Mr LATHAM(8.19 p.m.) —Mr Deputy Speaker, the 1996 budget reveals the way in which the Howard government is testing our traditional understanding of morality in this nation's public affairs. Its political agenda is more interested in the people it can hurt than the people it can help.

After a decade of economic and social restructuring we have entered a period of political restructuring. The political majority—what the Prime Minister, the member for Bennelong (Mr Howard), calls the mainstream—are having their interests defined not so much by what government can directly do for them but by the things government can take away from so-called minorities.

The emergence of an open post-industrial economy has reshaped Australia's social and political agenda. It is unusual now to find issues and interests defined by a clear division between capital and labour. We have very much become a 30, 40, 30 society: 30 per cent of citizens with competitive skills, high productivity and growing incomes; another 40 per cent who have jobs but not job security, a newly insecure middle group who face the uncertainty of industrial restructuring and reskilling; plus a bottom 30 per cent of citizens essentially outside the production process. This new structure is challenging most of the values and assumptions on which the inclusiveness of our society has been based.

I recall the 1960s and 1970s as decades in which there was a general assumption that the greatest threat to the working class in Australia came from unbridled privilege and wealth. Now a growing proportion of newly insecure workers see their interests being threatened not by people in groups above them on the social ladder but by those below—welfare recipients, the unemployed, and so on—generally, people outside the system of production.

In part, this involves the perception of double standards in the entitlement system of the welfare state—the middle group exposed to continuous change and certainty in the workplace, while other citizens are perceived as recipients of guaranteed government income. It also reflects what Marshall McLuhan described as the hot features of the electronic media. Television and, to some extent, radio rely on conflict and confrontation as the basis of popular entertainment, portraying winners and losers, majority and minority interests in every story.

This is why the Paxton family is better known in Australia than the Governor-General's family. This is why the electronic media spends so much time stereotyping unemployed people, Aborigines and welfare recipients. Just as the Romans had the Colosseum, and Tudor England the village square stocks, we have ACA with Ray.

Mr Howard is the first Australian political leader to set about the active exploitation of these trends. Never before has an Australian government made such a virtue and public spectacle of taking things away from people. Each of the deliberate cabinet leaks and set piece media announcements of the Howard government has been designed to punish so-called minorities—restrictions on migrant benefits, cuts to universities, evidence of welfare abuse, introduction of dole diaries, and savage cuts to Aboriginal funding.

This is what the Prime Minister means by mainstream values and political incorrectness. The policies of his government are not able to positively assist the interests of insecure workers. Indeed, the introduction of individual employment contracts, further micro-economic reform and the social wage cuts underpinning this budget actively work against their interests and economic security. Rather, Mr Howard's electoral pitch is to share the focus and prejudices of this middle group. In part, this reflects the Americanisation of Australian politics, with a shift from structural policy reform and outcomes to a strategy of value-laden empathy.

In truth, however, the greatest threat to the middle group comes from interests above them on the social ladder—not from below. By my assessment, Labor has no more important a task in this parliament than arguing this case—that is, to mount the policies and political attack which demonstrate that economic injustice in Australia is more likely a product of lavish executive salaries than an Aboriginal family living in North Queensland; that financial waste and privilege are more likely a product of anti-competitive business practices than a single mum living in a public housing estate in Campbelltown in my electorate; that economic insecurity is more likely caused by the Treasurer's big business mates in Collins Street, Melbourne than the long-term unemployed; that economic injustice is more likely caused by corporate crooks and tax avoiders than newly arrived migrants. But most of all the real threat to the newly insecure middle group in society comes not from below but from above.

In its first budget the Howard government has shown that it has just two policies: taxing and axing. There has been a lot of axing and many Australians, especially the disadvantaged, will be hurt, but it is the taxing which hits lower and middle income earners hardest. In his first budget, the member for Higgins, the Treasurer (Mr Costello), has revealed himself as much more a taxer than an axer. His increased taxes and charges strike at the heart of Australian families, with the reintroduction of university fees plus higher and earlier HECS repayments, paying more every time they go to the chemist, higher health charges estimated by the AMA—I am sure the member for Bradfield (Dr Nelson) will verify this—to leave an average family $200 worse off per annum, higher child-care fees and reduced fee relief for working families plus a massive increase in nursing home charges.

The government claims to have offered tax relief, yet for average PAYE taxpayers income tax will increase by 9.1 per cent in 1996-97; that is, for every $100 in tax paid to the Keating government, they will pay $109.10 to the Howard government. Where is the relief in that? Where is the relief in increasing income tax revenue by a whopping $5.5 billion? Where is the relief in major revenue measures in this budget which have a net impact of $1 billion this year and $2 billion the following financial year? Where is the relief in increasing Commonwealth tax revenue by nearly half a per cent of GDP?

Under this government there is no relief. It is all pain and no gain—no gain for the ordinary taxpayer; just more taxing and axing. It is just taxing lower and middle income earners and axing the services—the child care, the universities, the Austudy, the hospitals, the dental health program and the employment programs on which their families rely. Even if young people still manage after all of that to get a start in life and find a job, they face the prospect of a youth wage of less than $2 an hour.

It is not often that a government breaks commitments on both sides of an election. The member for Bennelong has now broken scores of election promises, and they stand condemned on his public record. Not so well known, however, are the commitments the Treasurer has broken since the election. This is a new level of immorality in Australian public life: breaking promises after the election.

On 12 March Mr Costello, at his first press conference as Treasurer, said that the coalition's election commitments have been fully funded. In truth, they had not been. The budget papers reveal that the coalition's unfunded election policies left a $2 billion hole in its own fiscal consolidation task over three years. On 12 March the Treasurer said he would not cut general assistance grants to the states, yet at the Premiers Conference in June he used the threat of a $1 billion sales tax impost on the states to extract from them a $1.5 billion cut in financial assistance grants over three years.

On 12 March Mr Costello said he would not introduce new taxes or increase existing taxes. His budget breaches that commitment not once, not twice, not three times, not four times, not five times but six times. Six times he has broken taxation promises. On 12 March Mr Costello said there would be no forced redundancies in the Commonwealth Public Service. Today thousands of workers face the sack.

On 12 March, after the election, Mr Costello said that fiscal consolidation would be achieved overwhelmingly through revenue reductions, yet his budget lists a net $2 billion worth of major revenue measures over the next two years—the equivalent of 31 per cent of the fiscal consolidation program. On 12 March the Treasurer said that $8 billion of net spending cuts were needed to improve Australia's national savings. His budget delivers, at face value at least, $5.2 billion over two years—around one per cent of GDP.

History can now record that the talk of an $8 billion problem was simply an attempt by the new government to establish an alibi for resurrecting large slabs of the Liberal Party's Fightback manifesto. On 12 March Mr Costello said his budget would resolve the current account deficit, yet the Treasury, his own department, has forecast only a marginal decline in the current account deficit, stuck at four per cent of GDP for 1996-97—all this despite a continued improvement in the terms of trade and a 0.75 per cent gap between Australia's forecast economic growth and that of our major trading partners.

By his own fiscal strategy, by his own B-grade melodrama on 12 March, the Treasurer's first budget is a spectacular bellyflop. He set the outlays bar at eight feet and then jumped right under it—not a Fosbury flop but a bellyflop. The member for Higgins has set an Australian record for breaking promises before and after an election. His integrity is doubly damned—breaching scores of promises made to the Australian people before 2 March, then failing each of the expectations he personally set for economic policy on 12 March.

Not only that, but on the way through his net spending cuts and revenue measures have left the average Australian family $700 worse off. The punters in the House will recognise a unique trifecta: a budget of betrayal, a budget of bellyflops and a budget delivering pain with no gain for working families. For the budget's pain, where are the gains in the macro economy?

Shortly after the election the Prime Minister admitted that he had `inherited an Australian economy that was a little better than just good in parts. We have had 19 quarters of positive economic growth and low levels of inflation.' This budget—for all its pain, for each of its broken promises and for its failure to meet the market expectations personally set by the Treasurer—fails to make any of the parts of the economy better.

In fact economic and employment growth are forecast to fall. The rates of unemployment and inflation are unchanged. My estimate is that, given the scale of public sector job cuts and the capital intensive nature of the output growth sectors—mining, farming and communications—unemployment will actually exceed nine per cent this financial year. The current account deficit remains anchored at four per cent GDP.

On interest rates, the Reserve Bank has already ruled out a cut on the basis of fiscal policy. The bank has repeatedly stated that there is no immediate trade-off between monetary policy and fiscal policy. It appears that Bernie Fraser would much rather have an exchange of letters with the Australian trade union movement than with the Commonwealth Treasurer, Mr Costello.

The 1996 budget is a failure because it relies on failed economic dogma. It reflects the coalition's wasted years in opposition and its inability to fashion a reform program outside the shortcomings of orthodox economic theory. The member for Higgins is simply a mouthpiece for each of these shortcomings. No-one has ever brought less original policy work or thinking on the economy to the treasury bench. No Treasurer has ever pinned his entire budget strategy so thoroughly to a single, essentially flawed economic theory.

At Monash University, of course, Mr Costello was part of the evangelical union. Treasury has now given him a new gospel to sing; it is called the twin deficits theory. This argues that a reduction in the federal budget deficit would automatically reduce the current account deficit. It relies on an assumption that an increase in public savings will increase national savings, which will in turn close the gap between national savings and investment and thereby lower the current account deficit.

It is essential, of course, in any aspect of economic analysis to close the gap between theory and practice. The chronic nature of Australia's current account deficit in itself indicates substantial market failures. In theory, our floating exchange rate should fall to a level which clears the deficit. Over the past 12 months our dollar has actually strengthened, indicating that foreigners remain more than willing to fund the excess of Australia's investment over national savings. Yet the same Treasury economists who urge massive public sector cuts have no explanation as to why the exchange rate is so far out of line with what they would otherwise call the market fundamentals.

There are three core flaws in the Treasurer's twin deficits theory. First, recent history in Australia has shown that it does not automatically work. In the late 1980s the Treasury elevated the twin deficits to the Holy Grail of national economic policy, yet deep cuts to federal spending were associated with increases in the current account deficit. Internationally, the same problem has arisen. New Zealand has forecast a budget operating surplus of nearly three per cent for this financial year yet a current account deficit of over five per cent GDP. In Malaysia a comfortable budget surplus and a national savings rate of more than 30 per cent has produced a current account deficit of nearly nine per cent GDP.

This statistical evidence of course highlights the second flaw in the twin deficits theory—that is, it makes no allowance for a surge in national investment. This is the key contradiction in Mr Costello's budget strategy—saying that the core objective of policy is to reduce the current account deficit, yet talking up confidence effects as the basis for a surge in business investment. Even if fiscal consolidation produced a gain in national savings, a comparable increase in national investment would leave the current account deficit unaltered.

If the current account deficit is such a problem, why is the Treasurer boasting of a forecast 14 per cent increase in business investment for 1996-97? He is simply repeating the experience of the 1980s, when net public sector borrowing was replaced by higher private borrowing, leaving the underlying trend in foreign debt unaltered.

The third flaw in the twin deficits theory concerns the high replacement effect in Australia between public savings and private savings. In a developed nation such as ours, with a strong culture of consumption, improvements in public savings are often associated with the decline in private savings. Even the Treasury in budget paper No. 1, page 1-30, notes that `both the IMF and OECD have recently published reports which suggest that the private sector tends to compensate in part for changes to public sector saving.'

The 1996 budget is absolutely rife with substitution effects of this kind. Most of the $2 billion revenue gains reflect a straight transfer from private savings to public savings, without any net gain in national savings. Two of the measures achieve even less. First, the new superannuation levy will push funds from super savings into fringe benefits, negative gearing and tax shelter schemes. The net impact will be a transfer from national savings to non-productive consumption and property investment.

Second, the new Medicare levy on high income earners can achieve nothing more than a transfer from private savings into the already bloated reserves of the private health funds. The tax rebates for private insurance effectively transfer resources from the public sector to these reserves.

On the outlays side, Australians are unlikely to lower their consumption of basic education, child care, health, pharmaceutical and nursing home services solely on the basis that the federal government has made them more expensive. In a nation accustomed to first-world services, these items form part of the absolute essentials for family life. As such, they are price inelastic and subject to large substitution effects between public and private expenditure.

Other budget cuts simply reflect public to public outlay shuffling. The $1.6 billion cut in state grants, for instance, is a straight transfer from state to federal savings performance. Even among outlays without substitution effects, such as administrative efficiencies, the ED and the like, the government's tightening is based on some fairly rubbery figures and forecasts.

Overall, the 1996 budget does not add substantially to national savings. It features the worst flaws and folly of the twin deficits theory. Even the Treasurer and his department have been absolutely unwilling to quantify the budget's consolidated impact on national savings—that is, having made national savings the key goal of economic policy, they are not prepared, among the 700-odd pages of the budget documents, to report to the Australian people on their satisfaction of that goal. So much for a charter of budget honesty!

The more I think of Australia's national savings, the more I believe that the issues are cultural and the answers prescriptive. Orthodox economics has no greater failing than its treatment of cultural influences as external to the workings of a market economy. This is because last century economics was deemed to be a science, with its analysis best guided by a series of mathematical formulas.

Today someone like Vince FitzGerald can talk for hours about national savings without mentioning Australia's cultural features. He is more likely to demonise the Whitlam government than mention the way in which every signal from the mass media points our society towards mass consumption.

As a nation, Australians have not been known for a culture of long-term planning and personal thrift. For many decades, the `lucky country' ethos promoted attitudes to wealth creation heavily reliant on commodity and property development. Elements of a hedonistic lifestyle have promoted the virtues of spending now and worrying later—best reflected in the `she'll be right' approach.

Accordingly, the debate about the correct balance between national savings and national investment needs to be refocused from the public to the private sector. It needs to be understood that the decline in public savings since the 1970s has been accompanied by a fall in public investment, ensuring that the net public sector borrowing requirement has remained reasonably stable. The greatest impact on national savings in recent years has come from the secular decline in private savings with the household ratio, net savings as a proportion of disposable income, falling from 7.5 per cent in 1990 to just two per cent earlier this year.

Close examination of Budget Paper No. 1 confirms this pattern across the longer term. Since the early 1970s, public sector net lending has declined by three per cent GDP while household savings has fallen by eight per cent. On an international comparison of private and public net lending performance over the past decade, the Treasury notes:

. . . private sector net lending in Australia has been consistently negative, indicating that private sector saving has fallen short of private sector investment. In contrast, private sector lending in the United States has been positive, or at worst marginally negative, and, for industrial countries on average, it has been positive.

For public sector net lending, Australia's performance has exceeded the United States and been far superior to the industrial countries' average. Treasury's conclusion, however, resembles a piece of Orwellian doublespeak:

Since Australia has a saving shortfall from the private sector, the public sector cannot draw on national savings.

That is, private savings may be the problem but Treasury only ever recommends public sector cuts as the answer. Shame on them and shame on the government and its 1996 budget. (Time expired)