MICHAEL KEATING. The Future Outlook for Economic Reform

Aug 15, 2016


In a recent article in the Sydney Morning Herald, Ross Gittins pronounced that we are ‘staring at the end of the era of economic reform. It has ended because it is seen by many voters as no more than a cover for advancing the interests of the rich and powerful at their expense.’

Gittins then goes on to cite a lot of evidence that people are disaffected. Thus the size of the support for Trump in the US and Brexit in the UK, and to a lesser extent, the success of minor parties favouring more economic autarchy in Australia, all point to a threat to economic reforms aimed at deregulation and open markets. In addition, Gittins argues that the reform agenda has been captured by the supporters of small government bent on privatising those services that remain funded by government, often with what Gittins claims to be dubious results or worse.

But according to Gittins, ‘the reformers’ greatest failure has been [to] … ignore their reforms’ effect on fairness’. Indeed, ‘at a time when technology and globalisation are shifting the distribution of market income in favour of the top few per cent of earners they’re pushing “reforms” to make the tax system less redistributive’.

There is much that resonates in Gittins critique of the present reform agenda and why it is foundering. Nevertheless, I would like to offer a somewhat different perspective.

I start, however, with two key points of agreement. First, Gittins is undoubtedly correct in his conclusion that the huge protest vote we have been seeing in many advanced democracies represents a rejection of the liberal-market based reform agenda. Second, at least a major part of this rejection reflects how those reforms, rightly or wrongly, have been associated with a substantial swing towards more inequality in all our countries.

As Gittins acknowledges, that increase in inequality of market incomes is mainly a reflection of changes in technology and to a lesser extent of globalisation. Nevertheless, the “reforms” also promoted structural adjustment, and governments should have been more conscious of the need to accompany reform measures with structural adjustment assistance to those disadvantaged by the decisions.

In Australia’s case, the general concensus is that the reform era basically ran from the mid-1980s, starting with financial deregulation, to 2001 when the GST was introduced. Nothing of any significance has happened since by way of economic reform. But during that genuine reform era, the Hawke-Keating Governments focussed heavily on improvements to the social wage, and provided considerable adjustment assistance. For example, decisions by the Labor Government increased social outlays in the Commonwealth Budget by the 2.5 percentage points of GDP between 1982-83 and 1996-97. This big increase in social outlays improved the lowest quintile of households share of ‘final income’ by one percentage point – that was more than enough to counteract any shift to increased inequality in the distribution of market incomes[i]. Similarly, the Howard Government more or less maintained the distribution of final incomes with the compensation it provided when it introduced the GST.

In short, former Australian governments during that successful reform era understood that economic reform is possible in Australia, but it must be perceived by most of us to be fair. Unfortunately that was a lesson that the Abbott Government ignored when it embarked on its ill-fated attempt at Budget repair in 2014. Furthermore, while the most inequitable and unfair measures in that 2014 Budget were rejected by the Parliament, overall since 2001 the welfare system has become less generous and the tax-transfer system is less effective in redistributing incomes than it used to be.

The second reason why there is no appetite for economic reform at present in Australia is the paucity of the agenda. Essentially, the standard reform agenda being proposed by the business community and faithfully parroted by much of the commentariat focuses exclusively on what they perceive would be best for business.

Consequently the reforms that we are supposedly missing out on are largely limited to business demands for labour market reform, which is mostly a euphemism for lower wages, and lower taxation. But how these reforms would lift productivity or participation is never explained, probably because it can’t be.

For example, the key demands from business affecting wages have been to restrain minimum wages and to reduce penalty rates. These demands continue, despite the evidence that employment participation by unskilled labour is higher in Australia than in the US, although Australia has a much higher minimum wage than the US. Similarly, supposing penalty rates were lowered so that more cafes opened on a Sunday, the most likely outcome is that the increase in the number of cups of coffee sold would rise less than proportionately with the number of extra hours. In that case, productivity would actually have fallen, and workers would be worse off, but profits would be higher.

Equally the Government’s own modelling told us how little we can expect from businesses’ demand for a company tax cut – an almost imperceptible annual increase in GDP of 0.1 per cent. Frankly any responsible government would have saved the money for Budget repair, which would have been much more beneficial to the economy.

In sum, given the widespread perception of unfairness, with reform only benefitting the top few, and the paucity of the agenda, it is no wonder that the present reform agenda is dead. So it should be.

But it would be a terrible leap to then assume that no worthwhile reform agenda is possible. Indeed, readers of this blog will recall last year’s series Fairness, Opportunity and Security, some of which have been reposted here again recently. The whole point of this series was to outline genuine and worthwhile reform proposals that could be implemented by a government with foresight and courage.

Most importantly, this reform agenda would focus on the best ways to enlarge the national cake, building coalitions among all stakeholders, and ensuring that it would generally be seen to be fair.

[i] These figures are taken from, Keating, M., 2004, Who Rules? How government retains control of a privatised economy, Federation Press, Sydney.

Michael Keating AC is a former Secretary of the Department of Finance and Prime Minister & Cabinet.

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