Usually the speeches of treasury secretaries are relatively bland, echoes of their political masters. But an address this week from Steven Kennedy was something quite different.
One economist described it as “unplugged”. It gave not just a blunt assessment of the challenges the Australian economy has, but offered a bracing critique of what needs to be done.
Kennedy mightn’t be a household name, but people should remember that it was advice from him and his colleagues that steered an initially reluctant Morrison government to JobKeeper, which kept so many businesses and workers afloat during the pandemic.
The Kennedy speech may reflect the Albanese government’s view that it wants a public service that’s more independent in its advice.
On the other hand it might involve some cunning politics, because it was run past Treasurer Jim Chalmers (the usual protocol). Kennedy is saying things that it would be difficult for the treasurer to say.
Kennedy’s core fiscal messages can be boiled down to these imperatives. The budget needs to be brought under control, so we are in a position to respond to future shocks. This means spending must be contained. And the tax system should be made fit for purpose.
Anthony Albanese won office by making himself a small target. What Kennedy is advising, for the best of reasons, would make the government a big target.
Albanese said before the election he wanted to leave a legacy. You don’t leave a legacy by just managing government, or even by undertaking some limited reform.
The Hawke-Keating government left a major legacy. It did so by tackling robustly the issues that circumstances threw up to it. What it ended up doing far outstripped the program on which it was elected.
A dive into the detail of Kennedy’s speech shows the magnitude of his prescription.
Kennedy says post-pandemic government spending will be higher than spending before COVID. Excluding temporary direct COVID support, payments as a share of GDP are expected to average 26.4% in the coming decade, compared with 24.8% in the decades before the pandemic.
“Most of the additional structural spending is driven by spending on the National Disability Insurance Scheme (NDIS), aged care, defence, health and infrastructure. Further pressures exist in all these areas,” Kennedy says.
There are two ways to fund the country’s priorities – make structural savings and/or raise additional tax.
For the Albanese government, this is what the policy wonks call a “wicked problem”.
You’ll note that at every opportunity Chalmers says he and Finance Minister Katy Gallagher are working on savings for the October budget.
In the election campaign Labor talked about finding savings from “rorts” in the Morrison government’s spending. But the magnitude of the task will go well beyond redirecting funds from Morrison waste.
The coming budget, the first of the term, is the logical time for a really tough look at spending. But this is difficult in practical terms and politically hazardous.
The government needs to avoid breaking promises, which forfeits public trust.
Apart from that, containing spending in areas that at the same time demand more spending is very hard.
In aged care, what the government has promised doesn’t include the cost of its commitment to funding the increase in wages the Fair Work Commission will deliver for workers in the sector.
Then there’s the NDIS. It is heading for financial unsustainability. But any effort to reform it will be fraught, because some people will lose, or not be able to obtain, help to which they feel entitled. Labor’s policy is to “stop the unfair cuts to NDIS participants’ plans with an expert review mechanism”. Bill Shorten, with ministerial oversight, has an uneviable job ahead of him.
Politicians know the community is reluctant to tolerate having “losers” from reforms, even if the reforms are necessary and for the overall good. And the budget situation means “losers” can’t be compensated or paid off as readily as they’ve been in the past.
Kennedy’s message on the tax side is that over time inflation and real wages growth (if it comes!) will result in higher average personal tax rates.
“Unless other taxes or revenues increase, there is little prospect of having sufficient fiscal space to give this back to taxpayers in the form of tax cuts. This would see average personal tax rates increase towards record levels, increasing the fiscal burden on wage and salary earners.”
Ongoing review of the tax base and tax concessions will be important, Kennedy says.
True – but who is up for serious tax reform these days? Albanese’s election commitment was not to raise taxes, or have new ones. The only exception was to crack down on multinationals’ tax avoidance.
The OECD annual economic outlook, released this week, says the current economic recovery “would also be a good time to reduce Australia’s heavy reliance on taxation of personal incomes, which adds to the vulnerability of public finances to an ageing population”.
It suggests, among other things, that “consideration should be given to increasing or broadening the base of the Goods and Services Tax”.
Hands up those politicians willing to launch into that battle.
Kennedy also had things to say about our low growth in productivity. He didn’t have time to get into the climate change and energy story.
Energy, a key part of the further rise in inflation we’ll see in coming months, is the current major (but by no means only) headache for the government.
The batch of measures from Wednesday’s federal and state energy ministers meeting was useful but will, as Energy Minister Chris Bowen conceded, provide no instant answer. The gas crisis will be painful in the short run; the vital transition to clean energy will be testing over the medium term.
The Albanese government can (rightly) blame the former government for not adequately paving the way for the transition. Its record is a disgrace. But blame doesn’t solve the here-and-now problems, and in the public’s mind it has a limited shelf life.
Again, the government finds itself hostage to expectations. The causes of the current gas crisis are largely outside government control (although we should have been better prepared). But many people want the government to cushion them through it by subsidies, which would exacerbate the already serious budgetary problem.
And that brings us to the question of political capital. In its rhetoric the government is being careful with this capital. Chalmers talks inclusively when outlining economic issues – about having a “conversation” with Australians. Albanese highlights consensus. The planned September jobs summit is about involvement.
Nevertheless the problems the government faces in coming months are so substantial that it will be likely spending political capital, including with the October budget if it does a portion of what it should do.
Much of the reform Kennedy urges might have to wait until a second term (assuming there is one). But that raises an awkward question: does the government make itself a bigger target at the next election by flagging robust change?
As for the present: so far in the new government Albanese has had the easy ride, with his two overseas trips, while Chalmers and Bowen have had to convey quite grim news. Now it’s time for the prime minister to step up and be very visible on the economic issues.