Education efficiency should start with Grattan compromise

If Treasury wants to start acting more like economists than accountants, a good place to start would be to urge its political masters to seize on the opportunity presented by the school funding "compact" proposed by the Grattan Institute.

Treasury advice would be much improved if it switched its approach to the budget from helping the politicians cook up some quick cuts to government spending to a more medium-term focus on achieving better value for the taxpayers' dollar through greater efficiency and effectiveness.

A more medium-term approach allows greater scope for micro-economic considerations to be incorporated into decision making.

The policy quagmire of school education is crying out for Treasury's guiding hand. It's hard to believe that school funding is still dogged by century-old sectarian rivalry between the public, Catholic systemic and independent school systems.

Thanks to this unending rivalry, the nation spends almost all its time arguing over how public funding is shared between the three systems, leaving little time to debate how well the money's being spent and how it could be better spent.

Meanwhile, domestic performance measures (NAPLAN) show, at best, no improvement in our performance over time, and international measures (PISA) show other countries improving while we mark time.

Our results show a wide gap between our best and worst performing students, which hasn't changed much, neither because our best have got better nor because our worst have got less worse.

Is this something Treasury is happy to see roll on? One unlikely to have much adverse effect on either the budget balance or national productivity?

Well, if we keep putting most of our energy into public versus Catholic versus independent, rest assured it will.

The Gonski funding review came up with a breakthrough proposal to rise above sectarian squabbling by moving to the division of combined federal and state funding on the basis of student need, regardless of which silo a disadvantaged student was in.

The Gillard government belatedly introduced a bastardised and far more expensive version of "Gonski", which the Abbott government pretended to support but disavowed immediately on winning office.

So the sectarian standoff remains. The Coalition isn't prepared to implement Labor's version of Gonski because it's too expensive, but it's too expensive because of Labor's promise to help the poor schools (those with many disadvantaged students) at no cost to the rich schools (those with few disadvantaged students).

Trouble is, until we direct more funds to the disadvantaged students, we don't stand much hope of improving our schooling outcomes.

Of course, a more efficient allocation of funds is just the first step towards improving the outcomes of disadvantaged students –  which is why it's so important to move the debate on from how the money's divided to how effectively it's being spent.

Clearly, moving to needs-based funding is as much about efficiency as about equity (fairness).

It makes zero economic sense to continue overfunding some students while those you underfund become an underclass of poorly educated workers who spend a lifetime in and out of employment, making a weak contribution to national productivity (not to mention being a recurring drag on the budget).

The 2014 budget did nothing to correct the maldistribution of federal funding to public and private schools, it just cut the basis of annual indexation from a high rate set by the Gillard legislation to just the consumer price index (much less than the rise in teachers' wages). It was about cost shifting, not reform.

This was always unsustainable politically. In the end, Malcolm Turnbull relented and promised to keep the original funding arrangement going for another three years to 2020.

Turns out grants are set to grow by 3.6 per cent a year, whereas teachers' salaries are more likely to grow by 2.5 per cent.

The genius of the "circuit-breaking new compact" proposed by Peter Goss and Julie Sonnemann of the Grattan Institute is that it seizes this rare chance to propose a deal that would get all schools up to 95 per cent of needs-based funding (the "schooling resources standard") by 2023, much earlier even than Gillard's plan.

This would involve schools below the 95 per cent benchmark having their funds raised by 3.6 per cent a year, while those between 95 and 100 per cent of the standard would rise by 2.5 per cent and those already above the standard would mark time.

This last element is the compact's point of political vulnerability, of course, and already Labor has found it.

Put the Labor opposition's personal ambitions ahead of the interests of disadvantaged students? Why not, says Labor's spokeswoman, the not so lovely Tanya Plibersek.

Let's hope Treasury has higher principles than Labor.

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Many guesses why productivity may have stopped improving

Conventional economics is falling apart, no longer making the sense we thought it made. Economists are entering a period of puzzlement and uncertainty, while their high priests struggle to hold the show together.

You can tell all that if you read between the lines of the Productivity Commission's discussion paper launching its inquiry into Increasing Australia's future prosperity, published last month.

It’s meant to be the first five-yearly review of our productivity performance, the micro-economic equivalent of Treasury’s (misnamed and now politically hijacked) five-yearly macro-economic intergenerational reports.

So it has potential to be a big deal. If you missed hearing about the discussion paper it may be because it was overshadowed that week by something that happened to a Mr Trump.

The commission opens its discussion with the alarming observation that "there is a justified global anxiety that growth in productivity – and the growth in national income that is inextricably linked to it over the longer term – has slowed or stopped".

Productivity is a measure of an economy's (or a business's) ability to convert inputs of resources into outputs of goods and services.

We commonly (and least inaccurately) measure it as output per unit of labour input – per worker or per hour worked.

But the commission prefers to measure it as output per unit of both labour and capital inputs, which it calls "multi-factor productivity". This is intended to be a measure of the essence of productivity improvement: technological advance and increased human capital.

Trouble is, the commission says, "since 2004, multi-factor productivity has stalled, here and around the developed world. This is a long enough period to suggest something is seriously awry in the economic fundamentals and the consequent generation of national wealth and individual opportunity."

Actually, by the commission's own figuring, Australia's labour productivity in the "12-industry market economy" improved by 1.9 per cent in 2014-15, the most recent year available, and our multi-factor productivity improved by 0.8 per cent, which was also our average rate of multi-factor improvement over the previous 40 years.

It's true, however, that our multi-factor performance has looked pretty sick since the turn of the century.

But the first point to note is that the problem is global, not just some weakness of ours – a fact a lot of those who've used our weak numbers to push their own favoured "reforms" have often failed to mention.

Next point, which is also often not mentioned: economists can't measure multi-factor productivity with even remote accuracy. That's mainly because they can only guess at the contribution one unit of physical capital (whatever that is) makes to production.

So it's hard to be sure the weak multi-factor productivity figures most developed countries are producing are real.

Next, assuming they are real, economists can only guess at the factors causing them. There's a lot of guessing going on by some of the world's top economists, but as yet there are no policy changes we could make with any confidence that they'd fix the problem.

Our eponymous commission produces an annual update on our productivity figures but, though it's been wringing its hands for years, its analysis has never once been able to put its finger on a causal factor we could do something about.

The few explanations it's found are either temporary or nothing to worry about.

The discussion paper acknowledges, but then dismisses, the argument of those wondering if the whole "problem" is merely a product of monumental mismeasurement.

I don't dismiss it. Had the economists not assured us of the opposite, most of us would look at the wonders of the digital revolution and the many industries being hit by digital disruption and assume the productivity indicators must be going gangbusters.

How can we be sure they aren't? One of our most thoughtful economists – one who's always gloried in digital advances – is professor John Quiggin, of the University of Queensland.

Quiggin argues that the economists' conventional model for thinking about the economy and how it grows is based on an industrial economy, which made sense in the 19th and 20th centuries, but is becoming increasingly outmoded and misleading.

We focus hard on the production of goods – agriculture, mining and manufacturing – but are vaguer about the production of services, which is the main part of the economy that's growing.

Today, he says, the primary engine of economic development is information, but information has radically different characteristics to a physical good or a service such as a haircut.

Information is often free ("non-excludable", as economists say) and it can't be used up ("non-rivalrous").

This outdated, industrial-age way of thinking about growth and productivity is reflected in the way we define and measure the economy and productivity via gross domestic product.

For instance, we measure only economic activity in markets, meaning we exclude all the activity taking place in households, and can't measure the productivity of the 20 per cent of GDP created in the public sector, including such minor industries as health and education.

And we ignore one of the most valuable outcomes of the greater prosperity that is the Productivity Commission's god: hours of leisure.

None of this, however, will stop the commission using its ultimate report to advocate a bunch of "reforms" intended to improve our small corner of the world's alleged productivity problem.

As we speak, Canberra's second biggest industry – the lobbyists – are busy churning out their self-interested submissions to the inquiry, advocating such radical new ideas as cutting company tax and weekend penalty rates.

To be fair, the commission says it's "particularly interested in new and novel ideas because there is already a strong awareness of many reform options that parties would like to see implemented. More of the same is not likely to be helpful."

We'll see how far it gets with that fond hope.

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