Cherry picking from world leaders in economic reform in 2007

The Financial Review asked me to write an op ed for them on prospects for reform in 2007 with an international flavour. (Actually they asked for international economic influences on Australia in 2007 and I sold them the idea of an op ed on reform. The result was published on on Tuesday 9th January in the Fin and is over the fold.

Cherry picking from world leaders in economic reform

We led the world in the ‘deregulatory’ phase of reform. But with so much achieved, diminishing marginal returns set in. Now we’re back in the pack relying on (yet another) mining boom.

Today no country is a clear leader in all aspects of economic reform. So let’s go cherry picking from successful policies as they emerge and are foreshadowed elsewhere.

Information and service delivery

The Blair Government sets the pace in education. Apart from a huge injection of funds (never a guarantee of results) it is publishing detailed information on school performance.

From 2002 rather than just publishing raw scores, ‘value added’ data has been published showing how much individual schools are improving (or impairing) their students’ results. To its credit the Howard Government is moving in a similar direction with national testing but, sadly, and in deference to education unions’ views, state governments still resist publishing the resulting data by school because it would make the worst performing schools and their communities feel bad as well it might!

Report cards on hospitals and doctors have become common in the United States but they’re produced by entrepreneurs with inadequate authority to conduct proper audits. So the benefits are unclear. No-one would accuse the Blair Government of unalloyed success in health, and its public ‘Star Rating’ of hospitals is not without its own problems. Some UK hospitals reduced reported delays by redesignating trolleys as beds on wheels! But such mishaps have created a strong constituency for rigorous information auditing, something that’s yet to discipline properly our own consensus driven annual report on government service provision.

Green Taxes

In 1997 the one year old Howard Government committed to tax reform and agreed to the Kyoto emissions targets though it subsequently refused to ratify them. Sadly Howard’s political courage on tax was expended on some unfinished business of the twentieth century, rather than setting us up for the twenty first.

Europe has since introduced carbon trading. But as with NSW’s own mini trading scheme huge improvements could have been effected by auctioning emission permits (rather than giving them away) to fund much deeper cuts in other taxes.

Another area of ‘green taxation’ that’s picking up momentum overseas is congestion charging. It’s commonsensical appeal spans the ideological divide and the decades from Lee Kwan Yew in Singapore in the 1970s to “Red Ken” Livingston in London this decade.

London’s congestion charge has been imitated elsewhere, but the debate is moving on to higher tolls at peak hour already in place in Singapore, Santiago and Toronto. Along with the Netherlands, the UK Government has supported integrated national road pricing though full implementation is a massive undertaking and will take years. Germany has led with comprehensive road pricing (with satellite tracking) for trucks.

Back home governments duck and weave on congestion which is expected to cost the Australian economy around $30 billion by 2015. We’ve somehow achieved the worst of all worlds: Tolls that are higher than necessary (to satisfy private financing hurdle rates), but which are unresponsive to peak congestion. Tolls that are imposed on new (often relatively uncongested) roads together with traffic diversion which exacerbates existing congestion.

Sydney cross-city tunnel anyone?

Tax and the competition for global capital

Meanwhile our debate on income taxation has tended to focus on aligning top personal and company tax rates when the most successful European countries Ireland, the Netherlands and the Nordics continue moving further from alignment, by cutting company tax rates much more aggressively than top personal tax rates. Canada has done the same, and Germany, whose economy is finally stirring, will follow suit cutting corporate tax from nearly 40% to 29% by 2008. We can have alignment or we can aggressively compete for global capital, but we can’t afford to do both.

Red tape busting

No country has cracked the increasingly important subject of busting red-tape, but the UK and the Netherlands are imposing binding constraints on escalating compliance burdens and seem to be taking them seriously. Our own recent national review of Red Tape was pretty sedate, although South Australia has committed to Dutch style red tape reduction targets and we’ll see how they go. (Declaration of interest: Lateral Economics may provide some consultancy services to this initiative).

And less red tape isn’t always less government it ‘s smarter government with a service ethic. Super-choice now imposes a maddening paper chase on Australian businesses each of which must make separate super payments to scores of different funds depending on their employees’ individual choices. We could have followed the Swedes and established super-choice infrastructure within the tax office like New Zealand will be doing this year. Businesses make one payment per employee to the tax office (just as they always have) which then sends each super component to the employee’s chosen fund.

Structured defaults

Finally, people save more if we just change what happens when they do nothing. In a world first, New Zealand will introduce ‘default super’ in 2007. Employees who do nothing will have an additional four per cent of their wage deducted from their pay and paid into super unless they tick a form opting out. Shouldn’t that cherry be picked by some enterprising government or opposition in a country with a yawning savings shortage?

Something tells me its time is coming. But so is Christmas. If we don’t get some interest in default super soon, I’ve got the perfect slogan for the next election either party may apply. “Now is the time for complacency”.

Thanks to Andrew Leigh and James Farrell for reading and commenting on an earlier draft.

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