Howard's big letdown

AS the spectre of a possible election defeat looms, John Howard's strategy of big-spending conservatism, so successful for so long, seems to be approaching the point of political and economic exhaustion.

During Howard's fourth term, fiscal and monetary policy has been in a tighter conflict. The more the Coalition tried to lock in special-interest voting blocs off the budget, the more the central bank raised interest rates to check inflation in an overstretched economy. Australia's revenue surge during the Howard era created a uniquely formidable technique: a big-spending PM running surplus budgets. It became a brilliant electoral tactic and a paradoxical element of Howard's success: the fiscal conservative as big spender.

The irony of Howard's macro-economic policy lies in his identity as an orthodox prime minister within the Labor tradition. Howard stands for big-spending social programs, a redistribution via the tax-transfer system to counter market-driven inequalities, a modest but inoffensive lift in the overall tax burden and a fiscal surplus.

This fits comfortably into the contemporary Labor model. The so-called Howard battlers did not transfer their votes from Labor to Howard for nothing.

Having won their support in 1996, Howard has paid a high price since to keep that support. A 2007 election defeat will terminate one of the most successful vote-pulling techniques in Australian history.

What, then, is the true nature of the Howard Government as judged by its budgets? Consider these benchmarks.

First, Opposition finance spokesman Lindsay Tanner says that in today's Labor-Liberal political contest the "size (of government) doesn't matter" any more. Tanner says there's a "broad consensus" about this.

Labor's message is explicit: it will not spend more than Howard; it will not tax more than Howard; and it will keep running budget surpluses. In short, Howard's conservatism is the outer limit of the Labor tax-spend agenda. So much for the nonsense peddled for years that Howard is a neo-liberal. Note that Kevin Rudd promises in this campaign to spend less than Howard, and Labor sees this pledge as a voting bonus.

Second, Labor's shadow treasurer Wayne Swan and Tanner argue that Howard has misjudged the limits of Reserve Bank tolerance. Labor accepts the narrative that Howard, in his fourth term, pushed spending too far and suffered the consequence of higher interest rates, a fiscal risk that Labor pledges to avoid.

Third, over 10 years Howard has converted a budget deficit of about 2 per cent of gross domestic product into a surplus of about 1 per cent of GDP, but examine how he did this. An analysis, carried in Policy magazine (winter 2007), by former federal Treasury officer Robert Carling, now with the Centre for Independent Studies, finds that the turnaround came by increasing the tax-GDP ratio by 1.7percentage points, by increasing the non-tax revenue to GDP ratio by 0.5 percentage points, and by reducing the spending to GDP ratio by 1 percentage point.

These figures over the decade show that Howard achieved his surplus more by raising revenue than by cutting spending.

The truth is that the spending cuts came in the first two budgets; after that, the story changed. The CIS's Andrew Norton finds that Howard's spending restraint overall is largely because of reduced interest payments (off Labor's debt).

Indeed, when it comes to social programs, Howard is a big spender. This story started before the 1996 poll with his historic decision to reverse policy and accept Medicare. This is the biggest philosophical reversal of Howard's career and the most valuable in voting terms.

According to Norton's analysis, in the decade from 1995 Howard's real increase in spending per person was 38 per cent on schools, 40 per cent on health and 28 per cent on welfare. "To many people these figures would look more like the record of a Labor than a Liberal government," Norton says. "This is where the 'big government' label comes from." He argues that Howard's "legacy of entitlement" is enduring.

Fourth, Howard has created new areas of spending and tax concession that have become a defining feature of Liberal Party philosophy. Witness assistance to private schools, the private health insurance rebate, the huge family support payments, a long series of concessions to over-55-year-olds and, more recently, tax-free super- annuation payouts.

Many of these policies are tied into right-wing political ideology, notably the promotion of choice and the social conservative philosophy of family support.

Consider that a single-income family with two children pays no net tax until its income exceeds $50,000 a year; that a dual-income couple with two children pays no net tax until income exceeds $55,000 a year; that since 1996-97 the real disposable income of a single-income family on average weekly earnings has risen by 34 per cent.

Reflecting the scepticism of the pro-free market CIS, Norton says: "Additional spending on families was a political choice. What are the long-term implications of drawing families capable of self-reliance into the welfare net?"

The formula has worked for Howard in political terms. His past election victories can be grasped only in the context of his growth economy and falling unemployment on the one hand (fiscal conservatism), combined with his raft of family and household assistance on the other (big-spending conservatism). But no political formula works forever. Howard's formula now faces trouble on two important fronts.

First, the globalised age is producing the phenomenon of rich economies with stressed households. There is plenty of wealth, yet people feel more insecure and under greater pressure. Witness the reaction to Work Choices and lower job security, rising interest rates, falling share markets, housing affordability, urban congestion and educational pressures. These stresses are far higher than at the 2004 election. Howard's ability to appease them via government transfers is weakening. And more stresses dictate that an 11-year-old government is a target.

Second, for all his success, Howard has had little success in changing Australia's political culture. As a practical PM he usually follows the "no losers" political axiom, Work Choices being a rare exception. But governments that pretend to guarantee "no losers" set a test that cannot be sustained. For all Howard's talk about self-help and mutual obligation, he has only encouraged the expectations that his Government now seems unable to satisfy.

Howard seemed trapped, facing an assembly of grievances that sit bizarrely with a 16-year growth cycle and constitute a series of complaints bordering on the spiritual that are beyond easy resolution by any government. In this context, cheery ALP frontbencher Craig Emerson has emerged to identify what Howard failed to provide: a new political philosophy. In a recent speech, Emerson says the new political philosophy that Australia needs is best branded as market democracy.

It repudiates "right-wing big government that involves welfare dependency and destroys self-esteem". It redefines the link between the individual and the state. And it offers the opportunities and risk of the marketplace as well as the genuine equality of opportunity in a democracy.