Institute for Private Enterprise

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December 1999 Newsletter

The Institute for Private Enterprise promotes the cause of private enterprise and a reduction in the role of government. Subscribers receive copies of all publications including a monthly newsletter complete with attachments.

  • Tax Changes - Using Up "Reform Capital".
  • The Fall in Unemployment is a Mirage - No Structural Improvement in Labour Market Functioning.
  • Should the AIRC be Abolished - Accepted for Sunday Age Debate!
  • Workplace Relations Reform - A Package Approach is Needed.
  • Stolen (sic) Generation - Hearings Finished - As is the Claim.
  • Greenhouse Gases "Threat" - Now 19,000 US Scientists Say its Nonsense. Monetary Policy - Why Interest Rates Should Not be Increased.
  • Victoria's Expenditure and Tax Levels - Why The Age Got It All Wrong.
  • Vic Schools - Does Enhanced Self-Management Mean Self-Government?
  • Globalisation - The Age Acknowledges Errors.
  • BCA - No Credibility in Canberra.
  • The Reform Agenda.

During the past month I had discussions in Canberra, mainly to explore priorities in the Government's economic reform program. When I suggested that, now that tax is "finished" we could move on to other issues, I was told very firmly that the implementation of the tax changes would be a major on-going exercise that would occupy considerable time next year for the Government and the Treasury (which still has three divisions working on tax issues) - there are many t's to be crossed and i's to be dotted. Clearly, a large amount of "reform capital" is being consumed on tax - and for what appears to be little economic benefit. (At a recent Melbourne Institute forum, Prof Peter Dixon claimed that there was now general agreement amongst economic modellers that the net economic benefits from the ANTS package will be minimal and, noting that the Ralph Committee avoided modelling the economic effects of the business tax reforms, he argued persuasively that they would also have very limited net effects, possibly negative).

In short, the "benefit" of the tax changes is largely political in that it allowed the Prime Minister (and the Government) to demonstrate leadership and "vision". Of course, those who perceive that a broader tax base is needed to finance additional government spending down the track, will also see a political benefit. So, why does Labor continue to attack the GST, with Beazley actually saying recently in Parliament that "we do not think there ought to be a GST on anything"? This is simply to take advantage of the virtual certainty that the implementation will prove very unpopular: once the GST has been implemented, Labor will embrace it, particularly as it will probably produce more revenue than estimated.

The Lower Unemployment Mirage

Perhaps the most interesting thing to emerge from my Canberra discussions was confirmation of my reading of Minister Newman's Discussion Paper on social welfare that the reduction in unemployed since 1992-93 ( the bottom of the labour market) has been more than offset by increases in other welfare recipients, most notably the very large increase in disability pension recipients. My Financial Review article examines the issue in more detail (attached and also on Clearly, both the social welfare system (sic) and the workplace relations system (sic) are in need of drastic reform - the analysis suggests that the underlying functioning of the labour market has not improved in the 1990s.

The social welfare review is being perceived as a major reform project, with an IDC backing up the "Reference Group" that is charged with producing a "final draft" (how cautious can you be!) report for Minister Newman by June 30 next year. The basic approach being adopted appears to be to try to improve the incentive to work without effecting any net reduction in spending - reducing middle class welfare is just too hard and would impinge on the Prime Ministers "battlers", I was told! Interestingly, however, in examining ways of reducing effective marginal tax rates (EMTRs) an attempt is being made to distinguish between those who are likely to stay on low incomes and those who can be expected to increase their incomes over time (for the latter, high EMTRs are not necessarily a deterrent to work, of course).

Abolish the AIRC - Heresy!

When the Sunday Age rang to ask me to be a contributor to their weekly debating corner and I suggested as a topic Should the Industrial Relations Commission be Abolished? , I did not really expect that anyone from the union movement would respond. The fact that they did indicates that they are taking the possibility seriously (the debate is attached and on

I also persuaded The Australian to accept an op-ed piece proposing a similar fate for the AIRC as part of the millennium celebrations (attached and on Actually, I am too compassionate to propose abolition - instead, I am suggesting it be converted into a voluntary mediation and conciliation service.

How About a Reform Package for Workplace Relations?

My Australian article also argues that the Government is unlikely to succeed with substantive reform unless it offers a "package" deal to the Senate that includes measures to ensure that living standards of any "losers" in low income households would be protected through the social welfare system. This proposal is being developed in more detail.

Incidentally, notwithstanding an attempt by the Fin Review's union men to take workplace relations reform off the agenda (the second day I was in Canberra they ran a front page beat-up "interpreting" the Prime Minister's end of year speech to the National Press Club as its abandonment ), there will be plenty of activity there next year even though the immediate prospects for legislative change are now clearly very limited.

Stolen (sic) Generation -Case Finished

The hearings have been completed in the Darwin test case involving the claim against the Commonwealth for compensation by two Aborigines on the ground that they were "stolen" from their mothers. Remarkably, there has been only one attempt by the media to examine the evidence and that was in the "Good Weekend" magazine published by the Fairfax group. This did cover most of the issues but presented a pretty one-sided interpretation and omitted some important facts. I cooperated with former Minister for Aboriginal Affairs, Peter Howson (who has read the transcripts and attended some of the hearings), in drafting a response by Howson but the editor refused to accept it.

Any reasonably impartial assessment would have to conclude that, at least for the period covered (roughly from 1940),no substantive evidence has been adduced that any Aboriginal child was stolen. However, what did become apparent is that the reputations of the dedicated people who looked after the half-caste children who were rejected by the traditional tribes have been traduced by the Wilson report. It is absolutely astonishing that none of the missionaries, patrol officers or senior welfare officers who have given evidence in the Darwin case were even invited to give evidence by Wilson (some offered but received no reply). If ever there has been a miscarriage of justice, this was it. Further, the evidence makes it difficult not to conclude that the policy pursued by successive governments, which essentially sought to provide half-castes the opportunity to become part of the wider community but did not force them to do so, is one for which the Australian community and those involved should be proud.

Counsel are expected to deliver their summing ups early in the New Year and the single judge to deliver his conclusions around mid-year. The latter will be under enormous pressure to deliver a politically correct verdict, particularly as he will in effect be delivering judgement on Wilson. We can only pray that he resists any temptation to prevaricate.

The Greenhouse Gas Farce

In last month's newsletter I referred briefly to the greenhouse gas "farce", and suggested that the BCA should be tackling that issue rather than promoting "soft" reform options. This produced one prominent BCA "challenger" who claimed that "the science" of global warming is now well accepted, that only "one or two" scientists were really challenging that science and that business has no real alternative but to accept that "something" has to be done to reduce greenhouse gas emissions. Shortly after that, it was reported that the Government has decided that legislation will be introduced with effect from I Jan 2001 to force an increase in the electricity industry's use of renewable energy.

I was able to respond to my challenger by referring to the petition which began circulating amongst US scientists after the December 1997 Kyoto conference under cover of a letter by a past President of the US National Academy of Sciences, Dr.Frederick Seitz. That petition has now been signed by about 19,000 scientists with advanced academic degrees. The full text of the petition, which as far as I am aware has never been published in the Australian media, is as follows:

"We urge the United States government to reject the global warming agreement that was written in Kyoto, Japan, in December 1997, and any other similar proposals. The proposed limits on greenhouse gases would harm the environment, hinder the advance of science and technology, and damage the health and welfare of mankind.
There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gases is causing or will, in the foreseeable future, cause catastrophic heating of the Earth's atmosphere and disruption of the Earth's climate. Moreover, there is substantial scientific evidence that increases in atmospheric carbon dioxide produce many beneficial effects upon the natural plant and animal environments of the Earth."

It is difficult to believe that, with such a strong petition, any Government could even contemplate ratifying the Kyoto Protocol (which is to be determined late 2000) It should be noted that those scientists who have signed this damming petition include some who were on the panel (IPCC) which produced the report claiming that there is a consensus about global warming! While those left on the IPCC are reportedly working on some further piece of obfuscation to counter the petition, the bottom line surely is that we are a long way away from having sufficient evidence to justify taking policy action to reduce CO2 emissions. If the Howard Government is looking for "reforms", it could do a lot worse than enlist the assistance of these US scientists to lead an international campaign against action to reduce greenhouse gas emissions.

Incidentally, there are two excellent web sites setting out convincing facts and argument as to why we do not need to adopt the precautionary principle in regard to the warming "threat" - a US one (The Science and Environmental Policy Project) at and an Australian one at

Monetary Policy - Further Increases in Interest Rates?

There have been some press reports that there was a difference of view between Canberra and Martin Place on the November interest rate increase of 0.25 per cent. My discussions suggest that those reports may have been correct. However, the media has not woken up to the basis of the difference in view, viz that improved productivity is allowing the economy to grow faster than previously without causing inflation to rise. As I have been pointing out for some time, with unit labour costs falling, there is actually downwards pressure on prices from this quarter. Thus, apart from the surveys which show that inflationary expectations have increased (probably due to expected GST effects), there is no substantive basis for rate increases.

Further, contrary to the very poor media analysis of the September quarter national accounts, the latest GDP figures showing a 1.6 per cent increase in that quarter (seasonally adjusted) do not provide additional support for rate increases. It will be recalled that these self-same analysts predicted that the original June quarter increase in GDP of 0.2 per cent was "unbelievable" and would be revised up. In fact, the ABS has now revised it down to 0.1 per cent! A better indication of what has been happening is obtained by comparing half-yearly figures and these show for the latest half-year a marked slowing in GDP growth to an annual rate of only 3 per cent. Further, the underlying rate of inflation as measured by the price index for domestic final demand increased by less than 1 per cent pa! The Australian business section has agreed to publish an article which puts these figures in better perspective.

This does not mean that there will be no further interest rate increases. For one thing, nobody knows whether and/or for how long the productivity surge will last. It is also said that it is difficult to change the view of the Reserve Bank Governor, who appears to want to establish a higher "base" from which rates could be further increased to deal with any inflationary upsurge next year from the GST price effects and/or the stimulus to demand from the tax cuts that are the fiscal price of introducing the GST.

There is no denying that these constitute a potential threat to price stability and I was told in Canberra that the decision to increase taxation via the notorious Timor tax reflected real concern that there was a need to be seen as sustaining a responsible fiscal strategy in the circumstances that would prevail in 2000-01. However, it seems very strange that a Coalition Government should decide to apply the Timor tax only on the "rich", particularly when it should be supporting a flattening of the rate scales (the upper income groups were treated better by Keating!). A far better strategy would have been to use the situation to cut middle class welfare. (Incidentally, the betting in Canberra is that the Timor tax will stay on in order to finance an on-going lift in defence expenditure. Belatedly, the Government has realised that it allowed such spending to fall to too low a level at less than 2 per cent of GDP).

As to GST price effects, as Prof Freebairn pointed out at the Melbourne Institute forum, the New Zealand experience suggests that there should be no lasting effects. The following table (from Freebairn) shows the NZ CPI changes between the September quarter of 1986 (a 10% GST was introduced in October 1986) and the March quarter of 1987 and between the June quarter of 1989 (the GST rate was increased to 12.5 per cent in July 1989) and the December quarter of the same year.

NZ Quarterly Price Change

Sept Quarter 1986 3.3
Dec Quarter 1986 8.9
March Quarter 1987 2.4
June Quarter 1989 1.2
Sept Quarter 1989 3.5
Dec Quarter 1989 1.2

The Government should not rely only on the Reserve Bank to inform the public of the expected extent and duration of price increases from the GST, and of the need to avoid flow-ons into wages. It will need to mount its own information/massaging campaign next year. The success or otherwise of this campaign could be of considerable importance in keeping the Governor's finger off the interest rate trigger.

Victorian Government Taxing and Spending Levels - The Age's Continuing Errors

The Age and its journalists have played a significant role in developing the widespread perception that standards of key government services were run down during the Kennett Government's period in office. In last month's newsletter I pointed out that this was incorrect and that Victorian taxes were almost 7 per cent above the States' average when Kennett left office.

This produced an irate response from The Age's economics editor, Tim Colebatch, who complained that I am "resistant to learning anything from those you see as ideological enemies" and proceeded to try to "educate" me as to the real picture. The only trouble was that Tim's basic analysis was quite wrong! The exchange between us is attached. To date, Tim has not acknowledged his errors.

Tim, of course, is far from being the only Age journalist who has been making basic errors of analysis on this important issue. But, as Tim's response illustrates, how to correct the errors when (apparently) the journos are convinced they are correct?! For one thing, it is extraordinary difficult to get Letters to the Editor published even to correct errors - one would have thought that would be fundamental to a newspaper (it almost makes me advocate regulation of the media to require that errors be corrected).

Victoria - Self-Governing or Enhanced Self- Managing Schools?

A major area of difference between the Kennett and Bracks Government is supposed to be over the important policy of self-governing schools, 51 of which had been established at the time of Kennett's defeat. Initially, the new Education Minister, Mary Delahunty, set out to abolish these arrangements, which are hated by the union because they give schools the right to determine who they will employ. However, after Delahunty clearly misrepresented the self-governing policy, and apparently acted in contravention of Labor's stated policy of honouring existing contracts, Bracks now appears have back-tracked, stating that Labor is pursuing "a proper autonomous self-management model for schools". In brief, it appears that we are now to have a policy of "enhanced self-management" instead of "self-government".

It remains to be seen whether this new model will include the right to select staff, described by one school principal as "the chief benefit of the self-governing scheme". My money is on the unions.

Globalisation and The Age

In last month's newsletter I pointed out that at a forum in early November former Commonwealth Statistician, Ian Castles, had exposed major errors in a United Nations report which had received widespread and uncritical coverage in The Age and Canberra Times. Castles showed that there has been no decline in the share of least developed countries in world GDP in this decade and that real per capita GDP in poorer countries has been increasing by 1.4-2.0 per cent pa.

Subsequently, reports/articles by two other Age journalists repeated the errors in the UN agency report and, after some quibbling, The Age Letters Editor agreed to publish a correction by Castles. This then led Tim Colebatch to publish an acknowledgement that Castles was correct - "The poor aren't all getting poorer" - although he could not resist throwing in the qualification that a considerable number of poorer countries (particularly those in the former Soviet Union and Eastern Europe) have been going backwards since the 1970s. This can very largely be attributed to poor domestic policies rather than globalisation per se.

Colebatch also acknowledged in his article that there had been no increase in inequality of incomes in Australia "up to 1995" (the UN report had claimed that inequality in Australia is amongst the highest in the world). He added, however, that it remains to be seen whether this would be sustained. Apparently Tim has not seen the ABS report on Income Distribution in 1997-98 which states that "the degree of inequality in income distribution of all income units remained almost unchanged between 1994-95 and 1997-98" (the report shows, in fact, that the share of the lowest quintile increased fractionally over this period).

More on the BCA

I took the opportunity while in Canberra to test views on attitudes to the agenda being pursued by the BCA, particularly in regard to the espousal of the wage freeze/tax credit solution (sic) to unemployment, of the establishment of an independent body with power to vary taxes to smooth the business cycle, and of the need for an increased population. It would be inappropriate to repeat here some of the reactions I received. The bottom line is that the BCA has little or no credibility in Canberra.

Happy Reforming in 2000

It remains only to wish subscribers (and any others who happen to read this) a very happy Christmas and a reforming New Year. I leave you with the following quote from an article by Robert Barro ( Professor of Economics at Harvard):

"A country's economic performance depends on various aspects of government policy, but no aspect is more important than the quality of political, legal and economic institutions. Differences in institutions have proven empirically to be among the most important determinants of cross-country differences in rates of economic growth and investment. Consequently, basic reforms that improve institutions provide one of the best routes for transforming a country over the long run from poverty to prosperity"
(From 2000 Index of Economic Freedom published by Heritage Foundation, Washington DC and the Wall St Journal, p31, Nov 1999).