II Kev SDeeches II

Options for Reform Governments Beyond the Year 2000

The Hon. Susan Ryan, A 0 Executive Director, Association of Superannuation Funds of Australia

Annual Spann Oration 24 July, 1995, Sydney Hilton Hotel

I became actively involved in politics and thus in public policy at the beginning of the 1970s. At that time there was great anticipation about the options for reform government. Not only did we believe that governments could entirely control and manage the Australian economy, we had high hopes of public policy improvements in traditional areas such as education and health, foreign policy and defence. Then there was the new Whitlam agenda: including the natural environment, Aboriginal land rights, equal opportunity, improvement of urban environments and the growth of a dynamic and unique Australian culture.

Coming out of a period of long-standing, conservative and stable national government, characterised by economic and employment growth within a regulated and protected economy, and inspired by reforms in Northern and Western Europe, Canada and the United States, we saw no limits to a reform government supported by a professional and dedicated public service. While our Constitution allocated powers in education. health, environment and planning to the states, we expected that shared public policy objectives would facilitate the implementation of this vast national agenda.

As I look back now on the twenty years that have intervened between my election to parliament in December 1975 and the current public policy debate, I have come to a very different view of what is possible.

The Whitlam agenda had inspired my entry into parliament. Thus it is something of a personal irony that when I tinally became a member of the Hawke government in 1983, the public policy debate had shifted a long way away from that agenda. The Hawke cabinet in general was intent on distancing itself as far as possible from anything that smacked of Whitlamism.

Economic reform, mainly fiscal cuts and shrinking of public sector activity, became the test of government performance and of public policy. Pursuing such reforms aggressively. the Hawke cabinet changed forever the options available for reform governments of the future.

By deregulating the economy, removing protection from manufacturing industry, making the currency subject to global assessment, the Hawke government shifted the possibilities for economic decision-making sharply and perman- ently. Australian governments can no longer

Auelmlian Journal of Public Adminielmtion 55(1): 5-11, March 1996

6 Ryun

decide what the Australian dollar is worth. They can no longer determine what the rest of the world will pay for what we produce, nor what we will pay for the rest of the world’s goods and services.

As a consequence, Australian governments cannot, except at the margins, influence which industries survive and which disappear. They cannot pick winners. Thus governments cannot determine what kinds of jobs, or indeed what numbers of jobs are available to the Australian workforce. Through a variety of tax incentives, information programs and encouraging rhetoric, they can hope to influence these things. That is all.

A further consequence of Australia’s joining the global economy is that governments, with or without the agreement of trade unions, can no longer determine, on a fundamental level, what Australian workers are paid for their labour. Let me give some practical examples; industry sector plans are now, sensibly, out of fashion. In the 1980s they were in fashion. The steel industry plan worked well; the car industry plan at least managed to keep parts of the industry alive. The textile and footwear industry plan failed, despite goodwill, public subsidies, training programs, tripartite boards and the undeniable skill of workers in that industry.

Whether the plans succeeded or failed did not ultimately depend on Australian public policy. It depended on whether the rest of the world wanted the products of those plans, and on whether Australian consumers preferred the Australian gtxxls and services to those imported.

Governments have little influence on interest rates. A great deal of our foreign debt, which involves interest payments for monies borrowed by private companies, is beyond the capacity of government to reduce. Governments, however, continue to make significant decisions affecting the economy. They decide by what mechanisms, and roughly in what quantity they collect revenue. They decide how to spend that revenue. They continue to allocate most of the funds that state governments use in carrying out their public policy responsibilities. Their tax policies and, in the case of the states, their management of infrastructure costs, create the local business environment. A further important part of that business environment comes from the extensive regulatory powers of the commonwealth and states,

particularly the commonwealth’s corporations powers. Pro-competitive, anti-monopolistic regulation of business through the Trade Practices Commission and the Prices Surveillance Authority now constitute the most direct impact of public policy on business activity.

Do those changes consequent upon deregulation of the economy mean that government in the next millennium will be less important to the lives of Australians? In my view, they do not. Government will have a different, but equally important set of tasks.

Along with economic rationalism, another area of public policy expanded rapidly in the 1980s. It atlracted far less media or academic advocacy than deregulation and was greeted with a great deal of scepticism by economic rationalists. I am referring to the development, as a part of the Accord Mark 1, of what we called the Social Wage.

In a recent analysis of the differences between the development during this ccntury of the welfare Sk?te in Australasia and the welfare state in Europe, Frances Castles (1985) points out that the commitment by the industrial movement in Australia to the expansion of the social wage through targeted benefits was unique among social democracies with strong industrial ties. He contrasts the Australian experience of centralised wage policy supported by targeted social benefits with the growth of tax-funded universal welfare in Europe. In Scandinavian and Western European social democracies the welfare state grew with the support of the trade union movement. Australia, according to Castles, saw little expansion of universal welfare services funded by an increase in levels of taxation in the decades following the second world war.

Castles points out that from the beginning of the century, particularly from the Harvester Judgement in 1907 which established a formula for a fair and reasonable wage, the industrial movement in Australia was focussed on increases for workers via centralised wage decisions. Increases were to reflect cost of living rather than productivity. This focus continued throughout the century. Thus historically award wages were intended to be high enough to allow workers to meet all of their needs and, to some extent, prepare for retirement by purchasing a home and accumulating some savings. The old age pension was introduced at the same time as the Harvester

Options for Reform Governments Beyond the Year 2000 7

Judgement and remains the basic building block of Australia's retirement incomes policy.

From this historical perspctive, it is not surprising that when Labor was returned to office in 1983 on a platform which included a Wages Accord with the trade unions, important elements of the Accord were dedicated to supplementing, by way of targeted social provision, those needs which could not be met by the individual wage earner. General health and education services were also major features in the Accord and have remained so in subsequent versions. The targeted social wage became increasingly important through the 80s as the deepening recession increased unemployment and the Accord became an instrument not only for inflation control but for real wage reductions.

The early implementation of the social wage was achieved during the turbulent and difficult expenditure-cutting budgets between 1983 and 1987. During those years as a cabinet minister with a big-spending social policy portfolio, Education, and with broad responsibilities to assist women towards economic independence by education, training and childcare, I was one of the key players in delivering commitments to the social wage. It was not a comfortable position.

Retrospective assessment of the significance of the social policy achievements of those times is increasingly favourable. It is now quite widely recognised in the public policy debate that social benefits constitute not only an important area, but also the most appropriate area for government action. Governments can decide on the level of the age pension and associated benefits; they can decide to pay education and training allowances, and to whom; governments can continue to pursue high- quality public health services and universal access to health care through the progressive Medicare structure.

Governments can choose to make direct cash payments to poorer families in recognition of the impossibility of those families earning enough in the streamlined and down-sized marketplace to meet all of their essential needs. To have supported wage rises during the 1980s to achieve the latter objective would not only have been futile, it would have created industrial chaos. To have sought tax increases when employment was shrinking and businesses folding would have been similarly misguided. The social wage achievements throughout that difficult period and up to the

present were efficient and equitable. The measurable improvements in the disposable income of poorer families constitute a much more solid achievement than the attempts, especially by state government agencies, to pick winners on the race tracks of Australian businesses. To fund the social wage through those tough times, public policy shifted to much more stringent targeting, and redirected savings made by withdrawing benefits from high-income earners. Bureaucratic efficiencies were achieved and tax reform enabled more revenue to be collected from those who had been avoiding or evading their tax liabilities.

Before I refer to some data supporting my claims for the success of the social wage, I would like to provide an example of the difficulties facing a minister intent on delivering the social wage.

When Prime Minister Hawke opened the National Economic Summit in 1983, as Minister for Education I was one of the government presenters and, at that stage had the good fortune, short-lived as it turned out to be, to have as my portfolio head, Dr Peter Wilenski. Peter and I, in the brief time available, had done an intense two- person workshop on what we could most usefully say at the summit and what we could define as the best policy options our portfolio could contribute to the summit's objectives.

In 1983 Australia had the second-lowest participation of students to the end of Year 12 of any OECD country. This was both surprising and appalling. We also had a record and growing level of youth unemployment. There were a couple of reasons for the conjunction of these two disturbing phenomena. One was that as a result of structural change, particularly that affecting the m'ulufacturing sector and retailing, award paid jobs for 15 year-old school-leavers were no longer available. There was no longer a teenage job market and the school system had not been able to respond to this development. Curriculum and teaching modes were still geared in Years 11 and 12 to students planning to undertake traditional university studies. Traditional apprenticeships, in any event available virtually only to males, were drying up as the result of a slump in the building industry and associated areas.

The other policy factor was that access to unemployment benefits for school-leavers was relatively open. It was possible for the 15 or 16 year old to leave school and move fairly quickly

8 Ryan

onto a subsistence level unemployment benefit, non-means-tested. Should the same student decide to stay at school, no student allowance was available, regardless of family needs. Only tertiary students were eligible for living assistance.

We decided to raise for discussion the target of raising the proportion of students completing Year 12 from one third to two thirds within the first period of government. We intended to support this target by funding schools and teachers directly to develop helpful education for this cohort of students, and to substitute for those whose families could not support them an education allowance in place of the dole. The participation and equity program was designed with these objectives. Austudy, a family income-tested student allowance for Year 11 and 12 was introduced. Our target was exceeded by 1987 and now in 1995 over 90 per cent of Australians complete high school.

In retrospect this all sounds sensible, not extravagant from a fiscal point of view and an example of the long-term development of our human resource base which is now high on Australia’s agenda. I can only say that in 1983 and in subsequent education budgets for which I had responsibility, these measures were resisted strenuously by the Expenditure Review Committee, particularly but not only by the Finance Minister, just as were initiatives to retrain or train for the first time single mothers living on benefits in anticipation for their re-entry into the workforce, and arguments for the retention of open, merit-based access to university education.

Increases in the amount and the numbers receiving the unemployment benefit were genemll y considered by my colleagues as better public policy than education and training allowances. The latter were classed as negative expenditure and as such not in keeping with cabinet’s objectives.

Pursuing the social wage initiatives was regarded by some of my more powerful colleagues as not only fiscally irresponsible and Whitlamite, but positively obstructive to cabinet’s economic reforms. I refer you to Peter Walsh’s comments on my efforts in his recently published auto- biography (1995).

I must say these days it is music to my ears to hear cabinet ministers and even economic commentators talk about the importance of investing in our human resources by expanding education and workforce training. This

development in the public policy debale supports my argument: freed by deregulation from having to try to pick winners, or decide the value of the nation’s currency, or invent programs that use hard-won public revenue to subsidise businesses that can not make it, governments can now apply their talents to the things they can and should do.

In the last federal budget there were a number of decisions that reflected this increased recognition of the social wage. For the first time publicly paid maternity leave was introduced; not a perfect policy design by any means but an important start. We saw new public payments for family support, the parenting allowance and, most significantly in terms of the social wage, the government decidcd to supplement the superannuation savings of average and low-income earners by replacing the promised One Nation lax cuts by direct govern- ment co-contributions to their superannuation accounts.

This was a significant and progressive measure and one with an interesting history. Australia was one of the first countries in the world to have a publicly-funded retirement system. Since 1908 basically all retired Australians who met the eligibility criteria have been entitled to a publicly funded pension. That access has varied from time to time and currently is subjected to a11 assets and means test, but it has been the basic builditig- block of Australia’s retirement income policy throughout this century.

In 1983 the incoming reform government understcxxl that changes in our demography and our economy required retirement incomes policy to be reviewed and restructured. We had an aging population. Our system for retirement income was polarising. The bulk of retirees lived on the age pension, a modest and means-tested cash payment.

Those who L?d been fortunate enough to work at senior management level in the corporate sector or in white-collar public sector jobs, mainly men, were receiving very generous superannuation benefits. Their own savings had been extensively supplemented by employer contributions. The gap between the age pension and typical senior coprate or public sector benefits was large and growing. The gap could not be reduced without a total restructuring of the system.

During the 1980s and finally in 1002 the required restructure was implemented. Australia now has a retirement incomes policy which in its

Options for Reform Governments Beyond the Yeur 2000 9

basic elements conforms to the ideal system proposed in the World Bank’s recent assessment of global retirement incomes policies, Averting the Old Age Crisis. In essence the World Bank has concluded, after reviewing a variety of schemes including the very generous publicly or employer- supported schemes in Western Europe and Scandinavia, that the successful and equitable retirement incomes policy of the future should be based on three columns. They are: first, the tax- funded publicly provided safety net - the age pension. Second, a compulsory system of life- time savings for all workers, a combination of employer and employee contributions. Australia now has this in place with the Superannuation Guarantee Scheme. Third, a voluntary pillar to encourage, by tax incentives or other government expenditures, further savings for retirement. This has been in place in Australia in some form or another since the 1950s. Voluntary employer sponsored schemes have existed since the 1850s.

Recognising that even such a well-designed system, because it is occupational earnings related, does not achieve of itself a desirable level of equity in provision, the government recently decided to make a $4.5 billion a year co-contribution directly into the savings of average and low-income earners.

Like other significant measures in the development of the social wage over the last fourteen years, the completed superannuation scheme will represent a huge advance in equity and is, according to the World Bank, global best practice public policy.

The mandating of life-time superannuation savings for a11 workers is a prime example of the appropriate role for governments in a globalised economy where national boundaries to the movement of goods. people and money are disappearing. Only a national government can act to achieve a mandated national savings scheme. Only a national government can regulate and supervise that scheme so that it achieves its national and individual objectives. Only a national government can adjust the scheme to achieve a higher degree of equity than the deregulated marketplace would deliver to an earnings-related scheme. And only a national government can support the scheme with a publicly-funded safety net.

This is social policy of the future, the kind of

option that will be available for reform governments beyond the year 2000. As well, it delivers other benefits. The growing net increase in national savings will reduce foreign debt and help to keep interest rates down. The reducing demand on the public purse for the age pension will free governments of the future to deal more generously with those who need it. Scarce resources can be redirected to other crucial but indirect elements of the social wage; health, education and housing. Compulsory superannuation savings are paid into a variety of funds (in all, numbering over 90,000). The investment strategy of each fund is entirely a matter for its trustee board. The savings are invested with the sole objective of minimising risk and maximising return for fund members.

A new engine of economic growth, expected to reach $600 billion by the end of the century, has grown out of the social policy objective. With the exception of public sector schemes, funds are privately owned and managed. Administration costs are met privately, relieving government of a huge and unproductive burden on the public purse. Even the all-essential government role of regulation is paid for privately. Each regulated superannuation fund is levied annually to fund the operation of the Insurance and Superannuation Commission, the industry regulator.

Superannuation policy has come in for criticism from the right and the left. Some, certainly not all, employer groups have complained about the award-based mechanisms for the employer contributions. The Australian Chamber of Commerce and Industry has a case before the Industrial Relations Commission attempting to undo the award superannuation connection. Criticism has emanated from the same source about the enhanced role for those trade union officials who become member representative trustees on the boards of the rapidly growing industry funds. Industry funds are industry-wide saving vehicles allowing a worker to keep the one account if he or she changes jobs within the same industry sector.

Industry fund development, with 50 per cent of trustees each representing employers and employees, often results in trustee roles for trade union officials. Since the ACTU was so seminally involved in the conceptual and practical development of compulsory superannuation, it is

10 Ryan

not unexpected that they are pleased to nominate where appropriate senior officials to these powerful and responsible roles.

In assessing the economic and social benefits of the union movement's role in superannuation and other social wage initiatives, I return to Castles' historical analysis: the Australian trade union movement could have pushed government to pursue the European strategy of ever-increasing tax revenues to fund an expanded public sector that would provide workers but also more affluent citizens with all their needs. By taking a different route, that of agreed anti-inflationary wages policy supported by targeted instead of universal benefits, they have helped to create a fairer and more durable social system.

It is my view that as a result of the public policy changes of the 1980s, following deregulation and pursuit of the social wage. we have a fair and durable system. Data in support of this view has been published in a new study by the University of Canberra's National Centre for Social and Economic Modelling. Gillian Beer's report, The Impact of Changes in the Personal Income Tax and Family Payment Systems on Australian Families, 1964-1994, examines the major changes to the income tax scales, excluding Medicare, changes in deductions, rebates and family payments and the impact of these changes in terms of real disposable incomes and average tax rates of different hypothetical family types.

Beer found that overall the average level of tax paid increased between 1964 and 1994 for all income levels; that is 50 per cent, 75 per cent, 100 per cent 200 per cent and 300 per cent of average weekly earnings (AWE). Those earning 200 per cent of AWE incurred the highest overall increase with those earning AWE incurring the next-highest increase. Those earning half AWE suffered the smallest overall rise. Overall, average tax rates for families with children earning half AWE and those with two or more children earning 75 per cent of AWE have fallen. For families earning AWE and above, average tax rates have increased. But when the effects of the tax changes are combined with family payments, Beer found the following:

Since 1984, reforms to the tax scale have resulted in a fall in tax rates. For families e<aming half AWE and those with two or more children and earning 75 per cent of AWE, the value of assist,ance has increased very

markedly. For families earning AWE and above, assistance as a percentage of income was generally lower in 1994 than in 1964. The overall effect of the tax changes, family allowance payment, the family income supplement and the home child-care allowance for those families earning 50 per cent and 75 per cent of AWE, was that the real value of the system for dependent children rose significantly. For those families earning 200 per cent or 300 per cent of AWE, an overall fall in benefit occullwl over the period. The tax changes, in combination with the social wage, have been able to respond not only to f,unily income disparities but to the equity issues of family size.

The findings of this study should lead to a reconsideration of criticisms of the social wage approach. Business leaders have bemoaned public expenditure on social policy on the grounds that it causes deticit blow-out and thus alarms global investment markets, making it harder for them to achieve a productive business environment. At the same time social policy, particularly supercannuation, has been criticised by the welfare sector who tend to judge each social policy in isolation, assess it as inadequate and propose increased fiscal outlay, benetit by benefit.

When assessing the overall success of the social wage, we should look at the overall effects on the economy, on groups, families and individuals. Business leaders should consider the fact that increases in the social wage were crucial in reducing and even stifling calls for wage increases, Social wage payments also meant that poor f'amilies continued to purchase gods and services.

The welfare lobby has been highly critical of the undeniable fact that superannuation benefits afe earnings related so that the more you earn, the more you save and the more you get from the tax concessions. This criticism does not take into account the fact that the person who can save only a little superannuation receives other benefits, such as family allowances and supplements, child-care subsidies, Austudy for teenage children and access to a ful l or part age pension in the absence of adequate savings through superannuation.

Governments cannot decree that failing, unproductive and uncompetitive companies shall stay in business to provide jobs. Governments

Options for Reform Governments Beyond the Year 2000 11

that uy to increase benefits and subsidise industry by raising taxes would probably be replaced by an administration with a much weaker commitment to the social wage.

It is important to acknowledge that the commonwealth’s theoretical capacity to increase public revenue by raising taxes has hit a stumbling block in practice. It is now the case that non- government parties in the Senate will not allow any new taxing measures. Whether one agrees with their particular decisions or not, they constitute a further limitation on public policy.

It is clear, particularly from Beer’s findings, that the targeted resources put into the social wage to assist families have achieved two important public policy objectives. They have significantly increased income for those families without depending on wage rises; and they have increased the equity of the public payment system.

So looking to the future and the options for reform governments beyond the year 2000: by setting the overall tax and regulatory environment for individuals and businesses they can maximise public revenue; by monitoring access to the labour market, incomes (earned and otherwise), and social needs they can utilise their constitutional powers to pursue equity and social stability through a variety of targeted services and cash payments.

By listening to and working with business, representatives of labour and service providers to the community, they can onsure that the workforce is effectively trained and that the community is healthy and cohesive. By recognising the severe structural difficulties imposed both on revenue raising and service delivery by our federal system, all Australian governments can work in the spirit of consensus and pragmatism to avoid duplication and other inefficiencies and apply our resources to the maximum benefit of our citizens.

Finally, government’s capacity to deliver these options depends on the existence of a professional, independent, high calibre and dedicated public service. The work of Dick Spann, after whom this annual oration is named, has inspired many of our senior administrators to provide such services. In conclusion, I express the hope that such inspiration will continue into the second millennium.

REFERENCES Beer, G 1995. ‘The Impact of Changes in the Personal

Income Tax and Family Payment Systems on Australian Families: 1964-1994’. NATSEM, University of Canberra, Canberra.

Binns, P 1995. ‘The History of Superannuation in Australia’, The Association of Superannuation Funds of Australia, unpublished paper.

Budget Papers, AGPS, May 1995. Castles, FC 1985. The Working Class and Welfare,

Reflections on the Political Development of the Welfare State in Australia and New Zealand 1890- 1980, Allen & Unwin, Sydney.

James, E 1994. Averting the Old Age Crisis - Policies to Protect the Old and Promote Growth’, World Bank.

Walsh, P 1995. Confessions of a Failed Finance Minister, Random House.