Politicians’ promises: either Peter pays Paul, or productivity pays all

The election campaign is so far mainly “spin” and tabloid trivia. Politicians’ promises tickling hip-pocket nerves blend largely inconsistent interest group-focused bribes.

Politicians’ promises will be paid for in two ways.

Politicians can redistribute from Peter to pay Paul or Mary (or Peter if they are sneaky!). Or they can facilitate more national productivity gains, improving living standards for all.

Good redistribution options exist. Henry’s super taxation reforms would have made super fairer and produced larger super savings, reducing an ageing population’s pension calls on the Budget.

The Government rejected them, keeping the current “flat tax” superannuation system and raising the Superannuation Guarantee to 12 per cent. This is unfair and inefficient - a poor public policy quinella.

Are any productivity improvements, rather than redistribution, paying for election promises?

The Henry Review proposed increasing the tax-free threshold (to $25,000), simplifying the income tax rate scale, and reducing high effective marginal tax rates (EMTRs) for many on targeted benefits.

If affordable, this reform is a good public policy trifecta. It improves fairness, increases workforce participation and total productivity, and reduces demands on the Budget. Productivity pays some of it.

The Treasurer was a big fan of reducing EMTRs. The government has been silent on this reform. Ironically, the Coalition says it will look at it.

But looking at “hard” election promises (an oxymoron?) for Australia isn’t encouraging. Consider some examples

The labour market

We need to maximise labour participation in an ageing Australia with looming labour market shortages. Do current government policies support labour market flexibility and productivity?  No, including for young people wanting short hours part time employment, but barred from it.

Student Mary pays Peter.

The Coalition promises discrimination for older people seeking jobs. Will this improve total labour market participation? Could it work against young people wanting a few hours part time work?

Will younger Mary pay older Peter?

The product market

Do the “green car”, and, more recently, the “cash for clunkers” policies stack up? The second might neuter the first. Small imported cars might benefit most, delivering some green benefits. If the policy is financed from other “green” programs, what’s the net “green” effect? Both schemes are grossly inefficient, not productivity-enhancing.

Service, mining and agriculture Peter and Mary pay manufacturing Paul.

The environmental market

On climate policy, putting a price on greenhouse gas emissions is the most efficient option if action is needed. Both major parties support much more inefficient options. Some are unfair, too.

Australian “feed-in tariffs” are an incentive to install solar panels on houses to generate electricity. Rich households can afford this. (Even with poor economics, it might make them feel good.) The poor that don’t follow suit pay higher electricity charges to subsidise the wealthy. This is neither fair nor efficient.

On climate policy, poorer Peter, Paul and Mary pay their richer namesakes.

The education market

The BER policy has little effect on education outcomes. Good teachers, well rewarded, with sanctions against poor performance, are central. Good education isn’t about “things”, still less about “things” poorly provided at excessive cost. (If it were, the BER scheme has given independent schools a “leg-up” against their public school counterparts prevented from managing their own school investment projects.)

Good education is about inspiring an eagerness to learn and leading by example.

Under the BER, student/taxpayer Peter and taxpayer/parent Mary pay construction union Paul.

The health market

I don’t understand recent health reforms. Maybe, somehow, they’ll be conducive to the spread of “best practice” service delivery and costs across Australia, rather than being buried by bureaucracy. Victoria seems to be the exemplar.

Taxpayer Peter might still pay more. Paul and Mary are still waiting for an appointment.

The financial markets

Prudential requirements, but more importantly the policing thereof, do need tightening, I suspect. Doing the job properly is essential. Recent government intervention in other markets (cars, education, insulation, etc.) isn’t encouraging.

Peter, Paul and Mary just pay.

The macro-economy

Australia has avoided recession so far, and the loss of human capital associated with high unemployment. This success has many fathers. Low interest rates, a flexible exchange rate, a relatively sound financial sector, still-booming China, and the current government’s stimulus measures, are all undergoing paternity tests.

Nobody knows what the “counterfactual” scenarios might have been. Stopping the collapse in confidence as the GFC emerged was crucial. Government action might have helped a fair bit. There remains a debate about how much stimulus was needed. Much of it was inefficient (e.g., the BER).

In hindsight, if we had to get the money out really fast, and to households, the better option might have been to provide all of it as a one-off, somewhat better-targeted, “cash splash”.

Peter, Paul and Mary paid themselves, but maybe they’ve paid to keep their own jobs - so far.

Improving productivity to pay for election promises has gone missing in the campaign.

Running projects through rigorous cost-benefit analysis is also absent. The national broadband network has escaped this filter. Resurrection of expectations about very fast trains based on yet another review doesn’t cut the mustard. (Incidentally, has anybody commented on the geomorphology between Sydney and Newcastle?)

Most policies in this election campaign are about trying to redistribute resources, and hoping those who pay won’t notice. This is not a “zero-sum” game. Redistribution often has “deadweight costs” due to losses in national efficiency. These adversely affect Peter, Paul and Mary.

We need a productivity filter.

The Productivity Commission is the appropriate “citizen’s assembly” filter. It already has the right focus.