The Money Men Chris Bowen (the red fox clan .txt) 📖

treasurer (as well as during my own brief term), was no better at forecasting the scale of the increase in prices the world was prepared to pay for our exports. As Costello has noted, the 2003 Budget forecast an increase in the terms of trade of 1.75 per cent, but the eventual result was an increase of 7 per cent. The 2004 forecast increase was 4.5 per cent, but the real result was 10 per cent. Similarly, the 2005 Budget forecast was a 12.25 per cent increase, but the real result was 10.9 per cent. This meant that the eventual budget results were usually much better than forecast, which gave Costello the ability to deliver last-minute tax cuts. This phenomenon continued right up to the end of the Howard–Costello government, with Costello recording that ‘Almost as soon as the 2007 budget was delivered, Treasury began revising its revenue forecasts upwards.’14 Costello and Howard were thus able to go to the 2007 election offering substantial personal tax cuts.

The massive increase in revenue reduced the necessity for restraint and enabled the government, primarily at Howard’s instigation, to embark on significant new spending. How big was this phenomenon? As Hartcher notes, just between 2004 and 2007, the boom in Australia’s exports due to the rise of China added $334 billion to the Budget’s bottom line. Of this windfall, 94 per cent was spent on new initiatives or tax cuts.15 The former economics editor of The Australian, Alan Wood, writes that ‘The Labor Party is right when it claims the Howard Government has been a high-taxing, high spending government.’16 It is telling that when the Howard government won office, spending on social security amounted to 35.4 per cent of the federal Budget. After ten years, despite the fact that unemployment had halved, welfare spending had increased to 42.5 per cent of the Budget,17 a direct result of new initiatives such as the Baby Bonus and other extensions of welfare into the realm of middle-income earners.

The IMF has also highlighted spending growth during the Costello years. A 2013 IMF analysis of spending over 200 years in fifty-five economies identifies two periods of ‘fiscal profligacy’ in Australia in recent times: in 2003, and between 2005 and 2007. It is interesting that the IMF does not regard the increased spending during the Rudd government as profligate because it constituted a defensible stimulus in the face of dangerous contraction.18 Paul Kelly, no fan of the fiscal record of the subsequent Rudd–Gillard government, has also been critical of the lack of spending restraint in the Howard government, arguing that:

On the way up the Howard Government had spent the proceeds of the boom when, despite its budget surpluses, it should have saved more. Because the revenue gains were temporary it was vital to save much of the windfall. That would have left the nation stronger to manage the fall in terms of trade. Labor’s fiscal laxity was probably not as great as Howard’s post-2003.19

It is the spending record of the Howard–Costello government that has been the cause of the most rancorous commentary from that administration’s two most senior members. ‘When you talk to Peter Costello, he will tell you I spent too much,’ Howard told me in 2014. ‘All treasurers will say that about their prime ministers, all of them.’20 Howard is defensive about his spending record, arguing in his memoirs, no doubt correctly, that the Treasury did not advise the government that the Budget was going into a structural deficit. Both the Treasury and the Parliamentary Budget Office said after the fall of the Howard government that the Budget had gone into structural deficit towards the end of the Howard years—the Budget’s structural position refers to whether the Budget is in surplus or deficit after looking at cyclical factors and the underlying structural issues. Howard argues that the spending-to-GDP ratio at the end of his term as prime minister (24 per cent) compared favourably with that which he inherited (26.2 per cent).

When Costello talks about ‘lots of fights’ with Howard, he is talking primarily about spending decisions, particularly Howard’s predilection for middle-class welfare. This was a symptom of Howard’s coming-of-political-age in the 1970s and 1980s, an era of electoral contests shaped around appeals to the hip-pocket. In the November 2007 election campaign, for example, Howard wanted to offer a $5000 payment to Australian families for every school-age child. Costello talked it down to an offer of $800 for high school students and $400 for primary school students, which still would have set the federal Budget back by $2 billion a year. Hartcher is scathing of the Howard approach:

It was pure pork-barrelled populism motivated by political panic. And it was part of the great churn of Federal finances that was one of the central features of the Howard era—he taxed Australians with one hand and returned the taxes as Family Tax Benefit or other payments with the other.21

Annual tax cuts became a signature feature of Costello’s treasurership, fuelled by the dramatic increases in government revenue flowing from the Australian mining exports boom. Such cuts were effectively delivered in the 1996 Budget by virtue of the introduction of the Family Tax Benefit. The first direct personal tax cuts were introduced in the 2000 Budget, just as the mining boom developed a head of steam. Every tax rate except the top one was cut, and the threshold for the top rate of 47 cents in the dollar was lifted from $50 000 to $60 000. Every Budget between 2003 and 2007 involved adjustments in the tax thresholds, which effectively meant personal income tax cuts.

It is instructive to examine the process Costello used for finalising his tax cuts because it tells us a lot about the dynamics of the government and the relationship between the prime minister and the treasurer. The tax cuts were never taken to Cabinet for approval. This is in keeping with the prerogatives of modern treasurers as the role has evolved from Keating onwards: Costello would inform the Cabinet