The Great Divorce

Governments are divorcing economic reality from social policy.
Dominic Perrottet | Jul 9 2015 | comment  



Map of Europe showing the percentage of the population over 65 in 2010 for each country.

The following is excerpted from a speech given by New South Wales Minister for Finance and Services the Hon. Dominic Perrottet at the Centre for International Studies Leadership Lunch on the 29th June 2015.

Today, while we are sitting here in St Leonards, the eyes of world are very much fixed on Greece and all the financial turmoil that country is going through right now.

But it’s no surprise Greece is currently experiencing such a tough time if a recent story I heard about the politics of their Finance Minister are any indication.

Writing on his blog, Yannis Varoufakis related his life experience and how his life has unfolded. After living and working in the UK for some time, he said he finally could not bear to live there after Margaret Thatcher won her third election in a row.

“Soon I started planning my escape,” he wrote. “The question was: Where do I escape to?” Well luckily Australia stepped up as he managed to get a posting at the University of Sydney teaching economics, a position he occupied for 12 years. Unfortunately for him, the Lucky country turned out not to be so lucky for him anyway.

That period of time also coincided with the success of another famous conservative, John Howard. A golden age for Australia, but for Mr Varoufakis it was a painful and difficult time where he had to endure an “abhorrent conservative turn under that awful little man John Howard”. So he pulled up stakes and left again, this time returning to his native Greece not much chance of finding an economic liberal there I suppose where he is now Finance Minister in the ruling left wing SIRIZA party.

As Piers Akerman said “the man responsible for turning around the failed Greek economy has bolted from two nations because they were led by two competent leaders who managed to prevent them going down the path of bankruptcy.” Ominous signs for Greece indeed.

This anecdote, while amusing, has a serious side for some in the political class, mainly on the Left, a fundamental denial of economic reality is taking place.

As I have said before, no one has ever run up a tab they didn’t have to pay. And for Greece, payment is now due. Greece faces many problems. A large welfare state. Extensive government borrowings. Cronyism and corruption. Generous public pensions with low retirement ages. Lax fiscal discipline compounded by a failure to collect taxes.

These are not liquidity problems but solvency problems. What is missing, from Greece and other EU countries, has been political will or ability to implement meaningful structural reform.

So what does this mean for us here in Australia? Well, as Tom Palmer from the CIS wrote recently, “the distance from Athens to Canberra is pretty far, but they’re getting closer every day.” We see this story playing out on a smaller scale at a Federal level, with significant and lasting implications for the States.

Just last week the Baird Government delivered a record budget in NSW, with a solid surplus and major investments.

It is investing in productive assets like infrastructure that creates jobs, builds the economy and will provide returns well into the future.

This was a budget built on fiscal discipline, targeted spending and smart use of capital. But this was a budget delivered in the shadow of reduced Federal funding for key areas like Health and Education.

There is little doubt that this is a significant challenge that will place all state budgets under renewed pressure in the years to come.

As the Minister for Finance in NSW, I live in a world of facts and figures, charts and tables, projections and estimates. These numbers do not lie. And they tell me one thing. Our current patterns of economic behaviour here in the West are simply unsustainable.

And just like we’re seeing in Greece, you can kick the can down the road for some time. But eventually you run out of road.

A fundamental part of the problem is that our social policy is completely divorced from our economic policy. They are considered in isolation. Like much in government developed in silos.

This divide has created unsustainably large structural deficits that can only be financed by levying unreasonable taxes on future generations.

In reality, economics is downstream from culture. Our policies on welfare, families and cultural issues all have economic implications.

Too often our political debate is couched in the terms of how the government can raise even more taxes, take even more of your money, to meet its seemingly insatiable appetite for new spending all with a short term focus.

As former Labor Finance Minister Lindsay Tanner has noted, much of the discussion focuses on meeting the needs of a 24 hour news cycle, or a short electoral cycle, rather than addressing deeper underlying issues.

Raising more taxes on high income earners, changing the rules so government gets more of your super or increasing the fuel excise are all stop gap measures that sidestep the main problem governments are spending too much.

And each year, our Tax Freedom Day, the day we stop working to pay the government and start working to pay ourselves, moves ever further down the calendar. We are spending too much, on the wrong things, for little result. There are three ways in particular that I think governments are divorcing economic reality from social policy. And that’s what I want to cover with you today.

Throwing money at welfare

The first is by simply throwing money at social issues, and measuring the success of these programs by the size of the investment, not the end state outcome.

One the clearest examples of this can be seen in the United States.  In March of 1965, a little known bureaucrat named Daniel Patrick Moynihan released a report into the widening gap between the black community and the rest of American society.

The “Moynihan Report”, as it became known, caused a firestorm of controversy. It was attacked by the Left for describing a “tangle of pathologies7” in low income neighbourhoods each factor feeding into the next to create a vicious cycle of poverty.

It was also attacked by the Right for highlighting the pervasive racism that “battered and harassed” black communities for over three centuries. But Moynihan's most controversial finding one that is still being debated today, was proposing a link between family breakdown and government welfare.

ldquo;The steady expansion of welfare programs”, wrote Moynihan, was directly tied to the “steady disintegration of [black] family structure.” Moynihan was unequivocal in citing the collapse of the nuclear family as the primary reason for black inequality. And he was equally direct at laying the blame on government policies where “marriage was penalised and single parenthood subsidized”.

In essence, the welfare state was acting as a substitute for the family, crowding out its formation, and increasing rates of divorce. This was having a flow on effect of ensnaring lower income families in a poverty trap, from which very few escape.

But things were about to get worse.

Instead of winding back these well-intentioned, but damaging policies, the US government dialled them up, launching a massive “War on Poverty” effort, focusing on Food Stamps, welfare payments and housing projects.

In 1965, the year the Moynihan Report was released, 25% of black children lived in single parent households. Today, that figure is now over 70%. The War on Poverty and other welfare programs essentially created a destructive feedback loop: Welfare promoted the decline of marriage, which in turn, generated the need for even more welfare.

To date, more than $22 trillion dollars has been spent by US Governments to end poverty over the past 50 years. The poverty rate though has remained pretty much the same as when the program started.

No one can doubt the good intentions of those who sought to end inequality. The outcomes though, have been catastrophic. We see similar problems here in Australia.

Take the example of Struggle Street, a documentary that follows the lives of those living in poorer neighbourhoods in Sydney’s western suburbs.

This was also controversial, attacked by some as “publicly funded poverty porn”, and it kicked off a debate about how we treat those at the margins of our society, I thought one of the most telling contribution to the debate came from Nick Cater, writing in the Australian, where he revealed that Mt Druitt was once the site of the largest housing project undertaken by the state of NSW.

Today, one in five of the houses in that suburb around 12,000 still belong to the Housing NSW.

More than half the tenants are single parents. They outnumber married parents by three to one. And the vast majority living there receive some kind of social security payments.

Once again we see the same “tangle of pathologies” described by Moynihan delinquency, dysfunction, crime and family breakdown. And with the same devastating effects.

The well-intended, but ham-fisted intervention into social policy by governments is having very real economic consequences.

Of the nearly $450 billion in spending in the Federal Budget, Social Security and Welfare spending now makes up 35% And don’t kid yourself, this isn’t just a federal government budget problem, it affects the budget of every single household in Australia.

For example, an individual on a salary of $50,000 pays around $8,000 in tax, with $3,000 almost 40% going to Welfare. That’s more than double Health and four times more than on Education.

The solution, though, is much more nuanced than simply slashing spending. Slashing spending can be seen as lazy economic policy just as much as raising taxes.

New Zealand’s Finance Minister Bill English gave an insightful speech at the Menzies Research Centre in Melbourne on exactly this topic. He was critical of what he called the post war model of simply borrowing and committing billions of dollar on good intentions.

Instead, the focus has to be on “purchasing results”, and you do this by making highly customised "social investments".

By using data and analytics to understand their “customers”, the NZ government was able work out what the path to welfare was. Just who was going to fall into that trap and what their lifetime cost was going to be.

They then targetted training and support to the most vulnerable in the community in an effort to drive down those costs in essence” reducing misery, rather than simply servicing it.” This approach would mean less welfare payments over time, fewer government programs and a smaller number of bureaucrats needed to administer them.

In others words smaller government through better government.

Forfeiting the future

The second way governments are failing to consider the economic reality of their social policy is by failing to invest in the future of generations to come.

Many financial analysts are now watching the events in Europe closely, convinced that a Greek exit from the Euro is a foregone conclusion.

But the current debates around the Eurozone only serve to obscure one of the most important statistics that should be getting a lot more attention. It’s not the net debt or GDP, it’s the birth rates.

At just 1.34 births per woman, Greece has one of the lowest birth rates in the world. As the number of deaths is now exceeding the number of births, it’s better being in the business of funerals than in the business of baptisms. In just 30 years from now, it’s expected one in three Greeks will be aged over 65.

“You can’t borrow against the future,” writes Mark Steyn, “because, in the crudest sense, you don’t have one… Welcome to My Big Fat Greek Funeral.” Greece isn’t alone.

Italy, Portugal and Spain also have below replacement birth rates, caught in what some have described as a demographic death spiral, where recovery is almost impossible.

Last week we learnt that Italy’s birth rate has dropped to the lowest level since 1861, and soon enough, six in ten Italians will have no brothers, no sisters, no cousins, no aunts or no uncles.

Germany, the so-called powerhouse of the EU, is expecting its population to shrink by almost 20% over the next thirty years.

In fact, Europe’s most rapidly growing family type is the one person household.

While the decline in birth rates is multi-causal, there is no doubt the meddling hand of big government is once again at work, with profound implications for the sustainability of human capital.

Some have argued that social security replaces the role of children in old age by socialising the traditional duties of the family.

I know Greg Lindsay has also written previously on the perverse incentives created by common pools of welfare, where everyone seeks to benefit at the expense of everyone else.

Countries with large pension systems tend to struggle with fertility.

As one commentator has asked, why have children at all when the state will take care of you in your old age? An ageing population also poses significant economic challenges.

How do you grow an economy in an ever shrinking market? How do you access capital when so much is tied up in pensions and benefits? How do you start up businesses when entrepreneurs are mostly found mainly among the young? Just like Greece and other parts of Europe, we here in Australia are seeing the same troubling shift in social patterns a collapse in marriage, a decline in the birth rate and a rapidly ageing population.

As Malcolm Turnbull noted in his maiden speech in 2004 “Demography is indeed destiny. The demographic storm is coming.

How hard it blows and how well our children weather it will depend in large measure on the decisions we take today.”

But just like in parts of Europe, we’re seeing governments that have focused on building up the needs of older generations at the expense of those who are to come.

Some in the UK have described what they call a “gerontocracy, where the smartest financial move you can make is to grow old...where you will be better off in retirement than you were working.” It’s no wonder that the young, the millennials, are increasingly losing trust in government and resentful of paying into a system they may never benefit from.

Edmund Burke famously said that “society is a partnership between those who are living, those who are dead and those who are yet to be born”. Today, we are failing in that partnership.

As someone under 35, I know all too well the difficulties young people face, from HECs debt to housing prices.

A Grattan report released last year shows that my generation, Gen Y, may be the first to be less wealthy than our parents, who have benefitted from sustained economic growth and high levels of spending.

Whether it’s hard to get a job, buy your own home or start a business, it does seem sometimes that the deck is stacked against you. We face higher levels of debt, working longer, retiring later whilst also paying higher levels of tax.

I notice that while the debate around housing affordability has focused on stamp duty and first home owners grants, there has been little discussion of the level of taxation that governments are currently levying, which reduce your ability to repay a loan or save up for a deposit.

As it says in the book “Disinherited: How Washington is Betraying Americas Young”....”millennials are expected to “pay higher taxes for government programs that benefit middle aged and older Americans, many of whom have better jobs and more assets.” I am also aware that this debate has been had before with the Baby Boomers claiming they were hard done by the generation before as well.

I also have some sympathy for the views of retirees who have worked their entire lives and contributed to the system and are now simply receiving their dues.

Clearly these are difficult problems to solve, or they would have been solved already.

But governments need to determine how to create a sustainable demographic dividend, or risk forfeiting the future altogether.

Ladies and Gentleman, the great divorce between economic and social policy is having very real and very damaging consequences.

The unique mix of social, economic and demographic factors that exist today perhaps represent the “new normal” a sustained period of low growth in which only the economically fittest can thrive.

But these trends also give a new urgency to the debate around the Federation.

The current system of taxation and distribution simply rewards mediocrity and provides no incentives for the states to undertake challenging economic reform.

Governments at all levels need to realise that pursuing welfare state policies, failing to invest in youth and pursuing costly social programs based on nothing more than naked ideology is a path paved to ruin.

As the unfolding events in Greece show, the great divorce is an extravagance we simply can no longer afford.

Dominic Perrottet is the New South Wales Minister for Finance and Services and State Member for Hawkesbury. Reprinted with permission. Read the original speech.



Copyright © Dominic Perrottet . Published by MercatorNet.com. You may download and print extracts from this article for your own personal and non-commercial use only. Contact us if you wish to discuss republication.

comments powered by Disqus
Follow MercatorNet
Facebook
Twitter
MercatorNet RSS feed
subscribe to newsletter
Sections and Blogs
Harambee
PopCorn
Conjugality
Careful!
Family Edge
Sheila Reports
Reading Matters
Demography Is Destiny
Bioedge
Conniptions
Connecting
Above
Vent
From the Editor
Information
contact us
our ideals
our People
our contributors
Mercator who?
partner sites
audited accounts
donate
advice for writers
privacy policy
New Media Foundation
L1 488 Botany Rd
Alexandria NSW 2015
Australia

editor@mercatornet.com
+61 2 8005 8605
skype: mercatornet

© New Media Foundation