Are we about to get real economic reform?

So, I was tempted to start this article with ‘Dear Angus’; the ‘Angus’ in question being Angus Taylor, the new leader of the federal parliamentary Liberal party.

But, well, in our hyperpartisan world, I would have been accused of either sucking up to, or unreasonably criticising, one party or the other.

So… I’m going to say exactly what I would have said, anyway… just without addressing it only to the new leader!

Because the thing is, the economic challenges Australia faces aren’t partisan political ones.

Unfortunately, our politicians are. And that’s kinda where the problems start.

To be a little fair, all politics tends to be ideological or philosophical to a greater or lesser extent. That’s natural.

People tend to coalesce around their common views of the world, their common interests and their common ideas of how to improve things.

That’s how parties end up with broadly agreed worldviews on what’s important and what policy options should be considered.

But that breaks down in two important ways.

First, ideology tends to trump (no pun intended, but it’s also not inaccurate) pragmatism and evidence. If you choose to see the world a certain way, and you want to see the potential solutions through that prism, you’ll be wilfully, or sometimes subconsciously, blinding yourself to other options which may be superior.

Secondly, and maybe more depressingly, policy is too often the servant of politics. That is, our current and would-be elected representatives are often only too happy to sell us poor policy because it’s electorally popular, or because it’s seen – however incorrectly – to be addressing a very real issue.

Take both major parties’ claimed ‘solutions’ for housing affordability:

The Labor party juiced house prices at the bottom and middle of the market by uncapping the First Home Buyers Deposit Guarantee. Dressed up as help for ‘affordability’, the turbocharged deposit guarantee just injected more demand into the market and pushed prices up, as demonstrated by research from property research firm, Cotality.

On the other side of the chamber, the Liberal and National Coalition wanted to improve ‘affordability’ by encouraging people to access their Super to buy a home. Which… would also simply have pushed prices up.

Both were dressed up as ‘affordability’ measures that did / would have simply pushed prices up, making housing no more affordable… but providing a nice political ‘solution’ to sell to the electorate.

And then you have populist politicians on the left and right arguing for seemingly attractive policies that are economically simplistic, wrong and play on the emotions (and too often, prejudice) of the electorate.

(By the way, can I gently say that if you think their side is populist but yours isn’t, you might need to open the other eye!)

But that’s enough about the politics. True, it’s a pretty big mountain to climb before policy can be implemented because it’s in the national interest, but let’s for a second imagine we can scale that particular obstacle.

The reason I was going to start with ‘Dear Angus’ is that we have a new leader, unburdened with policy legacy, and who is talking about some of the economic challenges that face us.

Yes, it’s easy for anyone to do that from opposition. And yes, there have only been motherhood statements so far. I’m not here to praise or condemn Angus Taylor, but rather to use the possibility of some new policy options as an opportunity to hope for better economic conversations in our politics.

Do you remember how little discussion there was from the majors on tax, or the economy, at the last election. Oh lots on the ‘cost of living’, but that was populism, not economics.

Why populism? Not because inflation isn’t real – it absolutely is. But because the ‘solutions’ were like proverbial band-aids. Useful, to deal with the injury, but absolutely no help to address the (ongoing) cause.

Now, I’m not going to claim to have all of the answers. But if the new Liberal leader does come up with differentiated policy solutions (not just the different slogans from the last election), then we’ll be able to have a real policy debate. And the government will also have to decide whether it wants to make policy changes, too.

Call me Pollyanna, but this might actually mean economic policy is actually up for discussion and improvement, whatever your politics.

Too much to hope for? Maybe. But below are some areas that I hope either or both parties bring to the table, either to gain an advantage, or kicking and screaming – it doesn’t matter, as long as they’re live discussions.

First is the very structure of government spending. The current bipartisan view seems to be that running endless deficits is fine.

Yes, we have an inflation problem and a federal parliament that has been happy to run endless deficits (and to project the same for the future) – adding to demand while the Reserve Bank has been trying to reduce it.

The Federal Budget, when constructed properly, has ‘automatic stabilisers’ – adding to demand when it’s needed (think: welfare spending that rises when the economy contracts), and reducing demand when it’s not (think: tax revenues that rise when company profits boom and unemployment falls).

When government adds to demand, in that scenario, it (appropriately) runs a deficit. When it’s subtracting from demand, it will record a surplus. And, over time, the two should roughly cancel each other out.

It’s not rocket science. It’s not even controversial. But it’s easier for governments to run endless deficits so they can keep spending on stuff we might vote for, so they make no serious effort to fix the problem.

Worse, we’ve become so used to it, and to having our votes bought, we’ve stopped demanding it.

We need the Budget to be in ‘structural balance’ so those automatic stabilisers can work the way they were intended.

(And it also means our national finances will be in ruddy good health the next time we’re confronted by a recession, pandemic or other unexpected external shock.)

Next, the same approach must be taken when it comes to State and Territory finances. As the International Monetary Fund said the other day (quoted in an AFR article):

“Should state spending continue to accelerate, risks include inefficiency due to rising construction costs and additional credit rating downgrades leading to higher interest expenses.

“As the Commonwealth is viewed as a de facto guarantor of state debt by some credit rating agencies, higher sub-national debt could eventually impact Commonwealth borrowing costs.”

Not only that, of course, but the ‘automatic stabilisers’ work – or don’t – at a State, as well as Federal, level. We need economic policy working together… not at loggerheads.

Then, both related to the Budget balance and for its impact on economic growth and prosperity, we have the mix of taxation and government spending.

Addressing the Budget means addressing both sides of the ledger, but it’s also important to make sure we have spending and tax settings right because of their impact on the economy.

How? Here are some starters for ten:

– We should be discussing increasing the GST and reducing income taxes (with full offsets for welfare recipients and low income earners).

– We should be removing dozens of tax deductions that are distortionary – and too often, politically motivated – and make accountants rich (sorry, accountants), using the proceeds to lower marginal tax rates further.

– We should be supporting those with disability, but junking the NDIS structure. A three-sided market where the payer, service provider and recipient are each different people is ripe for overcharging at least, and outright fraud at worst.

– We should pursue non-ideological efforts to remove/reduce wasteful government spending and duplication.

– We should take the same approach to ‘red tape’ – too often a political pejorative – to actively reduce the government burden on business where possible, to help boost productivity.

– We should increase resource rents and royalties and use the proceeds to fund a Sovereign Wealth Fund – turning one form of eternal assets (minerals and hydrocarbons) into another (financial) for the benefit of all current and future Australians.

– We should quickly and significantly reduce the rate of population growth, through non-discriminatory means, to rapidly improve housing affordability.

– We should absolutely resist the self-inflicted wound of imposing tariffs or subsidies.

In sum? Populism – the amplification of grievance and the proposal of simple-but-wrong ‘solutions’ – would be a terrible waste of the opportunity to make change. But real, grounded, pragmatic, evidence-based policies could meaningfully improve the standard of living of the average Australian over time, and avoid making things worse for our kids.

It’s not all I’d do, necessarily. But I reckon this is most of the problem and opportunity. And a bloody good start.

For the record, too, I’m not a ‘big government’ or ‘small government’ guy. To my mind, government should simply do the things that the market can’t or won’t do (well). The resultant size should be an output from the conversation, not the input. Anything else is, in my view, just ideology.

A reminder, too: this isn’t about policies that only the new Liberal leadership should adopt. I’d be very happy for either or both sides of politics to jump on the bandwagon; frankly, it’d be better if it was bipartisan, because that would stop the sniping and the fear campaigns that inevitably follow new policy announcements.

The risk, of course, is that they both just play popular/populist politics, instead. It’s seductive, but terrible for the country.

How about it Angus? Anthony? Jim? Jane?

Do it for the country?

Fool on!

The post Are we about to get real economic reform? appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.