MICHAEL KEATING. The role and responsibilities of government.

 

With the election of the new government, I have decided to repost several articles from our policy series that are still relevant.  One of these is by Michael Keating (below) on the role and responsibilities of government.  John Menadue

Different possible conceptions of the responsibilities and roles of government are an important backdrop to the policies that will be examined later in this series of articles. The purpose of the present article is to show that despite the ideological debate between the extremes on the Right and the Left of the political spectrum, in practice:

  • The responsibilities of governments have changed little in the last thirty years
  • The roles have changed, but changes in regulatory regimes and the ‘marketisation’ of some services has enabled governments to better fulfil their continuing responsibilities. 

Government responsibilities

At the end of World War II governments for the first time took responsibility for delivering full-employment and introduced a much more comprehensive system of social welfare. In addition, the government commitment to national development was continued and enhanced through an expanded migration program and the encouragement of new industries, such as automobile production.

This enhancement of government responsibilities was widely supported, including by all sides of politics, and for a long time there was no significant challenge to this broad scope of government responsibilities. Indeed probably the most divisive issue affecting government responsibilities in the last seventy years was State aid for non-government schools, and even that issue was resolved more than forty years ago.

In more recent years, however, the extent of government responsibilities has been questioned by some people, mostly on the Right of the political spectrum. The Treasurer Joe Hockey, for example, has mused about whether Australia should continue to support what he terms ‘an age of entitlement’.

This criticism is, however, essentially based on a narrow conception of government responsibilities promulgated by some neo-liberals. In their view, as far as possible individuals able should be free to pursue their own private interests and the State’s responsibilities should be limited to the provision of a narrow class of goods that the market cannot provide, such as defence and law and order.

The alternative mainstream view is that as citizens we are interdependent and have a mutual obligation to other members of our society. In this interdependent society there are some social goods and services that should be available to all.

The reality is that the vast majority of Australians seem to endorse this broader conception of our interdependent society. Accordingly, and notwithstanding criticism of the ‘age of entitlement’ and the scope of the welfare state, most Australians want to maintain present government responsibilities, and have even supported some further expansion in recent years.

For example, very recently there has been widespread agreement that assistance to disabled people and for child care should be extended. In addition, over time technological progress and increasing international economic integration (globalisation) have inevitably led to structural adjustment in some industries, but governments continue to be held responsible for national development and economic growth, even if they have felt that they needed to change the means. As a result government regulation and the ratio of government expenditure to GDP have increased under both the major political parties.

Indeed insofar as there is a difference between the two major parties, what stands out is that Labor has more tightly targeted welfare, while the Coalition has sometimes eased means testing and extended government subsidies to essentially private activities such as health insurance. So although this may well be an ‘age of entitlement’, that ‘entitlement’ seems to be deeply entrenched historically and is what we Australians continue to expect.

It would be prudent therefore for strategic policy development to be based on the premise that there will be no major reduction in government responsibilities. On the other hand, it can equally be expected that the public will continue to demand improvements in the performance of those responsibilities, and this may well lead to further changes in the role for governments. 

The changing role of governments

Since the economic reforms, which started in the mid-1980s, there has been a major change in the role of governments. These reforms are sometimes described as neo-liberalism or economic rationalism, probably because they have been distinguished by governments now making greater use of markets and/or market mechanisms to achieve their policy objectives.

Some people on the Left, however, are critical of this marketisation of service delivery and the associated change in regulations. They argue that these reforms have changed the role of government in a way that is inconsistent with the underlying purpose of government. Instead the critics on the Left argue that in a mutually interdependent society, the role of government is not only to ensure the provision of social goods and services. In addition, government should be the sole provider, so that services are common to all, freely or almost freely available, and used collectively.

Accordingly these critics from the Left are concerned about the changing role of government as other non-government and/or private groups have been allowed to provide social services on behalf of the government, user charging has been introduced, and clients are allowed to choose their service provider. These critics sometimes also question regulatory changes that provide less direct government control and rely more on creating incentives and disincentives.

The alternative view taken here is that while the means employed by government have changed, government responsibilities and their values, fundamental goals and objectives have not changed significantly. In short, this has meant a shift in the role of governments in favour of governments ‘steering not rowing’.

Furthermore, these reforms in favour of a greater role for markets were essentially driven by the need to respond to changes in our economic environment and changes in our society.

First, the experience of stagflation in the 1970s and beyond showed that macro-economic management could no longer guarantee full employment unless our markets became much more competitive and flexible. Hence the importance of tariff reductions, competition policy and the shift to enterprise bargaining to determine wages and employment conditions. And while much has been achieved, more still remains to be done before the full competition policy agenda is complete, especially in the area of infrastructure pricing.

Second, there have been major changes in the delivery of public services in response to changes in the character of our society. In particular, we have become a much better educated and more individualistic society. People are now more likely to question authority and to express their dissatisfaction with long-running programs which don’t seem to be making adequate progress towards achieving their objectives. Often the coordination of programs is at fault and people are sick of being shuffled from one government agency to another.

Another major concern is whether the traditional program approach of one size fits all continues to be appropriate, if it ever was. There is now an expectation that, within reason, services will be tailored to meet the needs of each specific individual, and that often the individual is the best judge of their own needs.

In effect, equity has been re-defined. Uniform provision of public services directly by the State, and based on the same treatment for all, is no longer always seen as equitable. Today the objective of many public services is to achieve equality of opportunities, or even more difficult, to achieve equality of outcomes. But in that case uniform service provision is likely to be insufficiently responsive to individual client needs to meet these new and different objectives. Instead individual clients need to be able to choose the combination of services that best meet their personal needs, and that usually also requires a choice of the service provider.

For these various reasons governments have been seeking to provide more client choice by making greater use of markets for the delivery of human services. It would be a mistake, however, to assume that government has lost its responsibility and power to ensure the provision of these services. Governments still provide much of the funding, and so governments can largely control access to the market by both clients and providers for these public services. Governments can also largely set the quality standards by a combination of regulation and their purchasing power, and frequently governments influence the pricing structures.

In short markets can be managed by governments to induce willing changes in behaviour, consistent with government objectives. This new means of retaining government control is a considerable achievement in an age where:

  • More critical citizens need to be persuaded and command and control regulation is much more difficult to sustain; and
  • These critical citizens have ready access to legal redress to contest government decisions where they disagree.

As will be discussed in subsequent articles in this series, much still remains to be done in improving government services. Better coordination of health services for people with chronic conditions and education and training and other support services for the most disadvantaged people is especially important. Better provision of services in both these areas may well involve appointing a budget holder who would coordinate the provision of multiple services for each client using a market-based approach to achieve best value for money.

Conclusion

The change in the role of governments in favour of making greater use of markets essentially represents a change in means, often in an attempt to enhance or restore the power of government to achieve their traditional responsibilities and objectives.

The attractiveness of this shift in favour of markets is that market-based instruments can be structured to create desirable incentives for individual actors to pursue the government’s policy objectives. Even globalisation, while it releases very powerful forces, can usually be managed now that the government has floated the exchange rate and the economy is sufficiently flexible to achieve the necessary real price adjustment to external shocks.

In effect governments can aim to construct and manage markets so as to create a synergy between the objectives of the individual, or individual interest groups, and the broader objectives of society. In that way the apparently independent activities of free agents become the instruments of government, and these instruments are politically attractive because they are the least coercive and most effective possible. To paraphrase Adam Smith, the government can guide the “invisible hand” of markets so as to ensure that individuals pursuing their own self interest are also acting in the public interest.

Mike Keating AC was formerly Secretary of Finance and Secretary. Prime Minister and Cabinet.

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One Response to MICHAEL KEATING. The role and responsibilities of government.

  1. Mael Colium says:

    There are fundamental flaws in this summary which seems to promote the view that market power will deliver benefits to citizenry due to the interdependency aspect prevalent in a market based society. I have never seen any data to support that perspective.
    Firstly the economic shock of the 70’s was created by the oil energy shocks by the cartel behaviour of predominately middle east producers. This, and the inadequate response of central banks to the supply side pressure, pushed inflation beyond the norm and governments were slow to respond. However, the breakdown of the Bretton Woods arrangements and the subsequent floats of global currencies also created economic adjustment which were countered by governments withdrawing from their public sector obligations rather than applying sound macroeconomic policies. Full employment was abandoned as a response, not as a means of achieving a market state. Thatcher and Reagan utilised the flawed monetarist theories promoted by Friedman et al to break apart the social contracts formed by previous governments and set about a rationalism based on flawed economics rather then sound long term social policy. Only now are we beginning to understand the flawed reality of monetarism. The flow of thinking is proving difficult to change as central banks floundered with LIRP, ZIRP and now NIRP while government concurrently exercise fiscal austerity in the pointless target of achieving balanced budgets. Basic macroeconomics has been abandoned. The reality of sovereign fiat opportunities to manage economic growth have been ignored while the economy has become mire financialised to the extent that cheap currency floats around the globe with various clipping creating a mask of activity when it is simply zero growth with maximum churn.
    The citizens are right to expect more of the political class who seem to be a homogenous group with firmly entrenched groupthink. Thank God for the crossbench. Surely Brexit has shown the elites to writing on the wall.

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