We are in the middle of the electoral cycle, which seems a good time to give advice on which policies make good economics in the sense of being in the interest of the long-run welfare of Australia. My top 5 of do-able economic policies, some big and some small, that a government from either side could implement:
- Have an independent Medicine Procurement Authority. We should pay much less for our medicines, both patented and generic medicine, by increasing the distance between politics and medicine pricing. As my colleague Philip Clarke keeps pointing out, Australia pays way too much for its medicine. Whilst we spend about 1% of our GDP on subsidised medicine, we should probably spend no more than half that. And the main reason we spend too much is political, i.e. the minister for health is put under direct pressure to hand out favours to big Pharmaceutical companies (such as via this fairly scandalous Memorandum of Understanding that commits Australia to uncompetitively high prices for generic medicines). An independent medicine procurement authority would have a budget fixed by parliament, revised every so often, with the single task of deciding what to buy for the allocated money. That fixed-budget constraint would force us to constantly review which medicines we still subsidise and what price we pay for them, getting us out of the lazy equilibrium whereby Pharmaceutical companies (invariably foreign) are getting rich because politicians are kept under direct pressure not to put the screws on the pharmaceuticals.
- Set up a Long-term Leasing Office charged with auctioning off the right to run public services, coupled with an ex-post regulation regime. I am here for instance thinking of inviting foreign universities to bid for the right to run existing inner-city universities, whereby the foreign bidders would get a long-term lease (say, 30 years) on the community land on which a current university stands, together with a regulatory requirement to deliver certain services (i.e. the land cant be used for other purposes) whilst also guaranteeing regular access to government student subsidy schemes and the like. Long-term leases are also a possibility for things like primary and secondary schools, hospitals, airports, prisons, and residential care. In all cases, we would be talking about outside organisations getting access to existing land and facilities with associated obligations to provide services and access to subsidies and the like. Whilst implementing this wholesale would be fairly revolutionary and difficult, any government could experiment with setting this up for a smaller set of current public service providers. It would not merely be a question of private providers taking over public tasks from public providers: public providers could bid to take over other public providers too. It is primarily a means to reduce overhead and encourage real competition.
- (One of Nick Gruen’s favourites) Set up an independent national budget office with the statutory obligation to calculate the long-run effects of major changes in the tax and spending plans of the government, including the vetting of major infrastructure projects like the National Broadband Network. Such institutions already exist in many major economies, witness the Congressional Budget Office in the US or the Rekenkamer in the Netherlands. The great advantage of such an institution is that it gives much greater confidence in projections of major changes and would replace the fairly dodgy current practise of having private consultancy firms give dubious projections on the impact of major changes in taxes. Such a budget office is a fairly low-cost institution and would partially serve as a training ground for fiscally-knowledgeable politicians and civil servants.
- A real mining tax. There is little doubt that Ken Henry’s long-run tax reform advice is basically sound: as a country we should reduce taxes on activities with close economic substitutes (such as small business incomes) and increase taxes on things that cannot run away, most notably the minerals we own in the ground. The companies that mine it currently are 85% foreign owned meaning the huge price increases in the international mineral markets are lining the coffers of New York and London stock traders, not Australian households. And yet, minerals cant run away and taxes on their profits have little (if any) deadweight loss, particularly given how few Australians actually work in the mining industry anyway. A 50% or higher profit tax on resources would clearly be in our interest. I would personally also favour putting the proceeds in a future fund that invests the revenue in the world stock markets, which reduces the impact of the mining boom on our exchange rate and thus doesn’t kill off other industries. As an aside, the mining tax we have now is clearly worse than nothing since it indirectly entails the duty of the federal government to prevent the states from increasing their royalties, co-opting our commonwealth government into doing the bidding of foreign-owned companies. One estimate is that this deal cost us 6 billion a year, but complicated tax-offset rules probably mean it is much more. A more realistic figure is that Gillard’s deal cost the country in the order of 50 million a day in lost revenue.
- (in the category small) Reduce the budget of the Australian Bureau of Statistics by about 90%, reducing it to merely being in charge of running the Census, and instead commission private providers of statistics to generate surveys of Australian businesses and the population. This would involve a quick reduction of around 300 million a year in expenses and would immediately improve the data available for economic decision making. The rational for cutting off the ABS is that it is completely secretive about the data it gathers: only ABS officials are trusted with using the full data by the ABS, not other government departments or Australian researchers. We are thus in the fairly ridiculous situation that those who devise the Australian budget in the Treasury do not have access to all the data gathered on the finances of individual industries. The ABS hides behind laws promising confidentiality to prevent anyone else from using its data, but similar laws on secrecy exist in other countries that have not been interpreted as ‘only people in our statistics organisation can be trusted’. Quite simply, the ABS has turned into a secretive rent-seeking organisation that draws huge subsidies but does not feel obliged to share its products with its paymasters. Why then should the Australian public pay for data that is not used to improve our knowledge of Australia? It might as well not exist and if it didn’t exist, the community would be free to buy data from other sources that are more consumer-friendly.
There are many other policies that have clear benefits, but the most obvious ones would take a long time to implement: the huge hidden unemployment in the bloated health ministries, defense department, and education administrations, are clear drains on the national purse but getting rid of them is very hard because they are so entrenched. Getting rid of waste in the bureaucracy of education and health is hard since the people you could ask to get rid of it would usually be the ones you would want to get rid of first. On defense, one can talk about major changes like setting up army units based abroad made up of foreigners that would be much cheaper than domestic soldiers (mainly because you bypass the existing bureaucracy), but such things cannot be set up overnight as the institutions one could charge with doing this have every incentive to stuff it up and have no expertise to do it. One would have to build up new institutions that take away part of the competencies of existing ones, which is not easy or quickly done.
Interesting other ideas I would be sympathetic to are the buying of foreign health services in bulk to by-pass local cartels; life-long public monitoring via the Tax Office of the wealth of any politician involved in major public spending decisions (like procuring big contracts or property re-zoning) to improve the incentives of politicians; and setting up Australian PhD institutes to stop the brain drain.