Foreign Policy White Paper finally acknowledges world power is shifting



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China’s rise in power has changed Australia’s foreign policy outlook.
Reuters/pool

Tony Walker, La Trobe University

Australia’s Foreign Policy White Paper released today cannot be accused of understatement.

Navigating the decade ahead will be hard, because as China’s power grows, our region is changing in ways without precedent in Australia’s modern history.

That’s the point. What we are witnessing is “without precedent” in Australian post-second world war history, during the various tremors that have unsettled the region from Korea to Vietnam and beyond.

Despite all of that, there has been nothing in our experience like China’s rise in all its dimensions.

The changing of the guard?

The much-used word “disruption” hardly does justice to the impact a modern China is having on age-old assumptions about a regional power balance in which US military superiority would prevail, come what may.

Starting with the above declaration, the white paper – a year in the making and more than a decade since the last such effort – does a reasonable job in laying out Australia’s choices in a new and challenging environment.

In this regard, we are spared an impression that policymakers are seeking to cling to the old order in which the US was paramount and suggestions to the contrary smacked of agnosticism about American power and influence – even an incipient anti-Americanism.

Those days – described in a 2003 white paper that underestimated the velocity of China’s rise and sought to adhere to age-old certainties about US paramountcy – are over.

Here’s the 2017 white paper on the end of the age of certainty for Australian foreign policy:

Powerful drivers are converging in a way that is reshaping the international order and challenging Australia’s interests. The United States has been the dominant power in our region throughout Australia’s post-World War II history. Today, China is challenging America’s position.

There is nothing profound in the above observation. It’s simply a statement of fact.

What is clear is that policymakers in Canberra are hedging their bets. They cannot be sure the US will remain invested in a wider security role in the Indo-Pacific, and one that will be long-lasting.

This prompts observations like the following:

The government recognises there is great debate and uncertainty in the United States about the costs and benefits of its leadership of the international system.

US alliance remains strong

However, for the foreseeable future the US will remain the “bedrock” of Australia’s security.

Interestingly, Labor’s foreign affairs spokesperson, Penny Wong, addressed alliance issues on the eve of the white paper’s release.

In an important speech, at a moment when Labor itself is debating how to frame its adherence to the alliance, Wong was at pains to encourage a sense of realism about what America might – or might not – be prepared to do in the event that Australia’s security was challenged.

She spoke at length about mutual obligations under the ANZUS Treaty that are misinterpreted as a blanket requirement for the US to come to Australia’s assistance in extremis. Put simply, what is required under Articles III and IV of the ANZUS Treaty is a commitment to consult.

In the final analysis, the 2017 white paper cannot be read separately from the 2016 Defence White Paper. This laid down a reinvigorated commitment to Australia’s ability to assert power in the Indo-Pacific via a significant investment in its maritime capabilities.

Leaving aside whether you agree with spending upwards of A$50 billion on 12 new French-sourced submarines rather than less expensive alternatives that could have been bought off the shelf, the defence paper foreshadowed an Australian foreign policy that recognised a more challenging environment, and thus the need for a more robust approach.

In this regard, the foreign policy paper speaks of “shifting power balances” in an era of “greater rivalry”, and calls on the US to remain “strongly engaged in the economic and security affairs of the region to help shape its institutions and norms”.

The paper also acknowledges challenges inherent in Australia’s policy of maintaining a balance between its alliance relationship and its management of relations with China if both the US and China cannot be persuaded their own interests would be served by preserving regional harmony. The paper adds that “this is not assured”.

In the decades ahead we expect further contestation over ideas and influence, directly affecting Australia. It is imperative that Australia prepare for the long term.“

Our place in the region

The white paper’s emphasis on the need to bolster regional friendships and alliances is a clear reference to moves by the Turnbull government to resuscitate a quadrilateral security dialogue with the US, Japan and India. The Rudd government shelved this on the grounds that it would appear to be a grouping whose aim was to contain China.

In its latest incarnation, the “Quad”, as it is known, clearly has a hedging purpose. But whether it develops past an agreement to consult and perhaps conduct joint military-to-military exchanges will depend on circumstance.

In other words, China’s regional assertiveness will dictate the extent to which Australia and its like-minded partners collaborate in seeking to balance China’s inexorable rise.

The Quad’s critics regard it as an unhelpful diversion, unnecessarily antagonistic to China. Its supporters see it as a prudent step to bring together functioning democracies intent on preserving regional security.

What would seem to be more productive would be a consensus involving the US, China, Russia, the ASEAN countries, Australia and New Zealand in an East Asia Summit agreement on regional security arrangements, much like the Helsinki Accords.

An encouraging aspect of the unclassified version of the white paper (a classified version will use starker language) is that within the constraints of bureaucratic language it provides a fairly direct challenge to China to live up to its commitment to a rules-based order.

So it encourages China to “exercise its power in a way that enhances stability, reinforces international law and respects the interests of smaller countries”.

This implies that China’s recent behaviour does not meet this standard.

Finally, it is hard to escape the conclusion that Australia’s policymakers have more or less come to the view – reluctantly – that US leadership in Asia is on a downward trajectory, and there is little point in pretending otherwise. The question is how fast, and to what extent will China continue to assert itself.

In his introduction, Prime Minister Malcolm Turnbull sets the tone for the next phase of Australian policy in a way that recognises these realities. “Australia,” he writes, “must be sovereign not reliant.”

The ConversationIf that’s not an acknowledgement of a disrupted security environment in which power relationships are shifting, I’m not sure what is. The 2017 Foreign Policy White Paper makes progress in coming to terms with that reality.

Tony Walker, Adjunct Professor, School of Communications, La Trobe University

This article was originally published on The Conversation. Read the original article.

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Australia’s Foreign Policy White Paper offers more wishful thinking than concrete ideas


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Prime Minister Malcolm Turnbull and Foreign Minister Julie Bishop launch the long-awaited foreign policy white paper.
AAP/Lukas Coch

Susan Harris Rimmer, Griffith University

A white paper has many purposes and audiences. There are, for example, the other government departments, ministers, opposition, internal staff that have to breach the silos and understand the Grand Vision.

The 2017 Foreign Policy White Paper will be snatched up by the diplomatic community in Canberra, analysed to a hair’s breadth and cabled around the world. This white paper, after a long pause and significant uncertainty created by the presidency of Donald Trump, attracted strong domestic interest outside the usual “business and boffins” types that follow the Department of Foreign Affairs and Trade portfolio.

These disparate audiences usually mean careful phrasing. This white paper is a little different: it is certainly filled with the usual “risk…but opportunity” stock phrases, but at moments is also unusually blunt in tone and stark in its delineation of options. For example:

The Government is publishing this White Paper to chart a clear course for Australia at a time of rapid change.

It goes on to name a most significant change:

The United States has been the dominant power in our region throughout Australia’s post-Second World War history. Today, China is challenging America’s position.

Prime Minister Malcolm Turnbull addresses the Trump in the room in his foreword:

More than ever, Australia must be sovereign, not reliant. We must take responsibility for our own security and prosperity while recognising we are stronger when sharing the burden of leadership with trusted partners and friends.

But whom should we trust?

The question of what we should do is relatively clear, and uncontroversial:

  • promote an open, inclusive and prosperous Indo–Pacific region in which the rights of all states are respected;
  • deliver more opportunities for our businesses globally and stand against protectionism;
  • ensure Australians remain safe, secure and free in the face of threats such as terrorism;
  • promote and protect the international rules that support stability and prosperity and enable cooperation to tackle global challenges; and
  • step up support for a more resilient Pacific and Timor–Leste.

The question is how we should do it. The guidance in the white paper sounds remarkably like that Australia should just keep being its awesome self – strong economy, strong borders, strong institutions (like parliament?) – and everything will turn out fine. That sounds more like wishful thinking than a foreign policy plan. Trying not to be the grass that gets trampled when elephants fight is not a plan.

The closest the white paper gets to a plan is to double-down on the US relationship, and trust that the Trump administration is a blip. Turnbull has just spent an extended period in Asia with Trump, attending the Asian Summit Season. Can he really be as confident as this document sounds?

Still, the white paper has to land somewhere, and that the US will wake up to itself soon is a defensible place to land. Acknowledging “friction” between our stronger engagement with China and our “different interests, values and political and legal systems” might be the best we can do at present.

Chapter two is probably of the most interest to the reading public – it is an excellent synthesis of all the complexity DFAT faces daily, although the climate chapter must be the rosiest version of facts possible. There is surely a top contender for understatement of the decade in the section headed “An Environment Under Strain”:

The coming decade will likely see an increased need for international disaster relief.

Generally speaking, the climate section is underwhelming. Other nations and international organisations, such as the EU Global Strategy, have underlined the strategic risk climate poses to the conduct of foreign policy in a clear-sighted and comprehensive manner.

What is also missing is the will to invest in diplomacy. What will Australia do if US global leadership conflicts with our desire for China to take a stronger role in regional security, which it must, given time?

A white paper ignites a domestic conversation about foreign policy, and this one is certainly substantive and to be welcomed. But there is little point in a Foreign Policy White Paper if it largely apes the Defence White Paper and the viewpoint of the intelligence community – as this one does. It should align, certainly, but it should also add value, the perspective gained from experienced statecraft about non-traditional security threats and relationship-building. When it comes to diplomacy, the government has to “live within its means” (bah), but defence is be described as “strong” or “substantial” no less than nine times.

What if geographic proximity to a rising Asia is not enough to ensure our own rise? What if increased defence spending doesn’t placate the US, and chokes off more creative options to integrate into the region?

There is more depth in the trade section of the paper, perhaps reflecting the increasing dominance of the trade agenda over the other parts of DFAT. The economic vision of the paper is clear – we will maintain an open economy and manage the winners and losers from this policy. “Strength through openness” is a strong narrative:

The Government will continue to work hard to ensure community support for our openness to trade, investment and skilled migration._

As a voter wading through a Queensland election at present, I can attest that the federal government has a serious job getting that narrative through to ordinary Australians. Moreover, the hard sell on trade continues with little acknowledgement that Australians outside the business community might have valid concerns about human rights or gender equality issues arising out of trade negotiations.

Other notable features

The promising governance innovation of MIKTA (Mexico, Indonesia, Turkey, Korea and Australia) is missing from the document, and seems to have been restructured out of existence. Mexico and Turkey are not mentioned at all. The focus on Indo-Pacific is clear. This is understandable, and the ALP’s “FutureAsia” policy means this is now a welcome bipartisan focus. But Bishop’s investments in innovative pivotal power diplomacy should not be abandoned.

The “cumbersome” United Nations is treated with a level of ambiguity and grudging acceptance. Australia will run for another Security Council term in 2029. Nonetheless, there is a encouraging focus on supporting international law and the rule of law.

In a breakthrough from the previous white paper in 2003, there is a section on gender equality. It is expressed as a development issue rather than a strategic foreign policy issue, and comes at the end of a 100-page plus document. But it is still a step forward. And before the poor old Great Barrier Reef and Papua New Guinea, Timor Leste and the Pacific, all of which surely deserve deeper treatment than is offered here. But at least our neighbours score a chapter to themselves and a spot as the fifth priority.

It is worth looking at the section on “soft power” at the very end of the document, an important addition. It covers science diplomacy, sports and creative diplomacy, international education, digital engagement and people-to-people links, as well as the New Colombo Plan.

The ConversationIt may feel like an afterthought, but much of Australia’s way through the maze presented in the white paper may in fact stem from better investment in these areas of statecraft and a stronger nation brand in pursuit of our five new priorities.

Susan Harris Rimmer, Australian Research Council Future Fellow, Griffith Law School, Griffith University

This article was originally published on The Conversation. Read the original article.

Australia is hedging its bets on China with the latest Foreign Policy White Paper


Remy Davison, Monash University

No surprises: the Foreign Policy White Paper from Australia’s Department of Foreign Affairs and Trade is about trade, not guns.

Unlike Defence, DFAT is about quiet diplomacy, not security dilemmas. So this is no reprise of the 2009 Defence White Paper, which infamously canvassed the “China threat”.

But the message in this white paper is undeniably for Beijing’s ears. It tells China that Australia will have polygamous economic relationships with its multiple trade partners throughout the world.

Although it welcomes China’s advances, it will not submit to the monogamous embrace of the People’s Republic of China’s economy. It emphasises that China’s emergence, prosperity and future wealth is inextricably linked with the status quo: a liberal international economic order under the rule of law. The alternative is unpredictability, potential economic chaos and possible conflict.

The paper does not level accusations at Beijing in the ham-fisted manner the 2009 Defence White Paper did. But in a high-stakes game of international poker, there is one certainty: you must hedge your bets.

The revolution has been postponed

In reality, white papers are elite exercises, designed to be pored over by journalists, while strategically engaging a narrow, overseas audience of decision makers. Foreign governments are the real target readership.

There are virtually no parliamentary questions that aren’t Dorothy Dixers about foreign affairs and defence. That is because the Canberra political class are all sailing the same ship.

The Labor Party and minor parties may grumble aloud about free trade details, but you would have to go back many years to witness a collapse in bipartisanship on foreign affairs and defence. To 2003, in fact. To Mark Latham and a war with Iraq.

You will find no revisionism in this foreign policy white paper; the first foreign policy white paper since 2003 is firmly in the camp of the status quo.

From the inception of the Abbott government in 2013, the Coalition endorsed a global strategy to consolidate and extend Australia’s network of bilateral and regional free trade agreements. The objective was to achieve preferential trade access to Australia’s major markets in the Asia, Europe and the Pacific region. This latest white paper emphasises the continuity of this overarching strategy.

The problem is that the status quo that persisted when the Coalition government took office under Tony Abbott no longer exists.

The promulgation of Xi Jinping’s assertive presidency in 2013, Russia’s annexation of Crimea in 2014, the Brexit conflagration of 2016, and the inauguration of US President Donald Trump in 2017 have overturned conventional wisdom about the structure of the future global order.

Inquietude about China is not entirely absent, but the criticism is mild and polite. The white paper expresses concern about Beijing’s aggrandisement of the South China Sea, where China has constructed more than 3,200 acres of artificial land as part of its “Great Wall of Sand” strategy.

However, the paper merely reiterates bland statements of principle, calling for disputes to be settled under international maritime law. Open seas are, of course, the lifeblood of commerce.

A hedging strategy?

The white paper’s economic forecasts are aggressive. It envisages a Chinese economy valued at US$42 trillion in purchasing power parity terms in 2030, almost double that of the US and EU, respectively. Purchasing power parity is an economic measure that compares different countries’ currencies.

Indian purchasing power parity GDP will expand by 250% by 2030. By contrast, Japan is expected to atrophy, with virtually no growth in the next decade. Indonesia will almost double in size, but its growth will be slower than China or India.

Naturally, China dominates the thinking of the white paper’s authors. China is, by far, Australia’s biggest two-way trade partner with A$62 billion in imports and A$93 billion in exports in 2016, an increase of 3.7% since the China-Australia Free Trade Agreement entered into force in December 2015. The paper recognises China will continue to dominate consumption of Australia’s minerals exports, tourism and education services.

There are clues to DFAT’s thinking in the white paper’s terminology, which eschews the traditional “Asia-Pacific” mindset for the “Indo-Pacific”, which manages to integrate both India and Indonesia, while offending neither of them. Australia’s pivot to the Indo-Pacific should not be understated.

Foreign Minister Bishop says the ultimate goal is a Indo-Pacific free trade area, reiterating Japanese Prime Minister Shinzo Abe’s objective of “a free and open Indo-Pacific”.

The paper recognises its strategic economic partnerships with India, Indonesia and Southeast Asia, noting that in 2016:

Australia’s trade with ASEAN countries was greater than with our second-largest bilateral trading partner, the United States.

More than any previous public government document, the 2017 paper articulates a hedging strategy. It acknowledges China’s centrality to Australia’s trade, investment and prosperity.

But the TPP, the EU and UK free trade agreements, together with this Indo-Pacific free trade area, are clear economic messages to Beijing: there are alternative trade agreements.

Getting real

There has long been an “Australian realism” in international affairs. It’s a realism that recognises Australia is a weak power in a region inhabited by great powers bristling with nuclear weapons, and fragile states (Pakistan and North Korea) possessing baroque. But it also acknowledges these nations’ lethal, nuclear capabilities.

Australian foreign policy has long recognised that as a subordinate power, heavily reliant upon the region’s sea lines of communication and a working peace system to advance its commercial interests, Canberra should maintain great and powerful friends throughout the Asia-Pacific.

In practice, that has meant consolidating and extending the US military alliance, appeasing Indonesia, forming a virtual alliance with Japan, and deepening and widening Australia’s trade and investment links with China.

But despite the fact that Australian budgets are built in Beijing, the white paper is curiously silent about the China-dominated Asian Infrastructure Investment Bank, with merely one passing reference. In contrast, the paper reinforces Australia’s support for Washington-dominated institutions, such as the World Bank, IMF and NATO.

The ConversationDespite the China challenge, it is clear that in the minds of Canberra, US hegemony is not over, and the Asian century is still to begin.

Remy Davison, Jean Monnet Chair in Politics and Economics, Monash University

This article was originally published on The Conversation. Read the original article.

Public investment in electricity generation – a hot-button issue in Queensland?


John Quiggin, The University of Queensland

One of the most striking features of the Queensland election campaign is that all major parties are advocating public investment in electricity generation.

The real choice to be made is whether this investment will promote the goal of a decarbonised energy system, or whether it will seek to delay this transition and prolong Australia’s reliance on coal-fired electricity.

Labor and the Greens are advocating public investment in renewables, while the LNP and One Nation want a new coal-fired power station.


Read more: Twitter analysis shows Queensland Labor has put Adani behind them


This choice, in turn, depends on attitudes to mainstream climate science. If the findings of mainstream science are accepted, a complete phase-out of coal-fired power, and its replacement by renewables, must take place over the next couple of decades. This implies a target of 50% renewables by around 2030.

The Queensland Renewable Energy Expert Panel modelled the achievement of a 50% renewables share for Queensland. The Expert Panel identified economic benefits of a renewable investment program including an average gain of 6,400 jobs.

Queensland has retained publicly owned electricity generators, primarily focused on coal-fired power. It would make sense for the public to diversify more into renewables.

Where the parties stand

At its recent conference, Labor committed to continued public ownership in the electricity sector and a 50% renewables target by 2030. The conference motion proposed a publicly owned energy corporation committed to protecting customers’ interests and building at least 1000 MW of clean energy.

The Greens propose more comprehensive public ownership with investment of $15 billion over the next 5 years to build publicly-owned clean energy and storage, estimated to create 5,500 jobs every year. The Labor-Green emphasis on renewables is consistent with the movement of the global mainstream.

Last week, at the UN Climate Conference in Bonn, 19 nations including the UK, New Zealand and Canada joined the Powering Past Coal Alliance, pledged to phase out coal-fired power altogether.


Read more: Bonn voyage: climate diplomats head into another round of talks


In sharp contrast, One Nation’s policy is based on the claim that climate change is a hoax, promoted by the United Nations as part of its sinister Agenda 21 policy, which, according to the One Nation platform, seeks to control you and your life .

This position is, at least, internally consistent. The willingness of conservative, liberal and labour governments around the world to sign up to a common climate change policy is seen by One Nation as evidence that the UN is making progress towards its goal of world domination.

The LNP takes a more ambivalent position. While backing coal and opposing renewables, its Queensland state conference narrowly rejected a motion calling on Australia to withdraw from its Paris commitments to reduce greenhouse gas emissions.

‘HELE’ of a big gamble

The key idea used to reconcile these contradiction is the idea that we can meet our commitments using “high efficiency, low emissions” (HELE) coal-fired power stations.

HELE power stations rely on the process of ultra-supercritical generation. That sounds impressive, but the reality is more prosaic. The term supercritical refers to the fact that at high temperatures and pressures, fluids are neither liquids (in this case, water) nor gases (steam) but display characteristics of both. Supercritical boilers are 10-20% more efficient than subcritical boilers.


Read more: Ultra, super, clean coal power? We’ve heard it before


The first supercritical boiler was invented in the 1920s. The technology was fully commercialised by the 1990s. Coal-fired power stations built in Queensland since 2000 operate on supercritical technology.

‘Ultra-supercritical’ plants, first installed around 2000, operate at even higher temperatures and pressures, but the additional increase in efficiency is limited, by the physics of the Carnot cycle, to between 10 and 15 per cent. The HELE acronym is misleading: emissions are lower than those of 20th century plants, but higher than any other generation technology.

So, the moment any substantial carbon price is imposed the proposed power plant will cease to be financially viable and will become a stranded asset. Investment in such a project is a bet that all the world’s scientists and every other government in the developed world have got things wrong or, alternatively, that Australia can go it alone on this issue.

It’s hard to see any financial institution taking a risk like this. Given the warnings already issued by regulators about the dangers of investing in stranded assets, a loan that goes bad will leave the lender open to litigation and regulatory sanctions. Will banks be willing to lend the necessary billion dollars or so on such collateral.

The ConversationShould the LNP gain office, then, their policy will face a critical test. Even with a substantial public investment, will any private firm be willing to take an equity stake in what looks certain to become a stranded asset? If not, will the Queensland public be forced to bear the entire risk?

John Quiggin, Professor, School of Economics, The University of Queensland

This article was originally published on The Conversation. Read the original article.

Citizenship crisis claims Nick Xenophon Team’s Kakoschke-Moore


Michelle Grattan, University of Canberra

Nick Xenophon Team senator Skye Kakoschke-Moore has resigned from parliament after being advised she is a British citizen via her mother, in another blow to the party.

The NXT has three Senate spots, as well as one member in the House of Representatives, Rebekha Sharkie – whose future is under a cloud in the citizenship crisis.

A tearful Kakoschke-Moore said she was “heartbroken” by the news. She had previously not believed she had British citizenship and had only checked when preparing the declaration to be presented to parliament.

Her mother was born in Singapore to British parents, and migrated to Australia with her family.

“Usually where a parent is born outside of the UK they are unable to pass their citizenship on to their children where those children are also born outside of the UK. It was my understanding for my entire life that I was not eligible for British citizenship due to that rule.”

When she was living in Oman as a child her father had inquired whether she was eligible for a British passport and was told she was not because she wasn’t eligible for citizenship. “We had no reason to doubt that this advice was incorrect.”

But the British Home Office had now advised her that, through a complicated train of circumstances, her mother became a British citizen under British legislation of the early 1980s “and I am therefore a British citizen under … the British Nationality Act 1981”.

She said she would ask that her case be referred to the High Court.

The issue is particularly complicated for the NXT because the next candidate on its ticket, Tim Storer, is no longer in the party after falling out with it.

Storer had wanted to replace Nick Xenophon when he quit the Senate for state politics. But it was a casual vacancy and Xenophon was able to appoint his staffer, Rex Patrick.

Xenophon told a joint news conference with Kakoschke-Moore that preliminary legal advice was “that we’re in uncharted legal territory as to whether it would be a countback or some other mechanism of dealing with this” vacancy.

The NXT will argue that Storer should not get the spot because he is no longer in the party. But Anne Twomey, constitutional expert from Sydney University, said she very much doubted the argument would fly.

Xenophon said he hoped that Kakoschke-Moore would be back in the Senate soon, at least after the next Senate election.

He said Kakoschke-Moore’s circumstance was completely different from that of Sharkie – who didn’t receive her confirmation of renouncing her British citizenship until after her nomination went in.

The British Home Office had pocketed her money before the nomination, Xenophon said. He said the initial legal advice was that she was in very strong position.

“There may be a referral. I think that what we’ll expect to see in coming days is a whole stack of referrals to the High Court from people from the major parties and crossbench as well.”

The ConversationKakoschke-Moore is the ninth member of the federal parliament to have either resigned or been knocked out by the High Court over being a dual citizen at the time of nomination.

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Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Young Australians will wear the costs of Turnbull’s middle income tax cut


Danielle Wood, Grattan Institute and Hugh Parsonage, Grattan Institute

Malcom Turnbull has promised tax cuts for middle-income earners in the next budget or even earlier. The short-term political benefits of pre-election tax cuts are not in doubt. But unless the government is willing to increase taxes elsewhere to pay for these sweeteners, there will be longer-term costs for the budget and the economy. And younger Australians will wear these costs.

Young people will pay the price

If the government goes ahead with tax cuts and nothing else changes, we can look forward to the announcement in the 2021 budget of Australia’s 13th successive budget deficit. This is despite the fact Australia is in the midst of the longest period of uninterrupted economic growth anywhere in the developed world. And the unlucky recipients of this legacy of poor budget management are the young.

Grattan Institute research shows that each year the government runs a A$40 billion deficit, it increases the lifetime tax burden for households headed by a person aged 25 to 34 by A$10,000. This is based on the share of debt they would have to repay – with interest – over time. With each successive budget deficit, the tab grows for today’s young Australians.

And the government is magnifying the cost of future economic downturns. Australia was well placed to respond to the global financial crisis because of its healthy fiscal position. But with net debt now sitting at A$322 billion (18.4% of GDP), the government has less room to respond if there is another serious downturn.

Middle-income earners are hit by bracket creep

In the 2017-18 budget, the government was clear: if the senate won’t support spending cuts, then tax increases will have to do the “heavy lifting” on budget repair. And this heavy lifting is largely happening through bracket creep – growth in income taxes as a share of wages.

Middle-income earners are particularly hurt by bracket creep. Based on the wages growth projected in the 2017 budget, the average tax rates for people in middle-income groups will increase by between 1.9 and 2.9 percentage points by 2021. For example, a person earning A$50,000 a year will go from paying an average tax rate of 17.1% in 2017 to 19.5 % in 2021 – and that’s before the government’s proposed increase in the Medicare levy.

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No government likes to go to an election with taxes going up, so the temptation to “give back” bracket creep was always going to prove irresistible in next year’s pre-election budget. And as the prime minister flagged, there is also an economic case for such tax cuts. High marginal tax rates for middle income earners can significantly affect incentives to participate in the workforce, particularly for for women with children in childcare.

Tax cuts will blow the surplus

But the kicker is the effect of the promised tax cuts on the budget bottom line. The Australian government has been running budget deficits since 2009. In the last budget, the treasurer promised a return to surplus in 2021.

That promised surplus always relied on optimistic assumptions: strong wages growth, healthy growth in profits, government spending restraint, and, importantly, no cuts to income taxes. The government’s proposal is light on details, but even modest cuts to tax rates could eliminate the forecast surplus.

For example, if the government was to reduce the tax rate only in the middle bracket (A$37,000-$80,000) from 32.5% to 30%, the cost to the budget bottom line would be about A$7.3 billion in 2021, almost wiping out the promised A$7.8 billion surplus.

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If Malcolm Turnbull wants to cut income taxes but is still serious about delivering on his commitment to return the budget to surplus, then he will need to look elsewhere for revenue. Winding back the capital gains tax discount or negative gearing, better targeting of superannuation tax concessions and tax breaks for older Australians, or increasing or broadening the GST are just a few policies we could suggest.

The ConversationBut if the PM pursues the sugar hit of tax cuts without the difficult work on paying for them, then politics will once again have trumped policy and the economic future of today’s young Australians.

Danielle Wood, Program Director, Budget Policy and Institutions, Grattan Institute and Hugh Parsonage, Associate, Grattan Institute

This article was originally published on The Conversation. Read the original article.

Turnbull wants to take middle-income earners’ income tax both up and down


Michelle Grattan, University of Canberra

If you were running a well-honed political strategy you’d surely have your prime minister announce his plan to give middle-income earners income tax relief in a major speech around Australia Day, forming a launchpad for 2018. You wouldn’t be tossing it out there at the fag end of a disastrous year, amid the general chaos.

But Malcolm Turnbull is operating on tactics rather than strategy.

Regardless of how long the tax aspiration had been in the pipeline, his Monday night speech to the Business Council of Australia did its job of securing a “look-over-here” effect, when Turnbull was under fire for cancelling next week’s House of Representatives sitting.

It achieved the front–page headlines despite being totally without detail.

Apart from general sentiments about the desirability of lower personal income tax, all Turnbull said in the way of specifics was: “In the personal income tax space, I am actively working with the treasurer and all my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus”.

How much this will amount to in the end and when taxpayers would get something tangible remain to be seen. Asked on Tuesday when he thought he would deliver the tax cuts, Turnbull said: “Well, this is going to be our focus next year. Obviously we’ve got the budget coming up, as always, in May. But we are determined to make sure that there is more money in the pockets of hardworking Australians.”

If in the event the tax relief became an election promise, rather than pre-election money in the pocket, would voters be sceptical?

In the meantime, Labor – which proposes a higher tax regime – had plenty of ammunition, not only to assert that Turnbull was looking for a distraction but to remind people that this year’s budget actually flagged an increase in personal tax. This is in the form of a higher Medicare levy to help fund the National Disability Insurance Scheme.

From July 2019 the Medicare levy will rise from 2% to 2.5%. This will be a nice little revenue-earner, raising A$8.2 billion over the forward estimates.

As Deloitte’s Chris Richardson points out, after finding deep spending cuts too hard a road in trying to repair the budget, the government in May opted for higher taxes (although it had just passed some of its business tax cuts from the 2016 budget and was still pressing the rest).

Richardson dubs the May strategy Plan B, after Plan A, based on spending cuts and epitomised by the 2014 budget, had been abandoned.

“Surely they can give Plan B longer than six months,” Richardson says. It seems not.

Richardson says tax cuts are not needed to stimulate the economy, and are counter-productive for fiscal repair – which is dependent on projected revenue growth.

“The figures show that what gets us to [the projected] surplus in 2020-21 is higher taxes. The move from deficit to surplus between 2016-17 and 2020-21 is a swing of 3% of national income. Of that, 2.5% is from revenue and 0.5% from spending cuts,” Richardson says.

Personal income tax cuts would be costly. On Tuesday former minister Eric Abetz, speaking on Sky, suggested the priority should be on income tax cuts over the company tax cut for big business that’s stymied in parliament. Any retreat on the business tax cut would be a major backflip from the government.

A Parliamentary Budget Office paper released a few weeks ago notes that the average tax rate for individuals is estimated to increase by 2.3 percentage points from 2017-18 to 2021-22.

There are increases in every income quintile although they vary. The largest increase is expected in the middle quintile (taxable incomes from $37,000 to $56,000) where taxable income is expected to be an average $46,000 this financial year. These taxpayers are projected to see their average tax rate increase by 3.2 percentage points by 2021-22, the paper says.

As for the Medicare levy increase, it “has the greatest impact on individuals in the third, fourth [$56,000 to $85,000], and fifth [$85,000 and over] income quintiles. Medicare levy concessional arrangements eliminate this impact for the first income quintile and limit the impact for the second,” the paper says.

So we have the government simultaneously planning a tax rise while now talking about tax relief for middle-income earners.

The ConversationAnd that takes us to the question of whether Turnbull can manage this new tax debate he has opened. This includes making sure he and his treasurer are on the same page, and the backbench doesn’t run off prematurely and in multiple directions. At an earlier stage of his prime ministership, a debate about tax directions didn’t go well. He can’t afford that sort of mess now that he has so little political capital.

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Income tax relief on Turnbull’s agenda


Michelle Grattan, University of Canberra

Malcolm Turnbull has raised the prospect of personal income tax relief to help middle-income earners, saying he is “actively working” on it.

As the government is still trying without success to get the remaining part of its company tax plan through parliament, which would deliver lower tax to big companies, Turnbull has moved to hold out the prospect of relief for individuals.

Speaking to the Business Council of Australia on Monday night, he noted the government had already lifted the second-highest income tax bracket threshold from A$80,000 to A$87,000, keeping some half-a-million people from moving into a higher bracket. It had also spared people facing a permanent top marginal rate of 49.5% by not making the temporary deficit levy permanent.

“You know our plans on corporate tax,” he said. “In the personal income tax space, I am actively working with the treasurer and all my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus.”

He said his commitment to all Australians was: “Whether you are starting out in your first job, a worker providing for their family, or a business hiring staff, our goal is always to leave more money in your pocket, not in ours.

“Higher taxes penalise people who are trying to get ahead. But when you reward hard work and enterprise, you encourage hard work and enterprise.

“It’s pretty simple – more investment, more jobs. That’s the key.”

He recalled that his earliest foray into the personal income tax debate in 2005 as a fairly new MP was not uniformly welcomed. He did not spell out that then-treasurer Peter Costello was furious.

But the concerns that underpinned a report he released then still existed: “The tax system remains complex and compliance is a burden, our marginal tax rates are high, bracket creep is a constant challenge that needs to be addressed”.

Turnbull said that “just because we’re in challenging fiscal times doesn’t mean we should raise the white flag on making the tax system work better”.

A Treasury analysis showed Australia risked being left behind by the rest of the world in the competitiveness of its business tax, he said, citing in particular the US and the UK.

The Conversation“If we don’t reduce our corporate rate to 25% as planned – in our Enterprise Tax Plan – over the coming decade, the only advanced nations that will exceed Australia’s tax rate are Japan and Malta.”

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

When you’re on the defensive, stepping backwards can send a bad signal


Michelle Grattan, University of Canberra

Malcolm Turnbull’s tactic of cancelling the House of Representatives’ sitting next week – because his numbers are depleted and the government is nervous – is a short-sighted decision that smacks of lack of nerve.

Undoubtedly it would have been a rough week in the lower house. But refusing to face it looks panicky, just when Turnbull is trying to convince people that he and the government are in control.

The government is desperate to keep the lower house agenda narrow and as tightly managed as its unfortunate circumstances permit. It declares the rest of the parliamentary year will be confined to legislating for same-sex marriage and considering which citizenship cases should be referred to the High Court.

Monday’s cancellation wasn’t Turnbull’s only ploy to avoid being embarrassed in the lower house’s final sitting days of 2017. When he recently met Bill Shorten to discuss citizenship disclosure, he tried to win agreement to confine the coming period to non-controversial legislation. Labor naturally wouldn’t play ball.

The cancellation has nothing logically to do with the timetable for the same-sex marriage bill. Consideration of that legislation was always to continue in the Senate next week, moving to the House of Representatives for debate the week after. Meanwhile, the lower house next week would have dealt with other legislation.

Nor is Leader of the House Christopher Pyne convincing when he claims this is just a routine change, and that there was no need for the lower house to meet next week because there was nothing urgent for it to do.

In truth, the government fears what trouble Labor games and rebels in its own ranks might cause, and is desperate to limit the time available to them. The latter, spearheaded by Nationals Barry O’Sullivan in the Senate and George Christensen in the lower house, are planning to try to force the issue of a commission of inquiry into the banks and other financial institutions.

O’Sullivan is preparing a bill for the banking commission and claims up to four lower house members could cross the floor. The O’Sullivan commission would report to the parliament; it would be distinct from a royal commission, which only the government can set up.

This bill was never going to get to the lower house next week; it’s not even clear whether it will be debated there when the lower house does sit the week starting December 4. But Christensen says he will vote for a commission or the like “in whatever guise it comes up and I definitely expect it’s going to come up”. Something will certainly “come up” if Labor can make it do so.

One big question is why the government has let this bank issue fester. It has been very critical of the banks, slapped a hefty tax on them, and moved to impose a tough regimen on their executives. But it has fought trenchantly against the royal commission that Labor advocates.

Given the strength of anti-bank feeling in the community, and within some of its own ranks – based on the banks’ bad behaviour – the government should have long ago cut its losses and set up a broad-ranging inquiry.

An important aspect of the rebel Nationals’ push is that they are referencing the precedent of the Liberals rebels’ success on same-sex marriage.

O’Sullivan told the ABC the government’s facilitating Liberal backbencher Dean Smith’s private member’s bill (now a crossbench bill) provided “a new pathway for backbenchers to be able to pursue matters of importance to them, and I’m just simply following along in his footsteps”.

The Nationals remain deeply out of sorts about the marriage debate sucking oxygen, as they see it, from other issues for months.

Beyond that, the rebels have taken from the marriage story the lesson that what’s good for the goose should be good for the gander. If a group of Liberal rebels – the “famous five” who put same sex-marriage back on the government agenda – can break ranks and end up getting what they want, why not a group of Nationals, with their issues?

And the win – and praise – scored by the Liberal rebels has meant the Nationals leadership and whips have reduced authority to keep their own rebels in line.

On Monday night Labor was seeking crossbench support for a proposed joint letter to put pressure on Turnbull to reverse his decision to cancel next week’s lower house sittings, but there’s no chance of his doing that.

Turnbull had raised the possibility of deferring the start of the House sitting at his meeting with Shorten. Shorten gave it short shrift at the time, and said so publicly, but Turnbull has rashly chosen to have the last word.

The ConversationTurnbull told a business audience on Monday night: “In times of uncertainty, the nation needs calm and measured leadership, a steady hand at the helm”. His earlier action suggested a touch of the tremble.

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.