Putting some yeast in the electoral Magic Pudding - ways Labor can fund tax cuts and spending

Taxation is a major issue this federal election in a number of ways. The government has given up trying to sell difficult policies to the public, leaving it only with the option of buying electoral support. To win, it will increase spending on projects, at the same time as aiming a tax cut at key voter groups like families with kids.

To stay in the game, Labor has to basically match the government's tax cuts and spending, as well as promising something more. However, it has a baseline advantage over the government. Earlier this year Howard was travelling so badly with all demographic groups that he had to bid up just to catch up to Labor. That meant large bribes to groups that normally support the Liberal Party overwhelmingly. Groups like those wealthy over-55s who are styled "self-funded retirees", and rural and regional voters.

Any realistic Labor election plan would assume that the Liberal Party would be getting those votes anyway and that it can probably afford to alienate them to some degree. It can afford to pare back benefits to them and redirect the savings towards the baby boomers with kids who are the election deciders in the seats Labor can win.

But the ALP will need more than just this natural advantage.

At this point it is worthwhile putting to rest a taxation furphy that is doing the global rounds. Don't believe the polls - electors are not interested in trading tax cuts for better services. This belief first reared its head in the US Presidential election where it was a key Al Gore campaign premise. It didn't work. Al Gore blew what should have been an easy campaign. One of the reasons was that the lightweight George Bush at least knew enough to promise to put more money in people's pockets. The debate is still going on in the US, and for an interesting excursion you might like to travel to www.donaterebate.org where US citizens disgusted at tax cuts can use the net to donate their summer tax rebate to charity. I'm waiting to see a report on the site stats, but I think there'll be more traffic in downtown Cunnamulla on a Sunday night than on DonateRebate.

The same premise had a run in the UK elections. This time it was the loser who promised tax cuts. Perhaps the theory can be right? Wrong. Hague didn't even meet mimimum expectations with the electorate. He could have had the most perfect plan for government and no-one would have paid any attention to it because they didn't expect or want him to win.

Yesterday in Australia, the Sydney Morning Herald published an AC Nielsen poll which found that most Australians prefer spending on services to tax cuts. It was taken up by ALP frontbencher Bob McMullan who branded talk of taxes as the major election issue "elite prattle". The survey asked "If extra funds were available from a budget surplus, which of the following do you think should be the highest priority for the Federal Government...". 16% nominated "reducing personal income tax"; 11% "rolling back the GST"; 43% "spending on health care"; and 27% "spending on education". The problem with this poll is context. The questions have been asked but without wising the respondents up to some of the complexities of the situation.

To start with, most funding for health care and education comes via the states. What is the ALP going to promise in these areas that is going to make a dint on services? While Knowledge Nation has gone down well it is aimed at the tertiary sector. I suspect "education" in the context of this poll equals "primary and secondary education". On health perhaps they can fiddle with Medicare and doctor numbers, but in this context I think "health" probably equals "hospitals". Howard has already got his pitch worked out on these. He claims that the GST has secured the funding base of the states. In other words GST equals more state government services equals more spending on health and education. Which puts the survey response to Roll Back in an entirely different light.

So, eliminate the two spending issues which the Federal Government can't do much about and, of those who were deciding on genuinely federal issues, 45% more favoured tax cuts than Roll Back, and 100% thought taxes were important.

There is a broader issue here as well - human nature. We all like to think that we could be as good as Mother Theresa, but deep down we know we've got a fair bit of Eminem in us. So we lie about ourselves to ourselves and friends, because we need to be better than we fear we might be. And if we would lie to people who know us so well, why not lie to opinion pollsters? Better services sounds good, but in real life, given the choice between the money or the box, we'll generally choose the money.

Don't follow this star, Bob! You'll be lucky to find a stable by Christmas, let alone the government benches. However, you're not completely lost. Tax cuts won't win an election for Labor, and neither will Roll Back. You do have to offer increased and better services, but within the parameters of offering tax incentives as well.

Labor will undoubtedly release most of its detailed policies during the course of the campaign. The rest of this article is speculation on how they might plausibly claim to fund whatever it is that they have planned.

Tax has been a challenge for Labor for the past 25 years because Labor likes to institute new programmes which inevitably cost money. Hawke and Keating came up with The Accord. This was the pact where the workers undertook to forego cash-in-the-hand wage rises in return for increased retirement security via compulsory superannuation paid for by employers; and increased job security paid for by an economy that could grow faster in the absence of higher wages. It enabled Keating to boast that the Labor Party was the party of high growth and job creation.

To win this election Labor doesn't need to do a lot. The public doesn't expect much of their politicians and doesn't see a lot of difference between Liberal and Labor. Changing governments is much like changing sheets. When one gets soiled you put it in the laundry basket, but you don't seriously expect the next one to be any different in a week's time. Beazley just needs a little "Omo brightness" and he's in. But slight as his product differentiation needs to be he does need a fudge factor to replace The Accord and undermine Howard's tax cuts.

Most political commentators are working on the basis that no such factor exists and see the promises that Howard is making on tax cuts and spending as fatally undermining Beazley's position because they limit his spending opportunities. I think there is at least one way out for Beazley.

Australia has just experienced its longest run of uninterrupted growth ever. That growth has partly been fuelled by a competitive exchange rate, partly by lowered tariffs, and partly by increased productivity. It is that last factor which has created a conundrum. Why is there so much community discontent if times are so good? The reason is that we are producing more, but because productivity growth has been so strong, we are only using the same proportion of the workforce as we needed 10 years ago.

If this is so, why are the unemployment figures down? Well, I have to reluctantly admit that in reality they aren't. Most of the decrease in our unemployment figures has been caused by definitional shifts, not people going back into work. Mark Latham first put his finger on the problem when he noticed that the number of invalid pensioners had grown proportionately to the decrease in the unemployed. Since then, Peter Brain at the National Institute for Economic and Industry Research has more systematically compared unemployment figures on a like-against-like basis, allowing for definitional changes, and finds that unemployment has actually remained static over the past decade.

That explains the electoral discontent. Those out of work are not sharing in the increase in living standards of those in work, and real unemployment is still at historically high levels.

There is another result. Normally, after 10 years of boom the budget bottom line should be much better. There are two cylinders in the budget engine - income and expenditure. A growing economy increases the power in income by increasing tax revenues; and increases power in expenditure by providing jobs for people and taking them off social security. In this boom the budget engine has only been running on one cylinder because economic growth hasn't provided more jobs. This gives the ALP an opportunity.

Polling shows that of all the indicators of economic competence, the one that the ALP tends to score best on is its perceived ability to create employment. Even when the economy is performing at its best this is still a common perception. Community discontent, it would seem, is also centred around the lack of jobs for all who want to work. While the government has a hugely popular programme in Work for the Dole, there is also a feeling that some of the work incentives are a little harsh, and perhaps strategic government interventions into the employment market might be required.

Here is Beazley's opening. Produce an employment programme connected to a jobs target. Set the jobs target lower than the government's forecasts, perhaps by no more than 1%, and undertake to decrease the number of invalid pensioners as well. It might be that the unemployment target is never met, a la Peter Beattie's 5% target in Queensland. But the punters will say, "At least Beazley tried". And trying shows at least the right attitude.

The Commonwealth currently spends about $12.5 Billion on Labour Market programmes, or around $18,000 per unemployed person. A jobs target of 1% less than the current unemployment rate of 6.9% is a 14% reduction in the unemployed. The financial result of this strategy would therefore be a decrease in budget outlays of somewhere in the vicinity of $1.75 Billion. This would be available for funding the jobs strategy, as well as other promises. The financial markets will accept this fudge factor, and better still from Beazley's point of view, it will intersect with the point of greatest community discontent. I suspect that employment may end up being the big issue this election.

Paul Keating used to say the budget wasn't a magic pudding and it isn't, but everyone wishes it was so when it comes to elections politicians "cut and come again". The public has woken up to some of their tricks, but just like kids at a magic show, we want to believe in the fantasy. These days it's not so easy to bake a magic pudding, GST free or not, but there are plenty of ways an imaginative Opposition can find to put a little yeast in the pudding and make it go just as far as it used to. There will be lots of bakers tricks from both sides before the election is decided later this year.