Smaller Government has failed, but let's cut taxes anyway

Think about this: despite a rocketing budget deficit, Scott Morrison is planning to press on with, and even bring forward, highly expensive tax cuts for high income-earners at just the time we’re realising that the 40-year pursuit of Smaller Government has been a disastrous failure.

Wake-up No. 1: the tragic consequences of the decision to outsource hotel quarantine in Victoria have confirmed what academic economists have long told us, and many of us have experienced. Contracting out the provision of public services to private operators cuts costs at the expense of quality.

Wake-up No. 2: efforts to keep the lid on the growing cost of aged care have given us appalling treatment of the old plus high profits to for-profit providers and some not-for-profits seeking to cross-subsidise other activities.

A new report by Dr Stephen Duckett and Professor Hal Swerissen, of the Grattan Institute, summarises the aged care system’s “litany of failures”, as revealed by the royal commission, as “unpalatable food, poor care, neglect, abuse and, most recently, the tragedies of the pandemic”.

There was a time when aged care was provided by governments, particularly in Victoria and Western Australia. But as the population has aged, successive federal governments have sought to limit the role of government by having aged care provided first by religious and charitable organisations and then by for-profit businesses.

The report’s authors note how little we spend on aged care. Countries with well-functioning aged care – such as the Netherlands, Denmark, Sweden and Japan – spend between 3 and 5 per cent of gross domestic product, whereas we spend 1.2 per cent.

“Rather than ensuring an appropriately regulated market, the government’s primary focus has been to constrain costs,” they say. When old people are assessed for at-home care or for residential care, the emphasis is less on their needs than on their eligibility for less-costly or more-costly support.

Partly because of the failure to set out clear standards for the quality of the care the community should be providing to our elderly – presumably, because keeping it vague helps limit costs – the system has become “provider-centric”.

Over the past two decades, the provision of aged care has increasingly been regarded by government as a market. “Residential facilities got bigger, and for-profit providers flooded into the system. Regulation did not keep pace with the changed market conditions,” the authors say.

But, though you’d better believe the profit motive of for-profit providers is super real, anyone who’s done even high-school economics could tell that the aged-care “market” offers nothing like the countervailing forces that textbooks describe.

The royal commission’s interim report found “it is a myth that aged care is an effective consumer-driven market”. A myth instigated and perpetuated by the Smaller Government brigade.

Duckett and Swerissen say that, “in practice, providers have much more information, control and influence than consumers. In residential care, a veil of secrecy makes it very difficult for consumers to make judgments about key quality variables such as staffing levels.”

Rather than turning aged care into a well-functioning market, “the so-called reforms resulted in for-profit providers increasingly dominating the system. The number of for-profit providers has nearly tripled in the past four years, from 13 per cent in 2016 to 36 per cent in 2019".

Even the Land of the Free has instituted a five-star system for ranking residential institutions to better inform the aged and their families. We haven’t bothered. But research for the royal commission shows that a majority of providers have staffing levels below three stars. And, the authors add, it doesn’t necessarily follow that the more you pay, the higher the quality.

Residential aged care can be so offputting that it’s gone from being a lifestyle choice to a last resort. So great is the public’s aversion to aged care that the government has had to offer a range of at-home assistance packages.

But, consistent with the half-arsed pursuit of Smaller Government, the government has allowed a waiting list of about 100,000 people to build up. And, since the packages are delivered by private providers, amazing proportions of the cost can be eaten up by “administrative costs”.

Duckett and Swerissen say that, while (much) more money is needed, this won’t be enough to fix the problem without not only better regulation but fundamental change in principles, governance and incentives. Access to extra funding should be tightly scrutinised so the money goes to upgrade staffing and not to greater profits for wealthy owners of provider businesses.

Back to tomorrow’s budget. The strongest motivation behind the Quixotic quest for Smaller Government is the desire of the better-off to pay lower taxes. Like Don Quixote, it has failed. Fixing it will cost billions. But blow that, let’s cut taxes regardless.

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Aged Care: the crappy end of the Smaller Government mentality

What do you get when politicians and econocrats go for decades trying to foist Smaller Government  on an unwilling public? Bad government. And the delivery of crappy services – often literally in the case of aged care.

The interim report of the royal commission into aged care is absolutely scathing about the appalling state the system has been allowed to fall into. Its summary is headed: 'A Shocking Tale of Neglect'.

Aged care services are “fragmented, unsupported and underfunded. With some admirable exceptions, they are poorly managed. All too often, they are unsafe and seemingly uncaring.”

“We have uncovered an aged care system that is characterised by an absence of innovation and by rigid conformity. The system lacks transparency in communication, reporting and accountability. It is not built around the people it is supposed to help and support, but around funding mechanisms, processes and procedures,” the report says.

“Many of the cases of deficiencies or outright failings in aged care were known to both the providers concerned and the regulators before coming to public attention. Why has so little been done to address these deficiencies?”

“We have heard evidence which suggests that the regulatory regime that is intended to ensure safety and quality of services . . . does not adequately deter poor practices. Indeed, it often fails to detect them. When it does so, remedial action is frequently ineffective. The regulatory regime appears to do little to encourage better practice beyond a minimum standard.”

Here’s where you see the fingerprints of the econocrats and accountants: “the aged care sector prides itself in being an ‘industry’ and it behaves like one. This masks the fact that 80 per cent of its funding comes directly from government coffers. Australian taxpayers have every right to expect that a sector so heavily funded by them should be open and fully accountable to the public and seen as a ‘service’ to them.”

Get it? Don’t ask us to publish performance indicators. They’re “commercial-in-confidence” – especially because many providers are for-profit providers. Why don’t the regulators insist? Because, like so many regulators, they’ve been “captured” by the providers, which have Canberra-based lobbyists, are generous wine-and-diners and employers of retired ministers and senior bureaucrats, and could make a lot more trouble for the government than a thousand mistreated mums aka silent Australians (whose vote for the Coalition is rusted-on).

The obvious reason the Smaller Government brigade has to shoulder the blame for the appalling treatment of so many (but not all) people in aged care – and many of the overworked and underpaid nurses working in it – is that, as part of the eternal crusade to keep government smaller, aged care is, as the commission finds, seriously underfunded.

But it’s worse than that. Part of the Smaller Government mentality is having aged care provided by someone other than the government – including for-profit providers which, as every Smaller Government crusader knows, are far more efficient than the public service.

Except that, as the commission’s report demonstrates yet again, they’re not. And when they can’t use greater efficiency to cover their profit margin, they extract it by cutting quality. The report doesn’t say so, but it’s a safe bet the for-profits are at the forefront of the “poor continence management,” “dreadful food, nutrition and hydration,” and “common use of physical restraint” and “overprescribing of drugs which sedate residents” to make them easier to manage, it uncovered.

Trouble is, so long as so much of the “industry” is profit-maximising, no amount of increased funding will be sufficient to stop residents being mistreated.

The more fundamental problem is that the Smaller Government zealots have never persuaded voters that less is more. Almost all of us think more is more. That’s what we want and what even conservative politicians promise us at every election.

So they have no mandate for Smaller Government and, since the disastrous 2014 budget, lack the political courage of their convictions. But they persist with their efforts to keep the lid on government spending, continually cutting away at the people they consider to be political weak and enemies of the Coalition: the ABC, people on welfare, and the deeply despised public service - particularly those bureaucrats offering policy advice (who needs it?) and those regulating and policing the public funding received by the party’s generous business donors.

In practice, Smaller Government means underspending on essentials such as aged care until the neglect is no longer tolerable politically, feigning shock and promising to spend big and crackdown on miscreants when voters react with horror to the revelations of the inevitable royal commission then, once the media circus has moved on, quietly welching on much of what you promised to do.

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Having stuffed-up deregulation, don't stuff-up re-regulation

As the banking royal commission finishes, the aged care royal commission begins investigating the mistreatment of old people by – taking a wild guess – mainly the for-profit providers. Surely it won’t be long before the politicians, responding to the public’s shock and outrage, are swearing to really toughen up the regulation of aged care facilities.

It’s not hard to see we’ve passed the point of “peak deregulation” and governments will now be busy responding to the electorate’s demands for tighter regulation of an ever-growing list of industries found to have abused the trust of economic reformers past.

But having gone for several decades under-regulating many industries and employers, there’s a high risk we’ll now swing to the opposite extreme of over-regulation. That could happen if politicians simply respond to populist pressures to wield the big stick against greedy business people.

It could happen if politicians yield to one of the great temptations of our spin-doctoring age: caring more about being seen to be acting decisively than whether those actions actually do much good.

And it could happen if our econocrats refuse to admit the shortcomings of their earlier advocacy of deregulation – including their naive confidence that the power of market forces would ensure businesses treated their customers well – and go into a sulk, washing their hands of responsibility for what happens next.

But against all those risks that, in seeking to correct the failures of the previous regime we introduce something that’s just as bad only different, there’s one cause for optimism: as the first cab off the re-regulatory rank, Commissioner Kenneth Hayne’s guiding principles for turning things around. (To be fair, those principles seem to have been influenced by Treasury’s submission to the commission.)

His first principle is that, since almost all the misconduct he uncovered was already unlawful, there’s no need for a raft of legislation to make them doubly illegal. The problem is more getting people to obey the existing law.

Blindingly obvious? Not to a politician who wants to be seen by an angry but uncomprehending public to be acting immediately and decisively. On the rare occasions when Australia is touched by a terrorist act, we see Parliament recalled to pass urgent legislation making terrorism quintuplely illegal.

Hayne’s second principle is that compliance will be increased by making the law simpler, rather than more complex, so no one can be in any doubt about what’s required of them.

The more complex and voluminous you make the law, the more scope you give well-resourced offenders to pay lawyers to find loopholes and argue the toss and string out court proceedings. In the process, increasing the cost to taxpayers of bringing them to justice, increasing the likelihood of them getting off and increasing the reluctance of the regulators to take them on in the first place.

Hayne says the whole body of law needs to be rewritten to simplify and clarify the legislators’ intentions. In the meantime, however, some changes should be made more quickly.

One is to get rid of exceptions, carve-outs and qualifications. Examples are the “grandfathering” (leaving existing arrangements unaffected by new rules) of certain commissions, and the exclusion of funeral insurance from rules affecting other insurance.

As two law professors from the University of Melbourne have pointed out, the rule of law requires like cases to be treated alike. To make exceptions you need powerful arguments – which haven’t been made.

“Instead,” they say, “exceptions and carve-outs reflect the lobbying of powerful industry groups concerned to preserve their own self-interest.” True. There’s no principle of deregulation that says it’s OK to look after your mates.

In highlighting the shortcomings of existing legislation, Hayne stressed that “where possible, conflicts of interest and conflicts between duty and interest [such as not acting in the best interests of your client] should be removed”.

But his final guiding principle is that existing laws must be enforced. “Too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished,” he said.

Just so. And it raises a mode of response to the electorate’s wider discontents, as governments set out on the path of “re-regulating” industries other than financial services: regulations may need improving, but we don’t need a lot more of them.

No, what we need a lot more of is regulators doing – and being seen to be doing – their job of enforcing existing regulations with vigour and effectiveness, and governments being unstinting in providing them with resources.

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Aged care abuses the latest of many economic mistakes

How will the era of “neoliberalism” end – with a bang or a whimper? With a royal commission – or three. But don’t worry. Royal commissions always make a lot of noise.

With the memory of the government’s embarrassing delay in yielding to public pressure for a royal commission into banking still fresh, Scott Morrison got in before the Four Corners expose to announce a royal commission into aged care.

Who’s to say this will be the last? A royal commission into electricity and gas prices is mooted. Maybe sometime in the future we'll see a royal commission into problems with the National Disability Insurance Scheme.

To Morrison, the aged care commission has the advantage of kicking a political hot potato into the long grass of the next parliamentary term. “How can you claim we’re doing nothing? We’ve called an inquiry.”

Actually, the neglect and mistreatment of old people in nursing homes has been the subject of so many inquiries and reports – going back to the kerosene baths in 1997 – that only an inquiry of the status of a royal commission could have satisfied the many complainants.

But I wonder if the increasing resort to royal commissions has a deeper economic and political significance.

A key part of the era of what we used to call “micro-economic reform” has been to take services formerly provided by governments – and sometimes charities – and pay profit-making businesses to provide them.

Among the first of these “outsourcing” schemes was the Howard government’s decision to abolish the Commonwealth Employment Service and contract a network of charitable and for-profit firms to help the jobless find work.

Then came the expansion of childcare to for-profit providers, the move by successive federal and state governments to make technical and further education “contestable” by private providers, and the decision to open the provision of aged care to for-profit providers.

Plus the decision to turn five state electricity monopolies into a single, competitive national electricity market.

The reformers were sure these changes would lead to big improvements. As everyone knows, the public sector is lazy and wasteful, whereas competition and the profit motive make the private sector very efficient.

The reform would allow governments to reduce their spending on the services they subsidised, even while the public got better service. Competition from private providers would oblige church and charitable providers to lift their game.

And introducing market forces meant the providers of government-subsidised services didn’t need to be closely regulated. As any economics textbook tells you, it would be irrational for providers to mistreat their customers because they’d soon lose them to their many rivals.

It hasn’t worked out the way the reformers hoped. We won’t know whether non-government provision of job-search services is working well until unemployment surges in the next recession. But we do know that childcare was thrown into crisis when one private provider, ABC Learning, which had been allowed to acquire about half the nation’s childcare centres, went belly up.

We know that making vocational education and training “contestable” was a costly disaster, as many private providers conned youngsters into signing up for unsuitable courses (and debt).

We know that turning electricity from government monopolies to a national market has seen the retail cost of power double in a decade.

And now it’s aged care where mounting complaints about neglect and abuse can no longer be fobbed off.

Providers have been required to make public so little evidence of staffing ratios and other indicators of performance that we don’t yet know whether neglect and abuse is greater among for-profit or non-profit providers.

The notorious Oakden nursing home in South Australia, after all, was state-government run. But our experience of private operators gaming government subsidies and cutting quality to increase profits in other areas of outsourcing makes me think I know where the greatest problems lie.

And the way the announcement of the commission prompted steep falls in the share prices of four aged-care companies listed on the stock exchange suggests investors share my suspicions.

According to research by the Tax Justice Network, if you measure it by number of beds, non-profit providers make up about half the “market”, with the six biggest for-profit providers accounting for more than 20 per cent.

The biggest is Bupa (owned by a British mutual), followed by Opal (part owned by AMP), Regis, Estia and Japara (all ASX listed), and Allity.

We do know that the number of serious-risk notices given to providers jumped by 170 per cent in the past financial year, and significant non-compliance increased by 292 per cent. This says there’s been a sudden increase not in misbehaviour, but in vigilance by the authorities.

Why are unannounced visits and compliance audits only now in vogue? Good question.

Aged care is just the latest instance of the failure of contestability and “marketisation” to deliver government services satisfactorily – a great embarrassment to econocrats and governments of both colours.

The chickens are coming home to roost and the uproar is threatening the Coalition’s survival. Calling a royal commission with all its shock revelations may be the answer to the politicians’ problem.

It changes the question from “how could you have been so naive as to believe competition would save customers from being abused?” to “what are you doing to punish these bastards and stop it happening?”.

It also tells generous donors to party coffers the government's had no choice but to let them go.

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The taxes we pay come back to us - now or later

As we roll on to the federal election, there’s a surprising number of economic problems we should be discussing, but probably won’t.

For the longer term, the most important problem is the likelihood we’re not doing enough to meet our Paris commitment to reduce greenhouse gas emissions - which is, in any case, inadequate.

Linked with this is the appalling mess we’ve made of privatising electricity. Despite (and partly because of) Tony Abbott’s wrong-headed abolition of the carbon tax, this has left us paying power prices far higher than they need to be.

Linked with soaring electricity prices are soaring gas prices, caused by the gas companies’ gross overestimate of the amount of gas available for export through the many liquefaction plants they built. Absurdly, it would now be cheaper for local users to import gas from the world market.

The most pressing problem we should be discussing is the causes of the four-year-long run of weak growth in wages, which is not just crimping living standards but is by far the greatest threat to the holiest of holies: Jobs and Growth.

Then there are such minor matters as the way the burden of our years of weak growth has fallen mainly on youth leaving education, the way the “gig economy” threatens to undermine decent working conditions, the appalling run of seemingly respectable firms accused of cheating their employees and the terrible hash federal and state governments have made of TAFE.

The misbehaviour of the banks is being following by growing evidence of the misbehaviour of for-profit providers of childcare, aged care and before long, no doubt, disability services. What makes these people think they can mistreat their government-supported clients with impunity?

But if few of these problems are likely to get much attention from our campaigning politicians, what will? They’ll be arguing about their tax cuts being better than the other crowd’s.

With the budget still in deficit and the public debt still rising a decade after the global financial crisis, you’d think a decade of tax cuts is the last thing we could afford, but let’s do it anyway.

Why the obsession with tax? Partly because a government behind in the polls is trying to buy some popularity, partly because the more we obsess about tax the more our attention is drawn away from problems the government can’t or won't fix, but also because a lot of powerful and highly paid men (and I do mean mainly men) will not rest until tax has been “reformed” in a way that means they pay less and others more.

These well-off men are convinced they’re asked to pay far too much. They convince themselves of this by focusing on income tax and seeing it as a “burden” we have to bear without anything coming back our way.

In truth, we pay plenty of other federal and state taxes, which usually fall more heavily on the poor than the rich. And the taxes we pay come back to us as government benefits in cash (pensions, the dole, family allowances) and kind - particularly healthcare (subsidised doctors and pharmaceuticals, free public hospitals, subsidised private insurance), subsidised aged care and childcare, plus pre-school, school, technical and university education.

Every six years the Australia Bureau of Statistics conducts a “fiscal incidence study” in which it allocates the federal and state taxes we pay between the nation’s 8 million households, then allocates federal and state government spending to those households. (Some taxes, such as company tax, it can’t attribute to particular households. Nor some classes of government spending, such as on defence and law and order. But these omissions should roughly cancel out.)

The bureau published its study for 2015-16 last month. It found that, on average, households received $76 a week more in government benefits than they paid in taxes.

Break the households up by life stage, however, and you get a very different picture. For our 1.3 million single-person households aged under 65, the taxes paid by those under 35 exceeded benefits received by $171 a week. For those aged 35 to 54, this increased to $204 a week.

Why? Because most of them had jobs and were in good health, but none had children, meaning they got no family payments nor government spending on school education.

Our 1.4 million couple-only households aged under 65 are the big net contributors. For those under 35, their taxes exceeded their benefits by $480 a week. For those 35 to 54, it rose to $618 a week.

Our 2.5 million couples with dependent children paid a lot of tax, but also got back a lot of benefits, particularly family allowance, a lot of education spending and a fair bit of healthcare. All told, they paid just $42 a week more than they got back.

Skipping half a million single-parent households with dependent children (big net gainers) and a further half million couple households with non-dependent children (modest net payers), we come to the 1.8 million single or couple households aged 65 and over.

The couples got back $452 a week more in benefits than they paid in tax. That’s because they pay little tax, get a lot in pensions and get huge spending on health and aged care. Single retirees get back a net $576 a week, thanks to even greater spending on health and aged care.

So, younger working singles and childless couples are big net payers, couples with children roughly break even, and oldies really clean up. Just as well we all get old.

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