Speak with economists. Many will acknowledge Wayne Swan’s excellent stewardship of the Australian economy through the Global Financial Crisis. It’s an achievement that recently earned him the title of Euromoney magazine’s Finance Minister of the Year.
- By Michael Wallace
Ask those familiar with Wayne Swan’s journey through public life and they say he hasn’t grown out of touch with ordinary families. They can readily recount stories demonstrating his continued commitment to the needs of local communities.
But an economic reformer? It’s a question that draws less instinctive responses. People aren’t able to reel off a set of reform bullet points like they can to summarise Gough Whitlam’s social reforms, or Bob Hawke and Paul Keating’s economic reforms. But consider the evidence a little more closely. Swan’s has embarked on the first reform of access to the age pension in a century. He has initiated the first great heave in superannuation savings since the system was created two decades ago. He has prescribed a big dose of competition for the banking sector. The significance of these moves cannot be dismissed.
Scaling back middle class welfare by means testing government benefits. Encouraging workforce participation among those facing barriers to work, including sole parents, the disabled, the long-term unemployed and the severely disadvantaged. These are not popular or easy measures. A big review of the tax system and reforms to match: a mining tax on Australia’s non-renewable resources, reducing company tax, and finally doing something about tax on company cars and the R&D tax concession.
Putting a price on carbon to transform Australia into a clean-energy economy, while delivering a household assistance package that is equal parts compensation and personal tax reform. Stand back after Swan’s four years as Treasurer: he has a substantial claim to the mantle of ‘economic reformer’.
A reputation as economic reformer is not one that appears overnight. Unlike the quick decisions of a macroeconomic crisis, which rapidly become the stuff of legend, the case for an economic reformer is one that emerges over time. Contrast his claim with that of Peter Costello, who preens himself on a reform record.
Costello’s achievements – the GST, bank supervision, and the Future Fund – have been canvassed extensively. But there is a story of his economic malaise too: tariff reform stalled in 1997, an untouched mining tax regime, and from 2002-03, a budget position structurally deteriorating under the weight of government spending.
Of course, Wayne Swan’s reforms are not like the one-off big bang reforms driven by Labor’s reform hero, Paul Keating, whose time as Treasurer included floating the dollar, bringing down the tariff wall, deregulating industries and much more. But Swan’s reforms are significant and they have a long term impact that builds over time. It will be years before the full impact of Swan’s policies can be measured, but it is time enough to take a closer look at how Australia’s 36th Treasurer is tracking.
WELFARE TO WORK
For those who know Swan well, there isn’t any area of reform more driven by his values than the centrepiece of the 2011 Budget: welfare to work. He is passionate about tackling poverty and social disadvantage. Swan is deeply knowledgeable on the subject, having a completed a six-year apprenticeship as Shadow Minister for Families and Community Services from 1998 to 2004. His 2005 book Postcode: the Splintering of a Nation is his treatise on the subject.
We must not concede defeat; we should not accept a culture of dependency. Australia’s success is built on work at decent wage levels. We must find new ways of helping people to participate in the economy and share in the dignity that work brings. Wayne Swan, Postcode, 2005, p.181
Economists say Australia should have more people in paid work. We need to lift the participation rate – that is, the number of working age people who are in paid work or looking for paid work. Australia’s official participation rate for those of working age is 76.5 percent, lower than in some countries we might normally compare ourselves with such as Canada or New Zealand. But equally, it’s hardly a crisis. Australia’s participation rate is higher than in the United States or Germany. For Wayne Swan, the impetus for getting people into paid work is not just about having fewer people on welfare. It is not just about having more people paying tax to cover the costs of an ageing population. It is about the benefits of paid work both for individuals and for their children. Swan saw the 2011 Budget as an opportunity to get people into paid work:
We believe in extending the benefits of work to every capable Australian — single parents and jobless families, young Australians, the very long-term unemployed, the disabled, and older workers whose experience we need and value. In a growing economy like ours, we cannot justify the fourth highest proportion of jobless families in the developed world. Wayne Swan, 2011 Budget Speech
Consider the 2011 reforms for sole parents without work. They move certain sole parents from Parenting Payment onto unemployment benefit once the child turns 12 (previously 16) – a difficult measure. But there’s a balance: the withdrawal rate of benefits for these sole parents will be 40 cents in the dollar rather than the up to 60 cent rate faced by unemployed people, recognising that encouraging women into work requires that they keep more of their income. The changes to Parenting Payment save $152 million; the support costs $179 million.
There are also more training places. More affordable childcare through the Childcare Rebate. Teenage parents will have to finish Year 12. Jobless families will have to attend workshops. Income management will be introduced for intensely disadvantaged areas like Bankstown in NSW. These initiatives are the policy nuts and bolts for the economic objective of lifting workforce participation. The changes are a first class piece of social policy.
We know that a disproportionate amount of teenage mums don’t continue their education and find themselves locked out of the world of work – in turn, their children struggle at school and are also locked out of economic participation. This policy says: you will be a better mum and your children will be better off if you continue your education while you are being a parent to your child. We will provide you with support and we expect that you will get some advice on planning and education.
These are higher expectations, commensurate with additional resources. Executive Director of the Brotherhood of St Laurence, Tony Nicholson Consider one more example: the disability support pension (DSP). Australia now has more people receiving the DSP than the unemployment benefit. The program costs $14 billion every year. In 2006, the Howard/Costello reforms tightened the work incapacity test for DSP eligibility. The 2011 Budget improved the DSP reforms. Tougher work tests. New and younger recipients to front for interviews every three months. Personal helpers and mentors. Wage subsidies for employers. There is also an easing of rules so that people can work more without disqualifying themselves from a part pension. The participation strategy also targets mature age workers, young people and the very long term unemployed.
RETIREMENT INCOMES
Another important reform is for retirement incomes.
In 2009, the Government announced a long overdue increase to the Age Pension. But in the long-term, the system has to be sustainable. So alongside the increase, the Government announced that the access age forthe Pension would gradually increase from 65 years to 67 years by 2023.
This is the first time the male pension age has been touched in over 100 years. It improves Australia’s fiscal position down the track. Acting now provides people with the time to make the decisions they need to before the large waves of retirees hit in a few years’ time.
Alongside reforms to the pension there is superannuation reform: most importantly, lifting the superannuation guarantee rate from 9 percent to 12 percent.
It is a reform that means a better retirement lifestyle. A 30-year old on a salary of $60,000 a year will retire with $472,000 rather than $370,000.
Raising the super rate to 12 percent doesn’t start until 2013 and won’t finish until 2019. The benefits won’t be felt until decades after. But in time, super will be a strong ballast for the economy and for the income security of retirees.
For the financial sector more broadly, Swan’s contribution is enhancing competition, driven by a belief that families shouldn’t get a ‘raw deal’ from the big banks. The ban on mortgage exit fees, which can swallow up any benefit of switching banks, has helped increase competition. Consumer legal advocates have supported it as a way to get a fairer deal for families. Banks will also be allowed to issue covered bonds, which will provide them with more funding options.
MIDDLE CLASS WELFARE
The 2011 Budget is only the latest effort to scale back middle class welfare. Consider how the nips and tucks have changed the system that Swan inherited:
2008: Means tests on Family Tax Benefit Part B and the Baby Bonus to people earning up to $150,000.
2009: Upper income threshold indexation paused for FTB Parts A and B and Baby Bonus and changes to FTB (A) payment indexation. Also, private health insurance rebate to be scaled back for families on more than $150,000 a year, and abolished for those earning over $240,000 a year.
2010: Superannuation co-contribution benefits scaled back.
2011: Further upper income threshold indexation paused and family payment supplement indexation paused. Also, Dependent Spouse Tax Offset phased out and minors’ eligibility for low income tax offset for unearned income removed.
These changes are clever. They allow the Government to make relatively minor decisions and let inflation do the heavy lifting over time. It’s a gradual approach to reform. In 2011-12, the savings from the last three budgets were cumulatively worth only $2.3 billion, but they will be worth $40.1 billion by 2020.
It’s a stark contrast with Peter Costello, who oversaw the introduction of new non-means tested benefits: family payments, the Baby Bonus, and the private health insurance rebate. And while the individual beneficiaries of such benefits obviously appreciate them, that does not make them sustainable or sensible. In the four years to 2007-08, real government spending grew on average by 4.0 percent per year, adding to inflation and fuelling increases in interest rates.
Swan is making these reforms not because he is ideologically opposed to ‘middle class welfare’ – he is actually committed to family payments – but because they are necessary.
TAX REFORM
The Australia’s Future Tax System report wasa major review of the tax system with 138 recommendations. The Government has announced 32 reforms moving on the directions identified in the review.
The most important of these is the mining tax.
The mining boom has seen average prices for our resource exports increase by around 200 percent since the end of 2003. This means soaring profits, but it also means resource charges fall behind.
Moving to a profit based tax makes economic sense.
The Minerals Resource Rent Tax will apply to the most profitable minerals, iron ore and coal; it will be set at 30 percent; it will raise $11.1 billion.
The Petroleum Resource Rent Tax regime is also proposed to be extended to all oil and gas projects. Alongside the MRRT, the company tax rate is to be reduced to 29 percent for 2013-14 and 28 percent from 2014-15, and all small businesses will get a new tax break that simplifies their tax at the same time.
By contrast, consider the performance of Swan’s predecessor, Peter Costello. In 2008, Treasury researchers found that over the period from 2004-05 to the end of the forward estimates (2010-11) parameter and other variations added $391 billion to the budget surplus while $314 billion was taken off the surplus through spending and tax cuts – “Effectively, the additional revenue from the commodity boom has been spent, or provided as tax cuts”.
Another tax reform example: the Research and Development Tax Concession, first introduced in 1985 to provide a financial incentive for firms to spend money on research.
Over time, its usefulness as a policy has been eroded. The Concession was cut from 150 percent to 125 percent in 1996. Lower company tax rates reduced effective levels of assistance. By 2007, the concession was worth only 7.5 cents in the dollar. And because it was available in arrears on tax payable, start-up companies (who might be in tax loss for years) waited a long time for any benefits. Its impact on corporate decision making had become marginal.
Meanwhile, over the same period, large companies became adept using the concession as a business subsidy. They were writing off a lot of business-as-usual production activity on the basis that it was directly related to R&D activity.
From 1 July 2011, the incentive would be paid earlier and at the higher rates of 15 cents in the dollar for small and medium businesses and 10 cents in the dollar for larger businesses (through tax credits of 45 and 40 percent respectively). Businesses get a stronger signal to invest in R&D.
The improved benefit was ‘paid for’ by tightening the definition of R&D, with a ‘dominant purpose test’ expected to knock out a substantial proportion of business-as-usual claims. It means the $1.8 billion a year incentive – the Government’s most significant direct innovation policy lever – is better used for its original intention.
Another good example of reform is the change to the Fringe Benefits Tax (FBT) on company cars.
Previously, FBT provided an unintended incentive for drivers to drive further. Analysis in the Henry Tax Review showed a remarkable number of people were driving their cars further to break into the 15,000, 25,000 and 40,000 kilometre thresholds relevant for the old FBT ‘statutory formula’.
The 2011 Budget fixed that problem: a single formula that removes the incentive to drive further. There’s an economic and environmental benefit.
CARBON PRICING
Finally, carbon pricing. It is a policy whose objectives are driven by climate science, but it is a major economic reform because of its ability to transform the Australian economy.
It will drive investment in new technologies, and set up the Australian economy to build its long-term competitiveness as the world moves to tackle climate change. It is the Gillard Government’s boldest reform.
Wayne Swan cannot be accused of shying away from the big reform debates – he sees carbon pricing as in the league of the biggest reforms of the 1980s and 1990s:
I start from a conviction that no first-rate, first-world economy will be anything other than a clean-energy economy into the future …The only way to drive investment in this technology is to put a price on pollution. Only a market mechanism does the job …As Treasurer, I see a price on pollution as the next crucial frontier in economic reform. It is the type of progress that future generations will speak of in the same terms as the big reforms of the ‘80s and ‘90s …We can’t let Australia become a country incapable of reform. A country where the deniers, the dinosaurs, the vested interests and partisan commentators destroy the reforms we need to prosper together.
Wayne Swan, 7 June 2011, Address to the National Press Club
And how is assistance for carbon pricing being delivered to households? Through payments and income tax reform. The carbon price reform is not being used as an opportunity to just hand out money to the Government’s favoured constituencies, but instead to deliver real reform.
For example, tripling the tax free threshold takes a million people out of the tax system. Reducing tax withheld by employers increases the weekly take home pay of low income workers and provides a greater incentive to work. It means no tax return at the end of the year.
REFLECTIONS OF A REFORMER
Swan approaches the job in a workmanlike manner: “I’ve never for a second wanted to be – or tried to be – the kind of Treasurer who thinks flamboyance is more important than getting the job done. It is pretty obvious that Peter Costello considered this job to be a decade-long vanity exercise all about Peter Costello, but I take a different view”.
If asked about the Global Financial Crisis, Swan focuses on the economic and social dividend of the policy response: “We didn’t suffer the capital destruction and skill destruction that we saw in many other countries,” says Swan.
Driving Swan during the period of policy emergency was his fear of the long term consequences of higher unemployment. Seared into Swan’s psyche are the dole queues of the early 1990s:
It is an awesome responsibility to enter this Parliament at a time when unemployment exceeds 10 percent and long-term unemployment is approaching half a million. The social cost of unemployment places enormous responsibility not just on politicians in this House but also on academics, industrial leaders and everyone in our community not to tap the mat and say, ‘There is nothing we can do’. We should never resort to the pathetic bleating that we sometimes hear from sections of our community that there is nothing that can be done.
Wayne Swan, First Speech to Parliament,10 May 1993
What connects Swan’s approach to macroeconomic policy and long term economic reform? A concern for how ordinary families fare when economic change occurs. He is interested in protecting families from short term economic volatility, and preparing them for the challenges ahead.
Swan’s efforts have won him the respect of Labor’s reform hero, Paul Keating, who recently said:
Wayne Swan happened to inherit the treasurership of Australia a moment before the onset of the most significant financial crisis since the Depression. The measure of his treasurership is to be found in his ability to comprehend danger and act decisively to minimise it.
The crisis abating, Wayne Swan turned his attention to structural policies incident to the performance of the economy, including to raise substantial increments to revenue by the more equitable taxation of resources. He is currently in the middle of a debate about the so-called Mineral Resources Rent Tax, designed to share some of the windfall gains arising from the sharp lift in commodity prices. Beyond this, as Treasurer, he will be presiding over a national summit on longer term taxation reform later in the year.
If the proof of the pudding is in the eating, Wayne Swan’s treasurership brought Australia through this profound crisis. His judgment and decisiveness, in international terms, must rank a high distinction.
The response to the Global Financial Crisis is the mark of Swan’s time as Treasurer, but there is also a story of long term economic reform. It is not the agenda of the 1980s or the 1990s. It tackles the new challenges facing Australia: how to strengthen participation in the labour market, how to prepare Australia for population ageing, how to repair the budget and improve the welfare state, and how to reform the tax system for the 21st century.
In decades to come, Wayne Swan’s achievements in these areas may be his most significant and well-known contributions to the Australian economy.