Date created: 28 November 1996
Last modified: 18 November 1997
Maintained by: John Quiggin
John Quiggin

Time to revitalise the public sector

The Canberra Times

Jul 6, 1994.

In a recent Newspoll ordinary Australians were asked which public issues concerned them most. The top issues were unemployment and crime (ranked equally), health, education and the environment. Yet if those in charge of formulating economic and budgetary policy were asked the same question they would probably respond that the central issues are private sector investment, reform of the industrial relations system and reductions in taxation, public spending and the budget deficit - issues which, if they were mentioned at all, ranked very low among the concerns of ordinary Australians.

Obviously the two lists have little in common. In fact, they imply radically different visions of the way in which Australian society is failing at present and the ways in which it could be made better. In the official view, Australia is laboring under the burden of an overdeveloped and inefficient state. The central role of policy is to create a framework which will permit the development of a dynamic private sector expansion leading to sustainable economic recovery. A central element of this framework is that the government should minimise the cost burden imposed on the private sector to support the provision of costly luxuries such as police, assistance to the unemployed, health, education and environmental improvements.

This official view has remained unchanged, in its essentials, for nearly twenty years. As Malcolm Fraser has recently pointed out, the myth of 'the wasted years of Fraserism', obscures the fact that the Fraser government was centrally concerned with winding back the public sector. The elusive 'investment-led recovery' promised by Fraser is the exact counterpart of the equally elusive investment boom promised in the 1994 Budget.

The Expenditure Review Committee of today had its roots in the 'Razor Gang' of the late seventies. All aspects of Commonwealth expenditure have been severely constrained. However, by far the harshest cuts have fallen on general purpose grants to the States. As a proportion of GDP, general purpose grants have been cut in half since the late seventies. The consequences have been felt in school and hospital closures, queues for treatment in hospitals and for entry to university and TAFE courses, inadequate police services, overcrowded prisons and the consequent pressure to release prisoners at all costs, neglect of pressing environmental concerns, and in a whole range of other areas. At the same time, the cost in terms of unemployment has been massive. The actual job losses have been substantial, but these are merely the tip of the iceberg. Direct personal service industries are the natural area of employment growth in the presence of rapid technical improvements in manufacturing and information processing. The largest numbers of jobs of this kind (and the highest quality jobs) are found in publicly provided or publicly funded areas such as health, education, police services and the environment. Twenty years of Razor Gangs and ERCs have prevented this natural job growth from taking place.

The official view, from Fraser onwards, has been to regard unemployment as a necessary transitional cost which should not be permitted to distract attention from the 'main game' of inflation control and microeconomic reform. Even in narrowly fiscal terms, the folly of this approach should be self-evident by now. The efforts of the Razor Gang and its successors in cutting expenditure has been largely offset by the budgetary consequences of remorselessly rising unemployment. Taking account of expenditure on unemployment benefits (and surrogate unemployment benefits such as the invalid pension) and of the loss of income tax revenue, it seems likely that the budgetary cost of unemployment is in excess of $20 billion per year.

To the great majority of Australians, it is evident that the official orthodoxy has failed. In the absence of any real debate over the fundamentals of economic policy, this recognition has been expressed more as nostalgia for a vanished past than as the demand for a specific alternative. However, the priorities expressed in the Newspoll survey could be used as the basis for a policy program more coherent, more humane and more effective than the present official strategy.

The first requirement is the abandonment of the ideologically driven commitment to promote the private sector at the expense of the public sector. This must be replaced by the recognition that our current need is for an expansion of precisely those services that have been curtailed under the prevailing orthodoxy. This can be achieved only if ordinary Australians are willing to accept higher taxes in return for better services and large reductions in unemployment. The list of concerns expressed in the recent poll, with services at the top of the list and taxes near the bottom, suggests that such a program would be politically feasible.

Some positive elements of the current orthodoxy could be retained. The emphasis on the need for efficiency in the provision of services, and clear choices concerning priorities would be retained and indeed would need to be strengthened. However, the dogmatic pursuit of cost-cutting and job-shedding for their own sake, and the mindless worship of the private sector must be abandoned.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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