Tony Abbott’s great mentor left him with a squandered boom and a tax system that may yet destroy his government. By Mike Seccombe.

How John Howard’s tax cuts undid his protégé Tony Abbott

Then prime minister John Howard (left) and his ‘political love child’ Tony Abbott.
Then prime minister John Howard (left) and his ‘political love child’ Tony Abbott.

There should have been a soundtrack of flapping wings and squawking to accompany Treasurer Joe Hockey’s release of the budget update on Monday. So many chickens were coming home to roost.

Hockey’s own personal chickens were the least of them, notwithstanding his repeated promise before the election: “We will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term.”

That promise was long ago rendered non-core. May’s budget forecast was a deficit of more than $29 billion. For that, Hockey blamed the previous Labor government.

Things have grown vastly worse in the six months since then, though. Monday’s Mid-Year Economic and Fiscal Outlook (MYEFO) numbers showed the budget deficit had ballooned a further $10.6 billion to more than $40 billion.

Now the promise is for the budget to get back in the black five years hence, and that is based on some pretty optimistic assumptions. Thus Hockey looks likely to emulate his Labor predecessor, Wayne Swan, and never deliver a surplus.

For Hockey to make good on his promise, three preconditions would have to be met. First, the economic forecast would have to be correct, and the experience of recent years is that they have been consistently over-optimistic. Second, Hockey would have to avoid being dumped from the treasury portfolio. And third, the Abbott government would have to survive into a third term, for that is how far away the predicted surplus is.

Already the polls and the talk in Canberra suggest those last two preconditions may not be met. No government in living memory has performed so badly, so early, in the opinion polls.

Understandably, Hockey did not look very happy on Monday. Also, he had apparently forgotten he was part of a “no surprises, no excuses” government.

He reached for lots of excuses: falling iron ore prices, wheat prices, an unprecedented drop in Australia’s terms of trade, a recalcitrant senate, unexpectedly low wages growth, unexpectedly high benefit payments.

Yet the treasurer made no mention of the underlying cause of the mess. He neglected to point out that most of those roosting chickens, now leaving great splotches of guano on his reputation and his budget and Tony Abbott’s government, actually belonged to John Howard and Peter Costello.

Were it not for them, Hockey – and Swan before him – would almost certainly have been able to announce balanced budgets or surpluses.

Instead, Australia finds itself in the remarkable position, at the end of the biggest resources boom in its history, looking at budget red ink for as far as the eye can see. And Smokin’ Joe Hockey, once among the most popular members of Team Abbott, finds himself the focus of blame.

This is understandable, but also a bit unfair. The budget is not just his work. It represents the economic world view of the whole government. Indeed, it represents the right-wing ideology of two governments: the Howard government and that of Tony Abbott, who memorably described himself as the political love child of John Howard and Bronwyn Bishop. 

The budget, with its raft of grossly regressive savings measures, can be seen as just one part of a long and concerted effort to redistribute income upwards.

1 . IMF assessment

That effort began more than a decade ago when John Howard and Hockey’s predecessor, Peter Costello, ran the most profligate government in Australian history.

Profligate is not our word. It was the word used by the International Monetary Fund in a major report it released early last year, that examined 200 years of government financial records across 55 major economies, identifying periods of government prudence and profligacy in spending.

Overall, Australia was judged very favourably. For most of the country’s history, governments of both persuasions had been prudent economic managers. The IMF identified only four periods of profligacy. The two biggest were during the Howard–Costello years. They were in 2003 and then between 2005 and 2007, and they accompanied the mining boom.

On its face, the IMF assessment might seem harsh. After all, before they were voted out in 2007, Howard and Costello had delivered six budget surpluses in a row.

But they also seriously undermined the structural integrity of the budget by making big spending commitments and giving huge tax cuts, on the basis of a flood of revenue that would inevitably dry up.

“You can sum it up in four words,” says Chris Richardson of Deloitte Access Economics. “Temporary boom, permanent promises.”

For a period money roared in to the economy, as a result of what was happening in China and elsewhere. According to Richardson, this enormous boom made the government of Howard and Costello look better than it was.

“Subsequently we’ve heard the sucking sound as the money’s gone back down the gurgler, which has made Rudd, Gillard and Swan look worse than they were,” he said. “And it’s now making Abbott and Hockey look worse than they are.”

2 . ‘They spent the lot’

To be fair to Howard and Costello, they were encouraged by the bureaucrats in Treasury, the Australian Bureau of Agricultural and Resource Economics and even the Reserve Bank to think this boom was different, and that the money would continue to roll in for decades to come.

“That was a failing. We’ve never had a permanent boom before,” says Richardson. “Anyway, they spent the lot. On tax cuts, baby bonuses, and so on.”

John Hewson, former Liberal leader, economist and now professor with the Crawford School of Public Policy at the Australian National University, underlines the point: “The tax cuts Howard and Costello gave are now costing [the budget] about $30 billion a year, and the deficit’s $40 billion.”

Without those cuts and the $9 billion Hockey gave – unasked for and against the will of treasury – to the Reserve Bank, says Hewson, “the deficit problem wouldn’t exist”.

And that’s without including some $40 billion in tax concessions for superannuation, which accrue overwhelmingly to the wealthiest 20 per cent of taxpayers.

“You can easily add it up to show that the deficit that exists today is a fake number,” says Hewson. “They’ve basically imposed it on themselves.”

More correctly, they imposed it on the less well-off.

Matt Grudnoff, the senior economist at The Australia Institute, calculates that over the seven years from 2005-06 to 2011-12, the federal government lost $169 billion in revenue as a result of the income tax cuts alone.

“Of the $169 billion in tax cuts, 42 per cent of them, or $71 billion, went to the top 10 per cent of income earners,” he wrote in his paper “Tax cuts that broke the budget”. “The top 10 per cent got more in tax cuts than the bottom 80 per cent.”

On Grudnoff’s figuring, this year’s budget would have been fatter by almost $40 billion had the cuts not been given.

3 . Rudd followed suit

The Howard–Costello government delivered five rounds of income tax cuts, and had promised more during the 2007 election campaign. The incoming Rudd Labor government, having committed to match the Coalition’s promised cuts, delivered them.

So Labor cannot escape all blame for the current state of the budget. But it is largely guilty of just proceeding to do what the Howard government would have done, by hacking into revenue. Its spending, contrary to the consistent assertions of conservatives over recent years, was not the issue.

That has been made abundantly clear by various analyses of the structural decline of the budget.

Having detailed two of these reports last year – by the treasury department and the independent Parliamentary Budget Office –The Sydney Morning Herald’s economics editor Ross Gittins apportioned the relative culpability of the two parties thus:

“They say it’s only when the tide goes out you discover who’s been swimming naked. It’s the same when you calculate the ‘structural’ budget balance. And we’ve just learnt that though Wayne Swan’s cossie has slipped revealingly, Peter Costello was completely starkers.”

Not surprisingly, Swan endorses these analyses: “It’s the revenue, stupid,” he says. “It was a revenue story throughout.”

Chris Richardson agrees. 

“To understand Canberra over the past decade, you have to follow the money,” he says, and takes us on a quick tour, complete with roller-coaster graphs.

The boom that made the Coalition government look good lasted less than a year into Labor’s term in office, he says.

“Then it all came crashing down with the GFC [at the end of 2008]. Then it roared back up in 2010-11, which is when Swan said we would be back in surplus in three years. He thought the commodity boom was returning, but in reality coal and iron ore prices had peaked in 2011.”

4 . Last surplus forecast

On October 22, 2012, MYEFO came out, for the last time forecasting a surplus in 2012-13.

“That happened to be the first day for payment of the new mining tax and the day for the quarterly payments of a couple of other taxes,” Richardson recalls.

But receipts were nowhere near the forecasts issued that very day.

“By the end of the day, MYEFO was all over, red rover. The surplus was gone. It was a bizarre day. From there it was a steep line of revenue write-downs,” says Richardson. 

Swan recalls that time only too well, and particularly the press conference he was forced to give five days before Christmas 2012, “when I had to go out and admit we weren’t coming back to surplus”.

“The last lot of revenue downgrades was so large it would have been damaging to the economy to try to force it back to surplus in 2012-13,” he says.

That was the worst, but he says: “All of our MYEFOs from 2010 onwards were like bloody budgets, because every forecast came in under.”

Joe Hockey is fast learning how that feels.

The important thing about all this history is how it illuminates the present.

It is largely because of decisions taken a decade and more ago that young unemployed people, pensioners, students, the sick and the recipients of foreign aid are now being targeted by budget cuts.

The Howard government was blessed with a huge windfall. Fiscal prudence, based on the understanding that all previous mining booms have ended in busts, would dictate that revenue be preserved somehow.

It might have done this in a number of ways, such as spending on big infrastructure projects. Instead infrastructure spending slipped to its lowest level in decades as a proportion of GDP. 

Or it might have put the extra tax revenue into a sovereign wealth fund, like so many resource-dependent economies around the world have done. 

It might have kicked one-off payments into the superannuation accounts of Australian workers.

But that is not what the Howard government did.

“Not only did they give away  $40 billion, but they skewed the giveaways heavily in favour of the wealthy,” says Hewson.

“Now, take that expenditure history and then look at this budget, with its 10-12 per cent cut to the disposable incomes at the bottom end of the income scale – people on $50,000 or $60,000, and less than 1 per cent cut to disposable income at the top end.

“What we have is the legacy of past inequity plus the inequity of the present measures. And they wonder why their budget gets slammed.”

The interesting thing in political terms is that there was no such outrage back when Howard and Costello were handing out tax cuts on an annual basis.

So long as everyone was getting a little extra, it seemed, most people were prepared to overlook the fact that 80 per cent of the extra lolly was being given to 20 per cent of the populace.

Clearly it is much easier to get away with giving to the rich than it is to get away with taking from the poor, even though both approaches result in the same outcome: a less equitable society.

Howard and Costello were lucky. The years of abundance allowed them to conceal their regressive economic agenda.

But in these straitened times, there is no such cover. Not for Abbott and Hockey and not, in retrospect, for Howard and Costello. Abbott’s great mentor has gifted him as political inheritance a tax system that might yet destroy his government.

This article was first published in the print edition of The Saturday Paper on December 20, 2014 as "How John Howard undid his protégé".

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Mike Seccombe is The Saturday Paper’s national correspondent.

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