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

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.