Respect the dismal science: public policy needs some economics

It has become increasingly obvious that public policy debate, though ostensibly about economic issues, has drifted further and further from time-tested economic principles.

These days, it seems economic growth and raising overall living standards through economic reform and improved productivity counts for nought and everything has to be “fair”.

Yet the risk with gearing policy towards equity at the expense of efficiency is that only fair economic performance will result.

Not excellent. Not good. Just fair. There are many examples of countries from Argentina to Zimbabwe where the demise of economics as a foundation for policy became a first step to economic demise.

During the recent election campaign increased taxes on individuals and business were proposed as fair, without regard to their macro-economic costs through lost work effort, investment and production.

Company tax cuts were criticised as an unfair giveaway to the top end of town when they were intended to improve Australia’s international competitiveness and improve long-term growth.

Mind you, the company tax cuts yet to pass through parliament would be much better sold if accompanied by equivalent cuts to the billions of dollars of industry assistance doled out annually by the federal government.

The GST cannot be raised to alleviate Australia’s serious fiscal problem because it would be unfair on low-income households, many of which pay no net income tax and are young.

Yet, because they are young, they are also likely to be richer than their forebears on average in the future because of continuous economic growth.

How much richer depends, of course, on how much productivity improves into the future because of greater efficiency.

Meanwhile, it is fair that the mostly older, top 20 per cent of taxpayers pay 60 per cent of the tax.

Pervasive economic illiteracy and an anti-business sentiment in the electorate is part of the present problem, and ultimately results from deficiencies in the education system.