Liberalism and the Simplification of Government – Greg Hunt

The Hon Greg Hunt MP is Shadow Minister for Climate Change, Environment & Heritage. He spoke at The Sydney Institute on Wednesday 6 April, 2011

 

LIBERALISM AND THE SIMPLIFICATION OF GOVERNMENT

 

GREG HUNT

Like all parents, Paula and I live the joys of watching our children – Poppy, who turned six yesterday and James, who will be two in July – learn and evolve on an almost daily basis. Like all parents, we also live the frustrations of trying to encourage, convince, drive, cajole or enthuse them – you get the point – to adopt positive behaviours rather than destructive tendencies! We’ve tried marbles in the jar, stars on the book, time out and any other number of approaches, with the basic lesson being that consistency is the best strategy. We are neither the world’s best nor the world’s worst parents.

Recently, however, there was one fascinating insight. Confronted with a plague of millipedes in the house, I urged Poppy to help clean them up. No luck. But then, she looked up with a knowing grin and said that if I gave her ten cents she would sweep up the millipede in the corner. Being a fan of volume discounting I countered with an offer of five cents for every millipede. To my surprise, she quietly went about sweeping all the millipedes she could find into a jar.

The job of counting the millipedes and paying was left to me. The task of counting the money and filling the piggy bank was left to Poppy. While you can’t run a home entirely on volume discounting, the millipede and the five cent piece reminded me of a fundamental fact; that people respond well to simple positive incentives.

Liberalism’s 20th century achievements

Moving from home to the broader world, the same principles of simplicity and incentive are two of the most powerful forces governing human behaviour and effective political society. In my view, they also underpin contemporary liberalism and provide a blueprint for the next phase of the Liberal Project globally, as well as in Australia.

Much of the developed world’s advance of the twentieth century was, to my mind, due to two waves of liberal reform. The first wave of liberal reform has been the spread of open markets and open societies across the world. In Australia, in terms of open markets, we have seen actions such as the 1957 Australia-Japan Agreement on Commerce, the creation of the Cairns Group, the establishment of Free Trade Agreements with New Zealand, Singapore, Thailand, the USA and the commencement of long-term projects with Japan and China. At the global level, the imperfect march of the WTO has helped, but it has in part been superseded by the natural speed of foreign direct investment and, increasingly, of e-commerce.

While this process of opening trade markets is imperfect and slow, it is, I believe, inevitable. It is also desirable. So whereas a former ALP Federal Leader wrote of “Civilising Global Capital”, I would talk about the “Civilising Effect of Global Capital”. Genuine free trade has been a profound contributor to the task of pulling people out of economic misery on a faster scale than at any time in human history. Indeed, it has been China’s economic liberalisation that has allowed for the reversal of the economic circumstances of hundreds of millions.

Just as economic liberalism has helped transform the world, so has the march of political liberalism and the open society. The twentieth century witnessed the battle between the open and the closed society tear Europe apart before the triumph of the open society. We then witnessed the decolonisation process in much of Africa and the Indian subcontinent. Then, in 1989, the collapse of the Eastern Block and the Soviet experiment led to a third era of democratisation. And right now, that same desire for an open society is playing itself out in the fourth democratic phase as the people of the Middle East and North Africa reaffirm that democracy is a human concept and not just a Western one. There will be much history to pass before the democratic phases are secure and even before they begin in earnest in places such as China. But the direction is set.

After open markets and societies, the second great wave of liberal reform came with the Thatcherite deregulation and privatisation which influenced the developed world. It contributed in significant part to the best reforms of the Hawke Government, and to the Howard Government tax, budget, waterfront and labour market reforms. In particular, this process included the privatisation of the Commonwealth Bank, Qantas, Telstra and the Victorian electricity providers. This second wave of what is sometimes referred to as economic rationalism is a work in progress. But it is an important and ongoing task which will manifest itself in the privatisation of Medibank Private and the remaining state-owned electricity providers, among others – even if it takes some time. Now, it is time for a third wave of liberal reform.

The twenty-first century: liberalism’s third wave

The third wave of liberal reform is the revolution in simplifying government.

It is also the simplification of consumer choice through deep competition reform. Simplification is an economic reform. It is, though, more than just an economic reform – it is also a social reform.  In short, economic simplification is about that most scarce of commodities: time. The deadweight losses from avoidable modern bureaucracy and barriers to competition are enormous. On the economic front, reducing the waste of time lost in bureaucratic activity is about a   productivity change on a grand scale for both large and small business. On the human front, the prospect of gaining back lost time is about a deep quality of life agenda.

In short, the third wave of liberalism – simplification of government and deep competition reform – offers real national productivity, while harnessing the prospect of giving people back personal time. In the balance of this paper I want to set out:

• A vision for simplification and incentive as the next wave of liberal reform;
• Two proposed structures to help simplify and improve accountability in the affairs of state through tax simplification and expenditure control; and
• Three suggested policy reforms to simplify the affairs of community by removing barriers to participation, investment and competition.

The liberal vision: the best shot at the life of your choice

This is the second in a series of papers built around liberalism and long-term planning. Those to come will address: Australia and Asia in 2030; the development of a deeper society built on the idea of community from below rather than government from above; and a blueprint for a cleaner economy through practical incentives. While the first paper talked of the need for bi-partisanship in long-term planning for our cities, this second paper recognises that there is also a profound choice between the economic vision of the Social Democratic Project of the left and the Liberal Project of the centre right.

The breakdown of the social democratic project

At their best, both sides can contribute to the advancement of living conditions and community. However, the Social Democratic Project is largely broken. It is – in my view – broken for three reasons: debt, taxes and disincentive.  In Australia, this has manifested itself in the ALP returning to an Age of Recklessness. Let me begin with hard facts. In terms of debt, I recently did a simple but interesting analysis. Using Treasury’s Mid-Year Economic and Fiscal Outlook (MYEFO) from 2010-11, I compared the last eight Federal ALP Budgets, comprising the last five of the Keating era and the first threeof the Rudd-Gillard-Swan-Combet-Shorten era. The debt goes something like this:

• 1991-92: $12.631 billion or -3.0% of GDP;
• 1992-93: $18.118 billion or -4.0% of GDP;
• 1993-94: $18.185 billion or -3.9% of GDP;
• 1994-95: $14.160 billion or -2.8% of GDP;
• 1995-96: $11.109 billion or -2.1% of GDP;
• 2008-09: $27.079 billion or -2.2% of GDP;
• 2009-10: $54.750 billion or -4.3% of GDP; and
• 2010-11: $41.468 billion or -3.0% of GDP on the most up to date figures.

That means eight consecutive deficits, all greater than 2 per cent of GDP, and a contribution of $197.5 billion towards Australia’s public debt. That’s a lot of bad luck. By comparison, the 12 budgets of the Howard and Costello era yielded a net budgetary surplus of $97.33 billion, a halving of debt in the first budget and then 10 out of 11 surpluses, with one year of $1 billion of debt following the global tech wreck. That’s a lot of good luck.

In reality the numbers reveal a fundamental predisposition to spending on one side and saving on the other. This is not just a tale of bad luck. It is a clear pattern of behaviour on each side – with events merely being the pretext for reversion to type. Against a volatile international background, paying down debt is the surest buffer we have against any future debt shocks internationally.

There is also an increasingly clear battle over approaches to taxation. The current federal government has increased or created 13 new taxes since late 2007. The most significant proposals – the mining tax and the carbon tax – have not even been factored into the budget. Each new tax is justified on the grounds of moral imperative. Yet each new tax is part of a pattern of larger government. There is, then, a deep philosophical divide emerging over the nature of taxation in Australia. This leads to the final element in this Age of Recklessness – disincentive. Nothing exemplifies the loss of economic rationality more than the re-nationalising of a significant part of Australia’s telecommunications sector into a state-owned monopoly, the NBN. Meanwhile, the rest of the world is moving to privatisation and diversity in the telecommunications sector.

I challenge the government to identify a single free market economy, or even command economy for that matter, which is nationalising and monopolising a large part of its telecommunications sector. By destroying competition we reduce the incentive to create and innovate. Every lesson about competition, diversity and incentive for innovation has been lost, and with it any claims to progressive leadership.

The liberal project

In contrast to the Social Democratic Project, the Liberal Project remains progressive. The most famous Australian enunciation of this was Menzies’ description in his 1967 memoir, Afternoon Light:

We took the name Liberal because we were determined to be a progressive party willing to make experiments, in no sense reactionary but believing in the individual, his rights and his enterprise.

For my own part, the most attractive extension of this idea into contemporary liberalism is that we seek to give people the best shot at the life of their choice. I have drawn this formulation from the title of Wilfred Thesiger’s autobiography The Life of My Choice. And while Thesiger was an essentially free-spirited British explorer who spent much of his life travelling alone in remote stretches of Africa and the Middle East, his summation of the life well lived is compelling.

In looking forward, there are then two elements that characterise the third wave of the Liberal Project. The first is about defining the objective of government. The second is the role of government itself in this project. First let’s define the objective of government.

In his 2009 Irving Kristol Lecture, The Happiness of the People, the American sociologist and contemporary conservative thinker Charles Murray laid out a powerful view that the object of government is to create the conditions through which people can seek the “deep satisfactions” of life. It is not for government to create those satisfactions, but to create the opportunity for each person to best pursue their own life.  Murray suggested that such deep individual fulfilment can come from family, from community or from vocation or faith. But that is a matter for each individual. At its best, then, liberalism is about providing the opportunity to pursue the majestic possibility of each life. Well lived, that majestic life can be found in the simplest of things – family, friendship and community.

The second element of our contemporary vision is the rightful role of government. In short, the role of government should be to empower individuals and communities to pursue their own fulfilment by providing responsible and simple government. Responsible government is about ensuring that we live within our means. Debt must be paid down, taxes should be kept low and government should be kept as small as possible – subject to providing the common services necessary for people to pursue fulfilment at the level of family or community.

Simple government is about ensuring that we take the unique opportunities of the moment to provide incentives by limiting complexity, reducing wasted time and removing barriers to participation, investment and competition. The third wave of liberalism is then about responsible governance that protects future generations from the recklessness of today and the simplification of governance that removes bureaucracy from community life today. How then do we make these ideas real?

Simplifying government: structures for reform

Let me propose two practical structures that can help simplify government and provide greater responsibility.

Tax simplification and efficiency: independent commission on tax reform and simplification

The Henry Review identified 125 separate taxes levied across the three tiers of government, with the bulk of the heavy lifting being done by just 10 major taxes. Clearly this is deeply inefficient and a significant bureaucratic burden for government, for large employers, but most notably for mum and dad small business owners. The direction between now and 2020, and indeed 2030, must be for a deep simplification of the tax system.

In order to establish and embed a permanent process of tax simplification, given that the Henry Review was a one-off review, I would propose an Independent Commission on Tax Reform and Simplification. This is an adaptation of an idea set out by the former ALP Special Minister of State Gary Johns (now Associate Professor of Public Policy at the Australian Catholic University) who suggested that the government publish a five-yearly tax and transfer analysis.

An Independent Commission on Tax Reform should have a Chief Commissioner and Commissioners with a statutory guarantee of independence and terms of office.

Its task would be to conduct a five-yearly review of the overall efficiency of our general taxes and individual taxes. In particular, we should aim to comprehensively simplify the tax system by identifying and then removing or consolidating all nuisance taxes by 2030. But bad news: this is an almost 20-year process, so I won’t be unilaterally abolishing taxes tonight – I’ll let the Commission make those proposals. On an annual basis it should review individual taxes and generate proposals for reform of inefficient taxes.

Both government and opposition should have the power to refer their proposals for abolition of or creation of new taxes to the Independent Commission.

While we currently have a non-statutory Board of Taxation it has nothing like the resources, independence or weight of the Productivity Commission and what I am proposing should sit alongside the Productivity Commission.

Expenditure review: independent office of expenditure review

Beyond tax, we must also deal with expenditure. Treasury has to a large extent maintained a monopoly on the preparation of financial projections and the review of proposed policy.  As can be seen from the mining tax and Home Insulation processes, there are inherent weaknesses in current arrangements. Agencies are rarely effective as self critics. Malcolm Turnbull first proposed an idea, adopted from the United States, of a Parliamentary Budget Office. Graham Bradley, Chair of the Business Council of Australia, has gone further and proposed a “permanent independent commission” with the capacity to “assess federal spending programs”.

I endorse that idea and propose that we have an Independent Office of Expenditure Review. The Independent Office of Expenditure Review should also have an executive with a statutory guarantee of independence and terms of office. As with the Tax Reform Commission, its task would be to conduct a five-yearly review of the overall efficiency of government expenditure.

Both government and opposition should have the power to refer their proposals for abolition of or creation of new expenditure to the Independent Office for analysis. In the case of an opposition, there would be a broader capacity to review the net budget impact of all proposed expenditure, savings and revenue measures in an election period.

Controversially, I believe such an office should have the power to independently investigate proposals for government expenditure without reference, such as for example the Home Insulation Program or the Green Loans Program. While the Auditor General’s Office would continue its current role, it has no remit for un-referred investigation of proposed or nascent programs and it is not in my view the best agency to do so.

Taken together, these two measures of the Independent Commission on Tax Reform and Simplification and an Independent Office of Expenditure Review are designed to put in place institutional pressures and independent mechanisms to help drive simpler and more responsible government.

 

Removing barriers to participation, investment and competition

In addition to institutional pressures on the taxing and expenditure powers of the government, we must also seek to remove barriers to participation, investment and competition – in other words, to provide incentives to participate, invest and compete. Here I want to set out three suggested reforms that will remove barriers for families and firms who seek to participate in our economy.

Perhaps the most common complaint that any MP receives is that people are not sure how to manage their way through the thicket of government. In its most malign form, this uncertainty means that particularly those who suffer disadvantage such as disability, limited literacy or lack of English can simply be too afraid to approach government at all. The individual suffers and systemic problems such as intergenerational unemployment are left unaddressed. It is time therefore to establish a genuine case management option across federal and state agencies through the creation of a Family Advocate system. In fleshing out this proposal, I acknowledge and am building on the work of Joe Hockey here at the Sydney Institute on 9 March 2011.

This one-stop shop approach would be based on five principles: Individuals or families engaged with government welfare or employment services should have the option of working with a Family Advocate; the Family Advocate would operate much as a GP does in diagnosing the problem, suggesting the solution and referring to the relevant specialist within government; the Family Advocate should be a joint initiative between state and federal governments; The goal should be to use this one-stop shop as a path to turning a two-tier welfare system by 2020 into a one-tier system. I remain open as to whether this is a federal or state system but surely we can seek a national agreement to deliver welfare and employment services through a single interface and a single tier of government by 2020; and, the Family Advocate’s role should be seen as a valuable vocation in itself. This means a long-term commitment by state and federal governments to training and supporting the Advocate’s role as a valued career path.

In my view, if we can create trusted Family Advocates we can help address some of the institutional barriers to participation that prevent the breakdown of intergenerational and chronic unemployment.

Fear of the system is, however, only one side of the equation. There must also be real incentives to work for those who have genuine capacity. In this respect, the Family Advocate is a complement to the incentives-based approach, which Tony Abbott set out in his speech to the Queensland Chamber of Commerce last week. The Advocate is also no substitute for removing barriers that may deter employers from taking on the long-term unemployed.

Removing barriers to investment: single entry point for business

Beyond barriers to participation are barriers to investment. Our economy, and therefore our society, are less than they could be because of barriers to investment. The current problem, as former Reserve Bank Board Member Hugh Morgan has explained to me, is that technology has inadvertently encouraged more and more government agencies to seek increasingly complex detail. The result is that major projects can involve multiple approvals across multiple departments and multiple tiers of government. An industry has been developed around government compliance. The most striking example of this I have seen was a map shown to me by one Australian firm, of over 40 different federal and state  laws or regulations governing the provision of hot water units.

Accountability is good. Pointless bureaucracy is bad. In economic terms, it is a sheer deadweight drag on productivity. As the Institute of Public Administration Australia set out last month in its Future Course of Modern Government policy paper, there is hope. The growth in genuine online societies and information sharing means that there is an opportunity to reshape the design and delivery of government services. This applies not just to individuals but also to business. As with services for families, the goal must be to simplify the process for businesses and create a one-stop government where possible.

We should therefore seek a Single Entry Point for Business Approvals by 2020. This could cover investment, environmental approvals and other items to be progressively added. It would involve:

• A shared federal and state commitment to establishing a Single Entry Point for Business Approvals by 2020. This would be for both major and minor project approvals;
• Genuine collaborative design with the business community;
• In particular, the pioneering work of the Danish Government through use of collaborative online communities is precisely the type of model that should be adopted here; and
• An invitation to local government to participate as a third tier in a common approvals process.
• By simplifying approvals, we can overcome one of the biggest barriers to investment currently facing the Australian economy.

Removing barriers to competition

The final area I want to address is removing barriers to competition, so as to provide incentives for new entrants. We need a new round of deep competition reform looking out to 2020, as was made evident by the federal government’s complete failure to allow competition through the parallel importation of books. The key to competition reform is, in my view, opening up competition by giving consumers more points of sale and greater transparency of pricing for services such as insurance and utilities. Let me start with an example.

As a time-poor father, I want to be able to go to one insurance provider for my house, car, health, life and travel. I want to be able to compare the total costs for my insurance and to bargain for a better deal by building a single package. As much as anything, though, I want the significant time savings of one provider, one bill broken into modular costs and one point of claim for all my needs. The same goes for how I would like to deal with my utilities. The danger, though, is that we allow the creation of vertical monopolies. The key to avoiding monopolies while allowing all-in-one services for insurance or utilities such as electricity, gas and water is a trade off.

If insurers or utilities want to offer all-in-one modular packages, they need to make two concessions. First, we should consider voluntary wholesale separation in return for the right to offer all-in-one insurance or utility packages.

That means that if you want to be able to sell anyone else’s product, they should be able to sell your product. But this is a voluntary trade off. Second, there should be greater transparency of pricing, particularly in the insurance sector where there are barriers to pricing comparison. Comparison drives down pricing. In plain terms, it can be as simple as ensuring that insurance renewals display the previous year’s premium.

Some of this work has already been done but I would propose that the Productivity Commission be given a general referral to identify the opportunities for and barriers to improving retail competition through voluntary wholesale separation out to 2020; and that the Productivity Commission begin with a specific referral for each of the insurance and utilities sectors.

My judgment is that this form of competition reform will deliver two key benefits. First, it offers genuine quality of life improvements in terms of helping people minimise time spent on the administrative component of their lives. Second, at an economic level, broadening the number of sales points – in return for more comprehensive but transparent consumer packages – not only cuts out deadweight cost, but introduces competitive pressures on pricing. Above all else, what these reforms mean for me is more time with my family. What these reforms mean for small business owners – who currently struggle with taxes, bureaucracy and complexity – is more time with their families – or to innovate and create in their own businesses. The third wave of liberalism is above all else about freeing you up to live the life of your choice.

Let me conclude then where I began. At its most noble, liberalism is about giving people the opportunity to pursue the deep satisfactions in their own life. And just as liberalism helped drive many of the advances in human welfare in the twentieth century, it remains a key driver for the coming century because it seeks to harness, not to perfect, human nature. It is a progressive force. And I choose this term deliberately to describe the Liberal Project. Right now, the opportunity exists to build a third wave of liberalism based on the simplification of governance and removal of the barriers to participation, investment and competition. Indeed, this theme has consciously unified the recent speeches of Tony Abbott, Joe Hockey, Scott Morrison, Andrew Robb, Christopher Pyne and tonight, myself.

We are preparing the intellectual and policy foundation for government based on the principles of simplification, accountability and removal of barriers to the higher goal of allowing people to pursue their own fulfilment. Ultimately, as a father who is daily surprised by the ingenuity of both Poppy and James, I cannot determine their future, but I can give them incentive and opportunity. As Members of Parliament, also daily amazed by the ingenuity of people, we cannot determine their future, but we can give them incentive and opportunity.

It’s amazing really, just how far five cents can go!