Andrew Leigh

I launched Paul Frijters and Gigi Foster's new book last night, titled Economic Theory of Greed, Love, Groups and Networks.

Speech launching Economic Theory of Greed, Love, Groups and Networks by Paul Frijters (with Gigi Foster)

Andrew Leigh
Federal Member for Fraser

Australian National University
2 May 2013

If you want a quick way to assess a piece of academic writing, try starting at the end. A skim through the reference list can tell you a great deal:

• Is it long, or so short you get the impression the author thinks they’re the only one to have considered the problem?


• Does the author’s own name dominate the reference list, or is there a sense that other people have sensible things to say too?


• Are the references all by people from the author’s country, or are they international?


• Are the references all in the same discipline, or are other disciplines cited too?


• How old are the references? (Frighteningly, the typical reference in an economics article is just five years old)

So, what does starting at the back tell you about Paul and Gigi’s book? They’re extensive, global and interdisciplinary – like the authors themselves. You’ll see references to Fox’s Behaviour of Wolves, Dogs and Related Canids; to a Sherlock Holmes novel; to Bourquin’s ‘The Zulu Military Organisation and the Challenge of 1879’; to Dr Seuss; and to Besse’s 1910 classic Hermits.

Indeed, the book betrays little sense of the authors’ national origins, and only a few pointers that they both work at Australian universities. The book contains more references to China than Australia, and only hints like the reference to the ‘Solow-Swan growth model’ give it away. Indeed, the only clue that the lead author is Dutch is that it contains over a dozen references to sex.

Speaking of Paul, I see that there is some uncertainty in the book as to how he has been treated by the profession. Is this the man who has been ‘labouring for 20 years mostly without acknowledgement’ (p.xii), or the man whose work ‘features regularly in the global media’, and was the second-ever winner of the Economics Society of Australia’s medal for the best Australian economist under 40 (back cover)?

Something of the same tension relates to the book itself. Is this the book that ‘heralds a new dawn in social science’ (p.xiii) or is it the case that ‘with one exception, none of the specific observations or individual theoretical arguments in this book is new’ (p6)? Is this groundbreaking, or a gentle seasonal tilling the soil?

I’m going with groundbreaking, perhaps because I learned some fascinating things from this book. Let me share a few of my favourites:

• In experiments in the mid-1940s, René Spitz followed infants who were raised in a foundling home, where seven infants were allocated to each nurse, and sheets prevented them from seeing out of their cribs. By age two, only one in ten of them could walk and talk. (p98)


• The output collapse in Eastern Europe in the 1990s can be partly explained by a collapse in people’s social ties (p257), exacerbated by a refusal to hand over control to local party bosses and bureaucrats (p264).


• If a life events – like being fired or promoted – happens to your spouse, then it has about 1/10^th the impact on your mental health than if it happened to you (p105)


• The ‘golden rule’ of ‘do unto others’ can be found in surprisingly similar form in the teachings of Buddhism, Christianity, Confucianism, Hinduism, Islam and Judaism.


• In a 1968 experiment conducted the day after Martin Luther King’s assassination, third grade teacher Jane Elliott divided her class of white children into brown eyed and blue eyed. She watched as they formed strong bonds, and eagerly discriminated against one another. (p171)


• On average, workers spend at least one-seventh of their time on ‘information seeking’ activities (p237)


• 12 percent of Chinese men – but only 2 percent of women – are Chinese Communist Party members (p288)


• If social norms are the main driver of littering behaviour, then Clean Up Australia Day is likely to be more effective in discouraging littering than higher spot fines (p323)

I also read some outrageous sentences, which reminded me of the differences between my former profession (where scandalous statements are encouraged) and my current one (where it is not so rewarded). Indeed at some points you feel as thought Paul and Gigi doing their best to provoke the reader. Try some of these for example:

• ‘From a simple cost-benefit point of view, then, self-interested individuals in advanced economies should be paying much less in taxes than they are.’ (p20)


• ‘Women are attracted to power’ (p126)


• ‘I would expect the poor to be loath to band together as a group of “losers” and instead to become more fervent members of religious groups, patriotic groups, and other large reciprocal groups.’ (p212)


• ‘Australia has no comparative advantage in banana production, and … from an efficiency perspective it should not therefore have a banana industry in the first place’ (p318)


• ‘A politician who says he loves his country is merely wasting time on irrelevant and even nonsensical statements.’ (p325)

Not to mention the fact that Paul describes his colleagues with the well-known Marxist appellation ‘fellow travellers’.

Paul and Gigi draw on a wealth of prior research, but they are essentially economists. Both are very comfortable with mathematical models. Yet this doesn’t stop them making fun of their own discipline, saying at one point ‘Much like an army sergeant successfully makes a platoon sergeant out of a selfish recruit by physical exhaustion, so too does the complexity of economic theory force clever yet ambitious young students to accept the group beliefs inherent in it.’ (p431)

This book is heavily informed by the advances in behavioural economics over recent decades. As they point out, the key challenge for behavioural economics now is not to keep identifying quirks (that way lies psychology). Instead, it is to attempt to build a coherent model that incorporates the new behavioural insights.

These insights are rich indeed (ten years ago, Thomas Schelling once told me that he thought behavioural economics had already contributed more to our discipline than game theory). But Paul and Gigi cite Drew Fudenberg, who argues that behavioural economics must ‘devote more attention to the foundations of its models, and develop unified explanations for a wider range of phenomena’ (p222).

* * *

At the core of this book is love. As those of you familiar with the economics of the family will know, we often put love in the error term. Indeed, I myself have written down models in which love is implicitly an independent and identically distributed random variable.

But Paul and Gigi want to know about love itself. They define love as ‘caring about [a] thing or person regardless of any observable reward’ (p74). [i] Their notion of love overlaps with what we might also call loyalty, and so covers parents and soldiers, sports fans and honest judges. They argue that love is a form of submission, and contrast it with greed, which they describe as a form of dominance.

Going further still, they contend that the ‘main game’ of life is a struggle between love and greed (p307). In the Frijters-Foster scoreboard, love wins in the short-term, greed wins in the medium term, but that the ‘thrust of history’ is towards love winning in the long term.

This is heady stuff.

The book is also incisive on the value of groups. As the authors point out, ‘No individual alone can produce procreation, defence, knowledge or insurance in meaningful amounts.’ (p198-9). Perhaps more persuasively to an Australian audience, they also say ‘No individual worker, machine, customer or supplier on his own would have produced or consumed beer.’ (p274)

We can drink to that.

* * *

This is a big, bold, ambitious book. As social science has grown increasingly complex, people have naturally come to focus on narrower fields. Most of us don’t have brains big enough to add to the literature on optimal income taxation, let alone to link it to psychology.

In the breadth of its subject matter and the sweeping nature of its claims, it has more in common with Adam Smith’s Theory of Moral Sentiments than the typical article written by an academic economist these days. This also means that it has the feel of a very good dinner party conversation with Paul and Gigi. And that’s no bad thing.

I notice also that the book refers to another work – cited as ‘Frijters and Foster 2013’, but tantalisingly omitted from the reference list. I eagerly await its arrival.

So, a final question: is this a book about greed or love?

In the former camp, we have the fact that entry tonight was contingent on purchasing a copy of the book. (Is that greed, or merely a convenient pricing model? I’ll leave you to decide.) But like most Australian authors, I expect that their hourly wage for working on this book is likely to be measured in cents rather than dollars.

Moreover, this project perfectly fits their definition of love. The production of this book demonstrates a care for us – the readers – regardless of any observable reward.

I thank them for it, and am pleased to launch, Paul Frijters and Gigi Foster’s Economic Theory of Greed, Love, Groups and Networks.

---

[i] The authors relate their formal model to the identity model of Akerlof and Kranton. But I regard their model of greed and love (set out in the book’s technical appendix) as better cast than Akerlof and Kranton’s, since it does not simply add a term into the utility function.

On ABC666, I spoke with presenter Ross Solly and Liberal Senator Gary Humphries this morning about how DisabilityCare Australia will help change lives, and the importance of ensuring it has a stable funding base. Here's a podcast.

TRANSCRIPT – ABC666 WITH ROSS SOLLY
Andrew Leigh MP
Parliamentary Secretary to the Prime Minister
Member for Fraser
2nd May 2013

TOPICS:               DisabilityCare Australia, Medicare Levy

Ross Solly:           Andrew Leigh, the Labor Member for Fraser, has joined me in the 666 Breakfast Studio, good morning Andrew.

Andrew Leigh: Good morning Ross.

Ross Solly:           And joining us on the phone this morning is Liberal Senator Gary Humphries, good morning Gary.

Gary Humphries:        Good morning Ross.

Ross Solly:           Can I ask you first Andrew Leigh, is there danger that this whole issue, this important issue, is going to be politicised? And has it already?

Andrew Leigh: Well Ross, I think that’s a question best put to Tony Abbott. If he is willing to back a secure line of funding for the National Disability Insurance Scheme, then we can change forever the support that is provided for people with a disability in Australia. I spoke in Parliament about a local Canberra woman Denise Reid who’d written to me about her son Tim, who has Down Syndrome, and she spoke about the frustration about having to get Tim reassessed continually to prove that his chromosomes haven’t changed. She finds that it’s just a complete waste of her time, and it’s one of the many examples of this patchwork of support, and inadequate set of supports, that we provided for people with disabilities and their carers.

Ross Solly:           You understand though, why the Liberal Party will want to see all the detail and would want some explanation of where the rest of the funding is going to come from before it agrees to sign up to something?

Andrew Leigh: Ross, what we’ve said here is that there is going to be a secure line of funding through an extra .5 per cent Medicare levy, that’ll cover about 60 per cent of the costs of DisabilityCare Australia. This is, as Craig said, quite a similar approach to Medicare, a levy that doesn’t fund everything but acts a bit like an insurance premium, because all of us know that if you fall of the roof of your house while cleaning your gutters and you become a paraplegic, you’re treated very differently than if you become a paraplegic as the result of a car accident, and this patchwork means that we need another pillar in the social insurance system. And the notion of paying 96 cents for that insurance is, I think, a pretty good insurance premium against something that could happen to any of us and any of our children.

Ross Solly:           Gary Humphries, is the Liberal Party likely to support the NDIS as it stands at the moment?

Gary Humphries:        Well I can’t answer that question because I don’t know where we are with these discussions. Obviously, we’ve had another new policy direction from the Labor Government. They’re policy making is a bit like a fly in a bottle at the moment, going every direction. We need to look carefully and what this represents and we need also to know where the rest of the money is coming from. On my calculations, when the NDIS is rolled out, the levy will only represent about 40 per cent of the cost of the whole scheme, so there is a very substantial amount of money yet to be identified as a source of funding for this. And we need to bear in mind that over the last five years, living standards in Australia have stagnated, in large part because government taxes have been rising across the board. This is the 29th or 30^th new tax, or increased tax this government will have introduced, and we need to be clear that while it’s easy for us in the parliament to sort of wave a wand and say yes, we’ll have a new tax to pay for this new scheme , it’s ordinary Australians that have to pay for this and it will impact on living standards as these sorts of taxes keep mounting up.

Ross Solly:           Do you think, Gary Humphries, that most Australians are happy – it certainly seems most Canberrans are happy – to pay a little bit extra for this important cause? Do you not think generally that most Australians do?

Gary Humphries:        Look it may well be the case, I really don’t know what most Australians think about this, I think you know, most Australians will not look forward to the prospect of, on average, paying another 350 dollars or so a year on taxes to pay for another government scheme. Bearing in mind that we’re yet to find the money for the Gonski changes, there’s a dental scheme that the government is talking about, and you know, there’s a collapse in the government’s revenue which is presumably having to be paid from somewhere as well. I don’t know how we’re going to pay for all of this and at the end of the day there’s only one source, and that’s the tax payer. Look having said all that Ross, I absolutely agree that the NDIS is important. I was the chair of the parliamentary committee back in 2007 which called for a comprehensive funding increase for disability services in Australia. If my party chose to have a levy to pay for that, I would be comfortable with that and I would support that. But I acknowledge that to do this comes at a cost to the living standards of ordinary Australians as they put their hands deeper in their pockets to pay for these schemes.

Andrew Leigh: Ross I’m really pleased to hear Gary supporting, at least in a personal sense, that levy there. I do also just want to point out there that the strength of the economy over recent years; our economy is now 13 per cent bigger than it was in 2007. Over a time period where all of Europe has shrunk, Europe has twice our unemployment rate, and the US has grown by nothing like what Australia has grown by, and in that period too, the tax take has actually gone down, so Commonwealth taxes are now 22 per cent of GDP, they were 24 per cent in the mid-2000s under the Howard government. We’ve had inflation that’s actually been running well below the historical average, meaning that the cost of living hasn’t increased as rapidly according to that measure as in the past.

Ross Solly:           Which is all good when you say it, and it looks good on paper, what Gary Humphries is saying that when people actually turn around and have to put their hand in their pocket, and when their 350 dollars worse off because there is a new tax that has been introduced, that is never going to come across all that well.

Andrew Leigh: Ross I would be delighted if regular consolidated revenue was so strong that we didn’t need to look to a levy. I mean that’s why the Prime Minister when asked about this last year said that she didn’t want to fund it using a levy.

Ross Solly:           So what’s changed?

Andrew Leigh: What’s changed is the budget position, and clear statements from a number of states and territories – particularly Campbell Newman – that he wanted to make sure that the Commonwealth had a sustainable funding source before he would sign on to the national disability insurance scheme. So if this is going to be a way of making sure that a Queensland paraplegic doesn’t have to fundraise for their own wheelchair, then that seems to be a pretty powerful reason for me. The budgetary collapse in revenues is pretty substantial, $12bn revenue down since last October, $30b over the last few years –

Ross Solly:           Which prompts the question Andrew Leigh, and I’ll go to you in a minute Gary Humphries, is this the time to be introducing big new spending measures?

Andrew Leigh: DisabilityCare Australia, Ross, is an idea whose time has come. You have listeners now who were up at 3 o’clock in the morning because they were taking care of their adult son go to the bathroom because he’s not able to go there himself. To say that somebody on 70, 000 dollars can’t afford 96 cents a day so that family gets better care to look after their son, so they don’t have to face that agonising question of who will look after my adult child when I’m no longer here… I think that is worth doing.

Ross Solly:           Gary Humphries?

Gary Humphries:        Look, I mean, the cause is fantastic, the idea of what we’re trying to do with this money is great. But let’s be clear, this is part of a pattern of o the government to rapidly and very significantly increase the amount that the government is spending in order to pay for a whole range of schemes, which – worthy though most of them are – does represent an imposition on the living standards of most Australians. The government's revenue since the last year of the Howard government has increased by 70 billion dollars, the government is raising 70 billion dollars a year more from Australians than they did since the last year of the Howard government, the problem is then that the government's spending has risen by 100 billion dollars a year. The result of that is that there is a huge gap that has to be bridged by yet another new tax. I acknowledge that the cause is good, I acknowledge that we have a great moral obligation to not let our citizens with disabilities to be second class citizens, to have a lower prospect of life than what other Australians have, that is an important imperative of public policy. But we’ve got to acknowledge that to do this will be a painful one for the Australian community and we still don’t know where the other 60% or whatever the figure is of this funding is going to come from, or for that matter what the other schemes the government thinks are important, where they are going to be paid from. That’s the important question.

Ross Solly:           Do we need to know that Andrew Leigh? Do we need to be told where the rest of the money is coming from?

Andrew Leigh: I’m very happy to tell you that Ross, it will come from consolidated revenue, from the budget revenue that is raised from company tax, from the mining tax, from income taxes. That’s where the rest of that money will come from.

Ross Solly:           But that money would already be pencilled in for other projects, so what would you cut?

Andrew Leigh: We’ve been making a set of savings, we made available 1 billion dollars for the initial work on DisabilityCare in the last budget. That wasn’t an easy save, it was done by doing things like means testing the private health insurance rebate, means testing the baby bonus, which Joe Hockey then compared to China’s one child policy. These aren’t easy savings that we’ve made, but we’re on track to cut real government expenditure which will be something that never happened under the Howard government. This drop in revenues, from 24 to 22 per cent of GDP means that tax revenue hasn’t kept pace with the economy. Gary’s talking about those nominal figures, but you’ve got to think about what’s the tax take compared to the economy because that tells you the demand for health services for the pensions, that’s the budget challenge we’re facing.

Ross Solly:           Gary Humphries?

Gary Humphries:        We’re still talking about having to find that money from pockets of Australians, and again I emphasise this is more policy on the run from a government which told us only a few months ago that they’d have a surplus budget that would help us pay for these sorts of things. Now the budget’s in deficit again, as have all the previous budgets under this government have been. We just don’t know where we’re heading and that worries me greatly. We’re asking for all Australians to take us on trusts, that we can somehow pay for this and all the other important things without actually knowing how it’s going to happen. It’s not responsible decision making and to answer that earlier question, Ross, there is a lot of politicking going on board with this, and Labor senators in the federal parliament keep talking about Labor’s NDIS, and this is Labor’s achievement, there’s a lot of positioning Julia Gillard in this for some issue that may carry her through the election, rather than necessarily a piece of national building.

Ross Solly:           Alright, we’ll just go to Mike. Hi Mike.

Mike (caller):     Hi, I’d just like to say that this is an opportunity, this is an issue that should be above politics –

Ross Solly:           And you don’t think it is at the moment?

Mike (caller):     It isn’t. And I’d like to compare it to the Apology. The first thing that Kevin Rudd did was reach across the corridor to Brendan Nelson and say this is an apology from all of us. The first thing that Julia Gillard did was to say I want to pick a fight with Tony Abbott on this, and I think it was completely the wrong way to go, and the politics that have started today in your studio, it is really sickening.

Ross Solly:           Alright, well thanks for your thoughts on this Mike. Let’s go to Darren.

Darren (caller):  Hi Ross, my concerns is that you’ve got two members of parliament there, one from the Senate and one from the other place, and it’s very frustrating from my perspective that you’ve asked a specific question about funding. The .5 per cent I think is a great idea but it doesn’t fund the total amount, and your question is where is the money coming from, and for Andrew Leigh to say that it’s coming from consolidated revenue, knowing the Treasury have got it wrong in the last 12 months, and the last two years, and the mining tax has not generated the revenue that’s expected, and I would suspect it’s not necessarily going to do that into the future, how can he say that its actually coming from consolidated revenue?

Ross Solly:           Alright Darren, Andrew Leigh?

Andrew Leigh: Most taxes are not tied directly to particular items of expenditure, a hypothecated tax like the Medicare levy or this new disability care levy is unusual. Like Medicare this is going to be a small levy that doesn’t cover the cost of all of the scheme, but guarantees that half is there, the rest of those income company taxes, through the revenue that is raised by the government, we will build this, because this is something we are passionately committed to.

Ross Solly:           Andrew Leigh, thank you for coming in this morning. Senator Humphries, thank you for joining us on the phone.

Andrew Leigh: Thanks Ross.

Gary Humphries:        Thanks Ross.

On 27 March 2013, I spoke at the Australia Institute's "Politics in the Pub" about strengthening community life, drawing on some of the ideas in my 2010 book Disconnected. In case you missed it, here's a video of the event.

On the Forum last night, I spoke with Richard Glover, Joe Hockey and Hugh MacKay about my favourite Australian food, teaching the ANZAC tradition in our school curriculum and the latest revenue projections coming out of Treasury.

702ABC Sydney The Forum with Richard Glover

Last night I had a chat with Richard Glover, Joe Hockey and Hugh MacKay about my favourite Australian food, teaching the ANZAC legend in our school curriculum and the latest revenue projections coming out of Treasury

On Sky AM Agenda, I spoke with host Kieran Gilbert and Liberal Senator Simon Birmingham about the drop in federal government revenue, and the challenges this poses for policy costings on both sides of politics.

TRANSCRIPT – SKY AM AGENDA
Andrew Leigh MP
Parliamentary Secretary to the Prime Minister
Member for Fraser
30 April 2013

TOPICS:                                New revenue and budget forecasts, Coalition plans for cuts, the challenging fiscal environment.

Kieran Gilbert:                   This is AM Agenda, thanks for your company. With me now are Liberal front bencher, Senator Simon Birmingham and Labor MP, Andrew Leigh. Andrew Leigh thanks for your time. I’ll start with you if I can. On the Budget, Joe Hockey is saying, well, the Disability Insurance Scheme, if the Government is going to pursue a Medicare style levy it’s only going to fund a fraction of the overall cost. You’re going to have find a lot more than just a levy, aren’t you?

Andrew Leigh: Well Kieran, we’ve been very clear that there are significant pressures on the Budget and that’s because of these surprising international circumstances that have seen commodity prices come off but yet the Australian dollar stay high because of the demand for our bonds. So we’re looking at a range of different ways of making the necessary saves, raising the additional revenue required for something like Disability Care Australia, which I know so many of your viewers are passionate about. Australia shouldn’t be the kind of country in which someone with a disability only gets to take one shower a week and we need to find space in the Budget to do that.

Kieran Gilbert:                   A lot of economists believe that a levy is the right way forward. The Productivity Commission recommended it; Sorles Lake from the Bank of America, Meryl Lynch also believes it. If you’ve got an insurance policy, you need a premium… do you see the merits in that case? And I suppose, why did the Treasurer ever rule it out in the first place?

Andrew Leigh:                   Well, I think in an ideal world, consolidated revenue is where you draw on for all of your schemes, but as we’ve seen this substantial hit to revenues, revenues down from 24% of GDP in the mid-2000s down to now 22% of GDP, that’s a substantial reduction. You’ll hear from people on the other side of politics that the dollar amount of revenue coming into the Commonwealth has gone up. But the fact is it hasn’t kept pace with the demand for things like the pension, things like health expenditure, and of course a growing population. So, that’s why we’re in the position we’re in now.

Kieran Gilbert:                   Senator Birmingham, “Every Australian Counts”, that campaign on a Disability Insurance Scheme believed that a levy is the way forward, what do you make of this debate?

Simon Birmingham:         Well Kieran, we want to see the NDIS implemented, and we’re very concerned about the fact though, that this Government has now taken it to a stage of having ruled out a levy, is now considering a levy. And this is of course sadly politicising something that should have been done in a far more sensible way. We have for a long period of time called for a Joint Parliamentary Committee that could work in a bipartisan way, to get the NDIS implemented and deal through these issues. Instead now, at the eleventh hour as the Government is creating its own Budget crisis, and it is a crisis of its own creation because the truth is, though Andrew wants to talk about revenues from a decade ago, the truth is this Government will still have more money this year than they had last year. They still will in fact have around $25 billion dollars or so more in revenue this year than they had last year. So, revenue is significantly up over the year. It is the Government’s spending that is the problem and it’s a tragedy the NDIS has been caught in the middle of this vortex.

Kieran Gilbert:                   That’s the point that was made repeatedly by Joe Hockey this morning and yesterday and Senator Birmingham just now on this revenue increase of 7.6% year on year. So you’re saying that spending has outstripped that. Is it time politicians, policy makers, re-think the way they do budgets?

Andrew Leigh: But Kieran, the point I was making was that demands of our society are outstripping that. The health expenditures have gone up…

Kieran Gilbert:                   So do expectations have to change?

Andrew Leigh: Well, I think we have to make responsible savings measures. Ever since the global financial crisis, every new spending measure Labor has made has been offset by an appropriate savings measure. But it’s just not helpful to talk about the dollar amount of revenue. What you need to focus on is revenue as a share of GDP because that brings into mind the increase  in the demand for health expenditure, the increase in the overall population, and so taken as a share of GDP, our tax revenue is well down on what it was in that boom period of the Howard years.

Kieran Gilbert:                   Senator Birmingham, that specific point there, if you could respond to that specific point? The revenue as a share of GDP as opposed to simply the dollar amount which has been referred to the last day or so.

Simon Birmingham:         Well Kieran, what is a good thing is that the Australian economy has kept growing and that’s why we should be in a surplus position, and when the economy grows, if it grows at a particular rate, ahead of the rate that taxation grows, then the revenue as a share of GDP will shrink. That is actually a good thing if that happens and governments should be able to manage in those circumstances. Revenues are still growing, that is an absolute fact. What is a complete bunkum, utter untruth, is when Andrew says that the Government has banked savings to offset new spending initiatives. That’s just not true. The Government has claimed to have revenue from its mining tax, made all these spending decisions based on it and not had the revenue there. The same thing is unfolding with the carbon tax. We see in other areas where the Government has shuffled around the timing of when it’s going to get its revenue from spectrum sale. So, this Government has played a lot of games on the revenue side, has made a lot of assumptions on the revenue side, and those assumptions have simply been wrong. Their problem is they’ve made all their spending decisions based on assumptions of their own making.

Kieran Gilbert:                   I suppose you get to the Treasury forecasts in that context, why are they so far out?

Andrew Leigh: Well revenues are a difficult thing to forecast, Kieran. I mean, we saw errors in the opposite direction under the Howard years. This isn’t because people are behaving in a mendacious way, it’s simply that revenues are challenging to forecast. But Kieran, we will continue to find those responsible saves. We’ve found $100 billion of them in past budgets. Let me just give you a couple of examples to answer Simon’s comment: means-testing the Private Health Insurance Rebate, means-testing the Family Tax Benefit Part B, means-testing the Baby Bonus. All of those of course, opposed by the Coalition who when we reduced the amount of the Baby Bonus Paid to second and subsequent children, compared it to China’s One Child Policy. So the Coalition also need to recognise that the current fiscal condition is very challenging for them, for example, they need to recognise that if they’re going to fund a parental leave scheme with a levy on company tax, that the huge reduction in company tax revenues is going to have an impact on that budget costing.

Kieran Gilbert:                   Let’s get to Senator Birmingham on that point, that reality that we saw yesterday. It is going to affect the Coalition if in government and on that specific policy.

Simon Birmingham:         Kieran, we don’t pretend that it’s going to be easy to get this budget back into shape. Especially not after the type of spending decisions the Government has taken. We know it will be hard, that’s why we’re being up front about having to make some difficult decisions. We know that it’s not popular to say we’ll axe the SchoolKids Bonus. Those people who are getting that money in the bank don’t like the fact that we’re going to cut that. But we recognise these types of savings decisions must be made and we will make those difficult decisions just as we outlined in our costings at the last election. We’ll outline them again in our costings at the next election. Most importantly, we will get the size of the bureaucracy under control as well. We’ve seen phenomenal growth in the bureaucracy, and I know it’s in Andrew’s own electorate there much of it. But we’ve seen huge growth in the size of our health bureaucracy, our education bureaucracy, despite the fact they don’t run any hospitals or schools. These are areas where Government has to keep a really tight rein on spending.

Kieran Gilbert:                   Senator Birmingham, Andrew Leigh, thank you for your time this morning. We’re out of time. That’s all for AM Agenda.

TRANSCRIPT – 2CC MORNINGS WITH MARK PARTON
Andrew Leigh MP
Parliamentary Secretary to the Prime Minister
Member for Fraser
30 April 2013

TOPICS:     Budget Deficit, falls in revenue, the Budget, Australian economy

Mark Parton:     … So much talk around town over the big announcement from Julia Gillard. We knew it was coming because so much of it had been leaked: that there’s this $12 billion black hole in revenue and obviously all these new things are going to be considered when it comes to the Budget which is delivered in a couple of weeks. Who do you blame for it? You know, it looks as though again that Treasury has overestimated the money that we were going to get as they’ve been doing for quite some time.  I know that there are a number of economists who sort of track it back to’96 and look; the question is how do we deal with it? We’ve got Andrew Leigh on the line. He is of course the Labor member for Fraser. Now, I know that there are those on the Right who are always extremely critical of whatever Andrew says about economics and look, I seriously think they should listen. He’s a very esteemed economist. I’m not, and I think it’s folly to dismiss what Andrew says.  You can have your ideological differences with him, but let’s see what the bloke’s got to say. G’day Andrew,

Andrew Leigh: G’day Mark

Mark Parton:     When Greg Hunt came on the program yesterday he said that basically what Treasury and your Government have done is budgeted for winning lotto and spent as though you’re going to win lotto and then found out that you hadn’t.

Andrew Leigh: Well the challenge, Mark, of predicting revenues is a big one. I mean, you said before that Treasury has traditionally overestimated the amount of revenue that will come in. Actually, the problem under the Howard Government was the reverse. They ended up getting a little more revenue than they expected and what we’ve found now is that the same Treasury forecasters are making the mistake in the opposite direction. Here’s what’s happened to this one: we’ve seen commodity prices come down a bit. Normally that should bring down the Australian dollar and that has benefits for many of our exporters. But the problem is that so many banks around the world are buying Australian government bonds which has kept the dollar high even while commodity prices have come off. It’s a pretty unusual set of circumstances and that’s meant that revenues are down $12 billion just from what we were forecasting in October last year. $30 billion down on what we were forecasting a few years ago.

Mark Parton:     But Andrew, like, I mean, you know much more about this stuff than I do. Why is it that so many others were able to predict that we were going to get this black hole but up until as late as December, your Treasurer and your Prime Minister were still talking about a surplus come hell or high water? Surplus was never going to happen was it?

Andrew Leigh: Well Mark, I think the reason for focusing on the surplus last year when we had better revenue projections was it gave a sense of discipline to spending decisions. In a sense, the global financial crisis, every new revenue measure we’ve made, and every item we’ve spent on we’ve offset by finding another saving. Something like means-testing a payment or something like that. And so we had that simmering through the Budget process until it became pretty clear at the end of last year that the utter collapse in revenues caused by what’s going on around the world meant that that surplus wasn’t going to be achieved and now we’re, I guess, laying out for the Australian public the fiscal challenge that’s ahead of us. That’s there for the Labor governments but it’s also there for the Coalition/opposition. Just to take one example, they’ve got a paid parental leave scheme, which is very expensive, paid for by a company tax levy. When you’re company tax returns are down, that’s going to affect the affordability of that plan. So, being up front about the revenue situation matters for everyone.

Mark Parton:     Medicare Levy. Talk to me.

Andrew Leigh: Well, this is certainly… I’ve seen mooted in the papers as you have but as you know, Mark, the Budget is a tightly kept document and no one wins any prizes for announcing the Budget before Budget night. We’re obviously looking at a range of different ways of addressing the revenue shortfall, but it’s a big shortfall. If you go back to the mid-2000s, we’ve got government revenue that’s 24% of GDP. Now it’s 22% of GDP. So, that 2% gap is pretty substantial…

Mark Parton:     …are there bigger, wider, long term questions to be asked here though, Andrew, in terms of like, the mining boom looks as though it’s over and certainly the Prime Minister is saying those good times will never return. If that’s the case, it’s going to take us a long time to get back into the black, isn’t it?

Andrew Leigh: I think we do have revenue challenges Mark. I’m not quite as pessimistic about the mining boom as you’ve said there. We’re seeing prices come off a smidgeon but we’re also seeing volumes go up a lot, so we’re moving out of a phase of the mining boom where it was driven by this once-in-a-150-years price spike to a phase where we’ve got still  pretty high prices but we’re just digging a whole lot more stuff out of the ground. I mean, some of these extraction projects are extraordinary in their scale and scope and that’ll drive mining profits as well.

Mark Parton:     What a challenge for the Treasurer who’s got to come up with this Budget, which I mean, obviously most of it’s worked out, but there will be some finer details still being sussed out now. A Budget in an election year which has to be desperately tough, but then you’re standing before the Australian people saying, “please vote us back in”.

Andrew Leigh: I think the important thing in politics, Mark, is to be upfront and honest about the challenges that we’re facing.

Mark Parton:     So do you think perhaps the Government hasn’t been as upfront and honest as it should have been in the last year and a half?

Andrew Leigh: No, we’ve been very clear about the revenue situation. What this reflects is that as that projection’s been updated, where the Prime Minister came out yesterday talking about the challenge that it poses. I mean, you’ll hear people saying that the total amount of dollars that they’re getting in in revenue is higher than last year. That’s true, but, it hasn’t kept pace with the increases in the Australian population, the demand for the pension, the health expenditures and so on. So that’s meant we need to look at belt tightening, look also at whether we can find government revenue in other ways. That’s just the political reality that all of us face. Look around the globe though and we’re in a pretty good position. We were the 15^th largest economy in 2007, we’re now the 12^th largest economy and so we’ve moved up the global rankings. And I bet many countries in Europe would rather have our challenges than theirs.

Mark Parton:     Andrew, thanks for your time this morning.

Andrew Leigh: Thank you, Mark. Appreciate it.

2CC Breakfast With Mark Parton-20130430

On ABC24's Capital Hill program, I spoke with host Lyndal Curtis and Liberal MP Sophie Mirabella about the challenging budget circumstances Australia faces, with federal revenues having fallen from 24% to 22% of GDP.

Recently, I spoke with Media Watch's Jonathan Holmes about social media and politics. A podcast and (mostly correct) transcript of the interview are available on the ABC website.

My op-ed in the AFR looks at the Coalition's climate change dilemma - do they meet their pledge to reduce emissions by 5% by 2020, or do they spend the paltry underestimate that they say their climate policy will cost?

Abbott's no-go carbon plan, Australian Financial Review, 22 April 2013

Over the past few weeks we have seen the Coalition dip their toes in the water of policy debate. Amidst running around the nation shouting ‘no’, Tony Abbott has revealed that the Coalition’s plan for superannuation includes taxing 3.6 million of Australia’s lowest-paid workers to the tune of $4 billion. We have seen them outline their tin-can-and-string broadband strategy. We have learned that families and small businesses will be expected to cough up to $5000 to connect to a service Labor will provide for free.

This is the most information we have heard about the Coalition’s vision for the future of Australia, and while it may not be pretty, it is a marked improvement from their three-year tradition of providing no alternative at all.

It seems strange then, in light of their cautious new ventures into actual policy discussions, that Tony Abbott has remained almost silent on the one issue he has pegged the bulk of his negative rhetoric: climate change.

We are no longer hearing the Coalition claim that putting a price on carbon will ‘crush’ the Australian economy; time has proven the emptiness of this fear-mongering and the economy continues to go from strength to strength.  Given the vehemence with which Tony Abbott has promised to rescind the carbon price (despite strong contrary advice from key industry groups such as AIG) you would expect to have heard more about the ‘Direct Action’ plan that he would have as the replacement. But we have not, and this is in no small part due the Coalition’s unwillingness to provide costing information.

When asked by reporters last month what the ‘Direct Action’ plan would cost, Tony Abbott responded that ‘our policy will cost what we commit to it in the policy that we will announce before the election’. Take what you will from this garbled tautology, but you certainly cannot take an answer.

Perhaps aware of the unsatisfactory nature of this response, Tony Abbott further offered that ‘we will spend no more and no less on reducing emissions than we allocate’. Clearly, we need to look further afield for answers on costs. In the Liberal Party’s ‘A Strong Australia’ policy direction statement, they claim their emissions reduction fund would spend $1 billion a year on average. This lines up with the figure provided in 2010, which was an expenditure of $10.5 billion out to 2020. The emissions reduction target that the Liberal Party set then was a 5%  reduction by 2020 – an annual reduction of 155 million tonnes in 2020, which they have reaffirmed in their policy platform.

But therein lies the fundamental problem. If the ‘Direct Action’ plan is implemented, Tony Abbott will either have to break his promise to spend no more than allocated, or fail to meet his own reduction target.

Treasury analysis shows the Liberal projection of $10.5 billion is a woeful underestimation, with the real cost by 2020 totalling at least $48 billion. Treasury analysis attributes this dramatically different figure to two key factors: first, ‘direct domestic action would forgo opportunities for cheaper, internationally sourced abatement’, and second, ‘direct action programs are generally less effective at driving take up of all potential abatement opportunities’.

The Grattan Institute has estimated that reliance upon a grant-tendering scheme in an effort to meet the 5% target would mean at least $100 billion would need to be put towards an abatement purchasing fund. This would be equivalent to nearly one third of the entire Federal Government budget. And because the ‘Direct Action’ plan is funded by taxpayers (compared to the Labor Government’s carbon price, which is funded by the biggest polluters), that means everyday Australians are expected to foot the bill for this ineffective policy. It would cost each household at least $1,300 a year in new taxes.

That the Coalition is finally giving us some insight into their plan for Australia’s future is a good thing. But they are not giving us the full picture – at best they are confused about their costings, and at worst they are being intentionally deceptive. The question Tony Abbott needs to answer now is this: which aspect of the ‘Direct Action’ plan would change if he won government. Would he fail to meet his promised emissions target, or would he let the cost blow out?  In reality, as Malcolm Turnbull has said, Direct Action is a “fig leaf” and Mr Abbott will not unwind Labor’s carbon price.

Andrew Leigh is the federal member for Fraser, and Parliamentary Secretary to the Prime Minister. His website is www.andrewleigh.com.

Note: An abbreviated version of this piece appeared in the AFR print edition.