Smaller government has failed, but let’s cut taxes anyway (SMH Oct 5, 2020)

Think about this: despite a rocketing budget deficit, Scott Morrison is planning to press on with, and even bring forward, highly expensive tax cuts for high income-earners at just the time we’re realising that the 40-year pursuit of Smaller Government has been a disastrous failure.

Wake-up No. 1: the tragic consequences of the decision to outsource hotel quarantine in Victoria have confirmed what academic economists have long told us, and many of us have experienced. Contracting out the provision of public services to private operators cuts costs at the expense of quality.

Wake-up No. 2: efforts to keep the lid on the growing cost of aged care have given us appalling treatment of the old plus high profits to for-profit providers and some not-for-profits seeking to cross-subsidise other activities.

A new report by Dr Stephen Duckett and Professor Hal Swerissen, of the Grattan Institute, summarises the aged care system’s ‘‘litany of failures’’, as revealed by the royal commission, as ‘‘unpalatable food, poor care, neglect, abuse and, most recently, the tragedies of the pandemic’’.

There was a time when aged care was provided by governments, particularly in Victoria and Western Australia. But as the population has aged, successive federal governments have sought to limit the role of government by having aged care provided first by religious and charitable organisations and then by for-profit businesses.

The report’s authors note how little we spend on aged care. Countries with well-functioning aged care – such as the Netherlands, Denmark, Sweden and Japan – spend between 3 and 5 per cent of gross domestic product, whereas we spend 1.2 per cent.

‘‘Rather than ensuring an appropriately regulated market, the government’s primary focus has been to constrain costs,’’ they say. When old people are assessed for at-home care or for residential care, the emphasis is less on their needs than on their eligibility for less-costly or more-costly support.

Partly because of the failure to set out clear standards for the quality of the care the community should be providing to our elderly – presumably, because keeping it vague helps limit costs – the system has become ‘‘provider-centric’’.

Over the past two decades, the provision of aged care has increasingly been regarded by government as a market. ‘‘Residential facilities got bigger, and for-profit providers flooded into the system. Regulation did not keep pace with the changed market conditions,’’ the authors say.

But, though you’d better believe the profit motive of for-profit providers is super real, anyone who’s done even high-school economics could tell that the agedcare ‘‘market’’ offers nothing like the countervailing forces that textbooks describe.

The royal commission’s interim report found ‘‘it is a myth that aged care is an effective consumerdriven market’’. A myth instigated and perpetuated by the Smaller Government brigade.

Duckett and Swerissen say that, ‘‘in practice, providers have much more information, control and influence than consumers. In residential care, a veil of secrecy makes it very difficult for consumers to make judgments about key quality variables such as staffing levels.’’

Rather than turning aged care into a well-functioning market, ‘‘the socalled reforms resulted in for-profit providers increasingly dominating the system. The number of for-profit providers has nearly tripled in the past four years, from 13 per cent in 2016 to 36 per cent in 2019’’.

Even the Land of the Free has instituted a five-star system for ranking residential institutions to better inform the aged and their families. We haven’t bothered. .

Residential aged care can be so offputting that it’s gone from being a lifestyle choice to a last resort.

But, consistent with the halfarsed pursuit of Smaller Government, the government has allowed a waiting list of about 100,000 people to build up. And, since the packages are delivered by private providers, amazing proportions of the cost can be eaten up by ‘‘administrative costs’’.

Duckett and Swerissen say that, while (much) more money is needed, this won’t be enough to fix the problem without not only better regulation but fundamental change in principles, governance and incentives. Back to tomorrow’s budget. The strongest motivation behind the Quixotic quest for Smaller Government is the desire of the better-off to pay lower taxes. Like Don Quixote, it has failed. Fixing it will cost billions. But blow that, let’s cut taxes regardless.

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Economics Editor, Sydney Morning Herald.

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