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Former politician and economist John Hewson speaks to ANU’s Crawford School’s Bruce Chapman and Daniel Connell.

John Hewson: tax reform doesn’t just mean lowering taxes

Welcome to the latest in our In Conversation series, between former politician and economist Dr John Hewson, Australian National University (ANU) Crawford School Director of Policy Impact Professor Bruce Chapman and Research Fellow, Dr Daniel Connell.

Leader of the Liberal Party of Australia between 1990 and 1994, Hewson has run an investment banking business and served on the several boards, including General Security Australia Insurance Brokers, Osteoporosis Australia and the Arthritis Research Taskforce.

He has been appointed an Honorary Professorial Fellow by the Australian National University.

The three men met fresh from this week’s ANU tax policy forum which re-examined the recommendations of the Ken Henry tax review - but tax is just one of the topics this broad-ranging discussion touches on.

Hewson discusses his new activist work with the Asset Owners Disclosure Project, which rates the world’s top retirement and superannuation funds on how they are managing the investment risks associated with climate change.

He also revisits some of his more famous battles with his then-adversary, Paul Keating, while commenting on:

  • The rise of slogan-based politics. “There’s not a detailed medium-term policy discussion at all… In fact, our tax policies consist of "we will lower taxes”, “we will stop the boats”. We have now very slogan-like policies, no serious debate at all.“

  • The core ideas of the Liberal party. "To me, it’s as Howard used to say, the Liberal party is a broad church, we have to keep adding pews on both sides of the room… The truth was he took the party a long way to the right, he narrowed its focus enormously under the guise of building a broad church.”

  • Pragmatism versus ideology in politics. “There are some identifiable differences [between the parties] on a couple of key issues, but they’re not ideologically based, they are pragmatically based. It’s pragmatism that has taken over the contest of ideas.”

  • Pricing carbon. “It was the reason why Rudd lost the leadership, it was the reason why Turnbull lost the leadership. Then the community support for the whole process of pricing carbon was lost – it was easily re-tagged as a "tax” not a “price”, so we’ve lost a lot of ground.“

  • The European crisis. "Germans are being asked to work longer and harder in some dingy manufacturing plant in the back of nowhere so that some Greek bureaucrat can retire early on an excessive pension.”

  • Gina Rinehart’s bid for the Fairfax board and the debate over its editorial charter. “It doesn’t bother me too much if she thinks she wants to determine editorial policy. She’s a businesswoman. She might be prepared to throw her money away for power reasons, that won’t last either. But as a business proposition, unless her product, the news service, unless they have a viable market it isn’t going to survive.”

  • Editorial independence. “Me thinks some of these journalists do protest too much about editorial independence and journalistic independence. We forget that Rupert Murdoch controls about 70% of the print media in this country – no one seems to be too worried about getting his board to sign off on a charter of editorial independence.”

Watch the full interview with John Hewson here.

Daniel Connell: Welcome to The Conversation, today we’re talking to John Hewson. John is previously leader of the Liberal party and also has been involved in the economics profession for a very long time. He is currently a professorial fellow at the Crawford school.

The Crawford school is also the place where Professor Bruce Chapman and myself, Daniel Connell, reside and we’re going to be putting some questions to you for the next half an hour.

John, I understand you’ve been discussing tax reform [at the Crawford School’s tax forum]. All my life people have been discussing tax reform, and you’ve had an embattled experience dealing with tax reform.

Just looking at what we heard [at the forum], what was the most poignant reflection that you came away with from this discussion?

John Hewson: One of the key things is the Henry tax review, which the Crawford discussion was based on, is really just a document to set pathways for reform over the next several decades rather than be a tax package that is to be delivered tomorrow, and which the government will be under pressure to deliver.

I think it was misinterpreted at the time it was brought down. There was an expectation in the electorate and in the media that he was delivering a tax package and this was something the government would be looking to implement – there were some 130 odd recommendations.

John Hewson discusses the issue of tax reform with Ken Henry, architect of the Henry Tax review. AAP Image/Alan Porritt

But then he got criticised and the government only picked up two or three of those recommendations, but that wasn’t the purpose – it was an opportunity for Ken Henry [this week] to emphasise that point and to engage in discussion around some of his recommendations from a number of perspectives.

You made the point about tax reform always being on the agenda, and it has been. It’s been the victim of a lot of political abuse over the years. I think most people in the electorate have expectations of tax reforms to equal lower tax.

Those are very simplistic and probably unrealistic expectations. If anything, from now, looking at the ageing of the population and other demographic trends, the need for infrastructure, we probably have to look at a world where taxes have to go up rather than down.

But that isn’t to say that you can’t restructure the tax system and the transfer system in that context. That was really where the discussion was going today.

Daniel Connell: Thinking about the sort of discussion that’s been going on in the United States in the last 12 months, how do you sell tax reform?

John Hewson: Well, as I say, there’s a simplistic expectation in the electorate that it’s about lowering tax, and that their votes can be bought by delivering that. The fact is today we’re not going to get a sensible debate on tax in most countries dominated by a 24-hour media cycle and governments trying to score short-term points.

There’s not a detailed medium-term policy discussion at all. It’s very difficult to raise an issue like tax, which usually has winners and losers. It becomes very difficult for it to be debated.

In fact, [in Australia] our tax policies consist of “we will lower taxes”, “we will stop the boats”. We have now very slogan-like policies, not serious debate at all.

Bruce Chapman: When it comes to tax reform and other economic policy, I’ve always found it very difficult because the identification of the losers and the winners is pretty clear. And the more explicit that is, the clearer it’s going to be that the losers will make a lot of noise and do a lot of complaining.

And I guess I’d like you to comment on how you actually can manage reform in that context. And I’m also interested in whether or not it is possible to have major reforms in economic policy without the two major parties disagreeing.

One example where I think there was a consensus and agreement - where we had some of our most important reforms - was the tariff restructuring in the 1980s. And there is no doubt that the Liberal party contributed to those reforms by not opposing them. But I can’t think of too many other examples…

John Hewson: It is important in all policy to identify the stage of analysis in designing the implementation to look at the potential winners and losers, and understand the impact of the policy, and understand that, in most cases, you’re trying to change behaviour.

And realistically, you need to give people time to readjust their affairs, in the case of tax for example. So you always have to have in mind not just whether or not they should be compensated but whether you should give them time or there should be some adjustment process. Policy is often lacking, particularly in that second part.

I guess there’s been a tendency in our debate in Australia, as emphasised in the debate [at the Crawford school], to overcompensate: “the impact is going to be X, so we’ll give you two X”. That’s unnecessary, but it comes from the fact that the hard yards in this is usually at the education stage: to tell people, this is the problem, this is why it’s important that we fix it, these are the solutions to the problem, and this is why we’re going to do this.

But rarely do we see that. We saw the carbon tax announced, but no explanation and no link to the science. Six months later the details were revealed. In the meantime, Tony Abbott had a daily free kick at the government being able to make all sorts of accusations about what would happen.

The mining tax was announced. It was changed, and then changed again in the run-up to an election campaign. No education, no assessment of the differences within the mining industry – big mines to small mines, rich mines to not-so-rich mines, early-stage mines and late stage mines. There was no discussion of the details.

I think that education is important as part of the analysis.

You do want to know as a government who is going to win and who is going to lose, and in some cases you want people to lose. I mean, the cash economy was attacked by the GST. Because for the first time, it wasn’t that you stopped people paying cash, but when they spent it you actually got some tax for the first time.

And you should be proud of the fact that that’s what you were about in terms of doing it – it’s a powerful argument in an electoral sense, but that’s just an example.

Paul Keating: begrudging about interest rates, says Hewson.

In terms of the more broad policy debate, and whether you need bipartisan support; you do need bipartisan support. But the nature of the debate has changed. My time as leader I tried to be objective and say, “this is the problem, this is what we need to do”.

For example, I challenged Keating in the late 1980s, early 1990s to put interest rates up. Because if he didn’t put up he’d have to put them up even higher in the end. And of course, he wouldn’t put them up and then he put them up begrudgingly, and then that little bit more, and then they went to those obscene levels in the early 90s. Then we had the recession he said we had to have. I would have argued we never really did have to have it. [EDITORS NOTE: Monetary policy is set by the RBA board; however, Dr Hewson has clarified his comments relate to the widespread belief that Keating wielded substantial influence at board level over monetary settings at the time. Read more here.]

In terms of the protection debate, we did give it support throughout the Hawke/Keating years. It started in the Fraser years, in terms of reducing tariff protection. When I became leader I went for zero tariff protection. Keating then, while still supporting lower tariffs, thought 5% or 10% was a better number than Captain Zero.

But the point was that the debate did run, and those sort of reforms – along with deregulating the financial system and moving away from centralised wage determination or workplace focused discussion – those key sorts of reforms underwrote a tremendous productivity boom in the 1990s, which was the result of, more or less, bi-partisan support (with a bit of point-scoring around the edge!).

Today, the debate is “No.” Abbott is a master of the negative, he says no and he means no, and he will deliver no. So it’s very hard for the government to do very much at all.

Tony Abbott is the master of the negative. AAP

Bruce Chapman: Do you think it’s about personalities or have the times changed?

John Hewson: It’s both. The fact that it’s a 24-hour media game, you know you’ve got to win today and tomorrow you can move on to another issue. You forgot what you said the day before and the media won’t remember it – that’s the way it operates.

It’s a hopeless environment in which to operate. The focus becomes on that little media grab – what you say at the press conference, or the 10 second television headline. So we’ve had policy debates reduced to dot points or slogans.

This is the policy: stop the boats, cut the tax, scrap the mining tax. There’s no real consideration as to how that will be done. The debate has just become so ridiculously simplified and it’s an insult to the intelligence of a lot of average Australians. They’re reflecting that with tremendous apathy about the political process generally, and the poor standing of politicians.

Daniel Connell: Do you think we can lead off in a different way with the introduction of major new ideas? Do you think a situation where leaders of the political parties, who are having to be out front discussing the most controversial propositions, do you think that’s preferable?

Or do you think we could find some sort of stalking horse, like the Crawford school public policy process, for example, where people can essentially get ideas out, get them thoroughly explored, get the most controversial elements sort of shock-worn, do you think that’s a more effective way to go?

John Hewson: The simple answer is that there’s been virtually no leadership on a lot of these key issues. Indeed even when there has been a policy initiative of significance, like putting a price on carbon, it was the outcome of a deal with [the Greens party] rather than a particular internal policy of the ALP.

It was announced in February, as I said before, yet no detail was announced until July. Where the government should have taken the opportunity to say, “here’s the science, this is what global warming is going to do, this is why it’s important that we move, the science is in, the options for dealing with it include putting a price on carbon, this is how we’re going to do it, this is the most cost-effective way of doing it…”

But we didn’t have that debate. The idea was out there, but there was absolutely no development of that idea, no leadership on that issue and I think that’s a problem.

There have been periods in our political history – say, the Thatcher years are a good example, and perhaps the Reagan era in the United States – where think tanks, university think tanks, independent think tanks maybe, were used just to “fly kites”, to float an idea. Get some analysis and get the debate going and ultimately it could be picked up by the government, but a lot of that influence has waned.

One of the things the Crawford school is now doing is rekindling its activity in the public policy debate, and contributing to that public policy debate in a way that governments, if they’re smart, and oppositions, if they’re smart, will see it and use it and get people to float ideas, or hold conferences, or develop research, which is where we should be.

I’m a great believer in politics being about a contest of ideas, as much as just scoring points on the other side.

Daniel Connell: In terms of major ideas in Australian politics, just this weekend we’ve seen the Labor party in NSW trying to argue very strongly that they’ve got a different core philosophy from what the Greens have got. There are obviously all sorts of strategic issues for them there.

Just coming to the Liberal party, what would you see as the core idea, or the core group of ideas, that are the essence of modern Liberalism?

John Hewson: Just to make one specific point about your initial comment, and that is that there isn’t really that much difference between the parties. There are some identifiable differences on a couple of key issues, but they’re not ideologically based, they are pragmatically based.

It’s pragmatism that has taken over the contest of ideas. I still believe that the Liberal tradition is a focus on free enterprise and a focus on the supremacy of the individual, not asking a government what it can do for you, but asking what you can do for the government.

There’s none of that. It’s still there but it’s driven more by pragmatism, as I say, than ideology. To me, it’s as Howard used to say, the Liberal party is a broad church, we have to keep adding pews on both sides of the room because we’re getting more and more people joining.

The truth was he took the party a long way to the right, he narrowed its focus enormously under the guise of building a broad church.

My concept of Liberalism, is really small “l” liberalism in a lot of social policy areas, while being somewhat hard-headed, hardlined as a rational economist on the other. One of the reasons I think I became leader was I drew from both dimensions of the party – I had the economic rationalists, conservatives on one side saying, “yes, we’ve got to solve these economic problems and deal with them properly”.

On the other side there are a host of social issues that we should also have a position on as well, a small “l” liberal position on some of those. Although I’m a trained economist, I believe we are building a society, not just an economy, and when we lose sight of that we tend to drift one way or the other.

And I’ve seen the party drift, under Howard, to the right. In the [Crawford School] tax debate, one of the speakers drew particular attention to the focus of some of Howard’s policies on family-based tax rather than individual-based tax, and family-based benefits rather than individual-based benefits. It does twist the system in a particular direction.

It was achieved, in a sense, by stealth at the time because people didn’t notice one decision after another. And I’m not sure that Howard was conscious personally of that drift, but the consequence of it in its aggregate was a shift to the right.

Bruce Chapman: I know you’ve been very interested in carbon pricing issues for quite a while, could you update us on where you’re at in terms of not just the policy debate, but where the economics is and internationally?

John Hewson: Where do you start with global warming? To me, I’m not a climate scientist, you guys aren’t scientists, how do we know we’ve even got a problem? The only reason we know we’ve got a problem is that a group of scientists – about 95% of peer group-assessed climate scientists – actually agreed on something.

This is very atypical because the natural process of science is to disagree, you contest each other’s hypotheses, you contest each other’s theories, you contest each other’s research. Yet here they came together to say, “this is a problem, this is an urgent problem”.

They might disagree about how big and how quickly we’re getting to the tipping point, and they may disagree on some of the solutions, but the fact that they agreed that there was a problem is the only reason people like us know about it. So I’m prepared to give the science the benefit of the doubt.

Having said that, then I look for the most cost-effective way of dealing with the issue. As an economist, I naturally think of putting a price a carbon, charging people for polluting the atmosphere. It’s a significant externality, which needs to be dealt with. It’s a cost-production they should have taken account of, whichever way you want to describe it.

But that’s not to say that there’s not a host of other initiatives, and some of them are by mandation. I mean we’ve seen the banning of incandescent light bulbs. We’ve seen various specifications for biofuels, mandation of biofuels. We have soil-carbon programs, soil farming initiatives which are beyond the carbon price, but that are helped and accelerated by the carbon price.

The thing that frustrates me most is that we had a constituency for change when Rudd came to power. He was going to ratify [the Kyoto protocol] and get on and deal with the pricing of carbon. Howard, under his government, had moved towards an emission-trading system. So the ground was set, the constituency was there.

Rudd came with a very strict agenda – green papers and Garnaut reports, white papers and legislation. [He said], “if I don’t get what I want I’m going to have a double dissolution and jam it through”. It went right through to that point and when push came to shove he didn’t do it.

A member of the ‘We Say Yes’ group supporting carbon pricing, Hewson believes community support has been lost.

In early 2010, we lost the opportunity to actually make the changes. Whatever you thought of the particulars of that system, at the time it was a step in the right direction.

Having then said that, it just became a matter of political contest. It was the reason why Rudd lost the leadership, it was the reason why Turnbull lost the leadership. Then the community support for the whole process of pricing carbon was lost – it was easily re-tagged as a “tax” not a “price”, so we’ve lost a lot of ground.

In that context, I’ve got involved more recently with a thing called the Asset Owners Disclosure project. What we’re doing is fairly audacious: we’re going to rate the top 1,000 pension and superannuation funds, private endowment funds, in the world. That’s funds of about 5 billion under management or more. They control about $US60 trillion worth of funds.

Right now about 50-55% of those funds are invested in carbon-intensive industries. Only about 2% are invested in alternative technologies, energy efficiency industries, and so on.

Our aim is to do two things: to survey them, to try to force disclosure as to how they’re responding to managing the risk of climate change and how that’s reflecting in their investment patterns and how much they’re investing in carbon intensive industries, with a view to getting them to think about increasing the percentage from 2. If it goes to around 5-6%, that would be enough in terms of available investment funds, and it is investment that is going to drive the responses to climate change.

You can create those investment funds going into those alternative technologies, into alternative energy sources, into cleaning up coal and that technology. You don’t have to specify, if you can just get that investment shift you’re going to drive the response to climate change.

And it can be a private sector-based response, irrespective of what governments are out there doing – you know, scoring points on each other about carbon pricing and so on – and I think that’s quite important.

We’re working at two levels: one is top-down surveying the asset owners, we’re going to rate them and give them AAA sort of standing in terms of markets and in terms of their transparency and investment. But also we’re working from the bottom up, where we’re using the social media targeting 18-35 year olds, getting them in on a letter writing campaign. Because when asset owners get letters of complaint or query from their beneficiaries as to how they’re responding to climate risk, or how much investment they have in this, that or the other thing. Then I think as essentially trustees of these people’s money they have to respond, and I think you can probably embarrass them from the top-down and the bottom-up to make the sort of investment shifts that we think are required.

So it’s a bit audacious, a bit in their face, but on the other hand I think it will work. And I’ve had some experience with rating the top 100 companies in Australia in terms of corporate social responsibility, and some 30-40% participated in that by answering surveys and so on.

Once the list was out and they were graded relative to [one company] against another, they responded pretty quickly and they started putting on their letterheads “AAA rating” or whatever. So I think it will work.

Daniel Connell: Talking about fund managers, it brings to mind the Global Financial Crisis, and the struggle that political leaders have had since 2008 to come up with a coherent response, at least that’s the way it looks from the outside.

The US is still struggling for a coherent response to the GFC.

What’s your rating of the way in which they’ve responded to the issue of the fund management that was involved in that crisis, and continues to be involved?

John Hewson: Going back to the basis of the crisis: sub-prime loans. To get a sub-prime loan in the United States you had to be a financial delinquent – you had to have missed interest payments or been declared bankrupt or defaulted on your loan. And then in those circumstances, you got a bank to lend you as much as 125% of the value of a house at an artificially initial low interest rate with no recourse lending – you could hand back the keys if you couldn’t service the loan.

That was just a punt, nation-wide, on house prices continuing to go up, and they mostly had since the Great Depression. But when they didn’t, those loans started to be called into check. Then you had various levels of securitisation, dead instruments built on top of them – you know, securitised mortgage instruments, collateralised debt obligations and so on.

It was a house of cards that the authorities must have known about. I mean I was writing about my local council’s exposure in the middle of 2007. So they did know about it, but for some reason they turned a blind eye to what was an international quest for yield. And they got caught short, and didn’t realise just how interconnected the financial system was.

Some institutions were saved because they were too big to fail, and others weren’t. When they let Lehman Brothers go they didn’t realise how significant an impact that would be and that house of debt-based cards came crashing down.

Now the political response was pretty mixed at best. One of President Barack Obama’s biggest problems is that he seems to have bailed out Wall Street at the expense of High Street and most of the industrial base of the United States. Not too dissimilar in other parts of Europe, for example, where the debt pressures are very real.

And you’ve had endless sort of attempts to coordinate central bank responses, regulatory responses, G20s, G8s – we haven’t moved too far in actually coming up with a sensible regulatory structure that you could overlay and say this isn’t going to happen again, or we’re going to reduce the chances of this happening again.

We’re still seeing elements of the crisis come to the fore. I think most of what I described of the debt mountain has been documented. But the activities of some of the bigger players, like Goldman Sachs, some of the British banks, world banks in setting, uh, influencing LIBOR, artificially keeping LIBOR low and trading against it, making money, that’s all still coming out.

Some of that’s catching the authorities by surprise, so we’ve still a long way to go, is the simple answer to your question. There’s been recognition of the nature of the problem, and most of the sources of the problem, but nobody has actually taken it through to, “Oh, should we separate all investment banking from commercial banking, or should we put some sort of debt limits? Change capital adequacy requirements yet again?” – that hasn’t happened.

Bruce Chapman: You made some comments related to this in [the tax policy forum] about Europe because we’ve now got a double-whammy - what’s going in in Europe’s economy is very frightening, I think.

Europe’s common currency requires a level of political and economic unity that can’t be realistically achieved.

I’ve always been interested in why they did it in the first place – that is, a common currency – because one of the very few things that markets do, without any government involvement at all,(and which are unambiguously healthy), is set an exchange rate that reflects your terms of trade and your relative power in the world trading situation. Once you’ve got a shared currency, that’s gone.

Why would you do that in the first place unless it was driven entirely by the politics of getting Europe unified, potentially because of the concerns about Germany?

John Hewson: It’s interesting, back in my International Monetary Fund (IMF) days through the early 70s, with the collapse of the Bretton Woods system, we used to look at issues about whether you could realistically expect a common market in Europe. That seemed to make eminent sense – the bigger the market, the better, the freer, the trade the better. The theory and practice was unequivocal in terms of the benefits of that.

But I could never see a common currency. It requires a level of political unity and policy coordination which I never imagined you’d get in Europe. And we haven’t had it in Europe and that’s why – it’s under so much pressure. The common market has been a reasonable success, and the European economy is the biggest economy in the world still.

But the common currency was at fault at the beginning because even with the countries you started with - there wasn’t that level of political unity and policy coordination.

One monetary policy - essentially one fiscal policy - and then they expanded it to 17 countries, bringing in a lot of marginal players, some of whom lied to get in there in terms of their economic performance. It was a prescription for disaster.

Now how you un-bungle that is very, very difficult because right now you have the Germans sitting there as the lenders of last resort. They complain on the one hand, but they have benefited enormously because they had an artifically low exchange rate relative to what the market would have been. So they’d done very well, thank you very much.

They’ve been able to integrate the two Germanys and a whole host of other things quite effectively.

But the pressure in Europe today, I would summarise, is that Germans are being asked to work longer and harder in some dingy manufacturing plant in the back of nowhere so that some Greek bureaucrat can retire early on an excessive pension.

You’ve got real issues here, cultural issues in Greece, Portugal, Spain compared to the Germans on the other. And you’ve got real economic pressure.

One way to get Australians to think about that is that we we have a common currency. And there’s a very significant difference between the performance and productivity of Tasmania versus Western Australia. But we can sustain the common currency because we can effectively have one monetary policy, one fiscal policy and we have a level of political unity – federation with all its faults. And so it works.

Europe would like to see that, but it can’t get there.

Daniel Connell: One final question, coming back to Australia. What we’ve been talking about, or central to it, has been quality of information. Something that most people have an opinion about is Gina Rinehart and her relationship, shall we call it that, to the Fairfax board – what’s your feeling?

John Hewson: I think back to the Fairfax family days when they owned Fairfax, and they determined editorial policy and I didn’t hear the journalists squealing because they went off and did their job and everyone knew the editorial policy was largely determined by the family.

It doesn’t bother me too much if she thinks she wants to determine editorial policy. She’s a businesswoman. She might be prepared to throw her money away for power reasons, that won’t last either. But as a business proposition, unless her product, the news service, unless they have a viable market it isn’t going to survive.

So I think there are natural constraints on how far she can go. If she identifies herself as writing editorial policy in the interests of the mining industry, it won’t be a very popular newspaper any longer. And people will move on.

Me thinks some of these journalists do protest too much about editorial independence and journalistic independence. We forget that Rupert Murdoch controls about 70% of the print media in this country – no one seems to be too worried about getting his board to sign off on a charter of editorial independence.

So I think it’s been blown out of proportion. Probably because the government’s standing with the media is not great and anyway they can look at actually insisting – I mean imagine a charter of editorial independence to be signed off by all newspapers, it won’t be worth the paper it’s written on.

My final comment would be: in the 1980s, it was very trendy to have a business code of ethics in the banking community. Goldman Sachs was a market leader in this respect. I remember reading it when they brought it out, and I thought, “Christ, that’s everything they don’t do.”

Daniel Connell: And didn’t do.

John Hewson: And didn’t do. And as you’ve seen, they’re now paying a substantial price for that.

Daniel Connell: Thank you John for taking part.

Many thanks to the Australian National University media unit, which kindly allowed The Conversation to record this interview in their studio.

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