T3 and the art of illusion

By Ross Gittins
August 20, 2005

THE economy is full of illusions — things that aren't what they appear to be. And one of the main roles of economics is to help you see through them.

This week's deal for privatising the remaining half of Telstra involved several illusions that need to be exposed.

Perhaps the most surprising thing is the way the public has sat silent while the Howard Government has been held to ransom by a few noisy National Party pollies.

Their votes in the Senate have been bought for the promise of $3.1 billion in funds towards improving telecommunication facilities in the bush at no extra cost to people in the bush.

What's that — a mere $3.1 billion? When you remember how much people resent paying tax, the absence of complaint from city people about that impost is remarkable.

I think there are several parts to the explanation. One is the sanctity of the country dweller. The Queensland National Party's key demand that people throughout the backblocks be given a quality of telecom service equal to that provided in the cities and at the same price seems to strike most city people as fair enough.

Perhaps that's our first illusion. The cost is picked up by some remote and impersonal source well able to afford it — the hugely profitable Telstra, say, or maybe the Government.

The notion that there are these inanimate objects that can absorb costs as though they were a black hole is a terribly attractive idea, but it's an illusion. In the end, costs can be borne only by humans.

In this case, the $3.1 billion cost of improving services to country telecom users will be paid predominantly by city taxpayers. So it's equivalent to a special new tax on city dwellers.

So why no indignation?

Mainly, I suspect, because this transfer to country people won't cost anything. The Government will have all this money once it's sold Telstra — about $30 billion — so it can give away a 10th of it without anyone being worse off. It's not as if you and I will have to pay higher taxes to cover it, is it?

Does that make sense to you? It shouldn't, because it's another illusion.

Remember opportunity cost? Every time you spend money on some purpose, it's not available to be spent on any other purpose. The next most desirable thing you could have done with the money is the price you're paying for the seemingly free lunch.

The remaining half of Telstra is the property of the Australian taxpayer. When the Government sells the last half, it gets a lot of money but it loses a valuable asset and the regular flow of dividend income the asset generates. So a high price will have been paid for the $30 billion-odd.

And any dollar of that $30 billion spent on one worthy cause can't be spent on another. It will come at the expense of non-country taxpayers, who'll either have less spent on causes closer to their hearts or will be paying more tax. So this week the Government decided to impose the equivalent of a new tax on city taxpayers. No one complained.

But, as the former senior econocrat Fred Argy has reminded us, sometimes the politicians use illusion as a weapon against their own kind. Government ministers Helen Coonan and Peter McGauran were trying to win the Nationals' support for the Telstra sale by warning that if there was no sale the Government would have less money to spend on country services.

Can you see why that's an illusion? Because it assumes governments can spend only the money they already have in their hands.

This would be true of an alkie who lived on a bench in the park, or someone who had no assets and no income.

But it's not true of you or me, much less the Federal Government. That is, the Government could borrow all it needed to spend on country services. Lending to governments is regarded as risk-free, and people are falling over themselves to do it.

Why are governments in a class of their own when it comes to borrowing? Because they have a power none of the rest of us possesses: if necessary, they can meet their debts by imposing extra tax on their citizens. They could avoid borrowing by simply using a new tax to pay for the country services — which, in their own disguised way, is just what Howard & Co have done.

But Mr Argy's objection is to the completely contrived notion that borrowing to cover the cost of capital works can't, or shouldn't, be done.

"Debt financing of new spending has broadly the same effect on the economy and on the Government's balance sheet (and hence its credit rating) as using the proceeds of public asset sales," he says.

"If it is sensible to invest more on regional infrastructure, then it should be done — irrespective of what happens to Telstra."
