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Inside John Howard’s legacy
In this story
They say old politicians are like old actors. They revive under the spotlight.
Exhibit A, John Howard. The coming week will mark the 20th anniversary of his election as prime minister, and suddenly he is everywhere.
He’s been offering views ranging from the ridiculous – suggesting that his protégé Tony Abbott, had he not been rolled from the prime ministership, could have won the next election; to the subversive – backing Abbott and the other government backbenchers opposed to any meaningful reform of negative gearing; to the electorally suicidal – advocating an increase in the goods and services tax, to fund personal and company tax cuts.
Needless to say, this has not been helpful for the current prime minister and putative leader of the government, Malcolm Turnbull.
He wisely let the comments about Abbott’s potential for electoral victory go through to the keeper. As for Howard’s views on tax, Turnbull said last Sunday that he had engaged in “a long chat with John about negative gearing and other aspects of tax only yesterday. He’s obviously a great source of advice.”
It must be galling to have to be so polite. First because Howard’s comments appear to have given succour to Abbott in his efforts to subvert the leadership, and second because the problems Turnbull is now struggling to fix were largely created by the Howard government.
Malcolm Turnbull would not say that, of course. He would say, as he did at the 20th-anniversary celebratory dinner this week, that Howard was the “gold standard” of prime ministership. To say otherwise would amount to apostasy.
But when you talk to public policy experts, the picture that emerges is one of a rather inert government that had a very thin record of reform, that left Australia more divided, that entrenched privilege and inequality, and that left the political and economic landscape littered with mines primed to blow up under successor governments.
The Howard government came to power with the election slogan “For All of Us” and its actions over the subsequent 11-and-a-half years suggest the word “us” was tightly defined.
Observers paint the picture of a government that was not particularly good, but extraordinarily lucky.
“They had three things going for them,” says Jeff Borland, professor of economics and labour market expert at the University of Melbourne.
“First, the continuing benefit of the economic reforms of the Hawke–Keating years. Second was a Reserve Bank which by the ’90s had a clear understanding of the workings of the economy and had, in Ian Macfarlane, an outstanding governor. Third, they had favourable economic conditions.”
Aside from introducing the GST, Borland says, they did little in the way of positive reform.
“Lots of [economists] bookend economic reform with the floating of the currency in 1983 and the GST in 2000,” says Borland. “They didn’t mess up. By which I mean they didn’t ever run a really loose budget that caused things to end up worse at that time.” But he stresses the phrase “at that time”.
“They didn’t set the economy up for the future and some of the policies they introduced have … been ticking time bombs. They squandered the opportunity the economic good times provided for further reform, and we’re paying for that now.”
Certainly the headline numbers look good. Through the Howard years economic growth was strong and people’s incomes rose at a healthy pace.
Official statistics show that between the time Howard came to power in March 1996 and the time he lost office in December 2007, per person household incomes grew by about 25 per cent in real terms. But when you dig a little deeper, things look less rosy, for the rising economic tide did not lift all boats by the same amount.
Economic inequality grew through that period, as did relative income poverty, says Professor Peter Whiteford of the ANU’s Crawford School of Public Policy.
Household income for the top 10 per cent went up 60 per cent.
“It was the highest for any OECD country for the period,” says Whiteford.
For the median household, it went up about 53 per cent. For the poorest 10 per cent, it went up about 37 per cent.
So the story is that everyone did better, but the rich did much better. It was the economic boom that drove incomes higher, but it was primarily the government’s approach to tax and welfare policy that caused the inequality.
“In general terms, most of the big economic changes made by the Howard government could be described as tribal. Looking after their tribe,” says another senior economist, who specialises in the welfare area, and who asked not to be named because he advises government.
“The work-for-the-dole scheme was symbolic of the Howard view of unemployment being an incentive problem. They committed to a scheme that made little difference to people’s job prospects.”
He ticks off a couple of other Howard-era initiatives that served to increase inequality.
“The introduction of the Job Network saw the stripping out of about $1 billion of assistance for people unemployed long term.
“There was the welfare-to-work policy that shifted single parents and people with disability off to the lower Newstart allowance.
“They redirected money away from those on working-age benefits towards older people generally, and particularly the upper middle class.”
One of Howard’s personal obsessions, the economist says, was the idea of income splitting, whereby couples with one high-income working partner and one non-working partner – like his household – could divide the income between them and so pay less income tax.
“He could not get income splitting through the tax system, so he got at it through the welfare system,” the economist says referring to the government’s family benefits scheme.
That’s perhaps a bit tough. The welfare changes of the Howard years, particularly the family tax benefits initiatives, says Roger Wilkins, research fellow at the Melbourne Institute, University of Melbourne, were “surprisingly redistributive”.
“They had an impact particularly in reducing child poverty, even though they weren’t very well targeted,” he says.
Which is another way of saying they equated to middle-class welfare.
“One of the unsung successes of the Rudd–Gillard government,” says John Daley, CEO of the centrist think tank the Grattan Institute, “was that they whittled it back so that today the Family Tax Benefit is now a very well-targeted policy, going where it should to the bottom half of the income scale.”
In any case, what the government did in welfare is very small beer compared with what it did on taxes.
With vast amounts of money coming into government coffers thanks to the mining boom and asset sales, the Howard government had the chance to put money aside to help the country through the inevitable downturn.
That is not what happened. Instead, we saw round after round of income tax cuts. To be fair, it should be noted the last of them was delivered by the incoming Rudd Labor government, although it was only honouring a commitment to match what Howard had promised.
The benefits flowed overwhelmingly to the upper end of the income scale.
By the calculation of The Australia Institute, 42 per cent went to the top 10 per cent of income earners. The most affluent 20 per cent of income earners got more than the bottom 80 per cent. Without these income tax cuts, there would be no budget crisis now.
As Daley says: “That’s where the underlying budget deficit started.”
And there’s more. Take superannuation, the benefits of which are skewed in favour of the wealthy. Because contributions are taxed at a flat rate of 15 per cent, the tax benefit of putting money into super are greater for those in higher tax brackets.
They became even more skewed after the Howard government decided to stop taxing the income earned on retirement incomes.
“This meant that people with very large amounts of money in superannuation just stopped paying tax,” says Daley. “Coupled with a couple of one-off things that allowed people to put big sums into their superannuation, some people literally borrowed millions to put into super. It amounted to an enormous, one-off tax holiday for a bunch of mostly rich old men.”
And then onto negative gearing. As Howard rightly said in at least one of his many media appearances in recent days, negative gearing – which allows investors to write off the costs of an investment against other income – had been around “forever”.
What he did not say was that until the 1999–2000 financial year, it was not a particularly popular tax dodge. Then his government changed the rules for taxing capital gains, which turbocharged negative gearing.
As Roger Wilkins explains: “There was previously a quite enlightened policy whereby capital gains were adjusted for inflation and then after adjustment, taxed at the marginal rate of income. For reasons for which there was no good explanation, they decided to go with a 50 per cent [tax] discount on all capital gains after an asset was held for 12 months or more.”
In combination, negative gearing and the capital gains discount encouraged investors to make a loss on their rental property and to focus not on rental returns but on capital gains.
The effect was to drive up house prices and lower rates of home ownership as would-be owner-occupiers were outbid by speculative investors.
Again, despite the claims that “mum-and-dad” investors benefit, the data shows the money flows overwhelmingly to high-income earners. The cost to the budget is about $7 billion a year.
The inequities fostered by the Howard government go beyond tax and welfare issues, too.
Take healthcare. When Howard was elected prime minister in 1996, private health insurance membership rates had fallen to a low of 34 per cent, for the simple reason that it was not good value.
On the pretext of easing the burden on the public hospital system, the government sought to drive more people back into private health cover.
They tried multiple unsuccessful policies, and in 1999 introduced a 30 per cent subsidy for private health insurance, for which all Australians were eligible, regardless of income.
Says one of the country’s leading health economists: “The private health insurers did very well out of it, private hospitals did very well out of it. But it did nothing to take the burden off public hospitals.”
In fact a 2005 study by health economist Stephen Duckett, former secretary of the federal Department of Health, found it simply increased the overall number of hospital visits, and that increasing activity in the private sector led to increases in waiting times in public hospitals.
To the extent that it benefited consumers at all, it benefited higher-income consumers. Poor people cannot afford private insurance, with or without a rebate. “It was certainly not an equity measure,” says one expert. “If you were interested in equity you’d invest in public hospitals.”
By 2014, the cost to the budget was $6 billion. A study by the Grattan Institute determined abandoning it would save $3 billion, even accounting for the increased cost to public hospitals. The current government is looking at doing just that.
Then take education. The new Howard government changed the basis on which federal funding was allocated to private schools.
The bottom line for the new funding model, says Chris Ryan, director of the economics of education program at the Melbourne Institute, was “lots of well-known and very rich getting millions more in funding”.
The change also increased the speed of the drift of students to private schools, which in turn has had an impact on public schools “because there has been a process of residualisation”, Ryan says. “More and more the hardest-to-educate kids have been left to the public system.”
Not only has this led to an increasing gap between the best and worst performing schools, it appears to have made Australia, for want of a better term, dumber overall.
The Program for International Student Assessment survey, which compares the skills and knowledge of 15-year-old students in more than 70 countries, shows Australia’s results have been in decline since 2000.
In general terms, says social researcher Hugh Mackay, the Howard years were marked by the fostering of social division. “More than any other prime minister he capitalised on fear for political advantage,” he says.
Howard, he says, exploited groups such as refugees for political advantage. Howard was the man who refused to apologise to the Indigenous Stolen Generations. His was the government that changed the Marriage Act to stipulate that it had to be between a man and a woman. He was the one who fostered the intolerant religious right within politics. He drove out moderate forces.
“He left us a meaner society than we were, much less committed to egalitarianism and to our moral obligations,” says Mackay.
Twenty years on, if the changes, social and economic, that John Howard wrought on Australia were to be summed up in two words, they would be “less fair”.
And Malcolm Turnbull must surely recognise this. When he took over the leadership of the government from Howard’s acolyte, Tony Abbott, he was at great pains to stress his fundamental goal for a fair society.
But, as the past week has shown, even 20 years on, it’s still John Howard’s Liberal Party.
This article was first published in the print edition of The Saturday Paper on Mar 5, 2016 as "Inside Howard’s actual legacy".
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