Monday, November 26, 2007

Devolution Australian style.

Imagine the reaction if anyone were to suggest in the debate about fiscal autonomy that all the tax revenues from house sales in Scotland should be handed to Holyrood. Then imagine the further row if (say)Wendy Alexander ? who keeps hinting about more powers but never seems to come up with any ? were to suggest that, in addition, Scotland should get the receipts from indirect taxation in Scotland ? for VAT. It would no doubt be condemned in Westminster as nationalism blue in teeth and claw. An attempt to create a degree of fiscal autonomy incompatible with the maintenance of the UK.

But what if someone were then to take leave of their senses and suggest that, on top of all this, there should further be a version of the Barnett Formula to provide further funding from the central government in addition to locally-raised revenue. Shock, Horror. Fiscal madness?How could anything so ridiculously complex and fraught possibly work?

Well, in the Australian state government of Victoria they don?t seem particularly mad. Indeed, in the sober, dark wood-lined state parliament chamber in Melbourne, political life seems to go on pretty normally despite the fact that, on top of sales taxes and stamp duty, there is a needs-based equalization formula of such complexity no one could explain it to me. But this is just the way things are in Australia. And it seems to work ? or it has up until now. The state government has, in one way or another, been raising its taxes for most of the last century, but no one would suggest that this made it a separate country from Australia. No worries, mate.

Following Kevin Rudd?s landslide election victory in Australia, the country is now bracing itself for the expected battle over their version of the West Lothian Question. It is an upside down version of our own. Not so much a question of regional politicians ?interfering? in the affairs of the central state as the centre running roughshod over the rights of the provincial parliaments.

Defenders of devolution in Australia ? who unlike here tend to be conservatives ? argue that the federal government in Canberra already has quite enough power and that Rudd has no right to challenge the autonomy of the state parliaments like Victoria. For his part, Rudd is adamant that standards in schools need to be improved across Australia, and if there is to be more federal funds to do this, the federal government is going to want to have a greater say.

It?s the mirror image of the debate taking place in the UK about the future powers of the devolved parliaments. Here, politicians in London complain about Scottish MPs having too much power in the UK parliament; down in Australia they are asking why politicians in Canberra should feel they have any right to tell the state what to do in areas where the provincial parliament has sole legislative authority. In the end ? as in Britain ? it all comes down to money, and who gets to tell the piper what tune to play.

And we really could learn a lot from looking at the debate in Australia, where I have been traveling for the last few weeks. Viewed from the southern hemisphere, our endless, inconclusive debates about tax raising seems pretty juvenile, unhistorical and ill-informed. We talk in hushed terms about fiscal autonomy as if it were a matter of constitutional life and death. It isn?t. It is a practical problem addressed by countless devolved constitutions around the world.

Indeed, across Australia, politicians and journalists I spoke to were surprised to find anyone should be interested in the mechanics of tax raising and the separation of powers, which are ? to them - the stuff of school text books; dry constitutionalism, not living and breathing politics. They were astonished that anyone in Britain could seriously propose that a parliament could be expected to rely on handouts from the central government, which is what happens under our beloved Barnett Formula. ?But why would anyone bother trying to govern responsibly if they don?t raise their own revenue?, was the response whenever I described our own constitutional arrangements. But what really caused their jaws to drop was that anyone would seriously suggest that handing fiscal powers to a provincial parliament would amount to separation, to independence.

The Australian state of Victoria is comparable in size to Scotland with just over five million people and a GDP of some 34 bn. The state government in Melbourne has extensive tax raising and legislative powers but remains very much a part of the Australian federation. Victoria has responsibility for all legislative functions excluding defence, foreign affairs, macro-economic policy and immigration, which are handled by the federal government in Canberra. This is in line with federal constitutions across the world.

Victoria also has a wide array of tax raising powers. The main revenue raisers for the Labor-led administration in Melbourne are stamp duties and VAT, all of which goes to the state coffers. It can also raise its own revenue through bond issues and loans, and can run a current account deficit if it needs to, but these are expected to be kept to under three percent of the state budget.

Now, as I say, this is all largely non-controversial,but it doesn?tmean there isn?t controversy ? far from it. Things can get very tense indeed between the various levels of government, especially when the states are running large deficits, as they have been in Australia in recent years. Finance is a complex business and involves endless haggling between the centre and the periphery. But this is simply how politics works in any decentralized political arrangement, whether asymettrical devolution or full frontal federalism.

My perambulations across this vast country confirmed that no constitution which involves devolution can be conflict free ? indeed, the conflict must be seen as a vital part of the process of decentralization of power. Rows between London and Edinburgh show that the system is working, not that it is failing, for this is the process by which regions express their interests in the face of centralized power.

It has also confirmed that a formal federation would not be appropriate for Scotland. In the UK we do not have a collection of states of roughly equivalent size, but one very big state ? England ? and three very little ones. You could not design a federation in which the states could be properly balanced, and Britain is condemned to ?asymettrical devolution?, unless or until the English regions decide they want a measure of autonomy themselves.

But this doesn?t mean we are condemned to dependency. The debate about fiscal powers in Scotland is ridiculous ? it is silly. It must end; and we must grow up. Of course, the Scottish parliament should have a wide array of tax powers and the sooner the better. It doesn?t mean Scotland becoming independent, but it would make Holyrood make sense.

Sunday, November 25, 2007

Downunder it's upside down as Rudd reinvents Blairism

You travel to the other side of the world and still all they're talking about is house prices. Even in Australia, where they're supposed to be interested in sport and barbecues, they've succumbed to the planetary obsession with real estate, that has ruined dinner table conversation and debased politics.

The Australian election, which has been won by Labor after over a decade in the wilderness, was supposed to have been about the environment, but the big issue on the ground was mortgage payments. The victorious Labor Party leader, Kevin Rudd, is youngish and personable in a Blairite sort of a way and he has a range of New Labourish policies from the environment to broadband. But what killed the Liberal leader, John Howard, after eleven years in office, was the shock rise in bank interest rates at the start of his campaign. Howard's warning to voters not to let Labor back because they were the party of high interest rates, exploded in his face as home payments rose. Shockwaves spread across the swimming pools faster than a kangaroo pursued by a dingo.

Home panic was compounded by insecurity in the workplaces of Middle Australia, brought about by Howard's "Work Choices" programme, a down under version of our own flexible labour market, which allows employers greater freedom to hire and fire. Australia may not have much in the way of trades unionism these days, but a history of labour shortages has left workers here - by hand and brain - a lot of residual power, and pay rates are as high as in the UK even though the cost of living is significantly lower. In his only obvious gesture to His party's socialist roots, Rudd has promised to scrap Work Choices and restore workers rights.

Attempts by Howard to buy last minute votes by offering financial help for private school fees and new tax-free housing loan accounts (surely coming soon to a Tory party near you) were to no avail. Nor were the countless Liberal attack ads warning that Rudd was a self-professed "Christian socialist" (shock) and that his cabinet would be filled with "trades unionists" as if that was synonymous with Stalinist commissars. The Liberal campaign sounded like John Major's in 1997, complete with the taint of sleaze and dirty tricks, so it was hardly surprising Howard was defeated by a clone of Tony Blair.

But in the end it was house prices wot lost it. The polls showed that the "battlers" as they're called here- people earning less than gbp 35,000 - deserted Howard because they were no longer sure they could afford their homes at a time when job security is becoming tenuous. Interest rates here are nudging 7percent and expected to rise further, possibly to 9percent as the federal treasury grapples with an overheating economy based on an unsustainable boom in house prices, latent inflation and huge personal debt.

Sound familiar? the similarity with Britain is uncanny and perplexing. This vast Australian continent is a very different place to crowded and cramped Britain, but they've somehow managed to have the same housing shortage. In the past decade house prices have risen to seven times earnings and average debt repayments are now over that critical level of 30 percent of household income beyond which home ownership becomes unsustainable.

Travelling across this vast country around the size of the USA with only a 12th of the population, you can only ask: why? There is no shortage of land here, and the construction industry doesn't have to deal with Nimby planning regulations. It's like having a sand shortage in the desert. The crisis clearly has less to do with physical characteristics of the housing market than with years of cheap money. Years which are now over - there as here.

Indeed, looking at Austalia you realise just how much this global debt cycle has been driving policy and politics in western democracies almost irrespective of whatever party happens to be in government. The Australian Liberal Party, their equivalent of our Tories, has been riding a decade long wave of apparent economic success, presided over by their answer to our iron chancellor, treasurer Peter Costello. As in Britain, the Aussie boom has been based on inflated house prices which have created a "wealth effect" and kept consumers spending beyond reason. Costello claimed to have ended boom and bust, and has been warning the voters not to risk going back to the days of negative equity and unemployment. Change the names and this could be our Labour government and Gordon Brown talking.

Indeed, you wonder if the election result in Britain - had Gordon Brown actually called one last month - might not also have led to a change of government. John Howard's record of apparent economic success didn't save him - even though looking around Australia you see evidence of it everywhere in the shiny new cars and new restaurants. Unemployment is non-existent and cities like Melbourne are booming as never before.

But to Howard's dismay the voters refused to stick to the script and decided it was time for a change even though, as Costello kept telling them, they'd never had it so good. The Australian voters have concluded that the new post-sub prime financial world needs a new administration in charge - one not drunk on its own hubris and dazzled by its own supposed economic competence. They see new problems ahead and they want new heads to tackle them.

The coming of Kevin Rudd will probably be a good thing - for the world at least. The Labor leader has promised to reverse Howard's hostility to Kyoto and to take global warming seriously. And since he may need the support of the Green Party in the Senate, there is every expectation the he will deliver. However, Rudd has his work cut out taking on the immense vested interests in Australia's colossal coal and mineral extraction industries. Australia is in the midst of its worst drought in a hunded years, but one of the solutions put forward by Howard was a desalination plant which would be coal-fired. Solar power is not being developed despite sunlight so intense that Australian mothers are afraid to let their children be exposed to it.

Australian citizens love their country and are intensely protective of the natural environment here. Many are probably instinctive environmentalists. But there is a huge battle ahead as the country awakens to the enormity of the challenge presented by climate change and discovers the commercial interest vested in the carbon economy. Can Kevin Rudd really grow the economy enough to pay for costly health and education reforms, not to mention 30 billion in tax cuts, and slash carbon emissions? He has promised to halt fuel price increases when the pump price is a third less than in Britain.

Otherwise, the victorious Rudd has promised to withdraw Australian troops from Iraq by next year, ending the involvement of the only remaining US ally with the stomach to fight there. It means the end of the line for George W. Bush's coalition of the willing. But like Gordon Brown, Rudd will remain broadly pro-American. And he will arguably be more conspicuously pro-British than the supposedly monarchist John Howard. Rudd wants to ally himself to the New Labour project and Gordon Brown will be happy to oblige.

It will be useful for the PM to have a new ally in the environmental debate, and in Afghanistan, a fight which Rudd says he still wants to fight. The danger for both of them is that they may sink or swim together, and things aren't looking too buoyant on either hemisphere right now. Both Rudd and Brown have been waiting a long time for the top job, but they may both have taken over just at the moment when the boom has finally bust.