The Age

By Melinda Cilento
Chief Economist
Business Council of Australia

Earlier this year, the Business Council of Australia designated 2006 ‘the year of reform action’.

After 18 months of intensive debate initiated by the media, policy leaders and think tanks on the need for a wide-ranging program of economic reform to lock in Australia’s prosperity for the long term, governments have collectively acknowledged the need for such a program.

They have also broadly agreed on what direction this reform action should take. Action to curtail the escalation in business red tape, renewing vital infrastructure and reforming the tax system are now all priorities.

At a time when prosperity could have easily led to reform complacency, our political leaders deserve congratulations for departing from the usual script of governments squandering windfall returns on short-term political gain.

The Victorian Government’s budget this week broadly delivered on its rhetoric, by investing a good part of the returns of a largely healthy economy into sustaining growth. A concerted attempt – backed by incentive payments to departments – to tackle the red tape blow-out through structural, rather than superficial reform, is very welcome.

So too are major investment flagged to renew state infrastructure, especially around transport, and cuts to business taxes.

Which makes the $300 payment to families with schoolchildren entering either prep or grade 7 perplexing.

At face value, there is nothing wrong with politicians giving parents a hand to meet school costs – in fact, investing in improved education and skill development is a key to future competitiveness and prosperity. However, while this measure is relatively small in itself, it raises several fundamental issues that are relevant at both state and federal levels.

The $300 payment is the latest in a long line of payments by governments pejoratively, but in many cases accurately, described as ‘middle-class welfare’.

The first issue is whether payments of this sort are the best way to invest scarce taxpayer resources; that is, do they support economic growth and prosperity? Second, because payment is not means tested – that is to say, not aimed at those most in need – what may well be termed as a ‘hand-up’ is in reality a ‘hand-out’ for many families that have prospered from 15 consecutive years of economic growth. Third, coming at a time when the budget cycle is at its strongest, does it meet the most basic fiscal criteria of being sustainable? After all, one of the most basic of political tenets is that what you give cannot be taken back without electoral pain.

Finally, and perhaps most importantly, is the tax churn justified? In other words, would we be better off putting more money in people's pockets through lower taxes or costs overall?

The Victorian Government is not alone. Recent examples at a federal level include:

• Additional benefits (Family Tax Benefit B) to support families, which do take not account of family income.
• Rebates on private health cover and child care, paid regardless of what the recipient earns.
• Additional child-care benefits that are still payable to high-income families.
• Maternity allowances that are not means tested.

Collectively, these policies demonstrate a recurrent theme in government policy making: that, despite recent reform rhetoric and action in key areas of the economy, and despite significant talk about the impending fiscal pressures associated with population ageing, old habits die hard.

Of course, the bottom line for politicians is that it is always expedient to dole out cash directly to as many as possible in the community that will decide their electoral fortunes.

Perhaps the issue demonstrates that in some areas, the age-old divide between good policy and good politics is still alive and well.