolic Gillard-era policies like the carbon tax, and govern moderately. He would not offend any interest groups. In doing so, he’d probably secure a couple of terms in office for himself and the Liberal Party. But would this be a successful government? We don’t believe so. The remorseless drift to bigger government and less freedom would not halt, and it would resume with vigour when the Coalition eventually loses office. We hope he grasps the opportunity to fundamentally reshape the political culture and stem the assault on individual liberty.

  1. Repeal the carbon tax, and don’t replace it. It will be one thing to remove the burden of the carbon tax from the Australian economy. But if it is just replaced by another costly scheme, most of the benefits will be undone.
  2. Abolish the Department of Climate Change
  3. Abolish the Clean Energy Fund
  4. Repeal Section 18C of the Racial Discrimination Act
  5. Abandon Australia’s bid for a seat on the United Nations Security Council
  6. Repeal the renewable energy target
  7. Return income taxing powers to the states
  8. Abolish the Commonwealth Grants Commission
  9. Abolish the Australian Competition and Consumer Commission
  10. Withdraw from the Kyoto Protocol
  11. Introduce fee competition to Australian universities
  12. Repeal the National Curriculum
  13. Introduce competing private secondary school curriculums
  14. Abolish the Australian Communications and Media Authority (ACMA)
  15. Eliminate laws that require radio and television broadcasters to be ‘balanced’
  16. Abolish television spectrum licensing and devolve spectrum management to the common law
  17. End local content requirements for Australian television stations
  18. Eliminate family tax benefits
  19. Abandon the paid parental leave scheme
  20. Means-test Medicare
  21. End all corporate welfare and subsidies by closing the Department of Industry, Innovation, Science, Research and Tertiary Education
  22. Introduce voluntary voting
  23. End mandatory disclosures on political donations
  24. End media blackout in final days of election campaigns
  25. End public funding to political parties
  26. Remove anti-dumping laws
  27. Eliminate media ownership restrictions
  28. Abolish the Foreign Investment Review Board
  29. Eliminate the National Preventative Health Agency
  30. Cease subsidising the car industry
  31. Formalise a one-in, one-out approach to regulatory reduction
  32. Rule out federal funding for 2018 Commonwealth Games
  33. Deregulate the parallel importation of books
  34. End preferences for Industry Super Funds in workplace relations laws
  35. Legislate a cap on government spending and tax as a percentage of GDP
  36. Legislate a balanced budget amendment which strictly limits the size of budget deficits and the period the federal government can be in deficit
  37. Force government agencies to put all of their spending online in a searchable database
  38. Repeal plain packaging for cigarettes and rule it out for all other products, including alcohol and fast food
  39. Reintroduce voluntary student unionism at universities
  40. Introduce a voucher scheme for secondary schools
  41. Repeal the alcopops tax
  42. Introduce a special economic zone in the north of Australia including:
    a) Lower personal income tax for residents
    b) Significantly expanded 457 Visa programs for workers
    c) Encourage the construction of dams
  43. Repeal the mining tax
  44. Devolve environmental approvals for major projects to the states
  45. Introduce a single rate of income tax with a generous tax-free threshold
  46. Cut company tax to an internationally competitive rate of 25 per cent
  47. Cease funding the Australia Network
  48. Privatise Australia Post
  49. Privatise Medibank
  50. Break up the ABC and put out to tender each individual function
  51. Privatise SBS
  52. Reduce the size of the public service from current levels of more than 260,000 to at least the 2001 low of 212,784
  53. Repeal the Fair Work Act
  54. Allow individuals and employers to negotiate directly terms of employment that suit them
  55. Encourage independent contracting by overturning new regulations designed to punish contractors
  56. Abolish the Baby Bonus
  57. Abolish the First Home Owners’ Grant
  58. Allow the Northern Territory to become a state
  59. Halve the size of the Coalition front bench from 32 to 16
  60. Remove all remaining tariff and non-tariff barriers to international trade
  61. Slash top public servant salaries to much lower international standards, like in the United States
  62. End all public subsidies to sport and the arts
  63. Privatise the Australian Institute of Sport
  64. End all hidden protectionist measures, such as preferences for local manufacturers in government tendering
  65. Abolish the Office for Film and Literature Classification
  66. Rule out any government-supported or mandated internet censorship
  67. Means test tertiary student loans
  68. Allow people to opt out of superannuation in exchange for promising to forgo any government income support in retirement
  69. Immediately halt construction of the National Broadband Network and privatise any sections that have already been built
  70. End all government funded Nanny State advertising
  71. Reject proposals for compulsory food and alcohol labelling
  72. Privatise the CSIRO
  73. Defund Harmony Day
  74. Close the Office for Youth
  75. Privatise the Snowy-Hydro Scheme