Issue 7, May 2008 | Paul Kelly

The Howard Decade - Separating Fact From Fiction

This address by Paul Kelly was delivered at UWA before the 2007 election. Rather then consigning it to the past now that the election has resulted in a change of government, the editors of The New Critic believe Kelly offers a useful contribution to a debate that must now be had into the legacy of the Howard Government

It is a great pleasure to deliver the 2007 oration in honour of Professor Gordon Reid. I acknowledge the role of both the Western Australian Division of the Institute of Public Administration and the University of Western Australia as joint hosts of this lecture.

I first became aware of Gordon Reid when I read that marvellous book Out of the Wilderness, published in 1974 that he co-authored with my friend the late Clem Lloyd. It was a vivid study of the impact of the Whitlam Government on political institutions. At that time Gordon Reid was Professor of Politics at the University of Western Australia and this was a rare collaboration between a professor and a Labor staffer and former journalist. The book's concluding sentence would become famous: "It is impossible to deny the Whitlam Government a certain grandeur.''

Gordon Reid possessed a deep understanding of our political system and as students we are all beneficiaries of his scholarship. I want to mention, in particular, his Bicentennial project, Australia's Commonwealth Parliament 1901-88, a difficult yet valuable study. Gordon Reid was not just a scholar; he became a practitioner. As a distinguished Governor of Western Australia he had the rare opportunity to operate at the apex of our system of governance.

With a national election fast approaching I have chosen as the subject of this lecture 'The Howard Decade - Separating Fact from Fiction'. In my view Howard is a complex prime minister whose political character and record defies much of the contemporary media caricature. With the twilight of the Howard era approaching I suggest his principal legacy will reside in bringing the technique of prime ministerial government to a new zenith. Under Howard our system of government has become far more politicised. John Howard is a 24/7 politician who runs a permanent campaign. As Prime Minister for 11 years and the winner of four elections Howard has brought the advantage of incumbency to a new refinement. He campaigns virtually every day, almost from the moment he completes his morning walk. Howard's influence on the Labor leader, Kevin Rudd is obvious.

In style and outlook Howard is far distant from his hero, Sir Robert Menzies of whom it could be said - the people knew he was there but rarely saw him.  Howard, by contrast, conducts a permanent conversation with the Australian people. If, as the polls suggest, the public is growing weary of Howard, it can hardly be a surprise given its exposure to him.

I believe that no single label captures Howard PM - he is a conservative, a populist, a reformer, an economic liberal, a nationalist, a radio personality, a war leader and cultural warrior. Each of these guises is an insight into his political character and their multitude testifies to his complexity. The world of 2007 has changed from the world of 1996 when he came to power and Howard has adapted to new events. Sometimes his judgement has been acute - witness his insights into the social conservatism of the Australian people. On other occasions he has misread the trend - witness the rising concern about climate change.

There is, however, an enduring theme - Howard's focus on economic management, his pride in his economic credentials and his belief, verified by the polls for 11 years, that economic policy has been the single most important factor in his success. In this lecture dealing with fact and fiction I focus on Howard's approach to the economy.

In each campaign he has fought since returning to the Liberal leadership Howard has advanced economic policy as the foundation of his political superiority. He put this proposition against Paul Keating, Kim Beazley, Simon Crean and Mark Latham. In his current contest with Rudd, it is Howard's strength on the economy that offers his only hope of electoral recovery.

The Howard era is defined by Australia's longest economic expansion, starting in 1991 in the shadow of the worst recession for half a century and now in its sixteenth year. It is the length of this expansion that provides its transforming power. Today's Australians have forgotten the mood of the nation back in 1991 with unemployment almost tipping 11 per cent in the trough of the recession. In his Boyer Lectures the former Reserve Bank Governor, Ian Macfarlane said : "A brooding pessimism seemed to affect all shades of economic and political opinion and little hope was held for our economic future.''1 

Since 1991 real income per head has increased by 43 per cent in Australia. This is a significant increase and superior to most other nations. The figure for the United States is 35 per cent, for Canada 32 per cent and for the United Kingdom 38 per cent2.  In this period Australia's economic growth has averaged 3.7 per cent. It highlights a difference between the current expansion and the 1950s Golden Age - this time Australia is not just doing well but doing well compared with other developed nations.

The point was made late last year by Treasury Secretary, Ken Henry, when reviewing the past 15 years. Henry said: "GDP per person has grown faster, on average, than the OECD raising Australia's GDP per person from the bottom third of OECD countries in the early 1990s to the top third today. On this measure, Australians are now enjoying unprecedented prosperity. The standard of living in Australia now surpasses all G-7 countries except the United States.''3  

During the 1996 campaign Paul Keating said: "The reason I want to win this election is because I am sure we have set this country up for a new golden age and I don't want the political inheritance to fall to the Liberal Party.''4   This is exactly what happened. The 1996 election was an election to win.

Over the past 16 years Australians have grown richer. If incomes rose appreciably this trend was excelled by the doubling in real wealth per person as the prices of houses, investment properties and shares increased by two or three times. Australians lived in larger houses, purchased more consumer goods, travelled overseas more often, spent more on their children's education and went into greater household debt to finance their life style and investments5. In recent years unemployment has fallen to just over 4 per cent nationally and, in Western Australia and Queensland, it is now 3 plus per cent. These figures would have defied belief back in 1991.

It would be misleading to think such progress does not have a downside. Australia has become a more unequal society. A small group at the top has become rich to an extent that divorces it from the experiences of fellow citizens. The nature of Australia's egalitarianism has been called into question. There are substantial pockets of poverty and entrenched deprivation. Generational and geographical differences in income and wealth have intensified.

In political terms Howard's longevity has resulted in a new Liberal Party model of economic governance. While it is false to see Howard deliberately designing a model, it is valid to argue that the principal policies he championed, taken together, constitute a new model.

This economic model is his most substantial achievement as Prime Minister. It is fundamental to his election victories and it is a unique creation in Australian public policy. As the Howard Government's standing declines, its utility seems to be eroding. But there is no gainsaying a decade of success.

My purpose in this lecture is to identify and evaluate the components of the Howard model, constructed in collaboration with Peter Costello, his deputy and Treasurer for the entire period. It has five dimensions - monetary policy, fiscal policy, tax-transfer policy, industrial relations and a nationalistic view of the Federation.

Howard's economic policy has been misinterpreted by many commentators as neo-liberal. The title of this lecture contains the word fiction and neo-liberalism is the fiction I am talking about. It is one of the great and repeated fictions of the Howard era owing more to polemic than analysis. My purpose in this lecture is to identity Howard as he exists and to expel the fiction. His economic policy constitutes a fusion of instincts - the compulsion to run a high growth economy to boost incomes and jobs, the vision of Australia fully integrated into global markets, a relatively status quo view of the tax and spending components of the economy, an income re-distribution reminiscent of a traditional Labor Prime Minister, a workplace culture that marginalizes the traditional instruments of union power and centralised regulation and the translation of a rising national consciousness into a stronger national government.

The record shows Howard as a mixture of pragmatist and believer. He is an unusual mixture of boldness (witness the GST and WorkChoices) and caution (witness timidity on health policy reform and infrastructure support). Throughout his prime ministership, however, Howard has had a unifying sense of mission - that it was his task to complete the economic transformation begun by Bob Hawke and Paul Keating. He saw this as a unique opportunity for the Liberal Party.

Howard was aware that he followed Hawke and Keating as the third prime minister of Australia's age of economic reform, an age inaugurated by the float of the dollar in 1983. He described the post-1983 reform age as resting upon five pillars - financial de-regulation, the dismantling of the tariff wall, industrial relations de-regulation, fiscal consolidation and tax reform6.  It is a convenient list because it enables Howard to claim credit for the final three pillars and to restrict Hawke and Keating to credit for the first two pillars. My view is that Labor's contribution is considerably greater than Howard concedes (consider, for example, competition policy), but that is not an argument for this lecture.

Throughout his prime ministership Howard saw himself as an engineer of this ongoing transformation. In this guise Howard was an economic liberal in the classical sense, though his rhetoric exceeded his actions. The political point is pivotal - while Labor began the reform process, Howard wanted to finish it. He wanted to impose the values of the Liberal Party on the new Australian economy thereby deepening its political ascendancy.
Let me begin with monetary policy because it is the single most important instrument. Howard and Costello came to power pledging to make the Reserve Bank of Australia independent in the cause of a low inflation economy. It is their most important economic decision. The recession of the early 1990s had broken the back of inflation. The bank under Governor, Bernie Fraser had introduced the idea of inflation targeting in 1993 and the Keating Government had acquiesced in this process.  But it was the August 1996 formal agreement between Costello and new governor, Ian Macfarlane that established the new system7

This was a formal transfer of power from government to the central bank, an unusual decision by politicians. It reflected a judgement that a low inflation economy would best be achieved by moving interest rate decision-making from ministers to the bank. The bank had won its preferred target range with the agreement specifying that its goal was to keep "underlying inflation between 2 and 3 per cent, on average, over the cycle.''

Macfarlane argues the main factor sustaining the 16 year expansion is the return to low inflation under the discipline of central bank independence. For Macfarlane, these 1990s decisions reflected contemporary economic thinking and the policy experience of the 60 years since the Great Depression. Given Australia's experiment with an independent Arbitration Commission for most of the twentieth century, an independent central bank is not such a radical innovation in democratic polity8.  It is, however, the most important step in economic policy since the float.

That fact that the Reserve Bank has increased interest rates in the current election year testifies to its unforgiving embrace of independence. Since the 1993 acceptance of an inflation target Australia has been a low inflation nation. The moral is that once inflationary expectations stabilise at a low level then interest rates can be contained at a reasonably low level as well. This has been Australia's story despite upward interest rate trajectory of the past five years.

Never has the central bank made such a contribution to politics as the Reserve Bank in the Howard era. The power of cheap money has transformed the landscape, the skyline, household balance sheets and helped to keep Howard in the Lodge. It is idle to think that because the bank has the decision-making authority that government will not take credit for low interest rates.

Political accountability for interest rate policy still rests with the government. The central bank cannot be held accountable at the ballot box. It is the government that is held accountable because the notion of independence is a self-interested gift the government has extended to the bank - a gift that can be withdrawn at any time. It is the government's task to support the bank's low inflation target using the other arms of economic policy. It should be no surprise that governments will take credit for low interest rates (witness Howard at the 1998, 2001 and 2004 elections) and that governments will be blamed when interest rates seem to be uncomfortably high (witness the 2007 experience).
In summary, Howard is the political beneficiary of the low inflation expansion. It is wrong, however, to believe this arose by accident. Howard and Costello had the judgement to formalise central bank independence in their early months of office. They have upheld the system ever since, despite some obvious tensions. The media's incredulity in 2004 at Howard's campaign on interest rates reflected its lack of understanding about the interest rate system that Costello had formalised eight years earlier. Howard's long prime ministership has been built on the foundation of low inflation, central bank independence and the wisdom of the bank's governors. 

The second area is fiscal policy where the defining decision taken by Howard and Costello in 1996 was to become a surplus strategy government. It is easy in 2007 to forget the political pain this involved in 1996. Costello's first budget provoked a wave of special interest and electoral resentment. Inheriting a $10 billion budget deficit Howard and Costello ran a "sound money'' strategy that restored the budget to surplus in two years. Howard believes the first budget was his most important because it defined his government's character and its commitment to operate "in the black.''

At the same time the government inaugurated new fiscal rules - it pledged a budget balanced "over the cycle'', the first government to make this medium-term commitment. It pledged that asset sales would be used to reduce government debt, a significant commitment from a government keen to sell assets. It introduced a charter of budget honesty that required a series of annual budget outlook reports, a pre-election fiscal update and a five yearly Intergenerational Report the first such report in 2002 triggering the debate about the fiscal consequences of population ageing.

During their first term Howard and Costello could not foresee the long revenue surge that lay before them and the impact of the China-driven commodities boom from the year 2000 onwards. For most of the Howard era the economy has driven the surplus rather than the surplus having driven the long expansion. There is, however, no gainsaying the Howard Government's commitment that saw the virtual elimination of government debt and the entrenchment of the surplus in the range of 1-1.7 percentage points of GDP.

This now seems taken for granted but it is an outcome conspicuously lacking in the US and most other developed nations. Ian Macfarlane described the Howard/Costello fiscal policy as "virtually the best in the OECD area.''9 

This medium-term surplus strategy was designed to promote economic stability, assist the bank's anti-inflation objective, encourage private investment and ensure that the current account deficit largely reflected private sector commercial decisions. Given the health of the economy, the surplus strategy was an orthodox as distinct from neo-liberal response.

In political terms the strategy worked brilliantly and much of Australia's political debate has focused on how to distribute the surplus. This technique multiplied the advantages of incumbency - Howard and Costello dictated the politics of each election campaign by their distribution of the surplus between tax cuts and new spending. Labor, desperate to regain its economic credentials, felt obliged to match the surplus but, having done this, could finance its own promises only by the difficult option of re-ordering Howard Government pledges and programs. Howard found that being a fiscal conservative had a political utility superior to Keynesian deficit financing of the earlier post World War Two age.

Over time, however, the revenue surge and the discharge of government debt saw Howard emerge in another guise - as a big spending conservative. This spending was financed by an overall increase in the taxation burden. The long-run trend in Australia's tax/GDP ratio is upwards and Peter Costello is Australia's highest taxing treasurer.

In a recent analysis former treasury officer and fellow at the Centre for Independent Studies, Robert Carling, after adjusting the numbers to take account of the changed arrangements flowing from the GST, finds that tax revenue for the Commonwealth's own purposes has risen by 1.5 percentage points to 20.5 per cent of GDP over the 11 years of Howard's Government. He also finds that the Howard/Costello turnaround from budget deficit to surplus over 11 years has been achieved more by raising revenue than by reducing spending10

The 2006 Warburton-Hendy review of the tax system commissioned by Peter Costello and supported by a Treasury secretariat found that Australia's overall tax burden was 31.6 per cent of GDP, the eighth lowest in the 30 member OECD club. They found that Australia was a "low-tax country.''11 It should be noted, however, that this comparison is largely with Europe, rather than from neighbouring East Asian nations where such a comparison would show Australia higher on the tax scale.

The conclusion, therefore, is that under Howard and Costello Australia remains a relatively low tax nation compared with Europe but that its tax burden has lifted marginally during the Howard era.

It is important, however, that Howard be judged not just by what he does but by what he could have done. Given the huge budget surpluses in recent years the opportunity for a radical tax reform involving lower rates has not been taken by this government. 

The gulf between Howard's modest tax cuts and the vast revenue available will offer a defining commentary upon his caution. The current policy stance, as revealed in the 2007 budget papers, is to provide annual tax cuts sufficient to ensure the tax/GDP ratio is held at its current level12.   After 11 years of Howard/Costello policy the accumulated surpluses are now being paid into the Future Fund to meet public service superannuation liabilities. The fund is worth more than $50 billion and a new Higher Education Endowment Fund is also being created. Meanwhile under the government's latest changes the tax rates are in a medium zone of 15, 30, 40 and 45 cents in the dollar - and sees the income tax burden as low compared with OECD nations13

This constitutes a political choice: the Howard Government could have significantly reduced these tax rates and the overall tax burden but it declined the option of more radical tax reform. It is important to grasp the choices that face governments. Howard had this choice and shunned the radical tax reduction option. I am sure he has no regrets.

Why has Howard been so cautious? The explanation lies in politics - Howard's approach to budget policy has been, first, to look after spending needs and second, to offer tax cuts. He sees more political value, on balance, in spending rather than tax relief. It is a defining feature of policy.

On the spending side total Commonwealth spending as a portion of GDP has fallen during the Howard era by about one percentage point of GDP. This is largely attributable to reduced interest payments on public debt. The Warburton-Hendy review found that Australia had the second lowest spending in the OECD club, a finding highlighted by Costello14. Once again, the point about comparisons with East Asia offering a different perspective is relevant.

Howard describes his government as being "lean but not mean" and boasted, with justification, that the typical US policy analyst would be stunned to hear about the existence of a country that had universal health insurance, comprehensive public education, a value-added tax and kept the size of government below US levels15.  

However, during a period of strong economic growth and falling unemployment Howard has presided over strong spending increases for health, schools and welfare. A guiding star was his historic decision before the 1996 election to accept Medicare, perhaps the biggest philosophical reversal of Howard's career and the most valuable in voting terms. This decision has not won the attention it deserves because, in a real sense, it shaped the character of Howard's government.

According to an analysis by Andrew Norton from the Centre for Independent Studies in the decade from 1995 the real increase in spending per person was 40 per cent in health, 38 per cent on schools and 28 per cent on welfare. Norton says that "to many people these figures would look more like the record of a Labor than a Liberal government.''16  Observe that for many years Health Minister, Tony Abbott has argued that the Howard Government is "the best friend'' that Medicare has ever had, a claim supported by the high bulk billing rates.

As a political leader Howard has refined the technique of winning constituencies off the budget. Examples are his funding of private schools, the private health insurance rebate, huge family support payments, making superannuation payouts tax free and a series of tax breaks and spending programs for the over-55 year olds, a pivotal Liberal-voting demographic.

These agendas are not just about winning votes. Many of them advance ideological ideas long cherished by Howard, notably individual choice in health and education and his belief in social conservatism exemplified by financial support for families. Indeed, Howard's support for Commonwealth funding of non-government schools originates as far back as the 1960s long before his entry into federal parliament. In short, there is a range of spending programs that deliver on deep philosophical and political beliefs Howard has advocated for much of the career. It is a point insufficiently appreciated and critical to the character of his government.

In this context it is illuminating that the Labor Party has no wish to expand the current size of John Howard's federal government. Shadow finance minister, Lindsay Tanner, said recently that in today's political contest the "size (of government) doesn't matter'' any more. Labor's message is explicit: in office it will not spend more than Howard; it will not tax more than Howard; it will keep running budget surpluses; and its election campaign promises will cost less than Howard's. The position put privately by Labor goes even further: that in office it will seek significant reductions from Howard's spending programs. This is a fascinating Labor commentary upon Howard: it promises more discipline and sees Howard's spending as defining the outer limits of responsibility for Labor's own agenda.

Spending, of course, counts not just for size but for purpose. A simplified but useful distinction to make is whether spending is geared to demand or supply. This distinction penetrates to a core question concerning the Howard Government: is it using the revenue from the growth cycle to invest in the nation's future or is it squandering the golden age?

The test for spending policy was defined by Treasury Secretary, Ken Henry last year in his "Managing Prosperity' speech.  In an economy close to capacity utilisation the task for policy was "to expand the economy's supply potential''. This meant a focus on population, greater labour force participation and measures to lift productivity. This agenda encompasses more investment in human capital, improvements in infrastructure, energy and transportation, welfare to work measures and incentives to keep the over-55 year olds in some form of work. Henry bemoaned the failure to develop proper markets and pricing for water and energy. He warned that in Australia's current situation "the premium on high quality policy decisions is unusually high".17  

Henry saw this as a vital historical moment. "There is a temptation to think that we can indulge ourselves in consuming the fruits of this economic boom, that this lucky country of ours can afford the luxury of the soft option," Henry said. "In that temptation lurks an intergenerational tragedy: if we succumb to the temptation we will avoid its cost but we will impose an unnecessary burden on our children and grandchildren, indeed, on all future generations of Australians. Is that to be the legacy of this period of prosperity?"

This question, from the Treasury chief, needs to be framed in lights. Its answer will require time but that answer will provide the decisive judgement on the Howard era and its use of the surplus.

Access Economics principal, Chris Richardson has no doubt about the answer. He warns that too much of the surplus is being spent for the wrong purposes. Richardson says: "The Howard Government is experiencing a revenue surge unprecedented in the lifetimes of today's middle aged Australians. The critical question is whether the government is using this unique revenue opportunity wisely. Reform is about the supply side. It is about more and better investments in education and training and infrastructure. The good times are rolling but the reforms are not."18  

In Howard's defence, he governs in a media-driven culture saturated by entitlement. Media support for special interest campaigns from the public revenue seems endless along with the discovery of new ailments that demand more funds and regulation. The folly in our popular culture is to think individual happiness can be purchased by public spending.

In conclusion, the critique is that Howard has invested too little in supply side reforms for the future and too much in rewarding households with extra gifts today. The jury remains out but the doubts are that Howard has not shown the discipline to limit consumption for the cause of investment in the future.

The third policy dimension to be examined is Howard's commitment to re-distribution and the Australian tradition of progressivity through the tax and welfare systems. In many ways the principal attack on the Howard Government is that it has terminated the "fair go" and demolished policy support for egalitarianism. This mantra is repeated so much that its truth is often assumed. Examples cited include the GST, capital gains tax concessions, welfare reforms and family support payments for the middle class.

Such specifics overlook the bigger trends - the increase in employment, the lift in employment for women, low inflation, a highly targeted welfare system and a progressive tax system. Contrary to impressions Howard has actually re-distributed income consistent with the Labor tradition. 

This should hardly be a surprise. Howard's political significance is that for a decade he stole part of the Labor base vote, the so-called Howard battlers. While Menzies penetrated the Labor base during the 1950s and 1960s he was assisted courtesy of the Labor split and the creation of the DLP that worked to keep the Coalition in office. Howard has achieved this re-alignment by his own efforts. He paid a high price off the budget to keep these votes for so long.

The debate about equity occurs against two mega-trends. The first is the huge expansion of wealth in Australia and its unequal nature. ABS data shows that in the year 2000 the wealthiest 10 per cent of households owned 45 per cent of the wealth. Research by National Centre for Social and Economic Modelling (NATSEM) under Professor Ann Harding showed that in 2001 the wealthiest 10 per cent owned 46 per cent of wealth19.  Surprising, both the ABS and NATSEM found that wealth inequality was increasing only very slowly. The trend may have intensified recently given rapid increases in house and share prices.

Second, wealth inequality is creating serious generational differences. Those with assets tend to be the baby boom generation. Ian Macfarlane warned in 2003 of the risk of generational tensions because "the young may resent the tax burden imposed upon them to pay for the pension and health expenditure on the old (and) this will particularly be the case if they see the old as owning most of the community's assets.''20 There is growing evidence of a wealth divide either side of the 45-50 year benchmark.

Most of Australia's policy debate focuses on income rather than wealth. The shift towards a more open and market-based economy since 1983 has produced income benefits across the spectrum. The increase in jobs is a powerful instrument to reduce inequality. Yet the move towards a more market based economy has promoted income inequality. One of the tasks of the Hawke-Keating era and the Howard era has been to deploy policy to limit income inequality and to support households.

An important assessment of such progress was presented by NATSEM's Director, Ann Harding to the 2005 Sustaining Prosperity Conference sponsored by The Australian newspaper and the Melbourne Institute of Applied Economic and Social Research21.  Harding's research incorporated income trends and the impact of government policy through the tax/transfer system. She found that under Howard the Australian welfare state was highly re-distributive.

Summarising her work Harding said: "We believe that the distribution of final income over the period from the mid-1990s to 2001-02 remained much the same. That is, we don't believe that Australia became more unequal and there may be evidence that it became a little more equal. We were surprised by this." NATSEM's work found the prosperity of the Howard years had been spread across all income deciles. "The spread of income growth is very positive and there is strong growth at the bottom - the bottom hasn't been left out," she reported. By analysing the difference between private income and final income (after government transfers) Harding found that the top 40 per cent of income earners was supporting the bottom 60 per cent and, in particular, the bottom 40 per cent. The scale of the transfers was striking. Harding said: "Our welfare state has been very successful at redistributing income from the rich to the poor. The transfers involved are substantial and when I presented these findings in the US there was a lot of surprise. The Howard Government has actually been a high taxing government and a large share of the revenue has gone in cash transfers and social services with the net impact being highly positive in terms of re-distribution."22  

Harding found that the bottom two deciles had the biggest increase in private income from 1994-95 to 2002-03 almost certainly because of job creation. The income tax system was highly progressive. Despite the introduction of the GST the progressivity of the tax system had remained stable. When Harding analysed the impact of indirect benefits (Medicare, school funding, welfare services) she found these benefits were also "highly progressive''. Underpinning all results was the growth in jobs with "the benefits from lower unemployment injected all the way across the entire distribution of income."23   It is Howard's creation of new jobs that is pivotal to his equity record. These results do not cover the years beyond 2003.

These findings are a rejection of the standard equity critique of the Howard Government. They suggest, as I have argued, that Howard's tax/transfer policies are consistent with Labor values and consistent with results he has obtained at the ballot box.

The Treasury has highlighted the progressivity of the Australian tax system. The Warburton-Hendy tax review referenced OECD research showing that on a comparison with 10 OECD nations Australia's system was the second most progressive after Ireland. A further OECD study found that on two different measures Australia's distribution of benefits was the most progressive24.  

In conclusion, the evidence is that Howard's policies have worked to limit market driven inequality and that a strongly progressive transfer system has been a feature of his economic and social policies. In this sense he has upheld rather than dismantled the Hawke-Keating system.

Any assessment of Howard's transfer policies must encompass his strong support for families, a stance enshrined as his priority. It has been criticised both as middle class welfare and for its social conservatism. Howard is utterly defiant. In the current year assistance to families with children totals $30 billion - this is 50 per cent more than the $20 billion allocated to defence. It is as revealing a statistic about Howard's values and priorities as can be obtained. This is another decisive social transfer - towards households with children.

For Howard, it is a touchstone of Liberal Party philosophy. He said his 1996 commitment to families was made bearing in mind Menzies' eloquent paean to the Forgotten People and to affirm that the Liberal Party could not survive as a party of privilege or elitism. Addressing the Menzies Research Centre last year Howard said of his promise to families: "This is how we said we would govern. That is how we have governed. That is how we will continue to govern." Keeping faith with families "has been our guiding principle." A healthy set of accounts was necessary for good government but it was not sufficient for a good society. For Howard, such support is the foundation for a decent society. Responding to the complaint of middle-class welfare Howard was scornful. "They are nothing of the kind," he said of the payments. "They are tax relief for a universal reality - that it costs money to raise children.''25 

The impact of these payments is immense. Consider that a single income family with two children now 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 its income exceeds $55,000 a year; that since 1996-97 the real disposable income of a single family on average weekly earnings has risen by 34 per cent. There is no mistaking that Howard's support for families has triumphed over his taste for small government. Such payments extend up the income scales.

This commitment is not about progressivity; it is inspired by traditional values and social vision. The conclusion is that Howard has devoted a wall of money to his cause of social conservatism.

The fourth dimension of Howard's economic policy is industrial relations reform - the subject closest to Howard's heart and character. Howard had two objectives in his industrial credo - to change Australia's enterprise culture by weakening the role of third parties and to eclipse forever the influence of the trade unions thereby altering the power balance in the workplace and politics. The intensity of Howard's beliefs meant that his 1996 election foreshadowed a clash with the unions - the prelude came on the waterfront but it took a decade for the full battle to unfold.

The irony of Howard's fourth term is that its principal economic reform, his WorkChoices package, provoked an ACTU campaign that poisoned public opinion against the policy and will be pivotal to Howard's defeat if the 2007 polling trend continues.

For Howard, industrial relations de-regulation was an essential consequence flowing from the float of the dollar and the post-1983 reform age. He believed that Australia's industrial tradition and its institutions were largely incompatible with the globalised world. Even more critical was Howard's interpretation of Australian society - he felt workplace culture was evolving with the idea of class collapsing as an instrument of egalitarianism. Howard felt that the egalitarian spirit would endure but find new expression in a more entrepreneurial society of opportunity and initiative with a marginalized union movement. These judgements were political, economic and cultural - and Howard held them with an intensity.

It was industrial relations reform that constituted Howard's sharpest break with the Menzian tradition. Unlike Menzies, Howard had a belief that the workplace should be transformed consistent with the new market philosophy that he had instilled into the Liberal Party. This was a point of departure between Menzies and Howard; it gave the Howard Liberal Party a more radical and risky content.
In practice, however, Howard took his opportunities when they came and compromised with the Senate that he did not control. His 1996 reforms while opposed by Labor built upon and extended the enterprise bargaining model created by the Keating Government. While individual Australian Workplace Agreements (AWAs) were created they operated under a tight "no disadvantage" test. The Treasury said the reform would deliver more jobs and higher growth but the results would take time.

The watershed on industrial relations came with Howard's unexpected Senate majority at the 2004 election. Confronting doubts about his reform resolution and enjoying a healthy labour market Howard gave licence to his instincts - he went for "big bang" industrial change. In the cabinet room it was Howard who accepted that some people would be losers. The irony of his reform gamble was that Australia's workplace was evolving anyway - in 2004 only 20 per cent of employees were reliant on awards as distinct from the 1990 figure of 68 per cent.

His economic justification was manifest - more de-regulation would promote productivity. In fact, Howard's party acted out of the industrial truths it had constructed over many years. With four election wins in his pocket Howard increased his political risk for a reform that would change the nation forever. Its chief elements were a weakening of the award system, the reduction of trade union statutory powers, a new system of AWAs that could trade-away core terms and conditions, a gutting of the Australian Industrial Relations Commission, a new body to determine minimum wages, a national industrial system to replace six state jurisdictions and the removal of the unfair dismissal laws on small business. The reforms, overall, were perhaps the most sweeping in the past century.26  Their defect lay in their legal and administrative complexity.

The gamble they represented for Howard can be stated precisely - the trade-off between more jobs and more income insecurity or, put another way, the trade-off between a better economy and a group of workers who would be worst off. Howard said: "The real test of the quality of those laws is not some debate about an individual clause or some debate about an individual procedure. The real test is the impact they have on the Australian economy. Will they make the economy better and stronger in the future or will they make the Australian economy weaker?''27 

This was right question. But it was not the question that dominated the political debate. Howard was subjected to attacks whose ferocity he under-estimated - that he was compromising family life and that in an age of prosperity there was no justification for leaving people worse off. Such attacks were ironic given Howard's ideological support for families and his previous attachment to a "no losers'' political strategy. It was more ironic that the political damage was inflicted upon Howard not by the Labor Party in its promise to "rip-up' WorkChoices but by the ACTU and its astute leader, Greg Combet through its television campaign. In the end Howard was forced to resurrect a form of "no disadvantage" test, a concession that he was losing the contest.
Howard's ultimate justification for the laws was Australia's competitive needs in the globalised world. This was a hard sell, yet he seemed to have forgotten the art of persuasion. His message was that "because we live in a globalised world economy we can never take for granted that our place is assured. Overnight our comparative competitive position can be challenged and can be altered. And each government that gives up on the cause of reform is a government that has no plans for the future." There was no gainsaying this proposition. Howard's task, however, was to show that WorkChoices was the correct path to this future.

This was Howard's greatest test in arguing the link between industrial relations reform and job creation. It was also a severe test of his political ability to mobilise small business in favour of the more flexible arrangements he had legislated.

The struggle between Howard on one hand, and the Labor Party and trade unions on the other, is over the industrial model for the globalised age. At an elemental level it is about wages, penalty rates and bargaining rules. But at the political level it is about something much greater - whether the Liberal Party or Labor Party will determine the values and the power arrangements in Australia's new, market-orientated economy. It is unsurprising that in the prelude to the 2007 election industrial relations is the main divide between Howard and Rudd.

Any defeat over WorkChoices will constitute an historic judgement on Howard's overall economic model. He has placed a premium on stability by his commitments to low inflation, a medium-term fiscal policy, a balanced tax policy and strong income support to households from the surplus. Given this structure of support along with a tight labour market Howard calculated that he could negotiate WorkChoices past the Australian public. In this sense, the utility of his economic model along with his judgement of the Australian voters is on the line.

The final area of Howard's policy for examination is his nationalistic approach to federalism. This is driven by two sentiments - Howard's conviction that the Australian public is more national in outlook with state loyalties eroding and his decade-long discovery that people look to the national government for solutions. Howard has abandoned the Liberal Party's ritualistic genuflection before state powers. Among conservatives this is a troubling even offensive event. Confronting entrenched state ALP governments Howard has sought an expansion in Commonwealth powers more akin to Labor's centralist tradition.

Howard is fascinated by the rise of national consciousness - in sport, economics, business and culture. Attending State of Origin Rugby League games he refuses to barrack for New South Wales. On talkback radio across all states he finds that people want national solutions from the national government. His pragmatism as well as his nationalism drive this historic re-positioning.

Howard's hostility to political theory is revealed in his dismissal of "an appropriate balance'' between the Commonwealth and States as "an end in itself." For Howard, the aim was to focus on outcomes and be "neither centralists nor slavish adherents of states rights."28   This offended the conservative tradition that believed there was such an appropriate balance and its recognition was the essence of federalism.

As a conservative Howard believes in the constitutional monarchy but he does not believe in state rights. Indeed, he thinks the idea is bunkum. By denying the positions of centralist and states rights Howard seeks to transcend this century old argument. He seeks a liberation from the old debate. For this reason Howard calls himself an "aspirational nationalist" - a pragmatism to explore what works best in the current age.

This is a reminder that Howard is the most overtly nationalistic leader in the history of the Liberal Party and that he has recruited nationalism to his flag. In his guise of the conservative as nationalist Howard has seized a position usually associated with the Labor Party. Howard's nationalism, on display in his championing of the ANZAC ethos, transcends symbols and penetrates to his foreign policy, domestic policy and views on governance. It is important not to exaggerate his break with the past. After all, his hero Sir Robert Menzies presided over an increase in Commonwealth responsibility, notably in education, and never considered the return of taxing powers to the States.

Howard's aspirational nationalism is a technique to legitimise the decline of the states. Under Howard this decline is driven by three forces: first, the need to run a more globalised Australian economy and eliminate in many areas separate state regulatory arrangements; second, Howard's determination to impose his reform agenda upon the nation (witness WorkChoices); and third, his efforts to build partnerships between the national government and local community (witness his schools policy, community water grants, Australian Technical Colleges and the effort to save the Mersey hospital in Tasmania).

Howard is dismissive of what he calls "the old rigid state monopoly models" for health, education, employment and welfare services. As their government has advanced Howard and Costello have become more disillusioned with the capacity of the states to engage in genuine reforms. Howard declares that localism and nationalism are the two most powerful trends in Australia in the early twenty-first century29.  

However Howard's pragmatism over federalism has been displayed in both the introduction of the GST and his recent revival of the Council of Australian Governments (COAG) process.

The decision to earmark GST revenue for the States was not driven by any concept of federalism but by the political need to neutralise State Labor opposition to Howard's tax reform package, a 'make or break' issue for his government. For years Costello has patronised the States, suggesting they were given a growth tax but failed to rise to the policy responsibility this involved. In 2006 Costello damned the states comprehensively saying they were moving "towards the role of service delivery more on the model of divisional offices than sovereign independent governments.''30  In fact, the GST has not proved a windfall for the States with the Commonwealth the main revenue winner from the long economic expansion.

The revival of COAG was driven by the Victorian Government and its then premier, Steve Bracks and then Treasurer, John Brumby. Recalling the earlier model of Hawke-Greiner co-operative federalism, Bracks in 2005 called for a "third wave" of economic reform involving the Commonwealth and the States to tackle on a co-operative basis issues such as infrastructure, health, education, training and to develop competition policy on a more extensive basis. The upshot was a formal COAG agreement last year to pursue a range of reforms and a series of startling meetings between Howard and the Labor premiers best characterised as political "love-ins''. They were underpinned by mutual recognition that the public hates buck passing and expects governments to work together. This spirit has been consigned to cold storage by the 2007 federal election but it is sure to be resuscitated post-election. It exists in an uneasy tension with Howard's expansion of Commonwealth powers.

This expansion reached its zenith in Howard's fourth term in industrial relations policy and water policy. These are insights into the authentic nature of Australian federalism - that the problems of a modern society demand national solutions. WorkChoices invoked the corporation's power, upheld by the High Court, to establish a national industrial relations system replacing six separate state jurisdictions. It is a necessary and long delayed reform. Such action is needed on a broader basis - Australia must progress towards national energy markets, a national water market, a rail regulatory system that is national and not state-based. The real critique of the Howard Government is not moving too fast, but for being too slow in these areas.

Heightened awareness about the environment and climate change is driving a new emphasis on Commonwealth powers. This is seen in Howard's 2007 initiative for the Commonwealth to assume policy responsibility for water in the Murray-Darling basin in the belief that this crisis affecting four states demands a national response31. It will be seen more vividly when the Commonwealth establishes a national emissions trading regime to combat greenhouse gas emissions. This is now an in principle promise shared by Howard and Rudd. One of the essential conditions is that States abandon their own plans for emissions trading since there can only be one scheme for the nation, such scheme to be linked into future global arrangements to address a global problem.

In summary, Howard's era is conspicuous for its unsympathetic attitude towards the states, a sentiment driven by their Labor identity. His pragmatism has led him down the same path as most of his predecessors - towards an expanded role for the Commonwealth. This has been underwritten by the High Court and public sentiment, a formidable duo. As a good populist, Howard has badged this process as aspiring nationalism. The trend has a long way to run, witness Rudd's pledge that, if necessary, his government will take over financial responsibility for the public hospital system.
In concluding this lecture, there are three observations to make.

First, a feature of the Howard/Costello record is its continuity with the Keating era. Consider the following - Reserve Bank independence began to evolve when Keating was in the Lodge; the overall tax and spending shares of the GDP after 11 years of Howard remain broadly similar with Keating's record; Howard, like Keating before him, has recognised the need to re-distribute income for electoral need and in deference to our egalitarian tradition; on industrial relations the break is sharpest with Howard moving to a far more radical model that Labor repudiates; and Howard has revised the Liberal Party tradition to pursue the cause of greater Commonwealth powers, a position associated with Labor and with Keating. My view is that history will show more continuity between Howard and his Labor predecessor than either side would concede.

Second, a feature of the Howard-Rudd contest is economic policy convergence. The campaign proper is yet to begin so judgements remain qualified. But, on the evidence so far and industrial relations aside, this is the tightest economic policy convergence in many decades, perhaps ever. On monetary, fiscal, tax, spending and federalism policies the parameters and often the details are remarkably similar. Rudd is anxious to assure the public that he will maintain Howard's policies. While this is a tactic, it is also a guide to Rudd's own beliefs. This is not to deny real differences in relation to education, health, child care, training, infrastructure, broadband, climate change and Iraq. The point, however, is that economic policy differences are limited. This means that Australia, on many of the bigger economic issues, operates close to consensus with differences focused more on a range of social, productivity and micro-reform issues. This consensus is hardly the Howard economic legacy that many commentators have predicted over the past decade.

Finally, the evidence is growing that Howard's model is wilting in the teeth of new pressures in the prelude to the 2007 election. It should not be a surprise. Running a successful economic policy for a decade is a considerable achievement and anyone who thinks this is just good luck knows nothing of the task.

The omens cannot be disguised - interest rates have been rising; Howard is unable to extract the same utility from his use of the budget surplus; despite his huge income re-distributions the sense is growing of Australia as a rich economy with stressed households; his main economic reform this term, WorkChoices, has provoked a damaging backlash; and his campaign as a nationalist against the Labor states seems to have been countered by Kevin Rudd.

If Howard does lose it will verify an old truth - that economic success does not guarantee political victory.

Paul Kelly is Editor-at-Large of The Australian. He was previously Editor-in-Chief of The Australian (1991-1996). He writes on Australian and international issues and is a regular commentator on television.

  1. Ian Macfarlane, "The Search for Stability", Boyer Lectures 2006, ABC Books, p 77 
  2. John Edwards, "Quiet Boom", Lowy Institute Paper 14, 2006, p 7 
  3. Ken Henry, Address to the 2006 Economic and Social Outlook Conference, 2 November 2006
  4. Paul Kelly, personal conversation with Paul Keating, February 1996
  5. see Edwards, op. cit. p 7-8
  6. Paul Kelly, 100 Years - The Australian Story, Allen & Unwin, Sydney 2001, p 243
  7. Peter Costello, press release, 14 August 1996
  8. Macfarlane op. cit. p 82-84
  9. Macfarlane, op. cit. p 91
  10. Robert Carling, "The Tax Take Is Up, Policy", Centre for Independent Studies, Volume 23 No 2 Winter 2007
  11. Refer Peter Costello, press release, 12 April 2006
  12. Budget Paper No I, 2007-08, p 1-5
  13. Refer Peter Costello, press release, 12 April 2006
  14. Refer Peter Costello, press release, 12 April 2006
  15. John Howard, Speech to the Menzies Research Centre, 18 April 2006 
  16. Andrew Norton, "Not So Small Government, Policy", The Centre For Independent Studies, Volume 23 No 2 Winter 2007
  17. Ken Henry, Address to the 2006 Economic and Social Outlook Conference, 2 November 2006   
  18. Paul Kelly, interview with Chris Richardson, 30 October 2006   
  19. Refer Edwards, op. cit. p 59 and Paul Kelly, The Australian, 15 November 2003
  20. Paul Kelly, The Australian, 15 November, 2003   
  21. Ann Harding, "Recent Trends in Income Inequality in Australia", NATSEM, University of Canberra, 31 March 2005
  22. Paul Kelly, The Australian, 2 April 2005
  23. ibid
  24. Refer Peter Costello, press release, 12 April 2006 
  25. John Howard, Speech to the Menzies Research Centre, 18 April 2006
  26. WorkChoices, A New Workplace Relations System, Australian Government, May 2005  
  27. John Howard, Address to the Chamber of Commerce and Industry, 21 July 2006
  28. John Howard, Australia Rising to a Better Future, 20 August 2007  
  29. ibid
  30. Paul Kelly, The Australian, 8 July 2006
  31. Refer Malcolm Turnbull, second reading speech, House of Representatives, 8 August 2007