Category: Economy

  • Tony Wood. The $50 b. submarine project.

    Jon Stanford’s papers on the submarine project make an important contribution and deserve widespread circulation particularly among our decision makers. The replacement submarine decision has profound implications for all Australians. Its intention is to provide a deterrent to “potential adversaries”, but also to offer to the young members of our defence force weapons at least comparable with those they might face in opposition. To achieve this it is proposed we spend more on this project than we have ever spent before on military equipment.

    The Stanford papers make a fair case that the present proposal will result in failure on all counts except the last one, expenditure. Exceeding predicted expenditure on military weapons appears to be one of our specialities. The project did not start well when a previous government arbitrarily determined that the nuclear option would not even be considered and the present government followed this view. Here was an example of bipartisan politics, but was it for better or worse? We will never know because the public who has to live with and pay for the decision has never heard the arguments put.

    The section on time line in Paper 2 should itself have excluded any thought of building the submarines in Australia. In the best case scenario, if the first is built in 2020 and the next 11 follow at yearly intervals and they are projected to last 30 years, the last will not phase out until 2061 and, in the worst case scenario, 2065. The world will be a much different place by 2065 and we will have long since discarded diesel submarines at enormous write down cost. All this for party politics and short term jobs in South Australia now. It would shorten the time line considerably to rent recent diesel submarines or better still nuclear submarines. Don’t laugh at the rental option. India has been renting nuclear submarines from Russia for some time now, as a prelude to building them itself. Maybe the US would rent us, for a few years, nuclear submarines surplus from the cold war, until we could reassess the world political situation. There is historical precedent. Historically our navy frequently used second hand Royal Navy vessels.

    My sympathy goes to the Government officials who are obliged to support the Government decision whatever it is. This can mean finding weasel words to justify the unbelievable. The Defence White Paper states that: “maintaining Australia’s technological edge and capability superiority over potential adversaries is an essential element of our strategic planning.” The claim is that because the diesel submarine is presently quieter than a nuclear submarine then it has, “capability superiority” in the region of the shallow waters of the south China Sea. Technological edge embraces more than avoiding detection. What about getting home safely? If or when our diesel submarine is detected off the China coast, the chances are that the crew will end up in a Chinese jail or worse. This is because upon detection it cannot move because, as Jon Stanford points out, it is too slow to escape and eventually it must come up for air. The parents of the crew members are not likely to thank our politicians when they discover the real risk to the crews and the irony is that the choice was not to save money, but to serve an ideology which cannot be supported by fact.

    The best solution would be to place a hold on this project for a year while all the options are re-examined in an impartial way . Are our submarines there to back diplomacy and if so how serious a threat would diesel submarines offer? If they are to defend our shoreline, how is that defence impacted by the slow transit speed and the high rate of “indiscretion” of the diesel submarine? To those who will argue we must have a home grown product for independence, how much independence do we have now with much of the sophisticated technology of our present submarines, such as the critical command systems, borrowed from the US nuclear submarines?

    Let’s turn our backs on those who want to rush in, the present politico- military situation in our region does not demand it.

    Tony Wood, nuclear engineer 30 years experience on reactor operation and safety for Aust Atomic Energy Comm and ANSTO and some time on Molten Salt Thorium Reactor in US.

     

     

  • Bill Carmichael. Overblown rhetoric about Free Trade Agreements.

    The goal of trade policy is not limited to increasing export opportunities. Nor is it just about improving trade balances. Rather trade policy is about taking opportunities to improve the economy’s productive base. When assessing a nation’s experience with bilateral trade agreements, this is the test that should be applied.

    In each bilateral agreement Australia has completed to date, projections of the potential gains for Australia, based on unimpeded access to all markets of the other country involved, were released prior to negotiations. These studies did not, and could not, project what was actually achieved in the ensuing negotiations. The quite modest outcomes for Australia from those negotiations meant the projected gains conveyed nothing about what was eventually achieved. Yet the projections were still quoted to support the agreements after they were signed, as though they reflected actual outcomes.

    This approach to accounting for the outcome of trade agreements has meant that Australia has missed opportunities for productivity gains. So how, given Australia’s recent experiences, can trade policy and negotiations be better conducted in future?

    Australia cannot change how it negotiated its agreements with the United States, Japan, South Korea and China. But policymakers can refine their approach to future negotiations. Australia’s trade policy should be guided by a model based on its conduct in the Uruguay Round of trade negotiations. The Uruguay Round confirmed that the domestic decisions needed to secure gains from unilateral liberalisation and those required to secure the full gains available from negotiations have converged.

    The negotiations in the Uruguay Round took place at a time when former prime ministers Bob Hawke and Paul Keating were reducing Australia’s barriers to trade unilaterally. Their productivity-enhancing reforms were subsequently offered and accepted in the Uruguay negotiations as Australia’s contribution to global trade reform. Consequently, Australia secured all the gains available from trade negotiations: the major gains in productivity from reducing the barriers protecting less competitive industries, as well as securing greater access to external markets.

    This was the kind of win–win outcome negotiators should seek from all trade agreements. It made a substantial contribution to the prosperity Australia has since enjoyed.

    The opportunity to improve economic performance in this way was missed in all three free trade agreements concluded in 2014. In those negotiations, conducted in secret, Australia’s agenda was simply a market access wish list. The outcome for domestic efficiency was determined by the market access arrangements negotiators happened to agree on, rather than a central objective in deciding which domestic barriers to reduce. And success was measured by whether the outcomes improved access to external markets.

    The agreement with the United States demonstrates the consequences of this approach for domestic efficiency. Australia gained no worthwhile access for beef — an export in which it is world-competitive — for the next 18 years. But it did secure immediate and unrestricted access to the US market for Australian cars — one of the country’s least competitive industries. If countries approach negotiations in ways that avoid adjustment for protected domestic industries, there will be less scope to develop export industries based on real competitive strengths.

    There is no conflict between the need for secrecy during negotiations and a process that provides transparency and a negotiating agenda that secures the productivity gains available. Both requirements can be met by following the model established by Australia in the Uruguay Round.

    In future trade negotiations, the Productivity Commission — Australia’s independent policy review institution — could provide a basis for market-opening offers by conducting a public inquiry and reporting to government before negotiations get underway. This report would be released only when negotiations are complete.

    This process would preserve secrecy during negotiations while providing a basis for market-opening offers. Parliamentary and public scrutiny of the outcomes of negotiations could take place before ratification. This would reflect the transparency arrangements that paved the way for Australia’s reforms of the 1980s and 1990s.

    It may be time for Australia to move responsibility for trade policy away from the Department of Foreign Affairs and Trade (DFAT). In view of the policy impasse that now exists, Australia should consider instead placing ministerial responsibility for trade policy with the treasurer, who is responsible for the Productivity Commission and all other areas of microeconomic policy.

    There are no grounds for suggesting that DFAT is anything other than competent in dealing with issues intrinsic to foreign affairs. But trade policy is not one of those issues.

    Of course, most people have only a passing interest in debates about trade policy. The approach currently undertaken by Australian negotiators enjoys popular acceptance because the competing approach I have outlined is counter-intuitive. Responsibility for introducing and communicating the need for change rests squarely with the political leadership.

    A change of this kind will require preparedness by leadership to embrace — and explain to the public — what is at issue for the economy and community. It is time to allow the community to enter the trade policy debate and, in doing so, make the most of future agreements.

    Bill Carmichael is former chairman of the Industries Assistance Commission.  This article first appeared in the East Asia Forum on 16 April 2016.                             

    A longer version of this paper is available here.

  • Jon Stanford and Michael Keating. A more efficient submarine solution.

    This week the Melbourne Age, SMH and the Canberra Times carried the following article written by Jon Stanford and Michael Keating on the $50 b. submarine project. This article is based on a three part article written by Jon Stanford and posted in Pearls and irritations. See link to three articles below.  John Menadue

     

     

    The 2016 Defence white paper proposes a substantial increase in expenditure on major assets for the Australian Defence Force. The largest item, and the most costly acquisition ever for the ADF, is the $50 billion project for 12 future submarines.

    This project raises major concerns related to its cost, timelines and the possibility that Australia will be left with no effective submarine capability for a decade or more.

    First, at $4.2 billion for a conventional submarine (SSK), the cost is unacceptably high. The improved Soryu class SSKs now being built in Japan cost about $720 million each. The latest nuclear attack submarines (SSNs) of the Virginia class (US) and Astute class (Britain), much larger and more capable than the FSM, currently cost about $3.85 billion and less than $2 billion each respectively.

    Second, since the white paper  posits a clear strategic need for the capability and the navy’s existing submarines are obsolescent, the delay in acquiring the FSM until the early 2030s seems excessively risky. A submarine purchased on a military off-the-shelf (MOTS) basis could be delivered at least 10 years earlier.

    Third, the delay means that the obsolescent Collins-class submarines will need to be upgraded, with the details, including the cost, yet to be specified. One former captain of the Collins considers it is not feasible to upgrade the class to contemporary standards and that such a project would be “throwing good money after bad”. The risk of an unsuccessful outcome leading to a 10-year gap in effective submarine capability is very high.

    These three substantial problems arise because of Defence’s assumption that Australia has a unique requirement for submarine capability that can be met only by a new design. This is because no current design of SSK would have the range to undertake extended offensive patrols in the South China Sea, regarded by Defence as a key role for the FSM.

    Yet the risks involved in developing a unique platform for the ADF and integrating new leading-edge systems are well known from past experience. The costs of commissioning a unique design for the Collins-class submarines, as well as of sustaining them, have been substantial. Before we go down that high-risk path again, at a vastly higher cost, we need to ensure that a more efficient solution is not available.

    While the navy’s requirement for submarine capability is ambitious, it is by no means unique. Its requirement, for example, is similar to that of the British and French navies. The problem is that its ambitious capability requirement for force projection in contested waters far from home points to a need for nuclear submarines (SSNs), which both the British and French navies have operated for many decades.

    The white paper  states that the FSM will be technologically superior to other submarines in the region. This is not accurate. Other navies in the Asia-Pacific, including those of Russia, China and India, already deploy SSNs and are in the process of acquiring more, of advanced design. China will have up to nine SSNs by 2020 and many more by the early 2030s.

    Although quiet, a SSK can never rival a nuclear submarine in the vital areas of underwater speed and endurance. If an Australian SSK were detected and attacked by a hostile SSN or by surface ships, it would not be capable of the sustained speed required to offer some reasonable chance of escape.

    This is hardly news to the defence community. For example, the Australian Strategic Policy Institute (ASPI), in proposing the operational characteristics required by the FSM, suggested its analysis “pretty much says ‘SSN’, but that’s not going to happen”. Indeed, former defence minister David Johnston belled the cat by saying: “ideally we are seeking a comparable capability to a nuclear submarine with diesel-electric motors”.

    Unfortunately, such a submarine is a fantasy. If the government is determined to operate submarines in the South China Sea in support of the Americans, we should make it clear that Australia’s participation is contingent on the US allowing Australia to acquire nuclear submarines (as agreed for Canada in 1988, although never taken up).

    On the other hand, if Australia cannot or will not acquire nuclear submarines, then it should abandon the ambition of projecting offensive power against a major adversary in far-off contested waters. As ASPI has pointed out, there is no evidence that the US expects the ADF to undertake this task, which, in reality is a great power role.

    Abandoning this force projection mission makes the capability requirement much more straightforward. Other roles include sea denial in the approaches to Australia, together with intelligence gathering and surveillance in our region. Indeed, a smaller SSK, readily available off-the-shelf, is better suited than a large boat to these tasks. We may need six submarines, delivered in the early 2020s at a total acquisition cost of less than $6 billion. Combined with the savings from not upgrading Collins, the budget would be more than $45 billion better off than under the current $50 billion proposal.

    Of course, Australian industry participation is a good thing provided it’s competitive and does not compromise defence requirements. In supporting South Australian jobs, however, it makes no sense to let the car industry go and then replace it with a more highly protected industry with significantly less spillover value. If ASC could deliver six SSKs in the early 2020s on a fixed-price contract within 5 per cent or so of a MOTS price, then by all means go for it provided the risks are managed appropriately. But otherwise, let’s bank the $45 billion or so saved by an overseas acquisition, minimise the risks and let Adelaide be content with the $30 billion project to build nine frigates, as promised in the White Paper. ASC would also be tasked with sustaining the new submarines, at a through life value much higher than the acquisition cost.

    Technology, economics and Australia’s future submarine. Part 1 of 3.

    Technology, economics and Australia’s future submarine. Part 2 of 3.

    Technology, economics and Australia’s future submarine, Part 3 of 3.

    Jon Stanford and Michael Keating are directors of Insight Economics. Previously they worked together in the Prime Minister’s Department, where Dr Keating was Secretary. Longer articles on this topic first appeared on the Pearls and Irritations policy blog.

     

  • Luke Fraser. Grattan in the transport pantomime: ‘You’re getting colder … ‘

    Earlier this month the Grattan Institute made its first major report into transport, producing Roads to Riches: better transport spending[i].

    The 70-page report is replete with interesting-enough statistics, but it misses the mark on the major problems and where solutions might most reliably be found. Its core conclusions could perpetuate expensive mistakes (more of that in a moment).

    The Grattan is one of our brightest and most respected think-tanks; its CEO is talented and speaks truth to power. So if even Grattan can miss the mark in transport, it bodes ill indeed for the national debate.   Transport matters: at current spending levels, just two years of national road funds would pay for Australia’s entire $50 billion dollar submarine program. A 15% per cent efficiency gain in road spending would yield almost $4 billion to almost meet the Gonski education funding reform shortfalls.

    Grattan’s report points out transport spending reached astronomical proportions even before former PM Abbott’s ‘I want to be remembered as a road builder’ speech. Grattan is also right to conclude that too many such projects have been wastes of money (some appalling examples are cited) But the report then walks into a dead-end by looking for solutions in new and improved bureaucratic and parliamentary process -such as more project cost-benefit analysis – as the saviour.

    More rigorous project selection and stronger powers to compel politicians to be transparent about choices will, it is argued, create superior outcomes. Fine, but a particularly big failing of cost-benefit in transport is that when applied to travel savings, the methodology does not distinguish between leisure time savings and more assuredly economic benefits, like getting to work quicker. The former doesn’t deliver a healthier economy. Witness the recent Pacific Highway upgrades which cost billions: the vaunted travel time savings which underpin much of the project’s positive benefit-cost case appear made up in part of the fact that people can simply get to their central coast fishing spot from Western Sydney quicker than previously.

    Or was the Pacific all about safety dividends? If so, why is the Grafton leg – the site of the most horrific bus crash in Australian history – still not fully upgraded? This business case was scrutinised and approved by Infrastructure Australia. So much for paper.

    Will more transparency make it much better? The irrational political power of big and sexy transport projects should not be underestimated – even when the facts are in plain sight: last year Victoria’s government published the full East-West Link business case revealing that the multi-billion dollar road would return only 45 cents in the dollar, yet many Victorians still swear the project should have been built. More paperwork doesn’t prevent such waste – common sense and an experienced grasp of practical transport operations does. Transport agencies appear increasingly denuded of this talent: how else to explain a project like North-West Rail in Sydney, which appears to break a cardinal rule of rail building: whatever new piece you add, make certain it is fully interoperable with the existing network. Billions of dollars can depend on simple, informed choices at early stages in a project.

    Beyond this, what are the really big problems and solutions confronting transport? First and foremost, the lack of pricing reform. Unlike all the other economic utilities, transport continues to resist it. But without seeing prices, users can’t influence a more rational pattern of infrastructure provision and we must all instead place our faith in bureaucratic paperwork and process to deliver ‘value’. Where is the evidence that road pricing works? Look at every failed or under-performing commercial toll road project over the last 15 years[ii]. Australian motorists will soon tell you their view on which roads they don’t want – they do it by not using them and avoiding their tolls. Prices are already proving they can shape the network.

    Grattan argues transport assets are mostly planned and funded by governments because they represent a public good – a market failure. This view is overstated. The advent of cheap GPS tracking and the explosion of deft smartphone apps mean that major roads are now ‘excludable at point of use’: in theory, we can indeed give people a say in what roads they want at a given price, so that they don’t have to pay if they don’t want to use.

    If you spice this with the prospect of large fuel tax and registration rebates being paid back to motorists who enter commercial road arrangements on, for instance, major highways (so they aren’t paying twice for the road), debate might start to turn in favour of the hip pocket.

    The national rail network is equally a government asset with no market failure in sight. The United States reformed its hidebound government rail nearly 40 years ago. It has gone from strength to strength since that decision[iii].

    The Grattan mentions it will turn attention to pricing in a subsequent report. But pricing is the main game. Pricing will not work for every road in Australia. Nor does it need to. The policy priority should be to implement pricing reforms to staunch the biggest and most wasteful politicised road spends first. This means major highways and motorways, and this appears to be in prospect, given some smart and patient effort.

    The elephant in the room is the role of the Commonwealth – specifically, whether it’s useful, or even constitutionally legitimate. Grattan’s report rightly points out that the Commonwealth plays a significant role in transport. Since Whitlam, Canberra has assumed all planning and funding responsibility for the major highways and other ‘nationally-significant’ infrastructure, but it has left the building and maintenance (and most of the opprobrium) to the States, in a textbook case of fracture between control and accountability. We see the results regardless of which party is in power – Canberra lecturing States over what transport project must be built with ‘Federal’ money. This practice only dilutes accountability to voters and scares potential market investors away.

    Under current arrangements, transport is one of the biggest and least certain commitments of Australian tax revenue. But there is hope to do better. One first step would see the Prime Minister commit to placing transport squarely on the agendum for Federation reform. It has been left off it to date.

    A final matter: in Williams v Commonwealth and Williams v Commonwealth 2 (the National School Chaplaincy cases), Australia’s High Court held that Commonwealth payments to State schools were invalid, in that they were beyond the authority of the Commonwealth to make. This has potential ramifications for many of Canberra’s payments to States, including roads and possibly some other transport projects[iv].

    Williams therefore signals not only the possibility of reform but perhaps the need for it. Williams might also hint to students of Commonwealth governments past that when it has most displayed leadership, Canberra has not been about spending money and shaming and lecturing the States: at its best, it assists the sovereign members of the Australian Federation to reform into something better.

    Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. Prior to this he was a national freight industry chief executive. Most recently he oversaw a new approach to heavy vehicle pricing and fuel rebates for the South Australian transport minister – a reform project which is partnered by the Commonwealth government. The views expressed here are his own.

    [i] http://grattan.edu.au/report/roads-to-riches/

    [ii] Better still, consult the excellent chart in Dr Robert Bain’s analysis of same: http://www.robbain.com/Toll%20Roads.pdf

    [iii] https://publish.pearlsandirritations.com/blog/?p=4475

    [iv]http://www.claytonutz.com/publications/news/201406/20/after_the_school_chaplains_case_where_to_now_for_commonwealth_funded_programs.page

  • Evan Williams. The seven sacred cows of Australian politics

    We are indebted to the Hindu religion for that useful term sacred cow. As every schoolboy knows, Hindus venerate the cow and forbid its slaughter or abuse. Our political landscape abounds in sacred cows – institutions or practices that are considered beyond criticism, immune to scrutiny and supported by politicians of all parties. Some sacred cows are worth having, of course. Perhaps the most sacred is the Parliamentary Remuneration Tribunal – much loved by MPs when it delivers them well-deserved salary rises at regular intervals. Other sacred political cows are harder to account for. Here’s my list of the top seven.

    The family home – This venerable institution has been a protected species for generations. Never mind that families are leaving the family home in increasing numbers, and one’s “principal place of residence” is quite likely to be standing empty while its owner decides whether to sell it at a hefty profit in an overheated property market. Since 1985 the “family home” has been exempt from capital gains tax – a concession Treasury estimates will cost the budget around $50 billion in 2015-16. On top of that, people with multi-million-dollar homes at Point Piper or Toorak can still claim the old-age pension. According to Canberra University’s National Centre for Social and Economic Modelling, almost 90 percent of the current GST exemption benefits the top half of income-earners. And neither side of politics wants to know.

    Defence – When was the last time a politician questioned the defence budget or dared suggest possible savings? There has been much argument about whether the Navy’s fleet of 12 new submarines should be built in Australia, but where is the argument about the cost of the subs (around $4 billion a pop) and how many we actually need? The last time an Australian sub fired a torpedo in anger was 1942. Perhaps we could manage with just ten new subs, or eight, even half a dozen. The rule at budget time seems to be that once the military have submitted their shopping lists, no one can question them. Who can argue with the experts about national security? But we pay a big price. According to the Government’s defence white paper, designing and constructing the new subs will cost at least $50 billion up front, with ongoing maintenance on top of that – all part of hefty upgrade of the overall defence budget. You could build a lot of schools, hospitals and very fast trains with that sort of money.

    The car – Motorists love their cars and politicians love motorists. After all, if enough people drive cars governments are saved the expense of building railways and other decent public transport services. I’d better confess that I’m a regular motorist myself, having driven an ancient Honda for the past 22 years and contributed my fair share to traffic congestion, air pollution, global warming and the incidence of obesity. Car manufacturing plants in Australia may be closing down, but that hasn’t stopped us buying cars in record numbers – 1,155,408 new ones last year, up 3.8 percent on the year before – which means more government revenue from petrol taxes, registration fees and the rest. And since the car is a sacred cow, the correct political response is to build more roads for it – bigger, more expensive freeways like Mike Baird’s extravagant West-Connex now hacking its way through Sydney’s western suburbs. The result: more pollution, more congestion, more cars.

    Wealthy private schools – The fathers of Federation laid it down that education in Australia should be free, secular and compulsory. Those were the days! For millions of Australians today, education is expensive and religiously based, and if parents opt for home-schooling, it is no longer compulsory for kids to go to school. So-called “State aid” was a source of deep sectarian bitterness until Gough Whitlam entrenched the principle of needs-based education in the 1960s. Yet many of the wealthiest private schools continue to receive lavish public subsidies. Why have the most privileged schools become a sacred cow? Julia Gillard shares some of the blame for promising that under the Gonski funding reforms no school would see its funding cut. It is now the norm for schools charging parents $30,000 a year to receive generous public funding enabling them to build extra tennis courts, swimming pools with underwater cameras and auditoriums with orchestra pits and state-of-the-art performance facilities. Fairfax media reported recently that five of Sydney’s most expensive schools have received more than $92 million in state and federal funding since 2012. Do politicians object? Not that I’ve heard.

    Development – By development I mean anything built by developers, that revered new breed of public benefactors who give us vast shopping malls, giant office towers and high-raise apartment blocks, often in unsuitable locations, whether we want them or not. Developers also build infrastructure – roads, railways and the like – which used to be called public works and were funded from the public purse, unlike today, when major infrastructure is more likely to be built and run by private operators for their own profit. But then, developers give us growth and jobs and prosperity and other features of the good life, so who can complain? Yet somehow I find it strange that using my seniors’ Opal card I can travel half way around NSW and home again for $2.50, but if I take the privately-run rail service with five stops between the city and Mascot airport (also privately run), it will cost me $19 each way, Is anything wrong?

    Sport – Of course sport is a good thing, but I’m talking here about Big Sport – sponsored professional football, big payouts for exclusive TV coverage, naming rights for multi-million-dollar stadiums funded by the taxpayer. Politicians don’t dare criticise the elite sporting establishment, and no premier or prime minister would dream of turning down an invitation to a footy grand final. Now that Malcolm Turnbull has pronounced AFL the most exciting football code – a brave call – and since this is a most exciting tiome to be an Australia, Aussie Rules must be the game to follow. Bad luck for rugby and soccer fans. The NSW Government is spending $1.6 billion on new sporting stadiums when there’s no shortage of good ones already. Why not spend some of that money on school ovals and local council sports grounds to encourage more people to participate in healthy recreation?

    The flag – The flag may be a sacred symbol, but why should the present design be considered sacred? You don’t have to be a rabid republican to wish for an Australia flag with a more distinctive national character. The Canadians removed the Union Jack from their flag in 1969. New Zealanders stuck with their old flag in a recent referendum, killing any prospect of change in Australia for the foreseeable future, but surely we can do better. Politicians hate talking about the flag because it divides public opinion and upsets the RSL. The same goes for Anzac Day. Rather than celebrate a great military disaster, why not celebrate peace, the end of the Second World War, the most lethal and destructive cataclysm in recorded history? Why not celebrate VP Day, the end of the war with Japan? Paul Keating, in his usual combative style, had this to say: “The Liberals were always soft on the Pacific War. For them it was all about Gallipoli, while our Second World War battles in places closer to home came second. I went to Kokoda to make the point that Gallipoli looked back at Britain, whereas Kokoda looked to our independence.”

    No doubt there are other sacred cows, and a few old ones , like the Monarchy and the Church, that are regularly lampooned these days and are no longer as sacred as they were. So let me round off my list with the cow herself. I don’t mean that Daisy is a sacred creature. I’m talking about the industry to which she belongs – the beef cattle industry, earning an estimated $7.27 billion in export income every year. There are roughly 26 million head of cattle in Australia and politicians love them all. Never mind that many cattlemen treat their animals cruelly, trucking them long distances in confined spaces to be put to death in blood-drenched slaughterhouses, or exporting them live for even more brutal treatment overseas. People have long wondered whether animals feel suffering as we do. I think Shakespeare had the answer, as he often did: “The poor beetle that we tread upon in corporate sufferance feels a pang as great as when a giant dies.” I couldn’t have put it better myself.

    Evan Williams is a former newspaper editor and Walkley Award-winning journalist. He wrote speeches for Prime Minister Gough Whitlam and a succession of NSW premiers. He headed the NSW Government’s cultural sector from 1977 to 2001, and for 33 years wrote regular film reviews for The Australian. He is a Member of the Order of Australia.

     

     

     

     

     

     

  • Mark Harris. Obesity: it is time to tax sugar sweetened beverages?

    Obesity rates are increasing in the Australian population (Figure 1). There is a widening socioeconomic gap with low socioeconomic groups having the highest rates. There is some evidence that obesity rates in children may be levelling off but not in low socioeconomic status children. Overweight and obesity contributes significantly to the burden of disease (about 9% in Australia at present), loss of quality of life and premature mortality (death before completing expected life span) in Australia.

    Obesity is a complex problem requiring complex solutions. There is no magic bullet. Ultimately obesity occurs because of an imbalance in the amount of energy consumed and absorbed in the gut and the amount used up as part of metabolism as well as through physical activity. There are many complex factors influencing this imbalance across the lifecycle (Figure 2). These are in turn influenced by many factors in the social and economic environment. It is easy to think that it is all just too hard at one extreme or that it can be simply address by individual will power at the other extreme.

    At a population level, there are a number of strategies that can achieve improvements. These involve changes in the way we live. While on their own any one strategy is unlikely to solve the problem of obesity, collectively they may contribute to further slowing or reversing the rise in the prevalence of obesity in the Australian community. One such strategy is to reduce sugar sweetened beverages (SSB). In the UK government will apply a levy on SSBs from 2018 joining a number of other countries including France, Belgium, Norway and Sweden.

    There are three main reasons for focusing on on SSBs:

    1. SSBs contribute significantly to the energy intake of Australians.   The Australian Health Survey in 2011-12 found that the reported consumption of sweetened beverages increased with age across childhood, with 61% of teenagers aged 14-18 years reporting drinking it on the previous day. Overall teenagers consumed 6% of their energy from SSBs. Rates are higher in low SES people.
    2. SSBs have no nutritional value (they are so called “empty calories”). Furthermore they tend not to cause satiety (as does food). There is an association between levels of SSB consumption and weight gain among both adults and children. In Australia water is a plentiful, safe and cheap alternative.
    3. Modelling and some experience from other countries suggests that reducing SSBs would have a significant effect weight gain. For example removing SSB from the diet of teenagers would reduce their energy intake by about 10% thus contributing to reduced rates of overweight and obesity in this age group.

    How can a reducing in SSB consumption be achieved? It is not easy. SSB are ubiquitous in the Australian environment. Dispensing machines are located almost everywhere in addition to availability through supermarkets, cafes and restaurants. A number of strategies have been proposed and attempted:

    • Reduce or ban advertising especially for children. Advertising on SSB exceeds $50m per annum in Australia and children are currently not protected from this advertising.
    • Educate the population about the risks of SSB through media campaigns. There is evidence that consumption of SSB has decreased since 1995 especially in children. However this may also contribute to inequities as the change has been greatest among higher SES groups.
    • Remove SSB from school and health service canteens and dispensers. This may be effective for primary school but is less effective for high school especially as children can access SSB outside the school grounds.
    • Reduce the size of SSB containers (eg new smaller soft drink cans).
    • Increase tax on SSB. This has been successful in tobacco control. Modelling suggests that this would need to increase prices by 20% to be effective.

    What are the possible unintended consequences of these actions? It is possible that a tax may economically disadvantage the poor who have higher SSB consumption. This can be partly addressed by education about use of water and could be offset by reduced tax on healthy alternatives such as fresh fruit and vegetables. These efforts may displace consumption onto other energy dense drinks without added sugar (fruit juices, milk drinks). This may have already occurred with fruit juice but there is no evidence for other drinks.

    So what is the way forward?   A range of health groups have recommended social marketing campaigns, restrictions of children’s exposure through marketing and in schools and sporting facilities, reduced availability it workplaces, government institutions, health care facilities and public places and exploration of tax increases. All these are likely to be necessary to reduce SSB consumption sufficiently to reduce obesity rates.

    These measures are, of course, likely to meet resistance from industry groups. They argue that this is a matter for individual choice and not for government regulation. However the socioeconomic gradient in SSB consumption and its effects on weight and the burden of disease both for individuals and the whole community suggest that public health action is warranted.   With its high impact on children, the consequences of inaction are likely to be significant across generations.

     

     

    References

    Australian Bureau of Statistics: 4364.0.55.007 – Australian Health Survey: Nutrition First Results – Foods and Nutrients, 2011-12

    Malik VS, Schulze MB, Hu FB. Intake of sugar-sweetened beverages and weight gain: a systematic review. American Journal of Clinical Nutrition 2006 Aug;84(2):274-88

    Lustig RH, Schmidt LA, Brindis CD. The toxic truth about sugar. Nature 2012; 482: 27-29

    Re-think sugary drink. Consensus Statement on sugar-sweetened beverages. Cancer Council Australia, National Heart Foundation, Diabetes Australia, Nutrition Australia, YMCA, Australian Dental Association, Dental Health Services Victoria, Obesity Policy Coalition. http://www.rethinksugarydrink.org.au/downloads/Consensus_position_statement.pdf

    Figure 1: Overweight or obese, persons aged 18 and over, 1995, 2007–08 and 2011–12

    Harris1

    Notes:

    1. Age-standardised to the 2001 Australian population.
    2. Overweight and obesity classification based on measured height and weight in all 3 surveys.

     

    Source: AIHW 2012, ABS 2013.

     

    Figure 2: Some of the causal factors involved in weight gain.

    Harris2

     

    Professor Mark Harris is from the Centre for Primary Health Care and Equity, UNSW. 

     

     

  • Kerry Breen. What ails the national registration scheme for Australia’s 600,000 health professionals?

    In response to one element of a 2005 Productivity Commission report , the Council of Australian Governments (COAG) decided that the state and territory systems of registration of health professionals, some in existence for over 150 years, would be replaced by a single national scheme . The new scheme, based on a “national law” adopted by all jurisdictions, is run by the Australian Health Practitioners Regulation Authority (AHPRA) which commenced operation in July 2010. It now covers 14 health professions and 600,000 health professionals. By the end of 2016, AHPRA will have been subject to two federal parliamentary inquiries (see here and here), one state parliamentary inquiry and an independent inquiry commissioned by the COAG Health Council. Such a record must lead to the question as to what is wrong with the scheme.

    First, it is not truly a “national” scheme as NSW declined to join in, other than to participate in the national register. This has been euphemistically deemed a form of “co-regulation”. Three years later Queensland also opted to become “co-regulated”. The 2012 Victorian Parliamentary inquiry recommended that Victoria follow the same path.

    The interim agency that designed and built the national scheme informed the health professions that the new scheme would bring efficiencies with cost savings and also claimed that the scheme would adopt best practices from the existing state and territory systems. Neither proved to be true as the annual renewal of registration fees for doctors rose by approximately 50% in Victoria in the first year of the system. In its first iteration, the draft national law omitted mention of funding for doctors health programs, an omission only amended after vigorous lobbying. Even now, nearly six years later, AHPRA’s allocation is inadequate to fund the best practice example of the comprehensive Victorian program for distressed doctors.

     

    A recurring theme behind the four inquiries has been dissatisfaction from complainants, state health complaints commissioners and health professionals over the timeliness and fairness of the handling of complaints against health professionals. To quote from the most recent inquiry conducted for the COAG Health Council by Mr Kym Snowball :

    “It was apparent from the outset of the Review that there is widespread concern about the manner in which notifications have been managed under the National Registration and Accreditation Scheme (the National Scheme). These views were repeatedly raised with the Independent Reviewer by members of the public, health practitioners, ombudsmen, jurisdictions and professions.”

    The report then itemised nine separate concerns including:

    “• delays in the preliminary assessment or investigation of concerns raised by notifiers

    • delays in the finalisation of notifications
    • poor communication with both notifiers and practitioners
    • State and Territory Health Complaints Entities are generally not informed about the investigations and outcomes of cases handled by the National Boards and AHPRA
    • perception of inconsistent investigative processes and outcomes among participating jurisdictions.”

     

    It is noteworthy that the CEO of AHPRA has downplayed this strong criticism, as is exemplified in this exchange on Radio National in March this year. The Snowball report also identified the national scheme’s lack of accountability to individual health ministers in the respective states and territories.

    In the absence of any detailed analysis as to why the scheme should be so strongly criticised, I offer the following possible explanations, together with suggestions for improvement. I believe that there are both structural flaws and legislative flaws in the scheme. The key structural flaws are the size of the bureaucracy that has been created and its consequent remoteness from the people it serves, its expensiveness (for little or no additional return) and the lack of direct responsibility to each state and territory health minister. The legislative flaws have been discussed elsewhere and, as they are only peripherally related to the overall problems with the national scheme, they are not detailed here.

    The larger a bureaucracy, the more difficulty the general public and each health professional group will have in accessing its services and in obtaining information. Five years of experience of the mega bureaucracy that is AHPRA bears this out.

    The lack of direct responsibility of each health minister is very evident when one compares the new national scheme with the system it replaced. Under the national scheme, any health minister with concerns must work through the COAG Health Council and AHPRA and then eventually the relevant national board (for doctors it is the Medical Board of Australia) and finally his or her relevant state board. Under the previous system, each state or territory medical board, nursing board and the like reported directly to the local health minister.

    Similarly under the previous system (and focussing now just on medical practitioners), the state medical board employed its own staff to handle the receipt and preliminary assessment of complaints. Those staff, their necessary skills and the quality and timeliness of their work were all directly under the control of the state medical board. Under the national scheme, each state board has no such responsibility and must simply accept whatever staff AHPRA provides. Medical complaints can be sensitive and complex to handle and a high degree of knowledge, experience and skill is required if the system is to work efficiently and sensitively. In my time as President of the Medical Practitioners Board of Victoria, the Board employed both legally qualified and medically qualified investigating officers. While salaries were necessarily higher, the benefits of their skill and knowledge made this a sensible use of resources.

    By comparison, there is a sense that the new system seems to be back to front in the following way. Section 25 of the national law states that a key function of AHPRA is ‘to provide administrative assistance and support to the National Boards and the Boards’ committees in exercising their functions’.   In practice, it appears that AHPRA, via its administrative staff, dictates to the Medical Board and its state Medical Board branches (committees) the work flows and the quality and timeliness of the work done on behalf of the Boards. To gain access to this “administrative assistance and support”, the Medical Board of Australia has to spend resources each year negotiating a “health profession agreement” with AHPRA.

    Fortunately, built into the national scheme is a solution to these structural flaws, namely the New South Wales model of “co-regulation”. Under co-regulation, NSW kept its previous Medical Board, renaming it the Medical Council of NSW. The Council (working in close cooperation with the NSW Health Care Complaints Commission) handles complaints, performance and health/impairment issues, leaving registration and the maintenance of the national register in the hands of AHPRA. Although there would be some short term additional costs, it would be relatively simple for all states and territories to copy NSW and become “co-regulated”. If this were to happen, it is envisaged that the national law would remain in place and with it, the powers for the health ministers as a group to control workforce issues would also remain.

    The experimental national scheme can rightfully claim that it has successfully established a single national register and with it, ready portability of registration across Australia. These key elements must be retained. As NSW has 30% of Australia’s 103,000 doctors and 27% of Australia’s 370,000 nurses, the NSW experience demonstrates that a national register can readily coexist with co-regulation.

    Dr Kerry Breen is a past president of the Medical Council of Australia, a past president of the Medical Practitioners Board of Victoria and a past chair of the Australian Health Ethics Committee of the NHMRC.

  • John Menadue. Health reform and cooperative federalism. Part 2

    In part 1 of this series, I set out why I was attracted to the development of an option set out in a COAG paper on health reform which suggested the establishment of a commonwealth hospital benefit which would replace the PHI subsidy. 

    Regional Purchasing Agencies to address the’ blame game’ in health.

    In part 2, I examine another option in the federalism discussion paper which is for ‘The commonwealth and the states and territories to share responsibility for all health care through Regional Purchasing Agencies.’

    The discussion paper outlines the proposal as follows:

    Option 4: The Commonwealth and the States and Territories share responsibility for all health care through Regional Purchasing Agencies

    The Commonwealth and the States and Territories would jointly establish regional purchasing agencies. These agencies would purchase a range of health services for individuals in their catchment, defined by a minimum service obligation including primary and specialist care, hospital (both public and private), and allied health services. Agencies could be accountable to the Commonwealth and the State and Territories, or just one level of government.

    The Commonwealth and the States and Territories would pool funding to make payments to the purchasing agencies based on demographic and health characteristics of catchment populations and the mix of services covered by the minimum service obligation. Agencies would then be responsible for managing the purchase of health services from within this fixed budget.

    Catchments for regional purchasing agencies could be based on existing structures, such as Primary Health Networks and Local Hospital Networks, or their equivalent State or Territory health service authorities.

    High level health policy, including setting minimum standards of care and quality, and funding roles would be shared between the Commonwealth and the States and Territories. Regional purchasing agencies would be responsible for funding and commissioning primary care and the MBS would no longer operate in the same way—for example, it could be cashed out to help fund the regional purchasing agencies. The impact on other roles would need to be considered.

    Various options could be considered for the establishment of regional purchasing agencies. They could be government or semi-autonomous government bodies, they could be managed by private organisations, selected through a competitive tender process, or there could be a mixture of different approaches. One option would be for the role of the Commonwealth to be limited to funding and setting minimum standards of care and quality, with the States and Territories taking responsibility for governance and system management.

    The Commonwealth and the States and Territories would agree to jointly fund regional purchasing agencies from existing health funding.

    This option would increase areas of shared responsibility between the Commonwealth and the States and Territories. It could seek to build on existing governance arrangements.

    Responsibility for service delivery and the commissioning of services would lie with the purchasing agencies. This would allow for greater competition in the market for services.

    This option would address system fragmentation and may also better respond to local circumstances. This is consistent with the principle of subsidiarity and should result in better services for patients, so long as adequate arrangements are in place to ensure provision of quality services in remote and disadvantaged regions.

    Pooled funding arrangements would need to be established in a way that would reduce incentives for cost shifting between governments. This approach should also increase incentives for investment in prevention and early intervention. There would be an incentive to ensure services were provided cost-effectively within allocated funding to avoid unnecessary (and costly) hospitalisations.

    This option would include many of the benefits of individualised care packages … It would need to be supported by well-designed and clearly defined roles to minimise the risk of blurred accountability and blame-shifting, resulting in service gaps.

    This option involves large-scale reform. It would present particular challenges for rural and remote areas where there are fewer existing services. Consideration would need to be given to the size of purchasing agency regions, to ensure they cover a large enough population to manage risk, realise economies of scale, and ensure availability of suitably skilled staff. This could be an issue for smaller States and Territories.

    Consideration would also need to be given to the role of private health insurers.

    Once implemented, this option would be durable as the health system would contain incentives to provide people with the care they need in a cost-effective manner as agencies operate from a fixed budget. It would take some time to implement and would require a significant up-front investment, in addition to ongoing operational costs.

    This option is a variation of a proposal I have been making for some time, that the commonwealth and the states establish a Joint Commonwealth State Health Commission in any state that would agree. In effect the Commission suggested would be a joint state wide purchasing agency. See link https://publish.pearlsandirritations.com/blog/?p=3810.

    This commission that I have proposed would pool all commonwealth and state health funds in that state, develop an agreed health plan in that state and purchase services from existing agencies, both public and private. The Regional Purchasing Agencies proposal in the draft federalism paper is a more modest approach, being regional and not state-wide, but it may be a more practical way to proceed. Perhaps establishing regional pilots would be a useful first step. A pilot project involving the whole of Tasmania would also be a useful first step given the small size of Tasmania.

    To address the blame game and improve health efficiency and equity, it is necessary that there is effective coordination of all health services, particularly those delivered by hospitals and non-hospital agencies. The great inefficiency in our present health arrangements stems from the fact that the commonwealth government has responsibility for primary care but the states operate the hospitals. A Regional Purchasing Agency could be a very useful way to start resolving the blame game.

    A major aim of a good health policy for Australia must be to keep people out of expensive hospitals. The division of responsibilities between the commonwealth and the states makes that very difficult.

     

     

  • Lara Moroko & Sarah Duffy. Thrashing the brand: ANZ and CBA could pay a high price for choosing profit over people.

    The recent CBA and ANZ scandals show that the big banks fail to understand the long-term pay off from investing in their relationships with people over short-term profit.

    ANZ stands accused of unconscionable conduct and manipulating the bank bill swap rate(known as the BBSW) in its favour, short changing its customers and generating illicit profits. In the same vein, it has been reported that employees of CommInsure, CBA’s insurance arm, have deliberately, and in some cases illegally, removed medical details or taken action to avoid or delay the payment of claims.

    If these allegations are true, these practices will prove damaging for CBA and ANZ stakeholders and undermine the credibility of both brands and the sector.

    Brands as a promise

    Annually, companies invest dizzying amounts to sculpt their corporate brands. The investment is made in the hope of creating positive and unique associations that collectively reflect the firm’s values and communicate who they are and what they stand for. For the past two decades, it has been increasingly understood that brands act as a promise – one that extends beyond customers to employees, investors, communities, partners and other stakeholders. Like any promise, evidence of a contravention can seriously damage relations with those relying on it in good faith.

    The association that stakeholders – including customers and employees – have with a brand takes significant time and investment to cultivate, but may be eroded rapidly. The CBA website claims they have a “range of conduct codes to ensure we provide a high level of service to our customers”. Similarly, ANZ champion a “deep understanding of customer needs”.

    Any disconnect between the carefully crafted formal messages and the less-than-upstanding action creates a dissonance in the minds of stakeholders. Last year’s Volkswagen scandal is a prime example of how quickly, once trust is betrayed, a much-loved brand can fall from grace. As a consequence of untoward behaviour, the shared values and beliefs are undermined destroying employer brand equity.

    When actions drown out a positive brand promise

    The employer brand promise is created both formally and informally. Typically, employers promise working conditions and remuneration contractually, but also make more tacit promises through the values espoused internally through practice and culture. Consequently, the employer brand of any organisation is not a static, immovable concept, it is continually being created through the interaction of both the firm and the employees.

    The employer brand directly impacts on an employees’ employment experience, which has consequences for performance and overall job satisfaction. There are particular conditions that will corrode employer brand success. Both the CBA and ANZ scandals touch on at least two of these conditions; disconnect between the promised and actual employment experience and divergence between the espoused and actual values. By wearing down employee trust, these firms have actively undermined the investments they have made in attracting and retaining talent.

    Recent research conducted at Google shows how trust, employee performance and engagement are related. In their long-term quest to understanding the secret of successful teams, Google found that teams who feel “psychologically safe” perform better.

    That is, a feeling of stability and safety combined with clear goals and a culture of dependability were the essential ingredients for a team’s superior performance. For now, it’s unlikely that the day-to-day employment experience of most employees at ANZ or CBA has changed significantly, however the psychological feeling of safety is likely to be marred by the recent scandals, detracting from optimal performance, job satisfaction and productivity.

    Their ability to attract and retain staff who can best deliver on a superior customer brand experience has also been diminished.

    Making amends – intention and timing is critical

    ANZ and CBA have approached restitution with their stakeholders differently. CBA has apologised, chief executive Ian Narev issued a statement in the wake of the controversy, taking ownership and pledging direct contact with victims.

    In contrast, ANZ intends to defend against the claims. How these opposing strategies will play out for each institution remains to be seen.

    The Volkswagen debacle involved years of public deception; however once the irrefutable truth of its actions was exposed, the CEO resigned and 6.5 billion euros were allocated to cover the amends. The Volkswagen scandal is perhaps still too fresh for us to be able to determine the consequences for the brand, however it has been over five years since BP’s Gulf of Mexico disaster in April 2010. It was found that the disaster was preventable and similar to Volkswagen, the CEO resigned and significant funds have been allocated to restitution. BP has continued to produce “corporate responsibility” reports and herald its position on sustainability.

    However, a protest in 2014 by climate activists against BP’s contributions to the Tate Modern show that the public has not forgiven or forgotten the Gulf of Mexico disaster.

    Brands are an important investment in social and cultural value

    An important question is: what can business, irrespective of industry, learn from this? Cautionary tales like this urge leadership to think beyond the bottom line: to value and cultivate a culture of trust, psychological safety and dependability to enable their employees to thrive in optimal environments. Economic value from profitable business units keeps the lights on, but social and cultural value from staff and customers keep the growth engine firing.

    Lara Moroko is Lecturer in Management at Macquarie Graduate School of Management.  Sarah Duffy is Lecturer, School of Business, Western Sydney University.  This article first appeared in The Conversation on March 16, 2016.

  • David Stephens. Bill Shorten’s Royal Commission proposal.

    Labor and the banks go way, way back

    Bill Shorten’s proposal to have a Royal Commission into the banking system is not just good politics. It also taps into a long Labor tradition: banking Royal Commissions – and banking policy generally – occupy a special corner in Labor’s history.

    We need to see terms of reference for the proposed Royal Commission. The emphasis so far, though, has been on illegal and unethical banking behaviour in the absence of adequate regulation, together leading to damage to consumers of financial advice, loans and life insurance. (The Australian Bankers’ Association believes a Royal Commission was unnecessary though it conceded that ‘in the past …. banks have not always lived up to their own standards, let alone those of their customers’.)

    The Royal Commission’s brief should range widely to look at the banks’ market power as this is intimately linked to the quality of their service to their clientele. Wobbly banks in Western economies have sometimes been seen as ‘too big to fail’. In other words, their collapse would bring down the economy. Banks can also be ‘too powerful to tangle with’, especially if their power is concentrated and they operate as cartels. The fewer banks there are the easier it is for them to work together and resist government regulatory power. Having few banks, working as a cartel, also limits consumer choice. Consumers escaping one shark in a suit may be gobbled up by another.

    Evan Jones, writing in Fairfax, gave a history of partial reviews of Australian banking. He saw the most recent review, Murray 2014, as emphasising capital adequacy requirements (a hedge against failure) but avoiding other symptoms of a ‘seriously broken’ system.

    The de facto cartel competes aggressively in misleading advertising, but declines to compete where it matters – competence and integrity in customer relations. In particular, the typical loan facilities for small business and farmers are not fit for purpose. Who cares? The strategy: take security on customer and guarantor assets and default at will … The finance sector is now a societal monolith, and with parasitical tendencies. 
    The Murray Report had tried to corral the issues when it concluded that

    the focus of financial system policy should be primarily on the degree of efficiency, resilience and fairness the system achieves in facilitating economic activity, rather than on its size or direct contribution (such as through wages and profits) to the economy.

    In reality, these attributes and effects run in all directions; Murray’s distinction is unsustainable. The ‘efficiency’ of the cartel delivers profits for the financial sector but may also hamper ‘economic activity’ by reducing competition and ‘fairness’ by denying service to viable customers or giving it to unviable ones.

    The clearest ‘contribution … to the economy’ is within the sector itself. Jones points out that the finance sector’s share of total business income – banks dominate the sector but it also includes building societies and credit unions – grew from three per cent in 1980-81 to 17.1 per cent last year. APRA figures show the ‘big four’ banks, ANZ, the Commonwealth, the National Australia Bank and Westpac, achieved profits in the year ended December 2014 of $30 billion out of total banking profits of $34 billion.

    According to the International Monetary Fund in 2012, Australia’s banking system is the most concentrated in the world. Our big four banks have a bigger share of banking business (around 80 per cent of total banking assets, with residential mortgages the largest component) than the biggest four banks in any other economy. This sounds like ‘too big to fail’ but it also raises the questions: how did this come about and what has Bill Shorten’s party done about it previously?

    The power of the banks has been a continuous theme for Labor. When the Fisher Government founded the Commonwealth Bank in 1911 as ‘the people’s bank’ it disappointed the radical Labor member, Frank Anstey, who complained the new bank ‘possesses no more power than any ordinary trading bank’.

    Thus [Anstey said] the Labor Government ignored the felonious bank history of all countries – “one of the frauds by which Capitalism bleeds the people”… It gave a Commonwealth Bank, but it left it stripped of those prerogatives specified in the [Labor] platform; prerogatives that would have made it the supreme banking power in the Nation, that would have made all other banks (while they existed) subject to its will.[1]

    The Great Depression of 1929-33 led to demands for banking reform, following what was seen as the banks’ contribution to the crisis – essentially, excessive lending during the 1920s followed by restrictive policies after the crash of 1929 – which harmed many ordinary Australians. While the product emphasis may have changed – more unwise loans in the 1920s, more dodgy financial advice today – the common and ageless threads over the long run of banking history are, first, shoddy service to customers and, secondly, profits.

    In 1937, the then former Labor member of federal parliament, Ben Chifley, used his minority report from the Royal Commission on the Monetary and Banking Systems to propose fundamental change. His fresh memories of the then recent depression added to his recollections of the impact of the 1890s depression, when thirteen banks closed in two months in 1893.

    Banking differs from any other form of business [Chifley said] because any action – good or bad – by a banking system affects almost every phase of national life … In my opinion the best service to the community can be given only by a banking system from which the profit motive is absent, and, thus, in practice only by a system entirely under national control.[2]

    The Royal Commission’s majority proposed far less sweeping reforms than Chifley preferred but even these were not followed up, due to opposition from the banks and then the onset of war. After World War II, the Curtin and Chifley Governments turned their attention to banking reform, largely in response to memories of earlier depressions and fears that a new one would occur.

    During the war, banking had been controlled under defence regulations. Labor’s 1945 banking legislation attempted to permanently regulate the trading banks through licensing, lodging of a part of bank deposits with the Commonwealth Bank and control by the Commonwealth of advances policy and interest rates. The legislation also expanded the Commonwealth’s role into that of a central bank, though it was to be subject to the government in any policy dispute. These reforms were along the lines of the wartime system and the majority recommendations of the 1930s Royal Commission.

    When the High Court knocked out the 1945 legislation[3], Chifley responded on 16 August 1947.

    Cabinet today authorized the Attorney-General (Dr. Evatt) and myself to prepare legislation for submission to the Federal Parliamentary Labor Party for the Nationalisation of banking, other than State banks, with proper protection for shareholders, depositors, borrowers and staff of private banks.[4]

    What followed over the next two years has been described as the most torrid political battle in Australia since the conscription referenda of 1916-17. Chifley put the case for nationalisation:

    We have only to cast our minds back to other days, when tens of thousands of people were deprived of the necessities of life. Even as a small child, I can remember the depression of the nineties, and the farmers near where I lived who were desolated and grief stricken at the closing of the banks …

    We move on then to the 1930s, and there is not one man, be he an economist or not, who will now defend the economic policy which was applied in 1930. We have seen people crowded at factory gates in their thousands trying to get one job; we have seen people at police stations to collect the dole of 5s. 9d. or 8s. 6d. a week.

    We do not say that the depression could have been avoided by monetary action. What we do know is that the misery and suffering of hundreds and thousands of men, women and children in this country could have been mitigated to a large degree had proper monetary action been taken …

    We do not want the conditions of the depression to recur … [W]e want to ensure that the government of the country shall be in a position to apply through its agent, the Commonwealth Bank, the financial and monetary policy that will prevent, as far as monetary policy can prevent, the sort of thing that happened in the days of the depression.[5]

    Trade unions strongly supported nationalisation. On the other side, a vigorous coalition of bank officers and their supporters allied with the Liberal and Country parties and much of the metropolitan press to attack Labor. The argument against bank nationalisation turned into a wide-ranging attack on what Opposition Leader Menzies called Labor’s desire ‘to put the lives and affairs of ordinary citizens into bondage’. Dramatised advertising starring ‘Bob Freeland’ and ‘John Henry Austral’ put the anti-Labor case as the government was accused of socialism, communism, nazism and fascism – and sometimes all of these at once.[6]

    Ultimately, the High Court and the Privy Council disallowed the 1947 banking legislation.[7] The attempt to nationalise the banks, along with discontent over petrol rationing, governmental restrictions persisting too long after the war, and other dissatisfaction, led to Labor’s defeat in 1949. A host of reasons then kept Labor out of office for 23 years.

    Looking just at banking policy, however, it seems clear that the concentration of banking power today in private hands is not all that different from what would have occurred had bank nationalisation succeeded. Just after the nationalisation announcement, the Sydney Morning Herald claimed that the plan meant that the Commonwealth Bank would control £800 million in deposits and shareholders’ funds in the biggest nine banks and be the largest banking monopoly in the world.

    As noted above, the big four Australian banks today control more of our banking business than the top four banks in any other country. We avoided monopoly but copped oligopoly; we denied Chifley’s ideal of banking in the public interest but now endure the profit motive in spades.

    Customers can judge the impacts of this history in areas like financial planning, insurance and interest rates. Banks still, in Chifley’s words of 1937, affect ‘almost every phase of national life’. Chifley’s remarks about the balance between banking profits and service to the community also remain extremely apposite.

    Chifley-style nationalisation is presumably off the agenda but if anyone wanted to make a case for a tax on bank profits or for breaking up the large banks, evidence like that presented here would bolster their arguments. Perhaps recommendations in that direction might come out of a Royal Commission – if one ever happens – which might bring a chuckle of satisfaction from the ghost of a former Labor Treasurer from Bathurst.

    David Stephens is secretary of the Honest History coalition and editor of its website (www.honesthistory.net.au). The views in this article are not necessarily those of all supporters of Honest History.

    [1] Frank Anstey, The Money Power, Fraser & Jenkinson, Melbourne, 1921, p. 73.

    [2] Australia. Parliament, Report of the Royal Commission appointed to Inquire into the Monetary and Banking Systems: Parliamentary Papers, Session 1937, No. 74, Vol. V, General and Finance, ‘Dissent, reservation and addenda by Mr. Chifley’.

    [3] Melbourne Corporation v Commonwealth (1947) 74 CLR 31; [1947] HCA 26.

    [4] LF Crisp, Ben Chifley:  A Political Biography, Longmans, London, 1961, pp 327-28.

    [5] Australia. Parliament. House of Representatives, Official Hansard, 11 November 1947, pp. 1927-28.

    [6] For the 1949 campaign, Freeland and Austral, see Robert Crawford, ‘Supporting banks, Liberals and the “Australian Way”: the Freelands and the 1949 election’, History Australia, 2, 3, 2005, downloadable from Monash University e-press; David Stephens, ‘Political theory, history and the Australian Labor Governments, 1941-49’ (MA thesis, Monash University, 1974), available on microfiche at the National Library of Australia; David Stephens, ‘The effect of the Great Depression on the Federal Labor Governments, 1941-49’, Australian Journal of Politics and History, XXII, 2, August 1976, pp. 258-70.

    [7] Bank of New South Wales v The Commonwealth (1948) 76 CLR 1; Commonwealth v Bank of New South Wales (1949) 79 CLR 497, [1950] AC 235.

  • David James. CommInsure expose proves spin doesn’t always win.

    One of the challenges facing business journalists in Australia is the wall of spin they face whenever they are trying to uncover an uncomfortable truth. The spin ranges from outright lying to being highly selective with the facts. Most journalists either struggle to get beyond the wall, decide it is to their benefit not to attempt to scale it, or are simply too busy to even contemplate its existence.

    Consequently the spin, by and large, wins. Journalists always need sources to create stories — it is essential to their careers — and so are readily drawn into trade-offs: access to important sources in return for adhering to a certain line in the story.

    Or, as is increasingly the case with younger journalists because of the thinning of the ranks in the media industry, they dutifully copy out the media release, a practice known as ‘churnalism’.

    That is why any reader of business news should always ask: cui bono? Who profits from the story running?

    Most spin doctors are either former journalists, who have personal experience in how the industry works, or they are extremely well schooled in its dynamics. If a story appears in the media, it is more often than not because some spin merchants want it to be there.

    Happily, there are exceptions. Gold Walkley winner Adele Ferguson did a brilliant expose of the insurance industry for Four Corners and Fairfax that was definitely not on any spin doctor’s agenda. Indeed it was a demonstration that the craft of spin has its limitations if the journalist is skilled enough to get beyond the wall. And in recent years no Australian journalist has been better at it than Ferguson.

    Ferguson’s examination of the Commonwealth Bank’s insurance arm, CommInsure, uncovered many instances of unscrupulous practices, including refusals to pay out to victims of heart attacks, multiple sclerosis, cancer and mental illness. She uncovered instances where insurers looked for additional medical opinions in order to avoid payment.

    Her interview with Ian Narev, chief executive of Commonwealth Bank, was a semi-comic exposure of how the art of spin works.

    Narev seemed to have been advised to mention the word ‘customers’ as often as possible. A cynic might suggest that it was spin doctor trick number one: reposition the discussion by talking about victims of the bank’s outrageous insurance practices as ‘customers’. The intention seemed to be to muddy the waters: are these people really victims, or just dissatisfied customers?

    It was also designed to make it look like the bank is always acting in the interests of its shareholders. Thus we had statements like: ‘The long term risk here is that satisfied customers are good for shareholders as well.’ This comment, somewhere between deflection and banality, seems intended to draw attention away from the specific issue in order to consider the ‘wider context’.

    The next step, which that cynic might suggest was spin doctor trick number two, was to claim that the news story was just an unfortunate exception: ‘Being ethical is not the same as being perfect,’ a suitably humble sounding Narev admitted. ‘We need to realise we will make mistakes … one test of how ethical we are is how we respond to those mistakes.’

    In other words, ‘Trust us, we mean well.’ It is a technique partly designed to tap into suspicion that journalists only pick out the sensationalist exceptions. The problem in this instance, however, was that, thanks to Ferguson’s incisive investigation and the moral courage of Dr Koh, CommInsure’s chief medical officer, it was clear that the mistreatment was not an aberration; it was business as usual.

    Device number three was to introduce vagueness — more deflection. Narev insisted that the ‘culture’ of the bank is ethical. ‘Culture’ is a management buzzword that is sufficiently vague to remove any threat that someone might be held accountable. At the same time it gives the impression that management is in control. What exactly such verbiage really means is anyone’s guess, but that is probably the point.

    Ferguson insisted on talking about the ‘human beings’ affected in an attempt to push Narev beyond his corporate-speak and towards a more human response, such as shame or regret or horror, about what had been done to the sick and dying by the bloodless operatives in the company’s insurance arm.

    It left one wondering what it must be like to spend one’s days being cruel and indifferent towards people in extreme distress. Presumably, in order to deal with it psychologically, these insurance bureaucrats find ways to de-personalise everything.

    Ferguson did not succeed in eliciting a human response, but she did expose the spin. Narev started to come out with sentences like: ‘The reason to do the right thing by customers is because we are here to do the right thing by customers.’ Hard to argue with that. And there’s that word ‘customers’ again.

    The Commonwealth Bank chief executive unswervingly stuck to the script. The result was not edifying. It is to be hoped that when his media advisers submit their fees, they give him a discount. This time the spin definitely did not work.

     

    David James is the managing editor of businessadvantagepng.com

    This article was first published in Eureka Street on 15 March 2016.

     

  • John Menadue. Bad apples, corporate culture and leadership.

    The recent scandals at CBA,ANZ  and now Wespac have focused us on business culture. But the CEOs  keep telling us that there is no business culture problem but only a few bad apples. If only that were true. The issues are more systemic than they would suggest and the problem covers a wide range of companies and not just the banks – massive tax avoidance by large multinational and private companies, the Seven/Eleven franchise, labor hire companies, child care and vocational education and training.

    The ANZ  and Wespac are accused of manipulating the bank swap rate (BBSW) in its favour to disadvantage customers and generate illegal profits. The CBA doesn’t seem able to put its house in order with abuse first by financial planners and more recently by Comminsure, threatening customers, by removing medical details and delays in payments.

    Now the Chairman of the Australian Securities and Investment Commission, Greg Metcalf, has been joined by the Australian Prudential Regulation Authority, Wayne Byers, in demanding the finance industry fix its corporate culture. Metcalf said ‘Time and time again we have seen firms blaming behaviour on a few bad apples driving bad outcomes for consumers, rather than taking responsibility by looking more closely at their organisation and implementing the necessary changes to address the cause of the problem. … At the end of the day, you need to have a culture that your customers can believe in.’ I would have added also the importance of staff belief in the culture of the organisation.

    Malcolm Turnbull has said ‘banks do not just operate under a banking licence,they operate under a social licence and that is underwritten by public confidence and trust’

    We have a serious problem but I am not persuaded that the loss of moral compass is any worse today than in years past. But the scale of our economy and the consequences are much greater than ever before. We are unprepared for the challenges we face. We have seen wealth generation in the last 50 years that probably exceeds the wealth generation of the last 2,000 years. Growing wealth and the permissive attitude to it is raising more and more problems.

    The Protestant Reformation from the 16th Century broke the grip of the church on economic and business life, and released those individualistic energies that have driven so much of capitalist enterprise over the last 400 years. The new religious climate following the Reformation with its more individualistic and less communal values set the scene for capitalist development. This transformation broke the power of the church over business activity and set the scene for unprecedented expansion and wealth alongside unemployment, business shortcuts and inequality in a pluralist society. We have been in catch-up ever since.

    We have not really addressed the social question that John Curtin spoke of, that the economy is to serve social norms and not the other way around. We could add to that, confusion of ends and means by noting the rise of economic fundamentalism which has promoted deregulation and privatisation with its claimed benefits to the community. ‘Rational people’ in the market are expected to put their private interests ahead of the public interest.

    Without morality in public life, we have only rules and laws to fall back on. But we all know that laws are not sufficient. We cannot legislate for good behaviour. A society that is based on laws alone can go down many slippery paths.

    Neither are the so-called codes of conduct that we hear about from business all that helpful. Codes are usually applied from the top down and seldom are they grounded in the attitudes of customers and staff. Codes and rules are usually external and have the effect of detracting from personal responsibility. Codes also have a problem in that they can never cover all situations which we face in a complex and diverse world. So often, these codes become ‘fig leaves’ for leaders and a business opportunity for lawyers who have colonised this field. Lawyers may be good at law, but I am not sure that they have any more to offer than other people on corporate culture and business morality.

    Two factors today seriously inhibit a socially-based corporate culture. The first is the lack of trust which is so essential in all parts of our lives. How can a CEO expect to have the trust of staff and customers if his or her salary is 100 times that of the average staff member? The conclusion that almost all staff members will draw from excessive executive salaries is that self-interest is paramount. Public relations and spin will never change that. And when trust is broken there is an inevitable high price to pay. It is no coincidence that the banks with their very high executive salaries are facing problems with their corporate culture.

    The second problem that inhibits a healthy business culture is when so-called private values are not reflected in public behaviour. Tax avoidance on a massive scale by major corporations can only persuade staff and customers that the corporation is not serious about public behaviour and responsibility. Staff and customers of large corporations are expected to pay, and do pay in most situations, their fair share of tax. They rightly believe that executives of many public companies talk about public morality but their behaviour is quite different. Not surprisingly again, staff and consumers get the message that if it’s OK for the boss to look his own interest to avoid tax why shouldn’t I cut some corners if necessary.

    Cultural and social values in a business must be derived from customers and staff. The ‘leader’ can assist in this process. As Lao Tsu put it ‘As for the best leaders, people do not notice their existence. … When the best leaders’ work is done, the people say “we did it ourselves”.’

    The attitude and values of staff and customers is critical in reflecting the way corporations should behave. They understand the ‘pub test’ better than many leaders.

    A good leader knows that power is always abused even by himself or herself. Many CEOs have great authority and status. But authentic leadership and understanding what a moral compass is, is quite another thing. Do leaders have principles that guide their public life-like personal coscience, transparency, loyalty to my principles as against my organisation and reciprocity-the golden rule?

    Leadership by example is more important than direction from the top and public relations.

  • David Peetz. Productivity in the Construction Industry: Did it surge under the Coalition’s Reforms?

    On 7.30 recently  the Prime Minister dismissed the Productivity Commission’s findings on productivity growth in the construction industry in favour of those from a small consultancy firm.  He used it to support a claim that the previous Coalition government’s legislative reforms in that industry had led to a 20% increase in construction productivity, which had ‘flatlined’ under Labor.

    Actually, though, things were a bit different.  To see how we know it didn’t, and why he said it did, we look at (i) what’s it all about—what reforms are we measuring; (ii) what the official data show about productivity in that industry; (iii) why the Productivity Commission and a consultancy firm differed on the issue; and (iv) why the Prime Minister wanted to prefer the consultant’s version of events.

    What’s is all about—what reforms are we measuring?

    The debate is all about special laws on industrial relations in the construction sector.  The Howard government passed laws in 2005 that created the Australian Building and Construction Commission (ABCC).  The legislation provided for six months jail for anyone refusing to cooperate with ABCC inquiries, or speaking about them to anyone, and increased penalties for other breaches of industrial law.  It didn’t just apply to construction workers—an passerby (an academic, in fact) on a street near a building site was interrogated for hours and threatened with jail if he spoke about it.

    But even more important than the legislation itself was how it was administered.

    In September 2010 the term of the Howard government’s appointee to the top job, John Lloyd, expired and he was replaced by a Gillard appointee, Leigh Johns.  Gillard in 2009 had already imposed some restrictions on Lloyd’s activities.  During most of Lloyd’s term, the coercive powers mentioned above were extensively used.  Johns adopted a very different approach.  He was much less antagonistic to unions.  The use of compulsory interrogations dropped by nine tenths in 2010.  Johns was criticised by Lloyd for pursuing sham contracting by companies—he labelled it a ‘trendy’ issue—at the expense of prosecuting unprotected strikers.

    In June 2012 the legislation establishing the ABCC was repealed and new legislation, retaining some coercive powers but with more safeguards, took its place.  The ABCC was replaced by the Fair Work Building Industry Inspectorate (which goes by the acronym FWBC).  Johns moved across to head that body.  As the ABCC under Johns had not been using its full powers, not so much changed with the new legislation in place.  

    In October 2013, after the election of the Abbott government, Minister Abetz put Nigel Hadgkiss into the top position, replacing Leigh Johns, who had resigned.  Hadgkiss was Lloyd’s deputy in the Howard years.  Hadgkiss accused Johns of having struck ‘deals’ with the construction union.  Hadgkiss was described as ‘tough’ and the ‘right man to restore rule of law in construction’ by mining employers and as a ‘well known union basher’ by former union official Brian Boyd.  The mining employer body considered that ‘appointing the right person…is just as important as implementing the appropriate institutional and legal arrangements’.

    So there are really three distinctive periods in Commonwealth oversight of the construction industry since 2005, corresponding to the ABCC under Lloyd (2005-2010), the years of the Labor appointee, Johns (2010-2013), and the Hadgkiss years in charge of FWBC (2013-2015).  The first and the third of these corresponded to ‘tough’ regulation, the second less so (though there were still coercive powers available).

    What do the official data show about productivity in that industry?

    The chart below shows labour productivity from 2005 onwards, in the construction industry and nationally, according to the ABS National Accounts.

    What immediately strikes you on looking at this is how labour productivity in construction moved in tandem with national level productivity until 2011.  There is no discernible effect from the ABCC legislation and the Lloyd years.  

    Peetz_Chart1

    Then, in 2012 and 2013, there were large improvements in construction productivity that were not matched by the rest of the economy.  Yet these were years when Labor’s appointee, Leigh Johns, was in charge of the ABCC and the FWBC, and coercive powers were rarely used.

    Through 2014 and 2015 productivity growth in construction wound back (it ‘flat-lined’) while other industries started to catch up.  This was the period when the ‘right person’ (or the ‘union basher’) Nigel Hadgkiss was back in charge of FWBC.  Hadgkiss’ years corresponded to the poorest two years of construction productivity growth since 2005.

    The second chart makes this pattern slightly clearer.  It shows the average annual growth rates over the three periods.

    Peetz_Chart2

    Across the economy as a whole, the average annual growth rate did not vary much between these periods.  But productivity in construction did: in the Lloyd/ABCC period, at 1.6% per annum, it was fairly similar to growth in the economy as a whole; in the Johns period, at 5.1 per cent per annum, it was well above national growth; and in the Hadgkiss period, at -0.5% per year, it was well below it.  (If you want to split the Johns period into the ABCC and FWBC sub-periods, the numbers were 5.7% and 3.9% respectively, both well above the rates achieved under the more aggressive regimes.)

    In short, the evidence suggested that productivity in construction was best when coercive approaches were not followed.  

    Why did the Productivity Commission and a consultancy firm differ on the issue?

    The consultancy firm the Prime Minister referred to—originally called Econtech, then KPMG Econtech, then Independent Economics—had been commissioned by the ABCC, and later by a construction employer body, to try to prove a point (that the ABCC had done a great job).  It published and republished largely similar reports, mostly updates using the same assumptions as the previous version.

    At the core of the original Econtech analysis was a spreadsheet error, which some colleagues and I identified.  Econtech eventually admitted this, but never changed the estimated productivity gains it claimed arose from the ABCC.  Instead it made selective (and contradictory) use of start and end dates and questionable techniques to try to maintain the original finding.

    The Productivity Commission obtained the original data we and Econtech had used, and found no error in our analysis.  It concluded that ‘it cannot be maintained that the data show — even in an indicative sense — that aggregate productivity improved because of the BIT/ABCC’ (p786).

    Why did the Prime Minister want to prefer the consultant’s version of events?

    The government seeks to re-enact legislation re-introducing the ABCC.  It has claimed that this is to deal with corruption in the industry, as identified by the Royal Commission on Trade Union Governance and Corruption, but there are three big problems with this. 

    First, the content of the ABCC legislation does not deal with corruption.  That is why it cannot be extended into a ‘federal ICAC’ as sought by some: ICAC deals with corruption, ABCC deals with strikers.

    Second, it was never the intention of the ABCC legislation that it deal with corruption.  It is not mentioned once in the Ministers’ second reading speeches in either 2005 or 2013.

    Third, re-establishing the ABCC was not a specific recommendation of the Royal Commission.

    So, another rationale is necessary.  Productivity has long been used, spuriously, as the rationale for the ABCC.  The Productivity Commission, never seen as a friend of unions, has dismissed the rationale, but the consultant’s report, paid for by the ABCC and employer bodies, naturally supported it.  So the Prime Minister has chosen to make use of the only report that endorsed the preferred course of action, regardless of its origin.

    What does it all mean?

    All this is not to say that productivity would be enhanced by a more liberal regulatory regime or regulator.  

    Rather, the whole idea that the regulatory regime or the regulator determine productivity growth in construction is a furphy.

    Productivity growth in the industry (and indeed, nationally) is influenced by a range of matters.  It goes up and down from one year to the next.

    In construction one of the biggest influences is simply how much work is going on.   So the biggest fall in construction productivity in the past three decades occurred after the construction boom leading to the 2000 Sydney Olympics came to an end.  It’s the downturn in the industry, not Nigel Hadgkiss himself, that has led to the current downturn in productivity.  

    But politicians and advocates will try to use productivity figures to prove a spurious point, carefully choosing the start and end dates to do so.  If it gives the right answer, they’ll broadcast it; if it gives the wrong answer, they’ll ignore it. 

    The claims about productivity in the construction industry follow that pattern.

    David Peetz is Professor of Employment Relations, Griffith Business School, Griffith University, Brisbane.

  • Paul Budde. NBN company needs support to pursue FTTdp

    In his blog of 5 April, Paul Budde suggests that the NBN company needs support to help it overcome the stumbling block of Malcolm Turnbull who seems unwilling to reconsider the mistake he made on the NBN as Communications Minister in the Abbott government.  See Paul Budde’s article below.  See also link to article  http://www.buddeblog.com.au/frompaulsdesk/nbn-company-needs-support-to-pursue-fttdp/

    With the election campaign starting to kick in, it is only a matter of time before the Opposition starts talking about the NBN again.

    Looking at statements that the Opposition Minister for Communication Jason Clare has made over the last year or so it is clear that Labor will pursue an NBN that will maximise the FttH route. In all reality this will mean deployingFTTdp (also called thin fibre) to people’s doorsteps and then using the copper cable or the last bit of conduit, which is already owned by the NBN company, to provide the last few meters of fibre connection. One could assume that this last bit is left to the home owner in order to make it work financially.

    Obviously there will be a problem with those premises already linked to an FttN system. FttN can indeed provide superior broadband access (100Mb+) so there is no immediate need to upgrade and the obstructing nodes can be eliminated at a later stage. Obviously there will be an issue with writing off the costs of these stranded assets.

    The HFC network is a completely different kettle of fish, and the problems of this infrastructure have been discussed in a recent analysis. It will be more difficult to deploy FTTdp here if the NBN company starts to upgrade the HFC network in order to use the multi-technology mix version of the NBN.

    My bet is that an Opposition NBN policy will work through the situation in the way I have mentioned above.

    What does this mean for the Coalition government? As Bill Morrow has clearly indicated, he likes the FTTdp network, and he also indicated that the ball is in the court of the Prime Minister to decide how to proceed with the NBN.

    Reading between the lines, looking at the body language of the CEO, and taking into account the ongoing stream of leaks that are coming out of the NBN company, it is clear to me that there is a significant force at play in the company, trying to nudge the NBN more and more in the direction of a full fibre network.

    Obviously these good people within the company will need the support of those who can influence the political situation.

    A major stumbling block will be the PM himself, as he has basically put his name on the line for the second-rate multi-technology mix as it is rolled out at the moment; and in his already vulnerable political position it will be very hard for him to backflip on the issue. As mentioned before, I can see a way out, as FTTdp still can be classified as a multi-mix technology but I am not sure is that is enough to persuade the PM to open the door to using FTTdp rather than FttN.

    Of course much of this also depends on how hard the Opposition is going to push on the NBN in its election campaign. If it stays soft on the issue it becomes more difficult for the NBN company to push its FTTdp deployment further into the market.

    Obviously anybody in favour of a better NBN can assist in trying to use the political cycle to promote the use of a full fibre network through their community, industry, political and media connections.

    There is now a chance for us to ensure that Australia will get a much more future-proof NBN and we should not miss the opportunity to at least try and make this happen.

    ——————-

    Paul Smith in the AFR also points to concern by NBN staff and executives about delays in broadband rollout and failure of the government to embrace fibre to the premises.

    See link to article:  http://www.afr.com/technology/web/nbn/fresh-nbn-leaks-showing-fttn-delays-raise-broadband-policy-questions-20160331-gnv0uz

  • James Morley. The idea that conservatives are better economic managers simply does not stand up.

    Conventional wisdom holds that conservative politicians are more prudent stewards of the economy. These politicians are often happy to reinforce this view by citing their business acumen and denigrating the experience – or lack thereof – of their opponents.

    Think of Mitt Romney as multi-millionaire businessman versus Barack Obama, former community leader. Donald Trump also highlights his business “experience”, although his track record suggests he’s done far worse at managing his father’s wealth than a monkey throwing darts at The Wall Street Journal.

    In Australia, Prime Minister Malcolm Turnbull has positioned himself as a successful manager of economic transition in advance of the next election.

    But what if we were to take the business metaphor seriously and hold politicians to account with a performance review in terms of “measurable outcomes”? Would there actually be any evidence for the view that conservatives are better managers of the economy?

    KPIs for politicians

    The key performance indicators (KPIs) in this context are economic growth and, possibly, inflation. And you might think it obvious that conservatives outperform their progressive counterparts given their penchant for deregulation and tax cuts. Ronald Reagan’s “Morning in America” after Jimmy Carter’s era of “stagflation” would seem to settle the case.

    Or perhaps the Reagan/Carter example is too carefully selected and the actual role of politicians in guiding the fortunes of the economy is far less significant than they tend to claim. That would have been my guess before looking at the data.

    However, in a new paper, Princeton professors Alan Blinder and Mark Watson have actually looked at the data and they find a striking difference in the performance of the US economy under Democratic and Republican presidents. And the Democrats perform much better than their conservative counterparts.

    Since the second world war, average annualised growth of US real GDP has been 4.33% for Democratic presidents and only 2.54% for Republican presidents. The difference is statistically significant and robust. Inflation has also been lower under Democrats, although the difference is not significant.

    Now, you are probably thinking of a lot of possible explanations for this finding that don’t necessarily imply conservatives are worse managers of the economy. But Blinder and Watson have probably thought of even more possibilities and have addressed them thoroughly in their paper.

    In terms of the KPI analogy, the first objection might be that the executive powers of the US president are more constrained by legislative checks and balances of Congress than a CEO is by a board of directors or shareholders, let alone a prime minister at the head of a loyal party. This is certainly plausible.

    But it turns out that there is no relationship between congressional control and economic growth. Average growth was highest when Democrats controlled both houses at 3.47%, but the difference with growth when Republicans controlled both houses at 3.35% is small and insignificant.

    So, perhaps, US presidents can be held accountable for what happened under their watch.

    Measuring success

    Now you might ask, who really cares about the real GDP? Probably only a few macroeconomists like myself, right?

    But real GDP growth turns out to be correlated with a lot of other stuff that people do care about.

    For example, and probably not surprisingly, the unemployment rate fell under Democrats and rose under Republicans.

    Perhaps more surprisingly, labour productivity and real wages grew faster under Democrats than Republicans, although the statistical significance is mixed.

    Definitely more surprisingly, fiscal conditions in terms of structural budget deficits were worse under Republicans than Democrats, although not significantly so.

    Completely surprisingly, corporate profits (as a share of total income) were significantly higher under Democrats than Republicans. In the words of Blinder and Watson, “Though business votes Republican, it prospers more under Democrats.”

    So, however one sets the KPIs, the Democratic presidents come out on top.

    The secret of failure?

    Why did conservatives do worse? This is the tricky question that Blinder and Watson only partially answer.

    Republicans were in the White House for 41 of the 49 quarters since the second world war in which the US economy was classified as being in recession by the National Bureau of Economic Research.

    So maybe Republican presidents just had to deal with the hangover from the profligate Keynesian policies of their Democratic predecessors.

    But, again, there is no support for this in terms of any indicators of fiscal (or monetary) policy. Meanwhile, Republican presidents actually tended to benefit from more momentum in the economy at the start of their terms.

    Blinder and Watson find that Democratic presidents mostly had the benefit of more benign oil shocks and international economic conditions, which were arguably beyond their direct control.

    In fact, the only Keynesian story that has traction in the data is the fact that consumer confidence was higher when Democrats were elected (perhaps “Happy Days Are Here Again” after all). But, as Blinder and Watson acknowledge, sorting out causality from correlation is particularly difficult with measures of confidence.

    It’s also the politician, stupid

    It has long been thought that economic conditions have a major influence on electoral outcomes. Yet it seems the electoral outcomes can also influence economic conditions, at least with US presidents.

    Looking at the Australian context, the difference in average real GDP growth across Liberal and Labor governments is not statistically significant, although the Liberals’ average has been somewhat higher at 3.58% compared to 3.18% for Labor since 1959 when quarterly data became available.

    But a lack of significance means this could reflect just a few outliers rather than a systematic pattern. Notably, the comparison is even closer since 2008, with 2.43% for Labor in the face of the Global Financial Crisis versus 2.60% for the Liberals at the end of the mining boom.

    No matter how one cuts the data, conservative politicians simply don’t perform so much better than their opponents as they would have us believe. At the same time, the reasons for their left-wing counterparts’ economic successes cannot be easily tied to better policies. Instead, it could simply be a “feelgood factor” that, alas, few of the current US presidential contenders seem to engender.

    As for Turnbull, he might do best to focus less on his economic management skills and more on promoting confidence – or perhaps even chasing rainbows (coincidentally the name of the musical that first featured “Happy Days Are Here Again”).

    Professor of Economics and Associate Dean (Research), UNSW Australia This article was first published in The Conversation on 5 April 2016.

     

     

  • Negative gearing has created empty houses and artificial scarcity.

    In the SMH on March 28, 2016, Laurence Troy and Bill Randolph discuss the problem of negative gearing encouraging owners to leave houses empty. In this article they say

    ‘At the last census there were nearly 120,000 empty dwellings in the greater Sydney region alone, representing nearly one fifth of the projected new housing demand to be met by 2031, or equivalent to nearly five years of projected dwelling need.  When this is combined with under-utilised dwellings, such as those let out as short-term accommodation, the total number of dwellings reaches 230,000 in Sydney and 238,00 in Melbourne.’

    Dr Laurence Troy is a research associate and Professor Bill Randolph is director of the City Futures Research Centre at UNSW.

    See full article in link below.  John Menadue.

    http://www.smh.com.au/comment/negative-gearing-has-created-empty-houses-and-artificial-scarcity-20160324-gnqoeb.html

  • John Dwyer. Structural reforms to healthcare – two major reforms.

    Does the government understand the structural reforms to health care needed by modern Australia?

     Political pre-election posturing at the moment has involved many debating the question that asks ’Do we have a spending or a revenue problem in Australia?” Certainly when it comes to our health system we should first be asking what structural reforms would make that question less important. 

    While the idea that States could tax their citizens to pay for hospital care vanished in a flash, there is a distressing significance to the idea ever having been floated in the first place. It means that the Coalition still does not understand the components of the structural reforms needed to improve both the health outcomes and cost effectiveness of our health system. Implemented, the proposal would have further entrenched the inefficiencies in a fractured health system.

    Equitable, cost-effective health care in modern Australia requires two major reforms.

    Informed opinion, generated by world-wide evidence, suggests that the first major reform requires us to appreciate that the funding for the total spectrum of health care, which includes hospital, community and the primary care funded by Medicare, needs to be pooled so that these services can be integrated. Funding flexibility is a crucial issue, as this would allow differential spending on various components of the system depending on regional need. For example, rural primary care is more problematic than rural hospital care. Sadly this imperative is obviously not in the conscious mind of a government that would enshrine a separation of hospital and primary care funding as demonstrated by their State tax proposal.

    The concept of regional funding is very important as different regions with very variable demographics and health priorities are readily demonstrated in our huge country. In our present system we have Local Hospital Districts and Primary Health Networks (PHNs) within a State boundary. While the latter are meant to improve the quality of Primary Care and better integrate individuals care and provider availability there geographical boundaries make this impossible. There is only one PHN for Tasmania and only one for the whole of Western Australia outside of Perth! New Zealand has 80 such organisations.

    If one agency held all the health dollars available for health care and logical health districts were established without reference to State boundaries a resource distribution based on local needs not just population density would markedly improve health outcomes and cost-effectiveness. Regional fund holding in the UK sees “Commissioning Agents” able to seek providers for that regions health needs. This was to be the approach taken by the short-lived “Health Care Commission”, established by the Whitlam government.

    Federation has failed our health system as it has prevented it being operated as one system in which three components are fully integrated (Primary, Community and Hospital care). This is our unique disadvantage within the OECD. Now, 40 years after the idea was first suggested there remains an urgent need for COAG to pool all our health dollars and establish a State/Federal “Health Commission” to disperse the funds. The COAG meeting of health ministers later this week should commit to a reform journey with this initiative as the destination.

    Currently our States are responsible for funding our public hospitals with a variable, oft insecure, contribution from Canberra. Hospital admissions continue to increase steadily and the growth in hospital spending far exceeds any increase in Medicare spending. Because of the responsibility/funding divide, States are at the mercy of the success or otherwise of Primary/Community care to reduce the number of people requiring hospital care. They have no levers to pull to control demand. Figures from the Australian Institute of Health and Welfare suggest that 600.000 admissions to public hospitals each year could be avoided by a better-resourced Primary Care system. It is clear that a future featuring affordable and excellent hospital care is dependent on reducing the demand for hospital care.

    So a second major reform is long overdue. We need a major structural reform to change our outdated hospital, doctor and sickness centric system to one that focuses on the prevention of chronic illness, the reduction of hospital admissions and “team medicine”. A multidisciplinary team working in the one practice integrating all the care needed by enrolled patients. In much of the world this proven approach to better health care is referred to as the “Medical Home” model. It provides the needed components for modern primary care. Patients enrol in a practice populated by a team of health professionals from different disciplines to Improve patient’s health literacy and maintenance of a healthy lifestyle. Continuity of care allows for early recognition of problems that if not treated could become serious and chronic. The range of services needed by patients with established chronic diseases are provided in their “one stop shop” and the practice is resourced to extend care into the home/community to minimise the need for hospital admission.

    Such a model necessarily increases practice expenses, as the multidisciplinary team the patient needs has to be funded. However, doing so will reduce hospital admissions and so for the whole system is cost effective. The program will need more commonwealth expenditure and that should also include funding for prevention strategies. Having more water bombers available for the fire season would be welcomed but their availability should not mean that hazard reduction during winter is not prioritised. We can do a better job of coordinating care for patients with advanced, incurable chronic diseases but in focussing almost entirely on this priority we are doing little to turn off the tsunami of Australians who continue down the path to chronic avoidable illness.

    The tentative step towards introducing the “Medical Home “ model into Australia announced last week is welcomed conceptually but it is focussed entirely on the management of established disease not strategies for minimising the current flood of Australians developing chronic disease and the “Healthcare Home” as envisaged is a pale reflection of the fully developed model described earlier. A detailed plan needs to be presented before any judgement can be made on the likely success of this first step. The plan, as announced, would aim to provide patients with “multiple chronic illnesses”, who stick with one GP for their care, benefit from better-integrated care. A participating GP practice would receive fixed amounts quarterly for providing the enhanced care. While moving away from a fee for service model for the care of chronic illness and appreciation of the need to integrate a range of needed services is welcomed it is not clear how the GP conducting the orchestra will be able to fund the additional players needed. For a scheme said to involve 200 GP practices and 65,000 patients the suggested cost of $21 million seems totally inadequate and anyway, what does it mean when we hear the scheme is to be cost neutral?

    As usual, the devil is in the detail. How much will the practices be paid for the integrated service? Will this payment (capitation) vary depending on the number of chronic problems suffered by a patient? What level of morbidity will set the threshold for entrance into the scheme? How will the trial’s outcomes be measured? Who will determine the additional staff requirements and the skills they need as well as the financial compensation they will be offered in the scheme? Etc.

    All these questions can be addressed and have been elsewhere, but how much better would be this initiative be if it were to establish thirty or more fully resourced Medical Homes to prove their worth in the Australian context? We need to continue to advocate for that suggestion.

    John Dwyer is Emeritus Professor of Medicine at the UNSW.

  • Jon Stanford and Michael Keating – Submarines; cost, capability and timelines.

    This article is a response to the article posted yesterday by Paul Barratt and Chris Barrie.  ‘The case for building the future submarines in Australia.’

    Both Paul Barratt and Chris Barrie have served at the highest levels in Defence and their views are clearly worthy of very serious consideration. Indeed, their contention that a military-off-the-shelf (MOTS) solution is impossible because Australia does have a unique role for a submarine and that the future submarine (FSM) should be built in locally, is shared by many people.

    Nevertheless, it is surprising that Mr Barratt and Admiral Barrie do not discuss the capability for the FSM required by the Navy, the cost of providing that capability and the timeline in which the capability needs to be delivered. The authors have not attempted to justify spending $4.2 billion each on a conventional submarine (SSK), the first of which will not be delivered for 17 years, when a MOTS conventional submarine would cost well under $1 billion and even a large, highly capable Virginia class nuclear submarine costs around $3.7 billion. These submarines could be delivered in the early 2020s, or ten years earlier than under the White Paper scenario. This would mean that a costly and highly risky upgrade of the Collins submarines would not be required.

    While the Navy’s requirement for submarine capability is ambitious, it is by no means unique. Its requirement, for example, is similar to that of the UK and French navies. The problem is that its ambitious capability requirement, particularly for force projection in the South China Sea, points to a need for nuclear submarines, which both the other two navies operate. The previous Defence Minister acknowledged this by saying: “ideally we are seeking a comparable capability to a nuclear submarine with diesel-electric motors”.

    Unfortunately this is a fantasy. If Australia is determined to operate its submarines in the South China Sea in support of the Americans, then this could only be achieved with a reasonable margin of safety by a nuclear powered submarine. In that case, Australia should make it clear that its support for the US in forward operations in the South China Sea is contingent on the US agreeing to allow Australia to acquire nuclear submarines.

    On the other hand, if Australia cannot or will not acquire a nuclear submarine, then it should abandon the strategy of force projection in far-off contested waters. In any case, as the Australian Strategic Policy Institute has pointed out, there is no evidence to suggest that the US expects the RAN to undertake this task, which, in reality is a great power role.

    Once the role of force projection in contested waters has been dropped, then contrary to what Mr Barratt and Admiral Barrie suggest, there are several off-the-shelf solutions that would meet Australia’s submarine requirements. These roles include sea denial in the approaches to Australia, together with intelligence gathering and surveillance in our region. Indeed, a small conventional submarine, readily available off-the-shelf, is more appropriate for these tasks than the large boat the Navy wants. We might need six of these submarines, delivered in the early 2020s at a total acquisition cost of less than $6 billion. Combined with the savings from not having to upgrade Collins (an impossible task, according to a former submarine captain), we would be well over $45 billion better off than under the $50 billion proposal contained in the White Paper, which in any case does not allow for the highly risky Collins upgrade.

    Of course, Australian industry participation is a good thing provided it is competitive and does not compromise the defence benefits to be provided by the new assets. If ASC could deliver six SSKs in the early 2020s on a fixed price contract within, say, five per cent of a MOTS price, then by all means go for it provided the risks are managed appropriately. But otherwise, let’s bank the $45 billion or so saved on the submarine acquisition and let ASC content themselves with the $30 billion project to build the nine large frigates they have been promised in the White Paper. They will also be tasked with sustaining the new submarines, at a through life value much higher than the acquisition cost.

    Jon Stanford and Michael Keating  are Directors of Insight Economics and formerly worked together at the Department of the Prime Minister and Cabinet, where Dr Keating was the Secretary.

  • Ian Marsh. Disaffected electorates? Dysfunctional political systems? Part 2 of 3.

    Malcolm Turnbull’s has created the grounds for a July election. This crafty electoral ploy offers short term gains. If the cross bench resist, the election is legitimate. If the cross bench cave in, he will have demonstrated bold leadership. Moreover, he will have attained legislation that is highly prized by his Liberal heartland. Then he can call the scheduled election later in the year.

    But in neither election scenario is he likely to achieve a Senate majority. Further, there is talk of preferencing the Greens. There may also be guile here. This might give him leverage on social issues against the Abbott diehards.

    But what about good government?

    To explore this more important issue, look first at changing voting patterns. In Australia’s case, an astonishing (in historical terms) around 40% of eligible citizens either vote for minor parties, vote informal or don’t register to vote. Hardly a ringing endorsement of the once dominant major parties. The preferential voting system used in the Representatives gives a totally false impression of their   public standing.

    The Senate on the other hand, is elected through a proportional voting system but based on state constituencies. Paradoxically, this yields a distribution of seats much more aligned to the actual distribution of the popular vote. The Senate represents our underlying diversity. So much for the ‘unelected swill’.

    Australia is not alone in these expressions of citizen disaffection. Perhaps the most familiar and egregious examples of disconnect between mainstream parties and voters are in the US and Britain. Trump and Sanders are both leading anti-Establishment insurgencies. In the case of the US, the political structure, the party structure and political culture vary so much from Australia’s that comparison or inference is mostly superficial.

    Britain is more familiar. Jeremy Corbyn reflects disenchantment with the neo-liberal consensus of the Blairite elite. Some say he is unlikely to survive the year although Labour Party rules on leadership elections are ambiguous. Despite his unexpected election victory, David Cameron may also later face a leadership challenge, so bitter are the fractures that the EU referendum has opened up in the Conservative party. Nicola Sturgeon and Scottish nationalism represent yet another fault-line.

    In Europe, elections this year and late last year have disavowed mainstream parties in Germany, Spain, Ireland, Portugal and Slovakia. Spain took three months to form a new semi-stable government after elections in December. Germany does not face a federal election until 2017 – but in recent local elections voters turned from the established Christian Democrats and Social Democrats to Greens, Liberals and the anti-immigrant AfD.

    The story was similar in Ireland with former Prime Minister Kenny’s Fine Gael losing 10 seats in the February election. Kenny remains Taoiseach (prime minister) but supported by an unstable coalition. There are now nine parties and four independents in the 158 seat House.

    In both Sweden and Denmark mainstream parties are hostage to anti-immigrant parties. In France, Marine Le Pen is seen as no longer the candidate of only a mad fringe.

    With 28% of Australians born overseas, it is hardly surprising anti-immigrant sentiment is more muted. Similarly, the financial crisis has not scarred the economy so deeply. But the unwanted consequences of globalisation and social differentiation both introduce new electoral fault lines.

    The end of the mining boom is one uncomfortable expression of globalisation, asylum seekers and refugees another and the off-shoring of the auto industry a third.

    For its part, social pluralisation is everywhere evident, reflected in school sex education controversies, same sex marriage debates, promotion of women, animal rights campaigns, environmental action and so on.

    In summary, a slow-burn crisis of legitimacy would seem to be enveloping politics in many states, not just Australia. This fundamental issue invites a fresh look at basic political structures: do they remain fit for purpose?

    In Australia’s case, the present system was born in 1909. Protectionist and Free Traders then joined to form a united bloc against Labour’s socialism. This adversarial structure has lingered despite the post-83 convergence of Liberal and Labor economic agendas. Yet our society and economy are transfigured.

    If the logic for a wholly adversarial system has diminished, why is it so hard to question the present political structure? One obvious reason is that an alternative is hard to imagine. The way things are is so hallowed by time and habit that it simply does not occur to people to consider that what we have is dysfunctional or that there could be a better way.

    Another explanation perhaps lies in the dominant voices in political discussion. At an expert level, economists enjoy greatest standing and respect. But neither by training nor preoccupation are political processes or structures a legitimate field of interest. In their world view, these matters simply do not figure.

    Then there are the politicians themselves. At first glance you might imagine they would be most disadvantaged by the frustrations of office – the most troubled by neutered legislative achievement. Shouldn’t they be most open to alternatives?

    But the major parties are the formal beneficiaries of current arrangements. They share the spoils of office, they receive most public benefits, and the theatre of parliament maintains the fiction of their representational dominance.

    The Senate remains the House where the newer forces in Australian politics have standing and voice. We might therefore expect the promotion of change to come from them. Surely it’s in their interest to move parliamentary debate from its present negative and reactive style towards more proactive practice? For example, the late Liberal Senator David Hamer proposed that ministerial appointments from the Senate be ended. This would pave the way for the establishment of proactive committees with real standing and a forward looking brief.

    Take the recent CEDA report on fixing the deficit. Endorsed by three former heads of Treasury and PM and C and one current Reserve Bank Board member, this is exactly the kind of document that a Senate Committee should be able to take up – hold hearings around the country – provide a platform for both conservative and liberal economists – and flush out public commitments from the myriad economic and other interests who stand to be affected.

    The committee would no doubt squabble internally about options and trade-offs. This would be transparent. Perhaps limited bipartisanship might be flushed out. A full Senate debate and a motion for the House might follow. All or some of these actions would sustain momentum. It would demonstrate how the theatre of parliament can be used constructively to reach into wider media and public opinion. But for now this is fantasy!

    Until the misalignment between the structure of politics and our newly pluralised society is recognised as a fundamental challenge, dysfunctional government will surely prevail.

    Ian Marsh is a Visiting Professor at the UTS Management School.

  • John Menadue. The fake discussion about state taxes.

    Malcolm Turnbull’s ruse is obvious. He wants us to forget all about deficits and debt and the need for budget repair. To avoid these issues, he now tells us that if we want improved health and education services, we cannot have them because the states have refused his offer on state taxes and he will not increase commonwealth taxes.

    But we know that large increases in commonwealth government revenue are possible without any increase in income tax rates.

    There are numerous proposals on ways to increase revenue without increasing tax rates. The most recent was from the Committee for Economic Development of Australia (CEDA). That Committee suggested various ways in which revenue could be increased without increasing income tax rates.

    • Reducing the superannuation concessions.
    • Reducing the capital gains discount
    • Halving the fuel tax subsidy scheme.
    • Removing negative gearing.
    • Removing the private health insurance rebate exemption.
    • Reducing industry tax concessions.
    • Reducing work-related deductions.

    The other obvious way to increase revenue is to ensure that large multinational companies, private companies in Australia and trusts pay their fair share of tax. Many don’t pay any tax at all.

    None of this involves increasing tax rates. But these proposals would not be welcomed by the wealthy vested interests that support the Liberal Party.

    There is probably $20 b. to $30 b. of increased revenue per annum by addressing the issues above.

    All public surveys that I have seen suggest that Australians are prepared to pay increased tax, even increased rates of tax, if they believe that the tax system is fair and the money is spent efficiently.

    I have posted blogs earlier about the remarkable successes of the Nordic countries – Denmark, Sweden and Norway. These countries have some of the most successful economies and societies in the world yet they have very high rates of taxation. The Nordic countries have a basic trust in government. They broadly believe that the tax system is fair and services are efficiently delivered.

    It is something badly lacking in Australia.

    See links to two earlier articles on the Nordic successes – Postcard from Denmark on the Nordic success (17/1/2015);  Why are the Nordics so successful? (18/1/2015).

     

     

  • Cavan Hogue. Malcolm Turnbull, COAG and media confusion.

    Turnbull knew what he was doing.
    The media has turned on Malcolm Turnbull who is accused of ignorance. Media views seem to change even more often than political promises.  However,surely the PM knew why he called the meeting with the states. He knew they would reject it which is what he want​ed ​them to do. He now claims the moral high ground in denying their requests for money. Opinions will differ on whether this was a good decision but only time will tell if it worked -​whatever the media seesaw comes up with next.
    Politics has always been a rough business because only people with strong egos go into it so we should not be surprised at the jealousy and infighting that goes on. The electoral mob is fickle but so it would seem is the press and it remains to be seen whose judgment is better.

  • Ian Marsh. What wrong with Australia’s political system? Part 1 of 3.

    Most people are familiar with the power of incentives in economic markets. They know that efficient price signals can channel investment into productive assets and these same signals can drain funds from unconstructive pursuits. The same process more or less works at other levels. Both good and bad performance is demonstrated by similar calculations. In turn these calculations draw on a variety of other metrics – prices, volumes, demand, supply, growth estimates and so forth.

    People also know these numbers are reasonably reliable because they come from credible institutions. Thus markets are reasonably ‘free’ and undistorted. The Bureau and Census and Statistics is honest. The Stock Exchange is not manipulated. The judicial system acts according to the rule of law.

    At a tertiary level, a variety of other institutions – the Productivity Commission, APRA, the Reserve Bank – police these secondary systems and reframe them when necessary to ensure that they continue to support wider public interests. This in essence is the familiar economic system.

    Why do so many people then approach the political system with naïve or simplistic assumptions? Why do they not recognise that the political world is also a complex interdependent system where immediate incentives depend on the effective working of more embedded institutions?

    If they did, the reasons for the current impasse in public policy in Australia might be more apparent – perhaps along with the profound nature of the present political challenge.

    But let’s start with a fact. Since 1983, only one major piece of economic reform requiring legislative endorsement has passed in this country without bipartisan support. That was the GST which John Howard successfully navigated into law after winning the 1998 election. But he won that election and lost the popular vote. Hardly an auspicious signal to his successors.

    Every other major measure in Australia since 1983 has required bipartisan support.

    Why, short of a palpable crisis, is bipartisanship so elusive? Look first at immediate incentives. Politicians live in a two party, winner-takes-all world. Conceding common ground can spell disaster for a leader. Look no further than Malcolm Turnbull’s fate as Opposition Leader.

    This adversarial system was conceived to highlight the choice between major parties that differed in their basic policy orientation. In the process, common ground, which was essential to sustain continuity in governance, was deliberately disguised or concealed. The parliamentary theatre was deliberately designed to highlight programmatic differences. The forms and procedures of parliament – question time, the allocation of time, executive prerogatives etc. – work to sustain this divide. The late Bernard Crick captured this perfectly in his depiction of parliamentary routines as ‘tantamount to a continuing election campaign.’

    This political architecture was indeed appropriate and relevant for much of the period from the birth of this system in 1909 until the adoption of a softened neo-liberal programme by the Hawke-Keating government after 1983. Now party differences do not turn on the basic longer term agenda. The market system has more or less won.

    But political leaders still live in a world in which immediate incentives dictate sharp product differentiation. How to respond? Is it surprising that from Tampa on we have seen a turn to populism and worse?

    But you might say – OK, the major parties have converged in their fundamental approach. So why not share this agreement with the public and fight over the detail of measures. Why not make clear we agree that the states need more tax revenue – but we disagree about where this should come from. The blue side says a GST of 15% and the red side says the Medicare levy. Why not play the game that way?

    The old problem of incentives recurs. Earlier we noted the political incentives that, on controversial issues, discourage disclosure of even partial common ground. These are reinforced by executive arrangements. Our present political system makes it impossible to separate debate into longer term and more immediate streams. The political system as it operates in parliament is governed by three basic conventions – ministerial responsibility, collective cabinet responsibility and confidence. Note these are conventions. They are not enshrined in the constitution. They have no wider legal base. They can be changed by votes on the floor of parliament. But they do determine the structure of executive power. They are long established. They distribute many privileges. And these rules of the game are sustained by the power and force of inertia. These conventions make it impossible to separate debate into longer term and more immediate components.

    Then there are the distorting incentives that are associated with the media cycle. This reinforces populism and a short term orientation. Why does this incentive structure now exercise so much power?

    The media cycle exercises its power because it now provides the primary link between political leaders and their publics. Earlier more complex tissue has largely dissolved. Once around 50% of the community had strong or very strong affiliation to one or other of the major parties. Party organisations enrolled activists. Party brands cued public opinion. Party programmes signalled longer term values and ambitions. Each party stood for a clear and distinctive position in the eyes of its supporters.

    Political loyalty then turned primarily on class identification. This was the dominant social fault line. Class remains an important marker. But it no longer predominates. The women’s, gay, environment, consumer, animal rights, Indigenous, ethnic and other movements of the 1970s have busted that simple binary divide. And they have stimulated conservative reactions which have further compounded differentiation. Australian society is now pluralised in a way that would be unrecognisable to Alfred Deakin or Billy Hughes much less to John Curtin and Robert Menzies.

    The major parties try to contain these internal pressures, not surprisingly often not very effectively.

    So if you want to understand why the Australia political system is in trouble look no farther than this catalogue of distorting incentives and hollowed out systems. Has the two party system passed its use-by date? Such a judgment is likely to be hotly contested – not least by those who in one form or another are advantaged by the present structure of power. Or by those whose political imaginations cannot extend beyond the existing architecture.

    Were we to move beyond it, what should count as the central challenge? Surely the primary concern must be to renew the tissue that links the system to the people? In our more fluid and more pluralised society we need capacities for a more informed public conversation. We need to be able to debate single issues and we need capacities to do this initially at the level of strategy. Is this an important issue for our country? What are some options in responding?

    In other words we need an institutional design that can separate the longer term strategic conversation from a more immediate one about responses. Ideally the main parties would campaign fiercely over the latter issue – but some degree of partisan consensus would reinforce public support for the former. By such means, majority coalitions that can underwrite (or prevent) policy action could be constructed.

    How to do this? We do not need wild schemes. This is how the Senate worked from 1901 to 1909. Ministers were drawn largely from the House. The Senate and its committees were custodians of longer term issues.

    But this is a bigger story. We may need new political architecture for a more pluralised twenty-first century. But before there is even a remote possibility of that happening, the distorting incentives and dysfunctional institutions that are causing our present political discontents need to be frankly acknowledged.

    Part 2 tomorrow: Disaffected electorates/ Dysfunctional political systems?

    Ian Marsh is a Visiting Professor at the UTS Management School.

     

  • Paul Barratt and Chris Barrie. The case for building the future submarine in Australia

    When charting a trajectory to a desired end point it is as important to have an accurate fix on the starting point as it is to know where one wants to end up. So it is with SEA 1000, the Future Submarine (FSM) project.

    Much of the commentary is based on a politically inspired perception that the Collins Class submarine project (‘Beazley’s subs’) was a disaster characterised by cost over-runs, delayed delivery, intractable technical problems, and chronic unreliability once introduced into service.

    The facts are that the submarines were built to within 3-4 per cent of the original contract price after allowing for inflation, that the average delay in delivering the submarine compares well with other major projects, and that the overwhelming consensus among military insiders is that the submarine project was a great success, with regular claims being made that the Collins Class submarines were the finest conventional submarines in the world[1]. Certainly they are highly regarded by the US Navy.

    Furthermore, in 2000 the Government acquired all of the shares in the Australian Submarine Corporation (ASC – now ASC Pty Ltd) so it began the new century in possession of a highly capable submarine builder and maintainer, with associated facilities and skilled workforce.

    Some of these painfully acquired advantages were compromised in the first decade of the 21st century by the fact that the submarines were introduced into service without a validated strategy for sustainment throughout the life of the class[2], and without an adequate inventory management system[3]. This in turn compromised availability, with flow-on consequences for crew training and inevitability the availability of trained crew. These situations have largely been rectified.

    Our industrial advantages were further compromised by the fact that from the moment the Howard Government acquired the outstanding shares in ASC, it saw ASC as something it was preparing for sale. This got in the way of Governments reaching the simple and obvious conclusion that the successor to Collins should be built onshore by the successful submarine builder it already owned, with the focus of attention being on the required characteristics of the replacement submarine and which overseas submarine builder should become our design partner for the FSM project.

    This ambivalence towards ASC, and the feeling that there might be someone out there who would give us an off-the-shelf solution or a bespoke submarine, has led to a succession of governments spinning their wheels for so long that we are now committed to a multi-billion dollar life extension of the obsolescent Collins submarine as well as the cost of FSM, so any potential savings have long since vanished.

    To compound this error, there is strong circumstantial evidence that former Prime Minister Tony Abbott did a handshake deal with Japanese Prime Minister Abe to acquire Soryu submarines from the Japanese – a deal he walked away from on the eve of the first challenge to his leadership. In walking away from the deal he set up a ‘competitive evaluation’ (whatever that might be) of potential partners, a process which over time seems thankfully to have drifted back in the direction of being a thoroughgoing evaluation of potential partners.

    Is there a military off-the-shelf (MOTS) solution out there? Many of those who see proposals to build a purpose-designed submarine in Australia as an indulgence and/or a branch of industry policy rather than defence policy would assert that there is. The Abbott Government seems to have thought so, based perhaps on advice in 2010 to then Opposition Defence Spokesman David Johnston by Vice-Admiral Robert Thomas, Commander of the U.S. Seventh Fleet: ‘you want to find the finest diesel-electric submarine made on the planet – it’s made at Kobe works in Japan’[4]. “Finest submarine for what?”, one might ask.

    Those who think the Japanese Soryu submarine is the solution would do well to read Option J for FSM – a Japanese solution?, Rear Admiral (Retd.) Peter Briggs’s comparison of the Soryu with the Collins Class published by the Australian Strategic Policy Institute.

    We would contend that there is no off-the-shelf solution, and this is the testimony that a range of expert witnesses gave in 2014 to the Senate Economics References Committee inquiry into naval shipbuilding, leading the Committee to recommend that

    • the Government formally and publically rule out a MOTS option for Australia’s future submarines
    • the Government focus its efforts on the ‘new design’ or ‘son-of-Collins’ options for Australia’s future submarines and suspend all investigations for acquiring a MOTS submarine, including the current Japanese Soryu-class[5].

    Having heard a range of evidence on the advantages of a local build, the Committee concluded:

    Given the weight of the evidence about the strategic, military, national security and economic benefits, the committee recommends that the government require tenderers for the future submarine project to build, maintain, and sustain Australia’s future submarines in Australia.

    When selecting its preferred tenderer the government must give priority to:

    • Australian content in the future submarines; and
    • proposals that would achieve a high degree of self-reliance in maintaining, sustaining and upgrading the future submarines in Australia for the entirety of their lifecycle[6].

    We agree with this conclusion, based upon the evidence presented to the Committee. We note in particular the evidence of Rear Admiral Briggs that the ability to build, sustain and evolve in country puts us in a much better position to manage the cost of ownership[7], and the evidence of Commander Frank Owen of the Submarine Institute of Australia regarding the experience with sustainment of the Oberon Class:

    We were second cousin, twice removed of the logistics support capability surrounding that submarine. When the host nation stopped operating them, the supplies dried up and we had occasions [where] submarines were unable to sail because of vital components and spare parts that were unavailable[8].

    We also agree with Rear Admiral Briggs that there is no point in buying a submarine that does not do the job:

    There is no point spending any money on a submarine that does not do what you need it to do. You have to modify and extend to get a new Collins-like capability. Buying an off-the-shelf submarine with a 6,000-mile range would be worse than a waste of money; it would be an illusion. You will think you have submarine capability and the day you want to use it you will find that it cannot get there or stay there and do the job[9].

    Finally, there are some important geo-political considerations to be brought to account. Former Prime Minister Tony Abbott commented in Tokyo in February that “for Japan this submarine deal is strategic: for the others, it’s commercial”. That seems to us a good reason to stay away from the Japan option, not only for the reasons cited by Hugh White and many others, but because our interests would be better served by a partnership with an experienced exporter that values its commercial reputation. Japan’s main interest would be served the day the contract is signed; for the Germans and the French, to protect their commercial reputation, the objective is successful, timely delivery of the project.

    Second, the submarine arm of the US Navy has demonstrated a high regard for the capability of our purpose-designed submarines, and for working with us in relation to submarine training, exercising and operations. If we simply became the operators of Australian-crewed Japanese submarines, would they sustain that interest?

    Our conclusion is that the Government should proceed with all due diligence in accordance with the November 2014 recommendations of the bipartisan Senate References Committee, and not be distracted by the siren-songs of those who would argue that there is a cheaper, lower risk, “adequate” option to be found elsewhere.

    Paul Barratt AO, Former Secretary, Department of Defence

    ADM (Retd.) Chris Barrie AC, Former Chief of the Australian Defence Force.

     

     

    [1] Yule, P. and Woolner, D., Steel, Spies and Spin: The Collins Class Submarine Story, Cambridge University Press, 2008, pp. 325-6.

    [2] Australian National Audit Office, 2008-09, Management of the Collins-class Operations Sustainment, paragraph 3, at

    http://www.anao.gov.au/Publications/Audit-Reports/2008-2009/Management-of-the-Collins-class-Operations-Sustainment/Audit-brochure

    [3] Ibid., paragraph 11.

    [4] Bloomberg 2014, ‘Australia Mulls Japan Submarines Under China’s Cautious Gaze’, Bloomberg Business, 18 December, at http://www.bloomberg.com/news/articles/2014-12-17/australia-mulls-japan-submarines-under-china-s-apprehensive-gaze.

    [5] Senate Economics References Committee, Part II: Future of Australia’s Naval Shipbuilding Industry: Future Submarines, page 38.

    [6] Ibid., p. 21.

    [7] Ibid., p. 29

    [8] Ibid., p. 31

    [9] Ibid., p. 61

  • Mike Steketee. COAG and hospitals: look beyond the funding to fix our health system.

    Before Malcolm Turnbull and the states start haggling over hospital funding, it’s worth looking at why the system costs so much to run. Maybe it’s not just cash, but waste and inefficiencies that need addressing, writes Mike Steketee.

    Why do our hospitals cost so much to run? Like$55 billion a year and rising rapidly?

    It is the question worth asking before Malcolm Turnbull and the premiers start haggling at today’s COAG meeting over how best to pour more money into hospitals. Yes we are an ageing population and the health system is devising ever more clever ways to treat us.

    But that is not all that is going on. If you are 55 or over living in Fairfield in western Sydney, your chances of having knee arthroscopic surgery were 185 per 100,000 people in 2012-13. In Bunbury in Western Australia, the chances were more than seven times greater – 1319 in 100,000.

    Are there that many more dicky knees in Bunbury or at least ones that require hospital surgery? Or is it that many older people in Fairfield have been denied necessary surgery?

    Not likely on either front, according to the Australian Commission on Safety and Quality in Health Care, funded by federal and state governments. As it said in November:

    Despite the evidence that knee arthroscopy is of limited value for people with osteoarthritis and may cause harm, more than 33,000 operations were performed on this age group during 2012-13. Many of these people will have degenerative disease in their knees and will not benefit from this intervention.

    It added that, even if you argue the extremes distort the picture and take out the areas with the highest and lowest rates, hospital admission rates for arthroscopy still varied more than four times between local areas.

    The Commission found an overall variation of more than seven times for cataract surgery, which was performed 160,489 times on those 40 or over in 2012-13. Age differences between areas do not come anywhere near explaining variations of this size.

    For lumbar spine surgery for those 18 and older, the variation was 4.8 times. This included spinal fusion procedures, for which the Commission said there was limited evidence of its effectiveness for painful degenerative back conditions.

    And so on. Carried across a hospital system which saw 9.7 million admissions in 2013-14, this suggests that a great deal of money is spent unnecessarily.

    John Dwyer, emeritus professor of medicine at the University of NSW, has had a stab at estimating the waste generated by doctors across the whole health system and comes up with a figure of at least $10 billion a year. As they say, a billion here and a billion there and soon you’re talking serious money.

    A Productivity Commission research paper last year made a similar point:

    Governments and patients spend a considerable amount of money on health interventions that are irrelevant, duplicative or excessive; provide very low or no benefits; or, in some cases, cause harm.

    Despite all this, the Australian health system delivers some of the best outcomes in the world, other than for Indigenous people. But costs are rising rapidly, in part because of too little control over waste and too much emphasis on hospital treatment.

    Knees seem to be one particular problem. Knee replacement surgery was performed at the rate of 191 per 100,000 population in Australia in 2013-14 – 61 per cent higher than the average in 30 OECD countries.

    Overall, admissions for longer than day surgery in Australian hospitals are lower than some countries such as Germany but higher than those with which we often like to compare ourselves, such as New Zealand, the UK, the US and Canada. The last of these had a rate of admissions half of that in Australia.

    The Productivity Commission paper canvasses some of the weaknesses that apply across the whole health system but often culminate in expensive hospital treatment. It says governments subsidise many health treatments that have not been assessed for clinical and cost effectiveness.

    Often clinicians do not realise they are over-diagnosing patients, providing superfluous or harmful treatments or applying valuable treatments in the wrong way. Clinical guidelines … can be an effective way to promote high value medicine but they are often too complex, out of date, lack credibility or poorly implemented.

    Doctors are often resistant to change, including in acting on the findings of evidence-based medicine, arguing that their training equips them to know best the needs of individual patients. The way they charge – on a fee-for-service basis – is an incentive to provide more services than are necessary.

    The initiative announced by Malcolm Turnbull and Health Minister Sussan Ley on Wednesday to trial a different way of treating chronically ill patients, who often have multiple conditions, is an attempt to address some of these problems. At the moment, they said, such high users of the health system saw up to five different GPs a year, making it more likely they would fall through the cracks and end up in hospital.

    “Half of all potentially avoidable hospital admissions in 2013-14 were attributed to chronic conditions,” they added. Under the two year trial, one GP practice will co-ordinate the care of these patients and receive quarterly payments. This shifts the emphasis to improving the overall health of the patient, rather than charging for individual treatments.

    Turnbull and Ley hailed this as “one of the biggest health system reforms since the introduction of Medicare 30 years ago.” However, we shouldn’t get too carried away: various forms of co-ordinated care, including for chronic illnesses, have been tried for at least the last 20 years, with mixed results. Nevertheless, an increased emphasis on primary care – that is through GPs and including prevention programs – is crucial to keeping people out of hospital.

    These potential savings are before we even start talking about inefficiencies in administering the health system. With both the federal and state governments putting money into public hospitals, there is bureaucratic duplication on a large scale.

    Each level of government blames the other for deficiencies in hospitals. As well as blame shifting, each is constantly manoeuvring to shift costs on to the other. For example, hospitals, which are run by the states, are forced to keep elderly patients in beds costing $1200 a day because there are not enough places costing only $200 a day in nursing homes, which are funded by the federal government.

    Turnbull is right in suggesting this week that if the states raised more of their own revenue – for example, through his proposal to let them levy income tax – it would make them look more carefully at how money was spent. At the moment, it is much easier to beg Canberra for more money than to make voters cough up through taxes.

    It is just that experience suggests that the main effect of Turnbull’s idea would be to put even more pressure on hospitals. In most areas where they already have the power to raise taxes, the states have competed with each other to bid them down, such as through ever more generous exemptions for payroll tax and land tax.

    Of course, if Canberra stood firm on the states solving their own problems, it would force them to tackle some of the waste and inefficiency in their spending – either that or allow hospital and other services to run down and cop the wrath of voters. But then the states would just try to blame it on Canberra.

    Mike Steketee is a freelance journalist. He was formerly a columnist and national affairs editor for The Australian. This article was first published in The Drum 1 April 2016.

     

  • Chris Bonnor. Malcolm abandons the middle in schooling

    Two plus years of conservative government has given oxygen to a number of strange solutions to ill-defined problems. Malcolm Turnbull’s proposal to have the States alone fund government schools, leaving the Commonwealth to look after private schools, is the latest.

    As a serious suggestion it has been widely condemned, but it would be premature to dismiss it as a piece of spontaneous kite flying. Conservatives have been playing in this space for some time. In April 2014 the Centre for Independent Studies (CIS) flagged having wealthy parents paying fees for public education. Around the same time Tony Abbott commissioned another Tony (Shepherd) to come up with ideas, including about funding for schooling. Most of his suggestions were wisely ignored – but issues arising from having schools funded by two levels of government struck a nerve.

    Then in June last year the Abbot government’s green paper on federation reform contained a proposal for the Commonwealth to abandon funding of public schools. It was one of four options – but it seems Turnbull’s current proposal has won the day. Malcolm has lurched to the right again. That emotional attachment of the Coalition to private schools, once declared by Christopher Pyne, won’t be shaken.

    It’s not that having two levels of government play around with schools isn’t a problem. It certainly is – and it helps explain why our current framework of schools is largely unsustainable. It’s just that sensible solutions to date have been placed in the too hard basket – or modified out of contention after lobbying by sectional interests.

    The best example is Gonski’s recommendation that a Commonwealth/State schools resourcing body be established to help restructure school funding to reflect student needs, regardless of sector. Both levels of government would contribute, but the allocation of funding would be well outside the political sphere and arguably manageable across levels of government.

    The fact that it didn’t happen is regrettable – because the Prime Minister’s current proposal is going to open a pandora’s box of new problems, while failing to resolve longstanding ones. In their most generous moments there will be few observers who would believe that a Coalition government will slow down galloping funding increases to private schools.

    Even leaving aside the school sector trench warfare that would be renewed, shifting all funding of public schools to the states, in the absence of any overarching equity monitoring, risks cementing the inexplicable variations between the states in the way they currently fund schools.

    There are many examples, best illustrated by comparing recurrent funding for secondary schools with an average level of socio-educational advantage (ICSEA 950-1050). On average the state and territory governments across Australia fund each student in these schools at around $10,260 (2013 figures from My School). Location alone suggests that there will be noticeable differences between the states/territories: Students in the Northern Territory, for example, are funded at $16,400, well above the national average.

    But secondary students in Victoria are funded at around 60% of the level of students in the ACT. In fact Victorian public school students are funded by their state government at levels well below those in other states. If you want to be a well-resourced public secondary student, don’t attend high school in Victoria, or for that matter in Tasmania. Aside from the two territories, the best funding per student comes from the state governments of South Australia and Western Australia.

    It’s not as if current Commonwealth funding solves any of these problems. The average federal recurrent funding to state public secondary school students was $2000 three years ago. Victoria, Tasmania and especially Queensland are well below this figure. There may be a good explanation for these variations but I’ve missed it.

    The patterns of capital expenditure on schools by the states…just don’t seem to form any pattern at all. The last time I checked (two years ago) annual capital expenditure per government school student in NSW and Victoria averaged around $500, but had generally declined over four years. In contrast, capital expenditure per student in Queensland government schools almost trebled, to around $1700 per student in 2012. Capital expenditure increased in South Australia. It also increased in Tasmania to 2011, yet all but disappeared in 2012. Western Australia showed a three year decline followed by a substantial boost in 2012.

    In the light of all this it is instructive to read the following in Matthew Knott’s SMH report. He showed how last year’s green paper warned that the option now adopted by Turnbull

    “could, however, lead to very different funding models being applied across the states and territories and between the government and non-government sectors, leading to differences in the level of public funding for schools with similar population characteristics.”

    Too late, that’s already happening – and on a large and inexplicable scale. Left to their own devices – especially the political ones – governments at both levels won’t get it right. We have to get back to Gonski’s recommendation to set up a schools resourcing body, funding schools on need with the money coming from both levels of government. Yes, where the money comes from is important, but where it goes, and who is checking, is critical.

    In the meantime and while he is licking his COAG wounds, the Prime Minister could do worse than read Jessice Irvine’s piece in the Fairfax media. Why would a canny investor like Malcolm Turnbull ignore the big dividends which would come from investing in schools?

    “Kids from low socioeconomic backgrounds are our greatest untapped source of potential growth. They are our most undervalued stock…..Investing in our most vulnerable kids remains the best social investment strategy around. Only a foolish investor would turn his back on it.”

    Chris Bonnor is a Fellow of the Centre for Policy Development and a Director of Big Picture Education Australia.

  • Michael Keating. The Turnbull Proposal for State Income Taxes

    Prime Minister Turnbull says his proposal for the States to levy their own income tax ‘is the most fundamental reform to the Federation in generations’. Well maybe. It certainly would be a significant change, but reform? Furthermore, even if this proposal were ever implemented, it is hardly new. For example, the Fraser Government actually legislated to allow the States to raise their own income taxes, but none took up the opportunity.

    In principal I agree that governments would be more accountable, and possibly more responsible, if they raised all or most of the revenue needed to fund their expenditures. Consequently, I accept that a move towards reducing the present degree of vertical fiscal imbalance and better match revenue and expenditure responsibilities should be seriously considered.

    At this stage, however, Prime Minster Turnbull is only proposing to transfer 2 percentage points of the income tax rate to the States; effectively an annual transfer between the Commonwealth and the States of about $14 billion. This compares with the $8 billion a year that the Abbott Government took away in the notorious 2014 Budget, and if nothing else changed this extra $14 billion would be quite a carrot to induce the States to agree.

    The Turnbull Government, however, is indicating that it is prepared to restore around $3 billion of these cuts to State payments, and so allowing the States to raise $14 billion in income tax revenue would leave the Australian Government Budget a net $9 billion down. Further savings would therefore be necessary, either from the Commonwealth’s own programs or from payments to the States. In this context it is not surprising that the Treasurer has floated the idea that another $6 billion could be clawed back by the Commonwealth ceasing its funding of State schools as part of the $14 billion package.

    But apart from this fiscal problem, realistically much more would be needed to realise the Prime Minister’s vision of the States taking over full responsibility for a variety of functions and thus ending the ‘blame game’. Indeed, the $14 billion a year that has so far been floated would not even cover the cost of the Commonwealth contribution to hospitals as well as schools.

    Most importantly, in this context, is that $14 billion is well short of the total of $50 billion paid each year to the States to cover all presently tied grants. For the States to be fully responsible for funding all their services would therefore require a far larger share of the income tax than has so far been mentioned, or alternatively allowing them much more freedom and capacity to increase income tax rates.

    But until the States get the taxable capacity to raise all or most of this annual $50 billion does anyone seriously believe that this relatively small change to give them a 2 percentage point income tax rate would make the States much more accountable and responsible?

    In my opinion there is some further scope to rationalise the respective roles and responsibilities of the Commonwealth and the States. For example, if Mr. Turnbull is fair dinkum why doesn’t he offer to return to the arrangements established by the Keating Government under which the Commonwealth was totally responsible for funding national highways, while the States and local government had total responsibility for all other roads. This arrangement was a sensible separation of responsibilities, but it fell foul of the pork-barrelling National Party, and so the Howard Government reversed it.

    As both John Menadue and I have emphasised, however, for many joint government programs there are good reasons why we have adopted our present shared funding arrangements (see my earlier article on Federalism, reposted on 31 March, and John Menadue’s post on the same day).

    Most importantly, in many cases the Australian Government has responsibilities that cannot be separated from those of the States. For example, education and training is vital for the future of innovation, productivity, employment participation, and economic growth, all of which are key Commonwealth responsibilities. While health necessarily involves both levels of government, as the Australian Government responsibilities for Medicare and aged care necessarily interact with the State Government responsibilities for hospital care.

    Indeed, the Turnbull Government seems to be prepared to acknowledge that separating the roles and responsibilities of the two levels of government presents a particular problem. According to some media reports the Australian Government may not withdraw from health funding, but it could withdraw totally from having any responsibility for Schools. Certainly the Australian Government has less at stake in schools, where its intervention has never achieved a great deal in the past. But in that case, maybe the Australian Government should take over total funding responsibility for vocational education and training which is necessarily closely related to the needs of industry, and where most of the funding is increasingly being provided to both private and public providers using a competitive model.

    Perhaps the most important Australian Government responsibility that would be compromised by the States setting their own tax rates would be the potential impact on fiscal policy. In the immediate future this is not expected to be a problem as the proposal envisages that the States would initially only be getting what would effectively be a share of the income tax, and the change would be revenue neutral. But once the States start setting their own income tax rates then this would compromise the necessary independence of the Australian Government to determine fiscal policy for the nation. Indeed, time is of the essence with fiscal policy and we cannot afford to have it run by some sort of Federal-State Committee. While on the other hand if governments set tax rates independently of one another, there is a risk that any time the Australian Government lowers its tax rates, then the States would seize the opportunity to take advantage of the extra taxation capacity available, and raise their own State income tax rates.

    In addition, although the Australian Tax Office would continue to be responsible for administering the tax system, and each taxpayer would continue to file only a single return, there would be a number of administrative problems with the Prime Ministers’ proposal that would not be easy to resolve. Thus, unlike the GST revenue, which has a common tax rate and can therefore be distributed on a per capita basis, this per capita distribution makes no sense for income tax revenue if rates of taxation differ among States. Accordingly, companies are already demanding that the states should not have a share of company tax because of this sort of complication. Many individuals, however, also derive income in more than one state, and it still remains to be worked out how their income tax payments can be distributed between two or more States where the rates of taxation vary.

    As John Menadue points out in his accompanying post, given its many problems and lack of clarity, this proposal by the Prime Minister is essentially a diversion from what is or should be the major concern of the Council of Australian Governments (COAG). The most critical challenge, which all Australian governments are facing, is first to repair the substantial Budget deficit, and in the longer-run to reconcile the demands for public services that are presently projected to run well ahead of likely government revenues.

    What COAG should therefore be discussing is how to raise more revenue and/or reduce the demand for services or improve their efficiency. Personally, and as I have argued in other postings, I think it will prove to be impossible to meet reasonable demands for future services without at least some increase in overall taxation in the decades ahead (see, for example, my recent article posted 28 March).

    In this regard the response by the Labor leader, Bill Shorten, to any suggestion that income tax might rise sometime in the future was most unhelpful. Mr. Shorten has already ensured that the possibility of raising the necessary extra revenue by increasing the GST was taken off the table, and now he seems to be intent on doing the same to any possible increase in the income tax in the decades ahead. One wonders how Labor could deliver its vision of society, and what it has supported, without increasing the overall tax take in the future – certainly Mr. Shorten has so far not told us.

    By contrast, allowing the States to determine their own tax rates raises the risk that at worst the States may enter a new race to the bottom. This is what happened after payroll tax was handed over to them by the McMahon Government in 1971. The States have since dropped the payroll tax rate and increased the tax threshold and exemptions. Ostensibly this was in response to tax competition generated by a perceived need to attract new firms, but most of the changes did little to attract industry because they mainly helped small business which is not geographically mobile.

    On the other hand, this time the Australian Government may force States to raise taxes by further squeezing their remaining tied grants. In that case the Australian Government would continue to solve its own fiscal problems by short-changing the States so that they are forced to raise taxes and thus take the blame for solving a problem of the Australian Government’s own making.

    A better alternative would be to adopt the proposal by SA and NSW that the States all get a fixed share of the income tax. This hypothecated share of the income tax could then be increased if all governments agreed to raise the rates for this purpose. Furthermore, by thus achieving an agreed increase in the overall level of taxation nationally, it would help to resolve Australia’s most important longer-run fiscal problem.

     

  • Ian McAuley. Labor’s policies.

    Amid all the political chatter about tensions between Turnbull and Morrison, a possible early election, and the laundering of donations to the Liberal Party, Labor has released a substantial policy document –Growing together: Labor’s agenda for tackling inequality.

    With a gathering of Labor luminaries – Jenny Macklin (who has main carriage of the policy), Bill Shorten, Chris Bowen, Andrew Leigh – it was hardly surprising that the media had a strong presence at its launch at ANU late last month.

    But it turns out that the journalists were more interested in a photo shoot than in public policy, because the document got little media coverage. Those who believe in an anti-Labor media conspiracy would not be surprised, but my view is that the journalists were looking for “deliverables” in the form of specific proposals (they found a few tidbits), but they weren’t equipped to do justice to a document outlining a major shift in policy emphasis.

    The document has two strong policy messages. First is its focus on inequality. Not welfare transfers or redistribution, but inequality. Second is its dismissal of any idea that there is a tradeoff between “economic” and “social” objectives.

    To understand how far these messages are out of sync with our present thinking, imagine Christian Porter, Alan Tudge, Scott Morrison and Mathias Cormann on one platform giving unscripted statements on the economic importance of dealing with inequality?

    These policy principles should really be no-brainers. Who would not say inequality is a major problem? And who would not believe that good economic policy and good social policy are inseparable?

    Unfortunately, they are not obvious.

    While most people may understand the moral case against rising inequality, they do not necessarily grasp the fact that inequality has bad economic consequences. High and persistent inequality destroys incentives, creates an “underclass” dependent on social security transfers, deprives people of the opportunity to develop and use their capabilities, and in the long run undermines the political legitimacy of the economic system. It’s no surprise that worldwide we are seeing the emergence of populist politicians with simplistic prescriptions for complex problems.

    And to suggest that we must sacrifice social objectives for the sake of “the economy” makes no more sense than the (probably apocryphal) story out of the Vietnam War: “we had to destroy the village in order to save it”.  As the philosopher Karl Polanyi stressed, we live in a society, not in a market: markets are, or should be, subservient to society, and should be subject to society’s norms. There is no superior entity called “the economy” to which we must pay homage. Economic policy that goes against our desire for a fair and just society is just plain bad economics.

    Yet that’s not the way the public see it. Poll after poll gives Labor a strong lead over the Coalition in “social policy”, while giving the Coalition a strong lead in “economic policy”.  Such a contradiction could be sustained only if the idea of a tradeoff is ingrained in people’s minds.

    So while Labor is on the right track in bringing together economic and social policy, it has a lot of convincing to do. Some of that work has to be directed at the public in general, some at journalists who have difficulty in understanding public policy, and some has to be directed at enthusiasts on the “left” who are too ready to dismiss economics, and who abandon the quest to find ways of overcoming inequality and social exclusion that are based on sound economic principles.

  • John Menadue. State income taxes – another political diversion?

    Malcolm Turnbull’s suggestion of states entering the income tax field may please ‘state rightists’ in the Liberal party, but it will damage our national aspirations and our national society and economy.

    In the repost below, Michael Keating, almost two years ago emphasised the importance of the commonwealth government’s domination of income taxes since 1942. This commonwealth government supremacy has been a key factor in building our successful national economy and society. Or as Paul Keating has said, the commonwealth’s income tax monopoly ‘is the glue that holds us together’.

    We federated to overcome the confusion of six different state tariff regimes. Do we now want eight different incomes tax regimes?

    The commonwealth’s supremacy in income tax is critical for economic management across the country. Do we want to weaken that national leadership and responsibility?

    We have national markets in every field and with a very mobile workforce. Do we now want to put up state barriers to this?

    Malcolm Turnbull’s proposal would put pressure on the states to reduce their own tax rates. Perhaps this is what his ‘state rightist’ supporters would like. We saw that in the 1970s when Queensland reduced state taxes and abolished death duties. All other states followed and we are now much worse off as a result. If states decided to introduce their own income taxes, we could see another race to the bottom.

    What Malcolm Turnbull is trying to do was tried forty years ago by Malcolm Fraser. The details may be different, but the Fraser proposal went nowhere.

    The Turnbull government has become very agile in diversionary tactics. The Abbott government spoke of a debt and deficit disaster but the Turnbull government wants to divert attention elsewhere. A GST was deliberately floated but then our attention was directed elsewhere. One critical issue above all else is budget repair. The Committee for Economic Development in Australia (CEDA) and others have suggested options for overcoming our persistent budget deficit, including increases in revenue. But the government doesn’t want to hear about that, so our attention is diverted to state income tax.

    I believe that strong national economic and social leadership is essential for the commonwealth government in the 21st Century, particularly in the global world economy in which we live. That globalisation will continue to grow. Why should we handicap ourselves in meeting such a challenge?

    I have always believed that ‘cooperative federalism’ although less sexy and requiring hard work, is the much better way to proceed. In the health field where states spend up to 30%of their budgets, I have proposed for many years a joint commonwealth-state health commission in any state that will agree. Perhaps a joint commonwealth-state health purchasing agency in regions would be a more practical way to start. I will be writing more about cooperative federalism in the health field.

    Tony Abbott has left us with many unfortunate legacies. He abolished the COAG Reform Council which had been trying to lead an informed debate on ways that the commonwealth, state and territory governments could cooperate to harmonise their responsibilities. One task of that Reform Council was to build a ‘seamless national economy’.

    Malcolm Turnbull seems to want to pull the seams apart.

    Michael Keating will be writing further on this subject.

  • Michael Keating. Federalism (repost)

    The Government’s Commission of Audit, which preceded this Budget, recommended that policy and service delivery should as far as practicable be the responsibility of the level of government closest to the people receiving those services, and that each level of government should be sovereign in its own sphere, with minimal duplication between the Commonwealth and the States. The Government for its part has insisted that it does not run schools or hospitals and that the States are ultimately responsible for them and what happens to them.

    This conception of the Australian Federation with its emphasis on States’ rights and separate roles and responsibilities is of course not new. Malcolm Fraser enunciated it before he became Prime Minister, and its supporters insist that it was what the framers of our Constitution intended.

    Furthermore, there is considerable intellectual attraction in separate roles and responsibilities for each sovereign government. It should enhance democratic accountability and help improve efficiency if the buck can no longer be passed backwards and forwards between the two levels of government. But why then has our Federation evolved in favour of greater national involvement in the provision of services that were originally the sole responsibilities of the States? The Commission of Audit seems to believe that centralism can and should be reversed, but I will argue below that there are good reasons why the national government has become more engaged in what were originally the prerogatives of the States.  Consequently, although there is probably some modest scope for redefining governments’ respective roles and responsibilities and reducing duplication, we will be best served by preserving the core features of our national system.

    In my view there are three key reasons for the pre-eminence of the national government. First, a fundamental reason why the States agreed to federate was to remove tariffs as a first step towards the creation of a national market. But now that we have a national market and indeed are facing global competition, businesses want common standards and licensing across a wide variety of fields; for example, everything from rail gauges, regulation of heavy road transport, company law and national competition, to food standards and the recognition of qualifications.

    Second, the responsibilities of government have grown. At the time of Federation pensions did not exist, but the Australian government now has constitutional responsibility for income support, including subsidising critical needs such as medical services, pharmaceuticals, and rental housing. Equally since World War II the Australian government has been expected to manage the macro-economy to ensure full employment and reasonable price stability.  Allied to this the Australian government also has responsibility for population policy, especially through migration, and for the growth in productivity and workforce participation which together determine the overall growth of the economy.

    However, these various national functions and responsibilities are not self contained. Today the various functions of government are heavily inter-related in a way that was much less true one hundred years ago, when we were all much less closely connected. For example, productivity is heavily dependent on the skills of the workforce, but these skills are in turn dependent on the quality of the education and training systems of the States. It is simply not possible for the Australian government to meet its responsibilities while being unconcerned about the effectiveness of various State government services.

    The third and final reason for national government pre-eminence is of course the national government’s domination of taxation, widely described as ‘vertical fiscal imbalance’ or VFI. Paul Keating called VFI the glue that holds our nation together, but for the States and the champions of States’ Rights, VFI is regularly trotted out as the root cause of centraliam. In the past the national government has passed payroll tax back to the States, and more recently they receive all the proceeds of the GST, but it seems unlikely that either of these taxes will ever be changed by so much as to make the States financially self-sufficient.

    In that case the removal of VFI would require that the States have access to the income tax. Legally there is nothing to stop them doing that now, but they have never taken up the opportunity, and indeed there are very important efficiency gains in only one government being responsible for administering any particular tax.  So the alternative is for the Australian government to raise the income tax and then to share the proceeds with the States. But why would sharing a tax result in clearer lines of responsibility than sharing responsibility for other functions of government which require expenditures? There would still be the same arguments about who should get how much and whether the States have adequate revenue. Alternatively if the States were allowed to add a surcharge to the Commonwealth tax, then there is the risk that the Commonwealth’s independent use of taxation policy for macro-economic policy would be compromised.

    In short it is not surprising that proposals to return to the past and increase State rights have got nowhere over a very long time. The truth is that a form of power sharing which we call ‘cooperative federalism’ is the only realistic way of managing inter-governmental relations. In Australia, for good or for ill, we have these two levels of government (plus local government), and power will inevitably need to be shared for a variety of functions where both have a legitimate interest. By contrast one cannot help being suspicious about the Commission of Audit proposals and whether their real intention is to provide a fig-leaf for the Commission’s smaller government agenda, with little or no concern for the impact on the availability and quality of publicly funded services.

    Instead a more productive discussion, than endless repetition of State’s Rights, would be to formulate better arrangements to guide the necessary future power sharing between the Australian Government and the States. To their credit that was what the Hawke, Keating and Rudd Governments were attempting to do with some success through COAG.

     

  • Ian Verrender. Turnbull will have a tough sell on economic policy

    Malcolm Turnbull is hardly going to win votes by spruiking the economic record of his predecessor. And yet he hasn’t exactly made any headway on his own tax reform or budget repair agenda, writes Ian Verrender.

    History, they say, is written by the victor.

    Try telling that to vanquished former prime minister Tony Abbott, who appears to be taking great delight in reminding us at every opportunity that the Turnbull Government will go to the next election on the record of the Abbott administration.

    When it comes to economic management, however, that’s not really the kind of record likely to win too many votes. For on any reading of the numbers, the Abbott-Hockey era was a bitter disappointment.

    After convincing the electorate in 2013 that we were facing an economic calamity, dubbed the “Debt and Deficit Disaster”, Abbott presided over a budget deterioration during his two years in office that sent government debt soaring.

    From $153 billion when he assumed office, net debt since has ballooned to $279 billion. It has risen from 10 per cent to almost 17 per cent of GDP.

    Curiously, given the scale of the deterioration, there has been an odd silence from the Government about how to rectify the problem. Budget repair quietly has been swept off the agenda and under the carpet.

    That is because it necessarily involves an overhaul of the tax system to lift revenue. Instead, the debate has devolved into a contest between those demanding ever greater tax concessions, which would apply even greater pressure on the budget.

    Missing is any discussion about the broader economic challenges we face or recognition of the opportunities that have been wasted.

    We’ve just emerged from a once-in-history resources boom, with virtually nothing to show for it. For a short period, it boosted our purchasing power – courtesy of a stronger currency – and made us all feel wealthier even as it hollowed out the economy. That period rapidly is coming to an end.

    Unlike farming, services or manufacturing, resources are non-renewable. And the national tragedy is that the vast bulk of the profits from those never-to-be-replaced resources flowed to offshore investors.

    The initial nobbling and eventual abolition of the Minerals Resources Rent Tax was a textbook study as to how an industry, with minimal investment, could shape public policy for maximum private gain.

    As Professor Ross Garnaut correctly postulated at the time, the mining tax debate would mark the end of a brief period when Australian politicians felt empowered to enact economic reform in the national interest. He concluded:

    At this dangerous time for the world and for Australia, it is important that we restore a capacity for Australian governments to implement policy in the public interest, independently of pressures from private interests.

    Six years on and the times are no less dangerous. Nor have the lobbying powers of the various sectional interests abated.

    Tax hikes have always been politically difficult. Now they spell almost certain political death.

    John Howard barely scraped across the line in 1998 with his proposal to introduce the Goods and Services Tax, an experience that Malcolm Turnbull clearly is keen to avoid.

    Having let slip vague hints of a broad overhaul of the tax system shortly after his ascension, involving possible changes to everything from the GST to negative gearing, capital gains tax and superannuation concessions, the prospect now is that if any changes are enacted, they will be minor.

    If that’s the case, the impact on the deficit will be minor. Part of the problem is that Turnbull and his Treasurer, Scott Morrison, have promised that any changes to the tax system would be revenue neutral; that it’s all about improving the efficiency of the system.

    That’s all well and good, but it ignores the fact that we have a structural deficit; our long-term spending is out of whack with our long-term revenue. Fixing it will require spending restraint and raising more revenue, all the while convincing the electorate of the desperate need for change.

    According to the former prime minister, his replacement should abandon any plans of raising new taxes and concentrate instead on spending cuts to get the deficit under control.

    If it were that easy, it would already have been done, perhaps even by Abbott when he was running the country.

    Abbott’s supporters claim that it was all the fault of a hostile Senate that refused his spending cuts, an argument that ignores basic mathematics. Not approving cuts should merely have kept the deficit steady.

    As Scott Morrison explained to the National Press Club earlier this year:

    Over the last two years … we have saved over $80 billion. But we have also had new spending of more than $70 billion.

    Even more damaging to the budget was the decision to axe the carbon and mining taxes. The carbon tax removal alone denuded the coffers of $7.6 billion a year. It was replaced by a subsidy called Direct Action, estimated to cost $1.5 billion over three years.

    Election promises they may have been, but removing such a large whack of revenue has limited any opportunity for tax relief elsewhere. There’s just no more wriggle room.

    When it comes to new taxes, Abbott’s abhorrence appears to be a relatively new phenomenon. It’s worth remembering that Joe Hockey’s first budget contained a temporary levy on higher income earners, a Medicare co-payment for GP visits and an increase in the fuel excise; taxes by another name.

    One of the biggest challenges facing Turnbull on budget night and at the ballot box – whenever an election is called – will be how to keep the nation’s schools and hospitals functioning.

    The Abbott government effectively stripped $80 billion out of health and education, passing on the funding responsibility to the states. That’s money they don’t have and it explains why NSW’s Mike Baird and South Australia’s Jay Weatherill were such strident supporters of an increased GST.

    All these concerns, however, appear to have drifted into the shadows as the new PM pontificates on innovation and confidence.

    The business lobby groups, in the meantime, continue to press the case for tax cuts, even in the face of revelations by the Australian Tax Office that show a third of all public companies and the largest private companies pay no tax at all. If recent statements from senior ministers are anything to go by, it appears they have succeeded.

    The property industry looks to have scored a win too.

    The PM has voiced his staunch opposition to the ALP’s plan to wind back negative gearing, a tax concession that has deployed hundreds of billions of dollars into loss-making assets, has made Australia among the world’s most expensive places to conduct business and transformed the country into a nation of landlords and renters.

    If tax reform or budget repair ever was on a table, it may well have been the marble one that splintered under the weight of a former treasurer the night his boss was dumped.

    Ian Verrender is the ABC’s business editor and writes a weekly column for The Drum.

    This article was originally published on ABC’s The Drum.