http://www.sbs.com.au/insight/insight_set.html
Now to the battle raging for the hearts and minds of Australian voters.
Today the Government and Opposition slugged it out, yet again, over tax. The
Opposition claimed the Government had a secret plan to increase the GST if
re-elected - a claim firmly denied by the Treasurer. It was all prompted by a
speech Peter Costello delivered to the Sydney Institute last night, where he
argued that social services should be funded through indirect taxes like the
GST. The Treasurer also took a strong stand in support of globalisation.
PETER COSTELLO, FEDERAL TREASURER: As I`ve previously argued, globalisation is
not a value, it is a process. That`s the key point I want to make tonight. It
is not a value, it is a process. It describes what is happening. It doesn`t
describe whether it is right or wrong, it describes what is happening, and
ranting against globalisation is like ranting against the telephone. You can
use the telephone for good or for ill, so too the wider process of which the
telephone is part, it can be a force for good or a force for ill. Those
countries where poverty is worsening are not those which have participated in
free capital flows and foreign investment. On the contrary, they are
those that have been unable to participate in globalisation because of war,
corruption or maladministration. The greatest victims of the
anti-globalisation demonstrators who want to stop more liberal world trade
would be the poor. Protectionist policies followed in developed countries
would lock the poor out of markets for agriculture and textiles, where they
could actually develop trade and earnings. To re-weight the tax system out of
indirect tax and by definition into direct tax, is a reverse direction. No
other developed country in the world
is moving that way. It is a recipe for uncompetitiveness. And with the
competitive challenge we face, we can`t afford errors.
One man who takes issue with the Treasurer is James
Galbraith, the son of John Kenneth Galbraith, one of the 20th century`s most
influential economic commentators. James Galbraith is Professor of Public
Affairs and Government at the University of Texas. He`s also had a career on
the staff of the US Congress and has written several books on economics.
Earlier this afternoon James Galbraith joined me in the studio.
JENNY BROCKIE: James Galbraith, welcome to Insight.
I`d like to begin with the issue that`s likely to dominate our coming election
here, and that`s taxation. The Treasurer, Peter Costello, also argued that we
should keep moving away from direct taxation - personal income tax, company
tax - towards a more indirect system of taxes like the GST. Your reaction to that?
PROFESSOR JAMES GALBRAITH, UNIVERSITY OF TEXAS,
USA: Well, it`s a curious argument to an American ear. We, after all,
raised income taxes in the US in 1993 and that decision was very largely
credited by both economists and political leaders with a very long period of
economic expansion that we enjoyed from 1993-1994 through the end of, let`s
say, 2000.
Now it`s true that in the US we have had an income tax cut enacted in the last
few months. Mr Bush pushed it through in his first days in office, but it was
largely an unpopular action and one which I think the political system was
already...we`re already seeing expressions of regret and worry that it was an
imprudent action, given the rate at which the budget surpluses are
disappearing in the US.
JENNY BROCKIE: Why do you say it was unpopular,
though? President Bush was elected, after all, and it was one of his major
issues, wasn`t it, during the election campaign?
PROFESSOR JAMES GALBRAITH: The question of whether
President Bush was elected is one which is still hotly disputed in the US, but
leaving that aside, he was not elected because of the promise of the income
tax cut. Most Americans felt that it was not a good bargain. That they would
rather have increase in services, particularly increase in healthcare
benefits, particularly covering prescription drugs, and other measures that
were very much the meat of the campaign discussion. The income tax cut, which
was something that Governor Bush proposed as part of his campaign, in order to
attract part of the Republican constituency to his banner earlier on, was
never a factor that greatly strengthened his support during the fall
campaign.
JENNY BROCKIE: But can you deliver the kind of
services that modern communities require through indirect taxes, just as
efficiently as you could through direct taxation?
PROFESSOR JAMES GALBRAITH: You can certainly
deliver services with indirect taxes, but the problem is that the burden of
taxation falls heavily on lower income people and upper income people, who
have large savings, simply escape the burden of indirect taxes. So the feeling
is - certainly the feeling in the US political community - is that moving too
heavily toward indirect taxes simply isn`t fair.
JENNY BROCKIE: Just this week in Australia, we`ve seen
an Australian company decide to move its revenues, its revenue base, to the
Netherlands so that it can effectively increase its profits. Isn`t that likely
to be what will happen if company tax isn`t reduced? Isn`t there a need to
reduce company tax for that reason?
PROFESSOR JAMES GALBRAITH: Well, I think there is a
need to, if you like, tighten up international tax regimes and to reduce the
rate at which companies are able to essentially move their taxes offshore,
their profits offshore for tax purposes. But it is possible to levy tax on the
worldwide base of a multinational company doing business in your country. So
it`s not an inherent obstacle. Globalisation is not an inherent obstacle to
taxing corporate profits.
JENNY BROCKIE: Well, of course, the Treasurer came out
very strongly in favour of globalisation in his lecture last night, saying
that the benefits that were being derived from globalisation were increasing
living standards, were helping the poor. Your reaction to that?
PROFESSOR JAMES GALBRAITH: I don`t really know what
he`s talking about. I do a lot of research into the effects of
globalisation on inequality. It`s very clear to me we`ve seen rising
inequality in the world economy. It`s also very clear to me that you`ve
seen rising poverty in many parts of the world in the last 15 years. Africa is
going through a demographic and health crisis that`s greatly exacerbated by
poverty. In Russia, the proportion of the population living in absolute
poverty has risen to around 30%-40%. In Indonesia, as I think Australians know
better than most people, the last four years have been a very, very tough time
for the poor. So the
statement that globalisation is leading to rising living standards for the
poor populations of the world doesn`t seem to me to correspond to fact.
JENNY BROCKIE: But isn`t globalisation inevitable?
The Treasurer says it`s like ranting against the telephone.
PROFESSOR JAMES GALBRAITH: For 25-30 years
following the Second World War, we lived under a system of managed and
governed globalisation. Growth rates were higher. Income distributions were
more stable. Development occurred on a more reliable and persistent and
successful basis, up until the middle 1970s, than it has since then. What
we`ve seen I think in the last 20 years is the evolution of a global system
which is ungoverned, which is very unstable, and which is very hard on the
poor, on lower income working people, wherever they may be found. I don`t
think that`s a sustainable system. That was essentially the theme of my
lecture last night for the Whitlam Institute at the University of Western
Sydney - was that we really need to rethink the basis of government, of global
finance, that development really cannot be sustained on commercial lending
terms. It`s something which many people have maintained for the last 20 years,
but the evidence is, I think, very strongly, that we are running into very,
very grave difficulties.
JENNY BROCKIE: So re-regulate, is that what you`re arguing?
PROFESSOR JAMES GALBRAITH: Yes, I think one does have
to have a system of global or regional financial stabilisation. It need not be
done in the same institutional way that the Brenton Woods institutions were
set up in 1945 to do that. That is to say with a single set of global
financial institutions - the IMF and the World Bank - you could do it on a
regional basis. In 1997, the Japanese proposed an Asian monetary fund. The
Europeans have, of course, greatly reduced the speculative instabilities
inside Europe by going to a single currency and a regional central bank. So there
are any number of institutional innovations that could be applied to our
current situation, which might give us a better result than we`ve seen over
the last 15 years.
JENNY BROCKIE: But we`ve had 20 years or so of
rhetoric about deregulation, about lower taxes, about smaller government.
Haven`t we reached a situation where people who argue against that are
perceived in some way as being old-fashioned?
PROFESSOR JAMES GALBRAITH: I think we`ve reached a
situation where people who continue to repeat this line are perceived as being
out of touch with the reality of our time and with the needs of the world
economy. Again, going back to the situation in the US, we had an experiment
with the deregulation of the electricity prices in the state of California -
very quickly perceived to have been a colossal disaster and there is a
universal political consensus, and supported by most professional economic
opinion, in favour of re-regulation in that sector, of controlling the prices
at the wholesale level, which has now been done, of putting electricity under
contract to a public authority on a long-term basis, which is now being done.
So people are recognising that governments have a role and must take pragmatic
steps to stabilise the situation when they`re faced with, let`s say private
monopolies who are exploiting their market power.
JENNY BROCKIE: Just quickly before we finish, the
question of the US economy and the downturn, Alan Greenspan`s most gloomy
recent predictions. What effect do you think that downturn is likely to have
on Australia?
PROFESSOR JAMES GALBRAITH: I think the US is
heading toward a rather serious downturn. Mr Greenspan has finally
acknowledged this. He`s always been a bit slow to acknowledge downturns. That
was true in `87 and it was true in 1991, but he is now, recently I think,
pretty clearly said that he sees the period ahead as being one which will be
quite bleak. It`s certainly going to affect, it is already affecting import
demand into the US, which has
actually been falling faster than domestic spending and demand. So it is going
to affect those countries that export heavily to the US, and it will affect
those countries who export indirectly to the US, because they sell to the
countries that do supply us. I was in northern Mexico in May and it was very
clear there, that they were already experiencing a rather sharp slowdown as a
result of declining demand from the US. I think we`re going to see a rather
rough one year to 18 months ahead.
JENNY BROCKIE: So Australia might catch a cold?
PROFESSOR JAMES GALBRAITH: I would not be confident
that Australia could escape the effects of this.
JENNY BROCKIE: Despite the reasonably healthy
economy at the moment?
PROFESSOR JAMES GALBRAITH: Australia has some
things, inventory cycle and other things, which apparently are moving
favourably at the moment, so there will be some offsetting from the
domestic cycle. But surely if the US has a major slump, then the entire
world economy will be affected.
JENNY BROCKIE: James Galbraith, thank you very much
for joining Insight tonight.
