Some ideas for economic reform

Here is the ‘op ed’ of a presentation I made to the National Policy Conference of the Australian Fabians. Naturally the Fabians were extremely keen to have troppodillian representation and so invited me and Tony Harris to give papers.

Tony’s session – on accountability – was marvellous. Tony was very good and so was Stephen Mayne. I’ve asked if we could have an MP3 file of the event to post. I’ll see.

Anyway, this op ed is a bit of a ‘spray’. The ideas are set out in staccato dot points. Not exactly a lot of development. But I’d be interested in discussion on any of them.

Reimagining economic reform

Australia is peculiar the land where left-of-centre governments initiated and most vigorously pursued economic reform.

Whitlam kicked things off cutting tariffs by a quarter. Having implored us to embrace market forces, Fraser lacked the economic bottle for further reform.

A world weary bureaucracy marveled at the new Hawke ALP Government’s response to the backlog of reform. A powerful reforming vision grew around deregulation, wage restraint, and helping those at the bottom of the heap.

Unlike in New Zealand, the UK and the US, big tax and welfare changes here offset much of the inequality that markets were increasingly producing. Might this have something to do with the economic and political success of Australian reform?

Roger Kerr, CEO of New Zealand’s Business Roundtable supported that country’s zealous ‘crash through or crash’ reforming but more recently endorsed Australia’s approach as “remarkably consistent, coherent and credible”.

But by the end of the ALP’s reign, reform had become formulaic deregulation. Even less imagination, and certainly less application has been shown by the current government.

Most economists agree on three remaining agendas.

1. Some industries still need some old fashioned deregulation post, pharmacies, newsagents, taxis. But just naming them demonstrates their relative unimportance.

2. We should address ‘poverty traps’ created as welfare is withdrawn and tax is paid as people move from welfare to work.

3. Health and education systems need reform. But though greater choice and competition between providers can help, it could do more harm than good if pursued too mindlessly. And it’s just one part of a large policy jig-saw which includes better accountability structures, and management for results.

These are all worthy enterprises but with returns now diminishing, there’s plenty of low hanging fruit on the tree of economic reform. If only we have the imagination to see it and the courage sometimes we’ll need no more than a little curiosity and goodwill to pick it. Here are some ideas to whet your appetite.

  • How about improving employees’ knowledge of the quality of Australia’s workplaces as part of the IR agenda? We should measure and publish the job satisfaction and health and safety performance (workers compensation premiums) of all Australia’s larger workplaces so their competition for employees becomes competition to provide satisfying jobs.
  • We can apply the same principles widely wouldn’t you like to know what students and parents think of their schools and patients of their hospitals and mightn’t it help them improve? Publishing the investment performance of investment advisors would do far more good than most of the regulation we put them through.
  • Rationalising the management responsibilities of government has been sensible with privatisation and contracting out for instance but these policies have shifted risk away from governments which can often manage and bear it better than firms or individuals. We should begin redressing the balance by embracing the idea that governments should, like firms and families, borrow to build assets for the future.
  • Our system of civil law is a scandal available to the rich and those poor enough to access legal aid, but only otherwise to those willing to risk their life savings. Legal costs should be commensurate with the magnitude of disputes and this simple micro-economic principle should be reflected in all legal procedure. Either litigant to a dispute should be able to pre-emptively elect a low cost tribunal free from any threat of appeal, except upon their opponent bearing all resulting costs.
  • In a world of increasing complexity what happens by ‘default’ matters. So we should engineer socially beneficial defaults. To bolster Australians’ inadequate savings we should ensure that employees’ salary sacrifice super contributions slowly rise above the nine percent compulsory rate by default always subject to their right to opt out. Likewise the authorities already have enough information about Australians’ wage, interest and dividend earnings to relieve them of the burden of filling out their tax return though of course we should them lodge a return to pick up additional tax deductions to which they are entitled. They’ve implemented both of these ‘sensible default’ ideas in New Zealand. Yet we’re hardly talking about them.
  • In areas where simple deregulation is neither possible nor desirable like occupational safety and consumer protection we can build a less dysfunctional, more responsive approach. We must think of regulation less as the issuing of sovereign commands and more as the management of complex systems. Firms and individuals should have rights to challenge the way regulation has been designed, and rights to alternative means of complying with it.
  • Like other reforms none of these ideas are panaceas. But in their modest way they begin to take economics out of its current comfort zone. As well as helping us run ‘the economy’, these reforms would help us see economic reform as it was by its founder, Adam Smith, as a means of improving quality and security of our lives by improving the fairness and fitness for purpose of our social institutions.

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    2024 years ago

    That is a great list but I dont have time to read it again and see if reduction of the burden of compliance with silly or over-complicated regulations (like the tax laws) is on it.

    Something that is not up to the government is to dissipate the toxic “us vs them”, zero sum mentality that is the legacy of Marxism and militant trade unionism.

    Right on comrade!
    Way to go!
    Peace and Love

    John Humphreys
    2024 years ago

    A good discussion starter.

    On the deregulation front — how about professional licences?

    I think the poverty trap is the biggest political issue for today. But the area in most need of economic debate is education/health reform. Price signals in the PBS, fewer restrictions on supply in the education sector, greater diversity of schools, abolish university quotas.

    The alternative economic reform agenda to be resisted is the idea for more R&D subsidies (the new corporate welfare) based on new growth theory.

    derrida derider
    derrida derider
    2024 years ago

    But Rafe, to say a game is positive sum is not to say that all those playing will win; the distribution as well as the aggregate quantum of payoffs matters. In my view there is nothing wrong with we, as a nation, deciding to forgo income in order to pursue some other goals. It just oughtta be an *informed* decision.

    The experience of economic reform is that there will always be some losers, and often amongst people who in no wise deserve to lose. Real life Pareto improvements are very rare.

    On the poverty traps, it’s actually a lot harder to fix than a naive inspection would seem (which is exactly why they haven’t been fixed). There is an ironcast tradeoff between generosity, incentives and affordability for any payment scheme – you can’t improve one without compromising at least one of the others. Affordability, of course, is necessary to maintain incentives for the taxpayers funding the scheme (as no doubt rafe would be quick to point out). No-one could credibly describe the base rates of payment for our working age payments as generous (lets see you try and live the high life on $200 a week). So it’s incentives that have been compromised.

    People who speak, as The Autralian editorial page did some time ago, of increasing targeting while improving incentives are contradicting themselves.

    Nicholas Gruen
    2024 years ago

    Well yes and no DD.

    The fact is that the Government have had buckets of revenue which they’ve chosen to spray around pretty recklessly – and also on moving thresholds up but mainly at the top of the scale.

    Surely the higher priority is to reduce effective that are much higher further down the income scale.

    We should use some of Mike Keating’s ideas to impose some maximum level of effective tax rates across the board – or something resembling it.

    Still, I take your basic point, there are no easy answers on this stuff, and targetting and high(er) effective marginal tax rates are the two sides of the one coin. But we’ve had so much money flowing into the coffers and then back out again as giveaways we could really have done something to address this. And we have done so little. And though Howard is regarded as a master politician, I think had he done what I’m suggesting he’d get more not less electoral support.


    […] propositions here and I argued the case for copying other countries and simplifying tax returns here.