Social Democratic renewal

I am asked to discuss the "how" of social democratic renewal. I start with the premise that Labor's only distinctive philosophy is egalitarianism. Of course economic, communitarian, environmental and

"aspirational" values are also important but they are not

distinctively Labor. So what can social democrats, and specifically the Australian Labor Party do, to make egalitarianism a political winner?

I will outline three broad themes to you.

First, to ensure redistribution is economically viable, Labor should continue to give high priority to economic efficiency but give it a distinctive Labor meaning.

Second, Labor should reorient its egalitarian policies more towards values that clearly appeal to Australians.

And thirdly, Labor needs to rethink its policy on taxes, borrowing and regulation..

Economic efficiency.

Economic efficiency has become almost a rude word with many on the Left who associate it with materialism and unfair distribution. This is a pity, as efficiency gains can be used for whatever purposes the community wants - they are a means to achieving a better society.

The gains can be used to improve economic growth and personal consumption. And that may well be part of what the community wants.

[I am not as certain as Clive Hamilton (Growth Fetish) that most Australians want to turn their backs on material wealth. I suspect they would be much less happy if a government adopted anti-growth policies because psychological research has found that losses are felt more than gains, so giving up some of their gains might produce pain even if the original gains themselves added little to wellbeing. Moreover, whatever they say about downshifting in response to polls, it seems that in practice, if given a choice, most Australian workers seem to prefer more work where they receive extra money. ]

But efficiency gains can also be used to increase leisure, improve the working and urban living environment, enhance the quality of health care and education, repair our ecology and so on. The choices lie with the voters at large. Improved efficiency only widens their choices e.g. by making government spending programs more sustainable.

So how can Labor distinguish itself on efficiency?

Firstly, it should broaden the concept of microeconomic reform. At present it means any government action which improves the workings of markets e.g. injects new or more competition or removes unnecessary market regulations and controls. Some of that is still needed. But micro reform is also to some extent about "strategic industry policy" - not picking winners but generic interventions to correct for market failure. For example markets have a tendency to under-invest in plant and equipment, public infrastructure, training and R & D because they cannot take account of wider spin-offs.. Governments should do more to capture these externalities and at the same time promote innovation and export diversification.

Secondly, Labor should shift some of the policy focus away from microeconomic reform back to macroeconomic policy. It should argue that there is scope for bolder, pro-growth macroeconomic policies. This might seem a pretty audacious line to run, given that since the

"recession we had to have" in 1990/1, the economy has had a dream

run. But our great economic performance is due to a range of factors, including an undervalued exchange rate, micro economic reform and improved monetary management. It has not been helped by short term fiscal management. Indeed, the only year under Howard where fiscal intervention was contra-cyclical was 2000/01 (when Howard decided to beef up the new home savings grant and remove indexation from the petrol excise). In all the other years, fiscal policy has been pro-cyclical.

Another neglected aspect of macroeconomic policy is national development - government borrowing and investment in essential economic infrastructure - an issue I return to later.

A third way Labor can distinguish itself on efficiency is to commit itself to ensuring that the efficiency gains from reform are fairly distributed. For example it could promise that

• if it gingered up competition in a particular sector, it would offer generous structural adjustment assistance and labour market programs to smooth the transition;
• if it opened up the government service delivery to more private sector competition, it would ensure workers wages and conditions and access to unions was not undermined in the process; and
• if it sought to further roll back inefficient workplace practices, it would insist on wide consultation and benefit sharing.

Yet another way it could distinguish itself on reform is to expose and reject the "phoney" kind that masquerades as economics but is really market ideology - in that the efficiency benefits are low and the equity costs high, so the reform cannot be justified on broad social welfare criteria. There are many examples of phoney reform - recent or proposed - especially

• the systematic and relentless attack on our welfare system (tougher eligibility criteria and penalties, erosion of benefits to unemployed and students relative to other welfare benefits, attempts to shame recipients and shift responsibility to non-government players);
• the steady worsening in the collective power and working conditions of workers, reliance on work-for-the-dole to the exclusion of employment-effective labour market programs;
• some privatisation and outsourcing decisions - those made without a comprehensive cost-benefit analysis; and
• most blatantly of all, the obsession about public debt - of which I will say more later.

Egalitarianism

I now turn to my second theme - egalitarianism with a difference. Poll after poll shows that the Australian commitment to a fair go is more about equality of opportunity than outcomes. Labor should not turn its back on passive income redistribution, which is needed to relieve pockets of real poverty (notably among aborigines) and to neutralize growing market inequality. But the emphasis should be on getting at the root causes of, and minimizing, market inequality where it cannot be explained and justified in terms of differences in effort and talent. This means not only equal treatment of equal starters but also unequal treatment of disadvantaged groups that start too far behind the rest of the field. It means for example intervening to

• help the children of disadvantaged families at the pre-school and primary schooling stages;
• assist such families to build savings and improving their access to affordable credit;
• reduce the inequalities of employment opportunities -across households, skills and regions;
• narrow the widening gap in access to education, health and housing;
• improve the quality of life in the workplace; and
• more generally, to re-empower the weak and voiceless in our community to give them more control over what happens in their lives.

On the last point, my recent book focused on the workplace impotence of low-paid workers as a consequence of the changing labour market, the decline of trade unionism and their declining access to independent statutory institutions like the AIRC and the HREOC. But the need is wider - citizens should be encouraged and assisted to take a greater part in decision making at all levels of authority, especially at the decentralized level through truly representative local government.

The instrument package

Reorienting Labor to a more egalitarian stance is empty rhetoric unless it is associated with a rethink of policy on taxation, public borrowing and social regulation.

Taxes

It is neither feasible nor fair to ask ordinary workers on or close to median income to pay more income tax. Many low-paid workers already pay too much. And in any case higher taxes would exacerbate poverty traps. But federal and state governments have many other economically efficient, morally defensible ways of raising revenue - through base broadening measures such as

• a tax on unimproved land values (a kind of holding charge on ownership)¹; 
• a wider and more neutral tax treatment of capital gains (including, as Tony Lamb has recently proposed, a full capital gains tax on the land component of all real estate acquired after a certain date);
• a tougher clamp down on tax minimization practices (artificial income-splitting devices, the abuse of family trusts, negative gearing, share options etc.); and
• environmental levies, such as on carbon emissions or congestion, which are socially regressive per se in the short term but have much else to commend them).

The trick is to make new or additional taxes politically acceptable. I believe the best way of doing that is to promise to ear mark the additional revenue for specific purposes that have wide community support - such as to improve access of lower income families to health, education and housing or restore our river systems. Such hypothecation would also help to "reconnect" citizens to their tax system generally and offer a unique form of participatory democracy. Treasury don't like it in principle because it reduces budgetary flexibility - but there are wider considerations.

Social regulation

I also believe Labor may need to look more closely at social regulation. I am a committed market liberal and I have frequently warned against a return to old levels of wage, banking and foreign exchange regulation. But governments cannot rely solely on fiscal intervention to temper the effects of free markets. Economic reform and structural change often have social or quality of life effects that are severe but cannot be easily neutralized by tax incentives or transfers. For example regulation is needed to maintain minimum labour standards in the workplace, to safeguard freedom of association and ensure a worker-friendly and family-friendly worker environment, especially where the main bread-earner is a casual worker. There is also a need for more regulation to protect small investors.

Financial deregulation has been mainly a force for good but it has spawned a new power bloc of global financial managers, rating agencies and multinationals that has the potential to destabilise financial markets and to distort the social priorities of social democratic governments (relative to the community's values). Governments cannot and should not reverse gear. But they should try to curb this power bloc. How?

First, the institutional responses to international financial crises or serious misalignments of currencies need to be rethought.

The IMF now acknowledges that the fiscal restraint it imposed in the late 90's, as a condition for lending, only compounded the crisis. And the crisis was further compounded by the IMF's fanatical addiction to market solutions. In exceptional circumstances, countries should be allowed - even encouraged - to impose limited restraints on short term capital flows, preferably in a non-discriminatory and market oriented manner (such as through a variable deposit requirement, which the Campbell Committee actually recommended as a reserve weapon!).

Again, central banks should engage more often in coordinated intervention in foreign exchange markets, backed by "jaw-boning". A tax on short term foreign exchange transactions has merit but is unrealistic in the short term.

There is also a need to set minimum international standards in two key areas of international competition for capital - taxation and labour. It is unacceptable that the world system of governance has binding rules on trade, intellectual property rights and investors' rights but refuses to protect the tax base and core social and labour rights of national governments.

Finally governments, while always insisting on fiscal responsibility and transparency, should not let financial markets intimidate them into pursuing social values and priorities that are out of line with community preferences. This is particularly true of a country like Australia with low taxes, very low public debt and a sturdy financial system.

In Australia, a moderate increase in social spending, well targeted and efficiently financed, will not produce a panic flight of capital. At the very worst, it may lead markets to impose a higher risk premium on sovereign borrowings, adding ¼ per cent so to interest rates. So when our politicians claim that globalization ties their hands, they are conning voters.

Public debt

Finally, and most importantly, I would urge a rethink on the role of public debt as a means of promoting equal opportunity and national development. I believe Labor is too timid here. At state and federal levels, it is committed to a policy of not increasing (and even reducing) the overall tax burden and of zero net public borrowings over the economic cycle.

I have written extensively about the irrationality of the present policy stance of zero net public borrowing over the business cycle. It is impeding the nation's capacity to meet its infrastructure needs, contributing to the retreat from Australian egalitarian values and creating a "democratic deficit". Yet it does nothing for intergenerational equity; and it offers few if any positive economic spin-offs. By allowing the private sector a free rein on borrowing and investment while arbitrarily restricting government borrowing, governments are creating a potential imbalance between public and private goods. The policy stance can only be explained in terms of "small government" ideology. It is a sign not of fiscal responsibility but of lazy government and is not consistent with good governance.