Government that knows best

Kevin Rudd, at the Queensland Media Club, is operating in the belief that government intervention or ownership is the way to go. Picture: Lyndon Mechielsen

EVERY first-term government is marked by contradictions but the evidence can no longer be denied: Kevin Rudd is taking Australia on to a new policy trajectory of state intervention, control and faith that "government knows best".

This looms as the decisive judgment on the Rudd era. It constitutes a break from Australia's post-1983 tradition of pro-market, middle-ground economic reform. It is not necessarily unpopular but raises the alarm that Australia is marching a false policy path.

This is the product of a new generation of Labor politicians, their distance from the Hawke-Keating generation, the 24-hour media cycle that drives political spin and their embrace of short-term tactics that succeeded for Labor at state government level.

The Rudd experiment is in serious trouble. At its heart is a dysfunctional government motivated by good intentions but plagued by its penchant for greater state control by various methods of spending, tax, ownership and regulation, and a focus group mindset that has produced spectacular blunders.

Rudd Labor is locked in a destructive political war with the mining industry that is damaging Australia's national interest. The responsibility lies with Labor. This is how the government has chosen to present itself in an election year.

Convinced by Treasury of the economic wisdom of the resource super-profits tax, Labor opted to impose this on the mining sector in an ambush it believed would further its political interest. This judgment seems dubious. But the bottom line is unequivocal: after a two-year tax review led by Treasury chief Ken Henry, the government defined itself by a modest reform package financed by a hefty new resources tax.

The process contrasts with the Hawke-Keating 1985 reforms based on a detailed Treasury tax-policy white paper with options, a public debate over several months, a tax summit chaired by Bob Hawke, abandonment of options that failed to win sufficient business-union-community support and, finally, cabinet decisions leading to a historic reform package. It was high risk but it worked.

Rudd Labor, by contrast, chose lack of consultation, industry confrontation, hubris about the superiority of its tax design and the calculation that it could win the politics by isolating the miners.

The mining industry has shown its ugly face by its campaign of threat and intimidation. The issue has got out of control. The mining companies are genuine in arguing the tax will undermine their competitiveness and Labor is correct to argue that a profits-based tax is the best design. But Labor has mismanaged this reform. The government appears petulant, not strong. It will be blamed for creating sovereign risk and held responsible for triggering the clash.

The optics this week were stunning: Rudd boycotting the annual mining industry dinner and instead attending the dinner celebrating the centenary of the 1910 election of Andrew Fisher's first majority labour government. The speeches were just as stunning. Rudd invoked Fisher's achievements as the template for Rudd Labor, a century later.

Fisher, he said, "was above all a nation-builder". He believed in "national leadership, national infrastructure, national institutions, uniform standards and collective national identity". Just as Fisher began a trans-Australia railway, "we will build a national broadband network to underpin the national economy of the future".

The NBN at an estimated capital cost of $43 billion is a highly dubious business proposition with the recent McKinsey-KPMG study finding that for financial reasons it would need to remain wholly in government hands for the first 15 years. It is a huge technological bet, opposed by the Coalition, symbolising Labor's deepest nation-building faith: that government knows best.

Rudd said Fisher "would be proud" that the "same values" he brought to the Conciliation and Arbitration Act were now reflected in the Rudd-Gillard Fair Work Act. It is incredible that Rudd Labor seeks to define itself by the century-old Harvester judgment values that undermined Australia's economy for 90 years in the name of fairness. But it's true. Indeed, Labor boasts of such identification, embolden by Howard's unpopular Work Choices. Witness this week's Fair Work Australia $26 a week increase in the minimum wage with cheers from unions and laments from employers. It was a trip down the time tunnel. One judgment is not important. What counts is the system it represents, an incremental slide to wage fixation giving less weight to the economy and job creation. The long-term trajectory is misconceived.

For Rudd, nation-building is exemplified by the early 2009 $42bn fiscal stimulus. This was one of his finest decisions. He is right to claim vindication with Australia avoiding recession.

But Labor misjudged the ability of government to administer and monitor such large spending so quickly. Flaws in the roof insulation program, now suspended, and the Building the Education Revolution will still be case studies in public administration folly in 50 years. Such defective programs shattered Labor's reputation for competence. The independent Hawke report on insulation found an alarming extent of potential fraud and unsafe work practices.

The minister assisting with energy efficiency, Greg Combet, said yesterday that homes with foil insulation were being inspected at the rate of 2000 a week, with Labor pledged to at least 150,000 inspections.

The further irony is that the issue Rudd declared as the boldest economic reform of the generation - pricing carbon with an emissions trading system - has been abandoned for an entire term at least and his third-best option, the Renewable Energy Target, had been dysfunctional until the scheme's redesign. In short, climate change policy lies in ruins.

Meanwhile, at the mining dinner, Rio Tinto director Rod Eddington, the business figure most linked with Rudd before the election, inaugural chairman of Rudd's Infrastructure Australia, offered gentle but lethal advice to the absent PM. "There can be no doubt whatsoever that the policy-making process to date leaves a lot to be desired," he said of the resources tax. "Good public policy is usually the product of good process," (By such logic the tax is bad policy.) Eddington wanted "genuine and substantial consultation with the affected parties". This was "even more critical when policy changes are significant". He warned that "the national stakes are high" and "that process must start now". In short, Rudd and Wayne Swan misread the policy and the process.

Rudd cannot accuse Eddington of bending the truth. He is a business friend of Labor. His message is unmistakable: Australia's national interest is being damaged and the onus lies on Rudd to bring the parties together. Could anybody imagine Hawke as PM allowing this sort of escalating conflict to continue?

This week The Daily Telegraph political reporter Simon Benson released his book Betrayal, an account of the destruction of the Iemma government in NSW on electricity privatisation reform. In effect, the party destroyed the government. Rudd, having persuaded Iemma to defer his privatisation until after the 2007 national election to avoid ructions in his campaign against John Howard, then watched the premier's destruction from the sidelines. Yet NSW electricity privatisation was pivotal to Rudd's micro-economic reforms.

For Paul Keating these events are a turning point for modern Labor. He says in the book the reform impulse has surrendered to organisational self-interest and poll-driven populism.

"When the motivation of the machinery of the party is unfurnished as to policy purpose, it has nothing more to offer than to focus on marketing and polls," Keating says. "The [NSW] government now dances to the party's tune rather than the other way round. This is not a winning formula."

It is not the situation at national level. But it documents a malaise infecting Labor that also affects the Rudd government. In reality, Rudd Labor is a bundle of internal contradictions. Swan's macro policy that returns the budget to surplus in three years remains its rock of Gibraltar.

Yet Labor keeps moving in the direction of Rudd's maiden speech philosophy. "I believe unapologetically in an active role for government," he said. He repudiated the view that "markets rather than governments are better determinants of not only efficiency but also equity". It is a sweeping statement. And it is entirely consistent with his interventionist car industry agenda, plans to build 12 new submarines, compulsion for new spending programs, government-directed nation-building across several fronts and declared timetables to reduce homeless levels and close the gaps for indigenous Australians.

The unifying idea is that government direction or intervention or ownership is the way forward. It fits into a more personal theme: Rudd knows best.