Australian Economy

Why we need ‘wickedly hard’ reform in Australia

They are needed to “jackhammer” unforgivingly entrenched disadvantage (think better and enduring Indigenous outcomes, think early comorbidity health interventions and enduring public health interventions such as dental care).

But wickedly hard policies, by requiring more than one level of government involvement, must first wrestle the biggest policy reform chiller of all, the much-maligned economic term – vertical fiscal imbalance.

Natural disaster funding

Translated, vertical fiscal imbalance means the states wear the political pain and the budget loss in doing the right thing. The Australian government wears little political pain and gets much of the budget dividend.

The most perverse example of this is natural disaster funding. The Australian government still spends 96 per cent on natural disaster mop-ups and 4 per cent on mitigation. Despite this perverse outcome, loudly called out by the Productivity Commission a decade ago, the lion’s share of the Productivity Commission’s 22 policy recommendations remain on the government’s “to-do list”.

The mop-up versus mitigation metrics have improved only by a paltry single percentage point in those 10 years. And with it, home insurance is becoming unaffordable for Australia’s 1 million vulnerable homes (concentrated in the Northern Territory, Queensland and Northern NSW).

In the distant past, the hard workaround for wickedly hard reform was compelling analysis, political leadership (collectively by premiers, prime ministers and treasurers) and state buy-in – think the GST.

But the real game changer, that acknowledged the vertical fiscal imbalance reform chiller in its design, was competition policy payments. They were a cunning, clever and pragmatic policy hatched by the Council of Australian Governments in 1994 in response to the 1993 Hilmer Report on competition policy.

Put simply, competition policy payments proved the reform fertiliser of an extraordinary seven years of national competition policy. By offsetting vertical fiscal imbalance, it afforded state ministers a big net benefit narrative to douse the policy naysayers.

‘Tsunami of reforms’

The national competition policy delivered a tsunami of reforms. This is perhaps best captured in the Productivity Commission’s estimate that they lifted GDP by between 2.5 and 5 percentage points.

We need reforms to resume on a wide and ongoing basis; not to disappear down a rabbit hole until the next crisis hits and a “unicorn reformist” makes a rare breakthrough.

Here, we need to acknowledge that wickedly hard reforms are not elusive simply because of the lack of state political will. Vertical fiscal imbalance means the states and territories simply don’t have the budget denominator to both walk (day-to-day program delivery) and chew gum (policy reform).

And the recent High Court decision of Vanderstock v Victoria suggests this is not getting better anytime soon.

We also find the Australian government facing not only a structural budget deficit but also structural inflationary pressures. So, today, policy inducement through competition policy payments is probably unaffordable and also inflation (and interest rate) tinder.

So, it’s time to think outside the policy playlist of the past, and make fiscal way for the states (working with the Australian government) to resuscitate productivity, relieve structural inflationary pressures and tackle entrenched disadvantage.

And they want to for the 1 million Indigenous people, many of whom face entrenched disadvantage.

For the 4.3 million Australians locked in the world of mental ill-health for 12 months or more.

And for the 2.6 million Australians at risk today of domestic and family violence.

For 1.5 million households in housing financial stress as renters and owners.

And for all Australians facing a world of serial extreme weather events. Policies taken collectively that would lift the wellbeing of all Australians.

It is time for a debt buyback scheme in lieu of the likely unaffordable competition policy payments of the past.

Independent agency needed

So how do we implement such a scheme? The Australian government assumes the lead, offsetting the vertical fiscal imbalance policy blocker with a debt buyback program. That will provide an inducement for the states to do the wickedly hard policies devoid of profligate expenditure and minimal inflationary flow-through.

And the Australian Office of Fund Management can do its work, bundling up the debt and funding it at a much lower cost than the states individually doing so (another wee inflationary valve release).

A robust independent agency will be needed to assess the merit of these wickedly hard policies. Something akin to the Clean Energy Finance Corporation as our Caesar’s wife.

There is also a ready-made, indeed pragmatic, policy playlist in the Productivity Commission’s inaugural Shifting the Dial report released in 2018. There was a recent addendum from former Productivity Commission chairman Peter Harris. Another worthy addition would be Rewiring Australia’s policy applied to state public housing.

A vertical fiscal imbalance-busting proposal along these lines was suggested to then-treasurer Scott Morrison upon his receipt of the Productivity Commission’s report on Australia’s System of Horizontal Fiscal Equalisation.

The report was the first to identify, and indeed to model, the first mover fiscal disadvantage for states undertaking meaningful tax reform. But, alas, the Productivity Commission’s narrow terms of reference precluded a public recommendation for a vertical fiscal imbalance de-chilling debt buyback program.

The good news: implementing the buyback program itself resides in our fast policy bucket. The government can pretty much establish the program and offer it up to the states on its own and (ideally) expeditiously.

On a final note, the debt buyback isn’t designed to be a “free kick” for any one state or territory. They all stand to benefit if they step up to the wickedly hard policy wicket and hit a six.

All Australians will benefit – delivering not just economic growth but also a modicum of downward pressure on inflation and jackhammering our bedrock of entrenched disadvantage.

Helen Silver AO is a former Victorian secretary of the Department of Premier and Cabinet and a former deputy managing director of Allianz Australia.

Karen Chester is a former deputy chairman of ASIC and the Productivity Commission.

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