The latest federal budget in Australia by the Liberal Party was a real break with the recent past in which politicians were reluctant to offend any large group of voters and in which the status quo with respect to entitlements was avidly kept. There was a bit of playing around with extra money under Labor – spent on projects like the NBN – and there were some attempts at taxing the richest sectors more, such as the carbon tax, but it was largely a case of ‘All quiet on the Western front’.
This budget was different and seems to herald a shift in orientation of our political elites, not just the Liberal Party. What seems to have happened is that the political elites now take their cue from well-organised interest groups, to the detriment of the unorganised majority, effectively trailing the US by about a decade. The US saw the same move towards a ‘money talks’ society about 10 years ago, including the lifting of the Glass-Steagall laws that were meant to prevent the kind of financial piracy that lead to the GFC. In the US the trend is again reversing, but here we are just getting to the crest of money-talks politics. This is dressed up as going towards ‘small government’, but in reality we are talking about Government for the few. It is an inequality increasing agenda that rewards topic-specific organisation. Let me expand.
As Ross Gittins has pointed out in a whole set of articles on the budget, the headline changes are quite dramatic for the majority, especially for young poor people: the Gonski reforms, benefitting the least able within the schooling system, have been axed; the Carbon Tax, a tax mainly on a couple of big firms (mines and electricity generators), has been repealed; the age-pension, which is one of the main transfer programs, has now been indexed to inflation rather than average wages, which implies a 2% reduction in relative terms per year and 25% within about 12 years; the public school system and the hospitals will similarly see their commonwealth subsidies indexed to inflation, ensuring the same 25% decline in about 12 years; the cuts in parenting support similarly hit large parts of the population, whilst the effective halving of the unemployment benefits for the young (via the 6-months-on, 6-months-off rules) are estimated by the Department of Social Services to eventually impoverish close to half a million people.
One might see all this as indications of a move towards ‘small government’ and ‘starving the beast of government of funds’. That is certainly the storyline kept up by the Coalition and one that business economists bandy around also. It was the story of the Bush years in the US. If you look closely though, you will find it is not about small government at all. For you would have missed all the areas where government just got bigger. Substantially bigger. So look at the other changes to see the full picture.
In terms of small fry, the government has increased its budget for infrastructure and armament by several billion a year, benefiting a few large construction companies and arms dealers.
The more radical increase in government spending comes via the liberalisation of the Hecs fees though: this can be expected to double if not treble the government subsidies for education in terms of new loans, which is currently a flow of around 6 billion a year. The government could thus quite possibly lend out an additional 10 billion AUS a year in coming years, or 50 billion over the next 5 years. That is an increase in the size of the government that dwarfs all the other changes, cuts or increases. It will not be counted as new government debt because of the presumption that these loans will be paid back in the future, but, as the UK experience suggests, non-repayment rates can easily go to 30-40%, particularly when the loans are indexed to nominal interest rates and hence blow up quickly for anyone who cannot repay them fast. A 40% non-payment rate would mean an effective cost blow-out of 4 to 7 billion a year, much bigger than any other item on the budget!
So just on the proposed changes to Hecs alone, one should see this budget as a massive expansion of government, not a move towards small government at all.
And one should be clear as to whom the winners and losers of this expansion will be: the losers will course be the students and their parents, which is the whole of the middle classes. The winners will be a quite small but well-organised group of top-administrators at the top 10 universities in the country who have lobbied for these changes for years. So for the benefit of a few hundred people, who wield large bureaucracies inside their universities that help them lobby politics on this topic, this government is expanding its involvement via government-backed loans quite massively.
Similarly, the axing of the Carbon Tax (something I don’t actually mind because the Carbon Tax was never going to have the effect it was supposed to have) benefits large generators and rich shareholders in London and New York and other overseas places (who own around 85% of all the shares of our biggest 3 mining firms).
The same theme of how the budget benefits very small but well-organised groups at the expense of millions of voters pertains to many other changes. Private schools for instance have not been affected by the reduced subsidies to public schools as their implicit subsidies (via tax write-offs) have been untouched. Indeed, with the temporary increase of the top rate of income tax, private schools are now subsidised more by the government, not less!
The reduction in Corporate Tax will also primarily benefit a few very large firms that make lots of profits, including those big three foreign-owned mining firms (BHP, Tinto, Extrata).
Then think of what has not been affected: there has been no move to reduce the tax write-offs used by the Super-rich; no move to unravel the medical cartels; no move to reduce the fees charged by the superannuation firms; no move against the fuel subsidies for the mining industry; no increase in accountability of financial advisers.
Worse, down the line, Gittins expects that we are looking at reductions in the marginal rate of taxation about $200,000, something that will benefit only a few percent of the population but will cost the other 99%.
We are clearly looking at the effect of years of lobbying of interest groups behind the scenes and a fundamental shift in the orientation of political elites on both sides of politics towards this lobbying, ie towards the ‘stakeholders’ they hang out with.
The writing was already on the wall in 2010 when the Labor government did not manage to push through a mining tax which would essentially have meant a grab for the profits of largely foreign shareholders (!!). It was obviously beneficial to the Australian population, but could not be pushed through due to concentrated lobbying and media efforts of the big foreign-owned mining companies. It also revealed the failure of civil society, top ministry advisers, and of academics who were caught off-guard by the media-blitz. The politicians saw ‘us’ lose.
This loss heralded a short period in which the Labor government effectively was in tax limbo-land, unable to push through any major change that would adversely affect the well-organised and the well-funded. Worse, it was co-opted to fund fanciful and inefficient projects like the NBN, which also benefited the few over the many. There were many other examples.
The shift in power that was hinted at following the battle over the mining tax in 2010 has now become much more apparent and ingrained: it seems to have become the actual policy of the government in power to do the bidding of the few. Like many newspapers, politicians are simply going with the stories that they get bombarded with, offered for free, which are the stories by the well-funded few (as well as the baby-boomers). These are our ‘Bush years’, whether or not the changes survive the Senate.
So we are looking at a shift in political influence in this country, away from the masses and towards the well-funded and the well-organised. For the moment, academics, ministry experts, and civil society, still oriented towards the wellbeing of the many, have no answer. Ministry experts who could formulate alternatives are being fired, left, right, and center. We are losing. Big time.
But what are the underlying reasons for this shift in our political elites to do the bidding of well-organised vested interests? What has eroded the relative ability of the many to have their needs represented and championed in our democracy? Where is this ‘regulatory capture’ of the government by the well-funded and the well-organised leading us as a society?
Core Economics 
Ofcourse, underlying this discussion is the fact that this is the worst received budget for many years, that many measures may not pass the Senate, and the Government could lose the next election.
A policy like HECS liberalisation has been in the policy-consciousness of the Liberals for some time now. It was official policy in 1991 when John Hewson launched Fightback. That was 23 years ago. When you talk about underlying shifts of political elites, what decade are you referring to? I think ideology has better explanatory power than the lobbying of university administrators. The Government made a judgment that the electorate would be more forgiving to an idea they’ve long held. Maybe they’re right, maybe they’re wrong.
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and what ideology would that be? I cant see any. Its certainly not a free market ideology, nor a small government one. Its not really pro business either.
Sure, debates about reforms of sectors have been present for decades. But Hecs liberalisation keeping the 2014 governance relations fixed is quite different from wholesale liberalisations under the governance structure of 1991, when there were far fewer students and academics controlled the universities. It would have been much less important in 1991 and would have had different effects.
The Hecs change is not the only current change either: across the board we are seeing a reduction in the entitlements of the many, to the advantage of the few. What is the underlying cause? ‘Ideology’ is not an answer but another way of saying you don’t know, for where would that ideology come from…
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Oh, I don’t disagree that HECS liberalisation in 1991 (or 1993 post-election) would have had different effects. That’s not really the point though – the rationale and intent of the Coalition was pretty much the same, right? Sure, anyone can make the case that a true small government policy would look different, but you can make that case about every policy ever. If existing policy doesn’t stack up to an ideal, I don’t think that’s reason to dismiss ideological influences. Nor do I think it is particularly difficult to trace either. Any interested journalist can work out who the key ministerial advisers and decision makers are and talk to them, or read what they’ve written in the past. I suspect there’s a degree of consistency here that your narrative ignores.
Now, obviously vested interests play a major role, but they’ve always done so. At its historical core, the ALP is a vested interest political party! And sure, it’s not surprising that the mining sector has a louder voice than it did 20 years ago. I just don’t see the fundamental shift you do. I see political processes playing out exactly as how anyone should expect them to. That is, governments ‘muddling through’, with interests, ideology, and sheer ignorance, playing the role they’ve always played.
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The Liberals under the long Howard years never implemented the Hecs changes, so it is hard to argue they are merely doing what they announced a long time ago. The reasons and the form are different, so it should be seen as a new policy.
Certainly, vested interests have always played a role in politics. If you like, democracy is all about organising interests in competing political parties, with shifting coalitions of interests between and within parties. What is new is that a particular type of interest has become so much more influential than before, and that this new elite seems to be able to muscle out the interests of the many. I am trying to find the common denominator in terms of just what type of interest has gained power and what the underlying reasons might have been for their ascendance. For those who feel life is good to them, it is of course tempting to believe there is no change. You need to look away often to say there is no real change. A fundamental shift? Perhaps not that fundamental: life in Australia is still good for the vast majority. The new elite seems only able to get away with what the general population fails to notice. There is a limit to such ignorance.
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The Howard Government actually attempted the very reforms we’re seeing now. This was the infamous 1999 cabinet submission leak, which lead Howard to drop the idea.
I’m in agreement with you that the changes we’re seeing are, on the whole, not good. I’m just not conceptualising it in terms of an influential ‘new elite’ – especially given the horrendous reception of the budget, which most journalists agree is unprecendented, together with the very real prospects that this could be a one-term government.
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which is my point: Howard (almost) unerringly avoided creating visible losers and tested the waters before implementing something. He was a master in honing in the potential losers of anything Labour proposed. The best example of that was when Labour hinted it would try to stop some forests in Tasmania being logged. The next day, Howard was in Tasmania being cheered by hundreds of loggers as he promised to oppose those policies. That instinct to prevent visible losers seems to have disappeared completely. You may be right that this is essentially political incompetence and will be punished at the next election and that we will be back to the previous status quo.
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O.k., let me take the bait. Yes, government is now for the few. And the few living. See today’s repeal of the carbon tax. Me thinkst the story starts in the seventies when inequality started to increase. Andrew Leigh has summarized the evidence persuasively. I think we agree on that. (I know we do not agree on the merits of the carbon tax but you are entitled to get some things wrong ;-)) And, yes, Gittins’ analyses of who stands to benefit from the budget were a good read. There is an interesting issue here, on the societal level, of when inequality becomes inefficient. That there is some such level, few would dispute. Equity is not just efficient in organizational processes. We probably agree on that one, too.
There is an additional problem that those who are rich also try to influence the societal decision processes. Murdoch comes to mind and his media empire (with his direct influence over governments as we know from the English patient; and the strong indications that Murdoch and his lackeys have tried to influence political processes here, too.) Whenever I get my morning coffee I can’t help but take a look at the DT and I often wonder in what universe they live (or maybe I.)
It is hard to underestimate how DT, The Australian, and similar sorry excuses for media, exert influence on the political process. In this context, Rinehart comes to mind and her attempts — so far failed, it seems — to reign into the editorial processes of Fairfax media. And then there is Palmer who, rather than going the roundabout way, does his bidding now directly in Canberra. Just look at the fate of the Financial Advice legislation yesterday. Or, as you already pointed out, the reductions in corporate tax, the untouched tax write-offs used by the super-rich, the ineffectual mineral tax (and the fact that minerals extraction is privatized business in the first place; there are better alternatives: See Norway. I know u know.) .
Who are the well-organized vested interests whose bidding is done? Well, looking at Murdoch and the minerals barons and the political class is a good start. I remember you writing here on CET at some point about those on the list of the richest Australians.That’s another good start. But of course, ultimately you look at many more who aspire to get into those realms. The various property “developers” (Packer!), the faceless men running the parties, and superannuation and banking industries, and what not. I think you are right, it’s money-talks politics. And it is not pretty.
Apart from money-talks politics tearing at the social fabric, it tears at the rationality of the political decision processes. it seems that for the longest time there was an attempt to make evidence-based policy and it seems to have worked reasonably well. What we see increasingly (e.g., in environmental politics, or education politics, or for that matter the repeal of the ACNC), is policy-based evidence. It is only possible because those doing the bidding for the well-organized vested interests must think they get away with it. I hope that is not true. And all the indications are, right now, that the Coalition will end up a three-year aberration for the history books.
Surely Labor and Greens will reverse many of the decisions currently being pushed through once they are back in power. The problem is, that’s not the way to run a country. That’s why you want to have some reasonable political processes that do not get hi-jacked by vested interests beyond the unavoidable minimum. And here is where the policy-based evidence, and the failure of much of the media to challenge it, have become a real problem. I can only hope that the Coalition and those well-organized vested interests whose bidding it does have under-estimated the influence of independent and social media. So far the indications are, they did. But I am not willing to bet it stays this way.
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Thanks for taking the bait! I agree with most of this, Andreas, there is indeed a conscious effort made to influence the national debate for personal gain. In order to get towards a coherent response, a plan if you like, I am trying to understand what has changed in recent decades. An understanding of what has changed, preferably in terms of economic fundamentals (marginal costs of things), makes it easier to see what can be done. And there are options on the table for societies like ours. There are different varieties of democratic processes we can choose, such as proportional representation or more direct democracy. There is a whole pantheon of regulatory institutions that have been tried in other countries. And there are new institutions we might dream up on the basis of our mental models. We are economists, to come up with plausible stories of what underlying economic realities might be responsible for the change is one of our roles.
What would your guess be as to what has changed?
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Have we established that there has been a change in recent decades?
A lot of stuff in the budget seems ill considered, but what has changed by way dialogue with professional economists?
Labor had its cadre of Sultan’s-Economists, in the past they happened to otherwise be good academic economists, and the present government has its own Sultan’s-Economists some of whom are less engaged with academia. But I’d suggest that with the exception of banking deregulation of the 1980’s governments haven’t been interested in what academic economists have to say.
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A lot has changed with respect to professional economists, I would say. The top of the Treasury has effectively been disbanded, apparently out of revenge for perceived historical sleights. There are now new heads of the Productivity Commission, the Tax Office, and the Treasury, and I encourage you check them out to see what ilk they are.
I agree that academic economists have not been at the top of the advisory pecking order for a while, but their efforts have filtered through and helped make changes. Such as Philip Clark’s efforts to get reduced prices for generic medicines. Such as the move against superannuation cream-skimming via the default super scheme (which now seems to face determined lobby-efforts to get rid of).
The victory of money is also visible in other recent appointments of key advisory or regulatory institutions, like the CMC in Queensland. They are ‘picking off’ the economic technocrats like flies. Andreas is quite right when he talks of policy-lead evidence now being the norm. The writing was already on the wall under Labour, but it has now become blatant.
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As said, imho the story starts in the seventies when inequality started to increase. The current income and wealth inequality is problematic enough and would be even more problematic if the Abbott government were to get its way in full. But the real issue is that the money-ed interests try to buy more than their fair share of influence through the media or now directly through participation in the political process (Palmer). That narrative is, admittedly, a bit simplistic but it strikes me as the most plausible mechanism that I see as being relevant.
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A lot of that change inequality is politically driven though. The easy-to-see stuff is on taxation: reduced tax rates for the top, tax-deductibility for second houses, the ability to circumvent superannuation taxes, etc. That has been going on for quite some time now.
Harder to see is that a lot of the new rich seem to have gotten there by moving the hand of (local) government. You yourself point this out when you talk about the composition of the rich: “The various property “developers” (Packer!), the faceless men running the parties, and superannuation and banking industries, and what not.”
This suggests it is not an exogenous change in inequality at all. The new rich seem to have made their fortunes through politics.
Which leads us back to the question: what shift has increased the returns to particular political investments?
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Have you followed the ICAC proceedings over the last couple of years? I think there is an answer there somewhere …
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I agree completely, the ICAC proceedings are very telling and indeed is a ‘data point’ as to what might have changed. It is not accidental that my reply to Rabee mentioned the recent appointments to the Queensland version of this, the CMC ….
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Paul,
Nice article! Let me start off by saying that a significant amount of the increase in inequality may be caused by globalization and changing technology (Average is Over). I do agree with you that rent-seeking has increased. The big benefit of rent-seeking is that you can skim a little bit of money off a lot of people, to produce massive gains for oneself without the public noticing. I would suggest two main things that could aid in our ability to fight rents.
1. More federalism: state competition for residents and capital really does reign in many excesses. Significant progress on land-use regulation, education, and medical monopolies have been made this way.
2. Independent institutions as you have already discussed.
Switzerland and Sweden both have highly localized systems of government leading to a stronger ability to resist rent-seeking.
Ravi Smith
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I think the elite theory of politics advanced by Mosca and Pareto could help with analysis. Pareto’s idea of a minimalist state and Mosca’s argument that power is gained by elites in a democracy through better organisatinal skills, something we have seen with the rise in influence of the IPA, and before that getup. The decline in union membership is key to the rise and acceptance of neoliberal views, from balanced budgets to the to dichotomy of lifters and leaners (only your economic contribution is valued). We can see fairly clearly the influence of Rhinehart, Forrest, Murdoch, Palmer et al in our political process either directly or through their proxies. Their greatest threat is a revival of the union movement, which this government is attacking through the Royal Commission.
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