Here are the problems the next government should face. Will they?

by John Daley

Published by The Guardian, Wednesday 15 June

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.

Government departments prepare a “blue book” and a “red book” as briefs for whichever party wins the election. In part these explain how election policies might be implemented. But they are also an opportunity for departments to step back and identify priorities for policy reform.

Grattan Institute’s Orange Book 2016, released on Tuesday, surveys policy recommendations from seven years of Grattan Institute reports and outlines what the next government’s priorities should be, whoever wins the election.

The problems it will face aren’t hard to find. Per capita national income has fallen over the last four years as the mining boom subsided. Economic growth is slow, reflecting trends across the developed world. Unemployment stands at nearly 6%, higher than in the United States and United Kingdom, countries hit much harder by the global financial crisis than Australia. Underemployment also remains high.

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 $40bn 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 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.

School education is not keeping up with the best in the world. Test results are well behind international benchmarks, and Australia is slipping down global rankings. Between years three and nine, talented students from poorer backgrounds fall almost two years behind their peers from richer backgrounds.

Our political system is not dealing well with these challenges. Politicians are often creating great expectations that far exceed what government can ever do. Meanwhile, they are failing to act on the things that they can control. The result is an often barren debate that disappoints everyone and makes for a dull campaign.

Yet 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. A growing evidence base shows which reforms would work.

Less efficient taxes need to be replaced with more efficient taxes. Taxes and welfare need to be better aligned to encourage more people to enter and stay in the workforce. We need to spend less on boondoggle transport projects in marginal electorates, and more on infrastructure that provides more benefits than it costs. We have wasted more than a decade failing to set up an effective market mechanism to reduce climate change. And electricity prices have skyrocketed because governments have failed to reform incentives to over-invest in electricity networks.

Health is the fastest growing area of government spending. That fact alone should not trouble us – it is inevitable that people will pay more to lead longer, healthier lives. However, health costs more than it should because governments have accepted the prices offered by large pathology and pharmaceutical companies, rather than negotiating a better deal. And government pays for some hospitals that have unjustifiably higher costs than others, and for some treatments that are known to be ineffective.

In school education, arguments about funding have distracted energy from reforming the classroom by encouraging more targeted teaching, in which teachers assess and respond to the needs of every child, and teacher feedback. In higher education, the commonwealth has not developed a coherent model for deciding how much universities should be paid for teaching undergraduates.

Progress in reducing budget deficits has been negligible for a decade. Governments have been good at changing policies but bad at making net budget improvements. And a shallow ideological argument borrowed from the US has distracted from the blindingly obvious: a budget deficit of $40bn a year will only be eliminated by both reducing spending and increasing taxes.

Perhaps progress on this agenda has been underwhelming because the prosperity of the mining boom has sapped the will for reform. The politics of reform is never easy yet when government lacks a robust reform agenda vested interest groups, emboldened by success, are more vocal in protecting their interests. Meanwhile the public interest has few friends.

Ironically, though, the public seems to be up for reform. Surveys suggest that people understand the need for budget repair, and are even prepared to contemplate slaying sacred cows such as negative gearing.

Our politics can implement this reform agenda by using the evidence that has been assembled, robustly articulating the public interest, and staring down 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. But we must make our own luck.