Aim for growth and fairness

14 June 2016

Like all countries, Australia needs both economic growth overall and the benefits of that to be shared equitably by all.

After a rare double dissolution, on July 2 Australians will vote for every seat in both houses of Parliament. The ruling Liberal-National coalition began the exceptionally long eight week campaign by pitching its competent economic management to ensure growth and jobs. The Labor Party has put a fair Australia at the center of its campaign.

This is a false dichotomy. Like all countries, Australia needs both economic growth overall and the benefits of that to be shared equitably by all. Else we will validate Winston Churchill's bon mot that capitalism is deeply flawed for the unequal sharing of wealth, while socialism is fatally flawed because it guarantees the equal sharing of misery.

Moreover, already both major parties have shown a willingness to dissemble, mislead and otherwise deceive voters, treating them as stupid and gullible. This despite decades of evidence that, in the famous words of a now retired Australian politician: The mob (the people) will work you (the politician) out.

Australia is not immune to broad political cross-currents sweeping democracies around the world.

There is a crisis of liberal democracy with dwindling trust and faith in political leaders by citizens. On the conservative side, politicians are seen as selfishly and cynically furthering their own material interests by gaming laws and regulations to tilt the playing field even more toward the big end of town. Multinational companies make mega-profits from Australian consumers but contribute only risible amounts to Australian coffers through paying a fair share of taxes on profits earned here. Revelations like those of the Panama Papers entrench the perception of politicians being hand in glove with immoral if not crooked seriously wealthy folks.

This is compounded by a crisis of international capitalism with irrefutable evidence of worsening inequality. In January, Oxfam reported that the world's 62 richest billionaires own as much wealth as half the world's poorest people.

The French economist Thomas Piketty has gained global fame for arguing that the rate of return on capital is greater than the rate of economic growth over the long term, explaining why the unequal distribution of wealth worsens over time and foments social and political instability. A continually shrinking wealthy super elite grows ever richer while real wages keep declining, jobs are being shipped overseas, and CEOs get obscene multimillion dollar bonuses for increasing productivity by firing hundreds of workers who became state dependents, thereby depressing national income. The next generation is likely to be worse off than its parents.

The third crisis is that of the liberal international order, with existing institutions of global governance, including the United Nations, proving too risk averse, poorly led, bureaucratic and unwieldy to be fit for purpose in addressing the major global challenges like climate change and nuclear weapons.

The convergence of the three crises helps to explain the rise of populist demagogues like Donald Trump, whose biggest hope of victory in the presidential election lies in depicting Hillary Clinton as the personal embodiment of the corrupt political elite furiously enriching itself while failing both America and the world through a leadership deficit.

Meanwhile a distorted debate over superannuation in Australia is symptomatic of the bankruptcy of leadership and the dishonesty that pervades the political discourse. Behind the narrower debate on superannuation as economic and social policy lies a fundamental philosophical divide. Economic growth and viability is indispensable for being able to afford redistribution that provides a social safety net for the most vulnerable. The brutal reality on which Labor and the Greens refuse to act is that the poorest suffer the most and are most vulnerable to life's many afflictions in the world's low-income countries. Therefore the tax system should avoid penalizing the industrious, talented and thrifty who grow the economy and create the nation's wealth.

Superannuation policy should encourage two things: promote efficiency by facilitating a transfer of income while working to a nest egg in order to reduce lifestyle gap on retirement; and promote self-reliance in retirement to reduce fiscal pressure on state pension. The temptation of short-term politics ("soak the rich") is undermining good long-term public policy and the top income quintile pays four-fifths percent of income tax.

Imagine two families with roughly comparable incomes for the 40-50 years of their working lives. One is prudent and puts aside savings for a comfortable self-reliant retirement. The second wastes earnings on frivolous expenditures and pins all post-retirement hope on government benefits.

On the Labor version of post-retirement fairness, the first must be taxed more to subsidize the latter. On any reasonable analysis, this is grossly unfair and the powerful sense of injustice and grievance is heightened when politicians protect their own extremely generous taxpayer funded pensions. It is also self-defeating. The incentive structure will ensure that increasing numbers of people shift from the first to the second camp - everyone hates being played for a sucker - and the public pension system is bankrupted by a continually expanding welfare state.

Bizarrely, the Turnbull government has changed the existing superannuation system to produce this perverse policy. Its spokespeople seem determined to infuriate, enrage and alienate growing numbers of their own supporters by insisting that backdating the change to 2007 does not make it retroactive. How professional politicians can prove so stupid as to forget the adage to stop digging when they find themselves in a deep hole is one of the wondrous puzzles of political behavior.

Meanwhile Labor is attacking the coalition for terminating a temporary levy imposed on the rich to help repair a big budget deficit. When Labor says it would support making the "temporary" levy permanent, it is effectively saying it would support the breaking of yet another promise. And they wonder why people return, with interest, the politicians' open contempt for citizens. As growing numbers of people shift from being net contributors to public coffers to becoming net beneficiaries of government benefits, the ability of the economy to provide decent social security steadily shrinks and at some point the country will go bust.

This is also known as killing the goose that lays the golden eggs. As the cohort of net beneficiaries expands, the block of voters determined to protect their "entitlements" at the ballot box keeps growing. The situation has reached farcical proportions when those who pay no tax protest against tax cuts for the rich. Perhaps Karl Marx got it wrong: It is not capitalism but democracy that contains the seeds of its own destruction.

As a non-economist concerned citizen, I would like to see a national and international conversation about three critical caps: Does it make policy sense to cap the proportion of net beneficiaries (those who get more benefits from the state than they pay in taxes), say one-third of the population? (It is presently around 45 percent in Australia.) Should there be an upper limit on taxes as a percentage of GDP? And should the maximum compensation of all public sector enterprises and private sector firms be limited to 12 times that of the average wage/salary, so that the CEO's monthly salary does not exceed the worker's annual pay?

The first will stop the steady drift to state dependency, the second will limit expanding government and the third will reverse rising inequality.

This article first appeared in the Japan Times.

Ramesh Thakur is a professor in the Crawford School of Public Policy, Australian National University.