Soft power, hard decisions

My grandfather spent part of his childhood living in a tent. His older brothers were working in the mines before they were in their teens. And his sisters spent time in the local orphanage because his widowed mother was too poor to care for them.

I grew up in a nice house in a small town in East Gippsland. It was better than a tent, but very basic. The local electricity supply powered only lights, not appliances. We had an ice chest, a copper, and a wood-fired stove but no sewerage, gas, or television.

I didn’t attend preschool, because there wasn’t one. We got our first fridge when I was seven and our first television, when I was ten. As a young boy I used to accompany the local milkman on his early morning rounds on his horse and cart.

Unlike my grandfather, I didn’t come from a deprived background, my family was middle class. The modern world just arrived a little bit later in East Gippsland than other places.

To my older children, growing up in comfort in suburban Melbourne, these stories sound bizarre. They don’t realise the things they take for granted haven’t been universally available for very long.

The amazing rise in general affluence over the last century - particularly the past 30 or 40 years - has changed Australia beyond recognition. For the overwhelming majority, the rise in living standards has been astonishing.

We often ignore rising affluence because it’s incremental. Ordinary working families buy swimming pools, speed-boats, overseas holidays and four-wheel drives. We barely remember when few could afford to. More people than ever before now send their children to private schools. Government funding has played a role, but rising affluence is a critical factor.

It’s easy to overlook the impact of rising living standards and base our expectations of government on a society which no longer exists. The state’s role is changing - and our thinking needs to change too.

The size of government is no longer the big issue. What governments actually do is changing, the emphasis shifting from building to learning, from regulating to persuading, and from alleviating producer risks to moderating family income changes.

The gradual shift in emphasis from building to learning has been the most important shift. Since the 1950s, public expenditure on infrastructure relative to the total economy has fallen sharply. Greater efficiency, more private sector involvement, and a reduced need for new networks have all contributed to this.

No-one suggests government investment in infrastructure should return to the relative levels of 50 years ago. Governments’ responsibility to ensure that all Australians can develop their capabilities is now more important than their responsibility to build things.

The rapid acceleration in the need for learning over the past 50 years has pushed education to the centre of government activity. When most people did not finish school and few attended university, the burden on government was limited. The need for more skilled workers has grown rapidly since then, and changed the role of government in its wake.

Since the early 1990s, governments have spent billions on active labour market programs. More resources are being directed to early childhood learning, and demand for learning has soared right across our community.

In spite of the Howard Government’s cuts in some education funding categories, the proportion of the 2005-06 Budget devoted to education and training is still more than double that in the 1969-70 Budget. Implicitly, the role of government is shifting - building skills and capabilities is now more important than building things.

Public ownership is less important than it once was, because technology and production processes have changed. Regulation and competition can now contribute a great deal more to social outcomes than they could 50 years ago.

There is a continuing role for public ownership in some sectors, reflecting universality of use, monopoly characteristics, and externalities. While many still struggle to accept the shift in emphasis from public ownership to regulation, a new shift is already beginning. Regulation is being augmented by advocacy and exhortation.

The future state will rely more on persuasion and less on compulsion. The soft power of governments might be commonly used in international affairs but is still largely untapped in the domestic sphere. That’s now starting to change.

Government campaigns to reduce smoking and road accidents are early examples of this emerging role. You can’t legislate against all foolish behaviour, but you can educate against it. While regulation will remain an important weapon of government, exhortation is set to become much more prominent.

Changing attitudes is as vital to reducing obesity as banning junk food advertising. Instead of encumbering financial services providers with ridiculous disclosure obligations that generate mountains of paper that consumers don’t read, governments could get serious about tackling financial illiteracy. Why not increase their levels of understanding, so they can make informed decisions by themselves?

A more educated, skilled workforce is crucial to Australia’s future. Governments invest large sums in providing education and training services, but how much effort do they put into increasing the commitment to learning? Hardly any. Their investment is all supply side and no demand side.

The first step to a more educated population is people wanting to learn. The commitment to learning displayed by parents and children is a key factor in education outcomes, yet we do little to strengthen that commitment among those who don’t value education.

The state’s role in moderating risk has changed enormously. An endless web of complex interventions designed to protect and advantage particular groups of producers is being unwound. Intervening to protect particular producers at the expense of others is a recipe for economic stagnation. The Common Agriculture Policy, and Japanese over-investment in physical infrastructure, are outstanding examples of this principle. A dynamic economy requires dynamic producers.

Unwinding outdated regulatory arrangements is usually painful, but the results speak for themselves. Deregulation of the dairy industry has increased returns to producers, and reduced prices for consumers.

In unreformed sectors like broadcasting and telecommunications, Australia is falling behind other developed nations. Our appalling performance in broadband is a direct consequence of retaining outdated regulatory frameworks. Consumers pay excessive prices for inadequate products and limited choices.

The role of government in smoothing fluctuations over the life-cycle was minimal 50 years ago. It is now central. Where once we had child endowment and the aged pension, we now have an extraordinary array of schemes and arrangements to limit the economic effects of child-rearing, studying and ageing - and the fluctuations in our economic circumstances driven by life-cycle events.

Since 1969-70, the proportion of the federal budget devoted to social welfare and health insurance has risen from under 20 per cent to over 50 per cent. These days, the government isn’t just an item in the family budget, it’s running it.

This ever-more complex financial relationship between individual families and the state raises significant issues of individual responsibility and public sector efficiency. We’re living much longer, requiring more skills for employment, and in the case of women, participating in formal employment much more. The complex mess that we have created to respond to these pressures is crying out for sweeping reform.

In 2003-04, Family Tax Benefit B - which gives extra assistance to single parent families and families with one main income where one parent chooses to stay at home to balance some paid work with caring for their children - was paid to 38,500 families earning over $100,000 a year, and 76 families earning over $1 million a year.

By 2006-07, single-income families renting with two kids in childcare, and earning $60,000 a year, will pay no net income tax. The combined effect of Family Tax Benefits, childcare assistance and rent allowance will cancel out the tax payable.

This is an extraordinary level of direct government intervention in the financial circumstances of middle-income families. Governments are taxing families, then returning the money with strings attached, creating complex relational and financial effects along the way.

Comprehensive reform of this complicated web of financial relationships is required, and it must be built on relational as well as financial considerations.

While the state is intruding more and more into the financial lives of ordinary families, it is retreating from its previous role of providing direct support to people with serious disadvantages.

Many government bodies used to provide basic jobs for disadvantaged workers with intellectual, literacy or alcohol problems. Deregulation, privatisation and technological change have wiped out this role, depriving many disadvantaged workers of the only reasonable job opportunity they’re ever likely to get. Deregulating product markets makes this unavoidable, but little has been done to compensate for it.

The role of government is shifting to less tangible, more complex interventions, and away from building, owning and running things. The state’s role in promoting and enabling learning is becoming paramount.

Its role in enabling individuals and families to manage the ups and downs of the life cycle is increasingly prominent. Its role in the economy involves less reliance on ownership, less intervention to favour particular producers, and less focus on building things. The use of soft power to change behaviour by exhortation is beginning to emerge.

Most of these changes are happening in spite of the Howard Government, not because of it. It has poured money into dubious regional grants while allowing Australia to become the only country in the developed world where public expenditure on education and training is declining.

The Howard Government has failed to tackle producer regulations restricting competition in sectors like aviation, agriculture, pharmacy, broadcasting and telecommunications.

It has used the power of exhortation to strengthen its chances of re-election rather than to improve social outcomes. It has increased state intervention in the finances of individuals and families to smooth life-cycle fluctuations, but very selectively. Assistance with the costs of ageing has soared, but financial help while studying has declined.

The Government’s cavalier approach to spending has kept the government share of Australia’s economy relatively unchanged. Once the figures are adjusted to take into account the abolition of Financial Assistance Grants to the states in 2000, spending is at significantly higher levels than in the late 1980s under Bob Hawke.

In 1989-90, under similar economic circumstances, federal government spending was 22.4 per cent of GDP. In 2004-05, it was 23.7 per cent. If the Howard Government were spending at the same rate as the Hawke Government in 1989-90, federal government spending would now be $11.6 billion a year lower.

The implications of the changing role of government for spending are mixed. While the Government has neglected its responsibilities in education, it has wasted enormous amounts on grants and entitlements that are hard to justify. Even in the 1950s, handing out grants to caravan parks and hotels couldn’t be justified. It’s totally indefensible now.

Future governments will control less and produce less. They will exhort more and educate more. They will protect producers from risk less, and protect families from financial pressures more. They will still build things, but mostly indirectly.

Learning will be at the heart of the new state’s mission. Building the capabilities of its people is now central to a government’s task. Our commitment to learning, as individuals, families, companies and governments, will determine our future as a nation.

My grandfather died in his 50s, like many of his generation, scarred by his service in the World War I. Born under the minimal state in the 1890s, he lived to see the arrival of the building state in the late 1940s. He would barely recognise the learning state that is now emerging, but as a lowly educated factory worker who nonetheless revered learning, I suspect he’d approve.