Talk to NSW Group, Sydney

On 14 June 2001


I want to try in this talk about Kennett and Bracks to bring out some issues that may be relevant to the NSW Opposition, which seems to be in much the same political position as the Victorian one. On 28 May the Herald Sun reported Premier Bracks as accusing the Liberal Party of being "one of the most obstructionist and one of the most unreconstructed (Oppositions) in the country" and of a "lurch to the right to try to get relevance, given that they have lost the center of Victorian politics". Although this assertion was a surprise to most objective observers, it does raise the fundamental question of whether the Liberal Party should accept the move towards the center by the Labor Party or whether it should more aggressively move the agenda forward.

The Bracks Government is sensitive because it is in a minority position that requires the support of three independents in the Lower House and does not have a majority in the Upper House. But for an inexperienced group it has done remarkably well in maintaining a stable political position since elected in September 1999.

The majority held by the two opposition parties in the Upper House has only been used to defeat two major Bills – those purporting to provide "fair" employment and safe heroin injecting rooms. However, the Opposition has caused the Government to significantly water-down the important Racial and Religious Tolerance bill that has now passed the Lower House and it has also indicated firm opposition to "reform" of the Upper House itself. The quietness of the Bracks Government after the defeat of the so-called Fair Employment Bill suggests that senior Ministers were not altogether sorry that the union-driven legislation failed. The relatively low substantive priority given to re-regulation of industrial relations is also suggested by the location of the relevant Minister, Monica Gould, in the Upper House and by her reputed weakness.

The Bracks Government has indeed done more than maintain stability. Latest opinion polls give it a two party preferred rating of 65:35, with Opposition Leader Denis Napthine having only 22% approval and a 53% disapproval. This consistently low rating produced a dubious immediate response from Denis. When a Victorian radio station heard that a NSW Shadow Minister had offered to undertake community work, its suggestion that it would be a good thing for a Victorian Shadow to do likewise led Napthine himself to offer a week’s work. Presumably the Opposition Leader hasn’t enough to do!

The Victorian Shadow Minister for Education made an even more remarkable response to the post-Budget strike threat by the head of the Education Union. After Premier Bracks had exploded in anger at the threat, the Shadow said in effect that he should have conceded some of the claims! The strike has now been called off and the Government does not appear to have made concessions to the union.

These kinds of response by the Victorian Liberals heighten my own concern that they have rather lost their way after Kennett. Indeed, the defeat of Kennett seems to have suggested to them that they should adopt a deliberately anti-arrogant posture by, for example, being seen to consult as much as possible and by responding in a friendly manner even when attacked aggressively.

Most importantly, they appear fearful of enunciating a pro-private sector philosophy and are avoiding support for privatization. The Opposition’s strategy (if it can be so-called) apparently also precludes any substantive defence of what happened during the Kennett era from 1992-93 to 1999-00 for fear that it may be labeled "economic rationalist" - or worse! One commentator has even suggested that the strategy is that, if Kennett did it, the current Liberals do the opposite!

Naturally, the Bracks team - with the help of Melbourne’s "Spencer Street Soviet" newspaper (The Age) - has been using the five-goal attitudinal start they have been given by denigrating the record of the Kennett Government at every opportunity. They have particularly emphasised the Kennett government’s alleged under-spending on basic services as this also provides a basis for "justifying" the very large 15 per cent increase (nominal) in current spending since assuming office.

The Government’s strategy has also been directed at distancing itself from the heavy borrowings undertaken by those Australian Mexicans of the 1980s, Jose` Cain and Juanita Kirner, which led to the extraordinary downgrading by Moody’s of Victoria’s credit rating for $A denominated debt. With Victoria’s AAA credit rating having been restored courtesy of the Kennett Government, Bracks and his senior Ministers are putting the same emphasis as Carr/Egan on maintaining that position.

In his 2001-02 budget speech Victorian Treasurer John Brumby even boasts on page 2 that net debt is estimated to decline from $4.9 billion to only $2.5 billion by June 2005. But when you get to the detailed tables on page 297 of the main budget document you find that the estimated net debt figure of $2.5 billion in 2005 is actually an increase from the current estimate of only $1.8 billion!

The Opposition is not being helped by the remarkably poor and partial analysis of State finances and services at the Spencer Street end of town. This is not as bad as it was in the 1980s, when The Age almost certainly unfairly deprived the Opposition of electoral victory in the 1988 election. However, a recent editorial that acknowledged that the Bracks Government inherited a "relatively thriving economy and enviable budgetary position" also claimed "on the debit side stood a depleted and demoralized public sector" (The Age 22 February). Fortunately, the more objective Herald Sun has been increasing its circulation at the expense of The Age, and now has over 865,000 more week-day readers.

However, the question is what should the Victorian Opposition do about all this? It faces a relatively conservative - or if you like centrist - Labor Government with a personable Premier and a media that, overall, is not likely to push for a major change in the agenda that would be helpful. The key question seems similar to the one faced by the Opposition here in NSW, that is, how does it differentiate itself when the Government is pursuing a budgetary and financial policy that would be hard to characterize as "irresponsible"?

One option of course is simply to wait and hope that the Government will make sufficient mistakes. But that seems a counsel of despair. My thesis is that, as the Opposition is unlikely to do much better under its (and the Government’s) present strategy, it needs to take a political risk or two by enunciating policies that would support a greater private sector role in providing government services and in investment and employment generally. If this were to be done in Victoria it would be important to challenge the perception that the Kennett Government ruthlessly pursued reductions in government services without paying adequate regard to the standard of services. The Opposition needs to distinguish between the role of Kennett the man and what the Kennett Government achieved.



Let me briefly provide some background to the Kennett era that is relevant to the Opposition both in Victoria and here in NSW.

First, for Australia as a whole the seven years of the Kennett era from 1992-93 to 1999-00 witnessed an astonishing 25 per cent increase in average living standards compared with the 10 per cent increase that would have occurred had growth rates of the 1980s and 1970s been repeated. But for Victoria itself the really significant thing to boast about is that it had the fastest growth in living standards of any State or Territory.

The margin was not large but it was in marked contrast with experience under the previous Labor Governments, when there was slower growth than the Australian average. And it set a standard that the Opposition could constantly remind the Bracks Government it should have to maintain.

It is significant that Victoria’s relatively rapid growth occurred despite the major structural changes flowing from tariff reductions and the decline in the Victorian government sector’s relative contribution to GSP from about 22 to 19 per cent, as shown in the accompanying table (Table 1).

Especially noteworthy was the growth in private sector investment, which much more than offset the small decline in the relative contribution of public capital spending. With Victoria’s privatizations the private sector contributed in the last year of the Kennett Government the highest proportion of total capital spending amongst the States – around 86 per cent. That is something for which the Opposition should be proud.

The role of public infrastructure projects is now relatively minor and, when State public sector investment contributes only 1.25-1.5 per cent of GSP, it is extraordinary that it receives so much attention. By contrast, private investment contributes closer to 20 per cent of GSP in both Victoria and NSW and it, not public investment, is the life-blood of the State’s income and employment levels. Moreover, on both efficiency and quality grounds, further privatizations are needed in the operation of government services and further encouragement needed to private investment. Indeed, the promotion of policies conducive to private investment should be a major plank in any Opposition platform.

What about the "bush" and its alleged neglect by the Kennett Government? While the rural sector in all States has complained vociferously about the services it receives, the Australian population living outside capital cities actually increased between 1995 and 2000 at a rate not much below the growth in capital cities. In both Victoria and NSW the pattern was similar - populations of most rural cities grew at rates close to the average and the declines were mostly in smaller rural towns as many moved to the larger centers. Real income of the Victorian agricultural sector increased by over 20 per cent over the seven years from 1992-93 and was the largest of any State in 1999-00. It is hard to construct a story of neglect out of this.


The marked improvement in the employment situation is another important feature of the Kennett era. Employment grew at a slightly lower rate than the States’ average but Victoria’s average unemployment rate in 1999-00 of 6.9 per cent recorded the largest proportionate fall for any State between 1992-93 and that year. Particularly as this improvement occurred despite the significant reductions in public sector employment and the sluggish growth in employment in the less-protected manufacturing industry, it suggests an economy that encouraged private investment and became able to adapt to structural change. The ceding to Canberra of most of the State’s regulatory power over employer-employee relations can hardly be said to have done any harm, and probably did some good.

Indeed, the Bracks Government failed to produce any substantive case in its attempt to re-regulate at the State level despite its argument that Victorian employees who are not under Federal awards have fallen "totally through the cracks of Federal regulation". In reality such employees were shown to be subject to minimum conditions under Federal regulation and research commissioned by the Government itself showed they earn an average minimum wage 7 per cent higher than for those under Federal awards.

Although this legislation was driven by the trade union movement and had no real economic or social justification, it was supported by institutions such as The Age and the churches even though it would not have fulfilled the claim of helping the "poor". The Opposition’s decision to defer consideration of the legislation in the Upper House, and to engage in extensive consultations directly with smaller businesses, provided it with a solid basis of support once the potential for adverse effects was realized amongst those businesses. The conference centering on the proposals held by the HR Nicholls Society also helped draw attention to the potential problems with the legislation.

Surprisingly little media attention was given to the successful and important strategy opposing the legislation, as also happened when the Carr Government’s attempts to turn contractors into employees were also successfully opposed. This suggests that there will on occasions be scope for Oppositions to appeal over the heads of the media.

A key point that all Liberal parties should be emphasizing is that the greater the regulation of employer/employee relations the greater the addition to business costs and risks and, hence, the less incentive businesses will have to add to employment - and the investment that creates employment. A policy of minimal regulation by the State Government should be one of the most important objectives for Victorian and other State Liberal parties.


Turning to the budgetary position, the Kennett Government was a generous benefactor in handing over a general government sector surplus of nearly $2 billion in 1999-00. But the generosity went much further than this. In Labor’s first budget – that is the one for the current financial year, 2000-01 – Bracks splurged on a very large (nominal) increase of about 10 per cent in current spending and is still estimating a surplus of over $1 billion (see Table 6 showing Cash Surpluses and Deficits from 1992-93 to 2004-05).

If the increase in current expenditure had been limited to a more reasonable 5 per cent in 2000-01, that in itself would have provided a spare billion or so for tax reductions. In short, in the 1999 election campaign it would have been possible from this source and from reducing the surplus to have offered electors a dividend from the Kennett Government period in the form of a cut in taxes of close to $2 billion or over 20 per cent - and starting in the year beginning July 1 2000.

The favourable budgetary outlook at the time of the September 1999 election campaign makes it difficult to understand why large tax cuts were not proposed then. It should be a primary objective of the Liberal Party to reduce taxes whenever it is financially responsible to do so and it is pleasing that the NSW Labor Treasurer made the elimination of the "bad tax" a feature of the recent NSW Budget. However, while NSW probably now has a lower tax severity than Victoria, it still a high tax State and the Opposition should actively propose a lower growth in current or operating spending on the ground that lower taxes should have priority.

The generosity of the Kennett Government has also allowed Premier Bracks to lower taxes by $350 million in the fourth year it is in Government. Although this amounts to a miniscule reduction of only about 4 per cent in 2004-05, it indicates that even the high spending Bracks Government is prepared to give tax reductions some attention.

I can only add that, in the detailed review of Victorian taxation which I undertook for the business sponsored group, Project Victoria, in 1996 I argued "a conservative tax reduction program would aim to cut taxes by about $1 billion by 1999-00". In the event that proved to be an under-statement ( Table 3 reveals where Victoria’s taxes could have been reduced to average severity in 1999-00). Moreover, with more restrained expenditure there should still be scope to reduce taxes further than Bracks has proposed.


When we turn to the level of Victorian services, the first question that arises is whether the Kennett Government’s reputation of "slashing" spending can be sustained. The truth is that, while an initial reduction was effected in total current spending, between 1992-93 and 1999-00 such spending actually increased by 17 per cent in real terms, or about 2 per cent per annum. Coincidentally, capital spending increased at the same rate.

Moreover, using Grants Commission estimates we now know that in 1999-00 Victoria was assessed as spending only about $674 million, or 3.6 per cent, less than needed to deliver services at the average level for the States. By contrast, when the Kennett Government took office in 1992-93 Victoria was spending about $1.7 billion or 15.6 per cent more than required to achieve that level. (Of course, the average level should not be the aim: from a competitive viewpoint, a State should have the lowest cost services for any given quality).

Further, analyses made by Project Victoria at the time clearly show that the standard of services being provided in 1992-93 was below average and that the higher spending involved a wasteful use of resources. In reality, the financial strengthening undertaken by the Kennett Government brought Victorian spending back to around the average service level for the States and improved service quality.

In assessing the lower overall spending levels, many seem to have overlooked that a major contribution to lower spending came from the debt reductions as a result of the Kennett Government privatizations that, combined with the lower inflation, resulted in a massive decline in interest payments. In 1999-00 only a miniscule 2.5 per cent of public sector revenue went to pay interest compared with 22.5 per cent in 1992-93. This effectively added over $5.5 billion (gross) to the capacity for spending on services.


Perhaps the most interesting part of the Grants Commission analysis of Victorian spending in both 1998-99 and 1999-00 is that it reveals above average service levels in the politically controversial service sectors of education, health, and welfare, with police only marginally below average (see Table 2). Yet the Kennett Government made no use of this analysis in either the 1999 election campaign or the lead up to it. Nor has the current Opposition used it to defend either past spending levels or, more importantly, the ones implied by the Bracks Government budgets.

In the areas where the Kennett Government spending was below average – mainly services to industry, economic affairs and non-urban public transport - only the much reduced public transport subsidies would have had much of a direct impact on the general public.

And this reduction provided a very significant benefit to Victorian taxpayers, presumably reflecting the franchise arrangements initiated by the privatization moves in public transport. These arrangements will also provide further significant savings to taxpayers over the next ten years or so.

In the case of schools education policy, the Bracks Government has claimed that there was a running down of government school services as a result of the sacking of 8,000 teachers and the closing of almost 400 schools. It has been strongly supported in such claims by The Age (on 17/9/00, for example, it accused the Kennett Government of "seriously depleting resources of public schools") and the Opposition does not appear to have challenged the analysis. However:

1. Grants Commission assessments show that in the last year for which the Kennett Government had responsibility (1999-00) Victorian spending on government schools was 15 per cent higher than the States average (NSW spending was 6 per cent below). Indeed, in the last five years of the Kennett Government spending per head on government schools was higher than needed to meet the average level for the States. Against this background, it is difficult to see the need for operating expenditure in 2001-02 by DEET to be 11.6 per cent higher than it was in 1999-00 and there was absolutely no basis for the Education Union’s strike call.

2. While the number of government school teachers in 1999 was considerably lower than in 1993, the reduction was much less than 8,000 (it was 5,400 net). More importantly, this reduction did no more than bring the pupil teacher ratio in government schools to 14.9 in 1999 (see Table 4), which was the same as the States’ average and slightly lower than in NSW. (In 2000 the Victorian ratio dropped but only to 14.8). A reversion to the average Victorian ratio of 13 in 1992 would be difficult to justify given the clear evidence that the quality of government school education was lower then, the fairly wide agreement that other influences are more important determinants of standards than slightly smaller ratios and the fact that 14.4 is the lowest ratio amongst other States.

These considerations are relevant to the fact that, although the number of pupils per teacher is obviously the key determinant of class sizes, both the Victorian Government and the Education Union have given primary emphasis to the size of classes rather than pupil-teacher ratios. As the ABS does not publish class size figures for other States, this allows them to avoid inter-state comparisons and it allows comparisons to be made with class sizes during the Kennett Government period. The Education Department figures show that, between 1999 and 2001, primary school class sizes have fallen from 25.4 to 24.0 and secondary school class sizes (for English only) from 22.7 to 22.5 (see Table 5). By implication, the Victorian pupil-teacher ratio will have fallen further in 2001 and could be below the Australian average.

3. Although the number of government schools was reduced by 382 between 1992 and 1999, this again only brought the number of pupils per school (322) up to the same as the States average (and still smaller than NSW’s 347).

State Liberal Parties should not be spending too much time debating pupil teacher ratios or school sizes but should be arguing for much greater autonomy for government schools, leading to the eventual elimination of government from the responsibility for delivering schools education, as distinct from its funding. There is a need to extend schools self-government well beyond what the Kennett Government did and to move down the path recently announced by UK Prime Minister Blair. He is even allowing some contracting out of the operation of government schools. It is rumoured that Blair’s Education Minister studied the Kennett Government’s education policies.

Individual schools need maximum freedom to make their own decisions, particularly over staffing and curricula. A move to "independent" government schools would create a competitive market in their operation, as exists amongst private schools, which would be most likely to improve education quality.


There has not been time to cover all of the reforms undertaken by the Kennett Government or to explore some of the areas of criticism. Nor has there been time to deal with the Bracks Government policies in detail. But let me try to summarise some of the lessons that might be drawn for State Liberal Parties from the Kennett era:

1. Perhaps the most important political outcome of the Kennett Government’s success was that it pushed the Labor Party into or at least towards the center economically and to some extent politically. This is symbolized by Labor’s recognition of the importance of maintaining the AAA credit rating. Labor’s recent support for tax reductions in both NSW and Victoria is also significant.

2. This is a welcome improvement and can be counted a Liberal success. But it poses a major challenge for a Liberal Party that tends to allow the expression of a wider range of views and "philosophies". The split of the former Victorian Coalition highlights this problem. The major question for the future is whether the Liberal Party is going to sit in the center itself or establish a clearer differentiation from Labor by actively advocating a lesser role for government and a greater role for the private sector. As a political competition for the center may give Labor the advantage, there may be a need to adopt a more politically risky approach.

3. The predominantly left-wing bias of the media, and the failure of most journalists to understand what is and what is not "fair", constitutes an ongoing problem for a party whose natural inclination should be to make changes that provide the private sector with greater freedom of action and greater involvement in public services. Part of the response to this situation should be to make a greater effort to espouse the cause of private enterprise and to better explain the benefits. Such a response might include the development of a policy-oriented think-tank along American lines, as Project Victoria provided temporarily in the late 1980s and early 1990s. An important factor in the defeat of the Kennett Government in 1999 was that it failed adequately to explain the benefits of its economic reforms.

4. In one sense the poor performance of the Labor Government in the 1980s made it easy for the Liberal Party to win. Labor came close to creating an economic and financial crisis and this provided a platform for both the obvious and less obvious reforms. But, if Labor now remains in the center (as seems likely), it will be far harder to convince the electorate of the need for change. It is relevant that one left-wing Age journalist attributed Blair’s second success to him being "the only credible Tory".

5. The reductions in the role of government through privatizations and the introduction of more competitive practices within the government sector, as well as the direct action taken to improve the efficiency of government services, undoubtedly contributed to the marked improvement in the economic performance of the Victorian economy and provided a more appropriate role for government. That provides a lesson that needs to be publicized, not put on one side as the current Victorian Opposition seems inclined to do.

6. The associated reduction in the relative importance of public investment provides a rationale for more actively promoting the cause of private enterprise on the basis that it is the main driving source of income and employment. Particular emphasis should be given to policies that minimize the regulation by the State Government of employer-employee relations and of other business activity, as well of course to lower taxation policies. The Victorian Liberal Party had an important success in having Labor’s Fair Employment bill rejected with minimal fuss.

6.There is also scope to adopt a policy that involves a greater private sector role in the operation of government services such as education and health. It is significant that the Blair Government has recently moved in this direction on both these services. This is not simply to improve efficiency and reduce government spending and taxes. Further reducing the role of government in the operation of services would also improve quality provided there are adequate competitive pressures.

While Simon Jenkins of The Times claimed that the top issue in the UK election was "the (poor) state of public services" and that the fault "does not lie in money" but "is systemic", he could only offer the pathetic comment that "the reasons for poor performance are obscure". In reality, the Conservatives’ failure to make the poor state of public services the top issue, and to point out that competition will solve the problems, probably cost them the election – and will keep them in Opposition, just as it will in Victoria and NSW.


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