Pearls and Irritations

You might interested in this repost of part 6 on the economic role of government.

The economic role of government

In addition to key principles the second immediate issue is the economic role of government. Those who would benefit from weak and distrusted government have deliberately undermined the legitimacy of the public sector.

We are often told that there is really no difference between the major parties. In some respects that is unfortunately true but I suggest there is a major and continuing difference. And that difference is over the role of government. The Labor Party has always rejected the view set out in the Liberal Platform ‘that only businesses and individuals are the creators of wealth and employment’

Australians have been encouraged to forget that their prosperity is based on both public and private goods. To many people government has become ‘invisible’, except as a vehicle for distributive welfare. Australians have lost sight of the contribution of the mixed economy, not only in providing public goods, but also in ensuring that the forces of greed and short-sightedness don’t lead to economic and social collapse. It is noteworthy that despite the continued denigration of government and the public sector, the three most trusted institutions in Australia are public institutions – the High Court, the ABC and the Reserve Bank. In the survey by Essential Research there was not a private group in the top eight most trusted groups and institutions in Australia. The three least trusted groups were business, trade unions and political parties.

Even conservatives acknowledge that only the public sector can provide some services such as national defence and management of the money supply. In addition, however there are economic functions where private funding or provision is possible but only at high economic cost, with distorted incentives and with serious consequences for equity. These include education, health insurance, energy and water utilities and communication and transport infrastructure. In these and other areas there are market failures for which prudent economic principles require a strong government role in funding or provision. Unless Labor articulates and defends the proper economic role of government – a pre-requisite to improving Australia’s weak taxation base – economic growth will be restrained by inadequate public spending and investment.

Of these investments, the most important is human capital to ensure that people can develop their capabilities so that they can contribute to their full potential through employment, business or unpaid work. In the competitive global economy of this century, human capital is a nation’s only secure asset. Scandinavian countries demonstrate this. A population with skills and with incentives which match rewards to contribution will draw less on distributive welfare, preserving public revenue for needed social insurance and public goods. The best antidote to disadvantage and low self-esteem is not welfare but well paid and meaningful employment.

Labor will find it hard to make these investments if it allows itself to be depicted as the party of big welfare spending. In fact conservative governments, because of under-investment in human capital and physical infrastructure, and neglect of economic adjustment, have spent strongly on distributive welfare to compensate for inequalities rising from a weakened economic structure. Over the last 50 years, social security assistance has risen from 5% of Australians’ household disposable income to 12%. Examples of this expanded social security assistance are baby-bonuses, family allowances and superannuation concessions for the wealthy. Governments are moving to wind back some middle class welfare, but the justification is more about immediate budgetary management rather than an expression of principles. Rather, Labor should be the party which ensures that Australia becomes less reliant on distributive welfare. Instead of referring to ‘the education revolution’ in isolation, it should present its human capital policies in the context of a unified set of principles in infrastructure, education, health, environmental  protection, underpinned by principles of investing in capabilities, nurturing individual freedom and autonomy and supporting social inclusion.

There is an opportunity to differentiate Labor from what has emerged as continuity between Howard and Abbott in that both are strong on distributive welfare while ready to sacrifice other aspects of government which would strengthen the economy’s capacity to provide well-paid and productive employment with less need for social transfers.

A reframing of policy in terms of strengthening the economy in order to reduce the need for distributive welfare would not only neutralise the ‘right’s’ attack on Labor as the party of the welfare state but would also give a unifying theme to many policies. It would link policies in industry adjustment, infrastructure, education, health and social inclusion. It would overcome the false framing of a trade-off between equity and efficiency. It would give Labor parliamentarians an opportunity to engage more openly with the public without the need for spin and carefully prepared texts.

In the last 5 blogs I have argued that Labor should be explicit about the principles that drive policies and programs. Those key principles were

Fairness

Freedom

Citizenship

Stewardship and

Ethical responsibility

In addition to these principles Labor should stand for democratic renewal, including of itself and the key role of government in a strong economy and society.

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