Good policy vs poor politics at Outlook 2018

There was no shortage of hard talk when politicians, economists, social policy experts, business leaders and public sector chiefs met at the Economic and Social Outlook conference in Melbourne; whether it was tax inequities, migration and low wages growth, US President Trump and China, or nuclear power and greening our cities.

But of all the issues, a recurring theme was the poor state of politics.

Over the two days, hosted by the Melbourne Institute and The Australian newspaper, policy questions circled back to concerns that government seems increasingly incapable of implementing much-needed policy reforms in the face of hyper-partisanship and a frustrated electorate.

“There was a lot of consensus at the conference around what we need to do and what we should be aspiring to do, but not much optimism that our political leadership or the political system was capable of executing it,” says University of Melbourne economist Professor Roger Wilkins.

“But there was a lot of sentiment that we just need to keep trying and speaking up for public policy that will make the country work better.”

POLICY AND DEMOCRACY

University of Melbourne economist and former economic advisor to the Hawke government, Ross Garnaut bluntly told the conference that “Australia is in trouble” as the “independent centre” gets drowned out by vested interests.

“We are now seeing policy discussion dominated more by vested interests,” he said. “We have seen a more partisan divide, we have seen less emphasis on analysis, and less respect for knowledge in the policy discussion.”

Former Treasurer in the Howard government, Peter Costello, said that governments no longer appeared to have a strong “economic narrative” around which to rally and push reform.

Former head of the department of Prime Minister and Cabinet during the Rudd and Gillard governments, Terry Moran, told the conference that driving more decision-making down to local communities should be part of the solution.

“We have to have a hard look at whether we can put more responsibility back into communities because that is where the social networks are, that is where people will look for support, and that is also where you want to go if you want cohesion in an increasingly multicultural society.”

TAXING TIMES

The frustration with policy-making extended into tax.

“There was a general sense of concern and pessimism that governments, whether Federal or State, aren’t taking appropriate care of the tax system as a whole,” says Professor Miranda Stewart, tax law and policy expert at the Melbourne Law School.

“We aren’t taxing the broad base in a consistently fair or efficient way, whether it’s the GST or personal income tax. Instead, governments are tending to take the politically easy route of making marginal changes like cutting a particular tax or tax rate, or making exemptions to taxes.”

For example, when it comes to taxing net wealth Professor Stewart says there are “a lot of holes” in the system with different types of savings or capital gains being taxed at different rates.

Professor Stewart said the tax system was also leaving some groups facing effectively much higher rates of tax when they move into work, after taking into account the loss of welfare benefits. These included women with children who lose family benefits and childcare payments as they start working.

“When women go to work as second earners, more than a couple of days a week, the family keeps less than 20 per cent of her salary net of costs, and sometimes is going backward,” she said.

Professor Stewart suggested that a simpler and more consistent tax system could be more “universal” and include a consistent tax on wealth. As an illustrative “thought experiment” she suggested that a simple tax on wage incomes at a flat 22 per cent, combined with a simple 1.5 per cent tax on wealth, would finance a minimum household income of A$20,000 for everyone.

Professor Stewart, along with researchers at the ANU’s Tax and Transfer Policy Institute, plan to release a working paper modelling the proposal in the near future.

WAGES CONUNDRUM

The conference shed important light on the possible reasons why real wages growth in Australia has stalled for so long.

A slow down in productivity, increased immigration and weaker unions have all been put forward as possible reasons. But University of Melbourne’s Professor Mark Wooden says he was most persuaded by Australian National University economist Professor Bob Gregory suggesting that a key factor is the fall in Australia’s terms of trade after the end of the China-led mining boom in 2001. That meant a weaker Australian dollar pushing up the cost of imported goods and reducing real wages.

“Productivity growth around the world has slowed, and this partly explains the slower wages growth we’ve also seen internationally,” says Professor Wooden.

“But in Australia the slow down in wages has been generally worse than elsewhere, effectively zero in recent years. That could well be explained by the deterioration in the terms of trade.”

If that is the case, Professor Wooden says the recent improvements in our export markets should soon start showing up in real wages.

“Presumably a response in terms of higher real wages should be just around the corner, but may take some time to be reflected in wage agreements. We’ll have to wait and see.”

KNOWING WHAT WORK AND WHAT DOESN’T

Melbourne Institute director Professor Abigail Payne says a key message from the conference is the importance of data and analysis in both identifying policy problems, assessing solutions and evaluating them.

“It is one of the reason why we run the Economic and Social Outlook Conference,” Professor Payne says.

“Core to our mission is that we care about scientific inquiry and economic analysis so we can help inform and evaluate policy.”

“If we aren’t consciously evaluating, how do we know what we are getting right?”

Banner Image: James Rafferty