Monday, August 11, 2014

Econocrats advise false economy

Joe Hockey and Tony Abbott shouldn't take all the blame for the low quality of the measures in the budget. I suspect they're victims of poor advice from the econocrats of Treasury and Finance.

Gary Banks, former boss of the Productivity Commission, says the public service's role is to inform policy choices. If so, it did an unimpressive job of informing an inexperienced government on the best way to exploit the unique political opportunity offered by the Coalition's very first budget.

We can never know exactly what advice passed between the bureaucrats and their masters, but it would be an unusual budget whose measures didn't arise from options provided by the presumed experts.

And a comment by Laura Tingle of The Australian Financial Review offers a clue: "Former Labor ministers were genuinely surprised after the May 13 budget that the new government had simply picked up the same raw policy proposals the public service had been serving up for years and included them in the budget ... It seemed no one in the new government ... recognised these as policy chestnuts from the bureaucracy's bottom drawer."

If that's right, it's an indictment of the bureaucrats' intellectual laziness and lack of expertise. It's the 21st century, but these people have sat for decades learning nothing but "here's where you could cut, minister".

A huge proportion of the spending on two of the nation's biggest and fastest-growing industries, education and health - industries whose performance has major implications for productivity and social wellbeing - passes through the federal budget, but all the budget bureaucrats have to offer is a list of things you could chop.

Since the budget measures focused almost exclusively on the spending side, and since those measures had the smell of the bookkeeper rather than the economist (economists are trained to think about subsequent, not just immediate, effects), I suspect it's Finance more than Treasury that's responsible for such a dismal performance.

What we needed were sophisticated initiatives aimed at raising the efficiency with which public services are delivered to the public.

What does the empirical literature and the experience of other governments tell us about what works and what doesn't? If Finance and Treasury aren't expert on this, why aren't they?

What we got instead were crude spending cuts - or, more often, cost-shifting. A high proportion of the savings will come merely from shunting more of the cost of education and health onto graduates, patients and the states. How much thought went into cooking that up?

The right answer to the growing cost of the Pharmaceutical Benefits Scheme, for instance, is to drive harder bargains on generics with the big foreign drug companies (which pose as Medicines Australia) and the chemists, and to force harder choices on the medicos who advise on which new drugs should be listed by giving them an annual spending cap.

So what did we get? A $5-a-pop increase in the already high general patient co-payment which, in any case, is indexed, with a smaller rise for pensioners. Could laying it on so thick discourage people from filling their prescriptions, thus worsening their health and eventually adding to public spending on healthcare?

Who knows? Who cares? No one in the budget bureaucracy, it seems. If the measure makes things worse rather than better, worry about that in a later budget. "I know, minister, let's whack up patient co-payments again. Tell 'em health costs are unsustainable."

It's a similar story with Medicare. Health economists have devised various ways of achieving greater efficiency, particularly in hospitals, but who's bothered about that? Why tax your brains when you could just chop spending on preventive health programs, slash grants to the states and introduce a $7 co-payment for GP visits and tests?

The co-payment will shift costs to the states and add to ill health and costs down the track, but who's worried? It will be costly to administer, but less so when we advise ministers to whack it up again in a few years' time because health costs are still rising "unsustainably".

But the most mindless false economy is surely the now 2.5 per cent annual "efficiency dividend" cut imposed on the budgets of government departments. Treasury complains it's had to cut staff numbers by one-third just since 2011. Finance must be suffering, too.

Wouldn't it be ironic if the budget bureaucrats were among the chief victims of their failure to give the pollies better advice on spending control? By now, of course, this would be their chief excuse for continuing bad advice. "We don't have the resources, minister."