Australia takes the fossil option

| June 1, 2019

Australia’s Liberal–National Party (LNP) coalition government seems to have limped its way to re-election despite a string of corruption scandals, ideological infighting that has seen three different leaders since 2015, and almost no policies offered in the election campaign.

Few predicted this election outcome mere months ago when several prominent members of cabinet declared that they would not contest the election and the former foreign minister was better recognised in polls over the new Prime Minister.

So what happened? Most pundits have accused the Australian Labor Party (ALP) opposition of miscalculating by offering ‘a big bold vision’ for Australia, rather than adopting a small target strategy.

Such an approach proved disastrous in the 1993 election for the John Hewson-led LNP opposition, whose 650-page Fightback agenda sank like a stone with the electorate.

But such a take on the 2019 election is misleading, and speaks to the emaciation that afflicts policymaking in Australia. The ALP made much of their agenda in sloganeering, having identified many of the key reform needs facing the country, notably in tax, competition policy, anti-corruption efforts and childcare.

But their policies themselves were arguably shallow. They consisted mostly of tinkering with a tax system long overdue for deep reform. Labor wanted the accolades for showing leadership but lacked both the skill to develop a compelling agenda and narrative and the willingness to take the requisite political risks.

Australia is certainly in need of reform. Were it not for a historically and deliberately high skilled-migrant intake (that many LNP voters want reduced), the nation would already have fallen into recession.

Capital is being misallocated due to distortions that favour unproductive real estate investment and increasingly obsolete fossil fuel industries. Many key sectors including banking, energy, housing, superannuation, aged-care and higher education have lost their social licenses to operate. Rent-seeking is rampant.

Yet the Liberal–National government has successfully navigated its way to re-election precisely by appealing to vested interests. Their campaign was dominated by classic scare-mongering: threats that the ALP would tax housing, tax retirement and tax death. These tactics cut through because the largest rent-seeking group in Australia is the property-owning class of retirees.

Australia does not face the pension crisis of many other OECD nations in part because of policies designed to encourage home-ownership and personal saving for retirement.

Many retirees own at least one property outright as a result. And even working class retirees have grown wealthy on the back of deliberately constricted housing supply over the past two decades, with house values going up by an order of magnitude.

The pension system is designed around the idea that citizens will draw down the equity in their houses in retirement. But this is not how average retirees think about their finances — they want to live off their savings and government transfers and bequeath their real estate assets in death.

As such, they resist any efforts to claw back entitlements or bring down real estate values. This is particularly challenging for the Labor Party, because despite having high wealth, many members of their ‘working’ class base have low incomes and consequently see themselves as ‘battlers’.

The clearest example of this was opposition to the repeal of franking credits: tax rebates for personal tax never paid by retirees on shares in corporations that have already paid corporate income tax. Franking credits were intended to prevent double taxation, not to send money to people who only paid tax once.

The policy is highly regressive to boot as the bulk of the AU$5.9 billion or so a year paid out in rebates goes to the top 20 per cent of wealthy households. Meanwhile, the means-tested pension remains meagre.

The other shining example was opposition to the repeal of negative gearing, a policy where property owners renting their houses at a loss can claim that loss as a tax deduction.

Negative gearing fuels housing-market speculation in Australia, with many investors relying on values going up to compensate rental losses. This lucrative casino would steadily crumble in the absence of government largesse directed at the housing sector, so vested interests therein aggressively obstruct reform.

A second key theme of the election is the possible arrival of the Trump phenomenon in Australia. The most recent change of leadership in the LNP was provoked by electoral fear in the right-faction of the party.

They worried about losing seats to minor parties in rural electorates and in Queensland if they didn’t double down on nativism, opposition to same-sex marriage and declining fossil fuel jobs. The then leader, Malcolm Turnbull, an urban, green-minded businessman, was dumped in August 2018.

While the brouhaha provoked deep fissures in the party, the conservative wing has been rewarded with substantial swings to nativist, pro-coal minor parties and LNP candidates in Queensland and rural seats, including two recently embroiled in corruption scandals: Peter Dutton and Barnaby Joyce.

Progressive parties’ best hope for making inroads into these electorates in the future may be investing greater thought into the notion of a ‘just climate transition’ for fossil fuel jobs.

In the meantime, one is ultimately forced to conclude that Australians have voted out of greed and economic fear. The unpopularity of the now resigned opposition leader Bill Shorten, with his Machiavellian reputation, certainly didn’t help, but the decisive factor seems to have been hip-pocket issues.

The much-loved former ALP prime minister Bob Hawke, the architect of Australia’s structural reforms in the 1980s and the nation’s subsequent prosperity, passed away two days before the election.

A similarly rare combination of charisma and competence may again be required to break the hold of vested interests and push through reforms.

This article was published by the East Asia Forum.