The major parties are readying themselves for a federal election in the spring of this year, and meanwhile, speculation around the ALP’s leadership continues to receive media coverage. For the record, I think the Party should stick with Anthony Albanese as any leadership spill would just lead the public to conclude that that type of divisions that afflicted Labor during the Rudd-Gillard-Rudd years continues. If Albo stood aside for his longstanding friend Tanya Plibersek that would be another matter. But… dream on.
But as important, or more important, than the leadership question is the electoral strategy. The Review of the 2019 election debacle concluded Labor lost the election because of a “cluttered policy agenda and unpopular leader”. The Review said this included “the size and complexity of Labor’s spending announcements, totaling more than $100 billion” which “drove its tax policies…” and “fuelled anxieties among insecure, low-income couples in outer-urban and regional Australia that Labor would crash the economy and risk their jobs”.
This has led to a predominant view across the Federal Parliamentary Party that the next election campaign should feature only 3-5 key policies. I don’t think this is viable. Labor does not get to unilaterally decide the election issues. Moreover, ALP members and the public are entitled to a full suite of policies. And unless you have that full suite in place you risk policy holes just being determined unilaterally by the relevant shadow responding to media questions. This can increase the possibility of divisions emerging because no policy has been settled by the Party. But I do agree that in its messaging Labor can emphasize fewer key policies or themes.
Affordable childcare and early childhood education have already been identified as a priority. The universality is part of its electoral appeal.
Industrial relations policies will be released shortly. These will likely emphasize what can be done to eliminate or reduce insecure work, including possibly bringing the gig economy into stronger regulation. The Reserve Bank has emphasized the economic importance of real wages increasing in Australia and the IR system has an important role to play in facilitating this.
What are the other areas that should feature in Labor messaging? Aged care reform possibly picks itself. Green jobs and energy policy, as well as social housing, are areas that have already been widely mentioned. Some, or all of, these may be bundled up into an already much-mentioned “jobs plan” which would give a unified theme to the campaign.
If Labor could find an additional universal measure- perhaps bringing key basic dental services under a Medicare-like arrangement, or something in the field of education, this would enable the campaign to focus on three or so key themes- the jobs plan and the two universals.
Nevertheless, there is no escaping that a central issue in the election will be whether Labor will seek to provide an economic stimulus to the economy that is greater than the Coalition promises, and if so, how will it fund this and at the same time defeat a Coalition scare campaign around economic responsibility, taxation, and the level of public debt.
Forget the ALP Review’s concern about the size of Labor’s proposed spending at the 2019 election. We have had a pandemic and economic crisis since then and $100 billion is now a relative drop in the ocean.
There are basically four options for Labor on its fiscal policy:
- Labor can do what it did at the 2019 election which was to try and convince voters that it is a more economically responsible economic manager than the Coalition by promising a quicker return to a budget surplus, that is, less public debt sooner under Labor than the Coalition;
- Labor can promise that its public debt will be around the same level as Coalition debt but that it will get better “bang for the buck” in terms of jobs growth by eliminating wasteful spending and reprioritizing that spending to more productive, employment-creating, or socially useful ends;
- Labor can acknowledge its public debt spending will be bigger than the Coalition’s but argue that this is necessary to stimulate job growth and that because interest rates are so low, provided the spending results in economic growth, increases in net debt will not result in debt increasing as a proportion of GDP.
- A strategy based on Modern Monetary Theory where government spending can increase without increasing debt or taxes provided that this does not cause inflation.
The problem with option 1 was that there was nothing responsible at all about Labor promising a bigger budget surplus faster in the face of an economy that was already weakening even prior to the Covid outbreak.
And contrary to what the ALP Review found it was NOT the size of Labor’s spending that drove its taxation policies. It was its commitment to bringing the budget into a larger surplus more quickly than the Coalition that drove them.
At the 2019 election Coalition tax policies were estimated to cost the budget $158 billion over the following ten years. Labor focused on cutting tax concessions and closing loopholes, which would have saved $154 billion over the same period.
But Labor’s policies resulted in a very effective fear campaign around the tax policies. And how much credit did Labor get with voters for its promise to deliver a bigger budget surplus more quickly than the Coalition? Zilch.
Labor has already dumped its policy to overhaul franking credits. What it may do with its negative gearing policy and its proposed reduction in the capital gains tax discount is less clear. But it will have to decide whether advocating significant tax changes from the Opposition, as it did in the 2019 election, is riskier than borrowing when interest rates are so low.
Changes to negative gearing and increasing capital gains tax remain sound policies. But in ‘The Write Stuff” Claire O’Neill MP concludes that increasing taxes on capital is too hard politically. I agree that the electoral record of parties proposing major structural reform to taxation from opposition is very poor. Major tax changes always create some winners and losers and it is not too hard to scare those voters who do not spend time on policy details that they may be a loser.
The prospect for such policies is better from within government, though the Resources Rent tax shows it is still difficult. You have to take measures to win over public opinion for such changes. In opposition, Labor could adopt a policy promising inquiries into inequality, or housing affordability, that would likely recommend changes to negative gearing and capital gains tax and help build community support for these changes. And even then it is probably only worth the trouble if there is a realistic possibility of getting such policy changes through the Senate.
At the moment Labor actually has a unique opportunity. Historically low-interest rates would give an incoming Federal Labor government an unprecedented opportunity to lead economic recovery through capital and recurrent investments that could increase economic growth, productivity, and labour force participation, as well as aiding the transition to a zero-emissions economy. This can be done without increasing taxes. These measures would benefit both businesses and workers and would contrast with the Coalition’s approach which lacks any comprehensive jobs plan and is based around poorly targeted tax cuts that will neither enhance productivity nor maximize consumer spending.
Oliver Blanchard, the former chief economist of the IMF, has stated that where interest rates are expected to remain below growth rates for a long time, the issuance of debt without a later increase in taxes may well be feasible. Public debt may have no fiscal cost. If interest rates remain below the rate of economic growth then a government that borrows to finance the initial spending, as well as the subsequent interest bill, will nevertheless see debt fall as a share of GDP. The Reserve Bank of Australia has publicly stated that it expects near-zero interest rates to stay at that level until at least 2024.
So option 3 above is a viable option. The problem with it is that it may require a reconditioning of public opinion around debt to ward off a scare campaign. Labor politicians may well think this is a hopeless task. There are few signs that it is interested in trying this approach. It is one thing to criticize wasteful Coalition spending of which there has undoubtedly been some. But Labor has also criticized the size of the Coalition’s deficit which it should not do if it was interested in reconditioning public opinion to be more comfortable with deficit spending in the low-interest-rate environment and an even higher level of net debt under Labor.
For example in November 2020, Shadow Fiance Minister Katy Gallagher issued a media release criticising the size of the Coalition’s deficit:
“This Coalition Government has spent the last seven years repeatedly breaking core promises made to the Australian people about delivering budget surpluses every year and getting debt under control.
But after seven years of economic mismanagement, all the Liberals have delivered so far is six budget deficits and the doubling of debt prior to the COVID-19 pandemic reaching Australia.
Just four months into the financial year the October numbers show the Budget is on track to report a record deficit in excess of $200 billion for 2021-22 with almost half a trillion dollars of cumulative deficits over the forward estimates.
Net debt has already exceeded $600 billion, well on the way to reaching the budget forecast of $700 billion.”
This indicates that option 2 above may well be Labor’s preferred option. But the problem with option 2 is whether just reprioritizing Coalition waste will be sufficient to fund Labor’s spending priorities and provide sufficient enough stimulus to the economy.
One way to shift public opinion on government debt in aid of option 3 might be to reform the government bond market.
Currently, government bonds are sold by Treasury into the primary bond market through an auction process. They are bought up by a select group of bond traders who then resell the bonds on the secondary market mainly to banks and other institutional investors. The Reserve Bank may also buy up treasury bonds in the secondary market from the banks and financial institutions, thereby increasing their liquidity in the hope that they will be incentivized to lend to business. This process is called Quantitative Easing (QE). QE also has the effect of lowering interest rates. This means the government can acquire debt far more cheaply and therefore spend more.
Labor could reform the bond market by setting aside a proportion of bonds to be sold directly to the general public. Individuals can buy government bonds. But they are only available through the stock market. They could be sold to ‘mum and dad investors through the Post Office or through banks.
Buying a government bond is an investment pretty much identical in type to a fixed-term deposit. During WWII the purchase of war bonds was promoted as a patriotic endeavor. Labor could sell Green bonds as a way of raising finance to low emissions technology projects or housing bonds to finance affordable housing. Members of the public who have savings would acquire a secure investment product with a job-creating, and socially useful, purpose. They would also acquire a financial interest in government debt.
Reform of the bond market may change attitudes in ways that economic advocacy might struggle to do, although advocacy would be needed as well. The basic message would be that federal government debt for a currency-issuing government, like Australia’s, is not the same in nature as household or private-sector debt. This is because as a currency issuer the federal government cannot go broke. Another message would be that federal government debt leads to a surplus in household and business savings and that government surplus, whether funded through tax increases or cuts to spending, reduce the net amount of money flowing to the private economy.
Option 4 is the most unlikely option. Modern Monetary Theory holds that debt or taxation revenue is not necessary to fund government spending. The way that spending occurs now is that when Parliament approves an expenditure, the Reserve Bank credits the bank account of the recipient of the spending. The decision to recoup that spending either through taxes or debt is a policy choice, not an economic imperative. The only constraint is that unless taxation or debt is used to offset the spending, then unless the spending increases the productive capacity of the economy, inflation will result.
But the extent of the deflationary environment in Australia and abroad is such that the massive expenditure on providing income support through programs like JobKeeper and JobSeeker payments has not resulted in a breath of inflation, despite the essentially non-productive ends associated with this expenditure. These types of payments have been necessary to maintain aggregate demand and support the recipients in the midst of an economic crisis. But the expenditure does not increase productivity. Labor is poised to oppose the Coalition’s winding up of JobKeeper on 28 March. Under Labor’s current (non-MMT) policy settings that must mean either higher debt, cuts in spending in other areas, or increased taxes.
MMT economists like Bill Mitchell argue that there is no need for the bond market-that offsetting the amount of money the government spends through bond issuance is a policy choice. Worse still, that the bond market is really a form of corporate welfare. The same money that the Reserve Bank creates to buy up government bonds from the intermediaries of bond traders, banks, and financial institutions through QE could be used to directly assist government fiscal policy. Paul Keating has called on the Reserve Bank to help the Federal Government with fiscal spending. But this idea has not been taken up by the government or opposition.
The main objection is that this would undermine the independence of the Reserve Bank. Its independence is said to be based on rules that only allow it to buy up government bonds on the secondary bond market. This might be regarded as just smoke and mirrors. A mere illusion of independence given that part of the stated goal is to lower interest rates to facilitate increased government spending. On the other and most mainstream economists, even the likes of Alan Kohler who has some sympathy with MMT, worry about Reserve Bank independence as the only buffer against reckless and uncontrolled government spending that will ultimately result in inflation. But Kohler has also pointed out in a recent article that debt can always be monetized by the Reserve Bank.
Kohler says “the RBA should buy all of the $800 billion Government debt, rising to $1 trillion this year, and cancel it. Just write it off. Nothing would happen. That’s because, as Dr. Lowe said on Tuesday: “The economy is expected to operate with considerable spare capacity for some time to come.”
What about Australia’s triple-A credit rating? Would this be jeopardised if the Australian government monetized the public debt thereby leading to a devaluation of our currency in foreign exchange markets? Not necessarily. Victorian and NSW governments AAA credit ratings were downgraded in December 2020 meaning that they will likely have to pay more for future borrowings. But neither are currency-issuing governments.
In a careful study of members of the Organisation for Economic Cooperation and Development between 2000 and 2020, Adelaide University researcher Matthew Crocker finds that credit rating downgrades do indeed push up the cost of borrowing for countries without monetary sovereignty (such as most members of the Euro-zone), but have no significant impact on the cost of borrowing for monetary sovereigns such as Australia.