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2.2 What should governments do?

Many of the things Australians expect from government have a strong foundation – both on an economic and social basis.

However, it is not always apparent where the boundaries lie or where new boundaries should be drawn when it comes to government intervention. Trade-offs and value judgements will inevitably have to be made and the financial capacity of government provides a limit to what it can provide.

There is no better way of improving services than by giving consumers real choice. In competitive markets customers take precedence. The pressures and constraints that arise from having to obtain and satisfy customers create strong incentives to control costs, improve quality and develop new and better ways of doing things.

There are instances when markets cannot do what is needed and governments have to intervene. In doing so they must strike the right balance. Government interventions should be justified on the basis that they produce net sustainable benefits that improve the wellbeing of the community. There is a need to be aware also of the potential for government interventions to crowd out the private and non-government sectors from activities that they may be more capable of providing.

Efficiency and effectiveness

Governments should always strive to be effective and efficient in achieving the clearly stated objectives of their programmes and policies with specified outcomes and transparent monitoring and reporting.

Ensuring government services are produced and delivered at the lowest possible cost is desirable as it releases funding for more services or other priorities.

Efficiency also requires resources to be allocated properly over time – taking account of better products and ways of doing things and making the most of new technologies.

Governments should aim to identify the most efficient option – the policy, programme and outcome that results in the highest net benefit to the community as a whole. Governments need to constantly question whether there is a better or more efficient way of achieving objectives.

We must accept that gains in efficiency — not just in government but in the private and non‑profit sectors — will improve the community’s wellbeing and raise standards of living. We are all better off when our dollars are working hardest for us.

The work of the Productivity Commission, for example, is focused on achieving gains in efficiency in support of the overall national interest.

Improving efficiency can involve reducing the costs of production for each unit of output produced but, equally, might be achieved by better matching the supply of goods and services to those things people want most or by removing barriers to innovation and flexibility.

Cost-effectiveness is particularly relevant to public policy. It requires a focus on direct programme costs, including administration. However, this approach will not always work when the options to achieve desired policy outcomes are not necessarily comparable. In aged care for example, it can be difficult to compare the cost effectiveness of home-based care (including the informal role of carers) relative to the formal residential care option.

Managing the economy for growth and stability

The Commonwealth Government should play a substantial role in maintaining the stability of markets and endeavouring to manage the overall economy. Its aim should be to foster long-term economic growth and economic stability, including keeping unemployment and inflation low.

Governments can have an important influence on the incentives that affect innovation, investment and decisions on whether to participate in the workforce – all fundamental drivers of growth. Incentives are also influenced by the disciplines imposed by competitive markets.

Management of the economy is made easier by having a sound policy framework including an independent central bank with responsibility for setting monetary policy.

A government’s approach to fiscal policy is also critical to imparting certainty and credibility to markets through the application of sound macroeconomic policies. Credibility in policy making contributes to reduced uncertainty and creates a more attractive environment for business. A disciplined fiscal policy with credibility over the medium term allows business to make investment decisions with greater confidence.

Good policy sets the markers by which we can get our bearings for the future.

Fiscal policy should be set over the medium term. Budget decisions will naturally vary from year to year in line with economic conditions and a government’s plans. However, for the most part, fiscal policy should not be used to fine tune the economy.

Fiscal policy should be used effectively at times of major economic shocks and downturns to lessen the negative impact on economic activity and thus reduce unemployment. As the international economic environment becomes more volatile and as Australia becomes more exposed to movements in global commodity prices the risks of such shocks are likely to rise.

In order to effectively manage extreme economic and financial circumstances, governments should create capacity through prudent fiscal management in normal times.

Having a strong budgetary position for many years before the global financial crisis enabled Australia to withstand its economic impact.

Protecting the balance sheet

As well as pursuing a disciplined approach to fiscal policy through prudent spending and taxing decisions, it is also important for governments to keep their balance sheets strong.

For governments, as with companies, a strong balance sheet is important. The state of the balance sheet is a key determinant of borrowing costs for government. Repairing poor balance sheets typically requires higher burdens on taxpayers and reductions in government services.

Liabilities on the balance sheet (including government debt) also have to be serviced and repaid, which reduces government’s capacity to fund other services.

Where governments have a strong balance sheet, they are able to use it to support the national interest. For example, the provision of banking guarantees during the global financial crisis.

Governments should be conscious that the provision of government guarantees is not without risk. If a government guarantee is drawn down then the balance sheet of the government can be weakened considerably.

Approach to equity, fairness and disadvantage

Alleviating the impact of poverty and providing people with an opportunity to escape it are essential functions of governments. This is particularly the case for children.

Nonetheless, there are diverse views on the appropriate extent of government help to families and people in poverty.

The provision of taxpayer funded assistance payments has been and should continue to be an important public priority. Their primary purpose should be to ensure a minimum, adequate standard of living for people who are unable to support themselves through work or their savings.

Rates of assistance payments, including their adequacy, should be balanced against their impact on incentives for people to get off welfare and into the paid workforce. Being able to provide for yourself or at least contribute to your own welfare is a vital part of the freedom and independence many take for granted. Payments also need to be seen as affordable, sustainable and fair by the community.

Assistance should be means tested to target those in greatest need.

Through the National Disability Insurance Scheme the Government intends to substantially expand public services to Australians with disabilities. The scheme has widespread community support and reflects a judgement that government should provide a form of social insurance for disability.

As well as the challenge of managing their disability, people with disabilities often face social exclusion and poor employment opportunities and outcomes. The scheme is also intended to improve the wellbeing of family members and carers, who often must leave employment to care full time for a relative with profound disability.

Over time, economic conditions and the characteristics of society change and it is accordingly important to ensure the objectives of welfare payments, as well as their rates and the means tests for eligibility, remain relevant and affordable.

Adding to productive capacity

Governments should also support economic growth and wealth creation by helping to boost productive capacity. Governments can influence the quality and productivity of the labour force and improve access to economic and social infrastructure to enhance Australia’s global competitiveness.

Access to basic health and education is critical for people to reach their potential, to engage in the workforce and to make a productive contribution to society. To ensure as many people as possible in society have access to good health and education, governments are involved in funding or providing these basic services.

Quality education and training, provided through the university and vocational education systems, support people in their working lives by equipping them with needed skills and competencies. As well as supporting Australia’s economic competiveness, education is a key driver of social mobility, economic prosperity and social cohesion.

More broadly, policy settings through the tax and welfare system impact on work incentives and should be framed in a way that avoids discouraging people from seeking paid employment.

The Commonwealth also determines the size and composition of Australia’s migration intake, which adds to Australia’s labour supply and long-term productive capacity. Since 1945, around 7 million migrants have settled in Australia bringing qualifications, skills and experience that are in demand.

Governments provide, fund and regulate economic infrastructure such as energy, road, rail and port facilities. The availability and quality of this infrastructure feeds directly into the cost structure of Australian businesses, impacting on productivity and the ability of local firms to compete in international markets.

Regulatory interventions

The community benefits from good regulation that supports the effectiveness of markets. Good regulatory interventions get the balance right, recognising the roles played by the formal rule of law and the discipline of a business’s own reputation.

Governments should aim to make regulation more efficient and effective by clearly setting out the reasons for new regulations. The process and a commitment to rigorously follow good process are essential.

Often regulatory proposals are accepted despite regulation not being the most effective mechanism to manage the risk. Governments often want to be seen to be doing something. This approach can result in an over-reaction to the problem and place a major cost on the community and business without addressing the underlying risk in the most sustainable and cost effective manner.

For example, many retailing businesses are forced to operate under different regulatory regimes that restrict their competitiveness and ability to innovate. These regimes include planning and zoning, retail tenancy regulation, transport restrictions, retail trading hours, workplace relations and a range of inconsistent state-based regulation.

The impact of this is to increase prices and reduce choices for consumers at a time when there is increasing competition from on-line businesses.

A commonsense approach to handling risk in society

Governments step in at times to reduce risk in society. Clearly they have a role when it comes to dealing with catastrophic events that impact on individuals or on whole communities, for example in the aftermath of natural disasters such as major floods, cyclones and bushfires.

However, government should not take on risk for the community unless it is better placed to manage the risk. In Australia and most societies, individuals and markets best handle the majority of risks.

Families should be the prime social institution for dealing with risk. Parents provide for their children and many people rely on family and friends to look after the sick and disadvantaged. Inheritance transfers family assets between generations.

Australia has private markets that provide various forms of insurance including home and car insurance to protect against accidents and property damage and injury. There is a strong and vibrant health insurance market in Australia.

Against this backdrop, governments should not act as the insurer of first resort. Governments should help families and individuals manage risk on their own behalf.

Similarly businesses should manage their own risks, including the risk of losing customers or falling behind as they face greater competition.

Government actions can also introduce or increase risks. Policies may have unintended consequences and poor economic management may reduce business and consumer confidence. Fiscal and tax policies which lack credibility or change the rules cause uncertainty and add to the risk of existing and future investments. Poor or unpredictable regulation also adds to risk.

Unsustainable fiscal policies pursued by governments represent a substantial risk for any country and its citizens. Equally, well managed finances and responsible, disciplined fiscal policy reduce risks.

In dealing with risks in society, governments should acknowledge eliminating all risk is both unattainable and undesirable. The community should not expect a risk-free life.