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Book review 'Vital Signs Vibrant Society': Labor can lead reform

By Corin McCarthy - posted Monday, 23 October 2006


Prominent Labor backbencher Craig Emerson has recently used his time to great effect - writing Vital Signs Vibrant Society - a detailed policy prescription for the next 50 years.

Ross Garnaut writes: “[Vital Signs] … is the most detailed plan for Australian economic reform written by an Australian parliamentarian”.

Vital Signs is indeed a rich blend of economic thought designed to persuade policy elites to change direction. Emerson provides a courageous call to reject short-term agendas and for his party to look at what Australia requires in the long run to succeed.

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Public service choice

The so-called twin pillars of Labor support - health and education - require a fundamental rethink in delivery method according to Emerson.

He advocates:

  • funding of school students based on need and not whether the schools are state or privately run; and
  • in health the wider use of offset co-payments in non-essential Medicare services.

This places Emerson to the right of his party on public sector reform.

His market-based service delivery is weighted with benefits towards the low end of the earning spectrum, providing a true reform model for public service choice with fairness instilled.

Education funding reform

Emerson cites that a larger sum for poorer students will provide better school funding outcomes and this I agree with. Further, that schools will consequently want poorer students to attend them for custom rather than these students being pushed to the margins of poor performing schools.

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This powerful case for removing the funding distinctions between state and private schools is valid as long as the funding differential (with weighting to poor families) is sufficient. Indeed the values of choice will be further embraced by Australians if more Australians are able to access better schools - especially those deprived students who have greater funding attached to them.

In supporting his school funding model, his strongest arguments are not made fully though. Choice also has a democratic component to it: I would argue the strongest reason to support his position is a democratic mandate that a parent - from greater earning backgrounds - may choose religious, non-religious, state or private schools more easily. Yet Emerson does not mark out this territory.

Medicare co-payments

In my view, more offset co-payments for non-essential Medicare use is a vital cost reduction strategy that can keep public health care costs under control by promoting wealthier people to take out “gap” insurance and use the private system. So this debate I also welcome.

Yet I would argue that the ageing of society could see grey power extend the very handout mentality in health that Emerson is so concerned with, undermining his arguments for the health sector reform of more patient payments from wealthier people. Yet this possibility is missed in Emerson’s analysis.

Whereas the economics of ageing could be an argument for implementing his policy to protect the welfare state from being overburdened, political pressure from aged people at the ballot box could see a burdensome welfare state on coming generations.

The economics and politics of ageing seem to be pulling in different directions and the reception of the Medicare Gold package is a case in point on this.

Therefore the debate must start on health care affordability in earnest before the handout mentality increases. Emerson’s position is an appropriate starting point for this debate.

Tax reform

On tax, Emerson writes:

The 2006-07 Budget presents(ed) the opportunity of making a substantial down payment on an ultimate tax reform package. This [down payment] could consist of reducing the 42-cent rate to 36 cents - half way to its complete abolition in subsequent budgets, as well as increasing the Lower Income Tax Offset (LITO) from $235 to $625, and converting it to a weekly or fortnightly working bonus, increasing the phase out of the LITO from $21,600 to $70,000.

When compared with the Costello budget, Emerson’s priorities are marked clearly. They are for people who work and earn in middle Australia. Emerson claims the Forgotten People (those earning between $21,600 and $70,000) would be given a tax cut of between $7.50 and $12.00 under his tax-free-threshold uplift.

Emerson sets a high bar for long-term tax reform as well. His vision is to reduce the current 40-cent rate to 30c and to reduce the top rate to 39c.

Emerson does not, in my view, establish why the 40-cent rate should fall further from his proposed 36c and (in my view)the effective marginal tax rates faced by those moving off welfare require more attention than those earning over $70,000 a year.

The benefits of reducing the top rate of tax have been over-estimated and pushing out the current 45-cent rate threshold is more cost-effective and provides greater relief for more people than reducing the rate itself.

Yet Emerson is most persuasive in linking reductions in upper-class welfare to falling top rates of tax. Emerson cites candidates such as the family tax benefits being in need of tightening, as well as income-tax base broadening which are appropriate prior to reducing top tax rates.

Work incentives - passive welfare to workforce participation

To me, welfare-to-work policies should be the main goal of any Labor government and are vital to increase labour force participation and productivity. Yet Labor - especially on the Left - is often seen as the party of passive welfare and this will need to change to obtain the favour of middle Australia. Emerson marks this perception out as a problem and proposes some solutions.

Emerson sees the tax-free-threshold as a means for addressing the workforce disincentives faced in the welfare transition. Emerson argues that the Lower Income Tax Offset (LITO) should rise from $235 to $625 and would provide an effective tax-free threshold of $10,000 providing some relief from crushing effective marginal tax rates on the welfare-to-work transition up to $10,000.

Indeed Peter Costello has implemented much of this suggestion in the 2006 budget, citing this benefit. However beyond $10,000 in earnings the promotion of work incentives over passive welfare is not fully addressed (see commentary below on tax credits).

Emerson’s tax incentives for the welfare transition are welcome, yet he does not address the other key issue preventing higher workforce participation.

Ross Garnaut writes:

My high opinions of Emerson’s efforts in this book should not be read as a blanket endorsement of his policy suggestions. For example, the book’s arguments that the minimum wage is unimportant to employment levels in a relatively tight labour market such as that experienced today in Australia, and the associated dismissal of tax and social security reforms as alternatives to increasing minimum wages … [Garnaut instead argues] a combination of minimum wage restraint and tax-social security reform can be seen to deliver substantially better employment outcomes without damaging the take home incomes of low-income Australians.

Indeed. When raising the take-home pay and job security of low-income Australians then Earned Income Tax Credits instead of significant minimum wage uplifts (as Garnaut supports) are the best means of promoting work over welfare.

Most economic study of this area indicates that tax credits in combination with minimum wage restraint will be a more effective means of reducing effective marginal tax rates, lifting workforce participation and improving the standard of living of poor people (as measured as working poor and unemployed people) than any other policy.

Work incentives - women and motherhood

Emerson writes: “There is no way of further reducing effective marginal tax rates for sole parents and for couples with children without undesirable consequences.”

In perhaps his best moment in the book, Emerson outlines: “Reducing phase-out rates for family payments would take Australia further into the realms of upper class welfare. An alternative approach is to identify variables that are not income related but that correlate closely with need and work decisions.”

Emerson cites the age of children as the logical variable. He claims that by making the system universal in respect of children under three followed by tighter means testing thereafter, will provide a 20 per cent reduction in effective marginal tax rates over a very large income range for many second income families.

Emerson also calls for far larger expenditure on child care and links good available child care with raising female participation rates in the workforce.

These policies on work incentives for mothers are welcome contributions.

Productivity and education

Emerson asserts that a doubling of university education places can occur in a 10-year period if Australian student equities and human capital contracts are promoted as access tools. In essence such tools would consist of investment funds and companies entering bonds and contracts with students to pay for education in exchange for an annual repayment sum that could be agreed on specific terms. He cites American approaches that limit an amount of income for a set period.

In my view, this is not a complete solution. A doubling of places can be justified if it fills gaps in Australia’s skills; the gaps may be better covered by a combination of more university education and TAFE and trades. Also on the specific policy, access and placement numbers could be advanced further by deregulating HECS fees in high earning degrees and ensuring that full fee places are used to top up Federal Government university funding rather than as a replacement for it.

Conclusion

I conclude that Emerson is indeed one of the brightest Labor MPs and has a real appreciation for the market zeal that drove the Hawke Government, including Keating, Walsh and Dawkins as ministers in the 1980s.

While Emerson may lose some friends in the Labor party over his more radical market-based approaches, he should proudly claim for Labor the mainstream values of work over welfare, hard work being rewarded, choice in services being valued by all, more available education paid by deferred individual contribution and opportunity being extended by incentives rather than gifts.

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About the Author

Corin McCarthy was an adviser in opposition and government to Craig Emerson MP. He also advised Labor’s 2007 election campaign on small business issues. He has written widely on these issues in The Australian and On Line Opinion. He currently works as a lawyer in London advising on major infrastructure projects. These views are his own.

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All articles by Corin McCarthy

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