Tuesday, April 08, 2008

No Hope for Liberals

There is now conclusive evidence that there is no hope for the Liberal Party. They have announced that Henry Ergas will be undertaking a review of their tax policy.

Ergas in the article is given a title that I don't think he is entitled to, but the absebce of that qualification alone is insufficient to invalidate his role. It is more that his only area of expertise is really regulatory economics, not macro policy issues and certainly not tax. He has no access to a General Equilibrium model to assess the affects of any proposed tax changes across the economy. And most tellingly, his last foray into this territory was embarrassing.

In 2007 Ergas prepared a report for the Menzies Research Centre (no active website!) on the issue of State and Commonwealth expenditures. This was designed to underpin the Costello claim that it was the States putting pressure on interest rates with an old-fashioned crowding out argument. This ignored the fact that the capacity constraints in the economy were in part due to lack of infrastructure spending by the States.

But worse, he tried to argue that the GST windfall to the States had been frittered away on "unearned" wage increases, that is wage increases not tied to productivity improvements.

His analysis was flawed because the evidence was the States had to respond to the general movement in wages in the labour market, and in a tight labour market with skills shortages it was the private sector that was leading in wage settlements. This was not an era of Whitlamesque government led wage increases.

His second problem was that he had blessed little meaningful data on productivity in the major employing areas in the States - health, education and policing. Further he had no idea of how productivity gains (usually achieved through the introduction of new technology) could be achieved in those sectors.

It should be an interesting tax policy when it is released.

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