Monday, November 28, 2016

Smarter thinking on budget is long overdue

I've been writing about the federal budget for 43 years, for 28 of which it's been in deficit.
So almost two-thirds of my career has been spent backing up Treasury in its recurring campaigns to pressure the government of the day to get the budget back to surplus. Sorry, not any more.
I've resigned from the budget-hectoring brigade because it finally dawned on me there has to be a better way.
You can put the blame for our eternally recurring budget crisis on the voters, whose demand for increased government spending is limitless, but whose willingness to countenance either spending cuts or tax increases is tiny.
Or you can blame the pollies – on both sides – who spend every election campaign pandering to and thus reinforcing this unreal thinking.
They wait until after elections to spring the bad news about the laws of arithmetic, then wonder why it's so hard to be economically responsible.
But I think some of the blame has to be shared with Treasury and Finance. It's true that treasuries – state as well as federal – accept ultimate responsibility for getting the budget back to balance. They care about budget balance above all other policy objectives.
Which is just as well. If Treasury didn't accept ultimate responsibility for fiscal rectitude, who do you reckon would? Certainly not the politicians, nor the media, nor the electorate.
That's why for so long I was happy to throw my puny weight behind Treasury's budget-repair campaigns.
I've stopped because, in all that time, there's been no sign of a learning curve. Treasury goes about attempting repair of the budget in just the same primitive way it did in the mid-1970s.
In all that time it's learnt almost no new tricks. It's applied no new science to its core responsibility of expenditure control, just kept on with the same old, same old simplistic cost-cutting approach.
Economists elsewhere have come up with inventive ways to make government spending more efficient and cost-effective: income contingent loans, activity-based health funding, the investment approach to welfare spending, early learning and other preventive programs, rigorous program evaluation and more.
Some of these techniques are being used in the federal budget, but not to the extent they should be and, to my knowledge, not because they were long championed by Treasury and Finance.
Indeed, it wouldn't surprise me if some had been opposed, or long-term investment in preventive medical programs sabotaged for a quick saving.
The best Treasury has come up with is the Orwellian annual "efficiency" dividend imposed on departments and agencies, and the rule that departments proposing new spending programs must also propose offsetting spending cuts of equivalent value.
Both crude devices have been relied on year after year, to the point where their economies are more likely to be false ones.
The efficiency dividend has become a euphemism for indiscriminate compulsory redundancies, which has robbed Treasury and Finance, and even the spending departments, of many of their policy experts.
Not to worry. If we need policy advice we'll buy it from one of the big accounting firms. They'll pretend to know what they're talking about and cost a fortune, but can be relied on to give us the recommendations we were hoping for.
The offsetting-savings rule has turned inefficiencies into valuable currency, to be husbanded jealously by their departments and given up only in return for equivalent spending increases.
It transfers responsibility for finding efficiencies away from the co-ordinating departments and into hands of departments just as likely to have been captured by the business interests they're supposed to be regulating.
The accountants of Finance can hardly be blamed for thinking like accountants. Trouble is, Treasury people too often think and act like accountants rather than economists.
They tend to view spending control as an annual scramble to knock the budget into shape, not a medium-term exercise in delivering value for money to the citizenry the government serves.
Too often they fail to consider the broader economic consequences of the cuts they push through. Like accountants, they think in terms of chopping spending down to the required size, not improving the efficiency and effectiveness of government service delivery.
They bang on about the nation's poor rate of productivity improvement while forgetting they themselves possess considerable scope to raise the efficiency of two of the economy's biggest and fastest growing industries, the two spending areas that dominate combined federal and state budgets and that will, unless made more efficient, do most keep budgets in crisis for decades to come: education and health.
No, no, leave that to the departments – or the other level of government.