Max Newton, “Seven witless years,”
Australian Penthouse, October 1979, pp. 43-52.

Now that politicians have successfully wrecked our economy, stand by for a middle class revolt.

The middle classes of Australia are at last beginning to realise the gravity of Newton’s first law: never put your faith in politicians.

Politicians cannot solve problems. They are not meant to. They are meant to reconcile differences and reach agreements.

They are by nature cowards. They are by nature liars. They are by nature procrastinators. Politicians react to pressure; they react to fear. And most of all they react to fear for their own jobs.

Malcolm Fraser will start cutting taxes and government spending when the wave of anger from the middle class voters of this country overwhelms the incessant pressure from the other side — the pressure from ambitious ministers and greedy civil servants for a continuance of the fantastic escalation of government spending which has brought this country to its knees in the past seven years.

It began in 1972 when Gough Whitlam told the people “It’s Time.” They did not believe he was telling them it was time for a disaster — and he was going to give it to them.

Today, almost seven disastrous years after that crucial election, our country is crippled and stunned, twisted and horrified, embittered and divided — as a result of the violent social revolution Whitlam tried to bring about.

Whitlam promised a new deal for the middle classes: bright new schools, sewerage, free health care, new roads, new suburbs, homes of their own.

This appeal to greed could not be resisted. The prosperous middle class voters of the metropolitan fringes gave Whitlam his chance, and today the whole nation is still suffering.

A feeble and divided Liberal-Country Party coalition in Canberra is reeling under the weight of the task of restoring peace and prosperity to this increasingly irascible, lawless and disillusioned nation.

Malcolm Fraser is a tough talker. But he has not started to perform. Yet there is a possibility that the rage of the middle classes will finally force him to act — and throttle the growth of the flaccid, self-indulgent public service of Australia.

This will happen for one reason — the middle classes are coming to realise that the size of the bill for the Whitlam revolution is too high for them to pay.

They thought someone else would pay for all the lovely things they were promised. They thought the “rich” would pay; the “big companies” would pay; or the “multinational corporations” would pay. They never thought they would be the ones to foot the bill for the revolution. They thought they were going to be the beneficiaries.

In revolutionary terms, the greedy, salaried middle classes have lost.

Whitlam set out to make a revolution. He set out to enrich the salaried urban middle classes at the expense of the self-employed, the farmers and the corporations. The revolution was to be accomplished through a frantic expansion of government spending, notably on health and education. While the Whitlamite rhetoric gave some intimations of concern for the so-called underprivileged, the principal thrust of his policies was to benefit the well-off middle classes. There was an appeal to their cupidity, to their resentments and to their credibility.

To date, Malcolm Fraser has only tinkered with these policies. He has made some token moves to restrain the headlong growth of government spending, while no doubt waiting for the build up of fear, disillusionment, rage and frustration to give him more political clout for truly vigorous counter-revolutionary policies.

Meanwhile, every day brings more evidence of the extent of the disaster which has overwhelmed the nation.

The broad consequences of the policies of the past seven years are:

  1. A stagnation of output.
  2. A collapse of private investment in buildings, housing and new productive plant and equipment.
  3. An unprecedented toll of unemployment, particularly among the nation’s young people.
  4. Inflation unrivalled in the nation’s history — or indeed in the history of most of the advanced, civilised, industrial nations. In the 40 years between Federation and 1941 prices doubled; between 1941 and 1951 they doubled again because of the war; in the 20 years between 1951 and 1971 they doubled again, and in the catastrophic six years between 1971 and 1977 they doubled again.
  5. A tide of industrial unrest, strikes, bitterness and violence.
  6. A pitifully small result in terms of educational or health output from the fortune which has been lavished on these areas.
  7. A bloated public service, virtually immune from any attempt to reduce its size.
  8. A permanent, built-in level of government spending which dooms the nation’s taxpayers to unprecedented levels of taxation for years to come.
  9. A lawlessness and cynicism among the rich, the self-employed and the young.
  10. The certain knowledge that the welfare state is not a healing but a terribly divisive idea. It is an idea which in its expression encourages waste, subsidises sloth, rewards dishonesty, ignores lawlessness and diverts efforts to areas where political pressure provides the guideline.

The stagnation of output
There were five “good years” up to 1971-72 (when Billy McMahon was primarily responsible for national economic policy) and six “bad years” after 1971-72 when Whitlam and Fraser were primarily responsible. The table shows the movement in main economic aggregates.

Five Good Years and Six Bad Years
For Australia
Per Cent Increase — Constant Prices

——————————————— 1966-67 to 1971-72 —— 1971-72 to 1977-78
Gross Domestic Product ———————— 32% —————— 20%
Personal Consumption ————————— 28% —————— 24%
Government Consumption ——————— 22% —————— 42%
Private Fixed Capital Expenditure ——— 36% —————— -3%
Government Fixed Capital Expenditure — 17% —————— 12%

During the “five good years” annual increases in national output averaged nearly 6%. In the “six bad years” annual increases in national output have averaged little more than 3%. If total output had increased in the six bad years at the same rate as in the five good years gross domestic product in 1977-78 would have been some $17,000 million greater. This would have been enough to give every civilian employee (about 4.7 million of them) an additional amount of about $70 a week in his pay.

That is a brief indication of the cost to the Australian people of the loss of growth of output which has been such a feature of our years under the welfare state.

Not only has the growth of output dropped very severely, but the growth of personal living standards has also been sharply cut. In the five good years the average annual growth rate in personal consumption spending (in terms of constant prices) was more than 5%. In the six bad years, the growth was little more than 3%. In these latter years, the effect of ballooning unemployment has been to concentrate more of the gains in living standards on a narrower group in the community.

The building decline
Of very grim significance for the future wealth of our country has been the decline in the level of private fixed investment spending since Whitlam. In the five good years, this private investment spending — which is the source of all new building, including housing as well as new factories and plant and equipment — was growing at almost 6.5% a year. In the six bad years, this spending, the very heart and soul of future growth in our nation’s output and wealth, actually fell. This is eating out the heart of our nation’s future wealth and productivity.

The one boom area in the years since Whitlam has been government consumption spending. This is the current spending by governments of our nation’s output. It is not money being invested. It is not being put away for the future. It is not creating productive assets. It is simply being consumed, primarily on wages and on current purchases for the governments across the nation. In the five good years government consumption (in terms of constant prices) rose by 4% a year. In the six bad years, current spending by governments (in terms of constant prices) has risen by nearly 6.5% a year. This is an annual acceleration of more than 50% in the growth of government consumption of the nation’s goods and services.

Notably, the rate of growth of government spending, in terms of constant prices, has remained very vigorous under Fraser. The average annual growth rate of real Government final consumption spending over the whole six bad years was about 6.5%. The figures for the Fraser years were:
1975-76 7.5%
1976-77 5.4%
1977-78 5.0%

Again, in terms of the rate of growth of real gross domestic product, Fraser has certainly been no great shakes. The average annual growth rate of real GDP in the six bad years was little more than 3%. The figures for the Fraser years were:
1975-76 2.7%
1976-77 3.9%
1977-78 1.4%

The most that can be said for Fraser is that his policies towards government spending are moving at a glacial pace in the right direction. But he is no reformer; he is no counter-revolutionary. Like most politicians, he is a window-dresser.

Youth and the welfare state
Even without any other problems, the mere stagnation in the growth of output in recent years would have produced a general rise in unemployment. This is a direct reflection of the demoralisation of private business since Whitlam.

Another factor weighing heavily towards a rise in unemployment has been the extraordinary escalation in wages during these years of inflationary crisis. This problem particularly affects young people whose wages are now so close to adult rates.

Of the total of 425,000 unemployed at March this year, 145,000 were under 20, representing an unemployment rate of a stunning 18% for this age group. A further 91,000 (9.5% unemployed rate) were between the ages of 20 and 24. Over 24, the numbers of unemployed and the unemployment rate, dropped very sharply from 5.4% for the 25-34 age group down to 3.3% for the 35-44 and 45-54 year olds.

The young people are the ones taking the knock. The low unemployment rates among the age groups over 24 point to the primary reason for the calm with which unemployment is accepted by the voting public these days. The adult population is simply not significantly affected by unemployment and, more importantly, married men are affected hardly at all. The unemployment rate among all married males over 20 was only 2.6% in March this year. Even among the 20-24 age group, unemployment among married men at 5% was far below the average of 9.5% for that group. It would seem that young married men try a lot harder to get work, further pointing up the fact that young people generally seem pretty relaxed about being on the dole. Their urge to get work tends to increase quickly as they move up the 20-24 age bracket, when they are also, no doubt, under more parental pressure to pay their own way.

Young people have been priced out of the labor market. The continued escalation of wages ensures that young people will continue to bear the main brunt of unemployment. Adults are organised; they can use their union muscle with success; the fact that escalation in wages ensures more young people will stay unemployed does not weigh with the leaders of organised labour.

The adult population is making the young pay. But it does not follow that the young are suffering intense hardship as a result. The payoff is the dole. Young people make up the overwhelming proportion of those on the dole. They have been allowed to “drop out” are are paid consolation money for their pains.

The adult population has allowed a generation of youngsters to start off with the idea that the world will pay them a living. They have also been allowed to develop habits of dishonesty. There is no doubt that a very large number of young dole recipients already have a job of some kind. These mostly part-time jobs allow young dole recipients to attain net incomes not too far from what would have been achieved from full-time employment. On full-time employment a 20-year-old can take home about $140 after tax. Starting off with about $50 from the dole, it is not a long jump, through “cash only” part-time work, to a net income of more than $100. And this usually requires only two day’s work a week.

For adult employers, particularly family businesses and small businesses of all kinds where the tax man can be kept at bay, the existence of the dole payment allows employers to get young labour cheap, as he argues to his young employee “you have got your base dole money to rely on” can then cut the rate on the amount paid out in actual wages.

The dole payment is thus a form of compensation to young people so that the adult population can maintain a wages structure which is too high. This is no doubt a satisfactory answer for the selfish aims of the organised unionised adult population, but when the bill to be paid, through exorbitant taxes, continues to mount, the wage and salary earning adults are gradually, and quite clearly, beginning to wake up.

Dropping out — the welfare state game
Under the welfare state system now operating in Australia, one primary aim is to get on the Government payroll. The easiest thing to do is to drop straight on to a Government pension. In the past six years, about one million additional Australians have dropped out on to a Government pension.

“Dropping Out” On To
A Government Pension
Numbers of pensioners ‘000

————— Age&Invalid — Widows — Unempl. Benefits — Total
1967 ————— 764 ————— 73 ————— 21 —————— 858
1972 ————— 972 ————— 93 ————— 29 —————— 1094
1978 (end) — 1568 ————— 155 ————— 280 ————— 2003

The cost of this process has been enormous. In 1967, the cost of the above pensions was $549 million. By 1972 the bill had risen to $949 million. By 1978 the bill was more than $5000 million — five times the pre-Whitlam level.

An example will point up the cost to wage and salary earners of these huge payments. In 1966-67, total wages and salaries paid amounted to some $12,000 million. So the pensions bill of $549 million represented about 4.5 cents in the dollar of wages paid. By 1971-72, wages and salaries amounted to some $20,000 million and the pension bill still represented about 4.5 cents in the dollar. By 1978, however, wages and salaries amounted to some $51,000 million and the pension bill had come to take almost 10 cents in the dollar. It is not surprising when huge additional costs of government are added that the wage and salary-earning middle classes are becoming disillusioned.

There is another way of looking at this. In 1967, there were some 3.9 million wage and salary earners in civilian employment. They were paying for about 858,000 pensioners. In other words, each pensioner was supported by almost five workers. By 1972, the number of wage earners had risen to 4.5 million and they were supporting one million pensioners. Each pensioner was supported by about four and a half workers — not much different from the previous five years. But by 1978, the number of civilian wage and salary earners was only 4.8 million. Yet they were supporting more than two million pensioners. Each pensioner was being supported by less than two-and-a-half workers.

The burden on the working population has thus doubled since Whitlam got in. Dropping out on to a pension is not the only form of dropping out available — there is also the prospect of dropping out on to a government job.

“Dropping Out” On To
A Government Job
Number of civilian wage and
salary earners ‘000

—————— In Private Jobs — In Government Jobs — Total
June 1967 ——— 2915 ——————— 987 ——————— 3902
June 1972 ——— 3341 ——————— 1127 —————— 4468
March 1979 —— 3263 ——————— 1510 —————— 4473

Since Whitlam came to power there has actually been a decline in the number of people working in private industry. Over the same period there has been an increase of some 400,000 in the numbers working for the government. Most are in permanent jobs. They cannot be sacked. Their competence is certainly hardly ever an issue, their productivity is way below average, and they are immune from criticism.

The number of pensioners and government employees per employed wage and salary earner in private industry in 1967 was 0.6; in 1972 the number was 0.7; and in 1978 it was 1.1. In other words, the employed salary/wage earner in private industry is today having to give almost twice the share of his income to support pensioners and government employees as he did before Whitlam. This is represented by an horrendous rise in the tax burden on wage and salary earners.

What Whitlam never talked about — who pays?
Since Whitlam there has been a large increase in the tax paid per dollar of national income produced. The rate has gone up from less than 29 cents in the dollar in 1971-72 to more than 34 cents in 1977-78. Virtually the whole of this burden of increased taxation rate has fallen on the wage and salary earner forking out pay-as-you-earn taxation each week.

The overall rate of tax per PAYE earner has risen in the past six years from 14.4 cents in the dollar to 18.7 cents. By comparison, the overall rate of company tax paid has remained stationary at 14.5 cents in the dollar.

To put it another way, in 1971-72 PAYE tax instalments amounted to $2.9 billion. In 1977-78 PAYE instalments amounted to $9.6 billion. If the rate of tax paid by PAYE earners had been the same in 1977-78 as in 1971-72, they would have paid $2.2 billion less in tax.

It is the PAYE earner who is making the really big contribution to funding the welfare state. There are several reasons for this.

1. The PAYE earner cannot fiddle his tax. He is the ultimate mug in the current income tax system. His money is taken out of his pay packet each week. He gets few “fringe benefits”; he gets few or no superannuation fiddles if he is privately employed; he cannot deduct normal family expenses as “business expenses”. He pays top price.

Thus, in the 10 years to 1977-78 the total GDP as factor cost (a measure of national income) rose by 230%, while total PAYE taxation collections rose by 410% — nearly twice as fast. Between 1971-72 and 1977-78 the trend was just as marked — GDP up 140% and PAYE collections up 220%. The Taxation Commissioner and every time-serving public servant must lay awake at night and say a prayer for the PAYE mug.

2. Other taxpayers are not upping their tax payments by anything like the speed attained by the diligent PAYE wage and salary mug.

Companies in particular are far behind the rate of increase of PAYE payers. Between 1971-72 and 1978-79 company taxation payments rose by only 110% as against 220% for PAYE.

One reason for this is the inability of companies to earn profits in the socialist environment in which we now operate in Australia. Hence they cannot pay tax. There are some other explanations, notable among them the acquisitions by companies of skills in modifying taxation payments by diligent use of tax loopholes.

3. In the past couple of years another trend has become evident. Individuals who pay income tax by assessment (not by PAYE — and this category presumably includes most of the self-employed) have had marked success in reducing their tax payments. In the two years ended 1977-78, while PAYE collections continued their strong uptrend — rising 37% — income tax collections from individuals who pay on assessment rose by only 13%. This indicates the success of the “underground” individuals who inhabit the “cash only” part of our economic system.

The loss to revenue from tax avoidance and tax evasion has been widely discussed, and the proportion of national income going unreported in advanced Western economies has been put as high as 7-10%. While it is obviously very difficult to document, ordinary daily experience reveals the widespread occurrence of “cash only” transactions.

4. Overall, the proportion of income tax paid by PAYE earners has risen sharply, up from 52% in 1970-71 to 63% in 1977-78. If PAYE earners had paid in the 1977-78 the same proportion of all income tax collected as they did in 1970-71, their tax payments overall would have been reduced by $1.8 billion a year. Translated into weekly tax reductions for the 4.5 million civilian wage and salary earners, this would yield a feasible reduction in tax payable of some $8 per week for everyone.

So the welfare state is working out in this way: the supposed beneficiaries, the ordinary wage and salary-earning middle classes of Australia, are turning out to be the mugs who are paying for it all. Their tax payments are going up much faster than national income; their tax rate paid is going up much faster than that of companies or the self-employed; they are paying more than their fair share of the cost to support a huge ramshackle and uncontrollable government apparatus.

The struggle to avoid paying for the welfare state
Not surprisingly, the wage and salaried middles classes are coming to realise that the welfare state dream has turned out to be a big joke — on them. They have only one direction in which they can move in the short term to try to remedy their plight. They can strike.

In the five years before 1971, the average number of working days lost in Australia due to industrial disputes was little more than one million a year. In the six years since 1971, the average was more than three million. [As these were “Hawke years”, when R. J. Hawke dominated the industrial scene, one could be excused for asking whether Hawke’s pretensions to be The Great Peacemaker — a role assiduously cultivated by his public relations apparatus — have any foundation in fact. The Hawke years in industrial relations have been among the most violent and disruptive we have ever known. Like all politicians, Hawke is primarily concerned with appearance rather than substance.]

The existence of high rates of personal income tax has inflamed demands for higher wages. Outrageous demands for increases in nominal wages are put forward as the ordinary employees of corporations and governments realise what a big hole marginal tax rates put in successfully won increases in nominal money wages. Take home pay is now more important than gross earnings.

Apart from striking for higher wages — a largely futile procedure — the ordinary workers does not have any real alternative to taking the punishment handed out to him by the tax collector. Working as he does for a corporation or a government, this worker is stuck without any significant “lurks”. Having family responsibilities, he cannot improve his position by dropping out of the cash society altogether.

He has an addition problem; he tends to be more honest on average than the society in which he lives. He is thus easy pickings for the thugs who inhabit the various Taxation departments. He is not likely to know how little he actually has to tell the Taxation Department bullies when they get him in a corner. He is unlikely to get professional advice in filling in his return. He is unlikely to be awake to the possibilities available for reducing taxable income.

Like all police the world over, the taxation department uses fear as a prime weapon. Very few people realise how easy it is to tell tax inspectors to get out of their premises. Most are fearful of the reprisals threatened. I had the experience ofr being investigated by the tax department. For two years they had two officials investigating my affairs. The total cost of the exercise must have been of the order of $100,000. Yet they got nothing — not a cent.

In the course of their activities they, like other policemen, offered me a deal. “Tell us all you know,” they said, “and we will come to a settlement with you.” My lawyer asked them what would happen if we continued to tell them nothing (which is what happened). The clear intimation was that if we didn’t help, life could be made difficult for us. I have heard similar words from the mouths of a dozen police bully boys in Melbourne and Canberra. They never cease to make me feel disgusted.

Yet so many innocents fall into the trap. They do not realise that most people are convicted because they feel they have to tell the police. It is not necessary to tell the tax thugs so much as the time of day.

Horror of health and education waste
The frantic escalation of government spending in the past seven years is at the heart of inflation, the increases in tax burdens, the unrest and the disorder. Yet this explosion of spending has been concentrated on a very narrow area — primarily health and education, as well as handouts to pensions of all kinds (including the unemployed).

Since 1971-72, “real” spending by governments on health and education has risen enormously.

Had it not been for the fantastic rise in government spending on health and education over that period, many of our economic problems would have been greatly simplified. As is obvious from the table, the growth in government demands on national resources would have been drastically reduced. Our problems would have been vastly more manageable.

Government Final Consumption Expenditure
At 1974-75 prices $million

——————— 1971-72 — 1976-77 — % Increase
Education —— 1971 ——— 3167 ——— 61%
Health ———— 1267 ——— 2373 ——— 87%
All other ——— 4386 ——— 4827 ——— 10%
TOTAL ———— 7624 ——— 10376 ——— 36%

Instead, we have experienced a huge rise in the demands made by education and health, as part of a dream to give security to Australians from the cradle to the grave. It is already evident that very little has been gained by this wild episode.

In the field of health, it is now clear that the governments have had little knowledge of how to evaluate the enormous growth in their spending. It is now recognised that the spending of huge sums on hospital construction has been largely ill-conceived. The result is that Australia now has a preponderance of hospital beds, with occupancy rates below 70% on average.

Many hospitals will have to close in the years to come. Hospital construction will have to be dramatically curtailed. It is also evident that much of the expenditure on increased health care has simply gone to line the pockets of the greatly inflated army of doctors now practising in this country, as well as to establish work standards and income expectations among the hospital and medical staff which simply cannot be afforded.

The Federal Government has already begun to recognise these facts and expenditure on health capital works is to be curtailed. Unfortunately, a level of national expenditure on health has been achieved which is simply insupportable if the country is ever to begin again spending large additional sums needed to modernise productive industry.

In the six years ended 1976-77, the proportion of GDP spent on health increased from 2% to nearly 4%. The vast proportion of these increased outlays has yielded little evident improvement in the nation’s health. Not only can the level of health expenditure in relation to gross domestic product not be maintained, (without further endangering the nation’s economic strength, through penalising taxpayers and corporate efficiency alike), but it is already evident that the hospital and medical benefits schemes are at or approaching bankruptcy. This is because the fit and single are opting out of the schemes and because they two million-odd pensioners know they are going to be looked after without any effort on their part.

The same sort of disaster has occurred in education. Between 1971-72 and 1977-78, the proportion of GDP spent on education increased from 4% to nearly 6%. Yet there is little evidence of any but a derisory increase in output from the educational field. While real government spending on education rose by about 60% in the past seven years the number of school students increased by only 5%; the number of university students rose by little more than 20%; and the total school and university population combined rose about 10%.

In the greatly-expanded colleges of advanced education the number of students rose from 52,000 to about 150,000, but it is depressing to observe the high proportion of students in tertiary institutions taking virtually useless liberal arts, business studies and teacher training courses. In 1978, the proportion of students at colleges of advanced education taking these practically unusable courses was 67%. These courses are a catch-all for students who can’t think of anything better to do with their time at tertiary level.

In other words, a program of spending on health and education was embarked on without any strong policy direction. Goals were not firmly established. Results were not evaluated and in many cases in the health field information is lacking so they cannot be assessed.

A huge spending program was undertaken from which the results are meagre in the extreme. There is little evidence of any improvement in output or quality in either health or education institutions after such a massive commitment of money. It was an unprecedented disaster.

It was in line with the whole of our experience with the welfare state in the past decade.

Can we trust the politicians to save us?
I have already said we can’t. Politicians by nature are a fearful lot, and their greatest fear is for their jobs. Let me give a personal example.

In the 1958 federal elections, in conjunction with Cyril Wyndham (then Private Secretary to Dr Bert Evatt) and Horrie Brown (of the Australian National University), I wrote many of the Doc’s speeches. It is a fact that the Doc, then aspiring to be Prime Minister, had virtually no knowledge of economic affairs and wanted to know little or nothing about it. He said what we told him to say.

In the 1961 and 1963 federal elections, I wrote (in conjunction with the same team) many of Arthur Calwell’s major speeches. He was aspiring to be Prime Minister. Yet again, he said what he was told to say. In fact, Mr Rupert Henderson, then managing editor of John Fairfax Limited (and grand architect of the 1961 and 1963 ALP election campaigns), said: “If I told Arthur Calwell to stand on his head in the corner, he would, he would stand on his head in the corner.”

The Doc and Arthur wanted one thing — to be Prime Minister. The words which needed to be said to achieve that weighed little with them.

Again, when I was co-operating with Billy McMahon to down Jack McEwen during the ’60s, Billy showed distress after failing to stand up in Cabinet for a cause the Treasury believed in. Much of Billy’s dirty work was done for him, by people such as myself. We were happy to be able to play a part in bringing down the enemies of the Treasury’s policies which were, and are, the best available expression of policies for individual freedom and economic efficiency.

Yet when Gorton and Jack McEwen put the Commonwealth Police on to the job of putting me into jail during the late ’60s, little Billy was nowhere to be seen. I well remember Billy ringing me at my home in Canberra the day after Harold Holt drowned to tell me that Jack McEwen had stated he would not serve under Billy as Prime Minister because I was supposed to be controlling Billy’s every thought and action. Billy pleaded with me never to ring him again.

Politicians are, by nature and training, fearful, egotistical, sly. They have their important role to play. But in giving them, as we have done in recent times, such enormous power to manage our nation’s economic affairs, we are necessarily ensuring that the emphasis of all decisions will be towards the soft option — which is, of course, the inflationary option.