Same old Rudd looks for FBT escape

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From the AFR today:

Public service departments which buy Australian-made cars could receive a rebate under measures being considered by Labor to undo some of the ­political damage caused by the crackdown on fringe benefits tax exemptions for salary-sacrificed vehicles.

Amid industry warnings that sales of locally made cars could be cut up to 20 per cent, rebates have been ­discussed with the industry amid other options.

Under one option, a local, state or federal public service agency which buys a Ford, Toyota or Holden would be eligible for a $3000 rebate.

The manufacturer could receive the money from the government and pass it on. Industry Minister Kim Carr ­confirmed discussions with the industry were taking place, but said nothing had been agreed to yet.

In my initial reaction to the FBT plan I attacked it on the basis that it created a potentially major fiscal drag that would be very poorly timed for the economy as we head off the mining investment cliff. At the same time, I agree with most of the commentary that has transpired at MB since, that the tax itself is a rort and should in principle get the chop. Assuming all of the industry bleating about falling sales has some merit, it shows just how fecund that rort has become.

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I don’t know if the solution being offered today, of boosting government sales via a fiddle to incentives, will work or not but the obvious question is how can happen without creating another budget black hole?

However, the major point that must be made in all of this today is not about the details of the policy. It is about the policy process itself.

Kevin Rudd has shown one great policy process failing since he rose to the prime ministership that has caused nearly all of Labor’s leadership woes, caused most of the business uncertainty, has exacerbated Australia’s rent-seeking business culture and, more recently, has worsened the ripple effects of Australia fiscal instability.

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The problem is this: Kevin Rudd announces peremptory policy to the public then negotiates in the open with those affected before he has won over the sympathies of the body politic. This really is a failure of political economy 101 and it’s hard to believe that the PM has not learned his lesson.

What should happen is this: a long policy process with a lead time measured in years that includes studies, research, consultation with vested interests and open public debate led by the government to bring in and persuade the public the need for potential reform.

Only then do you announce the actual policy and you do not budge from the announced position in the full knowledge that you have already won the debate and any whining that comes from vested interest at that point only makes you look a like strong leader of the national interest.

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What we have instead are hastily drawn changes quickly announced then a debate led by vested interest PR and a government in crisis control mode. Thus we have had under Kevin Rudd:

  • a Carbon Pollution Reduction Scheme (CPRS) policy announced up front, and an endless procession of special exemptions struck with business interests as they traipsed to Canberra.
  • a Resource Super Profits Tax (RSPT) that was hidden in the Henry Review Process then cherry-picked and sprung upon all and sundry resulting we all know what.

All of these episodes have the consequence of encouraging rent-seeking in business. In an economy dominated by concentrated monopolies, duopolies and oligopolies this is a red rag to a bull. Why compete when you can simply lobby or pressure the government to prevent competition.

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I have speculated that this is the triumph of state political practice over federal. After all, state politics is basically the business of negotiating with interests and Labor had been doing it in the major jurisdictions without much interruption for a long time. Rudd comes from that political schooling.

But given the persistence of the problem, and the failure to learn a very basic lesson that has cost the PM so much angst, one wonders as well if there isn’t something else going on. Maybe our PM can’t see past being at the centre of the drama.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.