Two proposals to reinstate egalitarianism as a policy driver: CEO salaries and negative gearing. By John Hirst.

How to reboot Labor’s program

None of the formulas for the revitalisation of Labor seems right to me. I am an outsider, but I want a good social democratic party as much as the next man.

Bill Shorten thinks that his first job is to reform the party. The great reformer of the party was Gough Whitlam, whose three-stage route for regaining power was described, though not by him, as party, platform, people. Shorten has cited this as his model but misunderstands it. Whitlam himself had shaped a new program before he set out to reform the party. He needed to reform the party in part to get it to adopt his program. Because he was a man with a new program he was an exciting figure, likely to lead his party to success, and that reputation was used to bludgeon the party into accepting structural reform and changes to its platform. 

Why would anyone join the Labor Party when it has not got an inspiring program? The young idealists will remain with the Greens. Shorten offers not a vision of a different Australia but the opportunity to participate, which is not the fun that it is made out to be. Devotion to a cause and a leader are much more alluring. In the modern way, Shorten has set himself a key performance indicator – he wants to take membership from 40,000 to 100,000 – and so has provided beforehand a measure of his failure.

The first challenge for Labor is intellectual. It has to establish what in the modern economy and society threatens its ideal of a social democratic polity and how these dangers are to be met. It will not get a visionary policy by taking positions on the political issues of the day – which is all it will get if it asks its new membership to contribute ideas. Nor will it be effective if it is guided by the commonsense of the insiders of what is politically possible. With vision and excitement more things become possible. Here are two suggestions for Shorten to ponder.

Labor can take some, but not all, the credit for opening up the economy and for the prosperity that has followed. But with greater prosperity has come greater economic inequality. This can be offset through the welfare system, which the Howard government did with family payments, but much more is needed to strike the problem at source.

The grossest, most flagrant new inequality of recent years is the salaries paid to CEOs of large companies. In 1993, CEOs of the top 100 companies were paid on average $1 million yearly; in 2009 this had risen to
$3 million. Instead of getting 17 times average earnings, they were getting 42 times what the rest of us earn. 

The argument against interfering with this is that top people have to be attracted. But our companies were quite well run in 1993. People want to be in the top job not only for money, but for power, prestige, a room with a view, a personal assistant. Labor could experiment: cap the salaries (plus all other remuneration) at 10 times average earnings and raise the bar if the economy falters. That would give CEOs more than $700,000 a year.

Given the mindset of the modern Labor Party, perhaps I should explain that such a capping would not be an unwarranted interference in private enterprise. Companies with limited liability are an institution of the state, which has strict rules as to how they can be formed and operated. The payment they make to their top executives would be added to the rules. There is no constitutional impediment since the High Court has greatly expanded the corporation power. Instead of a direct prohibition on rewards over the limit, they could be taxed at a high rate (say 80 per cent) or there could be graduated additions to the company tax for those companies that breached the rules – which would concentrate the minds of shareholders.

The politics of this are much easier than a general rise in taxation level. CEOs are a limited and known quantity; their rewards generally disgust people, in a way that those to footballers or opera singers don’t; sometimes, as with bank CEOs, they are hated. The symbolic benefits from such a rule would be as important as the limits placed on the accumulation of wealth. I do not resent these monstrous payments because I am envious; I resent some people proclaiming these amounts as their worth. We are encouraging the development of an aristocratic disdain for ordinary mortals.

As our wealth increases, the proportion of people owning their own home is declining. Australia did not have a bill of rights, but the right to own your own home was almost as firmly entrenched. It was the outward and visible sign of an egalitarian society. One reason why house prices are now so high is that the tax system encourages investors to buy houses for rent in competition with would-be home owners. I see it at Melbourne auctions: young couples walking away disappointed as men in suits win the bidding. 

The government policy to turn well-heeled people into landlords is known as negative gearing. For those readers not involved in this scheme, it works like this: you borrow heavily to buy a house; the rent you collect does not cover the cost of the borrowing; and the loss can be written off against your other income. You pay less tax and the government has helped you to an investment property whose value you can expect will rise rapidly.

Australia is unusual in treating such investments so generously. The defence of the policy is that it provides more properties for rent. But it does not increase the housing stock overall because overwhelmingly negative gearing is used to buy existing houses. 

In 1985, the Hawke government limited the benefits of negative gearing and rents rose in Sydney and Perth. The rises must have been for other reasons because they did not occur in the other capital cities. Nonetheless, the changes were reversed and it is established in the political world that negative gearing can’t be touched. The other reason why it is hard to touch is that more than a million voters are now landlords.

A Labor Party worth its salt has to do something about negative gearing. It could be phased out, continued for existing players but barred to newcomers, or applied to new houses not old. 

The political minders never want to provoke opposition. A reforming government should expect opposition; it can shame and persuade opponents but battles cannot be avoided. 

It is battles that win supporters so long as the vision is clear. The vision is a Labor Party that wants to preserve an egalitarian Australia with opportunity for all. A party that will confront the mechanisms that widen inequality, not just tinker with welfare.

Such a project would have to deal with much more than the two matters discussed here. Some would have support; over others there would be fights. But the party’s focus must be clear.

Julia Gillard made a bold attempt to reform school funding, a great generator of inequality. She promised that no school would get less but then – can it be credited? – that all schools would get more. So Scotch College had to be made richer before a state-school kid could get extra help with his reading. God save us from such Labor governments.

This article was first published in the print edition of The Saturday Paper on May 3, 2014 as "How to reboot Labor’s program". Subscribe here.

John Hirst
is an emeritus professor of history at La Trobe University. His most recent book is Australian History in Seven Questions.