Red giants

Far from protecting rights and providing certainty, the federal government is increasing instability and undermining trust

By Lyle Dunne

It seems Labor governments, like stars, become red giants toward the end of their lives. In the case of the Gillard government, the colour could be interpreted in either political or accounting terms, and “giant” as a reference to spending or the implicit conception of the role of government. (When Simon Crean and Martin Ferguson fear you’ve swung too far to the left, it’s time for a reality check.) Budgetary restraint is forgotten, and shamelessly populist promises are made, with no expectation that there will ever be a reckoning. 

I suspect many of us are thinking to ourselves “well that doesn’t matter too much: there’s no prospect any of this will ever be implemented; it’s just about damage limitation.” 

Of course, political fortunes are notoriously volatile, and such damage-limitation strategies have sometimes worked too well in the past, leaving unexpectedly-re-elected governments with an embarrassing backlog of undeliverable promises. (It’s a little like Max Bialystock in The Producers, selling 50% shares in a show to a score of indulgent investors, entitling each of them to half the profits he’s confident will never arise – then being embarrassed by a hit.)

The government’s latest plans on superannuation, however, promise to achieve something rare in politics: they have the capacity to do damage, and not just political but economic damage, even if they’re never implemented. 

To see how, let’s reflect for a moment on the recent Cyprus banking crisis: Abbott has described the Gillard position as having “shades of Cyprus”. The Cypriot government’s plan to shore up the sector by raiding depositors’ accounts met a relatively early, if not untimely death. 

Cyprus analogy

Yet the resultant financial shock waves resonated far beyond the borders of this tiny nation, affecting confidence in the entire European banking sector. The unthinkable had happened: a government had proposed seizing citizens’ savings. What had happened once could happen again. Banks were no longer safe. And of course, as critics of the finance system, students of twentieth-century history, and fans of It’s a Wonderful Life know only too well, banks live and die by investor confidence. 

In some respects, the ALP Super plans are even worse. 

Like the Cypriot raid, the ALP plan in its final form targets the rich. In fact, the threshold (incomes over $300,000) is so high that the actual savings would be tiny. It’s likely that, like the income test for the baby bonus, the scheme would cost more to administer than it would save – so its real rationale lies in the realm of the symbolic. 

In any case, the fundamental problem with “Robin Hood” economics, even before we get into the subtleties of perverse incentives, is that there are simply too few rich, and too many poor. Even seizing all the assets and income of the very rich and redistributing them would make very little difference to the position of the poor. 

Now if this sort of thing  — a sudden, cynical raid on investors’ money, to meet a short-term crisis — were to affect most classes of investment, the results would be disruptive but not necessarily catastrophic. Confidence would drop, money would be reinvested in other areas; returns would fall and the asset value would move correspondingly – in the long run, the market would adjust.

Red Giant star

“Labor governments, like stars, become red giants toward the end of their lives.”

Trust compromised

Superannuation, however, is different. 

Because it targets a class of investors rather than an industry, diversification is of no help as a preventive or cure. 

And the whole thrust of Australia’s comparatively successful approach to superannuation has been to encourage people to make provision for their retirement, ahead of time, so as not to be reliant on the pension. 

This relies on a high level of trust, however. People want to see that they can make arrangements in advance for their retirement income, and trust that they will not receive any sudden surprises in terms of, in particular, the taxation treatment of their superannuation.  

Until relatively recently, there has been bipartisan support for this position. 

Now, however, the government has signaled that they consider it acceptable to repudiate previous undertakings in relation to superannuation. What’s more, they’re prepared to do so not to deal with a new and unexpected financial crisis, but in order to gain a temporary political advantage (relatively speaking). 

It doesn’t matter that the people affected are few in number, and in receipt of the sort of incomes that are not greatly in need of government support. 

It doesn’t even greatly matter that the government has no intention of trying to introduce these measures before the election, which means that neither they nor anyone else expects that they’ll ever see the light of day. 

What matters is that the government have signalled their willingness to make sudden changes to the superannuation environment in response to short-term political exigencies. 

Meanwhile the government has hit back by describing Abbott’s Cypriot comparison as the talk of “an economic simpleton”, and accusing Abbott of undermining the Australian economy (with some support from The Age.) In an unusual twist on Hawke’s “London Doctrine” of not commenting on domestic matters while overseas, Gillard seemed to hint that Abbott was behaving improperly by discussing such matters while she was overseas. 

Damage long-term

But as we’ve seen, the problem with the government’s super plan is not so much its direct economic effect on the relatively few who would be affected, even if it ever got off the ground, but the long-term effect on the confidence of people deciding where they can safely invest for their long-term future. 

Critics of market economics often see it as a kind of anarchistic system, a dog-eat-dog world with “every man for himself”.  But in fact a free market depends on mutual trust, underpinned by the role of government in protecting property rights and enforcing the terms of legitimate contracts; in other words, government adding to the safety and predictability of dealings. 

What we’re seeing here is the opposite: the government, far from protecting rights and providing certainty, is increasing instability and undermining trust. 

The sheepdog is running with the wolves. 

In these terms, it’s precisely analogous to what’s happened in Cyprus. 

Labor is on firmer ground accusing Abbott of planning to target the superannuation arrangements of lower income earners.  Abbott has clearly stated that any initiatives funded by the mining tax would go, along with that tax, including Labor’s low-income super contribution. 

This dovetails neatly with Labor’s class-warfare rhetoric: Abbott taking from the working poor, and giving the proceeds to wealthy mining companies.   

Of course, this element of hypothecation – linking expenditure measures to particular taxes – is a fantasy. Income and expenditure are related only at the whole-of budget level. For (say) low-income earners, the total picture, including the effects of ALL tax and transfers, job prospects, prices, stability and consumer confidence, is what matters. 

Nevertheless the question of restoring confidence in superannuation arrangements remains a challenge. Coalition Spokesman Mathias Cormann has raised the possibility of revisiting superannuation co-contribution benefits for low-income earners when the budget has recovered, but unless a specific proposal emerges, the Coalition will remain vulnerable on this point. 

More generally, though an incoming Abbott government will face a major task in rebuilding trust in governments and their undertakings. 

Paradoxically, the only way to achieve this may be to proceed cautiously, rather than making rash undertakings.

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