The policy agenda: what the government should do now

A federal election is an opportunity to take stock of how Australia is doing, where it’s going, and what governments can do about it. This series, written by program directors at the Grattan Institute, explores the challenges that Australia faces and advocates policy changes for budgets, economic growth, cities and transport, energy, school education, higher education and health.

Australia has a new government. After an eight-week campaign, and a week of watching the count, its members will doubtless be delighted to switch from electioneering to governing. Their first and most important task is to choose their priorities.

What problems and opportunities face the government? And what can it do about them? This article, the first in a series for The Conversation, draws on the Grattan Institute’s recently released Orange Book 2016 to identify priorities for policy reform.

Above all, the government needs to promote economic growth in a sluggish global economy, and bring the budget back under control. Government should put a priority on those reforms that will make the biggest difference to the economy, to peoples’ lives, and to the budget. Priorities also need to take account of political realities. Top of the list should be those measures that either don’t require parliamentary approval, or where there is some chance of support from either the Labor Party or the Greens, given that mustering a Senate majority from among the independent Senators will mostly prove impossible.

The new government faces some tough tasks

After nearly 25 years of uninterrupted economic growth the economy risks running out of steam. The end of the mining investment boom and falling commodity prices have pushed down per capita national incomes over the last five years. GDP growth is subdued, although there’s a good chance that Australia will complete a mining cycle without ending in recession, for the first time in its history, as Grattan Productivity Growth Program Director Jim Minifie argues today in his article on the economic outlook.

But the prospects for faster economic growth are dim. Economic growth has tended to be slower across the developed world since before the global financial crisis. Although opinions differ on the causes, many believe that growth will be slower for longer.

Irrespective of what it may have argued during the election campaign, the incoming government won’t be able to put off the task of budget repair for much longer. Commonwealth budgets haven’t come close to balancing for eight years. Interest on the accumulating debt now consumes 4% of government income, or as much as the Commonwealth spends on public hospitals. Younger generations will be taxed more to pay for today’s spending. Every $40 billion deficit, the norm for each of the last eight years, forces households aged 25 to 34 to pay an extra $10,000 in tax over their working lives.

Our large capital cities, transformed in recent years by economic success, have growing pains. House prices are very high relative to incomes. Home ownership is falling for all households aged under 55. Most new housing is far from the city centres where most new jobs are being created. More people spend longer in traffic getting to work. The physical divide between rich and poor is growing.

Our political system is not dealing well with these challenges

The incoming government must face the challenges of reviving our economy and fixing the budget against a backdrop of growing community anxiety towards globalisation and distrust of political leaders. About 26% of the electorate voted for minor parties in the House of Representatives, and about 34% in the Senate. Australia’s swing away from mainstream politics is a milder form of the UK vote for Brexit and the US Presidential bid of Donald Trump. Yet it shows that progress is not inevitable towards the more open economy and flexible markets that have increased prosperity over recent decades.

The pace of economic reform has already slowed in Australia. There have been fewer economy-wide reforms over the last two decades than in the 1980s and 1990s, perhaps because many have largely been completed, and because there was less impetus for reform while the mining boom buoyed the economy.

In the absence of genuine reform, politicians are often creating great expectations that far exceed what government can do. Meanwhile, they are failing to act on the things that they can control. At the same time, vested interest groups, emboldened by past successes, are more vocal than ever in protecting their interests. This election campaign saw at least two major industry-sponsored scare campaigns against policies of the major parties – on negative gearing and cuts to public subsidies for pathology services – while the debate on superannuation tax breaks is sure to heat up again after the election. Often the public interest has few friends. A way forward But politics doesn’t make reform impossible. Many reforms don’t require legislation at all. For example, the Commonwealth could change how it accounts for higher education HELP loans so that the costs of the scheme are more transparent - along with the benefits of reform. Other reforms, such as strengthening markets for electricity generation and distribution, require support from states and territories, but not from the Commonwealth Parliament. Where legislation is required, negotiating with the Labor Party or the Greens is likely to matter more than negotiating with the cross-bench in the new parliament. On current counting, the Coalition will be able to pass legislation if either the Labor Party or the Greens support it. Without their support, legislation will only pass if the Coalition lines up eight out of 10 of the minor party senators – a formidable task, given their disparate views of life. Some measures will fit with the ideological predispositions of the Labor Party or the Greens. Often the real obstacle for such reforms will be the Coalition party room. For example, the government should tighten the Direct Action safeguard mechanism so that it evolves into a carbon pricing scheme, but that will be unpopular with many Coalition MPs. Other measures won’t immediately win opposition support, but it’s possible to imagine the government building the public case for reform, and then using public support to encourage at least one of the Labor Party or the Greens to play ball. For example, the government might be able to build the case to revise the Medicare schedule so that it pays less for operations where technology has reduced the cost, and practitioners are just reaping extra profits. Yet this won’t be easy. In 2009, the Labor Party proposed just such a reform – and then abandoned it in the face of vigorous lobbying by medical practitioner groups. Ironically, though, the public seems to be up for making tough choices. Surveys suggest that people understand the need to take on big challenges such as budget repair, and are even prepared to contemplate slaying sacred cows such as negative gearing. A government that is prepared to forcefully articulate the public interest could stare down interest groups and win public support for a brave and powerful reform agenda. Reform priorities So what should the new government do? There are many reforms that can contribute to economic growth, improve the quality and reduce the cost of government services, and bring budgets back into balance The remainder of this series will discuss the growing evidence base that shows what reforms would work in tax and budgets, economic growth, cities and transport, energy, school education, higher education and health. We will focus on those changes that would make the biggest difference to the lives of Australians, and where the politics are at least tractable, even if they are not going to be easy. Our politics can implement this reform agenda by using the evidence that has been assembled, and robustly articulating the public interest in the face of interest groups. Australia has a proud history of enlightened public policy. Many countries would be delighted to swap our problems for theirs. Australia can continue to be the lucky country. This series will show how we can make our own luck. Key challenges facing the government