Election 2016: How can we actually get any reform done from here

by John Daley

Published by the Australian Financial Review, Wednesday 6 July

Let’s hope the next prime minister of Australia – whoever that might be – is very good at doing a deal. Because he will have little choice if he wants to make a dent in Australia’s economic or budget challenges.

And there are many. Economic growth in developed countries, sluggish for over a decade, won’t be helped by worries about Brexit, the US election, and China. Australian GDP growth hasn’t done too badly, despite the winding down of the mining boom. But income per person has nevertheless been dropping for five years as resource prices fell. Labour force participation is declining, underemployment has crept up, and wages are stagnating.

Australia doesn’t have the budgetary room to throw government money at these problems. Last week we ruled a line under the eighth year in a row in which the deficit has been in the order of 2 to 3 per cent of gross domestic product. Amongst 25 developed countries, Australia ranks fourth for the increase in government debt over the last five years. Next year will be much the same, as will the following years, unless the economy suddenly turns upwards to match the heroic assumptions of the budget projections.

None of these problems hibernate while the Electoral Commission counts the votes. And the tight election result will make them even harder to deal with. Economic and budgetary improvement are long-run outcomes that depend on a series of individually difficult decisions that tend to have highly visible short-run costs.

The perils of a hung parliament

It’s going to be very hard to get those kind of decisions through the new Parliament. The new government may well depend on independents to survive; on any view the result will be sufficiently close that the government would be wise to keep a couple of independents on-side. Those independents won’t be keen to support unpopular calls.

In the Senate, the independents may paradoxically become all but irrelevant. The most likely outcome is that government legislation would need the support of either the other major party, or the Greens, or virtually all the independent 9 or 11 senators. Given their disparate backgrounds, the last outcome is likely to be the hardest to negotiate.

When a government needs the support of others in both houses, priorities change. A government – whether Coalition or Labor – would need to focus on three types of reform. First, it could look for genuine middle ground, such as the changes to superannuation proposed in the last budget. Second, it could use discussion papers and public argument to build popular momentum for change so compelling that the other major party or the Greens would follow where the people led them. The changes to the age pension passed by the last Parliament fall into this category. Third, it could propose legislation with little chance of immediate passage, in the hope that the other major party folded before the next election, admitting that change is necessary to produce an adequate budgetary outcome, as the ALP did with changes to research and development tax incentives.

This implies some pretty ruthless priority setting. And the government will have to spend a lot of time trying to win the public argument, in an effort to forge consensus.

This increases the importance of outside stakeholders: media, think tanks, and peak lobby groups. It increases the importance of following the evidence – it is pretty difficult to win over another party when even the experts are opposed.

Pressure on budget

Unfortunately, a divided Parliament also increases the power of vested interests who can often divert the public argument. Yet as the debate over negative gearing has shown, interest groups are not omnipotent. If anything, negative gearing appears to have been a positive for the ALP over the last six months despite the best efforts and overt campaigning of very powerful property groups.

But a divided Parliament also means that the budget position is likely to get worse before it gets better. If the Coalition forms government, the zombie measures are no longer walking. Other spending reductions that require legislative change are also unlikely to pass, since inevitably they will involve cutting services to someone, creating political opportunity for opposition parties. The government could buy change by supporting the wish-lists of minor parties, but experience from the Gillard years shows such horse trading while productive, can be expensive.

It will be particularly difficult for a Coalition government to rein in health spending. The ALP will have political incentives to portray many changes as attacks on Medicare. This is a real problem, because most of the increase in government spending faster than GDP over the last decade has been spent on health.

A Coalition government’s best options to improve the budget would be either to increase taxes – reducing the capital gains tax discount is a possibility – or to reduce spending that is not required by legislation. For example, there are any number of discretionary confetti programs to spend money, such as the sprinkling of roundabouts and netball courts through the last election campaign. But these programs are a protected species, exactly the ones that governments hope will buy the most votes at the least cost.

Australia faces real problems. Vital reforms are unlikely unless the new government negotiates with its opponents. Just as well both Malcolm Turnbull and Bill Shorten have done plenty of deals in their time.