By Peter Boyle
Paul Keating's February 26 economic statement was supposed to be about "creating jobs, jobs and jobs". But while Keating promised to create 800,000 jobs in the next four years, by his own estimates unemployment will remain around 10% for the rest of this year and decline only to 9.5% by the middle of 1993. Even in the 1995-96 financial year — when the economy is supposed to be well into the next upturn — unemployment is expected to be just under 8%.
On the other hand, the big business response has been overwhelmingly positive. "A step in the right direction", judged the Business Council of Australia, which groups Australia's biggest corporations.
Keating's "One Nation" package promises a boost in government spending of $2.3 billion between now and June 1993 — most to be spent on economic infrastructure like roads and rail and a package of new tax cuts and deductions for business, worth at least $50 million this financial year, $210 million next year. Even bigger tax cuts for business and for medium income earners are promised from 1994, if Labor is still in government then.
The objective is to deliver a modest boost to demand to help kick-start an economic recovery. Significantly lower corporate taxation, combined with continued cuts in wages and social services, is supposed to boost investment. While the modest pump priming may speed recovery to some degree, the business sector and most economists expect that any upturn will be gradual because of recessions in the major world economies.
Keating posed the package as a dramatic alternative to the opposition's "Fightback!" policy, but apart from the small injection of government spending and rejection (for now, at least) of a goods and services tax (GST), it is premised on the same economic "rationalist" strategy: the continued drive towards lower business costs, smaller government and more freedom for market forces.
To win popular support, Keating has included a once-off $317 million handout to family allowance recipients in April. As bodies like the Australian Council of Social Services have pointed out, this will do little to alleviate suffering from the recession — first, because it is a pittance (worth $125 to most of the families eligible) and second, because it is not targeted at the poorest, i.e. welfare recipients.
Keating has also sought to sell his package by whipping up nationalistic fervour, with lots of talk about workers and bosses cooperating for the common good. The opposition has helped him along by stupidly jumping behind the British gutter press and Tory backbenchers' "Hands 'orf our Queen" campaign.
Personal tax cuts
Keating has sought to match the Fightback! package by promising $3.4 billion in personal tax cuts in 1994-95 (after the next elections). ly to middle and high income earners, and the biggest cuts to middle income earners (on $20,700 or more a year).
Hewson promises the biggest tax cuts to the rich, but as compensation for GST also reduces tax for those on very low incomes. Keating has calculated better as far as winning votes through the hip pocket. Most high income earners have other ways of minimising their taxable personal income.
The two packages are not that different on where the money for the tax cuts will come from. Hewson has had to admit that it will come from cuts to government spending, mainly on education, health and welfare ($9 billion in the first year and $41 billion over three years) and $14 billion in asset sales. While Keating has not said so, this is essentially where his tax cuts are going to come from — if he gets to deliver them.
According to Keating's speech, the money will come from the revenue gained through bracket creep and from increased revenues resulting from the growth in the economy he predicts. Keating promises to deliver a budget deficit of only $0.6 billion in the same year he delivers the tax cuts, which can be guaranteed only if his government continues its vicious spending cutbacks. Thus what workers on $20,700 a year or more gain in tax cuts they will more than lose in social services.
The cuts Keating is delivering to business taxes are much more directed than the across the board $20 billion cut promised under Fightback! New accelerated depreciation allowances will favour businesses making large investments in capital equipment or in buildings for tourism or industry. Overseas banks are offered a concessional tax rate of 10% and major projects (worth $50 million or more) will be offered a 10% "development allowance" and a promise that they will be rushed past any environmental and Aboriginal land rights objections. While there some tax cuts for small business (via limited exemptions from capital gains tax), most of these "incentives" will go to large corporations.
Speculation danger
Keating hopes, by shaping these incentives, to diminish the chances that businesses will use their tax savings on another speculative binge. But the decisions to continue and financial deregulation preserve this risk.
Keating also promised to lift Foreign Investment Review Board scrutiny of projects worth less than $50 million and abolish the 50% equity requirement for new mining projects.
The unstated idea here seems to be to clear the way for more takeovers, especially by overseas investors, thus speeding up the equity for debt swap already taking place in the private sector. This reflects an acceptance that Australia will need continued inflow of capital for some time, and if foreign debt is not to become too big to service, it has to be replaced by more foreign ownership.
This makes One Nation a more "interventionist" package than Fightback!, though all the intervention is clearly carried out in the interests of the business sector.
Keating was able to deliver much of what big business wants immediately, but this does not mean that Fightback! and the GST are completely sunk. When the federal elections come up next year, Keating will have delivered his cuts to business taxes and his modest spending injection, and the demands for GST might be raised again by business.
Keating has another card, however — the Accord with the ACTU. The economic statement brought the Accord back to centre stage. As Keating pointed out, the Accord cut real wages and delivered unprecedented industrial peace during the 1980s. Then the recession took over the job so the Accord was shelved for the last 18 months.
In anticipation of an economic recovery and an improvement in the bargaining power of workers, Keating and the ACTU chiefs have come up with a continued commitment to enterprise bargaining and the limitation of wage growth to less than the average inflation rate of OECD countries.
This presents employers with a choice between gambling on whether Hewson can really trash the union movement or accepting Keating's offer of another round of Accord-guaranteed industrial peace and wage control.