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Rudd on Economy

We are in the midst of an election campaign where much concern is justifiably being expressed about the paucity of serious policy announcements by either major party - not to mention the paucity of most of those that have been announced. Perhaps the most important serious announcement has been by Abbott – if elected the Coalition will not increase the burden of taxation (that is, the proportion of tax to GDP) – but this has hardly been discussed.

Nor has much attention been given to the excellent Stan Kelly lecture given on 15 August by the former head of the Productivity Commission, Gary Banks. The occurrence of that during the election campaign is entirely coincidental. Even so it deserves much more attention because it identifies the need for major policy changes, both economic and political, to reverse the trend in recent years for government policies to become much more accommodative to special interest groups. Protective arrangements of various kinds now extend to a wide range of industries and these arrangements are reducing productivity and economic welfare generally. Just as importantly, it identifies a major problem with the political process now prevailing in Australia.

Banks first outlines some of the sources pressing for the  reduction in such policies from the 1960s and accords much deserved credit to former MP Bert Kelly (the son of Stan) for the almost lone role he played in the political system for many years in pointing out the economic damage being done by the high tariffs then imposed. My sole regret is that the important role played by the Treasury was overlooked, probably because Banks was unaware of it and the intense ongoing debate within the public service. When I joined in 1958 Treasury had another “Bert” (Bert Woodrow) who played a similar role to Bert Kelly but in combating the pressure from the department of Trade in support of “Black Jack” McEwen. Treasury’s Bert played an important role in the success of Treasury in securing Ministerial approval for a major reduction in quantitative restrictions on imports in 1959. That reduction, in turn, helped turn the intellectual debate against tariffs.

In his lecture Banks runs through policy problems that remain today or have developed anew:

• Assistance still provided under tariffs and much increased grants and budgetary assistance totalling $9.4 bn in 2011-12 (cf $6.8 bn in 2006-07);
• The more extensive justification of such assistance as being “innovative” when in reality it is largely used as a way of providing protective assistance;  
• The automotive industry not only receives direct assistance of over $1bn a year through tariffs and subsidies but is also indirectly assisted by government purchases of locally made cars (about 70 percent of such purchases). Yet local production now supplies only about 10 per cent of total market purchases and every job “saved” was estimated by the Productivity Commission a few years ago to cost the taxpayer around $300,000. Banks notes that for the most recent review of the industry the PC was bypassed;
• Increased assistance/protection from competition for coastal shipping, road transport and defence procurement. This is largely in response to union pressure to “protect” jobs.
• Increased resort to justification of government action/regulations because of alleged environmental benefits. Banks lists expenditure of $1.7 bn in 2011-12 on 200 programs designed to reduce carbon emissions. These include assistance for building wind turbines and use of solar panels. He notes that the PC has recommended the abolition of such assistance unless shown to yield benefits additional to those derived from pricing carbon emissions. (One might add here that, whether there are regulations requiring such pricing or obliging energy distributors to obtain 20 per cent of their power from renewable sources, they have no policy basis in circumstances where there is no enforceable international agreement).
• Importantly, Banks also asks why the pendulum in workplace regulation has “swung so far back, in some areas to pre-Keating days”, and expresses “particular surprise at the extent to which the unions had enhanced their influence and powers, despite having a fraction of the membership of his day”. He points to the upward trend in “industrial disputes and associated working days lost”; the anachronistic legislative freedoms for “unions to install their officers in workplaces for recruiting  purposes; the entrenching of penalty rates for weekend work in what has become a 24/7 economy and society; the right to ‘strike first, talk later’ (and on issues extraneous to wages and conditions); and limitations on an enterprises ability to employ external contractors or to engage in greenfields investments without union approval”.
• Other critical comments relating to workplace relations by Banks include that there appears no real change in either the industrial court from the old Conciliation and Arbitration Commission or in the so-called “modern” award system; that the minimum wage rate system is “likely to be a disincentive to employing many people”; that union representation in workplaces is “out of kilter with the changing nature of work and working relationships in the post-industrial age”; and that “few employees these days would see unions as more deserving of allegiance than their employers”.    
• In effect, with these and other comments Banks argues that the present regulatory arrangements applying to workplace relations are totally unsuited to a modern economy. From my personal perspective this is a very welcome analysis which I had unsuccessfully sought Banks to make when head of the PC. If the present PC can (if Abbott is elected) quickly produce a report that is consistent with Banks’s analysis, this would be a major step forward.

In addition to the foregoing listing of examples of the return towards a rent-seeking society, Banks considers the interest groups and media outlets, and the regressive changes in the political process, that have contributed to the changes in the recent political environment. He concludes that “the re-emergence of a rent-seeking society poses a bigger threat to the future living standards of Australia than the ageing of our population or the vicissitudes of world markets”.

In effect, Banks is saying that there need to be major changes in both economic and political arrangements. He is optimistic that the threat can be overcome if only because in the 1980s and 1990s we overcame the previous threat. Let us hope he is right.

Des Moore

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