The future of Mr. Peter Costello.

The past three months have seen two major political developments--the Prime Minister's so-called "Athens declaration" and associated political brouhaha, and the federal Budget for 2005-06. Common to both are the personality and performance of the Treasurer, Peter Costello.

In what follows I propose first to assess the quality of Mr. Costello's tenth Budget and comment upon his performance more generally in the Treasury portfolio. I shall then note some lessons from the "Athens declaration" incident regarding the behaviour of the Treasurer. Finally, I shall pose some suggestions for appropriately disposing of the now too-longrunning "Costello for P.M." saga.

THE 2005-06 BUDGET OPPORTUNITY

The Budget for 2005-06 is an extraordinary document. To see just how extraordinary it is, we need to look back to its predecessor. The 2004-05 Budget, after providing for spending increases totaling $37.8 billion over the four-year forward estimates period (2004-05 to 2007-08), and personal income tax cuts totaling $14.7 billion over the same period, nevertheless projected underlying cash surpluses totaling $11.9 billion.

With the ink hardly dry on that Budget, the Government embarked on a spending spree leading up to October's federal election. The Pre-Election Economic and Fiscal Outlook (P.E.F.O.) document, a report by the Secretary to the Treasury and the Secretary to the Department of Finance issued on 8 September 2004 under the Charter of Budget Honesty Act 1998, costed these spending policy decisions at $4.2 billion over the forward estimates period. As against that, upward revisions to the estimates (so-called "parameter and other variations") amounted to a massive $19.6 billion, more than wholly because of upward revenue estimates revisions of $21.5 billion. Projected underlying cash surpluses over the forward estimates period now totaled $25.2 billion--more than double the Budget figure.

The government was quick to take advantage of this revenue cornucopia in its election campaign promises. The Mid-Year Economic and Fiscal Outlook 2004-05 (M.Y.E.F.O.) document, published in December, 2004 in accordance with the Charter of Budget Honesty Act, provides the figures. In the three months between the P.E.F.O. and the M.Y.E.F.O., new spending policy decisions--almost all of them election campaign promises--were estimated to cost $7.0 billion over the forward estimates period. Again, however, upward "parameter and other variations" to the revenue estimates saw the underlying cash surpluses of $24.0 billion for the forward estimates period, in aggregate, barely dented.

In the months thereafter leading up to the Budget on 10 May 2005 there were persistent suggestions from independent sources that, so far from peaking in the M.Y.E.F.O. figures, the revenue estimates (and associated underlying cash surpluses) were being revised even further upwards. Probably the most respected of these independent sources is the Canberra consultancy Access Economics. (1) Its Budget Monitor document, finalised on 20 April, 2005, predicted a huge further jump in revenue growth, with the underlying cash surpluses over the forward estimates period forecast to soar by no less than $21.6 billion over and above the M.Y.E.F.O. figures, to an aggregate $45.5 billion.

Astonishing though the prospective Budget outlook painted by Access Economics was, in the event it proves to have understated, not overstated, the prospective surplus situation. The Budget papers indicate that, when Ministers sat down to finalise the Budget, Treasury figuring would have been providing for underlying cash surpluses, over the four years to 2007-08, (2) totaling more than $60 billion! Again, as in September and December last, and as Access Economics had suggested, the huge upward revisions derived principally from some $37.5 billion of "parameter and other variations" between the M.Y.E.F.O. and the Budget.

To those who have borne with me thus far in this heavily figure-laden recitation, I should now proffer some explanation for having inflicted it upon them. I have done so to underline the sheer magnitude of the taxation reform opportunity the Government had available to it in the lead up to the Budget. Not only was it an opportunity unprecedented in magnitude, but it was also one of whose surging build-up the Government clearly had more than ample warning. The large upward revisions to the surplus outlook portrayed first (publicly) in the P.E.F.O. were maintained (the cost of election campaign promises notwithstanding) in the M.Y.E.F.O., and must undoubtedly have been further reinforced in the New Year by the (unpublished) budgetary position review normally undertaken then by the Treasury. Key Ministers, at least, must have been well and truly aware, in good time, of the bountiful prospect before them.

It is one thing to have to frame a Budget in conditions of adversity--as this Government had to do in its first Budget in 1996, when it inherited the $10 billion "Beazley black hole" from the outgoing Keating Government. It is altogether another thing to be sitting down to frame the 2005-06 Budget in circumstances where not only have you paid off almost the whole of the Commonwealth's government debt, but you also see prospective surpluses running at $10-$15 billion each year for the next four years.

Blessed with this once-in-a-lifetime opportunity, how did the Government handle it?

THE BUDGET OUTCOME

Details aside, four features of the Budget stand out, namely:

(1) Despite the fact that (for understandable reasons) a government's first post-election Budget is traditionally one in which it seeks to tighten spending by cutting or abolishing some existing spending programs, little or no such effort seems to have been made this year in Cabinet's Expenditure Review Committee, chaired by the Treasurer.

(2) The Welfare to Work program purports to begin the long overdue task of shifting off the welfare rolls those many people who not only should never have been on them in the first place, but whose own lives are impoverished by being so. This comprehends a host of new and increased spending programs on such things as training, childcare facilities, and so on to aid that transition. For what the estimates are worth, any results are likely to be modest in magnitude, glacial in their pace of occurrence, and expenditure-increasing (net) for at least the next four or five years.

(3) Personal income tax cuts, which appeared to be cobbled together in the last week before the Budget, are estimated to cost $21.7 billion over the new four-year forward estimates period (to 2008-09).

(4) A so-called Future Fund is to be set up, to which will be devoted the proceeds of the surplus for 2004-05 (estimated at $8.9 billion); an amount of roughly $7 billion of Commonwealth funds currently on deposit with the Reserve Bank; probably, most of the proceeds from the proposed sale of the Government's remaining shareholding in Telstra; and such budgetary surpluses as, over future years, governments of the day manage to accumulate. These sums, plus the earnings from their investment, will finance what would otherwise be the call on future budgets to meet the unfunded liabilities of past Commonwealth public service superannuation schemes, (3) currently estimated at about $91 billion.

Before proceeding to my own less rosy assessment, it is fair to note that the Budget appears to have been initially well-received. A Newspoll conducted in its immediate aftermath ranked it as "the best-received on record" (during the past 15 years) in terms of people's reaction to the question whether they felt they would be better off, or worse off, as a result. (4) Even Labor-voting respondents were almost equally divided between those who thought the Budget would be "good for the Australian economy" (35 per cent) and those who thought it would be bad (41 per cent). (A later Westpac-Melbourne Institute poll also showed a sharp jump in consumer confidence post-Budget compared to the April figure.) Interestingly, however, the same Newspoll did not record any improvement in voter attitudes towards the Coalition, which actually slipped two percentage points versus Labor in two-party preferred terms.

THE PERSONAL INCOME TAX SYSTEM AND THE LOST OPPORTUNITY FOR REAL REFORM

In the January issue of this journal I argued that the window of political opportunity with which the new Senate will provide the Government from 1 July, 2005 should be used "to maintain and strengthen our recent outstanding record of economic growth", and that one of the two key aspects "of economic (but not only economic) policy which are central to achieving that objective" is "the reform of our personal income tax system". (5)

I was aware that a great obstacle, always raised against past calls for real personal income tax reform, has been the heavy cost to revenue involved, and the danger of thereby driving the federal Budget back into deficit. I therefore did not argue that my reforms could be effected overnight in a single Budget (although, had I then known the extent of the mounting prospective surplus situation, I may well have done!).

Four months later I called in The Australian for the government to lay out, and begin to implement, a tax reform plan: (6)

"Of course, no reasonable person has expected the government to do so [reform our personal income tax system] overnight in next week's Budget. What reasonable people have had every right to expect, however, are four things.

First, the Government next week should clearly and unequivocally commit to a significant reform. Second, it should clearly set out that reform's key objectives, including a broad timetable. Third, it should take the first steps towards those objectives, using the huge surpluses now available and in prospect. Fourth, it should stop talking nonsense about hoarding those surpluses for the benefit of some future generation much richer than us".

Given the main features of the Budget noted earlier, it is clear that, on almost all counts, it fails to meet those "reasonable expectations". It is, in fact, a lazy Budget from a Government showing increasing signs of complacency, and as such it represents a hugely wasted opportunity. How, we may ask, has this come about?

A LAZY BUDGET FROM A LAZY TREASURER

The outstanding hallmark of this Budget is its sheer laziness. First, as noted earlier, the Expenditure Review Committee, chaired by the Treasurer, seems to have made no significant effort to peg back (or better still, abolish) the hundreds of departmental programs via which it spends, and in many cases wastes, our money.

Second, there is the proposed Future Fund, into which a lazy Treasurer proposes to stuff tens of billions of our dollars because he can think of nothing better to do with them. Space does not permit a more thorough assessment of this fiscal confidence trick.

Third, the Welfare to Work program, although ostensibly well enough intentioned, is almost entirely lacking in either courage or genuine philosophical conviction, and is destined to have next to no effect on the problem to which it claims to be directed.

Over and above all these, however, is the failure on tax reform.

Now it may seem ungenerous to thus describe personal income tax cuts totaling $21.7 billion over the next four years, plus abolition of the vexatious superannuation surcharge (a crazy tax introduced in 1996 by the same Treasurer now taking credit for abolishing it). The fact is, however, that the personal income tax changes fall into essentially the same error as those in 2003-04 and 2004-05--that is, fiddling at the income threshold fringes rather than tackling the rate scale fundamentals. As on those earlier occasions, the Government has sought to ease the pain for taxpayers without addressing its real cause--namely, those high marginal tax rates of 43.5 per cent and 48.5 per cent (including the Medicare levy).

As noted in that aforementioned article in The Australian, so long as those rates exist, and diverge so widely from the 30 per cent corporate tax rate, "taxpayers will move heaven and earth to (legally) avoid them. In Kerry Packer's famous words to a parliamentary committee [which Mr. Costello should recall because Mr. Packer made a monkey of him personally on that occasion], they will do so because they rightly object to handing over their incomes 'to be spent by people like you' ".

It is remarkable that, after nine years in the Treasury portfolio, Mr Costello seems to have not even an inkling of this basic truth. Indeed, in defending his decision to increase the income thresholds at which these high marginal rates cut in, rather than beginning to cut the rates themselves, Mr Costello has employed precisely the same "politics of envy" arguments that one would expect from some Labor Party spokesman. Cutting those rates, he says, would have given too much to top taxpayers "like Kerry Packer". How he reconciles such an argument with the Government's own defence of its decision to lift the top rate thresholds (namely, that it is not surprising that tax cuts should appear to favour those who are actually paying the heaviest taxes), is beyond me.

The Budget betrays no evidence whatsoever that the Treasurer has even contemplated a program of genuine tax reform. Instead, after a lazy Expenditure Review Committee process, a lazy Treasurer, confronted with a huge and still upwardly spiraling budgetary surplus outlook, has reacted, first, by cobbling together some hastily assembled tax cuts having little or no genuine reform component; and second, by conjuring up a newly-devised Future Fund into which the remaining embarrassing surpluses might be stuffed, ostensibly to deal with a suddenly recognized problem which has existed long before this Government took office and which, for the past nine years, it has studiously managed to ignore.

I am not the only observer to be critical of the Budget's lack of focus, not to mention imagination, on these scores. Its generally favourable media (and public) reception notwithstanding, the more thoughtful journalists have expressed similar concerns, generally along the lines of it being "a wasted opportunity". (7)

My own criticisms, however, go further, to the personality and performance of the Treasurer himself; and to these, as illustrated by the so-called "Athens declaration" affair, I now turn.

THE "ATHENS DECLARATION"

The key elements of this affair are well known. On 29 April 2005 the Prime Minister, towards the end of a whirlwind overseas tour embracing China, Japan, Anzac Cove, Turkey and Greece, granted an interview to two journalists, Malcolm Farr from the Daily Telegraph and Steve Lewis from The Australian. Pressed repeatedly as to his future career intentions, he said, "I'm not planning going anywhere"; and when then asked whether he thought he could again defeat Labor's Kim Beazley at the next federal poll, he responded in the affirmative.

On 30 April these remarks--more precisely, the screaming headlines which both journalists put on them--burst like a thunderclap back in Australia. Throughout the following week their reverberations continued to roll as the Canberra press gallery panted in pursuit of what it loves best, namely stories that might hurt the Coalition in general, and their real bete noire, John Howard, in particular. Underneath all this media froth, however, a real story was emerging, namely the further confirmation of Mr. Costello's political immaturity.

In speaking of "confirmation", I am referring to the whole series now of instances in which, confronted with serious tests of his political maturity, Mr. Costello has failed to measure up. Perhaps most notably, in June 2003, when John Howard finally said that he would not be retiring on his impending 64th birthday, but proposed to contest the next election, Mr. Costello's response was extraordinary. At a press conference twenty-four hours later, having first expressed his (understandable) disappointment, he went on to behave like a sulky schoolboy. Anyone watching that self-indulgent, narcissistic performance with the future interests of the Liberal Party in mind must have done so with a sinking heart. This was not the behaviour of a leader, but of an immature man unable to handle the revelation that his reach had clearly far exceeded his grasp.

In an article in The Australian on 15 October 2004 I listed several more instances, all drawn from the recent federal election campaign, casting doubts on Mr Costello's future claim to the leadership. For example: (8)

"How could the Liberals' deputy leader, on the first day of the campaign, petulantly refuse to rule out a possible future challenge to his Prime Minister? Not once, but several times; until, a few hours later, he was finally dragged into a joint press conference with Howard to do so!"

In the week or so following "the Athens declaration" Mr. Costello's behaviour fully lived down to these (and other such) previous standards. On the very night of Mr. Howard's remarks in Athens, the Treasurer was rumbled dining in Melbourne with four journalists from The Age, who, judging by the front page story they then wrote for the later editions of that newspaper, went straight from the restaurant to Spencer Street to file the story he had clearly given them. Consistent with past precedent, it was a story of well-founded ambition perversely denied by a man (John Howard) who simply refuses to make way for his logical, and wholly deserving, successor.

And so it went on throughout the following week, with journalists clearly being briefed by both Mr Costello himself and, even more damagingly on several occasions, by various members of the small coterie of third-rate Liberal parliamentarians with whom he has almost entirely surrounded himself. As a Sydney Morning Herald editorial remarked: (9)

"Exclusive interview after exclusive interview with Peter Costello has been published this week. The excuse is the budget next Tuesday, but that is not what the questioners or the subject want to talk about". [My italics].

We were told that this would be Mr. Costello's last Budget, or alternatively, his last term as Treasurer. We were darkly warned that his talents were such that he didn't have to confine their use to a parliamentary career; he could readily find employment for them as Chief Executive of a major public company, at a salary of (say) $1.5 million a year. (If all of this sounds eerily reminiscent of some similar past performances by then Treasurer Paul Keating, I should however note that in Mr Costello's case there was no mention of "the Paris option".) The Minister for Foreign Affairs, Alexander Downer, was being "sounded out" to assist in dislodging Mr Howard, on the understanding that he would then succeed to the Treasury portfolio. And on it presumptuously went, as though the only people concerned in this matter were the small band of Liberal parliamentarians in Canberra--and (as with all such elites) to hell with the Australian electorate!

Then, after ten days of Costello-camp-generated political mayhem, the popguns fell silent when, on Monday, 9 May The Australian published the results of a special Newspoll on the leadership question. (10) Asked to choose "the best candidate to lead the Liberal Party", 61 per cent chose Howard and only 23 per cent Costello. Even more damaging to the claims of the Young Pretender was the 84 per cent (to only 12 per cent) preference for Mr. Howard among Coalition voters.

There should not, incidentally, have been anything surprising about this, or about the fact that, asked in that same Newspoll to choose between Mr. Costello and Mr. Beazley as to who "you think would make the better Prime Minister", 45 per cent (including, notably, 25 per cent of Coalition voters) chose Mr. Beazley, while only 34 per cent chose Mr. Costello. For years now, every poll I have ever seen has shown similar results.

The inescapable truth is that Mr. Costello is unsaleable to that element of the electorate on which, for some time now, the political fortunes of the Coalition have come to rest.

So, after all this sound and self-regarding fury, just what had the Costello camp achieved? One thing only, namely that in that post-Budget Newspoll referred to earlier, and notwithstanding the "best-received Budget" in the past 15 years, the Coalition had actually lost ground slightly, by two percentage points in the two-party preferred rating. Well done, Mr. Costello!

All of which leads to the question, what is to be done with the gentleman in question?

THE FUTURE OF MR. COSTELLO

In addressing that question I start from the position, inherent in what is said above, and consistent with what I have said for some years now,11 that the future of the Liberal Party, of the Coalition, and of political conservatism in Australia, now depend upon John Howard remaining Prime Minister. Subject always to those twin threats of personal health and hubris, I believe he can do so for at least another two federal elections. However, the "Athens declaration" uproar makes it clear that Mr Costello and his supporters continue to harbour the delusion that it is now "his turn". This boil must be lanced.

After the autumn session of the Parliament has concluded, and the Government has enacted most of its more immediately important legislation, John Howard should therefore invite Mr. Costello to discuss how best, in the interests of their party, to resolve the issue. He should, I suggest, inform his deputy that, in a Cabinet reshuffle before Christmas, he proposes to recommend to the Governor-General a new ministry, in which Mr. Costello can choose any portfolio he wishes other than the Treasury.

In doing so, the Prime Minister should put it to Mr Costello that, since he (Howard) is still "not planning going anywhere", it is no longer in the interests of the Government, or in Mr Costello's personal interest, for him to go on doing a job which he will then already have done for almost ten years and of which he has clearly grown tired. The Prime Minister should therefore say that he proposes to invite Mr Downer to take the Treasury portfolio (in part, though Mr. Howard will not say so, because in no way can Mr. Downer be seen as possibly supplanting him!). He should give Mr. Costello 24 hours to decide.

The choice would then be up to Mr. Costello. He could either choose another portfolio (Foreign Affairs? Defence? Attorney-General's?), retire to the backbench to sulk, or leave the Parliament to pursue one of those many alternative options which his supporters say would be readily open to him.

Of these choices, the manly course would be the first one, namely to choose another portfolio and, by buckling down and actually performing in it for some years, demonstrate that he does, after all, have leadership potential. The next most manly course would be to accept that his game is up, and make a clean break by leaving the Parliament.. The least worthy course would be to retire sulkily to the backbench, with a view to creating trouble for Mr. Howard. That, naturally, would be the course that would endear him most to the Canberra press gallery.

If we make the most pessimistic assumption, namely that Mr. Costello chooses the least worthy course, the question then becomes, how much trouble would such a situation in fact portend for the Howard Government?

In the short term at least, there would be some. Nevertheless, my own belief is that, the efforts of the journalists notwithstanding, it would not be long-lasting, and that the obvious petulance of such behaviour would rather quickly lose Mr. Costello such political friends as he has. As to the electorate, while it never likes to see a political house divided against itself, my judgment is that it would fairly quickly consign Mr. Costello to the graveyard to which it normally relegates failed politicians, particularly those who have proven too big for their boots. Mr Howard, in the aftermath, could then proceed calmly towards winning the 2007 election.

(1.) Although I have no connection with Access Economics, in the interests of full disclosure I should perhaps note that not only was the firm founded by a number of my former employees in the Treasury for whom I maintain a high regard, but also retains a high proportion of them to this day.

(2.) The "forward estimates period" referred to here is that laid out originally in the 2004-05 Budget, covering the four years 2004-05 to 2007-08 inclusive. The 2005-06 Budget, naturally, rolls that period forward by a year so that it now covers the four years 2005-06 to 2008-09.

(3.) Of one of which I am of course a beneficiary.

(4.) "Budget earns a record welcome", Denis Shanahan, The Australian, 17 May 2005.

(5.) "What Mr Howard's Government Needs To Do", National Observer, Issue 63, Summer 2005.

(6.) "Unjust, unimaginative gall of withholding cuts", in The Australian, 2 May 2005.

(7.) See, for example, "Wasted opportunity for fundamental reform", Alan Wood, The Australian, 11 May 2005; "Howard tax legacy a wasted opportunity", Neil Warren, The Australian Financial Review, 17 May 2005; "Stuck in a three-dollar mindset", Greg Sheridan, The Australian, 12 May 2005.

(8.) "Grow up and change jobs, Mr. Costello", in The Australian, 15 October, 2004.

(9.) "A question of ambition", Editorial, The Sydney Morning Herald, 6 May 2005.

(10.) "Costello fails to win over voters, Steve Lewis, The Australian, 9 May 2005.

(11.) See, for example, "Peter Costello would ruin the Coalition", in The Australian Financial Review, 16 August 2001; "A death-blow for cultural conservatism?", in The Adelaide Review, September 2002; "Costello as P.M. just won't do", in The Australian, 3 January 2003.