by John Howard
The terrorist attacks of 11 September 2001 changed our security environment dramatically. They also added new priorities to our economic planning. Large increases in defence, intelligence, border security and related security expenditures became a constant feature of Commonwealth budgets after 2001. That Australia was able to accommodate these additional demands, yet keep the budget in surplus and for five successive years further reduce income tax, became a testament to the strength the Australian economy had acquired.
In the 2002 budget Peter Costello released the inaugural intergenerational report which, incidentally, had been a stipulation of the Charter of Budget Honesty. For the first time, an Australian Government explained to the Australian public the impact of demographic changes, such as an ageing population, and what that meant to future budgets and the spending and taxing priorities of future governments, both federal and state. It was a far-reaching document and initiated a long-overdue national debate.
With the final repayment of the debt we inherited now in prospect, the Coalition was able to turn its attention to the debt-free future. One of the commitments made in the 2004 election campaign was to establish an Intergenerational Fund, and in his 2005 budget speech Peter Costello announced the establishment of the more appropriately named Future Fund. David Murray, the highly respected former managing director of the Commonwealth Bank, was appointed chairman of the guardians of the fund. Given an independent mandate to invest within prudent but sufficiently flexible guidelines, the fund had at its disposal the growing accumulation of surpluses from successive budgets. Its remit was to meet the superannuation liabilities of retiring commonwealth public servants, including a large number of defence personnel. As well as accumulated surpluses, the proceeds of the sale of the remainder of Telstra were also paid into the fund. When the Government left office in November 2007, the assets of the fund stood at some $61 billion.
The comparison was stark. When I became Prime Minister, the Commonwealth net debt was $96 billion. When I left office on 24 November 2007, not only had that net debt been liquidated, but the Future Fund had been established and it was worth $61 billion. Australia was well and truly ready for that rainy day.
The introduction of a GST, that historic reform of our taxation system, involved the largest income tax cut in Australia’s history. But the Government did not cease cutting income tax in 2000. In its last five budgets, up to and including the budget of 2007, the Treasurer announced reductions in personal income tax. In the seven years that went by after the introduction of a new taxation system, the commitment to taxation reform never wavered.
It always puzzled me that there was constant criticism that the Government had not done enough on the tax reform front. In theory, of course, no government ever does enough when it comes to cutting tax. Expectations always run well ahead of reality and capacity. Tax cuts announced in the Coalition’s last budget meant that a low-income earner eligible for the low-income tax offset would not pay any tax until his or her annual income exceeded $11,000. More than 80 per cent of taxpayers would face a top marginal rate of 30 per cent or less across the four-year period commencing on 1 July 2007. The top rate would apply to only approximately 2 per cent of taxpayers. In his 2007 budget speech Peter Costello said that in 1996 the top marginal rate — which was higher than it was in 2007 — applied from $50,000. If that threshold had merely been indexed, it would have stood below $68,000 by 1 July 2008. Under the changes announced by the Treasurer in that speech, the threshold would in fact be at $180,000, as at 1 July 2008. Claims that the Government had gone to sleep on taxation reform after 2000 were totally unjustified.
Equally, by mid-2011 the spurious claim emerged from some that there had been no substantial economic reforms in the last term of the Howard Government. The facts suggest otherwise.
The period 2004–7 saw the completion of the privatisation of Telstra (despite vehement Labor opposition); it witnessed the historic establishment of the Future Fund; major simplification of the superannuation system was a feature of the 2006 budget; and far-reaching welfare to work reforms were also introduced in 2006 — again in the teeth of wholly negative opposition from the ALP.
Then, most importantly, there were the industrial relations changes described later in Chapter 42. Aspects of WorkChoices were controversial and involved political misjudgements which I acknowledge, but they were tenacious economic reforms, which boosted the job prospects of many younger Australians. Those who, in retrospect, now attack WorkChoices are near universal in their condemnation that the changes it delivered had too hard an economic edge — put another way the legislation had been too reformist.
The final-term industrial relations measures — which also included the establishment of the Australian Building and Construction Commission, which markedly reduced lawlessness as well as boosting productivity in the commercial construction industry — combined with the other initiatives I have cited were not the deeds of a government which had lapsed into reform torpor.
To those who saw my Government as obsessed with economics, to the detriment of the human condition, I had something to say. In my Australia Day address on 25 January 2006, entitled ‘A Sense of Balance: The Australian Achievement in 2006’, I said that the achievement was higher, rarer and more precious than was commonly supposed. I reminded my audience that the Economist Intelligence Unit released a ranking of life in major cities around the world. It found that of the 12 most liveable cities on Earth five of them were in Australia. Of the top dozen, almost half were in one country, this country, with only one-third of 1 per cent of the world’s population. It evoked what to my mind was the secret of Australia’s enviable success — our sense of balance. I went on to say that 15 years before, Australia’s income per capita had fallen to 19th in the developed world. By 2006 it had recovered to be the eighth-highest. Total household disposable income had grown in real terms by more than one-third over the previous decade, and over the same period real private-sector wealth per capita had more than doubled.
It was the broader measures of our national wellbeing that were even more striking. At the beginning of 2006, Australia ranked number three, out of 177 countries, on the UN Human Development Index, which took account of achievements in education enrolment, adult literacy levels, per capita GDP and life expectancy. A report the previous year on Australian social attitudes found that Australians were much more confident in the economy than they had been 10 years earlier. Eighty per cent of people surveyed said that they were now proud of Australia’s economic achievements.
I argued that the economic management of the previous 10 years had given Australia a government — generically speaking — which was lean but not mean. As a share of GDP, Australia, at the beginning of 2006, had the second-lowest level of general government outlays in the OECD. Our elimination of net government debt compared with average government debt across the OECD of approximately 50 per cent of GDP.
Yet the real achievement was that we had been able to score these high economic marks without leaving behind the most vulnerable members in our society. Nothing could more powerfully refute the allegations that we had governed for the rich to the detriment of the poor. This condition was the very antithesis of the ‘brutopia’ which Kevin Rudd was to claim only a few months later that I had created in Australia.
This was reinforced in an OECD report, dated 7 January 2010, which found that Australia, whilst spending less on welfare, provided better protection against poverty, especially for families, than most other OECD countries. That was a double riposte to the Howard Government’s critics. It was a put-down to those who said that we had wasted money on welfare handouts and rebuked those who claimed we had been hard-hearted.
41
OUR WARM, DRY LAND
Australian politics has had some perfect storms. In my time, none exceeded the perfect storm which crashed onto the environmental debate in October–November 2006, dramatically recasting the politics of global warming within Australia.
> The climate-change debate had simmered for some time. It was a complicated issue, but there was a strengthening belief in the community that mankind had contributed to the growth of greenhouse gas emissions and that something had to be done. Most published scientific work supported this conclusion. A symbolic act seemed the perfect answer, and ratifying the Kyoto Protocol satisfied the desire to ‘do something’. That there was no immediate cost involved made the action even more attractive.
Although Australia had fully participated in all the climate-change conferences and had met her emission growth obligations under the Kyoto Protocol, my Government had refused to ratify the protocol. This was because we thought it bad for Australia to do so unless and until the major polluters were subject to its conditions. The United States had flatly refused to ratify. This was the attitude of both Democrats and Republicans. The United States Senate on 25 July 1997 voted 95–0 that the USA should not adhere to any protocol which did not bind developing countries as well as developed ones, or would result in serious harm to the US economy. This meant that there was never any real possibility that Washington would give Kyoto a tick. This is worth emphasising, particularly as so much of the blame for the anti-Kyoto stance of the United States has been sheeted home to George Bush. In turn the anti-ratification stance of my Government was falsely depicted as blindly following a prejudice peculiar to George Bush. Hostility towards Kyoto has been a bipartisan constant in US politics for many years, the former Vice-president notwithstanding. Nothing has changed with the Obama Administration. Like his Democrat predecessor, Bill Clinton, Barack Obama will not submit his country to any international deal which does not also bind developing nations. That was made clear by the Americans at Copenhagen in December 2009.
China was an adherent to Kyoto, but was not subject to the same conditions as would apply to developed countries such as Australia. That meant that if Australia ratified, industries with high emissions, if established in Australia, would carry a higher cost penalty than would be the case if those same industries were set up in China or Indonesia. It would stand to reason, therefore, that investment in those industries would flow from Australia to other countries. That is why my Government saw ratifying Kyoto as being potentially damaging both to jobs and industry. Rudd’s ratification came so late in the cycle that there is insufficient time for the negative consequences to show up before the current phase of Kyoto ends.
Even though there was a valid reason for not ratifying, it did not win acceptance, because ‘doing something’ about the environment had entered the popular culture. Whenever the Government said that we were meeting our obligations under the protocol, the reply was, if we were meeting the obligations, why not ratify?
Another logical argument against ratification was that the Kyoto Protocol was rapidly becoming obsolete, and the nations of the world should plan for an understanding post-Kyoto, which would include countries such as the United States and China on the same basis as all others. As if to demonstrate that in politics timing can be everything, the need for a world agreement beyond Kyoto was precisely the argument advanced by the Rudd Government at the chaotic and failed Copenhagen Summit.
To listen to Penny Wong, the Climate Change Minister, say again and again at Copenhagen that Kyoto needed to be replaced by a new agreement which bound China and the United States, and to know that this had been the self-same argument that I used to no political effect just two years earlier, was to feel acute political frustration. In the election campaign of 2007, Kevin Rudd held out ratification of Kyoto as Australia’s contribution to saving the planet. By the Copenhagen meeting in December 2009, salvation was elsewhere; Kyoto had to be replaced by a more comprehensive world agreement. That was an argument I had first advanced in November 2006, right in the middle of the perfect storm.
By the second half of 2006 the climate-change debate remained a lively one; it was one that the Coalition was not winning, but it was not really prominent in the public’s mind. That was until the perfect storm broke.
In the space of several weeks, commencing in October 2006, four separate events came together to push the climate-change concerns of the Australian community to higher levels than ever before. In Victoria the bushfire season started early; the drought affecting large areas of eastern Australia lingered on. So concerned had I been about the impact of the drought on the Murray-Darling River system that I called a meeting of premiers for Melbourne Cup Day, November 2006, to discuss emergency measures to help communities cope with the water shortage.
From outside Australia came the contributions of Al Gore, the former Vice-president of the United States, and Sir Nicholas Stern, a former chief economist at the IMF. Gore’s movie An Inconvenient Truth was a slick production and had an enormous impact on the millions of moviegoers around the world who viewed it. He came to Australia to promote the film, giving added impetus to the message he was conveying. My close friendship with his old nemesis, George Bush, gave him a further incentive to make his point in our country.
Stern’s contribution, through a specially commissioned report for the British Labour Government of Tony Blair, was more cerebral. The executive summary said, ‘… the scientific evidence is now overwhelming: climate change presents very serious global risks and it demands an urgent global response’.1 The analysis offered by Stern was beguilingly simple and seductively cheap.
He argued that the economic costs of not acting would be much greater than those of acting. He estimated that if a wide range of risks and impacts were taken into account, then the estimates of damage could go from a conservative one of 5 per cent of global GDP each year to 20 per cent of GDP each year. In contrast, he argued, reducing greenhouse gas emissions to avoid the worst repercussions of climate change could be limited to about 1 per cent of global GDP each year.
An argument in those terms was irresistible. If it was as cheap and simple as that, why on earth didn’t every government, including the Howard Government, grab it with both hands?
Later analyses asserted that Stern’s reasoning was based on flawed assumptions, particularly in relation to the discount rate, a standard economic methodology which measures future benefits against present costs. Nigel Lawson, Chancellor of the Exchequer in the Thatcher Government, delivered a particularly trenchant criticism of Stern in his book on the global warming issue, entitled An Appeal to Reason. Lawson’s broadside was that the discount rate employed by Stern was much too low. He cited a range of eminent academic economists who shared that opinion. This was a crucial point because, as Lawson rightly surmised, ‘And it has been demonstrated that with a higher, more normal discount rate, the argument for radical action over global warming now, on conventional cost-benefit calculations, collapses completely.’2
These four events coincided and dramatically increased the focus on global warming in Australia. The problem for the Coalition was that, because of its longstanding support for the simplistic solution of ratifying Kyoto, the Labor Party was regarded as more committed to taking decisive action against climate change than was the Coalition.
I concluded that the Government would need to shift its position on climate change. I nonetheless remained opposed to ratifying the Kyoto Protocol. There were, however, two important new policy attitudes struck by the Government. The first was to say that Australia would be part of a ‘new Kyoto’, provided that any new treaty included all of the world’s major emitters. This was the argument repeated almost ad nauseam by the Rudd Government at Copenhagen. We also needed to examine the establishment of an emissions trading system (ETS).
Sentiment had been gradually shifting within the business sector. Service industries had begun to sign up to the climate-change agenda. Some firms saw new business in the emissions trading world; others believed a lot of the science; yet still others felt that an ETS was inevitable and business should be in on the ground floor, influencing its design. Business minds were also concentrated by the threats of certain states to establish their own ETSs, which would
have created an administrative nightmare for companies. If there had to be a scheme, a national one would be much more acceptable.
Speaking to the Business Council of Australia (BCA) in Sydney on 13 November 2006, I announced that the Government would establish a joint government/industry taskforce to give advice on the form which an ETS, both domestically and internationally, might take. I said that any system which might be established should make an effective contribution to the greenhouse gas challenge, but not in a way which did disproportionate or unfair damage to the Australian economy or our vital industries. I stressed the importance of our fossil fuel industries as well as the need to keep the nuclear power option on the table. I also acknowledged a role for renewable energy sources, always recognising that their contribution to base-load power generation would be limited.
The taskforce could hardly have been more high-powered. Chaired by Dr Peter Shergold, the secretary of my department, it included the heads of Treasury, Foreign Affairs and Trade, the Environment Department and the Department of Industry. Amongst those from business came Margaret Jackson, chairman of Qantas; Peter Coates of the coal producer Xstrata; and John Stewart, boss of the National Australia Bank. This group would work in close professional collaboration for several months and, in May, produced what became known as the Shergold Report.
Cabinet was advised on 4 December 2006 that without new measures, Australia would be 109 over 1990 levels against the target of 108, under the Kyoto benchmarks. Although barely a slippage to speak of, the Government decided at that meeting to phase out incandescent lights from 2009–10 and replace them with high-efficiency compact fluorescent light bulbs. This was a practical step which could have a measurable impact. Another practical policy was our Global Initiative on Forests and Climate, announced in March 2007, under which $200 million was committed to reducing forest clearing in countries such as Indonesia.