The old masters and ordinary apprentices

THE cabinet papers of 28 years ago reveal we have lost our capacity for bold national reform.

PAUL Keating says achieving economic reform is hard political work. "People think there's a reform token and you just put it in the reform slot machine. Well, there's no reform token".

The intensity of economic reform under the Hawke government is in the spotlight with this week's release of the 1984 and 1985 cabinet papers .

Having floated the Australian dollar and removed capital controls that essentially made it illegal for Australians to invest offshore in 1983, government then took on the deregulation of banking, allowing banks to set their own deposit and lending rates and granting licences for 16 foreign banks to operate in Australia.

It picked up an agenda for tax reform lying in a pigeonhole for a decade and introduced capital gains tax, fringe benefits tax, dividend imputation and, though it took several years to implement, the petroleum resource rent tax.

The reforms kept rolling, including the lowering of tariffs, the development of a tightly targeted means-tested welfare system, liberalisation of foreign investment, the creation of Medicare and national superannuation and, under the Keating government, the replacement of centralised wage fixing with enterprise bargaining and the implementation of competition policy, which revolutionised the delivery of state government services.

None of it was easy, says Keating, with proposals having to be argued through the factions, the cabinet, the parliament and the public at large.

"It was the political skill in the melding of ideological and political interests and forming it into an adoptable, internally consistent package," he says.

It is a record that inevitably invites comparison with the halting progress of the current government on issues ranging from tax, to foreign investment, workplace relations and industry protection. Gary Banks gave vent to his frustration in his final speech as chairman of the Productivity Commission outlining the reforms he believed should be undertaken but which government found too politically difficult.

They included measures such as abolishing remaining tariffs and industry subsidies, subjecting public infrastructure investment to transparent cost-benefit analysis and also assessing the costs and benefits of labour laws.

Banks conceded most of the almost 50 items on his "to do" list were not popular. "Most of them involve arrangements that currently provide significant advantages to particular groups who naturally take more interest in resisting reform than the wider electorate takes in supporting it," he said.

Tax reform provides the clearest contrast between the current government and the Hawke government of the 1980s. In both cases there was a blueprint setting out what needed to be done.

The McMahon government had commissioned a comprehensive review of the tax system - known as the Asprey Review - which was delivered in 1975, recommending broadening the tax base with a consumption tax and the broadening of the income and company tax bases with capital gains tax and fringe benefits tax. The proceeds would finance lower marginal tax rates.

The Whitlam government was preparing to introduce capital gains tax when it was dismissed from office, and the Fraser government let the Asprey report lie fallow for its eight years.

Hawke sought to defuse a scare campaign over capital gains tax during the 1984 election by promising a tax summit. Keating was sceptical about the summit, but seized the initiative.

Treasury rolled out a white paper, picking up the recommendations of Asprey and adding a few ideas of its own, including dividend imputation. The summit was presented with three options. The first, which was essentially the status quo, the second which included sweeping reform but not the consumption tax and Keating's preferred "Option C", which included the lot.

Hawke concluded that there was not the support for a consumption tax, with neither unions, welfare groups nor business endorsing the "Option C" but left it to Keating to push through the remaining large tax reform agenda.

Keating says dividend imputation and lowering top marginal tax rates appealed to the right while capital gains tax and fringe benefits tax appealed to the left. In arguing the case through the ministry, there was enough on the table for everyone to put up with the things they didn't like.

At the media release of the cabinet documents, former Hawke minister Susan Ryan paid tribute to Keating's powers of persuasion.

"Keating led the charge and instructed us all. He was at his best. He would explain the complex things. He'd be dramatic, he'd draw graphs and diagrams about what would happen. I found it totally persuasive," she said. "Not every member of cabinet did, but he educated us about tax, how it worked and why it had to be reformed."

The University of NSW's Professor Chris Evans says this is the most important difference between the tax reforms of 1985 and 2010: the presence of a champion for the cause. Tax reform is always difficult and is never seen as a likely winner for the politicians. In both Hawke and Keating, there was someone willing to push and willing to go out on a limb."

"When you look at Julia Gillard and Wayne Swan, you don't see the same urgency. You don't see them having the same big picture of tax reform that was there at the 1985 summit."

Evans says Swan and Kevin Rudd gave the reform process a bad start when they sat on the Henry Report for six months after it was delivered in December 2009. "It made people suspicious and edgy about what the government would do."

When, without notice, they came out with the massive Resource Super Profits Tax (RSPT) that was to finance a showbag of tax giveaways, such as an concession on the tax paid on interest, a 2 percentage point reduction in the company tax rate and a shift to 12 per cent superannuation, it was a political debacle.

The gains for any of the groups being rewarded were not sufficient to galvanise support that would counter the wrath of the resource sector, which believed it faced the effective expropriation of 40 per cent of its assets.

The bulk of the 138 recommendations from the Henry review were ignored, while 27 were ruled out for all time.

"It looked like the government had cherry-picked the Henry Report and made a grab for the measure that brought significant revenue," says Evans.

In some respects, the government's response made future tax reform more difficult. The Henry Report had identified the hopeless mess in the taxation of savings, with investors in rental property, shares, and bank deposits all taxed at different rates, particularly if debt was involved.

He recommended a package in which the concessions for capital gains and negative gearing would be reduced, but there would be gains for property landlords through lower tax of rent. For all forms of investment income, only 60 per cent would be taxed at a person's marginal tax rate.

Swan destroyed the package by ruling out any changes to capital gains and negative gearing while offering a token rebate on the first $1000 of interest income.

"He queered the pitch for future tax reform with this reaction," says Evans. By contrast, although the Hawke government did not put up a consumption tax, it did nothing to stop one being implemented in future and allowed the debate to be aired.

"I see Swan as reacting rather than pushing or taking a proactive approach to tax reform. It is a very careful and cautious approach. It may be that tax is so politicised now. It is so easy to knock anything down from the other side with the 'big new tax' syndrome."

The knife-edge nature of Labor's hold on parliament and the give-no-quarter approach of Tony Abbott to opposition is seen by some as a reason for the government's caution on economic reform. The government denies that its policy agenda has been influenced by its lack of parliamentary majority or that it is cautious on reform.

Ministers point to the passage of the carbon tax, the (bare bones) mining tax and the cigarette plain packaging law among a full legislative agenda as evidence of the effectiveness of the government.

This suggests the failure to act on issues identified by Gary Banks reflects a lack of shared vision on economic reform, rather than political weakness.

This becomes clear in the government's attitude towards the manufacturing sector. Kevin Rudd famously said he didn't want to be prime minister of a country that "didn't make things", and this sentiment is reiterated by Julia Gillard.

The government is establishing a new "anti-dumping commission" to apply more focused resources to stopping the sale in Australia of goods for less than their home market, while it has already set up an advisory body on import barriers dominated by import-competing interests who stand to benefit from increased barriers. Consumer interests are not represented.

Similar examples where the Gillard government's actions depart with contemporary economic thinking include the new protections for coastal shipping, and the resistance to any cost-benefit analysis for the National Broadband Network.

The reforms of the 1980s were assisted by the groundwork of a group of politicians, economists and public officials through the 70s and early 80s.

Together they railed against the inactivity of the Fraser government and articulated the case for rolling back protection, deregulating labour markets and opening financial markets.

The Hawke government did things in its own way, but there was a vision for reform already there. Australian National University's Professor John Wanna says the Labor government was implementing a largely Liberal agenda.

"There were some things they dithered about, such as privatisation. In the end, they were influenced by (finance minister) Peter Walsh saying if we don't do it, the others will the moment they get in."

Although there was bipartisan support on some reforms, measures such as capital gains and petroleum resource rent taxes were strongly opposed by the Coalition.

Wanna says there was also strong opposition in the business community to the "corporatist" approach of the Hawke government, which sought to overcome the divisiveness of the Whitlam government's reforms by getting both business and unions to sign off on policy, particularly the series of "accords" under which the unions traded real wage cuts for social benefits such as superannuation, healthcare and education funding.

However Geoff Allen, who was the founding executive director of the Business Council, says the Hawke government was helped by the strong intellectual input from the business community.

This emerges in the cabinet papers, with Keating citing Business Council submissions in arguing for the liberalisation of foreign investment.

Allen says business leaders were much more closely engaged in public policy then than they are today. They funded internal policy groups, including economists.

"BHP, for example, was a largely Australian company. Its board was all Australian and so was its focus. It is now substantially focused on the global market, the leadership is largely not Australian and the board is made up of people from five countries."

"There is a thinning out of those corporate resources and the incentive system is all about short-term profit performance. There are now different parameters for business engagement in the reform process."

Allen makes the point that the Hawke government had a strong mandate for reform. It had been elected as the economy was emerging from recession, and as leader Hawke had huge popularity ratings.

The Gillard government has nothing like that level of political capital. The little it has, it is focusing on a few select areas like education and climate change.

The Hawke government had huge political capital and, with treasury in the hands of Keating, had someone ready and able to spend it.