La La Land Misses Out on Oscars - Again

Federal government budgets are exercises in wishful thinking. Perhaps thinking suggests too rational a flavour. They are usually paltry attempts to corral the unknowables of the future into the pretended certainties of the present. In fact, in hindsight, they inevitably turn out to be unsystematically wrong. The forecasts of specific variables like GDP, inflation, surplus or deficit and the like are hostage to the assumptions and models drawn upon. Even with hindsight from as little as a year on, there is rarely any obvious pattern to the mosaic of mistaken forecasts. If the present is only partly known – shadows on Plato’s cave – and the past is a foreign country, then the future is a parallel universe with no magic portal through which to enter.

The first and likely last Frydenberg Budget is no exception. The filmic image of a couple dancing off into the starry, starry night perfectly expresses the sight of Prime Minister and Treasurer taking the 2019-2020 Budget to the people. This one, of course, is special. It signalled the effective and much anticipated start of the 2019 federal election campaign. Since the last one three years ago, the political landscape has seen a continuation of the political chaos of the preceding decade. Six Prime Ministers (seven if you count Rudd twice) and numerous cabinet reshuffles, aided and abetted by the rise of right wing splinter groups, quasi-fascist opportunists and centrist independents, has made minority government a new feature of Australian politics. Factional divisions and intense personal feuds – Rudd v Gillard, Abbott v Turnbull, Hanson v anyone who has the temerity to oppose the Führer principle – further crosscut normal inter-party rivalries, creating multiple roadblocks to conventional policy making.

This Budget is also notable due to its widespread dismissal in the mainstream media. This response is not simply due to the hard-headed analysis of hard-headed journalists, though much of the commentary is well based and targeted. It captures the spirit of the age, the zeitgeist, that increasingly permeates Western Democracies like Australia. All the polling suggests that voters in country after country are thoroughly fed up with the political class- politicians, senior public servants, media commentators, lobbyists and large vested interests. Who can blame us? So much of what goes down in the curiously named ‘Canberra bubble’ is either irrelevant to or antagonises the vast majority of voters who simply want a reasonably competent, stable environment in which to live out their lives. After all, most people are apolitical in the sense that they have no wish, or see no need, to actively engage in the business of government, which is there, it is generally believed, to fill in the gaps left by civil society. Only anarchists and badly trained economists hold that government has no role in providing basic services, helping those who fall out of the system and ensuring that the worst excesses of the business cycle are ironed out. Of course, there are wide and conflicting disagreements about how these functions are to be financed and carried out.

This is the business of representative government. Citizens have delegated the power to set and execute public policies to their elected representatives. The bargain is simple. I’ll vote for you and you will govern. That means I can get on with my life and you will act competently and with integrity. From time to time you will account to me for your stewardship and I will have the opportunity, along with fellow citizens, to hold you accountable. I won’t always be happy with the job you and your team are doing and may be annoyed if, instead of being sanctioned by being replaced, you are returned to Parliament. But as long as I am satisfied that the electoral process of accountability maintains its transparent integrity, I am likely to acquiesce in the outcome. There is always the next time.

But there are worrying signs that increasing numbers or citizens are making the judgment call that the system is broken, that the increasing politicisation of the public service and the explosion of internecine warfare in the peoples’ house means that government policy and, as in the case of energy and climate change, non-policy, is in the hands of unelected elites that are not accountable to us. Although this has perhaps not reached the level of dysfunction apparent in America and parts of Europe, the signs of democratic decay are here. History provides plenty of warnings as to what may arise in the ruins of representative democratic systems. Turning off politics is a bad strategy if you want to survive in a world stalked by dangerous tyrants. If you think this is bad, try living in Iran, Saudi Arabia, Sudan or the United States of America under Trump. This reflection is best summed up by Churchill’s famous dictum that democracy is the worst form of government, except for all those other systems that have been tried from time to time. If you think that Churchill was too easy on democracy, remember his other observation that if you want to mount a case against it, have a look at the average voter. The chasers overlay, “This person votes”, expresses similar sentiments.

That – incongruously – brings us back to the Budget. What our government does and how it rises the money to do it affects us. So, ensuring that the government of the day, any day, does not bamboozle us is important. We can’t necessarily trust the system as it is evolving to do that for us. There are a few useful steps one can take.

First, be very wary of forecast outcomes that extend beyond two to three years. At best they are signposts to where the government would like to be many years on – or would like to persuade us that that is where they would like to be. At worst they are the juggler’s sleight of hand that distracts you from what they really want to do now.

Second, look for the key underlying assumptions baked into the small print. What population growth is assumed? What are the economic growth and inflation trajectories? Why are the thresholds for tax and benefit set as they are? How sensitive are the outcomes to small and medium sized changes in the key assumptions?

Third, what do the representatives of large vested interests – employers, unions, industry associations, environmental and social welfare groups – say about the budget outcomes and the basis on which they are cast? Apply a discount factor to each according to taste.

Fourth, whenever you hear someone say “average”, ignore and move on. Whether mean or median, there is no average taxpayer. This statistical fiction is used to blind you as to the differential impacts of tax and expenditure measures across the real people who make up society.

Fifth consult a range of ‘independent’ expert commentators but try to be aware of what behavioural psychologists and economists term ‘confirmation bias’. Remember, ‘independence’ is in the eye of the beholder, including this one.

Sixth, what could go wrong? Are there obvious storm clouds gathering, here at home or overseas. In the latter context, the Trump madness offers countless possibilities. In the longer term, macro-environmental problems associated with climate change make long term projections even more unwise (see point one above).

Finally, trust your in-built crapometer.

Judged on these terms, the Frydenberg budget looks pretty sick. Primary emphasis is given to outcomes cast well into the future. Take taxation as an example. As many commentators coming from a range of angles noted, the overall thrust is to concentrate the bulk of tax relief eventually on the more affluent third of taxpayers, though this is partly obscured by pushing the benefits back a few years. The only definite immediate gains flow to those earning under $40,000 per year, a promise immediately matched by the Opposition. The government’s clear intention, however, is to flatten the progressive personal income tax system, to create, if not a flat tax beloved by conservatives everywhere – remember Margaret Thatcher’s poll tax and various versions of the GST – then a proportional tax in line with company income tax. To suggest that this indicates a desire to free the aspirational ‘middle classes’ to work ever harder is to stretch the incentives argument beyond the limits of credulity. But in a society like Australia that is becoming more unequal in both wealth and pre-tax income distribution, reducing progressivity not only reduces the total tax take (unless a compensating proportional rate increase is adopted) to fund services but also gives up the most potent existing economic weapon in the government’s arsenal to offset the entrenched frogmarch of economic inequality. Other measures, like the reintroduction of death duties, could potentially offset a reduction in income tax progressivity. But it’s hardly likely to be considered by the current government nor, it must be said, the alternative one.

Retaining government’s capacity to offset the march of inequality is crucial, both at the individual level and more broadly. If an increasing proportion of the population see their living standards fall, as wage and benefit incomes fall behind rises in key components of the cost of living, like power and petrol, then popular support for democracy itself is at risk. In such circumstances, the scene is rife for the appearance of political demagogues with simplistic solutions and self-serving agendas. In macroeconomic terms, increasing inequality in disposable incomes raises the Keynesian spectre of over saving (underinvestment) as the engine of consumption splutters and the wealth hoovered to the top finds outlets in speculation and asset price inflation.

This last point underscores the key provenance of this federal budget. It is based on the orthodox supply-side model of how capitalist economies work. Freely operating markets will automatically allocate scarce resources to their most efficient uses, ensuring full employment and the necessary incentive for investment and growth. The possibility that total demand will be inadequate, due to lagging consumption and weak investment, while governments push the budget into surplus, is effectively ruled out by assumption – labour markets operate perfectly – and by ignoring the actual role of the financial sector.

In short, this federal budget and this federal election essentially repeats the trickle-down strategy of the Turnbull-Jobson Growth appeal in 2016. Will the voters give again?