Tough policy times ahead

Jack Waterford April 14, 2012

We live in straitened fiscal times. Apparently. One can tell this by retrenchment in, and of, the public service, sombre messages to premiers and chief ministers, gloomy pronouncements softening up the public for a harsh budget, claims by miners that they cannot afford to pay a single cent more in taxes, and wails of anguish from manufacturers, retailers, and other rent seekers, including their trade union spokesmen.

We are also told that ''working'' Australians are feeling crushed by the rising cost of living and increasing insecurity. On the official figures, however, prices are not moving much - certainly in aggregate - and unemployment is low and steady. Interest rates could be lower, but are low in historic terms. The economy is growing, even if, in that increasingly annoying phrase, we have a two-speed economy, one fuelled by high commodity prices forcing up the exchange rate and focused in Western Australia and Queensland, the other, in a more humdrum condition in Australia's south-east.

Australia's economic situation is generally far better than anywhere else in the world, but, what's even better is that there are some signs that parts of the world, including the United States, are slowly starting to pick themselves up from the floor after the global financial crisis. That ought to be good news for us and our trade.

If we did not seem to love living in a sense of fear and crisis, we might even think that we were doing fairly well. Certainly not think that the economy was lurching into crisis, with our jobs and our livelihoods under sustained attack from politicians, aliens and transnationals and simply unable to work to improve the social dividend, or, other than for job creation programs, the national infrastructure.

This sense of fear is in part promoted by the Coalition, for whom the sense that the public is being ground down and simply cannot take any more allows a certain opportunism. But it also suits, at least temporarily, the government as a way of batting off pleas for everyone's pet programs. Everyone knows, for example, that we (the nation) would like to move more quickly on disability reform, or extending dental care to those out of the private market, for homelessness, mental illness, indigenous programs and community services. We would particularly like to increase payments going to students and others engaged in training.

But, the softening-up process might have us understand, that now is not the time. We can plan such projects, perhaps commit ourselves to doing them in a few years, but, right now, we must cut back, not expand. This can be said with a straight face, even as politicians blithely commit themselves to defence acquisitions that simply do not fit in with our needs or situation, or allow, without critical analysis, the continuation of taxation expenditures such as net transfers of wealth to the more well-heeled superannuation savers.

The environment also permits the announcement of programs that spend little money, at least in effective budget terms - while leaving the winners of the next political term the poison pill of having to formally remove what had been promised.

It's within a context such as this that we should all welcome the establishment of yet another semi-independent think tank for public policy - this at the ANU in fulfilment of a promise made by former prime minister Kevin Rudd that he would set up something equivalent to the Kennedy School of Government in the US. The head of the school at the Crawford Centre is Ken Henry, presumably between various other gigs, including advising on the Asian century.

It was about six years ago - which is to say a completely different era and under a different government - that then Treasury secretary Ken Henry gave a talk to Treasury officers about how the department was travelling. He did not realise that his speech would be leaked and used to embarrass the government (and, in

punishment, his performance bonus), but, seen from six years away, it is easy to see that it was non-partisan - dealing with a problem of government rather than a problem of the government.

Henry did not have to tell Treasury officers that politicians were increasingly focused on the election to occur next year. Inevitably, politicians confronted by the risk of political mortality, tend to focus on grand schemes, quick fixes, and ways of appeasing sectional critics using large bags of government money.

''In a pre-election period, we need to be particularly vigilant in balancing our duty to be responsive to our ministers with the need to be non-partisan, non-political, in the advice that we provide, '' he said.

''Our capacity to ensure that our work is 'responsible', and not just 'responsive', will be put to the test. How successful we are will impact on our integrity as public servants and our long-term effectiveness.

'' Secondly, divisions will be under pressure to respond to the growing number of policy proposals leading up to the calling of an election and once the election is called. At this time, there is a greater than usual risk of the development of policy proposals that are, frankly, bad.

''More so than at other times, we need to be mindful of the high opportunity cost of proposed policy actions, to advocate sound and wellbeing-enhancing policy action - capacity-building measures, better functioning markets, less system complexity and greater fiscal discipline - and to educate others on the full implications of policy interventions in the current economic circumstances.

''Policy decisions - even relatively minor ones - can have a major impact on the wellbeing of the Australian people. Our principal role is to ensure that the advice going to government is well thought out and convincing. That is part of what it means to be a central policy agency.

''To be effective, to make the most of our opportunity, we need to exploit our capabilities [Chart 6: Capabilities]:

■ bring a whole of economy perspective to our day to day work;

■ test vested interest;

■ apply analytical rigour;

■ develop strategic approaches, not just the 'quick fix';

■ be sensitive to the policy environment of the day; and

■ understand how policy influences the wellbeing of Australians, individually and collectively.

''Many of the policy problems that we face today have a whole-of-government character. There is no room for silos between central, line and operational agencies; nor between levels of government.

''The government, our ministers and other agencies are under no compulsion to rely on our advice. We are competing for influence with other central agencies, line agencies and independent policy advisers, such as think-tanks, commentators and consultants. What gets us to the policy table is a reputation for deep analytical rigour and economy-wide thinking.''

Henry also had another tip. The employment figures suggested that the economy was at a state of ''full capacity realisation'', he said.

''As a rather crude, but nevertheless instructive generalisation, there is no policy intervention available to government, in these circumstances, that can generate higher national income without first expanding the nation's supply capacity. Policy actions that expand the nation's supply capacity target at least one of the 3Ps - population, participation or productivity.

''One of my messages to you today is that if you understand this, then you are a member of a rather small minority group. The political economy hasn't kept pace with the real economy.

''Consider, for example, recent commentary in the press which argues that the government should support a nuclear power sector because jobs would be created. Where will the nuclear scientists and technicians come from? Is it seriously being suggested that they will come from the dole queue or from Indigenous Community Development Employment Projects?

''The truth is that if present macroeconomic circumstances persist, unless all of the workers employed in the nuclear industry are immigrants who would not otherwise have been drawn to Australia, then every job 'created' by the nuclear industry will be a job 'destroyed' in some other industry. Ignoring transitional cost issues, there is nothing inherently bad about job destruction, of course; but the more important point is that there is nothing inherently 'good' about job creation either, unless it opens up an economic opportunity for someone who would otherwise not have a job or is associated with higher income than the job it replaces. And need I point out that if it belongs to the latter category, then it certainly doesn't need taxpayer support.

''The next time any of you get an opportunity to write a coordination comment on a Cabinet submission that proposes a taxpayer-funded handout for some stunning new investment proposition - and I predict that some of you won't have to wait very long for such an opportunity - I suggest you draw attention to the submission's failure to identify the businesses that will lose labour, and be forced to reduce output, if the proposal is agreed to.

'' I won't suggest that you go so far as to recommend that the sponsoring minister be required to write to the chief executives of each of those businesses explaining why it is in the national interest that their operations contract.

''The second implication of operating in a full-employment economy is that the community appetite for reform is considerably smaller. There is a growing view that the good times will roll on forever, especially given the strength of the fiscal position.

''Much of our recent macroeconomic and fiscal success is based on past reforms, assisted by the terms of trade. A significant proportion of the latter may be transitory. A steadily ageing population will also pose substantial challenges for the fiscal position and for our economic growth performance, as outlined in the IGR.

''The risk of complacency, and its economic consequences, is clear.

''This is where you come in. Our challenge is to develop policy advice that leads to government decisions that expand capacity and enhance flexibility. In the current economic environment, the pay-off for the wellbeing of Australians could be especially high.''

Henry would be the first to say that there are material differences between the state of a booming economy in (pre-GFC) 2006 and the situation now, but I doubt he would take back a word.

What's just as significant, however, is that he might also have been describing the charter of his new school.

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