ROSS GITTINS. Government losing its resistance to rent-seeking businesses

I’m starting to suspect the federal government – of whatever colour – has lost its ability to control its own spending.

Even if this is, as yet, only partly true, governments are likely to have unending trouble returning the recurrent budget to balance and keeping it there, let alone getting it into surplus so as to pay down debt.

Those of us who worry about such things have given too little thought to the causes of the Abbott-Turnbull government’s abject failure to achieve its oft-stated goal of repairing the budget solely by cutting government spending.

It’s common to blame this on political failure and obstacles. There’s truth in most of those excuses, but they miss the point. Spending restraint will never be easy politically, governments rarely have the number in the Senate and their opponents will always be opportunistic.

That’s why governments need to be a lot clearer about what they’re seeking to achieve on the spending side, and a lot more strategic in how they try to bring it about.

On ultimate objectives, the goal of literally smaller government – smaller than it is today – is a pipedream. Government spending is almost certain to rise over time – don’t you read Treasury’s intergenerational reports? – meaning taxes will have to rise over time.

But there are obvious limits to voters’ appetite for higher taxes, which is why governments need to be able to control the rate at which their spending is growing, and do it not by cost-shifting to other governments or service recipients – as was the approach in the failed 2014 budget – but by ensuring ever-improving value for money through greater efficiency and effectiveness.

Unless governments lose their obsession with welfare spending (most of which goes to the aged) and come to terms with the other two really big items of government spending, health and education – especially when you consolidate federal and state budgets – they won’t get far with controlling the rate of growth in their spending.

What too few people realise is how much of government spending goes not directly into the pockets of voting punters, but indirectly via businesses big and small: medical specialists, chemists, drug companies, private health funds, private schools, universities fixated by their ranking on global league tables, businesses chasing every subsidy they can get, not to mention international arms suppliers.

The budget, in other words, is positively crawling with vested interests lobbying to protect and increase their cut of taxpayers’ money.

A government that can’t control all this potential business rent-seeking – isn’t perpetually demanding better value for taxpayers; perpetually testing for effectiveness – is unlikely to have much success in limiting the growth in its spending.

Which brings me to my fear that government has already lost that ability.

A wrong turn taken early in the term of the Howard government – when the Finance department moved most responsibility for spending control to individual departments and got rid of most of its own experts on particular spending areas – plus many years of “efficiency dividends” (these days a euphemism for annual redundancy rounds) have hollowed out the public service.

The spending departments have lost much of their ability to advise on policy, while the “co-ordinating departments” – Treasury, Finance and Prime Minister’s – have lost much of their understanding of the specifics of major spending programs.

This matters not just because the departments have become increasingly dependent on outside consultants to tell them how to do their job – and to be the for-profit repositories of what was formerly government expertise – which could easily be more expensive than paying your own people.

The big four chartered accounting firms were paid $1 billion in consulting fees over the past three years, thus introducing a whole new stratum of potential rent-seeking.

More importantly, the longstanding practice of having specialised departments – one each for the farmers, miners, manufacturers, greenies etc – makes them hugely susceptible to being “captured” by the industry they’re supposed to be regulating in the public interest.

The departments soon realise their job is to keep the miners or whoever happy and not making trouble for the government.

The Health department, for instance, would see its primary task as dividing the taxpayers’ lolly between the doctors, the chemists, the drug companies and the health funds in a way that keeps political friction to a minimum.

How much incentive do you reckon this gives the spending departments to limit their spending, root out rent-seeking and lift effectiveness?

That’s why, by denuding the co-ordinating departments of people who know where the bodies are buried in department X, government has lost a key competency: the ability to control the growth in its own spending.

Ross Gittins is the Herald’s economics editor. Twitter: @1RossGittins

This article first appeared in the Sydney Morning Herald on 28 August,2017

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6 Responses to ROSS GITTINS. Government losing its resistance to rent-seeking businesses

  1. Jaquix says:

    Love your last para Ross. They’ve unleashed this on themselves. They’re not a hard working cohesive government, and basically they’re just flailing around making fools of themselves these days. So much needing to be done, and they’re not interested in doing it.

  2. DaveW says:

    Thank you for focusing on this obsession by Australian Governments who attempt to claim savings by shifting jobs, accountability & responsibility to for profit private contractors.

    All to often I fear, it facilitates rent seeking by mates or party supporters. I think these actions would keep a Federal ICAC busy for decades. I have serious doubts about some of the biggest corporate welfare policy decisions over the years which see an ever increasing flow of billions of dollars to sectors advantaging personal friends & the biggest donors to individual politicians & the parties who sponsored the legislation. Private Health Fund Rebate & Ethanol subsidies spring immediately to mind

    The current de-humanising of the Dept of Human Services is a classic case of not wanting to hear advice from our public service, when the ‘brilliant’ political ideas of political staffers, paid from the public purse are far more palatable to shallow, responsibility dodging, ministers.

    One thing any business manager knows is, poorly researched & defined IT projects are always a black hole. Even on well defined smaller projects, IT professionals have a habit in building perpetual propriety dependence from the very start. I’m sure we will look back in a decade & see the current upgrade still unfinished, still flawed, still frustrating, still billing & still frustrating all associated with it. Let us not forget, all this started with a treasurer’s quest to save pennies by getting rid of public servants for reasons I suspect were driven by other ideological drivers.

    The politics of the hip pocket nerve have caused so much damage to Australia over the last two decades in particular. One cannot keep undermining the tax base to buy votes at the cost of services, especially essential services & paying for it with borrowings.

    As a nation we need to decide what services we need & be prepared to pay the tax needed to pay for them. How sustainable that is depends on government supporting development of new technologies & sectors. The closure of the car industry in Australia was in my view premature, ideological, done for questionable motives. It should have been in parallel with employment growth in new technology & industries if for no other reason than ensuring tax collections were sustained. As a country we need to seize every opportunity to grow jobs & markets, not suppress transition.

    Ross, one of the biggest costs to our economy remains the cost of disgracefully inadequate infrastructure preventing any real decentralization of housing industry & employment. Everybody works for the banks, not the nation.

    The servicing of mortgages, costs & time of travel to work on congested transport networks is all the result of our lack of planning & infrastructure. Our urbanized society trapped in ghettos like Sydney, only serve to artificially inflated costs & only benefit the banks & rampant high rise development. All are effectively unofficial taxes on living. The current debate about high housing cost is just fluffing around the problem, not addressing the underlying cause.

    There has to be a better way to reduce debt, increase tax collections & providing services, than bashing pensioners & outsourcing government functions.

  3. Dog's breakfast says:

    Very true, in particular the money going to consultancies and particularly the big four is extreme, and with not a lot to show for it, which I can vouch for from personal experience.

    There is no end of low hanging fruit, just not the political will occasionally exacerbated by opportunist opposition to good policy.

    However bad you think it is, it’s far worse than that by a very long way.

  4. paul frijters says:

    Hi Ross,

    good piece, as usual, and I agree that it seems open-slather now.

    You say this started with John Howard. I understand from those who know those things much better than me and who whisper in my ear on these matters that the politicisation of the ministries in Canberra started with Paul Keating. That was the start of ministries as political cheer leaders rather than Whitehall departments with independent mandates and expertise.

    There’s a good chance some people reading this blog know this better, though some of those were so involved that they might want to remember things more positively than they were.

  5. Bolt says:

    “Government spending is almost certain to rise over time – meaning taxes will have to rise over time.”

    Wrong, there is no relationship between the amount of tax collected and the limit of government spending in its sovereign currency.

  6. Inez says:

    Ross is right on the mark, as usual.

    I’ve been working for government as a policy adviser for most of my career, and I have seen for myself how the policy expertise that used to be provided by public servants has increasingly been contracted out to companies like PWC, KPMG and Deloitte.

    At the same time, the public servants are being replaced with temporary contractors employed by labour hire companies.

    Not to mention the fact that more and more companies are utilising the services of professional lobbyists, who are also major political donors.

    There is good reason to be concerned that the policy process is being distorted away from the public interest and towards the interests of the corporate sector.

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