‘Social laboratory of the world’ or ‘reform sclerosis’ – the choice is ours


Compared with most countries, Australia’s democratic and social institutions have preserved and reflected an enviable degree of stability and wellbeing. In the democratic sphere, we invented the secret ballot, were one of the first countries in the world to extend the franchise to women, and we are one of the few nations to require that all citizens participate in elections. Once known as the ‘social laboratory of the world’, Australia was among the first to institute a minimum wage, unemployment benefits and a universal pension.

Thanks to Bill Leak

One hundred and twenty years ago Australia was ‘world’s best practice’, with our economy generating the highest GDP per capita of any country. And while wool, wheat and copper contributed much, even more our position as the ‘working man’s paradise’ came from our willingness to invest more in innovation, infrastructure and skills than any other country. We spent more per head on capital formation and education than any other country and had more patents per capita. And we were globally integrated and open to flows of goods, capital and people.

Today we are again globally integrated and open, and we are again liberalised and flexible. But we have yet to return to investing in ourselves on the scale of the Long Boom of that earlier era. So as the benefits of liberalisation begin to slow down, our future prospects are looking less rosy.

Modern Institutional Failings
We believe that there are four main causes of the failure of contemporary Australia to invest in the future: short-termism, divided responsibility, risk aversion, and a lack of trust in politicians. This week we explain short-termism and divided responsibility, and suggest some possible solutions. Next week we will visit risk aversion and a lack of trust in politicians.

Short-termism is a distortion towards more consumption and less savings and toward investment projects with short payback periods. It is found in Australia in both the private and public sectors. On the private sector side, examples include: the tendency for some superannuation funds to emphasise monthly or quarterly returns as the correct measure of performance; the requirement for private sector equity investors to receive a substantial equity premium over the long-term government bond rate; and the limited development of venture capital markets for high-tech start-ups from small to medium enterprise activity.

Worse still is the short-termism in the public sector. This is often blamed on our short federal terms. With just three years between elections, the stereotype of Australian political cycles is that the first year is spent recovering from the election, the second year is spent implementing policies, and the third year is spent preparing for the next election. But the problem goes beyond our overly short election cycles. Australia’s political culture is overly focused on the here-and-now. Policies with a long payoff time, such as R&D, early childhood interventions, preventative health care and infrastructure, remain under-funded.

The media as an institution also has a role to play here. Regrettably Australia has amongst the most concentrated newspaper ownership, most advertising dependent television and most parsimoniously funded public broadcasting amongst the OECD countries. This is not a suitable foundation for diverse and reflective views to contend. In addition, despite the fact that policy-making has become substantially more complex over recent decades, the policy expertise of parliamentary press gallery has not increased at the same rate.

Solutions to Encourage Long-Term Thinking
Focussing on the public sector issues of short-termism, one way forward is to move to reinforce the farsightedness of the 1980s. Australia did take a leadership position then in anticipating the need to break the ‘boom and bust’ cycle and to address the demographic ageing of the population. It did this through the introduction of ‘social wage’ policies which ‘snapped the inflation stick’ previously built into the wage system and turned this to looking forward by introducing compulsory superannuation for workers.

It would be a logical step to increase the superannuation contribution to 15% to improve retirement self-provision for an ageing population and to impose obligations on superannuation funds to invest in Australian infrastructure projects as a minimum 15% compulsory share of assets. Management of funds plus project delivery and operation would remain with the private sector but within a new planning and regulatory framework. In this latter respect a new National Development Commission would be needed and would overcome some of the divided responsibility issues that so bedevil this area. The self-imposed restriction on raising government debt would be removed for long-lived productive assets and a long-dated government bond market would be encouraged.

Within government itself the goal could be to increase the opportunities for reflection on national direction and avoid the exigencies of ‘one size fits all’ party-based elections.? One vehicle to increase deliberation is to increase the role of Parliamentary committees as vehicles of scrutiny. We support calls for the elevation of the Commonwealth Senate to serve directly as a house of policy formation, with well-resourced committees facilitating rigorous analysis.

Several major policy challenges also call for more long-term thinking. We should tackle the issue of reconciliation between Indigenous and non-Indigenous Australians, which has eluded political leaders for a generation. Australia should no longer be the only Commonwealth country without a treaty with its original inhabitants. Indigenous health is in a parlous state, with Aboriginal life expectancy today comparable to white life expectancy in 1901. Boosting the health of Indigenous people should be a national policy priority.

Australia should also work to improve the evidence base from which we build our economic and social policies. Cost-benefit analysis for all large public investment projects should be obligatory and made publicly available. Similarly, randomised policy trials, considered the gold standard in policy evaluation, are widespread in Canada and the United States, yet virtually non-existent in Australia. Like medical researchers, we should rigorously test social policies, discarding those that do not work, and moving on to new solutions. There is no contradiction between being optimistic about the ends, yet scientific and critical about the means.

Divided Responsibility
The Australian Constitution was written in the late-1800s, in a nation very different to the one we occupy today. Powered flight was in its infancy. Only a tiny elite attended university. Women were expected to quit their jobs upon getting married. Racism and ill-treatment of Indigenous Australians was widely accepted. Our founding fathers, ambitious as they were, could hardly foresee the Australia of 2005. Yet the federal-state balance of responsibilities entrenched in section 51 of the constitution has remained virtually unchanged for over a century.

The current situation of blame-shifting between Commonwealth and State/Territory jurisdictions which so irritates voters today in Australia is the outcome of the inconsistency between a late-nineteenth century constitution and early-twenty first century problems. Buck-passing has become a national sport for the political class. One only has to look at stalled progress on tax reform, schooling, universities, population policy and infrastructure to see the perverse incentives for existing politicians and the costs to the national interest and future generations.

Getting the Federal Balance Right
The division of responsibilities between the states and the Commonwealth is sorely in need of redress. The principle of subsidiarity is a simple basis for this, with each level of government raising the revenue required for its own functions. This means largely eliminating vertical fiscal imbalance and ending the buck-passing. A Federalism Commission would have an allocation for fiscal equalisation, and for dispute arbitration.

Tax reform to underpin this should recognise that Australia overtaxes incomes and undertaxes spending compared to other OECD economies. Our overall tax take is at the lower end of industrial economies as a share of GDP but, that said, is strongly biased toward income tax sourcing. This latter is the origin of our tax disincentive problems, not high overall taxation. One solution would be to raise the GST as the states’ tax to 15% with all exemptions eliminated, abolishing most other state taxes and, as Ross Garnaut has? proposed, set Commonwealth taxes at a flat 30 per cent for all corporate and personal income, including capital gains.

This approach has the virtue of simplicity, but it would also substantially raise the share of tax paid by low-income Australians. Given that many would not wish to do away with the progressivity inherent in the current taxation system, a preferable way to reduce some personal income tax rates would be through the introduction of an earned income tax credit, or negative income tax, for low-income earners. This would specifically address the problem of the high effective marginal tax rates which arise from our highly targeted welfare system, and encourage the movement from welfare into work. With concomitant rebalancing of the share of indirect and direct tax, some reduction in marginal rates on higher incomes would also be possible.

Essential to any long-term reform is agreement on responsibilities of state and federal government. We do not believe that Australia should abolish the states. The New Zealand experience of too much reform too fast serves as a warning about the undue concentration of power. Similarly, limited Commonwealth experience with service delivery would not auger well for effectiveness and efficiency either. Nor do we favour replacing states with regional governments. Despite the wishful thinking of some regionalists, the reality is that it is difficult to envisage any new regions of any significant population size. But there are many issues upon which the existing federal compact should be renegotiated ? and for this purpose the task is to reach beyond the status quo instincts of present incumbent politicians and seek a New Deal.

Lastly, in seeking to achieve the right state-federal balance, we need not be in thrall to the founding fathers. Nor would they have wanted us to be. Robert Garran, secretary to the 1897-98 constitutional convention, advocated periodic review of the constitution, preferably by elected conventions. Over a century later, we should heed Garran’s call. Constitutional conventions should be held every ten years, allowing Australia to fine-tune the state-federal-local balance to fit the evolving needs of our community.

Risk and Uncertainty
Liberalisation of social and economic relations in the last quarter of the twentieth century has exposed Australians to new risks and uncertainties in their personal and working lives.

For some, this is a long overdue liberation: women, gays, ethnic groups who previously felt oppressed and exploited can feel some greater empowerment. Others, however, have disliked change and have problems accommodating the options.

Thanks to Bill Leak at The Australian

The surge of support for the One Nation party was arguably a response to rapid change and a product of ‘reform fatigue’. Some writers speak of a deeper anomie with the ascendency of individualist and humanist values, and reflected, among other things, in the rapid growth of evangelical Christianity.

In the labour market, a growing incidence of self-employment, part-time and casual work is evident. Of eighteen developed economies with comparable data, Australia is ranked as follows: first on the proportion of temporary employment; second on the proportion of part-time employment; second on the proportion of part-time workers who would prefer full-time employment; fourth last on indices of employment protection legislation; and last on the median and mean duration of employment. Full-time working hours have risen and are the second longest in the OECD.

Again, for some this is liberating and a source of fulfillment, while for others it is another source of anxiety and stress. Certainly, getting the work/family/life balance right has been elusive – as reflected in indicators ranging from the incidence of depression through to the fertility rate. The new social science of ‘happiness studies’ is grappling with the claim that liberality and affluence have not led to unambiguous increases in happiness, along with deeper issues of what does produce happiness.

Social safety nets are in place but there is fear that these may be wound back severely as pressure on government budgets increases, including through demographic ageing. Australia has a more economical welfare state than in Europe due to its means-tested, flat rate systems of support, but growing numbers on disability support and single parent payments in Australia are a focus for debate here already and require new initiatives.

Solutions to Mitigate Risk and Uncertainty
In a more uncertain world there is the danger that a government already overloaded with demands for support will begin to retreat from providing security. Many European countries are now reducing the generosity of their welfare systems. In the United States, which saw the time limiting of welfare in the mid-1990s, further reductions in social insurance are already envisaged.

US economist Paul Krugman has denounced what he sees as the continued erosion of protection that government provides against personal misfortune, even as ordinary families face ever-growing economic insecurity.

In Australia, the notion of ‘mutual responsibility’ has strong resonance with taxpayers. Few things are more unpopular in Australia than unconditional aid in welfare (though it is less well understood by governments and lobbies that this applies as much to business welfare as it does to personal support).

One possible variation on passive welfare that promises a new way forward here for individuals and firms alike is the income-contingent loan. Invented in Australia as the Higher Education Contribution Scheme, income-contingent loans involve the government acting as banker – rather than its usual position as taxer, spender and regulator. But it does so only where individuals do not have access to normal credit markets, and where there is both a private and social benefit.

The notion of income contingent loans can spread readily beyond university funding to community development, assistance to elite athletes, innovation by small business start-ups to drought assistance and support for ex-prisoners.

Conditionality would apply, meaning support would be for productive investment that has a reasonable probability of pay-off, and repayment would be related to income or revenue (and interest) and it would be set to cover costs, so paying the taxpayer back. We propose that Australia establish a new Australian Development Fund to manage such schemes.

Australians do not feel well-disposed towards their politicians.

In part, politicians have contributed to this outcome. They have themselves abused the trust that Australians had in key institutions such as the civil service, military, judiciary and universities.

Ill-motivated sackings of senior public servants upon taking office, encouragement of irresponsible vendettas against judges, disciplining of senior police for speaking frankly, appointing political mates to sinecures, allocating funds by electoral "whiteboards" and self-indulgence in ‘culture wars’ are all contributing to cynicism in an increasingly educated electorate.

And the sins are at all levels of Government and across all parties.

With the party machines, change is needed too. The proportion of the population who are members of a political party has dropped from 3 per cent in the 1960s to around 1? per cent today – despite the occasional branch-stacking. As Liberal politician Chris Puplick once wrote, the risk is that the only ones left in our political parties are ‘the mad, the lonely and the ambitious’.

As parties fade into irrelevance, the business of candidate selection is increasingly being taken over by head offices and powerbrokers. The process of selecting members of parliament – and sometimes even members of the frontbench – is too important to be decided by party apparatchiks and factional warlords.

Another factor that erodes trust in politicians is question time. For ordinary voters, it is the main window into how politicians behave on the job – and many are appalled.

Solutions to Restore Trust in Politicians
A reasonable cause for distrust by Australian voters today is the limited say they have in choosing their parliamentary representatives. Two-thirds of Australians live in ‘safe’ seats – seats where the winner has a margin of 6 per cent or more. For these voters, the real choice is not between the Labor Party and the Coalition, but which individual will represent the dominant party at the poll.

Yet the task of preselecting party candidates is typically performed by party committees comprising representatives from the local area and administrators from the central party office. In most cases, this means that a few hundred people – invariably less than 1 per cent of the electorate – are involved in choosing the candidate.

Under the current system, candidates are too often preselected as a reward for loyal party service, rather than because they are the best person for the job. Today’s preselection system also discourages many talented individuals from underrepresented groups in our community – including women, Indigenous Australians and migrants – from seeking elected office.

In Imagining Australia: Ideas for Our Future, Macgregor Duncan, Andrew Leigh, David Madden and Peter Tynan propose making the process of choosing political candidates more democratic by adopting a system of open primary preselections, in which voters need only register as party supporters in order to vote in a preselection.

Such preselections, perhaps administered by the Australian Electoral Commission, would significantly invigorate the candidate preselection processes from the current system – in which new members of parliament are effectively chosen by unrepresentative factional cabals.

A more competitive and transparent process would raise the quality of candidates, as well as boosting public participation in the political process. While less than 1 per cent of Australians now vote in member-only preselections, open primary preselections in the US attract between 10 and 50 per cent of the electorate.

Another way in which trust in politicians could be improved is through a radical revamping of question time. Several useful procedural reforms have been canvassed in recent years: banning so-called "Dorothy Dixers", expanding the use of follow-up questions, and restricting the ability of Ministers to waffle when answering.

But the most important reform to question time does not require any alteration to the rules, merely a change in behaviour. By reducing the level of personal abuse, ceasing to shout interjections, and creating a sense of decorum in question time, Australian politicians could do much to win back the respect of their voters.

Australia faces two core challenges today. The first is to regain the confidence and the ingenuity that once placed us ahead of other nations in terms of our economic growth, our social policies and our democratic innovations. There is no country better poised for a new era of progress if new and farsighted public leadership can be forthcoming. But reformers must also be persuaders.

The second challenge therefore is to make a persuasive public case for continuing reform. To avoid slipping back into isolationism or sclerosis, Australia needs political leadership which can engage in a clear, honest discussion with the population about economic policy.

The challenge for Australian leaders is not merely to implement bold reforms for the sake of our future, but to bring national sentiment with them. This is the nation building agenda for the future.

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