The Economic Case for the Abbott Government

The first law of governing is that you can’t spend what you can’t raise through taxes and borrowings; and the second law is that today’s borrowings have to be paid for—with interest—by tomorrow’s taxes. Governments, like households and businesses, have to live within their means. Although governments have some unique capabilities, in the end, they can’t spend any more than taxpayers are prepared to pay for.

With more than $250 billion of cumulative deficits under the former Labor government, the need for budget repair was the constant refrain of the Abbott opposition and the task of budget repair was the most important work of the Abbott government. We were far from fully successful but made a determined effort. Certainly, no fair-minded judge could accuse us of shirking the challenge.

In 2014, launching Paul Kelly’s book on the Rudd–Gillard era, I said that the mission of the Abbott government was to prove that the age of reform had been interrupted, not ended; and that the Rudd–Gillard years were an aberration, not the new normal. To then lose the prime ministership in a party room coup was to repeat recent history, not to change it. Still, for two years, the Abbott government squarely faced up to our nation’s challenges and did much that will stand the test of time.

We stopped the boats—which none of our critics thought could be done. We repealed the carbon tax and the mining tax—which, like all new taxes, were supposed to be forever. In short order, we finalised the Korea, Japan and China free-trade agreements—which had gone nowhere for the preceding ten years. We met new national security challenges at home and abroad with a strength and sureness that was noticed internationally. And we began the critical task of budget repair. This was achieved despite a hysterical opposition, a populist Senate cross bench, a poisonous media—and, as shown by the very well-organised September 2015 spill, some senior members who didn’t want the Abbott government to succeed.

As a citizen paying a mortgage, let alone as a senior minister working to a budget, I had always understood very well that everything has to be paid for. Every single thing government does—maintaining the police and armed forces, administering justice, paying for social security and facilitating schools and hospitals—all has to be funded by taxpayers. So ensuring that government spends no more than it really must is not just an economic imperative; it’s also a moral one. It’s the respect that government owes to taxpayers, for whom every dollar is hard-earned.

The stronger the economy, the easier it is to fund and execute all the work of government and the easier it is for people to have good and fulfilling lives. The economy certainly isn’t a government’s only concern or, always, even its prime one; but because the strength of the economy impacts on everything, the capacity to be a strong and prudent economic manager is the most important qualification to be in office.

During the 2013 campaign, I was very clear that the objective of a new Liberal-National government would be to build a “strong and prosperous economy for a safe and secure Australia”. A strong and prosperous economy was needed to deliver the “hope, reward and opportunity” that people invariably want for themselves and their families. Far from being a political cliché, this was the shorthand summary of a detailed plan developed in opposition.

The key to a strong and prosperous economy was getting government spending down so that tax cuts could responsibly be delivered. This, in fact, is the constant challenge of government: keeping its own spending under control so that tax can be low and private-sector confidence can be high.

Early on, the Abbott government showed its economic mettle. Refusing to offer further subsidies to chronically unprofitable car makers when Holden and Toyota announced, around Christmas 2013, the end of production in Australia; declining to extend a loan guarantee to Qantas when it claimed its future was in jeopardy; and telling SPC Ardmona to look to its parent company, rather than to government, for a bailout when its closure was a risk to regional Victoria, meant that “the age of entitlement was over”, at least for business welfare.

These were not easy decisions. They were very vigorously debated inside the cabinet. Well before the 2014 budget, they demonstrated the government’s conviction that our job was not to pick winners or to prop up losers; it was to put the best system in place and then allow businesses to stand or fall on their own merits.

The Abbott government’s car industry decision will ultimately save taxpayers upwards of half a billion dollars a year. As its latest results show, our Qantas decision forced the unions to accept that their members’ jobs required their employer’s profitability. And our SPC decision forced the company to innovate rather than to continue products that had gone out of fashion.

Demands for job protection had not only led previous governments into wasteful subsidy; they’d also complicated successive governments’ attempts to make trade easier. There is, after all, much greater public support for more exports than for more imports—yet we can’t expect other countries to reduce their barriers to our goods and services if we don’t likewise relax ours against theirs.

Very soon after the election, I announced the government’s intention to finalise free-trade agreements with Korea, Japan and China within a year. As all these negotiations had been becalmed for the best part of a decade, this was a risky pledge to make; but thanks to Trade Minister Andrew Robb’s relentlessness, we got there in fourteen months with the most comprehensive free-trade agreements that any of these countries had yet made.

Freer trade means more trade; and more trade, ultimately, means more jobs. Freer trade boosts productivity by enhancing competition and that ultimately means higher wages. This is a hard message for local employers and for workers facing stronger overseas competition, but the alternative is less efficient local business, higher costs, worse products for consumers and, in the long term, a weaker economy.

After concluding its own free-trade agreement with China, for instance, New Zealand’s dairy exports had quadrupled while Australia’s had stagnated. The Abbott government’s readiness to do the best deal reasonably available, rather than wait for the perfect one, enabled our own bids for free-trade agreements to be concluded; and there’s no doubt that Australia will be a more prosperous economy as a result.

Likewise, in workplace relations, the Abbott government swiftly moved to reform the union movement in a pragmatic, two-step process that would lead to reform of workplaces.

Of course, it would be better if penalty rates didn’t force businesses to close on Sundays and public holidays. Of course, if businesses had more power to fire, they’d also have more power to hire. But the case for change needed to be made: especially to low-paid workers whose penalty rates allowed ends to meet; and to vulnerable people with insecure jobs; so we established a Productivity Commission inquiry to build the case for further reform.

At the 2013 election, we’d sought a mandate for a registered organisations commission to subject union officials to the same standards of governance as company directors; and for a re-established Australian Building and Construction Commission to be a tough cop on the beat for large projects regularly subject to union blackmail. We’d also promised a judicial inquiry into union corruption.

Now that the Heydon Royal Commission has provided an abundance of evidence to justify these policies, it’s hard to see the legislation once more being blocked in the Senate. The cross benchers have the justification they need; and even a CFMEU-influenced opposition is unlikely to risk a double-dissolution election defending union thugs.

These aren’t the workplace changes that the most committed reformers typically seek—but they were the ones most likely to pass this Senate. Higher-calibre union officials would be more likely to enter into constructive negotiations with vulnerable employers. Further, an intimidation-free building industry, on past evidence, would likely be at least 10 per cent more efficient, saving consumers upwards of $5 billion a year.

Wherever the Abbott government had comparative freedom of action—for instance in national security or foreign policy—it was largely successful. Even in economic policy—which often required the passage of legislation through a difficult Senate—much was achieved. Indeed, one of the strongest endorsements of the Abbott government’s economic policy has been Malcolm Turnbull’s pledge to maintain it.

The abolition of the carbon tax removed a $9 billion a year economic handbrake. The abolition of the confidence-killing mining tax was the clearest possible indicator that, under the Abbott government, Australia really was “open for business”. With the scrapping of its predecessor’s tax hits on educational expenses, on vehicle leasing, and on bank account deposits; and with its reductions in tax for small business and the small business tax write-off for assets under $20,000, the Abbott government demonstrated its tax cutting credentials.

Resolving the decades-old argument about Badgery’s Creek as Sydney’s second (and Western Sydney’s first) airport was another sign of the government’s determination to get things done. Just two years earlier, the former government had spent millions re-investigating alternative sites to delay a decision past yet another election.

The Abbott government’s pre-election pledge to reduce the public service headcount by 12,000 in three years was attacked as unachievable but Minister Eric Abetz managed to cut numbers by 14,000, or almost 10 per cent, in just two years without any disruption or diminution of services. As well, almost 300 unnecessary government agencies, boards or advisory groups were abolished or merged (a 25 per cent cut); and there was a reduction of almost $3 billion a year in red-tape costs, as assessed by the Office of Best Practice Regulation.

Despite the Senate’s ongoing failure to pass some important measures from the 2014 budget, much did pass, invariably after protracted negotiation, so that more than $50 billion of savings over the forward estimates were achieved.

Employment growth—the best sign of economic optimism—is on track to meet our election pledge of a million new jobs within five years. Just 23,000 more jobs were created in 2013 but this rose to 175,000 in 2014 and 300,000 in 2015, according to the latest ABS data. The Abbott government’s economic measures were succeeding, despite difficulties in the Senate and despite the sharpest collapse in our terms of trade in living memory.

People knew we were serious about economic reform because we were prepared to be unpopular if the national interest demanded it. As was pointed out on the afternoon of September 14, 2015, the Abbott government had been behind in thirty Newspolls in a row: we’d been behind, in fact, since the 2014 budget. Yet the 2014 budget had been our bid to ensure that long-term spending was at least matched by long-term revenue.

It was our attempt to repair the structural budget challenge Australia faces, which sky-high commodity prices had partly papered over under Labor. The poll-measured unpopularity of the Abbott government, in other words, was not due to any shirking of responsibility but to our determination to do our duty as a government by getting our own spending under control. We were prepared to risk deep unpopularity in order to do what was necessary in the long-term national interest.

Judging things by polls, many commentators have identified the 2014 budget as the Abbott government’s biggest mistake. I regard it more as a badge of honour because it showed that we were serious about long-term budget repair and could therefore be trusted with the long-term economic management of the country. I can remember saying, late in 2013, at the beginning of our first budget process, that we should savour good polls because the job before us meant that we’d be deep in poll deficit the following Christmas.

It was also claimed on September 14 last year that the government lacked an economic narrative. In fact, the government’s economic narrative had been clear from the beginning: lower taxes, less regulation and higher productivity; but that necessarily meant getting debt and deficit under control by responsibly restraining government spending: by cutting it where necessary, by refraining from increasing it where possible, and by striving in all areas to reduce its rate of growth.

In its May 2013 budget, the Labor government had claimed that the 2013-14 budget deficit would be just $18 billion. By the pre-election economic statement, this had become $30 billion; and, by the mid-year statement in December, with various hidden costs brought to book, the expected deficit stood at $47 billion.

On Labor’s budget trajectory, even with no new spending decisions, with no unexpected further deterioration in the terms of trade and with no return of “bracket creep” to taxpayers, there would be $123 billion in deficits over the forward estimates, with debt peaking at $667 billion early the following decade. The essential problem was that previous governments, especially between 2007 and 2013, had locked in permanent spending on the basis of what turned out to be temporary revenue.

Plainly, this was unsustainable. Before the election, I’d said there was a “budget emergency”. If anything, the budgetary situation was even worse than we’d feared. Steadily worsening terms of trade—and the risk of more to come—had made budget repair even more urgent, post-election, if “debt-and-deficit as far as the eye could see” were not to sap the capacity of government and erode Australia’s economic vitality.

Hence, the objective of the Abbott government’s 2014 budget was to produce a surplus of 1 per cent of GDP within a decade but to do so in ways which structurally reformed the economy, kept faith with our pre-election commitments and gave people a sense of confidence in Australia’s long-term economic future by demonstrating a capacity to live within our means.

The key measures of the 2014 budget meant that the workforce would grow, productivity would increase, the economy would strengthen and, on Treasury’s then-best forecasts, the budget would be back to broad balance in four years with peak debt halved. Each big measure was an important structural economic reform, as well as a saving designed to build over time with only a relatively modest initial impact on households.

The point of indexing pensions to CPI was to slow down the growth of social security as a percentage of GDP despite an ageing population. Reducing government support for two-parent-one-income families once the youngest child was at school would increase female participation in the workforce. Deregulating universities would increase their efficiency and their international competitiveness. Introducing more price signals into Medicare would help restrain over-servicing. Reducing the rate of growth in Commonwealth funding for state government-run public schools and public hospitals would force the states to seek efficiencies in organisations which account for nearly 10 per cent of GDP. And expecting school leavers to be learning or earning—and not on the dole—was a further measure to boost participation and productivity.

Over time, the Abbott government was determined to spend less on short-term consumption and more on long-term investment: hence the very large long-term boost to medical research as well as unprecedented Commonwealth spending on infrastructure.

Overall, it was a fundamentally fair budget because it sought to end the intergenerational theft involved in piling up debts for our children and grandchildren to meet. It asked this generation to tighten their belts a little so that future generations wouldn’t need to tighten theirs a lot more. As the Treasurer said on budget night, don’t ask what this budget will do for you; ask what it will do for our country. The temporary budget repair levy on people earning over $180,000 a year—who were less impacted by the savings—was to ensure that everyone carried some of the burden.

At every point in the Expenditure Review Committee process, Joe Hockey and I had been careful to avoid breaking promises. For instance, we’d promised “no changes to pensions”; that’s why lower indexation was not to begin until after the next election so voters could deliver their verdict on it.

In speeches in opposition, echoing former Labor national president Warren Mundine, I had said that young people should not be able to leave school and go straight on the dole. And we had specifically promised during the campaign (and been much condemned for it) not to continue Labor’s massive beyond-the-forward-estimates funding increases to schools and hospitals.

A more difficult issue was my “no surprises” commitment. There had been no election commitment not to introduce a Medicare co-payment but there had been no pre-election debate about it. Likewise, we hadn’t made specific commitments not to deregulate universities but it certainly hadn’t been flagged pre-election either.

Another difficulty was the reduction in family tax payments for stay-at-home mums coming on top of my commitment—through the 2010 and 2013 elections—to a paid parental leave scheme giving women their real pay for six months rather than the minimum wage. There had been no commitment not to change family payments but, coming on top of the “pro-working mums” PPL policy, this struck too many of my colleagues as too hard on traditional families.

It’s become accepted wisdom that no one had expected a tough budget in 2014. We considered a tough end-of-year “mini-budget” in 2013 but decided against it to avoid a pre-Christmas hit on business confidence. We could, perhaps, have made better use of the Commission of Audit report had it been released earlier and more widely debated. Perhaps because we were “hastening slowly”, the pre-budget fear expressed in Liberal Party focus groups was actually that we’d “squib” the challenge of budget repair rather than tackle it too vigorously.

Given its importance, it might have been tactically wiser to have been talking about budget repair as strongly post-election as we had pre-election and before we’d finalised the further structural measures needed. Still, my strong instinct was that people would accept tough changes, including changes that hadn’t explicitly been flagged, because getting the budget under control had been such a big part of our pre-election pitch.

Especially after we had rejected the business subsidy requests of the type that previous governments had regularly approved, a tough budget should have been predicted. The problem was less that the budget was tough but that some of its tough measures failed to pass the parliament. Announcing tough measures is the mark of a strong government but struggling to implement them can make it seem weak.

On many occasions, senior members of the government discussed the best ways of dealing with the cross bench. As it happened, cross bench senators were offered weekly meetings with Senate Leader Eric Abetz. They had an abundance of ministerial briefings (ministers Hunt, Cormann and Morrison were especially assiduous). Joe Hockey visited most of them in their electorate offices. There were dinners, including with me—but to little avail. Indeed, it was Clive Palmer’s subsequent boast that he’d destroyed the Abbott government!

To be fair to the cross bench, most measures for which we had a specific mandate (such as the repeal of the carbon and mining taxes and the end of the schoolkids bonus—although not, so far, workplace changes) eventually passed the Senate. The problem was individually unpopular measures for which there was no specific mandate other than an overall pledge to bring the budget back into surplus.

Nearly two years on from the 2014 budget, getting spending down remains the critical issue. Contrary to Keynesian orthodoxy, as recent UK experience suggests, reducing deficits is the key to increasing private-sector confidence and unlocking more prosperity. It’s also the key to tax reform because, without lower spending, any tax changes must either increase the overall tax burden or further increase the budget deficit.

The Coalition won the 2013 election despite promising tough measures: to abolish the schoolkids bonus and the low-income supplement, to delay employer-provided superannuation benefits and to reduce Labor’s promised funding boost to schools and hospitals beyond the next few years. I’m confident that we could have won the 2016 election with a program of budget savings and lower tax.

A credible savings strategy is essential for a credible tax strategy. Shifting the burden of tax from earning to spending makes sense but it’s hardly reform if it ends up increasing the overall burden of tax. No country, after all, has ever taxed its way to prosperity.

Changes to the GST and to the responsibilities of different levels of government so that people know who to blame when things go wrong is well worth considering. The Abbott government was canvassing this through the tax and federation reform white papers. But the only way to provide a tax cut rather than a tax shift is to get spending down; hence the need to implement reforms that generate savings.

In September last year, the Abbott government was just beginning the election policy process. The likelihood is that we would have gone to the election seeking a mandate to reduce or eliminate some of the one-off payments that seemed defensible with surpluses of $20 billion but not with deficits of $40 billion; and further to tighten eligibility for ongoing payments. After all, it’s hardly fair to ask taxpayers on modest incomes to subsidise people who could readily do more for themselves. With further budget savings in place, I was confident that there could be income tax cuts during the next term of parliament.

Even if the fate of the Abbott government owed much to the particular personalities that comprised it, its vulnerability-in-spite-of-its-record lends weight to Paul Kelly’s thesis that good government is becoming more difficult than ever. As the head of the European Commission recently observed, “We all know what to do; we just don’t know how to get re-elected after we’ve done it.”

If governments and leaders are required always to be ahead in the polls—as well as to win elections—tough-but-necessary decisions will rarely be taken. Apart from being strong on national security, in Australia’s current circumstances, the one absolute requirement of good government is the readiness to reduce its own spending. Yet cutting benefits that people merely anticipate, let alone benefits they already have, is never popular. At most, it might grudgingly be respected on election day.