Labor bluff in creating Ted Kennett

The Age Business

10th November 2006

Would Baillieu slash and burn? The inheritance is richer than Kennett's, writes Des Moore

The election campaign has started, with Labor suggesting an election of the Liberals would risk a return to policies of the Kennett Government involving "unwarranted" reductions in spending on government services and employees.

Does this mean that Labor is now retracting its heavy criticisms of Ted Baillieu's large promises of additional spending as unaffordable?

Does it mean Labor has correctly analysed what happened to Victoria under Kennett and its relevance to today?

First, during the Kennett era from 1992-93 to 1999-2000 Victoria had the fastest growth in living standards of any state or territory.

Under the previous Labor Governments, there was slower growth than the Australian average. And, despite Kennett's alleged neglect of the bush, real income of the Victorian agricultural sector was the largest of any State in 1999-00.

Second, with the privatizations, the growth in private sector investment much more than offset the small decline in the relative contribution of public capital spending.

Private investment's contribution to gross state product remains over 10 times greater than that of the public sector and provides the life-blood of the State's income and employment levels.

Third, despite the reduction in public sector employment, Victoria recorded the largest proportionate fall for any State in its average unemployment rate.

The ceding to Canberra of most of the State's regulatory power over employer-employee relations did no harm.

Fourth, while for very good reasons total current spending was reduced initially, over the seven year period such spending actually increased by 17 per cent in real terms. In fact, the major reduction in interest payments resulting from the debt reductions under the Kennett Government privatizations effectively allowed over $5.5 billion (gross) to be added to spending on services.

It is sometimes forgotten that in 1992- 93, nearly 23 per cent of public sector revenue went to service debt.

Indeed, by 1999-2000 Victorian spending was assessed by the Grants Commission only fractionally below the level needed to deliver services at the average for the States.

By contrast, when the Kennett Government took office in 1992-93, spending was about 16 per cent above average and analyses by Project Victoria clearly showed that involved much wasteful use of resources.

In reality, the measures taken by the Kennett Government to bring Victorian spending to around the average service level for the States improved service quality.

Finally, Grants Commission assessments of Victorian spending in 1998-99 and 1999-2000 revealed that above average service levels were then being delivered in each of the politically controversial service sectors of education, health, and welfare, with police only marginally below average. Spending on government schools, for example, was 15 per cent higher than the average for all states.

How does the Bracks Government measure up against this background?

Labor has undoubtedly benefited from the Kennett legacy of leaving the largest private sector of any State. Sensibly, it has not sought to increase the size of the public sector. This has helped offset the impetus from mining developments in Queensland and Western Australia and kept Victorian growth close to the States average.

Premier Bracks has also maintained a reasonably sound overall budgetary policy. One thing he seems to forget, however, is that the Kennett Government was a generous benefactor in handing over a general government sector surplus of nearly $2 billion in 1999-2000. With the strong growth in GST revenues, this has allowed Victoria to sustain a strong increase in spending on services without incurring the Kirner budget deficits that lost the AAA rating that Kennett subsequently regained.

This is not to say that there is no scope to reduce spending and taxation. Both are above the average level for the states and could be pruned in some areas, but Baillieu would not inherit the disastrous budget situation Kennett did. It is simply absurd to suggest that he might need to be a rampant cutter of services.

Where Baillieu seems to be missing out is in putting forward a more competitive framework designed to improve the quality of services. Despite the strong growth in spending under Labor, dissatisfaction with standards of government services, such as in education and hospitals, has increasingly caused users to move to private sector alternatives.

There is obviously scope to encourage a greater role for the private sector in many areas. That would take a helpful leaf out of the Kennett book.